SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934 For
the fiscal year ended December 31, 1997 Commission File No. 0-11255
Heritage Bankshares, Inc.
Virginia 54-1234322
(State or other jurisdiction of (IRS Employer incorporation
incorporation or organization) identification number)
200 East Plume Street
Norfolk, Virginia 23514
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (804) 523-2600
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5 par Value Securities not registered on a stock exchange
Title of Each Class
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation SB is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 24, 1998: $12,857,775*
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of March 24, 1998:
Common Stock, $5 Par Value - 797,250
- ----------------------------------------------
* In calculating the aggregate market value, we have used the most recent
sales price of Common Stock known to the Company, which is $19.00 per share
and voting stock held by non-affiliates of the registrant at March 24, 1998
of 676,725 shares.
<PAGE>
Part I
This Form 10-KSB contains certain forward-looking statements. For this
purpose any statements contained in this Form 10-KSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"estimate" or "continue" or comparable terminology are intended to identify
forward looking-statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety of factors.
Item 1. BUSINESS
GENERAL
Heritage Bankshares, Inc. (the "Company") was incorporated under the
laws of the Commonwealth of Virginia in 1983. In August of 1992, two
wholly-owned subsidiaries, Princess Anne Bank and The Heritage Bank-McLean, were
spun off, and the Company has operated as a one bank holding company since that
time. The principal executive office of the Company is located at 200 East Plume
Street, Norfolk, Virginia. Currently, the Company does not transact any material
business other than through its wholly-owned banking subsidiary. The total
consolidated assets of the Company on December 31, 1997 were $83,002,000
THE BANK
Heritage Bank & Trust is engaged in the general commercial and retail
banking business. The cities of Norfolk and Chesapeake, Virginia, constitute the
primary service area of the Bank and to a lesser extent the Bank includes the
remaining areas of Hampton Roads in its market area.
Heritage Bank & Trust is a state banking corporation. The Bank was
incorporated as a Virginia corporation on September 19, 1975, and commenced
business at its main office at 841 North Military Highway in Norfolk, Virginia
on February 7, 1977. On December 31, 1997, the Bank had assets of $82,875,000,
with loans of $52,130,000 and deposits of $72,837,000.
IBV REAL ESTATE HOLDINGS, INC.
IBV Real Estate Holdings, Inc., is a corporation formed for the sole
purpose of owning additional real estate assets acquired by the Company or the
Bank. Currently, IBV Real Estate Holdings, Inc. owns a 1% interest in IBV
Partners, LP, a Virginia limited partnership formed in December 1986. IBV Real
Estate Holdings, Inc., serves as the sole general partner of the partnership.
The partnership's sole asset is a 17,200 square-foot office building located at
1450 South Military Highway, Chesapeake, Virginia. Heritage Bank & Trust is a
major tenant in the property.
SENTINEL TITLE SERVICES, INC. AND SENTINEL TRUST SERVICES, L.L.C.
Sentinel Title Services, Inc. and Sentinel Trust Services, L.L.C. are
wholly-owned subsidiaries which own an interest in providers of title and trust
services. The financial activities pertaining to these interests are recorded on
the cost method of accounting for investments. The Company's strategic
relationship with these entities provides the Bank with the ability to provide
title and trust services to its customers.
COMPETITION
The banking business in the cities of Norfolk and Chesapeake, as well
as all of the Hampton Roads area is highly competitive. All of the major
commercial banking institutions based in Virginia conduct business in the area.
The Bank also encounters competition from local banks, savings and loan
associations, money market and mutual funds, small loan companies, credit
unions, brokerage firms and other financial institutions.
EMPLOYEES
The Company and the Bank have 39 employees. Of this total, 32 are
full-time and 7 are part-time. Management considers its employee relations to be
excellent.
REGULATION AND SUPERVISION
THE BANK
Regulatory Matters
The Bank is subject to state and federal banking laws and regulations
which impose specific requirements or restrictions, and provide for general
regulatory oversight with respect to virtually all aspects of operations,
including, but not limited to, maintenance of cash reserves, loans, mortgages,
maintenance of minimum capital, payment of dividends, and establishment of
branch offices. As a state-chartered bank and a member of the Federal Reserve
System, the Bank is supervised and regularly examined by representatives of the
Board of Governors of the Federal Reserve System (the "Federal Reserve") and the
Bureau of Financial Institutions of the Commonwealth of Virginia (the "Virginia
Bureau of Financial Institutions").
In addition to being affected by general economic conditions, earnings
of the Bank may be affected by the fiscal and monetary policies of the Federal
Reserve. The techniques used by the Federal Reserve include setting the reserve
requirements of member banks and establishing the discount rate on member banks'
borrowing. The impact of the policies of the Federal Reserve and other
regulatory authorities, cannot be accurately predicted. These policies can,
however, materially affect the revenues and net income of commercial banks
because they have a direct effect on the amount of bank loans and deposits and
the interest rates charged and paid thereon.
The Bank is also subject to restrictions under Section 23A of the
Federal Reserve Act ("The Act"). These restrictions limit the transfer of funds
to the Company and certain other affiliates, as defined in the Act, in the form
of loans, extensions of credit, investments or purchase of assets. Such
transfers by the Bank to the company are limited in amount to 10% of the Bank's
capital. Furthermore, such loans and extensions of credit are also subject to
various collateral requirements. See Note 3 of the Consolidated Financial
Statements for additional information on restrictions.
The Bank is also subject to restrictions on the payment of dividends
under Section 33 of the Federal Reserve Act. Under this section, approval of the
applicable Federal Reserve Bank is required if the total of all dividends
declared by the Bank during any calendar year exceeds the total of its net
profits (as defined by the Act) of that year combined with its net profits of
the preceding two years. See Note 3 of the Consolidated Financial Statements for
additional information on restrictions.
The Federal Reserve and the Bureau of Financial Institutions of
Virginia requires the Bank to maintain certain minimum capital ratios. The Bank
and the Company are required to maintain minimum risk-based capital to asset
ratios, as defined by the regulations, of 4.00% for the Tier 1 capital ratio and
8.00% for the Total (Tier 1 plus Tier 2) capital ratio. Additionally, a leverage
capital ratio, defined as Tier 1 capital divided by average assets, must also be
maintained by financial institutions. For financial institutions with the best
regulatory rating, generally, a minimum leverage ratio of 5.00% must be
maintained. The Bank and the Company met the minimum risk-based capital
requirements at December 31, 1997. See Note 15 of the Consolidated Financial
Statements for additional information on regulatory capital matters.
Mergers and Acquisitions
The Bank Holding Company Act formerly prohibited the Federal Reserve
from approving an application from a bank holding company to acquire shares of a
bank located outside the state in which the operations of the holding company's
banking subsidiaries were principally conducted, unless such an acquisition was
specifically authorized by statute of the state in which the bank whose shares
were to be acquired was located. The restriction on interstate acquisitions was
abolished effective September 29, 1996, and bank holding companies from any
state may now acquire banks and bank holding companies located in any other
state. Banks may branch across state lines effective June 1, 1997, provided
certain conditions are met, including that applicable state law must expressly
permit such interstate branching. Under Virginia law, effective July 1, 1995,
Virginia banks can branch across state lines in those states with which Virginia
has reciprocal agreements. Although this will have a significant impact on the
banking industry, it is not possible to determine, with any degree of certainty,
its impact on individual institutions.
Deposit Insurance
Section 38 of the Federal Deposit Insurance Act, as amended by the
Federal Deposit Insurance Corporation ("FDIC") Improvement Act ("FDICIA"),
requires that the federal banking agencies establish five capital levels for
insured depository institutions - "well capitalized", "adequately capitalized,"
"undercapitalized," "significantly "undercapitalized" and, "critically
undercapitalized", and requires or permits such agencies to take certain
supervisory actions as an insured institution's capital level falls. The Bank
has been notified by the Federal Reserve that it is classified as a "well
capitalized" institution for this purpose. An "adequately capitalized"
institution is restricted from accepting brokered deposits. A "significantly
undercapitalized" institution must develop a capital restoration plan and is
subject to a number of mandatory and discretionary supervisory actions. These
powers and authorities are in addition to the traditional powers of the federal
banking agencies to deal with undercapitalized institutions. As more fully
disclosed in the following paragraph, the FDIC deposit insurance premiums
required to be paid by institutions depend, in part, on their capital levels,
and "undercapitalized" institutions will be required to pay significantly
greater premiums than more highly capitalized institutions.
The FDIC has implemented a risk-based deposit insurance assessment
system under which the assessment rate for an insured institution may vary
according to regulatory capital levels of the institution and other factors
(including supervisory evaluations). Effective January 1, 1996, depository
institutions insured by the Bank Insurance Fund ("BIF"), ranked in the top risk
classification category of well capitalized, are required to pay only the
statutory minimum assessment of $2,000 annually for deposit insurance, while all
other banks are required to pay premiums ranging from .03% to .30% annually per
$100 of domestic deposits. These rate schedules are subject to future
adjustments by the FDIC. In addition, as more fully disclosed in the following
paragraph, the FDIC has authority to impose special assessments from time to
time. The Bank is currently assessed the statutory minimum assessment of $2,000
annually.
The Deposit Insurance Funds Act of 1996 ( the "Funds Act") was enacted
on September 30, 1996. Among other provisions, the Funds Act: (1) requires that
certain depository institutions pay a one-time special assessment (65.7 cents
per $100 of SAIF-assessable deposits) to the FDIC to capitalize the Savings
Association Insurance Fund ("SAIF") at its statutorily required reserve ratio of
1.25% of insurable deposits; (2) exempts certain depository institutions with
SAIF assessable deposits that meet any of several specified criteria from paying
the special assessment, (3)authorizes the Financing Corporation ("FICO") to
impose periodic assessments on depository institutions that are members of BIF,
in addition to institutions that are members of the SAIF, in order to spread the
cost of the interest payments on the outstanding FICO bonds over a larger number
of institutions. Until this change in the law, only SAIF-member institutions
bore the cost of funding these interest payments. FICO assessment rates for the
first semiannual period of 1997 were set at 1.30% (per $100) annually for
BIF-assessable deposits and 6.48% (per $100) annually for SAIF-assessable
deposits. These rates may be adjusted quarterly to reflect changes in assessment
bases for the BIF and the SAIF. By law, the FICO rate on BIF-assessable deposits
must be one-fifth the rate on SAIF assessable deposits until the insurance
fiends are merged or until January 1, 2000, whichever occurs first. These
changes in FDIC insurance are not expected to have a material effect on the
Bank's financial condition and results of operation for the foreseeable future.
The Bank is currently assessed at a rate of 1.3% annually (per $100) for FICO
purposes.
Regulations
On December 15, 1994, the Federal Reserve, the Office of Thrift
Supervision, the Office of the Controller of the Currency ("OCC"), and the FDIC
(collectively the "agencies") issued a final rule entitled, Risk-Based Capital
Standards: Concentration of Credit Risk and Risks of Nontraditional Activities.
The final rule amends the risk-based capital standards by explicitly identifying
concentrations of credit risk and certain risks arising from nontraditional
activities, as well as an institution's ability to manage these risks, as
important factors in assessing an institution's overall capital adequacy. While
no quantitative measure of such risk is included in the final rule, to the
extent appropriate, the agencies will issue examination guidelines on new
developments in nontraditional activities or concentrations of credit to ensure
that adequate account is taken of the risks of these activities. Moreover, the
agencies also believe that institutions identified though the examination
process as having significant exposure to concentration of credit risk, or as
not adequately managing concentration risks, should hold capital in excess of
the regulatory minimums. Therefore, due to the subjective nature of this final
rule, the Bank is unable to determine what effect, if any, this rule may have on
regulatory capital requirements.
On August 2, 1995, the OCC, the Federal Reserve, and the FDIC
(collectively the "banking agencies") issued a final rule entitled, Risk-Based
Capital Standards: Interest Rate Risk. The final rule implements minimum capital
standards for interest rate risk exposures in a two-step process. The final rule
implements the first step of that process by revising the capital standards of
the banking agencies to explicitly include a bank's exposure to declines in the
economic value of its capital due to changes in interest rates as a factor that
the banking agencies will consider in evaluating a bank's capital adequacy. It
is important to note that the banking agencies intend to implement this rule on
a case-by-case basis during the examination process. The second step of the
banking agencies' process will be to issue a proposed rule that would establish
an explicit minimum capital charge for interest rate risk, based on the level of
the bank's measured interest rate risk exposure. Due to the subjective nature of
the first phase of this final rule, the Bank is unable to determine what effect,
if any, this rule may have on its regulatory capital requirements
On October 1, 1996, the banking agencies issued new guidelines amending
the Interagency Guidelines Establishing Standards for Safety and Soundness (the
"Safety and Soundness Guidelines") to include asset quality and earnings
standards. The Safety and Soundness Guidelines were adopted pursuant to the
requirements of Section 39 of the Federal Deposit Insurance Act. The Safety and
Soundness Guidelines require financial institutions to identify problem assets
and estimate inherent losses. In order to comply with these Safety and Soundness
Guidelines a financial institution shall: (1) consider the size and potential
risks of material concentrations of credit risk; (2) compare the level of
problem assets to the level of capital and establish reserves sufficient to
absorb anticipated losses on those and other assets, (3) take appropriate
corrective action to resolve problem assets, as appropriate; and (4) provide
periodic asset quality reports to the of directors to assess the level of asset
risk. The earnings standards specified by the Safety and Soundness Guidelines
require an institution to compare its earnings trends ( relative to equity,
assets, and other common benchmarks) with its historical experience and with the
earnings trends of its peers. The Safety and Soundness Guidelines, relative to
the earnings standards, require the institution to: (1) evaluate the adequacy of
earnings with regard to the institution's relative size and complexity, and the
risk profile of the institution's assets and operations; (2) assess the source,
volatility, and sustainability of earnings, (3) evaluate the effect of
nonrecurring or extraordinary income or expense; (4) take steps to ensure that
earnings are sufficient to maintain adequate capital and reserves after
considering asset quality and the institution's rate of growth; and (5) provide
periodic reports with adequate information for management and the board of
directors to assess earnings performance. The Safety and Soundness Guidelines
note that the complexity and sophistication of an institution's monitoring,
reporting systems, and corrective actions should be commensurate with the size,
nature and scope of the institution's operations. The Bank does not believe that
these Safety and Soundness Guidelines will materially effect its operations or
financial condition in the foreseeable future.
On December 20, 1996 the FDIC Board of Directors adopted the FFIEC's
updated statement of policy entitled Uniform Financial Institutions Rating
System ("UFIRS"). The updated UFIRS replaces the previous rating system
established in the 1979 statement of policy, and is effective January 1, 1997.
Under the existing UFIRS, each financial institution is assigned a composite
rating based on an evaluation and rating of five essential components of an
institution's financial condition and operations. The five component areas are
Capital adequacy, Asset quality, Management, Earnings and Liquidity ("CAMEL").
The updated UFIRS includes the addition of a sixth component for Sensitivity to
market risk ("CAMELS"). The new sixth component addresses the degree to which
changes in interest rates, foreign exchange rates, commodity prices or equity
prices can adversely affect a financial institution's earnings or capital. The
new component focuses on an institution's ability to monitor and manage its
market risk, and will provide an institution's management with a clearer and
more focused indication of supervisory concerns in this area. The Bank does not
believe that this statement of policy will materially effect its operations in
the foreseeable future.
THE COMPANY
As a bank holding company, the Company is subject to regulation by the
Federal Reserve in accordance with the provisions of the Bank Holding Company
Act of 1956, as amended, and the rules and regulations promulgated thereunder.
The Federal Reserve may require a bank holding company to serve as a source of
financial strength to its subsidiary depository institution and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. In addition, the "cross-guarantee" provisions of the federal
law require insured depository institutions under common control to reimburse
the Federal Deposit Insurance Corporation for any loss suffered or reasonably
anticipated by either the Savings Association Insurance Fund ("SAIF") or the
Bank Insurance Fund ("BIF") as a result of the default of a commonly controlled
insured depository institution in danger of default. The Federal Deposit
Insurance Corporation's claim for damages is superior to claims of shareholders
of the insured depository institution or it holding company but is subordinate
to claims of depositors, secured creditors and holders of subordinated debt
(other than affiliates) of the commonly controlled insured depository
institutions.
A bank holding company is required to file with the Federal Reserve
annual reports along with those of its subsidiaries. It is also subject to
examination by the Federal Reserve and is required to obtain Federal Reserve
approval prior to acquiring, directly or indirectly, ownership or control of any
voting shares of any bank if, after such acquisition, it would own or control,
directly or indirectly, more than 5.00% of the voting stock of such bank.
Furthermore, a bank holding company is, with limited exceptions, prohibited from
acquiring direct or indirect ownership or control of more than 5.00% of any
company which is not a bank or bank holding company, and must engage only in the
business of banking or managing or controlling banks or furnishing services to
or performing services for its subsidiary banks. One of the exceptions to this
prohibition is the ownership of shares of a company, the activities of which the
Federal Reserve has determined to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto.
The Federal Reserve has determined that numerous activities are closely
related to banking, and thus bank holding companies may apply to the Federal
Reserve for permission to retain or acquire an interest in a company engaging in
or proposing to engage in these activities. The permitted non-banking activities
include making loans that would be made by mortgage, finance, credit card or
factoring companies; operating as an industrial bank; servicing loans;
performing the functions of a trust company; leasing personal property; making
investments to promote community welfare; providing bookkeeping or data
processing services; acting as insurance agent or broker with respect to
insurance that is directly related to the extension of credit or other financial
services and acting as an underwriter for credit life insurance and credit
health and accident insurance directly related to extensions of credit by the
appraisal activities. Also, an application may be filed as to other activities,
but the Federal Reserve will publish a notice of opportunity for hearing only if
it believes there is a reasonable basis for concurring in the holding company's
opinion that the activity applied for is closely related to banking.
A bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with the extension of
credit or provision of any property or service. Thus, an affiliate of a bank
holding company may not extend credit, lease, sell property or furnish any
services or fix or vary the consideration for these services on the condition
that (a) the customer must obtain or provide some additional credit, property,
or services from or to its bank holding company or subsidiaries thereof, or (b)
the customer may not obtain or provide some additional credit, property, or
services from a competitor, except to the extent reasonable conditions are
imposed to assure soundness of credit extended.
The Company is also registered under the bank holding company laws of
Virginia. Accordingly, the Company and its subsidiaries are also subject to
regulation and supervision by the Virginia Bureau of Financial Institutions.
Federal Securities Laws
The Company's Common Stock is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restriction and
other requirements of the SEC under the Exchange Act. Under the Securities
Enforcement and Penny Stock Reform Act of 1990, the Company may be subject,
among other things, to civil money penalties for violations of the federal
securities laws.
FEDERAL AND STATE TAXATION
General
The Company and the Bank are subject to the applicable corporate tax
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as certain additional provisions of the Code that apply to banks and other
types of financial institutions. The following discussion of tax matters is
intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Company and the Bank.
Under the applicable statutes of limitation, the Company's federal
income tax returns for 1994 through 1997 are open to examination by the Internal
Revenue Service (the "Service"). The Company is unaware, however, of any current
or pending Service examinations of the Company's returns for any of those open
years.
Historically, the Company has reported its income and expenses on the
accrual method of accounting and filed its consolidated federal income tax
returns on a December 31, fiscal year basis. Consolidated tax returns have the
effect of eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur.
Corporate Minimum Tax
The Company and its subsidiaries could be subject to an alternative
minimum tax ("AMT") which is imposed to the extent that it exceeds the
consolidated group's regular tax liability for a year. The alternative minimum
tax generally will apply at a rate of 20% to a base of regular taxable income
plus certain tax preferences and adjustments ("alternative minimum taxable
income" or "AMTI"), less an exemption amount. Currently no more than 90% of the
AMTI may be offset by net operating losses (as determined for AMTI purposes).
Payment of the AMT may be used as a credit against a portion of the regular tax
liabilities in future years. The Code provisions relating to the AMT also: (i)
treat as a preference item interest on certain tax exempt private activity bonds
issued on or after August 8, 1986; (ii) include in AMTI (for tax years beginning
after 1989) an amount equal to 75% of the amount by which a corporation's
adjusted current earnings exceed its AMTI (determined without regard to this
preference and before reduction for the alternative tax net operating losses.)
In addition, an environmental tax of 0.12% of the excess, if any, of AMTI (with
certain modifications) over $2 million is imposed on corporations, whether or
not an AMTis paid. The consolidated group was not subject to the AMT in 1997.
Corporate Dividends Received Deduction
The Company is permitted to exclude from its taxable income 100% of any
dividends received from the Bank and may exclude from its income dividends
received from its subsidiaries pursuant to the regulation applicable to
consolidated income tax returns. The Company and the Bank may deduct from their
income 80% of any dividends received from an unaffiliated corporation if they
own at least 20% of the stock of the corporation. If they own less than 20% of
the stock of a corporation paying a dividend, 70% of any dividends received may
be excluded from income.
State and Local Taxation
The Company's subsidiaries (other than the Bank) are subject to
Virginia corporate income taxes. The Virginia corporate income tax is imposed at
a rate of 6% on the combined net income of the Company, and its subsidiaries
(other than the Bank) as reported for federal income tax purposes with certain
modifications.
The Bank is chartered under the laws of Virginia and, accordingly, is
not subject to the Virginia corporate income tax. It is instead subject to
Virginia's Bank Franchise Tax. Under this system, the Bank's net capital is
subject to tax at a rate of one percent. Net capital is composed generally of
the equity accounts (common stock, additional paid-in capital, and retained
earnings) adjusted for investments in real and personal property, certain
reserves and certain securities exempt from state taxation.
Item 2. PROPERTIES
The Bank owns three of its banking locations, 841 North Military
Highway, 200 East Plume Street and 4815 Colley Avenue in Norfolk, Virginia.
Management believes these locations are in excellent condition. A third banking
location and the bank's operations center are located at 1450 South Military
Highway in Chesapeake, Virginia. See "IBV Real Estate Holdings, Inc." under Item
1 and "Certain Relationships and Related Transactions" under Item 12.
Item 3. LEGAL PROCEEDINGS
The Company is subject to claims and lawsuits which arise primarily in
the ordinary course of business. Based on information presently available to
management and advice received from legal counsel, there are no meritorious
claims involving the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of securities holders during the
fourth quarter of 1997.
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
There is a limited public market for the Company's common stock. It is
not listed for trading on a registered exchange. There are no "market makers"
for the stock. Trades in the common stock occur on a local basis. Scott &
Stringfellow Inc., a Virginia brokerage firm, attempts to match orders to buy
and sell the common stock. Accordingly, there is no established public trading
market for shares of common stock, and quotations do not necessarily reflect the
price that would be paid in an active, liquid market. There can be no assurance
an active trading market will develop in the future. The following table sets
forth the closing high and low sales price for the common stock by calendar
quarters for the past two years as reported to the Company by Scott &
Stringfellow Inc.
Calendar Quarter
HIGH LOW
1997
Fourth Quarter $ 18.00 $ 17.13
Third Quarter 13.75 13.75
Second Quarter 13.25 13.25
First Quarter 11.63 11.25
1996
Fourth Quarter $ 9.75 $ 9.25
Third Quarter 9.00 8.50
Second Quarter 8.63 8.50
First Quarter 7.75 7.00
At March 24, 1998, there are 1,345 record holders of the 797,250
outstanding shares of common stock.
As of March 24, 1998 , the most recent sales price of common stock
known to the Company was $19.00 per share.
The Company's Board of Directors determines whether to declare
dividends and the amount of such dividends. Determinations by the Board take
into account the Company's financial condition, results of operations, capital
requirements, general business conditions and other relevant factors. The
Company's principal source of funds for cash dividends is the dividends paid to
the Company by the Bank. The Company declared and paid annual dividends of $.14
and $.12 per share in 1997 and 1996, respectively. Regulatory restrictions on
the payment of dividends by the Bank to the Company are disclosed in Note 3 to
the Consolidated Financial Statements for additional information on
restrictions.
<PAGE>
Item 6. SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following sets forth certain selected financial data with respect
to the Company. The data presented below for the years ended December 31, 1997
and 1996, respectively, should be read in conjunction with the Consolidated
Financial Statements and notes thereto, which have been audited by Goodman &
Company, L.L.P. independent accountants. (The Consolidated Financial Statements
and notes thereto for the years ended December 31, 1997 and 1996 are filed
herewith). This data should also be read in conjunction with the discussion and
analysis that follows.
Summary of Consolidated Financial Data
(Dollars in thousands, except per share data)
1997 1996
FOR THE YEAR
Interest income $6,185 $5,380
Interest expense 2,909 2,495
Net interest income 3,277 2,885
Provision for loan losses 88 93
Noninterest income 288 246
Noninterest expense 2,056 1,950
Income taxes 440 218
Net income 980 870
AT YEAR END
Assets $83,002 $76,846
Loans, net 51,242 45,259
Federal funds sold 1,697 5,925
Securities 22,595 20,197
Deposits 72,797 68,427
Stockholders' equity 7,081 6,112
AVERAGE BALANCES
Assets $81,376 $70,968
Loans, net 47,322 42,970
Federal funds sold 6,122 8,605
Securities 22,490 14,509
Deposits 71,322 64,519
Stockholders' equity 6,607 5,686
PER SHARE DATA
Basic earnings per common share $1.24 $1.11
Diluted earnings per common share $1.17 $1.09
Cash dividends declared 0.14 0.12
Book value at year end 8.91 7.79
Shares outstanding at year end 795,050 784,150
Weighted average shares 790,450 784,150
Diluted average common shares outstanding 836,920 800,399
RATIOS
Return on average assets 1.20% 1.23%
Return on average equity 14.83% 15.30%
Average equity to average assets 8.12% 8.01%
Allowance to year end loans 1.71% 1.83%
Net loans charged-off to average loans 0.09% 0.03%
PERFORMANCE SUMMARY:
In 1997, net income for Heritage Bankshares, Inc. (the "Company")
totaled $980,000 compared to $870,000 earned in 1996. Heritage Bank & Trust's
(the "Bank") net income was $972,000 and net holding company income was $8,000.
In 1996, Heritage Bank & Trust's net income was $878,000 and net holding company
expenses were $8,000.
Basic earnings per common share in 1997 was $1.24 compared to $1.11 in 1996.
Diluted earnings per common share was $1.17 and 1.09 at December 31, 1997 and
1996, respectively.
The 1997 provision for loan losses was $88,000 compared to the
1996 provision of $93,000. Net interest income increased $391,000 in 1997 to
$3,277,000, from $2,886,000 in 1996.
Total assets increased at the end of 1997 to $83,002,000. Total
assets at the end of 1996 were $76,846,000. Net loans increased $5,982,000 from
$45,259,000 at the end of 1996 to $51,242,000 at the end of 1996. Deposits
increased from $68,427,000 at December 31, 1996 to $72,797,000 at December 31,
1997.
LIQUIDITY:
Liquidity is the ability of the Company to efficiently fund
depositors' withdrawals and extensions of credit to borrowers. The Company and
Heritage Bank & Trust must consider both immediate liquidity needs, as well as
the long-term matching of maturing loans and investments with obligations to
depositors.
The Company's Consolidated Statement of Cash Flows, found in the
Consolidated Financial Statements, provides information as to cash provided and
used from operating, investing and financing activities. At December 31, 1997,
cash and cash equivalents available to meet immediate liquidity needs and
reserve requirements were $5,716,000. The Bank also has borrowing capacity of
$5.9 million, as a member of the Federal Home Loan Bank System. As of December
31, 1997, no amounts have been drawn on this line of credit.
The Company's cash and cash equivalents decreased by $3,277,000
in 1997 compared to a $50,000 increase in 1996. Net cash used by investing
activities was $9,278,000 in 1997 and $9,555,000 in 1996. In both years, this
was primarily due to growth in both the loan and investment portfolios. In 1997,
gross loans increased $6,029,000 and the investment portfolio grew by
$2,399,000. In 1996, gross loans increased $2,320,000 and investment securities
increased $7,194,000. The increase in loans in both years is largely due to the
expansion of current customer relationships. In 1997, the net cash provided by
financing activities of $4,852,000, is largely due to the $4,370,000 increase in
deposits. In 1996, net cash provided by financing activities of $8,692,000 was
primarily due to the increase in deposits of $7,374,000. The expansion of
current customer relationships and the bank's continued sales efforts
contributed to these increases.
PARENT HOLDING COMPANY LIQUIDITY:
The parent holding company incurred expenses for
stockholder-related activities, stock transfer and other functions necessary for
the administration of the Company.
See Note 3 of the Consolidated Financial Statements for the
parent company's Cash Flow Statement for further information on cash provided or
used by the parent for operating, financing and investing activities. In
addition, certain restrictions on cash dividends, loans and advances are imposed
by regulation of the Bank, which are also disclosed in Note 3.
<TABLE>
Table 2: Selected Liquidity Statistics
For the year ended December 31,
<CAPTION>
1997 1996
(Dollars in thousands)
<S> <C>
Available short-term assets (1) $7,272 $8,262
Certificates of deposit $100,000 and over 8,128 6,728
----- -----
Net available short-term assets ($856) $1,534
Ratio of available short-term assets to
certificates $100,000 and over 89% 123%
Ratio of loans to deposits 72% 66%
Ratio of certificates $100,000 and over to
total assets 10% 9%
</TABLE>
(1)As of December 31, 1997, available short-term assets include federal funds
sold of $1,697,000 and held-to- maturity and available-for-sale securities
maturing within one year of $1,019,000 and $4,556,000, respectively. At
December 31, 1996, available short-term assets included federal funds sold of
$5,925,000 and held-to- maturity and available-for-sale securities maturing
within one year of $547,000 and $1,790,000 respectively.
CAPITAL:
Stockholders' equity at December 31, 1997 was $7,081,000 compared
to $6,112,000 at the end of the prior year. Book value per share increased from
$7.79 at December 31, 1996 to $8.91 at December 31, 1997.
Table 3 provides information on the Company's risk-based,
leverage and capital ratios at December 31, 1997 and 1996. The Company is
considered well-capitalized and in compliance with all relevant regulatory
capital requirements. See Note 15 of the Consolidated Financial Statements for
additional information with respect to compliance with regulatory capital
requirements.
Table 3: Capital Ratios
For the year ended December 31,
1997 1996
(Dollars in thousands)
Risk-based capital:
Tier I Capital
Stockholders' equity $7,024 $6,081
Tier II Capital
Allowance for loan losses 639 569
------ ------
(limited)
Total $7,663 $6,650
Risk adjusted assets $50,848 $45,230
Risk-based capital ratios:
Tier I 13.81% 13.44%
Total 15.07% 14.70%
Leverage ratio 8.63% 8.57%
Primary capital ratio 9.50% 8.91%
RATE SENSITIVITY:
At December 31, 1997, the Company had, on a cumulative basis,
$12,508,000 more in liabilities subject to repricing within one year than
assets. It is management's view that the Company is an asset-sensitive company.
This view is based on the fact that historically the Company's earnings have
been more favorable during periods of increasing interest rates.
Table 4 provides an interest sensitivity analysis as of December
31, 1997.
Table 4: Interest Sensitivity Analysis
December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Within Over 3 Over 1 Yr Over 3 Yr Over 5 Yr Total
1 through 3 through through through through through Over
months 12 months 3 yrs 5 yrs 10 yrs 10 yrs 10 yrs(4) Total
-----------------------------------------------------------------------------------------
Earning assets: (1)
Federal funds $1,697 $ - $ - $ - $ - $1,697 $ - $1,697
Investment securities (2) 3,644 4,797 10,446 2,848 193 21,928 581 22,509
Loans 21,555 2,005 8,084 7,368 2,988 42,000 10,131 52,131
-----------------------------------------------------------------------------------------
Total Earning Assets $26,896 $6,802 $18,530 $10,216 $3,181 $65,625 $10,712 $76,337
-----------------------------------------------------------------------------------------
Interest and non-interest bearing
liabilities: (1)
Commercial DDA (3) $4,701 - $2,820 $1,880 $9,401 - $9,401
Personal DDA (3) - - 2,101 700 700 3,501 - 3,501
TT&L Note 52 - - 52 - 52
Savings(3) - 2,757 919 919 4,595 - 4,595
Money Market(3) 2,309 2,309 - - 4,618 - 4,618
NOW(3) - 4,378 1,460 1,460 7,298 - 7,298
Certificates 9,345 27,854 4,966 1,275 - 43,440 - 43,440
Repurchase Agreements 1,945 - - - - 1,945 - 1,945
-----------------------------------------------------------------------------------------
Total Interest and non interest
bearing liabilities $16,043 $30,163 $19,331 $6,234 $3,079 $74,850 $ - $74,850
-----------------------------------------------------------------------------------------
Interest sensitivity gap 10,853 (23,361) (801) 3,982 102 (9,225) 10,712 1,487
Cumulative gap 10,853 (12,508) (13,309) (9,327) (9,225)
Ratio interest sensitive assets
to interest-sensitive liabilities 1.68 0.23 0.96 1.64 1.03 0.88
Ratio of cumulative gap to
total earning assets 14.22% -16.38% -17.43% -12.22% -12.08%
</TABLE>
(1)Assets and liabilities are presented in the period they mature or reprice,
whichever is earlier.
(2)Presented on an amortized cost basis.
(3)Based on the proposed range of permissible maturities for non-maturity
deposits issued by the banking agencies in the Joint Policy Statement (August
2, 1995): Supervisory Policy Statement Concerning a Supervisory Framework for
Measuring and Assessing Banks' Interest Rate Risk Exposure)
(4)Includes non-interest bearing liabilities.
NET INTEREST INCOME:
Net interest income is the difference between interest earned on
loans, investment securities and short-term investments and interest paid on
deposits, securities sold under agreements to repurchase and other short-term
borrowing. Material factors affecting net interest income included interest
rates earned on loans and investments and those paid on deposits, the mix and
volume of earning assets and interest-bearing liabilities, and the level of
noninterest-bearing liabilities.
Net interest income increased from $2,886,000 in 1996 to
$3,277,000 in 1997, a $391,000 increase. The increase is primarily attributable
to the 13% increase in gross loans. The growth in loans is an indication of the
Bank's growing sales effectiveness.
Table 5 presents the components of net interest income. Table 6
allocates changes in volume and rate on net interest earnings.
<TABLE>
<S> <C>
Table 5: Components of Net Interest Income
For the years ended December 31, 1997 1996
(Dollars in thousands)
Average Average Average Average
Balance(1) Interest yield/rate Balance(1) Interest yield/rate
Interest earning assets: (taxable equivalent basis(2))
Loans (net of unearned discount (3)) $ 48,166 $ 4,531 9.41% $ 43,781 $ 4,146 9.47%
Investment securities-taxable (4) 21,818 1,330 6.10% 14,360 853 5.94%
Investment securities- non-taxable (1) (4) 672 31 4.61% 149 10 6.71%
Federal Funds 6,122 334 5.46% 8,605 456 5.30%
-------- ------- ---- ---------- -------- ----
Total Interest earning assets $ 76,778 $ 6,226 8.11% $ 66,895 $ 5,465 8.17%
======== ======= ==== ========== ======== ====
Noninterest earning assets:
Cash and due from banks 2,644 2,525
Allowance for loan losses
(843) (811)
Other real estate owned 442 503
Premises and equipment 831 603
Other assets 1,524 1,253
-------- ----------
Total Assets $ 81,376 $ 70,968
======== ==========
Liabilities and stockholders' equity
Interest bearing liabilities:
Money Market and NOW accounts $12,849 $ 341 2.65% $ 14,235 $ 407 2.86%
Savings Deposits 5,050 176 3.49% 4,718 158 3.35%
Savings Certificates 34,599 1,937 5.60% 28,065 1,599 5.70%
Large denomination certificates 6,482 379 5.85% 6,449 328 5.09%
Securities sold under agreements to repurchase 1,810 73 4.03% 14 1 7.14%
Short-term borrowings 75 3 4.00% 96 3 3.13%
-------- ------- ---- ---------- -------- ----
Total interest bearing liabilities $60,865 $ 2,909 4.78% $ 53,577 $ 2,495 4.66%
======== ======= ==== ========== ======== ====
Noninterest bearing liabilities:
Demand deposits 12,341 11,051
Other 1,563 654
-------- ----------
Total Liabilities 74,769 65,282
Stockholders' equity 6,607 5,686
----- -----
Total liabilities and stockholders'
equity $ 81,376 $ 70,968
======== ==========
Net interest earnings $3,317 $ 2,970
====== =======
Net interest yield margin on average interest earning
assets (taxable equivalent basis) 4.32% 4.44%
===== =====
Less tax equivalent adjustment $ (41) $ (85)
------ -------
Net interest income $3,276 $ 2,885
====== =======
Net interest spread (taxable
equivalent basis) 3.33% 3.51%
===== =====
</TABLE>
(1) Daily average balances are calculated using the aggregate daily average
balances on a monthly basis.
(2) Tax equivalent adjustments (using 34% federal income tax rates) have been
made in calculating the yields on tax-free loans and investments. Virginia banks
are exempt from state income tax.
(3) For the purposes of these computations, nonaccruing loans are included in
the daily average loan amounts outstanding.
(4)The yield/rate of the investment securities is computed using the amortized
cost basis.
Table 6: Effect of Changes in Volume and Rate on Net Interest Earnings
For the years ended December 31, (1)
<TABLE>
<CAPTION>
1997 / 1996 1996 / 1995
(Dollars in thousands)
Increase (Decrease) Increase (Decrease)
Due to Change In (1): Due to Change In (1):
Volume Rate Total Volume Rate Total
<S> <C>
Interest income (2):
Loans $412 ($26) $386 $346 ($139) $207
Taxable securities 454 23 477 140 60 $200
Non-taxable
securities 23 (2) 21 10 - $10
Federal funds sold (136) 14 (122) 82 (33) $ 49
----- ---- ----- ----- ----- ----
Total interest income $753 $9 $762 $578 ($112) $466
======= ====== ======= ====== ======= =======
Interest expense:
Money Market and NOW
accounts (38) (28) (66) 35 (10) 25
Savings 11 7 18 (4) (13) (17)
Certificates 365 (27) 338 336 47 383
Certificates of $100,000
or more 2 49 51 (11) (65) (76)
Securities sold under -
agreements to repurchase 72 - 72 1 - 1
Short-term borrowings - - - - - -
----- ---- ----- ----- ----- ----
Total interest expense 412 1 413 357 (41) 316
======= ====== ======= ====== ======= =======
Net change in
interest
earnings $ 341 $ 8 $ 349 $ 221 $ (71) $ 150
======= ====== ======= ====== ======= =======
</TABLE>
(1)The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar of the changes in each.
(2)Interest income includes taxable equivalent adjustments of $41,000 in 1997
and $85,000 in 1996, which are used to adjust interest on tax exempt assets
to a fully taxable basis.
ASSET QUALITY
PROVISION AND ALLOWANCE FOR LOAN LOSSES:
The provision for loan losses is charged to operations in an
amount sufficient to maintain the allowance for loan losses at a level
management considers adequate to provide for future loan losses inherent in the
loan portfolio. Loans are charged against this allowance when management
perceives the collection of the loan is unlikely. The level of the allowance is
based upon management's ongoing review of the loan portfolio and includes the
present and prospective financial condition of borrowers, consideration of
actual loan loss experience and projected economic conditions in general and for
the Bank's service area.
In 1997, the provision for loan losses was $88,000, a 5% decrease
compared to the $93,000 provision for loan losses in 1996. Net loans charged-off
in 1997 were $42,000 compared to $13,000 in 1996.
Table 7 summarizes activity in the Allowance for Loan Losses and
provides statistics on nonperforming assets and past due loans. There were no
restructured loans, as defined by applicable securities rules and regulations.
<TABLE>
Table 7: Summary of the Allowance For Loan Losses
Nonperforming Assets and Past Due Loans
and Selected Loan Loss Statistics
<CAPTION>
<S> <C>
For The Years Ended
December 31, 1997 1996
(Dollars in Thousands)
Allowance for Loan Losses:
Balance, December 31
$ 843 $ 763
-------- --------
Charge-offs:
Commercial 0 $ 36
Real estate 2 0
Consumer 47 48
-------- --------
Total loans charged-off 49 84
Recoveries:
Commercial 0 42
Real estate 5 18
Consumer 2 11
-------- --------
Total recoveries 7 71
Net charge-offs 42 13
======== ========
Provision for loan losses 88 93
-------- --------
Balance, December 31, 1997 $889 $843
-------- --------
Ratio of net charge-offs to average loans outstanding 0.09% 0.03%
-------- --------
Ratio of allowance for loan losses to loans at period-end 1.71% 1.83%
-------- --------
Nonperforming Assets and Loans Past Due 90 Days
Nonaccrual loans
$ 27 $ 13
Other real estate owned
429 444
-------- --------
Total nonperforming assets
$ 456 $ 457
======= =========
Ratio of nonperforming assets to total assets 0.55% 0.59%
Nonaccrual loans:
Interest income that would have been recorded
under original terms $ 4 $ 2
======= =========
Interest income recorded during the period $ 0 $ 0
======= =========
Loans 90 days past due and still accruing $ 15 $ 15
======= =========
</TABLE>
A breakdown of the allowance is provided in Table 8; however, such a
breakdown has not historically been maintained by the Company, and management
does not believe the allowance can be fragmented by category with any precision
that would be useful to investors. The entire amount of the allowance is
available to absorb losses occurring in any category. The allowance is allocated
below based on the relative percent of loans in each category to total loans.
Table 8: Allocation of the Allowance for Loan Losses
December 31,
<TABLE>
<CAPTION>
1997 1996
Balance at End of Period Applicable to:
Percent Percent
Amount of Total Amount of Total
-------------------------- ------------------------
<S> <C>
Commercial $ 160 18% $ 171 20%
Real estate - mortgage 640 72% 577 68%
Real estate - construction 27 3% 38 5%
Consumer 62 7% 57 7%
--------------- -- -------------- --
$ 889 100% $ 843 100%
============ ==== =========== ====
</TABLE>
At December 31, 1997 and December 31, 1996, loans on either nonaccrual
status or loans past due 90 days or more and still accruing amounted to $42,000
and $28,000, respectively. At December 31, 1997, the Company had approximately
$828,000 of loans that have been internally classified, and $823,000 which
require more than normal attention and are potential problem loans. The Company
has considered these loans in establishing the level of the allowance for loan
losses. At December 31, 1996, loans that had been internally classified or which
required more than normal attention and were potential problem loans were
$668,000 and $699,000, respectively.
CREDIT RISK AND REGULATORY MATTERS:
Credit risk, the risk of loss from default, is inherent in
lending. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions. Management and the board of director of the Company believe
the allowance is a reasonable estimate of potential loss exposure in the loan
portfolio at year end, however, many factors affecting the ability of borrowers
to repay their loans, including economic factors beyond the control of the
Company or the borrowers, will impact this estimate on an ongoing basis.
Reports of examinations furnished by state and federal banking
authorities are also considered by management. Regulatory agencies periodically
review the allowance for loan losses as part of their examination process and
may require the Bank to recognize additions to the allowance based on their
judgment of information available to them at the time of their examination.
During 1997, regulators did not perform a regular examination of the Company or
the Bank. A federal examination was conducted in the fourth quarter of 1996 for
the balance sheet dated September 30, 1996. No additions to the allowance for
loan losses were recommended as a result of the examination.
NONPERFORMING ASSETS:
Nonperforming assets consist of loans on nonaccrual status and
other real estate owned. Loans are placed on nonaccrual status when they become
over 90 days past due unless such loans are fully collateralized and, in
management's judgment, are collectible. Other real estate owned consists of real
estate acquired in settlement of loans. These properties are carried at the
lower of cost or estimated fair value. Losses from the acquisition of other real
estate owned in full or partial satisfaction of a loan are charged to the
allowance for loan losses. Subsequent declines in value or losses upon
disposition are charged to noninterest expense.
Table 9 provides an analysis of the size, number and collateral
composition of nonperforming assets at December 31, 1997.
<TABLE>
Table 9: Nonperforming Assets
December 31, 1997
(Dollars in thousands)
<CAPTION>
<S> <C>
Nonperforming assets by dollar amount: Percent
Number Of
of Items Balance Total Dollars
-------- ----------- -------------
$400,000 and over - $ - -
$300,000 - $400,000 - - -
$200,000 - $300,000 - - -
$100,000 - $200,000 4 429 94%
$50,000 - $100,000 - - -
$50,000 and under 14 27 6%
-------- ----------- -------------
18 $456 100%
-------- ----------- -------------
Nonperforming assets by collateral composition:
<CAPTION>
Percent
Number Of
of Items Balance Total Dollars
-------- ---------- -------------
1-4 Family residential 1 $ 127 28%
Automobile, equipment and other - - -
Commercial property - - -
Land - - -
Multi-family residential 3 302 66%
Uncollateralized 14 27 6%
-------- ---------- -------------
18 $456 100%
-------- ---------- -------------
</TABLE>
LOAN PORTFOLIO:
The loan portfolio is the largest category of the Company's
earning assets. Table 10 shows the type and maturity of loans outstanding as of
December 31, 1997.
<TABLE>
Table 10: Loan Maturities
(Dollars in
thousands)
<CAPTION>
<S> <C>
After 1
Within but within After
1 year 5 years 5 years
------ ------- -------
Commercial $5,757 $2,967 $635
Real estate-mortgage 7,570 15,875 14,331
Real estate-construction 1,627 0 0
Consumer 200 2,942 227
------ ------- -------
$15,154 $21,784 $15,193
Loans maturing after 1 year with:
Fixed interest rates $14,784 $13,119
Variable interest rates 7,000 2,074
------- -------
$21,784 $15,193
</TABLE>
Table 11 includes loans collateralized by real estate at December 31, 1997. Some
of these loans are included in commercial loans for purposes of Table 10.
Table 11: Loans Collateralized By Real Estate
<TABLE>
<CAPTION>
<S> <C>
Percentage
of total
Amount loan portfolio
(Dollars in thousands)
-------------------------------------
Construction and land development $ 1,661 3%
Collateralized by 1 - 4 family residential properties 18,282 35%
Collateralized by multi-family residential properties 674 1%
Collateralized by non-farm non-residential properties 16,122 31%
------
$36,739 70%
</TABLE>
INVESTMENT PORTFOLIO:
The company's investment portfolio is a source of liquidity and
is the second largest category of earning assets. The investment portfolio is
used to provide liquidity in the event of the withdrawal of large deposits or to
satisfy unusual loan demands, and consists primarily of U.S. Treasury and
government agency securities.
Table 12 shows the maturities of investment securities at
December 31,1997, and the weighted average yields to maturity of such
securities:
Table 12: Investment Securities (1)
December 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
<S> <C>
1 Year or less 2 - 4 Years 4 - 5 Years (2) Over 5 Years (3)
Amount Yield Amount Yield Amount Yield Amount Yield
--------------------- --------------------- --------------------- --------------------
U.S. treasury, government
agencies, state and political
subdivisions $ 5,575 5.89% $ 13,961 6.17% $ 1,300 6.44% $ 1,028 5.84%
Other - - 65 6.00% - - 581 7.25%
--------- ---- -------- ---- -------- ---- -------- ----
$ 5,575 5.89% $ 14,026 6.09% $ 1,300 6.44% $ 1,609 6.55%
========= ==== ======== ==== ======== ==== ======== ====
</TABLE>
(1)Presented on an amortized cost basis
(2)Includes $484,296 in tax exempt securities with a weighted average yield of
4.40%
(3)Includes $343,286 in tax exempt securities with a weighted average yield of
5.05%
DEPOSITS:
The Company's deposit base includes large denomination
certificates of deposit of $100,000 or more which represent approximately 11% of
total deposits at December 31, 1997. The Bank pays market rates for these funds.
Management of the Bank attempts to match large denomination certificates of
deposit with rate-sensitive assets. At December 31, 1997, available short-term
assets totaled $7,272,000.
Table 13 presents remaining maturities of large denomination
certificates ($100,000 or more) at December 31, 1997.
Table 13: Remaining Maturities of Large Denomination Certificates
December 31, 1997
(Dollars in thousands)
Amount
------
Three months or less $2,510
Over three through six months 5,518
Over six through twelve months -
Over twelve months 100
------
Total $8,128
======
NONINTEREST INCOME:
Noninterest income increased $42,000 or 17% from 1997 to 1996
primarily due to an increase in charges on deposit accounts. A reimbursement for
site improvements on City property due to the construction of the Bank's Colley
Avenue office in Norfolk of $13,000 attributed to the 25% increase in other
income.
A comparison of noninterest income may be found in Table 14.
Table 14: Non-interest Income
(Dollars in thousands)
For the years ended December 31,
1997 1996 1997over1996
--------------------------------------------------
Service charges $ 195,865 $ 171,921 $ 23,944
Other income 91,874 73,642 18,232
--------- ---------- --------
$ 287,739 $ 245,563 $ 42,176
NONINTEREST EXPENSE:
Noninterest expense increased $106,000 or 5% from 1996 to 1997.
The increase relates to additional salary expenses due to the addition of the
Bank's Colley Avenue location. Also, employee benefit costs increased 18% from
$165,000 in 1996 to $195,000 at December 31, 1997. Increased costs related to
health benefits and the addition of an Employee's Stock Ownership Plan were the
chief components of the increase at $7,000 and $12,000, respectively.
A comparison of noninterest expense may be found in Table 15.
Table 15: Non-interest Expense
(Dollars in thousands)
For the years ended December 31,
<TABLE>
<CAPTION>
<S> <C>
1997 1996 1997 over/ (under) 1996
--------------------------------------------------------
Salaries and employee benefits $ 1,169 $ 1,046 $ 123
Other 235 283 (48)
Occupancy 165 174 (9)
Automated services 112 103 9
Furniture and equipment 95 96 (1)
Taxes & licenses 76 63 13
Stationery and supplies 56 47 9
Director's fees 47 39 8
Insurance 35 37 (2)
Accounting and audit 38 40 (2)
Marketing 28 22 6
---------- ---------- --------
$ 2,056 $ 1,950 $ 106
========== ========== ========
</TABLE>
INCOME TAXES:
For the year ended December 31, 1997, the Company recognized an
expense of $440,000. This represents a $222,000 increase from the $218,000
expense for 1996. See Note 11 of the Consolidated Financial Statements for
additional information with respect to income taxes.
YEAR 2000 PROJECT:
Heritage Bankshares, Inc. has undertaken a variety of measures to
ensure that the Company's hardware and software systems will be century date
compliant. The Company has established a project team and plan, completed a
hardware and software inventory, developed an impact assessment rating and has
assigned a rating to the areas identified. The company has initiated contacts
with vendors for specific product compliance confirmation. Testing of these
systems is expected to be completed by year-end 1998 and is not expected to
result in material additional costs. The Bank has compiled a list of commercial
customers who will be contacted regarding their Year 2000 readiness plans. In
1997, the Company's progress in addressing the Year 2000 issues were reviewed by
the Federal Reserve Bank. Based upon the results of the impact assessment and
information provided by vendors, management believes that its plan for
determining century date compliance is adequate and that the Company will not
incur significant incremental costs to achieve compliance.
RECENT ACCOUNTING PRONOUNCEMENTS:
The Financial Accounting Standards Board ("FASB") issued Statement No.
130, Reporting Comprehensive Income. This Statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, or losses) in a full set of general-purpose financial
statements, and is effective for fiscal years beginning after December 15, 1997.
This Statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement does not require a specific format for that
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. This Statement also requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The Company is currently assessing the impact
of this statement on its future financial statement presentation. However, the
only known item of other comprehensive income to which this standard would apply
is unrealized gains and losses on available-for-sale securities.
FASB Statement No. 131, Disclosures about Segments of an Enterprise,
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements, requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders and is effective for financial
statements for periods beginning after December 15, 1997. It also establishes
standards for related disclosures about products and services, geographical
areas and major customers. This Statement requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments.
This Statement also requires that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. It requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to corresponding amounts in the enterprises's general-purpose financial
statements. It requires that all public business enterprises report information
about the revenues derived from the enterprises's products or services (or
groups of similar products and services), about the countries in which the
enterprise earns revenues and holds assets, and about major customers regardless
of whether that information is used in making operating decisions. However, this
Statement does not require an enterprise to report information that is not
prepared for internal use if reporting it would be impracticable. Management is
currently assessing the impact of this statement on its future financial
statement disclosures.
FASB Statement No. 132, Employers' Disclosures about Pension and Other
Post Retirement Benefits, revises disclosures regarding pension and other post
retirement benefits and standardizes certain disclosure requirements regarding
these items. This Statement is effective for fiscal years beginning after
December 15, 1997. Management will assess the impact, if any, of this Statement
on the Company's future disclosures.
Item 7: FINANCIAL STATEMENTS
The financial statements of the Company are included (with an index
listing of all such statements) in a separate financial section at the end of
this Annual Report on Form 10-KSB.
Item 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES:
None.
<PAGE>
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
On January 5, 1990, the Board of Directors voted to amend the by-laws
to increase the size of the Board of Directors from 12 to 14 members. As of
December 31, 1997, there were 10 directors.
The following schedule sets forth certain information concerning the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
Director's Term to Position(s) With
Name Age Expire The Company
- -------------------------------------------------------------------------------------------------------------
<S> <C>
James A. Cummings 55 1998 Director
Lisa F. Chandler 43 2000 Director
F. Dudley Fulton 49 1999 Director
Henry U. Harris, III 46 2000 Director and Vice-Chairman of the Board
Stephen A. Johnsen 52 2000 Director and Secretary of the Board
Robert J. Keogh 49 1998 President; Director and President-Heritage
Bank & Trust
Peter M. Meredith, Jr. 46 1998 Director and Chairman of the Board
Gerald L .Parks 64 1999 Director
Ross C. Reeves 49 1999 Director
Harvey W. Roberts, III 53 1998 Director
</TABLE>
James A. Cummings was appointed director of the Company effective
November 1992, and has served as a director of Heritage Bank & Trust since April
1992. He has served as Vice President of Southern Atlantic Label Company, Inc.
since 1972.
Lisa F. Chandler was appointed director of the Company effective August
1997. She has served as Executive Vice President of Nancy Chandler Associates,
Inc. since 1992.
F. Dudley Fulton was appointed director of the Company effective
December 31, 1991, and has served as a director of Heritage Bank and Trust since
1988. He has served as President and Chief Executive Officer of Henderson and
Phillips, Inc. since 1986.
Henry U. Harris, III has been a director of the Company since November
1992 and has served as Vice-Chairman since January 1995. He has been a director
of Heritage Bank & Trust since September 1990. He is the President of Virginia
Investment Counselors, Inc. for ten years.
Stephen A. Johnsen has been a director of the Company since 1988 and
has served as Secretary since January 1995. He has served as a director of
Heritage Bank & Trust since 1984. Mr. Johnsen has been the President of Flagship
Group, LTD since 1984.
Robert J. Keogh is President and Chief Executive Officer of the
Company. He has served as President and a director of Heritage Bank & Trust
since August 1988. He previously was a Senior Vice President of First American
Bank of Virginia from December 1983 to August 1988.
Peter M. Meredith, Jr. was elected as a director of the Company in
November 1992 and has served as Chairman since January 1995. He has served as a
director of Heritage Bank & Trust since September 1991. He had been the
President of Meredith Construction Company, Inc. for several years and currently
serves as Chairman and Chief Executive Officer.
Gerald L. Parks has been a director of the Company since 1987 and has
served as a director of Heritage Bank & Trust since its inception. He had been
President of Capes Shipping Agencies, Inc. for several years, and is now serving
as Chairman of the Board of Directors.
Ross C. Reeves was elected as a director of the Company in February
1994. He has been a member of the law firm of Willcox & Savage, P.C. since 1982.
Harvey W. Roberts, III was elected as a director of the Company in
January 1993. Mr. Roberts has been a senior partner in the accounting firm of
Roberts and Speece, P.L.C Certified Public Accountants for over twenty years.
Item 10. EXECUTIVE COMPENSATION
1. CASH COMPENSATION:
Set forth below is information concerning the compensation paid to the
Company's executive officer.
Summary Compensation table
Annual Compensation (1)
<TABLE>
<CAPTION>
<S> <C>
Director's
Name and Principal Position Year Salary Bonus Fees Options (2)
- ---------------------------------------------------------------------------------------------------------------
Robert J. Keogh
President & Chief Executive Officer 1997 $ 94,725 $ 34,800 $ 4,800
1996 $ 93,450 $ 23,700 $ 4,800
1995 $ 93,000 $ 14,000 $ 2,400 36,000
</TABLE>
(1)No compensation earnined in either year was deferred.
(2)During 1995 options were granted to purchase common stock of the Company at
the option price ranging from $6.50 per share to $9.50 per share. See
"Compensation Pursuant to Plans". 5,600 shares were exercised by Mr. Keogh in
1997.
2. COMPENSATION PURSUANT TO PLANS:
EMPLOYEE STOCK OPTION PLAN
As of December 31, 1997, stock options for 99,850 shares are
outstanding and, of these shares, 67,913 are exercisable. Options are granted
and are exercisable at option prices ranging from $4.60 to $9.50 per share. See
disclosures regarding stock option plans in Note 10 to the Consolidated
Financial Statements.
DEFERRED COMPENSATION AND RETIREMENT ARRANGEMENTS
In 1985, Heritage Bank & Trust entered into deferred compensation and
retirement arrangements with seven directors and one officer. Each participant
is fully vested. The Company's policy is to accrue the estimated amounts to be
paid under the contracts over the expected period of active service or
employment.
Upon reaching age 70, each participant will receive a retirement
benefit ranging from $391 to $3,355 per month for each of the next 120 months.
If the participant dies prior to reaching age 70, his beneficiary will begin
receiving the monthly retirement benefits. The bank has purchased life insurance
contracts in order to fund the expected liabilities under the deferred
compensation arrangements. As of December 31, 1997, Heritage Bank & Trust had
accrued $208,239 to reflect the anticipated liability.
In 1990, Robert J. Keogh, President of Heritage Bank & Trust, became a
participant in the Heritage Bank & Trust Executive Security Plan. In the event
Mr. Keogh dies prior to age 65, his beneficiary will receive monthly payments of
$4,167 for each of the next 180 months. Upon his retirement at age 65, Mr. Keogh
will receive $4,167 per month for each of the next 180 months or until his
death, and thereafter other beneficiaries will receive such retirement benefits.
Heritage Bank & Trust funds this obligation through a life insurance contract.
Heritage Bank & Trust had accrued $61,756 as of December 31, 1997 to reflect the
anticipated liability.
Effective January 1, 1984, the Board of Directors adopted an Employee's
Stock Bonus Plan and Trust (the "ESOP"). The ESOP covered substantially all
employees, whereby funds contributed were used to purchase outstanding common
stock of the Company. Contributions were allocated to the participants based on
the employee/participant's annual compensation. Employee participants in the
ESOP included all employees who have reached the age of 21 and have completed
one year of service (1,000 hours), beginning with the effective date of the
ESOP. Benefits were payable upon separation from service or upon retirement,
disability or death. Employees are 30% vested with respect to the benefits under
the ESOP in three years and the vested percentage was increased annually,
reaching 100% after seven years. Participants were automatically 100% vested in
the ESOP upon reaching age 65, death or disability. Participants vote all shares
allocated to their respective accounts and the trustees of the ESOP vote any
unallocated shares. The Board of Directors of the Company has the right to amend
or terminate the ESOP and trust at any time. The Company made no contribution to
the plan for years ending December 31, 1997 and 1996. In October of 1995, the
trustees of the ESOP voted to terminate the plan and the participants in the
plan were notified of their options concerning distribution of their shares in
the plan in accordance with the terms of the ESOP and applicable law. At
December 31, 1997, 25,761 of the 25,934 shares in the plan had been distributed.
Effective January 1, 1993, the Board of Directors adopted a Retirement
Program (the "401K"). The Company may contribute cash to the 401K annually, as
determined each year by the Board of Directors. Contributions to the 401K are
allocated to its participants based on the employee/participant's contributions
to the plan. Eligible participants in the 401K include all employees who have
completed six months of service (500 hours) beginning with the effective date of
the 401K. Benefits will be payable upon separation from service or upon
retirement, disability or death. Employees are 20% vested with respect to the
benefits under the 401K in two years and the vested percentage is increased
annually, reaching 100% after six years. Participants are automatically 100%
vested in the 401K upon reaching age 65, death or disability. The Company has
the right to amend or terminate the 401K. The Company expensed $36,000 and
$28,000 for plan contributions for the years ended December 31, 1997 and 1996,
respectively.
Effective January 1, 1997, the Board of Directors adopted an Employee's
Stock Ownership Plan (the "ESOP"). The ESOP covers substantially all employees,
whereby funds contributed are used to purchase outstanding common stock of the
Company. Contributions are allocated to the participants based on the
employee/participant's annual compensation. Employee participants in the ESOP
includes all employees who have completed six months of service beginning with
the effective date of the ESOP. Benefits are payable upon separation from
service or upon retirement, disability or death. Employees are 20% vested with
respect to the benefits under the ESOP in three years and the vested percentage
increases annually, reaching 100% after seven years. Participants are
automatically 100% vested in the ESOP upon reaching age 65, death or disability.
Participants vote all shares allocated to their respective accounts and the
trustees of the ESOP vote any unallocated shares. The Board of Directors of the
Company has the right to amend or terminate the ESOP at any time. The Company
expensed $12,000 for plan contributions for the year ended December 31, 1997.
COMPENSATION OF DIRECTORS:
Directors of the Company and Directors of Heritage Bank & Trust receive
$400 for each Board of Directors' meeting attended and $100 for each committee
meeting attended.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following schedule sets forth information regarding the beneficial
ownership of the Company's common stock as of March 10, 1997, of (i) each of the
Company's directors; (ii) each person known by the Company to be the holder of
5% or more of the Company's outstanding common stock; and (iii) all of the
Company's directors and executive officers as a group.
OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS
PERCENT OF
NAME OF INDIVIDUAL SHARES CLASS
James A.Cummings 5,138 (1) 0.64%
2073 Thomas Bishop Lane
Virginia Beach, VA 23454 USA
Lisa F. Chandler 200 (2) 0.03%
6127 Studeley Avenue
Norfolk, VA USA 23508
F. Dudley Fulton 2,700 0.34%
5306 Lakeside Avenue
Virginia Beach, VA 23451 USA
Henry U. Harris, III 26,405 (3) 3.31%
1503 North Shore Road
Norfolk, VA 23505 USA
Stephen A. Johnsen 1,968 0.25%
401 College Place
Norfolk, VA 23510 USA
Robert J. Keogh 8,748 (4) 1.10%
6146 Sylvan Street
Norfolk, VA 23508 USA
Peter M. Meredith, Jr. 36,950 (5) 4.64%
5320 Edgewater Drive
Norfolk, VA 23508 USA
Gerald L. Parks 5,195 (6) 0.65%
27307 Evergreen Lane
Harborton, VA 23389 USA
Ross C. Reeves 4,142 (7) 0.52%
1068 Algonquin Road
Norfolk, VA 23505 USA
Harvey W. Roberts, III 29,079 (8) 3.65%
7612 North Shore Road
Norfolk, VA 23505 USA
Directors and Executive Officers as a
group (10 persons) 120,525 15.12%
(1) Includes 1,500 shares owned jointly with his wife. Also includes 1,766
shares owned by Scott & Stringfellow for Mr. Cummings.
(2) Shares owned jointly with her husband.
(3) Includes 3,555 shares owned by his wife. Also includes 4,249 shares held as
custodian for others and 3,700 shares held in trust.
(4) Includes 1,335 shares owned jointly with his wife. Also includes 2,051
shares owned by Scott & Stringfellow as an IRA for Mr. Keogh. Does not
include 38,100 shares that may be acquired by Mr. Keogh pursuant to the
Stock Option Plan for key employees of the Company. See "Compensation
Pursuant to Plans." If such shares were included, Mr. Keogh would own 5.89%
of the outstanding shares.
(5) Includes 10,960 shares held as Meredith Realty Company, L.L.C., 9,455 shares
held as Pomar Holding, L.L.C. and 3,000 shares held as Meredith Realty
Associates. Also includes 8,203 shares owned by Davenport & Company for Mr.
Meredith.
(6) Includes 4,614 shares owned jointly with his wife.
(7) Includes 3,142 shares held as custodian for others.
(8) Includes 15,455 shares owned by his wife and 3,000 shares owned jointly with
his wife. Also includes 2,112 shares owned by Scott & Stringfellow
consisting of 257 shares as an IRA for Roberts & Speece, CPA, P.L.C. and
1,825 owned for Mr. Roberts.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Many directors of the Company and Heritage Bank & Trust and their
associates, including firms and corporations of which they are officers or
directors; or in which they and their immediate families have a substantial
interest, are customers of Heritage Bank & Trust. As such, they have had
transactions with the bank, including loans made in the ordinary course of
business on substantially the same terms, including interest rates, collateral
and repayment terms, as those prevailing at the time for comparable loans to
other parties. Such loans have not involved more than the normal risk of
collectibility or other unfavorable features. See related party loan and deposit
disclosures in Note 13 of the Consolidated Financial Statements.
Heritage Bank & Trust occupies 7,581 square feet of space in a building
located at 1450 South Military Highway in Chesapeake, Virginia. The building is
owned by IBV Partners, L.P., a Virginia limited partnership, which has as its
sole general partner IBV Real Estate Holdings, Inc., a wholly-owned subsidiary
of the Company. Former and current directors of Heritage Bank & Trust own an
aggregate of approximately 34% of the partnership interests. IBV Partners, L.P.
and Heritage Bank & Trust entered into a lease in December 1986 which was
modified in December 1996. See disclosures regarding the lease commitment in
Note 12 of the Consolidated Financial Statements.
The Company and Heritage Bank & Trust purchase various types of
business insurance through the Flagship Group LTD, of which Stephen A. Johnsen
is President. Mr. Johnsen is a director and Secretary of the Company. Insurance
premiums paid to the Flagship Group LTD as agent for commercial insurance
providers was $21,661 during 1997. The Bank has also sold securities to the
Flagship Group LTD under agreements to repurchase, which constitute
approximately 91% of the securities sold under agreements to repurchase at
December 31, 1997. See Note 9 of the Consolidated Financial Statements for
additional information.
Heritage Bank & Trust has retained the law firm of Willcox & Savage,
P.C. in connection with certain legal representations and expects to continue to
do so in the future. Ross c. Reeves, a director of the Company is an attorney in
the law firm. Fees paid to Willcox & Savage, P.C. by Heritage Bank & Trust was
$2,118 in 1997.
<PAGE>
PART IV
Item 13: EXHIBITS AND REPORTS ON FORM 8-K
(A) (3) Exhibits:
3.1 Articles of Incorporation. (Incorporated herein by
reference to the Corporation's Form 10-K for 1983 filed
March 29, 1984.)
3.2 Bylaws, as amended.
10.1 Stock Option Plan for Employees (Incorporated herein by
reference to the Corporation's Form 10-K for 1987 filed
March 25, 1988.)
10.2 Employees Stock Option Plan. (Incorporated herein by
reference to the Corporation's Form 10-K for 1987 filed
March 25, 1988.)
10.3 Employee Stock Ownership Plan (Incorporated herein by
reference to the Corporation's Form 10-K for 1984 filed
April 12, 1985.)
10.4 Lease dated December 29, 1986, between IBV Partners, L.P.
as landlord, and Heritage Bank & Trust, as Tenant, for the
lease of 7,581 square feet of space in a building located
at 1450 South Military Highway, Chesapeake, Virginia.
(Incorporated herein by reference to the Corporation's Form
10-K for 1986 filed March 1987.)
10.5 Amended and restated January 1, 1989, Stock Ownership Plan,
which provided for certain changes required by IRS
regulations including changes in participant vesting
schedules. (Incorporated herein by reference to the
Corporation's Form 10-K for 1990 filed March 30, 1991.)
10.6 Employee's Stock Ownership Plan (filed herewith).
(B) Reports on Form 8-K
No reports were filed on Form 8-K during the year ended December 31, 1997.
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below under "SIGNATURES" hereby
authorizes Robert J. Keogh and Peter M. Meredith, Jr. or either of them, to
execute in the name of each such person, and to file any amendment to this
report, and hereby appoints Robert J. Keogh and Peter M. Meredith, Jr. or either
of them, as attorneys-in-fact to sign on his behalf, individually and in each
capacity stated below, and to file any and all amendments to this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Heritage Bankshares, Inc.
(Registrant)
Date: March 25,1998 by /s/ Robert J. Keogh
----------------------------------------
Robert J. Keogh, President and Chief
Executive Officer
by /s/ Peter M. Meredith, Jr.
----------------------------------------
Peter M. Meredith, Jr., Chairman of the
Board of Directors
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 25, 1998.
SIGNATURES
/s/ Peter M. Meredith, Jr.
- -------------------------------------
Peter M. Meredith, Jr.
Chairman of the Board of Directors
/s/ Robert J. Keogh
- -------------------------------------
Robert J. Keogh
President and Chief Executive Officer & Director
/s/ Henry U. Harris, III
- -------------------------------------
Henry U. Harris, III
Vice-Chairman of the Board of Directors
/s/ Stephen A. Johnsen
- -------------------------------------
Stephen A. Johnsen
Secretary of the Board of Directors
/s/ Lisa F. Chandler
- --------------------------------------
Lisa F. Chandler
Director
/s/ James A. Cummings
- -------------------------------------
James A. Cummings
Director
/s/ F. Dudley Fulton
- -------------------------------------
F. Dudley Fulton
Director
/s/ Gerald L. Parks
- -------------------------------------
Gerald L. Parks
Director
/s/ Ross C. Reeves
- -------------------------------------
Ross C. Reeves
Director
/s/ Harvey W. Roberts, III
- -------------------------------------
Harvey W. Roberts, III
Director
<PAGE>
HERITAGE BANKSHARES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants 1
Financial Statements:
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
<PAGE>
Consolidated
Financial Statements
Years Ended December 31,
1997 and 1996
HERITAGE BANKSHARES, INC.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors
Heritage Bankshares, Inc.
Norfolk, Virginia
We have audited the accompanying consolidated balance sheets of
Heritage Bankshares, Inc. and its subsidiaries at December 31, 1997 and 1996,
and the related consolidated statements of income, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Heritage Bankshares, Inc. and its subsidiaries as of December 31,
1997 and 1996, and the consolidated results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Goodman & Company, L.L.P.
One Commercial Place
Norfolk, Virginia
January 30, 1998
F-1
<PAGE>
<TABLE>
HERITAGE BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Cash and due from banks $ 4,019,169 $ 3,068,651
Federal funds sold 1,697,207 5,925,000
Securities available for sale 15,729,585 14,367,024
Securities held to maturity 6,865,595 5,829,535
Loans, net 51,241,833 45,259,390
Accrued interest receivable 692,488 535,172
Other real estate owned 428,500 443,731
Premises and equipment, net 1,328,297 582,971
Other assets 998,846 834,332
--------------------------------------------
$ 83,001,520 $ 76,845,806
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing deposits $ 12,902,336 $ 12,498,845
Interest-bearing deposits 59,894,701 55,927,746
--------------------------------------------
72,797,037 68,426,591
Securities sold under agreements to repurchase 1,945,212 1,349,091
Short-term borrowings 52,248 130,552
Accrued interest payable 342,306 290,583
Other liabilities 783,971 537,214
--------------------------------------------
75,920,774 70,734,031
--------------------------------------------
Stockholders' equity:
Common stock, $5 par value - authorized
3,000,000 shares; issued and outstanding:
1997 - 795,050 shares; 1996 - 784,150 shares 3,975,250 3,920,750
Additional paid-in capital (360,790) (380,330)
Retained earnings 3,409,668 2,539,941
Unrealized appreciation on securities
available for sale 56,618 31,414
--------------------------------------------
7,080,746 6,111,775
--------------------------------------------
$ 83,001,520 $ 76,845,806
============================================
The notes to consolidated financial statements
are an integral part of this statement.
F- 2
<PAGE>
HERITAGE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years Ended December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 4,490,735 $ 4,064,107
----------------------------------------
Interest on investment securities:
Available for sale 912,280 507,245
Held to maturity 448,749 352,626
----------------------------------------
1,361,029 859,871
----------------------------------------
Interest on federal funds sold 333,650 456,299
----------------------------------------
Total interest income 6,185,414 5,380,277
----------------------------------------
Interest expense:
Interest on deposits 2,832,417 2,491,616
Interest on short-term borrowings 76,247 3,104
----------------------------------------
Total interest expense 2,908,664 2,494,720
----------------------------------------
Net interest income 3,276,750 2,885,557
Provision for loan losses 88,333 92,935
----------------------------------------
Net interest income after provision for loan losses 3,188,417 2,792,622
----------------------------------------
Noninterest income:
Services charges 195,865 171,921
Other 91,874 73,642
----------------------------------------
287,739 245,563
----------------------------------------
Noninterest expense:
Salaries and employee benefits 1,169,148 1,045,502
Other 439,739 467,024
Occupancy expenses 164,786 174,276
Automated services 112,003 103,265
Furniture and equipment expense 94,746 95,997
Taxes & licenses 76,018 63,642
----------------------------------------
2,056,440 1,949,706
----------------------------------------
Income before income taxes 1,419,716 1,088,479
Income tax expense 439,746 218,021
----------------------------------------
Net income $ 979,970 $ 870,458
========================================
Earnings per common share - basic $ 1.24 $ 1.11
========================================
Earnings per common share - assuming dilution $ 1.17 $ 1.09
========================================
The notes to consolidated financial statements
are an integral part of this statement.
F- 3
<PAGE>
HERITAGE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Years Ended December 31, 1997 and 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Net Unrealized
Appreciation
Additional (Depreciation)
Common Stock Paid-in Retained on Securities
-------------------------
Shares Amount Capital Earnings Available-for-Sale Total
---------- ------------- ------------- -------------- ------------ ---------------
Balance, December 31, 1995 784,150 $ 3,920,750 $ (380,330) $ 1,763,581 $ 34,076 $ 5,338,077
Net changes in unrealized depreciation
on securities available-for-sale,
net of applicable income taxes
of $1,371 0 0 0 0 (2,662) (2,662)
Net income for 1996 0 0 0 870,458 0 870,458
Less: Dividends paid in 1996 0 0 0 (94,098) 0 (94,098)
---------------------------------------------------------------------------------------
Balance, December 31, 1996 784,150 3,920,750 (380,330) 2,539,941 31,414 6,111,775
Stock options exercised in 1997 10,900 54,500 19,540 0 0 74,040
Net changes in unrealized appreciation
(depreciation) on securities
available-for-sale, net of applicable
income taxes of $14,384 0 0 0 0 25,204 25,204
Net income for 1997 0 0 0 979,970 0 979,970
Less: Dividends paid in 1997 0 0 0 (110,243) 0 (110,243)
---------------------------------------------------------------------------------------
Balance, December 31, 1997 795,050 $ 3,975,250 $ (360,790) $ 3,409,668 $ 56,618 $ 7,080,746
=======================================================================================
The notes to consolidated financial statements
are an integral part of this statement.
F- 4
<PAGE>
HERITAGE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 979,970 $ 870,458
Adjustments to reconcile to net cash
provided by operating activities:
Provision for loan losses 88,333 92,937
Provision for losses on real estate owned 15,231 70,644
Provision for depreciation and amortization 71,226 78,344
Amortization of investment security premiums,
net of discounts 8,065 (270)
Deferred loan origination fees, net of costs (15,604) (2,479)
Changes in:
Interest receivable (157,316) (107,515)
Interest payable 51,723 34,979
Other assets (178,898) (90,385)
Other liabilities 246,757 (34,127)
----------------------------------------
Net cash provided by operating activities 1,109,487 912,586
----------------------------------------
Investing activities:
Proceeds from maturities of available-for-sale securities 2,669,820 1,599,270
Proceeds from maturities of held-to-maturity securities 2,625,314 3,970,805
Purchases of available-for-sale securities (3,993,939) (10,263,221)
Purchases of held-to-maturity securities (3,668,293) (2,500,143)
Loan originations, net of principal repayments (6,055,172) (2,330,635)
Proceeds from condemnation of land 9,503 0
Purchases of premises and equipment (826,055) (31,091)
----------------------------------------
Net cash used by investing activities (9,238,822) (9,555,015)
----------------------------------------
Financing activities:
Net decrease in demand deposits,
NOW accounts and savings accounts (92,597) (165,433)
Net increase in certificates of deposit 4,463,043 7,538,558
Net increase in securities sold under agreements to repurchase 596,121 1,349,091
Net increase (decrease) in short-term borrowings (78,304) 64,125
Net proceeds from exercise of stock options 74,040 0
Cash dividends paid (110,243) (94,098)
----------------------------------------
Net cash provided by financing activities 4,852,060 8,692,243
----------------------------------------
Increase (decrease) in cash and cash equivalents (3,277,275) 49,814
Cash and cash equivalents at beginning of year 8,993,651 8,943,837
----------------------------------------
Cash and cash equivalents at end of year $ 5,716,376 $ 8,993,651
========================================
Supplemental schedules and cash flow information:
Cash paid for:
Interest on deposits and other borrowings $ 2,856,941 $ 2,459,741
========================================
Income taxes $ 279,922 $ 244,583
========================================
The notes to consolidated financial statements
are an integral part of this statement.
F- 5
</TABLE>
<PAGE>
HERITAGE BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND BUSINESS
Heritage Bankshares, Inc. (the "Company") was organized under the
laws of the Commonwealth of Virginia in 1983. The Company has four wholly-owned
subsidiaries, including one bank: Heritage Bank & Trust (the "Bank") with four
full service branches in Norfolk and Chesapeake, Virginia. The Company's other
subsidiaries are IBV Real Estate Holdings, Inc., a Virginia corporation,
Sentinel Title Services, Inc., a Virginia corporation, and Sentinel Trust
Services, L.L.C., a Virginia limited liability company. The Bank is a
state-chartered bank and a member of the Federal Reserve System. The deposits of
the Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC")
to the extent and subject to the limitations set forth in the Federal Deposit
Insurance Act, as amended.
The Bank is a full-service bank conducting a general commercial and
consumer banking business with its customers located throughout the Hampton
Roads area of Virginia. Its principal banking activities include receiving
demand, savings and time deposits for personal and commercial accounts; making
commercial, real estate and consumer loans; acting as a United States tax
depository facility; providing money transfer and cash management services;
selling traveler's checks, bank money orders; issuing letters of credit; and
investing in U.S. Treasury securities and securities of other U.S. government
agencies and corporations, and mortgage-backed and state and municipal
securities.
IBV Real Estate Holdings, Inc. was formed in December, 1986.
Presently, its only business is owning a 1% general partnership interest in IBV
Partners, L.P., the lessor of office space to Heritage Bank and Trust in
Chesapeake, Virginia.
Sentinel Title Services, Inc. and Sentinel Trust Services, L.L.C. are
wholly-owned subsidiaries, which own an interest in providers of title and trust
services. The financial activities pertaining to these interests are recorded on
the cost method of accounting for investments. The Company's strategic
relationship with these entities provides the Bank with the ability to provide
title and trust services to its customers.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Statement Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Heritage Bankshares, Inc. and its wholly-owned subsidiaries, Heritage Bank
and Trust and IBV Real Estate Holdings, Inc., Sentinel Title Services, Inc. and
Sentinel Trust Services, L.L.C. All significant intercompany balances and
transactions have been eliminated in consolidation.
(Notes continued on next page)
F- 6
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, interest bearing deposits with banks and
federal funds sold. Generally, federal funds are sold for one-day periods.
Securities
Investments in debt securities that management has the positive intent
and ability to hold to maturity are classified as "held to maturity" and
reflected at amortized cost. Investments that are purchased and held principally
for the purpose of selling them in the near term, if any, are classified as
"trading securities" and reflected at fair value, with unrealized gains and
losses included in earnings. Investments not classified as either of the above
are classified as "available for sale" and reflected at fair value, with
unrealized gains and losses excluded from operations and reported as a separate
component of stockholders' equity.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity on held-to-maturity and
available-for-sale securities. Other-than-temporary declines in the fair value
of individual held-to-maturity and available-for-sale securities, if any, result
in write-downs of the individual securities to fair value. Gains and losses are
determined using the specific-identification method.
Loans
Loans are reported at their principal outstanding balance net of
charge-offs, deferred loan fees and costs on originated loans, unearned income,
and unamortized premiums or discounts, if any, on purchased loans. Interest
income is generally recognized when income is earned using the interest method.
Loan origination fees and certain direct loan origination costs are deferred and
the net amounts are amortized as an adjustment to yield on the respective loans.
Allowance for Loan Losses
The Bank accounts for loan losses in accordance with FASB Statement No.
114, Accounting by Creditors for Impairment of a Loan. Under the standard, a
loan is considered impaired, based on current information and events, if it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the present
value of expected future cash flows discounted at the historical effective
interest rate, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral.
(Notes continued on next page)
F- 7
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (continued)
The adequacy of the allowance for loan losses is periodically evaluated
by the Bank, in order to maintain the allowance at a level that is sufficient to
absorb probable credit losses. Management's evaluation of the adequacy of the
allowance is based on a review of the Bank's historical loss experience, known
and inherent risks in the loan portfolio, including adverse circumstances that
may affect the ability of the borrower to repay interest and/or principal, the
estimated value of collateral, and an analysis of the levels and trends of
delinquencies, charge-offs, and the risk ratings of the various loan categories.
Such factors as the level and trend of interest rates and the condition of the
national and local economies are also considered. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for losses on loans. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgements of information available to them at the time of their examination.
The allowance for loan losses is established through charges to earnings
in the form of a provision for loan losses. Increases and decreases in the
allowance due to changes in the measurement of impaired loans, if applicable,
are included in the provision for loan losses. Loans continue to be classified
as impaired unless they are brought fully current and the collection of
scheduled interest and principal is considered probable.
When a loan or portion of a loan is determined to be uncollectible, the
portion deemed uncollectible is charged against the allowance and subsequent
recoveries, if any, are credited to the allowance.
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual
if they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. If a loan or a portion of a loan is classified as
doubtful, or is partially charged off, the loan is generally classified as
nonaccrual. Loans that are on a current payment status or past due less than 90
days may also be classified as nonaccrual, if repayment in full of principal
and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained period
of repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectibility
of the recorded loan balance is doubtful, collections of interest and principal
are generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis. In the case where a nonaccrual loan had been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance at the
contractual interest rate. Cash interest receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior charge-offs
have been fully recovered.
(Notes continued on next page)
F- 8
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Real Estate Owned
Other real estate owned is comprised of real estate and other assets
acquired through foreclosure, acceptance of a deed in lieu of foreclosure, or
loans in which the Bank receives physical possession of the debtor's assets.
Other real estate owned is carried at the lower of the recorded investment in
the loan or the fair value less estimated costs to sell. Upon transfer of a loan
to foreclosed status, an appraisal is obtained and any excess of the loan
balance over the fair value less estimated costs to sell is charged against the
provision for credit losses. Revenues and expenses, and subsequent adjustments
to fair value less estimated costs to sell are classified as an expense for
other real estate owned.
Restructured Loans
Loans are considered troubled debt restructurings under FASB Statement
No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, if
for economic or legal reasons, a concession has been granted to the borrower
related to the borrower's financial difficulties that the Bank would not have
otherwise considered. The Bank has restructured certain loans in instances where
a determination was made that greater economic value will be realized under new
terms than through foreclosure, liquidation, or other disposition. The terms of
the renegotiation generally involve some or all of the following
characteristics: a reduction in the interest pay rate to reflect actual
operating income, an extension of the loan maturity date to allow time for
stabilization of operating income, and partial forgiveness of principal and
interest.
The carrying value of a restructured loan is reduced by the fair value
of any assets or equity interest received, if any. Prior to demonstrating
performance, the Bank generally classifies impaired restructured loans, if any,
as nonaccrual. The accrual of interest resumes when such loans can demonstrate
performance, generally evidenced by six months of pre- or post-restructuring
payment performance in accordance with the restructured terms, or by the
presence of other significant factors. In addition, at the time of
restructuring, loans are generally classified as impaired. A restructured loan
that is not impaired, based on the restructured terms and that has a stated
interest rate greater than or equal to a market interest rate at the date of the
restructuring, is reclassified as unimpaired in the year immediately following
the year it was disclosed as restructured.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
For financial reporting purposes, assets are depreciated over their estimated
useful lives using the straight-line method. For income tax purposes, the
accelerated cost recovery system and the modified accelerated cost recovery
system are used.
(Notes continued on next page)
F- 9
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company files a consolidated tax return. Provisions for income taxes
reflect tax expense incurred as a consolidated group. Tax expense is allocated
among the members of the consolidated group in accordance with an intercompany
agreement for tax expense. Income taxes are provided for the tax effects of the
transactions reported in the financial statements and consist of taxes currently
due plus deferred taxes related primarily to differences between the basis of
investment securities, deferred loan fees, allowance for loan losses, allowance
for losses on foreclosed real estate, accumulated depreciation and deferred
compensation for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled, and the deferred tax asset or liability created by the
difference in fair value and amortized cost of available-for-sale securities.
Deferred Compensation Plans
The Bank maintains deferred compensation and retirement arrangements
with certain directors and officers. The Company's policy is to accrue the
estimated amounts to be paid under the contracts over the expected period of
active employment. The Bank purchased life insurance contracts to fund the
expected liabilities under the contracts.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of
credit, standby letters of credit and financial guarantees written. Such
financial instruments are recorded in the financial statements when they become
payable.
Use of Estimates
The preparation of financial statements requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties. While management uses available
information to recognize losses on loans and foreclosed real estate, future
additions to the allowances may be necessary based on changes in local economic
conditions and other factors.
(Notes continued on next page)
F-10
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings per Share
The Company adopted FASB Statement No. 128, Earnings Per Share, on
December 31, 1997. This Statement establishes standards for computing and
presenting earnings per share (EPS). This Statement supersedes standards
previously set in APB Opinion No. 15, Earnings Per Share. FASB 128 requires dual
presentation of basic and diluted EPS on the face of the income statement, and
requires a reconciliation of the numerator and denominator of the basic EPS
computation with the numerator and denominator of the diluted EPS computation.
This Statement is effective for financial statements issued for periods ending
after December 15, 1997. In accordance with the requirements of this Statement,
all prior period EPS data have been restated to reflect the change in reporting
requirements.
Basic EPS excludes dilution and is computed by dividing income available
to common shareholders by the weighted-average number of shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised, converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
Reclassifications
Certain reclassifications have been made to prior year financial
statements to conform them to the current year's presentation.
NOTE 3 - CONDENSED FINANCIAL INFORMATION OF HERITAGE BANKSHARES, INC.
(PARENT COMPANY ONLY)
The financial position, results of operations and cash flows of Heritage
Bankshares, Inc. are presented below on a parent company only basis for the
years indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------
Condensed Balance Sheets
Assets 1997 1996
------------------------------------
<S> <C>
Cash on deposit with Heritage Bank and Trust $ 39,$20 $ 8,615
Investment in Heritage Bank and Trust 6,720,165 5,918,242
Investment in non-bank subsidiaries 217,549 132,549
Premises and equipment 11,755 19,951
Other assets 509,498 245,034
------------------------------------
Total assets $ 7,498,887 $ 6,324,391
====================================
Liabilities and Stockholders' Equity
Other liabilities $ 418,140 $ 212,616
Common stock 3,975,250 3,920,750
Additional paid-in capital (360,790) (380,330)
Retained earnings 3,409,669 2,539,941
Unrealized appreciation on securities available for sale 56,618 31,414
------------------------------------
Total liabilities and stockholders' equity $ 7,498,887 $ 6,324,391
====================================
</TABLE>
(Notes continued on next page)
F-11
<PAGE>
NOTE 3 - CONDENSED FINANCIAL INFORMATION OF HERITAGE BANKSHARES, INC.
(PARENT COMPANY ONLY) (Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
Condensed Statements of Income 1997 1996
------------------------------------
<S> <C>
Income:
Dividends from subsidiary bank $ 195,243 $ 109,098
Other 12,759 12,000
-----------------------------------
208,002 121,098
Expenses:
Other 27,443 24,991
-----------------------------------
Income before income taxes and equity in undistributed net income of
subsidiaries 180,559 96,107
Applicable income tax benefit 22,693 4,976
-----------------------------------
Income before equity in undistributed net income of subsidiaries 203,252 101,083
Equity in undistributed net income of subsidiaries 776,718 769,375
-----------------------------------
Net income $ 979,970 $ 870,458
====================================
Years Ended December 31,
-----------------------------------
Condensed Statements of Cash Flows 1997 1996
-----------------------------------
Operating activities:
Net income $ 979,970 $ 870,458
Adjustments to reconcile to net cash provided by operating activities:
Depreciation 8,196 8,196
Undistributed net income of subsidiaries (776,718) (769,375)
Changes in:
Other assets (264,464) (37,292)
Other liabilities 205,524 (21,614)
-----------------------------------
Net cash provided by operating activities 152,508 50,373
-----------------------------------
</TABLE>
(Notes continued on next page)
F-12
<PAGE>
NOTE 3 - CONDENSED FINANCIAL INFORMATION OF HERITAGE BANKSHARES, INC.
(PARENT COMPANY ONLY) (Continued)
<TABLE>
<CAPTION>
Investing activities:
Investment in Sentinel Trust Services, L.L.C. (85,000) 15,000
-----------------------------------
<S> <C>
Financing activities:
Net proceeds from exercise of stock options 74,040 -
Cash dividends paid (110,243) (94,098)
-----------------------------------
Net cash used by financing activities (36,203) (94,098)
-----------------------------------
Net increase (decrease) in cash and cash equivalents 31,305 (58,725)
Cash and cash equivalents at beginning of year 8,615 67,340
-----------------------------------
Cash and cash equivalents at end of year $ 39,920 $ 8,615
-----------------------------------
</TABLE>
Certain restrictions exist regarding the ability of Heritage Bank and
Trust to transfer funds to Heritage Bankshares, Inc. in the form of cash
dividends, loans or advances. Pursuant to Federal Regulations, dividends are
generally restricted to net profits, as defined, for the current year, plus
retained net profits for the previous two years. At December 31, 1997, dividends
from the Bank to the Company are limited to approximately $2,232,000 under these
regulations. The maximum amount available for transfer from Heritage Bank and
Trust to the Company in the form of loans and advances is 10% of Heritage Bank
and Trust's stockholder's equity. At December 31, 1997, such maximum amount
available is approximately $672,000.
NOTE 4 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Bank is required by the Federal Reserve Bank to maintain average
reserve balances. The average amount of maintained reserve balances was
approximately $710,000 for the year ended December 31, 1997, with the average
reserve requirement for the same period being approximately $432,000. On
December 31, 1997, the reserve balance was approximately $707,000.
(Notes continued on next page)
F-13
<PAGE>
NOTE 5 - SECURITIES
Securities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ----------- ----------- -----------
<S> <C>
December 31, 1997:
Securities available for sale:
U.S. Treasury $ 9,997,043 $ 50,198 $ 121 $10,047,120
U.S. government agencies 4,817,324 25,776 2,359 4,840,741
Mortgage-backed securities 829,433 13,082 791 841,724
----------- ----------- ----------- -----------
$15,643,800 $ 89,056 $ 3,271 $15,729,585
=========== =========== =========== ===========
Securities held to maturity:
U.S. Treasury $ 2,233,944 $ 17,934 $ -- $ 2,251,878
U.S. government agencies 2,702,120 14,178 554 2,715,744
Mortgage-backed securities 455,649 -- 1,327 454,322
States and political
subdivisions 827,582 15,457 -- 843,039
Other 646,300 -- -- 646,300
----------- ----------- ----------- -----------
$ 6,865,595 $ 47,569 $ 1,881 $ 6,911,283
=========== =========== =========== ===========
December 31, 1996:
Securities available for sale
U.S. Treasury $10,495,374 $ 29,182 $ 7,148 $10,517,408
U.S. government agencies 3,025,362 26,295 7,341 3,044,316
Mortgage-backed securities 800,091 6,965 1,756 805,300
----------- ----------- ----------- -----------
$14,320,827 $ 62,442 $ 16,245 $14,367,024
=========== =========== =========== ===========
Securities held to maturity:
U.S. Treasury $ 1,732,665 $ 3,039 $ 2,134 $ 1,733,570
U.S. government agencies 1,999,226 5,362 723 2,003,865
Mortgage-backed securities 1,340,585 -- 9,651 1,330,934
States and political
subdivisions 490,359 197 -- 490,556
Other 266,700 -- -- 266,700
----------- ----------- ----------- -----------
$ 5,829,535 $ 8,598 $ 12,508 $ 5,825,625
=========== =========== =========== ===========
</TABLE>
(Notes continued on next page)
F-14
<PAGE>
NOTE 5 - SECURITIES (Continued)
Investment securities having carrying values of $4,363,566 and
$3,902,828 at December 31, 1997 and 1996, respectively, are pledged to secure
deposits of the U.S. Government and the Commonwealth of Virginia. The estimated
fair values of these securities were $4,395,129 and $3,904,806 at December 31,
1997 and 1996, respectively.
The amoritized cost and fair value of securities by maturity date,
including the contractual maturities of mortgage-backed securities, at December
31, 1997 are as follows:
<TABLE>
<CAPTION>
Securities Held to Maturity Securities Available for Sale
--------------------------- -----------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- --------- --------- ---------
<S> <C>
Due in one year or less $ 1,018,998 $1,018,938 $4,556,046 $4,559,909
Due from one year to five years 4,766,880 4,803,656 10,558,544 10,633,990
Due from five years to ten years - - 92,435 94,556
Due after ten years 1,079,717 1,088,689 436,775 441,130
----------- ---------- ---------- ----------
$ 6,865,595 $6,911,283 $15,643,800 $15,729,585
=========== ========== =========== ===========
</TABLE>
NOTE 6 - LOANS
Loans consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
------------ ------------
<S> <C>
Gross loans:
Commercial $ 9,359,223 $ 9,334,870
Real estate - mortgage 37,775,710 31,551,386
Real estate - construction 1,626,634 2,083,717
Installment and consumer loans 3,369,650 3,132,132
------------ ------------
Total gross loans 52,131,217 46,102,105
Less - allowance for loan losses (889,384) (842,715)
------------ ------------
Loans, net $ 51,241,833 $ 45,259,390
============ ============
A summary of the activity in the allowance for loan losses account is as
follows:
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996
------------ ------------
Balance, beginning of year $ 842,715 $ 763,318
Provision charged to operations 88,333 92,935
Loans charged-off (48,690) (84,239)
Recoveries 7,026 70,702
------------ ------------
Balance, end of year $ 889,384 $ 842,715
============ ============
(Notes continued on next page)
F-15
</TABLE>
<PAGE>
NOTE 6 - LOANS (Continued)
Loans on which the accrual of interest has been discontinued amount to
$26,866 and $12,550 at December 31, 1997 and 1996, respectively. If interest on
these loans had been accrued, such income would have approximated $3,545 and
$2,000 for 1997 and 1996, respectively. No interest income was recognized or
received on these loans in 1997 and 1996.
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
<S> <C>
December 31,
-----------------------------------
1997 1996
------------ ------------
Land and improvements $ 252,829 $ 161,168
Buildings 1,166,522 673,631
Leasehold improvements 7,951 7,951
Equipment, furniture and fixtures 1,182,723 994,434
------------ ------------
2,610,025 1,837,184
Less - accumulated depreciation (1,281,728) (1,254,213)
------------ ------------
$ 1,328,297 $ 582,971
============ ============
Depreciation charged to operating expense for the years ended December
31, 1997 and 1996 was $71,226 and $78,344, respectively.
NOTE 8 - DEPOSITS
Interest bearing deposits consist of the following:
<CAPTION>
December 31,
-----------------------------------
1997 1996
------------ ------------
Money Market and NOW account deposits $ 11,870,772 $ 12,278,300
Savings deposits 4,587,008 4,675,568
Certificates of deposit $100,000 and over 8,128,297 6,727,894
Other time deposits 35,308,624 32,245,984
------------ ------------
$ 59,894,701 $ 55,927,746
============= ============
At December 31, 1997 and 1996, the scheduled maturities of time
deposits are as follows:
<CAPTION>
1997 1996
------------ ------------
Maturing in less than one year $ 37,195,696 $ 31,506,878
Maturing in more than a year, but less than five years 6,241,225 7,467,000
------------ ------------
$ 43,436,921 $ 38,973,878
=====================================
</TABLE>
(Notes continued on next page)
F-16
<PAGE>
NOTE 9 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SHORT-TERM
BORROWINGS
Securities sold under agreements to repurchase generally mature within
one to four days from the transaction date. Information concerning securities
sold under agreements to repurchase is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31,
-----------------------------------
1997 1996
------------ ------------
Average balance during the year $ 1,809,640 $ 14,308
============ ============
Average interest rate during the year 4.05% 4.36%
=========== ============
Maximum month end balance during the year $ 2,555,645 $ 1,349,091
=========== ============
</TABLE>
Short-term borrowings consist of U.S. Treasury tax and loan deposit
notes, which are payable on demand and fully collateralized by investment
securities.
The Bank is a member of the Federal Home Loan Bank of Atlanta. One of
the benefits of membership is a borrowing capacity of $5.9 million secured by a
blanket floating lien on the unpaid principal balance of the Bank's one-to-four
unit residential, real estate loans. As of December 31, 1997, the Bank had not
borrowed any amounts on this line of credit.
NOTE 10 - STOCK COMPENSATION PLANS
At December 31, 1997, the Bank has fixed stock compensation plans for
its officers. The Bank applies Accounting Principles Board Opinion No. 25 (APB
25), Accounting for Stock Issued to Employees, and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for these plans against earnings. For those companies applying APB 25, FASB
Statement No. 123, Accounting for Stock-Based Compensation, requires certain
pro-forma disclosures of net income and earnings per share. Net income and
earnings per share computed under FASB Statement No. 123 do not materially
differ from the amounts reported.
All options have ten year terms, vest and become fully exercisable in
three years. The option exercise price equals or exceeds the market price of the
stock as of the date the option was granted. The following is a summary of the
Bank's stock option activity, and related information for the years ended
December 31,:
<TABLE>
<CAPTION>
<S> <C>
1997 1996
--------------------------- -------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
Outstanding - Beginning of year 110,750 $7.39 110,750 $7.39
Granted - - - -
Exercised (10,900) 6.79 - -
Forfeited - - - -
------- ----- ------- -----
Outstanding - End of year 99,850 $7.45 110,750 $7.39
======= ===== ======= =====
Exercisable - End of year 67,913 $6.87 61,875 $6.47
======= ===== ======= =====
</TABLE>
(Notes continued on next page)
F-17
<PAGE>
NOTE 11 - INCOME TAXES
The principal components of income tax expense are as follows:
<TABLE>
<CAPTION>
<S> <C>
Years Ended December 31,
-----------------------------------
1997 1996
------------ ------------
Federal income tax expense - current $ 479,492 $ 222,599
Deferred federal income tax expense (benefit) (39,758) 4,578
------------ ------------
Income tax expense $ 439,746 $ 218,021
============ ============
Differences between income tax expense calculated at the statutory rate
and that shown in the statements of income are summarized as follows:
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996
------------ ------------
Federal income tax expense - at statutory rate $ 459,276 $ 370,083
Tax effect of:
Tax exempt interest (21,003) (49,475)
Exercised stock options 20,228 -
Other (18,755) (5,112)
Change in valuation allowance - (97,475)
------------ ------------
Income tax expense $ 439,746 $ 218,021
============ ============
</TABLE>
(Notes continued on next page)
F-18
<PAGE>
NOTE 11 - INCOME TAXES (Continued)
The Company has the following deferred tax assets and liabilities at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
<S> <C>
1997 1996
------------ ------------
Deferred tax assets:
Deferred compensation $ 94,028 $ 94,958
Bad debts and other provisions 276,116 195,588
Other 15,886 9,222
Minimum tax credit carryforward -- 12,997
------------ ------------
Total deferred tax asset 386,030 312,765
------------ ------------
Deferred tax liabilities:
Deferred loan fees (41,666) (14,383)
Discount accretion on securities (17,300) (11,723)
Net unrealized appreciation on available-for-
sale securities (29,167) (14,783)
Fixed assets (21,101) (20,454)
------------ ------------
(109,234) (61,343)
------------ ------------
Net deferred tax asset $ 276,796 $ 251,422
============ ============
</TABLE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES- RELATED PARTY
The Company has entered into a long-term lease with a related party to
provide space for one branch and the Bank's operations center. This lease has
been classified as an operating lease for financial reporting purposes. Future
minimum lease payments of $64,439 are required each year for five years under
the long-term non-cancellable lease agreement as of December 31, 1996, which
expires in December, 2001. Total lease expense was $64,440 and $75,810 for the
years 1997 and 1996, respectively.
NOTE 13 - OTHER RELATED PARTY TRANSACTIONS
The Bank has loan and deposit transactions with its officers and
directors, and with companies in which the officers and directors have a
financial interest. Related party deposits amounted to approximately $7,270,000
and $5,500,000 at December 31, 1997 and 1996, respectively. All securities sold
under agreements to repurchase were transacted with related parties. A summary
of related party loan activity for Heritage Bank and Trust is as follows during
1997:
Balance, December 31, 1996 $ 3,407,346
Originations - 1997 1,767,508
Repayments - 1997 (1,067,609)
------------
Balance, December 31, 1997 $ 4,107,245
============
(Notes continued on next page)
F-19
<PAGE>
NOTE 13 - OTHER RELATED PARTY TRANSACTIONS (Continued)
In the opinion of Management, such loans are made in the ordinary course
of business at normal credit terms, including interest rate and collateral
requirements and do not represent more than normal credit risk.
In the ordinary course of business, the Company has engaged in
transactions with certain of its directors' companies for legal services and
insurance.
Commitments to extend credit and letters of credit to related parties
amounted to $1,181,800 and $1,166,800 at December 31, 1997 and 1996,
respectively.
NOTE 14 - CREDIT COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK
The Bank has outstanding at any time a significant dollar amount of
commitments to extend credit. To accommodate major customers, the Bank also
provides standby letters of credit and guarantees to third parties. Those
arrangements are subject to strict credit control assessments. Guarantees and
standby letters of credit specify limits to the Bank's obligations. The amounts
of loan commitments, guarantees and standby letters of credit are set out in the
following table as of December 31, 1997 and 1996. Because many commitments and
almost all standby letters of credit and guarantees expire without being funded
in whole or in part, the contract amounts are not estimates of future cash
flows. The majority of commitments to extend credit have terms up to one year.
Interest rates on fixed-rate commitments range from 14% to 18%.
<TABLE>
<CAPTION>
<S> <C>
1997 1996
--------------------------------------------------------------------
Variable Rate Fixed Rate Variable Rate Fixed Rate
Commitments Commitments Commitments Commitments
----------- ----------- ----------- -----------
Loan Commitments $ 8,651,143 $ 904,068 $ 10,456,377 $ 648,085
Standby letters of credit and
guarantees written $ 100,000 $ 223,166 $ 124,133 $ 24,240
All of the guarantees outstanding at December 31, 1997 expire during 1998.
</TABLE>
(Notes continued on next page)
F-20
<PAGE>
NOTE 14 - CREDIT COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK (Continued)
Loan commitments, standby letters of credit and guarantees written have
off-balance-sheet credit risk because only origination fees and accruals for
probable losses, if any, are recognized in the statement of financial position,
until the commitments are fulfilled or the standby letters of credit or
guarantees expire. Credit risk represents the accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted. The credit risk amounts are equal to the contractual amounts,
assuming that the amounts are fully advanced and that, in accordance with the
requirements of FASB Statement No. 105, Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, collateral or other security is of no value. The
Bank's policy is to require customers to provide collateral prior to the
disbursement of approved loans. For retail loans, the Bank usually retains a
security interest in the property or products financed, which provides
repossession rights in the event of default by the customer. For business loans
and financial guarantees, collateral is usually in the form of inventory or
marketable securities (held in trust) or property (notations on title).
Concentrations of credit risk (whether on or off balance sheet) arising
from financial instruments exist in relation to certain groups of customers. A
group concentration arises when a number of counterparties have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The Bank
does not have significant exposure to any individual customer or counterparty.
The major concentrations of credit risk for the Bank arise by customer loan type
in relation to loans and credit commitments, as shown in the following table. A
geographic concentration arises because the Bank operates primarily in
southeastern Virginia.
<TABLE>
<CAPTION>
<S> <C>
Installment
Residential Commercial Small and
Property Property Business Consumer Total
-------- -------- -------- -------- -----
Loans and
receivables $ 19,389,572 $ 16,293,967 $ 9,595,316 $ 6,852,$62 $ 52,131,217
Credit
commitments 2,707,313 296,471 4,002,079 2,872,514 9,878,377
-------------- -------------- ------------- ------------- -------------
$ 22,096,885 $ 16,590,438 $ 13,597,395 $ 9,724,$76 $ 62,009,594
============== ============== ============== ============= =============
</TABLE>
The credit risk amounts represent the maximum accounting loss that would
be recognized at the reporting date if counterparties failed completely to
perform as contracted and any collateral or security proved to be of no value.
The Bank has experienced little difficulty in accessing collateral when
required. The amounts of credit risk shown, therefore, greatly exceed expected
losses, which are included in the allowance for loan losses.
(Notes continued on next page)
F-21
<PAGE>
NOTE 15 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components (such as interest rate risk), risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, the Bank
meets all capital adequacy requirements to which it is subject.
As of September 30, 1996, the most recent notification from the Federal
Reserve Bank of Richmond categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk- based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C>
As of December 31, 1997:
Total Capital
(to Risk-Weighted Assets) $ 7,663,000 15.07% $ 4,068,000 8.00% $ 5,085,000 10.00%
Tier I Capital
(to Risk-Weighted Assets) $ 7,024,000 13.81% $ 2,034,000 4.00% $ 3,051,000 6.00%
Tier I Capital
(to Average Assets) $ 7,024,000 8.63% $ 3,255,000 4.00% $ 4,069,000 5.00%
</TABLE>
(Notes continued on next page)
F-22
<PAGE>
NOTE 15 - REGULATORY MATTERS (Continued)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C>
As of December 31, 1996:
Total Capital
(to Risk-Weighted Assets) $ 6,650,000 14.70% $ 3,618,000 8.00% $ 4,523,000 10.00%
Tier I Capital
(to Risk-Weighted Assets) $ 6,081,000 13.44% $ 1,809,000 4.00% $ 2,714,000 6.00%
Tier I Capital
(to Average Assets) $ 6,081,000 8.57% $ 2,839,000 4.00% $ 3,548,000 5.00%
</TABLE>
There is no significant difference between the Bank's actual ratios
disclosed above, and the related actual ratios of the Company.
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair value of the
Bank's financial instruments at December 31, 1997 and 1996. FASB Statement No.
107, Disclosures about Fair Value of Financial Instruments, defines the fair
value of a financial instruments as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. The carrying amounts in the table are included in
the balance sheet under the indicated captions.
<TABLE>
<CAPTION>
<S> <C>
1997 1996
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- -------- --------- ---------
(Dollars in thousands) (Dollars in thousands)
Financial Assets:
Cash and cash equivalents $ 5,716 $ 5,716 $ 8,994 $ 8,994
Loans (net) 51,242 52,688 45,259 45,719
Investment securities 22,595 22,641 20,196 20,193
Accrued interest receivable 692 692 535 535
Financial Liabilities:
Deposit liabilities 72,797 73,049 68,427 68,678
Accrued interest payable 342 342 291 291
Short-term borrowings 52 52 131 131
Securities sold under
agreements to repurchase 1,945 1,945 1,349 1,349
</TABLE>
(Notes continued on next page)
F-23
<PAGE>
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Estimation of Fair Values
The following notes summarize the major methods and assumptions used in
estimating the fair value of financial instruments:
Short-term financial instruments are valued at their carrying amounts
included in the Bank's balance sheet, which are reasonable estimates of fair
value due to the relatively short period to maturity of the instruments. This
approach applies to cash and cash equivalents, short-term borrowings, and
securities sold under agreements to repurchase.
Loans are valued on the basis of estimated future receipts of principal
and interest, which are discounted at various rates. Loan prepayments are
assumed to occur at the same rate as in previous periods when interest rates
were at levels similar to current levels. Future cash flows for homogeneous
categories of consumer loans, such as motor vehicle loans, are estimated on a
portfolio basis and discounted at current rates offered for similar loan terms
to new borrowers with similar credit profiles. The fair value of nonaccrual
loans also is estimated on a present value basis, using higher discount rates
appropriate to the higher risk involved.
Investment securities are valued at quoted market prices if available.
For unquoted securities, the fair value is estimated by the Bank on the basis of
financial and other information.
The fair value of demand deposits and deposits with no defined maturity
is taken to be the amount payable on demand at the reporting date. The fair
value of fixed - maturity deposits is estimated using rates currently offered
for deposits of similar remaining maturities. The intangible value of long-term
relationships with depositors is not taken into account in estimating the fair
values disclosed.
The carrying amounts of accrued interest approximate fair value.
It is not practicable to separately estimate the fair values for
off-balance-sheet credit commitments, including standby letters of credit and
guarantees written, due to the lack of cost effective reliable measurement
methods for these instruments.
(Notes continued on next page)
F-24
<PAGE>
NOTE 17 - EARNINGS PER SHARE RECONCILIATION
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations.
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C>
Net income (numerator, basic and diluted) $ 979,970 $ 870,458
Weighted average shares outstanding (denominator) 790,450 784,150
------------ ------------
Earnings per common share-basic $ 1.24 $ 1.11
============ ============
Effect of dilutive securities:
Weighted average shares outstanding $ 790,450 $ 784,150
Effect of stock options 46,470 16,249
------------ ------------
Diluted average shares outstanding (denominator) 836,920 800,399
------------ ------------
Earnings per comon share-assuming dilution $ 1.17 $ 1.09
============ ============
</TABLE>
F-25
HERITAGE BANK
EMPLOYEE STOCK OWNERSHIP PLAN
SUMMARY PLAN DESCRIPTION
<PAGE>
TABLE OF CONTENTS
I
INTRODUCTION TO YOUR PLAN
II
GENERAL INFORMATION ABOUT YOUR PLAN
1. General Plan Information 2
2. Employer Information 2
3. Plan Administrator Information 2
4. Plan Trustee Information 3
5. Service of Legal Process 3
III
PARTICIPATION IN YOUR PLAN
1. Eligibility Requirements 3
2. Participation Requirements 4
3. Excluded Employees 4
IV
CONTRIBUTIONS TO YOUR PLAN
1. Employer Contributions to the Plan . 4
2. Your Share of Employer Contributions 5
3. Compensation 5
4. Forfeitures 6
V
BENEFITS UNDER YOUR PLAN
1. Distribution of Benefits Upon Normal Retirement 6
2. Distribution of Benefits Upon Late Retirement 6
3. Distribution of Benefits Upon Death 6
4. Distribution of Benefits Upon Termination of
Employment 7
5. Vesting in Your Plan 8
6. Benefit Payment Method S
7. Treatment of Distributions From Your Plan 9
8. Domestic Relations Order 9
9. Pension Benefit Guaranty Corporation 10
VI
INFORMATION REGARDING COMPANY STOCK
1. Voting of Company Stock 10
2. Right of First Refusal 10
VII
SERVICE RULES
1. Year of Service 11
2. Hour of Service 11
3. 1-Year Break in Service 11
4. Uniformed Services Employment and Reemployment
Rights Act 12
VIII
YOUR PLAN'S 'TOP HEAVY RULES"
1. Explanation of "Top Heavy Rules" 12
IX
CLAIMS BY PARTICIPANTS AND BENEFICIARIES
1. The Claims Review Procedure . 14
X
STATEMENT OF ERISA RIGHTS
1. Explanation of Your ERISA Rights 15
XI
AMENDMENT AND TERMINATION OF YOUR PLAN
1. Amendment 16
2. Termination 16
<PAGE>
HERITAGE BANK
EMPLOYEE STOCK OWNERSHIP PLAN
SUMMARY PLAN DESCRIPTION
I
INTRODUCTION TO YOUR PLAN
Heritage Bankshares, Inc. wishes to recognize the efforts its employees
have made to its success and to reward them by adopting a Stock Bonus Plan. This
Plan will be for the exclusive benefit of eligible employees and their
beneficiaries.
The purpose of this Plan is to reward eligible employees for long and
loyal service by providing them with retirement benefits.
Between now and your retirement, your Employer intends to make
contributions for you and other eligible employees. Contributions to the Plan
will be invested in Company Stock. Your efforts added to the efforts of all
other employees contribute to the profitability and growth of the Employer and
thereby increase the value of Company Stock and your benefits in the Plan. When
you retire, you will be entitled to receive the value of the amounts which have
accumulated in your account in the form of Company Stock.
Your Employer has the right to submit this Plan to the Internal Revenue
Service for approval. The Internal Revenue Service will issue a "determination
letter" to your Employer approving this Plan as a "qualified" retirement plan,
if this Plan meets specific legal requirements.
This Summary Plan Description is a brief description of your Plan and
your rights, obligations, and benefits under that Plan. Some of the statements
made in this Summary Plan Description are dependent upon this Plan being
"qualified" under the provisions of the Internal Revenue Code. This Summary Plan
Description is not meant to interpret, extend, or change the provisions of your
Plan in any way. The provisions of your Plan may only be determined accurately
by reading the actual Plan document.
A copy of your Plan is on file at your Employer's office and may be read
by you, your beneficiaries, or your legal representatives at any reasonable
time. If you have any questions regarding either your Plan or this Summary Plan
Description, you should ask your Plan's Administrator. In the event of any
discrepancy between this Summary Plan Description and the actual provisions of
the Plan, the Plan will govern.
1
<PAGE>
II
GENERAL INFORMATION ABOUT YOUR PLAN
There is certain general information which you may need to know about
your Plan. This information has been summarized for you in this section.
1. General Plan Information
Heritage Bank Employee Stock Ownership Plan is the name of your Plan.
Your Employer has assigned Plan Number 003 to your Plan.
The provisions of your Plan become effective on January 1, 1997, which
is called the Effective Date of the Plan.
Your Plan's records are maintained on a twelve-month period of time.
This is known as the Plan Year. The Plan Year begins on January 1st and ends on
December 31st.
Certain valuations and distributions are made on the Anniversary Date of
your Plan. This date is December 31st.
The contributions made to your Plan will be held and invested by the
Trustee of your Plan.
Your Plan and Trust will be governed by the laws of the Commonwealth of
Virginia.
2. Employer Information
Your Employer's name, address and identification number are:
Heritage Bankshares, Inc.
200 East Plume Street
Norfolk, Virginia 23510
54-1234322
3. Plan Administrator Information
The name, address and business telephone number of your Plan's
Administrator are:
Heritage Bankshares, Inc.
200 East Plume Street
Norfolk, Virginia 23510
(757) 523-2600
Your Plan's Administrator keeps the records for the Plan and is
responsible for the administration of the Plan. The Administrator has
discretionary authority to construe the terms of the Plan and make
determinations on questions which may affect
2
<PAGE>
your eligibility for benefits. Your Plan's Administrator will also answer any
questions you may have about your Plan.
4. Plan Trustee Information
The names of your Plan's Trustees are:
Catherine Jackson
Harvey Roberts, III
Henry U. Harris, III
The Trustees shall collectively be referred to as Trustee throughout
this Summary Plan Description.
The principal place of business of your Plan's Trustee is:
200 East Plume Street
Norfolk, Virginia 23510
Your Plan's Trustee has been designated to hold and invest Plan assets
for the benefit of you and other Plan participants. The trust fund established
by the Plan's Trustee will be the funding medium used for the accumulation of
assets from which benefits will be distributed.
5. Service of Legal Process
The name and address of your Plan's agent for service of legal process
are:
Heritage Bankshares, Inc.
200 East Plume Street
Norfolk, Virginia 23510
Service of legal process may also be made upon the Trustee or
Administrator.
III
PARTICIPATION IN YOUR PLAN
Before you become a member or a "participant" in the Plan, there are
certain eligibility and participation rules which you must meet. These rules are
explained in this section.
1. Eligibility Requirements
You will be eligible to participate in the Plan if you have completed
six (6) months of service.
You will have completed six (6) months of service if you are in the
employ of your Employer six (6) months after your employment commencement date.
3
<PAGE>
2. Participation Requirements
Once you have satisfied your Plan's eligibility requirements, your next
step will be to actually become a member or a participant" in the Plan. You will
become a participant on a specified day of the Plan Year. This day is called the
Effective Date of Participation.
You will become a participant on the first day of the calendar quarter
coinciding with or next following the date you satisfy your Plan's eligibility
requirements.
3. Excluded Employees
There are certain employees of Heritage Bankshares, Inc. who will not
be eligible to participate in your Plan. Those employees are:
(a) employees who are leased employees.
IV
CONTRIBUTIONS TO YOUR PLAN
1. Employer Contributions to the Plan
As a participant, you may be eligible to share in and benefit from the
contributions made by your Employer. Each year, your Employer's contribution, if
any, will be placed into a trust fund for the benefit of Plan participants. The
Administrator of your Plan will then establish and maintain a separate account
for you and all other participants, into which the contributions will be placed.
Each year, your Employer will determine the amount of net profits, if
any, to contribute to your Plan. This contribution is discretionary.
You must complete a Year of Service during the Plan Year and be actively
employed on the last day of the Plan Year to share in this contribution.
In determining your eligibility to share in contributions for the year,
there are special rules which apply if your employment terminates due to your
Retirement (Normal or Late)
In such cases, you will be eligible to share in the contributions made
by your Employer in accordance with the following:
If the reason your employment terminated is due to your Retirement
(Normal or Late) , then you will not be eligible to share in the
contribution for the year even if you satisfied the requirements
explained above.
4
<PAGE>
2. Your Share of Employer Contributions
Your Employer's contribution will be "allocated" or divided among
participants eligible to share in the contribution for the Plan Year. Your share
of the contribution will depend upon how much compensation you received during
the year and the compensation received by other eligible participants.
Your share of your Employer's discretionary contribution is determined
by the following fraction:
Your Compensation
Employer' s X -------------------------
Discretionary Contribution Total Compensation of All
Participants Eligible to
Share
For example:
Suppose the Employer's discretionary contribution for the Plan Year is
$20,000. Employee A's compensation for the Plan Year is $25,000. The
total compensation of all participants eligible to share, including
Employee A, is $250,000.
Employee A's share will be:
$25,000
$20,000 X --------- or $2,000
$250,000
In addition to the Employer's contributions made to your account, your
account will be credited annually with a share of the investment earnings or
losses of the fund.
You should also be aware that the law imposes certain limits on how much
money may be allocated to your account for a year. These limits are extremely
complex but generally no more than the lesser of $30,000 or 25% of your
compensation may be allocated to you (excluding earnings or losses) in any year.
The Administrator will inform you if these limits have affected you.
3. Compensation
For the purposes of your Plan, compensation has a special meaning.
Compensation is defined as your total compensation during a Plan Year that is
subject to income tax and is reflected on your W-2 Form, but
-- including your salary reduction contributions to any plan or
arrangement maintained by your Employer.
Your compensation will be recognized for benefit purposes from your date
of entry into the Plan.
5
<PAGE>
The Plan, by law, cannot recognize compensation in excess of $160,000.
This amount will be adjusted in future years for cost of living increases. It
will also be applied to certain highly compensated employees and their family
members as if they were a single participant. If you or a member of your family
may be affected by this rule, ask your Administrator for further details. For
any short Plan Year, the adjusted limit will be prorated based upon the number
of full months in the short Plan Year.
4. Forfeitures
Forfeitures are created when participants terminate employment before
becoming entitled to their full benefits under the Plan. Your account may grow
from the forfeitures of other participants. Forfeitures will be "allocated" or
divided among participants eligible to share for a Plan Year.
V
BENEFITS UNDER YOUR PLAN
1. Distribution of Benefits Upon Normal Retirement
Your Normal Retirement Date is the first day of the month coinciding
with or next following your Normal Retirement Age.
You will attain your Normal Retirement Age when you reach your 65th
birthday, or your 5th anniversary of joining the Plan, if later.
At your Normal Retirement Age, you will be entitled to 100% of your
account balance. Payment of your benefits will, at your election, occur as soon
as practicable following your Normal Retirement Date. If you continue working
after your Normal Retirement Age, you may defer receipt of your benefits until
your Late Retirement Date or, if earlier, the April 1st following the end of the
year in which you attain age 70 1/2.
2. Distribution of Benefits Upon Late Retirement
You may remain employed past your Plan's Normal Retirement Date and
retire instead on your Late Retirement Date. Your Late Retirement Date is the
first day of the month coinciding with or next following the date you choose to
retire after first having reached your Normal Retirement Date. On your Late
Retirement Date, you will be entitled to 100% of your Account. Actual benefit
payment will occur as soon as practicable following your Late Retirement Date.
3. Distribution of Benefits Upon Death
Your beneficiary will be entitled to a single lump-sum distribution of
100% of your account balance upon your death.
6
<PAGE>
If you are married at the time of your death, your spouse will be the
beneficiary of the death benefit, unless you otherwise elect in writing on a
form to be furnished to you by the Administrator. IF YOU WISH TO DESIGNATE A
BENEFICIARY OTHER THAN YOUR SPOUSE, HOWEVER, YOUR SPOUSE MUST IRREVOCABLY
CONSENT TO WAIVE ANY RIGHT TO THE DEATH BENEFIT. YOUR SPOUSE'S CONSENT MUST BE
IN WRITING, BE WITNESSED BY A NOTARY OR A PLAN REPRESENTATIVE AND ACKNOWLEDGE
THE SPECIFIC NONSPOUSE BENEFICIARY.
If, however,
(a) your spouse has validly waived any right to the death
benefit in the manner outlined above,
(b) your spouse cannot be located; or
(c) you are not married at the time of your death,
then your death benefit will be paid to the beneficiary of your own choosing in
a single lump sum. You may designate the beneficiary on a form to be supplied to
you by the Administrator. If you change your designation, your spouse must again
consent to the change.
Regardless of the method of distribution selected, your entire death
benefit must generally be paid to your beneficiaries within five years after
your death (the "5-year rule") . However, if your designated beneficiary is a
person (instead of your estate or most trusts) , then you or your beneficiary
may elect to have minimum distributions begin within one year of your death and
it may be paid over the designated beneficiary's life expectancy (the "1-year
rule") . If your spouse is the beneficiary, then under the "1-year rule," the
start of payments may be delayed until the year in which you would have attained
age 70 1/2. The election to have death benefits distributed under the "1-year
rule" instead of the "5-year rule" must be made no later than the time at which
minimum distributions must commence under the "1-year rule" (or, in the case of
a surviving spouse, the "5-year rule, " if earlier)
Since your spouse has certain rights in the death benefit, you should
immediately report any change in your marital status to the Administrator.
4. Distribution of Benefits Upon Termination of Employment
Your Plan is designed to encourage you to stay with your Employer until
retirement. Payment of your account balance under your Plan is available upon
your death or retirement.
If your employment terminates for reasons other than those listed above,
you will be entitled to receive only your "vested percentage" of your account
7
<PAGE>
balance and the remainder of your account will be forfeited. Only contributions
made by your Employer are subject to forfeiture. (See the Section in this
Article entitled "Vesting in Your Plan.")
If you so elect, the Administrator will direct the Trustee to distribute
your vested benefit to you before the date it would normally be distributed
(upon your death or retirement) . You must give written consent before the
distribution may be made.
5. Vesting in Your Plan
Your "vested percentage" in your account is determined under the
following schedule and is based on vesting Years of Service. You will always,
however, be 100% vested upon your Normal Retirement Age. (See the Section in
this Article entitled "Distribution of Benefits Upon Normal Retirement.")
Vesting Schedule
Years of Service Percentage
---------------- ----------
Less than 3
0 %
3 20 %
4 40 %
5 60 %
6 80 %
7 100 %
Your vested benefit will normally be distributed to you or your
beneficiary upon your death or retirement.
6. Benefit Payment Method
At the time you are entitled to receive a distribution under the Plan,
the Administrator will direct the Trustee to pay your benefits to you in one
lump-sum payment.
Distribution of your account at retirement will be in the form of cash
or Company Stock or both However, you or your beneficiary may demand
distribution of your entire account in the form of Company Stock. Cash may be
paid (1) in lieu of partial shares of Company Stock, or (2) in certain
circumstances where it may not be possible for the Plan to purchase Company
Stock for distribution.
If you elect to delay the receipt of benefits, there are other rules
which generally require minimum payments to begin no later than the April 1st
following the year in which you reach age 70 1/2. You should see the
Administrator if you feel you may be affected by this rule.
8
<PAGE>
7. Treatment of Distributions From Your Plan
Whenever you receive a distribution from your Plan, it will normally be
subject to income taxes. You may, however, reduce, or defer entirely, the tax
due on your distribution through use of one of the following methods:
(a) The rollover of all or a portion of the distribution to an
Individual Retirement Account (IRA) or another qualified employer plan.
This will result in no tax being due until you begin withdrawing funds
from the IRA or other qualified employer plan. The rollover of the
distribution, however, MUST be made within strict time frames (normally,
within 60 days after you receive your distribution) . Under certain
circumstances all or a portion of a distribution may not qualify for
this rollover treatment. In addition, most distributions will be subject
to mandatory federal income tax withholding at a rate of 20%. This will
reduce the amount you actually receive. For this reason, if you wish to
rollover all or a portion of your distribution amount, the direct
transfer option described in paragraph (b) below would be the better
choice.
(b) You may request for most distributions that a direct
transfer of all or a portion of your distribution amount be made to
either an Individual Retirement Account (IRA) or another qualified
employer plan willing to accept the transfer. A direct transfer will
result in no tax being due until you withdraw funds from the IRA or
other qualified employer plan. Like the rollover, under certain
circumstances all or a portion of the amount to be distributed may not
qualify for this direct transfer, e.g., a distribution of less than $500
will not be eligible for a direct transfer. If you elect to actually
receive the distribution rather than request a direct transfer, then in
most cases 20% of the distribution amount will be withhe1d for federal
income tax purposes.
(c) The election of favorable income tax treatment under
"10-year forward averaging," "5-year forward averaging" or, if you
qualify, "capital gains" method of taxation.
WHENEVER YOU RECEIVE A DISTRIBUTION, THE ADMINISTRATOR WILL DELIVER TO
YOU A MORE DETAILED EXPLANATION OF THESE OPTIONS. HOWEVER, THE RULES WHICH
DETERMINE WHETHER YOU QUALIFY FOR FAVORABLE TAX TREATMENT ARE VERY COMPLEX. YOU
SHOULD CONSULT WITH QUALIFIED TAX COUNSEL BEFORE MAKING A CHOICE.
8. Domestic Relations Order
As a general rule, your interest in your account, including your "vested
interest, may not be alienated. This means that your interest may not be sold,
9
<PAGE>
used as collateral for a loan, given away or otherwise transferred. In addition,
your creditors may not attach, garnish or otherwise interfere with your account.
There is an exception, however, to this general rule. The Administrator
may be required by law to recognize obligations you incur as a result of court
ordered child support or alimony payments. The Administrator must honor a
"qualified domestic relations order." A "qualified domestic relations order" is
defined as a decree or order issued by a court that obligates you to pay child
support or alimony, or otherwise allocates a portion of your assets in the Plan
to your spouse, former spouse, child or other dependent. If a qualified domestic
relations order is received by the Administrator, all or a portion of your
benefits may be used to satisfy the obligation. The Administrator will determine
the validity of any domestic relations order received.
9. Pension Benefit Guaranty Corporation
Benefits provided by your Plan are NOT insured by the Pension Benefit
Guaranty Corporation (PBGC) under Title IV of the Employee Retirement Income
Security Act of 1974 because the insurance provisions under ERISA are not
applicable to your Plan.
VI
INFORMATION REGARDING COMPANY STOCK
1. Voting of Company Stock
The Trustee of the Plan will vote all Company Stock held by it as a part
of the Plan assets, provided that, if the trust fund acquires securities of the
Employer amounting to more than 10 percent of the total assets of the trust
fund, you or your beneficiary will be entitled to direct the Trustee as to the
manner in which voting rights on shares of Company Stock which are allocated to
your account are to be exercised (I) with respect to any corporate matter which
involves the voting of such shares with respect to the approval or disapproval
of any corporate merger or consolidation, recapitalization, reclassification,
liquidation, dissolution, sale of substantially all assets of a trade or
business, or such similar transaction, and (ii) with respect to all corporate
matters if, at the time of the vote thereon, the Company Smock is a
"registration-type" class of securities. If you do not timely exercise your
right to vote Company Stock, the Trustee will vote such Company Stock.
2. Right of First Refusal
Company Stock distributed by the Plan to you or your beneficiary may be
subject to a right of first refusal in favor of the Employer. In other words the
Employer must be given an opportunity to purchase at the same price and same
terms as you or your beneficiary may offer to sell to a third party.
10
<PAGE>
VII
SERVICE RULES
1. Year of Service
The term "Year of Service" is used in this Summary Plan Description and
in your Plan.
You will have completed a Year of Service for vesting purposes if you
are credited with 1000 Hours of Service during a Plan Year, even if you were not
employed on the first or last day of the Plan Year.
You will have completed a Year of Service for purposes of sharing in
Employer contributions if you are credited with 1000 Hours of Service during a
Plan Year.
For purposes of determining whether you have completed a Year of Service
where the computation period is based upon a short Plan Year, your Administrator
will notify you of the number of the Hours of Service that are required and the
method or calculating a Year of Service.
2. Hour of Service
You will be credited with an Hour of Service for:
(a) each hour for which you are directly or indirectly
compensated by your Employer for the performance of duties during the
Plan Year;
(b) each hour for which you are directly or indirectly
compensated by your Employer for reasons other than performance of
duties (such as vacation, holidays, sickness, disability, lay-off,
military duty, jury duty or leave of absence during the Plan Year) ; and
(c) each hour for back pay awarded or agreed to by your
Employer.
You will not be credited for the same Hours of Service both under (a)
or (b) , as the case may be, and under (c)
3. 1-Year Break in Service
A 1-Year Break in Service is a computation period during which you have
not completed more than 500 Hours of Service with your Employer.
A 1-Year Break in Service does NOT occur, however, in the computation
period in which you enter or leave the Plan for reasons of:
(a) an authorized leave of absence;
11
<PAGE>
(b) certain maternity or paternity absences.
The Administrator will be required to credit you with Hours of Service
for a maternity or paternity absence. These are absences taken on account of
pregnancy, birth, or adoption of your child. No more than 501 Hours of Service
shall be credited for this purpose and these Hours of Service shall be credited
solely to avoid your incurring a 1-Year Break in Service. The Administrator may
require you to furnish proof that your absence qualifies as a maternity or
paternity absence.
4. Uniformed Services Employment and Reemployment Rights Act
If you are a veteran and are reemployed under the Uniformed Services
Employment and Reemployment Rights Act of 1994, your qualified military service
may be considered service with the Employer. If you may be affected by this law,
ask your Administrator for further details.
VIII
YOUR PLAN'S "TOP HEAVY RULES"
1. Explanation of "Top Heavy Rules"
A Plan that primarily benefits "key employees" is called a "top heavy
plan." Key employees are certain owners or officers of your Employer. A Plan is
a "top heavy plan" when more than 60% of the contributions or benefits have been
allocated to key employees.
Each year, the Administrator is responsible for determining whether
your Plan is a "top heavy plan."
If your Plan becomes top heavy in any Plan Year, then non-key and key
employees will be entitled to certain "top heavy minimum benefits, " and other
special rules will apply. Among these top heavy rules are the following:
(a) Your Employer may be required to make a contribution to your
account in order to provide you with at least "top heavy minimum
benefits."
(b) Instead of the vesting schedule outlined in the Article and
Section in this Summary entitled "BENEFITS UNDER YOUR PLAN: Vesting in
Your Plan," your nonforfeitable right to benefits or contributions
derived from Employer contributions will be determined according to the
following schedule:
12
<PAGE>
Vesting Schedule
Years of Service Percentage
---------------- ----------
Less than 2 0 %
2 20 %
3 40 %
4 60 %
5 80 %
6 100 %
(c) If you are a participant in more than one Plan, you may not
be entitled to "top heavy minimum benefits" under both Plans.
IX
CLAIMS BY PARTICIPANTS AND BENEFICIARIES
Benefits will be paid to participants and their beneficiaries without
the necessity of formal claims. You or your beneficiaries, however may make a
request for any Plan benefits to which you may be entitled. Any such request
must be made in writing, and it should be made to the Administrator. (See the
Article in this Summary entitled "GENERAL INFORMATION ABOUT YOUR PLAN.")
Your request for Plan benefits shall be considered a claim for Plan
benefits, and it will be subject to a full and fair review. If your claim is
wholly or partially denied, the Administrator will furnish you with a written
notice of this denial. This written notice must be provided to you within a
reasonable period of time (generally 90 days) after the receipt of your claim by
the Administrator. The written notice must contain the following information:
(a) the specific reason or reasons for the denial;
(b) specific reference to those Plan provisions on which
the denial is based;
(c) a description of any additional information or material
necessary to correct your claim and an explanation of why such material
or information is necessary; and
(d) appropriate information as to the steps to be taken if you
or your beneficiary wishes to submit your claim for review.
If notice of the denial of a claim is not furnished to you in accordance
with the above within a reasonable period of time, your claim will be deemed
denied. You will then be permitted to proceed to the review stage described in
the following paragraphs.
13
<PAGE>
If your claim has been denied, and you wish to submit your claim for
review, you must follow the Claims Review Procedure.
1. The Claims Review Procedure
(a) Upon the denial of your claim for benefits, you may file
your claim for review, in writing, with the Administrator.
(b) YOU MUST FILE THE CLAIM FOR REVIEW NO LATER THAN 60 DAYS
AFTER YOU HAVE RECEIVED WRITTEN NOTIFICATION OF THE DENIAL OF YOUR CLAIM
FOR BENEFITS, OR IF NO WRITTEN DENIAL OF YOUR CLAIM WAS PROVIDED, NO
LATER THAN 60 DAYS AFTER THE DEEMED DENIAL OF YOUR CLAIM.
(c) You may review all pertinent documents relating to the
denial of your claim and submit any issues and comments, in writing, to
the Administrator.
(d) Your claim for review must be given a full and fair review.
If your claim is denied, the Administrator must provide you with written
notice of this denial within 60 days after the Administrator's receipt
of your written claim for review. There may be times when this 60 day
period may be extended. This extension may only be made, however, where
there are special circumstances which are communicated to you in writing
within the 60 day period. If there is an extension, a decision shall be
made as soon as possible, but not later than 120 days after receipt by
the Administrator of your claim for review.
(e) The Administrator's decision on your claim for review will
be communicated to you in writing and will include specific references
to the pertinent Plan provisions on which the decision was based.
(f) If the Administrator's decision on review is not furnished
to you within the time limitations described above, your claim will be
deemed denied on review.
(g) If benefits are provided or administered by an insurance
company, insurance service, or other similar organization which is
subject to regulation under the insurance laws, the claims procedure
relating to these benefits may provide for review. If so, that company,
service, or organization will be the entity to which claims are
addressed. If you have any questions regarding the proper person or
entity to address claims, you should ask the Administrator.
14
<PAGE>
X
STATEMENT OF ERISA RIGHTS
1. Explanation of Your ERISA Rights
As a participant in this Plan you are entitled to certain rights and
protections under the Employee Retirement Income Security Act of 1974, also
called ERISA. ERISA provides that all Plan participants are entitled to:
(a) examine, without charge, all Plan documents, including:
(1) insurance contracts;
(2) collective bargaining agreements; and
(3) copies of all documents filed by the Plan with the U.S.
Department of Labor, such as detailed annual reports and Plan
descriptions.
This examination may take place at the Administrator's office and at
other specified employment locations of the Employer. (See the Article in this
Summary entitled "GENERAL INFORMATION ABOUT YOUR PLAN");
(b) obtain copies of all Plan documents and other Plan
information upon written request to the Plan Administrator. The
Administrator may make a reasonable charge for the copies;
(c) receive a summary of the Plan's annual financial report. The
Administrator is required by law to furnish each participant with a copy
of this summary annual report;
(d) obtain a statement telling you whether you have a right to
receive a retirement benefit at Normal Retirement Age and, if so, what
your benefits would be at Normal Retirement Age if you stop working
under the Plan now. If you do not have a right to a retirement benefit,
the statement will tell you how many years you have to work to get a
right to a retirement benefit. THIS STATEMENT MUST BE REQUESTED IN
WRITING AND IS NOT REQUIRED TO BE GIVEN MORE THAN ONCE A YEAR. The Plan
must provide the statement free of charge.
In addition to creating rights for Plan participants, ERISA imposes
duties upon the people who are responsible for the operation of the Plan. The
people who operate your Plan, called "fiduciaries" of the Plan, have a duty to
do so prudently and in the interest of you and other Plan participants and
beneficiaries. No one, including your employer or any other person, may fire you
or otherwise discriminate against you in any way to prevent you from obtaining a
pension benefit or exercising your rights under ERISA.
15
<PAGE>
If your claim for a retirement benefit is denied in whole or in part,
you must receive a written explanation of the reason for the denial. You have
the right to have the Administrator review and reconsider your claim. (See the
Article in this Summary entitled "CLAIMS BY PARTICIPANTS AND BENEFICIARIES.")
Under ERISA, there are steps you can take to enforce the above rights.
For instance, if you request materials from the Plan and do not receive them
within 30 days, you may file suit in a federal court. In such a case, the court
may require the Administrator to provide the materials and pay you up to $100.00
a day until you receive the materials, unless the materials were not sent
because of reasons beyond the control of the Administrator.
If you have a claim for benefits which is denied or ignored, In whole or
in part, you may file suit in a state or federal court.
If the Plan's fiduciaries misuse the Plan's money, or if you are
discriminated against for asserting your rights, you may seek assistance from
the U.S. Department of Labor, or you may file suit in a federal court. The court
will decide who should pay court costs and legal fees. If you are successful,
the court may order the person you have sued to pay these costs and fees. If you
lose, the court may order you to pay these costs and fees if, for example, it
finds your claim is frivolous.
If you have any questions about this statement, or about your rights
under ERISA, you should contact the nearest Regional Office of the U.S.
Department of Labor's Pension and Welfare Benefits Administration.
XI
AMENDMENT AND TERMINATION OF YOUR PLAN
1. Amendment
Your Employer has the right to amend your Plan at any time. In no event,
however, will any amendment:
(a) authorize or permit any part of the Plan assets to be used
for purposes other than the exclusive benefit of participants or their
beneficiaries; or
(b) cause any reduction in the amount credited to your
account.
2. Termination
Your Employer has the right to terminate the Plan at any time. Upon
termination, all amounts credited to your accounts will become 100% vested. A
complete discontinuance of contributions by your Employer will constitute a
termination.
16
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