Heritage Bankshares, Inc. Announces First Quarter 2013 Net Income

NORFOLK, Va., April 25, 2013 /PRNewswire/ -- Heritage Bankshares, Inc. ("Heritage"; the "Company") (OTCQB: HBKS), the parent of Heritage Bank (the "Bank"), today announced unaudited financial results for the first quarter of 2013.

The Company's net income for the first quarter of 2013 was $459,000 compared to net income of $630,000 for the first quarter of 2012, a decrease of $171,000.  Net income for the first quarter of 2013 included a $90,000 after-tax charge-off for furniture, fixtures, and equipment related to two branches that will close in July 2013.  Net income available to common shareholders was $413,000 for the first quarter of 2013, a decrease of $170,000 from net income available to common shareholders of $583,000 for the first quarter of 2012.  Earnings per diluted common share were $0.18 for the first quarter of 2013 compared to $0.25 for the first quarter of 2012.

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

"During the first quarter of 2013, we continued the implementation of our plan to focus as much of our banking operations as possible on our core business of serving the deposit and lending needs of small businesses and professional firms.

"We took several steps to align our branch operations more closely with our core business.  We announced that we will close our Ocean View and Military Highway branches on July 31, 2013.  These two branches are older branches with small deposit bases, and they present very limited opportunities for growing our core business.  Also, after careful study of our actual client usage of all of our branches, we reduced our basic branch staffing model to two employees and adjusted the hours of operations of our branch lobbies and drive-thrus to synchronize them with the banking patterns of our core business clients.

"Also, we filed our last Form 10-K with the Securities and Exchange Commission.  Our deregistration from reporting to the Securities and Exchange Commission is now complete.  We can reallocate to other endeavors the executive management time spent on the numerous regulatory filings required by the Securities and Exchange Commission for all companies, regardless of size or complexity.

"We continued to grow our core business in the first quarter.  We increased our core deposits, consisting of our various checking, savings and money market accounts, from $222 million at March 31, 2012, to $261 million at March 31, 2013.  At the same time, we increased our noninterest-bearing deposits from $95 million at March 31, 2012, to $110 million at March 31, 2013.  We made additional investments of our excess liquidity into certificates of deposit in other financial institutions because certificates of deposit offer higher yields than comparable maturities of securities and, in the event of substantial increases in intermediate-term interest rates, certificates of deposit do not require valuation adjustments on our balance sheet and may be redeemed at par with only early withdrawal penalties impacting our income statement.

"Our asset quality remains excellent.  At March 31, 2013, we only had one nonaccrual loan which has since been refinanced by another bank.  Our only real estate owned at March 31, 2013, consisted of three branch sites awaiting disposition.

"Finally, our expense reduction initiatives are showing tangible results.  We reduced our noninterest expense from $2.08 million for the first quarter of 2012, to $1.97 million for the first quarter of 2013.  Our noninterest expense for the first quarter of 2013 included nonrecurring expenses of $136 thousand for the charge-off of the fixtures, furnishings and equipment in the branches being closed, $25 thousand in legal and other fees related to the preparation and filing of our 2013 Form 10-K and branch closings, and nonemployee operating expenses of approximately $53 thousand for the two branches being closed.  Thus, our noninterest expense for the first quarter of 2013 would have been $1.76 million but for these nonrecurring expenses."

Comparison of Operating Results for the Three Months Ended March 31, 2013 and 2012

Overview.   The Company's pretax income was $628,000 for the first quarter of 2013, compared to pretax income of $882,000 for the first quarter of 2012, a decrease of $254,000.  A $112,000 reduction in noninterest expense only partially offset a decrease of $313,000 in net interest income and a charge off of $136,000 for furniture, fixtures and equipment in two branches that the bank will no longer utilize.

Net Interest Income.  The Company's net interest income before provision for loan losses decreased by $313,000, comparing the first quarters of 2013 and 2012.  Our average loan portfolio increased by $4.0 million, from $217.0 million in the first quarter of 2012 to $221.0 million in the first quarter of 2013, while our average certificates of deposit in other financial institutions and overnight funds increased by $49.8 million and our average investment in securities available for sale and other interest-earning assets (excluding loans, CDs and overnight funds) decreased by $22.3 million, for a net increase in interest-earning assets of $31.5 million comparing the two quarters.  Average interest-bearing liabilities increased by $16.3 million from $167.3 million in the first quarter of 2012 to $183.6 million in the first quarter of 2013, resulting primarily from a $20.0 million increase in average interest-bearing deposits.  The average yield on our interest-earning assets was adversely impacted by lower yields on loans and an increase in the average balance of other interest-earning assets, which was only partially offset by a decrease in the average cost of our interest-bearing liabilities.  As a result, our interest rate spread decreased by 75 basis points from 3.80% in the first quarter of 2012 to 3.05% in the first quarter of 2013, and our net interest margin decreased by 79 basis points from 4.04% in the first quarter of 2012 to 3.25% in the first quarter of 2013.  Compared to the three-month period ending December 31, 2012, our net interest spread increased 13 basis points from 2.92%, and our net interest margin increased 11 basis points from 3.14%.

Provision for Loan Losses.  There was no provision for loan losses or charge-offs in the quarter ending March 31, 2013 compared to no provision for loan losses and charge-offs of $1,000 for the quarter ending March 31, 2012.

Noninterest Income.  Total noninterest income decreased by $53,000, from $261,000 in the first quarter of 2012 to $208,000 in the first quarter of 2013.  This decrease is primarily attributable to decreases in service charges on deposit accounts, late charges and other fees on loans and income from bank-owned life insurance of $19,000, $11,000 and $23,000, respectively.

Noninterest Expense.  Total noninterest expense was $1,969,000 for the first quarter of 2013, a $112,000 decrease from the first quarter of 2012, primarily due to decreases of $136,000, $41,000 and $41,000 in compensation, data processing and professional fees, respectively, that were partially offset by a $136,000 charge-off of furniture, fixtures, and equipment in two branches that will no longer be utilized by the Company.

Income Taxes.  The Company's income tax expense for the first quarter of 2013 was $169,000, reflecting an effective tax rate of 26.9%, compared to income tax expense of $252,000 and an effective tax rate of 28.5%, for the first quarter of 2012.

Net Income Available to Common Stockholders.  The dividend rate on our SBLF program preferred stock was 2.36% for the first quarter of 2013, resulting in an SBLF preferred stock dividend of $46,000 compared to a $47,000 SBLF preferred stock dividend for the first quarter of 2012.  Net income available to common stockholders was $413,000 for the first quarter of 2013, compared to $583,000 for the first quarter of 2012, a decrease of $170,000, or $0.07 per diluted common share.

Financial Condition of the Company

Total Assets.  The Company's total assets increased by $16.6 million, or 5.4%, from $306.3 million at March 31, 2012 to $322.9 million at March 31, 2013.  The increase in assets resulted primarily from a $18.1 million increase in our aggregate cash, securities available for sale, interest-bearing deposits in other banks and federal funds sold.

 Investments.  Overall investments, including overnight interest-bearing deposits in other banks, federal funds sold, certificates of deposits in other banks, and investments in securities, increased by $17.8 million from $62.5 million at March 31, 2012 to $80.3 million at March 31, 2013.  Certificates of deposit and other interest-earning deposits in other banks increased by $48.1 million and $3.3 million, respectively.  These increases were partially offset by a $33.6 million decrease in the balance of investment securities. 

Loans.  Loans held for investment, net, were $216.1 million at March 31, 2013, an increase of $800,000 from our loan balance of $215.3 million at March 31, 2012.

Asset Quality.  Nonperforming assets were $1,777,000, or 0.55% of total assets, at March 31, 2013, compared to $1,682,000 in nonperforming assets, or 0.55% of total assets, at March 31, 2012.  Accruing loans past due 90 days or more consisted of one residential 1-4 loan that was refinanced in April by another bank and other real estate owned consisted of three bank branch sites that we no longer plan to utilize.

Deposits.  Total deposits at March 31, 2013 were $282.4 million compared to $257.0 million at March 31, 2012, an increase of $25.4 million, or 9.9%.  Core deposits, which are comprised of noninterest-bearing, money market, NOW and savings deposits, increased by $39.0 million, or 17.6%, from $222.0 million at March 31, 2012 to $261.0 million at March 31, 2013.  Noninterest-bearing deposits increased by $15.1 million to $110.0 million at March 31, 2013 and, as a percentage of total deposits, noninterest-bearing deposits increased from 36.9% at March 31, 2012 to 39.0% at March 31, 2013.

Average total deposits increased by $33.2 million, or 13.1%, from $253.3 million for the three-month period ended March 31, 2012 to $286.5 million for the three-month period ended March 31, 2013.  Average core deposits increased by $50.1 million, or 23.4%, over the comparable three-month periods.  Average noninterest-bearing deposits increased by $13.2 million, from $91.9 million in the three-month period ending March 31, 2012 to $105.1 million in the three-month period ending March 31, 2013.  As a percentage of average total deposits, average noninterest-bearing deposits increased slightly from 36.3% at March 31, 2012 to 36.7% at March 31, 2013.

Borrowed Funds.  Borrowed funds decreased by $8.9 million, from $10.4 million at March 31, 2012 to $1.5 million at March 31, 2013, primarily from a $7.3 million decrease in FHLB advances.

 Capital.  Stockholders' equity increased by $205,000, from $36.758 million at March 31, 2012 to $36.963 million at March 31, 2013, primarily due to an increase in retained earnings, partially offset by a $232,000 decrease in accumulated other comprehensive income related to the reduction of our securities available for sale portfolio.  In December 2012, the Company paid a special dividend of $819,000 that represented (a) an acceleration of – and payment in lieu of – total aggregate dividends of $0.24 per share that the Company would have otherwise expected to announce and pay in quarterly installments during the 2013 calendar year and (b) an additional amount of $0.12 per share.

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

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

About Heritage

Heritage is the parent company of Heritage Bank (www.heritagebankva.com).  Heritage Bank has four full-service branches in the city of Norfolk, two full-service branches in the city of Virginia Beach, and one full service branch in the city of Chesapeake.  After the closing on July 31, 2013 of our Ocean View and Military Highway branches, Heritage Bank will have two full-service branches in the city of Norfolk.

Forward Looking Statements

The press release contains statements that constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements address future events, developments or results and typically use words such as believe, anticipate, expect, intend, plan, forecast, outlook, or estimate.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause Heritage's actual results, performance, achievements, and business strategy to differ materially from the anticipated results, performance, achievements or business strategy expressed or implied by such forward-looking statements.  Factors that could cause such actual results, performance, achievements and business strategy to differ materially from anticipated results, performance, achievements and business strategy include:  general and local economic conditions, competition, significant increases in capital requirements or other significant changes in regulatory requirements, customer demand for Heritage's banking products and services, and the risks and uncertainties described in Heritage's most recent Form 10-K filed with the Securities and Exchange Commission.  Heritage disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

SOURCE Heritage Bankshares, Inc.

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