Annual Shareholders Meeting

April 14th, 2010

Heritage Bank Main Branch, 1401 S. Virginia St. Reno

Letter from the President

Heritage Bancorp produced its tenth consecutive year of record profitability despite the continuing economic challenges of 2009.

With one of the highest rated banks in the State of Nevada, Heritage Bancorp has grown while maintaining our strength and stability.  We remain profitable even during these unsettled times in both our national and local economies.  Heritage Bancorp’s strong capital, coupled with credit quality and outstanding earnings are the primary reasons that the State of Nevada Financial Institution and the FDIC recently approved the bank to assume substantially all the deposits and assets of Carson River Community Bank from the FDIC, increasing our asset size and geography.

During 2009, Heritage Bancorp was able to grow total assets by an amazing 20.0% from $334,936,000 FYE 2008 to $401,974,000 FYE 2009.  Our substantial growth in total assets occurred in 2009 during a time when the average peer group growth nationally was less than 5.0%.  This continued quality asset growth allowed the basic earnings per share to increase 2.90% from $3.10 per share 2008 to $3.19 per share 2009.  This compares very favorably to the majority of the banks in the Nevada market who were unable to generate a profit.

The loan portfolio of the subsidiary bank expanded 3.20%, increasing from $281,499,000 FYE 2008 to $290,515,000 FYE 2009.  This reflects a loan to deposit ratio of 80.30%, comparable to the bank’s national peer group.  The commercial lending group, managed by Senior Vice President and Chief Credit Officer Tom Traficanti, continues to do an outstanding job in the management, underwriting and collection of the loan portfolio. Solid core earnings from this division allowed us to fund a higher than normal loan loss provision during 2009 and still report positive earnings.  The loan loss reserve as a percentage of total loans increased from 1.27% FYE 2008 to 1.50% FYE 2009.   

Even though the economy remains challenging for all of us, the majority of our customers are moving forward with sound business strategies.  Our experienced lenders monitor all of our credits, focusing on the customers most affected by this economic downturn.  It is essential that we recognize credit problems early and work with our customers who need assistance to get them through these challenging times.  Net loan losses for 2009 were $968,000 which represents 0.34% of total loans.  This is substantially less than the average bank in our peer group of 1.06%.  It is imperative that we continue to work closely with our customers in order to minimize future loan losses.

A major factor in our success is that we continue to rigorously manage our cost control.  During the past year, we were able to grow the bank 20.0% with minimal increases in overhead expense.  Our efficiency ratio was 50.4% FYE 2009 which compares favorably to the national peer group of 70.9%.  The efficiency ratio is computed by taking non-interest expense as a percentage of net interest income and non-interest income.

Total shareholder’s equity at December 31, 2009 was $33,608,000, up $3,646,000 (12.17%) from December 31, 2008.  During 2009, Heritage Bancorp repurchased 72,378 shares of common stock at a total cost of $1,447,560.   The company’s subsidiary, Heritage Bank of Nevada, remains considerably above the regulatory requirements for a well-capitalized bank.  At December 31, 2009, Heritage Bank’s Tier 1 capital to average assets ratio was 9.62%, and total capital to risk weighted assets was 14.11%. 

Heritage Bank of Nevada is well positioned to remain profitable for 2010, and to continue to grow as opportunities present themselves.  The bank’s fundamental strength and stability is apparent in its reported ratios.  We expect the economy to continue to be very challenging for the duration of 2010.  As always, we remain focused on providing an outstanding banking experience for our customers, and a work environment in which our employees can be proud.  We appreciate our team of employees, our Board of Directors, our Stockholders and our customers all of whom continue to support the goals and ambitions of Heritage Bank of Nevada.