NORFOLK, Va., Dec. 9 /PRNewswire-FirstCall/ -- Heritage Bankshares,
Inc. (Pinksheets: HBKS) (Heritage), today provided the results of
its previously announced review of its financial statements for the
period 2000 through 2004. Management believes that accounting
errors for periods prior to January 1, 2002 were immaterial to the
company's financial condition and results of operations. Heritage
expects to reflect such errors as a cumulative adjustment to
Stockholders' Equity as of January 1, 2002, which will decrease by
$91,000 or (0.85%) from $10.658 million to $10.567 million. The
results of Heritage's financial review reflect that net income for
2002 has increased by $86,662, or approximately 6.4%; net income
for 2003 has decreased by $26,781, or approximately 1.5%; and net
income for 2004 has decreased by $732,214, or approximately 30.5%.
The following is a discussion of the financial analysis which
Heritage management has undertaken in order to reach its
conclusions. Heritage intends to finalize its work and file its
annual report on Form 10- KSB for the year ended December 31, 2004
with the Securities and Exchange Commission as soon as possible.
The report will include restated annual financial statements for
2002 and 2003 together with annual financial statements for 2004.
Background As previously announced, in February of 2005, Heritage
appointed a new President & Chief Executive Officer following
the death of its former President & CEO in November of 2004;
Heritage's Chief Financial Officer subsequently resigned and
Heritage appointed a new CFO. Shortly thereafter, the new
management team began a review of various items in Heritage's
financial statements and accounting records in connection with the
preparation of Heritage's annual report and Form 10-KSB for 2004.
Management discovered accounting errors in Heritage's previously
reported financial statements for 2004 relating to the treatment of
stock options under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and the
calculation of diluted earnings per share, and concluded and
announced that the financial statements for 2004 should no longer
be relied upon and would need to be restated. In light of the
errors discovered, Heritage management undertook additional review
of Heritage's financial statements for periods 2000 through 2004.
As previously announced, completing this review was a more
difficult task than management originally anticipated, in
particular because of Heritage's misapplication of Statement of
Financial Accounting Standards No. 91, "Accounting for
Non-Refundable Fees and Costs Associated with Originating or
Acquiring Loans and Indirect Costs of Leases" (FAS 91). As
previously announced, management concluded on November 3, 2005 that
due to certain accounting errors Heritage's financial statements
for the years ended December 31, 2003 and December 31, 2002 should
be restated and no longer be relied upon. On November 7, 2005, the
Audit Committee of the Board of Directors discussed this matter and
concurred with management's conclusion. In the course of its
review, management also found additional errors relating to various
matters, the impact of which are described below. FAS 91 - Deferral
of Loan Fees and Origination Costs FAS 91 generally requires that
loan fees and direct loan origination costs be deferred and
recognized as an adjustment to the loan's yield. Amortization of
the net fee and cost is calculated using either the level-yield or
straight-line method, depending on the type of loan. Heritage's
misapplication of FAS 91 involved both the calculation of direct
origination costs, as well as applying the correct amortization
method. Current management re-estimated the unamortized net fee and
cost for loans at the end of each fiscal year, beginning at
December 31, 1999. The result of the FAS 91 re-estimation analysis
reflected a cumulative adjustment to net deferred loan costs, as
well as an adjustment to pre-tax income. In addition, the analysis
reflected a significant reduction in salaries and benefit costs
(deferred direct loan origination costs for each respective year),
generally offset by a reduction in interest income (yield
adjustment) on loans. Deferred Compensation Plan Heritage currently
maintains a deferred compensation plan for certain directors and
its former Chief Executive Officer. The plan provides for a defined
monthly benefit for each participant in accordance with the terms
of each individual's participation agreement. Heritage has also
purchased life insurance to fund a portion of the deferred
compensation liability. Management discovered errors in accounting
for the deferred compensation plans and associated life insurance
resulting from a misapplication of generally accepted accounting
principles (GAAP), which require that the employer's obligation be
accrued according to the terms of the individual contracts over the
required service period to the date the participants are fully
eligible to receive the benefits. Under such principles, at the
full eligibility date, the deferred compensation liability should
equal the then present value of the estimated benefit payments to
be made under the individual contract. Heritage's misapplication of
these calculations required by GAAP resulted in an understatement
of the required liability. GAAP also requires that life insurance
purchased to fund any portion of the deferred compensation
liability to be accounted for separately, that is, not offset
against or otherwise integrated into the accounting for the
deferred compensation liabilities. In 2002, life insurance proceeds
were incorrectly credited to the deferred compensation liability,
thereby partially covering a shortfall that existed in that
liability. In addition, an increase in the cash surrender value of
the life insurance contracts during 2001 was not recorded until
2002, thus requiring an additional accounting correction. Stock
Options As previously reported, Heritage misapplied APB 25 in
accounting for the exercise of stock options. When options were
exercised, the tax benefit from the option exercises was
incorrectly reflected as an income tax expense reduction and,
therefore, an increase in Heritage's net income. However, under APB
25, the tax benefit should not have been included in Heritage's
income statement but instead should have been recorded solely as an
increase in additional paid-in capital. As a result, Heritage's
income tax expense for each year was understated by the amount of
the tax benefit and, therefore, the earnings were overstated by a
commensurate amount. Also as previously announced, Heritage had not
properly accounted for the effect of tax benefits in the
calculation of outstanding dilutive common stock options. Earnings
per share have been recalculated to correct this error. Other
Adjustments Adjustments were also necessary to correct accounting
errors related to the following items: * A 2004 charge, as
previously announced, related to the impairment of certain loans
under a lending relationship with one borrower. * In the early
1990s, Heritage acquired, through foreclosure, four properties
which were subsequently rented. Although initially recording
depreciation expense for these properties, Heritage discontinued
recordation of that expense several years later. Accordingly, since
the properties were held for investment, accounting corrections to
adjust for the discontinued depreciation were necessary. * Employer
401(k) matching contributions were not recorded properly during the
year incurred. * A 2004 impairment charge related to certain
long-lived assets. * Income tax expense adjustments to correct
errors in 2002 and 2003. Heritage also made additional adjustments
to correct other miscellaneous accounting errors. Summary of
Adjustments The tables below present the estimated adjustments to
net income with respect to the years ended December 31, 2002, 2003
and 2004, and the balance sheet at December 31, 2002, 2003 and
2004. HERITAGE BANKSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 As Reported Effects of Restated 2002
Adjustments 2002 Interest and fees on loans FAS 91 Yield Adjustment
$(405,596) Loan fees - reclassification to noninterest income
(83,021) Miscellaneous 2,039 Total $6,418,644 (486,578) $5,932,066
Interest on investment securities Available for sale -
reclassification to AFS 98 Held to maturity - Total 819,735 98
819,833 Interest on federal funds sold 135,251 - 135,251 Interest
on deposit accounts - - Total interest income 7,373,630 (486,480)
6,887,150 Interest expense Interest on deposits 2,525,852 -
2,525,852 Interest on short-term borrowings 55,685 - 55,685 Total
interest expense 2,581,537 - 2,581,537 Net interest income
4,792,093 (486,480) 4,305,613 Provision for loan losses 99,000 -
99,000 Net interest income after provision for loan losses
4,693,093 (486,480) 4,206,613 Noninterest income Services charges
295,217 - 295,217 Other noninterest income Life insurance proceeds
142,000 Loan fees - reclassification from interest on loans 83,021
Cash Surrender Value - Life insurance (46,504) Dividends on
equities (98) Miscellaneous - Total - other noninterest income
551,957 178,419 730,376 Total noninterest income 847,174 178,419
1,025,593 Noninterest expense Salaries and employee benefits FAS 91
Deferred Costs (391,909) Deferred compensation plans (38,023)
401(k) plan expense adjustments 36,108 Miscellaneous 13,901 Total
salaries and employee benefits 1,932,129 (379,923) 1,552,206 Other
noninterest expense Depreciation expense - Investment property
21,485 Loss on impairment - ATMs - Miscellaneous (22,984) Total -
other noninterest expense 657,362 (1,499) 655,863 Automated
services 297,413 - 297,413 Occupancy expenses 239,177 - 239,177
Furniture and equipment expense Miscellaneous 24,096 Total
furniture and equipment expense 199,443 24,096 223,539 Taxes and
licenses 126,355 - 126,355 Stationery and supplies 73,245 - 73,245
Total noninterest expense 3,525,124 (357,326) 3,167,798 Income
before income taxes 2,015,143 49,265 2,064,408 Income tax expense
APB 25, Stock Options 22,594 Tax effect of adjustments 32,561
Correction of other tax provision errors (92,552) Total income tax
650,440 (37,397) 613,043 Net income $1,364,703 $86,662 $1,451,365
Earnings per share: (1) Basic $0.87 $0.06 $0.93 Diluted $0.82 $0.07
$0.89 Weighted average basic shares (1) 1,562,358 (567) 1,561,791
Weighted average diluted shares (1) 1,656,418 (29,638) 1,626,780 As
Reported Effects of Restated 2003 Adjustments 2003 Interest and
fees on loans FAS 91 Yield Adjustment $(419,040) Loan fees -
reclassification to noninterest income (80,466) Miscellaneous
(1,333) Total $6,460,321 (500,839) $5,959,482 Interest on
investment securities Available for sale - reclassification to AFS
286 Held to maturity - Total 692,134 286 692,420 Interest on
federal funds sold 112,263 112,263 Interest on deposit accounts
2,046 2,046 Total interest income 7,266,764 (500,553) 6,766,211
Interest expense Interest on deposits 2,178,402 2,178,402 Interest
on short-term borrowings 39,444 39,444 Total interest expense
2,217,846 - 2,217,846 Net interest income 5,048,918 (500,553)
4,548,365 Provision for loan losses 40,000 40,000 Net interest
income after provision for loan losses 5,008,918 (500,553)
4,508,365 Noninterest income Services charges 302,688 - 302,688
Other noninterest income Life insurance proceeds - Loan fees -
reclassification from interest on loans 80,466 Cash Surrender Value
- Life insurance - Dividends on equities (286) Miscellaneous 4,418
Total - other noninterest income 1,041,200 84,598 1,125,798 Total
noninterest income 1,343,888 84,598 1,428,486 Noninterest expense
Salaries and employee benefits FAS 91 Deferred Costs (485,720)
Deferred compensation plans 4,079 401(k) plan expense adjustments
11,108 Miscellaneous 5,503 Total salaries and employee benefits
2,102,315 (465,030) 1,637,285 Other noninterest expense
Depreciation expense - Investment property 21,485 Loss on
impairment - ATMs - Miscellaneous (20,781) Total - other
noninterest expense 749,306 704 750,010 Automated services 376,690
- 376,690 Occupancy expenses 246,192 - 246,192 Furniture and
equipment expense Miscellaneous 15,781 Total furniture and
equipment expense 181,173 15,781 196,954 Taxes and licenses 144,543
- 144,543 Stationery and supplies 74,842 - 74,842 Total noninterest
expense 3,875,061 (448,545) 3,426,516 Income before income taxes
2,477,745 32,590 2,510,335 Income tax expense APB 25, Stock Options
30,041 Tax effect of adjustments 11,080 Correction of other tax
provision errors 18,250 Total income tax 740,079 59,371 799,450 Net
income $1,737,666 $(26,781) $1,710,885 Earnings per share: (1)
Basic $1.10 $(0.01) $1.09 Diluted $1.02 $0.01 $1.03 Weighted
average basic shares (1) 1,576,258 (597) 1,575,661 Weighted average
diluted shares (1) 1,698,864 (41,226) 1,657,638 As Reported Effects
of Restated 2004 (2) Adjustments 2004 Interest and fees on loans
FAS 91 Yield Adjustment $(332,561) Loan fees - reclassification to
noninterest income (83,971) Miscellaneous (4,370) Total $7,441,632
(420,902) $7,020,730 Interest on investment securities Available
for sale - reclassification to AFS 1,174 Held to maturity - Total
586,677 1,174 587,851 Interest on federal funds sold 47,905 47,905
Interest on deposit accounts 2,665 2,665 Total interest income
8,078,879 (419,728) 7,659,151 Interest expense Interest on deposits
2,119,106 2,119,106 Interest on short-term borrowings 35,898 35,898
Total interest expense 2,155,004 - 2,155,004 Net interest income
5,923,875 (419,728) 5,504,147 Provision for loan losses 100,000
353,000 453,000 Net interest income after provision for loan losses
5,823,875 (772,728) 5,051,147 Noninterest income Services charges
300,477 - 300,477 Other noninterest income Life insurance proceeds
- Loan fees - reclassification from interest on loans 83,971 Cash
Surrender Value - Life insurance - Dividends on equities (1,174)
Miscellaneous 5,919 Total - other noninterest income 1,012,517
88,716 1,101,233 Total noninterest income 1,312,994 88,716
1,401,710 Noninterest expense Salaries and employee benefits FAS 91
Deferred Costs (263,861) Deferred compensation plans 11,240 401(k)
plan expense adjustments (48,382) Miscellaneous (12,181) Total
salaries and employee benefits 2,149,055 (313,184) 1,835,871 Other
noninterest expense Depreciation expense - Investment property
21,485 Loss on impairment - ATMs 45,857 Miscellaneous (13,563)
Total - other noninterest expense 1,178,130 53,779 1,231,909
Automated services 438,856 (9,056) 429,800 Occupancy expenses
249,642 - 249,642 Furniture and equipment expense Miscellaneous
8,226 Total furniture and equipment expense 197,189 8,226 205,415
Taxes and licenses 150,468 - 150,468 Stationery and supplies 71,765
- 71,765 Total noninterest expense 4,435,105 (260,235) 4,174,870
Income before income taxes 2,701,764 (423,777) 2,277,987 Income tax
expense APB 25, Stock Options 452,521 Tax effect of adjustments
(144,084) Correction of other tax provision errors - Total income
tax 300,858 308,437 609,295 Net income $2,400,906 $(732,214)
$1,668,692 Earnings per share: (1) Basic $1.42 $(0.43) $0.99
Diluted $1.37 $(0.41) $0.96 Weighted average basic shares (1)
1,689,295 (6,658) 1,682,637 Weighted average diluted shares (1)
1,754,085 (17,415) 1,736,670 (1) Adjusted for 2 for 1 stock split
(2) Certain noninterest expenses as presented in Heritage's press
release for the year 2004 have been reclassified to conform with
prior years' presentation HERITAGE BANKSHARES, INC. CONSOLIDATED
BALANCE SHEETS December 31, As Reported Effects of Restated 2002
Adjustments 2002 ASSETS Cash and due from banks $8,878,558
$(217,864) $8,660,694 Federal funds sold 13,423,376 217,864
13,641,240 Securities available for sale 14,257,498 24,221
14,281,719 Securities held to maturity 1,641,357 (7,455) 1,633,902
Loans, net 81,465,850 143,055 81,608,905 Loans held for sale
3,361,680 - 3,361,680 Accrued interest receivable 477,100 3,716
480,816 Other real estate owned 433,340 (433,340) - Premises and
equipment, net 2,391,222 24,791 2,416,013 Other assets 1,799,351
260,042 2,059,393 Total Assets $128,129,332 $15,030 $128,144,362
LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest bearing
deposits $21,623,273 $15,349 $21,638,622 Interest-bearing deposits
89,000,702 - 89,000,702 110,623,975 15,349 110,639,324 Securities
sold under agreements to repurchase 4,467,660 - 4,467,660
Short-term borrowings 65,349 (15,349) 50,000 Accrued interest
payable 248,356 - 248,356 Other liabilities 961,279 (11,440)
949,839 Total liabilities 116,366,619 (11,440) 116,355,179
Stockholders' equity Common stock, $5 par value - authorized
3,000,000 shares 3,922,625 3,922,625 7,845,250 Additional paid-in
capital (302,461) 99,677 (202,784) Retained earnings 7,878,163
(4,003,598) 3,874,565 Accumulated other comprehensive income (loss)
264,386 7,766 272,152 Total stockholders' equity (1) 11,762,713
26,470 11,789,183 Total Liabilities and Stockholders' Equity
$128,129,332 $15,030 $128,144,362 Outstanding shares (2) 1,569,050
1,569,050 Book value per share (2) $7.50 $0.01 $7.51 As Reported
Effects of Restated 2003 Adjustments 2003 ASSETS Cash and due from
banks $8,929,926 $(193,484) $8,736,442 Federal funds sold
10,600,345 193,484 10,793,829 Securities available for sale
18,572,979 28,680 18,601,659 Securities held to maturity 1,691,802
(17,455) 1,674,347 Loans, net 100,352,375 209,735 100,562,110 Loans
held for sale 171,475 - 171,475 Accrued interest receivable 571,655
2,383 574,038 Other real estate owned - - - Premises and equipment,
net 2,289,328 15,553 2,304,881 Other assets 1,789,389 (181,105)
1,608,284 Total Assets $144,969,274 $57,791 $145,027,065
LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest bearing
deposits $29,525,495 $7,477 $29,532,972 Interest-bearing deposits
95,221,901 - 95,221,901 124,747,396 7,477 124,754,873 Securities
sold under agreements to repurchase 5,959,341 - 5,959,341
Short-term borrowings 57,477 (7,477) 50,000 Accrued interest
payable 201,942 - 201,942 Other liabilities 694,008 31,719 725,727
Total liabilities 131,660,164 31,719 131,691,883 Stockholders'
equity Common stock, $5 par value - authorized 3,000,000 shares
3,959,500 3,959,500 7,919,000 Additional paid-in capital (260,005)
92,843 (167,162) Retained earnings 9,474,344 (4,030,379) 5,443,965
Accumulated other comprehensive income (loss) 135,271 4,108 139,379
Total stockholders' equity (1) 13,309,110 26,072 13,335,182 Total
Liabilities and Stockholders' Equity $144,969,274 $57,791
$145,027,065 Outstanding shares (2) 1,583,800 1,583,800 Book value
per share (2) $8.40 $0.02 $8.42 As Reported Effects of Restated
2004 Adjustments 2004 ASSETS Cash and due from banks $6,759,478
$(288,788) $6,470,690 Federal funds sold 1,117,880 288,788
1,406,668 Securities available for sale 14,177,896 106,618
14,284,514 Securities held to maturity 1,626,489 (80,475) 1,546,014
Loans, net 123,757,168 (211,965) 123,545,203 Loans held for sale
1,515,700 - 1,515,700 Accrued interest receivable 578,625 (1,987)
576,638 Other real estate owned - 182,037 182,037 Premises and
equipment, net 2,559,201 (33,402) 2,525,799 Other assets 1,943,546
(376,192) 1,567,354 Total Assets $154,035,983 $(415,366)
$153,620,617 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits
Noninterest bearing deposits $26,075,405 $(16,711) $26,058,694
Interest-bearing deposits 107,052,436 - 107,052,436 133,127,841
(16,711) 133,111,130 Securities sold under agreements to repurchase
2,030,021 - 2,030,021 Short-term borrowings 1,774,289 16,711
1,791,000 Accrued interest payable 231,905 - 231,905 Other
liabilities 1,089,486 (171,591) 917,895 Total liabilities
138,253,542 (171,591) 138,081,951 Stockholders' equity Common
stock, $5 par value - authorized 3,000,000 shares 8,535,910 -
8,535,910 Additional paid-in capital 18,197 245,909 264,106
Retained earnings 7,254,268 (503,638) 6,750,630 Accumulated other
comprehensive income (loss) (25,934) 13,954 (11,980) Total
stockholders' equity (1) 15,782,441 (243,775) 15,538,666 Total
Liabilities and Stockholders' Equity $154,035,983 $(415,366)
$153,620,617 Outstanding shares (2) 1,707,182 1,707,182 Book value
per share (2) $9.24 $(0.14) $9.10 (1) Stockholders' equity at
January 1, 2002 was reduced by $90,552 for the cumulative effect,
net of income taxes, for prior years' accounting errors (2)
Adjusted for 2 for 1 stock split The "as reported" figures for 2004
were reported in Heritage's Form 8-K filed on January 31, 2005; the
"as reported" figures for 2002 and 2003 were reported in Heritage's
Forms 10-KSB for the applicable fiscal year. The financial
information contained in the above tables may be adjusted in
connection with Heritage's final preparation of the financial
statements that will be included in its Form 10-KSB for 2004;
Heritage currently does not expect that any such adjustments would
be material. Heritage is the parent company of Heritage Bank
(http://www.heritagebankva.com/). Heritage Bank has four
full-service branches in the City of Norfolk, one full-service
branch in the City of Virginia Beach, and one branch in the City of
Chesapeake. Heritage Bank provides a full range of financial
services including business, personal and mortgage loans,
insurance, and annuities. Forward Looking Statements The press
release contains statements that constitute "forward-looking
statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors
that may cause Heritage's actual results, performance,
achievements, and business strategy to differ materially from those
anticipated. Forward looking statements often contain a word such
as "expect," "believe," "estimate" or "anticipate." For example,
our forward-looking statements include statements regarding our
expectations for on-going review of accounting matters, the
expected or estimated results of that review, and our current
analysis of the results of that review. Factors that could cause
such actual results, performance, achievements and business
strategy to differ materially from those anticipated include:
discovery of further accounting errors, general and local economic
conditions, competition, capital requirements of the bank's
announced expansion plans, customer demand for Heritage's banking
products and services, and the risks and uncertainties described in
Heritage's Form 10-KSB filed with the Securities and Exchange
Commission. Heritage disclaims any intention or obligation to
update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. DATASOURCE:
Heritage Bankshares, Inc. CONTACT: John O. Guthrie of Heritage
Bankshares, Inc., +1-757-523-2600 Web site:
http://www.heritagebankva.com/
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