As filed with the Securities and Exchange Commission on November , 1998
REGISTRATION NO.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-8
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
---------------
HERITAGE BANCORP, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1914902
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1313 Dolley Madison Boulevard
McLean, VA 22101
(703) 356-6610
(Address, including Zip Code, of principal executive offices)
---------------
The Heritage Bank
1998 Employee Incentive Stock Option Plan
1998 Outside Directors Stock Option Plan
1992 Employee Incentive Stock Option Plan
(Full title of the Plans)
---------------
Mr. John T. Rohrback
President and Chief Executive Officer
Heritage Bancorp. Inc.
1313 Dolley Madison Blvd.
McLean, Virginia 22101
(703) 356-6610
Copy to:
Richard A. Schaberg, Esq.
Thacher Proffitt & Wood
1700 Pennsylvania Avenue, N.W. Suite 800
Washington, D.C. 20006
(202) 347-8400
(Name and address, including Zip Code, telephone number and area
code, of agent for service)
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================================
Title of Securities Amount to be Proposed Maximum Offering Proposed Maximum Amount of
to be Registered Registered(1) Price Per Share (2) Aggregate Offering Price (2) Registration Fee
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value 200,000 shares $4.4375 $887,500 $247.00
==================================================================================================================================
</TABLE>
(1) Based on 200,000 shares of common stock of Heritage Bancorp, Inc. (the
"Company") reserved for issuance upon exercise of options granted pursuant
to The Heritage Bank 1998 Employee Incentive Stock Option Plan, The
Heritage Bank 1998 Outside Directors Stock Option Plan and The Heritage
Bank 1992 Employee Incentive Stock Option Plan ("Plans"). In addition to
such shares, this registration statement also covers an undetermined number
of shares of common stock of the Company that, by reason of certain events
specified in the Plans, may become issuable upon exercise options through
the use of certain anti-dilution provisions.
(2) Estimated solely for purpose of calculating the registration fee in
accordance with Rule 457 of the Securities Act of 1933, 200,000 shares that
may be acquired upon exercise of options granted are deemed to be offered
at $4.4375 per share, the average of the daily high and low sales prices of
common stock of the Company on the Nasdaq SmallCap Market at the close of
trading on November 20, 1998.
================================================================================
<PAGE>
PART I
INFORMATION REQUIRED IN THE SECTION 10(A) PROSPECTUS
ITEM 1. PLAN INFORMATION.
Not required to be filed with the Securities and Exchange Commission (the
"Commission").
ITEM 2. REGISTRANT INFORMATION AND EMPLOYEE PLAN ANNUAL INFORMATION.
Not required to be filed with the Commission.
Note: The document containing the information specified in this Part I will
be sent or given to employees as specified by Rule 428(b)(1). Such document need
not be filed with the Commission either as part of this registration statement
or as prospectuses or prospectus supplements pursuant to Rule 424. These
documents and the documents incorporated by reference in this registration
statement pursuant to Item 3 of Part II of this form, taken together, constitute
a prospectus that meets the requirements of Section 10(a) of the Securities Act
of 1933, as amended ("Securities Act").
PART II
ITEM 3. INCORPORATION OF DOCUMENTS BY REFERENCE.
The following documents and information heretofore filed with the
Commission by the Registrant (File No. 00-24933) are incorporated by reference
in this registration statement:
(1) the description of the Registrant's common stock (the "Common Stock")
contained in the Registrant's Registration Statement on Form S-4,
which was filed with the Commission pursuant to the Securities Act of
1933, as amended, on July 6, 1998 ("Securities Act");
All documents filed by the Registrant pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act after the date hereof and prior to the date of the
termination of the offering of the Common Stock offered hereby shall be deemed
to be incorporated by reference into this Registration Statement and to be a
part hereof from the date of filing of such documents. Any statement contained
herein or in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Registration Statement to the extent that a statement contained herein or in any
document which is or is deemed to be incorporated
2
<PAGE>
by reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Registration Statement. The Heritage Bank's Annual
Report on 10-K and quarterly reports for the quarters ended March 31, 1998 and
June 30, 1998, as filed with the Federal Reserve Board, are included as Exhibits
99.1 and 99.2 to this Registration Statement.
Heritage Bancorp, Inc. will provide without charge to each person to whom
this Prospectus is delivered, upon request of any such person, a copy of any or
all of the foregoing documents incorporated herein by reference (other than
exhibits to such documents). Written requests should be directed to Mr. William
B. Sutphin, Heritage Bancorp, Inc., 1313 Dolley Madison Boulevard, McLean,
Virginia 22101. Telephone requests may be directed to (703) 356-6610.
ITEM 4. DESCRIPTION OF SECURITIES.
Not applicable.
ITEM 5. INTERESTS OF NAMED EXPERTS AND COUNSEL.
Not applicable.
ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 13.1-696 of the Code of Virginia authorizes a Virginia corporation
to indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding (other
than an action by or in the right of the corporation in which the director was
adjudged liable and action charging improper personal benefit to the director in
which he was adjudged liable) by reason of the fact that such person is or was a
director, officer, employee or agent of another corporation or other enterprise
at the corporation's request, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interest of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Furthermore, under Section 13.1-698, a corporation shall indemnify a director
who entirely prevails in the defense of any proceeding to which he was a party
because he is or was a director of the corporation against reasonable expenses
incurred by him in connection with the proceeding unless limited by its articles
of incorporation. Section 13.1-702 states that unless, limited by a
corporation's articles of incorporation, an officer of the corporation is
entitled to mandatory indemnification under Section 13.1-698. Furthermore, under
this article, the corporation may indemnify and advance expenses to an officer,
employee, or agent of the corporation to the same extent as to a director.
Section 13.1-703 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or who, while a director, officer, employee or agent
of the corporation, is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against
3
<PAGE>
liability asserted or incurred by him in any such capacity or arising from his
status as such, whether or not the corporation would have the power to indemnify
him against the same liability under Sections 13.1-697 or 13.1-698.
Article 5 of the Company's Articles of Incorporation provides that
directors and officers shall not be personally liable to the Company or its
stockholders for monetary damages to the extent that the Virginia Stock
Corporation Act permits such limitation or elimination of liability. Article 5
of the Company's Articles of Incorporation states that the Company may, among
other things, indemnify any person who is or was a director or officer of the
Company, who was or is made a party to, or is threatened to be made a party to,
or has become a witness in, any threatened, pending or completed action, suit or
proceeding, by reason of such agreement or service or the fact that such person
is, was or has agreed to serve as a director, officer, employee or agent of
another corporation or organization at the request of the Company.
Article 5 also empowers the Company to purchase and maintain insurance to
protect itself and its directors and officers, and those who were serving as
directors or officers of another corporation or enterprise at the request of the
Corporation, against any liability asserted against him arising out of his
status as such.
ITEM 7. EXEMPTION FROM REGISTRATION CLAIMED.
Not applicable.
ITEM 8. EXHIBITS.
3.1 Articles of Incorporation of Heritage Bancorp, Inc.*
3.2 By-Laws of Heritage Bancorp, Inc.*
4.1 The Heritage Bank 1998 Employee Incentive Stock Option Plan.*
4.2 The Heritage Bank 1998 Outside Directors Stock Option Plan.*
4.3 The Heritage Bank 1992 Employee Incentive Stock Option Plan.*
4.4 Form of Stock Option Agreement for The Heritage Bank 1998 Employee
Incentive Stock Option Plan.
4.5 Form of Stock Option Agreement for The Heritage Bank 1998 Outside
Directors Stock Option Plan.
4.6 The Heritage Bank Outside Directors Stock Option
5.1 Opinion of Thacher Proffitt & Wood, counsel for Registrant, as to
the legality of the securities being registered.
23.1 Consent of Thacher Proffitt & Wood (included in Exhibit 5.1
hereof).
23.2 Consent of Yount, Hyde & Barbour, P.C.
99.1 The Heritage Bank's Annual Report on Form 10-K for the fiscal year
ended December 1997, which was filed with the Federal Reserve
Board pursuant to the Securities Exchange Act of 1934
4
<PAGE>
99.2 The Heritage Bank's Quarterly Report on Form 10-Q for the quarters
ended March 31, 1998 and June 30, 1998 as filed with the Federal
Reserve Board.
* Incorporated by reference to the Registrant's Registration Statement on
Form S-4, as amended (Registration No. 333-58515).
ITEM 9. UNDERTAKINGS.
A. Rule 415 offering. The undersigned Registrant hereby undertakes:
(1) For determining liability under the Securities Act , treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(2) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-8 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of McLean, Commonwealth of Virginia, on this 28th day of
October, 1998.
HERITAGE BANCORP, INC.
(Registrant)
By: /s/ John T. Rohrback
-----------------------------
John T. Rohrback
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ John T. Rohrback President and Chief Executive Officer October 28, 1998
- ------------------------------ (Principal Executive Officer) and
John T. Rohrback Director
/s/ William B. Sutphin Senior Vice President (Principal October 28, 1998
- ------------------------------ Accounting Officer) and Corporate
William B. Sutphin Secretary
/s/ Harold E. Lieding Chairman of the Board and Director October 28, 1998
- ------------------------------
Harold E. Lieding
/s/ Philip F. Herrick, Jr. Assistant Secretary and Director October 28, 1998
- ------------------------------
Philip F. Herrick, Jr.
/s/ George K. Degnon Secretary and Director October 28, 1998
- ------------------------------
George K. Degnon
/s/ Kevin P. Tighe Director October 28, 1998
- ------------------------------
Kevin P. Tighe
/s/ Stanley I. Richards Director October 28, 1998
- ------------------------------
Stanley I. Richards
/s/ Henry E. Hudson Director October 28, 1998
- ------------------------------
Henry E. Hudson
/s/ Ronald W. Kosh Director October 28, 1998
- ------------------------------
Ronald W. Kosh
/s/ George P. Shafran Vice Chairman, Assistant Secretary October 28, 1998
- ------------------------------ and Director
George P. Shafran
</TABLE>
6
EXHIBIT 4.4
HERITAGE BANCORP, INC.
EMPLOYEE INCENTIVE STOCK OPTION
THIS EMPLOYEE INCENTIVE STOCK OPTION entered into as of the 23rd day of
September, 1998, by and between HERITAGE BANCORP, INC., a Virginia corporation
(hereinafter referred to as "HBI") and (hereinafter referred to as "the
Employee"), an Employee of The Heritage Bank (the "Bank").
WHEREAS, the Stockholders and the Board of Directors of the Bank determined
that it was in the best interest of the Bank to establish an Employee Incentive
Stock Option Plan (the "Plan"), the obligations of which Plan have been fully
assumed by HBI, the sole shareholder of capital stock in the Bank. Under the
terms of the Plan certain Employees of the Bank may be granted the option to
acquire shares of common stock in HBI (the "Stock Option"); and
WHEREAS, it was determined by the Stock Option Committee (the "Stock Option
Committee") appointed by the Board of Directors of HBI (the "HBI Board of
Directors") and ratified by the HBI Board of Directors that such stock should be
sold to the Employee, upon exercise of the Stock Option, at a price no less than
fair market value of the stock on the declaration date (such amount being the
"Option Price"); and
WHEREAS, the Stock Option Committee has determined, and the HBI Board of
Directors has ratified such determination, that the Option Price should properly
be established at Three and 87 1/2/100 Dollars ($3.875) per share; and
WHEREAS, the Employee shall be granted this Stock Option to acquire ( )
shares of common stock of HBI; and ---------- -------
WHEREAS, the Employee has sufficient knowledge and experience in financial
and business matters to be capable of evaluating the merits and risks of a
prospective investor in HBI's stock and has acquired extensive knowledge of the
operations of HBI by virtue of the Employee's position as an Employee of the
Bank and, upon exercise of the Stock Option, will acquire the stock in the Bank
for investment purposes and not for speculation.
W I T N E S S E T H :
THAT FOR AND IN CONSIDERATION of the foregoing and the mutual covenants
hereinafter contained and other good and
<PAGE>
valuable consideration, the parties hereto agree as follows:
1. OPTION GRANT.
HBI grants to the Employee a Stock Option to purchase ______________
(_________) shares of the common stock of HBI at a price of Three and 87 1/2/100
Dollars ($3.875) per share, which HBI and the Board of Directors deem to be fair
value for such stock.
2. TERM OF OPTION.
The right to exercise this Stock Option shall continue for ten (10)
years following the effective date hereof as defined in Section 8 hereof, unless
the Employee is discharged from employment by the Bank for cause, as defined in
the Bank's Plan assumed by HBI, in which case this Stock Option shall expire six
(6) months following the date the Employee is notified of his or her discharge
by the Bank.
3. NON-ASSIGNABILITY OF THIS OPTION.
This Stock Option shall not be sold, pledged, assigned, hypothecated,
transferred or disposed of by the Employee during the Employee's lifetime,
provided however, should the Employee die during the period within which this
Stock Option may be exercised, it may be exercised by the Employee's duly
qualified personal representative, heirs or distributees.
4. EXERCISE OF OPTION.
The Stock Option shall be deemed to have been exercised by the Employee
upon delivery to HBI of written notice thereof, together with payment in full in
cleared funds for the stock to be acquired, by certified mail, postage prepaid,
addressed to HBI or by hand-delivery of such notice and payment to the President
of HBI.
5. DELIVERY OF SHARES.
Upon the exercise of the Stock Option and the tender to HBI of the
purchase price for the full ______________ (_______) shares of stock, HBI shall
deliver to the Employee a stock certificate reflecting the stock in HBI for
which the Stock Option was exercised.
6. TERMS OF THE PLAN.
This Option is granted in accordance with the Plan
<PAGE>
and the provisions of the Plan are incorporated herein by reference. A copy of
the Plan can be obtained from the Office of the President of HBI.
3
<PAGE>
7. SUCCESSORS AND ASSIGNS.
All terms of this Agreement shall be binding upon and inure to the
benefit of, and be enforceable by or against, the respective legal
representatives, successors and assigns of HBI.
8. EFFECTIVE DATE.
The Effective Date of this Agreement shall be October 23, 1998.
9. GOVERNING LAW.
This Agreement is intended to be performed in the Commonwealth of
Virginia and shall be construed and enforced in accordance with the laws of the
Commonwealth.
IN WITNESS whereof the parties have duly executed this Agreement.
HBI:
Date: HERITAGE BANCORP, INC.
- ------------------------------- ----------------------------------
By:
-----------------------------------
EMPLOYEE:
Date:
- -------------------------------- -----------------------------------
4
HERITAGE BANCORP, INC.
OUTSIDE DIRECTORS STOCK OPTION
THIS OUTSIDE DIRECTORS STOCK OPTION entered into as of the 23rd day of
September, 1998, by and between HERITAGE BANCORP, INC., a Virginia corporation
(hereinafter referred to as "HBI") and _________________________________________
____________ , a Director of HBI (hereinafter referred to as "the Director").
WHEREAS, the Stockholders and the Board of Directors of The Heritage Bank
(the "Bank") determined that it was in the best interest of the Bank to
establish an Outside Directors Stock Option Plan (the "Plan"), the obligations
of which Plan have been fully assumed by HBI, the sole shareholder of capital
stock in the Bank. Under the terms of the Plan certain Directors of HBI may be
granted the option to acquire shares of common stock in HBI (the "Stock
Option"); and
WHEREAS, it was determined by the Stock Option Committee (the "Stock Option
Committee") appointed by the Board of Directors of HBI (the "Board of
Directors") and ratified by the Board of Directors that such stock should be
sold to the Director, upon exercise of the Stock Option, at a price no less than
fair market value of the stock on the declaration date (such amount being the
"Option Price"); and
WHEREAS, the Stock Option Committee has determined, and the Board of
Directors has ratified such determination, that the Option Price should properly
be established at Three and 87 1/2/100 Dollars ($3.875) per share; and
WHEREAS, the Director shall be granted this Stock Option to acquire ___
___________ (_______)shares of common stock of HBI; and
WHEREAS, the Director has sufficient knowledge and experience in financial
and business matters to be capable of evaluating the merits and risks of a
prospective investor in HBI's stock and has acquired extensive knowledge of the
operations of HBI by virtue of the Director's position as a member of the Board
of Directors of the Bank and, upon exercise of the Stock Option, will acquire
the stock in the Bank for investment purposes and not for speculation.
W I T N E S S E T H :
THAT FOR AND IN CONSIDERATION of the foregoing and the mutual covenants
hereinafter contained and other good and
<PAGE>
valuable consideration, the parties hereto agree as follows:
1. OPTION GRANT.
HBI grants to the Director a Stock Option to purchase ( )
shares of the common stock of HBI at a price of Three and 87 1/2/100 Dollars
($3.875) per share, which HBI and the Board of Directors deem to be fair value
for such stock.
2. TERM OF OPTION.
The right to exercise this Stock Option shall continue for ten
(10) years following the effective date hereof as defined in Section 8 hereof,
unless the Director resigns or is removed from the Board of Directors, as
defined in the Bank's Plan assumed by HBI, in which case this Stock Option shall
expire sixty (60) days following his or her departure from the Board of
Directors.
3. NON-ASSIGNABILITY OF THIS OPTION.
This Stock Option shall not be sold, pledged, assigned,
hypothecated, transferred or disposed of by the Director during the Director's
lifetime, provided however, should the Director die during the period within
which this Stock Option may be exercised, it may be exercised by the Director's
duly qualified personal representative, heirs or distributees within the sixty
(60) days next following the Director's death.
4. EXERCISE OF OPTION.
The Stock Option shall be deemed to have been exercised by the
Director upon delivery to HBI of written notice thereof, together with payment
in full in cleared funds for the stock to be acquired, by certified mail,
postage prepaid, addressed to HBI or by hand-delivery of such notice and payment
to the President of HBI.
5. DELIVERY OF SHARES.
Upon the exercise of the Stock Option and the tender to HBI of
the purchase price for the full________________________(___________) shares of
stock, HBI shall deliver to the Director a stock certificate reflecting the
stock in HBI for which the Stock Option was exercised.
2
<PAGE>
6. TERMS OF THE PLAN.
This Option is granted in accordance with the Plan and the
provisions of the Plan are incorporated herein by reference. A copy of the Plan
can be obtained from the Office of the President of HBI.
7. SUCCESSORS AND ASSIGNS.
All terms of this Agreement shall be binding upon and inure to
the benefit of, and be enforceable by or against, the respective legal
representatives, successors and assigns of HBI.
8. EFFECTIVE DATE.
The Effective Date of this Agreement shall be October 23,
1998.
9. GOVERNING LAW.
This Agreement is intended to be performed in the Commonwealth
of Virginia and shall be construed and enforced in accordance with the laws of
the Commonwealth.
IN WITNESS whereof the parties have duly executed this Agreement.
HBI:
Date: HERITAGE BANCORP, INC.
- ------------------------- -------------------------
By:
-------------------------
DIRECTOR:
Date:
- ------------------------- -------------------------
3
EXHIBIT 4.6
THE HERITAGE BANK
OUTSIDE DIRECTORS STOCK OPTION
THIS DIRECTORS STOCK OPTION entered into as of the 26th day of March, 1997
by and between THE HERITAGE BANK, a Virginia banking corporation (hereinafter
referred to as "the Bank") and ______________________, a resident of the
Commonwealth of Virginia and a member of the Board of Directors of the Bank
(hereinafter referred to as "the Director").
WHEREAS, on March 26, 1997 (hereinafter referred to as the "Declaration
Date"), the Board of Directors of the Bank (the "Board of Directors") determined
that it was in the best interest of the Bank to establish a Stock Option Plan
under the terms of which those members serving on the Board of Directors of the
Bank who are not employees or officers of the Bank (the "Outside Directors") on
the Declaration Date should have the option to acquire shares of the $1.00 par
value common stock in the Bank (the "Stock Option"); and
WHEREAS, it was determined by the Board of Directors that such stock should
be sold to the Director, upon exercise of the Stock Option, at the higher of
book value of the stock, or fair market value of the stock on the Declaration
Date (such higher amount being the "Option Price"); and
WHEREAS, the Board of Directors determined that upon the Declaration Date
the Option Price should properly be established at Two and 86/100 Dollars
($2.86) per share; and
WHEREAS, each of the Outside Directors shall be granted identical options
to acquire two thousand (2,000) shares of common stock of the Bank; and
WHEREAS, the Bank is a banking institution organized under the laws of the
Commonwealth of Virginia and is thus exempt from registration under the
provisions of Section 3 (a) (2) of the Securities Act of 1933 and Virginia Code
3.1-514 (A) (3) ; and
WHEREAS, the Director has sufficient knowledge and experience in financial
and business matters to be capable of evaluating the merits and risks of the
prospective investor in the Bank's stock and has acquired extensive knowledge of
the operations of the Bank by virtue of his position as a member of the Board of
Directors of the Bank and, upon exercise of the Stock Option, will acquire the
stock in the Bank for investment purposes and not for speculation.
<PAGE>
W I T N E S S E T H :
THAT FOR AND IN CONSIDERATION of the foregoing and the mutual covenants
hereinafter contained and other good and valuable consideration, the parties
hereto agree as follows:
1. OPTION GRANT.
The Bank grants to the Director a Stock Option to purchase two thousand
(2,000) shares (and not less than two thousand (2,000) shares) of the common
stock of the Bank at a price of Two and 86/100 Dollars ($2.86) per share which
the Bank and the Director deem to be fair value for such stock.
2. TERM OF OPTION.
The right to exercise this Stock Option shall continue until March 25,
2007, unless the Director ceases to be a member of the Board of Directors of the
Bank prior thereto by reason of death, resignation, removal or otherwise, in
which case the Stock Option shall expire sixty (60) days following the date the
Director ceases to be a member of the Board of Directors.
3. NON-ASSIGNABILITY OF THIS OPTION.
This Stock Option shall not be assignable by the Director to any person,
provided however, should the Director die during the period within which this
Stock Option may be exercised, it may be exercised by the Director's duly
qualified personal representative within the sixty (60) days next following the
Director's death.
4. EXERCISE OF OPTION.
The Stock Option shall be deemed to have been exercised by the Director
upon delivery to the Bank of written notice thereof, together with payment in
full in cleared funds for the stock to be acquired, by certified mail, postage
prepaid, addressed to the Bank or by hand delivery of such notice and payment to
the President of the Bank.
5. DELIVERY OF SHARES.
Upon the exercise of the Stock Option and the tender to the Bank of the
purchase price for the full two thousand (2,000) shares of stock, the Bank shall
deliver to the Director a stock certificate reflecting the stock in the Bank for
which the Stock option was exercised.
2
<PAGE>
6. SUCCESSORS AND ASSIGNS.
All terms of this Agreement shall be binding upon and inure to the benefit
of, and be enforceable by or against, the respective legal representatives,
successors and assigns of the Bank.
7. EFFECTIVE DATE.
This Agreement shall be immediately effective upon the delivery of a fully
executed copy hereof by the Director to the Bank.
8. GOVERNING LAW.
This Agreement is intended to be performed in the Commonwealth of Virginia
and shall be construed and enforced in accordance with the laws of the
Commonwealth.
IN WITNESS whereof the parties have duly executed this Agreement.
BANK:
Date:____________________________ THE HERITAGE BANK
By:_____________________________
DIRECTOR:
Date:____________________________ ________________________________
3
Exhibit 23.1
November 24, 1998
Heritage Bancorp, Inc.
1313 Dolley Madison Boulevard
McLean, VA 22101
Re: Registration Statement on Form S-8
Dear Sirs:
We have acted as counsel for Heritage Bancorp, Inc., a Virginia corporation
(the "Company"), in connection with the filing of a registration statement on
Form S-8 under the Securities Act of 1933, as amended ("Registration Statement")
with respect to shares of its common stock, no par value per share (the
"Shares"), of which 200,000 shares are authorized but unissued shares which have
been reserved for issuance ("Original Issue Shares") upon the exercise of
options granted pursuant to the Company's 1998 The Heritage Bank Employee
Incentive Stock Option Plan, the 1998 The Heritage Bank Employee Incentive Stock
Option Plan (collectively, the "Plans"). In rendering the statement set forth
below, we do not express any opinion concerning law other than the corporate law
of the Commonwealth of Virginia and the federal law of the United States.
We have examined originals or copies, certified or otherwise identified, of
such documents, corporate records and other instruments as we have deemed
necessary or advisable for purposes of this opinion. As to matters of fact, we
have examined and relied upon the Plans described above and, where we have
deemed appropriate, representations or certificates of officers of the Company
or public officials. We have assumed the authenticity of all documents submitted
to us as originals, the genuineness of all signatures, the legal capacity of
natural persons and the conformity to the originals of all documents submitted
to us as copies.
<PAGE>
Heritage Bancorp, Inc.
November 24, 1998 Page 2
Based on the forgoing, we are of the opinion that the Original Issue Shares
that are being registered pursuant to the Registration Statement have been duly
authorized and, when issued and paid for in accordance with the terms of the
Plans, such Original Issue Shares will be validly issued, fully paid and
non-assessable.
In rendering the opinion set forth above, we have not passed upon and do
not purport to pass upon the application of "doing business" or securities or
"blue-sky" laws of any jurisdiction (except federal securities laws).
This opinion is given solely for the benefit of the Company and purchasers
of Shares under the Plans, and no other person or entity is entitled to rely
hereon without express written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to our Firm's name therein.
Very truly yours,
THACHER PROFFITT & WOOD
/s/ Richard A. Schaberg
by: Richard A. Schaberg
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-8 of our
report, dated January 21, 1998, except for Note 18 as to which the date is March
20, 1998, relating to financial statements of The Heritage Bank.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
November 18, 1998
BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM
Washington, D. C. 20551
Form 10-K-A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997. Commission file number N/A
THE HERITAGE BANK
(Exact name of registrant as specified in its charter)
Virginia 54-1418824
(State or other jurisdiction of (I. R. S. Employer
Incorporation or organization.) Identification No. )
1313 Dolley Madison Blvd. McLean, Va. 22101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 703-356-6060
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $1.00 per share
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x or No
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of regulation S-K 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-K or any amendment to this
form 10-K [x]
The number of shares outstanding of the registrant's Common Stock as of March
10,1998: 1,489,636.
<PAGE>
PART I
Item 1. Business
General
The Heritage Bank, a Virginia-chartered commercial bank, is the only
independent financial institution headquartered in McLean, Virginia. Established
in 1987, the Bank operated as a wholly-owned subsidiary of Heritage Bankshares,
Inc. (formerly Independent Banks of Virginia, Inc.), until 1992 when it became
an independent bank. The Bank is a well-capitalized, profitable community bank
dedicated to financing small business and consumer needs in its market area and
providing personalized "hometown" quality service to its customers by tailoring
its products and services to appeal to a local market. The Bank currently
operates one full-service office and engages in a broad range of lending and
deposit services aimed at individual and commercial customers in the McLean area
of Fairfax County, Virginia. At December 31, 1997, the Bank had total assets of
$45.4 million, total deposits of $40.6 million and total stockholders' equity of
$4.7 million. Net income for the year ended December 31, 1997 was $571,000, an
increase of 41.55% from the net income of $403,000 for the comparable period in
1996. Basic earnings per share for the year ended December 31, 1997 were $0.45
($0.44 per share, assuming dilution), up from $0.32 per share ($0.32 per share,
assuming dilution) for the year ended December 31, 1996.
The business of the Bank consists of attracting deposits from the general
public and using these funds to originate various types of individual and
commercial loans primarily in the McLean area. The Bank's commercial activities
include providing checking accounts, money market accounts and certificates of
deposit to small and medium sized businesses. The Bank also provides credit
services, such as lines of credit, term loans, construction loans, and letters
of credit, as well as real estate loans and other forms of collateralized
financing. The Bank's personal services include checking accounts, NOW accounts,
savings accounts, certificates of deposit, installment accounts, construction
and other personal loans, home improvement loans, automobile and other consumer
financing.
The Bank's profitability depends primarily on its net interest income, the
difference between the interest income it earns on its loans and investment
portfolio and its cost of funds, which consists mainly of interest paid on
deposits. Net interest income is affected by the relative amounts of
interest-earning assets and interest-bearing liabilities and the interest rates
earned or paid on these balances. When interest-earning assets approximate or
exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income.
The Bank's profitability is also affected by the level of other
(noninterest) income and operating expenses. Other income consists primarily of
service fees, loan servicing and other loan fees and gains on sales of
investment securities. Operating expenses consist of salaries and benefits,
occupancy-related expenses, and other general operating expenses.
The operations of the Bank, and banking institutions in general, are
significantly influenced by general economic conditions and related monetary and
fiscal policies of financial institutions' regulatory agencies. Deposit flows
and the cost of funds are influenced by interest rates on competing investments
and general market rates of interest. Lending activities are affected by the
demand for financing real estate and other types of loans, which in turn are
affected by the interest rates at which such financing may be offered and other
factors affecting loan demand and the availability of funds.
Asset/Liability Management
A principal operating objective of the Bank is to produce stable earnings
by achieving a favorable interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Since the Bank's principal
interest-earning assets have longer terms to maturity than its primary source of
funds, i.e., deposit liabilities, increases in general interest rates will
generally result in an increase in the Bank's cost of funds before the yield on
its asset portfolio adjusts upward. The Bank has sought to reduce its exposure
to adverse
2
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changes in interest rates by attempting to achieve a closer match between the
periods in which its interest-bearing liabilities and interest-earning assets
can be expected to reprice through the origination of adjustable-rate mortgages
and loans with shorter terms and the purchase of other shorter term
interest-earning assets.
The term "interest rate sensitivity" refers to those assets and liabilities
which mature and reprice periodically in response to fluctuations in market
rates and yields. As noted above, one of the principal goals of the Bank's
asset/liability program is to maintain and match the interest rate sensitivity
characteristics of the asset and liability portfolios.
In order to properly manage interest rate risk, the Bank's Board of
Directors has established an Asset/Liability Management Committee ("ALCO") made
up of members of management to monitor the difference between the Bank's
maturing and repricing assets and liabilities and to develop and implement
strategies to decrease the "negative gap" between the two. The primary
responsibilities of the committee are to assess the Bank's asset/liability mix,
recommend strategies to the Board that will enhance income while managing the
Bank's vulnerability to changes in interest rates and report to the Board the
results of the strategies used.
Credit Policies
The Bank utilizes written policies and procedures to enhance management of
credit risk. The loan portfolio is managed under a specifically-defined credit
process. This process includes formulation of portfolio management strategy,
guidelines for underwriting standards and risk assessment, procedures for
ongoing identification and management of credit deterioration, and regular
portfolio reviews to estimate loss exposure and ascertain compliance with the
Bank's policies. Lending authority is granted to individual lending officers
with the current highest limit being $150,000 for secured and $25,000 for
unsecured loans. Any two officers acting together may approve a loan up to the
amount of the lower lending authority of the two officers. An Officers' Loan
Committee comprised of six officers is authorized to approve credit of up to
$400,000 for secured loans and $200,000 for unsecured loans. Approval of such
credits requires a majority vote of the Officers' Loan Committee. The Directors'
Loan Committee is authorized to approve loans up to the legal lending limit of
the Bank.
The Bank's management generally requires that secured loans have a
loan-to-value ratio of 80% or less. Management believes that when a borrower has
significant equity in the assets securing the loan, the borrower is less likely
to default on the outstanding loan balance.
A major element of credit risk management is diversification. The Bank's
objective is to maintain a diverse loan portfolio to minimize the impact of any
single event or set of circumstances. Concentration parameters are based on
factors of individual risk, policy constraints, economic conditions, collateral
and product type.
Lending activities include a variety of consumer, real estate and
commercial loans with a strong emphasis on serving the needs of customers within
the Bank's market territory. Consumer loans are made primarily on a secured
basis in the form of installment obligations or personal lines of credit. The
focus of real estate lending is commercial mortgages, but also includes home
improvement loans, construction lending and home equity lines of credit.
Commercial lending is provided to businesses seeking credit for working capital
and the purchase of equipment and facilities. The principal lending activity of
the Bank is concentrated in mortgage loans secured by commercial real estate,
usually consisting of commercial and warehouse facilities in the Bank's market
area.
Market Area
The Bank currently has one office serving the McLean area of Fairfax
County, Virginia. From this office, the Bank serves its customers, the majority
of whom own businesses or reside in the McLean/Great Falls area of Northern
Virginia, which is located eight miles west of Washington, DC. The remainder of
3
<PAGE>
the Bank's customers reside primarily in other communities in Fairfax County,
and, to a lesser extent, Arlington and Loudoun counties.
McLean lies in the northernmost part of Fairfax County, Virginia, by most
measures, the wealthiest county in Virginia. The median household income in
Fairfax County in 1996 was $78,000 - the highest in the country. The 1997
population of Fairfax County is estimated to have been 913,012. Fairfax County
is also home to many information technology firms including UUNet and PSINet. It
is estimated that nearly one-half of all international Internet traffic flows
through one of the Fairfax-based access providers.
McLean is home to the Central Intelligence Agency, McLean's largest
employer, and the Federal Home Loan Mortgage Corporation. The Bank provides
financial services to the many professional service firms, including lawyers,
accountants, consultants and engineers that have offices in McLean. McLean's
population is estimated to be approximately 63,000. The median household income
in McLean was estimated to be $70,000 in 1996. McLean also includes the Tysons
Corner area, an office and commercial district that is home to a significant
number of high-technology employers. Major employers in Tysons Corner include
INOVA Health Systems, EDS, SAIC and AT&T. Tysons Corner is also home to two
major shopping centers and several major hotels.
With the opening of the CountrySide branch, the Bank expects to expand its
market area to include a significant portion of Loudoun County, one of the
fastest growing counties in the United States. According to census figures, the
1997 population of Loudoun County has increased to approximately 133,000
persons, representing an increase of 55% since 1990 compared to population
growth of 9% in the Washington, D.C. region as a whole during the same period.
Among counties with more than 10,000 residents, Loudoun County's 7.7% growth
rate for 1996-97 ranked eighth in the nation. This area is experiencing
significant economic growth as a result of the expansion of the Dulles
International Airport technology corridor and the influx of "high-tech"
companies from Fairfax County. The Loudoun County market is predominately
residential with a healthy mix of retail, service activities and light industry.
Eastern Loudoun County, with a population of approximately 50,000, is the
fastest growing area of Loudoun County and Northern Virginia. It contains
several mature residential neighborhoods and the newer developments of
CountrySide, Cascades, and Ashburn Village. Several large high-tech companies
such as America Online and Alcatel Data Networks have recently moved their
headquarters to eastern Loudoun County, giving rise to accelerated residential
building and retail development in the area. More than 4,000 housing sites are
in various stages of future development in the area. In addition, the 300-acre
regional mall, Dulles Town Center, is being constructed within one mile of the
site. The new branch will be located in the CountrySide Shopping and
Professional Center, a 350,000 square foot retail/professional/medical campus
near the entrance to the 2,500 unit CountrySide residential community that is
home to over 12,000 persons. The site also borders on Cascades, a new 6,000-unit
planned residential development and associated shopping center, Cascades Market
Place. Over 100,000 persons with an average family income of $71,000 are
estimated to live within five miles of the branch's proposed location. The Bank
believes that development now taking place along the Route 7 and Route 28
corridors, coupled with the rapid population growth in eastern Loudoun County,
will provide the Bank with the opportunity to expand its consumer and small
business services.
Competition
The Bank operates in the highly competitive environment of the McLean area
of Fairfax County. It competes for deposits and loans with commercial banks,
savings and loans, credit unions and other financial institutions, including
non-bank competitors such as loan companies, insurance companies and large
securities firms. Many of these organizations possess substantially greater
financial and technical resources than the Bank.
4
<PAGE>
In Fairfax County, the Bank commands 0.42% of the market, according to the
most recent survey of deposits by the Federal Deposit Insurance Corporation
("FDIC"). In McLean, the Bank commands 3.27% of the market. Seventeen banks with
31 branches operate in the greater McLean area and 17 of these branches are
located in proximity to the Bank in the McLean Central Business District. The
Heritage Bank is the only community bank headquartered in McLean.
The market is mature and the growth of deposits and loan demand has slowed
in recent years. While it can produce stable earnings from its operations in the
McLean office, the Bank believes the future growth of the Bank will be in
expansion to other parts of Northern Virginia, including Loudoun County.
There are 12 commercial banks with 37 branches located in Loudoun County
with deposits totaling approximating $900 million. A number of mortgage
companies along with several non-bank financial institutions also compete in the
area. Nine bank branches are located in eastern Loudoun County. All are
full-service banks and provide a wide array of bank products and services,
although none of these banks is considered to be a community bank, like the
Heritage Bank. The Bank believes that it will enjoy a competitive advantage due
to its local community bank orientation and reputation for providing
personalized service to its customers.
With the opening of the new branch in Loudoun County, the Bank expects to
increase its deposit base, which in turn will increase the funds available for
loans and other profitable opportunities for the Bank. While the Bank will
continue to experience a competitive environment in Fairfax and Loudoun
counties, there still exist opportunities to establish new branches in those
areas where significant population increases and economic growth are occurring.
Year 2000 Issues
The "Year 2000 Problem" centers on the inability of computer systems to
precisely recognize the year 2000. Many existing computer programs and systems
were originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. If
computer systems are not adequately changed to identify the year 2000, many
computer applications could fail or create erroneous results. As a result, many
calculations which rely on the date/field information, such as interest, payment
or due dates and other operating functions, will generate results which could be
significantly misstated, and the Bank could experience a temporary inability to
process transactions, send invoices or engage in similar normal business
activities. In addition, under certain circumstances, failure to adequately
address the Year 2000 Problem could adversely affect the viability of the Bank's
suppliers and creditors and the creditworthiness of its borrowers. Thus, if not
adequately addressed, the Year 2000 Problem could result in a significant
adverse impact on the Bank's products, services and competitive condition.
Financial institution regulators have recently increased their focus upon
year 2000 issues, issuing guidance concerning the responsibilities of senior
management and directors. The FDIC and the other federal banking regulators have
issued safety and soundness guidelines to be followed by insured depository
institutions, such as the Bank, to assure resolution of any year 2000 problems.
The federal banking agencies have asserted that year 2000 testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams, and thus an institution's failure to address appropriately the Year 2000
Problem could result in supervisory action, including such enforcement actions
as the reduction of the institution's supervisory ratings, the denial of
applications for approval of a merger or acquisition, or the imposition of civil
money penalties.
The Bank recently hired an outside consultant to assess the impact of the
Year 2000 Problem on the Bank. Because the Bank outsources its data processing
and item processing operations, a significant component
5
<PAGE>
of the year 2000 plan is working with external vendors to test and certify their
systems as year 2000 compliant. The Bank's external vendors have surveyed their
programs to inventory the necessary changes and have begun correcting the
applicable computer programs and replacing equipment so that the Bank's
information systems will be year 2000 compliant prior to the end of 1998. This
will enable the Bank to devote substantial time to the testing of the upgraded
systems prior to the arrival of the millennium in order to comply with all
applicable regulations. The Bank expects to complete its timetable for carrying
out its plans to address year 2000 issues by December 31, 1998 .
At December 31, 1997, the Bank had twenty-three full-time equivalent
employees. None of its employees is represented by any collective bargaining
unit. The Bank considers relations with its employees to be good.
Item 2. Properties
The principal office of the Bank is located at 1313 Dolley Madison
Boulevard, McLean, Virginia where the Bank leases approximately 8,407 square
feet in an office building. All of the Bank's administrative and customer
service facilities are at this location. The lease was for an initial term of
ten years, beginning July 1988, with three 5 year renewal options. The current
monthly rent is $16,060. The Bank also owns a parcel of land in Great Falls,
Virginia valued at $245,000, which it is holding for future bank use. The Bank
has classified one parcel of real estate, acquired through foreclosure, as
"other real estate owned" totaling $263,000. This parcel currently is under
contract for sale, which will result in the Bank charging-off approximately
$16,000.
The Bank also entered into a ten-year lease for its future branch office,
contingent upon regulatory approval. The lease is ten years and commences on
June 1, 1998 or 15 days following the issuance of an occupancy certificate,
whichever occurs last. In the first year of the lease, the minimum monthly rent
will be $6,500, with minimal increases in subsequent years.
Item 3. Legal Proceedings
In the normal course of its operations, the Bank from time to time is party
to various legal proceedings. Based upon information currently available, and
after consultation with its counsel, management believes that such legal
proceedings, in the aggregate, will not have a material adverse effect on the
Bank's business, financial position or results of operations, except for the
following.
The Bank has recently been advised of a claim against it by Travelers
Casualty & Surety Company of America asserting negligence in accepting allegedly
fraudulently endorsed checks by an employee of an entity insured by Travelers.
The claimed loss is $460,534 plus interest. The Bank believes it has little or
no liability for the claim and has denied liability to Travelers and intends to
vigorously defend the claim. The Bank's insurance carrier has notified the Bank
that the Bank's insurance policy will cover a fraudulent endorsement loss above
the policy's $25,000 deductible.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Part II
Item 5. Market for Regisrant's Common Equity and Related Stockerholder Matters
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 10, 1998: $6,703,362. This is a estimate based on a
price of $4.50 per share, which to the best of management's knowledge is the
last price at which stock was traded. There is currently no established public
trading market for the Common Stock, although it is quoted on the non-Nasdaq
Over the Counter Bulletin Board and is traded on limited basis under the symbol
"HBVA". The Bank has approximately 1300 shareholders. There have no dividends
paid.
6
<PAGE>
Item 6.
SELECTED FINANCIAL DATA
The year-end income statement data, the year-end balance sheet data and the
year-end per share data regarding net income contained in the following selected
financial data for the five years ended December 31, 1997 are derived from the
financial statements of the Bank, which have been audited on an annual basis.
The selected financial information should be read in conjunction with the
financial statements of the Bank and the notes thereto.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Summary of operating results:
Total interest income ................................ $ 3,256 $ 3,420 $ 3,048 $ 3,034 $ 3,196
Total interest expense ............................... 1,111 1,411 1,165 960 1,104
----------- ----------- ----------- ----------- -----------
Net interest income .................................. $ 2,145 $ 2,009 $ 1,883 $ 2,074 $ 2,092
Provision for (recovery of) loan losses .............. 4 -- (87) 488 472
----------- ----------- ----------- ----------- -----------
Net interest income after provision for (recovery
of )loan losses ...................................... $ 2,141 $ 2,009 $ 1,970 $ 1,586 $ 1,620
Other income ......................................... 181 119 98 168 271
Other expenses ....................................... 1,836 1,725 1,854 1,868 1,880
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes ........................... 486 403 214 (114) 11
Income tax expense (benefit)(1) ...................... (85) -- 31 -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) .................................... $ 571 $ 403 $ 183 $ (114) $ 11
=========== =========== =========== =========== ===========
Per share:
Basic earnings (loss) per share ...................... $ 0.45 $ 0.32 $ 0.15 $ (0.09) $ 0.01
Diluted earnings (loss) per share .................... 0.44 0.32 0.15 (0.09) 0.01
Cash dividend declared ............................... -- -- -- -- --
Book value at period end ............................. 3.18 2.84 2.52 2.30 2.46
Common shares outstanding ............................ 1,489,636 1,249,634 1,249,634 1,249,634 1,249,634
Balance sheet data (at period end):
Loans, net of unearned interest ...................... $ 23,390 $ 25,202 $ 24,346 $ 27,426 $ 29,517
Allowance for loan loss .............................. 634 617 685 1,164 959
Total assets ......................................... 45,450 46,075 46,874 41,944 45,335
Total deposits ....................................... 40,604 42,387 43,539 38,933 42,226
Total stockholders' equity ........................... 4,730 3,543 3,149 2,878 3,070
Performance and asset quality ratios:
Return on average total assets ....................... 1.33% 0.87% 0.46% (0.26)% .02%
Return on average stockholders' equity ............... 15.24 12.05 5.89 (3.84) .43
Average stockholders' equity to average total
assets ............................................... 8.74 7.19 7.74 6.81 5.63
Non-accrual and past due loans to total loans ........ .98 1.85 2.93 3.11 2.74
Allowance for loan losses to total loans ............. 2.71 2.45 2.81 4.24 3.25
Net yield ............................................ 4.29 3.69 3.96 4.26 4.16
Net interest margin(2) ............................... 5.25 4.54 4.93 4.37 4.84
</TABLE>
- ------------------
(1) At December 31, 1997, the Bank had available approximately $387,000 of
an operating loss carryforward which could be offset against future
income.
(2) Net interest margin is calculated as net interest income divided by
average earning assets and represents the Bank's net yield on its
earning assets.
7
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist readers in understanding and
evaluating the financial condition and results of operations of the Bank. This
review should be read in conjunction with the Bank's financial statements and
accompanying notes. This analysis provides an overview of the significant
changes that occurred during the periods presented.
Results of Operations
The Bank's operating results depend primarily upon its net interest income,
the difference between the interest earned on its interest-bearing assets (loans
and investment securities) and the interest paid on interest-bearing liabilities
(deposits). Operating results are significantly affected by provisions for loan
losses, other income and operating expenses. Each of these factors is
significantly affected not only by the Bank's policies, to varying degrees, but
general economic and competitive conditions and by policies of state and federal
regulatory authorities.
Comparison of Financial Condition at December 31, 1997 and 1996
Beginning in 1996, the management team implemented a growth oriented
strategy designed to enhance the Bank's franchise value and operating
profitability by increasing the size and quality of the Bank's assets. In the
initial stages of this strategy, the Bank focused on improving its long term
profitability by strengthening the quality of the Bank's loan portfolio. This
policy caused an increase in collection efforts on past due loans, the
collateralization of previously unsecured loans and a decision not to renew
certain lending relationships. As a result, total assets decreased by $625,000
during 1997, from $46.1 million at December 31, 1996 to $45.4 million at
December 31, 1997. This decrease in total assets was caused primarily by a $1.8
million decrease in net loans, from $24.6 million at December 31, 1996 to $22.8
million at December 31, 1997. Although the policy resulted in decreases in total
assets and net loans during fiscal year 1997, the Bank believes that this policy
has increased the size of the non-criticized loan portfolio, which has
positively impacted earnings.
Stockholders' equity at December 31, 1997 was $4.7 million, as compared to
$3.5 million on December 31, 1996. The increase in stockholders' equity was due
to net income for the year of $571,000 and to the exercise of common stock
purchase warrants during the year. In connection with the Private Placement
Offering completed on June 15, 1993, the Bank issued 240,002 warrants to
purchase stock at $2.50 per share, exercisable on or before December 31, 1997.
All such warrants were exercised in 1997, resulting in an increase to
stockholders' equity of $600,000 for the year ended December 31, 1997. Book
value per share increased from $2.84 per share on December 31, 1996 to $3.18 per
share on December 31, 1997.
Total deposits decreased 4.2%, from $42.4 million at December 31, 1996 to
$40.6 million at December 31, 1997. The decline in deposits was the result of
the Bank's decision to reduce interest rates paid on certain certificates of
deposit products to prevailing market rates in order to enhance the
profitability of the Bank.
The Bank's return on average assets was 1.33% and its return on average
equity was 15.24% in fiscal year 1997. The Bank's return on average assets was
0.87% and its return on average equity was 12.05% in fiscal year 1996.
The Bank is required to meet certain capital requirements as established by
the Federal Reserve Board. At December 31, 1997 and 1996, the Bank met all
capital adequacy requirements to which it was subject.
8
<PAGE>
Results of Operations for the Years Ended December 31, 1997 and 1996
Net Income. Net income for the year ended December 31, 1997 increased
$168,000 to $571,000, or $0.45 basic earnings per share ($0.44 per share,
assuming dilution), from net income of $403,000, or $0.32 basic earnings per
share ($0.32 per share, assuming dilution) for the year ended December 31, 1996.
The increase in net income is primarily due to an increase of $136,000 in net
interest income to $2.1 million for the year ended December 31, 1997 from $2.0
million for the year ended December 31, 1996.
Interest Income. The major component of the Bank's net earnings is net
interest income, which is the excess of interest income on interest-earning
assets over the interest expense on interest-bearing liabilities. Net interest
income is affected by changes in volume resulting from growth and alterations of
the balance sheet composition as well as fluctuations in interest rates
("interest rate spread") and maturities of sources and uses of funds. The Bank's
management seeks to maximize net interest income by managing the balance sheet
and determining the optimal product mix with respect to yields on assets and
costs of funds in light of projected economic conditions, while maintaining an
acceptable level of risk.
Interest income totaled $3.3 million for the year ended December 31, 1997,
a decrease of $164,000 or 4.8% from $3.4 million from the year ended December
31, 1996. This decrease in interest income was due to a $121,000 decrease in
interest on federal funds sold with lower yields on loans. Interest on federal
funds sold decreased because of the decrease in deposits, resulting in less
federal funds available to sell. The decrease in interest income is also due in
part to a decrease in the loan portfolio which resulted from management's policy
to improve the overall quality of the Bank's loan portfolio. Net loans decreased
by $1.8 million or 7.4% from December 31, 1996 to December 31, 1997.
Interest Expense. Total interest expense decreased $300,000, or 21.3%, from
$1.4 million for the year ended December 31, 1996 to $1.1 million for the year
ended December 31, 1997. This decrease was primarily due to the $4.6 million
decrease in the average balance of interest-bearing liabilities from $34.8
million for the year ended December 31, 1996 to $30.2 million for the year ended
December 31, 1997. The decrease also resulted from a decrease in the average
rate paid on interest-bearing liabilities from 4.05% to 3.68% due to a
management decision not to renew Certificates of Deposit at higher rates
previously offered.
Net Interest Income. Net interest income increased by $136,000 or 6.8% from
$2.0 million for the year ended December 31, 1996 to $2.1 million for the year
ended December 31, 1997.
The Bank's net interest margin (net interest income expressed as a
percentage of total average interest-earning assets) increased to 5.25% for the
year ended December 31, 1997 compared to 4.54% for the year ended December 31,
1996. The Bank's net yield (the average yield earned on interest-earning assets
less the average rate incurred on interest-bearing liabilities) was 4.29% and
3.69% for the years ended December 31, 1997 and December 31, 1996, respectively.
Noninterest Income. Noninterest income for the year ended December 31, 1997
was $181,000, representing an increase of $62,000 from the noninterest income of
$119,000 for the year ended December 31, 1996. This increase was caused
primarily by an increase in service charges on deposit accounts and $47,000
representing gains on the sale of government securities during 1997.
Noninterest Expense. Noninterest expense consists primarily of operating
expenses for compensation and related benefits, occupancy, federal insurance
premiums and operating assessments, and equipment expenses.
9
<PAGE>
Noninterest expense increased $111,000 or 6.5% from $1.7 million for the
year ended December 31, 1996 to $1.8 million for the year ended December 31,
1997. This increase was due in part to an increase in salaries and employee
benefits expense of $54,000 or 6.1% from $899,000 for the year ended December
31, 1996 to $953,000 for the year ended December 31, 1997. Other operating
expenses increased by $60,000 or 11.5% from $520,000 to $580,000 for the years
ended December 31, 1996 and 1997, respectively. This increase was due to a
normal increase in data processing service contract charges of $8,000 from 1996
to 1997; increases in stationery and supply expense of $17,000 primarily due to
additional printing expenses for brochures for the loan department and other
printing costs; and increases due to advertising expense increasing $8,000, the
payment of directors' fees of $19,000 in 1997, and an increase of $5,000 in
charitable contributions by the Bank.
Income Taxes. The Bank had an income tax benefit of $85,000 for the year
ended December 31, 1997 and had no income tax liability for the year ended
December 31, 1996. At December 31, 1997, the Bank has operating loss
carryforwards of approximately $387,000 that may be offset against future
taxable income. The Bank expects to use its net operating loss carryforward in
its entirety by the end of fiscal year 1998.
10
<PAGE>
Comparison of Financial Condition for the Years Ended December 31, 1996 and 1995
The Bank's total assets decreased $799,000 or 1.7% to $46.1 million at
December 31, 1996, from $46.9 million at December 31, 1995. Net loans increased
$925,000, or 3.9%, from $23.7 million at December 31, 1995 to $24.6 million at
December 31, 1996. This increase was due to increased loan demand. Total
deposits decreased $1.1 million, or 2.65%, from $43.5 million at December 31,
1995 to $42.4 million at December 31, 1996. The decrease in deposits is
primarily due to a decrease in attorney escrow accounts. Federal Funds sold and
securities purchased under an agreement to resell decreased $11.8 million from
1995 to 1996 and securities available-for-sale increased $10.6 million from 1995
to 1996. This shift in assets was a result of the Bank converting its
investments from federal funds sold into higher yielding government securities.
The Bank's return on average assets was 0.87% for the year ended December
31, 1996 as compared to 0.46% for the year ended December 31, 1995. The Bank's
return on average stockholder equity was 12.05% and 5.89% for the years ended
December 31, 1996 and 1995, respectively. Stockholders' equity at December 31,
1996 was $3.5 million, as compared to $3.1 million on December 31, 1995. This
increase was due to net income for the year ended December 31, 1996 of $403,000.
Book value per share increased from $2.52 per share on December 31, 1995 to
$2.84 per share on December 31, 1996.
The Bank is required to meet certain capital requirements as established by
the Federal Reserve Board. At December 31, 1996 and 1995, the Bank's met all
capital adequacy requirements to which it was subject.
Results of Operations for the Years Ended December 31, 1996 and 1995
Net Income. Net income for the year ended December 31, 1996 was $403,000,
representing an increase of $220,000, or 120.9%, over the net income of $183,000
for the year ended December 31, 1995. On a per share basis, the Bank earned
$0.32 basic earnings per share ($0.32 per share, assuming dilution) in 1996
compared with $0.15 basic earnings per share ($0.15 per share, assuming
dilution) in 1995.
Interest Income. The major component of the Bank's net earnings is net
interest income, which is the excess of interest income on interest-earning
assets over the interest expense on interest-bearing liabilities. Net interest
income is affected by changes in volume resulting from growth and alterations of
the balance sheet composition as well as fluctuations in interest rates
("interest rate spread") and maturities of sources and uses of funds. The Bank's
management seeks to maximize net interest income by managing the balance sheet
and determining the optimal product mix with respect to yields on assets and
costs of funds in light of projected economic conditions, while maintaining an
acceptable level of risk.
The Bank's net interest margin (net interest income expressed as a
percentage of total average interest-earning assets) decreased to 4.54% for the
year ended December 31, 1996 compared to 4.93% for the year ended December 31,
1995. The Bank's net yield (the average rate incurred on interest-bearing
liabilities) was 3.69% and 3.96% for the years ended December 31, 1996, and
December 31, 1995, respectively.
Interest income increased $372,000 or 12.2% to $3.4 million for the year
ended December 31, 1996 over the year ended December 31, 1995. This increase in
interest income was primarily due to an increase in income from the investment
portfolio.
Interest income on loans decreased $78,000 from $2.4 million at December
31, 1995 to $2.3 million at December 31, 1996. This decrease occurred
11
<PAGE>
primarily because of competitive pressure on loan pricing. Interest income on
securities increased by $504,000, or 157.8%, from $320,000 at December 31, 1995
to $823,000 at December 31, 1996. This increase was due primarily to the
increased volume of investment in securities.
Interest Expense. Total Interest Expense increased $246,000, or 21.1%, from
$1.2 million at December 31, 1995 to $1.4 million at December 31, 1996. Interest
expense on interest checking deposits increased from $417,000 for the year ended
December 31, 1995 to $453,000 for the year ended December 31, 1996. The increase
in total interest expense is primarily due to a $210,000 increase in interest
paid on certificates of deposit and a $36,000, increase in the interest earned
on checking deposits. The balance of interest checking deposits on the balance
sheet increased $2.5 million, or 18.3%, from $13.7 million for the year ended
December 31, 1995 to $16.2 million for the year ended December 31, 1996.
Net Interest Income. Net interest income increased by $126,000, or 6.7%, in
the year ended December 31, 1996 over the same period of 1995. This increase in
net interest income occurred because of an increase in bond income and the
increased volume of investment in securities, which outpaced the increase in
deposit interest expense.
Noninterest Income. Noninterest Income amounted to $98,000 and $119,000 for
the years ended December 31, 1995, and December 31, 1996, respectively.
Noninterest income consists primarily of service charges and fees associated
with the Bank's loan and savings accounts. The $21,000 increase from 1995 to
1996 was due primarily to an increase in service charges on deposit accounts.
Noninterest Expense. Noninterest expense consists primarily of operating
expenses for compensation and related benefits, occupancy, federal insurance
premiums and operating assessments and data processing charges. Total other
expenses decreased $129,000 from $1.9 million for the year ended December 31,
1995 to $1.7 million for the year ended December 31, 1996. This decrease was
primarily the result of reduced overhead, achieved through a reduction of legal
fees to collect loans, FDIC insurance premiums and other expenses. FDIC
insurance premiums decreased $58,000 from December 31, 1995 to December 31,
1996. Professional fees decreased $62,000, or 32.7%, from $191,000 at December
31, 1995 to $129,000 at December 31, 1996.
Income Taxes. The Bank had no tax liability at December 31, 1996, compared
to income tax expense of $31,000 at December 31, 1995. At December 31, 1996, the
Bank had operating loss carryforwards of approximately $849,000 that were
available to offset future taxable income and which will expire over various
years from the year 2006 to the year 2010.
12
<PAGE>
Average Balances, Interest and Average Yields
The following table sets forth information relating to the Bank's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated and the average yields earned and rates
paid for the periods indicated. Such yields and costs are derived by dividing
income or expense by the average daily balances of assets and liabilities,
respectively, for the periods presented.
AVERAGE BALANCES, INTEREST INCOME AND EXPENSES AND AVERAGE YIELDS AND RATES
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------- ------------------------------ -----------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield Average Income Yield/ Average Income/ Yield
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans receivable(1)................ $ 24,533 $2,286 9.32% $24,458 $2,322 9.49% $26,346 $2,399 9.11%
Investment securities, taxable 13,432 816 6.08 14,597 823 5.64 6,082 320 5.26
Federal funds sold................. 2,867 154 5.37 5,148 275 5.34 5,782 329 5.69
-------- ------ ------- ------ ------- ------
Total earning assets............ 40,832 3,256 7.97 44,203 3,420 7.74 38,210 3,048 7.98
-------- ------ ------- ------ ------- ------
NON-EARNING ASSETS:
Cash and due from banks............. 1,649 1,891 1,899
Other assets 414 444 34
-------- -------- --------
Total non-earning assets......... 2,063 2,335 1,933
-------- -------- --------
Total assets.....................$ 42,895 $ 46,538 $ 40,143
======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing demand (NOW)
deposits......................$ 5,073 113 2.23% $ 5,495 119 2.17% $ 5,745 147 2.56%
Money market deposits............ 10,377 330 3.19 10,535 335 3.18 7,921 270 3.41
Savings deposits................. 3,369 99 2.94 3,259 97 2.98 3,619 115 3.18
Time deposits.................... 11,196 561 5.01 15,511 860 5.54 11,727 633 5.40
Federal funds purchased.......... 159 7 4.40 - - - - - -
------ ----- ------ ----- ------ -----
Total interest-bearing
liabilities 30,174 1,111 3.68 34,800 1,411 4.05 29,012 1,165 4.02
------ ----- ------ ----- ------ -----
NON-INTEREST-BEARING
LIABILITIES:
Demand deposits..................... 8,829 8,222 7,879
Other liabilities................... 145 172 144
------- -------- --------
Total non-interest-bearing
liabilities 8,974 8,394 8,023
-------- -------- --------
Stockholders' equity................ 3,747 3,344 3,108
-------- -------- --------
Total liabilities and stockholders
equity........................$ 42,895 $ 46,538 $ 40,143
======== ======== ========
Interest spread..................... 4.29% 3.69% 3.96%
Net interest margin................. $ 2,145 5.25% $ 2,009 4.59% $ 1,883 4.93%
======= ======= =======
</TABLE>
- ------------------
(1) Non-accrual loan balances are included in the calculation of average
balances.
13
<PAGE>
Rate/Volume Analysis
The following table sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); and (ii) changes in rates (change in
rate multiplied by old volume). Changes in rate-volume (changes in rate
multiplied by the changes in volume) are allocated between changes in rate and
changes in volume.
RATE AND VOLUME ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
Compared To Compared To
December 31, 1996 December 31, 1995
Increase (Decrease) Due to Increase (Decrease) Due to
----------------------------------------------------------------------------
Rate Volume Total Rate Volume Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST EARNED ON:
Loans receivable, net...................... $ (43) $ 7 $ (36) $ 107 $(184) (77)
Investment securities, taxable............. 304 (311) (7) 25 478 503
Federal funds sold......................... 2 (123) (121) (19) (35) (54)
------ ----- ------ ------ ---- -----
Total interest income.............. 263 (427) (164) 113 259 372
------ ----- ------ ------ ---- -----
INTEREST PAID ON:
Interest-bearing (NOW)
deposits....................... 3 (9) (6) (22) (6) (28)
Money market deposits.............. 1 (5) (4) (17) 82 65
Savings deposits................... (1) 3 2 (7) (11) (18)
Time deposits...................... (77) (222) (299) 17 210 227
Federal funds purchased............ - 7 7 - - -
------ ----- ------ ------ ---- -----
Total interest expense............. (74) (226) (300) (29) 275 246
------ ----- ------ ------ ---- -----
Net interest income............ $ 337 $ 201) $ 136 $ 142 $ (16) $ 126
====== ===== ====== ====== ==== =====
Interest Rate Sensitivity
An important element of both earnings performance and liquidity is
management of interest rate sensitivity. Interest rate sensitivity reflects the
potential effect on net interest income of a movement in interest rates. The
difference between the Bank's interest-sensitive assets and interest-sensitive
liabilities for a specified time frame is referred to as "gap." A financial
institution is considered to be asset-sensitive, or having a positive gap, when
the amount of its earning assets maturing or repricing within a given time
period exceeds the amount of its interest-bearing liabilities also maturing or
repricing within that time period. Conversely, a financial institution is
considered to be liability-sensitive, or have a negative gap, when the amount of
its interest-bearing liabilities maturing or repricing within a given period
exceeds the amount of earning assets also maturing or repricing within that time
period. During a period of rising interest rates, a positive gap would tend to
increase net interest income, while a negative gap would tend to have an adverse
effect on net interest income. During a period of falling interest rates, a
positive gap would tend to have an adverse effect on net interest income, while
a negative gap would tend to increase net interest income.
14
<PAGE>
The Bank evaluates interest sensitivity risk and then formulates guidelines
regarding asset generation and pricing, funding sources and pricing, and
off-balance sheet commitments in order to decrease sensitivity risk. These
guidelines are based upon management's outlook regarding future interest rate
movements, the state of the regional and national economy and other financial
and business risk factors. The Bank uses a static gap model and a computer
simulation to measure the effect on net interest income of various interest rate
scenarios over selected time periods. The gap can be managed by repricing assets
or liabilities, selling investments held for sale, replacing an asset or
liability prior to maturity or adjusting the interest rate during the life of an
asset or liability. Matching the amount of assets and liabilities repricing
during the same time interval helps to reduce the risk and minimize the impact
on net interest income in periods of rising or falling interest rates.
As of December 31, 1997, the Bank's static one-year cumulative gap to total
interest-sensitive assets position was negative (5.0)% and the Bank was,
therefore, in a liability-sensitive position. It is the Bank's policy to control
the mix and rate sensitivity of assets and liabilities such that the revolving
gap (the gap is less than one year) will never exceed 10% (positive or negative)
of assets.
The following table illustrates the interest sensitivity gap position of
the Bank as of December 31, 1997 (focusing only on repricing schedules, not
fixed versus variable rates). This table presents a position as of a particular
day, which position changes continually and is not necessarily indicative of the
Bank's position at any other time.
INTEREST SENSITIVITY ANALYSIS
December 31, 1997
(Dollars in thousands)
Maturing or Repricing In:
---------------------------------------------------
3 Months 4-12 1 to 5 More than
or Less Months Years 5 Years Total
---------- ---------- ---------- ---------- ----------
Interest-sensitive Assets:
Loans (1)....................................... $ 8,843 $ 6,103 $ 7,011 $ 1,211 $ 23,168
Securities...................................... 250 1,195 9,987 612 12,044
Federal funds sold.............................. 7,600 - - - 7,600
------ ----- ----- ----- ------
Total interest-sensitive assets.......... 16,693 7,298 16,998 1,823 42,812
====== ===== ===== ===== ======
Interest-sensitive Liabilities:
Certificates of deposit less than $100,000...... 1,030 2,409 913 - 4,352
Certificates of deposit greater than $100,000 1,383 3,683 1,706 - 6,772
Super NOW accounts/Money Market deposit
accounts(2).................................. 17,624 - - - 17,624
------ ----- ----- ----- ------
Total interest-sensitive liabilities..... 20,037 6,092 2,619 - 28,748
====== ===== ===== ===== ======
Period gap......................................... $ (3,344) $ 1,206 $14,379 $ 1,823 $ 14,064
Cumulative gap..................................... $ (3,344) $(2,138) $12,241 $14,064 -
Ratio of cumulative interest-
sensitive liabilities to interest-sensitive asset 120.02% 108.91% 70.14% 67.15% -
====== ====== ===== =====
</TABLE>
- ------------------
(1) Excludes non-accrual loans.
(2) Non-certificate deposit accounts are shown as repricing within the 3 month
or less timeframe, although the Bank believes, based on historical
experience, that such deposits are less interest sensitive.
15
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
Loan Portfolio
The loan portfolio is the largest category of the Bank's earning assets and
is comprised of commercial real estate loans, commercial loans, home equity
loans, construction loans, consumer loans and participation loans with other
financial institutions. The primary markets in which the Bank makes loans
include the town of McLean, Virginia and Fairfax County, Virginia. The mix of
the loan portfolio is weighted toward loans secured by real estate and
commercial loans. In management's opinion, there are no significant
concentrations of credit with particular borrowers engaged in similar
activities.
Net loans consist of total loans minus the allowance for loan losses,
unearned discounts and deferred loan fees. The Bank's net loans were $22.8
million at December 31, 1997, representing a 7.4% decrease over net loans of
$24.6 million at December 31, 1996. While loan originations increased in 1997,
there was an overall decrease in net loans due to the Bank's strategy of
strengthening the quality of its loan portfolio. Net loans increased 3.9% in
1996, from a balance of $23.7 million at December 31, 1995. The average balance
of total loans as a percentage of average earning assets was 60.1% for December
31, 1997, up from 55.3% for 1996. The average balance of total loans as a
percentage of average earnings assets was 69.0% for 1995.
In the normal course of business, the Bank makes various commitments to
meet the financing needs of its customers and incurs certain contingent
liabilities which are disclosed but not reflected in the financial statements
contained in this Offering Circular, including standby letters of credit and
commitments to extend credit. At December 31, 1997, commitments for standby
letters of credit totaled $191,000 and commitments to extend credit totaled $6.7
million. Commitments for standby letters of credit totaled $274,000 and $408,000
for the years ended December 31, 1996 and 1995, respectively. Commitments to
extend credit totaled $5.2 million and $4.9 million for the years ended December
31, 1996 and 1995, respectively.
The following table summarizes the composition of the Bank's loan portfolio
at the periods indicated:
LOAN PORTFOLIO
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ---------------- ----------------- ------------------ ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Mortgage...... $ 17,532 75.0% $19,524 77.5% $18,735 76.9% $21,219 77.4% $22,313 75.6%
Construction. 448 1.9 633 2.5 147 0.6 305 1.1 216 0.7
Commercial......... 4,191 17.9 4,210 16.7 4,526 18.6 4,851 17.7 5,767 19.6
Consumer........... 1,219 5.2 835 3.3 938 3.9 1,051 3.8 1,221 4.1
------ ---- ------ ----- ------ ----- ------ ---- ------ -----
Loans, gross....... 23,390 100% 25,202 100.% 24,346 100.% 27,426 100% 29,517 100.0
------ ---- ------ ----- ------ ----- ------ ---- ------ -----
Less: allowance for
loan losses..... (634) (617) (685) (1,164) (959)
-------- -------- ------ ------- -------
Loans, net......... $ 22,756 $ 24,585 $23,661 $26,262 $28,558
======== ======== ======= ======= =======
</TABLE>
16
<PAGE>
The following table sets forth certain information with respect to the
Bank's non-accrual, restructured and past due loans, as well as foreclosed
assets, for the periods indicated.
NON-PERFORMING ASSETS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accrual loans......................................... $222 $465 $445 $594 $775
Real estate owned......................................... 263 263 300 500 800
--- --- --- ---- -----
Total non-performing loans........................... 485 728 745 1094 1,575
--- --- --- ---- -----
Loans past due 90 or more days accruing interest.......... 7 - 268 260 35
Non-performing loans to total loans, at period end ....... 0.9% 1.8% 1.8% 2.2% 2.6%
Non-performing assets to period end assets................ 1.1% 1.6% 1.6% 2.6% 3.5%
Non-performing assets: total loans and other real
estate owned ............................................. 2.1% 2.9% 3.0% 3.9% 5.2%
</TABLE>
The amount of interest on non-accrual loans which would have been recorded
as income under the original terms of such loans was approximately $34,300,
$10,800, and $61,200 for the years ended December 31, 1997, 1996 and 1995,
respectively. Loans are placed on non-accrual when a loan is specifically
determined to be impaired or when principal or interest is delinquent for 90
days or more.
In addition to the nonaccrual loans, past due loans, and other real estate
owned listed above, loans totaling $3.6 million or 15.4% of total loans at
December 31, 1997 were either internally classified or specially mentioned,
require more than normal attention, and are potential problem loans. These
potential problem loans represent an increase from $3.0 million of potential
problem loans, or 12% of total loans, at December 31, 1996. The increase is
related primarily to one credit which management believes requires additional
monitoring due to the borrower's industry.
The Real Estate Owned of $263,000 in 1997 consists of a single piece of
industrial property located in Loudoun County, Virginia which currently is under
a contract for sale, which will result in the Bank charging- off approximately
$16,000.
17
<PAGE>
Loan Maturity
The following table shows the contractual maturity at December 31, 1997.
The table reflects the entire unpaid principal balance in the maturity period
that includes the final loan payment date and, accordingly, does not give effect
to periodic principal repayments or possible prepayments.
MATURITY AND RATE SENSITIVITY OF LOANS
(Dollars in thousands)
<TABLE>
<CAPTION>
At December 31, 1997
-----------------------------------------------------------------------------------
Over One Year
Through Five Years Over Five Years
One Year ----------------------------- -----------------------------
or Less Fixed Rate Floating Rate Fixed Rate Floating Rate
------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Commercial $1,895 $985 $560 $178 $573
Real estate-construction 448 - - - -
------ ---- ---- ---- ----
$2,343 $985 $560 $178 $573
====== ==== ==== ==== ====
</TABLE>
Allowance for Loan Losses
In originating loans, the Bank recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the quality of the collateral for such loan. The Bank maintains an allowance for
loan losses based upon, among other things, such factors as changes in the
character and size of the loan portfolio and related loan loss experience, a
review and examination of overall loan quality which includes the assessment of
problem loans, the amount of non-performing assets, regulatory policies,
generally accepted accounting principles, general economic conditions, and other
factors related to the collectability of loans in the Bank's portfolios. In
addition to unallocated allowances, specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and after considering the net realizable value of any collateral for
the loan.
Management actively monitors the Bank's asset quality in a continuing
effort to charge-off loans against the allowance for loan losses and to provide
specific loss allowances when necessary. Although management believes it uses
the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ from the assumptions used in making the initial
determinations. The Bank's allowance for loan losses was $634,000, or 2.71% of
total loans, as of December 31, 1997, $617,000, or 2.45% of total loans, as of
December 31, 1996 and $685,000, or 2.81% of total loans, as of December 31,
1995.
Management believes the allowance is adequate to absorb losses inherent in
the loan portfolio. The Bank expects that its allowance for loan losses is
adequate and that with the expected increases in the Bank's loan portfolio, the
allowance for loan losses remains adequate. The Bank expects to grow its loan
portfolio and believes it has adequate reserves in the allowance for loan losses
to mirror the growth in the loan portfolio.
In view of the Bank's plans for expansion and possible loan growth,
management will continue to closely monitor the performance of its portfolio and
make additional provisions as necessary. The Bank does not presently anticipate
that such provisions will have a material adverse impact on the Bank's results
of operations in future periods.
18
<PAGE>
An analysis of the allowance for loan losses, including charge-off activity, is
presented below:
ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning of year............ $ 617 $ 685 $ 1,164 $ 959 $1,124
Charge-offs:
Commercial.......................... 8 70 360 85 364
Real estate......................... 50 34 158 234 283
Consumer............................ 3 5 2 5 37
----- ------ ------- ----- ------
Total loans charged off........ 61 109 520 324 684
----- ------ ------- ----- ------
Recoveries:
Commercial.......................... 60 15 32 35 46
Real estate......................... 14 26 96 - 1
Consumer............................ - - - 6 -
----- ------ ------- ----- ------
Total recoveries............... 74 41 128 41 47
----- ------ ------- ----- ------
Net charge-offs (recoveries)............ (13) 68 392 283 637
Provision for (recovery of) loan losses 4 - ( 87) 488 472
----- ------ ------- ----- ------
Balance at end of year.................. $ 634 $ 617 $ 685 1,164 $ 959
===== ====== ======= ===== ======
Ratio of net charge-offs (recoveries) to
average loans outstanding........... (.05)% .28% 1.49% 0.95% 1.98%
Ratio of allowance for loan
losses to loans at year-end......... 2.71% 2.45% 2.81% 4.24% 3.25%
</TABLE>
19
<PAGE>
A breakdown of the allowance for loan losses is provided in the following
table. However, the Bank's management does not believe that the allowance for
loan losses can be allocated by category with a degree of precision that would
be useful to investors. Because all of these factors are subject to change, the
allocation of loan losses in the following table is not necessarily predictive
of future loan losses in the indicated categories. See Note 1 of the notes to
the financial statements for further information regarding the classification of
loan losses.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ -------------------- ------------------ ------------------
Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1)
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial............ $109 17.9% $105 16.7% $ 88 18.6% $456 17.7% $337 19.6
Real Estate
Mortgage and
Construction........ 502 76.9 492 80.0 560 77.5 656 78.5 569 76.3
Consumer.............. 23 5.2 20 3.3 37 3.9 52 3.8 52 4.1
---- ---- ---- ------ ----
Total allowance for
loan losses........... $634 $617 $685 $1,164 $959
==== ==== ==== ====== ====
</TABLE>
- ------------------
(1) Represents percentage of loans in each category to total loans.
Investment Activities
The Bank is required to maintain an amount of liquid assets appropriate to
its level of net savings withdrawals and current borrowings. It has generally
been the Bank's policy to maintain a liquidity portfolio in excess of regulatory
requirements. At December 31, 1997, the Bank's liquidity ratio was 52.51%.
Liquidity levels may be increased or decreased depending upon the yields on
investment alternatives, management's judgment as to the attractiveness of the
yields then available in relation to other opportunities, management's
expectations of the level of yield that will be available in the future and
management's projections as to the short-term demand for funds to be used in the
Bank's loan origination and other activities.
Interest income from investments in various types of liquid assets provides
a significant source of revenue for the Bank. The Bank invests in U.S. Treasury
and Federal Agency securities, bank certificates of deposits, equity securities,
corporate debt securities, taxable municipals and overnight federal funds. The
balance of investment securities maintained by the Bank in excess of regulatory
requirements reflects management's historical objective of maintaining liquidity
at a level that assures the availability of adequate funds, taking into account
anticipated cash flows and available sources of credit, for meeting withdrawal
requests and loan commitments and making other investments. See "Liquidity and
Capital Resources."
The Bank purchases securities through a primary dealer of U.S. Government
obligations or such other securities dealers authorized by the Board of
Directors and requires that the securities be delivered to a safekeeping agent
before the funds are transferred to the broker or dealer. The Bank purchases
investment securities pursuant to an investment policy established by the Board
of Directors.
Investment securities are recorded on the books of the Bank in accordance
with GAAP. The Bank does not purchase investment securities for trading.
Effective January 1, 1994, the Bank implemented SFAS No. 115. Available-
for-sale securities are reported at fair value with unrealized gains or losses
reported as a separate component of net worth, net of tax effects.
Held-to-maturity securities are carried at amortized cost. Substantially all
purchases of investment securities conform to the Bank's interest rate risk
policy.
20
<PAGE>
The following table summarizes the carrying value of securities for the
dates indicated:
SECURITIES PORTFOLIO
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. treasury and other government agencies ........... $ 9,828 $12,854 $ 2,518
State, county and municipal ........................... 1,854 340 100
Other ................................................. 112 88 94
------- ------- -------
Total available for sale .......................... 11,794 13,282 2,712
------- ------- -------
HELD TO MATURITY:
U.S. treasury and other government agencies ........... 250 500 2,057
------- ------- -------
Total held to maturity ............................ 250 500 2,057
------- ------- -------
Total securities ...................................... $12,044 $13,782 $ 4,769
======= ======= =======
</TABLE>
The following table sets forth the maturity distribution and weighted
average yields of the investment portfolio at December 31, 1997. The weighted
average yields are calculated on the basis of the book value of' the investment
portfolio and on the interest income of investments adjusted for amortization of
premium and accretion of discount.
INVESTMENT PORTFOLIO - MATURITY AND YIELDS
(Dollars in thousands)
<TABLE>
1 Year 1 Year 5 Years After
or Less to 5 Years to 10 Years 10 Years
------- ---------- ----------- --------
<S> <C> <C> <C> <C>
MATURITY DISTRIBUTION:
U.S. treasury issues ..................... $ 1,249 $ 2,828 $ -- $ --
U.S. agency issues ....................... -- 5,801 500 --
Municipal issues ......................... 196 1,358 -- --
Federal Reserve Bank Stock ............... -- -- -- 112
--------- --------- ------- -------
Total maturity distribution ......... $ 1,445 $ 9,987 $ 500 $ 112
========= ========= ======= =======
WEIGHTED AVERAGE YIELD:
U.S. treasury issues ..................... 5.98% 6.12% -- --
U.S. agency issues ....................... -- 6.25% 6.65% --
Municipal issues ......................... 6.25% 6.28% -- --
Federal Reserve Bank Stock ............... -- -- -- 6.00%
---- ---- ---- ----
Total ............................... 6.12% 6.21% 6.65% 6.00%
==== ==== ==== ====
Total portfolio weighted average yield ... 6.21%
====
Deposits
</TABLE>
The Bank primarily uses deposits to fund its loans and investment
portfolio. The Bank offers a variety of deposit accounts to individuals and
small- to medium-sized businesses. Deposit accounts include checking, savings,
escrow accounts, money market and certificates of deposit. Average certificates
of deposit in amounts of $100,000 or more totaled $4.0 million at December 31,
1997 and 1996. Many of these deposits are from long-standing customers and,
therefore, are believed by the Bank's management to be as stable as, and for all
practical purposes, no more rate sensitive than, core deposits.
21
<PAGE>
The following table details the average amount of, and the average rate
paid on, the following primary deposit categories for the periods indicated:
AVERAGE DEPOSITS AND AVERAGE RATES PAID
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
NOW accounts ........................... $ 5,073 2.23% $ 5,495 2.17% $ 5,745 2.56%
Money market savings ................... 10,377 3.19 10,535 3.18 7,921 3.41
Regular savings ........................ 3,369 2.94 3,259 2.98 3,619 3.18
Certificates of deposit ................ 11,196 5.01 15,511 5.54 11,727 5.40
------- ------- -------
Total interest-bearing deposits .......... $30,015 3.68 $34,800 4.05 $29,012 4.02
Non-interest-bearing deposits ............ 8,829 8,222 7,879
------- ------- -------
Total deposits ........................... $38,843 $43,022 $36,891
======= ======= =======
</TABLE>
The following is a summary of the maturity distribution of certificates of
deposit in amounts of $100,000 or more as of December 31, 1997:
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
(Dollars in thousands)
Maturity Period Amount Percent
- --------------- ------ -------
3 months or less...........................................$1,030 23.67%
Over 3 months to 6 months.................................. 447 10.27
Over 6 months to 12 months................................. 1,962 45.08
Over 12 months............................................. 913 20.98
------ ------
Total................................................ $4,352 100.00%
====== ======
Short-Term Borrowings
The Bank occasionally finds it necessary to purchase funds on a short-term
basis due to fluctuations in loan and deposit levels. The Bank has several
arrangements under which it may purchase funds. A Repurchase Agreement is
maintained with First Union Bank for up to the market value of bonds in
safekeeping, which as of the date of this Offering Circular is approximately
$1.25 million. For the periods ended December 31, 1997, 1996 and 1995, the
expense for federal funds purchased totaled approximately $7,000, $0 and $0,
respectively.
Capital Requirements
The determination of capital adequacy depends upon a number of factors,
such as asset quality, liquidity, earnings, growth trends and economic
conditions. The Bank seeks to maintain a strong capital base to support its
growth and expansion plans, provide stability to current operations and promote
public confidence in the Bank.
Management believes that the Bank's capital position, as of December 31,
1997, exceeds all regulatory minimums. The federal banking regulators have
defined three tests for assessing the capital strength and adequacy of banks,
based on two definitions of capital. "Tier 1 Capital" is defined as a
combination of common and qualifying preferred stockholders' equity less
goodwill. "Tier 2 Capital" is defined as qualifying subordinated debt and a
portion of the allowance for loan losses. "Total Capital" is defined as Tier 1
Capital plus Tier 2 Capital. Three risk-based capital ratios are computed using
the above capital definitions, total assets and risk-weighted assets
22
<PAGE>
and are measured against regulatory minimums to ascertain adequacy. All assets
and off-balance sheet risk items are grouped into categories according to degree
of risk and assigned a risk weighting and the resulting total is risk-weighted
assets. "Tier 1 Risk-based Capital" is Tier 1 Capital divided by risk-weighted
assets. "Total Risk-based Capital" is Total Capital divided by risk-weighted
assets. The Leverage Ratio is Tier 1 Capital divided by total average assets.
See "Supervision and Regulation--Capital Requirements."
The following table shows the Bank's capital ratios and the minimum ratios
currently required by the Federal Reserve to be well-capitalized:
CAPITAL RATIOS
<TABLE>
<CAPTION>
December 31,
-------------------------------- Regulatory
1997 1996 1995 Minimum
---- ---- ---- -------
<S> <C> <C> <C> <C>
Tier 1 Risk-based Capital................................. 17.4% 12.6% 11.7% 4.0%
Total Risk-based Capital.................................. 18.6 13.9 13.0 8.0
Leverage ratio............................................ 11.0 7.8 7.2 4.0
</TABLE>
Liquidity and Capital Resources
Liquidity is a measure of the Bank's ability to generate sufficient cash to
meet present and future financial obligations in a timely manner through either
the sale or maturity of existing assets or the acquisition of additional funds
through liability management. These obligations include the credit needs of
customers, funding deposit withdrawals, and the day-to-day operations of the
Bank. Liquid assets include cash, interest-bearing deposits with banks, federal
funds sold, and certain investment securities. As a result of the Bank's
management of liquid assets and the ability to generate liquidity through
liability funding, management believes that the Bank maintains overall liquidity
sufficient to satisfy its depositors' requirements and meet its customers'
credit needs.
As of December 31, 1997, cash, federal funds sold, held-to-maturity
investment securities maturing within one year and available-for-sale securities
represented 52.51% of deposits and other liabilities, compared to 46.93% at
December 31, 1996 and 49.69% at December 31, 1995. See "-- Interest
Sensitivity." At December 31, 1997, based upon the Bank's investment policy,
approximately 97.9% of total investment securities were available for sale, and
were primarily invested in U.S. Treasury and agency securities, with a market
value of approximately $23,000 greater than their book value. See "--Investment
Activities." Asset liquidity is also provided by managing loan maturities. At
December 31, 1997, approximately 64% or $15.0 million of loans would mature or
reprice within a one-year period.
23
<PAGE>
The following table summarizes the Bank's liquid assets for the periods
indicated:
SUMMARY OF LIQUID ASSETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash and due from banks................................... $ 1,987 $ 2,879 $ 1,909
Federal funds sold........................................ 7,600 3,800 15,550
Investment securities(1).................................. -- -- 1,558
Available-for-sale securities, at fair value.............. 11,794 13,282 2,712
------- ------- -------
Total liquid assets....................................... $21,381 $19,961 $21,729
======= ======= =======
Deposits and other liabilities............................ $40,719 $42,532 $43,725
Ratio of liquid assets to deposits and other liabilities.. 52.51 46.93 49.69
</TABLE>
- ------------------
(1) Only held-to-maturity investment securities at amortized cost with a
maturity of one year or less are considered liquid assets for this table.
Impact of Inflation, Changing Prices and Monetary Policies
The financial statements and related financial data concerning the Bank
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation. The primary
effect of inflation on the operations of the Bank is reflected in increased
operating costs. Unlike industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
changes in interest rates have a more significant effect on the performance of a
financial institution than do the effects of changes in the general rate of
inflation and changes in prices. Interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services.
Interest rates are highly sensitive to many factors which are beyond the control
of the Bank, including the influence of domestic and foreign economic conditions
and the monetary and fiscal policies of the U.S. government and federal
agencies, particularly the Federal Reserve.
The Federal Reserve implements national monetary policies such as seeking
to curb inflation and combat recession by its open market operations in U.S.
government securities, control of the discount rate applicable to borrowing by
banks, and establishment of reserve requirements against bank deposits. The
actions of the Federal Reserve in these areas influence the growth of bank
loans, investments and deposits, and affect the interest rates charged on loans
and paid on deposits. The nature, timing and impact of any future changes in
federal monetary and fiscal policies on the Bank and its results of operations
are not predictable.
Accounting Matters
In February 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"), which is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. SFAS 128 establishes
standards for computing and presenting earnings per share and applies to
entities with publicly held common stock or potential common stock. Management
does not expect that the adoption of SFAS 128 will have a material impact on the
Bank's financial condition or reported earnings per share.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, Disclosure of Information about Capital Structure ("SFAS
129") which is effective for financial statements issued for periods ending
after December 15, 1997. SFAS 129 establishes standards for disclosing
information about an entity's capital
24
<PAGE>
structure and applies to all entities. Management does not expect that the
adoption of SFAS 129 will have a material impact on the Bank's financial
condition or reported capital structure.
During June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS 130 is effective for financial statements for
periods beginning after December 15, 1997.
During June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997.
25
<PAGE>
ITEM 8 FINANCIAL STATEMENTS and SUPPLEMENTARY DATA
The report of independent accountants and the Bank's financial statement
for the years ended December 31, 1997, 1996 and 1995 are incorporated herein by
reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Changes in Registrant's Certifying Accountant. None
Change in Accounting firms:
None
26
<PAGE>
PART 3
Item 10-13
Information called for by part 3 (Items 10 through 13) is incorporated by
reference to the Bank's definitive proxy statement for the 1998 Annual meeting
of Shareholders to be filed with the Board of Governors of the Federal Reserve
System.
PART 4
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(A) (1) The following financial statement of The Heritage Bank is incorporated
herein by reference in item 8:
Balance Sheets - December 31 1997 and 1996.
Statement of operation - Years ended December 31, 1997, 1996, and 1995.
Statement of changes in Stockholders' Equity - Years ended December 31,
1997, 1996, and 1995 Statements of Cash Flows - Years ended December
31, 1997, 1996 and 1995 Notes to Financial statements. Report of
independent accountants.
(A) (2) All other schedules provided for in the applicable regulation of he
Securities and Exchange Commission pertain to items which do not appear in the
financial statements, to items which are insignificant, or to items as to which
the required disclosures have been made elsewhere in the financial statements
and notes thereto. These schedules have therefore been omitted.
(A) (3) Exhibits:
3.1 Articles of Incorporation. (see 10k report December 31, 1992)
3.2 Bylaws. (see 10k report December 31, 1992)
10.1 Stock Option Plan for Employees (see 10k report December 31,1992)
10.2 Lease relating to Bank Building (see 10k report December 31,1992)
27
<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.
The Heritage Bank, Inc
(Registrant)
Date by /S/ John T. Rohrback
-------------------------
John T. Rohrback
Chief Executive Officer
by /S/ William B. Sutphin
-------------------------
William B. Sutphin
Senior V.P
28
<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 25, 1997.
SIGNATURES TITLE
/S/ Harold C. Lieding
- ----------------------- Chairman of the
Harold C. Lieding Board of Directors
/S/ George Degnon
- ----------------------- Director
George Degnon & Secretary
/S/ Kevin P. Tighe
- ----------------------- Director
Kevin P. Tighe
/S/ Philip F. Herrick
- ----------------------- Director
Philip F. Herrick
/S/ John T. Rohrback
- ----------------------- Director
John T. Rohrback & CEO and president
/S/ Stanley I Richards
- ----------------------- Director
Stanley I Richards
/S/ George P. Shafran
- -------------------------- Director
George P. Shafran
29
<PAGE>
Supplemental information to be furnished with reports filed pursuant to
Section 15(d) of the Act by Registrants which have not registered securities
pursuant to Section 12 of the Act.
(A) The annual report and proxy statement have not been sent to security
holders. They will be furnished to security holders subsequent to the filing of
this annual report on Form 10-K.
30
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
The Heritage Bank
McLean, Virginia
We have audited the accompanying statements of condition of The Heritage
Bank as of December 31, 1997 and 1996, and the related statements of operations,
changes in stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of The Heritage Bank as of and for the year
ended December 31, 1995 were audited by other auditors whose opinion dated March
11, 1996, on those statements was unqualified.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1997 and 1996 financial statements referred to above
present fairly, in all material respects, the financial position of The Heritage
Bank as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia
January 21, 1998
F-1
<PAGE>
THE HERITAGE BANK
STATEMENTS OF CONDITION
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
ASSETS --------------- -------------
<S> <C> <C>
Cash and due from banks ............................. $ 1,986,523 $ 2,878,931
Federal funds sold and securities purchased under
agreement to resell ................................ 7,600,000 3,800,000
----------- -----------
Total cash and cash equivalents ........... $ 9,586,523 $ 6,678,931
Securities available for sale, at approximate
market value ....................................... 11,793,716 13,281,900
Securities to be held to maturity (fair value: 1997,
$249,375 and 1996, $500,570)........................ 250,000 500,000
Loans, net .......................................... 22,756,260 24,585,494
Premises and equipment, net ......................... 378,939 355,752
Other real estate owned ............................. 263,199 263,199
Accrued interest and other assets ................... 421,006 409,719
----------- -----------
Total assets .............................. $45,449,643 $46,074,995
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits ....................... $11,855,769 $ 9,641,823
Savings and interest-bearing demand deposits........ 17,623,691 19,316,846
Time deposits ...................................... 11,124,375 13,427,863
----------- -----------
Total deposits ............................ $40,603,835 $42,386,532
Accrued interest and other liabilities ............. 115,460 145,629
Commitments and contingent liabilities ............. -- --
----------- -----------
Total liabilities ......................... $40,719,295 $42,532,161
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; authorized
10,000,000 shares; issued and outstanding
1,489,636 and 1,249,634 shares, respectively...... $ 1,489,636 $ 1,249,634
Capital surplus .................................... 3,327,451 2,967,448
Accumulated deficit ................................ (104,856) (675,712)
Unrealized gain on securities available for sale,
net .............................................. 18,117 1,464
----------- -----------
Total stockholders' equity ................ $ 4,730,348 $ 3,542,834
----------- -----------
Total liabilities and stockholders' equity. $45,449,643 $46,074,995
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements.
F-2
<PAGE>
THE HERITAGE BANK
STATEMENTS OF OPERATIONS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- --------------- -------------
<S> <C> <C> <C>
INTEREST INCOME
Loans ............................................ $2,285,986 $ 2,321,858 $2,399,446
Securities ....................................... 816,256 822,760 319,087
Federal funds sold ............................... 154,066 274,892 329,408
---------- ----------- ----------
Total interest income ................... $3,256,308 $ 3,419,510 $3,047,941
---------- ----------- ----------
INTEREST EXPENSE
Interest checking deposits ....................... $ 443,836 $ 453,352 $ 417,338
Other time deposits .............................. 512,337 744,650 630,292
Certificates of deposits $100,000 or more......... 147,801 212,699 117,070
Federal funds purchased .......................... 6,797 -- --
---------- ----------- ----------
Total interest expense .................. $1,110,771 $ 1,410,701 $1,164,700
---------- ----------- ----------
Net interest income ..................... $2,145,537 $ 2,008,809 $1,883,241
Provision for (recovery of) loan losses ........... 3,825 -- (87,400)
---------- ----------- ----------
Net interest income after
provision for
(recovery of) loan losses .............. $2,141,712 $ 2,008,809 $1,970,641
---------- ----------- ----------
OTHER INCOME
Service charges on deposit accounts .............. $ 112,039 $ 101,440 $ 79,882
Other operating income, net ...................... 21,233 17,660 18,035
Gain on sale of securities ....................... 47,261 -- --
---------- ----------- ----------
Total other income ...................... $ 180,533 $ 119,100 $ 97,917
---------- ----------- ----------
OTHER EXPENSES
Salaries and employee benefits ................... $ 953,246 $ 898,649 $ 949,398
Occupancy expense ................................ 215,204 214,171 191,876
Equipment expense ................................ 88,275 91,687 88,565
Other operating expenses ......................... 579,961 520,109 624,468
---------- ----------- ----------
Total other expenses .................... $1,836,686 $ 1,724,616 $1,854,307
---------- ----------- ----------
Income before income taxes .............. $ 485,559 $ 403,293 $ 214,251
Income tax expense (benefit) ..................... (85,297) -- 31,696
---------- ----------- ----------
NET INCOME ........................................ $ 570,856 $ 403,293 $ 182,555
========== =========== ==========
EARNINGS PER SHARE, basic ......................... $ .45 $ .32 $ .15
========== =========== ==========
EARNINGS PER SHARE, assuming dilution ............. $ .44 $ .32 $ .15
========== =========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-3
<PAGE>
THE HERITAGE BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
COMMON STOCK ON SECURITIES TOTAL
------------------------- CAPITAL ACCUMULATED AVAILABLE STOCKHOLDERS'
SHARES AMOUNT SURPLUS DEFICIT FOR SALE EQUITY
----------- ------------- ------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 ......... 1,249,634 $1,249,634 $2,967,448 $ (1,261,560) $ (77,517) $2,878,005
Net income ........................ -- -- -- 182,555 -- 182,555
Change in unrealized gain (loss)
on securities available for sale -- -- -- -- 88,504 88,504
--------- ---------- ---------- ------------ --------- ----------
BALANCE, DECEMBER 31, 1995 ......... 1,249,634 $1,249,634 $2,967,448 $ (1,079,005) $ 10,987 $3,149,064
Net income ........................ -- -- -- 403,293 -- 403,293
Change in unrealized gain (loss)
on securities available for sale -- -- -- -- (9,523) (9,523)
--------- ---------- ---------- ------------ --------- ----------
BALANCE, DECEMBER 31, 1996 ......... 1,249,634 $1,249,634 $2,967,448 $ (675,712) $ 1,464 $3,542,834
Net income ........................ -- -- -- 570,856 -- 570,856
Warrants exercised ................ 240,002 240,002 360,003 -- -- 600,005
Change in unrealized gain (loss)
on securities available for
sale, net of deferred income
taxes of $9,333 .................. -- -- -- -- 16,653 16,653
--------- ---------- ---------- ------------ --------- ----------
BALANCE, DECEMBER 31, 1997 ......... 1,489,636 $1,489,636 $3,327,451 $ (104,856) $ 18,117 $4,730,348
========= ========== ========== ============ ========= ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-4
<PAGE>
THE HERITAGE BANK
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ......................................... $ 570,856 $ 403,293 $ 182,555
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for (recovery of) for loan losses ...... 3,825 -- (87,400)
Gain on sale of securities ....................... (47,261) -- --
Depreciation and amortization .................... 67,733 72,182 72,325
Deferred income taxes ............................ (85,297) -- --
Amortization of investment security
premiums, net of discounts ...................... 13,845 24,245 30,244
(Increase) decrease accrued interest and
other assets .................................... 64,677 (109,696) 162,256
Increase (decrease) in accrued interest and
other liabilities ............................... (30,169) (17,419) 52,466
------------ ------------- ------------
Net cash provided by operating activities........ $ 558,209 $ 372,605 $ 412,446
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and calls of securities available for
sale ............................................. $ 1,800,000 $ 2,000,000 $ 3,716,654
Purchase of securities available for sale .......... (9,236,816) (12,601,919) (1,300,126)
Maturities of securities held to maturity .......... 250,000 1,550,000 750,000
Proceeds from sale of securities available for
sale ............................................. 8,984,402 5,100 --
Net (increase) decrease in loans ................... 1,825,409 (1,010,908) 2,379,097
Purchase of premises and equipment ................. (90,920) (42,487) (40,045)
Proceeds from sale of other real estate owned. -- 100,508 510,000
------------ ------------- ------------
Net cash provided by (used in) investing
activities .................................... $ 3,532,075 $ (9,999,706) $ 6,015,580
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in demand deposits, NOW
accounts and savings deposits .................... $ 550,791 $ 986,664 $ (2,714,171)
Increase (decrease) in certificates of deposit ..... (2,333,488) (2,139,345) 7,320,604
Proceeds from stock warrants exercised ............. 600,005 -- --
------------ ------------- ------------
Net cash provided by (used in) financing
activities .................................... $ (1,182,692) $ (1,152,681) $ 4,606,433
------------ ------------- ------------
Net change in cash and cash equivalents.......... $ 2,907,592 $ (10,779,782) $ 11,034,459
CASH AND CASH EQUIVALENTS, beginning of year ........ 6,678,931 17,458,713 6,424,254
------------ ------------- ------------
CASH AND CASH EQUIVALENTS, end of year .............. $ 9,586,523 $ 6,678,931 $ 17,458,713
============ ============= ============
</TABLE>
See Accompanying Notes to Financial Statements.
F-5
<PAGE>
THE HERITAGE BANK
STATEMENTS OF CASH FLOWS
(Continued)
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest ......................................... $1,113,620 $1,419,643 $1,164,700
========== ========== ==========
Income taxes ..................................... $ 9,187 $ -- $ --
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITIES
Other real estate acquired in settlement of loans. $ -- $ 86,750 $ 300,000
========== ========== ==========
Unrealized gain (loss) on securities available for
sale ............................................ $ 25,986 $ (9,523) $ 88,504
========== ========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-6
<PAGE>
THE HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
The Heritage Bank was incorporated under the laws of the Commonwealth of
Virginia in 1987. It operated as a wholly-owned subsidiary of Heritage
Bankshares, Inc. until September 1, 1992, when it became independent.
The Bank is a state chartered member of the Federal Reserve System with
deposits insured by the Federal Deposit Insurance Corporation (FDIC) and
is located in McLean Virginia.
The Bank provides a variety of banking services to individuals and
businesses. Its primary deposit products are demand and savings deposits
and certificates of deposit. Its primary lending products are commercial
business and real estate mortgage loans. The loans are expected to be
repaid from cash flow or proceeds from the sale of selected assets of
the borrowers.
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles and to accepted practice within the
banking industry. The following is a description of the more significant
of these policies and practices.
SECURITIES
Securities are classified in three categories and accounted for as
follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those debt
securities the Bank has both the intent and ability to hold to
maturity regardless of changes in market conditions, liquidity
needs or changes in general economic conditions. These
securities are carried at cost adjusted for amortization of
premium and accretion of discount, computed by the interest
method over their contractual lives.
b. Securities Available for Sale
Securities classified as available for sale are those debt and
equity securities that the Bank intends to hold for an
indefinite period of time, but not necessarily to maturity. Any
decision to sell a security classified as available for sale
would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the
Bank's assets and liabilities, liquidity needs, regulatory
capital considerations, and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains
or losses are reported as increases or decreases in
stockholders' equity, net of the related deferred tax effect.
Realized gains or losses, determined on the basis of the cost of
specific securities sold, are included in earnings.
F-7
<PAGE>
THE HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
c. Trading Securities
Trading securities, which are generally held for the short term
in anticipation of market gains, are carried at fair value.
Realized and unrealized gains and losses on trading account
assets are included in interest income on trading account
securities. The Bank had no trading securities at December 31,
1997 and 1996.
LOANS
Loans are shown on the balance sheets net of unearned discounts and
the allowance for loan losses.
Interest on loans is computed by methods which generally result in
level rates of return on principal. Interest accrual is discontinued
when, in the opinion of management, the likelihood of collection is
doubtful. Loans are charged off when in the opinion of management
they are deemed to be uncollectible after taking into consideration
such factors as the current financial condition of the customer and
the underlying collateral and guarantees.
The Bank adopted FASB No. 114, "Accounting by Creditors for
Impairment of a Loan." This Statement has been amended by FASB No.
118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures." Statement 114, as amended, requires
that the impairment of loans that have been separately identified
for evaluation is to be measured based on the present value of
expected future cash flows or, alternatively, the observable market
price of the loans or the fair value of the collateral. However, for
those loans that are collateral dependent (that is, if repayment of
those loans is expected to be provided solely by the underlying
collateral) and for which management has determined foreclosure is
probable, the measure of impairment of those loans is to be based on
the fair value of the collateral. Statement 114, as amended, also
requires certain disclosures about investments in impaired loans and
the allowance for credit losses and interest income recognized on
loans.
The Bank considers all consumer installment loans and residential
mortgage loans to be homogeneous loans. These loans are not subject
to impairment under FASB 114. A loan is considered impaired when it
is probable that the Bank will be unable to collect all principal
and interest amounts according to the contractual terms of the loan
agreement. Factors involved in determining impairment include, but
are not limited to, expected future cash flows, financial condition
of the borrower, and the current economic conditions. A performing
loan may be considered impaired, if the factors above indicate a
need for impairment. A loan on nonaccrual status may not be impaired
if in the process of collection or there is an insignificant
shortfall in payment. An insignificant delay of less than 30 days or
a shortfall of less than 5% of the required principal and interest
payment generally does not indicate an impairment situation, if in
management's judgment the loan will be paid in full. Loans that meet
the regulatory definitions of doubtful or loss generally qualifies
as an
F-8
<PAGE>
THE HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
impaired loan under FASB 114. Charge-offs for impaired loans occur
when the loan or portion of the loan is determined to be
uncollectible, as is the case for all loans.
Loans are placed on nonaccrual when a loan is specifically
determined to be impaired or when principal or interest is
delinquent for 90 days or more. Any unpaid interest previously
accrued on those loans is reversed from income. Interest income
generally is not recognized on specific impaired loans unless the
likelihood of further loss is remote. Interest payments received on
such loans are applied as a reduction of the loan principal balance.
Interest income on other nonaccrual loans is recognized only to the
extent of interest payments received.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent
in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
credit concentrations, trends in historical loss experience,
specific impaired loans, and economic conditions. Allowances for
impaired loans are generally determined based on collateral values
or the present value of estimated cash flows. The allowance is
increased by a provision for loan losses, which is charged to
expense and reduced by charge-offs, net of recoveries. Changes in
the allowances relating to impaired loans are charged or credited to
the provision for loan losses. Because of uncertainties inherent in
the estimation process, management's estimate of credit losses
inherent in the loan portfolio and the related allowance may change
in the near term.
BANK PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Premises and equipment are
depreciated over their estimated useful lives; leasehold
improvements are amortized over the lives of the respective leases
or the estimated useful life of the leasehold improvement, whichever
is less. Depreciation and amortization are recorded on the
straight-line method.
Costs of maintenance and repairs are charged to expense as incurred.
Costs of replacing structural parts of major units are considered
individually and are expensed or capitalized as the facts dictate.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences,
operating loss carryforwards, and tax credit carryforwards. Deferred
tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance
F-9
<PAGE>
THE HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of
the changes in tax laws and rates on the date of enactment.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share." Statement 128 replaced the
calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings
per share amounts for all periods have been presented, and where
appropriate, restated to conform to the statement 128 requirements.
NONREFUNDABLE LOAN FEES AND COSTS
Loan origination and commitment fees are being deferred and
amortized as an adjustment of the related loan's yield.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, federal funds sold and
securities purchased under agreement to resell. Generally, federal
funds are purchased and sold for one-day periods.
OTHER REAL ESTATE
Real estate acquired through foreclosure is carried at the lower of
cost or fair market value less estimated selling costs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
ADVERTISING
The Bank follows the policy of charging the costs of advertising to
expense as incurred.
F-10
<PAGE>
THE HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
NOTE 2. CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances with the Federal
Reserve Bank. For the final weekly reporting period in the years ended
December 31, 1997 and 1996, the aggregate amounts of daily average
required balances were approximately $348,000 and $330,000,
respectively.
NOTE 3. SECURITIES
The amortized cost, unrealized holding gains and losses, and the fair
value of securities are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
December 31, 1997:
U.S. Treasury Securities .......... $ 4,052,641 $26,532 $ (3,001) $ 4,076,172
U.S. Government Agencies .......... 5,751,783 7,279 (7,841) 5,751,221
Obligations of states and political
subdivisions .................... 1,849,592 5,819 (1,338) 1,854,073
Other ............................. 112,250 -- -- 112,250
----------- ------- --------- -----------
Total .......................... $11,766,266 $39,630 $ (12,180) $11,793,716
=========== ======= ========= ===========
December 31, 1996:
U.S. Treasury Securities .......... $ 8,053,464 $31,555 $ (10,677) $ 8,074,342
U.S. Government Agencies .......... 4,799,272 2,732 (22,534) 4,779,470
Obligations of states and political
subdivisions .................... 340,000 388 -- 340,388
Other ............................. 87,700 -- -- 87,700
----------- ------- --------- -----------
Total .......................... $13,280,436 $34,675 $ (33,211) $13,281,900
=========== ======= ========= ===========
</TABLE>
F-11
<PAGE>
THE HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
HELD TO MATURITY SECURITIES:
December 31, 1997:
U.S. Government Agencies ......... $250,000 $ -- $ (625) $249,375
======== ==== ====== ========
December 31, 1996:
U.S. Government Agencies ......... $500,000 740 $ (170) $500,570
======== ==== ====== ========
</TABLE>
The scheduled maturities of securities at December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
HELD TO MATURITY
AVAILABLE FOR SALE SECURITIES SECURITIES
----------------------------- ------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Due in one year or less .................. $ 1,442,842 $ 1,444,579 $ -- $ --
Due from one year to five years .......... 9,711,174 9,736,887 250,000 249,375
Due from five years to ten years ......... 500,000 500,000 -- --
Federal reserve stock .................... 112,250 112,250 -- --
----------- ----------- -------- --------
Total ................................ $11,766,266 $11,793,716 $250,000 $249,375
=========== =========== ======== ========
</TABLE>
Proceeds from sale of securities available for sale during 1997 and 1996
were $8,984,402 and $5,100. Gross gains on those sales during 1997 were
$47,261. There were no gains or losses on the sales during 1996. There
were no sales of securities for the year ended December 31, 1995.
Securities having a book value of approximately $1,000,000 at both
December 31, 1997 and 1996, were pledged to secure public deposits and
letters of credit.
F-12
<PAGE>
THE HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
NOTE 4. LOANS
Major classifications of loans were as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Real estate:
Mortgage ............................... $17,532 $19,524
Construction ........................... 448 633
Commercial .............................. 4,191 4,210
Consumer loans .......................... 1,219 835
------- -------
$23,390 $25,202
Less: allowance for loan losses ......... (634) (617)
------- -------
Loans, net .............................. $22,756 $24,585
======= =======
</TABLE>
Changes in the allowance for loan losses are summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of year ....................... $ 617,430 $ 684,607 $1,164,055
Provision for (recovery of) loan losses .......... 3,825 -- (87,400)
Loans charged-off ................................ (61,336) (108,402) (519,736)
Recoveries ....................................... 73,878 41,225 127,688
--------- ---------- ----------
Balance at end of year ........................... $ 633,797 $ 617,430 $ 684,607
========= ========== ==========
</TABLE>
Information about impaired loans as of and for the years ended December 31, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Impaired loans for which an allowance has been provided...... $185,166 $432,021
Impaired loans for which no allowance has been provided...... -- --
-------- --------
Total impaired loans .................................... $185,166 $432,021
======== ========
Allowance provided for impaired loans, included in the
allowance for loan losses .................................. $ 27,775 $ 77,380
======== ========
Average balance in impaired loans ........................... $378,901 $109,565
======== ========
Interest income recognized .................................. $ 26,858 $ 25,331
======== ========
</TABLE>
F-13
<PAGE>
THE HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $36,735 and $32,500 at December 31, 1997 and 1996,
respectfully. If interest on these loans had been accrued, such income
would have approximated $5,852 and $13,471 for the years ended December
31, 1997 and 1996.
NOTE 5. RELATED PARTY TRANSACTIONS
The Bank has loan transactions with its officers and directors and with
companies in which the officers and directors have a financial interest.
In the opinion of management, such loans were made in the ordinary
course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same
time for comparable transactions with other customers, and did not
represent more than normal credit risk.
The aggregate amount of loans to such related parties at December 31,
1997 and 1996 was $348,483 and $757,413, respectively. During 1997, new
loans to such related parties amounted to $145,000 and repayments
amounted to $553,930.
NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Land ......................................................... $ 245,000 $ 245,000
Leasehold improvements ....................................... 147,647 155,260
Equipment, furniture and fixtures ............................ 337,613 599,487
---------- ----------
$ 730,260 $ 999,747
Less: accumulated depreciation and amortization .......... (351,321) (643,995)
---------- ----------
$ 378,939 $ 355,752
========== ==========
</TABLE>
Depreciation and amortization charged to operations totaled $67,733,
$72,182 and $72,325 in 1997, 1996 and 1995, respectively.
NOTE 7. REPURCHASE AGREEMENT
In 1994, the Bank executed a Master Repurchase Agreement with a major
financial institution. Under this agreement, the Bank may borrow
short-term funds by selling securities under agreement to repurchase.
Generally, these securities will be limited to U.S. Government and
government agency securities and agency mortgage-backed securities. The
amount available to be borrowed under this plan is limited by the amount
of securities held in safekeeping by the correspondent financial
institution, which was $1,250,000 at year end. As of December 31, 1997
and 1996, no funds were borrowed under this agreement.
F-14
<PAGE>
THE HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
NOTE 8. INCOME TAXES
Net deferred tax assets consist of the following as of December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards ......................... $ 131,717 $ 296,211
Alternative minimum tax credits .......................... 14,354 --
Accumulated depreciation ................................. 32,233 28,943
Other .................................................... 6,644 19,787
Less: valuation allowance ................................ (85,297) (332,311)
--------- ----------
Gross deferred tax asset .............................. $ 99,651 $ 12,630
--------- ----------
DEFERRED TAX LIABILITIES:
Unrealized gain on securities available for sale ......... $ 9,333 $ 498
Deferred loan fees ....................................... -- 11,827
Allowance for loan losses ................................ -- 305
--------- ----------
Gross deferred tax liabilities ........................ $ 9,333 $ 12,630
--------- ----------
Net deferred tax asset ................................... $ 90,318 $ --
========= ==========
</TABLE>
The provision for income taxes charged to operations for the years ended
December 31, 1997, 1996 and 1995, consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Current .......................................... $ -- $ -- $ --
Deferred ......................................... 161,717 132,611 68,700
Benefit of operating loss carryforwards .......... (247,014) (132,611) (37,004)
---------- ---------- ---------
$ (85,297) $ -- $ 31,696
========== ========== =========
</TABLE>
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax income
for the years ended December 31, 1997, 1996 and 1995, due to the
following:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Tax expense at statutory rate .................... $ 165,090 $ 137,120 $ 66,800
Benefit of operating loss carryforwards .......... (247,014) (132,611) (37,004)
Other, net ....................................... (3,373) (4,509) 1,900
---------- ---------- ---------
$ (85,297) $ -- $ 31,696
========== ========== =========
</TABLE>
At December 31, 1997, the Bank has operating loss carryforwards of
approximately $387,000 that may be offset against future taxable income
and which will expire over various years from 2006 to 2010.
F-15
<PAGE>
NOTE 9. DEPOSITS
The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100,000 was approximately $4,352,098 and $4,231,376 in
1997 and 1996, respectively.
At December 31, 1997, the schedule maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
<S> <C>
Three months or less ......................... $ 2,413
Over three months through 12 months .......... 6,092
Over one year through three years ............ 2,411
Over three years ............................. 208
-------
$11,124
=======
</TABLE>
NOTE 10. OTHER OPERATING EXPENSES
The components of other operating expenses consisted of the following
for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Data processing ................................. $ 78,702 $ 70,594 $ 69,440
Insurance ....................................... 21,498 29,192 32,344
FDIC insurance .................................. 4,429 6,939 65,312
Processional fees ............................... 115,024 128,628 191,021
Stationary and supplies ......................... 61,957 44,843 53,170
Postage ......................................... 36,899 37,499 34,082
Other (includes no items in excess of 1% of total
revenue) ....................................... 261,452 202,414 179,099
-------- -------- --------
$579,961 $520,109 $624,468
======== ======== ========
</TABLE>
F-16
<PAGE>
THE HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
NOTE 11. EARNINGS PER SHARE
The following shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number
of shares of diluted potential common stock. Potential dilutive common
stock had no effect on income available to common shareholders.
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- ------------------------
PER SHARE PER SHARE PER SHARE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share ......... 1,271,176 $ .45 1,249,634 $ .32 1,249,634 $ .15
===== ===== =====
Effect of dilutive securities:
Stock options ................... 1,307 -- --
Warrants ........................ 22,726 -- --
--------- --------- ---------
Diluted earnings per
share ......................... 1,295,209 $ .44 1,249,634 $ .32 1,249,634 $ .15
========= ===== ========= ===== ========= =====
</TABLE>
Warrants on 240,002 shares of common stock were not included in
computing diluted EPS in 1996 and 1995 because their effects were
antidilutive.
Options on 30,675 and 40,675 shares of common stock were not included
in computing diluted EPS in 1996 and 1995, respectively, because their
effects were antidilutive.
NOTE 12. COMMITMENTS AND CONTINGENCIES
The Bank entered into a long-term lease for its main office and
operations center which expires in 1998. The lease contains three
five-year renewal periods. Total rent expense was $194,945, $197,096
and $174,485, for 1997, 1996 and 1995, respectively, and was included
in occupancy expense.
The following is a schedule by year of future minimum lease payments
required under the long-term noncancelable lease agreements.
<TABLE>
<S> <C>
1998 .............. $105,945
========
</TABLE>
F-17
<PAGE>
THE HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
The Bank also entered into a long-term lease for its future branch
office on December 22, 1997. The term of the lease is ten years
commencing June 1, 1998 or fifteen days following the issuance of an
occupancy permit, whichever occurs last. If the Certificate of
Occupancy is not granted by October 31, 1998, the lease may be declared
void by either party by providing written notice to the other party.
In the normal course of business there are outstanding various
commitments and contingent liabilities, which are not reflected in the
accompanying financial statements. Management does not anticipate any
material losses as a result of these transactions.
See Note 14 with respect to financial instruments with
off-balance-sheet risk.
NOTE 13. STOCK OPTIONS AND WARRANTS
The Bank has a nonqualified stock option plan which full-time employees
and part-time employees working at least 25 hours per week are eligible
to receive options to acquire Common Stock. The Bank's Board of
Directors or a committee appointed by the Board of Directors may grant
options at prices determined by the Board or committee. Options expire
ten years after the date of grant. The Plan authorized the Board of
Directors or committee to grant up to 50,000 options; however, the
Board of Directors may increase the number of aggregate number of
options that may be granted.
On March 26, 1997, the Board of Directors established a stock option
plan under which those members serving on the Bank's Board of
Directors, who are not employees or officers of the Bank, have the
option to acquire common stock at an exercise price of $2.86. The
options expire ten years after the grant date, unless the Director
ceases to be a member of the Bank's Board of Directors, in which case
the options expire sixty days following such date. As of December 31,
1997, the 10,000 options granted under the plan were outstanding.
The status of the Option Plans during 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Outstanding at
January 1 ........... 30,675 $ 3.51 40,675 $ 3.26
Granted ........... 10,000 2.86 -- --
Exercised ......... -- -- -- --
Canceled .......... (3,300) 4.20 (10,000) 2.50
------ -------
Outstanding at
December 31 ......... 37,375 3.28 30,675 3.51
====== =======
</TABLE>
F-18
<PAGE>
THE HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
The status of the options outstanding at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
NUMBER
OUTSTANDING REMAINING
EXERCISE AND CONTRACTUAL
PRICE EXERCISABLE LIFE
------------------- ------------- ------------
<S> <C> <C> <C>
$3.99 to $4.20 5,050 .75 years
$ 4.10 3,000 1.75 years
$3.10 to $3.15 19,325 2.75 years
$ 2.86 10,000 9.25 years
</TABLE>
The Bank applies APB Opinion 25 in accounting for its incentive stock
option plan. Accordingly, no compensation cost has been recognized for
the plan in 1996 and 1995. Had compensation cost been determined on the
basis of fair value pursuant to FASB Statement No. 123, net income and
earnings per share would not have been materially different from the
amounts presented.
In 1993, the Bank issued two stock purchase warrants ("warrant") for
every four shares of common stock purchased in a private offering. A
total of 240,002 warrants were issued. Warrants entitled the holder to
purchase one share of common stock at a price of $2.50 per share until
December 31, 1997. All 240,002 warrants were exercised during 1997.
NOTE 14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of
the amount recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance-sheet instruments.
F-19
<PAGE>
THE HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
A summary of the contract or notional amount of the Bank's exposure to
off-balance-sheet risk as of December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit ............ $6,654,155 $5,247,060
Standby letters of credit ............... $ 191,257 $ 274,160
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property and
equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The Bank holds cash and marketable securities supporting
those commitments for which collateral is deemed necessary. The extent
of collateral held for those commitments at December 31, 1997 varies
from 0 percent to 100 percent; the average amount collateralized is 86
percent.
NOTE 15. CAPITAL REQUIREMENTS
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 -- 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, risk weightings, 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 1 capital to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes,
as of December 31, 1997, that the Bank meets all capital adequacy
requirements to which it is subject.
F-20
<PAGE>
THE HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
As of December 31, 1997, the most recent notification from the Federal
Reserve Bank 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
1 risk-based, and Tier 1 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.
The Bank's actual capital amounts and ratios are also presented in the
table. No amount was deducted from capital for interest-rate risk.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- ----------------------------------- ----------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ---------- ----------------- ----------------- ----------------- ----------------
(Amount in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted greater than or greater than or greater than or greater than or
Assets) ...................... $5,051 18.6% equal to $2,170 equal to 8.0% equal to $2,712 equal to 10.0%
Tier 1 Capital (to Risk greater than or greater than or greater than or greater than or
Weighted Assets) ............. $4,712 17.4% equal to $1,085 equal to 4.0% equal to $1,627 equal to 6.0%
Tier 1 Capital (to Average greater than or greater than or greater than or greater than or
Assets) ...................... $4,712 11.0% equal to $1,714 equal to 4.0% equal to $2,142 equal to 5.0%
As of December 31, 1996:
Total Capital (to Risk Weighted greater than or greater than or greater than or greater than or
Assets) ...................... $3,895 13.9% equal to $2,250 equal to 8.0% equal to $2,812 equal to 10.0%
Tier 1 Capital (to Risk greater than or greater than or greater than or greater than or
Weighted Assets) ............. $3,541 12.6% equal to $1,125 equal to 4.0% equal to $1,687 equal to 6.0%
Tier 1 Capital (to Average greater than or greater than or greater than or greater than or
Assets) ...................... $3,541 7.8% equal to $1,828 equal to 4.0% equal to $2,285 equal to 5.0%
</TABLE>
NOTE 16. RETAINED EARNINGS
Federal regulations limit the amount of dividends which the Bank can
pay without obtaining prior approval from regulatory authorities. As of
December 31, 1997, the Bank could not declare or pay any dividends and
had made no requests to do so.
F-21
<PAGE>
THE HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
NOTE 17. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Those
standards are based on consistent application of a financial components
approach that focuses on control of the affected asset or liability
that it controls or surrenders. This Statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. The Bank is not presently expected to be impacted by
this Statement in the foreseeable future.
In October 1996, the FASB issued FASB Statement No. 127, which deferred
for one year paragraphs 9-12 (Accounting for Transfers and Servicing of
Financial Assets) under FASB No. 125 for securities lending, repurchase
agreements, dollar rolls, and other secured transactions. The FASB also
agreed to defer for one year paragraph 15 (Secured Borrowings and
Collateral) under FASB No. 125 for all transactions.
During June 1997, the FASB issued FASB No. 130, "Reporting
Comprehensive Income." This pronouncement established standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. FASB No. 130 is effective for financial
statements beginning after December 15, 1997.
Additionally during June of 1997, the FASB issued FASB No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
FASB No. 131 establishes standards for the way that public enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. This statement becomes effective for financial statements
for periods beginning after December 31, 1997.
F-22
FEDERAL RESERVE BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
Washington, D. C. 20551
FORM 10-Q
Quarterly Report Under Section 13 or 15 (D)
of The Securities Exchange Act of 1934
For the Quarter Ended March 31, 1998
Commission file Number N/A
THE HERITAGE BANK
(Exact Name of Registrant As Specified In Its Charter)
VIRGINIA 54-1418824
(State or Other Jurisdiction of I.R.S. Employer
Incorporation of Organization) Identification No.)
1313 Dolley Madison Blvd., McLean, Va. 22101
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
703-356-6060
(Former Name, Former Address and Former Year,
If Changed Since Last Report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1)
HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12
MONTHS (OF SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES__x_______ NO___
COMMON SHARES OUTSTANDING AS OF March 31, 1998 1,489,636
1
<PAGE>
THE HERITAGE BANK
ITEM I.
Part I. Financial Information
STATEMENT OF CONDITION
(in thousands unaudited)
ASSETS MARCH 31, 1998 DECEMBER 31, 1997
Cash and due from banks $ 1,705 $ 1,987
Federal Funds Sold 4,250 7,600
Repurchase Agreements 0 0
----- -----
Total Cash and Due From Banks 5,955 9,587
Securitiies available for sale 14,040 11,794
Securities held to maturity 250 250
Loans, Net 23,201 22,756
Premises and Equipment, Net 368 379
Other Real Estate Owned 263 263
Accrued Int and other Assets 557 $ 421
---- ----
TOTAL ASSETS $ 44,634 $ 45,450
LIABILITIES
Noninterest bearing deposits $ 8,995 $ 11,856
Interest bearing deposits 30,388 28,748
------ ------
TOTAL DEPOSITS 39,383 40,604
Repurchase agreements 315 0
Other liabilities 120 116
----- -----
TOTAL LIABILITIES 39,818 40,720
====== ======
CAPITAL
Common Stock 1,490 1,490
Surplus 3,327 3,327
Undivided profits -4 -105
Accumulated other comprehensive
income net 3 $ 18
------ ------
TOTAL CAPITAL 4,816 4,730
----- -----
TOTAL CAPITAL AND LIABILITIES 44,634 45,450
====== ======
2
<PAGE>
STATEMENTS OF OPERATION
THREE MONTHS ENDING MARCH 31, 1998
INTEREST INCOME MARCH 31, 1998 MARCH 31, 1997
TOTAL INTEREST INCOME $ 837,000 $ 793,000
INTEREST EXPENSE
Total interest expense 277,000 284,000
Net interest income 560,000 509,000
Provision for loan losses 2,000 4,000
Net interest income after
provision for loan losses 558,000 505,000
OTHER INCOME
Total other income 32,000 33,000
OTHER EXPENSES
Total other expenses 489,000 461,000
Income before income taxes 101,000 77,000
Income tax 0 5,000
NET INCOME $101,000 $ 72,000
Basic income per share $ 0.07 $ 0.06
Diluted income per share $ 0.07 $ 0.06
Weighted average shares outstanding 1,489,636 1,249,634
3
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
MARCH 31 1998 MARCH 31 1997
--------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT
OF PER SHARE DATA)
<S> <C> <C>
SUMMARY OF OPERATING RESULTS:
Total interest income............... $ 837 $ 793
Total interest expense.............. 277 284
----- -----
Net interest income................. $ 560 $ 509
Provision for (recovery of) loan 2 4
-- -----
losses..............................
Net interest income after
provision for (recovery of ) $ 558 $ 505
loan losses..................
Other income........................ 32 33
Other expenses...................... 489 461
----- -----
Income (loss) before taxes.......... 101 77
Income tax expense (benefit)(1)..... - 5
- ---
Net income (loss)................... $101 $ 72
==== ====
PER SHARE:
Basic earnings (loss) per share..... $ 0.07 $ 0.06
Diluted earnings (loss) per share... 0.07 0.06
Cash dividend declared.............. - -
Book value at period end............ 3.26 2.86
Common shares outstanding........... 1,489,636 1,249,634
BALANCE SHEET DATA (AT PERIOD MARCH 31 1998 December-31,1997
END): ------------------------------ ----------------
Loans, net of unearned interest..... $ 23,842 $ 23,391
Allowance for loan loss............. 641 634
Total assets........................ 44,632 45,450
Total deposits...................... 39,383 40,604
Total stockholders' equity.......... 4,816 4,730
PERFORMANCE AND ASSET QUALITY
RATIOS:
Return on average total assets..... 0.90% 1.33%
Return on average stockholders' 8.38 15.24
equity.............................
Average stockholders' equity to 12.00 8.74
average total assets...............
Non-accrual and past due loans to 1.35 .98
total loans........................
Allowance for loan losses to 2.69 2.71
total loans........................
Net yield.......................... 4.25 4.29
Net interest margin(2)............. 5.29 5.25
</TABLE>
- ------------------
(1) At December 31, 1997, the Bank had available approximately $387,000 of an
operating loss carryforward which could be offset against future income.
(2) Net interest margin is calculated as net interest income divided by average
earning assets and represents the Bank's net yield on its earning assets.
4
<PAGE>
STATEMENT OF CHANGE IN STOCKHOLDER'S EQUITY
FOR THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
(Dollars in Thousands, unaudited)
<TABLE>
<CAPTION>
Accumulated
other
Comprehensive Retained comprehensive Common Capital
Total income Earings income Stock Surplus
----- ------------- -------- ------------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Balances January 1, 1997 $ 3,543 -- $ (676) $ 2 $ 1,250 $ 2,967
Comprehensive income --
Net income $ 72 $ 72 $ 72 -- --
Other comprehensive income bet of tax -- -- -- -- -- --
Unrealized gain(loss) on securities available for sale (52) (52) (52) -- --
Unrealized holding gain(loss) arising during the period -- -- -- -- -- --
Less reclassification adjustment -- -- -- -- -- --
Other comprehensive income, net of tax -- -- -- -- -- --
Total comprehensive income $ 20 $ 20 -- $ (50) -- --
------- ------- ------- ------- ------- -------
Balances March 31, 1997 $ 3,563 $ (604) $ (50) $ 1,250 $ 2,967
======= ======= ======= ======= =======
Balances January 1, 1998 $ 4,730 $ (105) $ 18 $ 1,490 $ 3,327
Comprehensive income -- --
Net income $ 101 $ 101 $ 101 -- -- --
Other comprehensive income bet of tax -- -- -- -- -- --
Unrealized gain(loss) on securities available for sale $ (15) $ (15) -- $ (15) -- --
Unrealized holding gain(loss) arising during the period -- -- -- -- -- --
Less reclassification adjustment -- -- -- -- -- --
Other comprehensive income, net of tax -- -- -- -- -- --
Total comprehensive income $ 86 $ 86 $ 3 -- --
------- ------- ------- ------- -------
Balances March 31, 1998 $ 4.816 $ (4) $ 3 $ 1.490 $ 3,327
======= ======= ======= ======= =======
</TABLE>
5
<PAGE>
Item II. Management's Discussion and Results of Operations
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial statements included
in The Heritage Bank March 31, 1998 on Form 10-Q.
General
The Heritage Bank, a Virginia-chartered commercial bank, is the only
independent financial institution headquartered in McLean, Virginia. Established
in 1987, the Bank operated as a wholly-owned subsidiary of Heritage Bankshares,
Inc. (formerly Independent Banks of Virginia, Inc.), until 1992 when it became
an independent bank. The Bank is a well-capitalized, profitable community bank
dedicated to financing small business and consumer needs in its market area. The
Bank is also committed to providing personalized "hometown" quality service to
its customers by tailoring its products and services to appeal to a local
market. The Bank currently operates one full-service office and engages in a
broad range of lending and deposit services aimed at individual and commercial
customers in the McLean area of Fairfax County, Virginia.
The business of the Bank consists of attracting deposits from the general
public and using these funds to originate various types of individual and
commercial loans primarily in the McLean area. The Bank's commercial activities
include providing checking accounts, money market accounts and certificates of
deposit to small and medium sized businesses. The Bank also provides credit
services, such as lines of credit, term loans, construction loans, and letters
of credit, as well as real estate loans and other forms of collateralized
financing. The Bank's products include checking accounts, NOW accounts, savings
accounts, certificates of deposit, installment accounts, construction and other
personal loans, home improvement loans, automobile and other consumer financing.
In the first part of May 1998, the Bank will be offering for sale 805,000
shares of its Common Stock, par value $1.00 per share (the "Offering"). All of
the shares of Common Stock offered will be sold on a "best effort" basis. The
Bank will use the net proceeds of the Offering to support future growth of the
Bank's assets, including increased loan origination and the potential opening of
one or more additional branches, and for general corporate purposes. A portion
of the net proceeds of the offering will also be used to purchase shares in an
Odd Lot Tender Offer.
Comparison of Financial Condition at March 31, 1998 and December 31, 1997
The Bank's total assets decreased $816,000, from $45,450,000 at December
31, 1997 to $44,634,000 at March 31, 1998. The decrease is primarily caused by
decreases in federal funds sold. Gross loans increased $451,000 from $23,391,000
at December 31, 1997 to $23,842,000 at March 31, 1998. Total deposits decreased
from $40,604,000 at December 31, 1997 to $39,383,000 at March 31, 1998. This
decrease was caused primarily by a decrease in attorney's escrow account
balances. Of these deposits, $35,324,000 were core deposits which the Bank uses
to make loans. Federal Funds Sold decreased $3,350,000 from $7,600,000 at
December 31, 1997 to $4,250,000 at March 31, 1998. This decrease was caused by
excess funds being invested in securities. Net loans increased $445,000 from
$22,756,000 at December 31, 1997 to $23,201,000 at March 31, 1998.
Stockholders equity at March 31, 1998, was $4,816,000, as compared to
$4,730,000 on December 31, 1997. This increase is due to the net income of
$101,000 for the three months ended March 31, 1998. Book value per share
increased from $3.18 per share on December 31, 1997 to $3.23 per share on March
31, 1998. At March 31, 1998 and December 31, 1997, there were 1,489,636 shares
outstanding.
The ratio of allowance for loan losses to total loans was 2.69% at March
31, 1998. Management believes the allowance is adequate to absorb losses in the
loan portfolio. The Bank believes that its allowance for loan losses is adequate
6
<PAGE>
and that, with the expected increases in the Bank's loan portfolio after the
Offering, it will remain adequate. The Bank expects to grow its loan portfolio
and believes it has adequate reserves in the allowance for loan losses to mirror
such growth.
The Bank's return on average total assets was 0.90% at March 31, 1998 and
its return on average stockholders' equity was 8.38% at March 31, 1998. The
Bank's return on average assets was 1.33% and its return on average equity was
15.24% at December 31, 1997. This change was caused by in increase in Common
Stock and capital surplus.
The Bank is required to meet certain capital requirements as established by
the Federal Reserve Board. At March 31, 1998 and December 31, 1997, the Bank met
all capital adequacy requirements to which it was subject.
Results of Operations for the Three Months Ended March 31, 1998 and 1997
Net income. Net income for the three months ended March 31, 1998 for the
Heritage Bank totaled $101,000, compared to the $72,000 for the three months
ended March 31, 1997. This is a net increase of $29,000 over the first three
months of 1997. This increase in net income was primarily due to an increase in
interest income on investments and a decrease in interest paid on deposits, due
to lower volume of deposits.
Interest Income and Expense. Interest income for the three months ended
March 31, 1998 was $837,000, as compared to $793,000 for the three months ended
March 31, 1997, representing an increase of $44,000. Total interest expense
decreased from $284,000 at March 31, 1997 to $277,000 at March 31, 1998,
representing a decrease of $7,000. This decrease was due to a decrease in
interest paid on deposits.
Net Interest Income. Net interest income is the difference between interest
earned on loans, investments, securities and short term investments and interest
paid on deposits. 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 or non-earning
assets and non-interest bearing liabilities. The Bank's management seeks to
maximize net interest income by managing the balance sheet and determining the
optimal product mix with respect to yields on assets and costs of funds in light
of projected economic conditions, while maintaining an acceptable level of risk.
Net interest income increased in the first three months of 1998 by $51,000,
or 10.02%, from $509,000 at March 31, 1997 to $560,000 at March 31, 1998. This
increase was primarily due to an increase in interest income on the bond
investment portfolio.
Provision for Loan Losses. The provision for loan losses for the three
months ended March 31, 1998 was $2,000, as compared to $4,000 for the same
period in the prior year, representing a $2,000 decrease. An analysis of the
allowance for loan losses follows:
Loan loss reserve
Balance December 31, 1997 $ 634,000
Provision for loan losses 2,000
Charge offs --
Recoveries 5,000
Balance March 31, 1998 $ 641,000
7
<PAGE>
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 areas in particular.
Noninterest income. Noninterest income consists primarily of service
charges and fees associated with the Bank's loan and savings accounts.
Noninterest income decreased $1,000 from $33,000 for the three months ended
March 31, 1997 to $32,000 at to March 31, 1998.
Noninterest expense. Noninterest expense consists primarily of operating
expenses for compensation and related benefits, occupancy, federal insurance
premiums and operating assessments and data processing charges. Non-interest
expense increased by $28,000 from $461,000 at March 31, 1997 to $489,000 for the
three months ended March 31, 1998. This increase was due primarily to an
increase in salaries and employee benefits.
Income Tax Expense. The Bank had no tax liability at March 31, 1998,
compared to income tax expense of $5,000 at March 31, 1997. At December 31,
1997, the Bank had operating loss carryforwards of approximately $387,000 that
may be offset against future taxable income. The Bank expects to use its net
operating loss carryforward in its entirety by the end of fiscal year 1998.
Liquidity and Capital Resources
Liquidity is a measure of the Bank's ability to generate sufficient cash to
meet present and future financial obligations in a timely manner through either
the sale or maturity of existing assets or the acquisition of additional funds
through liability management. These obligations include the credit needs of
customers, funding deposit withdrawals, and the day-to-day operations of the
Bank. Liquid assets include cash, interest-bearing deposits with banks, federal
funds sold, and certain investment securities. As a result of the Bank's
management of liquid assets and the ability to generate liquidity through
liability funding, management believes that the Bank maintains overall liquidity
sufficient to satisfy its depositors' requirements and meet its customers'
credit needs.
As of March 31, 1998, cash, federal funds sold, held-to-maturity investment
securities maturing within one year and available-for-sale securities
represented 50.62% of deposits and other liabilities, compared to 52.51% at
December 31, 1997.
Capital
Management continuously reviews the capital position of the Bank to insure
compliance with minimum regulatory requirements, as well as exploring ways to
increase capital either by retained earnings or other means.
Banks are required to maintain minimum risk-based capital ratios. These
ratios compare capital, as defined by the risk-based regulations, to assets
adjusted for their relative risk as defined by the regulations. Guidelines
required banks to have a minimum Tier 1 capital ratio, as defined, of 4.00% and
a minimum Tier 2 capital ratio of 8.00%, and a minimum 4.00% leverage capital
ratio. On March 31, 1998, the Bank's Tier 1 capital ratio was 17.38% and Tier 2
capital ratio was 18.63% and leverage ratio was 10.79%.
Year 2000 Issues
The "Year 2000 Problem" centers on the inability of computer systems to
precisely recognize the year 2000. Many existing computer programs and systems
were originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. If
computer systems are not adequately changed to identify the year 2000, many
computer applications could fail or create erroneous results. As a result, many
calculations which rely on the date/field information, such as interest, payment
8
<PAGE>
or due dates and other operating functions, will generate results which could be
significantly misstated, and the Bank could experience a temporary inability to
process transactions, send invoices or engage in similar normal business
activities. In addition, under certain circumstances, failure to adequately
address the Year 2000 Problem could adversely affect the viability of the Bank's
suppliers and creditors and the creditworthiness of its borrowers. Thus, if not
adequately addressed, the Year 2000 Problem could result in a significant
adverse impact on the Bank's products, services and competitive condition.
Financial institution regulators have recently increased their focus upon
year 2000 issues, issuing guidance concerning the responsibilities of senior
management and directors. The FDIC and the other federal banking regulators have
issued safety and soundness guidelines to be followed by insured depository
institutions, such as the Bank, to assure resolution of any year 2000 problems.
The federal banking agencies have asserted that year 2000 testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams, and thus an institution's failure to address appropriately the Year 2000
Problem could result in supervisory action, including such enforcement actions
as the reduction of the institution's supervisory ratings, the denial of
applications for approval of a merger or acquisition, or the imposition of civil
money penalties. The Bank recently hired an outside consultant to assess the
impact of the Year 2000 Problem on the Bank. Because the Bank outsources its
data processing and item processing operations, a significant component of the
Year 2000 plan is working with external vendors to test and certify their
systems as Year 2000 compliant. The Bank's external vendors have surveyed their
programs to inventory the necessary change sand have begun correcting the
applicable computer programs and replacing equipment so that the Bank's
information systems will be Year 2000 compliant prior to the end of 1998. This
will enable the Bank to devote substantial time to the testing of the upgraded
systems prior to the arrival of the millennium in order to comply with all
applicable regulations. The Bank expects to complete its timetable for carrying
out its plans to address Year 2000 issues by December 31, 1998.
9
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits-None
(b) Reports on Form 8-K
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
None.
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
THE HERITAGE BANK
(Registrant)
Date: 5/14/98
/s/ John T. Rohrback
- -----------------------------------
John T. Rohrback
C.E.O.
/s/ William B. Sutphin
- -----------------------------------
William B. Sutphin
Senior V. P. and Cashier
9
<PAGE>
THE HERITAGE BANK
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) Basis of Presentation
The financial statements included herein have been prepared by the Bank
without audit. In the opinion of management, the quarterly unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the financial position and results of
operations at and for the periods presented. The Bank believes that the
disclosures are adequate to make the information presented not misleading,
however, the results for the periods presented are not necessarily indicative of
results to be expected for the entire year.
(2) Accounting Policies
The interim financial information should be read in conjunction with the
Bank's 1997 Annual Report on Form 10-K. Management is required to make estimates
and assumptions that affect amounts reported in the financial statements. Actual
results could differ significantly from estimates.
10
<PAGE>
FEDERAL RESERVE BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
Washington, D. C. 20551
FORM 10-Q
Quarterly Report Under Section 13 or 15 (D)
of The Securities Exchange Act of 1934
For the Quarter Ended June 30, 1998
Commission file Number N/A
THE HERITAGE BANK
(Exact Name of Registrant As Specified In Its Charter)
VIRGINIA 54-1418824
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification No.)
1313 Dolley Madison Blvd., McLean, Va. 22101
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
703-356-6060
N/A
(Former Name, Former Address and Former Year,
If Changed Since Last Report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1)
HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12
MONTHS (OF SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES__x_______ NO___
COMMON SHARES OUTSTANDING AS OF August 7, 1998 2,294,617
11
<PAGE>
INDEX
THE HERITAGE BANK
Part 1 Financial Information Page
Item 1 Financial Statements
Balance Sheets
June 30 1998 and December 31, 1997 3
Statement of income
Three months ended June 30, 1998 and 1997 4
Six months ended June 30, 1998 and 1997 5
Statement of Stockholders Equity
Six months ended June 30, 1998 and 1997 6
Statement of Cash Flows
Six months ended June 30, 1998 and 1997 7
Notes to Financial Statements 8
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of operation 9
and Selected Financial Data
Part II. Other Information: 17
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon /Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
12
<PAGE>
ITEM I.
Part I. Financial Information
THE HERITAGE BANK
STATEMENT OF CONDITION
(in thousands unaudited)
ASSETS JUNE 30, 1998 DECEMBER 31, 1997
Cash and due from banks $ 2,064 $ 1,987
Federal Funds Sold 5,100 7,600
Repurchase Agreements 0 0
------- -------
Total Cash and Due From Banks 7,164 9,587
Securities available for sale 19,071 11,794
Securities held to maturity 250 250
Loans, Net 25,332 22,756
Premises and Equipment, Net 354 379
Other Real Estate Owned 263 263
Accrued Int and other Assets 844 $ 421
------- -------
TOTAL ASSETS $53,278 $45,450
======= =======
LIABILITIES
Noninterest bearing deposits $11,673 $11,856
Interest bearing deposits 31,929 28,748
------- -------
TOTAL DEPOSITS 43,602 40,604
Repurchase agreements 530 0
Other liabilities 115 116
------- -------
TOTAL LIABILITIES 44,247 40,720
======= =======
CAPITAL
Common Stock 2,293 1,490
Surplus 6,631 3,327
Undivided profits 97 -105
Accumulated other comprehensive 10 18
------- -------
income net
TOTAL CAPITAL 9,031 4,730
------- -------
TOTAL CAPITAL AND LIABILITIES $53,278 $45,450
======= =======
Notes to financial statements are an
integral part of these statements
13
<PAGE>
STATEMENTS OF OPERATION
THREE MONTHS ENDING MARCH 31, 1998
THE HERITAGE BANK
STATEMENTS OF OPERATION
SECOND QUARTER ENDING JUNE 30, 1998
INTEREST INCOME 2ND QUARTER 1998 2ND QUARTER 1997
TOTAL INTEREST INCOME $ 917,000 $ 828,000
INTEREST EXPENSE
Total interest expense 304,000 269,000
------- -------
Net interest income 613,000 559,000
Provision for loan losses 2,000 4,000
------- -------
Net interest income after
provision for loan losses 611,000 555,000
OTHER INCOME
Total other income 35,000 34,000
OTHER EXPENSES
Total other expenses 544,000 459,000
------- -------
Income before income taxes 102,000 130,000
Income tax 2,000 2,000
------- -------
NET INCOME $100,000 $ 128,000
======== =======
Basic income per share $ 0.05 $ 0.10
Diluted income per share $ 0.05 $ 0.10
Weighted avg shares outstanding 1,879,195 1,249,634
Notes to financial statements are an integral part of these statements
14
<PAGE>
THE HERITAGE BANK
STATEMENTS OF OPERATION
SIX MONTHS ENDING JUNE 30, 1998
INTEREST INCOME JUNE 30, 1998 JUNE 30, 1997
TOTAL INTEREST INCOME $1,754,000 $ 1,621,000
INTEREST EXPENSE
Total interest expense 581,000 553,000
------- -------
Net interest income 1,173,000 1,068,000
Provision for loan losses 4,000 8,000
----- -----
Net interest income after
provision for loan losses 1,169,000 1,060,000
OTHER INCOME
Total other income 67,000 68,000
OTHER EXPENSES
Total other expenses 1,033,000 920,000
--------- -------
Income before income taxes 203,000 208,000
Income tax 2,000 7,000
----- -----
NET INCOME $201,000 $ 201,000
======== ========
Basic income per share $ 0.12 $ 0.16
Diluted income per share $ 0.12 $ 0.16
Weighted average shares outstanding 1,685,353 1,249,634
Notes to financial statements are an integral
part of these statements
15
<PAGE>
THE HERITAGE BANK
STATEMENT OF CHANGE IN STOCKHOLDER'S EQUITY
For Six Months Ended June 30, 1998 and June 30 1997
(Dollars in Thousands,unaudited)
<TABLE>
<CAPTION>
Accumulated
other
Comprehensive Retained comprehensive Capital
Total income earnings income Common stock surplus
<S> <C> <C> <C> <C> <C> <C> <C>
Balances January 1 1997 $ 3,543 0 $ (676) $ 2 $ 1,250 $ 2,967
Comprehensive income
Net income 201 201 201 - - -
Other comprehensive income net of tax - - - - - -
Unrealized gain(loss) on securities available for - - - - - -
sale
Unrealized holding gain(loss) arising during period - - - - - -
Less reclassification adjustment - - - - - -
Other comprehensive income, net of tax - - - - - -
---- ----
Total comprehensive income $ 201 - $ 2 - -
------ ---- ---- ---- ----
Balances June 30, 1997 $3,744 $ (475) $ 2 $ 1,250 $ 2,967
====== ======= === ======= =======
Balances January 1 1998 $ 4,731 $ (104) $ 18 $ 1,490 $ 3,327
Comprehensive income
Net income 201 201 201 - - -
Other comprehensive income net of tax - - - - - -
Unrealized gain(loss) on securities available for (9) (9) - (9) - -
sale
Unrealized holding gain(loss) arising during period - - - - - -
Less reclassification adjustment 1 1 - 1 - -
---- ---- ----
Other comprehensive income, net of tax (8) (8) - (8) - -
Total comprehensive income $ 193 - -
======
Issuance of common stock $ 4,107 - - $ 803 $ 3,304
-------- ----- -------
Balances June 30, 1998 $ 9,031 $ 97 $ 10 $ 2,293 $ 6,631
======= ==== ==== ======= =======
</TABLE>
17
<PAGE>
THE HERITAGE BANK
Statement of Cash Flows
(In Thousands of Dollars)
June 30 1998 June 30 1997
--------------------------
Cash Flows From Operating Activities
Net income $ 201 $ 201
Adjustments to reconcile net income(loss) to net
cash provided by (used in) operating activities
Provision for loan losses 4 8
Depreciation and amortization 29 35
Gain on sale of available-for-sale investments (1)
Amortization of investment security
premiums, net of discount 15 6
(Increase)decrease in accrued interest and
other assets (417) 16
(Decrease) in accrued interest and other liabilities (1) (46)
Net cash provided by(used in) operating activities $ (170) $220
-------- -----
Cash Flows From Investing Activities
Maturities of securities available-for-sale $ 4,000 $ 750
Purchases of securities available-for-sale (11,803) (4,000)
Proceeds from sale of securities available-for-sale 499 4,020
Increase(decrease) in loans (2,580) 267
Purchase of premises and equipment (4) (73)
-------- -------
Net cash provided by (used in) investing activities $(9,888) $ 964
--------- ------
Cash Flows From Financing Activities
(decrease) in non interest-bearing deposits $ (183) $ (110)
Increase(Decrease)in certif of deposits and savings 3,181 (3,789)
Increase in securities sold under repurchase agreement 530 --
Issuance of common stock 4,107 --
-------- ------
Net cash provided by (used in) financing activities $7,635 $(3,899)
-------- --------
Net change in cash and cash equivalents (2,423) $(2,715)
Cash and cash equivalents, beginning of year 9,587 6,679
------ -----
Cash and cash equivalents, end of year $ 7,164 $ 3,964
======= =======
18
<PAGE>
THE HERITAGE BANK
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) Basis of Presentation
The financial statements included herein have been prepared by the Bank
without audit. In the opinion of management, the quarterly unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the financial position and results of
operations at and for the periods presented. The Bank believes that the
disclosures are adequate to make the information presented not misleading,
however, the results for the periods presented are not necessarily indicative of
results to be expected for the entire year.
(2) Accounting Policies
The interim financial information should be read in conjunction with the
Bank's 1997 Annual Report on Form 10-K-A. Management is required to make
estimates and assumptions that affect amounts reported in the financial
statements. Actual results could differ significantly from estimates.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial statements included
in The Heritage Bank Form 10-Q for the quarter ended June 30, 1998.
General
The Heritage Bank, a Virginia-chartered commercial bank, is the only
independent financial institution headquartered in McLean, Virginia. Established
in 1987, the Bank operated as a wholly-owned subsidiary of Heritage Bankshares,
Inc. (formerly Independent Banks of Virginia, Inc.) until 1992 when it became an
independent bank. The Bank is a well-capitalized, profitable community bank
dedicated to financing small business and consumer needs in its market area. The
Bank also is committed to providing personalized "hometown" quality service to
its customers by tailoring its products and services to appeal to its local
market. The Bank currently operates one full-service office and engages in a
broad range of lending and deposit services aimed at individual and commercial
customers in the McLean area of Fairfax County, Virginia.
The business of the Bank consists of attracting deposits from the general
public and using these funds to originate various types of individual and
commercial loans primarily in the McLean area. The Bank's commercial activities
include providing checking accounts, money market accounts and certificates of
deposit to small and medium sized businesses. The Bank also provides credit
services, such as lines of credit, term loans, construction loans, and letters
of credit, as well as real estate loans and other forms of collateralized
financing. The Bank's products include checking accounts, NOW accounts, savings
accounts, certificates of deposit, installment accounts, construction and other
personal loans, home improvement loans, automobile and other consumer financing.
On May 18, 1998, the Bank closed a secondary offering of 805,000 shares of
its common stock, par value $1.00 per share (the "Offering"), at $5.50 per
share, raising $4.4 million in proceeds. After the underwriting commissions of
$309,925, this netted the Bank $4,117,575 in new capital. The Bank will use the
net proceeds of the Offering to support future growth of the Bank's assets,
including increased loan origination and the potential opening of one or more
additional branches (including its first branch office in Loudoun County,
Virginia) and for general corporate purposes. On June 8,1998 the Bank used part
of the new capital to complete an odd-lot tender offer, purchasing 2,719 shares
at $5.50 per share for a total cost of $14,954.50.
20
<PAGE>
The selected financial ratios and other data of the Bank set forth below is
derived in part from, and should be read in conjunction with, the Unaudited
Financial Statements of the Bank and Notes thereto presented elsewhere in this
report.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS
JUNE 30, 1998 ENDED JUNE 30, 1997
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
SUMMARY OF OPERATING RESULTS:
Total interest income............................... $1,754 $ 1,621
Total interest expense.............................. 581 553
----- -----
Net interest income................................. $1,173 $1,068
Provision for (recovery of) loan losses............. 4 8
-- -----
Net interest income after provision for (recovery
of ) $1,169 $1,060
loan losses..................................
Other income........................................ 67 68
Other expenses...................................... 1,033 920
----- -----
Income (loss) before taxes.......................... 203 208
Income tax expense (benefit)(1)..................... 2 7
- ---
Net income (loss)................................... $201 $201
==== ====
PER SHARE:
Basic earnings (loss) per share..................... $ 0.12 $ 0.16
Diluted earnings (loss) per share................... 0.12 0.16
Cash dividend declared.............................. - -
Book value at period end............................ 3.94 2.99
Common shares outstanding........................... 2,292,917 1,249,634
BALANCE SHEET DATA (AT PERIOD END): JUNE 30, 1998 Year ended December
31,1997
------------------------------------------------------
Loans, net of unearned interest..................... $ 25,914 $ 23,391
Allowance for loan loss............................. 582 634
Total assets........................................ 53,278 45,450
Total deposits...................................... 43,602 40,604
Total stockholders' equity.......................... 9,031 4,730
PERFORMANCE AND ASSET QUALITY RATIOS:
Return on average total assets (3).................. 0.85% 1.33%
Return on average stockholders' equity...........(3) 7.02 15.24
Average stockholders' equity to average total 13.30 8.74
assets..............................................
Non-accrual and past due loans to total loans....... 2.29 .98
Allowance for loan losses to total loans............ 2.25 2.71
Net yield........................................... 4.02 4.29
Net interest margin(2).............................. 5.21 5.25
</TABLE>
- ------------------
(1) At December 31, 1997, the Bank had available approximately $387,000 of
an operating loss carryforward which
could be offset against future income.
(2) Net interest margin is calculated as net interest income divided by
average earning assets and represents the Bank's net yield on its
earning assets.
(3) Annualized for the six months ended June 30, 1998.
21
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997
Total assets increased $7.8 million, or 17.2%, to $45.5 million at December
31,1997 to $53.3 million at June 30 1998. This increase in assets primarily is
due to the receipt by the Bank of $4.l million in net proceeds from the Offering
which closed on May 18, 1998. The proceeds of the Offering were invested in U.S.
agency securities. In addition, net loans increased by $2.6, million. Federal
funds sold decreased $2.5 million from $7.6 million at December 31, 1998 to $5.1
million at June30, 1998. This decrease primarily is due to use of these funds to
purchase U. S. Agencies Bonds.
Securities available for sale increased $7.3 million, or 61.7%, from $11.8
million at December 31, 1997 to $19.1 million a June 30, 1998. The increase was
caused by the investment by the Bank of the net proceeds of the Offering in the
bond portfolio.
Net loans increased $2.6 million, or 11.3%, from $22.8 million at December
31, 1997 to $25.3 million at June 30, 1998. This increase was primarily due to
the increased marketing of the Bank's loan products.
Total deposits increased $3.O million, or 7.4%, from $40.6 million at
December 31, 1997 to $43.6 million at June 30, 1998. This increase was caused by
a increase in attorney's escrow account balances and one large deposit by a
customer of $1.8 million. Of these deposits, $39.l million were core deposits
which the Bank uses to make loans.
Repurchase agreements at June 30,1998 totaled $530,000, as compared to no
repurchase agreements at December 31, 1997. The Bank utilizes repurchase
agreements to fund customers sweep accounts.
22
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998
AND 1997
Net income. Net income for the three months ended June 30, 1998 for The
Heritage Bank totaled $100,000, or $0.05 basic and diluted earnings per share,
compared to the $128,000, or $0.10 basic and diluted earnings per share, for the
three months ended June 30, 1997. This is a net decrease of $28,000, or 28%,
over the second quarter of 1997. This $28,000 decrease was due primarily to an
increase in other expenses of $85,000, which was partially offset by an increase
in net interest income after provision of loan losses of $56,000.
Interest Income. Total interest income for the three months ended June 30,
1998 was $917,000, as compared to $828,000 for the three months ended June 30,
1997, representing an increase of $89,000, or 10.7%. This increase was due
primarily to the increase in net loans.
Interest Expense. Total interest expense increased from $269,000 for the
three months ended June 30, 1997 to $304,000 for the three months ended June 30,
1998, representing a increase of $35,000, or 13%. This increase was due
primarily to the increase in deposits.
Net Interest Income. Net interest income is the difference between interest
earned on loans, investments, securities and short term investments and interest
paid on deposits. 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 or non-earning
assets and non-interest bearing liabilities. The Bank's management seeks to
maximize net interest income by managing the balance sheet and determining the
optimal product mix with respect to yields on assets and costs of funds in light
of projected economic conditions, while maintaining an acceptable level of risk.
Net interest income increased in the second three months of 1998 by
$55,000, or 9.7%, from $559,000 for the three months ended June 30, 1997 to
$613,000 for the three months ended June 30, 1998. This increase was due
primarily to an increase in interest income on the bond investment portfolio.
The bond portfolio increased due to the investment by the Bank of the net
proceeds of the Offering which occurred in May, 1998.
Provision for Loan Losses. The provision for loan losses for the three
months ended June 30, 1998 was $2,000, as compared to $4,000 for the same period
in the prior year, representing a $2,000 decrease.
The level of the allowance for loan losses 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 areas in
particular. Management believes that the provision for loan losses and the
allowance for loan losses are reasonable and adequate to cover any known losses
and any losses reasonably expected in the existing loan portfolio. While
management estimates loan losses using the best available information, such as
independent appraisals on collateral, no assurance can be given that future
additions to the allowance will not be necessary based on changes in economic
and real estate market conditions, further information obtained regarding known
problem loans, identification of additional problem loans, regulatory
examinations and other factors, both within and outside of management's control.
23
<PAGE>
Other income. Total other income consists primarily of service charges and
fees associated with the Bank's loan and savings accounts. Total other income
increased $1,000 from $34,000 for the three months ended June 30, 1997 to
$35,000 for the three months ended June 30, 1998.
Other expense. Other expense consists primarily of operating expenses for
compensation and related benefits, occupancy, federal insurance premiums and
operating assessments and data processing charges. Total other expense increased
by $85,000, or 18.5%, from $459,000 for the three months ended June 30, 1997 to
$544,000 for the three months ended June 30, 1998. This increase was due, in
part, to a $25,000 loss from a robbery at the Bank which occurred in May, 1998.
The increase is also due, in part, to costs associated with the Year 2000
expenses and increases in salaries and benefits.
Income Tax Expense. The Bank had a tax liability of $2,000 for the three
months ended June 30, 1998 and 1997. At December 31, 1997, the Bank had
operating loss carryforwards of approximately $387,000 that may be offset
against future taxable income. The Bank expects to use its net operating loss
carryforward in its entirety by the end of fiscal year 1998.
24
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net income. Net income for the six months ended June 30, 1998 and 1997 was
$201,000. For the six months ended June 30, 1997 basic and diluted earnings per
share was $0.16 per share, as compared to basic and diluted earnings per share
of $0.12 for the six months ended June 30, 1998. Net profit did not show an
increase primarily due to a $25,000 loss from a robbery and a Year 2000 expense
of $14,000.
Interest Income. Total interest income for the six months ended June 30,
1998 was $1.8 million, as compared to $1.6 million for the six months ended June
30, 1997, representing an increase of $133,000, or 8.2%. This increase was due
primarily to the increase in net loans.
Interest Expense. Total interest expense increased from $553,000 for the
six months ended June 30, 1997 compared to $581,000 for the six months ended
June 30, 1998, representing a increase of $28,000, or 5.1%. This increase was
due to the growth in deposits.
Net Interest Income. Net interest income is the difference between interest
earned on loans, investments, securities and short term investments and interest
paid on deposits. 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 or non-earning
assets and non-interest bearing liabilities. The Bank's management seeks to
maximize net interest income by managing the balance sheet and determining the
optimal product mix with respect to yields on assets and costs of funds in light
of projected economic conditions, while maintaining an acceptable level of risk.
Net interest income increased in the second six months of 1998 by $105,000,
or 9.8%, from $1.1 million for the six months ended at June 30, 1997 to $1.2
million for the six months ended June 30, 1998. This increase was due primarily
to an increase in interest income on the bond investment portfolio. The bond
portfolio increased due to the investment by the Bank of the net proceeds of the
Offering which occurred in May, 1998.
Provision for Loan Losses. The provision for loan losses for the six months
ended June 30, 1998 was $4,000, as compared to $8,000 for the same period in the
prior year, representing a $4,000 decrease. This decreased was caused by a
excess of funds in the reserve for loan losses
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 areas in particular. Management
believes that the provision for loan losses and the allowance for loan losses
are reasonable and adequate to cover any known losses and any losses reasonably
expected in the existing loan portfolio. While management estimates loan losses
using the best available information, such as independent appraisals on
collateral, no assurance can be given that future additions to the allowance
will not be necessary based on changes in economic and real estate market
conditions, further information obtained regarding known problem loans,
identification of additional problem loans, regulatory examinations and other
factors, both within and outside of management's control. The ratio of the
allowance for loan losses to total loans was 2.25% at June 30, 1998, as compared
to 2.71% for the year ended December 31, 1997.
Other income. Total other income consists primarily of service charges and
fees associated with the Bank's loan and savings accounts. Total other income
decreased $1,000 from $68,000 for the six months ended June 30, 1997 to $67,000
for the six months ended June 30, 1998.
25
<PAGE>
Other expense. Other expense consists primarily of operating expenses for
compensation and related benefits, occupancy, federal insurance premiums and
operating assessments and data processing charges. Total other expense increased
by $113,000, or 12.3%, from $920,000 for the six months ended June 30, 1997 to
$1.0 million for the six months ended June 30, 1998. This increase was due to a
$25,000 loss from a robbery at the Bank which occurred in May, 1998. The
increase also was due, in part, to a $14,000 expense associated with Year 2000
compliance and increases in salaries and benefits.
Income Tax Expense. The Bank had a tax liability of $2,000 for the six
months ended June 30, 1998, as compared to $7,000 for the six months ended June
30, 1997. At December 31, 1997, the Bank had operating loss carryforwards of
approximately $387,000 that may be offset against future taxable income. The
Bank expects to use its net operating loss carryforward in its entirety by the
end of fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Bank's ability to generate sufficient cash to
meet present and future financial obligations in a timely manner through either
the sale or maturity of existing assets or the acquisition of additional funds
through liability management. These obligations include the credit needs of
customers, funding deposit withdrawals, and the day-to-day operations of the
Bank. Liquid assets include cash, interest-bearing deposits with banks, federal
funds sold, and certain investment securities. As a result of the Bank's
management of liquid assets and the ability to generate liquidity through
liability funding, management believes that the Bank maintains overall liquidity
sufficient to satisfy its depositors' requirements and meet its customers'
credit needs. The levels of the Bank's liquid assets are dependent on the Bank's
operating, financing and investing activities during any given period.
Management believes it will have adequate resources to fund all commitments on a
short-term and long-term basis in accordance with its business strategy.
As of June 30, 1998, cash, federal funds sold, held-to-maturity investment
securities maturing within one year and available-for-sale securities
represented 55.65% of deposits and other liabilities, compared to 52.51% at
December 31, 1997.
Management continuously reviews the capital position of the Bank to insure
compliance with minimum regulatory requirements, as well as exploring ways to
increase capital either by retained earnings or other means.
Banks are required to maintain minimum risk-based capital ratios. These
ratios compare capital, as defined by the risk-based regulations, to assets
adjusted for their relative risk as defined by the regulations. Guidelines
require banks to have a minimum Tier 1 capital ratio, as defined by the
regulators, of 4.00% and a minimum Tier 2 capital ratio of 8.00%, and a minimum
4.00% leverage capital ratio. On June 30, 1998, the Bank's Tier 1 capital ratio
was 29.19%, Tier 2 capital ratio was 30.44% and leverage ratio was 16.93%. At
June 30, 1998, the Bank exceeded all of its regulatory capital requirements.
At June 30, 1998, the total stockholders' equity of The Heritage Bank was
$9.03 million, and the ratio of average stockholders' equity to average total
assets was 13.30%, as compared to 8.74% on December 31, 1998.
26
<PAGE>
YEAR 2000 ISSUES
The "Year 2000 Problem" centers on the inability of computer systems to
recognize the Year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the Year 2000. Like
most financial service providers, the Bank may be significantly affected by the
Year 2000 Problem due to the nature of financial information. Furthermore, if
computer systems are not adequately changed to identify the Year 2000, many
computer applications could fail or create erroneous results.
The Bank recently hired an outside consultant to assess the impact of the
Year 2000 Problem on the Bank. Because the Bank outsources its data processing
and item processing operations, a significant component of the Year 2000 plan is
working with external vendors to test and certify their systems as Year 2000
compliant. The Bank's external vendors have surveyed their programs to inventory
the necessary changes and have begun correcting the applicable computer programs
and replacing equipment so that the Bank's information systems will be Year 2000
compliant prior to the end of 1998. This will enable the Bank to devote
substantial time to the testing of the upgraded systems prior to the arrival of
the millennium in order to comply with all applicable regulations. The Bank
expects to complete its timetable for carrying out its plans to address Year
2000 issues by December 31, 1998.
The costs of the project and the date on which the Bank plans to complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those plans. In
addition, there can be no guarantee that the systems of other companies on which
the Bank's systems rely will be timely converted, or that a failure to convert
by another company, or a conversion that is incompatible with the Bank's
systems, would not have a material adverse effect on the Bank.
PROVISION FOR LOAN LOSSES
For the six months ended June 30, 1998 the provision for loan losses was
$4,000, a $4,000 decrease compared to the $8,000 allowance for loan losses
recorded in the first six months of 1997. An analysis of the allowance for loan
losses is as follows:
Loan Loss Reserve
Balance, December 31, $634,000
1998
Provision for Loan Losses 4,000
Charge-offs (65,000)
Recoveries 9,000
Balance, June 30, 1998 $582,000
27
<PAGE>
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 areas in particular.
POTENTIAL PROBLEM LOANS
At June 30, 1998, in addition to $454,000 of loans on either non-accrual
status or loans past due 90 days or more and still accruing, the Bank had
approximately 7.07% of the loan portfolio in loans which were either internally
classified or specially mentioned and require more than normal attention and are
potential problem loans. The Bank has considered these loans in establishing the
level of the allowance for loan losses. As of June 30, 1997, $883,000 of loans
were either on a non-accrual status or loans past due 90 days or more and still
accruing. In addition to these loans, 13.0% of the loan portfolio were either
internally classified or specially mentioned and required more than normal
attention and were considered potential problems loans.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 24, 1998, in the case or Wills v. The Heritage Bank, the United
States Bankruptcy Court for the Eastern District of Virginia, Alexandria
Division, granted plaintiff's motion for partial summary judgment ruling against
the Bank. The Court ruled that the Bank violated an automatic stay imposed by
the United States Bankruptcy Code (the "Code") by collecting interest payments
on a note payable by plaintiff to the Bank and in selling stock pledged as
collateral to secure such note. The Bank received the interest payments in 1990
and the stock was sold in 1993. The total amount of the judgment is $108,382
plus attorney's fees in an amount to be determined at a later date. This sum
represents payments received by the Bank in excess of sums due it under the
plaintiffs Plan of Reorganization. The Bank is entitled to recover the sun of
$11,810 from plaintiff for sums due the Bank under plaintiff's Plan of
Reorganization upon payment of the judgment. Plaintiff's request for punitive
damages in the sum of $105,000 was denied on the summary judgment motion, but
remains pending for adjudication. An additional claim by the plaintiff, in the
aggregate amount of $326,437, is vigorously disputed by the Bank and remains
unresolved, but will be the subject of a summary judgment motion by the Bank
provided that all matters are not otherwise resolved. The Bank is attempting to
settle all outstanding judgments and claims. In the absence of any such
settlement, the Bank intends to appeal the judgment against it and to vigorously
pursue its appeal and defenses against its outstanding claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 18, 1998, the Bank completed a secondary stock offering in which it
sold 805,000 shares of its common stock, par value $1.00 per share (the "Common
Stock") in a secondary stock offering at a price of $5.50 per share. Net
proceeds for the Bank were approximately $4.1 million. Ryan, Lee & Company of
McLean, Virginia served as the lead underwriter for the Offering. The
underwriting discount and commission amounted to $0.385 per share. The
securities are exempt from registration under the Securities Act of 1933, as
amended, pursuant to Section 3(a)(2).
The Bank has decided to focus on expanding the Bank's asset and deposit
base, while continuing to maintain its image as a community bank. The proceeds
of the offering will be used primarily to fund the costs of establishing the
Bank's first branch office in eastern Loudoun County. This area is situated
within the Bank's target area and is among the fastest growing
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communities in Virginia. Furthermore, this area is not currently served by an
independent community bank and the Bank believes there is a need for a bank
focused on serving the local community. The Bank believes that its expansion
will be limited to a twenty mile radius of the executive offices of the Bank in
McLean. The Bank believes it will be the most successful in delivering its
personalized service within this delineated market area with which it is most
familiar.
Accordingly, the Bank recently has entered into an agreement, to lease and
build its first branch office, to be located in eastern Loudoun County,
Virginia, three miles west of the Fairfax County line. The proposed branch will
be a 3,000 square foot facility with an ATM and drive-up window and will be
located along Route 7, a major traffic corridor serving the growing commercial
and residential market of Loudoun and Fairfax Counties. The proposed branch will
be situated between the "Cascades" and "CountrySide" residential communities
next to the newly opened 14 screen Regal Cinema complex in the CountrySide
Commercial and Professional Center. This site is particularly attractive because
it is located near a growing number of office parks; commercial and retail
shopping centers and large developments presently under construction in eastern
Loudoun County to help service this growth, construction has begun on Dulles
Town Center, a 300 acre retail shopping mall located near the branch site.
Construction of the mall should be completed by the end of 1999.
The proceeds of the Offering also will be used to make additional loans in
the Bank's McLean, Virginia market area and in the areas of Fairfax and Loudoun
Counties which the Bank has targeted for expansion. Pending such use, the net
proceeds of the Offering will be invested in U. S. government and government
agency securities and interest bearing deposits. Part of the net proceeds of the
Offering also were used to purchase shares, in an odd-lot tender offer, from
shareholders of record on March 31, 1998 who owned 99 or fewer shares of the
Bank on the record date. The remainder of the funds will be used for general
corporate purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
At the Annual Meeting on August 26, 1998, the stockholders will be asked to
vote upon a proposal to form a holding company for the Bank by the adoption and
approval of an Agreement and Plan of Reorganization, dated as of July 1, 1998,
between the Bank and Heritage Bancorp, Inc., a newly-formed Virginia corporation
organized at the direction of the Bank to be a bank holding company with the
Bank as its wholly-owned subsidiary.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The Bank filed two Current Reports on Form 8-K with the Federal Reserve
("FRB"), dated April 9, 1998 and May 18, 1998, in connection with the Offering.
The Form 8-K, dated April 9, 1998, filed the preliminary offering circular with
the FRB and the Form 8-K, dated May 18, 1998, filed the Bank's final offering
circular with the FRB and reported the closing of the Offering on May 18, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Act 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
THE HERITAGE BANK
(Registrant)
Date:
/s/ William B. Sutphin
- -----------------------------------
William B. Sutphin
Senior V. P. and Cashier
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