SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File No. 0-11255
Heritage Bankshares, Inc.
Virginia 54-1234322
(State or other jurisdiction of (IRS Employer corporation
incorporation or organization) identification number)
200 East Plume Street
Norfolk, Virginia 23514
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (757) 523-2600
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5 par Value Securities not registered on a stock exchange
Title of Each Class
Indicate by a 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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation SB is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 22, 1999: $10,763,888*
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of March 22, 1999:
Common Stock, $5 Par Value - 803,150
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o In calculating the aggregate market value, we have used the most recent
sales price of Common Stock known to the Company, which is $16.00 per share
and voting stock held by non-affiliates of the registrant at March 22, 1999
of 672,743 shares.
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Part I
This Form 10-KSB contains certain forward-looking statements. For this
purpose any statements contained in this Form 10-KSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"estimate" or "continue" or comparable terminology are intended to identify
forward looking-statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety of factors.
Item 1. BUSINESS
GENERAL
Heritage Bankshares, Inc. (the "Company") was incorporated under the
laws of the Commonwealth of Virginia in 1983. In August of 1992, two
wholly-owned subsidiaries, Princess Anne Bank and The Heritage Bank-McLean, were
spun off, and the Company has operated as a one bank holding company since that
time. The principal executive office of the Company is located at 200 East Plume
Street, Norfolk, Virginia. Currently, the Company does not transact any material
business other than through its wholly-owned banking subsidiary. The total
consolidated assets of the Company on December 31, 1998 were $87.3 million.
THE BANK
Heritage Bank & Trust is engaged in the general commercial and retail
banking business. The cities of Norfolk and Chesapeake, Virginia, constitute the
primary service area of the Bank and to a lesser extent the Bank includes the
remaining areas of Hampton Roads in its market area.
Heritage Bank & Trust is a state banking corporation. The Bank was
incorporated as a Virginia corporation on September 19, 1975, and commenced
business at 841 North Military Highway in Norfolk, Virginia on February 7, 1977.
On December 31, 1998, the Bank had assets of $87.1million, with loans of $56.6
million and deposits of $77.5 million.
IBV REAL ESTATE HOLDINGS, INC.
IBV Real Estate Holdings, Inc., is a corporation formed for the sole
purpose of owning additional real estate assets acquired by the Company or the
Bank. Currently, IBV Real Estate Holdings, Inc. owns a 1% interest in IBV
Partners, LP, a Virginia limited partnership formed in December 1986. IBV Real
Estate Holdings, Inc., serves as the sole general partner of the partnership.
The partnership's sole asset is a 17,200 square-foot office building located at
1450 South Military Highway, Chesapeake, Virginia. Heritage Bank & Trust is a
major tenant in the property.
SENTINEL TITLE SERVICES, INC. AND SENTINEL TRUST SERVICES, L.L.C.
Sentinel Trust Services, L.L.C. is a wholly-owned subsidiary of the
Company. Sentinel Title Services, Inc. is a wholly-owned subsidiary of Heritage
Bank & Trust. These entities own an interest in providers of title and trust
services. The financial activities pertaining to these interests are recorded on
the cost method of accounting for investments. The strategic relationship with
these entities provides the Bank with the ability to provide title and trust
services to its customers.
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COMPETITION
The banking business in the cities of Norfolk and Chesapeake, as well
as all of the Hampton Roads area is highly competitive. All of the major
commercial banking institutions based in Virginia conduct business in the area.
The Bank also encounters competition from local banks, savings and loan
associations, money market and mutual funds, small loan companies, credit
unions, brokerage firms and other financial institutions.
EMPLOYEES
The Company and the Bank have 42 employees. Of this total, 35 are
full-time and 7 are part-time. Management considers its employee relations to be
excellent.
REGULATION AND SUPERVISION
THE BANK
Regulatory Matters
The Bank is subject to state and federal banking laws and regulations
which impose specific requirements or restrictions, and provide for general
regulatory oversight with respect to virtually all aspects of operations,
including, but not limited to, maintenance of cash reserves, loans, mortgages,
maintenance of minimum capital, payment of dividends, and establishment of
branch offices. As a state-chartered bank and a member of the Federal Reserve
System, the Bank is supervised and regularly examined by representatives of the
Board of Governors of the Federal Reserve System (the "Federal Reserve") and the
Bureau of Financial Institutions of the Commonwealth of Virginia (the "Virginia
Bureau of Financial Institutions").
In addition to being affected by general economic conditions, earnings
of the Bank may be affected by the fiscal and monetary policies of the Federal
Reserve. The techniques used by the Federal Reserve include setting the reserve
requirements of member banks and establishing the discount rate on member banks'
borrowing. The impact of the policies of the Federal Reserve and other
regulatory authorities, cannot be accurately predicted. These policies can,
however, materially affect the revenues and net income of commercial banks
because they have a direct effect on the amount of bank loans and deposits and
the interest rates charged and paid thereon.
The Bank is also subject to restrictions under Section 23A of the
Federal Reserve Act ("The Act"). These restrictions limit the transfer of funds
to the Company and certain other affiliates, as defined in the Act, in the form
of loans, extensions of credit, investments or purchase of assets. Such
transfers by the Bank to the company are limited in amount to 10% of the Bank's
capital. Furthermore, such loans and extensions of credit are also subject to
various collateral requirements. See Note 3 of the Consolidated Financial
Statements for additional information on restrictions.
The Bank is also subject to restrictions on the payment of dividends
under Section 33 of the Federal Reserve Act. Under this section, approval of the
applicable Federal Reserve Bank is required if the total of all dividends
declared by the Bank during any calendar year exceeds the total of its net
profits (as defined by the Act) of that year combined with its net profits of
the preceding two years. See Note 3 of the Consolidated Financial Statements for
additional information on restrictions.
The Federal Reserve and the Bureau of Financial Institutions of
Virginia requires the Bank to maintain certain minimum capital ratios. The Bank
and the Company are required to maintain minimum risk-based capital to asset
ratios, as defined by the regulations, of 4.00% for the Tier 1 capital ratio and
8.00% for the Total (Tier 1 plus Tier 2) capital ratio. Additionally, a leverage
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capital ratio, defined as Tier 1 capital divided by average assets, must also be
maintained by financial institutions. For financial institutions with the best
regulatory rating, generally, a minimum leverage ratio of 5.00% must be
maintained. The Bank and the Company met the minimum risk-based capital
requirements at December 31, 1998. See Note 15 of the Consolidated Financial
Statements for additional information on regulatory capital matters.
Mergers and Acquisitions
The Bank Holding Company Act formerly prohibited the Federal Reserve
from approving an application from a bank holding company to acquire shares of a
bank located outside the state in which the operations of the holding company's
banking subsidiaries were principally conducted, unless such an acquisition was
specifically authorized by statute of the state in which the bank whose shares
were to be acquired was located. The restriction on interstate acquisitions was
abolished effective September 29, 1997, and bank holding companies from any
state may now acquire banks and bank holding companies located in any other
state. Banks may branch across state lines effective June 1, 1998, provided
certain conditions are met, including that applicable state law must expressly
permit such interstate branching. Under Virginia law, effective July 1, 1995,
Virginia banks can branch across state lines in those states with which Virginia
has reciprocal agreements. Although this will have a significant impact on the
banking industry, it is not possible to determine, with any degree of certainty,
its impact on individual institutions.
Deposit Insurance
Section 38 of the Federal Deposit Insurance Act, as amended by the
Federal Deposit Insurance Corporation ("FDIC") Improvement Act ("FDICIA"),
requires that the federal banking agencies establish five capital levels for
insured depository institutions - "well capitalized", "adequately capitalized,"
"undercapitalized," "significantly "undercapitalized" and, "critically
undercapitalized", and requires or permits such agencies to take certain
supervisory actions as an insured institution's capital level falls. The Bank
has been notified by the Federal Reserve that it is classified as a "well
capitalized" institution for this purpose. An "adequately capitalized"
institution is restricted from accepting brokered deposits. A "significantly
undercapitalized" institution must develop a capital restoration plan and is
subject to a number of mandatory and discretionary supervisory actions. These
powers and authorities are in addition to the traditional powers of the federal
banking agencies to deal with undercapitalized institutions. As more fully
disclosed in the following paragraph, the FDIC deposit insurance premiums
required to be paid by institutions depend, in part, on their capital levels,
and "undercapitalized" institutions will be required to pay significantly
greater premiums than more highly capitalized institutions.
The FDIC has implemented a risk-based deposit insurance assessment
system under which the assessment rate for an insured institution may vary
according to regulatory capital levels of the institution and other factors
(including supervisory evaluations). Effective January 1, 1997, depository
institutions insured by the Bank Insurance Fund ("BIF"), ranked in the top risk
classification category of well capitalized, are required to pay only the
statutory minimum assessment of $2,000 annually for deposit insurance, while all
other banks are required to pay premiums ranging from .03% to .30% annually per
$100 of domestic deposits. These rate schedules are subject to future
adjustments by the FDIC. In addition, as more fully disclosed in the following
paragraph, the FDIC has authority to impose special assessments from time to
time.
The Deposit Insurance Funds Act of 1997 ( the "Funds Act") was enacted
on September 30, 1997. Among other provisions, the Funds Act: (1) requires that
certain depository institutions pay a one-time special assessment (65.7 cents
per $100 of SAIF-assessable deposits) to the FDIC to capitalize the Savings
Association Insurance Fund ("SAIF") at its statutorily required reserve ratio of
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1.25% of insurable deposits; (2) exempts certain depository institutions with
SAIF assessable deposits that meet any of several specified criteria from paying
the special assessment, (3) authorizes the Financing Corporation ("FICO") to
impose periodic assessments on depository institutions that are members of BIF,
in addition to institutions that are members of the SAIF, in order to spread the
cost of the interest payments on the outstanding FICO bonds over a larger number
of institutions. Until this change in the law, only SAIF-member institutions
bore the cost of funding these interest payments. FICO assessment rates for the
first semiannual period of 1998 were set at 1.30% (per $100) annually for
BIF-assessable deposits and 6.48% (per $100) annually for SAIF-assessable
deposits. These rates may be adjusted quarterly to reflect changes in assessment
bases for the BIF and the SAIF. By law, the FICO rate on BIF-assessable deposits
must be one-fifth the rate on SAIF assessable deposits until the insurance
fiends are merged or until January 1, 2000, whichever occurs first. These
changes in FDIC insurance are not expected to have a material effect on the
Bank's financial condition and results of operation for the foreseeable future.
Regulations
On December 15, 1994, the Federal Reserve, the Office of Thrift
Supervision, the Office of the Controller of the Currency ("OCC"), and the FDIC
(collectively the "agencies") issued a final rule entitled, Risk-Based Capital
Standards: Concentration of Credit Risk and Risks of Nontraditional Activities.
The final rule amends the risk-based capital standards by explicitly identifying
concentrations of credit risk and certain risks arising from nontraditional
activities, as well as an institution's ability to manage these risks, as
important factors in assessing an institution's overall capital adequacy. While
no quantitative measure of such risk is included in the final rule, to the
extent appropriate, the agencies will issue examination guidelines on new
developments in nontraditional activities or concentrations of credit to ensure
that adequate account is taken of the risks of these activities. Moreover, the
agencies also believe that institutions identified though the examination
process as having significant exposure to concentration of credit risk, or as
not adequately managing concentration risks, should hold capital in excess of
the regulatory minimums. Therefore, due to the subjective nature of this final
rule, the Bank is unable to determine what effect, if any, this rule may have on
regulatory capital requirements.
On August 2, 1995, the OCC, the Federal Reserve, and the FDIC
(collectively the "banking agencies") issued a final rule entitled, Risk-Based
Capital Standards: Interest Rate Risk. The final rule implements minimum capital
standards for interest rate risk exposures in a two-step process. The final rule
implements the first step of that process by revising the capital standards of
the banking agencies to explicitly include a bank's exposure to declines in the
economic value of its capital due to changes in interest rates as a factor that
the banking agencies will consider in evaluating a bank's capital adequacy. It
is important to note that the banking agencies intend to implement this rule on
a case-by-case basis during the examination process. The second step of the
banking agencies' process will be to issue a proposed rule that would establish
an explicit minimum capital charge for interest rate risk, based on the level of
the bank's measured interest rate risk exposure. Due to the subjective nature of
the first phase of this final rule, the Bank is unable to determine what effect,
if any, this rule may have on its regulatory capital requirements.
On October 1, 1997, the banking agencies issued new guidelines amending
the Interagency Guidelines Establishing Standards for Safety and Soundness (the
"Safety and Soundness Guidelines") to include asset quality and earnings
standards. The Safety and Soundness Guidelines were adopted pursuant to the
requirements of Section 39 of the Federal Deposit Insurance Act. The Safety and
Soundness Guidelines require financial institutions to identify problem assets
and estimate inherent losses. In order to comply with these Safety and Soundness
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Guidelines a financial institution shall: (1) consider the size and potential
risks of material concentrations of credit risk; (2) compare the level of
problem assets to the level of capital and establish reserves sufficient to
absorb anticipated losses on those and other assets, (3) take appropriate
corrective action to resolve problem assets, as appropriate; and (4) provide
periodic asset quality reports to the board of directors to assess the level of
asset risk. The earnings standards specified by the Safety and Soundness
Guidelines require an institution to compare its earnings trends ( relative to
equity, assets, and other common benchmarks) with its historical experience and
with the earnings trends of its peers. The Safety and Soundness Guidelines,
relative to the earnings standards, require the institution to: (1) evaluate the
adequacy of earnings with regard to the institution's relative size and
complexity, and the risk profile of the institution's assets and operations; (2)
assess the source, volatility, and sustainability of earnings, (3) evaluate the
effect of nonrecurring or extraordinary income or expense; (4) take steps to
ensure that earnings are sufficient to maintain adequate capital and reserves
after considering asset quality and the institution's rate of growth; and (5)
provide periodic reports with adequate information for management and the board
of directors to assess earnings performance. The Safety and Soundness Guidelines
note that the complexity and sophistication of an institution's monitoring,
reporting systems, and corrective actions should be commensurate with the size,
nature and scope of the institution's operations. The Bank does not believe that
these Safety and Soundness Guidelines will materially effect its operations or
financial condition in the foreseeable future.
On December 20, 1997 the FDIC Board of Directors adopted the FFIEC's
updated statement of policy entitled Uniform Financial Institutions Rating
System ("UFIRS"). The updated UFIRS replaces the previous rating system
established in the 1979 statement of policy, and is effective January 1, 1998.
Under the existing UFIRS, each financial institution is assigned a composite
rating based on an evaluation and rating of five essential components of an
institution's financial condition and operations. The five component areas are
Capital adequacy, Asset quality, Management, Earnings and Liquidity ("CAMEL").
The updated UFIRS includes the addition of a sixth component for Sensitivity to
market risk ("CAMELS"). The new sixth component addresses the degree to which
changes in interest rates, foreign exchange rates, commodity prices or equity
prices can adversely affect a financial institution's earnings or capital. The
new component focuses on an institution's ability to monitor and manage its
market risk, and will provide an institution's management with a clearer and
more focused indication of supervisory concerns in this area. The Bank does not
believe that this statement of policy will materially effect its operations in
the foreseeable future.
THE COMPANY
As a bank holding company, the Company is subject to regulation by the
Federal Reserve in accordance with the provisions of the Bank Holding Company
Act of 1956, as amended, and the rules and regulations promulgated thereunder.
The Federal Reserve may require a bank holding company to serve as a source of
financial strength to its subsidiary depository institution and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. In addition, the "cross-guarantee" provisions of the federal
law require insured depository institutions under common control to reimburse
the Federal Deposit Insurance Corporation for any loss suffered or reasonably
anticipated by either the Savings Association Insurance Fund ("SAIF") or the
Bank Insurance Fund ("BIF") as a result of the default of a commonly controlled
insured depository institution in danger of default. The Federal Deposit
Insurance Corporation's claim for damages is superior to claims of shareholders
of the insured depository institution or its holding company, but is subordinate
to claims of depositors, secured creditors and holders of subordinated debt
(other than affiliates) of the commonly controlled insured depository
institutions.
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A bank holding company is required to file with the Federal Reserve
annual reports along with those of its subsidiaries. It is also subject to
examination by the Federal Reserve and is required to obtain Federal Reserve
approval prior to acquiring, directly or indirectly, ownership or control of any
voting shares of any bank if, after such acquisition, it would own or control,
directly or indirectly, more than 5.00% of the voting stock of such bank.
Furthermore, a bank holding company is, with limited exceptions, prohibited from
acquiring direct or indirect ownership or control of more than 5.00% of any
company which is not a bank or bank holding company, and must engage only in the
business of banking or managing or controlling banks or furnishing services to
or performing services for its subsidiary banks. One of the exceptions to this
prohibition is the ownership of shares of a company, the activities of which the
Federal Reserve has determined to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto.
The Federal Reserve has determined that numerous activities are closely
related to banking, and thus bank holding companies may apply to the Federal
Reserve for permission to retain or acquire an interest in a company engaging in
or proposing to engage in these activities. The permitted non-banking activities
include making loans that would be made by mortgage, finance, credit card or
factoring companies; operating as an industrial bank; servicing loans;
performing the functions of a trust company; leasing personal property; making
investments to promote community welfare; providing bookkeeping or data
processing services; acting as insurance agent or broker with respect to
insurance that is directly related to the extension of credit or other financial
services and acting as an underwriter for credit life insurance and credit
health and accident insurance directly related to extensions of credit by the
appraisal activities. Also, an application may be filed as to other activities,
but the Federal Reserve will publish a notice of opportunity for hearing only if
it believes there is a reasonable basis for concurring in the holding company's
opinion that the activity applied for is closely related to banking.
A bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with the extension of
credit or provision of any property or service. Thus, an affiliate of a bank
holding company may not extend credit, lease, sell property or furnish any
services or fix or vary the consideration for these services on the condition
that (a) the customer must obtain or provide some additional credit, property,
or services from or to its bank holding company or subsidiaries thereof, or (b)
the customer may not obtain or provide some additional credit, property, or
services from a competitor, except to the extent reasonable conditions are
imposed to assure soundness of credit extended.
The Company is also registered under the bank holding company laws of
Virginia. Accordingly, the Company and its subsidiaries are also subject to
regulation and supervision by the Virginia Bureau of Financial Institutions.
Federal Securities Laws
The Company's Common Stock is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restriction and
other requirements of the SEC under the Exchange Act. Under the Securities
Enforcement and Penny Stock Reform Act of 1990, the Company may be subject,
among other things, to civil money penalties for violations of the federal
securities laws.
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FEDERAL AND STATE TAXATION
General
The Company and the Bank are subject to the applicable corporate tax
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as certain additional provisions of the Code that apply to banks and other
types of financial institutions. The following discussion of tax matters is
intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Company and the Bank.
Under the applicable statutes of limitation, the Company's federal
income tax returns for 1994 through 1998 are open to examination by the Internal
Revenue Service (the "Service"). The Company is unaware, however, of any current
or pending Service examinations of the Company's returns for any of those open
years.
Historically, the Company has reported its income and expenses on the
accrual method of accounting and filed its consolidated federal income tax
returns on a December 31, fiscal year basis. Consolidated tax returns have the
effect of eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur.
Corporate Minimum Tax
The Company and its subsidiaries could be subject to an alternative
minimum tax ("AMT") which is imposed to the extent that it exceeds the
consolidated group's regular tax liability for a year. The alternative minimum
tax generally will apply at a rate of 20% to a base of regular taxable income
plus certain tax preferences and adjustments ("alternative minimum taxable
income" or "AMTI"), less an exemption amount. Currently no more than 90% of the
AMTI may be offset by net operating losses (as determined for AMTI purposes).
Payment of the AMT may be used as a credit against a portion of the regular tax
liabilities in future years. The Code provisions relating to the AMT also: (i)
treat as a preference item interest on certain tax exempt private activity bonds
issued on or after August 8, 1986; (ii) include in AMTI (for tax years beginning
after 1989) an amount equal to 75% of the amount by which a corporation's
adjusted current earnings exceed its AMTI (determined without regard to this
preference and before reduction for the alternative tax net operating losses.)
In addition, an environmental tax of 0.12% of the excess, if any, of AMTI (with
certain modifications) over $2 million is imposed on corporations, whether or
not an AMT is paid. The consolidated group was not subject to the AMT in 1998.
Corporate Dividends Received Deduction
The Company is permitted to exclude from its taxable income 100% of any
dividends received from the Bank, and may exclude from its income dividends
received from its subsidiaries pursuant to the regulation applicable to
consolidated income tax returns. The Company and the Bank may deduct from their
income 80% of any dividends received from an unaffiliated corporation if they
own at least 20% of the stock of the corporation. If they own less than 20% of
the stock of a corporation paying a dividend, 70% of any dividends received may
be excluded from income.
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State and Local Taxation
The Company's subsidiaries (other than the Bank) are subject to
Virginia corporate income taxes. The Virginia corporate income tax is imposed at
a rate of 6% on the combined net income of the Company, and its subsidiaries
(other than the Bank) as reported for federal income tax purposes with certain
modifications.
The Bank is chartered under the laws of Virginia and, accordingly, is
not subject to the Virginia corporate income tax. It is instead subject to
Virginia's Bank Franchise Tax. Under this system, the Bank's net capital is
subject to tax at a rate of one percent. Net capital is composed generally of
the equity accounts (common stock, additional paid-in capital, and retained
earnings) adjusted for investments in real and personal property, certain
reserves and certain securities exempt from state taxation.
Item 2. PROPERTIES
The Bank owns four of its banking locations, 841 North Military
Highway, 200 East Plume Street, 4815 Colley Avenue and 735 East Ocean View
Avenue (opening spring 1999) in Norfolk, Virginia. Management believes these
locations are in excellent condition. A fifth banking location and the bank's
operations center are located at 1450 South Military Highway in Chesapeake,
Virginia. See "IBV Real Estate Holdings, Inc." under Item 1 and "Certain
Relationships and Related Transactions" under Item 12.
Item 3. LEGAL PROCEEDINGS
The Company is subject to claims and lawsuits arising primarily in the
ordinary course of business. Based on information presently available to
management and advice received from legal counsel, there are no meritorious
claims involving the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of securities holders during the
fourth quarter of 1998.
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the OTC Bulletin Board under
the symbol HBKS. At March 22, 1999, there are 1,216 record holders of the
803,150 outstanding shares of common stock. As of March 22, 1999, the most
recent sales price of common stock known to the Company is $16.00 per share.
The following table sets forth the closing high and low sales price for
the common stock by calendar quarters for the past two years as reported to the
Company by Scott & Stringfellow Inc.
Calendar Quarter
HIGH LOW
1998
Fourth Quarter $16.00 $13.50
Third Quarter 18.37 14.00
Second Quarter 18.75 17.75
First Quarter 19.00 17.50
1997
Fourth Quarter $18.00 $17.13
Third Quarter 13.75 13.75
Second Quarter 13.25 13.25
First Quarter 11.63 11.25
The Company's Board of Directors determines whether to declare
dividends and the amount of such dividends. Determinations by the Board take
into account the Company's financial condition, results of operations, capital
requirements, general business conditions and other relevant factors. The
Company's principal source of funds for cash dividends is the dividends paid to
the Company by the Bank. The Company declared and paid annual dividends of $.17
and $.14 per share in 1998 and 1997, respectively. Regulatory restrictions on
the payment of dividends by the Bank to the Company are disclosed in Note 3 to
the Consolidated Financial Statements for additional information on
restrictions.
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Item 6. SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following sets forth certain selected financial data with respect
to the Company. The data presented below for the years ended December 31, 1998
and 1997, respectively, should be read in conjunction with the Consolidated
Financial Statements and notes thereto, which have been audited by Goodman &
Company, L.L.P. independent accountants. (The Consolidated Financial Statements
and notes thereto for the years ended December 31, 1998 and 1997 are filed
herewith). This data should also be read in conjunction with the discussion and
analysis that follows.
Summary of Consolidated Financial Data
(Dollars in thousands, except per share data)
1998 1997
FOR THE YEAR
Interest income $6,567 $6,185
Interest expense 3,051 2,909
Net interest income 3,516 3,277
Provision for loan losses 66 88
Noninterest income 355 287
Noninterest expense 2,322 2,056
Income taxes 421 440
Net income 1,063 980
AT YEAR END
Assets $87,291 $83,002
Loans, net 55,671 51,242
Federal funds sold 3,457 1,697
Securities 19,437 22,595
Deposits 77,283 72,797
Stockholders' equity 8,079 7,081
AVERAGE BALANCES
Assets $86,510 $81,376
Loans, net 52,679 47,322
Federal funds sold 6,108 6,122
Securities 20,877 22,490
Deposits 75,903 71,322
Stockholders' equity 7,618 6,607
PER SHARE DATA
Basic earnings per common share $1.33 $1.24
Diluted earnings per common share $1.25 $1.17
Cash dividends declared
0.17 0.14
Book value at year end 10.08 8.91
Shares outstanding at year end 801,250 795,050
Weighted average shares 799,496 790,450
Diluted average common shares outstanding 851,391 836,920
RATIOS
Return on average assets 1.23% 1.20%
Return on average equity 13.95% 14.83%
Dividend payout ratio 12.78% 11.29%
Average equity to average assets 8.81% 8.12%
Allowance to year end loans 1.58% 1.71%
Net loans charged-off to average loans 0.11% 0.09%
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FINANCIAL OVERVIEW:
In 1998, net income for Heritage Bankshares, Inc. (the "Company")
totaled $1.06 million compared to $980 thousand earned in 1997. Heritage Bank &
Trust's (the "Bank") net income was $1.06 million and net holding company income
was $3 thousand. In 1997, Heritage Bank & Trust's net income was $972 thousand
and net holding company income was $8 thousand. Basic earnings per common share
in 1998 was $1.33 compared to $1.24 in 1997. Diluted earnings per common share
was $1.25 and 1.17 at December 31, 1998 and 1997, respectively. Increases in
both net income and earnings per share during 1998 primarily reflect growth in
loans as well as continued expense control and efficient capital management.
Net interest income on a taxable equivalent basis totaled $3.59
million in 1998 and $3.31 million in 1997. The net interest margin for 1998 was
4.46% compared with 4.32% in 1997. This modest increase was primarily due to the
increase in gross loans of $5.37 million and the relatively flat rate
environment of 1998.
The 1998 provision for loan losses was $66 thousand compared to the
1997 provision of $88 thousand. The allowance for loan losses of $895 thousand
at year-end 1998 and $889 thousand in 1997 reflect an allowance to year-end
loans ratio of 1.58% and 1.71%, respectively.
Non-interest income increased $67 thousand to $355 thousand. Service
charges on deposit accounts increased $29 thousand primarily due to an increase
in the number of accounts. Fees related to merchant credit card processing
increased $5 thousand and fees related to credit and debit cards increased $18
thousand. Both of these increases were due to increased volume. Also,
approximately $7 thousand in fees were generated from the Colley Avenue office
during its first full year of operations.
Non-interest expense totaled $2.32 million for 1998, compared with
$2.06 million in 1997. Expense levels reflect the addition of the Colley Avenue
branch. A refund of $45 thousand for Franchise Taxes previously paid by the bank
was recorded in 1998. The refund represents a portion of an enterprise-zone
credit for the Colley Avenue branch location. The ratio of non-interest expense
to average assets was 2.68% in 1998 and 2.74% in 1997. These ratios reflect the
Company's successful cost containment efforts.
Total loans at December 31, 1998 were $56.6 million compared with
$52.0 million at December 31, 1997. The increase is attributable to strong loan
growth in commercial loans and real estate loans each of which increased over $2
million in 1998.
Total deposits increased $4.49 million primarily due to the opening of
the Colley Avenue branch and to the expansion of existing customer
relationships.
LIQUIDITY:
Liquidity is the ability of the Company to efficiently fund
depositors' withdrawals and extensions of credit to borrowers. The Company and
Heritage Bank & Trust must consider immediate liquidity needs as well as the
long-term matching of maturing loans and investments with obligations to
depositors.
The Company's Consolidated Statement of Cash Flows, found in the
Consolidated Financial Statements, provides information as to cash provided and
used from operating, investing and financing activities. At December 31, 1998,
cash and cash equivalents available to meet immediate liquidity needs and
reserve requirements were $7.06 million. The Bank also has borrowing capacity of
$5.9 million, as a member of the Federal Home Loan Bank System. As of December
31, 1998, no amounts have been drawn on this line of credit.
12
<PAGE>
The Company's cash and cash equivalents increased $1.35 million from
$5.72 million at December 31, 1997. This increase was primarily due to the
increase in deposits of $4.49 million combined with the decrease in the
investment portfolio of $3.16 million. These increases were partially offset by
the increase in gross loans of $5.37 million and a decrease in securities sold
under agreements to repurchase of $964 thousand.
PARENT HOLDING COMPANY LIQUIDITY:
The parent holding company incurred expenses for
stockholder-related activities, stock transfer and other functions necessary for
the administration of the Company. See Note 3 of the Consolidated Financial
Statements for the parent company's Cash Flow Statement for further information
on cash provided or used by the parent for operating, financing and investing
activities. In addition, certain restrictions on cash dividends, loans and
advances are imposed by regulation of the Bank, which are also disclosed in Note
3.
Table 2: Selected Liquidity Statistics
For the year ended December 31,
1998 1997
(Dollars in thousands)
Available short-term assets (1) $9,954 $7,272
Certificates of deposit $100,000 and over 10,406 8,128
------ -----
Net available short-term assets ($452) ($856)
Ratio of available short-term assets to
certificates $100,000 and over 96% 89%
Ratio of loans to deposits 73% 72%
Ratio of certificates $100,000 and over to
total assets 12% 10%
(1) As of December 31, 1998, available short-term assets include federal funds
sold of $3,457,000 and held -to-maturity and available-for-sale securities
maturing within one year of $750,000 and $5,747,000, respectively. At
December 31, 1997, available short-term assets included federal funds sold
of $1,697,000 and held-to-maturity and available-for-sale securities
maturing within one year of $1,019,000 and $4,556,000
CAPITAL:
Stockholders' equity at December 31, 1998 was $8.08 million compared to
$7.08 million at the end of the prior year. Book value per share increased from
$8.91 at December 31, 1997 to $10.08 at December 31, 1998.
Table 3 provides information on the Company's risk-based,
leverage and capital ratios at December 31, 1998 and 1997. The Company is
considered well-capitalized and in compliance with all relevant regulatory
capital requirements. See Note 15 of the Consolidated Financial Statements for
additional information with respect to compliance with regulatory capital
requirements.
13
<PAGE>
Table 3: Capital Ratios
For the year ended December 31,
1998 1997
(Dollars in thousands)
Risk-based capital:
Tier I Capital
Stockholders' equity $7,991 $7,024
Tier II Capital
Allowance for loan losses (limited) 743 639
--- ---
Total $8,734 $7,663
Risk adjusted assets $59,277 $50,848
Risk-based capital ratios:
Tier I 13.48% 13.81%
Total 14.73% 15.07%
Leverage ratio 9.24% 8.63%
Primary capital ratio 10.18% 9.50%
RATE SENSITIVITY:
At December 31, 1998, the Company had, on a cumulative basis,
$10.71 million more in liabilities subject to re-pricing within one year than
assets. Table 4 provides an interest sensitivity analysis as of December 31,
1998.
14
<PAGE>
<TABLE>
Table 4: Interest Sensitivity Analysis
December 31, 1998
<CAPTION>
Within Over 3 Over 1 Yr Over 3 Yr Over 5 Yr Total
1 through 3 through through through through through Over
months 12 months 3 yrs 5 yrs 10 yrs 10 yrs 10 yrs(4) Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets: (1)
Federal funds $3,457 $ - $ - $ - $ - $3,457 $ - $3,457
Investment securities (2) 2,728 5,604 8,573 1,421 193 18,519 784 19,303
Loans 19,572 3,346 6,182 7,477 6,697 43,274 13,292 56,566
----------------------------------------------------------------------------------------
Total Earning Assets $25,757 $8,950 $14,755 $8,898 $6,890 $65,250 $14,076 $79,326
----------------------------------------------------------------------------------------
Interest and non-interest bearing
liabilities: (1)
Commercial DDA (3) $ 6,070 $ - $3,642 $2,428 $ - $12,140 $ - $12,140
Personal DDA (3) - - 1,429 476 476 2,381 - 2,381
TT&L Note 63 - - - - 63 - 63
Savings(3) - - 2,593 864 864 4,321 - 4,321
Money Market(3) - 2,866 2,866 - - 5,732 - 5,732
NOW(3) - - 5,950 1,983 1,983 9,916 - 9,916
Certificates 10,382 25,056 3,966 3,363 25 42,792 - 42,792
Repurchase Agreements 981 - - - - 981 - 981
----------------------------------------------------------------------------------------
Total Interest and non interest
bearing liabilities $17,496 $27,922 $20,446 $9,114 $3,348 $78,326 $ - $78,326
----------------------------------------------------------------------------------------
Interest sensitivity 8,261 (18,972) (5,691) (216) 3,542 (13,076) 14,076 1,000
gap
Cumulative gap 8,261 (10,711) (16,402) (16,618) (13,076)
Ratio interest sensitive assets
to interest-sensitive liabilities 1.47 0.32 0.72 0.98 2.06 0.83
Ratio of cumulative gap to
total earning assets 10.41% -13.50% -20.68% -20.95% -16.48%
</TABLE>
(1) Assets and liabilities are presented in the period they mature or reprice,
whichever is earlier.
(2) Presented on an amortized cost basis.
(3) Based on the proposed range of permissible maturities for non-maturity
deposits issued by the banking agencies in the Joint Policy Statement
(August 2, 1995): Supervisory Policy Statement Concerning a Supervisory
Framework for Measuring and Assessing Banks' Interest Rate Risk Exposure)
(4) Includes non-interest bearing liabilities.
NET INTEREST INCOME:
Net interest income is the difference between interest earned on
loans, investment securities and short-term investments and interest paid on
deposits, securities sold under agreements to repurchase and other short-term
borrowing. Material factors affecting net interest income included interest
rates earned on loans and investments and those paid on deposits, the mix and
volume of earning assets and interest-bearing liabilities, and the level of
noninterest-bearing liabilities.
Table 5 presents the components of net interest income. Table 6
allocates changes in volume and rate on net interest earnings.
15
<PAGE>
<TABLE>
Table 5: Components of Net Interest Income
For the years ended December 31, 1998 1997
(Dollars in thousands)
Average Average Average Average
Balance(1) Interest yield/rate Balance(1) Interest yield/rate
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets: (taxable equivalent basis (2))
Loans (net of unearned discount (3)) $ 53,597 $ 5,030 9.33% $ 48,166 $ 4,531 9.41%
Investment securities-taxable (4) 19,868 1,212 6.10% 21,818 1,330 6.10%
Investment securities- non-taxable (1) (4) 1,009 70 6.93% 672 31 4.61%
Federal Funds 6,108 332 5.44% 6,122 334 5.46%
--------- -------- ---- -------- ------- ----
Total Interest earning assets $ 80,582 $ 6,643 8.21% $ 76,778 $ 6,226 8.11%
--------- -------- ---- -------- ------- ----
Noninterest earning assets:
Cash and due from banks 2,919 2,644
Allowance for loan losses
(919) (843)
Other real estate owned 429 442
Premises and equipment 1,541 831
Other assets 1,958 1,524
--------- --------
Total Assets $ 86,510 $ 81,376
========= ========
Liabilities and stockholders' equity
Interest bearing liabilities:
Money Market and NOW accounts $ 12,988 $ 341 2.63% $ 12,849 $ 341 2.65%
Savings Deposits 4,609 147 3.19% 5,050 176 3.49%
Savings Certificates 36,572 2,002 5.47% 34,599 1,937 5.60%
Large denomination certificates 8,436 474 5.62% 6,482 379 5.85%
Securities sold under agreements to repurchase 2,081 84 4.04% 1,810 73 4.03%
Short-term borrowings 70 3 4.29% 75 3 4.00%
--------- -------- ---- -------- ------- ----
Total interest bearing liabilities $ 64,756 $ 3,051 4.71% $ 60,865 $ 2,909 4.78%
--------- -------- ---- -------- ------- ----
Noninterest bearing liabilities:
Demand deposits 13,297 12,341
Other 1,563
--------- --------
839
Total Liabilities 78,892 74,769
Stockholders' equity 7,618 6,607
--------- --------
Total liabilities and stockholders'
equity $ 86,510 $ 81,376
========= ========
Net interest earnings $ 3,592 $ 3,317
======== =======
Net interest yield margin on average interest earning
assets (taxable equivalent basis) 4.46% 4.32%
==== ====
Less tax equivalent adjustment $ (76) $ (41)
-------- -------
Net interest income $ 3,516 $ 3,276
======== =======
Net interest spread (taxable
equivalent basis) 3.53% 3.33%
==== ====
</TABLE>
(1) Daily average balances are calculated using the aggregate daily average
balances on a monthly basis.
(2) Tax equivalent adjustments (using 34% federal income tax rates) have been
made in calculating the yields on tax-free loans and investments. Virginia
banks are exempt from state income tax.
(3) For the purposes of these computations, non-accruing loans are included in
the daily average loan amounts outstanding.
(4) The yield/rate of the investment securities is computed using the amortized
cost basis.
16
<PAGE>
<TABLE>
Table 6: Effect of Changes in Volume and Rate on Net Interest Earnings For the
years ended December 31, (1) (Dollars in thousands)
<CAPTION>
1998 / 1997 1997 / 1996
(Dollars in thousands)
Increase (Decrease) Increase (Decrease)
Due to Change In (1): Due to Change In (1):
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Interest income (2):
Loans $513 ($14) $499 $412 ($26) $386
Taxable securities (119) 1 (118) 454 23 477
Non-taxable securities 19 20 39 23 (2) 21
Federal funds sold (1) (1) (2) (136) 14 (122)
---- ---- ---- ---- ---- ----
Total interest income $412 ($6) $418 $753 $9 $762
---- ---- ---- ---- ---- ----
Interest expense:
Money Market and NOW
accounts 3 (3) (0) (38) (28) (66)
Savings (15) (14) (29) 11 7 18
Certificates 110 (45) 65 365 (27) 338
Certificates of $100,000
or more 109 (14) 95 2 49 51
Securities sold under
agreements to repurchase 11 - 11 72 - 72
Short-term borrowings - - - - - -
---- ---- ---- ---- ---- ----
Total interest expense 218 (76) 142 412 1 413
---- ---- ---- ---- ---- ----
Net change in interest
earnings $ 194 $ 82 $ 276 $ 341 $ 8 $ 349
======= ======= ======= ====== ====== =======
</TABLE>
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar of the changes in each.
(2) Interest income includes taxable equivalent adjustments of $76,000 in 1998
and $41,000 in 1997, which are used to adjust interest on tax exempt assets
to a fully taxable basis.
ASSET QUALITY
PROVISION AND ALLOWANCE FOR LOAN LOSSES:
The provision for loan losses is charged to operations in an
amount sufficient to maintain the allowance for loan losses at a level
management considers adequate to provide for future loan losses inherent in the
loan portfolio. Loans are charged against this allowance when management
perceives the collection of the loan is unlikely. The level of the allowance is
based upon management's ongoing review of the loan portfolio and includes the
present and prospective financial condition of borrowers, consideration of
actual loan loss experience and projected economic conditions in general and for
the Bank's service area.
In 1998, the provision for loan losses was $66 thousand compared to the
$88 thousand provision for loan losses in 1997. Net loans charged-off in 1998
were $60 thousand compared to $42 thousand in 1997.
17
<PAGE>
<TABLE>
Table 7 summarizes activity in the Allowance for Loan Losses and
provides statistics on non-performing assets and past due loans. There were no
restructured loans, as defined by applicable securities rules and regulations.
Table 7: Summary of the Allowance For Loan Losses
Non-performing Assets and Past Due Loans
and Selected Loan Loss Statistics
For The Years Ended
December 31, 1998 1997
(Dollars in Thousands)
<S> <C> <C>
Allowance for Loan Losses:
Balance, December 31 $ 889 $ 843
Charge-offs:
Commercial 0 0
Real estate 41 2
Consumer 40 47
----- -----
Total loans charged-off 81 49
----- -----
Recoveries:
Commercial 0 0
Real estate 15 5
Consumer 6 2
----- -----
Total recoveries 21 7
Net charge-offs 60 42
===== =====
Provision for loan losses 66 88
----- -----
Balance, December 31, 1998 $895 $889
----- -----
Ratio of net charge-offs to average loans outstanding 0.11% 0.09%
----- -----
Ratio of allowance for loan losses to loans at period-end 1.58% 1.71%
----- -----
Non-performing Assets and Loans Past Due 90 Days
Non-accrual loans $ 424 $ 27
Other real estate owned 429 429
----- -----
Total non-performing assets $ 853 $ 456
======= =======
Ratio of non-performing assets to total assets 0.98% 0.55%
Non-accrual loans:
Interest income that would have been recorded
under original terms $57 $4
======= =======
Interest income recorded during the period $0 $0
======= =======
Loans 90 days past due and still accruing $162 $15
======= =======
</TABLE>
18
<PAGE>
A breakdown of the allowance is provided in Table 8; however, such a
breakdown has not historically been maintained by the Company, and management
does not believe the allowance can be fragmented by category with any precision
that would be useful to investors. The entire amount of the allowance is
available to absorb losses occurring in any category. The allowance is allocated
below based on the relative percent of loans in each category to total loans.
<TABLE>
Table 8: Allocation of the Allowance for Loan Losses
As of December 31, 1998 and 1997
<CAPTION>
1998 1997
Percent Percent
Amount of Total Amount of Total
------------------------- -------------------------
<S> <C> <C> <C> <C>
Commercial $ 188 21% $ 160 18%
Real estate - mortgage 618 69% 640 72%
Real estate - construction 18 2% 27 3%
Consumer 71 8% 62 7%
----- --- ----- ---
$ 895 100% $ 889 100%
===== === = ======== ===
</TABLE>
POTENTIAL PROBLEM LOANS
At December 31, 1998 and 1997, loans on either non-accrual status or
loans past due 90 days or more and still accruing amounted to $586 thousand and
$42 thousand, respectively. In addition to these loans, at December 31, 1998,
the Company had approximately $738 thousand of loans that have been internally
classified, and $313 thousand which require more than normal attention and are
potential problem loans. The Company has considered these loans in establishing
the level of the allowance for loan losses. At December 31, 1997, loans that had
been internally classified or which required more than normal attention and were
potential problem loans were $828 thousand $823 thousand, respectively.
CREDIT RISK AND REGULATORY MATTERS:
Credit risk, the risk of loss from default, is inherent in
lending. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions. Management and the board of directors of the Company
believe the allowance is a reasonable estimate of potential loss exposure in the
loan portfolio at year end, however, many factors affecting the ability of
borrowers to repay their loans, including economic factors beyond the control of
the Company or the borrowers, will impact this estimate on an ongoing basis.
Reports of examinations furnished by state and federal banking
authorities are also considered by management. Regulatory agencies periodically
review the allowance for loan losses as part of their examination process and
may require the Bank to recognize additions to the allowance based on their
judgment of information available to them at the time of their examination. A
federal examination of the Company and the Bank was conducted in the second
quarter of 1998 for the balance sheet dated March 31, 1998. No additions to the
allowance for loan losses were recommended as a result of the examination.
Regulators did not perform a regular examination of the Company or the Bank in
1997.
19
<PAGE>
NONPERFORMING ASSETS:
Non-performing assets consist of loans on non-accrual status and
other real estate owned. Loans are placed on non-accrual status when they become
over 90 days past due unless such loans are fully collateralized and, in
management's judgment, are collectible. Other real estate owned consists of real
estate acquired in settlement of loans. These properties are carried at the
lower of cost or estimated fair value. Losses from the acquisition of other real
estate owned in full or partial satisfaction of a loan are charged to the
allowance for loan losses. Subsequent declines in value or losses upon
disposition are charged to non-interest expense.
Table 9 provides an analysis of the size, number and collateral
composition of non-performing assets at December 31, 1998.
<TABLE>
Table 9: Non-performing Assets
<CAPTION>
Number Total
of items Balance Dollars
-------- ------- -------
<S> <C> <C> <C>
Non-performing assets by dollar amount:
$100,000 - $200,000 6 $ 712 83%
$50,000 - $100,000 1 76 9%
$50,000 and under 43 65 8%
-------- ------ ---
50 $ 853 100%
-------- ------ ---
Non-performing assets by collateral composition:
1 - 4 Family residential 1 $ 127
Multi-family residential 3 302
Automobile, equipment and other 4 396
Uncollateralized 42 28
-------- ------
50 $ 853
-------- ------
</TABLE>
LOAN PORTFOLIO:
The loan portfolio is the largest category of the Company's earning
assets. Table 10 shows the type and maturity of loans outstanding as of December
31, 1998.
Table 10: Loan Maturities
(Dollars in
thousands)
After 1
Within but within After
1 year 5 years 5 years
------ ------- -------
Commercial $ 6,313 $ 2,838 $ 2,450
Real estate-mortgage 6,698 12,679 19,678
Real estate-construction 1,422 - -
Consumer 323 4,062 103
------ ------- -------
$14,756 $19,579 $22,231
Loans maturing after 1 year with:
Fixed interest rates $14,899 $19,831
Variable interest 4,680 2,400
rates
------- -------
$19,579 $22,231
20
<PAGE>
<TABLE>
Table 11 includes loans collateralized by real estate at December 31, 1998. Some
of these loans are included in commercial loans for purposes of Table 10.
Table 11: Loans Collateralized By Real Estate
<CAPTION>
Percentage
of total
Amount loan portfolio
(Dollars in thousands)
-------------------------------------
<S> <C> <C>
Construction and land development $ 1,455 3%
Collateralized by 1 - 4 family residential properties 17,302 33%
Collateralized by multi-family residential properties 2,065 4%
Collateralized by non-farm non-residential properties 19,655 38%
-------
$40,477 78%
INVESTMENT PORTFOLIO:
The company's investment portfolio is a source of liquidity and
is the second largest category of earning assets. The investment portfolio is
used to provide liquidity in the event of the withdrawal of large deposits or to
satisfy unusual loan demands, and consists primarily of U.S. Treasury and
government agency securities.
Table 12 shows the maturities of investment securities at
December 31,1998, and the weighted average yields to maturity of such
securities:
Table 12: Investment Securities (1)
December 31, 1998
Dollars in thousands
<CAPTION>
1 year or less 1 - 2 years (2) 2 - 3 years 3 - 4 years(3 4 - 5 years Over 5 years (4)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.Treasury,
government
agencies, state Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
and political
subdivisions $6,496 6.06% $5,186 5.79% $2,522 5.77% $1,550 6.31% $1,252 6.03% $1,448 5.62%
Other $ - - $ 65 6.00% $ - - $ - - $ - - $ 784 8.25%
------------------------------------------------------------------------------------------------------------
$6,496 6.06% $5,251 5.89% $2,522 5.77% $ 1,550 6.31% $1,252 6.03% $2,232 6.93%
</TABLE>
(1) Presented on an amortized cost basis
(2) Includes a $225,938 tax-exempt security with a yield of 4.30%
(3) Includes a $252,026 tax-exempt security with a yield of 4.50%
(4) Includes $537,040 in tax-exempt securities with a weighted average yield of
4.78%
DEPOSITS:
The Company's deposit base includes large denomination
certificates of deposit of $100,000 or more which represent approximately 14% of
total deposits at December 31, 1998. The Bank pays market rates for these funds.
Management of the Bank attempts to match large denomination certificates of
deposit with rate-sensitive assets. At December 31, 1998, available short-term
assets totaled $9.9 million.
Table 13: Remaining Maturities of Large Denomination Certificates of
December 31, 1998
(Dollars in thousands)
Three months or less Amount
--------------
Over three through six months $ 3,226
Over six through twelve months 4,002
Over twelve months 2,035
Total 1,143
---------
$ 10,406
---------
21
<PAGE>
NON-INTEREST INCOME:
A comparison of non-interest income may be found in Table 14.
Table 14: Non-interest Income
(Dollars in thousands)
For the years ended December 31,
1998 1997 1998 over
1997
---------------------------------------------------
Service charges $ 224,781 $195,865 $ 28,916
Other income 130,148 91,874 38,274
--------- -------- --------
$ 354,929 $287,739 $ 67,190
NONINTEREST EXPENSE:
A comparison of noninterest expense may be found in Table 15.
Table 15: Non-interest Expense
(Dollars in thousands)
For the years ended December 31,
1998 over
1998 1997 (under) 1997
-------------------------------------
Salaries and employee benefits $ 1,316 $ 1,169 $ 147
Other 48
318 270
Occupancy 20
185 165
Automated services 21
133 112
Furniture and equipment 35
130 95
Taxes & licenses (32)
44 76
Stationery and supplies 16
72 56
Director's fees 7
54 47
Accounting and audit
38 38 -
Marketing 4
----------- ------------- ----------------
32 28
-- --
$ 2,322 $ $ 266
---------- ------- -------------
2,056
INCOME TAXES:
For the year ended December 31, 1998, the Company recognized an expense
of $421 thousand. This represents a $19 thousand decrease from the $440 thousand
expense for 1997. See Note 11 of the Consolidated Financial Statements for
additional information with respect to income taxes.
RECENT ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1998. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
22
<PAGE>
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Management will assess the impact, if any
on the consolidated Company's financial statements.
The American Institute of Certified Public Accountants issued Statement
of Position (SOP) 98-1, Accounting for Costs of Computer Software Developed or
Obtained for Internal Use. This SOP is effective for financial statements for
fiscal years beginning after December 31, 1998. The SOP requires entities to
capitalize certain internal-use software costs once certain criteria are met.
Generally, internal costs with respect to software configuration and interface,
coding, installation to hardware, testing (including parallel processing), and
data conversion costs allowing access of old data by new systems should be
capitalized. All other data conversion costs, training, application maintenance,
and ongoing support activities should be expensed. The Company will adopt this
SOP in 1999 and does not expect it to have a material effect on the Company's
consolidated financial condition or consolidated results of operations.
The American Institute of Certified Public Accountants issued Statement
of Position (SOP) 98-5, Reporting on the Costs of Start-up Activities, in April
1998. The SOP requires such costs to be expensed as incurred instead of being
capitalized and amortized. It applies to start-up activities and costs of
organization of both development stage and established operating activities, and
it changes existing practice for some industries. The SOP broadly defines
start-up activities as those one-time activities that relate to the opening of a
new facility, introduction of a new product or service, doing business in a new
territory, initiating a new process in an existing facility, doing business with
a new class of customer or beneficiary, or commencing some new operation. The
SOP is effective for financial statements for fiscal years beginning after
December 15, 1998. Consistent with banking industry practice it is the
consolidated Company's policy to expenses such costs. Therefore, this SOP is not
expected to materially affect the consolidated Company's financial position or
results of operations.
YEAR 2000 PROJECT:
The Company continues to monitor and revise its Year 2000 project
plan to ensure there will be no material adverse effects on customers or
disruption of operations as a result of a failure of the Company or third
parties to properly process data, on or after January 1, 2000.
The Company's project team developed a plan that consists of five
phases: Awareness, Assessment, Renovation, Validation and Implementation. The
plan was patterned after the Federal Financial Institution Examination Council
interagency statement of May 5, 1997. The Awareness, Assessment and Renovation
phases are substantially complete; the Validation and Implementation phases are
currently in process and on schedule. The core application processing system
(demand and time deposit accounting, loan accounting, general ledger accounting
and the customer information processing systems) of the Company and the hardware
upon which it is processed were tested during the third quarter of 1998 and,
based upon the results, the Company believes these systems will function
properly on and after January 1, 2000.
The company has drafted a Year 2000 business recovery contingency and
testing plan in accordance with FFIEC directives. This plan defines the
infrastructure that will be put in place for managing a failure after January 1,
2000. At this time, the Company anticipates that even the worst case Year 2000
scenario (loss of support from the Company's service bureau) would not have a
long lasting, significant adverse effect on the Company's financial condition
and results of operations for the year ending December 31, 2000 and beyond.
23
<PAGE>
The company will concentrate its efforts on customer communications and
business resumption contingency plan testing during 1999. The Company expects
that expenditures related to Y2K compliance will not exceed $10 thousand. The
Federal Reserve Bank of Richmond reviewed the Company's compliance efforts
regarding Year 2000 issues in February of 1999.
Item 7: FINANCIAL STATEMENTS
The financial statements of the Company are included (with an index
listing of all such statements) in a separate financial section at the end of
this Annual Report on Form 10-KSB.
Item 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
24
<PAGE>
<TABLE>
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
On January 5, 1990, the Board of Directors voted to amend the by-laws
to increase the size of the Board of Directors from 12 to 14 members. As of
December 31, 1998, there were 10 directors.
The following schedule sets forth-certain information concerning the
directors and executive officers of the Company.
<CAPTION>
Term to Director
Director's Name Age Expire Principal Occupation Since
- --------------- --- ------ -------------------- -----
<S> <C> <C> <C> <C>
Lisa F. Chandler 44 2000 Executive Vice-President of Nancy Chandler Associates, 1998
Inc.
James A. Cummings 56 2001 Vice-President of Southern Atlantic Label Company, Inc. 1992
F. Dudley Fulton 50 1999 President and Chief Executive Officer of Henderson and 1991
Phillips, Inc.
Henry U. Harris, III 47 2000 President of Virginia Investment Counselors, Inc. 1992
Vice-Chairman of the Board since 1995.
Stephen A. Johnsen 53 2000 President of Flagship Group, LTD. Secretary of the 1988
Board since 1995.
Robert J. Keogh 50 2001 President and Chief Executive Officer of the Company 1988
since 1992; President and Chief Executive Officer of
Heritage Bank & Trust since 1988.
Peter M. Meredith, Jr. 47 2001 Chairman and Chief Executive Officer of Meredith 1992
Construction Company, Inc. Chairman of the Board
since 1995.
Gerald L. Parks 65 1999 Chairman of the Board of Capes Shipping Agencies, Inc. 1987
Ross C. Reeves 50 1999 Member of the law firm of Willcox & Savage, P.C. 1994
Harvey W. Roberts, III 54 2001 Partner in the accounting firm of McPhillips, Roberts 1993
and Deans.
</TABLE>
25
<PAGE>
<TABLE>
Item 10. EXECUTIVE COMPENSATION
1. CASH COMPENSATION:
Set forth below is information concerning the compensation paid to the
Company's executive officer.
Summary Compensation Table
Annual Compensation (1)
<CAPTION>
Director's
Name and Principal Position Year Salary Bonus Fees
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert J. Keogh
President & Chief Executive Officer 1998 $ 97,190 $ 29,800 $ 4,800
1997 $ 94,725 $ 34,800 $ 4,800
1996 $ 93,450 $ 23,700 $ 4,800
</TABLE>
(1) No compensation earned in either year was deferred.
2. COMPENSATION PURSUANT TO PLANS:
EMPLOYEE STOCK OPTION PLAN
As of December 31, 1998, stock options for 96,650 shares are
outstanding and, of these shares, 78,575 are exercisable. Options are granted
and are exercisable at option prices ranging from $4.60 to $9.50 per share. See
disclosures regarding stock option plans in Note 10 to the Consolidated
Financial Statements.
DEFERRED COMPENSATION AND RETIREMENT ARRANGEMENTS
In 1985, Heritage Bank & Trust entered into deferred compensation and
retirement arrangements with seven directors and one officer. Each participant
is fully vested. The Company's policy is to accrue the estimated amounts to be
paid under the contracts over the expected period of active service or
employment.
Upon reaching age 70, each participant will receive a retirement
benefit ranging from $391 to $3,355 per month for each of the next 120 months.
If the participant dies prior to reaching age 70, his beneficiary will begin
receiving the monthly retirement benefits. The bank has purchased life insurance
contracts in order to fund the expected liabilities under the deferred
compensation arrangements. As of December 31, 1998, Heritage Bank & Trust had
accrued $190,489 to reflect the anticipated liability.
In 1990, Robert J. Keogh, President of Heritage Bank & Trust, became a
participant in the Heritage Bank & Trust Executive Security Plan. In the event
Mr. Keogh dies prior to age 65, his beneficiary will receive monthly payments of
$4,167 for each of the next 180 months. Upon his retirement at age 65, Mr. Keogh
will receive $4,167 per month for each of the next 180 months or until his
death, and thereafter other beneficiaries will receive such retirement benefits.
Heritage Bank & Trust funds this obligation through a life insurance contract.
Heritage Bank & Trust had accrued $72,811 as of December 31, 1998 to reflect the
anticipated liability.
Effective January 1, 1984, the Board of Directors adopted an Employee's
Stock Bonus Plan and Trust (the "ESOP"). The ESOP covered substantially all
employees, whereby funds contributed were used to purchase outstanding common
stock of the Company. Contributions were allocated to the participants based on
the employee/participant's annual compensation. The Company made no contribution
to the plan for years ending December 31, 1998 and 1997. In October of 1995, the
trustees of the ESOP voted to terminate the plan and the participants in the
plan were notified of their options concerning distribution of their shares in
the plan in accordance with the terms of the ESOP and applicable law.
At December 31, 1998, all shares in the plan had been distributed.
26
<PAGE>
Effective January 1, 1993, the Board of Directors adopted a Retirement
Program (the "401K"). The Company may contribute cash to the 401K annually, as
determined each year by the Board of Directors. Contributions to the 401K are
allocated to its participants based on the employee/participant's contributions
to the plan. Eligible participants in the 401K include all employees who have
completed six months of service (500 hours) beginning with the effective date of
the 401K. Benefits will be payable upon separation from service or upon
retirement, disability or death. Employees are 20% vested with respect to the
benefits under the 401K in two years and the vested percentage is increased
annually, reaching 100% after six years. Participants are automatically 100%
vested in the 401K upon reaching age 65, death or disability. The Company has
the right to amend or terminate the 401K. The Company expensed $55,000 and
$36,000 for plan contributions for the years ended December 31, 1998 and 1997,
respectively.
Effective January 1, 1998, the Board of Directors adopted an Employee's
Stock Ownership Plan (the "ESOP"). The ESOP covers substantially all employees,
whereby funds contributed are used to purchase outstanding common stock of the
Company. Contributions are allocated to the participants based on the
employee/participant's annual compensation. Employee participants in the ESOP
includes all employees who have completed six months of service beginning with
the effective date of the ESOP. Benefits are payable upon separation from
service or upon retirement, disability or death. Employees are 20% vested with
respect to the benefits under the ESOP in three years and the vested percentage
increases annually, reaching 100% after seven years. Participants are
automatically 100% vested in the ESOP upon reaching age 65, death or disability.
Participants vote all shares allocated to their respective accounts and the
trustees of the ESOP vote any unallocated shares. The Board of Directors of the
Company has the right to amend or terminate the ESOP at any time. The Company
expensed $18,000 and $12,000 for plan contributions for the years ended December
31, 1998 and 1997, respectively.
COMPENSATION OF DIRECTORS:
Directors of the Company and Directors of Heritage Bank & Trust receive
$400 for each Board of Directors' meeting attended and $100 for each committee
meeting attended.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following schedule sets forth information regarding the beneficial
ownership of the Company's common stock as of March 10, 1999, of (i) each of the
Company's directors; (ii) each person known by the Company to be the holder of
5% or more of the Company's outstanding common stock; and (iii) all of the
Company's directors and executive officers as a group.
27
<PAGE>
OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS
NAME OF INDIVIDUAL PERCENT OF
SHARES CLASS
James A.Cummings 5,128 (1) 0.64%
2073 Thomas Bishop Lane
Virginia Beach, VA 23454 USA
Lisa F. Chandler 642 0.08%
6127 Studeley Avenue
Norfolk, VA USA 23508
F. Dudley Fulton 2,700 0.37%
5306 Lakeside Avenue
Virginia Beach, VA 23451 USA
Henry U. Harris, III 28,205 (2) 3.51%
1503 North Shore Road
Norfolk, VA 23505 USA
Stephen A. Johnsen 3,618 (3) 0.45%
401 College Place
Norfolk, VA 23510 USA
Robert J. Keogh 8,695 (4) 1.08%
6146 Sylvan Street
Norfolk, VA 23508 USA
Peter M. Meredith, Jr. 42,703 (5) 5.32%
5320 Edgewater Drive
Norfolk, VA 23508 USA
Gerald L. Parks 5,195 (6) 0.65%
27307 Evergreen Lane
Harborton, VA 23389 USA
Ross C. Reeves 4,142 (7) 0.52%
1068 Algonquin Road
Norfolk, VA 23505 USA
Harvey W. Roberts, III 29,079 (8) 3.62%
7612 North Shore Road
Norfolk, VA 23505 USA
Directors and Executive Officers as a
group (10 persons) 130,407 16.24%
(1) Includes 1,500 shares owned jointly with his wife. Also includes 3,628
shares held in an investment account for Mr. Cummings
(2) Includes 3,555 shares owned by his wife. Also includes 4,249 shares held as
custodian for others and 4,500 shares held in trust.
(3) Includes 1,650 shares owned jointly with his wife.
(4) Includes 1,335 shares owned jointly with his wife. Also includes 1,998
shares owned by Scott & Stringfellow as an IRA for Mr. Keogh. Does not
include 34,400 shares that may be acquired by Mr. Keogh pursuant to the
Stock Option Plan for key employees of the Company. See "Compensation
Pursuant to Plans." If such shares were included, Mr. Keogh would own 5.37%
of the outstanding shares.
(5) Includes 10,960 shares held as Meredith Realty Company, L.L.C., 13,208
shares held as Pomar Holding, L.L.C. and 3,000 shares held as Meredith
Realty Associates. Also includes 8,203 shares owned by Davenport & Company
for Mr. Meredith.
(6) Includes 4,614 shares owned jointly with his wife.
(7) Includes 3,142 shares held as custodian for others.
(8) Includes 17,280 shares owned by his wife and 3,000 shares owned jointly
with his wife. Also includes 2,112 shares owned by Scott & Stringfellow
consisting of 257 shares as an IRA for Roberts & Speece, CPA, P.L.C. and
1,825 owned for Mr. Roberts.
28
<PAGE>
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Many directors of the Company and Heritage Bank & Trust and their
associates, including firms and corporations of which they are officers or
directors; or in which they and their immediate families have a substantial
interest, are customers of Heritage Bank & Trust. As such, they have had
transactions with the bank, including loans made in the ordinary course of
business on substantially the same terms, including interest rates, collateral
and repayment terms, as those prevailing at the time for comparable loans to
other parties. Such loans have not involved more than the normal risk of
collectibility or other unfavorable features. See related party loan and deposit
disclosures in Note 13 of the Consolidated Financial Statements.
Heritage Bank & Trust occupies 7,581 square feet of space in a building
located at 1450 South Military Highway in Chesapeake, Virginia. The building is
owned by IBV Partners, L.P., a Virginia limited partnership, which has as its
sole general partner IBV Real Estate Holdings, Inc., a wholly-owned subsidiary
of the Company. Former and current directors of Heritage Bank & Trust own an
aggregate of approximately 34% of the partnership interests. IBV Partners, L.P.
and Heritage Bank & Trust entered into a lease in December 1986 which was
modified in December 1997. See disclosures regarding the lease commitment in
Note 12 of the Consolidated Financial Statements.
The Company and Heritage Bank & Trust purchase various types of
business insurance through the Flagship Group LTD, of which Stephen A. Johnsen
is President. Mr. Johnsen is a director and Secretary of the Company. Insurance
premiums paid to the Flagship Group LTD as agent for commercial insurance
providers was $27,393 during 1998. The Bank has also sold securities to the
Flagship Group LTD under agreements to repurchase, which constitute
approximately 43% of the securities sold under agreements to repurchase at
December 31, 1998. See Note 9 of the Consolidated Financial Statements for
additional information.
Heritage Bank & Trust has retained the law firm of Willcox & Savage,
P.C. in connection with certain legal representations and expects to continue to
do so in the future. Ross C. Reeves, a director of the Company is an attorney in
the law firm. Fees paid to Willcox & Savage, P.C. by Heritage Bank & Trust was
$12,917 in 1998.
29
<PAGE>
PART IV
Item 13: EXHIBITS AND REPORTS ON FORM 8-K
(A) (3) Exhibits:
3.1 Articles of Incorporation. (Incorporated herein by reference
to Corporation's Form 10-K for 1983 filed March 29, 1984.)
3.2 Bylaws, as amended.
10.1 Stock Option Plan for Employees. (Incorporated herein by
reference to the Corporation's Form 10-K for 1987 filed
March 25, 1988.)
10.2 Employee's Stock Option Plan. (Incorporated herein by
reference to the Corporation's Form 10-K for 1987 filed
march 25, 1988.)
10.3 Employee Stock Ownership Plan. (Incorporated herein by
reference to the Corporation's Form 10-K for 1984 filed
April 12, 1985.)
10.4 Lease dated December 29, 1996, between IBV Partners, L.P. as
landlord, and Heritage Bank & Trust, as Tenant, for the
lease of 7,581 square feet of space in a building located at
1450 South Military Highway, Chesapeake, Virginia.
(Incorporated herein by reference to the Corporation's Form
10-K for 1986 filed March 1987.
10.5 Amended and restated January 1, 1989, Stock Ownership Plan,
which provided for certain changes required by IRS
regulations including changes in participant vesting
schedules. (Incorporated herein by reference to the
Corporation's Form 10-K for 1990 filed March 30, 1991.)
10.6 Employee's Stock Ownership Plan. (Incorporated herein by
reference to the Corporation's Form 10-KSB for 1997 filed
March 30, 1998.)
(B) Reports on Form 8-K
No reports were filed on Form 8-K during the year ended December 31, 1998.
30
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below under "SIGNATURES" hereby
authorizes Robert J. Keogh and Peter M. Meredith, Jr. or either of them, to
execute in the name of each such person, and to file any amendment to this
report, and hereby appoints Robert J. Keogh and Peter M. Meredith, Jr. or either
of them, as attorneys-in-fact to sign on his behalf, individually and in each
capacity stated below, and to file any and all amendments to this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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: March 24,1999 by /s/ Robert J. Keogh
-----------------------------------------
Robert J. Keogh, President and Chief
Executive Officer
by /s/ Peter M. Meredith, Jr.
-----------------------------------------
Peter M. Meredith, Jr., Chairman of the
Board of Directors
31
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 24, 1999.
SIGNATURES
/s/ Peter M. Meredith, Jr.
- -------------------------------------
Peter M. Meredith, Jr.
Chairman of the Board of Directors
/s/ Robert J. Keogh
- -------------------------------------
Robert J. Keogh
President and Chief Executive Officer & Director
/s/ Henry U. Harris, III
- -------------------------------------
Henry U. Harris, III
Vice-Chairman of the Board of Directors
/s/ Stephen A. Johnsen
- -------------------------------------
Stephen A. Johnsen
Secretary of the Board of Directors
/s/ Lisa F. Chandler
- --------------------------------------
Lisa F. Chandler
Director
/s/ James A. Cummings
- -------------------------------------
James A. Cummings
Director
/s/ F. Dudley Fulton
- -------------------------------------
F. Dudley Fulton
Director
/s/ Gerald L. Parks
- -------------------------------------
Gerald L. Parks
Director
/s/ Ross C. Reeves
- -------------------------------------
Ross C. Reeves
Director
/s/ Harvey W. Roberts, III
- -------------------------------------
Harvey W. Roberts, III
Director
32
<PAGE>
HERITAGE BANKSHARES, INC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM PAGE
Report of Independent Accountants....................................... F-1
FINANCIAL STATEMENTS:
Consolidated Balance Sheets.................................... F-2
Consolidated Statements of Income.............................. F-3
Consolidated Statements of Stockholders' Equity ............... F-4
Consolidated Statements of Cash Flows ......................... F-5
Notes to Consolidated Financial Statements .................... F-6
<PAGE>
Consolidated
Financial Statements
Years Ended December 31,
1998 and 1997
HERITAGE BANKSHARES, INC.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors
Heritage Bankshares, Inc.
Norfolk, Virginia
We have audited the accompanying consolidated balance sheets of
Heritage Bankshares, Inc. and its subsidiaries at December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Heritage Bankshares, Inc. and its subsidiaries as of December 31,
1998 and 1997, and the consolidated results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Goodman & Company, L.L.P.
One Commercial Place
Norfolk, Virginia
January 28, 1999
F-1
<PAGE>
<TABLE>
HERITAGE BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 3,603,916 $ 4,019,169
Federal funds sold 3,457,492 1,697,207
Securities available for sale 14,318,091 15,729,585
Securities held to maturity 5,118,715 6,865,595
Loans, net 55,670,814 51,131,833
Loans held for sale 938,456 110,000
Accrued interest receivable 578,616 692,488
Other real estate owned 428,500 428,500
Premises and equipment, net 2,010,228 1,328,297
Other assets 1,166,670 998,846
--------------------------------------------
$ 87,291,498 $ 83,001,520
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing deposits $ 14,521,488 $ 12,902,336
Interest-bearing deposits 62,761,449 59,894,701
--------------------------------------------
77,282,937 72,797,037
Securities sold under agreements to repurchase 981,271 1,945,212
Short-term borrowings 63,234 52,248
Accrued interest payable 317,995 342,306
Other liabilities 567,109 783,971
--------------------------------------------
79,212,546 75,920,774
--------------------------------------------
Stockholders' equity:
Common stock, $5 par value - authorized 3,000,000 shares; issued and
outstanding:
1998 - 801,250 shares; 1997 - 795,050 shares 4,006,250 3,975,250
Additional paid-in capital (351,757) (360,790)
Retained earnings 4,336,068 3,409,668
Accumulated other comprehensive income 88,391 56,618
--------------------------------------------
8,078,952 7,080,746
--------------------------------------------
$ 87,291,498 $ 83,001,520
============================================
The notes to consolidated financial statements
are an integral part of this statement.
F- 2
<PAGE>
HERITAGE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years Ended December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 4,976,458 $ 4,490,735
----------------------------------------
Interest on investment securities:
Available for sale 890,310 912,280
Held to maturity 367,637 448,749
----------------------------------------
1,257,947 1,361,029
----------------------------------------
Interest on federal funds sold 332,250 333,650
----------------------------------------
Total interest income 6,566,655 6,185,414
----------------------------------------
Interest expense:
Interest on deposits 2,964,137 2,832,417
Interest on short-term borrowings 86,770 76,247
----------------------------------------
Total interest expense 3,050,907 2,908,664
----------------------------------------
Net interest income 3,515,748 3,276,750
Provision for loan losses 65,500 88,333
----------------------------------------
Net interest income after provision for loan losses 3,450,248 3,188,417
----------------------------------------
Noninterest income:
Services charges 224,781 195,865
Other 130,148 91,874
----------------------------------------
354,929 287,739
----------------------------------------
Noninterest expense:
Salaries and employee benefits 1,315,750 1,169,148
Other 442,481 382,528
Occupancy expenses 185,443 164,786
Automated services 132,961 112,003
Furniture and equipment expense 130,121 94,746
Taxes & licenses 43,460 76,018
Stationery and supplies 71,813 57,211
----------------------------------------
2,322,029 2,056,440
----------------------------------------
Income before income taxes 1,483,148 1,419,716
Income tax expense 420,637 439,746
----------------------------------------
Net income $ 1,062,511 $ 979,970
========================================
Earnings per common share - basic $ 1.33 $ 1.24
========================================
Earnings per common share - assuming dilution $ 1.25 $ 1.17
========================================
The notes to consolidated financial statements
are an integral part of this statement.
F- 3
<PAGE>
HERITAGE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Additional
Common Stock Paid-in Retained
--------------------------------------
Shares Amount Capital Earnings
----------------- ------------------- ------------------- -------------------
Balance, December 31, 1996 784,150 $ 3,920,750 $ (380,330) $ 2,539,941
Net income for 1997 - - - 979,970
Net changes in unrealized appreciation
on securities available-for-sale,
net of applicable income taxes
of $14,384
Total comprehensive income
Stock options exercised in 1997 10,900 54,500 19,540 -
Less: Dividends paid in 1997 - - - (110,243)
--------------------------------------------------------------------------------
Balance, December 31, 1997 795,050 3,975,250 (360,790) 3,409,668
Net income for 1998 - - - 1,062,511
Net changes in unrealized appreciation
on securities available-for-sale,
net of applicable income taxes
of $16,368 - - - -
Total comprehensive income
Stock options exercised in 1998 6,200 31,000 9,033 -
Less: Dividends paid in 1998 - - - (136,111)
--------------------------------------------------------------------------------
Balance, December 31, 1998 801,250 $ 4,006,250 $ (351,757) $ 4,336,068
================================================================================
<CAPTION>
Accumulated
Other
Comprehensive
Income Total
------------------- -------------------
Balance, December 31, 1996 31,414 $ 6,313,761
-------------------
Net income for 1997 7,262,317
Net changes in unrealized appreciation
on securities available-for-sale,
net of applicable income taxes
of $14,384 25,204 7,262,317
-------------------
Total comprehensive income 14,524,634
-------------------
Stock options exercised in 1997 - 7,311,153
Less: Dividends paid in 1997 - 7,200,910
-------------------------------------
Balance, December 31, 1997 56,618 35,350,458
-------------------
Net income for 1998 - 15,230,931
Net changes in unrealized appreciation
on securities available-for-sale,
net of applicable income taxes
of $16,368 31,773 15,230,931
-------------------
Total comprehensive income 30,461,862
-------------------
Stock options exercised in 1998 - 40,033
Less: Dividends paid in 1998 - 15,103,080
-------------------------------------
Balance, December 31, 1998 88,391 $ 80,955,433
=====================================
The notes to consolidated financial statements
are an integral part of this statement.
F- 4
<PAGE>
HERITAGE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 1,062,511 $ 979,970
Adjustments to reconcile to net cash
provided by operating activities:
Provision for loan losses 65,500 88,333
Provision for losses on real estate owned - 15,231
Provision for depreciation and amortization 116,307 71,226
Amortization of investment security premiums,
net of discounts 15,105 8,065
Deferred loan origination fees, net of costs (7,538) (15,604)
Changes in:
Interest receivable 113,872 (157,316)
Interest payable (24,311) 51,723
Loans held for sale (828,456) (110,000)
Other assets (123,884) (178,898)
Other liabilities (216,862) 246,757
-----------------------------------------
Net cash provided by operating activities 172,244 999,487
-----------------------------------------
Investing activities:
Proceeds from maturities of available-for-sale securities 6,154,865 2,669,820
Proceeds from maturities, prepayments and calls of
held- to-maturity securities 2,454,675 2,625,314
Purchases of available-for-sale securities (4,758,877) (3,993,939)
Purchases of held-to-maturity securities (707,394) (3,668,293)
Loan originations, net of principal repayments (4,596,943) (5,945,172)
Proceeds from condemnation of land - 9,503
Purchases of land, premises and equipment (810,405) (826,055)
-----------------------------------------
Net cash used by investing activities (2,264,079) (9,128,822)
-----------------------------------------
Financing activities:
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 5,131,125 (92,597)
Net increase (decrease) in certificates of deposit (645,225) 4,463,043
Net increase (decrease) in securities sold under
agreements to repurchase (963,941) 596,121
Net increase (decrease) in short-term borrowings 10,986 (78,304)
Net proceeds from exercise of stock options 40,033 74,040
Cash dividends paid (136,111) (110,243)
-----------------------------------------
Net cash provided by financing activities 3,436,867 4,852,060
-----------------------------------------
Increase (decrease) in cash and cash equivalents 1,345,032 (3,277,275)
Cash and cash equivalents at beginning of year 5,716,376 8,993,651
-----------------------------------------
Cash and cash equivalents at end of year $ 7,061,408 $ 5,716,376
=========================================
Supplemental schedules and cash flow information:
Cash paid for:
Interest on deposits and other borrowings $ 3,075,544 $ 2,856,941
=========================================
Income taxes $ 775,579 $ 279,922
=========================================
The notes to consolidated financial statements
are an integral part of this statement.
F- 5
</TABLE>
<PAGE>
HERITAGE BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND BUSINESS
Heritage Bankshares, Inc. (the "Company") was organized under the
laws of the Commonwealth of Virginia in 1983. The Company has four wholly-owned
subsidiaries, including one bank: Heritage Bank & Trust (the "Bank") with four
full service branches in Norfolk and Chesapeake, Virginia. The Company's other
subsidiaries are IBV Real Estate Holdings, Inc., a Virginia corporation,
Sentinel Title Services, Inc., a Virginia corporation, and Sentinel Trust
Services, L.L.C., a Virginia limited liability company. The Bank is a
state-chartered bank and a member of the Federal Reserve System. The deposits of
the Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC")
to the extent and subject to the limitations set forth in the Federal Deposit
Insurance Act, as amended.
The Bank is a full-service bank conducting a general commercial and
consumer banking business with its customers located throughout the Hampton
Roads area of Virginia. Its principal banking activities include receiving
demand, savings and time deposits for personal and commercial accounts; making
commercial, real estate and consumer loans; acting as a United States tax
depository facility; providing money transfer and cash management services;
selling traveler's checks, bank money orders; issuing letters of credit; and
investing in U.S. Treasury securities and securities of other U.S. government
agencies and corporations, and mortgage-backed and state and municipal
securities.
IBV Real Estate Holdings, Inc. was formed in December, 1986.
Presently, its only business is owning a 1% general partnership interest in IBV
Partners, L.P., the lessor of office space to Heritage Bank and Trust in
Chesapeake, Virginia.
Sentinel Title Services, Inc. and Sentinel Trust Services, L.L.C. are
wholly-owned subsidiaries, which own an interest in providers of title and trust
services. As these subsidiaries own a less than ten percent (10%) interest in
other companies, the financial activities pertaining to these interests are
recorded on the cost method of accounting for investments. The Company's
strategic relationship with these entities provides the Bank with the ability to
provide title and trust services to its customers.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Statement Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Heritage Bankshares, Inc. and its wholly-owned subsidiaries, Heritage Bank
and Trust and IBV Real Estate Holdings, Inc., Sentinel Title Services, Inc. and
Sentinel Trust Services, L.L.C. All significant intercompany balances and
transactions have been eliminated in consolidation.
(Notes continued on next page)
F- 6
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, interest bearing deposits with banks and
federal funds sold. Generally, federal funds are sold for one-day periods.
Securities
Investments in debt securities that management has the positive intent
and ability to hold to maturity are classified as "held to maturity" and
reflected at amortized cost. Investments that are purchased and held principally
for the purpose of selling them in the near term, if any, are classified as
"trading securities" and reflected at fair value, with unrealized gains and
losses included in earnings. Investments not classified as either of the above
are classified as "available for sale" and recorded at fair value, with
unrealized gains and losses excluded from earnings and reported in other
comprehensive income.
Purchase premiums and discounts are recognized in interest income using
the interest method over the period to maturity on held-to-maturity and
available-for-sale securities. Other-than- temporary declines in the fair value
of individual held-to-maturity and available-for-sale securities, if any, result
in write-downs of the individual securities to fair value. Gains and losses are
determined using the specific-identification method.
Loans
Loans are reported at their principal outstanding balance net of
charge-offs, deferred loan fees and costs on originated loans, unearned income,
and unamortized premiums or discounts, if any, on purchased loans. Interest
income is generally recognized when income is earned using the interest method.
Loan origination fees and certain direct loan origination costs are deferred and
the net amounts are amortized as an adjustment to yield on the respective loans.
Loans Held For Sale
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation allowance by
charges to income.
Allowance for Loan Losses
The Bank accounts for loan losses in accordance with FASB Statement No.
114, Accounting by Creditors for Impairment of a Loan. Under the standard, a
loan is considered impaired, based on current information and events, if it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the present
value of expected future cash flows discounted at the historical effective
interest rate, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately identify
individual consumer and residential loans for impairment disclosures.
(Notes continued on next page)
F- 7
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (continued)
The adequacy of the allowance for loan losses is periodically evaluated
by the Bank, in order to maintain the allowance at a level that is sufficient to
absorb probable credit losses. Management's evaluation of the adequacy of the
allowance is based on a review of the Bank's historical loss experience, known
and inherent risks in the loan portfolio, including adverse circumstances that
may affect the ability of the borrower to repay interest and/or principal, the
estimated value of collateral, and an analysis of the levels and trends of
delinquencies, charge-offs, and the risk ratings of the various loan categories.
Such factors as the level and trend of interest rates and the condition of the
national and local economies are also considered. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for losses on loans. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgements of information available to them at the time of their examination.
The allowance for loan losses is established through charges to earnings
in the form of a provision for loan losses. Increases and decreases in the
allowance due to changes in the measurement of impaired loans, if applicable,
are included in the provision for loan losses. Loans continue to be classified
as impaired unless they are brought fully current and the collection of
scheduled interest and principal is considered probable.
When a loan or portion of a loan is determined to be uncollectible, the
portion deemed uncollectible is charged against the allowance and subsequent
recoveries, if any, are credited to the allowance.
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual
if they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. If a loan or a portion of a loan is classified as
doubtful, or is partially charged off, the loan is generally classified as
nonaccrual. Loans that are on a current payment status or past due less than 90
days may also be classified as nonaccrual, if repayment in full of principal
and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained period
of repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectibility
of the recorded loan balance is doubtful, collections of interest and principal
are generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis. In the case where a nonaccrual loan had been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance at the
contractual interest rate. Cash interest receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior charge-offs
have been fully recovered.
(Notes continued on next page)
F- 8
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Real Estate Owned
Other real estate owned is comprised of real estate acquired through
foreclosure, acceptance of a deed in lieu of foreclosure, or loans in which the
Bank receives physical possession of the debtor's real estate. Other real estate
owned is carried at the lower of the recorded investment in the loan or the fair
value less estimated costs to sell.
Restructured Loans
Loans are considered troubled debt restructurings under FASB Statement
No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, if
for economic or legal reasons, a concession has been granted to the borrower
related to the borrower's financial difficulties that the Bank would not have
otherwise considered. The Bank has restructured certain loans in instances where
a determination was made that greater economic value will be realized under new
terms than through foreclosure, liquidation, or other disposition. The terms of
the renegotiation generally involve some or all of the following
characteristics: a reduction in the interest pay rate to reflect actual
operating income, an extension of the loan maturity date to allow time for
stabilization of operating income, and partial forgiveness of principal and
interest.
The carrying value of a restructured loan is reduced by the fair value
of any assets or equity interest received, if any. Prior to demonstrating
performance, the Bank generally classifies impaired restructured loans, if any,
as nonaccrual. The accrual of interest resumes when such loans can demonstrate
performance, generally evidenced by six months of pre- or post-restructuring
payment performance in accordance with the restructured terms, or by the
presence of other significant factors. In addition, at the time of
restructuring, loans are generally classified as impaired. A restructured loan
that is not impaired, based on the restructured terms and that has a stated
interest rate greater than or equal to a market interest rate at the date of the
restructuring, is reclassified as unimpaired in the year immediately following
the year it was disclosed as restructured.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
For financial reporting purposes, assets are depreciated over their estimated
useful lives using the straight-line method. For income tax purposes, the
accelerated cost recovery system and the modified accelerated cost recovery
system are used.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control
over the assets has been surrendered. Control over transferred assets is deemed
to be surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.
(Notes continued on next page)
F- 9
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company files a consolidated tax return. Provisions for income taxes
reflect tax expense incurred as a consolidated group. Tax expense is allocated
among the members of the consolidated group in accordance with an intercompany
agreement for tax expense. Income taxes are provided for the tax effects of the
transactions reported in the financial statements and consist of taxes currently
due plus deferred taxes related primarily to differences between the basis of
investment securities, deferred loan fees, allowance for loan losses, allowance
for losses on foreclosed real estate, accumulated depreciation and deferred
compensation for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled.
Deferred Compensation Plans
The Bank maintains deferred compensation and retirement arrangements
with certain directors and officers. The Company's policy is to accrue the
present value of estimated amounts to be paid under the contracts over the
expected period of active employment. The Bank purchased life insurance
contracts to fund the expected liabilities under the contracts.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of
credit, standby letters of credit and financial guarantees written. Such
financial instruments are recorded in the financial statements when they become
payable.
Use of Estimates
The preparation of financial statements requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. While management uses available information to recognize
losses on loans and foreclosed real estate, future additions to the allowances
may be necessary based on changes in local economic conditions and other
factors.
(Notes continued on next page)
F-10
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings per Share
The Company adopted FASB Statement No. 128, Earnings Per Share, on
December 31, 1997. This Statement establishes standards for computing and
presenting earnings per share (EPS). This Statement supersedes standards
previously set in APB Opinion No. 15, Earnings Per Share. FASB 128 requires dual
presentation of basic and diluted EPS on the face of the income statement, and
requires a reconciliation of the numerator and denominator of the basic EPS
computation with the numerator and denominator of the diluted EPS computation.
This Statement is effective for financial statements issued for periods ending
after December 15, 1997. In accordance with the requirements of this Statement,
all prior period EPS data have been restated to reflect the change in reporting
requirements.
Basic EPS excludes dilution and is computed by dividing income available
to common shareholders by the weighted-average number of shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised, converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
Comprehensive Income
The Company adopted newly-issued FASB Statement No. 130, Reporting
Comprehensive Income, as of January 1, 1998. Accounting principles generally
require that recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as unrealized
gains and losses on available-for-sale securities, are reported as a separate
component of the equity section of the balance sheet, such items, along with net
income, are components of comprehensive income. The adoption of FASB Statement
No. 130 had no effect on the Corporation's net income or shareholders' equity.
The components of other comprehensive income and related tax effects are
as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Unrealized holding gains on available-for-sale securities $ 50,346 $ 41,947
Reclassification adjustment for gains realized in income (2,205) (2,359)
-----------------------------------
Net unrealized gains 48,141 39,588
Tax effect (16,368) (14,384)
-----------------------------------
Net-of-tax amount $ 31,773 $ 25,204
===================================
</TABLE>
Reclassifications
Certain reclassifications have been made to prior year financial
statements to conform them to the current year's presentation.
(Notes continued on next page)
F-11
<PAGE>
<TABLE>
NOTE 3 - CONDENSED FINANCIAL INFORMATION OF HERITAGE BANKSHARES, INC.
(PARENT COMPANY ONLY)
The financial position, results of operations and cash flows of Heritage
Bankshares, Inc. are presented below on a parent company only basis for the
years indicated.
<CAPTION>
December 31,
-----------------------------------
Condensed Balance Sheets
Assets 1998 1997
-----------------------------------
<S> <C> <C>
Cash on deposit with Heritage Bank and Trust $ 257,382 $ 39,920
Investment in Heritage Bank and Trust 7,675,357 6,720,165
Investment in non-bank subsidiaries 217,549 217,549
Premises and equipment 3,559 11,755
Other assets 79,783 509,497
-----------------------------------
Total assets $ 8,233,630 $ 7,498,886
====================================
Liabilities and Stockholders' Equity
Other liabilities $ 154,678 $ 418,140
Common stock 4,006,250 3,975,250
Additional paid-in capital (351,757) (360,790)
Retained earnings 4,336,068 3,409,668
Accumulated other comprehensive income 88,391 56,618
-----------------------------------
Total liabilities and stockholders' equity $ 8,233,630 $ 7,498,886
====================================
Years Ended December 31,
Condensed Statements of Income 1998 1997
-----------------------------------
Income:
Dividends from subsidiary bank $ 136,111 $ 195,243
Other 12,000 12,759
-----------------------------------
148,111 208,002
Expenses:
Other 30,082 27,443
-----------------------------------
Income before income taxes and equity in undistributed net
income of subsidiaries 118,029 180,559
Applicable income tax benefit 21,063 22,693
-----------------------------------
Income before equity in undistributed net income of subsidiaries 139,092 203,252
Equity in undistributed net income of subsidiaries 923,419 776,718
-----------------------------------
Net income $ 1,062,511 $ 979,970
====================================
</TABLE>
(Notes continued on next page)
F-12
<PAGE>
<TABLE>
NOTE 3 - CONDENSED FINANCIAL INFORMATION OF HERITAGE BANKSHARES, INC.
(PARENT COMPANY ONLY) (Continued)
<CAPTION>
Years Ended December 31,
Condensed Statements of Cash Flows 1998 1997
-----------------------------------
Operating activities:
<S> <C> <C>
Net income $ 1,062,511 $ 979,970
Adjustments to reconcile to net cash provided by operating activities:
Depreciation 8,196 8,196
Undistributed net income of subsidiaries (923,419) (776,718)
Changes in:
Other assets 429,714 (264,464)
Other liabilities (263,462) (205,524)
-----------------------------------
Net cash provided by operating activities 313,540 152,508
-----------------------------------
Investing activities:
Investment in Sentinel Trust Services, L.L.C -- (85,000)
-----------------------------------
Financing activities:
Net proceeds from exercise of stock options 40,033 74,040
Cash dividends paid (136,111) (110,243)
-----------------------------------
Net cash used by financing activities (96,078) (36,203)
-----------------------------------
Net increase (decrease) in cash and cash equivalents 217,462 31,305
Cash and cash equivalents at beginning of year 39,920 8,615
-----------------------------------
Cash and cash equivalents at end of year $ 257,382 $ 39,920
-----------------------------------
</TABLE>
Certain restrictions exist regarding the ability of Heritage Bank and
Trust to transfer funds to Heritage Bankshares, Inc. in the form of cash
dividends, loans or advances. Pursuant to Federal Regulations, dividends are
generally restricted to net profits, as defined, for the current year, plus
retained net profits for the previous two years. At December 31, 1998, dividends
from the Bank to the Company are limited to approximately $2,130,000 under these
regulations. The maximum amount available for transfer from Heritage Bank and
Trust to the Company in the form of loans and advances is 10% of Heritage Bank
and Trust's stockholder's equity. At December 31, 1998, such maximum amount
available is approximately $768,000.
NOTE 4 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Bank is required by the Federal Reserve Bank to maintain average
reserve balances. The average amount of maintained reserve balances was
approximately $746,000 for the year ended December 31, 1998, with the average
reserve requirement for the same period being approximately $726,000. On
December 31, 1998, the reserve balance was approximately $753,000.
(Notes continued on next page)
F-13
<PAGE>
<TABLE>
NOTE 5 - SECURITIES
Securities at December 31, 1998 and 1997 are as follows:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1998:
Securities available for sale
U.S. Treasury $ 5,999,454 $ 83,666 $ - $ 6,083,120
U.S. government agencies 7,038,469 51,222 7,083,240 6,451
Mortgage-backed securities 1,180,599 8,528 959,947
States and political
subdivisions 193,643 191,784 - 1,859
----------- ----------- ----------- -----------
$14,184,165 $14,318,091 $ 143,416 $ 9,490
=========== =========== =========== ===========
Securities held to maturity:
U.S. Treasury $ 1,742,557 $ 28,856 $ - $ 1,771,413
U.S. government agencies 1,706,042 18,671 - 1,724,713
States and political
subdivisions 821,361 27,118 - 848,479
Other 848,755 - - 848,755
----------- ----------- ----------- -----------
$ 5,118,715 $ 74,645 $ - $ 5,193,360
=========== =========== =========== ===========
December 31, 1997:
Securities available for sale
U.S. Treasury $ 9,997,043 $ 50,198 $ 121 $10,047,120
U.S. government agencies 4,817,324 25,776 2,359 4,840,741
Mortgage-backed securities 829,433 841,724 13,082 791
----------- ----------- ----------- -----------
$15,643,800 $ 89,056 $15,729,585 $ 3,271
=========== =========== =========== ===========
Securities held to maturity:
U.S. Treasury $ 2,233,944 $ 17,934 $ - $ 2,251,878
U.S. government agencies 2,702,120 14,178 554 2,715,744
Mortgage-backed securities 455,649 - 1,327 454,322
===========
States and political
subdivisions 827,582 15,457 - 843,039
Other 646,300 - - 646,300
----------- ----------- ----------- -----------
$ 6,865,595 $ 47,569 $ 1,881 $ 6,911,283
=========== =========== =========== ===========
</TABLE>
Other securities include restricted investments of $846,300 and
$646,300 at December 31, 1998 and 1997, respectively. These securities do not
have a readily determinable fair value and lack a market. Therefore, they are
carried at cost and periodically evaluated for impairment.
(Notes continued on next page)
F-14
<PAGE>
NOTE 5 - SECURITIES (Continued)
Investment securities having carrying values of $3,910,064 and
$4,363,566 at December 31, 1998 and 1997, respectively, are pledged to secure
deposits of the U.S. Government and the Commonwealth of Virginia. The estimated
fair values of these securities were $3,969,068 and $4,395,129 at December 31,
1998 and 1997, respectively.
The amortized cost and fair value of securities by maturity date,
including the contractual maturities of mortgage-backed securities, at December
31, 1998 are as follows:
<TABLE>
<CAPTION>
Securities Held to Maturity Securities Available for Sale
--------------------------- -----------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 749,669 $ 754,223 $ 5,746,761 $ 5,782,573
Due from one year to five years 3,241,794 3,295,629 7,333,183 7,428,860
Due from five years to ten years - - 324,910 330,073
Due after ten years 1,127,252 1,143,509 779,311 776,585
------------ ------------ ------------ ------------
$ 5,118,715 $ 5,193,360 $ 14,184,165 $ 14,318,091
============ ============ ============ ============
NOTE 6 - LOANS
Loans consist of the following:
<CAPTION>
December 31,
------------------------------------
1998 1997
----------- -----------
Gross loans:
Commercial $11,600,892 $ 9,359,223
Real estate - mortgage 39,055,029 37,317,500
Real estate - construction 1,421,877 1,626,634
Installment and consumer loans 4,487,861 3,717,860
----------- -----------
Total gross loans 56,565,659 52,021,217
Less - allowance for loan losses (894,845) (889,384)
----------- -----------
Loans, net $55,670,814 $51,131,833
=========== ===========
A summary of the activity in the allowance for loan losses account is as
follows:
<CAPTION>
Years Ended December 31,
------------------------------------
1998 1997
----------- -----------
Balance, beginning of year $ 889,384 $ 842,715
Provision charged to operations 65,500 88,333
Loans charged-off (81,338) (48,690)
Recoveries 21,299 7,026
-----------
Balance, end of year $ 894,845 $ 889,384
=========== ===========
</TABLE>
(Notes continued on next page)
F-15
<PAGE>
<TABLE>
NOTE 6 - LOANS (Continued)
The following is a summary of information pertaining to impaired loans:
<CAPTION>
December 31,
-------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Impaired loans without a valuation allowance $ - $ -
Impaired loans with a valuation allowance 424,210 26,866
------------- ------------
Total impaired loans $ 424,210 $ 26,866
============= ============
Valuation allowance related to impaired loans $ 212,100 $ 550
============= ============
<CAPTION>
Years Ended December 31,
-------------------------------
1998 1997
------------- ------------
Average investment in impaired loans $ 490,000 $ 20,000
============= ============
Interest income recognized on impaired loans $ - $ -
============= ============
Interest income recognized on a cash basis on impaired
loans $ - $ -
============= ============
No additional funds are committed to be advanced in connection with
impaired loans.
Loans on which the accrual of interest has been discontinued amount to
$424,210 and $26,866 at December 31, 1998 and 1997, respectively. If interest on
these loans had been accrued, such income would have approximated $56,922 and
$3,545 for 1998 and 1997, respectively. No interest income was recognized or
received on these loans in 1998 and 1997.
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<CAPTION>
December 31,
------------------------------------
1998 1997
---------------- ----------------
Land and improvements $ 612,567 $ 252,829
Buildings 1,505,217 1,166,522
Leasehold improvements 7,951 7,951
Equipment, furniture and fixtures 1,043,663 1,182,723
---------------- ----------------
3,169,398 2,610,025
Less - accumulated depreciation (1,159,170) (1,281,728)
---------------- ----------------
$ 2,010,228 $ 1,328,297
================ ================
</TABLE>
Depreciation charged to operating expense for the years ended December
31, 1998 and 1997 was $116,307 and $71,226, respectively.
(Notes continued on next page)
F-16
<PAGE>
<TABLE>
NOTE 8 - DEPOSITS
Interest bearing deposits consist of the following:
<CAPTION>
December 31,
------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Money Market and NOW account deposits $ 15,648,268 $ 11,870,772
Savings deposits 4,321,485 4,587,008
Certificates of deposit $100,000 and over 10,405,870 8,128,297
Other time deposits 32,385,826 35,308,624
---------------- ----------------
$ 62,761,449 $ 59,894,701
================ ================
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
1999 $ 35,489,924
2000 3,913,845
2001 3,362,927
2002 -
2003 -
Thereafter 25,000
--------------
$ 42,791,696
NOTE 9 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SHORT-TERM
BORROWINGS
Securities sold under agreements to repurchase generally mature within
one to four days from the transaction date. Investment securities with carrying
values of $3,002,067 and $3,019,065 at December 31, 1998 and 1997, respectively,
are pledged to secure these agreements. Information concerning securities sold
under agreements to repurchase is summarized, as follows:
<CAPTION>
December 31,
------------------------------------
1998 1997
---------------- ----------------
Average balance during the year $ 2,081,131 $ 1,809,640
=============== ===============
Average interest rate during the year 4.05% 4.05%
=============== ===============
Maximum month end balance during the year $ 3,149,029 $ 2,555,645
=============== ===============
</TABLE>
Short-term borrowings consist of U.S. Treasury tax and loan deposit
notes, which are payable on demand and fully collateralized by investment
securities.
The Bank is a member of the Federal Home Loan Bank of Atlanta. One of
the benefits of membership is a borrowing capacity of $5.9 million secured by a
blanket floating lien on the unpaid principal balance of the Bank's one-to-four
unit residential, real estate loans. As of December 31, 1998, the Bank had not
borrowed any amounts on this line of credit.
(Notes continued on next page)
F-17
<PAGE>
<TABLE>
NOTE 10 - STOCK COMPENSATION PLANS
At December 31, 1998, the Bank has fixed stock compensation plans for
its officers. The Bank applies Accounting Principles Board Opinion No. 25 (APB
25), Accounting for Stock Issued to Employees, and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for these plans against earnings. For those companies applying APB 25, FASB
Statement No. 123, Accounting for Stock-Based Compensation, requires certain
pro-forma disclosures of net income and earnings per share. Net income and
earnings per share computed under FASB Statement No. 123 do not materially
differ from the amounts reported.
All options have ten year terms, vest and become fully exercisable in
three years. The option exercise price equals or exceeds the market price of the
stock as of the date the option was granted. The following is a summary of the
Bank's stock option activity, and related information for the years ended
December 31,:
<CAPTION>
1998 1997
-------------------------- --------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
<S> <C> <C> <C> <C>
Outstanding - Beginning of year 99,850 $7.45 110,750 $7.39
Granted - - - -
Exercised (6,200) 6.32 (10,900) 6.79
Forfeited - - - -
Outstanding - End of year 93,650 $7.52 99,850 $7.45
Exercisable - End of year 78,575 $6.87 67,913 $6.87
NOTE 11 - INCOME TAXES
The principal components of income tax expense are as follows:
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997
------------- ------------
Federal income tax expense - current $ 444,824 $ 479,492
Deferred federal income tax expense (benefit) (24,187) (39,758)
---------- ----------
Income tax expense $ 420,637 $ 439,746
========== ==========
</TABLE>
(Notes continued on next page)
F-18
<PAGE>
<TABLE>
NOTE 11 - INCOME TAXES (Continued)
Differences between income tax expense calculated at the statutory rate
and that shown in the statements of income are summarized as follows:
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Federal income tax expense - at statutory rate $ 458,061 $ 459,276
Tax effect of:
Tax exempt interest (44,763) (21,003)
Exercised stock options 25,030 20,228
Other (17,691) (18,755)
---------- ------------
Income tax expense $ 420,637 $ 439,746
========== ============
The Company has the following deferred tax assets and liabilities at
December 31, 1998 and 1997:
<CAPTION>
1998 1997
------------- ------------
Deferred tax assets:
Deferred compensation $ 89,522 $ 94,028
Bad debts and other provisions 288,603 276,116
Other 19,208 11,895
Interest income 23,467 3,991
------------- ------------
Total deferred tax asset 420,800 386,030
------------- ------------
Deferred tax liabilities:
Deferred loan fees (36,247) (41,666)
Discount accretion on securities (14,423) (17,300)
Net unrealized appreciation on available-for-
sale securities (47,394) (29,167)
Fixed assets (39,800) (21,101)
------------- ------------
(137,864) (109,234)
------------- ------------
Net deferred tax asset $ 282,936 $276,796
========== ============
</TABLE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES- RELATED PARTY
The Company has entered into a long-term lease with a related party to
provide space for one branch and the Bank's operations center. This lease has
been classified as an operating lease for financial reporting purposes. Future
minimum lease payments of $64,439 are required each year for five years under
the long-term non-cancellable lease agreement as of December 31, 1996, which
expires in December, 2001. Total lease expense was $64,439 for the years 1998
and 1997, respectively.
(Notes continued on next page)
F-19
<PAGE>
NOTE 13 - OTHER RELATED PARTY TRANSACTIONS
The Bank has loan and deposit transactions with its officers and
directors, and with companies in which the officers and directors have a
financial interest. Related party deposits amounted to approximately $5,640,000
and $7,270,000 at December 31, 1998 and 1997, respectively. In addition to
related party deposits, securities sold under agreements to repurchase with
related parties amounted to approximately $646,000 and $1,840,000 at December
31, 1998 and 1997, respectively. A summary of related party loan activity for
Heritage Bank and Trust is as follows during 1998:
Balance, December 31, 1997 $ 4,272,012
Originations - 1998 3,333,165
Repayments - 1998 (2,699,969)
-------------
Balance, December 31, 1998 $ 4,905,208
=============
In the opinion of Management, such loans are made in the ordinary course
of business at normal credit terms, including interest rate and collateral
requirements and do not represent more than normal credit risk.
In the ordinary course of business, the Company has engaged in
transactions with certain of its directors' companies for legal services and
insurance.
Commitments to extend credit and letters of credit to related parties
amounted to $1,365,800 and $1,181,800 at December 31, 1998 and 1997,
respectively.
NOTE 14 - CREDIT COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK
The Bank has outstanding at any time a significant dollar amount of
commitments to extend credit. To accommodate major customers, the Bank also
provides standby letters of credit and guarantees to third parties. Those
arrangements are subject to strict credit control assessments. Guarantees and
standby letters of credit specify limits to the Bank's obligations. The amounts
of loan commitments, guarantees and standby letters of credit are set out in the
following table as of December 31, 1998 and 1997. Because many commitments and
almost all standby letters of credit and guarantees expire without being funded
in whole or in part, the contract amounts are not estimates of future cash
flows. The majority of commitments to extend credit have terms up to one year.
Interest rates on fixed-rate commitments range from 14% to 18%.
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------------
Variable Rate Fixed Rate Variable Rate Fixed Rate
Commitments Commitments Commitments Commitments
<S> <C> <C> <C> <C>
Loan Commitments $ 10,492,268 $ 2,149,258 $ 8,651,143 $ 904,068
Standby letters of credit and
guarantees written $ 400,465 $ 47,000 $ 100,000 $ 223,166
</TABLE>
All of the guarantees outstanding at December 31, 1998 expire during 1999.
(Notes continued on next page)
F-20
<PAGE>
NOTE 14 - CREDIT COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK (Continued)
Loan commitments, standby letters of credit and guarantees written have
off-balance-sheet credit risk because only origination fees and accruals for
probable losses, if any, are recognized in the statement of financial position,
until the commitments are fulfilled or the standby letters of credit or
guarantees expire. Credit risk represents the accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted. The credit risk amounts are equal to the contractual amounts,
assuming that the amounts are fully advanced and that, in accordance with the
requirements of FASB Statement No. 105, Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, collateral or other security is of no value. The
Bank's policy is to require customers to provide collateral prior to the
disbursement of approved loans. For retail loans, the Bank usually retains a
security interest in the property or products financed, which provides
repossession rights in the event of default by the customer. For business loans
and financial guarantees, collateral is usually in the form of inventory or
marketable securities (held in trust) or property (notations on title).
Concentrations of credit risk (whether on or off balance sheet) arising
from financial instruments exist in relation to certain groups of customers. A
group concentration arises when a number of counterparties have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The Bank
does not have significant exposure to any individual customer or counterparty.
The major concentrations of credit risk for the Bank arise by customer loan type
in relation to loans and credit commitments, as shown in the following table. A
geographic concentration arises because the Bank operates primarily in
southeastern Virginia.
The credit risk amounts represent the maximum accounting loss that would
be recognized at the reporting date if counterparties failed completely to
perform as contracted and any collateral or security proved to be of no value.
The Bank has experienced little difficulty in accessing collateral when
required. The amounts of credit risk shown, therefore, greatly exceed expected
losses, which are included in the allowance for loan losses.
NOTE 15 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components (such as interest rate risk), risk weighting, and other factors.
(Notes continued on next page)
F-21
<PAGE>
NOTE 15 - REGULATORY MATTERS (Continued)
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, the Bank
meets all capital adequacy requirements to which it is subject.
As of March 31, 1998, the most recent notification from the Federal
Reserve Bank of Richmond categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk- based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk-Weighted Assets) $ 8,734,000 14.73% $ 4,711,000 8.00% $ 5,889,000 10.00%
Tier I Capital
(to Risk-Weighted Assets) $ 7,991,000 13.48% $ 2,355,000 4.00% $ 3,533,000 6.00%
Tier I Capital
(to Average Assets) $ 7,991,000 9.24% $ 3,460,000 4.00% $ 4,326,000 5.00%
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1997:
Total Capital
(to Risk-Weighted Assets) $ 7,663,000 15.07% $ 4,068,000 8.00% $ 5,085,000 10.00%
Tier I Capital
(to Risk-Weighted Assets) $ 7,024,000 13.81% $ 2,034,000 4.00% $ 3,051,000 6.00%
Tier I Capital
(to Average Assets) $ 7,024,000 8.63% $ 3,255,000 4.00% $ 4,069,000 5.00%
</TABLE>
There is no significant difference between the Bank's actual ratios
disclosed above, and the related actual ratios of the Company.
(Notes continued on next page)
F-22
<PAGE>
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair value of the
Bank's financial instruments at December 31, 1998 and 1997. FASB Statement No.
107, Disclosures about Fair Value of Financial Instruments, defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. The carrying amounts in the table are included in
the balance sheet under the indicated captions.
<TABLE>
<CAPTION>
1998 1997
----------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 7,061 $ 7,061 $ 5,716 $ 5,716
Loans (net) 56,609 58,806 51,242 52,688
Investment securities 19,434 19,509 22,595 22,641
Accrued interest receivable 579 579 692 692
Financial Liabilities:
Deposit liabilities 77,540 78,095 72,797 73,049
Accrued interest payable 318 318 342 342
Short-term borrowings 63 63 52 52
Securities sold under
agreements to repurchase 981 981 1,945 1,945
</TABLE>
Estimation of Fair Values
The following notes summarize the major methods and assumptions used in
estimating the fair value of financial instruments:
Short-term financial instruments are valued at their carrying amounts
included in the Bank's balance sheet, which are reasonable estimates of fair
value due to the relatively short period to maturity of the instruments. This
approach applies to cash and cash equivalents, short-term borrowings, and
securities sold under agreements to repurchase.
Loans are valued on the basis of estimated future receipts of principal
and interest, which are discounted at various rates. Loan prepayments are
assumed to occur at the same rate as in previous periods when interest rates
were at levels similar to current levels. Future cash flows for homogeneous
categories of consumer loans, such as motor vehicle loans, are estimated on a
portfolio basis and discounted at current rates offered for similar loan terms
to new borrowers with similar credit profiles. The fair value of nonaccrual
loans also is estimated on a present value basis, using higher discount rates
appropriate to the higher risk involved.
(Notes continued on next page)
F-23
<PAGE>
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Estimation of Fair Values (continued)
Investment securities are valued at quoted market prices if available.
For unquoted securities, the fair value is estimated by the Bank on the basis of
financial and other information.
The fair value of demand deposits and deposits with no defined maturity
is taken to be the amount payable on demand at the reporting date. The fair
value of fixed - maturity deposits is estimated using rates currently offered
for deposits of similar remaining maturities. The intangible value of long-term
relationships with depositors is not taken into account in estimating the fair
values disclosed.
The carrying amounts of accrued interest approximate fair value.
It is not practicable to separately estimate the fair values for
off-balance-sheet credit commitments, including standby letters of credit and
guarantees written, due to the lack of cost effective reliable measurement
methods for these instruments.
NOTE 17 - EARNINGS PER SHARE RECONCILIATION
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations.
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S> <C> <C>
Net income (numerator, basic and diluted) $ 1,062,511 $ 979,970
Weighted average shares outstanding (denominator) 799,496 790,450
---------------- ----------------
Earnings per common share-basic $ 1.33 $ 1.24
================ ================
Effect of dilutive securities:
Weighted average shares outstanding $ 799,496 $ 790,450
Effect of stock options 51,895 46,470
---------------- ----------------
Diluted average shares outstanding (denominator) 851,391 836,920
---------------- ----------------
Earnings per comon share-assuming dilution $ 1.25 $ 1.17
================ ================
</TABLE>
* * * * *
F-24
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,508
<INT-BEARING-DEPOSITS> 96
<FED-FUNDS-SOLD> 3,457
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,318
<INVESTMENTS-CARRYING> 5,119
<INVESTMENTS-MARKET> 5,193
<LOANS> 56,566
<ALLOWANCE> 895
<TOTAL-ASSETS> 87,291
<DEPOSITS> 77,283
<SHORT-TERM> 63
<LIABILITIES-OTHER> 1,866
<LONG-TERM> 0
0
0
<COMMON> 4,006
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 87,291
<INTEREST-LOAN> 4,976
<INTEREST-INVEST> 1,258
<INTEREST-OTHER> 332
<INTEREST-TOTAL> 6,567
<INTEREST-DEPOSIT> 2,964
<INTEREST-EXPENSE> 87
<INTEREST-INCOME-NET> 3,516
<LOAN-LOSSES> 66
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 2,322
<INCOME-PRETAX> 1,483
<INCOME-PRE-EXTRAORDINARY> 1,483
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,063
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.25
<YIELD-ACTUAL> 4.46
<LOANS-NON> 424
<LOANS-PAST> 162
<LOANS-TROUBLED> 738
<LOANS-PROBLEM> 313
<ALLOWANCE-OPEN> 889
<CHARGE-OFFS> 81
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 895
<ALLOWANCE-DOMESTIC> 895
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
