NORFOLK, Va., Feb. 9 /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 2006. Net income,
after tax, for the year ended December 31, 2006 was $180,000, or
$0.10 per diluted share, compared to $809,000, or $0.46 per diluted
share, earned in 2005. Michael S. Ives, President and CEO of the
Company and the Bank, commented: "From an earnings standpoint, 2006
was another difficult year. The initiatives of restating our prior
financial statements and enhancing the Bank's infrastructure,
technology, branch facilities and personnel have been very
expensive; however, they were critical undertakings to establish
the sound platform needed to carry out our plans for the future.
The current structure of our balance sheet and a closer look at our
earnings for 2006 provide an emerging picture of our new company.
Comparing the fourth quarter of 2006 to the fourth quarter of 2005,
our net interest income grew by approximately $118,000, or 7.2%,
from a net increase in our average assets of only $9.7 million or
4.7%. In addition, our net interest margin increased from 3.44% in
the fourth quarter of 2005 to 3.52% in the fourth quarter of 2006.
This demonstrates the potential earnings growth for Heritage from
asset growth under our strategy of focusing on core deposit
generation." Ives continued: "Visible progress in all other areas
of our Company continues. During 2006, the Company added $8.2
million in additional capital to support our growth from a private
offering to our directors and executives and from a second private
offering to advisory directors and customers. Construction is
underway on our new executive and retail banking offices in the
Dominion Enterprises Building in the Financial District of the City
of Norfolk and on our new retail banking office in the Lynnhaven
area of the City of Virginia Beach. We expect to occupy our new
offices in the Dominion Enterprises Building in the summer of 2007
and our new Lynnhaven retail banking office in early 2008. These
offices in premier locations will present a new look for our Bank
and should provide us with new business development opportunities."
Ives stated further: "During 2007, we expect to continue to focus
on growing our core deposits. We implemented a formal calling
program for our retail banking team during the second half of 2006.
The focus of this program is the development of new sources of core
deposits. This program should be an important factor in the
continuing deposit growth, and we expect the benefits to our
shareholders from these initiatives to become even more apparent
next year." Comparison of Operating Results for the Twelve Months
Ended December 31, 2006 and 2005 Overview. The Company's pre-tax
income was $256,000 for the year ended December 31, 2006 as
compared to $1.2 million in 2005, a decrease of $926,000. During
2006, net interest income increased by $757,000, the provision for
loan losses increased by $31,000, other noninterest income
decreased by $313,000, and other noninterest expense increased by
$1.3 million. Net income, after tax, in 2006 was $180,000, a
decrease of $629,000 from $809,000 in 2005. Diluted earnings per
share decreased by $0.36, from $0.46 per share in 2005 to $0.10 per
share in 2006. Net Interest Income. The Company's net interest
income before provision for loan losses increased by $757,000 in
2006. 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 2005. Interest on loans increased by $1.2
million, or 14.3%, from $8.5 million in 2005 to $9.7 million in
2006. This increase was attributable to a $10.4 million increase in
the average balance of loans, and an increase in the yield on the
Company's loan portfolio from 6.70% in 2005 to 7.08% in 2006.
Interest on investment securities increased by $290,000 in 2006
compared to 2005. This increase resulted primarily from an increase
in the average balance of the Company's investment portfolio from
$13.4 million in 2005 to $16.1 million in 2006, and an increase in
year-over-year average yield from 3.06% to 4.33%. Interest on
federal funds sold increased by $872,000, due to the average
balance increasing from $30.3 million in 2005 to $40.9 million in
2006 and an increase in the average rate from 3.75% in 2005 to
4.91% in 2006. The Company's interest expense increased by $1.6
million, from $3.7 million in 2005 to $5.3 million in 2006.
Interest paid on deposits increased by $1.6 million, resulting from
an increase in the average balance of interest-bearing deposits
from $120.0 million in 2005 to $136.5 million in 2006 and from an
increase in the average cost of interest-bearing deposits from
2.70% in 2005 to 3.53% in 2006. Interest paid on borrowed funds
increased by $62,000, from $501,000 in 2005 to $563,000 in 2006.
The Company's net interest margin decreased by 6 basis points, from
3.69% for the year ended December 31, 2005 to 3.63% for the year
ended December 31, 2006, as the interest rate spread decreased by
28 basis points, from 3.04% to 2.76%, partially offset by the
positive impact of the growth in noninterest- bearing deposits. The
decrease in the Company's interest rate spread occurred because the
cost of its interest-bearing liabilities increased 79 basis points,
from 2.84% in 2005 to 3.63% in 2006, which more than offset the 51
basis point increase in yield on interest-earning assets, which
increased from 5.88% in 2005 to 6.39% in 2006. Average
noninterest-bearing deposits increased by $7.1 million, from $35.0
million in 2005 to $42.1 million in 2006. Provision for Loan
Losses. The Company's provision for loan losses increased by
$31,000, from $33,000 in 2005 to $64,000 in 2006. This increase in
the provision for loan losses resulted primarily from additional
provision expense necessary to support loan growth. Noninterest
Income. Total noninterest income decreased by $313,000, from $1.7
million in 2005 to $1.4 million in 2006: -- There were no gains on
the sale of real estate owned ("REO") in 2006 compared to gains of
$427,000 in 2005. -- Late charges and other loan fees decreased by
$96,000, from $188,000 in 2005 to $92,000 in 2006, primarily due to
a decrease in prepayment penalties collected on loans paid before
maturity. -- Gains on sale of mortgage loans held for sale
decreased by $82,000, from $260,000 in 2005 to $178,000 in 2006,
due to a decrease in mortgage origination volume. -- Fees on credit
cards declined by $33,000 in 2006 as compared to 2005 due to the
sale of the Bank's retail credit card portfolio. -- Service charges
on deposit accounts increased by $232,000, from $396,000 in 2005 to
$628,000 in 2006, due to an increase in transaction accounts as
well as a more systematic application of appropriate account fees.
-- Gains on the sale of the Bank's retail credit card portfolio and
equity securities held by the Company were $96,000 and $34,000,
respectively, in 2006. The Bank sold its credit card portfolio
primarily to eliminate a significant diversion of the Bank's retail
banking team from the core strategy of serving business customers.
There were no similar gains on sale in 2005. Noninterest Expense.
Total noninterest expense increased by $1.3 million, from $6.8
million in 2005 to $8.1 million in 2006: -- Compensation expense
increased by $1.0 million, from $3.2 million in 2005 to $4.2
million in 2006. This increase related primarily to the impact of
employee growth during 2005, which fully impacted 2006 costs. Also,
as previously announced, the Company's Board of Directors approved
the Heritage 2006 Equity Incentive Plan ("Incentive Plan") and
granted stock options under the Plan to certain employees and
nonemployee directors, and the Company's stockholders approved the
Incentive Plan and option grants on December 28, 2006. Statement of
Financial Accounting Standard No.123(R), Accounting for Stock-Based
Compensation, requires that the fair value of such stock options be
recognized as an expense over the requisite service period.
Accordingly, in December 2006, the Bank expensed $72,000 for the
2006 portion of the total fair value expense related to the 2006
option grants. -- Data processing expense increased by $158,000
from 2005 to 2006, due to additional customer services and an
increase in total transaction costs. -- The Company's expenditures
for furniture and fixtures increased by $141,000, from $452,000 in
2005 to $593,000 in 2006, due to the impact of infrastructure and
expansion initiatives. -- Occupancy expense increased by $125,000,
from $372,000 in 2005 to $497,000 in 2006, primarily due to
additional operating expenses for the Bank's Virginia Beach retail
banking office and City Center commercial loan office and increases
in other maintenance and security expenses. -- Loss on the
write-down of fixed assets increased by $64,000, from $11,000 in
2005 to $75,000 in 2006, primarily attributable to the impairment
of fixed assets related to the planned 2007 consolidation of the
Bank's Plume Street and City Center offices into a new facility,
and the replacement of the Bank's antiquated telephone system in
the fourth quarter of 2006. -- Telephone expense increased by
$39,000, attributable to higher operating costs associated with the
new telephone system. -- Taxes and license expense increased by
$33,000, from $152,000 in 2005 to $185,000 in 2006, primarily due
to increase in franchise tax and assessment expense related to
growth in the Bank's deposits. -- Impairment charges related to the
Company's investment in Bankers Investment Group LLC, a retail
stock brokerage firm sponsored by the Virginia Bankers Association
("Bankers Investment"), decreased by $118,000, from $125,000 in
2005 to $7,000 in 2006. -- Contract employee services decreased by
$86,000, from $293,000 in 2005 to $207,000 in 2006, primarily
related to a decrease in the second half of 2006 in expenses for
consultants and contract accounting staff utilized in the Company's
restatement process. -- Marketing expenses decreased by $80,000,
from $297,000 in 2005 to $217,000 in 2006, primarily related to the
non-recurrence in 2006 of approximately $38,000 in 2005 expenses
associated with the Bank's name and logo change, as well as lower
advertising expenses. -- Credit card expense decreased by $40,000,
from $82,000 in 2005 to $42,000 in 2006, due to sale of the Bank's
retail credit card portfolio. Income Taxes. The Company's income
tax expense for the year ended December 31, 2006 was $76,000
compared to $373,000 for 2005, which represented effective tax
rates of 29.6% and 31.5%, respectively. Comparison of Operating
Results for the Three Months Ended December 31, 2006 and 2005
Overview. The Company recorded a net loss, after tax, of $41,000,
or $0.02 per diluted share, for the three months ended December 31,
2006 compared to a net loss of $196,000, or $0.11 per diluted
share, for the three months ended December 31, 2005. The pretax
loss was $62,000 for the fourth quarter of 2006 compared to a
pretax loss of $319,000 in the fourth quarter of 2005. Net Interest
Income. The Company's net interest income before provision for loan
losses increased by $118,000 in the fourth quarter of 2006 as
compared to the fourth quarter of 2005. Average interest earning
assets increased by $9.2 million from the fourth quarter 2005 to
the fourth quarter 2006, while the net interest margin increased
from 3.44% to 3.52%. Net interest income for the fourth quarter of
2006 includes interest expense at an annualized interest rate of
7.8% related to the Company's $5.0 million unsecured term loan. The
Company repaid this loan in January 2007 with the proceeds of its
December 2006 private placement. Provision for Loan Losses.
Provision for loan losses increased by $13,000, from $3,000 in the
fourth quarter of 2005 to $16,000 in the fourth quarter of 2006, to
support loan growth. Noninterest Income. Total noninterest income
decreased by $57,000, from $352,000 in the fourth quarter of 2005
to $295,000 in the fourth quarter of 2006. This decrease was
primarily attributable to a $19,000 decrease in other fees on loans
related mostly to lower loan prepayment penalties and late charges
on credit cards; a decline of $15,000 in gains on sale of mortgage
loans held for sale due to decreased loan origination volume; a
$12,000 decrease in income resulting from the sale at the end of
2005 of the Bank's interest in Bankers Title of Hampton Roads, LLC,
a title insurance agency sponsored by the Virginia Bankers
Association; and a $13,000 decrease in other credit card related
fees due to the sale of the Bank's credit card portfolio.
Noninterest Expense. Total noninterest expense decreased by
$209,000, from $2.3 million in the fourth quarter of 2005 to $2.1
million in the fourth quarter of 2006. Impairment charges related
to Bankers Investment declined by $118,000; contract employee
services decreased by $103,000 during the period largely because
costs related to the Company's restatement were eliminated by the
fourth quarter; marketing expenses decreased by $77,000 primarily
due to the nonrecurrence in the fourth quarter of 2006 of expenses
for the Bank's logo change and decreased advertising expenses;
credit card expense decreased by $22,000 due to the sale of the
Bank's retail credit card portfolio; furniture and fixture expense
declined by $19,000 resulting from decreases in small office
equipment purchases and service contracts; and professional fees
decreased by $10,000, notwithstanding $15,000 in consultant
expenses related to the stock option valuation in the fourth
quarter of 2006. These decreases in noninterest expense were
partially offset by an increase in compensation expense of $73,000,
primarily due to a $72,000 charge in recognition of the 2006
portion of the stock option fair value expense; a $63,000 increase
in losses on fixed asset write-downs primarily attributable to the
impairment related to the planned relocation of the Bank's downtown
office in 2007 and the replacement of the Bank's phone system in
2006; a $24,000 increase in data processing expense due to
additional customer services as well as higher total transaction
costs; and a $19,000 increase in stockholders' expense due to
printing, mailing and transfer agent costs associated with the
Company's annual meeting in December 2006. Income Taxes. The
Company's income tax benefit for the quarter ended December 31,
2006 was $21,000 compared to a benefit of $123,000 for the fourth
quarter of 2005. Financial Condition of the Company Total Assets.
The Company's total assets increased by $18.3 million, or 8.9%,
from $204.6 million at December 31, 2005 to $222.9 million at the
end of 2006. The increase in assets resulted primarily from an
increase in the ending balances of loans held for investment and
securities available for sale, partially offset by a decrease in
the balance of federal funds sold. Federal Funds Sold and
Investment Securities. Total federal funds sold and investment
securities increased by $9.1 million, from $55.8 million at
December 31, 2005 to $64.9 million at December 31, 2006. Loans.
Loans held for investment at December 31, 2006 were $140.1 million,
which represents an increase of $9.7 million, or 7.4%, from the
loan balance of $130.4 million at December 31, 2005. Asset Quality.
The Company's total nonperforming assets decreased to $178,000, or
0.08% of assets, at December 31, 2006, compared to $230,000, or
0.11 % of assets, at December 31, 2005, attributable to a decrease
in the balance of nonaccrual loans. Deposits. Driven by growth in
core deposits, total deposits increased by $15.6 million, or 9.1%,
from $172.8 million at December 31, 2005 to $188.4 million at
December 31, 2006. Core deposits, which are comprised of
noninterest-bearing, money market, NOW and savings deposits,
increased by $20.4 million, or 20.1%, from $101.7 at December 31,
2005 to $122.1 million at December 31, 2006. This increase in core
deposits was partially offset by a $4.8 million decrease in
certificate of deposit balances. Borrowed Funds. Borrowed funds
decreased by $5.5 million, from $14.3 million at December 31, 2005
to $8.8 million at December 31, 2006, primarily due to the
repayment of the Bank's $10.0 million, 4.54% fixed rate FHLB
advance, partially offset by the $5.0 million unsecured 5-year term
loan obtained by the Company in September 2006. At December 31,
2006, the Company's borrowed funds consisted primarily of the $5.0
million unsecured term loan and $3.7 million of securities sold to
customers under agreements to repurchase ("repos"). In January
2007, the Company repaid the $5.0 million unsecured term loan,
which during the fourth quarter of 2006 had an average cost to the
Company of 7.8%. Capital. Stockholders' equity increased by $8.3
million, or 51.8%, from $16.1 million at December 31, 2005 to $24.4
million at December 31, 2006. Stockholders' equity increased
primarily as a result of a total of $8.2 in net capital raised in
connection with sales of the Company's common stock in private
placements that closed in June, July and December 2006. The tables
attached to and incorporated within this release present certain of
the unaudited financial information described in greater detail
above. The 2006 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. HERITAGE BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS At December 31, 2006 and 2005 (in
thousands) 2006 2005 (unaudited) ASSETS Cash and due from banks
$7,903 $8,349 Federal funds sold 19,286 45,831 Securities available
for sale, at fair value 44,901 9,285 Securities held to maturity,
at cost 679 681 Loans, net Held for investment, net of allowance
for loan losses 140,119 130,420 Held for sale 520 1,351 Accrued
interest receivable 736 684 Stock in Federal Reserve Bank, at cost
313 65 Stock in Federal Home Loan Bank of Atlanta, at cost 409 758
Premises and equipment, net 6,766 5,743 Other assets 1,256 1,469
Total assets $222,888 $204,636 LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities Deposits Noninterest bearing $47,694 $37,955
Interest-bearing 140,703 134,810 Total deposits 188,397 172,765
Federal Home Loan Bank Advance - 10,000 Securities sold under
agreements to repurchase 3,716 4,235 Other borrowings 5,050 50
Accrued interest payable 376 378 Other liabilities 945 1,136 Total
liabilities 198,484 188,564 Commitments and contingent liabilities
- - Stockholders' equity Common stock, $5 par value - authorized
3,000,000 shares; issued and outstanding: 2006 - 2,277,652 shares;
2005 - 1,714,668 shares 11,388 8,573 Additional paid-in capital
6,032 315 Retained earnings 6,972 7,238 Accumulated other
comprehensive income (loss), net 12 (54) Total stockholders' equity
24,404 16,072 Total liabilities and stockholders' equity $222,888
$204,636 HERITAGE BANKSHARES, INC. CONSOLIDATED STATEMENTS OF
INCOME (in thousands, except per share data) Three Months Ended
Twelve Months Ended December 31 December 31 2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) Interest income Loans and fees
on loans $2,464 $2,169 $9,677 $8,466 Taxable investment securities
263 74 651 362 Nontaxable investment securities 12 12 49 48
Dividends on FRB and FHLB stock 10 10 48 33 Interest on federal
funds sold 484 542 2,007 1,135 Total interest income 3,233 2,807
12,432 10,044 Interest expense Deposits 1,338 1,008 4,813 3,244
Borrowings 125 147 563 501 Total interest expense 1,463 1,155 5,376
3,745 Net interest income 1,770 1,652 7,056 6,299 Provision for
loan losses 16 3 64 33 Net interest income after provision for loan
losses 1,754 1,649 6,992 6,266 Noninterest income Service charges
on deposit accounts 145 145 628 396 Gains on sale of other real
estate owned - - - 427 Gains on sale of loans held for sale, net 50
65 178 260 Late charges and other fees on loans 19 38 92 188 Other
81 104 448 388 Total noninterest income 295 352 1,346 1,659
Noninterest expense Compensation 1,136 1,063 4,198 3,159 Data
processing 138 114 524 366 Occupancy 119 120 497 372 Furniture and
equipment 153 172 593 452 Taxes and licenses 46 39 185 152
Professional fees 129 139 528 534 Contract employee services 1 104
207 293 Marketing 47 124 217 297 Other 342 445 1,133 1,118 Total
noninterest expense 2,111 2,320 8,082 6,743 Income before provision
for income taxes (62) (319) 256 1,182 Provision for income taxes
(21) (123) 76 373 Net income $(41) $(196) $180 $809 Earnings per
share Basic $(0.02) $(0.11) $0.10 $0.47 Diluted $(0.02) $(0.11)
$0.10 $0.46 HERITAGE BANKSHARES, INC. OTHER SELECTED FINANCIAL
INFORMATION (Unaudited) (in thousands, except share and per share
data) Three Months Ended Twelve Months Ended December 31 December
31 2006 2005 2006 2005 Financial ratios Annualized return on
average assets -0.08% -0.38% 0.09% 0.44% Annualized return on
average equity -0.85% -4.81% 1.03% 5.03% Average equity to average
assets 8.98% 7.90% 8.36% 8.71% Equity to assets, at period-end
10.95% 7.85% 10.95% 7.85% Net interest margin 3.52% 3.44% 3.63%
3.69% Per common share Earnings per share - basic $(0.02) $(0.11)
$0.10 $0.47 Earnings per share - diluted $(0.02) $(0.11) $0.10
$0.46 Book value per share $10.71 $9.37 $10.71 $9.37 Dividends
declared per share $0.06 $0.06 $0.24 $0.24 Common stock outstanding
2,277,652 1,714,668 2,277,652 1,714,668 Weighted average basic
shares outstanding 1,944,319 1,712,974 1,820,300 1,709,405 Weighted
average diluted shares 1,970,404 1,752,407 1,853,634 1,752,533
Asset quality Nonaccrual loans $170 $226 $170 $226 Accruing loans
past due 90 days or more 8 4 8 4 Total nonperforming loans 178 230
178 230 Real estate owned, net - - - - Total nonperforming assets
$178 $230 $178 $230 Nonperforming assets to total assets 0.08%
0.11% 0.08% 0.11% Allowance for loan losses Balance, beginning of
period $1,348 $1,328 $1,335 $1,264 Provision for loan losses 16 3
64 33 Loans charged-off - (1) (91)(a) (51) Recoveries 9 5 65 89
Balance, end of period $1,373 $1,335 $1,373 $1,335 (a) includes
$(28) charged-off upon the sale of the retail banking credit card
portfolio Allowance for loan losses to gross loans held for
investment, net of unearned fees and costs 0.97% 1.01% 0.97% 1.01%
DATASOURCE: Heritage Bankshares, Inc. CONTACT: Michael S. Ives of
Heritage Bankshares, Inc., +1-757-648-1601 Web site:
http://www.heritagebankva.com/
Copyright