Heritage Bankshares, Inc. Announces Second Quarter 2015 and First Six Months 2015 Net Income; Quarterly Dividends

NORFOLK, Va., July 29, 2015 /PRNewswire/ -- Heritage Bankshares, Inc. ("Heritage"; the "Company") (OTCQX: HBKS), the parent of Heritage Bank (the "Bank"), today announced unaudited financial results for the second quarter and the first six months of 2015.

The Company had net income of $465,000 for the second quarter of 2015, a decrease of $79,000 over net income of $544,000 for the second quarter of 2014.  In the second quarter of 2015, the Company had earnings per diluted common share of $0.19 compared to $0.22 per diluted common share for the second quarter of 2014, a decrease of $0.03 per share.

The Company had net income of $983,000 for the first six months of 2015, an increase of $22,000 over net income of $961,000 for the first six months of 2014.  Earnings per diluted common share were $0.40 for the first half of 2015 compared to $0.39 for the first half of 2014.

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

"The Company experienced an unusual combination of events in the second quarter that negatively impacted our net income.

"First, we had a significant total increase of $54,000, after tax, in our noninterest expense from early withdrawal penalties on certificates of deposit redeemed by us, vacation pay accruals, severance and recruiting expenses, comparing the second quarter of 2015 with the second quarter of 2014.  Fortunately, we expect these expenses to abate substantially over the remainder of the year.

"Second, in April and May, we experienced large prepayments totaling approximately $6.3 million from two mortgage loans and one securities loan.  The bunching in any one quarter of these three large loan repayments was out of the ordinary and unexpected.  These prepayments adversely impacted our net interest income for the quarter, particularly in the month of June.

"Third, late in the first quarter of this year, we redeemed $10.5 million of certificates of deposit held at other banks and sold $10.1 million of U.S. government-sponsored agency securities.  This large reduction in our assets negatively impacted our net interest income in the second quarter."

Comparison of Operating Results for the Three Months Ended June 30, 2015 and 2014

Overview.   The Company's pretax income was $640,000 for the second quarter of 2015, compared to pretax income of $755,000 for the second quarter of 2014.  Increases in net interest income of $53,000 were offset by increases to noninterest expense of $176,000 comparing the two quarters.

Net Interest Income.  The Company's net interest income before provision for loan losses increased by $53,000, comparing the second quarters of 2015 and 2014.  Despite a $5.4 million decrease in total average balances of interest-earning assets from $312.0 million in the second quarter of 2014 to $306.6 million in the second quarter of 2015, interest income remained stable.  Average loan balances yielding 3.98% increased by $7.2 million comparing the two quarters, while other lower-yielding investments decreased $12.6 million.  This shift to higher yielding assets improved total yield by 6 basis points to 3.35% during the second quarter of 2015.  The yield in the second quarter of 2015 increased 12 basis points compared to the first quarter of 2015 yield of 3.23%.

Average interest-bearing liabilities decreased by $16.6 million during the same time period, from $185.8 million for the second quarter of 2014 to $169.2 million for the second quarter of 2015.  Average noninterest-bearing deposits grew $7.8 million to $114.0 million during the second quarter of 2015.  Overall our interest rate on our interest-bearing liabilities decreased by 8 basis points, and, combined with the 6 basis point increase in yield on interest-earning assets, produced a 14 basis point increase in our spread, from 2.81% during the second quarter of 2014 to 2.95% during the second quarter of 2015.  As well, our margin increased 12 basis points from 3.00% for the second quarter of 2014 to 3.12% for the second quarter of 2015.

Provision for Loan Losses.  There were no provisions for loan loss or charge-offs in either quarter ending June 30, 2015 or June 30, 2014.

Noninterest Income.  Total noninterest income was stable comparing the second quarter of 2014 to the second quarter of 2015. 

Noninterest Expense.  Total noninterest expense was $1,866,000 for the second quarter of 2015, a $176,000 increase from $1,690,000 in the second quarter of 2014.

Income Taxes.  The Company's income tax expense for the second quarter of 2015 was $175,000, an effective tax rate of 27.4%, compared to income tax expense of $211,000 for the second quarter of 2014, an effective tax rate of 28.0%.

Net Income Available to Common Stockholders.  Net income available to common stockholders was $445,000 for the second quarter of 2015, compared to $524,000 for the second quarter of 2014, a decrease of $79,000, or $0.03 per diluted common share.

Comparison of Operating Results for the Six Months Ended June 30, 2015 and 2014

Overview.   The Company's pretax income was $1,363,000 for the first six months of 2015 compared to pretax income of $1,323,000 for the first six months of 2014.  A $207,000 increase in net interest income and a $164,000 increase in noninterest income offset a $331,000 increase in noninterest expense.

Net Interest Income.  The Company's net interest income before provision for loan losses increased by $207,000, comparing the first six months of 2015 and 2014.  Average balances of interest-earning assets increased $8.4 million, from $308.3 million in the first six months of 2014 to $316.7 million in the first six months of 2015.  A $12.5 million increase in average loan balances comparing the two six-month periods improved interest income by $155,000, stabilizing our six-month yield on average interest-earning assets at 3.29%, on par with the first six months of 2014.

Average interest-bearing liabilities decreased by $2.0 million to $183.4 million, comparing the first six months of 2015 to the first six months of 2014, primarily from a $1.4 million decrease in average interest-bearing deposits.  Our interest rate on average interest-bearing liabilities was 41 basis points in the first six months of 2015, a decrease of 7 basis points from the first six months of 2014.  This 7 basis point decrease in average cost of funds improved our spread point for point to 2.88% for the first six months of 2015 from 2.81% for the first six months of 2014.  Net margin increased to 3.05% for the first six months of 2015 from 3.01% for the same period in 2014.

Provision for Loan Losses.  There were no provisions for loan loss or charge-offs in either six-month period ending June 30, 2015 or June 30, 2014.

Noninterest Income.  Total noninterest income increased by $164,000, from $308,000 in the first six months of 2014 to $472,000 in the first six months of 2015, primarily as the result of a $158,000 gain on sale of investment securities in the first six months of 2015 that did not occur in the first six months of 2014.

Noninterest Expense.  Total noninterest expense was $3,805,000 for the first six months of 2015, a $331,000 increase from $3,474,000 in the first six months of 2014.   

Income Taxes.  The Company's income tax expense for the first six months of 2015 was $380,000, an effective tax rate of 27.9%, compared to income tax expense of $362,000 for the first six months of 2014, an effective tax rate of 27.4%.

Net Income Available to Common Stockholders.  Net income available to common stockholders was $944,000 for the first six months of 2015, compared to $922,000 for the first six months of 2014, an increase of $22,000, or $0.01 per diluted common share.

Financial Condition of the Company

Total Assets.  The Company's total assets at June 30, 2015 were $329.6 million, an $11.1 million decrease from $340.7 million at June 30, 2014.

Investments.  Overall investments, including overnight interest-earning deposits in other banks, federal funds sold, certificates of deposit in other banks and investments in securities, decreased by a net of $3.0 million from $90.0 million at June 30, 2014 to $87.0 million at June 30, 2015.  This decrease is the result of a $10.5 million redemption of certificates of deposit at other banks at the end of the first quarter of 2015 for the purpose of repaying short term borrowings, partially offset by a $5.9 million increase in interest-earning deposits at other banks.

Loans.  Loans held for investment, net, decreased by $4.9 million from $224.4 million at June 30, 2014 to $219.5 million at June 30, 2015.  Our commercial real estate loan portfolio increased by 2% year over year, but this increase was offset by the large payoffs of several loans in our residential mortgage loan portfolio and one large securities loan during the second quarter of 2015.

Asset Quality.  Asset quality remained excellent.  Nonperforming assets were $743,000, or 0.23% of total assets, at both June 30, 2014 and 2015, and consisted only of other real estate owned of one bank branch facility that was closed in July 2013.

Deposits.  Average total deposits increased by $6.1 million from $267.3 million for the six-month period ended June 30, 2014 to $273.4 million for the six-month period ended June 30, 2015.  Average core deposits, which are comprised of noninterest bearing deposits, money market, NOW and savings deposits, increased $3.6 million comparing the two six-month periods, while average CDs increased by $2.5 million during that same time period.  Average noninterest-bearing deposits increased by $7.5 million, from $102.6 million in the six-month period ending June 30, 2014 to $110.1 million in the six-month period ending June 30, 2015.  As a percentage of average total deposits, average noninterest-bearing deposits increased from 38.4% at June 30, 2014 to 40.3% at June 30, 2015.

Total deposits at June 30, 2015 were $284.3 million compared to $272.8 million at June 30, 2014, an increase of $11.5 million, primarily from a $9.7 million increase in core deposits.  Noninterest bearing deposits increased by $22.8 million, or 21.9%, comparing the two quarter ends, and were 44.7% of total deposits at June 30, 2015, compared to 38.2% at June 30, 2014.

Borrowed Funds.  Borrowed funds, which consist of Federal Home Loan Bank of Atlanta advances and customer repurchase agreements, decreased by $24.3 million, from $26.5 million at June 30, 2014 to $2.2 million at June 30, 2015, primarily from repayment of short-term advances at the Federal Home Loan Bank of Atlanta.

Capital.  Stockholders' equity increased by $1.7 million, from $39.4 million at June 30, 2014 to $41.1 million at June 30, 2015, primarily due to a $1.5 million increase in retained earnings.

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

Dividends

On July 29, 2015, our Board of Directors declared the Company's regular quarterly dividend of $0.12 per share on our common stock.  The dividend will be paid on August 21, 2015 to common shareholders of record on August 10, 2015.

The Company will pay dividends of $19,500 on the preferred stock issued in connection with our participation in the SBLF program.  This dividend shall be paid on October 1, 2015 to the holders of the SBLF preferred stock of record on September 17, 2015.  Currently the sole shareholder of record of the SBLF preferred stock is the Secretary of the Treasury.

About Heritage

Heritage is the parent company of Heritage Bank (www.heritagebankva.com).  Heritage Bank has two full-service branches in the city of Norfolk, two full-service branches in the city of Virginia Beach, and one full-service branch in the city of Chesapeake.

Forward Looking Statements

The press release contains statements that constitute "forward-looking statements".  Forward-looking statements address future events, developments or results and typically use words such as believe, anticipate, expect, intend, plan, forecast, outlook, or estimate.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause Heritage's actual results, performance, achievements, and business strategy to differ materially from the anticipated results, performance, achievements or business strategy expressed or implied by such forward-looking statements  Heritage disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

SOURCE Heritage Bankshares, Inc.

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