Document And Entity Information
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Document And Entity Information
3 Months Ended
Mar. 31, 2012
Apr. 30, 2012
Document And Entity Information [Abstract]    
Document type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2012  
Document Fiscal Period Focus Q1  
Document Fiscal Year Focus 2012  
Entity Registrant Name HERITAGE BANKSHARES INC /VA  
Entity Central Index Key 0000719731  
Current Fiscal Year End Date --12-31  
Entity Filer Category Smaller Reporting Company  
Entity Common Stock, Shares Outstanding   2,305,965

Consolidated Balance Sheets
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Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
ASSETS    
Cash and due from banks $ 5,989 $ 5,335
Interest-bearing deposits in other banks 9,988 8,646
Federal funds sold 16 33
Total cash and cash equivalents 15,993 14,014
Securities available for sale, at fair value 52,549 45,310
Loans, net    
Held for investment, net of allowance for loan losses 215,346 213,183
Accrued interest receivable 754 694
Stock in Federal Reserve Bank, at cost 594 591
Stock in Federal Home Loan Bank of Atlanta, at cost 891 834
Premises and equipment, net 10,994 11,029
Other real estate owned 1,682 1,719
Bank owned life insurance 5,559 5,616
Other assets 1,887 1,594
Total assets 306,249 294,584
LIABILITIES AND STOCKHOLDERS' EQUITY    
Noninterest-bearing 94,927 92,839
Interest-bearing 162,049 157,139
Total deposits 256,976 249,978
Federal Home Loan Bank Advances 7,300 4,000
Securities sold under agreements to repurchase 2,414 1,502
Other borrowings 703 782
Accrued interest payable 54 83
Other liabilities 2,044 1,802
Total liabilities 269,491 258,147
Commitments and contingencies      
Stockholders' equity    
Preferred stock, no par value- 1,000,000 shares authorized; Senior non-cumulative perpetual preferred stock; Series C, 7,800 shares issued and outstanding at both March 31, 2012 and December 31, 2011 7,800 7,800
Common stock, $5 par value - 6,000,000 shares authorized; 2,305,965 shares and 2,304,965 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively 11,530 11,525
Additional paid-in capital 6,729 6,704
Retained earnings 10,411 9,967
Accumulated other comprehensive income, net 288 441
Total stockholders' equity 36,758 36,437
Total liabilities and stockholders' equity $ 306,249 $ 294,584

Consolidated Balance Sheets (Parenthetical)
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Consolidated Balance Sheets (Parenthetical) (USD $)
Mar. 31, 2012
Dec. 31, 2011
Preferred stock, par value $ 0 $ 0
Preferred stock, shares authorized 1,000,000 1,000,000
Common stock, par value $ 5 $ 5
Common stock, shares authorized 6,000,000 6,000,000
Common stock, shares issued 2,305,965 2,304,965
Common stock, shares outstanding 2,305,965 2,304,965
Senior Non-Cumulative Perpetual Preferred Stock, Series C [Member]
   
Preferred stock, shares issued 7,800 7,800
Preferred stock, shares outstanding 7,800 7,800

Consolidated Statements Of Income
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Consolidated Statements Of Income (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Interest income    
Interest income and fees on loans $ 2,668 $ 2,855
Interest on taxable investment securities 276 148
Dividends on FRB and FHLB stock 12 12
Interest on federal funds sold      
Other interest income 6 27
Total interest income 2,962 3,042
Interest expense    
Deposits 251 305
Borrowings 9 16
Total interest expense 260 321
Net interest income 2,702 2,721
Provision for loan losses      
Net interest income after provision for loan losses 2,702 2,721
Noninterest income    
Service charges on deposit accounts 68 92
Late charges and other fees on loans 47 16
Income from bank-owned life insurance 66  
Other 80 76
Total noninterest income 261 184
Noninterest expense    
Compensation 1,099 1,083
Data processing 155 144
Occupancy 223 191
Furniture and equipment 138 146
Taxes and licenses 79 85
Professional fees 107 119
FDIC assessment 40 79
Marketing 26 39
Telephone 32 32
Loss on sale or impairment of other real estate owned 37  
Other 145 154
Total noninterest expense 2,081 2,072
Income before provision for income taxes 882 833
Provision for income taxes 252 273
Net income 630 560
Preferred stock dividend and accretion of discount (47) (199)
Net income available to common stockholders $ 583 $ 361
Earnings per common share    
Basic $ 0.25 $ 0.16
Diluted $ 0.25 $ 0.16
Dividends per share $ 0.06 $ 0.06
Weighted average shares outstanding - basic 2,305,820 2,307,502
Effect of dilutive stock options 39,239 10,589
Weighted average shares outstanding - diluted 2,345,059 2,318,091

Consolidated Statements Of Cash Flows
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Consolidated Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Cash flows from operating activities:    
Net income $ 630 $ 560
Adjustments to reconcile net income to net cash provided by operating activities:    
Amortization of loan yield adjustments, net 75 94
Depreciation, amortization and accretion, net 154 157
Stock based compensation 22 16
Deferred compensation 15 66
Exercise of stock options tax benefit 1  
Net loss on:    
Sale or impairment of other real estate owned 37  
Net gain on bank owned life insurance (66)  
Changes in assets/liabilities, net    
Increase in interest receivable and other assets (273) (40)
Increase in interest payable and other liabilities 203 14
Net cash provided by operating activities 798 867
Cash flows from investing activities:    
Proceeds from maturities and principal repayments of securities available for sale 11,513 2,362
Purchases of securities available for sale (18,996) (3,007)
Net decrease in certificates of deposit   734
Net increase in loans held for investment (2,238) (259)
Purchases of Federal Home Loan Bank stock and Federal Reserve Bank stock (60) (5)
Purchases of premises and equipment (114) (8)
Purchases of and premiums paid for bank-owned life insurance (12) (13)
Proceeds from bank owned life insurance 135  
Net cash used for investing activities (9,772) (196)
Cash flows from financing activities:    
Proceeds from exercise of stock options 8  
Net increase in deposits 6,998 2,265
Net increase in Federal Home Loan Bank advances 3,300 6,000
Net increase/(decrease) in securities sold under agreements to repurchase 912 (1,358)
Repayments of other borrowings (79) (77)
Repurchase of preferred stock   (2,606)
Cash dividends paid (186) (283)
Net cash provided by financing activities 10,953 3,941
Increase in cash and cash equivalents 1,979 4,612
Cash and cash equivalents, beginning of period 14,014 16,380
Cash and cash equivalents, end of period 15,993 20,992
Supplemental disclosure:    
Interest paid 290 323
Income taxes paid $ 213 $ 479

Consolidated Statements Of Comprehensive Income
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Consolidated Statements Of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Consolidated Statements Of Comprehensive Income [Abstract]    
Net income for three months ended March 31 $ 630 $ 560
Unrealized holding losses on securities available for sale (233) (115)
Tax effect on unrealized losses 80 39
Total comprehensive income $ 477 $ 484

Principles Of Consolidation And Basis Of Presentation
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Principles Of Consolidation And Basis Of Presentation
3 Months Ended
Mar. 31, 2012
Principles Of Consolidation And Basis Of Presentation [Abstract]  
Principles Of Consolidation And Basis Of Presentation

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 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, 2011.  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 based on guidance for 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 provided by guidance for 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.

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 guidance for 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.

Recent Accounting Pronouncements

The following is a summary of recent authoritative pronouncements: 

In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03.  The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control.  The other criteria to assess effective control were not changed.  The amendments were effective for the Company on January 1, 2012 and had no effect on the financial statements.

 

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements.  The amendments were effective for the Company beginning January 1, 2012 and had no effect on the financial statements.

 

The Comprehensive Income topic of the ASC was amended in June 2011.  The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive income.  The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively.  In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements.  Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements.

 

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.

Share-Based Compensation
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Share-Based Compensation
3 Months Ended
Mar. 31, 2012
Share-Based Compensation [Abstract]  
Share-Based Compensation

Note 2 – Share-Based Compensation

The following table presents a summary of stock option activity for the period of January 1, 2012 through March 31, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Weighted Average Exercise Price

 

Weighted Average Remaining Term(years)

 

Aggregate Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2012

 235,800

 

 

$

 12.65

 

 

 

 

 

 

Granted

 -

 

 

 

 -

 

 

 

 

 

 

Exercised

(1,000)

 

 

 

(7.50)

 

 

 

 

 

 

Forfeited/expired

 -

 

 

 

 -

 

 

 

 

 

 

Outstanding at March 31, 2012

 234,800

 

 

$

 12.67

 

 

 4.5

 

$

 324

Exercisable at March 31, 2012

 226,400

 

 

$

 12.75

 

 

 4.4

 

$

 305

 

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 March 31, 2012.  The amount changes based on the fair market value of the Company’s common stock, as reflected by stock market prices.  The Company’s current policy is to issue new shares of common stock to satisfy option exercises.  The aggregate intrinsic value of options exercised during the three months ended March 31, 2012 was $3,700.  Cash received from exercises of options during the first three months of 2012 was $7,500.  There were no options exercised during the three months ended March 31, 2011.   

On January 25, 2012, the Company’s Board of Directors granted, effective February 1, 2012, 43,600 shares of restricted stock to certain executives under the Heritage 2006 Equity Incentive Plan, as amended (“2006 Incentive Plan”).  The shares vest at a rate of 20% over a five year period beginning on February 1, 2013 and on each February 1 thereafter.  Upon the death or permanent disability of the executive or a change of control of the Company, any remaining unvested shares will vest immediately.

 

As defined in the 2006 Incentive Plan, fair value of the shares was measured by the closing price of a share of the Company’s common stock on the OTC Bulletin Board on the grant date of the applicable award or, if the Company’s shares were not traded on the grant-date, then the closing price of a share of common stock on the OTC Bulletin Board on the next preceding date on which a trade occurred.  In addition, because the share-recipients are not entitled to dividends until the shares vest, the grant date fair value of the award was reduced by the present value of the dividends expected to be paid on the underlying shares during the service period, discounted at the appropriate risk-free interest rate.

 

The following table presents a summary of restricted stock award activity for the period of January 1, 2012 to March 31, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

Fair Value at Grant Date

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2012

 -

 

 

 

 -

Granted

 43,600

 

 

$

 11.28

Vested

 -

 

 

 

 -

Forfeited/expired

 -

 

 

 

 -

Outstanding at March 31, 2012

 43,600

 

 

$

 11.28

 

The amount charged against income, before income tax benefit of $5,574, in relation to stock‑based payment arrangements was $21,651 for the three months ended March 31, 2012.  The amount charged against income, before income tax benefit of $620, in relation to stock‑based payment arrangements was $16,173 for the three months ended March 31, 2011.  At March 31, 2012, unrecognized compensation expense, net of estimated forfeitures, related to unvested stock option and restricted stock grants was $492,578 and is currently expected to be recognized over a weighted average period of 2.4 years as follows:

 

 


Earnings Per Common Share Reconciliation
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Earnings Per Common Share Reconciliation
3 Months Ended
Mar. 31, 2012
Earnings Per Common Share Reconciliation [Abstract]  
Earnings Per Common Share Reconciliation

Note 3 – 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 March 31,

 

2012

 

2011

 

 

 

 

 

 

 

(in thousands, except share)

 

and per share data)

 

 

 

 

 

 

Net income available to common stockholders

 

 

 

 

 

(numerator, basic and diluted)

$

 583

 

$

 361

Weighted average common shares outstanding (denominator)

 

 2,305,820

 

 

 2,307,502

Earnings per common share - basic

$

 0.25

 

$

 0.16

 

 

 

 

 

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding during the period

 

 2,305,820

 

 

 2,307,502

Effect of dilutive stock options

 

 39,239

 

 

 10,589

Weighted diluted average common shares outstanding during the period

 

 

 

 

 

(denominator) during the period

 

 2,345,059

 

 

 2,318,091

Earnings per common share - assuming dilution

$

 0.25

 

$

 0.16

 

 

 

 

 

 

 

 

 

 

 

 

 


Disclosure About Fair Value Of Financial Instruments
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Disclosure About Fair Value Of Financial Instruments
3 Months Ended
Mar. 31, 2012
Disclosure About Fair Value Of Financial Instruments [Abstract]  
Disclosure About Fair Value Of Financial Instruments

Note 4 – 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, fair value and level of input of those financial instruments whose fair value differs from carrying amount at March 31, 2012 and December 31, 2011.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

(in thousands)

Loans held for investment

$

 215,346

 

$

 220,724

 

$

 -

 

$

 1,683

 

$

 219,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

$

 256,976

 

$

 257,116

 

$

 -

 

$

 257,116

 

$

 -

Other borrowings

 

 703

 

 

 739

 

 

 -

 

 

 -

 

 

 739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2011