Heritage Bankshares, Inc. Announces Third Quarter and Nine Months 2008 Earnings

NORFOLK, Va., Oct. 17  /PRNewswire-FirstCall/ -- Heritage Bankshares, Inc. ("Heritage"; the "Company") (OTC:HBKS) (BULLETIN BOARD: HBKS) , the parent of Heritage Bank (the "Bank"), today announced unaudited financial results for the third quarter and first nine months of 2008.

Net income, after tax, for the quarter ended September 30, 2008 was $386,000, or $0.17 per diluted share, compared to net income, after tax, of $345,000, or $0.15 per diluted share, for the third quarter of 2007. Net income, after tax, for the first nine months of 2008 was $617,000, or $0.27 per diluted share, compared to net income, after tax, of $584,000, or $0.25 per diluted share, for the same period in 2007.

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

"We believe the Company is well-positioned to deal with these uncertain economic times. As of September 30, 2008, our tangible capital was 10.2% of our total assets. Our net interest margin for the third quarter of 2008 remained unchanged as compared to the third quarter of 2007. At the end of this quarter, our noninterest-bearing deposits were 30.6% of our total deposits, and our total core deposits, that is checking, savings and money market accounts, were 75.6% of our total deposits.

"Liquidity is now at a premium for all banks, large and small. At September 30, 2008, our loan to deposit ratio was only 81.1%, which should provide the Bank a high level of liquidity for future operations. Unlike many community banks, we have not relied on expensive and volatile funding sources such as brokered certificates of deposit or other high-yield certificates of deposit from other geographic areas. Furthermore, certificates of deposit represented only 24.4% of our deposit base as of September 30, 2008, so we do not anticipate having to compete aggressively with institutions seeking to obtain liquidity from this expensive funding source.

"Our non-performing assets were a remarkable 0.02% of assets at September 30, 2008, unchanged from June 30, 2008. This ratio would be outstanding and likely difficult to maintain even in the best of economic times. With the current economic climate being particularly stressful for consumers and small businesses, we have to expect some increases in non-performing assets and net charge-offs over the negligible levels that we have seen so far this year. However, at this time we do not foresee any changes in our net charge-offs or non-performing assets that would have any material impact on the soundness of the Bank.

"During the third quarter, we also undertook several initiatives designed to reduce the operating expenses of the Company, such as small staff reductions and the restructuring of our deposit courier program. We will continue to take all appropriate measures to operate our Company in an efficient and sound manner."

Comparison of Operating Results for the Three Months Ended September 30, 2008 and 2007

Overview. The Company's pretax income was $602,000 for the third quarter of 2008, compared to a pretax income of $517,00 for the third quarter of 2007. Compared to the third quarter of 2007, net interest income increased by $72,000, provision for loan losses decreased by $34,000, noninterest income decreased by $43,000 and noninterest expense decreased by $22,000. Net income, after tax, was $386,000, or $0.17 per diluted share, for the three months ended September 30, 2008, compared to a net income, after tax, of $345,000, or $0.15 per diluted share, for the three months ended September 30, 2007.

Net Interest Income. The Company's net interest income before provision for loan losses increased by $72,000 in the third quarter of 2008 compared to the third quarter of 2007. This increase was primarily attributable to an increase in net interest spread from 2.58% to 3.06%. The net interest margin was 3.72% for the third quarter of both 2008 and 2007.

Provision for Loan Losses. The provision for loan losses decreased by $34,000, from $102,000 for the three months ended September 30, 2007 to $68,000 for the three months ended September 30, 2008.

Noninterest Income. Total noninterest income decreased by $43,000, from $791,000 in the third quarter of 2007 to $748,000 in the third quarter of 2008. This decrease was due to a decrease of $14,000 in service charges on deposits as well as a number of other miscellaneous items. As previously announced in July 2008, the Company recorded in the third quarter of 2008 a gain of $523,000 on the July 2008 sale of $28.5 million of FNMA and FHLMC mortgage-backed securities. This gain on sale in the third quarter of 2008 was offset by a $526,000 gain on the sale of the Bank's Plume Street office in September 2007 that did not recur in 2008.

Noninterest Expense. Total noninterest expense was approximately $2.0 million for the third quarter of both 2008 and 2007.

Income Taxes. The Company's income tax expense for the quarter ended September 30, 2008 was $216,000, which represented an effective tax rate of 35.9%, compared to income tax expense of $172,000 for the quarter ended September 30, 2007, which represented an effective tax rate of 33.3%.

Comparison of Operating Results for the Nine Months Ended September 30, 2008 and 2007

Overview. The Company's pretax income was $972,000 for the first nine months of 2008, compared to pretax income of $875,000 for the first nine months of 2007, an increase of $97,000. Compared to the first nine months of 2007, net interest income increased by $258,000, provision for loan losses decreased by $37,000, noninterest income decreased by $147,000 and noninterest expense increased by $51,000. Net income, after tax, was $617,000, or $0.27 per diluted share, for the nine months ended September 30, 2008, compared to after-tax net income of $584,000, or $0.25 per diluted share, for the nine months ended September 30, 2007.

Net Interest Income. The Company's net interest income before provision for loan losses increased by $258,000 for the first nine months of 2008 compared to the first nine months of 2007. This increase was primarily attributable to an increase in net interest spread from 2.61% to 2.97%. Our net interest margin declined by 4 basis points, from 3.78% for the first nine months of 2007 to 3.74% for the first nine months of 2008.

Provision for Loan Losses. Provision for loan losses decreased by $37,000, from $105,000 for the nine months ended September 30, 2007 to $68,000 for the nine months ended September 30, 2008.

Noninterest Income. Total noninterest income decreased by $147,000, from $1.4 million in the first nine months of 2007 to $1.2 million in the first nine months of 2008. This decrease was primarily related to a $64,000 decrease in service charges on deposits and nonrecurring gains of $22,000 related to sales of investments in subsidiaries in 2007.

Noninterest Expense. Total noninterest expense was approximately $6.0 million for both the nine month periods ended September 30, 2008 and 2007. An increase of $171,000 in courier expense in 2008 was partially offset by a $73,000 decrease in compensation expense and reductions in a variety of other operating expenses. The Company moved its courier operations in-house in October 2008 and expects future courier expense to decrease as a result of this initiative.

Income Taxes. The Company's income tax expense for the nine months ended September 30, 2008 was $355,000, which represented an effective tax rate of 36.6%, compared to income tax expense for the nine months ended September 30, 2007 of $291,000, which represented an effective tax rate of 33.3%.

Financial Condition of the Company

Total Assets. The Company's total assets increased by $13.0 million, or 5.6%, from $233.1 million at September 30, 2007 to $246.1 million at September 30, 2008. The increase in assets resulted primarily from a $27.3 million increase in the ending balance of loans held for investment, which was partially offset by a decrease in the balance of federal funds sold.

Funds Sold and Investment Securities. Total federal funds sold and investment securities available for sale were $49.0 million at September 30, 2008, compared to a combined balance of $69.0 million at September 30, 2007, reflecting a decrease in the combined balance of $20.0 million, or 29.0%.

Loans. Loans held for investment, net, at September 30, 2008 were $170.8 million, which represents an increase of $27.3 million, or 19.0%, from the September 30, 2007 loan balance of $143.5 million.

Asset Quality. The Company's total nonperforming assets decreased to $52,000, or 0.02% of assets, at September 30, 2008, compared to $227,000, or 0.10% of assets, at September 30, 2007, attributable to a decrease in the balance of nonaccrual loans.

Deposits. Driven by growth in core deposits, total deposits increased by $7.4 million, or 3.6%, from $205.2 million at September 30, 2007 to $212.6 million at September 30, 2008. Core deposits, which are comprised of checking, savings and money market accounts, increased by $10.6 million, or 7.0%, from $150.2 million at September 30, 2007 to $160.8 million at September 30, 2008.

Average total deposits increased by $5.1 million, or 2.7%, from $186.0 million during the nine months ended September 30, 2007 to $191.1 million during the nine months ended September 30, 2008. Average core deposits increased by $9.7 million, offset by a $4.6 million decrease in the average balance of certificates of deposit, between the comparable nine -month periods.

Borrowed Funds. To fund asset growth, in addition to the increase in deposit balances, borrowed funds increased by $5.4 million, from $1.1 million at September 30, 2007 to $6.5 million at September 30, 2008, primarily due to an increase in FHLB borrowings.

Capital. Stockholders' equity increased by $456,000, or 1.8%, from $24.7 million at September 30, 2007 to $25.1 million at September 30, 2008. Stockholders' equity increased primarily as a result of a $570,000 increase in retained earnings and additional paid-in capital, offset by an $117,000 decrease in accumulated after-tax comprehensive income attributable to a decrease in the market value of the Company's available-for-sale investment securities portfolio. At September 30, 2008, the Company's equity to asset ratio was 10.2% and, based on the Bank's regulatory capital ratios, was considered "well capitalized."

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 (http://www.heritagebankva.com/). Heritage Bank has four full-service branches in the city of Norfolk and one full-service branch in the city of Virginia Beach. Heritage Bank provides a full range of banking services including business, personal and mortgage loans.

Forward Looking Statements

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

  HERITAGE BANKSHARES, INC.
  CONSOLIDATED BALANCE SHEETS
  (in thousands)

                                                       At September 30,
                                                     2008           2007
                                                 (unaudited)    (unaudited)
  ASSETS

  Cash and due from banks                          $11,699         $7,141
  Federal funds sold                                11,849         30,211
  Securities available for sale, at fair value      37,158         38,831
  Securities held to maturity, at cost                   -            677
  Loans, net
    Held for investment, net of allowance
     for loan losses                               170,817        143,530
    Held for sale                                        -            152
  Accrued interest receivable                          668            808
  Stock in Federal Reserve Bank, at cost               321            313
  Stock in Federal Home Loan Bank of Atlanta,
   at cost                                             623            401
  Premises and equipment, net                       11,519          9,711
  Other assets                                       1,430          1,327
  Total assets                                    $246,084       $233,102

  LIABILITIES AND STOCKHOLDERS' EQUITY
  Liabilities

  Deposits
  Noninterest bearing                              $65,135        $53,762
  Interest-bearing                                 147,501        151,431
  Total deposits                                   212,636        205,193

  Federal Home Loan Bank Advance                     5,000              -
  Securities sold under agreements to repurchase     1,498          1,045
  Other borrowings                                       -             50
  Accrued interest payable                             279            342
  Other liabilities                                  1,526          1,783
  Total liabilities                                220,939        208,413

  Stockholders' equity
  Common stock, $5 par value - authorized
   3,000,000 shares; issued and outstanding:
   2,279,252 shares at September 30, 2008;
   2,278,652 shares at September 30, 2007           11,396         11,393
  Additional paid-in capital                         6,297          6,134
  Retained earnings                                  7,552          7,145
  Accumulated other comprehensive income
   (loss), net                                        (100)            17
  Total stockholders' equity                        25,145         24,689
  Total liabilities and stockholders' equity      $246,084       $233,102



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

                               Three Months Ended        Nine Months Ended
                                 September 30              September 30
                               2008         2007         2008         2007
                          (unaudited)  (unaudited)  (unaudited)  (unaudited)

  Interest income
    Loans and fees on loans   $2,454       $2,530       $7,398       $7,452
    Taxable investment
     securities                  308          491        1,212        1,413
    Nontaxable investment
     securities                    7           13           33           38
    Dividends on FRB and
     FHLB stock                   10           11           42           33
    Interest on federal
     funds sold                   53          190          135          587
    Other interest income          1            3            4            9
    Total interest income      2,833        3,238        8,824        9,532

  Interest expense
    Deposits                     816        1,335        2,748        3,845
    Borrowings                    53           11          199           68
    Total interest expense       869        1,346        2,947        3,913

  Net interest income          1,964        1,892        5,877        5,619

  Provision for loan losses       68          102           68          105

  Net interest income after
   provision for loan losses   1,896        1,790        5,809        5,514

  Noninterest income
    Service charges on
     deposit accounts            111          125          316          380
    Late charges and
     other fees on loans          10           12           43           51
    Gains on sale of
     loans held for sale, net     24           14           91           97
    Gains on sale of
     investment securities       523            -          528            1
    Gain on sale of fixed
     assets                        1          529            1          529
    Other                         79          111          232          300
    Total noninterest income     748          791        1,211        1,358

  Noninterest expense
    Compensation               1,007        1,002        3,090        3,163
    Data processing              132          127          409          387
    Occupancy                    193          272          599          571
    Furniture and equipment      131          136          419          387
    Taxes and licenses            72           54          204          163
    Professional fees             71           66          231          286
    Marketing                     32           37          109          122
    Telephone                     25           31           75           95
    Stationery and supplies       12           39           58          108
    Loss on disposal or
     impairment of fixed
     assets                       68           61           68           61
    Loss on sale of
     investment securities        10            -           10            -
    Other                        289          239          776          654
    Total noninterest
     expense                   2,042        2,064        6,048        5,997

  Income before provision
   for income taxes              602          517          972          875

  Provision for income
   taxes                         216          172          355          291

  Net income                    $386         $345         $617         $584
  Earnings per common share
    Basic                      $0.17        $0.15        $0.27        $0.26
    Diluted                    $0.17        $0.15        $0.27        $0.25
  Dividends per share          $0.06        $0.06        $0.18        $0.18

  Weighted average
   shares outstanding -
   basic                   2,278,840    2,278,652    2,278,715    2,278,555
  Effect of dilutive
   stock options              18,223       20,878       16,151       16,038
  Weighted average
   shares outstanding -
   assuming dilution       2,297,063    2,299,530    2,294,866    2,294,593



  HERITAGE BANKSHARES, INC.
  OTHER SELECTED FINANCIAL INFORMATION
  (Unaudited)
  (in thousands, except share and per share data)

                                   Three Months Ended     Nine Months Ended
                                      September 30,          September 30,
                                     2008       2007       2008       2007

  Financial ratios
    Annualized return on average
     assets                          0.67%      0.63%      0.36%      0.36%
    Annualized return on average
     equity                          6.03%      5.58%      3.23%      3.18%
    Average equity to average
     assets                         11.07%     11.25%     11.16%     11.45%
    Equity to assets, at
     period-end                     10.22%     10.59%     10.22%     10.59%
    Net interest margin              3.72%      3.72%      3.74%      3.78%

  Per common share
    Earnings per share - basic       $0.17      $0.15      $0.27      $0.26
    Earnings per share - diluted     $0.17      $0.15      $0.27      $0.25
    Book value per share            $11.03     $10.84     $11.03     $10.84
    Dividends declared per share     $0.06      $0.06      $0.18      $0.18

  Common stock outstanding       2,279,252  2,278,652  2,279,252  2,278,652
  Weighted average basic
   shares outstanding            2,278,840  2,278,652  2,278,715  2,278,555
  Weighted average diluted
   shares                        2,297,063  2,299,530  2,294,866  2,294,593

  Asset quality
    Nonaccrual loans                   $44       $201        $44       $201
    Accruing loans past due
     90 days or more                     8         26          8         26
    Total nonperforming loans           52        227         52        227

    Real estate owned, net               -          -          -          -

    Total nonperforming assets         $52       $227        $52       $227

    Nonperforming assets to
     total assets                    0.02%      0.10%      0.02%      0.10%


  Allowance for loan losses
    Balance, beginning of period    $1,592     $1,382     $1,400     $1,373
    Provision for loan losses           68        102         68        105
    Loans charged-off                  (57)      (102)       (58)      (111)
    Recoveries                          (7)         -        186         15
    Balance, end of period          $1,596     $1,382     $1,596     $1,382


  Allowance for loan losses to
   gross loans held for investment,
   net of unearned fees and costs    0.93%      0.95%      0.93%      0.95%


DATASOURCE: Heritage Bankshares, Inc.



CONTACT:  Michael S. Ives of Heritage Bankshares, Inc., [phone]



Web site:  http://www.heritagebankva.com/ 

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