Conformed Copy
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Quarterly period Ended September 30, 1999
HERITAGE BANCORP, INC.
(Name of Small Business Issue in its Charter)
Virginia 54-1914902
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1313 Dolley Madison Blvd., McLean, Virginia 22101
(Address of Principal Executive Offices)
(703) 356-6060
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $1.00 per share.
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days:
Yes X No
------- -------
As of September 30, 1999, 2,294,617 shares of the registrant's common stock were
outstanding.
Transitional Small Business Disclosure Format: Yes ____ No _X___
<PAGE>
<TABLE>
HERITAGE BANCORP, INC.
INDEX TO FINANCIAL STATEMENTS
Page(s)
-------
Part I Financial Information:
<S> <C>
Item 1. Financial Statements:
Consolidated Statements of Financial Condition as of September 30, 1999
and December 31, 1998 3
Consolidated Statements of Operations for the three and nine month periods ended
September 30, 1999 and 1998 4
Consolidated Statements of Stockholders Equity for the nine month periods ended
September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 6
Notes to Financial Statements 7
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operation and Selected Financial Data 7
Part II. Other Information:
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
2
<PAGE>
<TABLE>
ITEM I.
Part I. Financial Information
HERITAGE BANCORP, INC.
AND SUBSIDIARY
Consolidated Statement of Condition
September 30, 1999 and December 31, 1998
(dollars in thousands, unaudited)
<CAPTION>
Assets 1999 1998
------------ ------------
<S> <C> <C>
Cash and due from banks $ 1,736 $ 5,825
Federal funds sold and securities purchased under 7,700 8,550
------------ ------------
Total cash and cash equivalents 9,436 14,375
Securities available for sale, at approximate market value 23,023 19,824
Loans, net 28,749 29,181
Premises and equipment, net 816 376
Accrued interest receivable 529 460
Other real estate owned 263 263
Other assets 382 297
------------ ------------
Total assets $ 63,198 $ 64,776
============ ============
Liabilites and Stockholders' Equity
Liabilities
Noninterest-bearing deposits $ 13,456 $ 17,385
Savings and interest-bearing demand deposits 22,298 20,734
Time deposits 14,461 15,323
------------ ------------
Total deposits 50,215 53,442
Accrued interest and other liabilities 77 119
Securities sold under agreement to repurchase 4,103 2,287
------------ ------------
Total liabilities 54,395 55,848
------------ ------------
Stockholders' Equity
Common stock, $1 par value; authorized 10,000,000
shares; issued and outstanding 2,294,617 2,295 2,295
Capital surplus 6,530 6,530
Retained earnings 194 29
Accumulated other comprehensive income (loss) (216) 74
------------ ------------
Total stockholders' equity 8,803 8,928
------------ ------------
Total liabilites and stockholders' equity $ 63,198 $ 64,776
============ ============
Notes to financial statements are an integral part of these statements.
</TABLE>
3
<PAGE>
<TABLE>
HERITAGE BANCORP, INC.
AND SUBSIDIARY
Consolidated Statement of Operations
Nine and Three Month Periods Ended September 30, 1999 and 1998
(dollars in thousands, unaudited)
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------- -------------------------
Interest Income 1999 1998 1999 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Loans $ 2,014 $ 1,744 $ 623 $ 614
Securities 1,036 802 361 316
Federal funds sold 213 213 68 75
----------- ----------- ----------- ----------
Total interest income 3,263 2,759 1,052 1,005
----------- ----------- ----------- ----------
Interest Expense
Savings and interest-bearing demand 375 445 297 162
Time deposits 654 452 41 161
Securities sold under agreement to repurchase 63 24 28 17
----------- ----------- ----------- ----------
Total interest expense 1,092 921 366 340
----------- ----------- ----------- ----------
Net interest income 2,171 1,838 686 665
Provision for loan losses 18 102 5 98
----------- ----------- ----------- ----------
Net interest income after provision for loan losses 2,153 1,736 681 567
----------- ----------- ----------- ----------
Other Income
Service charges on deposit accounts 85 80 31 27
Other operating income, net 64 23 47 9
Gain (loss) on sale of securities 1 (1) - -
----------- ----------- ----------- ----------
Total other income 150 102 78 36
----------- ----------- ----------- ----------
Other Expenses
Salaries and employee benefits 1,022 792 373 267
Occupancy and equipment expense 323 212 126 46
Other operating expenses 714 669 241 328
----------- ----------- ----------- ----------
Total other expenses 2,059 1,673 740 641
----------- ----------- ----------- ----------
Income before income taxes 244 165 19 (38)
Income tax expense (benefit) 79 3 46 1
----------- ----------- ----------- ----------
Net income $ 165 $ 162 $ (27) $ (39)
=========== =========== =========== ==========
Earnings Per Share, basic $ 0.07 $ 0.09 $ (0.01) $ (0.02)
Earnings Per Share, assuming dilution $ 0.07 $ 0.09 $ (0.01) $ (0.02)
Notes to financial statements are an integral part of these statements.
</TABLE>
4
<PAGE>
<TABLE>
Consolidated Statements of Change in Stockholders' Equity
Nine Month Periods Ended September 30, 1999 and September 30, 1999
(dollars in thousands, unaudited)
<CAPTION>
Accumulated
Other
Comprehensive Retained Comprehensive Common Capital
Total Income Earnings Income(loss) Stock Surplus
------------ ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1998 $ 4,730 $ (105) $ 18 $ 1,490 $ 3,327
Comprehensive income
Net income 162 $ 162 162
Unrealized holding gain(loss) arising
during period net of tax 101
Less reclassification adjustment
Other comprehehsive income, net of tax 101 101 - 101
-------------
Total comprehensive income $ 263
=============
Stock options exercised 10 3 7
Repurchase of stock in odd lot tender (15) (3) (12)
Issuance of common stock 4,013 805 3,208
------------ ------------ ------------- ------------ ------------
Balance September 30, 1998 $ 9,001 $ 57 $ 119 $ 2,295 $ 6,530
============ ============ ============= ============ ============
Balance January 1, 1999 $ 8,928 $ 29 $ 74 $ 2,295 $ 6,530
Comprehensive income
Net income 165 $ 165 165 - - -
Unrealized holding gain(loss) arising
during period net of tax - (290) - - - -
Loss reclassification adjustment -
-------------
Other comprehehsive income, net of tax (290) (290) - (290) - -
Total comprehensive income $ (125)
------------ ============= ------------ ------------- ------------ ------------
Balance September 30, 1999 $ 8,803 $ 194 $ (216)$ 2,295 $ 6,530
============ ============ ============= ============ ============
</TABLE>
5
<PAGE>
<TABLE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998
(dollars in thousands, unaudited)
<CAPTION>
Nine months ended September 30,
Cash flows from operating activities 1999 1998
----------------- -----------------
<S> <C> <C>
Net income $ 165 $ 162
Adjustments to reconcile net income(loss) to net
cash provided by (used in ) operating activities
Provision for loan losses 18 102
Depreciation and amortization 56 35
(Gain) loss on sale of available for sale investments (1) 1
Amortization of investment security premiums, net of discount (1) 26
Increase in accrued interest and other assets (254) (446)
Increase (decrease) in accrued interest and other liabilities (40) -
----------------- -----------------
Net cash used in operating activities (57) (120)
----------------- -----------------
Cash flows from investing activities
Maturities and calls of securities available for sale 8,819 7,000
Maturities of securities held-to-maturity - 250
Purchase of securities available for sale (12,552) (16,524)
Proceeds from sale of securities available for sale 646 499
Net (increase) decrease in loans 432 (4,402)
Purchase of premises and equipment (816) (2)
----------------- -----------------
Net cash provided by (used in) investing activities (3,471) (13,179)
----------------- -----------------
Cash flows from financing activities
Increase (decrease) in demand deposits, NOW
accounts and savings deposits (2,365) 913
Increase (decrease) in time deposits (862) 2,636
Proceeds from sale of common stock - 4,023
Repurchase of common stock - (15)
Increase in securities sold under agreement to repurchase 1,816 1,922
----------------- -----------------
Net cash provided by (used in) financing activities (1,411) 9,479
----------------- -----------------
Net change in cash and cash equivalents (4,939) (3,820)
Cash and cash equivalents, beginning of period 14,375 9,587
----------------- -----------------
Cash and cash equivalents, end of period $ 9,436 $ 5,767
================= =================
Supplemental disclosures of cash flow information Cash payments for:
Interest 1,089 916
Income taxes 32 -
Supplemental schedule of noncash investing activities
Unrealized gain (loss) on securities available for sale (325) 175
Notes to financial statements are an integral part of these statements.
</TABLE>
6
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) Basis of Presentation. The consolidated financial statements included herein
have been prepared by Heritage Bancorp, Inc. (the "Company"), 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 Company 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. The consolidated statements include the accounts of Heritage
Bancorp, Inc. and its subsidiary, The Heritage Bank (the "Bank"). All
significant intercompany balances and transactions have been eliminated.
(2) Accounting Policies. The interim financial information should be read in
conjunction with the Company's 1998 Annual Report on Form 10-KSB. Management is
required to make estimates and assumptions that effect amounts reported in the
financial statements. Actual results could differ significantly from estimates.
(3) 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>
September 30, 1999 September 30, 1998
Per Share Per Share
Shares Amount Shares Amount
- ---------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic earnings per share 2,294,617 $ .07 1,714,071 $ .09
Effect of dilutive securities: Stock options 29,455 20,190
Diluted earnings per share 2,324,072 $ .07 1,734,261 $ .09
</TABLE>
(4) Holding Company Formation. On October 1, 1998, the Heritage Bank became a
wholly-owned subsidiary of Heritage Bancorp, Inc., a newly formed stock holding
company, pursuant to an agreement and plan of reorganization approved by the
Bank's shareholders on August 26, 1998. Upon completion of the reorganization,
holders of the Bank's common stock became holders of Heritage Bancorp, Inc.
common stock in a share for share exchange. The common stock of Heritage
Bancorp, Inc. trades on the Nasdaq SmallCap Market under the symbol "HBVA."
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The following discussion of the financial condition and results of
operations of Heritage Bancorp, Inc. (the "Company"), a Virginia corporation,
should be read in conjunction with the Company's financial statements and 1998
annual report on form 10-KSB. Results reflect the operations of the Company and
The Heritage Bank, the Company's wholly owned subsidiary (the "Bank"), a
Virginia chartered commerical bank, during the nine months ended September 30,
1999 and 1998.
The 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 to
medium sized business and consumer needs in its market area. The Bank also is
7
<PAGE>
committed to providing personalized quality service to its customers by
tailoring its products and services to appeal to its local market. The Bank
currently operates two full-service offices 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 and the Sterling area of Loudoun County.
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. 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, money market
accounts, certificates of deposit, installment accounts, construction and other
personal loans, home improvements loans 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 gross proceeds. After offering expenses and
underwriting commission, the Bank received $4,012,204 in new capital from the
offering.
8
<PAGE>
The selected financial ratios and other data of the Company set forth
below are derived in part from, and should be read in conjunction with, the
Unaudited Financial Statements of the Company and Notes thereto presented
elsewhere in this report.
<TABLE>
SELECTED FINANCIAL DATA
<CAPTION>
For the Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
(dollars in thousands , unaudited)
Summary of operating results:
<S> <C> <C>
Total interest income $ 3,263 $ 2,759
Total interest expense 1,092 921
--------- --------
Net interest income 2,171 1,838
Provision for loan losses 18 102
--------- --------
Net interest income after provision for loan losses 2,153 1,736
Other income 150 102
Other expenses 2,059 1,673
--------- --------
Income before taxes 244 165
Income tax expense(1) 79 3
--------- --------
Net income $ 165 $ 162
========= ========
Per share:
Basic earnings per share $ 0.07 $ 0.09
Diluted earnings per share $ 0.07 $ 0.09
Book value at period end $ 3.84 $ 3.92
Common shares outstanding 2,294,617 2,294,617
Balance sheet data (at period end): September 30, 1999 December 31, 1998
------------------ -----------------
Loans, net of unearned interest $29,186 $29,610
Allowance for loan losses 437 429
Total assets 63,198 64,776
Total deposits 50,215 53,442
Total stockholders' equity 8,803 8,928
Performance and asset quality ratios:
Return on average total assets (3) .36% 0.26%
Return on average stockholders' equity (3) 2.54 1.79
Average stockholders' equity to average total assets 14.28 14.47
Non-accrual and past due loans to total loans 1.12 1.35
Allowance for loan losses to total loans 1.50 1.45
Net yield 3.90 3.87
Net interest margin(2) 5.05 5.09
</TABLE>
(1) At December 31, 1998, the Company had available approximately $129,000
of an operating loss carryforward which could be offset against future
income. In 1999, the operating loss carryforward has been fully
utilized.
(2) Net interest margin is calculated as net interest income divided by
average earning assets and represents the Company's net yield on its
earning assets.
(3) Annualized for the nine months ended September 30, 1999.
9
<PAGE>
Comparison of Financial Condition at September 30, 1999 and December 31, 1998.
------------------------------------------------------------------------------
As of September 30, 1999 the Company's total assets were $63,198,000 as
compared to $64,776,000 as of December 31, 1998 which represented a decrease of
2.4%. The 1999 decline in total assets of $1,578,000 was primarily due to the
loss of funds provided by a one time $8,000,000 deposit into attorneys escrow
accounts at the end of fiscal year 1998. These funds were withdrawn the first
week of January 1999 decreasing total deposits. Total deposits decreased by 6.0%
or $3,227,000 to $50,215,000 at September 30, 1999 from $53,442,000 at December
31, 1998.
Repurchase agreements at September 30, 1999 were $4,103,000 or 79.4%
greater than the December 31, 1998 balance of $2,287,000. The Bank increased the
offering of repurchase agreements for customers with larger short term funds.
Federal funds sold and cash and due from banks represent the Company's
cash and cash equivalents. Federal funds sold and cash and cash due from banks
at September 30, 1999 totaled $9,436,000 compared to $14,375,000 at December 31,
1998, representing a decrease of $4,939,000, or 34.4%. Federal funds sold
represented $850,000 of the decrease with cash and due from banks decreasing
$4,089,000. The decrease in due from banks was attributable to large clearing
balances at the Federal Reserve at December 31, 1998.
Securities available for sale increased $3,199,000 or 16.1% to
$23,023,000 at September 30, 1999 from $19,824,000 at December 31, 1998. This
investment in securities was made to increase the yield on earning assets as
compared to the lower yield of Federal Funds Sold.
Net loans were $28,749,000 at September 30, 1999 as compared to
$29,181,000 at December 31, 1998. This decrease of $432,000 or 1.5% was
primarily due to usual pay down on loans and increased competition for new
loans.
Results of Operations for the Three Months Ended September 30, 1999 and 1998.
- -----------------------------------------------------------------------------
Net income. The Company reported a net loss for the three months ended
September 30, 1999 of $27,000 or ($.01) basic and diluted earnings per share as
compared to the $39,000 net loss or ($.02) basic and diluted earnings per share
for the same period of 1998. The net loss represents an increase of $12,000 or
30.8% in net income from September 30, 1998 as compared to the same period of
1999. The Company had used all of its loss carryforward for tax purposes at the
end of 1998. The net loss for the third quarter ended September 30, 1999 was
created by an adjustment of $46,000 to federal income taxes to reflect this
change in tax position as compared to $1,000 for the third quarter ended
September 30, 1998.
Net interest income. Net interest income is the difference between
interest earned on loans, investment securities and short term investments, and
the interest paid on deposits and repurchase agreements. Factors affecting net
interest income include interest rates earned on loans and investments and those
paid on deposits and repurchase agreements, the mix and volume of earning assets
and interest bearing liabilities and the level of non-earning assets and
non-interest bearing liabilities. Net interest income for the quarter ended
September 30, 1999 increased $21,000 or 3.2% over the same quarter of 1998.
Non-interest income. During the three month period ended September 30,
1999 non-interest income increased $42,000 over the same period of 1998. This
increase resulted from increased overdraft and return check charges, loan
service fees and other commission fees such as ATM fees and merchant discount
fees.
Non-interest expense. In the third quarter of 1999 non-interest
expenses increased $99,000 or 15.4% over the same period of 1998 due to
increased operational and facility costs due to the Sterling branch which opened
in April of 1999 and additional space rented for operational expansion at the
Main office address in 1999. These increased leases raised rental expense by
10
<PAGE>
$49,000 for the three months ended September 30, 1999 as compared to the same
period of 1998. Additional salaries of $41,000 due to increase employees at the
Sterling branch also contributed to the increased non-interest expenses for the
quarter.
Provision for loan losses. In view of the loan growth for 1999 and the
fact that there was no deterioration in the Bank's loan portfolio, a provision
of $5,000 was made for loan losses in the third quarter of 1999. The allowance
for loan losses at September 30, 1999 was 1.50% of outstanding loans. A
provision of $98,000 was made for loan losses in the third quarter of 1998 to
return the reserve for loan losses to an acceptable level. The reserve had been
reduced due to a charge resulting from the settlement of a law suit. At
September 30, 1998 the allowance for loan losses was 1.45% of outstanding loans.
The level of the allowance for loan losses is based upon management's 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 and other factors, both within and
outside management's control.
Income Taxes. The Company recognized a net income tax expense of
$46,000 in the third quarter of 1999, as compared to $1,000 in the same period
of 1998. A net operating loss carryforward of the Company became completely
utilized for accounting purposes by June 30, 1999.
Results of Operations for the Nine Months Ended September 30, 1999 and 1998.
- ----------------------------------------------------------------------------
Net income. The Company reported net income for the nine months ended
September 30, 1999 of $165,000 or $.07 basic and diluted earnings per share as
compared to $162,000 net income or $.09 basic and diluted earnings per share for
the same period of 1998. The net income represents an increase of $3,000 or 1.9%
in net income from September 30, 1998 as compared to the same period of 1999.
Net interest income. Net interest income is the difference between
interest earned on loans, investment securities and short term investments, and
the interest paid on deposits and repurchase agreements. Factors affecting net
interest income include interest rates earned on loans and investments and those
paid on deposits and repurchase agreements, the mix and volume of earning assets
and interest bearing liabilities and the level of non-earning assets and
non-interest bearing liabilities. Net interest income for the nine months ended
September 30, 1999 increased $333,000 or 18.1% over the same nine months of
1998. Although total loans, the highest yielding earning asset, decreased, the
mix of earning assets and interest bearing liabilities created increased net
interest income.
Non-interest income. During the nine month period ended September 30,
1999 non-interest income increased $48,000 over the same period of 1998. This
increase resulted from increased overdraft and return check charges, loan
service fees and other commission fees such as ATM fees and merchant discount
fees.
Non-interest expense. During the nine month period ended September 30,
1999 non-interest expenses increased $386,000 or 23.1% over the same period of
1998. This increase was partially due to increased operational and facility
costs of the Sterling branch that opened in April of 1999 and additional space
rented for operational expansion at the Main office address in 1999. These
increased leases raised occupancy and equipment expense by $111,000 for the nine
months ended September 30, 1999 as compared to the same period of 1998.
Additional salaries and benefits of $103,000 due to the increase in employees of
11
<PAGE>
the Sterling branch also contributed to the increased non-interest expenses for
the quarter. Incentive bonuses of $52,000 were paid to employees during the nine
months ended September 30, 1999. Salaries and benefits increased partially due
to $15,000 in severance pay to Bank employees during 1999. Other expenses
increased by $105,000 caused by legal fees and consultant fees in connection
with a possible branch location in Great Falls, Virginia. Other expenses were
also affected by $40,000 of non-loan charge-offs, of which a large part was the
payment due under the terms of a lawsuit settled in March 1999.
Provision for loan losses. In view of the loan balances for 1999 and
the fact that there was no deterioration in the Bank's loan portfolio, a
provision of $18,000 was made for loan losses in the nine months ended September
30, 1999. A provision of $102,000 was made for loan losses in the nine months
ended September 30, 1998 to return the reserve for loan losses to an acceptable
level. The reserve had been reduced due to a charge resulting from the
settlement of a lawsuit. The allowance for loan losses at September 30, 1999 was
1.50% of outstanding loans. At September 30, 1998 the allowance for loan losses
was 1.45% of outstanding loans. The level of the allowance for loan losses is
based upon management's 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. Additions
may be necessary based on changes in economic and real estate market conditions,
further information obtained regarding known problem loans, identification of
additional problem loans and other factors, both within and outside management's
control.
Income Taxes. The Company recognized a net income tax expense of
$79,000 in the first nine months of 1999, as compared to $3,000 in the same
period of 1998. A net operating loss carryforward of the Company became
completely utilized for accounting purposes by June 30, 1999.
Loan Quality
- ------------
The Bank attempts to manage the risk characteristics of its loan
portfolio through various control processes, such as credit evaluation of
borrowers, establishment of lending limits and application of lending
procedures, including the holding of adequate collateral and the maintenance of
compensating balances. However, the Bank seeks to rely primarily on the cash
flow of its borrowers as the principal source of repayment. Although credit
policies are designed to minimize risk, management recognizes that loan losses
will occur and that the amount of these losses will fluctuate depending on the
risk characteristics of the loan portfolio as well as general and regional
economic conditions.
The allowance for loan losses represents a reserve for potential losses
in the loan portfolio. The adequacy of the allowance for loan losses is
evaluated periodically based on a review of all significant loans, with a
particular emphasis on non-accruing, past due and other loans that management
believes require special attention. As of September 30, 1999, the Company had
loans for $326000 in non-accrual or 90 days past due as compared to $838,000 in
non-accrual or 90 days past due as of September 30, 1998.
For significant problem loans, management's review consists of
evaluation of the financial strengths of the borrower, the related collateral,
and the effects of economic conditions. Specific reserves against the remaining
loan portfolio are based on analysis of historical loan loss ratios, loan
charge-offs, delinquency trends, and previous collection experience, along with
an assessment of the effects of external economic conditions.
12
<PAGE>
The provision for loan losses is a charge to earnings in the current
period to replenish the allowance and maintain it at a level management has
determined to be adequate. The Company made a provision for loan losses for the
nine months ended September 30, 1999 of $18,000 as compared to $102,000 in the
same period of 1998. The Bank's total loan balances decreased with no decreases
in the loan quality and therefore management determined the above provision was
more than adequate.
As of September 30, 1999, the allowance for loan losses was 1.50% of
outstanding loans, which was an increase from September 30, 1998 percentage of
1.45%. Management's judgment as to the level of future losses on existing loans
is based on management's internal review of the loan portfolio, including an
analysis of the borrowers' current financial position, the consideration of
current and anticipated economic conditions and their potential effects on
specific borrowers, an evaluation of the existing relationships among loans,
potential loan losses, and the present level of the loan loss allowance; and
results of examinations by independent consultants. In determining the
collectibility of certain loans, management also considers the fair value of any
underlying collateral. However, management's determination of the appropriate
allowance level is based upon a number of assumptions about future events, which
are believed to be reasonable, but which may or may not prove valid. Thus, there
can be no assurance that charge-offs in future periods will not exceed the
allowance for loan loss or that additional increases in the loan loss allowance
will not be required.
An analysis of the allowance for loan losses is as follows:
Loan Loss Reserve
Balance at December 31, 1998 $429,000
Provision for loan losses 18,000
Charge-offs (20,000)
Recoveries 10,000
--------
Balance at September 30, 1999 $437,000
========
Capital Resources
- -----------------
Stockholders' equity was $8,803,000 as of September 30, 1999 as
compared to $8,928,000 as of December 31, 1998. The $125,000 decrease, or 1.4%,
was partially due to a $290,000 reduction in the unrealized gain on investment
securities available-for-sale which was offset by net income of $165.000. No
dividends have been declared by the Company since its inception. In addition, no
options under the Stock Option Plan have been exercised during 1999.
Under the Federal Reserve's capital regulations, for as long as the
Company's assets are under $150 million, the Company's capital ratios are
reviewed on a bank-only basis. The Bank exceeded its capital adequacy
requirements as of September 30, 1999 and December 31, 1998. The Company
continually monitors its capital adequacy ratios to assure that the Bank remains
within the guidelines.
Liquidity and Interest Rate Sensitivity
- ---------------------------------------
The primary objective of asset/liability management is to ensure the
steady growth of the Company's primary earnings component, net interest income.
Net interest income can fluctuate with significant interest rate movements. To
lessen the impact of these rate swings, management endeavors to structure the
balance sheet so that repricing opportunities exist for both assets and
liabilities in roughly equivalent amounts at approximately the same time
intervals. Imbalances in these repricing opportunities at any point in time
constitute interest rate sensitivity.
13
<PAGE>
The measurement of the Company's interest rate sensitivity, or "gap,"
is one of the principal techniques used in asset/liability management.
Interest-sensitive gap is the dollar difference between assets and liabilities
which are subject to interest-rate repricing within a given time period,
including both floating rate or adjustable rate instruments and instruments
which are approaching maturity.
In theory, interest rate risk can be diminished by maintaining a
nominal level of interest rate sensitivity. In practice, this is made difficult
by a number of factors, including cyclical variations in loan demand, different
impacts on interest-sensitive assets and liabilities when interest rates change,
and the availability of funding sources. Accordingly, the Company undertakes to
manage the interest-rate sensitivity gap by adjusting the maturity of and
establishing rate prices on the earning asset portfolio and certain
interest-bearing liabilities to keep it in line with management's expectations
relative to market interest rates. Management generally attempts to maintain a
balance between rate-sensitive assets and liabilities as the exposure period is
lengthened to minimize the overall interest rate risk to the Company.
The Bank's Executive Committee that oversees the asset/liability
management function meets periodically to monitor and manage the structure of
the balance sheet, control interest rate exposure, and evaluate pricing
strategies for the Company. The asset mix of the balance sheet is continually
evaluated in terms of several variables: yield, credit quality, appropriate
funding sources and liquidity. Management of the liability mix of the balance
sheet focuses on expanding the various funding sources.
Securities maintained in the available-for-sale portfolio may be sold
prior to maturity in order to provide the Company and the Bank with increased
liquidity. Available-for-sale investment securities totaled $23,023,000 and
$19,824,000 as of September 30, 1999 and December 31, 1998.
Year 2000 Issues
The year 2000 problem centers on the inability of computer systems to
recognize the "00" digits as 2000 rather than 1900. Like most financial service
providers, the Bank may be significantly affected 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.
In addition, noninformation technology systems, such as telephones,
copiers and elevators may contain embedded technology which controls its
operations and which may be affected by the year 2000 problem. Thus, even these
technology systems may affect the normal operations of the Company upon the
arrival of the year 2000.
To address the year 2000 problem, the Bank hired an outside consultant
to assess the impact on the Bank. Because the Bank outsources its data
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 substantially completed or completed the corrections
to the applicable computer programs and replaced equipment so that the Bank's
information systems will be year 2000 compliant prior to the year 2000. The Bank
has devoted substantial time to the testing of the upgraded systems in order to
comply with all applicable regulations.
14
<PAGE>
The Company's timetable for working on the year 2000 problem is divided
into the following five phases:
<TABLE>
<CAPTION>
Phase Description Status
- ----------------------- -------------------------------------------------------- ------------------
<S> <C>
1. Awareness Define the problem. Completed 11/1/97
2. Assessment Identify all systems and the criticality of systems . Completed 6/1/98
3. Renovation Program enhancements, hardware and software Completed 6/30/99
upgrades, system replacements, and vendor
certifications.
4. Validation Test and verify system changes. Completed 12/30/98
5. Implementation Components certified as year 2000 Completed 6/30/99
compliant and moved to production.
</TABLE>
Contingency Planning. The Bank has a contingency plan to keep the Bank
in operation in the event that some year 2000 problems have been overlooked and
system malfunctions occur at the turn of the century. This plan was developed by
the Bank's outside consultant with the help of management. The Company has
developed contingency or alternate plans for its mission critical systems on a
department by department basis in anticipation of potential unplanned system
difficulties or third-party failures at January 1, 2000 or dates beyond.
However, the Bank understands that certain events beyond its control such as
extended power outages and loss of telecommunications, may diminish its ability
to provide minimum levels of service. Failure of these services will affect
companies, individuals and the government, and cannot be remedied by anyone
other than the responsible party. For some systems, contingency plans consist of
using or reverting to manual systems until the problems can be corrected.
While the Company expects to complete its year 2000 project in a timely
manner, it cannot guarantee that the systems of companies with whom it conducts
business, will also be completed in a timely manner. The failure of these
entities to adequately address the year 2000 problem could adversely affect the
Company's ability to conduct business.
Costs. The Company currently estimates its total direct and indirect
cost will be $35,000. To date, the Company has spent $31,000 on year 2000
issues. 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.
Financial Services Modernization Bill
- -------------------------------------
In October 1999, the U.S. Congress overwhelmingly passed the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999, federal
legislation intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers. The legislation has been forwarded to the President for his approval.
Generally, the legislation would (i) repeal the historical restrictions and
eliminate many federal and state law barriers to affiliations among banks,
securities firms, insurance companies and other financial service providers,
(ii) provide a uniform framework for the functional regulation of the activities
of banks, savings institutions and their holding companies, (iii) broaden the
activities that may be conducted by national banks, banking subsidiaries of bank
holding companies and their financial subsidiaries, (iv) provide an enhanced
framework for protecting the privacy of consumer information, (v) adopt a number
of provisions related to the capitalization, membership, corporate governance
and other measures designed to modernize the Federal Home Loan Bank systems,
(vi) modify the laws governing the implementation of the Community Reinvestment
Act and (vii) address a variety of other legal and regulatory issues affecting
both day-to-day operations and long-term activities of financial institutions.
15
<PAGE>
Bank holding companies, such as the Company, would be permitted to
engage in a wider variety of financial activities than permitted under current
law, particularly with respect to insurance and securities activities. In
addition, in a change from current law, bank holding companies will be in a
position to be owned, controlled or acquired by any company engaged in
financially related activities.
We do not believe that the proposed legislation, as publicly reported,
would have a material adverse effect on our operations in the near term.
However, to the extent the legislation permits banks, securities firms and
insurance companies to affiliate, the financial services industry may experience
further consolidation. This could result in a growing number of larger financial
institutions that offer a wider variety of financial services than we currently
offer and that can aggressively compete in the markets we currently serve.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of Stockholders of Heritage Bancorp, Inc. was held on
September 9, 1999. The following eight directors were elected to serve the
designated staggered terms or until their successors have been elected.
Votes Cast :
---------------------------
Director Term Expires: For Witheld
-------- ------------- --------- -------
Ronald W. Kosh 2000 1,876,335 93,026
George P. Shafran 2000 1,873,179 96,182
Terrie G. Spiro 2000 1,877,037 92,324
George K. Degnon 2001 1,876,235 93,126
Kevin P. Tighe 2001 1,868,443 100,918
Stanley I. Richards 2002 1,876,235 93,126
Harold E. Lieding 2002 1,872,411 96,950
Philip F. Herrick, Jr. 2002 1,856,562 112,799
In addition the appointment of Yount, Hyde & Barbour, P.C., as the Company's
independent public auditors for the fiscal year ending December 31, 1999 was
ratified by 1,945,924 for votes, 15,198 against and 8,239 abstained.
ITEM 5. OTHER INFORMATION
None.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits required by Item 601 Regulation S-K:
Exhibit 27: Financial Data Schedule
B. Reports on Form 8-K:
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HERITAGE BANCORP, INC.
(Registrant)
BY: /s/Terrie G. Spiro ,
----------------------------
Terrie G. Spiro, President, Chief
Executive Officer, and Director
BY: /s/Janet A. Valentine,
----------------------------
Janet A. Valentine, Secretary,
Executive Vice President and Chief
Financial Officer
Date: November 12, 1999
18
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information derived from Heritage
Bancorp, Inc.'s unaudited financial statements for the nine months ended
September 30, 1999, and is qualified in its entirety by reference to such
financial statements and the notes thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,736,000
<INT-BEARING-DEPOSITS> 36,759,000
<FED-FUNDS-SOLD> 7,700,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,023,000
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 29,186,000
<ALLOWANCE> 437,000
<TOTAL-ASSETS> 63,198,000
<DEPOSITS> 50,215,000
<SHORT-TERM> 4,103,000
<LIABILITIES-OTHER> 77,000
<LONG-TERM> 0
0
0
<COMMON> 2,295,000
<OTHER-SE> 6,508,000
<TOTAL-LIABILITIES-AND-EQUITY> 8,803,000
<INTEREST-LOAN> 2,014,000
<INTEREST-INVEST> 1,036,000
<INTEREST-OTHER> 213,000
<INTEREST-TOTAL> 3,263,000
<INTEREST-DEPOSIT> 1,029,000
<INTEREST-EXPENSE> 1,092,000
<INTEREST-INCOME-NET> 2,171,000
<LOAN-LOSSES> 18,000
<SECURITIES-GAINS> 1,000
<EXPENSE-OTHER> 2,059,000
<INCOME-PRETAX> 244,000
<INCOME-PRE-EXTRAORDINARY> 244,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 165,000
<EPS-BASIC> .07
<EPS-DILUTED> .07
<YIELD-ACTUAL> 4.85
<LOANS-NON> 3,000
<LOANS-PAST> 323,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 564,000
<ALLOWANCE-OPEN> 429,000
<CHARGE-OFFS> 20,000
<RECOVERIES> 10,000
<ALLOWANCE-CLOSE> 437,000
<ALLOWANCE-DOMESTIC> 200,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 237,000
</TABLE>
