U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File No.: 000-24933
HERITAGE BANCORP, INC.
(Name of Small Business Issuer 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) 356-6610
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to section 12(g) of the Exchange Act:
COMMON STOCK
(Title of Class)
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 __
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
The revenues for the issuer's fiscal year ended December 31, 1999 are
$4,603,158.
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, as of a specified date within the last 60 days. On March 20,
2000: $6,103,394.38.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. The Company had 2,294,617
shares outstanding as of March 24, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS.................................................... 3
ITEM 2. PROPERTIES..................................................16
ITEM 3. LEGAL PROCEEDINGS...........................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.........................................17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS........................18
ITEM 7. FINANCIAL STATEMENTS........................................35
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.........................35
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
AND PRINCIPAL OFFICERS OF THE COMPANY.......................35
ITEM 10. EXECUTIVE COMPENSATION......................................37
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................42
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............43
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K......................43
AUDITED FINANCIAL STATEMENTS........................................F-1
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains certain forward looking
statements consisting of estimates with respect to the financial condition,
results of operations and business of the Company that are subject to various
factors which could cause actual results to differ materially from these
estimates. These factors include: changes in general, economic and market
conditions; the development of an adverse interest rate environment that
adversely affects the interest rate spread or other income anticipated from the
Company's operations and investments; and depositor and borrower preferences.
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PART I
ITEM 1. BUSINESS
GENERAL
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 the shareholders of the Bank became shareholders of the
Company in a share for share exchange under 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." At December 31,
1999, the Company had total assets of $59.9 million, total deposits of $48.0
million and total stockholders' equity of $8.6 million. Net income for the year
ended December 31, 1999 was $182,000, an increase of $49,000 from net income of
$133,000 for the comparable period in 1998. Basic earnings per share for the
year ended December 31, 1999 were $0.08 ($0.08 per share, assuming dilution), up
from $0.07 per share ($0.07 per share, assuming dilution) for the year ended
December 31, 1998. Unless otherwise disclosed, the information presented in this
Annual Report on Form 10-KSB represents the activity of the Bank for the period
prior to October 1, 1998 and the activity of the Company consolidated
thereafter. Unless the context otherwise requires, all references to the Bank or
the Company include the Company and the Bank on a consolidated basis.
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 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 two
full-service offices in McLean and Sterling, Virginia and engages in a broad
range of lending and deposit services aimed at individual and commercial
customers in Fairfax and Loudoun Counties, Virginia. A third branch in Tysons
Corner, Virginia is projected to open May 2000, subject to regulatory approvals.
The Bank closed its secondary offering of common stock (the "Offering") in which
it sold 805,000 shares of common stock to the public at a per share price of
$5.50, resulting the raising of net proceeds to the Bank of approximately $4.1
million in May, 1998.
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, as well as in Fairfax and Loudoun
counties. 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 loans, 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.
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The Bank's profitability is also affected by the level of other
non-interest 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, strength
of the economy 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 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 and outside directors 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.
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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, as well as a branch office in Sterling, Virginia, which
primarily serves Loudoun County, Virginia ("Sterling Branch"). From this office,
the Bank serves its customers, many 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 the Bank's customers reside primarily in
other communities in Fairfax, Arlington and Loudoun counties.
McLean resides in the northernmost part of Fairfax County, Virginia, by
most measures, the wealthiest county in Virginia. Fairfax County's labor force
of 523,863 ranks eleventh out of the twenty largest U.S. cities and ninth in
number of residents that can be employed. The employment industries with the
largest share of the Fairfax County market are Services with 40% of the market
and Trade with 23% of that market. Both of these areas contain customers that
fit well into the small to medium sized businesses the Bank serves. 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. Fairfax County 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. The Bank's projected new branch
will service this area.
With the opening of the Sterling branch, the Bank has expanded its market
area to include a significant portion of Loudoun County, one of the fastest
growing counties in the United States. According to Loudoun county's Department
of Economic Development in January 2000, the county has one of the fastest
growing populations and employment bases in the country with the average income
per household of $93,769. 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.
The Sterling branch is 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 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.
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COMPETITION
The Bank operates in the highly competitive environment of Fairfax County,
as well as in Loudoun County, Virginia. 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.
In Fairfax County, the Bank commands 0.39% of the market, according to the
most recent survey of deposits by the Federal Deposit Insurance Corporation
("FDIC"). 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 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.
There are numerous commercial banks located in Loudoun County. A number of
mortgage companies along with several non-bank financial institutions also
compete in the area. All are full-service banks and provide a wide array of bank
products and services 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 Sterling branch in April 1999, the Bank expected to
increase its deposit base, which in turn increased 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. One of those
opportunities is the planned opening in May 2000 of the Tysons Corner branch,
pending regulatory approvals, and the deposit and loan base is expected to
continue to grow.
EMPLOYEES
At December 31, 1999, the Bank had thirty 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.
FEDERAL TAXATION
General. The following is intended only as a discussion of material federal
income tax matters and does not purport to be a comprehensive description of the
federal income tax rules applicable to the Bank or the Company. For federal
income tax purposes, the Company and the Bank, as members of the same affiliated
group, file consolidated income tax returns on a December 31 fiscal year basis
using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's "base year reserve", and then from the Bank's
supplemental reserve for losses on loans, to the extent thereof, and an amount
based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. Non-dividend distributions
include distributions in excess of the Bank's current and accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits
will not be so included in the Bank's income.
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The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if the Bank makes a
non-dividend distribution to the Company, approximately one and one-half times
the amount of such distribution (but not in excess of the amount of such
reserves) would be includible in income, assuming a 34% federal corporate income
tax rate. The Bank does not intend to pay dividends that would result in a
recapture of any portion of its bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax ("AMT") on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers of which the Bank currently has
none. AMTI is also adjusted by determining the tax treatment of certain items in
a manner that negates the deferral of income resulting from the regular tax
treatment of those items. The Company and the Bank have not been subject to the
AMT during the past five years.
Elimination of Dividends; Dividends Received Deduction. The Company may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations.
STATE TAXATION
The Bank is exempt from paying state income tax to the Commonwealth of
Virginia. Under Virginia law, however, banks must pay a franchise tax at the
rate of $1 on each $100 of net capital as defined under Virginia law. For
additional information regarding taxation, see Note 8 of the Notes to Financial
Statements.
REGULATION AND SUPERVISION
The Bank is extensively regulated under both federal and state law. The
following is a brief summary of certain statutes, rules and regulations
affecting the Company and the Bank. This summary is qualified in its entirety by
reference to the particular statutory and regulatory provisions referred to
below and is not intended to be an exhaustive description of the statutes or
regulations applicable to the Bank's business.
FINANCIAL SERVICES MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the "Act"),
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. Generally, the Act:
o repeals the historical restrictions and eliminates many federal and state
law barriers to affiliations among banks, securities firms, insurance
companies and other financial service providers;
o provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;
o broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies and their financial subsidiaries;
o provides an enhanced framework for protecting the privacy of consumer
information;
o adopts a number of provisions related to the capitalization, membership,
corporate governance and other measures designed to modernize the Federal
Home Loan Bank system;
o modifies the laws governing the implementation of the Community
Reinvestment Act; and
o addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
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Bank holding companies will be permitted to engage in a wider variety of
financial activities than permitted under prior law, particularly with respect
to insurance and securities activities. In addition, in a change from prior 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 Act will have a material adverse effect on our
operations in the near-term. However, to the extent that it 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.
REGULATION OF THE BANK
The Bank is organized as a Virginia-chartered banking corporation and is
regulated and supervised by the Virginia State Corporation Commission ("SCC").
In addition, as a state member bank, the Bank is regulated and supervised by the
FRB, which serves as its primary federal regulator, and is subject to certain
regulations promulgated by the FDIC. The SCC and the FRB conduct regular
examinations of the Bank, reviewing the adequacy of its loan loss reserves, the
quality of its loans and investments, the propriety of management practices,
compliance with laws and regulations, and other aspects of the Bank's
operations. In addition to these regular examinations, the Bank must furnish to
the FRB semi-annual reports containing detailed financial statements and
schedules.
Federal and Virginia banking laws and regulations govern all areas of the
operations of the Bank, including reserves, loans, mortgages, capital, issuance
of securities, payment of dividends and establishment of branches. Federal and
state bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks. See "--Limits on Dividends and Other Payments."
As its primary federal regulator, the FRB has authority to impose penalties,
initiate civil and administrative actions and take other steps intended to
prevent the Bank from engaging in unsafe or unsound practices. In this regard,
the Federal Reserve has adopted capital adequacy requirements applicable to
state member banks such as the Bank. See "--Capital Requirements."
Transactions with Affiliates and Insiders of the Bank. Transactions between
an insured bank, such as the Bank, and any of its affiliates are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any
company or entity which controls, is controlled by or is under common control
with the bank. Generally, Sections 23A and 23B (i) limit the extent to which the
bank or its subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and limit all such transactions with all affiliates to an amount equal
to 20% of such capital stock and surplus and (ii) require that all such
transactions be on terms that are consistent with safe and sound banking
practices. In addition, any purchase of assets or services by a bank from an
affiliate must be on terms that are substantially the same, or at least as
favorable, to the institution as those that would be provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of guarantees and similar other types of
transactions. Further, most loans by a bank to its affiliate must be supported
by collateral in amounts ranging from 100 to 130 percent of the loan amounts.
Banks are also subject to the restrictions contained in Section 22(h) of
the Federal Reserve Act and the Federal Reserve Board's Regulation O thereunder
on loans to executive officers, directors and principal stockholders. Under
Section 22(h), loans to a director, an executive officer or a greater than 10%
stockholder of a bank as well as certain affiliated interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
person and affiliated interests, the loans-to-one-borrower limit applicable to
national banks (generally 15% of the institution's unimpaired capital and
surplus), and all loans to all such persons in the aggregate may not exceed the
institution's unimpaired capital and unimpaired surplus. Regulation O also
prohibits the making of loans in an amount greater than $25,000, or 5% of
capital and surplus but in any event over $500,000, to directors, executive
officers and greater than 10% stockholders of a bank, and their
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respective affiliate, unless such loans are approved in advance by a majority of
the Board of Directors of the bank with any "interested" director not
participating in the voting. Further, Regulation O requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as those that are offered in comparable transactions to
other persons. Regulation O also prohibits a depository institution from paying
the overdrafts over $1,000 of any of its executive officers or directors unless
they are paid pursuant to written pre-authorized extension of credit or transfer
of funds plans.
Community Reinvestment. Under the Community Reinvestment Act, any insured
depository institution, including the Bank, has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The Community Reinvestment Act does not establish specific lending requirements
or programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community. The Community Reinvestment Act requires
the FRB, in connection with its examination of a state member bank, to assess
the depository institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution, including applications for additional branches and
acquisitions.
Among other things, the current Community Reinvestment Act regulations
replace the prior process-based assessment factors with a new evaluation system
that rates an institution based on its actual performance in meeting community
needs. In particular, the current evaluation system focuses on three tests:
o a lending test, to evaluate the institution's record of making loans in its
service areas;
o an investment test, to evaluate the institution's record of investing in
community development projects, affordable housing, and programs
benefitting low or moderate income individuals and businesses; and
o a service test, to evaluate the institution's delivery of services through
its branches, ATMs and other offices.
The Community Reinvestment Act requires the FRB to provide a written
evaluation of an institution's Community Reinvestment Act performance utilizing
a four-tiered descriptive rating system and requires public disclosure of an
institution's Community Reinvestment Act rating. The Bank received a
"satisfactory" rating in its last Community Reinvestment Act examination
conducted by the FRB.
Safety and Soundness Standards. Pursuant to the requirements of FDIC
Improvement Act, as amended by the Riegle Community Development and Regulatory
Improvement Act of 1994, each federal banking agency, including the FRB, has
adopted guidelines establishing general standards relating to internal controls,
information and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, asset quality, earnings, and compensation,
fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director, or principal stockholder.
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Uniform Real Estate Lending Standards. Under the FDIC Improvement Act, the
federal banking agencies adopted uniform regulations prescribing standards for
extensions of credit that are secured by liens on interests in real estate or
made for the purpose of financing the construction of a building or other
improvements to real estate. Under the joint regulations adopted by the federal
banking agencies, all insured depository institutions must adopt and maintain
written policies that establish appropriate limits and standards for extensions
of credit that are secured by liens or interests in real estate or are made for
the purpose of financing permanent improvements to real estate. These policies
must establish loan portfolio diversification standards, prudent underwriting
standards, including loan-to-value limits, that are clear and measurable, loan
administration procedures, and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies that have been adopted
by the federal bank regulators.
The Interagency Guidelines, among other things, require a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits:
o for loans secured by raw land, the supervisory loan-to-value limit is 65%
of the value of the collateral;
o for land development loans, or loans for the purpose of improving
unimproved property prior to the erection of structures, the supervisory
limit is 75%;
o for loans for the construction of commercial, multi-family or other
non-residential property, the supervisory limit is 80%;
o for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and
o for loans secured by other improved property, for example, farmland,
completed commercial property and other income-producing property including
non-owner occupied, one- to four-family property, the limit is 85%.
Although no supervisory loan-to-value limit has been established for
owner-occupied, one to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
Deposit Insurance. Pursuant to FDIC Improvement Act, the FDIC established a
system for setting deposit insurance premiums based upon the risks a particular
bank or savings association posed to its deposit insurance funds. Under the
risk-based deposit insurance assessment system, the FDIC assigns an institution
to one of three capital categories based on the institution's financial
information, as of the reporting period ending six months before the assessment
period. The three capital categories are (1) well capitalized, (2) adequately
capitalized and (3) undercapitalized. The FDIC also assigns an institution to
one of three supervisory subcategories within each capital group. With respect
to the capital ratios, institutions are classified as well capitalized,
adequately capitalized or undercapitalized using ratios that are substantially
similar to the prompt corrective action capital ratios discussed below. The FDIC
also assigns an institution to supervisory subgroup based on a supervisory
evaluation provided to the FDIC by the institution's primary federal regulator
and information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds, which may
include information provided by the institution's state supervisor.
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications, or
combinations of capital groups and supervisory subgroups, to which different
assessment rates are applied. Assessment rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed.
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A bank's rate of deposit insurance assessments will depend upon the category and
subcategory to which the bank is assigned by the FDIC. Any increase in insurance
assessments could have an adverse effect on the earnings of insured
institutions, including the Bank.
Under the Deposit Insurance Funds Act of 1996 the assessment base for the
payments on the bonds issued in the late 1980's by the Financing Corporation to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation was
expanded to include, beginning January 1, 1997, the deposits of institutions
insured by the Bank Insurance Fund, such as Cambridgeport Bank. Until December
31, 1999, or such earlier date on which the last savings association ceases to
exist, the rate of assessment for Bank Insurance Fund-assessable deposits will
be one-fifth of the rate imposed on deposits insured by the Savings Association
Insurance Fund. The annual rate of assessments for the payments on the Financing
Corporation bonds for the quarterly period beginning on January 1, 1999 was
0.0122% for Bank Insurance Fund-assessable deposits and 0.0610% for Savings
Association Insurance Fund-assessable deposits.
Under the Federal Deposit Insurance Act, the FDIC may terminate the
insurance of an institution's deposits upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC. The management of the Bank does not know of
any practice, condition or violation that might lead to termination of deposit
insurance.
CAPITAL REQUIREMENTS
The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA") requires
the Federal Reserve to take "prompt corrective action" with respect to any
insured depository institution which does not meet specified minimum capital
requirements. The applicable regulations establish five capital levels, ranging
from "well-capitalized" to "critically undercapitalized," and require or permit
the Federal Reserve to take supervisory action in certain circumstances. Under
these regulations, an insured depository institution is considered
well-capitalized if it has a Total Risk-based Capital ratio of 10.0% or greater,
a Tier 1 Risk-based Capital ratio of 6.0% or greater, and a Leverage ratio of
5.0% or greater, and it is not subject to an order, written agreement, capital
directive or prompt corrective action directive to meet and maintain a specific
capital level for any capital measure. An insured depository institution is
considered adequately capitalized if it has a Total Risk-based Capital ratio of
8.0% or greater, a Tier I Risk-based Capital ratio and Leverage ratio of 4.0% or
greater (or a Leverage ratio of 3.0% or greater if the institution is rated
composite 1 in its most recent report of examination, subject to appropriate
federal banking agency guidelines), and the institution does not meet the
definition of an undercapitalized institution. An insured depository institution
is considered undercapitalized if it has a Total Risk-based Capital ratio that
is less than 8.0%, a Tier 1 Risk-based Capital ratio that is less than 4.0%, or
a Leverage ratio that is less than 4.0%. A significantly undercapitalized
institution is one which has a Total Risk-based Capital ratio that is less than
6.0%, a Tier 1 Risk-based Capital ratio that is less than 3.0%, or a Leverage
ratio that is less than 3.0%. A critically undercapitalized institution is one
which has a ratio of tangible equity to total assets that is equal to or less
than 2.0%. As of December 31, 1999, the Bank was classified as well-capitalized.
The Bank's Tier 1 and Total Risk-based Capital ratios as of December 31, 1999
were 23.3% and 24.4%, respectively.
The severity of action authorized or required to be taken under prompt
corrective action regulations increases as a bank's capital deteriorates within
the three undercapitalized categories. All banks are prohibited from paying
dividends or other capital distributions or paying management fees to any
controlling person, if, following such distribution, the bank will be
undercapitalized. The Federal Reserve is authorized by this legislation and
under Regulation H (which regulates state member banks) to take various
enforcement actions against any undercapitalized insured depository institution
and any insured depository institution that fails to submit an acceptable
capital restoration plan or fails to implement a plan accepted by the Federal
Reserve. These powers include, among other things, requiring the institution to
be recapitalized, prohibiting asset growth, restricting interest rates paid,
requiring prior approval of capital distributions by any bank holding company
which controls the institution, requiring divestiture by the institution of its
subsidiaries or by the
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holding company of the institution itself, requiring new election of directors,
and requiring the dismissal of directors and officers.
With certain exceptions, insured depository institutions will be prohibited
from making capital distributions or paying management fees if the payment of
such distributions or fees will cause them to become undercapitalized.
Furthermore, undercapitalized insured depository institutions will be required
to file capital restoration plans with the Federal Reserve. Undercapitalized
insured depository institutions also will be subject to restrictions on growth,
acquisitions, branching and engaging in new lines of business unless they have
an approved capital plan that permits otherwise. The Federal Reserve also may,
among other things, require an undercapitalized insured depository institution
to issue shares or obligations, which could be voting stock, to recapitalize the
institution or, under certain circumstances, to divest itself of any subsidiary.
Significantly and critically undercapitalized insured depository
institutions may be subject to more extensive control and supervision. The
Federal Reserve may prohibit any such institutions from, among other things,
entering into any material transaction not in the ordinary course of business,
amending their Articles of Incorporation or bylaws, or engaging in certain
transactions with affiliates. In addition, critically undercapitalized
institutions generally will be prohibited from making payments of principal or
interest on outstanding subordinated debt. Within 90 days of an insured
depository institution becoming critically undercapitalized, the Federal Reserve
must appoint a receiver or conservator unless certain findings are made with
respect to the prospect for the institution's continued viability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Analysis of Financial Condition -- Capital Requirements" for more
information about the Bank's capital ratios and applicable minimum ratios.
BRANCHING
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle Act"), the Federal Reserve may approve bank holding company
acquisitions of banks in other states, subject to certain aging and deposit
concentration limits. As of June 1, 1997, banks in one state may merge with
banks in another state, unless the other state has chosen not to implement this
section of the Riegle Act. These mergers are also subject to similar aging and
deposit concentration limits.
Virginia "opted-in" to the provisions of the Riegle Act. Since July 1,
1995, an out-of-state bank that did not already maintain a branch in Virginia
was permitted to establish and maintain a de novo branch in Virginia, or acquire
a branch in Virginia, if the laws of the home state of the out-of-state bank
permit Virginia banks to engage in the same activities in that state under
substantially the same terms as permitted by Virginia. Also, Virginia banks may
merge with out-of-state banks, and an out-of-state bank resulting from such an
interstate merger transaction may maintain and operate the branches in Virginia
of a merged Virginia bank, if the laws of the home state of the out-of-state
bank involved in the interstate merger transaction permit interstate merger.
FEDERAL RESERVE SYSTEM
Under Federal Reserve Board regulations, the Bank is required to maintain
non-interest-earning reserves against its transaction accounts. The Federal
Reserve Board regulations generally require that reserves of 3% must be
maintained against aggregate transaction accounts of $44.3 million or less,
subject to adjustment by the Federal Reserve Board, and an initial reserve of
$1.3 million plus 10%, subject to adjustment by the Federal Reserve Board
between 8% and 14%, against that portion of total transaction accounts in excess
of $44.3 million. The first $5.0 million of otherwise reservable balances,
subject to adjustments by the Federal Reserve Board, are exempted from the
reserve requirements. The Bank is in compliance with these requirements. Because
required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the Federal Reserve Board, the effect of this reserve requirement
is to reduce the Bank's interest-earning assets.
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EFFECT OF ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of
the Federal Reserve, have a significant effect on the operating results of banks
and their subsidiaries. Among the means available to the Federal Reserve to
affect the money supply are open market operations in U.S. government
securities, changes in the discount rate on member bank borrowings, and changes
in reserve requirements against member bank deposits. These means are used in
varying combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may affect interest rates charged on
loans or paid for deposits.
Federal Reserve monetary policies have materially affected the operating
results of commercial banks in the past and are expected to continue to do so in
the future. The nature of future monetary policies and the effect of such
policies on the business and income of the Bank cannot be predicted.
LIMITS ON DIVIDENDS AND OTHER PAYMENTS
As a state member bank subject to the regulations of the Federal Reserve,
the Bank must obtain the approval of the Federal Reserve for any dividend if the
total of all dividends declared in any calendar year would exceed the total of
its net profits, as defined by the Federal Reserve, for that year, combined with
its retained net profits for the preceding two years. In addition, the Bank may
not pay a dividend in an amount greater than its undivided profits then on hand
after deducting its losses and bad debts. For this purpose, bad debts are
generally defined to include the principal amount of loans which are in arrears
with respect to interest by six months or more, unless such loans are
fully-secured and in the process of collection. Moreover, for purposes of this
limitation, the Bank is not permitted to add the balance in its allowance for
loan losses account to its undivided profits then on hand; however, it may net
the sum of its bad debts, as so defined, against the balance in its allowance
for loan losses account and deduct from undivided profits only bad debts, as so
defined, in excess of that account.
In addition, the Federal Reserve is authorized to determine under certain
circumstances relating to the financial condition of a state member bank, that
the payment of dividends would be an unsafe or unsound practice and to prohibit
payment thereof. The payment of dividends that would deplete a bank's capital
base could be deemed to constitute such an unsafe or unsound practice. The
Federal Reserve has indicated that banking organizations should generally pay
dividends only out of current operating earnings.
FDICIA provides that no insured depository institution may make any capital
distribution, including a cash dividend if, after making the distribution, the
institution would not satisfy one or more of its minimum capital requirements.
In addition, Virginia law imposes restrictions on the ability of all banks
chartered under Virginia law to pay dividends. Under Virginia law, no dividend
may be declared or paid that would impair a Virginia-chartered bank's paid-in
capital. The SCC also has authority to limit the payment of dividends by a
Virginia bank if it determines the limitation is in the public interest and is
necessary to ensure the bank's financial soundness.
REGULATION OF HOLDING COMPANY
Federal Regulation. The Company is as a bank holding company. Bank holding
companies are subject to examination, regulation and periodic reporting under
the Bank Holding Company Act, as administered by the Federal Reserve Board. The
Federal Reserve Board has adopted capital adequacy guidelines for bank holding
companies on a consolidated basis. As of December 31, 1999, the Company's Total
capital and Tier 1 capital ratios exceeded these minimum capital requirements.
Regulations of the Federal Reserve Board provide that a bank holding
company must serve as a source of strength to any of its subsidiary banks and
must not conduct its activities in an unsafe or unsound manner. Under the prompt
corrective action provisions of FDIC Improvement Act, a bank holding company
parent of
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an undercapitalized subsidiary bank would be directed to guarantee, within
limitations, the capital restoration plan that is required of such an
undercapitalized bank. See "- Federal Banking Regulation - Prompt Corrective
Action" above. If the undercapitalized bank fails to file an acceptable capital
restoration plan or fails to implement an accepted plan, the Federal Reserve
Board may prohibit the bank holding company parent of the undercapitalized bank
from paying any dividend or making any other form of capital distribution
without the prior approval of the Federal Reserve Board.
As a bank holding company, the Company is required to obtain the prior
approval of the Federal Reserve Board to acquire all, or substantially all, of
the assets of any bank or bank holding company. Prior Federal Reserve Board
approval will be required for the Company to acquire direct or indirect
ownership or control of any voting securities of any bank or bank holding
company if, after giving effect to such acquisition, it would, directly or
indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company.
A bank holding company is required to give the Federal Reserve Board prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, will be equal to 10% or more of the company's
consolidated net worth. The Federal Reserve Board may disapprove such a purchase
or redemption if it determines that the proposal would constitute an unsafe and
unsound practice, or would violate any law, regulation, Federal Reserve Board
order or directive, or any condition imposed by, or written agreement with, the
Federal Reserve Board. Such notice and approval is not required for a bank
holding company that would be treated as "well capitalized" under applicable
regulations of the Federal Reserve Board, that has received a composite "1" or
"2" rating at its most recent bank holding company inspection by the Federal
Reserve Board, and that is not the subject of any unresolved supervisory issues.
In addition, a bank holding company which does not qualify as a financial
holding company under the Act is generally prohibited from engaging in, or
acquiring direct or indirect control of any company engaged in non-banking
activities. One of the principal exceptions to this prohibition is for
activities found by the Federal Reserve Board to be so closely related to
banking or managing or controlling banks as to be permissible. Some of the
principal activities that the Federal Reserve Board has determined by regulation
to be so closely related to banking as to be permissible are:
o making or servicing loans;
o performing certain data processing services;
o providing discount brokerage services;
o acting as fiduciary, investment or financial advisor;
o leasing personal or real property;
o making investments in corporations or projects designed primarily to
promote community welfare; and
o acquiring a savings and loan association.
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Bank holding companies that do qualify as a financial holding company may
engage in activities that are financial in nature or incident to activities
which are financial in nature. Bank holding companies may qualify to become a
financial holding company if:
o each of its depository institution subsidiaries is "well capitalized";
o each of its depository institution subsidiaries is "well managed";
o each of its depository institution subsidiaries has at least a
"satisfactory" Community Reinvestment Act rating at its most recent
examination; and
o the bank holding company has filed a certification with the Federal Reserve
Board that it elects to become a financial holding company.
Under the Federal Deposit Insurance Act, depository institutions are liable
to the FDIC for losses suffered or anticipated by the FDIC in connection with
the default of a commonly controlled depository institution or any assistance
provided by the FDIC to such an institution in danger of default. This law would
potentially be applicable to the Company if it ever acquired as a separate
subsidiary a depository institution in addition to the Bank.
FEDERAL SECURITIES LAWS
The Company's Common Stock is registered with the SEC under Section 12(g)
of the Securities Exchange Act of 1934 (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
ITEM 2. PROPERTIES
The principal office of the Bank is located at 1313 Dolley Madison
Boulevard, McLean, Virginia where the Bank leases approximately 11,182 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 and expires in
2008. The current monthly rent is $21,101.
The Bank also entered into a lease for its Sterling Branch in Sterling,
Virginia at 46005 Regal Plaza Dr. #180. The lease is for ten years with one five
year renewal option.
On March 16, 2000, the Bank entered into a long-term lease for its Tyson's
branch pending regulatory approval. If all approvals are received as anticipated
the lease will expire in 2006.
The Bank also owns a parcel of land in Great Falls, Virginia, which it is
holding for future bank use.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of its operations, the Company and the Bank from time
to time are 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 Company's or the Bank's business, financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq SmallCap Market and
quoted under the symbol "HBVA." Prior to its secondary offering of 805,000
shares on May 18, 1998 (the "Offering") and commencement of trading on the
Nasdaq SmallCap Market, the common stock of The Heritage Bank traded on the OTC
Bulletin Board on a limited basis. The Bank's common stock traded as Company
common stock when the Reorganization became effective in October 1998, prior to
the end of the Company's 1998 fiscal year.
At December 31, 1999, the last trading date in the Company's fiscal year,
the Company's common stock closed at $3 11/16. At March 24, 2000, there were
2,294,617 shares of the Company's common stock outstanding, which were held of
record by approximately 2,000 stockholders.
The Board of Directors has not paid a cash dividend since its
incorporation. The Board of Directors may consider the payment of cash dividends
dependant on the results of operations and financial condition of the Company,
tax considerations, industry standards, economic conditions, regulatory
restrictions and other factors. There are significant regulatory limitations on
the Company's ability to pay dividends depending on the dividends it receives
from its subsidiary, the Bank, which is subject to regulations and the Bank's
continued compliance with all regulatory capital requirements and the overall
health of the institution. See Note 16 to the Notes to the consolidated
financial statements for a discussion of the regulatory restrictions on
dividends.
The table below shows the high and low sales price as quoted on the Nasdaq
SmallCapMarket during the periods indicated.
<TABLE>
<CAPTION>
Price Range ($)
---------------
Quarter Ended High Low
------------- ---- ----
<S> <C> <C>
Fiscal Year ended December 31, 1999:
First Quarter ended March 31, 1999 ................. 3 3/4 3 1/2
Second Quarter ended June 30, 1999 ................. 4 9/6 3
Third Quarter ended September 30, 1999 ............. 4 3
Fourth Quarter ended December 31, 1999 ............. 4 3
Fiscal year ended December 31, 1998:
Second Quarter ended June 30, 1998 ................. 6 3/4 4 3/4
Third Quarter ended September 30, 1998 ............. 5 1/2 3 3/4
Fourth Quarter ended December 31, 1998 ............. 4 3/4 3 1/2
</TABLE>
Based on information available to the Bank from a limited number of sellers
and purchasers of the Bank's common stock prior to the Offering, the Bank
believes that the selling price for the Bank common stock ranged from $4.00 to
$4.625 from January 1, 1998 through March 31, 1998.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 Company and
the Bank. This review should be read in conjunction with the audited 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 and securities sold under agreement to repurchase). 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, 1999 AND 1998
As of December 31, 1999, the Company's total assets were $59.9 million, as
compared to $64.8 million at December 31, 1998, which represents a decrease of
$4.9 million, or 7.5%. The 1999 decline in total assets was primarily due to the
loss of funds provided by a one time $8.0 million deposit into attorneys escrow
accounts at the end of fiscal 1998. These funds were withdrawn the first week of
January 1999 in the normal course of business, decreasing total deposits. Total
deposits decreased by $5.4 million to $48.0 million at December 31, 1999, as
compared to $53.4 million at December 31, 1998. Adjusting for the $8.0 million
in escrow deposits, total assets at December 31, 1999 increased $3.1 million
over December 31, 1998 and total deposits increased $2.6 at December 31, 1999 as
compared to December 31, 1998.
Securities Sold under Agreements to Repurchase at December 31, 1999 were
$3.0 million or 31.2% greater than the December 31, 1998 balance of $2.3
million. The Bank increased the offering of repurchase agreements for customers
with larger short term funds in fiscal 1999. 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 December 31, 1999 totaled $2.7 million,
compared to $14.4 million at December 31,1998, representing a decrease of $11.7
million, or 81.4%. Federal funds sold represented $8.6 million of the decrease
with cash and due from banks decreasing $3.2 million. Increased loan production
and the decrease of deposits in January 1999 was the primary cause for the
decrease in federal funds sold.
Securities available for sale increased $4.2 million, or 21.3%, to $24.1
million at December 31, 1999 from $19.8 million 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 $31.3 million at December 31, 1999 as compared to $29.2
million at December 31, 1998. This net increase of $2.1 million, or 7.2%, was
primarily due to the change in lending officers prior to year end and the new
customer relationships developed by the new lending officers.
Stockholders' equity at December 31, 1999 was $8.6 million, as compared to
$8.9 million at December 31, 1998, representing a decrease of $330,000, or 3.7%.
This decline was primarily due to an increase in the unrealized loss net of
income taxes on the available for sale security portfolio due to market
declines.
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The Company's return on average assets was 0.30% and its return on average
equity was 2.06% in fiscal year 1999. The Bank's return on average assets was
0.26% and its return on average equity was 1.79% in fiscal year 1998.
The Bank is required to meet certain capital requirements as established by
the Federal Reserve Board. At December 31, 1999 and 1998, the Bank met all
capital adequacy requirements to which it was subject.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Net Income. Net income for the year ended December 31, 1999 was $182,000,
an increase of 36.4% from $133,000 for the same period of 1998. Net income per
basic and diluted share increased 14.3% to $.08 from $.07 for the same period of
1998. The increase in net income for the year ended December 31, 1999 as
compared to the same period of 1998 was primarily the result of increases in net
interest, which were partially offset by increases in non-interest expenses. In
addition, the allowance for loan losses was considered adequate without
additional provision expense for 1999, due to an improvement in the quality of
the loan portfolio as compared to year end 1998. In 1998, the net operating loss
carryforward was fully utilized. This change in tax status created a $133,000
variance in tax expense. Net income before taxes for the year ended December 31,
1999 increased 195.7% to $275,000 as compared to $93,000 for the same period of
1998.
Interest Income. Interest income totaled $4.4 million for the year ended
December 31, 1999, an increase of $615,000, or 16.3%, from $3.8 million for the
year ended December 31, 1998. The increase in interest income was primarily due
to a $304,000 increase in interest on increased loan balances and an increase of
$296,000 on securities available for sale.
Interest Expense. Total interest expense increased $167,000, or 13.1%, from
$1.3 million for the year ended December 31, 1998 to $1.4 million for the year
ended December 31, 1999. Increased interest expense was due to a shift from
balances in non-interest deposits to interest bearing deposits and securities
sold under agreements to repurchase.
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 year ended
December 31, 1999 increased $448,000, or 18.0%, from $2.5 million for the year
ended December 31, 1998 to $2.9 million for the year ended December 31, 1999.
The increase in net interest income is primarily due to the growth in the loan
portfolio.
Non-interest income. During the year ended December 31, 1999, non-interest
income increased $85,000 over the same period in 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. The Bank also had a
gain on the sale of other real estate of $57,000 in fiscal 1999, a nonrecurring
item.
Non-interest Expense. During the year ended December 31, 1999, non-interest
expenses increased $468,000, or 19.3%, 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 1999 and additional space rented for
operational expansion at the main office address in McLean during 1999. These
increased leases raised occupancy and equipment expense by $196,000 for the year
ended December 31, 1999, as compared to fiscal 1998. Salaries and employee
benefits expense increased by $398,000, from $1.1 million for the year ended
December 31, 1998 to $1.5 million for the year ended December 31, 1999. This
increase is due, in part, to the increase in employees at the Sterling branch.
Incentive bonuses of $52,000 were also paid to employees during the year
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<PAGE>
ended December 31, 1999. Salaries and benefits increased partially due to
$15,000 in severance pay to Bank employees during 1999. Other expenses decreased
by $126,000, or 11.8%, from $1.1 million for the year ended December 31, 1998 to
$943,000 for the year ended December 31, 1999. This decrease is due primarily to
a decrease in professional fees, which was partially offset by an increase in
business development fees paid in connection with a possible branch location in
Great Falls, Virginia. Other expenses were also affected by $42,000 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
improvement in the Bank's loan portfolio, no provision was made for loan losses
in the year ended December 31, 1999. A provision of $117,000 was made for loan
losses in the year ended December 31, 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 December 31,
1999 was 1.33% of outstanding loans. At December 31, 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 condition,
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 $93,000
for the year ended December 31, 1999, as compared to a tax benefit of $41,000
for the year ended December 31, 1998. This increase in income tax expense for
the year ended December 31, 1999 is primarily due to the fact that a net
operating loss carryforward of the Company became completely utilized for
accounting purposes by January 1, 1999.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Net Income. Net income for the year ended December 31, 1998 decreased
$437,000 to $133,000, or $0.07 basic earnings per share ($0.07 per share,
assuming dilution), from net income of $570,000, or $0.45 basic earnings per
share ($0.44 per share, assuming dilution) for the year ended December 31, 1997.
The decrease in net income was primarily due to loan loss from a bankruptcy
during the third quarter totaling $141,456, an increase in stockholder expenses
of $89,944 incurred in connection with the formation of the holding company, an
increase in legal fees of $175,000 incurred in defending lawsuits and the
$25,000 settlement of a lawsuit plus a $25,000 loss due to a robbery. The
expenses associated with the formation of the holding company, the opening of
the Sterling branch in Sterling, Virginia, and the legal fees incurred in
connection with the settlement of a lawsuit are nonrecurring items and are not
expected to have an impact on the long-term profitability of the Bank.
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.
19
<PAGE>
Interest income totaled $3.7 million for the year ended December 31, 1998,
an increase of $509,000 or 15.6% from $3.2 million from the year ended December
31, 1997. The increase in interest income was due to a $108,000 increase in
interest on federal funds sold and an increase of $302,000 on securities
available for sale. Loan interest income also increased by $99,000. The increase
in interest on securities available for sale was the result of the Bank
investing the funds received from the sale of stock in the Offering in
investment bonds. The increase in federal funds sold interest was the result of
the increase in deposits. The increase in interest income on loans was the
result of an increase in the loan portfolio, due to the ability of the Bank to
increase its legal lending limit as a result of proceeds received in the
Offering and favorable interest rates in fiscal 1998.
Interest Expense. Total interest expense increased $162,000, or 14.6%, from
$1.1 million for the year ended December 31, 1997 to $1.3 million for the year
ended December 31, 1998. This increase was primarily due to the $3.1 million
increase in the average balance of interest-bearing liabilities from $30.2
million for the year ended December 31, 1997 to $33.3 million for the year ended
December 31, 1998.
Net Interest Income. Net interest income increased by $349,000, or 16.3%,
from $2.1 million for the year ended December 31, 1997 to $2.5 million for the
year ended December 31, 1998.
The Bank's net interest margin (net interest income expressed as a
percentage of total average interest-earning assets) decreased to 5.09% for the
year ended December 31, 1998 compared to 5.25% for the year ended December 31,
1997. The Bank's interest spread (the average yield earned on interest-earning
assets less the average rate incurred on interest-bearing liabilities) was 3.87%
and 4.29% for the years ended December 31, 1998 and 1997, respectively.
Provision for Loan Losses. The provision for loan losses for the year ended
December 31, 1998 was $117,000 as compared to $3,825 for the year ended December
31, 1997. This increase was necessary due to a loss on a loan in connection with
a bankruptcy and the need to replenish some of the reserves used.
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 loan portfolio. While management estimates
loan losses using the best available information, no assurance can be made that
future additions to the allowance will not be necessary.
Non-interest Income. Non-interest income consists primarily of service
charges and fees associated with the Bank's loan and savings accounts and gains
on the sale of securities. Non-interest income for the year ended December 31,
1998 was $137,000, representing a decrease of $44,000 from the non-interest
income of $181,000 for the year ended December 31, 1997. This decrease was
caused primarily by a $47,000 decrease in gains on the sale of government
securities.
Non-interest Expense. Non-interest expense consists primarily of operating
expenses for compensation and related benefits, occupancy, federal insurance
premiums and operating assessments, and equipment expenses.
Non-interest expense increased $585,000, or 31.9%, from $1.8 million for
the year ended December 31, 1997 to $2.4 million for the year ended December 31,
1998. This increase was due in part to an increase in salaries and employee
benefits expense of $121,000 or 12.7% from $953,000 for the year ended December
31, 1997 to $1,074,000 for the year ended December 31, 1998. Other operating
expenses increased by $489,000 or 84.3% from $580,000 to $1,069,000 for the
years ended December 31, 1997 and 1998, respectively. This increase was due to
settlement of a lawsuit of $108,800, loss on a bankruptcy of $141,456, legal
fees of $175,732 incurred in defending a lawsuit, expenses associated with the
formation of the holding company of $89,944 and the $25,000 loss in a robbery.
20
<PAGE>
Income Taxes. The Bank had an income tax benefit of $41,000 for the year
ended December 31, 1998 compared to a benefit of $85,000 in 1997. At December
31, 1998, the Bank had effectively used all of its operating loss carryforwards.
The Bank expects to have tax expense for the fiscal year 1999.
PERFORMANCE RATIOS AND PER SHARE DATA
The table below presents per share data regarding the Company and the Bank,
as well as performance and asset quality ratios for the time periods indicated.
SELECTED FINANCIAL DATA
As of and for the Year Ended December 31,
(Dollars in thousands, except for per share data)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net income, basic $ 0.08 $ 0.07 $ 0.45 $ 0.32 $ 0.15
Net income, diluted 0.08 0.07 0.44 0.32 0.15
Cash dividends -- -- -- -- --
Dividend Payout ratio -- -- -- -- --
Book value at period end 3.75 3.89 3.18 2.84 2.52
Common shares outstanding 2,294,617 2,294,617 1,489,636 1,249,634 1,249,634
PERFORMANCE AND ASSET
QUALITY RATIOS
Return on average assets 0.30% 0.26% 1.33% 0.87% 0.46%
Return on average equity 2.06% 1.79% 15.24% 12.05% 5.89%
Average stockholders'
equity to average total assets 14.49% 14.47% 8.74% 7.19% 7.74%
Non-accrual and past due
loans to total loans 0.00% 1.35% 0.98% 1.85% 2.93%
Allowance for loan losses
to total loans 1.33% 1.45% 2.71% 2.45% 2.81%
Net yield 4.07% 3.87% 4.29% 3.69% 3.96%
Net interest margin 5.16% 5.09% 5.25% 4.54% 4.93%
</TABLE>
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.
21
<PAGE>
AVERAGE BALANCES, INTEREST INCOME AND EXPENSES AND AVERAGE YIELDS AND RATES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
--------------------------------- ------------------------------ ----------------------------
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) $ 29,383 $2,690 9.15% $ 25,978 $ 2,386 9.18% $24,533 $ 2,286 9.32%
Investment securities, taxable 22,583 1,414 6.26 18,208 1,118 6.14 13,432 816 6.08
Federal funds sold 5,523 277 5.02 4,830 262 5.42 2,867 154 5.37
------- ------- -------- -------- -------- -----
Total earning assets 57,489 4,381 7.62 49,016 3,766 7.68 40,832 3,256 7.97
- -------------------- ------- ------- -------- -------- -------- -----
NON-EARNING ASSETS:
Cash and due from banks 2,141 1,691 1,649
Other assets 1,329 802 414
-------- --------- --------
Total non-earning assets 3,470 2,493 2,063
-------- --------- --------
Total assets $ 60,959 $ 51,509 $ 42,895
======== ========= ========
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing demand (NOW)
deposits $7,387 $ 130 1.76% $ 5,696 $ 133 2.33% $ 5,073 $113 2.23%
Money market deposits 11,808 350 2.96 10,875 363 3.34 10,377 330 3.19
Savings deposits 3,250 90 2.77 3,298 97 2.94 3,369 99 2.94
Time deposits 15,373 772 5.02 12,424 640 5.15 11,196 561 5.01
Repurchase agreements 2,675 97 3.63 1,069 39 3.65 159 7 4.40
------- ------ ------- ------ ------- ----
Total interest-bearing
liabilities 40,493 1,439 3.55 33,362 1,272 3.81 30,174 1,111 3.68
------- ------ ------- ------ ------- -----
NON-INTEREST-BEARING LIABILITIES:
Demand deposits 11,522 10,546 8,829
Other liabilities 114 149 145
------- ------ -----
Total non-interest-bearing
liabilities 11,636 10,695 8,974
------- ------ -----
Stockholders' equity 8,830 7,452 3,747
------- ------ -----
Total liabilities and
stockholders' equity $ 60,959 $ 51,509 $ 42,895
======== ======== ========
Interest spread 4.07% 3.87% 4.29%
Net interest margin $ 2,942 5.12% $ 2,494 5.09% $ 2,145 5.25%
======= ======= =======
</TABLE>
- ----------------------
(1) Non-accrual loan balances are included in the calculation of average
balances.
22
<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, 1999 December 31, 1998
Compared To Compared To
December 31, 1998 December 31, 1997
Increase (Decrease) Due to Increase (Decrease) Due to
----------------------------- -------------------------------
Rate Volume Total Rate Volume Total
------ --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Loans receivable, net...................... $ 29 $ 275 $ 304 $ (34) $ 134 $ 100
Investment securities, taxable............. 22 274 296 8 294 302
Federal funds sold......................... (16) 31 15 1 107 108
------ --------- -------- -------- --------- --------
Total interest income.................... 35 580 615 (25) 535 510
------ --------- -------- -------- --------- --------
INTEREST PAID ON:
Interest-bearing (NOW) deposits............ 14 (17) (3) 5 15 20
Money market deposits...................... (53) 40 (13) 16 17 33
Savings deposits........................... (6) (1) (7) -- (2) (2)
Time deposits.............................. (16) 148 132 15 63 78
Securities sold under agreement to
repurchase............................... -- 58 58 -- 32 32
------ --------- -------- -------- --------- --------
Total interest expense................... (61) 228 167 36 125 161
------ --------- -------- -------- --------- --------
Net interest income.............. $ 96 $ 352 $ 448 $ (61) $ 410 $ 349
====== ========= ======== ======== ======== ========
</TABLE>
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.
23
<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 available 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, 1999, the Bank's static one-year cumulative gap to total
interest-sensitive assets position was a negative 23.8% and the Bank was,
therefore, in an asset-sensitive position. It is the Bank's goal to control the
mix and rate sensitivity of assets and liabilities such that the revolving gap
(the gap is less than one year) will not exceed 10% (positive or negative) of
assets.
The following table illustrates the interest sensitivity gap position of
the Bank as of December 31, 1999 (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, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
MATURING OR REPRICING IN:
-------------------------
3 MONTHS 4-12 1 TO 5 MORE THAN
OR LESS MONTHS YEARS 5 YEARS TOTAL
--------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Federal funds sold ......................... $ -- $ -- $ -- $ -- $ --
Loans (1)................................... 12,732 4,611 11,367 2,979 31,689
Securities.................................. -- 508 21,962 1,585 24,055
--------- --------- ------- ------- -------
Total interest-sensitive assets....... 12,732 5,119 33,329 4,564 55,744
========= ========= ======= ======= =======
INTEREST-SENSITIVE LIABILITIES:
Certificates of deposit > $100,000.......... 1,395 1,831 1,513 -- 4,739
Certificates of deposit < $100,000........... 1,715 4,272 4,671 -- 10,658
Super NOW accounts/Money Market deposit 18,888 -- -- -- 18,888
Securities sold under agreement to repurchase 3,001 -- -- -- 3,001
-------- --------- ------- ------- -------
Total interest-sensitive liabilities.... 24,999 6,103 6,184 -- 37,286
======== ========= ======= ======= =======
Period gap....................................... $(12,267) $ (984) $27,145 $ 4,564 $18,458
Cumulative gap................................... $(12,267) $(13,251) $13,894 $18,458
Ratio of cumulative interest-
sensitive liabilities to interest-sensitive
asset 196.3% 174.2% 72.9% 66.9%
====== ====== ===== =====
</TABLE>
(1) Excludes non-accrual loans.
(2) Non-certificate deposit accounts are shown as repricing within the 3 month
or less time frame, although the Bank believes, based on historical
experience, that such deposits are less interest sensitive.
24
<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 Fairfax and Loudoun Counties, 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 discount. The Bank's net loans at December 31, 1999 were $31.3 million,
representing a 7.1% increase over net loans of $29.2 million at December 31,
1998. Loan volume increased in 1999 due to the Bank's ability to make larger
loans as a result of the increase in the Bank's legal lending limit from the
Offering. Gross loans increased 23.8% in 1998 from a balance of $23.4 million at
December 31,1997. The average balance of total loans as a percentage of average
earning assets was 51.1% for December 31, 1999, down from 53.0% for December
31,1998. The average balance of total loans as a percentage of average earnings
assets was 60.1% for 1997.
In the normal course of business, the Bank makes various commitments to
meet the financing needs of its customers and incurs certain contingent
liabilities , including standby letters of credit and commitments to extend
credit. At December 31, 1999, commitments for standby letters of credit totaled
$92,300 and commitments to extend credit totaled $10.6 million. Commitments for
standby letters of credit totaled $182,000 and $191,000 for the years ended
December 31, 1998 and 1997, respectively. Commitments to extend credit totaled
$8.7 million and $6.7 million for the years ended December 31, 1998 and 1997.
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,
------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ =----- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Mortgage............. $24,653 77.8% $24,077 81.3% $17,532 75.0% $19,524 77.5% $18,735 76.9%
Constructition....... 1,157 3.6 441 1.5 448 1.9 633 2.5 147 0.6
Commercial.............. 4,372 13.8 3,789 12.8 4,191 17.9 4,210 16.7 4,526 18.6
Consumer................ 1,507 4.8 1,306 4.4 1,219 5.2 835 3.3 938 3.9
------- ------- ------- ------- -------
Loan, gross............. 31,689 100.0% 29,610 100.0% 23,390 100.0% 25,202 100.0% 24,346 100.0%
------- ------- ------- ------- -------
Less: allowance for
loan losses.......... (421) (429) (634) (617) (685)
------- ------- ------- ------- -------
Loans, net.............. $31,268 $29,181 $22,756 $24,585 $23,661
======= ======== ======= ======= =======
</TABLE>
25
<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,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans.................................. -- $395 $222 $465 $445
Real estate owned.................................. -- 263 263 263 300
--- ---- ---- ---
Total non-performing loans...................... -- 658 485 728 745
=== ==== ==== ===
Loans past due 90 or more days accuring interest.. -- -- 7 -- 268
Non-performing loans to total loans, at period end 0.0% 1.3% 0.9% 1.8% 1.8%
Non-performing assets to period end asses.......... 0.0% 1.0% 1.1% 1.6% 1.6%
Non-performing assets: total loans
and other real estate owned.................... 0.0% 2.2% 2.1% 2.9% 3.0%
</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 $0, $26,800
and $34,300 for the years ended December 31, 1999, 1998 and 1997, 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 $1.7 million or 5.4% of total loans at
December 31, 1999 were either internally classified or specially mentioned,
require more than normal attention, and are potential problem loans. These
potential problem loans represent a decrease from $2.5 million of potential
problem loans, or 8.4% of total loans, at December 31, 1998. The decrease is
related primarily to the Bank's efforts to improve loan quality.
LOAN MATURITY
The following table shows the contractual maturity at December 31, 1999.
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, 1999
One Year Over One Year
Or less Through Five Years over Five Years
Fixed Rate Floating Rate Fixed Rate Floating Rate
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Commercial $1,271 $1,858 $398 $-- $138
Real Estate-construction $1,157 -- -- -- --
</TABLE>
26
<PAGE>
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 collectibility 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 identify potential loans that would be charged 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
$421,000, or 1.33% of total loans, as of December 31, 1999 and $429,000, or
1.45% of total loans, as of December 31, 1998.
Management believes the allowance is adequate to absorb losses inherent in
the loan portfolio. The Bank expects to grow its loan portfolio and believes it
will add to thee 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.
27
<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,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year.......... $ 429 $ 634 $ 617 $ 685 $1,164
CHARGE-OFFS:
Commercial............................ 20 332 8 70 360
Real estate........................... -- -- 50 34 158
Consumer.............................. -- 7 3 5 2
----- ----- ----- ---- ------
Total loans charged off............... 20 339 61 109 520
----- ----- ----- ---- ------
RECOVERIES:
Commercial............................ 6 13 60 15 32
Real estate........................... 3 -- 14 26 96
Consumer.............................. 3 4 -- -- --
----- ----- ----- ---- ------
Total recoveries...................... 12 17 74 41 128
----- ----- ----- ---- ------
Net charge-offs (recoveries).......... 8 322 (13) 68 392
----- ----- ----- ---- ------
Provision for (recovery of)
loan losses........................... -- 117 4 -- (87)
----- ----- ----- ---- ------
Balance at end of year................ $ 421 $ 429 $ 634 $617 $ 685
===== ===== ===== ==== ======
Ratio of net charge-offs
(recoveries to average loans
outstanding........................... 0.03% 1.24% (.05)% .28% 1.49%
Ratio of allowance for loan
losses to loans at year-end........... 1.33% 1.45% 2.71% 2.45% 2.81%
</TABLE>
28
<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,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ----- ----
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............ $ 60 14.3% $ 82 12.8% $109 17.9% $105 16.7% $ 88 18.6%
Real Estate
Mortgage and
Contruction........... 351 83.3% 334 82.8% 502 76.9% 492 80.0% 560 77.5%
Consumer.............. 10 2.4% 13 4.4% 23 5.2% 20 3.3% 37 3.9%
---- ---- ---- ---- ----
Total Allowance for
Loan Losses........... $421 $429 $634 $617 $685
==== ==== ==== ==== ====
</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, 1999, the Bank's liquidity ratio was 52.05%.
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
29
<PAGE>
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.
The following table summarizes the carrying value of securities for the
dates indicated:
SECURITIES PORTFOLIO
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998 1997
<S> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. treasury and other government agencies.............. $22,273 $17,333 $ 9,828
State, county and municipal.............................. 1,007 1,685 1,854
Other.................................................... 755 806 112
------- ------- -------
Total available for sale................................. 24,055 19,824 11,794
------- ------- -------
HELD TO MATURITY:
U.S. treasury and other government agencies................ -- -- 250
------- ------- -------
Total held to maturity................................... -- -- 250
------- ------- -------
Total securities........................................... $24,055 $19,824 $12,044
======== ======= =======
</TABLE>
The following table sets forth the maturity distribution and weighted
average yields of the investment portfolio at December 31, 1999. 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>
<CAPTION>
1 Year 5 Years After
1 Year or less To 5 Years To 10 Years 10 Years
<S> <C> <C> <C> <C>
MATURITY DISTRIBUTION:
U.S. Agency Issues............................ $ -- $20,983 $ 945 $ 375
Municipal Issues.............................. 509 498 -- --
Other Corp Securities......................... -- 510 -- --
Federal Reserve Bank Stock.................... -- -- -- 265
------ ------- ----- -----
Total Maturity Distribution................. $ 509 $21,961 $ 945 $ 640
------ ------- ----- -----
WEIGHTED AVERAGE YIELD:
U.S. Agency Isses............................. -- 6.45% 6.18% 9.23%
Municipal Issues.............................. 10.43% 6.69% -- --
Other Crop Securities......................... -- 6.37% -- --
Federal Reserve Bank Stock.................... -- -- -- 6.00%
Total....................................... 10.43% 6.45% 6.18% 7.89%
====== ======= ===== =====
Total Portfolio Weighted Average Yield........ 6.56%
</TABLE>
30
<PAGE>
DEPOSITS
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. Certificates of
deposit in amounts of $100,000 or more totaled $4.7 million at December 31,
1999. 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.
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,
------------------------------------------------------------------
1999 1998 1997
------------------- -------------------- -------------------
Average Average Average Average Average Average
Interest-bearing deposits: Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
NOW accounts.............................. $ 7,387 1.76% $ 5,696 2.33$ $ 5,073 2.23%
Money market savings...................... 11,808 2.96 10,875 3.34 10,377 3.19
Regular savings........................... 3,250 2.77 3,298 2.94 3,369 2.94
Certificates of deposit................... 15,373 5.02 12,424 5.14 11,196 5.01
------- ------- -------
Total interest-bearing deposiuts.......... $37,818 3.55% $32,293 3.82% $30,015 3.68%
Non-interest-bearing deposits............... 11,522 10,546 8,829
------- ------- -------
Total deposits.............................. $49,340 $42,839 $38,844
======= ======= =======
</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, 1999:
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Maturity Period Amount Percent
--------------- ------ -------
<S> <C> <C>
3 months or less..................... $1,395 29.44%
Over 3 months to 6 months............ 852 17.98
Over 6 months to 12 months........... 979 20.66
Over 12 months....................... 1,513 31.93
------ -----
Total................................ $4,739 100.00%
====== ======
</TABLE>
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. For the
31
<PAGE>
periods ended December 31, 1999 and 1998, the expense for federal funds
purchased totaled approximately $0 and $7,000, 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,
1999, 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 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 weighing 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
---------------------------------- Minimum
1999 1998 1997
<S> <C> <C> <C> <C>
Tier 1 Risk-based Capital................ 23.3% 24.5% 17.4% 4.0%
Total Risk-based Capital................. 24.4 25.7 18.6 8.0
Leverage ratio........................... 14.7 17.2 11.0 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, 1999, cash, federal funds sold, held-to-maturity
investment securities maturing within one year and available-for-sale securities
represented 52.05% of deposits and other liabilities compared to 61.23% at
December 31, 1998 and 52.51% at December 31, 1997. See "-- Interest
Sensitivity." At December 31, 1999, based upon the Bank's investment policy,
approximately 100% of total investment securities were available for sale, and
were primarily invested in U.S. Treasury and agency securities. See "--
32
<PAGE>
Investment Activities." Asset liquidity is also provided by managing loan
maturities. At December 31, 1999, approximately 85.8% or $27.2 million of loans
would mature or reprice within a one-year period.
The following table summarizes the Bank's liquid assets for the periods
indicated:
SUMMARY OF LIQUID ASSETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash and due from banks................................... $ 2,667 $ 5,824 $ 1,987
Federal funds sold........................................ -- 8,550 7,600
Available-for-sale securities, at fair value.............. 24,055 19,824 11,794
------- ------- -------
Total liquid assets....................................... $26,722 $34,198 $21,381
======= ======= ========
Deposits and other liabilities............................ $51,341 $55,848 $40,719
Ratio of liquid assets to deposits and other liabilities.. 52.05% 61.23% 52.51%
</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 June 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities", which is required to be adopted in years
beginning after June 15, 2000. The statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. This Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measure them at fair value. Because the
Company does not use these derivative instruments and strategies, management
does not expect the adoption of this Statement to have any effect on earnings or
financial position.
33
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Financial Statements are included as pages F-1 through F-27 to this Form
10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT AND PRINCIPAL OFFICERS OF THE
COMPANY
DIRECTORS
The following lists the Board of Directors of the Company:
<TABLE>
<CAPTION>
Position(s) Held with the Director
Name Age(1) Term Expires Company(1) Since(2)
- -------------------------------- ----------- --------------------- -------------------------------- ----------------
<S> <C> <C> <C> <C>
Ronald W. Kosh 54 2000 Director 1998
George P. Shafran 72 2000 Vice Chairman 1997
Terrie G. Spiro 43 2000 President, CEO and 1999
Director
George K. Degnon 59 2001 Director 1993
Kevin P. Tighe 55 2001 Director 1994
Stanley I. Richards 63 2002 Director 1996
Harold E. Lieding 63 2002 Chairman 1990
Philip F. Herrick, Jr. 59 2002 Director 1987
</TABLE>
(1) As of December 31, 1999.
(2) Includes service as a director of the Bank prior to the formation of the
Company in 1998.
Set forth below is certain information regarding the directors and
executive officers of the Company. Unless otherwise indicated, each director and
executive officer has held his or her current position for the last five years.
RONALD W. KOSH is Vice President and Division Manager of AAA MidAtlantic,
Inc., Fairfax, Virginia. Mr. Kosh was General Manager of the American Automobile
Association, Inc., Fairfax, Virginia, from 1985 to 1997.
GEORGE P. SHAFRAN is a business consultant to a number of varied clients.
He is also involved in several partnerships and is the chairman of the AAA
MidAtlantic Advisory Board. He is president of Geo. P.
34
<PAGE>
Shafran & Associates, Inc., a consulting firm in McLean, Virginia. Mr. Shafran
serves as Vice Chairman of the Company and has served as Vice Chairman of the
Board of Directors of the Bank since August 1998.
TERRIE G. SPIRO is President and Chief Executive Officer of the Company and
the Bank, positions she has held since October 1999. Prior to that, she
served as a consultant to the Board of Directors of the Company and the Bank.
She is the founding President and Chief Executive Officer of Tysons National
Bank and Tysons Financial Corporation, its publicly-traded holding company. In
March 1998, Tysons Financial Corporation was acquired in a stock for stock
transaction by another public company, Mainstreet Financial Corporation. In
April 1998, Ms. Spiro resigned under her "change of control" provision then
served as a consultant for Riggs National Bank. Prior to 1988, when Ms. Spiro
began the organizational efforts for Tysons National Bank, she was the Senior
Vice President and Chief Lending Officer of Century National Bank in Washington,
D.C. Ms. Spiro is also an active member in several local community
organizations, including the United Way and the Fairfax County Chamber of
Commerce.
GEORGE K. DEGNON is president of Degnon Associates, Inc., a company that
provides organizational management services to national and international health
and medical associations, in McLean, Virginia.
KEVIN P. TIGHE is a senior partner in the law firm of Tighe, Patton,
Tabackman and Babbin in Washington, D.C. Mr. Tighe is also the owner and
Chairman of the Board of Directors of the McLean Racquet and Health Club in
McLean, Virginia.
STANLEY I. RICHARDS is the Chairman and President of the Richards
Corporation, a company engaged in the manufacture and sale of imagery
interpretation equipment and aircraft galley equipment in Sterling, Virginia.
HAROLD E. LIEDING is a senior partner in the law firm of Lieding and
Anderson, P.C., in McLean, Virginia, has practiced law in McLean since 1970. Mr.
Lieding is a member of the Fairfax Bar Association and the McLean Bar
Association. Mr. Lieding is the Chairman of the Board of the Company and the
Bank.
PHILIP F. HERRICK, JR. is the owner of Herrick Holdings, which engages in
investments and real estate management in Northern Virginia.
EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the non-director
executive officers of the Company and/or the Bank:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Name Age Position(s) Held With the Company and the Bank
---- --- ----------------------------------------------
<S> <C> <C>
John P. Carroll 48 Executive Vice President and Chief Operating Officer
Janet A. Valentine 48 Executive Vice President and Chief Financial Officer
</TABLE>
The principal occupation and business of the non-director executive
officers is set forth below:
JOHN P. CARROLL joined the Bank in July, 1999 as the Executive Vice
President and Chief Operating Officer. Mr. Carroll was previously Vice
President/Marketing Officer of Fremont Financial Corporation. He was employed at
Tysons National Bank from 1993 to 1998 as the Senior Vice President and Chief
Credit Officer. Mr. Carroll's banking career began over 20 years ago at Maryland
National Bank and has included various positions and responsibilities.
JANET A. VALENTINE joined the Bank in September, 1999 as the Executive Vice
President and Chief Financial Officer. Ms. Valentine was previously the founding
Senior Vice President and Chief
35
<PAGE>
Financial Officer of Alliance Bank from April 1998 to September 1999. She was
employed at Tysons National Bank as Senior Vice President and Chief Financial
Officer from February 1996 to April 1999 and at Patriot National Bank from April
1991 to February 1996. Ms. Valentine has over 25 years banking experience and
obtained her CPA in the District of Columbia.
The executive officers of the Company and the Bank are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation, retirement or removal by the board of directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires that the Company's directors,
executive officers, and any person holding more than ten percent of the
Company's Common Stock file with the Securities and Exchange Commission (the
"SEC") reports of ownership changes, and that such individuals furnish the
Company with copies of the reports.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that all of its executive officers and directors complied with all Section 16(a)
filing requirements applicable to them.
ITEM 10. EXECUTIVE COMPENSATION
MANAGEMENT COMPENSATION
Directors' Fees. Currently, each outside director of the Company receives
the following fees:
o $250 per month; and
o $100 per committee meeting attended, with an annual payment cap of
$600.
In 2000, directors fees increased to $500 per month and $100 per committee
meeting with an annual payment cap of $700. Members of the executive committee
receive $750 per month.
Outside Directors of the Company are also eligible to receive options under
the Company' stock option plans. See --Stock Ownership of Certain Beneficial
Owners and Management" for the number of stock options granted to each director.
36
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth cash and noncash compensation for the fiscal
years ended December 31, 1999, 1998 and 1997 awarded to or earned by the
Company's and the Bank's Chief Executive Officer. No other officers received
total compensation in excess of $100,000 in such years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation(1) Compensation
- --------------------------------------------------------------------------------------------------------------
Name and Principal Other Annual Awards All Other
Positions(2) Year Salary($) Bonus($) Compensation ($) Options (#) Compensation ($)
<S> <C> <C> <C> <C> <C> <C>
Terrie G. Spiro, 1999 80,000 28,000 -- 8,000(3) 10,000(5)
President and Chief
Executive Officer
John T. Rohrback, 1999 8,558 -- -- -- 15,585(6)
Former President and 1998 100,000 -- -- -- 10,228(4)
Chief Executive Officer 1997 100,000 10,000 -- -- 3,829
</TABLE>
(1) Under Annual Compensation, the column titled "Salary" includes base salary,
amounts deferred under the Bank's 401(k) plan (but not matching
contributions from the Bank) and payroll deductions for health insurance
under the Bank's health insurance plan.
(2) Effective October 1, 1999, Ms. Spiro has been serving as President and
Chief Executive Officer of the Bank and the Company. Effective January 25,
1999, Mr. Rohrback's employment with the Bank terminated. He had served as
the President and Chief Executive Officer of the Bank since July of 1996.
(3) Ms. Spiro received an option to purchase 5,000 shares of Company common
stock, which is fully exercisable and an option to purchase 3,000 shares of
Company common stock, which will vest on the first anniversary date of Ms.
Spiro's employment with the Bank.
(4) This amount includes (a) the use of the vehicle provided by the Bank valued
at $8,126 and $3,325 for the years ended December 31, 1998 and 1997,
respectively; (b) the amount of insurance premiums paid by the Bank on
behalf Mr. Rohrback in the amounts of $600 and $504 for the years ended
December 31, 1998 and 1997, respectively; and (c) contributions made by the
Bank to Mr. Rohrback's 401(k) Plan account in the amount of $1,502 in 1998
for the fiscal year ended December 31, 1997;
(5) Executive expense allowance of $10,000 for the fiscal year ended December
31, 1999 to be used for auto, country club dues, disability insurance and
other expenses.
(6) This amount represents severance pay received by Mr. Rohrback upon his
resignation.
37
<PAGE>
STOCK OPTION PLANS
The Company's 1998 Outside Directors Stock Option Plan (the "Directors
Option Plan") and the Company's 1998 Employee Incentive Stock Option Plan (the
"Employee Option Plan," together with the Directors Option Plan, the "Stock
Option Plans") were adopted by the Board of Directors of the Bank and approved
by its shareholders at the 1998 Annual Meeting. The purpose of the Stock Option
Plans is to promote the growth of the Company, the Bank and other affiliates by
linking the incentive compensation of officers, key executives and directors
with the profitability of the Company. The Stock Option Plans are not subject to
ERISA and are not tax-qualified plans. The Company has reserved an aggregate of
75,000 shares of Common Stock under each Plan for issuance upon the exercise of
stock options granted under each stock option plan. The Company also has made
stock option grants that remain outstanding under the 1992 Employee Stock Option
Plan.
The members of a stock option committee (the "Option Committee") administer
the Stock Option Plans. The option committee administering the Employee Option
Plan consists of not less than three members of the Board of Directors. In
contrast, the option committee administering the Outside Directors Option
Committee consists of three members, including an outside director, an employee
who is not an outside director, and a stockholder who is neither an employee or
an outside director. Options may be granted to eligible employees and to members
of the Board who are Outside Directors. The Option Committee has discretion
under the Stock Option Plans to establish certain material terms of the Options
granted to employees or to Outside Directors provided such grants are made in
accordance with the Stock Option Plans' requirements. As of December 31, 1999,
each Outside Director of the Company had been granted a non-qualified stock
option to purchase an aggregate of 2,000 shares of Common Stock at an exercise
price of $4.00 per share. Under the Employee Incentive Stock Option Plan, as of
December 31, 1999, options for 26,107 shares of Common Stock have been granted
to eligible employees.
All stock options currently granted under the Plan are immediately
exercisable. The Option Committee has the discretion to determine the vesting
schedule of a stock option award; provided, however, that each option granted
shall automatically become 100% vested and fully exercisable in the event of an
option holder's death, disability or retirement or upon a "change in control" of
the Company. No option is exercisable after the tenth anniversary from the date
it was granted. The Company pays all costs and expenses of the Stock Option
Plans. The Company has reserved the right to amend or terminate the Stock Option
Plans, in whole or in part, subject to the requirements of all applicable laws.
38
<PAGE>
The following table summarizes the option grants that were made to Terrie
G. Spiro during the fiscal year ended December 31, 1999.
OPTION/SAR GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
Individual Grants
- -------------------------------------------------------------------------------------------------------------------
Number of Percent of Total
Securities Options/SARs
Name Underlying Granted to Exercise or Base
Options/SARs Employees in Price
Granted Fiscal Year ($ per Share) Expiration Date
(#)(1) (%)
<S> <C> <C> <C> <C> <C>
Terrie G. Spiro
President and
Chief Executive Officer 8,000 32.6 4.000 9/30/09
</TABLE>
- ---------------
(1) All options awarded were immediately exercisable upon grant, except for the
option to purchase 3,000 shares of Company common stock awarded to Ms.
Spiro. These options will vest on the first anniversary date of Ms. Spiro's
employment with the Bank.
The following table provides information with respect to Ms. Spiro and Mr.
Rohrback concerning the exercise of options during the last fiscal year and the
value for "in-the-money" options held by each at year end, which represents the
positive spread between the exercise price of any such existing stock options
and the year-end price of the Common Stock. Ms. Spiro and Mr. Rohrback did not
hold any "in-the-money" options at year end.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN 1999 FISCAL YEAR AND 1999 FISCAL YEAR END OPTION/VALUES
---------------- -------------- --------------------------------- ------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Name Shares Value Options/SARs at Fiscal Options/SARs at Fiscal
----- Acquired on Realized Year-end Year-end
Exercise (#) ($) (#) ($)
------------ --- Exercisable/Unexercisable Exercisable/Unexercisable(1)
-------------------------
<S> <C> <C> <C> <C>
Terrie G. Spiro -- -- 8,000/3,000 N/A
John T. Rohrback -- -- 2,581/0 N/A
</TABLE>
(1) Based upon a market price of $3.688 per share at December 31, 1999 minus
the exercise price.
EMPLOYMENT AGREEMENT
The Bank and the Company have entered into an employment agreement with
Terrie G. Spiro providing for an initial term of three years and every two years
thereafter, the employment agreement will be automatically extended an
additional two years unless either party gives the other six months prior
written notice of non-renewal. The employment agreement provides for an initial
annual base salary of $120,000, which will be reviewed annually by the
Compensation Committee, commencing with the salary for the calendar year 2002,
and increased as the Compensation Committee determines, but at least by the
Consumer Price Index. Upon the execution of the employment agreement, Ms. Spiro
was granted an option to purchase 5,000 shares of Company stock, which is fully
and immediately exercisable, and an option to purchase 3,000
39
<PAGE>
shares of Company stock, which will become fully exercisable one year from the
anniversary date of Ms. Spiro's employment with the Bank.
The employment agreement provides for an annual performance bonus in an
amount based on the performance of the Bank in relation to pre-established
targets for annual net profit and asset growth and for an annual grant of stock
options in an amount based on the performance of the Bank in relation to
pre-established targets for earnings and asset growth. The employment agreement
also provides for certain executive perquisites, such as the use of a car and
club dues.
The employment agreement also provides that in the event that Ms. Spiro's
employment is terminated by the Bank and the Company during the term of the
agreement for reasons other than just cause, Ms. Spiro will continue to receive
the payment of her salary and coverage under various fringe benefit plans for
the remaining term of the agreement, but in no event for a period of less than
nine months. Ms. Spiro also would be entitled to the continuation of her regular
salary for a period of not less than nine months if she resigns during the
agreement's term after any of the following occur without cure within 30 days:
(i) the requirement that she move her personal residence or perform her
executive duties more than thirty-five (35) miles from her primary office; (ii)
the assignment of duties and responsibilities not normal for the President and
Chief Executive Officer; (iii) loss of Board membership; and a material
diminution or reduction in her responsibilities or authority.
Within six months following a "change in control" of the Bank or the
Company, as defined in the employment agreement, Ms. Spiro may resign and be
entitled to receive a severance benefit equal to 2.99 multiplied by her annual
compensation plus bonus.
Prior to entering into the employment agreement, Ms. Spiro entered into a
consulting agreement with the Bank and the Company on May 3, 1999 under which
she provided services in an advisory capacity to the Bank and the Company as
requested and directed from time to time by the Board of Directors until her
appointment as President and Chief Executive Officer on October 1, 1999.
The compensation Ms. Spiro received in her capacity as a consultant to the Bank
and the Company is included in the Summary Compensation Table.
40
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 24, 2000, the beneficial
ownership of Common Stock of the Company by: (i) each director of the Company;
(ii) each executive officer named in the Summary Compensation Table; (iii) each
person who owns or is known by management to own beneficially more than five
percent of the outstanding shares of the Company's Common Stock; and (iv) all
executive officers and directors as a group.
<TABLE>
<CAPTION>
Name and Address Number of Shares
of Beneficial Owner (1) Owned Beneficially (1)(2) Percent of Class (3)
---------------------- ------------------------ --------------------
<S> <C> <C>
George K. Degnon 27,100(4) 1.18%
Philip F. Herrick, Jr. 136,058(5) 5.91
Ronald W. Kosh 10,900(6) .47
Harold E. Lieding 368,993(7) 16.00
Stanley I. Richards 18,102(8) .79
Terrie G. Spiro 45,000(9) 1.94
Kevin P. Tighe 11,000(10) .48
George P. Shafran 50,269(11) 2.10
All Directors and
Executive Officers as a
Group (10 persons) 679,422(12) 22.85%
-------
</TABLE>
- ---------------------
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from March 24, 2000. Unless
otherwise indicated, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them. Unless otherwise indicated, the
address for the individuals listed above is c/o Heritage Bancorp, Inc.,
1313 Dolley Madison Blvd., McLean, Virginia 22101.
(2) Based on 2,294,617 shares of Common Stock outstanding as of March 24, 2000.
Each beneficial owner's percentage ownership is determined by assuming that
options that are held by such person (but not those held by any other
person) and which are exercisable within 60 days from December 31, 1999
have been exercised.
(3) Includes stock options granted to the following outside directors: 6,000
shares to Messrs. Degnon, Herrick, Lieding, Richards and Tighe; 5,000
shares issued to Mr. Shafran and 3,500 shares issued to Mr. Kosh.
(4) Includes 100 shares held jointly with his spouse, and 20,000 shares held in
a profit sharing trust, of which Mr. Degnon serves as the trustee.
41
<PAGE>
(5) Includes 111,433 shares held jointly with his spouse.
(6) Includes 4,700 shares held jointly with his spouse.
(7) Includes 146,652 shares held in an individual retirement account.
(8) Includes 7,000 shares jointly held with his spouse and 2,500 held in his
spouse's name.
(9) Excludes an option to purchase 3,000 shares of Company common stock, which
is not exercisable nor will be exercisable within 60 days of March 24,
2000. Includes 22,000 options granted which are immediately exercisable.
(10) Includes 3,000 shares held jointly with his spouse.
(11) Includes 3,634 shares held as custodian for Mr. Shafran's minor
grandchildren.
(12) Includes additional options to purchase 8,000 shares of Company's common
stock granted to executive officers.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The officers, directors, their immediate families and affiliated companies
in which they are stockholders maintain normal relationships with the Company
and the Bank. Loans made by the Bank are made in the ordinary course of business
on the same terms, including interest rates and collateral, as those prevailing
at the time of comparable transactions with others and do not involve more than
normal risks of collectability or present other unfavorable features. The amount
of such loans was approximately $306,496 and $279,384 as of December 31, 1999
and 1998, respectively. No loan to a director or any director's related interest
exceeded ten percent of capital or exceeded $300,000 at December 31, 1999.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(1) The following financial statements of Heritage Bancorp, Inc. and the
Heritage Bank are incorporated herein by reference in item 8:
Balance Sheets - December 31, 1999 and 1998.
Statement of operation - Years ended December 31, 1999, 1998, and 1997.
Statement of changes in Stockholders' Equity - Years ended December 31,
1999, 1998, and 1997.
Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997.
Notes to Financial statements.
Report of independent accountants.
(2) Exhibits:
2.1 Agreement and Plan of Reorganization by and among The Heritage Bank
and Heritage Bancorp, Inc.*
3.1 Articles of Incorporation of Heritage Bancorp, Inc.*
3.2 Bylaws of Heritage Bancorp, Inc.*
3.3 Articles of Incorporation of The Heritage Bank*
3.4 Bylaws of The Heritage Bank*
4.1 Stock Certificate of Heritage Bancorp, Inc.*
10.1 The Heritage Bank 1998 Employee Incentive Stock Option Plan*
10.2 The Heritage Bank 1998 Outside Director Stock Option Plan*
10.3 The Heritage Bank 1992 Employee Incentive Stock Option Plan*
10.4 Employment Agreement between Terrie G. Spiro, The Heritage Bank and
Heritage Bancorp, Inc.**
21.1 Subsidiaries of the Registrant (see page 3 of Item 1)
23.1 Consent of Yount, Hyde & Barbour, P.C.
27.1 Financial Data Schedule (only filed in EDGAR format)
42
<PAGE>
*Incorporated by reference to the initial filing of the Registration Statement
on Form S-4 (File No. 333-58515) as filed with the U.S. Securities and Exchange
Commission on July 6, 1998, as amended,
**Incorporated by reference to the Form 10-QSB for the quarter ended June 30,
1999, as filed with the SEC on August 16, 1999.
(3) Reports on Form 8-K:
None.
43
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HERITAGE BANCORP, INC.
By: /s/ Terrie G. Spiro
-------------------------------------
Terrie G. Spiro
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Harold E. Lieding Chairman of the Board March 30, 2000
- --------------------------------
Harold E. Lieding
/s/ Terrie G. Spiro Director, President & Chief March 30, 2000
- --------------------------------- Executive Officer
/s/ George K. Degnon Director March 30, 2000
- ---------------------------------
George K. Degnon
Director March 30, 2000
- ---------------------------------
Kevin P. Tighe
/s/ Philip f. Herrick, Jr. Director March 30, 2000
- ---------------------------------
Philip F. Herrick, Jr.
Director March 30, 2000
- ---------------------------------
Ronald W. Kosh
/s/ Stanley I. Richards Director March 30, 2000
- ---------------------------------
Stanley I. Richards
/s/ George P. Shafran Director and Vice Chairman March 30, 2000
- ---------------------------------
George P. Shafran
/s/ Janet A. Valentine Secretary March 30, 2000
- ---------------------------------
Janet A. Valentine
</TABLE>
44
<PAGE>
HERITAGE BANCORP, INC.
AND SUBSIDIARY
MCLEAN, VIRGINIA
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1999
<PAGE>
C O N T E N T S
PAGE
INDEPENDENT AUDITOR'S REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statements of condition F-2
Consolidated statements of operations F-3
Consolidated statements of changes in stockholders' equity F-4
Consolidated statements of cash flows F-5 and F-6
Notes to consolidated financial statements F-7 - F-27
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Heritage Bancorp, Inc. and Subsidiary
McLean, Virginia
We have audited the accompanying consolidated statements of condition of
Heritage Bancorp, Inc. and Subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the three years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Heritage
Bancorp, Inc. and Subsidiary as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the three years then ended, in
conformity with generally accepted accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
February 4, 2000
F-1
<PAGE>
HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Cash and due from banks $ 2,667,443 $ 5,824,649
Federal funds sold -- 8,550,000
------------ ------------
Total cash and cash equivalents $ 2,667,443 $ 14,374,649
Securities available for sale, at approximate market value 24,054,515 19,823,754
Loans, net of allowance for loan losses of $420,940 in 1999
and $429,059 in 1998 31,268,232 29,181,039
Premises and equipment, net 848,995 376,453
Accrued interest receivable 535,571 459,340
Other real estate owned -- 263,199
Other assets 564,657 297,160
------------ ------------
Total assets $ 59,939,413 $ 64,775,594
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 13,707,792 $ 17,385,307
Interest-bearing deposits 34,284,891 36,056,672
------------ ------------
Total deposits $ 47,992,683 $ 53,441,979
Accrued interest and other liabilities 347,527 119,170
Securities sold under agreement to repurchase 3,001,225 2,286,781
Commitments and contingent liabilities -- --
------------ ------------
Total liabilities $ 51,341,435 $ 55,847,930
============ ============
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized 10,000,000
shares; issued and outstanding 2,294,617 shares $ 2,294,617 $ 2,294,617
Capital surplus 6,529,539 6,529,539
Retained earnings 210,534 28,549
Accumulated other comprehensive income (loss) (436,712) 74,959
------------ ------------
Total stockholders' equity $ 8,597,978 $ 8,927,664
------------ ------------
Total liabilities and stockholders' equity $ 59,939,413 $ 64,775,594
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE>
HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 2,689,853 $ 2,386,091 $ 2,285,986
Securities 1,413,942 1,117,858 816,256
Federal funds sold 277,106 262,053 154,066
----------- ----------- -----------
Total interest income $ 4,380,901 $ 3,766,002 $ 3,256,308
----------- ----------- -----------
INTEREST EXPENSE
Deposits $ 1,342,470 $ 1,233,550 $ 1,103,974
Securities sold under agreement to repurchase 96,794 38,859 6,797
----------- ----------- -----------
Total interest expense $ 1,439,264 $ 1,272,409 $ 1,110,771
----------- ----------- -----------
Net interest income $ 2,941,637 $ 2,493,593 $ 2,145,537
Provision for loan losses -- 117,000 3,825
----------- ----------- -----------
Net interest income after
provision for loan losses $ 2,941,637 $ 2,376,593 $ 2,141,712
----------- ----------- -----------
OTHER INCOME
Service charges on deposit accounts $ 116,343 $ 122,684 $ 112,039
Other operating income, net 47,835 15,477 21,233
Gain (loss) on sale of securities 1,468 (781) 47,261
Gain on sale of other real estate 56,611 -- --
----------- ----------- -----------
Total other income $ 222,257 $ 137,380 $ 180,533
----------- ----------- -----------
OTHER EXPENSES
Salaries and employee benefits $ 1,472,136 $ 1,074,228 $ 953,246
Occupancy expense 328,105 204,669 215,204
Equipment expense 146,172 73,667 88,275
Other operating expenses 942,821 1,068,643 579,961
----------- ----------- -----------
Total other expenses $ 2,889,234 $ 2,421,207 $ 1,836,686
----------- ----------- -----------
Income before income taxes $ 274,660 $ 92,766 $ 485,559
Income tax expense (benefit) 92,675 (40,639) (85,297)
----------- ----------- -----------
Net income $ 181,985 $ 133,405 $ 570,856
=========== =========== ===========
EARNINGS PER SHARE, BASIC $ 0.08 $ 0.07 $ 0.45
=========== =========== ===========
EARNINGS PER SHARE, ASSUMING DILUTION $ 0.08 $ 0.07 $ 0.44
=========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME (LOSS) INCOME (LOSS) TOTAL
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 1,249,634 $ 2,967,448 $ (675,712) $ 1,464 $ 3,542,834
Net income -- -- 570,856 -- $ 570,856 570,856
Other comprehensive income,
net of tax:
Unrealized holding gains on
securities available for sale
arising during period,
net of tax of $25,401 -- -- -- -- $ 47,845 --
Less reclassification adjustment,
net of tax of $16,068 -- -- -- -- (31,192) --
-----------
Other comprehensive income -- -- -- 16,653 $ 16,653 16,653
-----------
Comprehensive income -- -- -- -- $ 587,509 --
-----------
Warrants exercised 240,002 360,003 -- -- 600,005
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 $ 1,489,636 $ 3,327,451 $ (104,856) $ 18,117 $ 4,730,348
Net income -- -- 133,405 -- $ 133,405 133,405
-----------
Other comprehensive income,
net of tax:
Unrealized holding gains on
securities available for sale
arising during period,
net of tax of $29,016 -- -- -- -- $ 56,327 --
Add reclassification adjustment,
net of tax of $266 -- -- -- -- 515 --
-----------
Other comprehensive income -- -- -- 56,842 $ 56,842 56,842
-----------
Comprehensive income -- -- -- -- $ 190,247 --
-----------
Stock options exercised 2,700 7,120 -- -- 9,820
Repurchase of stock in odd lot tender (2,719) (12,236) -- -- (14,955)
Issuance of common stock 805,000 3,207,204 -- -- 4,012,204
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 $ 2,294,617 $ 6,529,539 $ 28,549 $ 74,959 $ 8,927,664
Net income -- -- 181,985 -- $ 181,985 181,985
-----------
Other comprehensive income,
net of tax:
Unrealized holding losses on
securities available for sale
arising during period,
net of tax of $263,089 -- -- -- -- $ (510,702) --
Less reclassification adjustment,
net of tax of $499 -- -- -- -- (969) --
-----------
Other comprehensive income (loss) -- -- -- (511,671) $ (511,671) (511,671)
-----------
Comprehensive income (loss) -- -- -- -- $ (329,686) --
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 $ 2,294,617 $ 6,529,539 $ 210,534 $ (436,712) $ 8,597,978
----------- ----------- ----------- ----------- -----------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 181,985 $ 133,405 $ 570,856
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses -- 117,000 3,825
(Gain) loss on sale of securities (1,486) 781 (47,261)
(Gain) on sale of fixed assets (200) -- --
(Gain) on sale of other real estate (56,611) -- --
Depreciation and amortization 81,460 50,958 67,733
Deferred tax (benefit) expense 72,362 (45,239) (85,297)
Amortization of investment security premiums,
net of discounts 22,442 37,438 13,845
(Increase) decrease in accrued interest and other assets (152,502) (319,486) 64,677
Increase (decrease) in accrued interest and other liabilities 228,357 5,412 (30,169)
------------ ------------ ------------
Net cash provided by (used in) operating activities $ 375,807 $ (19,731) $ 558,209
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and calls of securities available for sale $ 9,250,000 $ 9,195,000 $ 1,800,000
Purchase of securities available for sale (14,923,462) (17,676,403) (9,236,816)
Maturities of securities held to maturity -- 250,000 250,000
Proceeds from sale of securities available for sale 646,486 499,219 8,984,402
Net (increase) decrease in loans (2,087,193) (6,543,481) 1,825,409
Purchase of premises and equipment (554,002) (48,472) (90,920)
Proceeds from sale of equipment 200 -- --
Proceeds from sale of other real estate owned 319,810 -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities $ (7,348,161) $(14,324,137) $ 3,532,075
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in demand deposits, NOW accounts
and savings deposits $ (3,677,515) $ 8,639,394 $ 550,791
Increase (decrease) in certificates of deposit (1,771,781) 4,198,750 (2,333,488)
Proceeds from stock warrants exercised -- -- 600,005
Proceeds from sale of common stock -- 4,022,024 --
Repurchase of common stock -- (14,955) --
Increase in securities sold under agreement to repurchase 714,444 2,286,781 --
------------ ------------ ------------
Net cash provided by (used in) financing activities $ (4,734,852) $ 19,131,994 $ (1,182,692)
------------ ------------ ------------
Net change in cash and cash equivalents $(11,707,206) $ 4,788,126 $ 2,907,592
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 14,374,649 9,586,523 6,678,931
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,667,443 $ 14,374,649 $ 9,586,523
============ ============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 1,437,740 $ 1,269,516 $ 1,113,620
=========== ============ ===========
Income taxes $ 40,500 $ -- $ 9,187
=========== ============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
unrealized gain (loss) on securities available for sale $ (775,258) $ 86,124 $ 25,986
=========== ============ ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
HERITAGE BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Heritage Bancorp, Inc. (Company) is a bank holding company organized
under Virginia law in July, 1998. During 1998, the Company acquired
The Heritage Bank through a share exchange in which the stockholders
of The Heritage Bank received one share of the Company for each share
of The Heritage Bank. The exchange was a tax-free transaction for
federal income tax purposes. The merger was accounted for on the same
basis as a pooling-of-interests. Financial statements for the prior
years, have been retroactively adjusted for the exchange as if it
occurred on January 1, 1997.
The Company's wholly-owned subsidiary, The Heritage Bank (Bank) was
incorporated under Virginia law 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 headquartered in McLean, Virginia.
During 1999, the Bank opened its first branch office in Sterling,
Virginia.
BUSINESS
Heritage Bancorp, Inc. is a bank holding company that 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.
PRINCIPLES OF CONSOLIDATION
The accounting and reporting policies of Heritage Bancorp, Inc. and
subsidiary conform to generally accepted accounting principles and
general practices within the banking industry. The following is a
description of the more significant of those policies:
SECURITIES
Debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity"
and recorded at amortized cost. Securities not classified as held
to maturity, including equity securities with readily
determinable fair values, are classified as "available for sale"
and recorded at fair value, with unrealized gains and losses
excluded from earnings and reported in other comprehensive
income.
Purchased premiums and discounts are recognized in interest
income using the interest method over the terms of the
securities. Declines in the fair value of held to maturity and
available for sale securities below their cost that are deemed to
be other than temporary are reflected in earnings as realized
losses. Gains and losses on the sale of securities are recorded
on the trade date and are determined using the specific
identification method.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
LOANS
The Company grants mortgage, commercial and consumer loans to
customers. A substantial portion of the loan portfolio is
represented by residential and commercial real estate loans. The
ability of the Company's debtors to honor their contracts is
dependent upon the real estate and general economic conditions of
the Company's market area.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are
reported at their outstanding unpaid principal balances adjusted
for the allowance for loan losses and any deferred fees or costs
on originated loans. Interest income is accrued on the unpaid
principal balance. Loan origination fees, net of certain
origination costs, are deferred and recognized as an adjustment
of the related loan yield using the interest method.
The accrual of interest on mortgage and commercial loans is
discontinued at the time the loan is 90 days delinquent unless
the credit is well-secured and in process of collection.
Installment loans are typically charged off no later than 180
days past due. In all cases, loans are placed on nonaccrual or
charged-off at an earlier date if collection of principal or
interest is considered doubtful.
All interest accrued but not collected for loans that are placed
on nonaccrual or charged-off is reversed against interest income.
The interest on these loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all principal and
interest amounts contracturally due are brought current and
future payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are
estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan
balance is confirmed. Subsequent recoveries, if any, are credited
to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience,
the nature and volume of the loan portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value
of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information
becomes available.
A loan is considered impaired when, based on current information
and events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due
according to the contractural terms of the loan agreement.
Factors considered by management in determining impairment
include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment
shortfalls
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including
the length of the delay, the reasons for the delay, the
borrower's prior payment record, and the amount of the shortfall
in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction
loans by either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if
the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment. Accordingly, the Company
does not separately identify individual consumer and residential
loans for impairment disclosures.
BANK PREMISES AND EQUIPMENT
Land is carried at cost. Buildings and equipment are carried at
cost, less accumulated depreciation computed on the straight-line
method over the estimated useful lives of the assets.
INCOME TAXES
Deferred income tax assets and liabilities are determined using
the balance sheet method. Under this method, the net deferred tax
asset or liability is determined based on the tax effects of the
temporary differences between the book and tax bases of the
various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.
EARNINGS PER SHARE
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share
reflects additional common shares that would have been
outstanding if dilutive potential common shares had been issued,
as well as any adjustment to income that would result from the
assumed issuance. Potential common shares that may be issued by
the Company relate solely to outstanding stock options, and are
determined using the treasury method.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents
include cash and balances due from banks and federal funds sold.
OTHER REAL ESTATE
Assets acquired through, or in lieu of, loan foreclosure are held
for sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to
foreclosure, valuations are periodically performed by management
and the assets are carried at the lower of carrying amount or
fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in
net expenses from foreclosed assets.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
USE OF ESTIMATES
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management is required
to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the balance
sheet and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible
to significant change in the near term relate to the
determination of the allowance for loan losses, and the valuation
of foreclosed real estate and deferred tax assets.
ADVERTISING
The Company follows the policy of charging the costs of
advertising to expense as incurred. The amount of advertising
included in expense for December 31, 1999, 1998 and 1997 was
$37,231, $31,482 and $20,394, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which is required
to be adopted in years beginning after June 15, 2000. The
statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. This Statement establishes
accounting and reporting standards for derivative instruments and
hedging activities, including certain derivative instruments
embedded in other contracts, and requires that an entity
recognize all derivatives as assets or liabilities in the balance
sheet and measure them at fair value. Because the Company does
not use these derivative instruments and strategies, management
does not expect the adoption of this Statement to have any effect
on earnings or financial position.
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, 1999 and 1998, the aggregate amounts of daily average
required balances were approximately $469,000 and $391,000,
respectively.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 3. SECURITIES
The amortized cost, with gross unrealized gains and losses, follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities Available for Sale
U.S. Government agencies $22,916,301 $ -- $ (643,120) $22,273,181
Obligations of states and
political subdivisions 1,009,856 -- (3,378) 1,006,478
Corporate 525,343 -- (15,187) 510,156
Other 264,700 -- -- 264,700
----------- ----- ----------- -----------
Total $24,716,200 $ -- $ (661,685) $24,054,515
=========== ===== =========== ===========
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Securities Available for Sale
U.S. Treasury securities $ 3,021,530 $ 29,721 $ -- $ 3,051,251
U.S. Government agencies 14,769,231 57,082 (2,344) 14,823,969
Obligations of states and
political subdivisions 1,654,720 29,114 -- 1,683,834
Corporate
Other 264,700 -- -- 264,700
----------- ----------- ----------- -----------
Total $19,710,181 $ 115,917 $ (2,344) $19,823,754
=========== =========== =========== ===========
</TABLE>
The amortized cost and fair value of securities by contractural
maturity follows:
<TABLE>
<CAPTION>
1999
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less $ 510,000 $ 508,477
Due from one year to five years 22,565,980 21,961,130
Due from five years to ten years 1,000,000 944,688
Due after ten years 375,520 375,520
Federal Reserve stock 264,700 264,700
----------- -----------
Total $24,716,200 $24,054,515
=========== ===========
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
Proceeds from sale of securities available for sale during 1999, 1998
and 1997 were $646,486 $449,219 and $8,984,402. Gross gains on those
sales during 1999, 1998 and 1997 were $1,468, $0 and $47,261. Gross
losses on those sales were $0, $781 and $0 during 1999, 1998 and 1997,
respectively.
Securities having a book value of approximately $5,496,544 and
$3,792,558 at December 31, 1999 and 1998, were pledged to secure
public deposits, letters of credit, and customer repurchase
agreements.
NOTE 4. LOANS
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Real estate:
Residential $ 10,475 $ 11,168
Commercial 13,088 11,791
Farmland 972 992
Construction 1,157 441
Commercial 3,665 3,279
Consumer 1,507 1,306
All other loans 825 633
-------- --------
$ 31,689 $ 29,610
Less: allowance for loan losses (421) (429)
-------- --------
Loans, net $ 31,268 $ 29,181
======== ========
</TABLE>
Analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 429 $ 634 $ 617
Provision for loan losses -- 117 4
Loans charged-off (20) (339) (61)
Recoveries 12 17 74
----- ----- -----
Balance at end of year $ 421 $ 429 $ 634
===== ===== =====
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
Information about impaired loans is as follows:
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Impaired loans for which an allowance
has been provided $ -- $ 29,370
Impaired loans for which no allowance
has been provided -- --
------- --------
Total impaired loans $ -- $ 29,370
------- --------
Allowance provided for impaired loans,
included in the allowance for loan
losses $ -- $ 11,405
------- --------
<CAPTION>
1999 1998 1997
------- --------- ---------
<S> <C> <C> <C>
Average balance in impaired loans $ 2,719 $ 176,334 $ 378,901
------- --------- ---------
Interest income recognized $ 524 $ 23,605 $ 26,858
------- --------- ---------
</TABLE>
There were no nonaccrual loans excluded from impaired loan disclosure
at December 31, 1999. Nonaccrual loans excluded from impaired loan
disclosure under FASB 114 amounted to $365,670 at December 31, 1998.
If interest on these loans had been accrued, such income would have
approximated $26,836.
NOTE 5. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has granted loans to
principal officers and directors and their affiliates amounting to
$306,496 at December 31, 1999 and $279,384 at December 31, 1998.
During the year ended December 31, 1999, total principal additions
were $150,500 and total principal payments were $123,388.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 6. PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of premises and
equipment follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Land $ 245,000 $ 245,000
Land improvements 41,964 31,885
Leasehold improvements 242,997 147,647
Equipment, furniture and fixtures 459,268 354,200
--------- ---------
$ 989,229 $ 778,732
Less accumulated depreciation
and amortization (140,234) (402,279)
--------- ---------
$ 848,995 $ 376,453
========= =========
</TABLE>
Depreciation and amortization charged to operations totaled $81,460,
$50,958 and $67,733 in 1999, 1998 and 1997, respectively.
NOTE 7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase, which are classified
as secured borrowings, generally mature within one to four days from
the transaction date. Securities sold under agreements to repurchase
are reflected at the amount of cash received in connection with the
transaction. The Company may be required to provide additional
collateral based on the fair value of the underlying securities.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 8. INCOME TAXES
The components of the net deferred tax assets, included in other
assets, are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ -- $ 47,105
Alternative minimum tax credits -- 6,652
Unrealized loss on securities available for sale 224,973 --
Accumulated depreciation 24,794 28,160
Allowance for loan losses 32,448 32,448
Organization costs 15,286 19,362
Other -- 11,163
-------- --------
Gross deferred tax asset $297,501 $144,890
======== ========
DEFERRED TAX LIABILITIES, unrealized gain
on securities available for sale $ -- $ 38,615
-------- --------
Net deferred tax assets $297,501 $106,275
-------- --------
</TABLE>
Allocation of federal income taxes between current and deferred
portions is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Current $ 165,498 $ 4,600 $ --
Deferred (72,823) 40,058 161,717
Change in valuation allowance -- (85,297) (247,014)
--------- --------- ---------
$ 92,675 $ (40,639) $ (85,297)
========= ========= =========
</TABLE>
The reasons for the difference between the statutory federal income
tax rate and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Tax expense at statutory rate $ 93,384 $ 31,540 $ 165,090
Change in valuation allowance -- (85,297) (247,014)
Other, net (709) 13,118 (3,373)
--------- --------- ---------
$ 92,675 $ (40,639) $ (85,297)
========= ========= =========
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 9. DEPOSITS
The aggregate amount of time deposits, in denominations of $100,000 or
more at December 31, 1999 and 1998 was $4,738,768 and $6,339,277,
respectively.
At December 31, 1999, the scheduled maturities of time deposits are as
follows:
2000 $ 9,095,970
2001 4,932,561
2002 1,368,049
------------
$ 15,396,580
============
NOTE 10. OTHER OPERATING EXPENSES
The components of other operating expenses consisted of the following
for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Data processing $ 126,762 $ 99,589 $ 78,702
Professional fees 175,555 374,229 115,024
Stationary and supplies 85,693 70,172 61,957
Postage 38,461 33,235 36,899
Stockholder expense 49,329 77,524 18,116
Bank franchise tax 59,556 27,597 27,366
Business development 84,533 31,482 20,794
Other (includes no items in excess of
1% of total revenue) 322,932 354,815 221,103
---------- ---------- ----------
$ 942,821 $1,068,643 $ 579,961
========== ========== ==========
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
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 stockholders.
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- -----------------------------
PER SHARE PER SHARE PER SHARE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------------ --------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings
per share 2,294,617 $ 0.08 1,890,666 $ 0.07 1,271,176 $ 0.45
============ ============ =============
Effect of dilutive
securities:
Stock options 6,931 5,585 1,307
Warrants -- -- 22,726
Diluted earnings
per share 2,301,548 $ 0.08 1,896,251 $ 0.07 1,295,209 $ 0.44
============ ============ =============
</TABLE>
NOTE 12. COMMITMENTS AND CONTINGENCIES
The Company leases its main office and operations center in McLean and
its branch office in Sterling. The McLean lease contains three, five
year renewal periods and expires in 2008. The Sterling lease has a
term of ten years with one five year renewal option. The Sterling
lease expires in 2009. Total rent expense was $310,910, $191,272 and
$194,945 for 1999, 1998 and 1997, 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.
2000 $ 336,892
2001 350,194
2002 364,325
2003 374,705
2004 385,959
Due thereafter 1,355,997
----------
$3,168,072
==========
The Company entered into a long-term lease for its Tyson's branch on
March 16, 2000, which is subject to regulatory approval. The lease
expires March 31, 2006 and has annual base rent of $111,078 with 3%
yearly increases.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
In the normal course of business there are outstanding various
commitments and contingent liabilities, which are not reflected in the
accompanying consolidated financial statements. Management does not
anticipate any material losses as a result of these transactions.
See Note 15 with respect to financial instruments with
off-balance-sheet risk.
NOTE 13. STOCK-BASED COMPENSATION
In 1998, the stockholders approved an employee incentive stock option
plan. The option price for shares granted under this plan shall be
determined by a Committee of the Company's Board of Directors, but in
no event shall the option price be less than the fair market value of
the Company's stock at the time of grant. The term of each option
granted under the plan is ten years, unless the optionee has been
discharged from his or her employment by the Company for cause in
which case the option must be exercised no later than six months
following the date of discharge. The maximum aggregate number of
shares which may be optioned and sold under the plan is 75,000 shares.
As of December 31, 1999, 29,480 options were outstanding under this
plan.
In 1992, the Company adopted a nonqualified stock option plan which
full-time employees and part-time employees working at least 25 hours
per week were eligible to receive options to acquire Common Stock.
Options expire ten years after the date of grant. There are 18,125
options outstanding under this plan as of December 31, 1999.
Grants under the above plans are accounted for following APB Opinion
No. 25 and related interpretations. Accordingly, no compensation cost
has been recognized for grants under the stock option plans. No
employee stock options were granted during 1997 and 1996. Had
compensation cost for the employee stock-based compensation plan been
determined based on the grant date fair values of awards (the method
described in FASB Statement No. 123), reported net income and earnings
per common share would have been reduced to the pro forma amounts
shown below for 1999:
<TABLE>
<S> <C>
Net income:
As reported $ 181,985
Pro forma $ 139,600
Basic earnings per share:
As reported $ .08
Pro forma $ .06
Diluted earnings per share:
As reported $ .08
Pro forma $ .06
</TABLE>
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model. The following weighted average
assumptions for grants in 1999 were used: price volatility of 20.9%;
risk-free interest rate of 6.5%; dividend rate of 0.00% and expected
life of 10 years.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
The status of the Option Plans during 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1 29,550 $ 3.45 27,375 $ 3.43 30,675 $ 3.51
Granted 24,500 3.97 8,925 3.875 -- --
Exercised -- -- (2,700) 3.64 -- --
Canceled (6,445) 3.96 (4,050) 4.13 (3,300) 4.20
------ ------ ------
Outstanding at
December 31 47,605 $ 3.65 29,550 $ 3.45 27,375 $ 3.43
------ ------ ------
Exercisable at
end of year 47,605 29,550 27,375
====== ====== ======
Weighted-average
fair value per
option of options
granted during
the year $ 2 $ 2 $ --
====== ====== =====
</TABLE>
The Status of the options outstanding at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE
EXERCISE AND CONTRACTUAL EXERCISE
PRICE EXERCISABLE LIFE PRICE
------------- ----------- ----------- --------
<S> <C> <C> <C>
$3.10 - $3.15 18,125 0.75 years 3.14
$3.875 12,480 9.35 3.875
$4.00 16,000 9.75 4.00
$4.25 1,000 9.75 4.25
------
47,605 6.22 3.65
======
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 14. DIRECTOR COMPENSATION PLAN
In 1998, the stockholders approved a stock option plan for outside
directors of the Company. The option price for shares to be issued
upon exercise of any option granted under this plan shall be
determined by a Committee of the Company's Board of Directors, but in
no event shall the option price be less than the fair market value of
the Company's stock at the time of grant. The term of each option
granted under this plan shall be ten years from the date of grant. If
a director resigns or is removed from the Board, all of the Director's
stock options must be exercised within sixty days of his or her
departure from the Board. The maximum aggregate number of shares which
may be optioned and sold under the plan is 75,000 shares. As of
December 31, 1999, 28,500 options were outstanding under this plan.
On March 26, 1997, the Board of Directors granted stock options to
those members serving on the Bank's Board of Directors, who were not
employees or officers of the Bank, 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, 1999, there were 10,000 options outstanding.
The status of the Option Plan during 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ------------------------ -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 26,000 $ 3.48 10,000 $ 2.86 -- $ --
Granted 14,000 4.00 16,000 3.875 10,000 2.86
Forfeited (1,500) 3.875 -- -- -- --
------ ------ ------
Outstanding at December 31 38,500 $ 3.66 26,000 $ 3.48 10,000 $ 2.86
====== ====== ======
</TABLE>
The status of the options outstanding as of December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED NUMBER
AVERAGE OUTSTANDING REMAINING
EXERCISE AND CONTRACTUAL
PRICE EXERCISABLE LIFE
------- ----------- ---------
<S> <C> <C>
$ 2.860 10,000 7.25 years
3.875 14,500 8.75
4.000 14,000 10
------
$ 3.660 38,500 8.81
======
</TABLE>
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is party to credit related 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. Such
commitments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
consolidated balance sheets.
The Company's exposure to credit loss is represented by the
contractural amount of these commitments. The Company uses the same
credit policies in making commitments as it does for on-balance-sheet
instruments.
At December 31, 1999 and 1998, the following financial instruments
were outstanding whose contract amounts represent credit risk:
<TABLE>
<CAPTION>
1999 1998
---------------- --------------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 10,594,692 $ 8,708,866
Standby letters of credit $ 92,333 $ 181,900
</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 Company evaluates each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company 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.
Unfunded commitments under commercial lines of credit, revolving
credit lines and overdraft protection agreements are commitments for
possible future extensions of credit to existing customers. These
lines of credit may be uncollateralized and usually do not contain a
specified maturity date and may not be drawn upon to the total extent
to which the Company is committed.
Standby letters of credit are conditional commitments issued by the
Company 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 Company holds cash and marketable
securities supporting those commitments for which collateral is deemed
necessary.
The Company maintains several cash accounts in other commercial banks.
The amount on deposit with correspondent institutions at December 31,
1999, exceeded the insurance limits of the Federal Deposit Insurance
Corporation by $490,963.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 16. RESTRICTIONS ON TRANSFERS TO PARENT
Federal and state banking regulations place certain restrictions on
dividends paid and loans or advances made by the Bank to the Company.
The total amount of dividends, which may be paid at any date is
generally limited to the retained earnings of the Bank, and loans or
advances are limited to 10 percent of the Bank's capital stock and
surplus on a secured basis. As of December 31, 1999, the aggregate
amount of unrestricted funds, which could be transferred from the
banking subsidiary to the Parent Company without prior regulatory
approval totaled $1,025,519 or 11.93% of the consolidated net assets.
NOTE 17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
SECURITIES
For securities held for investment purposes, fair values are
based on quoted market prices or dealer quotes.
LOAN RECEIVABLES
For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on
carrying values. Fair values for certain mortgage loans (e.g.,
one-to-four family residential), and other consumer loans are
based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for
differences in loan characteristics. Fair values for other loans
(e.g., commercial real estate and investment property mortgage
loans, commercial and industrial loans) are estimated using
discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for non-performing loans are
estimated using discounted cash flow analyses or underlying
collateral values, where applicable.
DEPOSITS
The fair values disclosed for demand deposits (e.g., interest and
non-interest checking, statement savings, and certain types of
money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying
amounts). The carrying amounts of variable-rate, fixed-term money
market accounts and certificates of deposit approximate their
fair values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
ACCRUED INTEREST
The carrying amounts of accrued interest approximate fair value.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit were evaluated and fair value was
estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the
counterparties. The fair value of standby letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting date. The
carrying amount of treasury, tax and loan deposits approximates
the fair value.
The carrying amounts and fair values of financial instruments as
of December 31, 1999 are presented below:
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 2,667 $ 2,667 $ 5,825 $ 5,825
Federal funds sold and securities
purchased under agreement to resell -- -- 8,550 8,550
Securities 24,055 24,055 19,824 19,824
Loans, net 31,268 31,113 29,181 29,539
Accrued interest receivable 536 536 459 459
Financial liabilities:
Deposits $47,993 $47,918 $53,442 $53,684
Securities sold under agreement
to repurchase 3,001 3,001 2,287 2,287
Accrued interest payable 53 53 55 55
</TABLE>
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 18. CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the Bank are subject to
various regulatory capital requirements administered by the Federal
banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct
material effect on the Company's and Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Prompt corrective action provisions are not applicable to bank holding
companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined)
and of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1999 and 1998, that the
Company and the Bank met all capital adequacy requirements to which
they are subject.
As of December 31, 1999, 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, an institution 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.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
The Company and Subsidiary's actual capital amounts and ratios are
also presented in the table. No amount was deducted from capital for
interest-rate risk.
<TABLE>
<CAPTION>
MINIMUM
TO BE WELL
CAPITALIZED UNDER
MINIMUM CAPITAL PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
------ ----------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Amount in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 9,456 24.5% greater than greater than N/A
or equal to $ 3,088 or equal to 8.0%
The Heritage Bank $ 9,456 24.5% greater than greater than greater than greater than
or equal to $ 3,088 or equal to 8.0% or equal to $ 3,860 or equal to 10.0%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $ 9,035 23.4% greater than greater than N/A
or equal to $ 1,544 or equal to 4.0%
The Heritage Bank $ 9,035 23.4% greater than greater than greater than greater than
or equal to $ 1,544 or equal to 4.0% or equal to $ 2,316 or equal to 6.0%
Tier 1 Capital (to
Average Assets)
Consolidated $ 9,035 14.7% greater than greater than N/A
or equal to $ 2,453 or equal to 4.0%
The Heritage Bank $ 9,035 14.7% greater than greater than greater than greater than
or equal to $ 2,453 or equal to 4.0% or equal to $ 3,066 or equal to 5.0%
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 9,282 25.7% greater than greater than N/A
or equal to $ 2,886 or equal to 8.0%
The Heritage Bank $ 9,282 25.7% greater than greater than greater than greater than
or equal to $ 2,886 or equal to 8.0% or equal to $ 3,607 or equal to 10.0%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $ 8,853 24.5% greater than greater than N/A
or equal to $ 1,443 or equal to 4.0%
The Heritage Bank $ 8,853 24.5% greater than greater than greater than greater than
or equal to $ 1,443 or equal to 4.0% or equal to $ 2,164 or equal to 6.0%
Tier 1 Capital (to
Average Assets)
Consolidated $ 8,853 17.2% greater than greater than N/A
or equal to $ 2,060 or equal to 4.0%
The Heritage Bank $ 8,853 17.2% greater than greater than greater than greater than
or equal to $ 2,060 or equal to 4.0% or equal to $ 2,575 or equal to 5.0%
</TABLE>
NOTE 19. COMMON STOCK
On May 18, 1998, the Company completed a secondary stock offering in
which it sold 805,000 shares of common stock at a price of $5.50 per
share. Net proceeds for the Company were $4,012,204 after deducting
underwriting commissions of $309,925 and direct offering costs of
$105,371. On June 8, 1998, the Company 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 $14,955.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 20. PARENT COMPANY ONLY FINANCIAL STATEMENTS
HERITAGE BANCORP, INC.
(Parent Company Only)
BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
ASSETS
<S> <C> <C>
Investment in subsidiary, at cost, plus
equity in undistributed net income $ 8,737,251 $ 9,017,608
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES, due to subsidiary $ 139,273 $ 89,944
----------- -----------
STOCKHOLDERS' EQUITY
Common stock $ 2,294,617 $ 2,294,617
Surplus 6,529,539 6,529,539
Retained earnings 210,534 28,549
Accumulated other comprehensive income (436,712) 74,959
----------- -----------
Total stockholders' equity $ 8,597,978 $ 8,927,664
----------- -----------
Total liabilities and stockholders' equity $ 8,737,251 $ 9,017,608
=========== ===========
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
HERITAGE BANCORP, INC.
(Parent Company Only)
STATEMENTS OF INCOME
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
INCOME
Equity in undistributed net income of subsidiary $231,314 $223,349
-------- --------
EXPENSES
Organization costs $ -- $ 89,944
Stockholder expense 49,329 --
-------- --------
Total expenses $ 49,329 $ 89,944
-------- --------
Net income $181,985 $133,405
======== ========
</TABLE>
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 181,985 $ 133,405
Adjustments to reconcile net income to
net cash provided by operating activities,
increase in due to subsidiary 49,329 89,944
Undistributed earnings of subsidiary (181,985) (223,349)
--------- ---------
Net cash provided by operating activities $ 49,329 $ --
CASH AND CASH EQUIVALENTS, beginning of year -- --
--------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 49,329 $ --
========= =========
</TABLE>
F-27
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
Exhibit 27
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>
<CIK> 0001065304
<NAME> HERTIGAGE BANCORP, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,667,000
<INT-BEARING-DEPOSITS> 34,285,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,055,000
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 31,689,000
<ALLOWANCE> 420,940
<TOTAL-ASSETS> 59,939,000
<DEPOSITS> 47,993,000
<SHORT-TERM> 3,001,000
<LIABILITIES-OTHER> 348,000
<LONG-TERM> 0
0
0
<COMMON> 2,295,000
<OTHER-SE> 6,303,000
<TOTAL-LIABILITIES-AND-EQUITY> 59,939,000
<INTEREST-LOAN> 2,690,000
<INTEREST-INVEST> 1,414,000
<INTEREST-OTHER> 277,000
<INTEREST-TOTAL> 4,381,000
<INTEREST-DEPOSIT> 1,342,000
<INTEREST-EXPENSE> 1,439,000
<INTEREST-INCOME-NET> 2,942,000
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 1,468
<EXPENSE-OTHER> 2,889,000
<INCOME-PRETAX> 275,000
<INCOME-PRE-EXTRAORDINARY> 275,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 182,000
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
<YIELD-ACTUAL> 4.13
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,664,000
<ALLOWANCE-OPEN> 429,000
<CHARGE-OFFS> 20,000
<RECOVERIES> 12,000
<ALLOWANCE-CLOSE> 421,000
<ALLOWANCE-DOMESTIC> 421,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
