Heritage Bankshares (HBKS) 10-Q 2010 Q3 Quarterly report

U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from            to            

Commission File Number 0-11255

HERITAGE BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

Virginia	54-1234322
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

150 Granby Street, Suite 150, Norfolk, Virginia 23510

(Address of principal executive office)

(757) 648-1700

(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

A total of 2,307,502 shares of the registrant’s common stock were outstanding as of October 31, 2010.

TABLE OF CONTENTS

		Page No.
Part I. FINANCIAL INFORMATION
Item 1 -	Financial Statements (Unaudited)
Consolidated Balance Sheets September 30, 2010 and December 31, 2009			3
Consolidated Statements of Income Three and Nine Months Ended September 30, 2010 and 2009			4
Consolidated Statements of Cash Flows Nine Months Ended September 30, 2010 and 2009			5
Notes to Consolidated Financial Statements			6
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operation		13
Item 3 -	Quantitative and Qualitative Disclosures About Market Risk		19
Item 4 -	Controls and Procedures		19
Part II. OTHER INFORMATION
Item 1 -	Legal Proceedings		19
Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds		20
Item 3 -	Defaults Upon Senior Securities		20
Item 4 -	(Removed and Reserved)		20
Item 5 -	Other Information		20
Item 6 -	Exhibits		20
Signatures			21

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Part I. FINANCIAL INFORMATION

Item 1 Financial Statements

HERITAGE BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2010 (Unaudited)			2009 (Audited)
	(in thousands, except per share data)
ASSETS
Cash and due from banks	$	4,004		$	4,598
Interest-bearing deposits in other banks		28,784			18,674
Federal funds sold		346			2,668
Total cash and cash equivalents		33,134			25,940
Securities available for sale, at fair value		23,911			50,103
Loans, net of allowance for loan losses of $2,026 and $1,773, respectively		207,614			181,544
Accrued interest receivable		693			747
Stock in Federal Reserve Bank, at cost		587			586
Stock in Federal Home Loan Bank of Atlanta, at cost		1,843			1,476
Premises and equipment, net		11,554			11,891
Other real estate owned		—			313
Other assets		2,045			1,954
Total assets	$	281,381		$	274,554
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Noninterest-bearing	$	83,563		$	76,429
Interest-bearing		150,025			152,707
Total deposits		233,588			229,136
Federal Home Loan Bank advances		5,000			5,000
Securities sold under agreements to repurchase		2,427			2,016
Other borrowings		1,160			—
Accrued interest payable		113			119
Other liabilities		1,685			1,505
Total liabilities		243,973			237,776
Commitments and contingencies		—			—
Stockholders’ equity
Preferred stock, no par value – 1,000,000 shares authorized:
Fixed rate cumulative perpetual preferred stock, Series A, 10,103 shares issued and outstanding at both September 30, 2010 and December 31, 2009		10,103			10,103
Fixed rate cumulative perpetual preferred stock, Series B, 303 shares issued and outstanding at both September 30, 2010 and December 31, 2009		303			303
Common stock, $5 par value – 6,000,000 shares authorized; 2,307,502 and 2,291,352 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		11,538			11,457
Additional paid-in capital		6,622			6,473
Retained earnings		8,461			7,854
Discount on preferred stock		(249	)		(289	)
Accumulated other comprehensive income, net		630			877
Total stockholders’ equity		37,408			36,778
Total liabilities and stockholders’ equity	$	281,381		$	274,554

See accompanying notes to consolidated financial statements.

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HERITAGE BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months Ended September 30						Nine Months Ended September 30
	2010			2009			2010			2009
	(in thousands, except share and per share data)
Interest and dividend income
Loans and fees on loans	$	2,710		$	2,266		$	7,340		$	6,735
Taxable investment securities		422			491			1,216			1,666
Dividends on FRB and FHLB stock		11			10			29			20
Interest on federal funds sold		—			1			1			2
Other interest income		32			24			97			49
Total interest income		3,175			2,792			8,683			8,472
Interest expense
Deposits		363			496			1,067			1,664
Borrowings		57			33			124			107
Total interest expense		420			529			1,191			1,771
Net interest income		2,755			2,263			7,492			6,701
Provision for loan losses		178			65			337			141
Net interest income after provision for loan losses		2,577			2,198			7,155			6,560
Noninterest income
Service charges on deposit accounts		113			99			344			286
Late charges and other fees on loans		39			12			71			36
Gains on sale of loans held for sale		—			—			—			3
Gain on sale of investment securities		278			—			764			—
Income from bank-owned life insurance		—			—			—			35
Other		84			100			225			206
Total noninterest income		514			211			1,404			566
Noninterest expense
Compensation		1,078			1,079			3,358			3,131
Data processing		143			123			419			381
Occupancy		193			191			571			613
Furniture and equipment		141			149			442			476
Taxes and licenses		88			68			259			204
Professional fees		96			145			269			359
FDIC assessment		99			86			246			374
Marketing		31			21			96			70
Telephone		30			24			77			79
Loss on early extinguishment of debt		49			—			49			—
Loss on sale or impairment of other real estate owned		—			36			30			36
Other		149			150			484			519
Total noninterest expense		2,097			2,072			6,300			6,242
Income before provision for income taxes		994			337			2,259			884
Provision for income taxes		346			131			799			296
Net income		648			206			1,460			588
Preferred stock dividends and accretion of discount		(147	)		(10	)		(439	)		(10	)
Net income available to common stockholders	$	501		$	196		$	1,021		$	578
Earnings per common share
Basic	$	0.22		$	0.09		$	0.44		$	0.25
Diluted	$	0.22		$	0.09		$	0.44		$	0.25
Dividends per common share	$	0.06		$	0.06		$	0.18		$	0.18
Weighted average shares outstanding - basic		2,307,141			2,286,579			2,300,109			2,282,982
Effect of dilutive stock options		10,561			10,579			8,495			11,407
Weighted average shares outstanding - diluted		2,317,702			2,297,158			2,308,604			2,294,389

See accompanying notes to consolidated financial statements.

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HERITAGE BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended September 30,
	2010			2009
	(in thousands)
Cash flows from operating activities:
Net income	$	1,460		$	588
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan loss		337			141
Amortization of loan yield adjustments, net		266			298
Depreciation, amortization and accretion, net		674			686
Stock-based compensation		106			179
Deferred compensation		31			133
Exercise of stock options tax benefit		31			14
Net (gains) losses on:
Sale of securities		(764	)		—
Sale, disposal or impairment of property, plant and equipment		3			4
Sale or impairment of other real estate owned		30			25
Net gain on bank owned life insurance		—			(35	)
Changes in assets/liabilities net
(Increase) decrease in interest receivable and other assets		188			(143	)
Increase (decrease) in interest payable and other liabilities		56			(194	)
Net cash provided by operating activities		2,418			1,696
Cash flows from investing activities:
Proceeds from maturities and principal repayments of securities available for sale		34,036			16,651
Purchases of securities available for sale		(46,053	)		(21,064	)
Proceeds from sales of securities available for sale		38,361			—
Proceeds from the sale of other real estate owned		283			—
Net increase in loans held for investment		(26,673	)		(804	)
Purchases of Federal Home Loan Bank stock and Federal Reserve Bank stock		(439	)		(1,738	)
Redemption of Federal Home Loan Bank stock and Federal Reserve Bank stock		71			883
Purchases of premises and equipment		(113	)		(596	)
Proceeds from premises and equipment		—			15
Proceeds from bank owned life insurance		—			135
Net cash used for investing activities		(527	)		(6,518	)
Cash flows from financing activities:
Proceeds from exercise of stock options		93			83
Net increase in deposits		4,452			10,291
Proceeds from Federal Home Loan Bank advances		101,355			148,100
Repayments of Federal Home Loan Bank advances		(101,355	)		(148,100	)
Net increase (decrease) in securities sold under agreements to repurchase		411			(6	)
Proceeds of federal funds purchased		—			43,736
Repayment of federal funds purchased		—			(43,737	)
Proceeds from other borrowings		1,160			—
Net proceeds from issuance of preferred stock		—			9,992
Cash dividends paid		(813	)		(411	)
Net cash provided by financing activities		5,303			19,948
Increase in cash and cash equivalents		7,194			15,126
Cash and cash equivalents, beginning of period		25,940			13,418
Cash and cash equivalents, end of period	$	33,134		$	28,544
Supplemental disclosure:
Interest paid	$	1,196		$	1,839
Income taxes paid	$	913		$	315

See accompanying notes to consolidated financial statements.

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HERITAGE BANKSHARES, INC.

Notes to Consolidated Financial Statements

Note 1 – Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Heritage Bankshares, Inc. and its wholly-owned subsidiary, Heritage Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

Heritage Bankshares, Inc. (the “Company”) is a bank holding company that was incorporated under the laws of the Commonwealth of Virginia in 1983, and the Company serves as the holding company for its wholly-owned subsidiaries. The Company’s only subsidiary, Heritage Bank (the “Bank”), is a state banking corporation engaged in the general commercial and retail banking business. 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.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with and with reference to the audited consolidated financial statements and accompanying footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2009. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Certain reclassifications have been made to prior year financial statements to conform to current period presentation.

The Company believes its critical accounting policies are those that are particularly sensitive in terms of judgments and the extent to which estimates are used, and such policies include (a) the valuation of the allowance for loan losses and the impairment of loans, (b) the impairment of financial investments and other accounts, (c) the deferral of loan fees and direct loan origination costs, and (d) accounting for income taxes.

Allowance for Loan Losses; Impairment of Loans.The Bank maintains an allowance for loan losses at a level that, in management’s judgment, is adequate to absorb estimated credit losses on existing loans. The amount of the allowance is affected by: (1) loan charge-offs, which decrease the allowance, (2) recoveries on loans previously charged-off, which increase the allowance, and (3) the provision for loan losses charged to income, which increases the allowance.

The Bank analyzes its loan portfolio through ongoing credit review processes and constructs a comprehensive allowance analysis for its loan portfolio at least quarterly. This analysis includes two basic elements: (1) specific allowances for individual loans; and (2) general allowances for loan portfolio segments, which factor in historical loan loss experience and delinquency rates for the Bank and the banking industry and numerous other environmental factors.

The Bank evaluates various loans individually for impairment as required by generally accepted accounting principles related to receivables. The evaluation is based upon either discounted cash flows or collateral evaluations. If the evaluation shows that a particular loan is impaired, then a specific reserve is established, or a charge-off is made, for the amount of any impairment.

For loans without an individual measure of impairment, the Bank makes estimates of losses for groups of loans as required by generally accepted accounting principles related to contingencies. As part of the loan loss reserve methodology, loans are placed into one of four major categories or segments of loans: (1) commercial and industrial loans, (2) consumer loans, (3) 1-4 family residential loans (including home equity loans and lines), and (4) multi-family and other commercial real estate loans.

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The Bank then considers the impact of various bank, industry, economic and other environmental factors and documents, which are further used in the analysis.

The Bank’s allowance for loan losses is divided into four distinct portions: (1) Historical – an amount based on the Bank’s actual net charge-offs; (2) Impaired Loans – an amount for specific allocations on significant individual credits as prescribed by generally accepted accounting principles related to receivables; (3) Loan Segments – an amount to adjust the historical allocation for the four loan segments based on environmental factors as provided by guidance for contingencies; and (4) Unallocated – an amount to reflect the imprecision inherent in these calculations.

Impairment of Financial Investments and Other Accounts. Impairment of investment securities, other equity investments and other asset accounts results in a write-down that must be included in net income when the fair value of the asset declines below cost and the decline is other-than-temporary. The fair values of these investments and other assets are subject to change, as they are influenced by market conditions and management decisions.

Deferral of Loan Fees and Direct Loan Origination Costs. Generally accepted accounting principles relating to accounts receivable require that loan fees and direct loan origination costs be deferred and recognized as an adjustment to the loan’s yield. While the amount of fees to be deferred is generally apparent in the origination of a loan, the Company utilizes estimates to determine the amount of deferred direct origination costs, especially payroll costs, that are attributable to the loan origination process. Management’s estimates of the amount of costs associated with successful loan origination activities are reviewed and updated annually.

Accounting for Income Taxes. The determination of the Company’s effective tax rate requires judgment. In the ordinary course of business, there are transactions and calculations for which the ultimate tax outcomes are uncertain. In addition, the Company’s tax returns are subject to audit by various tax authorities. Although we believe that our estimates are reasonable, there can be no assurance that the final tax outcome will not be materially different than that which is reflected in the income tax provision and accrual.

Subsequent Events. In accordance with accounting guidance, the Company has evaluated events and transactions for potential recognition or disclosure in these financial statements through the date the financial statements were issued.

Note 2 – Share-Based Compensation

The following table presents a summary of stock option activity for the period of January 1, 2010 through September 30, 2010.

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Term (Years)		Aggregate Intrinsic Value
								(in thousands)
Outstanding at January 1, 2010		267,000		$	12.02		—		—
Granted		—			—		—		—
Exercised		(16,150	)		5.76		—		—
Forfeited/expired		(9,450	)		7.42		—		—
Outstanding at September 30, 2010		241,400		$	12.62		5.9	$	258
Exercisable at September 30, 2010		173,800		$	12.69		5.7	$	185

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2010. The amount changes based on the fair market value of the Company’s stock, as reflected by stock market prices. The Company’s current policy is to issue new shares of common stock to satisfy option exercises.

7

The aggregate intrinsic value of options exercised during the nine months ended September 30, 2010 and September 30, 2009 was $91,686 and $42,635, respectively. Cash received from exercises of options during the first nine months of 2010 and 2009 was $93,050 and $83,325, respectively.

The amount charged against income, before income tax benefit of $8,114, in relation to stock-based payment arrangements, was $106,038 for the nine months ended September 30, 2010. The amount charged against income, before income tax benefit of $57,816, in relation to stock-based payment arrangements, was $178,634 for the nine months ended September 30, 2009. At September 30, 2010, unrecognized compensation expense, net of estimated forfeitures, related to unvested stock option grants was $119,463 and is currently expected to be recognized over a weighted average period of 0.8 years as follows:

At September 30, 2010:	Stock-Based Compensation Expense
	(in thousands)
2010	$	35
2011		68
2012		12
2013		4
Total	$	119

Note 3 – Other Comprehensive Income

The components of the Company’s other comprehensive income and related tax effects are as follows:

	Three Months Ended						Nine Months Ended
	September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009
	(in thousands)
Unrealized holding gains on available for sale securities	$	50		$	556		$	389		$	674
Realized gains on sales of available for sale securities, net of tax		(184	)		—			(505	)		—
Tax effect on unrealized gain		(17	)		(189	)		(132	)		(229	)
Other comprehensive income, net of tax	$	(151	)	$	367		$	(248	)	$	445

Note 4 – Earnings Per Common Share Reconciliation

The Company’s basic and diluted earnings per common share calculations are presented in the following table:

	Three Months Ended				Nine Months Ended
	September 30, 2010		September 30, 2009		September 30, 2010		September 30, 2009
	(in thousands, except share and per share data)
Net income available to common stockholders (numerator, basic and diluted)	$	501	$	196	$	1,021	$	578
Weighted average shares outstanding (denominator)		2,307,141		2,286,579		2,300,109		2,282,982
Earnings per common share - basic	$	0.22	$	0.09	$	0.44	$	0.25
Effect of dilutive securities
Weighted average shares outstanding during the period		2,307,141		2,286,579		2,300,109		2,282,982
Effect of dilutive stock options		10,561		10,579		8,495		11,407
Weighted diluted average shares outstanding (denominator) during the period		2,317,702		2,297,158		2,308,604		2,294,389
Earnings per common share - assuming dilution	$	0.22	$	0.09	$	0.44	$	0.25

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Note 5 – Disclosure About Fair Value of Financial Instruments

The following summary presents an estimate of the fair value of the Company’s financial instruments. Because no active market readily exists for a portion of the Company’s financial instruments, fair values of some financial instruments are based on estimates using present value and other valuation techniques. Much of the information used to determine fair value is highly subjective in nature and therefore the results may not be precise. The subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality and interest rates, all of which are subject to change. Accordingly, the amounts that will actually be realized or paid upon settlement or maturity of the various instruments could be significantly different.

The following table presents the carrying amounts and fair value of the Company’s financial instruments at September 30, 2010 and December 31, 2009.

	At September 30, 2010				At December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Dollars in Thousands)
Financial assets:
Cash and due from banks	$	32,788	$	32,788	$	23,272	$	23,272
Federal funds sold		346		346		2,668		2,668
Securities available for sale		23,911		23,911		50,103		50,103
Loans held for investment, net		207,614		209,179		181,544		182,340
Accrued interest receivable		693		693		747		747
Stock in FRB and FHLB		2,430		2,430		2,062		2,062
Bank-owned life insurance		566		566		553		553
Other real estate owned		—		—		313		313
Other financial assets		99		99		—		—
Financial liabilities:
Deposits		233,588		233,841		229,136		229,214
Federal Home Loan Bank advance		5,000		5,200		5,000		5,053
Securities sold under agreements to repurchase		2,427		2,427		2,016		2,016
Other borrowings		1,160		1,168		—		—
Accrued interest payable		113		113		119		119

Fair Value Hierarchy

“Fair Value Measurements and Disclosures” establishes three levels of inputs that may be used to measure fair value:

Level 1: Valuation is based on quoted prices in active markets for identical assets or liabilities.

Level 2: Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

Level 3: Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 2 securities include Treasury notes and bills, mortgage-backed securities issued by government sponsored entities, municipal bonds and other securities issued by government sponsored agencies.

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Loans

The Company does not record loans at fair value on a recurring basis. From time to time, a loan is considered impaired. Loans that are deemed to be impaired are valued in accordance with guidance related to receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value and discounted cash flows. When the fair value of collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as Level 2. If the fair value of the loan is based on criteria other than observable market prices or current appraised value, the loan is recorded as Level 3.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Foreclosed assets are carried at the lower of the carrying value or fair value. Fair value is based upon independent observable market prices or appraised values of the collateral, which the Company considers to be Level 2 inputs.

General

The Company has no liabilities carried at fair value or measured at fair value on a nonrecurring basis.

The Company has no assets or liabilities whose fair values are measured using Level 3 inputs.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

September 30, 2010 in thousands	Total		Level 1		Level 2		Level 3
Investment in securities available for sale:
Mortgage-backed securities	$	23,911	$	—	$	23,911	$	—
Total Assets at Fair Value	$	23,911	$	—	$	23,911	$	—

There were no liabilities recorded at fair value on a recurring basis at September 30, 2010.

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

September 30, 2010 in thousands	Total		Level 1		Level 2		Level 3
Loans	$	60	$	—	$	60	$	—
Total Assets at Fair Value	$	60	$	—	$	60	$	—

There were no liabilities recorded at fair value on a non-recurring basis at September 30, 2010.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

December 31, 2009 in thousands	Total		Level 1		Level 2		Level 3
Investment in securities available for sale:
U.S. government sponsored enterprises	$	4,975	$	—	$	4,975	$	—
Mortgage-backed securities		45,128		—		45,128		—
Total Assets at Fair Value	$	50,103	$	—	$	50,103	$	—

There were no liabilities recorded at fair value on a recurring basis at December 31, 2009.

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Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

December 31, 2009 in thousands	Total		Level 1		Level 2		Level 3
Other real estate owned	$	313	$	—	$	313	$	—
Total Assets at Fair Value	$	313	$	—	$	313	$	—

There were no liabilities recorded at fair value on a non-recurring basis at December 31, 2009.

Note 6 – Securities

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
At September 30, 2010
Securities available for sale
Mortgage-backed securities	$	22,957	$	954	$	—	$	23,911
Total securities available for sale	$	22,957	$	954	$	—	$	23,911
Total securities(1)	$	22,957	$	954	$	—	$	23,911

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
At December 31, 2009
Securities available for sale
U.S. government sponsored enterprises	$	5,000	$	—	$	25	$	4,975
Mortgage-backed securities		43,774		1,354		—		45,128
Total securities available for sale	$	48,774	$	1,354	$	25	$	50,103
Total securities (1)	$	48,774	$	1,354	$	25	$	50,103

(1) At September 30, 2010 and at December 31, 2009, the Company held no securities classified as held to maturity.

The following tables show gross unrealized losses and fair value on investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2010 and at December 31, 2009. The current year unrealized losses on investment securities, if any, are a result of changes in interest rates during the periods. All unrealized losses on investment securities are considered by management to be temporary given the credit ratings on these investment securities and the short duration of the unrealized loss.

There were no investment securities in an unrealized loss position at September 30, 2010.

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	At December 31, 2009
	Less Than 12 Months				12 Months or More				Total
	(in thousands)
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. government sponsored enterprises	$	4,975	$	25	$	—	$	—	$	4,975	$	25
Mortgage-backed securities		—		—		—		—		—		—
Total temporarily impaired securities	$	4,975	$	25	$	—	$	—	$	4,975	$	25

The amortized cost and fair value of investment securities at September 30, 2010, by contractual maturity, are reflected below. Actual maturities will differ from contractual maturities because some securities may be called or prepaid prior to their contractual maturity.

	Securities Available for Sale
	(in thousands)
	Amortized Cost		Fair Value
Due in one year or less	$	715	$	725
Due after one year through five years		12,658		13,079
Due after five years through ten years		6,627		7,000
Due after ten years		2,957		3,107
Total	$	22,957	$	23,911

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Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used in this Quarterly Report on Form 10-Q, the “Company,” “we,” “our” and “us” refer to Heritage Bankshares, Inc. and its subsidiaries, unless the context requires otherwise.

Forward-Looking Statements

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by the use of such words as “may,” “will,” “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential”, among others, though these words are not the exclusive means of identifying such forward-looking statements. These forward-looking statements relate to, among other things, expectations regarding the business environment in which we operate, projections of future performance and perceived opportunities in the market, and they are based on management’s current beliefs, assumptions and expectations. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. For a detailed discussion of the factors that might cause such a difference, see Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission on March 26, 2010.

Factors that might affect forward-looking statements include, among other things:

• the demand for our products and services;

• actions taken by our competitors;

• changes in prevailing interest rates;

• changes in delinquencies and defaults by our borrowers;

• changes in loan quality and performance;

• changes in FDIC insurance assessments;

• legislative or regulatory changes or actions that affect our business;

• our ability to achieve financial goals and strategic plans;

• our participation in the TARP Capital Purchase Program;

• litigation; and

• credit and other risks of lending activities.

As a result, we cannot assure you that our future results of operations, financial condition or other matters will be consistent with those expressed or implied in any forward-looking statements. You should not place undue reliance on these forward-looking statements, as they all are based only on information available at this time, and we assume no obligation to update any of these statements.

Financial Condition of the Company at September 30, 2010

Total Assets. The Company’s total assets increased by $10.7 million, or 3.9%, from $270.7 million at September 30, 2009 to $281.4 million at September 30, 2010. The increase in assets resulted primarily from a $30.7 million, or 17.3%, increase in loans and a $4.6 million, or 16.1%, increase in cash and cash equivalents, offset by a $25.9 million, or 52.0%, decrease in investment securities available for sale. Total assets increased by $6.8 million, or 2.5%, from $274.6 million at December 31, 2009, attributable to a $26.1 million, or 14.4%, increase in loans and a $7.2 million, or 27.7%, increase in cash and cash equivalents, offset by a $26.2 million, or 52.3%, decrease in available for sale securities.

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Liquid Assets.Liquid assets, which include cash and cash equivalents and investment securities, decreased by $21.3 million, from $78.3 million at September 30, 2009 to $57.0 million at September 30, 2010. Investment securities available for sale were $23.9 million at September 30, 2010 compared to $49.8 million at September 30, 2009, a decrease of $25.9 million, or 52.0%. Compared to December 31, 2009, liquid assets decreased by $19.0 million, or 25.0%. Decreases in securities available for sale of $26.2 million to finance increases in loans were partially offset by increases in interest-bearing deposits in other banks of $10.1 million.

Loans. Loans held for investment, net, were $207.6 million at September 30, 2010, an increase of $30.7 million, or 17.3%, from the loan balance of $176.9 million at September 30, 2009, and $26.1 million, or 14.4%, from the loan balance of $181.5 million at December 31, 2009. The Company added $6.3 million of tax-exempt loans to its portfolio during the latter part of the third quarter 2010.

Asset Quality. Nonperforming assets were $60,000, or 0.02% of assets, at September 30, 2010, compared to $348,000, or 0.13% of assets, at September 30, 2009. Nonperforming assets were $314,000, or 0.11% of assets, at December 31, 2009.

Deposits. At September 30, 2010, an increase in noninterest-bearing deposits of $11.0 million more than offset a decrease in interest-bearing deposits of $3.5 million, resulting in a net increase in total deposits of $7.5 million, or 3.3%, from $226.1 million at September 30, 2009 to $233.6 million at September 30, 2010. Core deposits, which are comprised of noninterest-bearing, money market, NOW and savings deposits, increased by $9.7 million, or 5.6%, from $174.5 million at September 30, 2009 to $184.2 million at September 30, 2010. Certificates of deposit decreased by $2.2 million between the comparable nine-month periods. Total deposits at September 30, 2010 increased by $4.5 million, or 1.9%, from $229.1 million at December 31, 2009.

Average total deposits increased by $6.5 million, or 2.9%, from $221.7 million during the nine months ended September 30, 2009 to $228.2 million during the nine months ended September 30, 2010. Average core deposits increased by $10.9 million between the comparable nine-month periods, partially offset by a $4.4 million decrease in certificates of deposit. In addition, the mix of average noninterest-bearing deposits to average total deposits increased from 28.4% to 33.9% between the first nine months of 2009 and 2010, further contributing to the improvement in our net interest margin.

Borrowed Funds. Borrowed funds increased by $2.4 million, from $6.2 million at September 30, 2009 to $8.6 million at September 30, 2010, resulting from increases in securities sold under agreements to repurchase and other borrowings. Compared to the $7.0 million balance at December 31, 2009, borrowed funds at September 30, 2010 increased by $1.6 million.

Capital. Stockholders’ equity increased by $679,000, or 1.8%, from $36.7 million at September 30, 2009 to $37.4 million at September 30, 2010, primarily as a result of an $846,000 increase in retained earnings and $124,000 in proceeds and associated tax benefits from stock option exercises. These increases were offset by a decrease in other comprehensive income of $488,000, primarily attributable to a $25.9 million decrease in the balance of available for sale investment securities between the periods. Stockholders’ equity at September 30, 2010 increased by $630,000 compared to the $36.8 million balance at December 2009, largely attributable to an increase in retained earnings.

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The tables below set forth, for the periods indicated, information with respect to our nonperforming assets and allowance for loan losses.

Nonperforming assets at the dates indicated were:

	At September 30,
	2010		2009
	(in thousands)
Nonaccrual loans	$	60	$	189
Accruing loans past due 90 days or more		—		6
Total nonperforming loans				195
Other real estate owned, net		—		153
Total nonperforming assets(1)	$	60	$	348

(1) A restructured loan of $205,823 at September 30, 2009 was not included as a non-performing asset because, both at September 30, 2009 and currently, we expect that the applicable borrower will satisfy in full all of its payment obligations, both interest payments and repayment of principal, in accordance with the modified terms of the loan.

The following presents a summary of activity in the allowance for loan losses account for the applicable periods:

	Three Months Ended						Nine Months Ended
	September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009
	(in thousands)
Balance, beginning of period	$	1,932		$	1,728		$	1,773		$	1,652
Provision for loan losses		178			65			337			141
Loans charged-off		(85	)		(39	)		(109	)		(69	)
Recoveries		1			17			25			47
Balance, end of period	$	2,026		$	1,771		$	2,026		$	1,771

Comparison of Operating Results for the Three Months Ended September 30, 2010 and 2009

Overview. The Company’s pretax income was $994,000 for the third quarter of 2010, compared to a pretax income of $337,000 for the third quarter of 2009, an increase of $657,000. Compared to the third quarter of 2009, net interest income increased by $492,000, provision for loan losses increased by $113,000, noninterest income increased by $303,000, and noninterest expense held steady.

Net Interest Income. The Company’s net interest income before provision for loan losses increased by $492,000 to $2.8 million in the third quarter of 2010, compared to $2.3 million in the third quarter of 2009. This increase in net interest income was primarily attributable to an increase in average interest-earning assets of $39.1 million, resulting from increases in our loan portfolio and interest-earning accounts at other banks, partially offset by an increase in average interest-bearing liabilities of $16.4 million, between the third quarter of 2009 and the third quarter of 2010; these quarter over quarter changes resulted in a 26 basis point increase in net interest spread from 3.25% for the three months ended September 30, 2009 to 3.51% for the three months ended September 30, 2010. Additionally, average noninterest-bearing deposits increased by $12.5 million. Net interest margin increased by 19 basis points, from 3.64% in the third quarter of 2009 to 3.83% in the third quarter of 2010.

Provision for Loan Losses. The Company’s provision for loan losses in the third quarter of 2010 was $178,000, an increase of $113,000 over a provision of $65,000 in the third quarter of 2009, driven largely by an $11.7 million net increase in total loans in the third quarter of 2010. Net charge-offs were $84,000 in the third quarter of 2010, compared to net charge-offs of $22,000 in the third quarter of 2009. Nonperforming assets were $60,000 at September 30, 2010, compared to $348,000 at September 30, 2009.

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Noninterest Income. Total noninterest income increased by $303,000, from $211,000 in the third quarter of 2009 to $514,000 in the third quarter of 2010, primarily as a result of a $278,000 gain on the sale of investment securities.

Noninterest Expense. Total noninterest expense remained steady at $2.1 million for both third quarter periods. Because of our high level of liquidity, the Bank was able to repay a $10 million medium term FHLB advance during the third quarter of 2010, incurring a loss on the early extinguishment of medium term debt of $49,000. This loss was offset by a decrease in professional fees over the comparable quarters.

Income Taxes. The Company’s income tax expense for the third quarter of 2010 was $346,000, reflecting an effective tax rate of 34.9%, compared to income tax expense of $131,000 for the third quarter of 2009, reflecting an effective tax rate of 39.0%. The lower effective tax rate for the third quarter of 2010 was attributable to higher pre-tax income relative to net non-deductible items compared to the third quarter of 2009.

Net Income Available to Common Stockholders. After the impact of dividends on our outstanding TARP preferred stock, net income available to common stockholders was $501,000 for the third quarter of 2010, compared to $196,000 for the third quarter of 2009.

Comparison of Operating Results for the Nine Months Ended September 30, 2010 and 2009

Overview. The Company’s pretax income was $2.3 million for the nine months ending September 30, 2010, compared to a pretax income of $884,000 for the nine months ending September 30, 2009, an increase of $1.4 million. Compared to the first nine months of 2009, net interest income increased by $791,000, provision for loan losses increased by $196,000, noninterest income increased by $838,000, and noninterest expense increased by $58,000.

Net Interest Income. The Company’s net interest income before provision for loan losses increased by $791,000 to $7.5 million in the first nine months of 2010, compared to $6.7 million in the first nine months of 2009. This increase in net interest income was primarily attributable to an $18.4 million increase in average interest-earning assets and a $6.0 million decrease in average interest-bearing liabilities between the first nine months of 2009 and the first nine months of 2010; these year-to-date over year-to-date changes resulted in a 20 basis point increase in net interest spread, from 3.25% for the nine months ended September 30, 2009 to 3.45% for the nine months ended September 30, 2010. Additionally, average noninterest-bearing deposits increased by $14.4 million. Net interest margin increased by 15 basis points, from 3.67% for the first nine months of 2009 to 3.82% for the first nine months of 2010.

Provision for Loan Losses. The Company’s provision for loan losses in the first nine months of 2010 was $337,000, compared to a provision of $141,000 in the first nine months of 2009. The increase is primarily attributable to a $26.3 million net increase in total loans in the first nine months of 2010. Net charge-offs were $84,000 in the nine months ended September 30, 2010, compared to $22,000 in net charge-offs in the nine months ended September 30, 2009.

Noninterest Income. Total noninterest income increased by $838,000, from $566,000 in the first nine months of 2009 to $1.4 million in the first nine months of 2010, primarily due to gains of $764,000 on the sale of investment securities.

Noninterest Expense. Total noninterest expense increased by only $58,000 to remain relatively constant at $6.3 million for the first nine months of 2010 and 2009. Increases in compensation expense of $227,000 were offset by decreases in FDIC assessment expenses, occupancy expenses, and professional fees of $128,000, $42,000, and $90,000, respectively. The decrease in FDIC assessment relates primarily to a $121,000 special assessment in June 2009 that did not recur in 2010.

Income Taxes. The Company’s income tax expense for the first nine months of 2010 was $799,000, reflecting an effective tax rate of 35.4%, compared to income tax expense of $296,000 for the first nine months of 2009, reflecting an effective tax rate of 33.4%. The lower effective tax rate for the first nine months of 2009 was attributable to a $48,000 tax benefit resulting from an increase in non-qualified stock options related to certain stock options that were repriced in the first quarter of 2009 and to nontaxable life insurance income.

Net Income Available to Common Stockholders. After the impact of dividends on our outstanding TARP preferred stock, net income available to common stockholders was $1,021,000 for the nine months ended September 30,

16

2010, compared to $578,000 for the comparable 2009 period. The Company issued TARP preferred stock on September 25, 2009, so the impact of the TARP dividends on net income in deriving net income available to common stockholders for the three and nine months ended September 30, 2009 was a minimal reduction of $10,000, compared to reductions of $147,000 and $439,000 for the comparable three and nine month periods in 2010.

Commitments

We are a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or loans approved but not yet funded, standby letters of credit, and commitments to sell loans. These instruments involve, to varying degrees, elements of risk which have not been recognized in our consolidated balance sheets.

Loan commitments are agreements to extend credit to a customer so long as there are no violations of the applicable contract terms prior to the funding. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Because certain of the commitments are expected to be withdrawn or expire unused, the total commitment amount does not necessarily represent future cash requirements. Standby letters of credit are written unconditional commitments to guarantee the performance of a Bank customer to a third party.

We use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments. Unless otherwise noted, we require collateral or other security to support financial instruments with credit risk.

The following table reflects our other loan commitments outstanding at the dates indicated:

	At September  30, 2010		At September 30, 2009
	(in thousands)
Commitments to extend credit	$	35,713	$	35,943
Standby letters of credit		221		1,012
Commitments to sell loans		—		—
	$	35,934	$	36,955

Liquidity

Liquidity refers to the availability of sufficient funds to meet the needs of depositors, borrowers, creditors and investors and to fund operations. Our primary sources of funds are customer deposits, cash and cash equivalents, investment securities available for sale, loan repayments and borrowings. These funds are used to make loans, purchase investment securities, meet depositor withdrawals and fund operations. At September 30, 2010, cash and cash equivalents were $33.1 million, an increase of $7.2 million from $25.9 million at December 31, 2009, largely attributable to a $10.1 million increase in the balance of interest-bearing deposits in other banks.

In addition, we maintain a liquid available for sale investment securities portfolio. At September 30, 2010, the balance of our available for sale investment portfolio was $23.9 million, compared to a $50.1 million balance at December 31, 2009. We also are able to obtain funds through approved borrowing lines with the Federal Home Loan Bank of Atlanta and another financial institution. Management believes our existing liquidity sources are sufficient to satisfy the Company’s operational requirements and obligations. We maintain a high level of liquidity due to a concentration in some customer deposits, which can fluctuate significantly as depositor needs change.

Capital Resources

The Company’s capital is reflected in its stockholders equity, which was $37.4 million at September 30, 2010, compared to $36.8 million at December 31, 2009. At September 30, 2010, the Company and the Bank were considered “well-capitalized” as defined by the Federal Reserve Bank. We monitor the current and projected capital levels of the Bank and the Company and will consider additional sources of capital, through the issuance of stock, debt, or otherwise, as needs arise.

17

Recent Accounting Pronouncements

The following is a summary of recent authoritative pronouncements:

Income Tax guidance was amended in April 2010 to reflect an SEC Staff Announcement after the President signed the Health Care and Education Reconciliation Act of 2010 on March 30, 2010, which amended the Patient Protection and Affordable Care Act signed on March 23, 2010. According to the announcement, although the bills were signed on separate dates, regulatory bodies would not object if the two Acts were considered together for accounting purposes. This view is based on the SEC staff’s understanding that the two Acts together represent the current health care reforms as passed by Congress and signed by the President. The amendment had no impact on the financial statements.

Stock compensation guidance was updated in April 2010 to address the classification of employee share-based payment awards with exercise prices dominated in the currency of a market in which a substantial portion of the entity’s equity securities trade. The guidance states that these awards should not be considered to contain a condition that is not a market, performance, or service condition. Share based payments that contain conditions related to market, performance and service must be recorded as liabilities. These awards should not be classified as liabilities if they otherwise qualify to be classified as equity. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company does not expect the update to have an impact on the financial statements.

In April 2010, guidance was issued related to accounting for acquired troubled loans that are subsequently modified. The guidance provides that if these loans meet the criteria to be accounted for within a pool, modifications to one or more of these loans does not result in the removal of the modified loan from the pool even if the modification would otherwise be considered a troubled debt restructuring. The pool of assets in which the loan is included will continue to be considered for impairment. The amendments do not apply to loans not meeting the criteria to be accounted for within a pool. These amendments are effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. These amendments had no impact on the financial statements.

In July 2010, the Receivables topic of the ASC was amended to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments will require the allowance disclosures to be provided on a disaggregated basis. The Company is required to begin to comply with the disclosures in its financial statements for the year ended December 31, 2010.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes several provisions that will affect how community banks, thrifts, and small bank and thrift holding companies will be regulated in the future. Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift holding companies. The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks. Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting originator compensation, minimum repayment standards, and pre-payments. Management is actively reviewing the provisions of the Dodd-Frank Act and assessing its probable impact on our business, financial condition, and results of operations.

In August 2010, two updates were issued to amend various SEC rules and schedules pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies and based on the issuance of SEC Staff Accounting Bulletin 112. The amendments related primarily to business combinations and removed references to “minority interest” and added references to “controlling” and “noncontrolling interests(s)”. The updates were effective upon issuance but had no impact on the Company’s financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

18

Recent Regulatory Developments

The Small Business Jobs Act of 2010 was signed into law on September 27, 2010. The Act establishes a $30 billion Small Business Lending Fund (“SBLF”), designed to provide small banks, like the Bank, with capital to increase the availability of credit for small businesses. Qualifying banks that are currently participating in the TARP Capital Purchase Program will have the opportunity to “refinance” their TARP investment with an investment under the SBLF program, by exchanging their existing TARP preferred stock for new SBLF program preferred stock or another financial instrument that would qualify as capital. The dividend rate payable on SBLF investments could be reduced to as low as 1% from an initial dividend rate of 5%, to the extent participating institutions achieve certain levels of additional small business lending. Our Board of Directors has authorized the Company to apply to the United States Treasury to participate in this new SBLF program at the earliest opportunity. If our application is accepted, the Board of Directors will make a final decision about participation in the SBLF program once the Treasury has issued the final rules and regulations that would be applicable to the Company, but at this time we cannot determine what impact, if any, the SBLF will have on our business or operations.

Item 3 Quantitative and Qualitative Disclosures About Market Risk

The Company is a smaller reporting company and thus is not required to provide the information required by this Item 3.

Item 4 Controls and Procedures

The Company is required to maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as this quarterly report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to Company management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, the Company recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2010. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have determined that our disclosure controls and procedures with respect to financial reporting were effective as of September 30, 2010 to ensure that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported as and when required.

Changes in Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

There were no changes in the Company’s internal control over financial reporting in the quarter ended September 30, 2010 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1 Legal Proceedings

The Company is a party to routine litigation incidental to our business, none of which is considered likely to have a material effect on the Company.

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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3 Defaults Upon Senior Securities

None

Item 4 (Removed and Reserved)

Item 5 Other Information

None

Item 6 Exhibits

See Index to Exhibits

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HERITAGE BANKSHARES, INC.
	(Registrant)
November 10, 2010	/s/ Michael S. Ives
	Michael S. Ives,
	President & Chief Executive Officer
	(Principal Executive Officer)
November 10, 2010	/s/ John O. Guthrie
	John O. Guthrie,
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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Index to Exhibits

3.1	Amended and Restated Articles of Incorporation of Heritage Bankshares, Inc. (Incorporated herein by reference to the Company’s Form 10-Q filed on August 11, 2009.)
3.2	Articles of Amendment to the Articles of Incorporation of Heritage Bankshares, Inc. Establishing the Terms of the Preferred Shares. (Incorporated herein by reference to the Company’s Form 8-K filed on September 25, 2009.)
3.3	Amendment to Bylaws of Heritage Bankshares, Inc. (Incorporated herein by reference to the Company’s Form 8-K filed on September 25, 2009.)
4.1	Form of Certificate for Series A Preferred Stock. (Incorporated herein by reference to the Company’s Form 8-K filed on September 25, 2009.)
4.2	Form of Certificate for Series B Preferred Stock. (Incorporated herein by reference to the Company’s Form 8-K filed on September 25, 2009.)
4.3	Warrant to Purchase up to 303.00303 shares of Series B Preferred Stock, dated September 25, 2009. (Incorporated herein by reference to the Company’s Form 8-K filed on September 25, 2009.)
10.8	Amended and Restated Bylaws of Heritage Bankshares, Inc. (Incorporated herein by reference to the Company’s Form 8-K filed on May 3, 2005.)
10.11	Amendment to Bylaws of Heritage Bankshares, Inc. (Incorporated herein by reference to the Company’s Form 8-K filed on August 1, 2006.)
*10.16	Heritage 2006 Equity Incentive Plan (As Amended and Restated Effective January 28, 2009). (Incorporated herein by reference to the Company’s Form S-8 filed on July 27, 2009.)
10.22	Letter Agreement, dated September 25, 2009, including Securities Purchase Agreement – Standard Terms, incorporated by reference therein, between Heritage Bankshares, Inc. and the United States Department of the Treasury. (Incorporated herein by reference to the Company’s Form 8-K filed on September 25, 2009.)
10.23	Side Letter, dated September 25, 2009, between Heritage Bankshares, Inc. and the United States Department of the Treasury. (Incorporated herein by reference to the Company’s Form 8-K filed on September 25, 2009.)
10.24	ARRA Agreement, dated September 25, 2009, between Heritage Bankshares, Inc. and the United States Department of the Treasury. (Incorporated herein by reference to the Company’s Form 8-K filed on September 25, 2009.)
*10.25	Form of Waiver. (Incorporated herein by reference to the Company’s Form 8-K filed on September 25, 2009.)
*10.26	Form of Amendment to Employment Agreement. (Incorporated herein by reference to the Company’s Form 8-K filed on September 25, 2009.)
*10.27	Amendment to Employment Agreement of Michael S. Ives dated September 23, 2009. (Incorporated herein by reference to the Company’s Form 8-K filed on September 25, 2009.)
*10.28	Supplemental Executive Retirement Plan between the Company and Michael S. Ives dated September 23, 2009. (Incorporated herein by reference to the Company’s Form 8-K filed on September 25, 2009.)
*10.29	Elective Deferred Compensation Agreement with Michael S. Ives. (Incorporated herein by reference to the Company’s Form 8-K filed on February 2, 2010.)

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*10.30	Deferred Compensation Plan Trust. (Incorporated herein by reference to the Company’s Form 8-K filed on February 2, 2010.)
*10.31	Amendment to Employment Agreement of Michael S. Ives dated December 22, 2009. (Incorporated herein by reference to the Company’s Form 10-K filed on March 26, 2010.)
*10.32	Amendment to Employment Agreement of John O. Guthrie dated December 21, 2009. (Incorporated herein by reference to the Company’s Form 10-K filed on March 26, 2010.)
*10.33	Amendment to Employment Agreement of Sharon Curling Lessard dated December 21, 2009. (Incorporated herein by reference to the Company’s Form 10-K filed on March 26, 2010.)
*10.34	Amendment to Employment Agreement of Leigh C. Keogh dated December 21, 2009. (Incorporated herein by reference to the Company’s Form 10-K filed on March 26, 2010.)
31.1	Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
31.2	Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
32.1	Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2	Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

* Indicates management contract or compensatory plan or arrangement.

** Indicates filed herewith.

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