<PAGE>

================================================================================

                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549
                                    10-KSB
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 1999 Commission File No. 0-11255


                           Heritage Bankshares, Inc.


         Virginia                                            54-1234322
(State or other jurisdiction of                       (IRS Employer corporation
incorporation or organization)                         identification number)


    200 East Plume Street
     Norfolk, Virginia                                          23514
(Address of principal executive offices)                     (Zip Code)


Registrant's telephone number, including area code:        (757) 523-2600



Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $5 par Value         Securities not registered on a stock exchange
     Title of Each Class

Indicate by a 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, and (2) has been subject to such filing
requirements for the past 90 days.

                  Yes   X                            No

Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation SB is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-KSB or any amendment to
this Form 10-KSB. [X]

State the aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 17, 2000: $7,201,818*

Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of March 17, 2000: Common Stock, $5 Par Value - 765,700
--------------------------------------------------------------------------------
 .    In calculating the aggregate market value, we have used the most recent
     sales price of Common Stock known to the Company, which is $11.50 per share
     and voting stock held by non-affiliates of the registrant March 17, 2000 of
     626,245 shares.
<PAGE>

--------------------------------------------------------------------------------
This Form 10-KSB contains certain forward-looking statements. For this purpose
any statements contained in this Form 10-KSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"estimate" or "continue" or comparable terminology are intended to identify
forward looking-statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety of factors.
--------------------------------------------------------------------------------

Part I

Item 1.  BUSINESS

General

         Heritage Bankshares, Inc. (the "Company") was incorporated under the
laws of the Commonwealth of Virginia in 1983. In August of 1992, two wholly-
owned subsidiaries, Princess Anne Bank and The Heritage Bank-McLean, were spun
off, and the Company has operated as a one bank holding company since that time.
The principal executive office of the Company is located at 200 East Plume
Street, Norfolk, Virginia. Currently, the Company does not transact any material
business other than through its wholly-owned banking subsidiary. The total
consolidated assets of the Company on December 31, 1999 were $94.9 million.

The Bank

         Heritage Bank & Trust is engaged in the general commercial and retail
banking business. The cities of Norfolk and Chesapeake, Virginia, constitute the
primary service area of the Bank and to a lesser extent the Bank includes the
remaining areas of Hampton Roads in its market area.

         Heritage Bank & Trust is a state banking corporation. The Bank was
incorporated as a Virginia corporation on September 19, 1975, and commenced
business at 841 North Military Highway in Norfolk, Virginia on February 7, 1977.
On December 31, 1999, the Bank had assets of $94.7 million, with loans of $62.3
million and deposits of $83.9 million.

IBV Real Estate Holding, Inc.

         IBV Real Estate Holdings, Inc., is a corporation formed for the sole
purpose of owning additional real estate assets acquired by the Company or the
Bank. Currently, IBV Real Estate Holdings, Inc. owns a 1% interest in IBV
Partners, LP, a Virginia limited partnership formed in December 1986. IBV Real
Estate Holdings, Inc., serves as the sole general partner of the partnership.
The partnership's sole asset is a 17,200 square-foot office building located at
1450 South Military Highway, Chesapeake, Virginia. Heritage Bank & Trust is a
major tenant in the property.


Sentinel Title Services, Inc. and Sentinel Trust Services, L.L.C.

         Sentinel Trust Services, L.L.C. is a wholly-owned subsidiary of the
Company. Sentinel Title Services, Inc. is a wholly-owned subsidiary of Heritage
Bank & Trust. These entities own an interest in providers of title and trust
services. The strategic relationship with these entities provides the Bank with
the ability to provide these services to its customers. The financial activities
pertaining to these interests are recorded on the cost method of accounting for
investments

                                       2
<PAGE>

Competition

         The banking business in the cities of Norfolk and Chesapeake, as well
as all of the Hampton Roads area is highly competitive. All of the major
commercial banking institutions based in Virginia conduct business in the area.
The Bank also encounters competition from local banks, savings and loan
associations, money market and mutual funds, small loan companies, credit
unions, brokerage firms and other financial institutions.

         Current federal law allows the acquisition of banks by bank holding
companies nationwide. Further, federal and Virginia law permit interstate
banking. As a consequence of these developments, competition in the Bank's
principal market may increase, and a consolidation of financial institutions in
Virginia may occur.

Employees

         The Company and the Bank have 42 employees. Of this total, 35 are
full-time and 7 are part-time. Management considers its employee relations to be
excellent.

Regulation And Supervision

         The Company is registered as a bank holding company, under the Bank
Holding Company Act of 1956. As such, the Company is subject to regulation and
examination by the Federal Reserve Board, and is required to file periodic
reports and any additional information that the Federal Reserve Board may
require. The Bank Holding Company Act imposes certain restrictions upon the
Company regarding the acquisition of substantially all of the assets of or
direct or indirect ownership or control of any bank of which it is not already
the majority owner; or, with certain exceptions of any company engaged in
nonbanking activities.

         The Bank is subject to supervision, regulation and examination by the
State Corporation Commission of the State of Virginia. Asset growth, deposits,
reserves, investments, loans, consumer law compliance, issuance of securities,
establishment of branches, mergers and consolidation, changes in control,
electronic funds transfer, management practices and other aspects of operations
are subject to regulation by the appropriate federal and state supervisory
authorities. The Bank is also subject to various regulatory requirements of the
Federal Reserve Board applicable to FDIC insured depository institutions.

Recent Legislation

         The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company
that meets specified conditions to become a "financial holding company" and
thereby engage in a broader array of financial activities than previously
permitted. Such activities can include insurance underwriting and investment
banking. The Gramm-Leach-Bliley Act also authorizes banks to engage through
"financial" subsidiaries in certain of the activities permitted for financial
holding companies.

Monetary Policy

         The Company and the Bank are affected by fiscal and monetary policies
of the federal government, including those of the Federal Reserve Board, which
regulates the national money supply in order to mitigate recessionary and
inflationary pressures. Among the techniques available to the Federal Reserve
Board are engaging in open market transactions of U.S. Government securities,
changing the discount rate and changing reserve requirements against bank
deposits. These techniques are used in varying combinations to influence the
overall growth of bank loans, investments and deposits. Their use may also
affect interest rates charged on loans and paid on deposits. The effect of
governmental policies on the earnings of the Company and the Bank cannot be
predicted.

                                       3
<PAGE>

Item 2.  Properties

         The Bank owns four of its banking locations, 841 North Military
Highway, 200 East Plume Street, 4815 Colley Avenue and 735 East Ocean View
Avenue in Norfolk, Virginia. Management believes these locations are in
excellent condition. A fifth banking location and the bank's operations center
are located at 1450 South Military Highway in Chesapeake, Virginia. See "IBV
Real Estate Holdings, Inc." under Item 1 and "Certain Relationships and Related
Transactions" under Item 12.

Item 3.  Legal Proceedings

         The Company is subject to claims and lawsuits arising primarily in the
ordinary course of business. Based on information presently available to
management and advice received from legal counsel, there are no meritorious
claims involving the Company.

Item 4.  Submission Of Matters To A Vote Of Securities Holders

         No matters were submitted to a vote of securities holders during the
fourth quarter of 1999.

PART II

Item 5.  Market For The Registrant's Common Stock And Related Stockholder
         Matters


         The Company's common stock is listed on the OTC Bulletin Board under
the symbol HBKS. At March 17, 2000, there are 1,175 record holders of the
765,700 outstanding shares of common stock. As of March 17, 2000, the most
recent sales price of common stock known to the Company is $11.50 per share.

         The following table sets forth the trading range for the common stock
by calendar quarters for the past two years as reported to the Company by Scott
& Stringfellow, Inc.


Calendar Quarter

                             HIGH            LOW
        1999
Fourth Quarter              $14.50           12.50
Third Quarter                15.75           13.25
Second Quarter               16.75           14.88
First Quarter                17.00           15.00

        1998
Fourth Quarter              $16.00          $13.50
Third Quarter                18.37           14.00
Second Quarter               18.75           17.75
First Quarter                19.00           17.50


         The Company's Board of Directors determines whether to declare
dividends and the amount of such dividends. Determinations by the Board take
into account the Company's financial condition, results of operations, capital
requirements, general business conditions and other relevant factors. The
Company's

                                       4
<PAGE>

principal source of funds for cash dividends is the dividends paid to the
Company by the Bank. The Company declared and paid annual dividends of $.20 and
$.17 per share in 1999 and 1998, respectively. Regulatory restrictions on the
payment of dividends by the Bank to the Company are disclosed in Note 3 to the
Consolidated Financial Statements.

Item 6.  Selected Financial Data And Management's Discussion And Analysis Of
         Financial Condition And Results Of Operations


Table 1: Summary of Consolidated Financial Data
            For the year-ended December 31,
Summary of Consolidated Financial Data
(Dollars in thousands, except per share data)

                                                 1999               1998

FOR THE YEAR
Interest income                                $6,601             $6,567
Interest expense                                2,967              3,051
Net interest income                             3,633              3,516
Provision for loan losses                         101                 66
Noninterest income                                622                355
Noninterest expense                             2,651              2,322
Income taxes                                      444                421
Net income                                      1,059              1,063

AT YEAR END
Assets                                        $94,896            $87,291
Loans, net                                     61,437             55,671
Federal funds sold                              4,049              3,457
Securities                                     21,225             19,437
Deposits                                       83,634             77,283
Stockholders' equity                            8,273              8,079

AVERAGE BALANCES
Assets                                        $92,020            $86,510
Loans, net                                     59,208             52,679
Federal funds sold                              5,614              6,108
Securities                                     19,069             20,877
Deposits                                       80,719             75,903
Stockholders' equity                            8,396              7,618

PER SHARE DATA
Basic earnings per common share                 $1.33              $1.33
Diluted earnings per common share               $1.26              $1.25
Cash dividends declared                          0.20               0.17
Book value at year end                          10.81              10.08
Shares outstanding at year end                765,700            801,250
Weighted average shares                       798,452            799,496
Diluted average common shares outstanding     840,041            851,391

RATIOS
Return on average assets                        1.15%              1.23%
Return on average equity                       12.61%             13.95%
Dividend payout ratio                          14.49%             12.78%
Average equity to average assets                9.12%              8.81%
Allowance to year end loans                     1.46%              1.58%
Net loans charged-off to average loans           .14%              0.11%

                                       5
<PAGE>

FINANCIAL REVIEW:

         The principal objective of this Financial Review is to provide an
overview of the financial condition and results of operations of Heritage
Bankshares, Inc. and its subsidiaries for the years ended December 31, 1999 and
1998. This discussion and tabular presentation should be read in conjunction
with the Consolidated Financial Statements and notes thereto (filed herewith)
which have been audited by Goodman & Company, L.L.P. independent accountants.

         Heritage Bankshares, Inc. (the "Company"), through its wholly owned
subsidiary, Heritage Bank & Trust (the "Bank"), offers consumer and commercial
banking services. The bank operates in Norfolk and Chesapeake Virginia through a
network of 5 offices. The Bank offers other financial services through its
wholly owned subsidiaries including trust services and mortgage title insurance
services.

         The Company recorded net income in 1999 of $1.06 million or $1.33 per
share/basic, $4 thousand dollars below the earnings of 1998. This earnings level
was achieved although considerable resources were directed towards the opening
of the Bank's fifth full-service branch location. That branch office opened at
735 East Ocean View Avenue in Norfolk, Virginia in mid-April of 1999.

         The Company's principal source of revenue is net interest income, the
difference between interest income on earning assets and interest expense on
deposits and borrowings. Interest income is presented on a tax-equivalent basis
to recognize associated tax benefits. This presentation provides a basis for
comparison of yields with taxable earning assets. Tax-equivalent net interest
income increased $230 thousand or 6.75%, from 1998 as average earning assets
grew $4.2 million over the prior year. The net interest margin for 1999 was
4.38% compared with 4.32% in 1998. The decrease in yield was mainly due to a
lower interest rate environment during 1999 compared to 1998. Average prime rate
in 1999 was 8.0% compared to 8.35% in 1998.

         The provision for loan losses is charged to operations in an amount
sufficient to maintain the allowance for loan losses at a level management
considers adequate to provide for future loan losses inherent in the loan
portfolio. Loans are charged against this allowance when management perceives
the collection of the loan is unlikely. The level of the allowance is based upon
management's ongoing review of the loan portfolio and includes the present and
prospective financial condition of borrowers, consideration of actual loan loss
experience and projected economic conditions in general and for the Bank's
service area. The 1999 provision for loan losses was $101 thousand compared to
the 1998 provision of $66 thousand. The allowance for loan losses of $912 at
year-end 1999 and $895 thousand in 1998 reflect an allowance to year-end loans
ratio of 1.46% and 1.58%, respectively.

         Non-interest income is largely derived from fee-based services and
mortgage banking activities. Total non-interest income increased $155 thousand
to $622 thousand. Service charges on deposit accounts increased $34 thousand
primarily due to an increase in the number of accounts and to a lesser extent a
slight increase in service charges. Fees related to merchant credit card
processing increased $15 thousand and fees related to credit, debit and ATM card
services increased $24 thousand. These increases were due to growth in the
number of transactions. The addition of 2 automated teller machines also
contributed to the increased revenue from electronic transactions.

         Non-interest expense totaled $2.65 million for 1999, compared with
$2.32 million in 1998. The ratio of non-interest expense to average assets was
2.88% in 1999 slightly above the 2.68% in 1998. These ratios reflect the
Company's successful management of overhead and other related expenses.

         Total loans at December 31, 1999 were $62.3 million compared with $56.6
million at December 31, 1998. The increase is attributable to significant growth
in the commercial real estate portfolio, which grew by $5.69 million from 1998
to 1999.

                                       6
<PAGE>

LIQUIDITY:

         An important component of the Bank's asset/liability structure is the
level of liquidity available to fund depositors' withdrawals and extensions of
credit to borrowers. Traditional sources of bank liquidity include deposit
growth, loan repayments, investment maturities, borrowings and interest
received.

         The Company's Consolidated Statement of Cash Flows, found in the
Consolidated Financial Statements, provides information as to cash provided and
used from operating, investing and financing activities. At December 31, 1999,
cash and cash equivalents available to meet immediate liquidity needs and
reserve requirements were $7.49 million. The Bank also has borrowing capacity of
$9.5 million, as a member of the Federal Home Loan Bank System. As of December
31, 1999, no amounts have been drawn on this line of credit.

         The Company's cash and cash equivalents increased $424 thousand from
$7.06 million at December 31, 1998.

PARENT HOLDING COMPANY LIQUIDITY:

         The parent holding company incurred expenses for stockholder-related
activities, stock transfer and other functions necessary for the administration
of the Company. See Note 3 of the Consolidated Financial Statements for the
parent company's Cash Flow Statement for further information on cash provided or
used by the parent for operating, financing and investing activities. In
addition, certain restrictions on cash dividends, loans and advances are imposed
by regulation of the Bank, which are also disclosed in Note 3.

Table 2: Selected Liquidity Statistics
For the year ended December 31,

                                             1999           1998
                                            (Dollars in thousands)

Available short-term assets (1)              $ 12,727       $13,558
Certificates of deposits $100,000 and over     12,645        10,406
                                             --------       -------
Net available short-term assets              $     82       $ 3,152
                                             ========       =======
Ratio of available short-term assets to
certificates $100,000 and over                    101%          130%

Ratio of loans to deposits                         75%           73%

Ratio of certificates $100,000 and over to
 total assets                                      13%           12%

(1)  As of December 31, 1999, available short-term assets include cash of
     $3,437,000, federal funds sold of $4,049,000 held-to-maturity and
     available-for-sale securities maturing within one year of $1,238,000 and
     $4,003,000, respectively. At December 31, 1998, available short-term assets
     included cash of $3,604,000, federal funds sold of $3,457,000, and held-to-
     maturity and available-for-sale securities maturing within one year of
     $750,000 and $5,747,000, respectively.

Capital

         Stockholders' equity at December 31, 1999 was $8.27 million compared to
$8.08 million at the end of 1998. Book value per share increased from $10.08 at
December 31, 1998 to $10.81 at December 31, 1999.

          Table 3 provides information on the Company's risk-based, leverage and
capital ratios at December

                                       7
<PAGE>

31, 1999 and 1998. The Company is considered well-capitalized and in compliance
with all relevant regulatory capital requirements. See Note 15 of the
Consolidated Financial Statements for additional information with respect to
compliance with regulatory capital requirements.

Table 3: Capital Ratios
For the year ended December 31,

                                                   1999             1998
                                                 (Dollars in thousands)

Risk-based capital:
Tier I Capital
   Stockholders' equity                         $ 8,394          $ 7,991
Tier II Capital
   Allowance for loan losses (limited)              797              743
                                                -------          -------

Total                                           $ 9,191          $ 8,734
                                                =======          =======

Risk adjusted assets                            $63,611          $59,277

Risk-based capital ratios:
   Tier I                                        13.20%           13.48%
   Total                                         14.45%           14.73%

Leverage ratio                                    9.12%            9.24%
Primary capital ratio                             9.59%           10.18%


RATE SENSITIVITY:

         At December 31, 1999, the Company had, on a cumulative basis, $18.5
million more in liabilities subject to re-pricing within one year than assets.
Table 4 provides an interest sensitivity analysis as of December 31, 1999.

                                       8
<PAGE>

Table 4: Interest Sensitivity Analysis
         December 31, 1999

<TABLE>
<CAPTION>
                                    Within        Over 3    Over 1 Yr   Over 3 Yr
                                 1 through 3      through     through     through      Over
                                    months      12 months      3 yrs       5 yrs      5 yrs      Total
                                ------------------------------------------------------------------------
Earning assets: (1)
<S>                             <C>             <C>        <C>         <C>          <C>        <C>
  Federal funds                       $4,049      $     0     $     0      $    0    $     0    $ 4,049
  Investment securities (2)            2,815        4,368      10,200       3,204        824    $21,411
  Loans                               19,120        2,713       6,595       6,543     27,377     62,348
Total Earning Assets                 $25,984      $ 7,081     $16,795      $9,747    $28,201    $87,808

Interest and non-interest
 bearing liabilities
  Commercial DDA (3)                  $6,780           $0     $ 4,068      $2,713         $0    $13,560
   Personal DDA (3)                        0            0       1,675         558        558      2,792
  TT&L Note                               53            0           0           0          0         53
  Savings (3)                              0            0       2,919         973        973      4,866
  Money Market (3)                         0        2,708       2,708           0          0      5,415
  NOW (3)                                  0            0       5,916       1,972      1,972      9,860
  Certificates                        14,490       25,447       3,443       3,737         25     47,142
  Repurchase Agreements                2,070            0           0           0          0      2,070

Total Interest and non interest
  bearing liabilities                $23,392      $28,155     $20,729      $9,953    $ 3,529    $85,759


Interest sensitivity gap               2,592      (21,074)     (3,934)       (206)    24,672      2,050

Cumulative gap                         2,592      (18,482)    (22,416)    (22,623)     2,050

Ratio interest sensitive assets
to interest-sensitive
liabilities                             1.11         0.25        0.81        0.98       7.99       1.02

Ratio of cumulative gap to
 total earning assets                   2.95%      -21.05%     -25.53%     -25.76%      2.33%
</TABLE>



(1) Assets and liabilities are presented in the period they mature or reprice,
    whichever is earlier.

(2) Presented on an amortized cost basis.

(3) Based on the proposed range of permissible maturities for non-maturity
    deposits isued by the banking agencies in the Joint Policy Statement
    (August 2, 1995): Supervisory Policy Statement Concerning a Supervisory
    Framework for Measuring and Assessing Banks' Interest Rate Risk Exposure)



Net Interest Income:

         Net interest income is the difference between interest earned on loans,
investment securities and short-term investments and interest paid on deposits
and other borrowings. Material factors affecting net interest income include
interest rates earned on loans and investments and those paid on deposits, the
mix and volume of earning assets and interest-bearing liabilities and the level
of noninterest-bearing liabilities.

                                       9
<PAGE>

         Table 5 presents the components of net interest income. Table 6
allocates changes in volume and rate on net interest earnings.


<TABLE>
<CAPTION>

Table 5:  Components of Net Interest Income
For the years ended December 31,                                   1999                                 1998
 (Dollars in thousands)

                                                           Average                  Average     Average                 Average
                                                           Balance(1)   Interest    yield/rate   Balance(1)  Interest  yield/rate
<S>                                                        <C>         <C>        <C>           <C>         <C>         <C>
Interest earning assets: (taxable equivalent basis (2))
Loans (net of unearned discount (3))                          $60,112     $5,239      8.72%        $53,597     $4,918      9.18%
Investment securities-taxable (4)                              18,064      1,079      5.97%         19,868      1,212      6.10%
Investment securities- non-taxable (1) (4)                      1,005         71      7.06%          1,009         70      6.94%
Federal Funds                                                   5,614        289      5.15%          6,108        332      5.44%
                                                          ----------------------------------- ---------------------------------
Total Interest earning assets                                 $84,795     $6,678      7.88%        $80,582     $6,532      8.11%
Noninterest earning assets:
Cash and due from banks                                         3,617                                2,919
Allowance for loan losses                                        (903)                                (919)
Other real estate owned                                           429                                  429
Premises and equipment                                          2,259                                1,541
Other assets                                                    1,823                                1,958
                                                                -----                                -----
Total Assets                                                  $92,020                              $86,510

Liabilities and stockholders' equity
 Interest bearing liabilities:
Money Market and NOW accounts                                 $15,776     $  411      2.61%        $12,988     $  341      2.63%
Savings Deposits                                                4,643        146      3.14%          4,609        147      3.19%
Savings Certificates                                           36,060      1,851      5.13%         36,572      2,002      5.47%
Large denomination certificates                                 8,832        474      5.37%          8,436        474      5.62%
Securities sold under agreements to repurchase                  2,026         82      4.05%          2,081         84      4.04%
Short-term borrowings                                              55          3      5.45%             70          3      4.29%
                                                          ----------------------------------- ---------------------------------
Total interest bearing liabilities                            $67,392     $2,967      4.40%        $64,756     $3,051      4.71%

Noninterest bearing liabilities:
Demand deposits                                                15,408                               13,297
Other                                                             824                                  839
 Total Liabilities                                             83,624                               78,892
Stockholders' equity                                            8,396                                7,618
                                                          -----------                         ------------
  Total liabilities and stockholders'
      equity                                                  $92,020                              $86,510
                                                          ===========                         ============

Net interest earnings                                                     $3,711                               $3,481
                                                                      ==========                          ===========


Net interest yield margin on average interest earning
 assets (taxable equivalent basis)                                                    4.38%                                4.32%
                                                                                      ====                                 ====

Less tax equivalent adjustment                                              ($77)                                ($76)
                                                                      ----------                          -----------
Net interest income                                                       $3,634                               $3,405
                                                                      ==========                          ===========

 Net interest spread (taxable
    equivalent basis)                                                                 3.47%                                3.39%
                                                                                      ====                                 ====
</TABLE>


(1) Daily average balances are calculated using the aggregate daily average
    balances on a monthly basis.

(2) Tax equivalent adjustments (using 34% federal income tax rates) have been
    made in calculating the yields on tax-free loans and investments. Virginia
    banks are exempt from state income tax.

                                       10
<PAGE>

    on tax-free loans and investments. Virginia banks are exempt from state
    income tax.

(3) For the purposes of these computations, non-accruing loans are included in
    the daily average loan amounts outstanding.

(4) The yield/rate of the investment securities is computed using the amortized
    cost basis.



Table 6: Effect of Changes in Volume and Rate on Net Interest
Earnings
For the years ended December 31, (1)
(Dollars in thousands)

<TABLE>
<CAPTION>
                                              1999 / 1998                      1998 / 1997
                                                                  (Dollars in thousands)
                                                 Increase (Decrease) Increase (Decrease)
                                         Due to Change in (1):           Due to Change in (1):

                                     Volume      Rate       Total     Volume      Rate       Total
                                   ------------------------------------------------------------------
<S>                                <C>           <C>        <C>       <C>        <C>         <C>
Interest income (2):
  Loans                              $   547     $ (226)    $  21     $   513     $   (14)    $   499

  Taxable securities                    (108)       (25)     (133)       (119)          1        (118)
  Non-taxable securities                   -         (2)       (2)         19          20          39
  Federal funds sold                      (25)      (18)      (43)         (1)         (1)         (2)
                                   ------------------------------------------------------------------
    Total interest income            $    414   $  (271)    $  143    $    412    $     6     $   418

Interest expense:
  Money Market and NOW
    accounts                               73        (3)        70           3         (3)          -
  Savings                                   1        (2)        (1)        (15)       (14)        (29)
  Certificates                            (28)     (135)      (163)        110        (45)         65
  Certificates of $100,000
    or more                                 -         -          -         109        (14)         95
  Securities sold under
   agreements to repurchase                (2)        -         (2)         11          -          11
  Short-term borrowings                     -         1          1           -          -           -
                                   ------------------------------------------------------------------
    Total interest expense                 44      (139)       (95)        218        (76)        142

Net change in interest
  earnings                          $     370   $  (132)    $   48    $    194    $    82      $  276
</TABLE>

(1)  The change in interest due to both rate and volume has been allocated to
     volume and rate changes in proportion to the relationship of the absolute
     dollar of the changes in each.

(2)  Interest income includes taxable equivalent adjustments of $77,000 in 1999
     and $76,000 in 1998, which are used to adjust interest on tax exempt assets
     to a fully taxable basis.


ASSET QUALITY

Provision and Allowance For Loan Losses:

         In 1999, the provision for loan losses was $101 thousand compared to
the $66 thousand provision for loan losses in 1998. Net loans charged-off in
1999 were $84 thousand compared to $60 thousand in 1998.

                                       11
<PAGE>

          Table 7 summarizes activity in the Allowance for Loan Losses and
provides statistics on non-performing assets and past due loans. There were no
restructured loans, as defined by applicable securities rules and regulations.


Table 7:  Summary of the Allowance For Loan Losses
          Non-performing Assets and Past Due Loans
          and Selected Loan Loss Statistics

<TABLE>
<CAPTION>

For The Years Ended
December 31,                                                         1999                 1998
(Dollars in Thousands)
<S>                                                                  <C>                  <C>
Allowance for Loan Losses:
Balance, December 31                                                 $895                 $889
Charge-offs:
   Commercial                                                         109                    0
   Real estate                                                         25                   41
   Consumer                                                            40                   40
                                                                       --                   --
      Total loans charged-off                                         174                   81
Recoveries:
   Commercial                                                          66                    0
   Real estate                                                         18                   15
   Consumer                                                             6                    6
                                                                        -                    -
      Total recoveries                                                 90                   21
Net charge-offs                                                        84                   60
Provision for loan losses                                             101                   66
Balance, December 31, 1999                                           $912                 $895

Ratio of net charge-offs to average loans outstanding                0.14%                0.11%

Ratio of allowance for loan losses to loans at period-end            1.46%                1.58%

Non-performing Assets and Loans Past Due 90 Days
   Non-accrual loans                                                 $ 82                 $424
   Other real estate owned                                            429                  429

      Total non-performing assets                                    $511                 $853


   Ratio of non-performing assets to total assets                    0.54%                0.98%

   Non-accrual loans:
      Interest income that would have been recorded
      under original terms                                           $ 10                 $ 57

     Interest income recorded during the period                      $  0                 $  0

   Loans 90 days past due and still accruing                         $ 11                 $162
</TABLE>

         A breakdown of the allowance is provided in Table 8; however, the
Company has not historically maintained such a breakdown, and management does
not believe the allowance can be fragmented by

                                       12
<PAGE>

category with any precision that would be useful to investors. The entire amount
of the allowance is available to absorb losses occurring in any category. The
allowance is allocated below based on the relative percent of loans in each
category to total loans.

Table 10: Loan Maturities
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                             After 1
                                            Within          but within           After
                                            1 year           5 years            5 years
                                            ------           -------            -------
<S>                                      <C>               <C>               <C>
Commercial                               $     5,750       $     4,280       $     2,172
Real estate-mortgage                           4,855            12,085            26,330
Real estate-construction                       1,658                 -                 -
Consumer                                         289             4,626               304
                                         ===========       ===========      ============
                                         $    12,552       $    20,991      $     28,806
                                         ===========       ===========      ============

Loans maturing after 1 year with:
Fixed interest rates                                       $    14,195      $     27,033
Variable interest rates                                          6,796             1,773
                                                           ===========      ============
                                                           $    20,991      $     28,806
                                                           ===========      ============
</TABLE>



POTENTIAL PROBLEM LOANS

     At December 31, 1999 and 1998, loans on either non-accrual status or loans
past due 90 days or more and still accruing amounted to $93 thousand and $586
thousand, respectively. In addition to these loans, at December 31, 1999, the
Company had approximately $271 thousand of loans that have been internally
classified, and $876 thousand that required more than normal attention and are
potential problem loans. The Company has considered these loans in establishing
the level of the allowance for loan losses. At December 31, 1998, loans that had
been internally classified or which required more than normal attention and were
potential problem loans were $738 thousand $313 thousand, respectively.

CREDIT RISK AND REGULATORY MATTERS:

     Credit risk, the risk of loss from default, is inherent in lending. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. Management and the Board of Directors of the Company believe the
allowance is a reasonable estimate of potential loss exposure in the loan
portfolio at year end, however, many factors affecting the ability of borrowers
to repay their loans, including economic factors beyond the control of the
Company or the borrowers, will impact this estimate on an ongoing basis.

     Management also considers reports of examinations furnished by state and
federal banking authorities. Regulatory agencies periodically review the
allowance for loan losses as part of their examination process and may require
the Bank to recognize additions to the allowance based on their judgment of
information available to them at the time of their examination. A federal
examination of the Company and the Bank was conducted in the fourth quarter of
1999 for the balance sheet dated September 30, 1999. No additions to the
allowance for loan losses were recommended as a result of the examination.

NONPERFORMING ASSETS:

     Non-performing assets consist of loans on non-accrual status and other real
estate owned. Loans are placed on non-accrual status when they become over 90
days past due unless such loans are fully collateralized and, in management's
judgment, are collectible. Other real estate owned consists of real estate
acquired in settlement of loans. These properties are carried at the lower of
cost or estimated fair value. Losses from the acquisition of other real estate
owned in full or partial satisfaction of a loan are charged to

                                       13
<PAGE>

the allowance for loan losses. Subsequent declines in value or losses upon
disposition are charged to non-interest expense

     Table 9 provides an analysis of the size, number and collateral composition
of non-performing assets at December 31, 1999.

<TABLE>
<CAPTION>
                                                        Number                                Total
Non-performing assets by dollar amount:                of items           Balance            Dollars
                                                    ---------------------------------------------------
<S>                                                 <C>                   <C>                <C>
$100,000 - $200,000                                        4                $429               84%
$50,000  - $100,000                                        1                  50               10%
$50,000 and under                                         43                  32                6%
                                                          --                ----              ---
                                                          48                $511              100%
                                                          --                ----              ---
Non-performing assets by collateral composition:
1 - 4 Family residential                                   2                $177
Multi-family residential                                   3                 302
Automobile, equipment and other                            0                   -
Uncollateralized                                          43                  32
                                                          --                ----
                                                          48                $511
                                                          --                ----
</TABLE>


Loan Portfolio:

     The loan portfolio is the largest category of the Company's earning assets.
Table 10 shows the type and maturity of loans outstanding as of December 31,
1999.

<TABLE>
<CAPTION>
                                                               After 1
                                               Within        but within          After
                                               1 year         5 years           5 years
                                               ------         -------           -------
<S>                                           <C>            <C>                <C>
Commercial                                    $   5,750      $   4,280          $  2,172
Real estate-mortgage                              4,855         12,085            26,330
Real estate-construction                          1,658              -                 -
Consumer                                            289          4,626               304
                                              ---------      ---------          --------
                                              $  12,552      $  20,991          $ 28,806
                                              ---------      ---------          --------
Loans maturing after 1 year with:
Fixed interest rates                                         $  14,195          $ 27,033
Variable interest rates                                          6,796             1,773
                                                             ---------          --------
                                                             $  20,991          $ 28,806
                                                             ---------          --------
</TABLE>

Table 11 includes loans collateralized by real estate at December 31, 1999. Some
of these loans are included in commercial loans for purposes of Table 10.

                                       14
<PAGE>

Table 11: Loans Collateralized By Real Estate

<TABLE>
<CAPTION>
                                                                                   Percentage
                                                                                    of total
                                                                  Amount         loan portfolio
                                                                       (Dollars in thousands)
                                                              -----------------------------------
<S>                                                           <C>                <C>
Construction and land development                              $   1,689                3%
Collateralized by 1 - 4 family residential properties             16,780               27%
Collateralized by multi-family residential properties              1,808                3%
Collateralized by non-farm non-residential properties             24,966               40%
                                                               ---------              ----
                                                               $  45,243               73%
</TABLE>

Investment Portfolio

     The Company's investment portfolio is a source of liquidity and is the
second largest category of earning assets. The portfolio includes U.S.
Government securities, municipal securities, mortgage-backed securities and
other debt securities. In addition to the investment securities, the Company
also invests in federal funds sold. Management's principal objectives for the
investment portfolio during 1999 were to maintain an appropriate level of
quality and to ensure sufficient liquidity in various interest rate environments
while maximizing yield.

     Table 12 shows the maturities of investment securities at December 31,
1999, and the weighted average yields to maturity of such securities:

Table 12:  Investment Securities (1)
           December 31, 1999
              (Dollars in thousands)

<TABLE>
<CAPTION>
                   1 Year or less (2)  1 - 2 Years      2 - 3 Years (3)      3 - 4 Years        4 - 5 Years       Over 5 Years (4)
<S>                <C>                 <C>              <C>                  <C>                <C>               <C>
U.S. Treasury,
government
agencies, state
and political      Amount   Yield    Amount   Yield    Amount    Yield    Amount    Yield     Amount    Yield    Amount    Yield
subdivisions       $5,176   5.66%   $5,011    6.06%   $4,529    5.90%     $2,957     6.31%    $1,496    6.28%    $1,360     5.47%
Other                  65   6.00%      250    5.21%        -       -           -        -          -       -        563     5.65%
                   ------   -----   ------    -----   ------    -----     ------   ------     ------    ----     ------    -----
                   $5,241   5.83%   $5,261    5.64%   $4,529    5.90%     $2,957     6.31%    $1,496    6.28%    $1,923     5.56%
</TABLE>

(1)  Presented on an amortized cost basis
(2)  Includes a $222,445 tax-exempt security with a yield of 4.28%
(3)  Includes a $248,980 tax-exempt security with a yield of 4.50%
(4)  Includes $535,931 in tax-exempt securities with a weighted average yield of
     4.80%

Deposits:

     The Company's deposit base includes large denomination certificates of
deposit of $100,000 or more. These deposits represented approximately 19% of
total deposits at December 31, 1999. The Bank pays market rates for these funds.
Management of the Bank attempts to match large denomination certificates of
deposit with rate-sensitive assets. At December 31,1999, available short-term
assets totaled $12.7 million.

                                       15
<PAGE>

Table 13: Remaining Maturities of Large Denomination Certificates of Deposit
December 31, 1999
(Dollars in thousands)

                                     Amount
                                   --------
Three months or less               $  7,037
Over three through six months         2,595
Over six through twelve months        2,037
Over twelve months                      976
                                   --------
    Total                          $ 12,645
                                   --------

Non-interest Income:

     A comparison of non-interest income may be found in Table 14.

Table 14: Non-interest Income
(Dollars in thousands)
For the years ended December 31,

                               1999                 1998        1999 over
                                                                1998
                              -------------------------------------------
Service charges                 $ 258,757         $224,781       $ 33,976
Other income                      363,462          242,086        121,376
                              -----------         --------      ---------
                                $ 622,219         $466,867       $155,352

Non-interest Expense:

     A comparison of non-interest expense may be found in Table 15.

Table 15: Non-interest Expense
(Dollars in thousands)
For the years ended December 31,

<TABLE>
<CAPTION>
                                        1999        1998       1999 over (under) 1998
                                    --------------------------------------------------------
<S>                                 <C>           <C>          <C>
Salaries and employee benefits      $ 1,445       $ 1,316        $    129
Other                                   393           350              43
Occupancy                               212           185              27
Automated services                      194           133              61
Furniture and equipment                 149           130              19
Taxes & licenses                        102            44              58
Stationery and supplies                  64            72              (8)
Directors' fees                          50            54              (4)
Accounting and audit                     42            38               4
                                    -------      --------        --------
                                    $ 2,651       $ 2,322        $    329
</TABLE>

Income Taxes:

     For the year ended December 31, 1999, the Company recognized an expense of
$444 thousand. This represents a $23 thousand increase from the $421 thousand
expense for 1998. See Note 11 of the Consolidated Financial Statements for
additional information with respect to income taxes.

                                       16
<PAGE>

Item 7:   FINANCIAL STATEMENTS

          The financial statements of the Company are included (with an index
listing of all such statements) in a separate financial section at the end of
this Annual Report on Form 10-KSB.

Item 8:   Changes In And Disagreements With Accountants on Accounting and
          Financial Disclosures

               None.

PART III

Item 9.  Directors And Executive Officers Of The Registrant

          The Company's by-laws currently provide for 14 directors. As of
December 31, 1999, there were 10 directors of the Company. The following
schedule sets forth certain information concerning the directors and executive
officers of the Company.

<TABLE>
<CAPTION>
                                   Term to                                                         Director
Director's Name              Age   Expire                 Principal Occupation                      Since
---------------              ---   ------                 --------------------                      -----
<S>                          <C>   <C>      <C>                                                    <C>
Lisa F. Chandler              45    2000    Executive Vice-President of Nancy Chandler Associates,   1998
                                            Inc.

James A. Cummings             57    2001    President of Southern Atlantic Label Company, Inc.  1992

F. Dudley Fulton              51    2002    President and Chief Executive Officer of Henderson and   1991
                                            Phillips, Inc.

Henry U. Harris, III          48    2000    President of Virginia Investment Counselors, Inc.        1992
                                            Vice-Chairman of the Board since 1995.

Stephen A. Johnsen            54    2000    President of Flagship Group, LTD.  Secretary of the      1988
                                            Board since 1995.

Robert J. Keogh               51    2001    President and Chief Executive Officer of the Company     1988
                                            since 1992; President and Chief Executive Officer of
                                            Heritage Bank & Trust since 1988.

Peter M. Meredith, Jr.        48    2001    Chairman and Chief Executive Officer of Meredith         1992
                                            Construction Company, Inc.  Chairman of the Board
                                            since 1995.

Gerald L. Parks               66    2002    Chairman of the Board of Capes Shipping Agencies, Inc.   1987

Ross C. Reeves                51    2002    Member of the law firm of Willcox & Savage, P.C.         1994

Harvey W. Roberts, III        55    2001    Partner in the accounting firm of McPhillips, Roberts    1993
                                            and Deans.
</TABLE>

                                       17
<PAGE>

Item 10.  EXECUTIVE COMPENSATION

1.   CASH COMPENSATION:

          Set forth below is information concerning the compensation paid to the
Company's executive officer.

Summary Compensation Table
Annual Compensation (1)

<TABLE>
<CAPTION>
                                                                                      Director's
Name and Principal Position                  Year         Salary          Bonus          Fees
--------------------------------------------------------------------------------------------------
<S>                                          <C>         <C>             <C>          <C>
Robert J. Keogh

     President & Chief Executive Officer     1999        $ 97,190        $ 29,800       $ 4,800
                                             1998        $ 97,190        $ 34,800       $ 4,800
                                             1997        $ 94,725        $ 23,700       $ 4,800
</TABLE>

(1)  No compensation earned in either year was deferred.

2.   COMPENSATION PURSUANT TO PLANS:


EMPLOYEE STOCK OPTION PLAN

          As of December 31, 1999, stock options for 117,950 shares are
outstanding and, of these shares, 72,125 are exercisable. Options are granted
and are exercisable at option prices ranging from $4.60 to $14.50 per share. See
disclosures regarding stock option plans in Note 10 to the Consolidated
Financial Statements.

DEFERRED COMPENSATION AND RETIREMENT ARRANGEMENTS

          In 1985, Heritage Bank & Trust entered into deferred compensation and
retirement arrangements with seven directors and one officer. Each participant
is fully vested. The Company's policy is to accrue the estimated amounts to be
paid under the contracts over the expected period of active service or
employment.

          Upon reaching age 70, each participant will receive a retirement
benefit ranging from $391 to $3,355 per month for each of the next 120 months.
If the participant dies prior to reaching age 70, his beneficiary will begin
receiving the monthly retirement benefits. The Company has purchased life
insurance contracts in order to fund the expected liabilities under the deferred
compensation arrangements. As of December 31, 1999, Heritage Bank & Trust had
accrued $176,468 of the anticipated liability.

          In 1990, Robert J. Keogh, President of Heritage Bank & Trust, became a
participant in the Heritage Bank & Trust Executive Security Plan. In the event
Mr. Keogh dies prior to age 65, his beneficiary will receive monthly payments of
$4,167 for each of the next 180 months. Upon his retirement at age 65, Mr. Keogh
will receive $4,167 per month for each of the next 180 months or until his
death, and thereafter other beneficiaries will receive such retirement benefits.
Heritage Bank & Trust funds this obligation through a life insurance contract.
Heritage Bank & Trust had accrued $84,750 as of December 31, 1999 of this
anticipated liability.

               Effective January 1, 1993, the Board of Directors adopted a
Retirement Program (the "401k"). The Company may contribute cash to the 401k
annually, as determined each year by the Board of Directors. Contributions to
the 401k are allocated to its participants based on the employee/participant's
contributions to

                                       18
<PAGE>

the plan. Eligible participants in the 401k include all employees who have
completed six months of service (500 hours) beginning with the effective date of
the 401k. Benefits will be payable upon separation from service or upon
retirement, disability or death. Employees are 20% vested with respect to the
benefits under the 401k in two years and the vested percentage is increased
annually, reaching 100% after six years. Participants are automatically 100%
vested in the 401k upon reaching age 65, death or disability. The Company has
the right to amend or terminate the 401k. The Company expensed $46,000 and
$60,000 for plan contributions for the years ended December 31, 1999 and 1998,
respectively.

          Effective January 1, 1998, the Board of Directors adopted an
Employee's Stock Ownership Plan (the "ESOP"). The ESOP covers substantially all
employees, whereby funds contributed are used to purchase outstanding common
stock of the Company. Contributions are allocated to the participants based on
the employee/participant's annual compensation. Employee participants in the
ESOP include all employees who have completed six months of service beginning
with the effective date of the ESOP. Benefits are payable upon separation from
service or upon retirement, disability or death. Employees are 20% vested with
respect to the benefits under the ESOP in three years and the vested percentage
increases annually, reaching 100% after seven years. Participants are
automatically 100% vested in the ESOP upon reaching age 65, death or disability.
Participants vote all shares allocated to their respective accounts and the
trustees of the ESOP vote any unallocated shares. The Board of Directors of the
Company has the right to amend or terminate the ESOP at any time. The Company
expensed $28,000 and $13,000 of plan contributions for the years ended December
31, 1999 and 1998, respectively.

COMPENSATION OF DIRECTORS:

          Directors of the Company and Directors of Heritage Bank & Trust
receive $400 for each Board of Directors' meeting attended and $100 for each
committee meeting attended.

ITEM 11:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

          The following schedule sets forth information regarding the beneficial
ownership of the Company's common stock as of March 10, 2000, of (i) each of the
Company's directors; (ii) each person known by the Company to be the holder of
5% or more of the Company's outstanding common stock; and (iii) all of the
Company's directors and executive officers as a group.

                                       19
<PAGE>

                                                                      PERCENT OF
NAME OF INDIVIDUAL                             SHARES                     CLASS

Lisa F. Chandler                                 642                     0.08%
6127 Studeley Avenue
Norfolk, VA  23508 USA

James A. Cummings                              6,128(1)                  0.80%
2073 Thomas Bishop Lane
Virginia Beach, VA  23454 USA

F. Dudley Fulton                               5,300                     0.69%
5306 Lakeside Avenue
Virginia Beach, VA  23451 USA

Henry U. Harris, III                          29,705(2)                  3.88%
1503 North Shore Road
Norfolk, VA  23505 USA

Stephen A. Johnsen                             3,618(3)                  0.47%
29368 Pungoteague Road Box 48
Harborton, VA 23422 USA

Robert J. Keogh                                8,695(4)                  1.14%
6146 Sylvan Street
Norfolk, VA  23508 USA

Peter M. Meredith, Jr.                        45,126(5)                  5.89%
5320 Edgewater Drive
Norfolk, VA  23508 USA

Gerald L. Parks                                5,195(6)                  0.68%
27307 Evergreen Lane
Harborton, VA  23389 USA

Ross C. Reeves                                 4,142(7)                  0.54%
1068 Algonquin Road
Norfolk, VA  23505 USA

Harvey W. Roberts, III                        29,792(8)                  3.89%
7612 North Shore Road
Norfolk, VA  23505 USA

Directors and Executive Officers as a
     group (10 persons)                      138,343                    18.07%

(1)  Includes 1,500 shares owned jointly with his wife. Also includes 2,765
     shares owned by Scott & Stringfellow for Mr. Cummings.
(2)  Includes 3,555 shares owned by his wife. Also includes 4,249 shares held as
     custodian for others and 4,500 shares held in trust.
(3)  Includes 1,650 shares owned jointly with his wife.
(4)  Includes 1,335 shares owned jointly with his wife. Also includes 1,998
     shares owned by Scott & Stringfellow as an IRA for Mr. Keogh. Does not
     include 32,900 shares that may be acquired by Mr. Keogh pursuant to the
     Stock Option Plan for key employees of the Company. See "Compensation
     Pursuant to Plans." If such shares were included, Mr. Keogh would own 5.43%
     of the outstanding shares.
(5)  Includes 10,960 shares held as Meredith Realty Company, L.L.C., 13,208
     shares held as Pomar Holding, L.L.C. and 3,000 shares held as Meredith
     Realty Associates. Also includes 8,203 shares owned by Davenport & Company
     for Mr. Meredith.
(6)  Includes 4,614 shares owned jointly with his wife.
(7)  Includes 3,142 shares held as custodian for others.
(8)  Includes 17,280 shares owned by his wife and 3,000 shares owned jointly
     with his wife. Also includes 1,000 shares owned by Scott & Stringfellow as
     an IRA for Roberts & Speece, CPA, P.L.C. for Mr. Roberts.

                                       20
<PAGE>

ITEM 12:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:

     Many directors of the Company and Heritage Bank & Trust and their
associates, including firms and corporations of which they are officers or
directors; or in which they and their immediate families have a substantial
interest, are customers of Heritage Bank & Trust. As such, they have had
transactions with the bank, including loans made in the ordinary course of
business on substantially the same terms, including interest rates, collateral
and repayment terms, as those prevailing at the time for comparable loans to
other parties. Such loans have not involved more than the normal risk of
collectibility or other unfavorable features. See related party loan and deposit
disclosures in Note 13 of the Consolidated Financial Statements.

     Heritage Bank & Trust occupies 7,581 square feet of space in a building
located at 1450 South Military Highway in Chesapeake, Virginia. The building is
owned by IBV Partners, L.P., a Virginia limited partnership, which has as its
sole general partner IBV Real Estate Holdings, Inc., a wholly-owned subsidiary
of the Company. Former and current directors of Heritage Bank & Trust own an
aggregate of approximately 34% of the partnership interests. IBV Partners, L.P.
and Heritage Bank & Trust entered into a lease in December 1986, which was
modified in December 1998. See disclosures regarding the lease commitment in
Note 12 of the Consolidated Financial Statements.

     The Company and Heritage Bank & Trust purchase various types of
business insurance through the Flagship Group LTD, of which Stephen A. Johnsen
is President. Mr. Johnsen is a director and Secretary of the Company. Insurance
premiums paid to the Flagship Group LTD as agent for commercial insurance
providers was $41,928 during 1999. The Bank has also sold securities to the
Flagship Group LTD under agreements to repurchase, which constitute
approximately 42% of the securities sold under agreements to repurchase at
December 31, 1999. See Note 9 of the Consolidated Financial Statements for
additional information.

     Heritage Bank & Trust has retained the law firm of Willcox & Savage, P.C.
in connection with certain legal representations and expects to continue to do
so in the future. Ross C. Reeves, a director of the Company is an attorney in
the law firm. Fees paid to Willcox & Savage, P.C. by Heritage Bank & Trust were
$23,025 in 1999.

                                       21
<PAGE>

PART IV

Item 13:  EXHIBITS AND REPORTS ON FORM 8-K

(A) (3)  Exhibits:

           3.1      Articles of Incorporation. (Incorporated herein by reference
                    to Corporation's Form 10-K for 1983 filed March 29, 1984.)

           3.2      Bylaws, as amended.

          10.1      Stock Option Plan for Employees. (Incorporated herein by
                    reference to the Corporation's Form 10-K for 1987 filed
                    March 25, 1988.)

          10.2      Employee's Stock Option Plan. (Incorporated herein by
                    reference to the Corporation's Form 10-K for 1987 filed
                    March 25, 1988.)

          10.3      Employee Stock Ownership Plan. (Incorporated herein by
                    reference to the Corporation's Form 10-K for 1984 filed
                    April 12, 1985.)

          10.4      Lease dated December 29, 1996, between IBV Partners, L.P.
                    as landlord, and Heritage Bank & Trust, as Tenant, for the
                    lease of 7,581 square feet of space in a building located at
                    1450 South Military Highway, Chesapeake, Virginia.
                    (Incorporated herein by reference to the Corporation's Form
                    10-K for 1986 filed March 1987.

          10.5      Amended and restated January 1, 1989, Stock Ownership Plan,
                    which provided for certain changes required by IRS
                    regulations including changes in participant vesting
                    schedules. (Incorporated herein by reference to the
                    Corporation's Form 10-K for 1990 filed March 30, 1991.)

          10.6      Employee's Stock Ownership Plan. (Incorporated herein by
                    reference to the Corporation's Form 10-KSB for 1998 filed
                    March 30, 1998.)

(B)  Reports on Form 8-K

                    One Form 8-K was filed during the year ended December 31,
                    1999. The information filed is listed below:

                         .   Filing Date -  December 1, 1999

                         .   Item(s) Reported -Company acquired 42,000 shares of
                             its common stock from a single holder on November
                             26, 1999.

                         .   Financial Statements Filed - None

                                       22
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15 (d) 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)

Date: March 22, 2000               by /s/ Robert J. Keogh
                                      -----------------------------------------
                                          Robert J. Keogh, President and Chief
                                          Executive Officer


                                    by /s/ Peter M. Meredith
                                       ----------------------------------------
                                           Peter M. Meredith, Jr., Chairman of
                                           the Board of Directors

                                       23
<PAGE>

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 22, 2000.

SIGNATURES*

/s/ Peter M. Meredith, Jr.
-------------------------------------
Peter M. Meredith, Jr.
Chairman of the Board of Directors

/s/ Robert J. Keogh
-------------------------------------
Robert J. Keogh
President and Chief Executive Officer & Director

/s/ Henry U. Harris, III
-------------------------------------
Henry U. Harris, III
Vice-Chairman of the Board of Directors

/s/ Stephen A. Johnsen
-------------------------------------
Stephen A. Johnsen
Secretary of the Board of Directors

/s/ Lisa F. Chandler
--------------------------------------
Lisa F. Chandler
Director

/s/ James A. Cummings
-------------------------------------
James A. Cummings
Director

/s/ F. Dudley Fulton
-------------------------------------
F. Dudley Fulton
Director

/s/ Gerald L. Parks
-------------------------------------
Gerald L. Parks
Director

/s/ Ross C. Reeves
-------------------------------------
Ross C. Reeves
Director

/s/ Harvey W. Roberts, III
-------------------------------------
Harvey W. Roberts, III
Director

                              *POWER OF ATTORNEY
                               -----------------

Each person whose signature appears above under "SIGNATURES" hereby authorizes
Robert J. Keogh and Peter M. Meredith, Jr. or either of them, to execute in the
name of each such person, and to file any amendment to this report, and hereby
appoints Robert J. Keogh and Peter M. Meredith, Jr. or either of them, as
attorneys-in-fact to sign on his behalf, individually and in each capacity
stated below, and to file any and all amendments to this report.

                                       24
<PAGE>

                            HERITAGE BANKSHARES, INC
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
ITEM                                                                                                PAGE
<S>                                                                                                 <C>
Report of Independent Accountants...........................................................        F-1

FINANCIAL STATEMENTS:

         Consolidated Balance Sheets........................................................        F-2

         Consolidated Statements of Income..................................................        F-3

         Consolidated Statements of Stockholders' Equity ...................................        F-4

         Consolidated Statements of Cash Flows .............................................        F-5

         Notes to Consolidated Financial Statements ........................................        F-6
</TABLE>

                                       25
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS


The Stockholders and Board of Directors
Heritage Bankshares, Inc.
Norfolk, Virginia


      We have audited the accompanying consolidated balance sheets of Heritage
Bankshares, Inc. and its subsidiaries at December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended.  These consolidated financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

      We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Heritage Bankshares, Inc. and its subsidiaries as of December 31, 1999 and 1998,
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.

/s/ Goodman & Company, LLP

Norfolk, Virginia
January 14, 2000
<PAGE>

HERITAGE BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
========================================================================================

December 31,                                                  1999             1998
----------------------------------------------------------------------------------------
<S>                                                     <C>              <C>
                                  ASSETS

Cash and due from banks                                 $    3,436,565   $     3,603,916
Federal funds sold                                           4,049,069         3,457,492
Securities available for sale                               16,908,604        14,318,091
Securities held to maturity                                  4,316,878         5,118,715
Loans, net                                                  61,437,024        55,670,814
Loans held for sale                                                  -           938,456
Accrued interest receivable                                    646,619           578,616
Other real estate owned                                        428,500           428,500
Premises and equipment, net                                  2,353,524         2,010,228
Other assets                                                 1,318,933         1,166,670
                                                        --------------------------------

                                                        $   94,895,716   $    87,291,498
                                                        ================================

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
     Noninterest bearing deposits                       $   16,350,570   $    14,521,488
     Interest-bearing deposits                              67,283,837        62,761,449
                                                        --------------------------------
                                                            83,634,407        77,282,937
Securities sold under agreements to repurchase               2,069,810           981,271
Short-term borrowings                                           53,045            63,234
Accrued interest payable                                       302,276           317,995
Other liabilities                                              562,788           567,109
                                                        --------------------------------
                                                            86,622,326        79,212,546
                                                        --------------------------------
Stockholders' equity:
     Common stock, $5 par value - authorized
       3,000,000 shares; issued and outstanding:
       1999 - 765,700 shares; 1998 - 801,250 shares          3,828,500         4,006,250
     Additional paid-in capital                               (343,377)         (351,757)
     Retained earnings                                       4,908,908         4,336,068
     Accumulated other comprehensive income (loss)            (120,641)           88,391
                                                        --------------------------------
                                                             8,273,390         8,078,952
                                                        --------------------------------

                                                        $   94,895,716   $    87,291,498
                                                        ================================
</TABLE>

                The notes to consolidated financial statements
                    are an integral part of this statement.

                                                                             F-2
<PAGE>

HERITAGE BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
==================================================================================================================

Years Ended December 31,                                                              1999              1998
------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                <C>
Interest income:
     Interest and fees on loans                                                 $      5,185,754   $     4,864,520
                                                                                ----------------------------------
     Interest on investment securities:
        Available for sale                                                               848,820           890,310
        Held to maturity                                                                 277,027           367,637
                                                                                ----------------------------------
                                                                                       1,125,847         1,257,947
                                                                                ----------------------------------

     Interest on federal funds sold                                                      289,102           332,250
                                                                                ----------------------------------
            Total interest income                                                      6,600,703         6,454,717
                                                                                ----------------------------------

Interest expense:
     Interest on deposits                                                              2,882,323         2,964,137
     Interest on short-term borrowings                                                    84,956            86,770
                                                                                ----------------------------------
            Total interest expense                                                     2,967,279         3,050,907
                                                                                ----------------------------------

            Net interest income                                                        3,633,424         3,403,810

Provision for loan losses                                                                101,250            65,500
                                                                                ----------------------------------

            Net interest income after provision for loan losses                        3,532,174         3,338,310
                                                                                ----------------------------------

Noninterest income:
     Services charges                                                                    258,757           224,781
     Other                                                                               363,462           242,086
                                                                                ----------------------------------
                                                                                         622,219           466,867
                                                                                ----------------------------------

Noninterest expense:
     Salaries and employee benefits                                                    1,444,685         1,315,750
     Other                                                                               477,647           442,481
     Occupancy expenses                                                                  212,444           185,443
     Automated services                                                                  198,400           132,961
     Furniture and equipment expense                                                     148,518           130,121
     Taxes and licenses                                                                  102,430            43,460
     Stationery and supplies                                                              66,795            71,813
                                                                                ----------------------------------
                                                                                       2,650,919         2,322,029
                                                                                ----------------------------------

Income before income taxes                                                             1,503,474         1,483,148

Income tax expense                                                                       444,324           420,637
                                                                                ----------------------------------

Net income                                                                      $      1,059,150   $     1,062,511
                                                                                ----------------------------------

Earnings per common share - basic                                               $           1.33   $          1.33
                                                                                ----------------------------------

Earnings per common share - assuming dilution                                   $           1.26   $          1.25
                                                                                ----------------------------------
</TABLE>

                The notes to consolidated financial statements
                    are an integral part of this statement.

                                                                             F-3
<PAGE>

HERITAGE BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
===============================================================================

<TABLE>
<CAPTION>
Years Ended December 31, 1999 and 1998
------------------------------------------------------------------------------------------------------------------------------
                                                                                                    Accumulated
                                                                                                       Other
                                                 Common Stock         Additional                   Comprehensive
                                           -----------------------     Paid-in        Retained        Income
                                            Shares       Amount        Capital        Earnings        (Loss)         Total
                                           ---------   -----------    -----------    -----------   ------------- -------------
<S>                                        <C>         <C>            <C>           <C>            <C>           <C>
Balance, December 31, 1997                   795,050   $ 3,975,250    $ (360,790)   $ 3,409,668    $   56,618    $   7,080,746
                                                                                                                 -------------
Net income for 1998                                              -             -      1,062,511                      1,062,511

Net changes in unrealized gain (loss)
     on securities available-for-sale,
     net of deferred income taxes
     of $16,368                                                                                        31,773           31,773
                                                                                                                 -------------
Total comprehensive income                                                                                           1,094,284
                                                                                                                 -------------
Stock options exercised in 1998                6,200        31,000         9,033              -             -           40,033

Less: Dividends paid in 1998                                     -             -       (136,111)            -         (136,111)
                                           -----------------------------------------------------------------------------------

Balance, December 31, 1998                   801,250     4,006,250      (351,757)     4,336,068        88,391        8,078,952
                                                                                                                 -------------

Net income for 1999                                              -             -      1,059,150             -        1,059,150


Net changes in unrealized gain (loss)
     on securities available-for-sale,
     net of deferred income tax benefit
     of $107,683                                                 -             -              -      (209,032)        (209,032)
                                                                                                                 -------------
Total comprehensive income                                                                                             850,118
                                                                                                                 -------------

Stock options exercised in 1999                6,450        32,250         8,380              -             -           40,630
Common stock reacquired                      (42,000)     (210,000)                    (325,500)                      (535,500)
Less: Dividends paid in 1999                                     -             -       (160,810)            -         (160,810)
                                           -----------------------------------------------------------------------------------

Balance, December 31, 1999                   765,700   $ 3,828,500    $ (343,377)   $ 4,908,908    $ (120,641)   $   8,273,390
                                           ===================================================================================
</TABLE>

                The notes to consolidated financial statements
                    are an integral part of this statement.

                                                                             F-4

                                       4
<PAGE>

HERITAGE BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
===============================================================================

<TABLE>
<CAPTION>
Years Ended December 31,                                                                  1999           1998
------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>            <C>
Operating activities:
    Net income                                                                       $    1,059,150   $  1,062,511
    Adjustments to reconcile to net cash
        provided by operating activities:
        Provision for loan losses                                                           101,250         65,500
        Provision for depreciation and amortization                                         136,125        116,307
        Amortization of investment security premiums,
           net of discounts                                                                  21,355         15,105
        Deferred loan origination fees, net of costs                                        (21,621)        (7,538)
        Changes in:
           Interest receivable                                                              (68,003)       113,872
           Interest payable                                                                 (15,719)       (24,311)
           Loans held for sale                                                              938,456       (828,456)
           Other assets                                                                     (45,644)      (123,884)
           Other liabilities                                                                 (4,321)      (216,862)
                                                                                     -----------------------------
              Net cash provided by operating activities                                   2,101,028        172,244
                                                                                     -----------------------------
Investing activities:
    Proceeds from maturities of available-for-sale securities                             6,740,890      6,154,865
    Proceeds from maturities, prepayments and calls of
        held-to-maturity securities                                                       1,878,301      2,454,675
    Purchases of available-for-sale securities                                           (9,663,065)    (4,758,877)
    Purchases of held-to-maturity securities                                             (1,082,873)      (707,394)
    Loan originations, net of principal repayments                                       (5,845,839)    (4,596,943)
    Purchases of land, premises and equipment                                              (478,356)      (810,405)
                                                                                     -----------------------------
              Net cash used by investing activities                                      (8,450,941)    (2,264,079)
                                                                                     -----------------------------
Financing activities:
    Net increase in demand deposits,
        NOW accounts and savings accounts                                                 2,000,402      5,131,125
    Net increase (decrease) in certificates of deposit                                    4,351,067       (645,225)
    Net increase (decrease) in securities sold under
        agreements to repurchase                                                          1,088,539       (963,941)
    Net increase (decrease) in short-term borrowings                                        (10,189)        10,986
    Common stock reacquired                                                                (535,500)             -
    Net proceeds from exercise of stock options                                              40,630         40,033
    Cash dividends paid                                                                    (160,810)      (136,111)
                                                                                     -----------------------------
              Net cash provided by financing activities                                   6,774,139      3,436,867
                                                                                     -----------------------------
Increase in cash and cash equivalents                                                       424,226      1,345,032

Cash and cash equivalents at beginning of year                                            7,061,408      5,716,376
                                                                                     -----------------------------
Cash and cash equivalents at end of year                                             $    7,485,634   $  7,061,408
                                                                                     =============================
    As shown on the Consolidated Balance Sheets:
        Cash and due from banks                                                           3,436,565      3,603,916
        Federal funds sold                                                                4,049,069      3,457,492
                                                                                     -----------------------------
                                                                                     $    7,485,634   $  7,061,408
                                                                                     =============================
Supplemental schedules and cash flow information: Cash paid for:
        Interest on deposits and other borrowings                                    $    2,982,997   $  3,075,544
                                                                                     =============================

        Income taxes                                                                 $      543,036   $    775,579
                                                                                     =============================
</TABLE>

                The notes to consolidated financial statements
                    are an integral part of this statement.

                                                                             F-5
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HERITAGE BANKSHARES, INC.

DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND BUSINESS

      Heritage Bankshares, Inc. (the "Company") was organized under the laws of
the Commonwealth of Virginia in 1983.  The Company has four wholly-owned
subsidiaries, including one bank: Heritage Bank & Trust (the "Bank") with five
full service branches in Norfolk and Chesapeake, Virginia.  The Company's other
subsidiaries are IBV Real Estate Holdings, Inc., a Virginia corporation,
Sentinel Title Services, Inc., a Virginia corporation, and Sentinel Trust
Services, L.L.C., a Virginia limited liability company.  The Bank is a state-
chartered bank and a member of the Federal Reserve System.  The deposits of the
Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC") to
the extent and subject to the limitations set forth in the Federal Deposit
Insurance Act, as amended.

      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.  Its principal banking activities include receiving
demand, savings and time deposits for personal and commercial accounts; making
commercial, real estate and consumer loans; acting as a United States tax
depository facility; providing money transfer and cash management services;
selling traveler's checks, bank money orders; issuing letters of credit; and
investing in U.S. Treasury securities and securities of other U.S. government
agencies and corporations, and mortgage-backed and state and municipal
securities.

      IBV Real Estate Holdings, Inc. was formed in December, 1986.  Presently,
its only business is owning a 1% general partnership interest in IBV Partners,
L.P., the lessor of office space to Heritage Bank and Trust in Chesapeake,
Virginia.

      Sentinel Title Services, Inc. and Sentinel Trust Services, L.L.C. are
wholly-owned subsidiaries, which own an interest in providers of title and trust
services.  As these subsidiaries own a less than ten percent (10%) interest in
other companies, the financial activities pertaining to these interests are
recorded on the cost method of accounting for investments. The Company's
strategic relationship with these entities provides the Bank with the ability to
provide title and trust services to its customers.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Basis of Statement Presentation and Principles of Consolidation

    The accompanying consolidated financial statements include the accounts of
Heritage Bankshares, Inc. and its wholly-owned subsidiaries, Heritage Bank and
Trust and IBV Real Estate Holdings, Inc., Sentinel Title Services, Inc. and
Sentinel Trust Services, L.L.C.  All significant intercompany balances and
transactions have been eliminated in consolidation.

                         (Notes Continued on Next Page)

                                                                             F-6
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

    Cash Equivalents

    For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, interest bearing deposits with banks and
federal funds sold.  Generally, federal funds are sold for one-day periods.

    Securities

    Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and reflected
at amortized cost.  Investments that are purchased and held principally for the
purpose of selling them in the near term, if any, are classified as "trading
securities" and reflected at fair value, with unrealized gains and losses
included in earnings.  Investments not classified as either of the above are
classified as "available for sale" and recorded at fair value, with unrealized
gains and losses excluded from earnings and reported in other comprehensive
income.

    Purchase premiums and discounts are recognized in interest income using the
interest method over the period to maturity on held-to-maturity and available-
for-sale securities.  Other-than-temporary declines in the fair value of
individual held-to-maturity and available-for-sale securities, if any, result in
write-downs of the individual securities to fair value.  Gains and losses are
determined using the specific-identification method.

    Loans

    Loans are reported at their principal outstanding balance net of charge-
offs, deferred loan fees and costs on originated loans, unearned income, and
unamortized premiums or discounts, if any, on purchased loans.  Interest income
is generally recognized when income is earned using the interest method.  Loan
origination fees and certain direct loan origination costs are deferred and the
net amounts are amortized as an adjustment to yield on the respective loans.

    Loans Held For Sale

    Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate.  Net
unrealized losses, if any, are recognized through a valuation allowance by
charges to income.

                        (Notes Continued on Next Page)

                                                                             F-7
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

    Allowance for Loan Losses

    The Bank accounts for loan losses in accordance with FASB Statement No. 114,
Accounting by Creditors for Impairment of a Loan.  Under the standard, a loan is
considered impaired, based on current information and events, if it is probable
that the Bank will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement.  The
measurement of impaired loans is generally based on the present value of
expected future cash flows discounted at the historical effective interest rate,
except that all collateral-dependent loans are measured for impairment based on
the fair value of the collateral.

    Large groups of smaller balance homogeneous loans are collectively evaluated
for impairment.  Accordingly, the Bank does not separately identify individual
consumer and residential loans for impairment disclosures.

    The adequacy of the allowance for loan losses is periodically evaluated by
the Bank, in order to maintain the allowance at a level that is sufficient to
absorb probable credit losses.  Management's evaluation of the adequacy of the
allowance is based on a review of the Bank's historical loss experience, known
and inherent risks in the loan portfolio, including adverse circumstances that
may affect the ability of the borrower to repay interest and/or principal, the
estimated value of collateral, and an analysis of the levels and trends of
delinquencies, charge-offs, and the risk ratings of the various loan categories.
Such factors as the level and trend of interest rates and the condition of the
national and local economies are also considered.  In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for losses on loans.  Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.

    The allowance for loan losses is established through charges to earnings in
the form of a provision for loan losses.  Increases and decreases in the
allowance due to changes in the measurement of impaired loans, if applicable,
are included in the provision for loan losses.  Loans continue to be classified
as impaired unless they are brought fully current and the collection of
scheduled interest and principal is considered probable.

    When a loan or portion of a loan is determined to be uncollectible, the
portion deemed uncollectible is charged against the allowance and subsequent
recoveries, if any, are credited to the allowance.

                        (Notes Continued on Next Page)

                                                                             F-8
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

    Income Recognition on Impaired and Nonaccrual Loans

    Loans, including impaired loans, are generally classified as nonaccrual if
they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection.  If a loan or a portion of a loan is classified as
doubtful, or is partially charged off, the loan is generally classified as
nonaccrual.  Loans that are on a current payment status or past due less than 90
days may also be classified as nonaccrual, if repayment in full of principal
and/or interest is in doubt.

    Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained period
of repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.

    While a loan is classified as nonaccrual and the future collectibility of
the recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding.  When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis.  In the case where a nonaccrual loan had been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance at the
contractual interest rate.  Cash interest receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior charge-offs
have been fully recovered.

    Other Real Estate Owned

    Other real estate owned is comprised of real estate acquired through
foreclosure, acceptance of a deed in lieu of foreclosure, or loans in which the
Bank receives physical possession of the debtor's real estate.  Other real
estate owned is carried at the lower of the recorded investment in the loan or
the fair value less estimated costs to sell.

    Restructured Loans

    Loans are considered troubled debt restructurings under FASB Statement No.
15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, if for
economic or legal reasons, a concession has been granted to the borrower related
to the borrower's financial difficulties that the Bank would not have otherwise
considered.  The Bank has restructured certain loans in instances where a
determination was made that greater economic value will be realized under new
terms than through foreclosure, liquidation, or other disposition.  The terms of
the renegotiation generally involve some or all of the following
characteristics:  a reduction in the interest pay rate to reflect actual
operating income, an extension of the loan maturity date to allow time for
stabilization of operating income, and partial forgiveness of principal and
interest.

                        (Notes Continued on Next Page)

                                                                             F-9
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

    Restructured Loans (Continued)

    The carrying value of a restructured loan is reduced by the fair value of
assets or equity interest received, if any.  Prior to demonstrating performance,
the Bank generally classifies impaired restructured loans, if any, as
nonaccrual.  The accrual of interest resumes when such loans can demonstrate
performance, generally evidenced by six months of pre- or post-restructuring
payment performance in accordance with the restructured terms, or by the
presence of other significant factors.  In addition, at the time of
restructuring, loans are generally classified as impaired.  A restructured loan
that is not impaired, based on the restructured terms and has a stated interest
rate greater than or equal to a market interest rate at the date of the
restructuring, is reclassified as unimpaired in the year immediately following
the year it was disclosed as restructured.

    Premises and Equipment

    Premises and equipment are stated at cost less accumulated depreciation.
For financial reporting purposes, assets are depreciated over their estimated
useful lives using the straight-line method.  For income tax purposes, the
accelerated cost recovery system and the modified accelerated cost recovery
system are used.

    Transfers of Financial Assets

    Transfers of financial assets are accounted for as sales, when control over
the assets has been surrendered.  Control over transferred assets is deemed to
be surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.

    Income Taxes

    The Company files a consolidated tax return.  Provisions for income taxes
reflect tax expense incurred as a consolidated group.  Tax expense is allocated
among the members of the consolidated group in accordance with an intercompany
agreement for tax expense.  Income taxes are provided for the tax effects of the
transactions reported in the financial statements and consist of taxes currently
due plus deferred taxes related primarily to differences between the basis of
investment securities, deferred loan fees, allowance for loan losses, allowance
for losses on foreclosed real estate, accumulated depreciation and deferred
compensation for financial and income tax reporting.  The deferred tax assets
and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled.  An allowance is provided if it is more
likely than not that the Company will not realize the benefits of a deferred tax
asset.  As of December 31, 1999, a valuation allowance has not been provided
against the deferred tax asset.

    Deferred Compensation Plans

    The Bank maintains deferred compensation and retirement arrangements with
certain directors and officers.  The Company's policy is to accrue the present
value of estimated amounts to be paid under the contracts over the expected
period of active employment.  The Bank purchased life insurance contracts to
fund the expected liabilities under the contracts.

                        (Notes Continued on Next Page)

                                                                            F-10
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

    Off-Balance-Sheet Financial Instruments

    In the ordinary course of business, the Bank has entered into off-balance-
sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements, commercial letters of credit,
standby letters of credit and financial guarantees written.  Such financial
instruments are recorded in the financial statements when they become payable.

    Use of Estimates

    The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those estimates.

    Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans.  While management uses available information to recognize
losses on loans and foreclosed real estate, future additions to the allowance
may be necessary based on changes in local economic conditions and other
factors.

    Earnings per Share

    The Company adopted FASB Statement No. 128, Earnings Per Share, on December
31, 1997.  This Statement establishes standards for computing and presenting
earnings per share (EPS).  This Statement supersedes standards previously set in
APB Opinion No. 15, Earnings Per Share.  FASB 128 requires dual presentation of
basic and diluted EPS on the face of the income statement, and requires a
reconciliation of the numerator and denominator of the basic EPS computation
with the numerator and denominator of the diluted EPS computation.

    Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of shares outstanding for the
period.  Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised, converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.

    Comprehensive Income

    The Company adopted FASB Statement No. 130, Reporting Comprehensive Income,
as of January 1, 1998.  Accounting principles generally require that recognized
revenue, expenses, and realized gains and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, are reported as a separate component of
the equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.  The adoption of FASB Statement No. 130 had
no effect on the Corporation's net income or shareholders' equity.

                        (Notes Continued on Next Page)

                                                                            F-11
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

    Comprehensive Income (Continued)

    The components of other comprehensive income and related tax effects are as
follows:



<TABLE>
<CAPTION>
                                                       1999                 1998
                                                  ---------------     ----------------
        <S>                                          <C>                   <C>
        Unrealized holding gains (losses) on
           available-for-sale securities              $(316,715)            $ 50,346
        Reclassification adjustment for
           gains realized in income                           -               (2,205)
                                                      ---------             --------
        Net unrealized gains (losses)                  (316,715)              48,141
        Tax effect                                      107,683              (16,368)
                                                      ---------             --------

        Net-of-tax amount                             $(209,032)            $ 31,773
                                                      =========             ========
</TABLE>

    Computer Software

    During the year ended December 31, 1999, the Company adopted Statement of
Position (SOP) 98-1, Accounting for Costs of Computer Software Developed or
Obtained for Internal Use.  This SOP was effective for fiscal years beginning
after December 31, 1998.  The SOP requires entities to capitalize certain
internal-use software costs once certain criteria are met.  Generally, internal
costs with respect to software configuration and interface, coding, installation
to hardware, testing (including parallel processing), and data conversion costs
allowing access of old data by new systems should be capitalized.  All other
data conversion costs, training, application maintenance, and ongoing support
activities should be expensed.  The Company's adoption of this SOP on January 1,
1999 did not materially impact the Company's consolidated financial condition or
results of operations.

    Start-up Activities

    During the year ended December 31, 1999, the Company adopted SOP 98-5,
Reporting on the Costs of Start-up Activities.  The SOP requires such costs to
be expensed as incurred instead of being capitalized and amortized.  It applies
to start-up activities and costs of organization for both development stage and
established operating activities as those one-time activities that relate to the
opening of a new facility, introduction of a new product or service, doing
business in a new territory, initiating a new process in an existing facility,
doing business with a new class of customer or beneficiary, or commencing some
new operation.  The SOP was effective for fiscal years beginning after December
15, 1998.  Consistent with banking industry practice, the Company's policy is to
expense such costs.  Therefore, its adoption, on January 1, 1999, did not
materially affect the Company's consolidated financial position or results of
operations.

    Reclassifications

    Certain reclassifications have been made to prior year financial statements
to conform them to the current year's presentation.

                        (Notes continued on next page)

                                                                            F-12
<PAGE>

NOTE 3 - CONDENSED FINANCIAL INFORMATION OF HERITAGE BANKSHARES, INC.
         (PARENT COMPANY ONLY)

    The financial position, results of operations and cash flows of Heritage
Bankshares, Inc. are presented below on a parent company only basis for the
years indicated.

<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                                                              ---------------------------------
Condensed Statements of Income                                    1999                 1998
                                                              --------------     ---------------
<S>                                                              <C>               <C>
Income:
Dividends from subsidiary bank                                    $  696,310         $  136,111
Other                                                                 12,116             12,000
                                                              ---------------------------------

Expenses:
Other                                                                 35,004             30,082
                                                              =================================

Income before income taxes and equity in
    undistributed net income of subsidiaries                         673,425            118,029
Applicable income tax benefit                                         18,521             21,063
                                                              ---------------------------------
Income before equity in undistributed net
    income of subsidiaries                                           691,946            139,092
Equity in undistributed net income of subsidiaries                   367,204            923,419
                                                              ---------------------------------

           Net income                                             $1,059,150         $1,062,511
                                                              =================================
</TABLE>

                        (Notes continued on next page)

                                                                            F-13
<PAGE>

NOTE 3 - CONDENSED FINANCIAL INFORMATION OF HERITAGE BANKSHARES, INC.
         (PARENT COMPANY ONLY) (Continued)

<TABLE>
<CAPTION>
                                                                       Years Ended December 31,
                                                                      --------------------------
Condensed Statements of Cash Flows                                        1999          1998
                                                                      -----------    -----------
<S>                                                                    <C>            <C>
Operating activities:
Net income                                                              $1,059,150     $1,062,511
Adjustments to reconcile to net cash provided by
 operating activities:
Depreciation                                                                 3,940          8,196
Undistributed net income of subsidiaries                                  (367,204)      (923,419)
Changes in:
    Other assets                                                           (56,573)       429,714
    Other liabilities                                                       (8,305)      (263,462)
                                                                        ----------     ----------
Net cash provided by operating activities                                  631,008        313,540
                                                                        ----------     ----------

Financing activities:
Net proceeds from exercise of stock options                                 40,630         40,033
Common stock reacquired                                                   (535,500)             -
Cash dividends paid                                                       (160,810)      (136,111)
                                                                        ----------     ----------
Net cash used by financing activities                                     (655,680)       (96,078)
                                                                        ----------     ----------
Net increase (decrease) in cash and cash equivalents                       (24,672)       217,462

Cash and cash equivalents at beginning of year                              257,382        39,920
                                                                        ===========    ==========
Cash and cash equivalents at end of year                                $   232,710    $  257,382
                                                                        -----------    ----------
</TABLE>

    Certain restrictions exist regarding the ability of Heritage Bank and Trust
to transfer funds to Heritage Bankshares, Inc. in the form of cash dividends,
loans or advances.  Pursuant to federal regulations, dividends are generally
restricted to net profits, as defined, for the current year, plus retained net
profits for the previous two years.  At December 31, 1999, dividends from the
Bank to the Company are limited to approximately $2,650,000 under these
regulations.  The maximum amount available for transfer from Heritage Bank and
Trust to the Company in the form of loans and advances is 10% of Heritage Bank
and Trust's stockholder's equity.  At December 31, 1999, such maximum amount
available is approximately $783,000.


NOTE 4 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS

    The Bank is required by the Federal Reserve Bank to maintain average reserve
balances.  The average amount of maintained reserve balances was approximately
$828,000 for the year ended December 31, 1999, with the average reserve
requirement for the same period being approximately $818,000.  On December 31,
1999, the reserve balances were approximately $806,000.

                        (Notes continued on next page)

                                                                            F-14
<PAGE>

NOTE 5 - SECURITIES

    Securities at December 31, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                                Gross             Gross
                                            Amortized        Unrealized         Unrealized        Estimated Fair
                                              Cost              Gains             Losses              Value
                                          -------------    ---------------    --------------   --------------
<S>                                         <C>              <C>                <C>               <C>
December 31, 1999
 Securities available for sale
     U.S. Treasury                           $ 2,756,257      $  2,730           $ 16,952         $ 2,742,035
     U.S. government agencies                 13,438,368           842            157,769          13,281,441
     Mortgage-backed securities                  704,400         1,717                489             705,628
     State and political subdivisions            192,368             -             12,868             179,500
                                          -------------------------------------------------------------------
                                             $17,091,393      $  5,289           $188,078         $16,908,604
                                          ===================================================================
 Securities held to maturity
     U.S. Treasury                           $   997,176      $    537           $     53         $   997,660
     U.S. government agencies                  1,459,551           475             22,545           1,437,481
     Mortgage-backed securities                  166,975             -                 10             166,965
     State and political subdivisions            814,987         1,865              4,060             812,792
     Other                                       878,189             -              7,229             870,960
                                          -------------------------------------------------------------------
                                             $ 4,316,878      $  2,878           $ 33,897         $ 4,285,858
                                          ===================================================================
 December 31, 1998
   Securities available for sale
     U.S. Treasury                           $ 5,999,454      $ 83,666           $      -         $ 6,083,120
     U.S. government agencies                  7,038,469        51,222              6,451           7,083,240
     Mortgage-backed securities                  952,599         8,528              1,180             959,947
     State and political subdivisions            193,643             -              1,859             191,784
                                          -------------------------------------------------------------------
                                             $14,184,165      $143,416           $  9,490         $14,318,091
                                          ===================================================================
    Securities held to maturity
     U.S. Treasury                           $ 1,742,557      $ 28,856           $      -         $ 1,771,413
     U.S. government agencies                  1,706,042        18,671                  -           1,724,713
     State and political subdivisions            821,361        27,118                  -             848,479
     Other                                       848,755             -                  -             848,755
                                          -------------------------------------------------------------------
                                             $ 5,118,715      $ 74,645           $      -         $ 5,193,360
                                          ===================================================================
</TABLE>

                        (Notes continued on next page)

                                                                            F-15
<PAGE>

NOTE 5 - SECURITIES (Continued)

     Other securities include restricted investments of $626,100 and $846,300 at
December 31, 1999 and 1998, respectively. These securities do not have a readily
determinable fair value and lack a market. Therefore, they are carried at cost
and periodically evaluated for impairment.

     Investment securities having carrying values of $6,858,604 and $3,910,064
at December 31, 1999 and 1998, respectively, are pledged to secure deposits of
the U.S. Government and the Commonwealth of Virginia. The estimated fair values
of these securities were $6,787,210 and $3,969,068 at December 31, 1999 and
1998, respectively.

     The amortized cost and fair value of securities by maturity date, including
the contractual maturities of mortgage-backed securities, at December 31, 1999
are as follows:


<TABLE>
<CAPTION>
                                              Securities Held to Maturity                Securities Available for Sale
                                            -----------------------------------      --------------------------------------
                                                                 Estimated Fair                             Estimated Fair
                                             Amortized Cost          Value            Amortized Cost            Value
                                            ---------------     ---------------      ----------------      ----------------
     <S>                                    <C>                 <C>                 <C>                   <C>
     Due in one year or less                     $1,237,776          $1,238,787           $ 4,003,191           $ 3,991,229
     Due from one year to five years              2,004,910           1,976,267            12,238,669            12,081,413
     Due from five years to ten years               193,563             194,245               305,145               303,059
     Due after ten years                            880,629             876,559               544,388               532,903
                                               ------------        ------------        --------------        --------------
                                                 $4,316,878          $4,285,858           $17,091,393           $16,908,604
                                               ============        ============        ==============        ==============
</TABLE>

NOTE 6 - LOANS

  Loans consist of the following:


<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                         -----------------------------------
                                                                            1999                   1998
                                                                         -------------         --------------
                      <S>                                            <C>                    <C>
                      Gross loans
                      Commercial                                           $11,771,965            $11,600,892
                      Real estate - mortgage                                43,686,330             39,055,029
                      Real estate - construction                             1,657,724              1,421,877
                      Installment and consumer loans                         5,232,608              4,487,861
                                                                         -------------         --------------
                      Total gross loans                                     62,348,627             56,565,659

                      Less - allowance for loan losses                        (911,603)              (894,845)
                                                                         -------------         --------------
                      Loans, net                                           $61,437,024            $55,670,814
                                                                         =============         ==============
</TABLE>


                         (Notes Continued on Next Page)                     F-16
<PAGE>

NOTE 6 - LOANS (Continued)

     A summary of the activity in the allowance for loan losses account is as
follows:

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                                        ---------------------------------
                                                                           1999                 1998
                                                                        ------------          -----------
              <S>                                                       <C>                   <C>
              Balance, beginning of year                                   $ 894,845             $889,384
              Provision charged to operations                                101,250               65,500
              Loans charged-off                                             (174,688)             (81,338)
              Recoveries                                                      90,196               21,299
                                                                        ------------          -----------
              Balance, end of year                                         $ 911,603             $894,845
                                                                        ============          ===========
</TABLE>

     The following is a summary of information pertaining to impaired loans:

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                     -------------------------------------
                                                                           1999                 1998
                                                                     ----------------     ----------------
              <S>                                                    <C>                  <C>
              Impaired loans without a valuation allowance           $              -     $              -
              Impaired loans with a valuation allowance                        81,967              424,210
                                                                     ----------------     ----------------
              Total impaired loans                                            $81,967             $424,210
                                                                     ================     ================
              Valuation allowance related to impaired loans                   $25,639             $212,100
                                                                     ================     ================
</TABLE>

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                                     -------------------------------------
                                                                           1999                 1998
                                                                     ----------------      ---------------
      <S>                                                            <C>                  <C>
      Average investment in impaired loans                                   $222,000             $490,000
                                                                     ================      ===============
      Interest income recognized on impaired loans                           $      -             $      -
                                                                     ================      ===============
      Interest income recognized on a cash basis on impaired loans           $      -             $      -
                                                                     ================      ===============
</TABLE>

     No additional funds are committed to be advanced in connection with
impaired loans.

     Loans on which the accrual of interest has been discontinued amount to
$81,967 and $424,210 at December 31, 1999 and 1998, respectively. If interest on
these loans had been accrued, such income would have approximated $10,048 and
$56,922 for 1999 and 1998, respectively. No interest income was recognized or
received on these loans in 1999 and 1998.

                         (Notes Continued on Next Page)                     F-17
<PAGE>

NOTE 7 - PREMISES AND EQUIPMENT

     Premises and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                          -------------------------------------
                                                                                1999                 1998
                                                                          ---------------       ---------------
                          <S>                                             <C>                  <C>
                          Land and improvements                               $   612,567           $   612,567
                          Buildings                                             1,769,232             1,505,217
                          Leasehold improvements                                    7,951                 7,951
                          Equipment, furniture and fixtures                     1,206,096             1,043,663
                                                                          ---------------       ---------------
                                                                                3,595,846             3,169,398
                          Less - accumulated depreciation                      (1,242,322)           (1,159,170)
                                                                          ---------------       ---------------
                                                                              $ 2,353,524           $ 2,010,228
                                                                          ===============       ===============
</TABLE>


     Depreciation charged to operating expense for the years ended December 31,
1999 and 1998 was $136,125 and $116,307, respectively.


NOTE 8 - DEPOSITS

     Interest bearing deposits consist of the following:

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                         ---------------------------------------
                                                                               1999                  1998
                                                                         -----------------      ----------------
                          <S>                                            <C>                   <C>
                          Money Market and NOW account deposits                $15,275,362           $15,648,268
                          Savings deposits                                       4,865,712             4,321,485
                          Certificates of deposit $100,000 and over             12,644,699            10,405,870
                          Other time deposits                                   34,498,064            32,385,826
                                                                         -----------------      ----------------
                                                                               $67,283,837           $62,761,449
                                                                         =================      ================
</TABLE>


     At December 31, 1999, the scheduled maturities of time deposits are as
follows:

<TABLE>
                                  <S>                                                 <C>
                                  2000                                                $39,937,342
                                  2001                                                  2,474,658
                                  2002                                                    968,946
                                  2003                                                  2,610,161
                                  2004                                                  1,126,656
                                  Thereafter                                               25,000
                                                                                      -----------
                                                                                      $47,142,763
                                                                                      ===========
</TABLE>

                         (Notes Continued on Next Page)                     F-18
<PAGE>

NOTE 9 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SHORT-TERM
BORROWINGS

    Securities sold under agreements to repurchase generally mature within one
to four days from the transaction date.  Investment securities with carrying
values of $3,682,680 and $3,002,067 at December 31, 1999 and 1998, respectively,
are pledged to secure these agreements.  Information concerning securities sold
under agreements to repurchase is summarized, as follows:

<TABLE>
<CAPTION>
                                                           1999                 1998
                                                    -----------------    -----------------
<S>                                                 <C>                  <C>
       Average balance during the year                     $2,026,344           $2,081,131
                                                    =================    =================

       Average interest rate during the year                     4.06%                4.05%
                                                    =================    =================

       Maximum month end balance during the year           $2,880,363           $3,149,029
                                                    =================    =================
</TABLE>

    Short-term borrowings consist of U.S. Treasury tax and loan deposit notes,
which are payable on demand and fully collateralized by investment securities.

    The Bank is a member of the Federal Home Loan Bank of Atlanta.  One of the
benefits of membership is a borrowing capacity of $5.9 million secured by a
blanket floating lien on the unpaid principal balance of the Bank's one-to-four
unit residential real estate loans.  In addition, the Bank may borrow up to 10%
of its total assets under a separate credit availability program with the
Federal Home Loan Bank of Atlanta.  As of December 31, 1999, the Bank had no
outstanding balance on these lines of credit.

NOTE 10 - STOCK COMPENSATION PLANS

    At December 31, 1999, the Bank had fixed stock compensation plans for its
employees.  The Bank applies Accounting Principles Board Opinion No. 25 (APB
25), Accounting for Stock Issued to Employees, and related interpretations in
accounting for its plans.  Accordingly, no compensation cost has been recognized
for these plans against earnings.  For those companies applying APB 25, FASB
Statement No. 123, Accounting for Stock-Based Compensation, requires certain
pro-forma disclosures of net income and earnings per share.  Net income and
earnings per share computed under FASB Statement No. 123 do not materially
differ from the amounts reported.

                        (Notes Continued on Next Page)

                                                                            F-19
<PAGE>

NOTE 10 - STOCK COMPENSATION PLANS (Continued)

    All options have ten year terms, vest and become fully exercisable in three
years.  The option exercise price equals or exceeds the market price of the
stock as of the date the option was granted. The following is a summary of the
Bank's stock option activity, and related information for the years ended
December 31:

<TABLE>
<CAPTION>
                                                               1999                                         1998
                                             ----------------------------------------     -----------------------------------------
                                                                    Weighted-Average                             Weighted-Average
                                                  Options            Exercise Price            Options            Exercise Price
                                             -----------------     ------------------     -----------------     -------------------
<S>                                          <C>                   <C>                    <C>                   <C>
    Outstanding - beginning of year                     93,650                 $ 7.52                99,850                  $7.45
    Granted                                             30,750                  14.50                     -                      -
    Exercised                                           (6,450)                  6.30                (6,200)                  6.32
    Forfeited                                                -                      -                     -                      -
                                             -----------------     ------------------     -----------------     -------------------
    Outstanding - end of year                          117,950                 $ 9.40                93,650                  $7.52
                                             =================     ==================     =================     ===================
    Exercisable - end of year                           72,125                 $ 7.27                78,575                  $6.87
                                             =================     ==================     =================     ===================
</TABLE>

NOTE 11 - INCOME TAXES

    The principal components of income tax expense are as follows:

<TABLE>
<CAPTION>
                                                                           Years Ended December 31,
                                                                          1999                 1998
                                                                     ---------------     ---------------
<S>                                                                  <C>                 <C>
       Federal income tax expense - current                                 $418,703            $444,824

       Deferred federal income tax expense (benefit)                          25,621             (24,187)
                                                                     ---------------     ---------------
       Income tax expense                                                   $444,324            $420,637
                                                                     ===============     ===============
</TABLE>

    Differences between income tax expense calculated at the statutory rate and
that shown in the statements of income are summarized as follows:


<TABLE>
<CAPTION>
                                                                       Years Ended December 31,
                                                                      1999                 1998
                                                                  ---------------     ---------------
<S>                                                               <C>                 <C>
       Federal income tax expense - at 34% statutory rate                $511,181            $504,270
       Tax effect of:
         Tax-exempt interest                                              (45,763)            (44,763)
         Exercised stock options                                          (19,380)            (25,030)
         Other                                                             (1,714)            (13,840)
                                                                     -------------       -------------
       Income tax expense                                                $444,324            $420,637
                                                                     =============       =============
</TABLE>

                        (Notes Continued on Next Page)

                                                                            F-20
<PAGE>

NOTE 11 - INCOME TAXES (Continued)

     A cumulative net deferred tax asset is included in other assets at December
31, 1999 and 1998.  The components of the asset are as follows:

<TABLE>
<CAPTION>
                                                                               1999               1998
                                                                          --------------     ---------------
<S>                                                                       <C>                <C>
       Deferred tax assets:
           Deferred compensation                                               $  88,814          $  89,522
           Bad debts and other provisions                                        291,423            288,603
           Other                                                                  24,688             19,208
           Interest income                                                         3,444             23,467
           Net unrealized depreciation on available-for-sale
             securities                                                           62,149                  -
                                                                          --------------     --------------
           Total deferred tax asset                                              470,518            420,800
                                                                          --------------     --------------

       Deferred tax liabilities:
           Deferred loan fees                                                    (40,722)           (36,247)
           Discount accretion on securities                                      (14,170)           (14,423)
           Net unrealized appreciation on available-for-sale
             securities                                                                -            (47,394)
           Fixed assets                                                          (50,627)           (39,800)
                                                                          --------------     --------------
                                                                                (105,519)          (137,864)
                                                                          --------------     --------------
           Net deferred tax asset                                              $ 364,999          $ 282,936
                                                                          ==============     ==============
</TABLE>

NOTE 12 - COMMITMENTS AND CONTINGENCIES- RELATED PARTY

    The Company has entered into a long-term lease with a related party to
provide space for one branch and the Bank's operations center.  This lease has
been classified as an operating lease for financial reporting purposes.  Future
minimum lease payments of $64,439 are required each year for five years under
the long-term non-cancellable lease agreement as of December 31, 1996, which
expires in December, 2001.  Total lease expense was $64,439 for the years 1999
and 1998, respectively.

                        (Notes Continued on Next Page)

                                                                            F-21
<PAGE>

NOTE 13 - OTHER RELATED PARTY TRANSACTIONS

    The Bank has loan and deposit transactions with its officers and directors,
and with companies in which the officers and directors have a financial
interest.  Related party deposits amounted to approximately $6,400,000 and
$5,640,000 at December 31, 1999 and 1998, respectively.  In addition to related
party deposits, securities sold under agreements to repurchase with related
parties amounted to approximately $1,805,000 and $646,000 at December 31, 1999
and 1998, respectively. A summary of related party loan activity for Heritage
Bank and Trust is as follows during 1999:

          Balance, December 31, 1998                   $ 5,456,742
          Originations - 1999                            1,329,491
          Repayments - 1999                             (1,533,256)
                                                      -------------

          Balance, December 31, 1999                   $ 5,252,977
                                                      =============

    In the opinion of Management, such loans are made in the ordinary course of
business at normal credit terms, including interest rate and collateral
requirements and do not represent more than normal credit risk.

    In the ordinary course of business, the Company has engaged in transactions
with certain of its directors' companies for legal services and insurance.

    Commitments to extend credit and letters of credit to related parties
amounted to $837,340 and $1,365,800 at December 31, 1999 and 1998, respectively.

                        (Notes continued on next page)

                                                                            F-22
<PAGE>

NOTE 14 - CREDIT COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK

    The Bank has outstanding at any time a significant dollar amount of
commitments to extend credit.  To accommodate major customers, the Bank also
provides standby letters of credit and guarantees to third parties.  Those
arrangements are subject to strict credit control assessments.  Guarantees and
standby letters of credit specify limits to the Bank's obligations.  The amounts
of loan commitments, guarantees and standby letters of credit are set out in the
following table as of December 31, 1999 and 1998.  Because many commitments and
almost all standby letters of credit and guarantees expire without being funded
in whole or in part, the contract amounts are not estimates of future cash
flows.  The majority of commitments to extend credit have terms up to one year.
Interest rates on fixed-rate commitments range from 14% to 18%.

<TABLE>
<CAPTION>
                                                  December 31, 1999                             December 31, 1998
                                      -------------------    ----------------      -------------------     -----------------
                                         Variable Rate          Fixed Rate            Variable Rate           Fixed Rate
                                          Commitment            Commitment             Commitment             Commitment
                                      -------------------    -----------------     -------------------     -----------------
<S>                                   <C>                    <C>                   <C>                     <C>
Loan Commitments                              $11,000,158           $4,480,008             $10,492,268            $2,149,258

Standby letters of credit
   and guarantees written                     $   186,075           $  103,905             $   400,465            $   47,000
</TABLE>

    All of the guarantees outstanding at December 31, 1999 expire during 2000.

    Loan commitments, standby letters of credit and guarantees written have off-
balance-sheet credit risk because only origination fees and accruals for
probable losses, if any, are recognized in the statement of financial position,
until the commitments are fulfilled or the standby letters of credit or
guarantees expire.  Credit risk represents the accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted.  The credit risk amounts are equal to the contractual amounts,
assuming that the amounts are fully advanced and that, in accordance with the
requirements of FASB Statement No. 105, Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, collateral or other security is of no value.  The
Bank's policy is to require customers to provide collateral prior to the
disbursement of approved loans.  For retail loans, the Bank usually retains a
security interest in the property or products financed, which provides
repossession rights in the event of default by the customer.  For business loans
and financial guarantees, collateral is usually in the form of inventory or
marketable securities (held in trust) or property (notations on title).

                        (Notes continued on next page)

                                                                            F-23
<PAGE>

NOTE 14 - CREDIT COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK (Continued)

    Concentrations of credit risk (whether on or off balance sheet) arising from
financial instruments exist in relation to certain groups of customers.  A group
concentration arises when a number of counterparties have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions.  The Bank
does not have significant exposure to any individual customer or counterparty.
The major concentrations of credit risk for the Bank arise by customer loan type
in relation to loans and credit commitments.  A geographic concentration arises
because the Bank operates primarily in southeastern Virginia.

    The credit risk amounts represent the maximum accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted and any collateral or security proved to be of no value.  The Bank
has experienced little difficulty in accessing collateral when required.  The
amounts of credit risk shown, therefore, greatly exceed expected losses, which
are included in the allowance for loan losses.

NOTE 15 - REGULATORY MATTERS

     The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies.  Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements.  Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices.  The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components (such as
interest rate risk), risk weighting, and other factors.

     Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined).  Management believes, as of December 31, 1999, the Bank
meets all capital adequacy requirements to which it is subject.

     As of September 30, 1999, the most recent notification from the Federal
Reserve Bank of Richmond categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action.  To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table.  There are no conditions
or events since that notification that management believes have changed the
institution's category.

                        (Notes continued on next page)

                                                                            F-24
<PAGE>

NOTE 15 - REGULATORY MATTERS (Continued)

     The Bank's actual capital amounts and ratios are also presented in the
table.

<TABLE>
<CAPTION>
                                                                                            To Be Well Capitalized
                                                             For Capital Adequacy          Under Prompt Corrective
                                          Actual                   Purposes                   Action Provisions
                                  ----------------------   --------------------------    ---------------------------
                                    Amount       Ratio         Amount        Ratio          Amount          Ratio
                                  ---------   ----------   ------------   -----------    ------------    -----------
<S>                               <C>         <C>          <C>            <C>            <C>             <C>
As of December 31, 1999:
Total Capital
    (to Risk-Weighted Assets)      $9,191,000    14.45%      $5,089,000         8.00%      $6,361,000         10.00%
Tier I Capital
    (to Risk-Weighted Assets)      $8,394,000    13.20%      $2,544,000         4.00%      $3,817,000          6.00%
Tier I Capital
    (to Average Assets)            $8,394,000     9.12%      $3,680,000         4.00%      $4,600,000          5.00%

<CAPTION>
                                                                                            To Be Well Capitalized
                                                             For Capital Adequacy          Under Prompt Corrective
                                          Actual                   Purposes                   Action Provisions
                                  ----------------------   --------------------------    ---------------------------
                                    Amount       Ratio         Amount        Ratio          Amount          Ratio
                                  ---------   ----------   ------------   -----------    ------------    -----------
<S>                               <C>         <C>          <C>            <C>            <C>             <C>
As of December 31, 1998:
Total Capital
    (to Risk-Weighted Assets)      $8,729,000    14.73%      $4,711,000         8.00%      $5,889,000         10.00%
Tier I Capital
    (to Risk-Weighted Assets)      $7,991,000    13.48%      $2,355,000         4.00%      $3,533,000          6.00%
Tier I Capital
    (to Average Assets)            $7,991,000     9.24%      $3,460,000         4.00%      $4,326,000          5.00%
</TABLE>

    There is no significant difference between the Bank's actual ratios
disclosed above, and the related actual ratios of the Company.

                        (Notes continued on next page)

                                                                            F-25
<PAGE>

NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS

    The following table presents the carrying amounts and fair value of the
Bank's financial instruments at December 31, 1999 and 1998.  FASB Statement No.
107, Disclosures about Fair Value of Financial Instruments, defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.  The carrying amounts in the table are included in
the balance sheet under the indicated captions.

<TABLE>
<CAPTION>
                                                           1999                                    1998
                                         ----------------------------------      ---------------------------------
                                           Carrying                                 Carrying
                                             Amount            Fair Value             Amount          Fair Value
                                         ---------------     --------------      ---------------     -------------
                                               (Dollars in thousands)                  (Dollars in thousands)
<S>                                      <C>                 <C>                 <C>                 <C>
Financial Assets:
Cash and cash
    equivalents                                  $ 7,486             $ 7,486             $ 7,061             $ 7,061
Loans (net)                                       61,437              61,099              56,609              58,806
Investment securities                             21,225              21,192              19,434              19,509
Accrued interest
    receivable                                       647                 647                 579                 579

Financial Liabilities:
Deposit liabilities                               83,634              83,798              77,283              78,095
Accrued interest
    payable                                          302                 302                 318                 318
Short term borrowings                                 53                  53                  63                  63
Securities sold under
    agreements to repurchase                       2,070               2,070                 981                 981
</TABLE>

    Estimation of Fair Values

    The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments:

    Short-term financial instruments are valued at their carrying amounts
included in the Bank's balance sheet, which are reasonable estimates of fair
value due to the relatively short period to maturity of the instruments.  This
approach applies to cash and cash equivalents, short-term borrowings, and
securities sold under agreements to repurchase.

                        (Notes continued on next page)

                                                                            F-26
<PAGE>

NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

    Estimation of Fair Values (continued)

    Loans are valued on the basis of estimated future receipts of principal and
interest, which are discounted at various rates.  Loan prepayments are assumed
to occur at the same rate as in previous periods when interest rates were at
levels similar to current levels.  Future cash flows for homogeneous categories
of consumer loans, such as motor vehicle loans, are estimated on a portfolio
basis and discounted at current rates offered for similar loan terms to new
borrowers with similar credit profiles.  The fair value of nonaccrual loans also
is estimated on a present value basis, using higher discount rates appropriate
to the higher risk involved.

    Investment securities are valued at quoted market prices if available.  For
unquoted securities, the fair value is estimated by the Bank on the basis of
financial and other information.

    The fair value of demand deposits and deposits with no defined maturity is
taken to be the amount payable on demand at the reporting date.  The fair value
of fixed-maturity deposits is estimated using rates currently offered for
deposits of similar remaining maturities.  The intangible value of long-term
relationships with depositors is not taken into account in estimating the fair
values disclosed.

    The carrying amounts of accrued interest approximate fair value.

    It is not practicable to separately estimate the fair values for off-
balance-sheet credit commitments, including standby letters of credit and
guarantees written, due to the lack of cost-effective reliable measurement
methods for these instruments.

                        (Notes continued on next page)

                                                                            F-27
<PAGE>

NOTE 17 - EARNINGS PER SHARE RECONCILIATION

    The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations.

<TABLE>
<CAPTION>
                                                                               1999               1998
                                                                          ---------------    ---------------

<S>                                                                       <C>                <C>
           Net income (numerator, basic and diluted)                           $1,059,150         $1,062,511

           Weighted average shares outstanding (denominator)                      798,542            799,496
                                                                          ---------------    ---------------

           Earnings per common share-basic                                     $     1.33         $     1.33
                                                                          ===============     ==============

           Effect of dilutive securities

           Weighted average shares outstanding                                 $  798,542         $  799,496
           Effect of stock options                                                 41,499             51,895
                                                                          ---------------     --------------
           Diluted average shares outstanding (denominator)                       840,041            851,391
                                                                          ---------------     --------------

           Earnings per common share - assuming dilution                       $     1.26         $     1.25
                                                                          ===============     ==============
</TABLE>

                                   * * * * *

                                                                           F-28