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 March 31, 1999
Commission file Number 000-24933
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 of Organization) Identification No.)
1313 Dolley Madison Blvd., McLean, Va. 22101
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER
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(d) OF
EXCHANGE ACT 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 April 15,1999: 2,294,617
1
<PAGE>
INDEX
HERITAGE BANCORP,INC.
Part 1 Financial Information Page
Item 1 Financial Statements
Balance Sheets
March 31, 1999 and December 31, 1998 3
Statement of income
Three months ended March 31, 1999 and 1998 4
Statement of Stockholders Equity
Three months ended March 31, 1999 and 1998 5
Statement of Cash Flows
Three months ended March 31, 1999 and 1998 6
Notes to Financial Statements 7
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of operation 8
and Selected Financial Data
Part II. Other Information: 16
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
2
<PAGE>
<TABLE>
ITEM I.
Part I. Financial Information
HERITAGE BANCORP,INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands, unaudited)
<CAPTION>
ASSETS MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
Cash and due from banks $ 1,870 $ 5,825
Federal Funds Sold 6,000 8,550
Total Cash and Due From Banks 7,870 14,375
Securities available for sale 22,757 19,824
Securities held to maturity 0 0
Loans, Net 28,665 29,181
Premises and Equipment, Net 454 376
Other Real Estate Owned 263 263
Accrued Int and other Assets 1,041 $ 757
--------- ---------
TOTAL ASSETS $ 61,050 $ 64,776
========= =========
LIABILITIES
Noninterest bearing deposits $ 12,562 $ 17,386
Interest bearing deposits 38,060 36,056
--------- ---------
TOTAL DEPOSITS 50,622 53,442
Repurchase agreements 1,278 2,287
Other liabilities 119 119
--------- ---------
TOTAL LIABILITIES 52,019 55,848
--------- ---------
CAPITAL
Common Stock 2,295 2,295
Surplus 6,530 6,530
Undivided profits 205 28
Accumulated other comprehensive
income net 1 75
--------- ---------
TOTAL CAPITAL 9,031 8,928
--------- ---------
TOTAL CAPITAL AND LIABILITIES $ 61,050 $ 64,776
========= =========
Notes to financial statements are an
integral part of these statements.
</TABLE>
3
<PAGE>
HERITAGE BANCORP,INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATION
Three Months Ending March 31, 1999
Three Months Ended
-----------------------------------
INTEREST INCOME March 31, 1999 March 31, 1998
-------------- --------------
Loans $ 699,000 $ 553,000
Securities 319,000 227,000
Federal Funds Sold 81,000 57,000
---------- ----------
Total interest income $1,099,000 $ 837,000
INTEREST EXPENSE
Interest checking deposit 36,000 31,000
Other time deposit 241,000 198,000
Cert.of deposit $100,000 or more 71,000 45,000
Repurchase agreements 12,000 3,000
---------- ----------
Total interest expense 360,000 277,000
Net interest income 739,000 560,000
Provision for loan losses 7,000 2,000
---------- ----------
Net interest income after
provision for loan losses 732,000 558,000
OTHER INCOME
Service charges on deposit accounts 26,000 25,000
Other operating income, net 8,000 7,000
Gain or loss on sale of securities 0 0
---------- ----------
Total other income 34,000 32,000
OTHER EXPENSES
Salaries and employee benefits 295,000 264,000
Occupancy expense 77,000 74,000
Equipment expense 14,000 10,000
Other operating expenses 184,000 141,000
---------- ----------
Total other expenses 570,000 489,000
Income before income taxes 196,000 101,000
Income tax 19,000 0
---------- ----------
NET INCOME $ 177,000 $ 101,000
========== ==========
Basic income per share $ 0.08 $ 0.07
Diluted income per share $ 0.08 $ 0.07
Weighted avg shares outstanding 2,294,617 1,489,636
Notes to financial statements are an integral part of these statements.
4
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<TABLE>
HERITAGE BANCORP,INC. AND SUBSIDIARY
Consolidated Statements of Change in Stockholder's Equity
For Three Months Ended March 31, 1999 and March 31 1998
(Dollars in Thousands,unaudited)
<CAPTION>
Accumulated
other
Comprehensive etained comprehensive Capital
Total income arnings income Common stock surplus
----- ------------- ------- ------------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Balances January 1 1998 $ 4,730 $ (105) $ 18 $ 1,490 $ 3,327
Comprehensive income
Net income 101 $ 101 101 - - -
Other comprehensive income net of tax - - - - - -
Unrealized holding gain(loss) arising during period (15) (15) - (15) - -
net of tax of $(8)
Less reclassification adjustment - - - - - -
Other comprehensive income, net of tax (15) (15) - (15) - -
------ ------ ------
Total comprehensive income 86 $ 86 - - -
------ ====== ------- ------- -------
Balances March 31 1998 $4,816 $ (4) $ 3 $ 1,490 $ 3,327
====== ======= ====== ======= =======
Balances January 1 1999 $ 8,928 $ 28 $ 75 $ 2,295 $ 6,530
Comprehensive income
Net income 177 $ 177 177 - - -
Other comprehensive income net of tax - - - - - -
Unrealized holding gain(loss) arising during period (74) (74) - (74) - -
net of tax of $(39)
Less reclassification adjustment 0 0 - 0 - -
------ ------ ------
Other comprehensive income, net of tax (74) (74) - (74) - -
------ ------ ------
Total comprehensive income $ 103 $ 103 - -
------ ======
Balances March 31 1999 $9,031 $ 205 $ 1 $ 2,295 $ 6,530
====== ======= ====== ======= =======
</TABLE>
5
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<TABLE>
HERITAGE BANCORP, INC. AND
SUBSIDIARY
Consolidated Statements of Cash Flows Three months Ended
(In Thousands of Dollars) ---------------------------
Mar 31, 1999 Mar. 31, 1998
------------ -------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 177 $ 101
Adjustments to reconcile net income(loss) to net
cash provided by (used in) operating activities
Provision for loan losses 7 2
Depreciation and amortization 12 73
Amortization of investment security
premiums, net of discount 9 6
(Increase)decrease in accrued interest and
other assets (259) (210)
(Increase)Decrease in accrued interest and other
liabilities 0 (6)
------- -------
Net cash provided by(used in) operating activities $ (54) $ (34)
------- -------
Cash Flows From Investing Activities
Maturities of securities available-for-sale $ 4,000 $ 3,250
Purchases of securities available-for-sale (7,055) (5,497)
(Increase)decrease in loans 523 (445)
Purchase of premises and equipment (90) 0
------- -------
Net cash provided by (used in) investing activities $(2,622) $(2,692)
------- -------
Cash Flows From Financing Activities
(Decrease) in non interest-bearing deposits $(4,824) $(2,861)
Increase(Decrease)in certif of deposits and savings 2,004 1,640
Increase(Decrease) in securities sold under repurchase
agreement. (1,009) 315
------- -------
Net cash provided by (used in) financing activities $(3,829) $ (906)
------- -------
Net change in cash and cash equivalents (6,505) $(3,632)
Cash and cash equivalents, beginning of year 14,375 9,587
------- -------
Cash and cash equivalents, end of period $ 7,870 $ 5,955
======= =======
</TABLE>
6
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HERITAGE BANCORP,INC.
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 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.
(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 affect 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.
March 31, 1999 March 31,1998
--------------------------------------------------------
Per Share Per Share
Shares Amount Shares Amount
------ ------ ------ ------
Basic earnings
per share 2,294,617 $ .08 1,489,636 $ .07
======== ========
Effect of dilutive
securities:
Stock options 55,550 37,375
Warrants 0 0
--------- --------
Diluted earnings
per share 2,350,167 $ .08 1,527,011 $ .07
========= ======== ========= ========
(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. will continue to
trade on the Nasdaq SmallCap Market under the symbol "HBVA."
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The following discussion and analysis of financial condition and
results of operations, unless otherwise disclosed, presented in this quarterly
report on Form 10-QSB represents the activities of the Company for the quarter
ended March 31, 1999 and should be read in conjunction with the financial
statements of the Company included in this Form 10-QSB.
Heritage Bancorp, Inc. (the "Company"), a Virginia corporation, is the
holding company for The Heritage Bank (the "Bank"), a Virginia chartered
commercial bank. On October 1, 1998, the Company acquired all of the capital
stock of the Bank and shareholders of the Bank became shareholders of the
Company in a share for share exchange pursuant to a plan of reorganization
approved by the Bank's shareholders on August 26, 1998, whereby the Bank became
the wholly-owned subsidiary of the Company (the "Reorganization"). The Company's
sole business activity is ownership of the Bank. The Company's common stock
trades on the Nasdaq SmallCap Market under the symbol "HBVA".
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
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 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 primarily in the McLean and Sterling areas. 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 gross proceeds. After offering expenses and
underwriting commission , the Bank received $4,012,204 in new capital from the
offering.
8
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<TABLE>
The selected financial ratios and other data of the Company set forth
below is 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.
SELECTED FINANCIAL DATA
<CAPTION>
For the Three Months For the Three Months
Ended Mar. 31, 1999 Ended Mar. 31, 1998
---------------------------------------------------
(Dollars in thousands)
(Unaudited)
<S> <C> <C>
Summary of operating results:
Total interest income............................... $1,099 $ 837
Total interest expense.............................. 360 277
------ -------
Net interest income................................. $ 739 $ 560
Provision for (recovery of) loan losses............. 7 2
------ -------
Net interest income after provision for
(recovery of)loan losses......................... $ 732 $ 558
Other income........................................ 34 32
Other expenses...................................... 570 489
------ -------
Income (loss) before taxes.......................... 196 101
Income tax expense (benefit)(1)..................... 19 0
------ -------
Net income (loss)................................... $ 177 $ 101
====== =======
Per share:
Basic earnings (loss) per share..................... $ 0.08 $ 0.07
Diluted earnings (loss) per share................... 0.08 0.07
Cash dividend declared.............................. 0 0
Book value at period end............................ 3.94 3.26
Common shares outstanding........................... 2,294,617 1,489,636
Balance sheet data (at period end): March 31, 1999 December 31, 1998
---------------- -----------------
Loans, net of unearned interest..................... $ 29,083 $ 29,610
Allowance for loan loss............................. 418 429
Total assets........................................ 61,050 64,776
Total deposits...................................... 50,622 53,442
Total stockholders' equity.......................... 9,031 8,928
Performance and asset quality ratios:
Return on average total assets (3).................. 1.18% 0.26%
Return on average stockholders' equit (3)........... 7.84 1.79
Average stockholders' equity to average total
assets........................................... 15.07 12.00
Non-accrual and past due loans to total loans....... 0.46 14.47
Allowance for loan losses to total loans............ 1.44 1.45
Net yield........................................... 4.81 3.87
Net interest margin(2).............................. 5.15 5.09
- ------------------
</TABLE>
(1) At December 31, 1998, the Company had available approximately $138,000
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 Company's net yield on its
earning assets.
(3) Annualized for the three months ended March 31, 1999.
9
<PAGE>
Comparison of Financial Condition at March 31, 1999 and December 31, 1998
Total assets decreased $3.7 million, or 5.8%, from $64.8 million at
December 31, 1998 to $61.0 million at March 31 1999. This decrease in assets was
due to the withdrawal of funds from attorneys escrow accounts. On December 28,
1998 the Bank had $7.0 million dollars deposited into attorneys escrow account.
These funds were withdrawn the first week of January 1999. In addition, net
loans decreased by $500,000. Federal funds sold decreased $2.5 million from $8.5
million at December 31, 1998 to $6.0 million at March 31, 1999. This decrease
primarily is due to use of these funds to purchase U. S. Agencies Bonds.
Securities available for sale increased $2.9 million, or 14.8%, from
$19.8 million at December 31, 1998 to $22.8 million at March 31, 1999. The
increase was caused by the investment of funds transferred from the fed funds
sold into the bond portfolio.
Net loans decreased $500,000, or 1.8%, from $29.1 million at December
31, 1998 to $28.7 million at March 31, 1999. This decrease was primarily due to
the scheduled payoff of one commercial loan.
Total deposits decreased $2.8 million, or 5.3%, from $53.4 million at
December 31, 1998 to $50.6 million at March 31, 1999. This decrease was caused
by an decrease in attorney's escrow account balances. Of these deposits, $40.0
million were core deposits which the Bank uses to originate loans.
Repurchase agreements at March 31, 1999 totaled $1.3 million as
compared to $2.3 million repurchase agreements at December 31, 1998. The Bank
utilizes repurchase agreements to fund customer sweep accounts.
10
<PAGE>
Comparison of Operating Results for the Three Months Ended March 31,
1999 and 1998
Net income. The Company had a net income for the three months ended
March 31, 1999 of $177 000, or $0.08 basic and diluted earnings per share,
compared to net income of $101,000, or $0.07 basic and diluted earnings per
share, for the three months ended March 31, 1998. This $76,000 increase was due
primarily to an increase in interest on loans and securities of $262,000 which
was partially offset by an increase in interest on deposits of $83,000, an
increase in salaries and benefits of $31,000, an increase in other operating
expenses of $43,000 some of which was due to the opening of the Loudoun Branch
and income tax of $19,000.
Interest Income. Total interest income for the three months ended March
31, 1999 was $1,1 million as compared to $837,000 for the three months ended
March 31, 1998, representing an increase of $262,000, or 31.3%. This increase
was due primarily to the increase in the bond portfolio and interest on Fed
Funds sold and interest on loans.
Interest Expense. Total interest expense increased from $277,000 for
the three months ended March 31, 1998 to $360,000 for the three months ended
March 31, 1999, representing an increase of $83,000, or 30.0%. This increase was
due primarily to the increase in deposits from the prior period.
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 three months ended March 31, 1999
by $179,000, or 32.0%, from $560,000 for the three months ended March 31, 1998
to $739,000 for the three months ended March 31, 1999. This increase was due
primarily to the increase in the bond portfolio and interest on Fed Funds sold.
Provision for Loan Losses. The provision for loan losses for the three
months ended March 31, 1999 was $7,000, as compared to $2,000 for the same
period in the prior year, representing a $5,000 increase.
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.
11
<PAGE>
Other income. Total other income consists primarily of service charges
and fees associated with the Bank's checking and savings accounts. Total other
income increased $2,000 from $32,000 for the three months ended March 31, 1998
to $34,000 for the three months ended March 31, 1999. This was caused by an
increase in service charges on deposit accounts.
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 $81,000, or 16.6%, from $489,000 for the three months ended March 31, 1998 to
$570,000 for the three months ended March 31, 1999. This increase was due, in
part, to a $31,000 increase in salaries and benefits and other costs connected
with the opening of the branch in Loudoun County.
Income Tax Expense. The Company had a tax liability of $19,000 for the
three months ended March 31, 1999 and no liability for March 31, 1998. At
December 31, 1998, the Company had operating loss carryforwards of approximately
$138,000 that may be offset against future taxable income. The Company expects
to use its net operating loss carryforward in its entirety by the end of fiscal
year 1999.
12
<PAGE>
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 March 31, 1999, cash, federal funds sold, held-to-maturity
investment securities maturing within one year and available-for-sale securities
represented 58.87% of deposits and other liabilities, compared to 61.24% at
December 31, 1998.
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 March 31, 1999, the Bank's Tier 1 capital ratio
was 24.89%, Tier 2 capital ratio was 26.14% and leverage ratio was 15.04%. At
March 31, 1999, the Bank exceeded all of its regulatory capital requirements.
At March 31, 1999, the total stockholders' equity of the Company was
$9.0 million, and the ratio of average stockholders' equity to average total
assets was 15.07%, as compared to 12.00% for 1998.
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.
In addition, noninformation technology systems, such as telephones,
copies and elevators may contain embedded technology which controls its
operations and which may be affected by the Year 2000 Problem. Thus, even
noninformation technology systems may affect the normal operations of the
Company upon the arrival of the Year 2000.
13
<PAGE>
To address the Year 2000 Problem, the Bank hired an outside consultant to
assess the impact of the Year 2000 Problem 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 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 Company's timetable for working on the Year 2000 Problem is divided
into the following five phases:
<TABLE>
<CAPTION>
Phase Description Status
- ----- ----------- ------
<S> <C> <C>
1. Awareness Define the problem. Completed 11/1/97.
2. Assessment Identify all systems and criticality of systems. Completed 6/1/98
3. Renovation Program enhancements, hardware and software 99% complete
upgrades, system replacements, and vendor 12/30/98
certifications.
4. Validation Test and verify system changes. completed
12/30/98
5. Implementation Components certified as Year 2000 compliant and 99% complete
moved to production. 12/30/98
</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 Bank 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 can not 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 and Bank'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
14
<PAGE>
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. 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 Bank management.
Provision for Loan Losses
For the three months ended March 31, 1999 the provision for loan losses
was $7,000, a $5,000 increase compared to the $2,000 allowance for loan losses
recorded in the first three months of 1998.
An analysis of the allowance for loan losses is as follows:
Loan Loss Reserve
Balance, December 31, 1998 429,000
Provision for Loan Losses 7,000
Charge-offs (20,000)
Recoveries 2,000
--------
Balance, March 31,1999 418,000
========
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 March 31, 1999, in addition to $17,000 of loans on either
non-accrual status or loans past due 90 days or more and still accruing, the
Bank had approximately 3.25% 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 March 31 1998,
$266,000 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, 8.0% of the loan
portfolio was either internally classified or specially mentioned and required
more than normal attention and considered potential problems loans.
15
<PAGE>
Part II OTHER INFORMATION
Item 1. Legal Proceedings
Brault,et al., v. The Heritage Bank. The Bank has settled this matter
in principle as of March 2, 1999 for a total cash payment of $50,000.00, which
involved a $20,000.00 payment from the Bank and $30,000.00 from the Bank's
insurance carrier. The parties are now in the process of preparing final
settlement documents for execution which will result in the dismissal of this
case with prejudice. The Bank's contribution to this settlement was deemed to be
less than the cost to be expended by the Bank in defending the matter.
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
Exhibit 27.1-Financial Data Schedule*
*Filed in electronic format only.
(b) Reports on Form 8-K
None
16
<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.
HERITAGE BANCORP, INC.
(Registrant)
Date: May 10, 1999 /s/ William B. Sutphin
-------------------------------
William B. Sutphin
Senior V. P. and Cashier
17
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and the statements of income of Heritage Bancorp,
Inc. and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,870,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,757,000
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 29,083,000
<ALLOWANCE> 418,000
<TOTAL-ASSETS> 61,050,000
<DEPOSITS> 50,622,000
<SHORT-TERM> 1,278,000
<LIABILITIES-OTHER> 119,000
<LONG-TERM> 0
0
0
<COMMON> 2,295,000
<OTHER-SE> 6,736,000
<TOTAL-LIABILITIES-AND-EQUITY> 61,050,000
<INTEREST-LOAN> 699,000
<INTEREST-INVEST> 319,000
<INTEREST-OTHER> 81,000
<INTEREST-TOTAL> 1,099,000
<INTEREST-DEPOSIT> 348,000
<INTEREST-EXPENSE> 360,000
<INTEREST-INCOME-NET> 739,000
<LOAN-LOSSES> 7,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 570,000
<INCOME-PRETAX> 196,000
<INCOME-PRE-EXTRAORDINARY> 196,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 177,000
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
<YIELD-ACTUAL> 4.81
<LOANS-NON> 3,000
<LOANS-PAST> 14,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 962,000
<ALLOWANCE-OPEN> 429,000
<CHARGE-OFFS> 20,000
<RECOVERIES> 2,000
<ALLOWANCE-CLOSE> 418,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 418,000
</TABLE>
