NORFOLK, Va., July 6 /PRNewswire-FirstCall/ -- Heritage Bankshares,
Inc. ("Heritage"; the "Company") (Pinksheets: HBKS), the parent of
Heritage Bank (the "Bank"), today announced unaudited financial
results for the fourth quarter and full year 2005. Net income,
after tax, for the year ended December 31, 2005 was $840,000, or
$0.48 per diluted share, compared to $1.7 million, or $0.96 per
diluted share, earned in 2004. Michael S. Ives, President and CEO
of the Company and the Bank, commented: "The year 2005 could best
be described as both a year of challenge and a year of transition.
Our challenge was to restate our financial statements for past
years. Our transition was to enhance the Bank's infrastructure,
technology, branch facilities, and personnel to provide the highest
level of service to individuals, small businesses, and professional
firms." Ives continued: "Both of these initiatives were tremendous
undertakings for a small bank, and the cumulative impact on our
noninterest expense has been quite substantial. They were vitally
important in order to establish the sound platform we will need to
carry out our plans for the future. We believe that the bulk of the
restatement work is behind us and expect that our subsequent
regulatory filings will proceed satisfactorily, without nearly as
large an impact on our expenses after the second quarter of 2006.
We intend to focus on business development to take full advantage
of our infrastructure and our profitability should benefit at a
steady pace." Comparison of Operating Results for the Years Ended
December 31, 2005 and 2004 Overview. The Company's pre-tax income
was $1.2 million for the year ended December 31, 2005 compared to
$2.3 million in 2004, a decrease of $1.1 million. During 2005, net
interest income increased by $792,000, the provision for loan
losses decreased by $420,000, other noninterest income increased by
$297,000, and other noninterest expenses increased by $2.5 million.
Net income, after tax, in 2005 was $840,000, a decrease of $827,000
from $1.7 million in 2004. Diluted earnings per share decreased by
$0.48, from $0.96 per share in 2004 to $0.48 per share in 2005. Net
Interest Income. The Company's net interest income before provision
for loan losses increased by $792,000 in 2005. This increase
resulted from a $2.4 million increase in interest income offset by
a $1.6 million increase in interest expense, as compared to 2004.
Interest on loans increased by $1.4 million, or 20.6%, from $7.0
million in 2004 to $8.4 million in 2005. This increase was
attributable to an $11.5 million increase in the average balance of
loans, and an increase in the yield on the Company's loan portfolio
from 6.14% in 2004 to 6.73% in 2005. Interest on investment
securities decreased by $163,000 in 2005 compared to 2004. This
decrease resulted primarily from a decrease in the average balance
of the portfolio from $18.2 million in 2004 to $13.7 million in
2005. Interest on federal funds sold increased by $1.1 million, due
to the average balance increasing from $4.9 million in 2004 to
$32.5 million in 2005 and an increase in the average rate from
1.03% in 2004 to 3.51% in 2005. The growth in the balance of
federal funds sold was primarily related to a $39.7 million growth
in deposits from December 31, 2004 to December 31, 2005. During a
rising interest rate environment with a flat yield curve,
management elected to invest in federal funds sold until more
attractive investment or lending opportunities arose. The Company's
interest expense increased by $1.6 million compared to 2004, as a
result of an increase in interest paid on both deposits and
borrowings. Interest paid on deposits increased by $1.1 million,
resulting from an increase in the average balance of
interest-bearing deposits from $102.0 million in 2004 to $120.2
million in 2005 and from an increase in the average cost of
interest-bearing deposits from 2.08% in 2004 to 2.70% in 2005.
Interest paid on borrowed funds increased by $464,000, from $36,000
in 2004 to $500,000 in 2005, primarily as a result of the Company
borrowing $10.0 million in 2005 from the FHLB of Atlanta at a fixed
rate of 4.54% with a maturity in 2010. The Company's net interest
margin decreased from 3.99% for the year ended December 31, 2004 to
3.64% for the year ended December 31, 2005. The interest rate
spread decreased from 3.54% to 2.98% for the same periods. The
decrease in the Company's interest rate spread occurred because the
cost of its interest-bearing liabilities increased 81 basis points,
from 2.02% in 2004 to 2.83% in 2005, which more than offset the 25
basis point increase in yield on interest-earning assets, which
increased from 5.56% in 2004 to 5.81% in 2005. Provision for Loan
Losses. The Company's provision for loan losses decreased by
$420,000, from $453,000 in 2004 to $33,000 in 2005. This decrease
in the provision for loan losses resulted primarily from the
nonrecurrence in 2005 of a $353,000 impairment provision in 2004
related to a lending relationship with one borrower. Other
Noninterest Income. Total other income in 2005 was $1.7 million, an
increase of $297,000 over 2004: * Gains on the sale of real estate
owned ("REO") were $427,000 in 2005 compared to no gains or losses
on the sale of REO in 2004. At December 31, 2004, the Company
reclassified as REO four properties that had been previously and
improperly classified as investment property. All of the properties
were sold during the first three quarters of 2005. * Service
charges on deposit accounts increased by $126,000, from $300,000 in
2004 to $426,000 in 2005, due to an increase in transaction
accounts as well as a more systematic application of appropriate
account fees. * Late charges and other loan fees increased by
$98,000, from $90,000 in 2004 to $188,000 in 2005, primarily due to
an increase in prepayment penalties collected on loans paid before
maturity. * These increases in noninterest income were offset by a
decrease of $373,000 in bank-owned life insurance income, a
significant item of non- recurring noninterest income recorded in
2004. Other Noninterest Expense. Total other expenses increased by
$2.5 million, from $4.2 million in 2004 to $6.7 million in 2005: *
Compensation increased by $904,000, from $2.2 million in 2004 to
$3.1 million in 2005, related primarily to a $1.2 million increase
in salary and various benefit costs, partially offset by a $286,000
decrease in deferred compensation expense. The Company's number of
full-time equivalent employees increased from 51 at December 31,
2004 to 82 at December 31, 2005. In addition to opening a new
retail banking office in Virginia Beach, the Bank has also
recruited a number of additional lending, retail banking,
accounting and administrative personnel intended to provide a
foundation for future growth of the Bank. The decrease in deferred
compensation expense resulted from the nonrecurrence in 2005 of
expenses incurred in 2004 to adjust the liability in connection
with the death of a plan participant in 2004, and to also adjust
the deferred compensation liability, at December 31, 2004, to
reflect a change in estimates to the discount rates used to
calculate that liability. * Professional fees increased by
$428,000, from $106,000 in 2004 to $534,000 in 2005, primarily as a
result of an $81,000 increase in accounting and audit fees, and a
$333,000 increase in legal fees due to various corporate legal
matters, including expense associated with the restatement,
updating the Company's stock option plan, and branch development. *
Contract employee services increased by $317,000, from $9,000 in
2004 to $326,000 in 2005, primarily related to $277,000 in expenses
for consultants and contract accounting staff utilized in the
Company's restatement process. * Marketing expenses increased by
$248,000, from $49,000 in 2004 to $297,000 in 2005, related to
approximately $38,000 in expenses associated with the Bank's name
and logo change, a $101,000 increase in advertising and other
general marketing expense, and a related $109,000 expense related
to advisory board incentive campaigns initiated in 2005. The Bank
formed Advisory Boards in 2005 and has implemented an Advisory
Board Incentive Campaign through a model developed by the Bank's
staff. * The Company's expenditures for furniture and fixtures
increased by $241,000, from $211,000 in 2004 to $452,000 in 2005,
due to the impact of the Bank's infrastructure and expansion
initiatives. From 2004 to 2005, expenses increased related to
service contracts, software maintenance, general office equipment
and supplies, and depreciation on furniture, equipment and
software. * The Bank also incurred a $124,700 impairment charge
related to its investment in Bankers Investment Group, LLC, a
retail stock brokerage firm sponsored by the Virginia Bankers
Association. * Occupancy, stationery and supplies, and data
processing expense increased by $83,000, $73,000 and $53,000,
respectively, from 2004 to 2005, due to the Bank's expansion.
Income Taxes. The Company's income tax expense for the year ended
December 31, 2005 was $388,000 compared to $610,000 for 2004, which
represented effective tax rates of 31.6% and 26.8%, respectively.
The primary reason for the increased effective tax rate in 2005 was
related to the non- taxable life insurance proceeds recorded in
2004. Operating Results for the Fourth Quarter 2005 The Company
recorded a pretax loss of $292,000 for the quarter ended December
31, 2005. The net loss, after tax, was $179,000 or $0.10 per
diluted share. In addition to the impact of the increased expenses
as discussed above, the fourth quarter 2005 pretax loss of $292,000
was impacted by approximately $194,000 in pretax expenses related
to certain legal, consulting and contract staffing expenses
incurred in the quarter in connection with the Company's
restatement, and a $124,700 charge related to the impairment of the
Bank's investment in Bankers Investment Group, LLC, as described
above. Financial Condition of the Company Total Assets. At December
31, 2005, the Company's total assets increased by $51.1 million, or
33.3%, compared to total assets at the end of 2004. The increase in
assets resulted primarily from an increase in the balance of
federal funds sold, loans held for investment, and premises and
equipment, offset by a reduction in the balance of investment
securities. Investment Securities. Investment securities decreased
by $5.5 million, or 35.6%, as compared to December 31, 2004, due to
portfolio maturities. Loans. Loans held for investment at December
31, 2005 were $130.4 million, which represents an increase of $6.9
million, or 5.6%, from the balance of $123.5 million at December
31, 2004. Asset Quality. The Company's total nonperforming assets
decreased to $212,000, or 0.10% of assets, at December 31, 2005,
compared to $961,000, or 0.62% of assets, at December 31, 2004. The
aggregate decrease of $749,000 resulted from a $452,000 reduction
in nonperforming loans and the sale of $297,000 in REO during 2005.
At December 31, 2005, there was no REO, compared to $297,000 of REO
at the end of 2004. Deposits. Deposits increased by $39.7 million,
or 29.8%, from $133.1 million at December 31, 2004 to $172.8
million at December 31, 2005, due to growth in noninterest bearing
and money market deposits. Borrowed Funds. At December 31, 2005,
the Company's borrowed funds consisted of advances from the FHLB of
Atlanta and securities sold to customers under agreements to
repurchase ("repos"). FHLB advances increased by $10.0 million as a
result of a five year fixed-rate loan during 2005. The balance of
customer repos increased by $2.2 million, from $2.0 million at
December 31, 2004 to $4.2 million at December 31, 2005. These
increases were partially offset by a $1.7 million decrease in other
short-term borrowings. Capital. Stockholders' equity increased
$455,000, or 2.9%, from $15.6 million at December 31, 2004 to $16.1
million at December 31, 2005. Stockholders' equity increased
primarily as a result of a $798,000 increase in the Company's
comprehensive income, reduced by the payment of cash dividends of
$410,000 to stockholders. The tables attached to and incorporated
within this release present certain of the unaudited financial
information described in greater detail above. The 2005 financial
information contained in this release, including the attached
tables, is unaudited and may be adjusted upon completion of the
Company's audit for the period. About Heritage Heritage is the
parent company of Heritage Bank (http://www.heritagebankva.com/).
Heritage Bank has four full-service branches in the city of
Norfolk, and one full-service branch in the city of Virginia Beach.
Heritage Bank provides a full range of banking services including
business, personal and mortgage loans. 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. Forward-looking
statements address future events, developments or results and
typically use words such as believe, anticipate, expect, intend,
plan, forecast, outlook, or estimate. 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 the
anticipated results, performance, achievements or business strategy
expressed or implied by such forward-looking statements. Factors
that could cause such actual results, performance, achievements and
business strategy to differ materially from anticipated results,
performance, achievements and business strategy include: general
and local economic conditions, competition, capital requirements of
the planned expansion, customer demand for Heritage's banking
products and services, and the risks and uncertainties described in
Heritage's most recent 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. Selected
Financial Information (Dollars in thousands, except per share data)
Income Statement For the Twelve Months Ended 12/31/2005 12/31/2004
Interest income $10,044 $7,659 Interest expense 3,745 2,152 Net
interest income 6,299 5,507 Provision for loan losses 33 453 Net
interest income after provision for loan losses 6,266 5,054
Noninterest income: Service charges on deposit accounts 426 300
Gain on sale of REO 427 - Gain on sale of loan, net 260 234 Income
from bank-owned life insurance 20 393 Late charges and other fees
on loans 188 90 Other 373 380 Total noninterest income 1,694 1,397
Noninterest expense: Compensation 3,125 2,221 Professional fees 534
106 Furniture and equipment 452 211 Contract employee services 326
9 Data processing 366 313 Occupancy 361 278 Marketing 297 49 Taxes
and licenses 153 123 Other 1,118 864 Total noninterest expense
6,732 4,174 Income before provision for income taxes 1,228 2,277
Provision for income taxes 388 610 Net income $840 $1,667 Earnings
per share: Basic $0.49 $0.99 Diluted $0.48 $0.96 Balance Sheet at
period-end At or for the Years Ended December 31, 2005 2004 Total
assets $204,921 $153,775 Loans held for investment, net 130,420
123,529 Investment securities 9,966 15,476 Federal funds sold
45,831 1,407 Deposits Noninterest bearing 37,955 26,026 Interest
bearing 134,810 107,052 Total deposits 172,765 133,078 Securities
sold under agreements to repurchase 4,235 2,030 Federal Home Loan
Bank advances 10,000 - Stockholders' equity 16,103 15,648 Book
value per share $9.39 $9.17 Common stock outstanding 1,714,668
1,707,182 Asset Quality: Nonaccrual loans $208 $649 Accruing loans
past due 90 days or more 4 15 Total nonperforming loans 212 664
Real estate owned, net - 297 Total nonperforming assets 212 961
Nonperforming assets to total assets 0.10% 0.62% Delinquency ratio
0.41% 0.61% Allowance for Loan Losses: Balance, beginning of year
$1,264 $1,187 Provision for loan losses 33 453 Loans charged-off
(51) (386) Recoveries 89 10 Balance, end of year $1,335 $1,264
Allowance for loan losses to loans held for investment, net of
unearned fees and costs 1.01% 1.01% DATASOURCE: Heritage
Bankshares, Inc. CONTACT: Michael S. Ives of Heritage Bankshares,
Inc., +1-757-523-2651 Web site: http://www.heritagebankva.com/
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