US SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the Quarter Ended September 30, 1998
Commission file number 0-11255
HERITAGE BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1234322
(State of Incorporation) (IRS Employer ID No.)
200 East Plume Street
Norfolk, VA 23514
(Address of principal executive offices) (Zip Code)
757-523-2600
(Telephone Number)
Indicate by 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 ( or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Common stock, par value $5.00 per share: 801,150 shares outstanding as 11/10/98
<PAGE>
HERITAGE BANKSHARES, INC.
Part I. Financial Information
Item I. Financial Statements
The following financial information of Heritage Bankshares, Inc. and
subsidiaries is included herein:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
HERITAGE BANKSHARES, INC.
(dollars in thousands)
<CAPTION>
September 30, December 31, September 30,
1998 1997 1997
-------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Cash and due from banks $ 3,253 $ 4,019 $ 2,681
Federal funds sold 6,245 1,697 4,505
Securities available for sale 13,727 15,730 14,969
Securities held to maturity 5,665 6,866 7,937
Loans, net of unearned income 54,478 52,131 50,833
Allowance for loan losses (926) (889) (833)
Loans, net of unearned income and allowance 53,552 51,242 50,000
Premises and equipment 1,777 1,329 1,003
Other real estate owned 429 429 436
Other assets 1,552 1,690 1,529
----------- ----------- -----------
86,200 83,002 83,060
LIABILITIES
Non-interest bearing deposits 13,450 12,902 15,200
Interest bearing deposits 62,794 59,895 58,107
----------- ----------- -----------
76,244 72,797 73,307
Short-term borrowings 52 52 51
Securities sold under agreements to repurchase 1,319 1,945 1,888
Other liabilities 750 1,127 988
----------- ----------- -----------
78,365 75,921 76,234
STOCKHOLDERS' EQUITY
Common stock, $5.00 par value-authorized 3,000,000 shares,
issued and outstanding 801,150 4,001 3,975 3,973
Additional paid-in capital (353) (361) (362)
Retained earnings 4,078 3,410 3,169
Unrealized gains (losses) on investment securities 109 57 46
----------- ----------- -----------
7,835 7,081 6,826
$ 86,200 $ 83,002 $ 83,060
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
HERITAGE BANKSHARES, INC
(dollars in thousands except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
1998 1997 1998 1997
----------------------------- ----------------------------
Interest income:
Interest and fees on loans 1,283 1,133 3,731 3,285
Interest on investment securities 310 360 967 1,018
Interest on federal funds sold 89 63 260 280
------ ------ ------ ------
Total interest income 1,682 1,556 4,958 4,583
Interest expense:
Interest on deposits 753 720 2,239 2,103
Interest on short-term borrowings 19 19 67 55
------ ------ ------ ------
Total interest expense 772 739 2,306 2,158
Net interest income 910 817 2,652 2,425
Provision for loan losses and OREO losses 0 20 33 31
- --- --- --
Net interest income after provision 910 797 2,619 2,394
Total other income 109 75 290 215
Other expenses:
Salaries and employee benefits 324 290 933 836
Other expenses 277 226 775 654
------ ------ ------ ------
Total other expenses 601 516 1,708 1,490
Income before income taxes 418 356 1,201 1,119
Income tax expense 137 120 396 380
------ ------ ------ ------
Net income $ 281 $ 236 $ 805 $ 739
Net income per common equivalent share $ 0.35 $ 0.29 $ 1.00 $ 0.90
Cash dividends per common share outstanding $ - $ - $ 0.17 $ 0.14
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
HERITAGE BANKSHARES, INC.
(Dollars in thousands)
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---- ----
Operating Activities:
Net Income $805 $739
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 33 23
Provision for losses on other real estate owned 8
Provision for depreciation and amortization 91 40
Amortization of investment security premiums,
net of discounts 8 7
Deferred loan origination fees, net of cost 2 (21)
Gain on sale of premises and equipment (5) -
Changes in:
Interest receivable (121) (48)
Interest payable (35) 8
Other assets 235 (105)
Other liabilities (341) 152
--------- -------
Net cash provided by operating activities 672 803
Investing Activities:
Proceeds from maturities of available-for-sale securities 2,635
Proceeds from maturities of held-to-maturity securities 1,907 1,151
Purchase of available-for-sale securities (2,239) (3,213)
Purchase of held-to-maturity securities (900) (3,266)
Loan originations, net of principal repayments (2,345) (4,743)
Proceeds from sale of premises and equipment 6 10
Purchase of land (359) (101)
Purchases of premises and equipment (185) (365)
--------- -------
Net cash used by investing activities 393 (7,892)
Financing Activities:
Net increase in demand deposits,
NOW accounts and savings accounts
3,000 2,049
Net increase in certificates of deposit
447 2,831
Net increase (decrease) in short-term borrowings
- (80)
Net increase in securities purchased under agreements
to repurchase (627) 539
Net proceeds from sale of common stock 34 52
Cash Dividends Paid (136) (110)
--------- -------
2,718 5,281
Increase (decrease) in cash and cash equivalents 3,783 (1,808)
Cash and cash equivalents at beginning of year 5,716 8,994
Cash and cash equivalents at end of year $ 9,499 $ 7,186
Supplemental schedules and cash flow information:
Cash paid for:
Interest on deposits and other borrowings $ 2,342 $ 2,145
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HERITAGE BANKSHARES, INC.
Note 1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Heritage Bankshares, Inc. (the "Company") and its wholly-owned subsidiaries
Heritage Bank & Trust (the "Bank"), and IBV Real Estate Holding, Inc. All
significant inter-company accounts and transactions have been eliminated. The
consolidated financial statements have not been audited; however, in the opinion
of management, all adjustments necessary for a fair presentation of the
consolidated financial statements have been included and are of a normal,
recurring nature. The financial information included herein should be read in
conjunction with the consolidated financial statements included in the Company's
1997 Annual Report to Shareholders and the 1997 Form 10-K filed with the
Securities and Exchange Commission.
Note 2. Earnings Per Common and Common Equivalent Share
Basic earnings per common and common equivalent share is obtained by dividing
net income by the weighted average number of common shares outstanding. The
weighted average number of shares used in the computation of earnings per share
was 798,933 for the period ended September 30, 1998 and 788,972 for the period
ended September 30, 1997.
Note 3: Comprehensive Income
The Company has adopted Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income". This
new standard requires an entity to report and display comprehensive income and
its components. Comprehensive income is as follows:
For the Nine Months Ended September 30,
Dollars in thousands 1998 1997
---- ----
Net income $805 $739
Other comprehensive Income: 109 57
Unrealized gain on securities
Available-for-sale, net of tax
Comprehensive Income $914 $796
<PAGE>
ITEM II. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Earnings Summary
For the nine months ended September 30, 1998, net income for Heritage
Bankshares, Inc. totaled $805,000, up 7% from the $739,000 reported for the same
period in 1997. Heritage Bank & Trust earned $823,000 and net holding company
expenses were $18,000. Basic earnings per common share were $1.01 as compared to
$.94 for the same period in 1997.
Net Interest Income
Net interest income for the first nine months of 1998 was $2,619,000,
an increase of $225,000 or 9% over the $2,394,000 reported for the same period
in 1997.
The primary determinant of this increase was growth in the loan
portfolio. Gross loans at September 30, 1998 were $54,478,000, up $3,645,000
over the September 30, 1997 total of $50,833,000. Deposits increased $2,937,000
or 4% to $76,244,000 compared to $73,307,000 for the same period in 1997.
Provision For Loan Losses
The allowance for loan losses is maintained at a level necessary to
provide for potential losses associated with lending activities. The provision
for loan losses of $33,000 represents a 6% increase from the $31,000 provision
for loan losses at September 30, 1997. The allowance for loan losses at
September 30, 1998 and 1997 as a percentage of net loans outstanding was 1.70%
and 1.64% respectively.
Net charge-offs during the first nine months of 1998 were ($3,000). At
September 30, 1998, loans 90 days or more past due and still accruing and loans
on non-accrual status were $440,000 or .81% of total loans compared to September
30, 1997 when such loans were $45,000 or .09% of total loans. Non-performing
assets consisting of non-accruing loans and foreclosed properties totaled
$788,000 or .91% of total assets at September 30, 1998. At September 30, 1997,
non-performing assets were $481,000 or .55% of total assets.
Other Income
During the first nine months of 1998, other income was $290,000
increasing $75,000 or 34% over the comparable period in 1997. This increase is
the result of fees related to deposit account services and a portion of an
enterprise zone related tax credit. This credit is a result of the location of
the bank's Colley Avenue office which opened in late 1997.
Other Expenses
Other expenses totaled $2,104,000 which is a 13% increase or $234,000
over the $1,870,000 reported for the same period in 1997. $97,000 of this
increase is the result of increased costs relating to salaries and employee
benefits. The remaining portion of the increase is the result of normal
operating costs. As a percent of average assets, noninterest expenses were 2.62%
in the first nine months of 1998 compared to 2.44% in the same period of 1997.
The "efficiency ratio" (non-interest expenses divided by total non-interest
income plus net interest income) was 58% for the first nine months of 1998
versus 56% for the same period in 1997. These measures of operating efficiency
compare very favorably to other financial institutions in the Company's peer
group.
Interest Sensitivity and Liquidity
The primary functions of asset/liability management are to assure
adequate liquidity and maintain an appropriate balance between interest
sensitive earning assets and interest bearing liabilities. Liquidity management
involves the ability to fund depositors' withdrawals and extensions of credit to
borrowers. Interest rate sensitivity management seeks to avoid fluctuating net
interest margins and to enhance consistent growth of net interest income through
periods of changing interest rates.
At September 30, 1998, net loans to total deposits was 70% compared to
68% for the same period in 1997. Certificates of deposit over $100,000 were
$9,488,000 at September 30,1998 compared to $9,429,000 for the same period in
1997. These large denomination certificates of deposit represented 11% of total
assets at September 30, 1998 and 1997.
Interest rate sensitivity varies with different types of interest
earning assets. Rates change daily on the $6,245,000 the Company had invested in
federal funds on September 30, 1998. In addition, $17,210,000 or 32% of the
bank's loans have adjustable interest rates. Managing these assets is of primary
importance in maintaining the appropriate balance between interest sensitive
earning assets and interest bearing liabilities.
Capital Resources
The capital structure of the Company remains strong. Total risk based
capital increased from 14.77% at September 30, 1997 to 15.43% at September
30,1998. Tier I capital increased from 13.52% to 14.18% compared to the same
time period. The leverage ratio, defined as Tier I capital divided by average
assets, was 8.88% at September 30, 1998 compared to 8.33% at September 30,1997.
Year 2000
The Company's Year 2000 plans are subject to guidelines promulgated by
the Federal Financial Institutions Examination Council (FFIEC). The Federal
Reserve Bank of Richmond periodically measures the status of the Company's plans
and progress, as outlined in the FFIEC guidelines. Management of the Company is
acutely aware of the Year 2000 issue and has an ongoing program designed to
ensure that its operational and financial systems, and those of its
subsidiaries, will not be adversely affected by Year 2000 software failures.
The Company formed a Year 2000 compliance committee to assess the
extent to which outside vendors may be adversely affected by Year 2000 problems.
This committee has prepared and is responsible for monitoring the vendors and
equipment that have been determined to be Year 2000 sensitive. As of September
30, 1998, the Company had received written assurances from all vendors providing
mission-critical systems and from most of those providing non-mission critical
systems indicating that their systems are or will be able to process information
beyond December 31, 1999.
The most significant vendor to Heritage Bank & Trust, which acts as a
service bureau for the Bank's account and data processing, has completed its
system renovation and testing. The Bank has and will continue to evaluate the
testing and verification of Year 2000 related changes made by that vendor.
As part of its planning process, the Company has begun to develop
contingency plans based on possible scenarios, and their likelihood of
occurrence, which may impact its operations, liquidity, and financial condition
for the year ending December 31, 2000. The contingency plans will address
operational issues, including communication links with other entities, utility
and transportation services, and the availability of alternative services among
vendor relationships. The Company expects to complete its contingency plans in
various stages, during 1998 and 1999.
Based on current estimates, the Company does not expect to incur a
material amount of expenses relating to Year 2000 issues. It is recognized that
any Year 2000 compliance failures could result in additional expense to the
Company.
<PAGE>
Part II. Other Information
Item I. Legal Proceedings
The Company is subject is subject to claims and lawsuits which arise
primarily in the ordinary course of business. Based on information presently
available, there are no such claims involving the Company.
Item V. Other Information
None
Item VI. Exhibits and Reports on Form 8-K
a) Exhibits
None.
b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the registration requirements 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: November 12, 1998
BY:/s/ Robert J. Keogh
---------------------------
Robert J. Keogh
President & CEO
BY:/s/ Catherine P. Jackson
---------------------------
Catherine P. Jackson
Sr. Vice-President and Cashier
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 3158
<INT-BEARING-DEPOSITS> 95
<FED-FUNDS-SOLD> 6245
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13727
<INVESTMENTS-CARRYING> 5665
<INVESTMENTS-MARKET> 5661
<LOANS> 54478
<ALLOWANCE> 926
<TOTAL-ASSETS> 86200
<DEPOSITS> 76244
<SHORT-TERM> 52
<LIABILITIES-OTHER> 2069
<LONG-TERM> 0
0
0
<COMMON> 4001
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 86200
<INTEREST-LOAN> 3731
<INTEREST-INVEST> 967
<INTEREST-OTHER> 260
<INTEREST-TOTAL> 4958
<INTEREST-DEPOSIT> 2239
<INTEREST-EXPENSE> 67
<INTEREST-INCOME-NET> 2652
<LOAN-LOSSES> 33
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 1709
<INCOME-PRETAX> 1201
<INCOME-PRE-EXTRAORDINARY> 1201
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 805
<EPS-PRIMARY> 1.00
<EPS-DILUTED> .99
<YIELD-ACTUAL> 4.40
<LOANS-NON> 360
<LOANS-PAST> 288
<LOANS-TROUBLED> 357
<LOANS-PROBLEM> 489
<ALLOWANCE-OPEN> 889
<CHARGE-OFFS> 18
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 926
<ALLOWANCE-DOMESTIC> 926
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
