Heritage Bankshares, Inc. Announces Second Quarter Net Income and Record First Six Months Net Income; Declares Dividends

NORFOLK, Va., July 26, 2012 /PRNewswire/ -- Heritage Bankshares, Inc. ("Heritage"; the "Company") (OTCBB: HBKS), the parent of Heritage Bank (the "Bank"), today announced unaudited financial results for the second quarter and first six months of 2012.

The Company's net income for the second quarter of 2012 was $541,000 compared to $591,000 for the second quarter of 2011.  This decrease in net income was primarily attributable to a non-recurring $87,000 pre-tax gain on the sale of investment securities during the second quarter of 2011.  The Company did not incur any gains or losses on the sale of investment securities during the second quarter of 2012.

Net income available to common shareholders was $522,000 for the second quarter of 2012, an increase of $42,000, or 9%, over net income available to common shareholders of $480,000 for the second quarter of 2011.  Earnings per diluted common share were $0.22 for the second quarter of 2012 compared to $0.21 for the second quarter of 2011.

The Company's net income for the first six months of 2012 was a record $1,172,000, an increase of $21,000 over the net income of $1,151,000 for the first six months of 2011.  For the first six months of 2012, the Company's earnings per diluted common share were $0.47 compared to $0.36 for the first six months of 2011, an increase of $0.11 per share, or 30.6%.

Comparison of Operating Results for the Three Months Ended June 30, 2012 and 2011

Overview.   The Company's pretax income was $750,000 for the second quarter of 2012, compared to pretax income of $879,000 for the second quarter of 2011, a decrease of $129,000.  This decrease is attributable to a decrease in net interest income of $96,000 and an $87,000 decrease in gain on sale of investment securities that were only partially offset by a $31,000 reduction in noninterest expense.  Our effective tax rate decreased from 32.8% in the second quarter of 2011 to 27.8% in the second quarter of 2012.

Net Interest Income.  The Company's net interest income before provision for loan losses decreased by $96,000, comparing the second quarters of 2012 and 2011.  Our average loan portfolio increased by $500,000 from $215.7 million in the second quarter of 2011 to $216.2 million in the second quarter of 2012, while our average investment in securities available for sale and other interest-earning assets (excluding loans) increased by $25.2 million, for a net increase in interest-earning assets of $25.7 million comparing the two quarters.  Average interest-bearing liabilities increased by $16.7 million from the second quarter of 2011 to $170.8 million in the second quarter of 2012, resulting primarily from a $16.1 million increase in average interest-bearing deposits.  The average yield on our interest-earning assets was adversely impacted by lower yields on loans and an increase in the average balance of investment securities and other interest-earning assets, which was only partially offset by a decrease in the average cost of interest-bearing liabilities.  As a result, our interest rate spread decreased 38 basis points from 3.96% in the second quarter of 2011 to 3.58% in the second quarter of 2012, and our net interest margin decreased 48 basis points from 4.29% in the second quarter of 2011 to 3.81% in the second quarter of 2012.

Provision for Loan Losses.  Provision for loan losses was $35,000 and $11,000 for the quarters ending June 30, 2012 and 2011, respectively.

Noninterest Income.  Total noninterest income decreased by $40,000, from $245,000 in the second quarter of 2011 to $205,000 in the second quarter of 2012.  This decrease is primarily attributable to an $87,000 gain on sale of investment securities in the second quarter of 2011 that did not recur in the second quarter of 2012, partially offset by $52,000 in income from bank-owned life insurance in the second quarter of 2012 that did not occur in the second quarter of 2011.

Noninterest Expense.  Total noninterest expense was $2.069 million for the second quarter of 2012, a $31,000 decrease from the second quarter of 2011, primarily due to a $38,000 decrease in compensation expense.

Income Taxes.  The Company's income tax expense for the second quarter of 2012 was $209,000, reflecting an effective tax rate of 27.8%, compared to income tax expense of $288,000 for the second quarter of 2011, reflecting an effective tax rate of 32.8%.  This reduction in effective tax rate was attributable to increases in tax-exempt interest income and other non-taxable income.

Net Income Available to Common Stockholders.  Because of qualified loan growth, the dividend rate on our SBLF program preferred stock was 1.00% for the second quarter 2012, compared to a composite 5.26% rate on our TARP preferred stock for the second quarter of 2011, resulting in a decrease in dividends on preferred stock of $92,000 in the second quarter of 2012 compared to the second quarter of 2011.  Net income available to common stockholders was $522,000 for the second quarter of 2012, compared to $480,000 for the second quarter of 2011, an increase of $42,000, or $0.01 per weighted average diluted common share.

Comparison of Operating Results for the Six Months Ended June 30, 2012 and 2011

Overview.   The Company's pretax income was $1,633,000 for the first six months of 2012, compared to pretax income of $1,712,000 for the first six months of 2011, a decrease of $79,000.  This decrease resulted primarily from a $115,000 decrease in net interest income and an $87,000 decrease in gain on sale of investment securities that were partially offset by a $24,000 decrease in noninterest expense between the two six month periods.  The Company's effective tax rate for the first half of 2012 was 28.2% compared to a tax rate for the first half of 2011 of 32.8%.

Net Interest Income.  The Company's net interest income before provision for loan losses decreased by $115,000, comparing the first six month periods of 2012 and 2011.  Our average loan portfolio decreased by $200,000 from $216.8 million in the first half of 2011 to $216.6 million in the first half of 2012, while our average investment in securities available for sale and other interest-earning assets (excluding loans) increased by $21.0 million, for a net increase in interest-earning assets of $20.8 million comparing the two six-month periods.  Average interest-bearing liabilities increased by $15.7 million from the first half of 2011 to $169.1 million in the first half of 2012, resulting primarily from a $16.4 million increase in average interest-bearing deposits.  The average yield on our interest-earning assets was adversely impacted by lower yields on loans and an increase in the average balance of investment securities and other interest-earning assets, which was only partially offset by a decrease in the average cost of interest-bearing liabilities.  As a result, our interest rate spread decreased 28 basis points from 3.97% in the first half of 2011 to 3.69% in the first half of 2012, and our net interest margin decreased 39 basis points from 4.31% in the first half of 2011 to 3.92% in the first half of 2012.

Provision for Loan Losses.  Provision for loan losses was $35,000 and $11,000 for the six months ending June 30, 2012 and 2011, respectively.

Noninterest Income.  Total noninterest income increased by $36,000, from $430,000 in the first half of 2011 to $466,000 in the first half of 2012.  The primary factor in this increase was a $117,000 increase in income from bank-owned life insurance in the first half of 2012, which was partially offset by an $87,000 gain on the sale of investment securities in the first half of 2011 that did not recur in the first half of 2012.

Noninterest Expense.  Total noninterest expense decreased $24,000 to $4.149 million in the first half of 2012 from $4.173 million in the first half of 2011.  Decreases in compensation, professional fees, marketing, FDIC assessment and other expenses totaling $144,000 were offset by increases in occupancy and valuation allowances on other real estate owned of $58,000 and $52,000, respectively. 

Income Taxes.  The Company's income tax expense for the first half of 2012 was $461,000, reflecting an effective tax rate of 28.2%, compared to income tax expense of $561,000 for the first half of 2011, reflecting an effective tax rate of 32.8%.  This reduction in effective tax rate was primarily attributable to an increase in tax-exempt interest income and other non-taxable income.

Net Income Available to Common Stockholders.  After the impact of dividends on our preferred stock, net income available to common shareholders was $1.105 million for the first six months of 2012, or earnings per diluted common share of $0.47, compared to net income available to common stockholders in the first half of 2011 of $841,000, or earnings per diluted common share of $0.36, an increase of $264,000, or $0.11 per diluted common share.  This increase in earnings available to common stockholders is primarily attributable to qualified loan growth which resulted in a 1.72% dividend rate on our SBLF program preferred stock in the first half of 2012 compared to accelerated accretion of the discount on outstanding TARP preferred stock and the associated dividend rate of 5.26% in the first half of 2011.

Financial Condition of the Company

Total Assets.  The Company's total assets increased by $37.0 million, or 13.4%, from $276.3 million at June 30, 2011 to $313.3 million at June 30, 2012.  The increase in assets resulted primarily from a $30.3 million increase in our aggregate cash, securities available for sale, interest-bearing deposits in other banks and federal funds sold, together with a $5.0 million increase in bank-owned life insurance.

Investments.  Securities available for sale increased by $8.9 million to $32.3 million at June 30, 2012 compared to $23.4 million at June 30, 2011.  Certificates of deposit, interest-bearing deposits in other banks, and federal funds sold increased by a total of $21.5 million, from $16.5 million at June 30, 2011 to $38.0 million at June 30, 2012. 

Loans.  Loans held for investment, net, were $216.0 million at June 30, 2012, an increase of $1.3 million, or 0.6%, from our loan balance of $214.7 million at June 30, 2011.

Asset Quality.  Nonperforming assets were $1,805,000, or 0.58% of total assets, at June 30, 2012, compared to $1,732,000 in nonperforming assets, or 0.63% of total assets, at June 30, 2011.  Other real estate owned consisted of a bank branch site that we no longer plan to utilize and one additional property obtained through foreclosure proceedings against one borrower. 

Deposits.  Total deposits at June 30, 2012 were $272.4 million compared to $235.9 million at June 30, 2011, an increase of $36.5 million, or 15.4%.  Core deposits, which are comprised of noninterest-bearing, money market, NOW and savings deposits, increased by $55.1 million, or 29.4%, from $187.4 million at June 30, 2011 to $242.5 million at June 30, 2012.  Noninterest-bearing deposits increased by $17.9 million to $104.9 million at June 30, 2012 and, as a percentage of total deposits, increased from 36.9% at June 30, 2011 to 38.5% at June 30, 2012.

Average total deposits increased by $27.7 million, or 12.0%, from $231.9 million for the six-month period ended June 30, 2011 to $259.6 million for the six-month period ended June 30, 2012.  Average core deposits increased by $40.2 million, or 21.9%, over the comparable six-month periods.  Average noninterest-bearing deposits increased by $11.3 million from $84.1 million in the six-month period ending June 30, 2011 to $95.4 million in the comparable period ending June 30, 2012.  As a percentage of total average deposits, average noninterest-bearing deposits increased slightly from 36.3% at June 30, 2011 to 36.8% at June 30, 2012.

Borrowed Funds.  Borrowed funds decreased by $1.2 million, from $2.9 million at June 30, 2011 to $1.7 million at June 30, 2012.

Capital.  Stockholders' equity increased by $1.5 million, or 4.0%, from $35.4 million at June 30, 2011 to $36.9 million at June 30, 2012, primarily from an increase in earnings.  The Company purchased and retired 30,000 of its own common shares late in the second quarter of 2012, of which the excess cost over par was allocated to additional paid in capital and retained earnings.

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.

Dividends

On July 25, 2012, our Board of Directors declared a $0.06 per share dividend on our common stock.  The dividend will be paid on August 17, 2012 to common shareholders of record on August 6, 2012.

The same day, the Board of Directors also declared a dividend on the preferred stock issued in connection with our participation in the SBLF program.  Specifically, the Board declared a cash dividend of $19,500.00, which represents the expected amount of the dividend next payable by the Company under the SBLF program based on its applicable level of "Qualified Small Business Lending".  This dividend shall be payable and paid on October 1, 2012 to the holders of the SBLF preferred stock of record on September 18, 2012 (currently the sole shareholder of record of the SBLF preferred stock is the Secretary of the Treasury).

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, two full-service branches in the city of Virginia Beach, and one full service branch in the city of Chesapeake.

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  June 30, 


2012


2011


(unaudited)


(unaudited)

ASSETS








Cash and due from banks

$           5,204


$           5,296

Interest-bearing deposits in other banks

37,988


15,231

Federal funds sold

25


28

   Total cash and cash equivalents

43,217


20,555

Certificates of deposit in other banks

-


1,285

Securities available for sale, at fair value 

32,349


23,443

Loans, net




   Held for investment, net of allowance for loan losses 

215,968


214,733

   Held for sale

-


-

Accrued interest receivable

652


634

Stock in Federal Reserve Bank, at cost

594


592

Stock in Federal Home Loan Bank of Atlanta, at cost

579


1,335

Premises and equipment, net

10,874


10,972

Other real estate owned

1,666


263

Bank-owned life insurance

5,604


597

Other assets

1,768


1,914

Total assets

$       313,271


$       276,323





LIABILITIES AND STOCKHOLDERS' EQUITY








Liabilities




Deposits




Noninterest-bearing 

$       104,903


$         87,012

Interest-bearing 

167,459


148,916

Total deposits

272,362


235,928





Federal Home Loan Bank Advances

-


-

Securities sold under agreements to repurchase

1,067


2,011

Other borrowings

624


935

Accrued interest payable

43


91

Other liabilities

2,303


1,916

Total liabilities

276,399


240,881





Stockholders' equity




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




   Fixed rate cumulative perpetual preferred stock, Series A,




      0 shares and 7,497 shares issued and outstanding at June 30,




      2012 and June 30, 2011, respectively

-


7,497





   Fixed rate cumulative perpetual preferred stock, Series B,




      0 shares and 303 shares issued and outstanding at June 30,




      2012 and June 30, 2011, respectively

-


303





   Senior non-cumulative perpetual preferred stock, Series C,




      7,800 shares and 0 shares issued and outstanding at June 30, 




      2012 and June 30, 2011, respectively

7,800


-





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




    2,275,891and 2,303,108 shares issued and outstanding




    at June 30, 2012 and June 30, 2011, respectively

11,379


11,516

Additional paid-in capital

6,705


6,657

Retained earnings

10,632


9,348

Discount on preferred stock

-


(153)

Accumulated other comprehensive income, net

356


274

Total stockholders' equity

36,872


35,442

Total liabilities and stockholders' equity

$       313,271


$       276,323

 

HERITAGE BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)



Three Months Ended


Six Months Ended


June 30,


June 30,


2012


2011


2012


2011


(unaudited)


(unaudited)


(unaudited)


(unaudited)

Interest income








Interest income and fees on loans

$           2,587


$           2,856


$           5,255


$           5,710

Interest on taxable investment securities

267


173


543


321

Dividends on FRB and FHLB stock

12


12


24


25

Interest on federal funds sold

-


-


-


-

Other interest income

14


23


21


50

Total interest income

2,880


3,064


5,843


6,106









Interest expense








Deposits

223


308


475


614

Borrowings

8


11


17


26

Total interest expense

231


319


492


640









Net interest income

2,649


2,745


5,351


5,466









Provision for loan losses

35


11


35


11









Net interest income after provision for loan losses

2,614


2,734


5,316


5,455









Noninterest income








Service charges on deposit accounts

61


81


129


173

Late charges and other fees on loans

19


15


66


32

Gain on sale of investment securities

-


87


-


87

Income from bank-owned life insurance

52


-


117


-

Other

73


62


154


138

Total noninterest income

205


245


466


430









Noninterest expense








Compensation

1,072


1,110


2,171


2,193

Data processing

156


143


311


288

Occupancy 

224


197


447


389

Furniture and equipment 

148


151


286


296

Taxes and licenses

80


81


159


166

Professional fees

79


98


186


217

FDIC assessment

37


21


77


100

Marketing

27


40


53


79

Telephone

32


28


64


60

Loss on sale or impairment of other real estate owned

16


1


53


1

Other

198


230


342


384

Total noninterest expense

2,069


2,100


4,149


4,173









Income before provision for income taxes

750


879


1,633


1,712









Provision for income taxes

209


288


461


561









Net income 

$              541


$              591


$           1,172


$           1,151

Preferred stock dividend and accretion of discount

$              (19)


$            (111)


$              (67)


$             (310)

Net income available to common stockholders

$              522


$              480


$           1,105


$              841









Earnings per common share








Basic

$             0.23


$             0.21


$             0.48


$             0.36

Diluted

$             0.22


$             0.21


$             0.47


$             0.36

Dividends per share

$             0.06


$             0.06


$             0.12


$             0.12









Weighted average shares outstanding - basic

2,304,529


2,306,348


2,305,174


2,306,925

Effect of dilutive stock options

54,553


9,706


46,896


10,147

Weighted average shares outstanding - diluted

2,359,082


2,316,054


2,352,070


2,317,072

 

HERITAGE BANKSHARES, INC.

OTHER SELECTED FINANCIAL INFORMATION

(Unaudited)

(in thousands, except share, per share data, and ratios)



Three Months Ended


Six Months Ended


June 30,


June 30,


2012


2011


2012


2011

Financial ratios








Annualized return on average assets (1)

0.70%


0.86%


0.77%


0.84%

Annualized return on average common equity (2)

7.41%


8.49%


8.07%


8.35%

Average equity to average assets

12.01%


12.83%


12.17%


13.20%

Equity to assets, at period-end

11.77%


12.83%


11.77%


12.83%

Net interest margin (3)

3.81%


4.29%


3.92%


4.31%









Per common share








Earnings per share - basic

$               0.23


$               0.21


$               0.48


$               0.36

Earnings per share - diluted

$               0.22


$               0.21


$               0.47


$               0.36

Book value per share

$             12.77


$             12.07


$             12.77


$             12.07

Dividends declared per share

$               0.06


$               0.06


$               0.12


$               0.12









Common stock outstanding

2,275,891


2,303,108


2,275,891


2,303,108

Weighted average shares outstanding - basic

2,304,529


2,306,348


2,305,174


2,306,925

Weighted average shares outstanding - diluted

2,359,082


2,316,054


2,352,070


2,317,072









Asset quality








Nonaccrual loans

$                139


$             1,469


$                139


$             1,469

Accruing loans past due 90 days or more

-


-


-


-

Total nonperforming loans

139


1,469


139


1,469









Other real estate owned, net

1,666


263


1,666


263









Total nonperforming assets

$             1,805


$             1,732


$             1,805


$             1,732









Nonperforming assets to total assets

0.58%


0.63%


0.58%


0.63%

















Allowance for loan losses








Balance, beginning of period

$             2,110


$             2,093


$             2,091


$             2,090

Provision for loan losses

35


11


35


11

Loans charged-off 

(30)


(1)


(31)


(2)

Recoveries 

-


46


20


50

Balance, end of period

$             2,115


$             2,149


$             2,115


$             2,149

















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 divided by average total assets.

(2) Return is defined as net income, after tax, before preferred stock dividend and accretion of discount divided by average common equity.

(3) Tax equivalency calculations have been included in the computation of net interest margin and net interest spread.

 

SOURCE Heritage Bankshares, Inc.



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