Heritage Bankshares, Inc. Announces Third Quarter and Nine Months 2009 Earnings

NORFOLK, Va., Oct. 22 /PRNewswire-FirstCall/ -- 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 2009.

Net income for the quarter ended September 30, 2009 was $206,000 compared to net income of $385,000 for the third quarter of 2008. After the effect of dividends on preferred stock, net income available to common stockholders was $196,000, or $0.09 per diluted share compared to net income available to common stockholders, of $385,000, or $0.17 per diluted share, for the third quarter of 2008. Net income for the first nine months of 2009 was $588,000 compared to net income of $595,000 for the same period in 2008. After the effect of dividends on preferred stock, net income available to common stockholders for the first nine months of 2009 was $578,000, or $0.25 per diluted share, compared to net income available to common stockholders, of $595,000, or $0.26 per diluted share for the same period in 2008.

Net income for the third quarter of 2008 included an after tax gain of $339,000 on the sale of investment securities in the third quarter of 2008. The Company took the unusual step of selling a large number of securities in the third quarter of 2008 to avoid any potential impairment of these securities from the turbulence in the financial markets existing at that time. There were no gains on the sale of investment securities in the third quarter of 2009.

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

"Our Company is well prepared for growth now that the recession is beginning to wane. We can make new loans at aggressive rates to creditworthy customers because of our high levels of liquidity and capital and our low cost of funds. We are not burdened with a large number of nonperforming assets. We look forward to 2010 with great anticipation for substantial growth for our Company."

Comparison of Operating Results for the Three Months Ended September 30, 2009 and 2008

Overview. The Company's pretax income was $337,000 for the third quarter of 2009, compared to pretax income of $600,000 for the third quarter of 2008. Compared to the third quarter of 2008, net interest income increased by $299,000, provision for loan losses decreased by $3,000, noninterest income decreased by $527,000 and noninterest expense increased by $38,000.

Net Interest Income. The Company's net interest income before provision for loan losses increased by $299,000 in the third quarter of 2009 compared to the third quarter of 2008. This increase was primarily attributable to an increase of $37.2 million in the average balance of interest-earning assets, which more than offset an increase of $17.6 million in average interest-bearing liabilities, and to an increase in net interest spread from 3.06% to 3.25%. Net interest margin decreased by 8 basis points, from 3.72% in the third quarter of 2008 to 3.64% in the third quarter of 2009.

Provision for Loan Losses. Provision for loan losses for the three months ended September 30, 2009 was $65,000 compared to a $68,000 loan loss provision for the three months ended September 30, 2008.

Noninterest Income. Total noninterest income decreased by $527,000, from $738,000 in the third quarter of 2008 to $211,000 in the third quarter of 2009. This decrease was primarily attributable to nonrecurring net gains of $513,000 in the third quarter of 2008 related to sales of investment securities.

Noninterest Expense. Total noninterest expense increased by $38,000, from $2.03 million in the third quarter of 2008 to $2.07 million in the third quarter of 2009. This increase in noninterest expense was driven primarily by a $74,000 increase in professional fees attributable to several legal projects unrelated to asset quality issues; a $73,000 increase in compensation expense largely related to a $105,000 one-time charge for the immediate vesting of benefits under a supplemental executive retirement plan; and a $52,000 increase in FDIC insurance expense impacted by an increase in FDIC assessment rates and growth in deposit balances. These increases were partially offset by a $96,000 decrease in courier expense and a $68,000 decrease in loss on disposal or impairment of fixed assets, as well as decreases in a variety of miscellaneous expenses.

Income Taxes. The Company's income tax expense for the quarter ended September 30, 2009 was $131,000, which represented an effective tax rate of 39.0%, compared to income tax expense of $215,000 for the quarter ended September 30, 2008, which represented an effective tax rate of 35.9%. The higher effective tax rate was primarily attributable to a higher percentage of net non-deductible items relative to pre-tax income in the third quarter of 2009.

Comparison of Operating Results for the Nine Months Ended September 30, 2009 and 2008

Overview. The Company's pretax income was $884,000 for the first nine months of 2009, compared to pretax income of $939,000 for the first nine months of 2008, a decrease of $55,000. Compared to the first nine months of 2008, net interest income increased by $824,000, provision for loan losses increased by $73,000, noninterest income decreased by $636,000 and noninterest expense increased by $170,000.

Net Interest Income. The Company's net interest income before provision for loan losses increased by $824,000 for the first nine months of 2009 compared to the first nine months of 2008. This increase was primarily attributable to an increase of $34.6 million in the average balance of interest-earning assets, which more than offset an increase of $21.1 million in average interest-bearing liabilities, and to an increase in net interest spread from 2.97% to 3.25%. Net interest margin decreased by 7 basis points, from 3.74% for the first nine months of 2008 to 3.67% for the first nine months of 2009.

Provision for Loan Losses. Provision for loan losses for the nine months ended September 30, 2009 was $141,000 compared to a $68,000 provision for the nine months ended September 30, 2008. Net charge-offs in the nine months ended September 30, 2009 were $22,000 compared to $128,000 in net recoveries for the nine months ended September 30, 2008.

Noninterest Income. Total noninterest income decreased by $636,000, from $1.2 million in the first nine months of 2008 to $566,000 in the first nine months of 2009. This decrease was primarily due to a $518,000 decrease in net gains on the sale of investment securities, a $89,000 decrease in gains on sales of mortgage loans held for sale and a $30,000 decrease in the service charges on deposit accounts.

Noninterest Expense. Total noninterest expense increased by $170,000, from $6.1 million in the first nine months of 2008 to $6.3 million in the first nine months of 2009. Increases of $275,000 and $128,000 in FDIC insurance expense and professional fees, respectively, were partially offset by a $230,000 decrease in courier expense.

Income Taxes. The Company's income tax expense for the nine months ended September 30, 2009 was $296,000, which represented an effective tax rate of 33.4%, compared to income tax expense for the nine months ended September 30, 2008 of $344,000, which represented an effective tax rate of 36.7%. The lower effective tax rate for the first nine months of 2009 was primarily attributable to a $48,000 tax benefit resulting from an increase in nonqualified stock options related to certain of the stock options that were repriced in the first quarter of 2009 and to nontaxable life insurance income recorded in the second quarter of 2009.

Financial Condition of the Company

Total Assets. The Company's total assets increased by $24.6 million, or 10.0%, from $246.1 million at September 30, 2008 to $270.7 million at September 30, 2009. The increase in assets resulted primarily from increases of $12.6 million, $6.1 million and $5.0 million in the ending balances of securities available for sale, loans held for investment and cash and cash equivalents, respectively.

Total Cash and Cash Equivalents and Investment Securities. Total cash and cash equivalents and investment securities available for sale were $78.3 million at September 30, 2009, compared to a combined balance of $60.7 million at September 30, 2008, reflecting an increase in the combined balance of $17.6 million.

Loans. Loans held for investment, net, at September 30, 2009 were $176.9 million, which represents an increase of $6.1 million, or 3.6%, from the September 30, 2008 loan balance of $170.8 million.

Asset Quality. The Company's total nonperforming assets increased to $553,000, or 0.20% of assets, at September 30, 2009, compared to $52,000, or 0.02% of assets, at September 30, 2008, attributable to an increase in the balance of other real estate owned as well as increases in nonaccrual and restructured loans.

Deposits. Driven by continued growth in core deposits, total deposits increased by $13.5 million, or 6.3%, from $212.6 million at September 30, 2008 to $226.1 million at September 30, 2009. Core deposits, which are comprised of checking, savings and money market accounts, increased by $13.7 million, or 8.6%, from $160.8 million at September 30, 2008 to $174.5 million at September 30, 2009.

Average total deposits increased by $30.6 million, or 16.0%, from $191.1 million for the nine months ended September 30, 2008 to $221.7 million for the nine months ended September 30, 2009. Average core deposits increased by $29.5 million and average certificate of deposit balances increased by $1.1 million between the comparable nine month periods.

Borrowed Funds. Borrowed funds decreased by $257,000, from $6.5 million at September 30, 2008 to $6.2 million at September 30, 2009.

Capital. Stockholders' equity increased by $11.6 million, or 46.3%, from $25.1 million at September 30, 2008 to $36.7 million at September 30, 2009. Stockholders' equity increased primarily as a result of the $10.1 million of preferred stock issued by the Company on September 25, 2009 to the U.S. Treasury under its Capital Purchase Program. Stockholders' equity also increased due to a $1.2 million increase in accumulated after-tax comprehensive income attributable to an increase in the market value of the Company's available-for-sale investment securities portfolio.

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

The unaudited financial statements and accompanying information contained in this press release reflect the impact of corrections to FDIC insurance expense related to prior periods. Specifically, as a result of such corrections to prior-period FDIC insurance expense, retained earnings at September 30, 2008 decreased by $43,479 compared to the originally-reported amount. Further, net income for the three months ended September 30, 2008 decreased by $1,000, from $386,000, as originally reported, to $385,000 (earnings were $0.17 per diluted share both before and after the correction). Net income for the nine months ended September 30, 2008 decreased by $22,000, from $617,000, or $0.27 per diluted share as originally reported, to $595,000, or $0.26 per diluted share.

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

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, capital requirements of the planned expansion, customer demand for Heritage's banking products and services, and the risks and uncertainties described in Heritage's most recent Form 10-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,
                                                      ------------------
                                                    2009               2008
                                                    ----               ----
                                                 (unaudited)       (unaudited)
    ASSETS

    Cash and due from banks                         $8,492             $11,449
    Interest-bearing deposits in other banks        11,232                 250
    Federal funds sold                               8,820              11,849
                                                     -----              ------
       Total cash and cash equivalents              28,544              23,548
    Securities available for
     sale, at fair value                            49,776              37,158
    Loans, net
       Held for investment, net
        of allowance for loan losses               176,927             170,817
       Held for sale                                     -                   -
    Accrued interest receivable                        641                 668
    Stock in Federal Reserve Bank, at cost             324                 321
    Stock in Federal Home Loan Bank of Atlanta, at
     cost                                            1,476                 623
    Premises and equipment, net                     12,015              11,519
    Other real estate owned                            153                   -
    Other assets                                       880               1,399
                                                       ---               -----
    Total assets                                  $270,736            $246,053
                                                  ========            ========

    LIABILITIES AND STOCKHOLDERS' EQUITY
    Liabilities

    Deposits
    Noninterest-bearing                            $72,602             $65,135
    Interest-bearing                               153,471             147,501
                                                   -------             -------
    Total deposits                                 226,073             212,636
                                                   -------             -------

    Federal Home Loan Bank Advances                  5,000               5,000
    Securities sold under
     agreements to repurchase                        1,241               1,498
    Accrued interest payable                           168                 280
    Other liabilities                                1,525               1,538
                                                     -----               -----
    Total liabilities                              234,007             220,952
                                                   -------             -------

    Stockholders' equity
    Preferred stock, no par
     value - 1,000,000 shares
     authorized:
       Fixed rate cumulative
        perpetual preferred
        stock, Series A,
       10,103 and 0 shares
        issued and outstanding
        at September 30,
       2009 and September 30,
        2008, respectively                          10,103                   -

       Fixed rate cumulative
        perpetual preferred
        stock, Series B,
       303 and 0 shares issued
        and outstanding at
        September 30,
       2009 and September 30,
        2008, respectively                             303                   -

    Common stock, $5 par
     value - 6,000,000 shares
     authorized;
    2,291,352 and 2,279,252
     shares issued and
     outstanding
    at September 30, 2009
     and September 30, 2008,
     respectively                                   11,457              11,396
    Additional paid-in
     capital                                         6,435               6,297
    Retained earnings                                7,615               7,508
    Discount on preferred
     stock                                            (302)                  -
    Accumulated other
     comprehensive income,
     net                                             1,118               (100)
                                                     -----                ----
    Total stockholders'
     equity                                         36,729              25,101
                                                    ------              ------
    Total liabilities and
     stockholders' equity                         $270,736            $246,053
                                                  ========            ========



    HERITAGE BANKSHARES, INC.
    CONSOLIDATED STATEMENTS OF INCOME
    (in thousands, except per share data)

                                  Three Months Ended         Nine Months Ended
                                      September 30             September 30
                                      ------------             ------------
                                    2009         2008        2009         2008
                                    ----         ----        ----         ----
                             (unaudited)  (unaudited) (unaudited)  (unaudited)
    Interest income
        Loans and fees on
         loans                    $2,266       $2,454      $6,735       $7,398
        Taxable investment
         securities                  491          308       1,666        1,212
        Nontaxable investment
         securities                    -            7           -           33
        Dividends on FRB and
         FHLB stock                   10           10          20           42
        Interest on federal
         funds sold                    1           53           2          135
        Other interest income         24            1          49            4
                                      --            -         ---            -
        Total interest income      2,792        2,833       8,472        8,824

    Interest expense
        Deposits                     496          816       1,664        2,748
        Borrowings                    33           53         107          199
                                      --           --         ---          ---
        Total interest
         expense                     529          869       1,771        2,947

    Net interest income            2,263        1,964       6,701        5,877

    Provision for loan losses         65           68         141           68
                                      --           --         ---           --
    Net interest income after
     provision for loan losses     2,198        1,896       6,560        5,809
                                   -----        -----       -----        -----

    Noninterest income
        Service charges on
         deposit accounts             99          111         286          316
        Late charges and
         other fees on loans          12           10          36           43
        Gains on sale of
         loans held for sale, net      -           24           3           92
        Gain on sale of investment
         securities                    -          513           -          518
        Gain on bank-owned
         life insurance                -            -          35            -
        Other                        100           80         206          233
                                     ---           --         ---          ---
        Total noninterest
         income                      211          738         566        1,202

    Noninterest expense
        Compensation               1,080        1,007       3,134        3,090
        Data processing              123          132         381          409
        Occupancy                    191          193         613          599
        Furniture and
         equipment                   149          131         476          419
        Taxes and licenses            68           72         204          204
        Professional fees            145           71         359          231
        FDIC insurance                86           34         374           99
        Marketing                     20           32          75          109
        Telephone                     24           25          79           75
        Loss on disposal or
         impairment of
         fixed assets                  -           68           4           68
        Other                        186          269         543          769
                                     ---          ---         ---          ---
        Total noninterest
         expense                   2,072        2,034       6,242        6,072

    Income before provision for
     income taxes                    337          600         884          939

    Provision for  income taxes      131          215         296          344
                                     ---          ---         ---          ---

    Net income                      $206         $385        $588         $595
    Preferred stock dividend and
     accretion of discount          $(10)          $-        $(10)          $-
                                    ----           --        ----           --
    Net income available to  common
     stockholders                   $196         $385        $578         $595
                                    ====         ====        ====         ====

    Earnings per common  share
        Basic                      $0.09        $0.17       $0.25        $0.26
                                   =====        =====       =====        =====
        Diluted                    $0.09        $0.17       $0.25        $0.26
                                   =====        =====       =====        =====
    Dividends per share            $0.06        $0.06       $0.18        $0.18
                                   =====        =====       =====        =====

    Weighted average  shares
     outstanding -  basic      2,286,579    2,278,840   2,282,982    2,278,715
    Effect of dilutive
     stock options                10,579       18,223      11,407       16,151
                                  ------       ------      ------       ------
    Weighted average  shares
     outstanding -   diluted   2,297,158    2,297,063   2,294,389    2,294,866
                               =========    =========   =========    =========



    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,
                                        -------------           ---------
                                       2009       2008       2009       2008
                                       ----       ----       ----       ----
    Financial ratios
        Annualized return on
         average assets                0.30%      0.67%      0.30%      0.35%
        Annualized return on
         average equity                2.86%      6.01%      2.93%      3.11%
        Average equity to
         average assets               10.31%     11.07%     10.12%     11.16%
        Equity to assets, at
         period-end                   13.57%     10.20%     13.57%     10.20%
        Net interest margin            3.64%      3.72%      3.67%      3.74%

    Per common share
        Earnings per share -
         basic                        $0.09      $0.17      $0.25      $0.26
        Earnings per share -
         diluted                      $0.09      $0.17      $0.25      $0.26
        Book value per share         $11.62     $11.01     $11.62     $11.01
        Dividends declared per
         share                        $0.06      $0.06      $0.18      $0.18

    Common stock outstanding      2,291,352  2,279,252   2,291,352  2,279,252
    Weighted average shares
     outstanding - basic          2,286,579  2,278,840   2,282,982  2,278,715
    Weighted average shares
     outstanding -diluted         2,297,158  2,297,063   2,294,389  2,294,866

    Asset quality
        Nonaccrual loans               $189        $44       $189        $44
        Accruing loans past due
         90 days or more                  6          8          6          8
                                     ------     ------     ------     ------
        Total nonperforming loans       195         52        195         52

        Restructured loans              205          -        205          -

        Other real estate
         owned, net                     153          -        153          -
                                     ------     ------     ------     ------

        Total nonperforming
         assets                        $553        $52       $553        $52
                                     ======     ======     ======     ======

        Nonperforming assets to
         total assets                  0.20%      0.02%      0.20%      0.02%


    Allowance for loan losses
        Balance, beginning of
         period                      $1,728     $1,592     $1,652     $1,400
        Provision for loan
         losses                          65         68        141         68
        Loans charged-off               (39)       (57)       (69)       (58)
        Recoveries                       17         (7)        47        186
                                     ------     ------     ------     ------
        Balance, end of period       $1,771     $1,596     $1,771     $1,596
                                     ======     ======     ======     ======



    Allowance for loan losses to
     gross loans held for
     investment, net of unearned
     fees  and costs                   0.99%      0.93%      0.99%      0.93%
                                       ----       ----       ----       ----

SOURCE Heritage Bankshares, Inc.



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