Heritage Bankshares, Inc. Announces Record Earnings for Third Quarter 2010; Declares Dividend

NORFOLK, Va., Oct. 27 /PRNewswire/ -- Heritage Bankshares, Inc. ("Heritage"; the "Company") (OTC Bulletin Board: HBKS), the parent of Heritage Bank (the "Bank"), today announced unaudited financial results for the third quarter and first nine months of 2010.

Net income for the quarter ended September 30, 2010 was a record $648,000, or $0.22 per share, compared to net income of $206,000, or $0.09 per share, for the third quarter of 2009, an increase of $442,000, or 214.6%.  Net income for the first nine months ended September 30, 2010 was $1.46 million, or $0.44 per share, compared to net income of $588,000, or $0.25 per share, for the same period in 2009, an increase of $872,000, or 148.3%.

Michael S. Ives, President and CEO of the Company and the Bank, commented:

"We are very pleased with our operating results for the third quarter.  Of particular note is the $492,000 increase in our net interest income from the third quarter of 2009 to the third quarter of 2010.  In addition, our net interest income for the third quarter of 2010 improved by $373,000 over the second quarter of 2010.

"While we were unable to duplicate the 'Perfect Game' in asset quality that we achieved in the second quarter of 2010, our asset quality remained excellent in the third quarter, with total nonperforming assets of only $60,000, or 0.02% of our total assets.

"We continue to strengthen our balance sheet.  From September 30, 2009 to September 30, 2010, the outstanding balance of our loan portfolio increased by approximately $31 million, or 17.3%.  In addition, during the third quarter of 2010, we sold approximately $28.2 million of fixed-rate, fixed-term mortgage-backed securities, substantially reducing the interest rate risk in our securities portfolio.  

"There has been much public discussion about the relative benefits and detriments to banks that participated in the TARP Capital Purchase Program.  For our part, participation in the TARP Program has been an unqualified success. We increased our already strong capital ratios, which permitted us to be more aggressive in our lending.  We accomplished this without compromising our standards for asset quality and, further, without exposing our shareholders to massive dilution from a secondary offering of common stock at very low share prices relative to our current book value per share.  

"Recently, the Congress and the President enacted the Small Business Jobs Act of 2010, directing the United States Treasury to create a $30 billion Small Business Lending Fund ("SBLF").  The SBLF program will make additional capital available to qualified financial institutions, with an implicit focus on community banks like ours, and is designed to increase  small business lending.  Qualifying banks that are currently participating in the TARP Capital Purchase Program will have the opportunity to 'refinance' their TARP investment with an investment under the SBLF program, by exchanging their existing TARP preferred stock for new SBLF program preferred stock or another financial instrument that would qualify as capital.   The dividend rate payable on SBLF investments could be reduced to as low as 1% from an initial dividend rate of 5%, to the extent participating institutions achieve certain levels of additional small business lending.

"Because our primary focus is lending to small businesses and professional firms, we believe that this new SBLF program provides us with an excellent opportunity to reduce the dividend rate on our outstanding preferred stock.  Accordingly, our Board of Directors has authorized the Company to apply to the United States Treasury to participate in this new SBLF program at the earliest opportunity.  The Board of Directors will make a final decision about participation in the SBLF program once the Treasury has issued the final rules and regulations that would be applicable to the Company."

Comparison of Operating Results for the Three Months Ended September 30, 2010 and 2009

Overview.   The Company's pretax income was $994,000 for the third quarter of 2010, compared to a pretax income of $337,000 for the third quarter of 2009, an increase of $657,000.  Compared to the third quarter of 2009, net interest income increased by $492,000, provision for loan losses increased by $113,000, noninterest income increased by $303,000, and noninterest expense held steady.

Net Interest Income.  The Company's net interest income before provision for loan losses increased by $492,000 to $2.8 million in the third quarter of 2010, compared to $2.3 million in the third quarter of 2009.  This increase in net interest income was primarily attributable to an increase in average interest-earning assets of $39.1 million, resulting from increases in our loan portfolio and interest-earning accounts at other banks, partially offset by an increase in average interest-bearing liabilities of $16.4 million, between the third quarter of 2009 and the third quarter of 2010;  these quarter over quarter changes resulted in a 26 basis point increase in net interest spread from 3.25% for the three months ended September 30, 2009 to 3.51% for the three months ended September 30, 2010.  Additionally, average noninterest-bearing deposits increased by $12.5 million.  Net interest margin increased by 19 basis points, from 3.64% in the third quarter of 2009 to 3.83% in the third quarter of 2010.

Provision for Loan Losses.  The Company's provision for loan losses in the third quarter of 2010 was $178,000, an increase of $113,000 over a provision of $65,000 in the third quarter of 2009, driven largely by an $11.7 million net increase in total loans in the third quarter of 2010.  Net charge-offs were $84,000 in the third quarter of 2010, compared to net charge-offs of $22,000 in the third quarter of 2009.  Nonperforming assets were $60,000 at September 30, 2010, compared to $348,000 at September 30, 2009.

Noninterest Income.  Total noninterest income increased by $303,000, from $211,000 in the third quarter of 2009 to $514,000 in the third quarter of 2010, primarily as a result of a $278,000 gain on the sale of investment securities.

Noninterest Expense.  Total noninterest expense remained steady at $2.1 million for both third quarter periods.  Because of our high level of liquidity, the Bank was able to repay a $10 million medium term FHLB advance during the third quarter of 2010, incurring a loss on the early extinguishment of medium term debt of $49,000.  This loss was offset by a decrease in professional fees over the comparable quarters.

Income Taxes.  The Company's income tax expense for the third quarter of 2010 was $346,000, reflecting an effective tax rate of 34.9%, compared to income tax expense of $131,000 for the third quarter of 2009, reflecting an effective tax rate of 39.0%.  The lower effective tax rate for the third quarter of 2010 was attributable to higher pre-tax income relative to net non-deductible items compared to the third quarter of 2009.

Net Income Available to Common Stockholders.  After the impact of dividends on our outstanding TARP preferred stock, net income available to common stockholders was $501,000 for the third quarter of 2010, compared to $196,000 for the third quarter of 2009.

Comparison of Operating Results for the Nine Months Ended September 30, 2010 and 2009

Overview.   The Company's pretax income was $2.3 million for the nine months ending September 30, 2010, compared to a pretax income of $884,000 for the nine months ending September 30, 2009, an increase of $1.4 million.  Compared to the first nine months of 2009, net interest income increased by $791,000, provision for loan losses increased by $196,000, noninterest income increased by $838,000, and noninterest expense increased by $58,000.

Net Interest Income.  The Company's net interest income before provision for loan losses increased by $791,000 to $7.5 million in the first nine months of 2010, compared to $6.7 million in the first nine months of 2009.  This increase in net interest income was primarily attributable to an $18.4 million increase in average interest-earning assets and a $6.0 million decrease in average interest-bearing liabilities between the first nine months of 2009 and the first nine months of 2010; these year-to-date over year-to-date changes resulted in a 20 basis point increase in net interest spread, from 3.25% for the nine months ended September 30, 2009 to 3.45% for the nine months ended September 30, 2010.  Additionally, average noninterest-bearing deposits increased by $14.4 million.  Net interest margin increased by 15 basis points, from 3.67% for the first nine months of 2009 to 3.82% for the first nine months of 2010.

Provision for Loan Losses.  The Company's provision for loan losses in the first nine months of 2010 was $337,000, compared to a provision of $141,000 in the first nine months of 2009.  The increase is primarily attributable to a $26.3 million net increase in total loans in the first nine months of 2010.  Net charge-offs were $84,000 in the nine months ended September 30, 2010, compared to $22,000 in net charge-offs in the nine months ended September 30, 2009.

Noninterest Income.  Total noninterest income increased by $838,000, from $566,000 in the first nine months of 2009 to $1.4 million in the first nine months of 2010, primarily due to gains of $764,000 on the sale of investment securities.

Noninterest Expense.  Total noninterest expense increased by only $58,000 to remain relatively constant at $6.3 million for the first nine months of 2010 and 2009.  Increases in compensation expense of $227,000 were offset by decreases in FDIC assessment expenses, occupancy expenses, and professional fees of $128,000, $42,000, and $90,000, respectively. The decrease in FDIC assessment relates primarily to a $121,000 special assessment in June 2009 that did not recur in 2010.

Income Taxes.  The Company's income tax expense for the first nine months of 2010 was $799,000, reflecting an effective tax rate of 35.4%, compared to income tax expense of $296,000 for the first nine months of 2009, reflecting an effective tax rate of 33.4%.  The lower effective tax rate for the first nine months of 2009 was attributable to a $48,000 tax benefit resulting from an increase in non-qualified stock options related to certain stock options that were repriced in the first quarter of 2009 and to nontaxable life insurance income.

Net Income Available to Common Stockholders.  After the impact of dividends on our outstanding TARP preferred stock, net income available to common stockholders was $1,021,000 for the nine months ended September 30, 2010, compared to $578,000 for the comparable 2009 period.  The Company issued TARP preferred stock on September 25, 2009, so the impact of the TARP dividends on net income in deriving net income available to common stockholders for the three and nine months ended September 30, 2009 was a minimal reduction of $10,000, compared to reductions of $147,000 and $439,000  for the comparable three and nine month periods in 2010.

Financial Condition of the Company

Total Assets.  The Company's total assets increased by $10.7 million, or 3.9%, from $270.7 million at September 30, 2009 to $281.4 million at September 30, 2010.  The increase in assets resulted primarily from a $30.7 million, or 17.3%, increase in loans and a $4.6 million, or 16.1%, increase in cash and cash equivalents, offset by a $25.9 million, or 52.0%, decrease in investment securities available for sale.

Liquid Assets.  Liquid assets, which include cash and cash equivalents and investment securities, decreased by $21.3 million, from $78.3 million at September 30, 2009 to $57.0 million at September 30, 2010.  Investment securities available for sale were $23.9 million at September 30, 2010 compared to $49.8 million at September 30, 2009, a decrease of $25.9 million, or 52.0%.  

Loans.  Loans held for investment, net, were $207.6 million at September 30, 2010, an increase of $30.7 million, or 17.3%, from the loan balance of $176.9 million at September 30, 2009.  

Asset Quality.  Nonperforming assets were $60,000, or 0.02% of assets, at September 30, 2010, compared to $348,000, or 0.13% of assets, at September 30, 2009.

Deposits.  At September 30, 2010, an increase in noninterest-bearing deposits of $11.0 million more than offset a decrease in interest-bearing deposits of $3.5 million, resulting in a net increase in total deposits of $7.5 million, or 3.3%, from $226.1 million at September 30, 2009 to $233.6 million at September 30, 2010.  Core deposits, which are comprised of noninterest-bearing, money market, NOW and savings deposits, increased by $9.7 million, or 5.6%, from $174.5 million at September 30, 2009 to $184.2 million at September 30, 2010.  Certificates of deposit decreased by $2.2 million between the comparable nine-month periods.  

Average total deposits increased by $6.5 million, or 2.9%, from $221.7 million during the nine months ended September 30, 2009 to $228.2 million during the nine months ended September 30, 2010.  Average core deposits increased by $10.9 million between the comparable nine-month periods, partially offset by a $4.4 million decrease in certificates of deposit.  In addition, the mix of average noninterest-bearing deposits to average total deposits increased from 28.4% to 33.9% between the first nine months of 2009 and 2010, further contributing to the improvement in our net interest margin.

Borrowed Funds.  Borrowed funds increased by $2.4 million, from $6.2 million at September 30, 2009 to $8.6 million at September 30, 2010, resulting from increases in securities sold under agreements to repurchase and other borrowings.

Capital.  Stockholders' equity increased by $679,000, or 1.8%, from $36.7 million at September 30, 2009 to $37.4 million at September 30, 2010, primarily as a result of an $846,000 increase in retained earnings and $124,000 in proceeds and associated tax benefits from stock option exercises.  These increases were offset by a decrease in other comprehensive income of $488,000, primarily attributable to a $25.9 million decrease in the balance of available for sale investment securities between the periods.

Certain reclassifications have been made to prior period financial statements to conform them to the current period presentation.

The tables attached to and incorporated within this release present in greater detail certain of the unaudited financial information described above.

Dividend

On October 27, 2010, the Company's Board of Directors declared a $0.06 per share dividend on our common stock.  The dividend will be paid on November 19, 2010 to shareholders of record on November 8, 2010.

The same day, the Board of Directors also declared quarterly dividends on the preferred stock issued by the Company in connection with its participation in the TARP Capital Purchase Program.  Specifically, the Board declared (a) a cash dividend in the aggregate amount of $126,287.50 on the outstanding shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and (b) a cash dividend in the aggregate amount of $6,817.50 on the outstanding shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series B (collectively, the "Preferred Dividends").  The Preferred Dividends are payable on November 15, 2010 to the U.S. Department of the Treasury, the sole holder of record of such preferred stock.

About Heritage

Heritage is the parent company of Heritage Bank (www.heritagebankva.com).  Heritage Bank has four full-service branches in the city of Norfolk and two full-service branches in the city of Virginia Beach.  Heritage Bank provides a full range of banking services including business, personal and mortgage loans.

Forward Looking Statements

The press release contains statements that constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements address future events, developments or results and typically use words such as believe, anticipate, expect, intend, plan, forecast, outlook, or estimate.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause Heritage's actual results, performance, achievements, and business strategy to differ materially from the anticipated results, performance, achievements or business strategy expressed or implied by such forward-looking statements.  Factors that could cause such actual results, performance, achievements and business strategy to differ materially from anticipated results, performance, achievements and business strategy include:  general and local economic conditions, competition, significant increases in capital requirements or other significant changes in regulatory requirements, customer demand for Heritage's banking products and services, and the risks and uncertainties described in Heritage's most recent Form 10-K filed with the Securities and Exchange Commission.  Heritage disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

HERITAGE BANKSHARES, INC.



CONSOLIDATED BALANCE SHEETS




(in thousands)








At  September 30,





2010


2009





(unaudited)


(unaudited)

ASSETS












Cash and due from banks


$           4,004


$           4,636

Interest-bearing deposits in other banks



28,784


15,088

Federal funds sold


346


8,820

  Total cash and cash equivalents



33,134


28,544

Securities available for sale, at fair value

23,911


49,776

Loans, net





  Held for investment, net of allowance for loan losses


207,614


176,927

  Held for sale


-


-

Accrued interest receivable


693


641

Stock in Federal Reserve Bank, at cost

587


324

Stock in Federal Home Loan Bank of Atlanta, at cost

1,843


1,476

Premises and equipment, net


11,554


12,015

Other real estate owned




-


153

Other assets


2,045


880

Total assets


$       281,381


$       270,736








LIABILITIES AND STOCKHOLDERS' EQUITY




Liabilities









Deposits





Noninterest-bearing

$         83,563


$         72,602

Interest-bearing

150,025


153,471

Total deposits



233,588


226,073





Federal Home Loan Bank Advances

5,000


5,000

Securities sold under agreements to repurchase

2,427


1,241

Other borrowings




1,160


-

Accrued interest payable

113


168

Other liabilities


1,685


1,525

Total liabilities



243,973


234,007







Stockholders' equity




Preferred stock, no par value - 1,000,000 shares authorized:





  Fixed rate cumulative perpetual preferred stock, Series A,





  10,103 shares issued and outstanding at September 30,





  2010 and September 30, 2009, respectively


10,103


10,103








  Fixed rate cumulative perpetual preferred stock, Series B,





  303 shares issued and outstanding at September 30,





  2010 and September 30, 2009, respectively


303


303








Common stock, $5 par value - 6,000,000 shares authorized;




2,307,502 and 2,291,352 shares issued and outstanding




at September 30, 2010 and September 30, 2009, respectively

11,538


11,457

Additional paid-in capital

6,622


6,435

Retained earnings

8,461


7,615

Discount on preferred stock




(249)


(302)

Accumulated other comprehensive income, net

630


1,118

Total stockholders' equity

37,408


36,729

Total liabilities and stockholders' equity

$       281,381


$       270,736



HERITAGE BANKSHARES, INC. 

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)



Three Months Ended


Nine Months Ended


September 30


September 30


2010


2009


2010


2009


(unaudited)


(unaudited)


(unaudited)


(unaudited)

Interest income








Loans and fees on loans

$           2,710


$           2,266


$        7,340


$           6,735

Taxable investment securities

422


491


1,216


1,666

Dividends on FRB and FHLB stock

11


10


29


20

Interest on federal funds sold

-


1


1


2

Other interest income

32


24


97


49

Total interest income

3,175


2,792


8,683


8,472









Interest expense








Deposits

363


496


1,067


1,664

Borrowings

57


33


124


107

Total interest expense

420


529


1,191


1,771









Net interest income

2,755


2,263


7,492


6,701









Provision for loan losses

178


65


337


141









Net interest income after provision for loan losses

2,577


2,198


7,155


6,560









Noninterest income








Service charges on deposit accounts

113


99


344


286

Late charges and other fees on loans

39


12


71


36

Gain on sale of loans held for sale

-


-


-


3

Gain on sale of investment securities

278


-


764


-

Income from bank-owned life insurance

-


-


-


35

Other

84


100


225


206

Total noninterest income

514


211


1,404


566









Noninterest expense








Compensation

1,078


1,079


3,358


3,131

Data processing

143


123


419


381

Occupancy

193


191


571


613

Furniture and equipment

141


149


442


476

Taxes and licenses

88


68


259


204

Professional fees

96


145


269


359

FDIC assessment

99


86


246


374

Marketing

31


21


96


70

Telephone

30


24


77


79

Loss on early extinguishment of debt

49


-


49


-

Loss on sale or impairment of other real estate owned

-


36


30


36

Other

149


150


484


519

Total noninterest expense

2,097


2,072


6,300


6,242









Income before provision for income taxes

994


337


2,259


884









Provision for income taxes

346


131


799


296









Net income

$             648


$            206


$      1,460


$            588

Preferred stock dividend and accretion of discount

$            (147)


$             (10)


$        (439)


$             (10)

Net income available to common stockholders

$              501


$              196


$        1,021


$              578









Earnings per common share








Basic

$             0.22


$             0.09


$          0.44


$             0.25

Diluted

$             0.22


$             0.09


$          0.44


$             0.25

Dividends per share

$             0.06


$             0.06


$          0.18


$             0.18









Weighted average shares outstanding - basic

2,307,141


2,286,579


2,300,109


2,282,982

Effect of dilutive stock options

10,561


10,579


8,495


11,407

Weighted average shares outstanding - diluted

2,317,702


2,297,158


2,308,604


2,294,389



HERITAGE BANKSHARES, INC. 

OTHER SELECTED FINANCIAL INFORMATION

(Unaudited)

(in thousands, except share and per share data)


Three Months Ended


Nine Months Ended


September 30,


September 30,


2010


2009


2010


2009

Financial ratios








Annualized return on average assets (1)

0.85%


0.31%


0.70%


0.30%

Annualized return on average equity (1)

6.85%


3.00%


5.26%


2.97%

Average equity to average assets

12.39%


10.31%


13.25%


10.12%

Equity to assets, at period-end

13.29%


13.57%


13.29%


13.57%

Net interest margin (2)

3.83%


3.64%


3.82%


3.67%









Per common share








Earnings per share - basic

$             0.22


$             0.09


$             0.44


$                0.25

Earnings per share - diluted

$             0.22


$             0.09


$             0.44


$                0.25

Book value per share

$           11.81


$           11.62


$           11.81


$              11.62

Dividends declared per share

$             0.06


$             0.06


$             0.18


$                0.18









Common stock outstanding

2,307,502


2,291,352


2,307,502


2,291,352

Weighted average shares outstanding - basic

2,307,141


2,286,579


2,300,109


2,282,982

Weighted average shares outstanding - diluted

2,317,702


2,297,158


2,308,604


2,294,389









Asset quality








Nonaccrual loans

$                60


$              189


$                60


$                 189

Accruing loans past due 90 days or more

-


6


-


6

Total nonperforming loans

60


195


60


195









Other real estate owned, net

-


153


-


153









Total nonperforming assets

$                60


$              348


$                60


$                 348









Nonperforming assets to total assets

0.02%


0.13%


0.02%


0.13%

















Allowance for loan losses








Balance, beginning of period

$           1,932


$           1,728


$           1,773


$              1,652

Provision for loan losses

178


65


337


141

Loans charged-off

(85)


(39)


(109)


(69)

Recoveries

1


17


25


47

Balance, end of period

$           2,026


$           1,771


$           2,026


$              1,771

























Allowance for loan losses to gross loans held for investment, net of unearned   fees and costs









0.97%


0.99%


0.97%


0.99%

















(1) Return is defined as net income, after tax, before preferred stock dividend and accretion of discount.

(2) Tax equivalency calculations are not included in the computation of net interest income, net interest margin, or net interest spread. Late in the third quarter, the Company made loans on a tax-exempt basis of $6.3 million with quarterly average balances of $1.9 million and year to date average balances of $0.7 million.  Future presentations will be made on a tax equivalency basis.





SOURCE Heritage Bankshares, Inc.



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