<TABLE>
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
<CAPTION>
September 30, December 31,
1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks $36,094 $36,870
Federal funds sold and interest bearing deposits 38,046 49,286
------ ------
Total cash and cash equivalents 74,140 86,156
Securities:
Held-to-maturity (market value: $292,391 in
1995 and $228,416 in 1994) 289,591 236,810
Available-for-sale (at market value) 87,403 71,478
------- -------
Total securities 376,994 308,288
Loans, net of unearned income 567,695 524,815
Less: allowance for loan losses (8,713) (8,720)
------- -------
Net loans 558,982 516,095
Premises and equipment 16,502 17,079
Goodwill and core deposit intangibles 13,960 15,080
Other assets 11,892 10,152
---------- --------
TOTAL ASSETS $1,052,470 $952,850
========== ========
LIABILITIES
Demand deposits $153,542 $143,378
NOW accounts 71,289 78,654
Money market accounts 96,535 66,889
Savings deposits 203,884 232,100
Time deposits 377,776 302,569
-------- -------
Total deposits 903,026 823,590
Securities sold under agreements to repurchase 48,203 33,018
Notes payable 1,500 6,500
Other liabilities 7,789 6,631
------- -------
TOTAL LIABILITIES 960,518 869,739
SHAREHOLDERS' EQUITY
Preferred shares - no par value; shares authorized:
12,000,000; shares issued: none - -
Common shares - $.625 par value; shares authorized:
16,000,000; shares issued: 7,939,222 in 1995
and 7,915,972 in 1994 4,962 4,947
Surplus 17,498 17,385
Retained earnings 69,980 62,879
Net unrealized gains (losses) on securities, net
of tax (488) (2,100)
------ -------
TOTAL SHAREHOLDERS' EQUITY 91,952 83,111
---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$1,052,470 $952,850
========== ========
<FN>
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE> 3
<TABLE>
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Nine Months Ended September 30, 1995 and 1994
(in thousands, except per share data)
(unaudited)
<CAPTION>
1995 1994
<S> <C> <C>
INTEREST INCOME
Loans, including fees $35,710 $29,817
Securities:
Taxable 13,828 9,200
Exempt from federal income taxes 3,222 3,163
Federal funds sold and interest bearing
deposits 1,872 1,253
------- ------
TOTAL INTEREST INCOME 54,632 43,433
------- ------
INTEREST EXPENSE
Deposits 23,104 14,942
Other borrowings 1,364 555
------- ------
TOTAL INTEREST EXPENSE 24,468 15,497
------- ------
NET INTEREST INCOME 30,164 27,936
------- ------
Provision for loan losses 150 90
------- ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 30,014 27,846
------- ------
OTHER INCOME
Service charges on deposit accounts 3,079 2,885
Income for trust services 562 523
Investment product fees 633 626
Other operating income 755 743
Securities gains 205 10
------ ------
TOTAL OTHER INCOME 5,234 4,787
------ ------
OTHER EXPENSES
Salaries and employee benefits 11,466 10,638
Net occupancy expense 1,915 1,744
Equipment expense 1,170 1,113
Federal deposit insurance premiums 869 1,254
Data processing expense 613 574
Amortization of intangible assets 1,207 957
Other operating expenses 3,592 2,835
------- ------
TOTAL OTHER EXPENSES 20,832 19,115
------- ------
INCOME BEFORE INCOME TAXES 14,416 13,518
------- ------
Income tax expense 4,695 4,298
------- ------
NET INCOME $9,721 $9,220
======= ======
Net income per common share:
Primary $ 1.17 $ 1.11
Fully diluted $ 1.17 $ 1.11
Weighted average common and common equivalent
shares outstanding:
Primary 8,303 8,288
Fully diluted 8,328 8,303
<FN>
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended September 30, 1995 and 1994
(in thousands, except per share data)
(unaudited)
<CAPTION>
1995 1994
<S> <C> <C>
INTEREST INCOME
Loans, including fees $12,302 $11,162
Securities:
Taxable 5,050 3,568
Exempt from federal income taxes 1,155 1,057
Federal funds sold and interest bearing
deposits 607 540
------- ------
TOTAL INTEREST INCOME 19,114 16,327
------- ------
INTEREST EXPENSE
Deposits 8,375 5,755
Other borrowings 531 310
------ ------
TOTAL INTEREST EXPENSE 8,906 6,065
------ ------
NET INTEREST INCOME 10,208 10,262
------ ------
Provision for loan losses 50 40
------ -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,158 10,222
OTHER INCOME
Service charges on deposit accounts 1,043 1,041
Income for trust services 192 172
Investment product fees 193 184
Other operating income 260 239
Securities gains (losses) 7 2
------ ------
TOTAL OTHER INCOME 1,695 1,638
------ ------
OTHER EXPENSES
Salaries and employee benefits 3,805 3,842
Net occupancy expense 649 639
Equipment expense 387 429
Federal deposit insurance premiums (46) 452
Data processing expense 198 224
Amortization of intangible assets 406 405
Other operating expenses 1,279 1,037
------ ------
TOTAL OTHER EXPENSES 6,678 7,028
------ ------
INCOME BEFORE INCOME TAXES 5,175 4,832
Income tax expense 1,730 1,591
------- -------
NET INCOME $3,445 $3,241
======= =======
Net income per common share:
Primary $ .41 $ .39
Fully diluted $ .41 $ .39
Weighted average common and common equivalent
shares outstanding:
Primary 8,331 8,302
Fully diluted 8,331 8,308
<FN>
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1995 and 1994
(dollars in thousands)
(unaudited)
<CAPTION>
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net income $9,721 $9,220
Adjustments to reconcile net income to net cash
provided by operating activities:
Discount accretion on securities (744) (617)
Deferred loan fee accretion (247) (306)
Provision for loan losses 150 90
Securities gains (205) (10)
Depreciation and amortization 1,272 1,194
Deferred income taxes (348) (286)
Net amortization of purchase accounting adjustments 1,531 1,281
Increase in accrued interest income (1,672) (217)
Increase in accrued interest expense 501 103
Other, net (172) (416)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,787 10,036
------- -------
INVESTING ACTIVITIES
Securities held-to-maturity:
Proceeds from maturities, repayments and calls 27,290 29,782
Purchases (79,483) (62,168)
Securities available-for-sale:
Proceeds from sales 7,962 4,920
Proceeds from maturities, repayments and calls 14,902 43,011
Purchases (35,766) (7,257)
Net (increase) decrease in loans (43,585) 644
Purchases of premises and equipment (997) (950)
Proceeds from the sale of premises and equipment 29 249
Proceeds from sales of foreclosed assets 607 544
Cash and cash equivalents of acquired subsidiary bank
less than purchase price - (11,509)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (109,041) (2,734)
--------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW and money
market accounts and savings deposits 4,229 (24,979)
Net increase in time deposits 75,316 24,277
Net increase in securities sold under agreements
to repurchase 15,185 3,142
Increase in notes payable - 8,000
Principal payments on notes payable (5,000) -
Proceeds from stock option exercises 128 629
Dividends paid (2,620) (2,135)
--------- ---------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 87,238 8,934
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12,016) 16,236
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 86,156 63,504
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $74,140 $79,740
======== ========
Supplemental disclosures:
Interest paid to depositors and creditors $24,076 $15,084
Income taxes paid 4,930 4,504
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 6
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the
accounts of Heritage Financial Services, Inc. and its subsidiaries
(the "Company"). In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations
and cash flows for the interim periods have been made. Certain
amounts reported in prior periods have been reclassified for
presentation or comparative purposes. The results of operations
for the three and nine months ended September 30, 1995 are not
necessarily indicative of the results to be expected for the entire
fiscal year.
The unaudited interim financial statements have been prepared
in conformity with generally accepted accounting principles and
reporting practices. Certain information in footnote disclosures
normally included in financial statements prepared in accordance
with generally accepted accounting principles has been condensed or
omitted pursuant to rules and regulations of the Securities and
Exchange Commission, although the Company believes the disclosures
are adequate to make the information not misleading. These
financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's 1994 Annual Report.
NEW ACCOUNTING PRONOUNCEMENT
As of January 1, 1995, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan" as amended by SFAS 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures".
SFAS 114 requires creditors to establish a valuation allowance when it is
probable that all the principal and interest due under the contractual terms of
a loan will not be collected. The impairment is measured based on the
present value of expected future cash flows discounted at a loan's
effective interest rate, the observable market price of a loan or
the fair value of collateral if the loan is collateral dependent.
SFAS 118 allows for existing income recognition practices to
continue.
Under the Company's impaired loan accounting policy, all
loans, except for home equity loans and other consumer loans, are
subject to impairment recognition on a quarterly basis. The
Company generally considers most loans 90 days or more past due and
all nonaccrual loans to be impaired. Interest income on impaired
loans will be recognized in a manner consistent with prior income
recognition policies. For all impaired loans other than nonaccrual
loans, interest income is recorded on an accrual basis. Interest
income on nonaccrual loans is recognized on a cash basis.
The adoption of SFAS 114 and SFAS 118 did not have a material
effect on the Company's financial position or results of operations
since the Company has historically established valuation allowances
based on the impaired loan's expected cash flows or the fair
value of underlying collateral. The primary difference in
valuation methods is that under SFAS 114 the Company also
establishes valuation allowances for uncollectible interest in
addition to the principal amounts of impaired loans.
SFAS 114 also changed the definition of in-substance
foreclosures ("ISFs"). Under SFAS 114, ISF recognition is limited
to circumstances in which the debtor surrenders collateral to the
creditor and the creditor receives physical possession of the
collateral. The Company adopted a new definition concurrent with
the adoption of the other provisions of SFAS 114. At December 31,
1994, the Company had no ISFs and therefore no reclassification
adjustments were made to those financial statements.
EARNINGS PER SHARE
Primary and fully diluted earnings per common share for the
three and nine months ended September 30, 1995 and 1994 are
computed by dividing net income by the weighted average number of
common shares outstanding and common equivalent shares, assumed to
be issued under the Company's stock option plan. Common share
equivalents attributable to stock options are computed based on the
treasury stock method.
<PAGE> 7
Heritage Financial Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
ACQUISITION
On September 28, 1995, the Company entered into a definitive
agreement to acquire all of the issued and outstanding shares of
the First National Bank of Lockport for $16.8 million in cash. At
June 30, 1995, the First National Bank of Lockport had total assets
of approximately $107 million. The transaction, which is subject
to regulatory approval, will be accounted for as a purchase.
LOANS
<TABLE>
The following table sets forth loan balances by categories
(AMOUNTS IN THOUSANDS):
<CAPTION>
September 30 December 31
1995 1994
<S> <C> <C>
Commercial and industrial $135,606 $124,351
Commercial real estate 147,910 142,833
Construction 8,555 6,096
Residential real estate 188,034 162,246
Home equity and other consumer 90,214 92,472
-------- --------
Gross loans 570,319 527,998
Less: unearned income (2,624) (3,183)
-------- -------
Loans, net of unearned income $567,695 $524,815
======== ========
</TABLE>
COMMON SHARES
During the nine month period ended September 30, 1995, the Company
issued 23,250 common shares pursuant to the exercise of stock
options at $5.55.
LITIGATION
On May 16, 1995, Federal Insurance Company ("Federal"), a
subrogee of SSM Health Care ("SSM"), filed a lawsuit against the
Company in the United States District Court for the Northern
District of Illinois alleging that the Company had made
unauthorized wire transfers. The wire transfers were made at the
request of a former SSM officer who allegedly diverted the funds
and defrauded SSM. As the insurer of SSM, Federal honored SSM's
claim of loss incurred as a result of the employee defalcation.
The lawsuit seeks damages in the amount of $1,247,500 plus interest
and legal costs. The Company believes it has meritorious defenses
and it will vigorously defend its position. Management believes,
after discussions with counsel, that the outcome of this litigation
will not have a material impact on the Company's financial position
or results of operations.
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following represents management's analysis of the
Company's results of operations for the three and nine month
periods ended September 30, 1995 and 1994 and its consolidated
financial condition at September 30, 1995 as compared to December
31, 1994. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing
elsewhere in this Form 10-Q.
ANALYSIS OF INCOME STATEMENTS
Summary of Operations
Net income in the 1995 third quarter increased to $3,445,000,
up 6% from $3,241,000 earned in the same quarter of 1994. On a
fully diluted basis, earnings per share for the quarterly period
increased to 41 cents per share, up 5% from 39 cents per share
earned in the third quarter of 1994. Higher earnings in 1995 third
quarter were due to a reduction in deposit insurance premiums.
For the nine months ended September 30, 1995 net income was
$9,721,000 up 5% compared to $9,220,000 in 1994. Earnings per share
for the nine month period were $1.17, up 5% compared to $1.11 in the same
period in 1994. The growth in year-to-date earnings was primarily the
result of an increase in net interest income and the reduction in deposit
insurance premiums.
Net Interest Income
Third quarter net interest income was $10,208,000, a decrease
of $54,000 or 1% compared to the third quarter of 1994. The
decrease was due primarily to the decline in the Company's net
interest spread which more than offset the additional net interest
revenue resulting from an increase in the volume of average earning
assets. For the nine months ended September 30, 1995, net interest
income increased $2,228,000 or 8% compared to 1994. Higher net
interest income in the nine month period resulted from an increase
in the volume of average earning assets, partially offset by a
decline in the net interest spread.
Average earning assets for 1995 third quarter were $972
million, up $88 million or 10% compared to the same quarter a year
ago. For the nine month period average earning assets increased
$119 million or 15% compared to the same period in 1994. The
higher levels of average earning assets were primarily the result
of strong deposit growth in 1995. On a year-to-date basis, the growth in
average earning assets was also attributable to the additional assets of
Midlothian State Bank ("Midlothian") which was acquired in July, 1994.
On a taxable equivalent basis, the annualized net interest
spread in the third quarter decreased to 3.68% compared to 4.29% in
the 1994 quarter. Year-to-date, the net interest spread decreased
to 3.87% in 1995 compared to 4.33% a year ago. The decline in the
net interest spread was primarily due to an increase in the
Company's funding costs, reflecting an increase of approximately
250 basis points in short-term market interest rates from early
1994 through March of 1995. The volume and extent of rate
sensitive liabilities which repriced in 1995 were relatively
greater than rate sensitive assets, resulting in a contraction in
the net interest spread. The decrease in the net interest spread
was also the result of the flattening of the yield curve in 1995 as
longer-term interest rates fell while short-term rates stabilized.
For the three month period, the change in the net interest
rate spread reflected an increase of .47% in the yield on average
earning assets which was more than offset by a 1.08% increase in
the rate paid on interest-bearing liabilities. Year-to-date, the
yield on average earning assets increased .66% while the rate paid
on interest-bearing liabilities rose 1.12%. The increase in
earning asset yields primarily reflects higher rates earned on new
loans and securities and rate sensitive assets such as federal
funds sold, adjustable-rate securities and floating rate loans.
<PAGE> 9
Higher rates paid on interest-bearing liabilities were primarily
due to increases in interest rates paid on time deposits, money
market accounts and short-term borrowings. Premium rates offered
on short-term time deposit promotions in 1995 and a shift of some
savings deposits to higher-yielding time deposits also contributed
to the increases in funding costs in the three and nine month
periods.
Allowance and Provision For Loan Losses
The allowance for loan losses is maintained at a level
management believes to be adequate to provide for known and
potential risks inherent in the Company's loan portfolio. On a
quarterly basis, management assesses the adequacy of the allowance
for loan losses. Management's evaluation of the adequacy of the
allowance considers such factors as prior loss experience, loan
portfolio growth and reviews of impaired loans and the value of
underlying collateral securing these loans. A provision for loan
losses is charged to income to increase the allowance to a level
deemed to be adequate, but not excessive, based on management's
evaluation. When a loan or a part thereof is considered by
management to be uncollectible, a charge is made against the
allowance. Recoveries of previously charged-off loans are credited
back to the allowance.
<TABLE>
The changes in the allowance for loan losses for the three and
nine months ended September 30, 1995 and 1994 were as follows
(amounts in thousands):
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Balance, beginning of period $8,692 $7,803 $8,720 $7,655
Allowance of acquired bank - 850 - 850
Provision for loan losses 50 40 150 90
Loan charge-offs (92) (111) (381) (374)
Loan recoveries 63 70 224 431
------ ------ ------ ------
Balance, end of period $8,713 $8,652 $8,713 $8,652
====== ====== ====== ======
Allowance for loan losses
as a percent of loans 1.53% 1.64% 1.53% 1.64%
Annualized net charge-offs
(recoveries) as a percentage
of average loans .02% .03% .04% (.02)%
</TABLE>
<TABLE>
The following table sets forth an allocation of the allowance
for loan losses and the percent of loans in each category to total
loans outstanding for the periods and categories shown (amounts in
thousands):
<CAPTION>
September 30, December 31,
1995 1994
Amount % Amount %
<S> <C> <C> <C> <C>
Commercial and industrial $2,263 24 $2,570 24
Commercial real estate 4,200 26 4,500 27
Construction - 1 - 1
Residential real estate 1,500 33 1,100 31
Home equity and other consumer 750 16 550 17
------ --- ------ ---
Total $8,713 100 $8,720 100
====== === ====== ===
</TABLE>
Since year-end, changes in the allocation of the allowance to
individual loan categories were primarily the result of growth in
loan portfolios, changes in management's risk assessment and
assignment of unallocated reserves and the adoption of the new
impaired loan accounting standard. Notwithstanding management's
allocation of the allowance, the entire allowance for loan losses
is available to absorb losses in any particular category of loans.
<PAGE> 10
Asset Quality
NONPERFORMING ASSETS
<TABLE>
The following table sets forth the Company's nonperforming assets
and asset quality ratios (amounts in thousands):
<CAPTION>
September 30, December 31,
1995 1994
<S> <C> <C>
Nonaccrual loans $3,538 $4,272
Loans past due ninety days or more 1,277 1,201
------ ------
Total nonperforming loans 4,815 5,473
Other real estate owned 725 563
------ ------
Total nonperforming assets $5,540 $6,036
====== ======
Nonperforming loans to loans .85% 1.04%
Nonperforming assets to loans plus OREO .97% 1.15%
Allowance for loan losses to nonperforming loans 181% 159%
Allowance for loan losses to nonperforming assets 157% 144%
</TABLE>
IMPAIRED LOANS
<TABLE>
The following table sets forth the recorded investment in
impaired loans and the related valuation allowance for each loan
category as of September 30, 1995 (amounts in thousands):
<CAPTION>
Amount of Impaired Loans
No Valuation Valuation Amount of
Allowance Allowance Valuation
Required Required Total Allowance
<S> <C> <C> <C> <C>
Commercial and industrial $ 556 $ 856 $1,412 $280
Commercial real estate 3,635 1,175 4,810 276
Residential real estate 1,142 211 1,353 61
------ ------ ----- ----
Total impaired loans $5,333 $2,242 $7,575 $617
====== ====== ====== ====
</TABLE>
At September 30, 1995, $3,006,000 of nonaccrual loans were
included in the total balance of impaired loans. Of the total
amount of impaired loans, $3,897,000 were measured using the
present value of expected future cash flows and $3,678,000 were
measured based on the fair value of collateral. The average
recorded investment in impaired loans for the three and nine months
ended September 30, 1995, were approximately $7,901,000 and
$7,440,000, respectively. Interest income recognized on impaired
loans in the third quarter totaled $110,000 and year-to-date was
$317,000.
Other Income
Other income, excluding securities transactions, for the three
months ended September 30, 1995 increased $52,000 compared to the
same period in 1994. On a year-to-date basis, other income,
excluding securities transactions, increased $252,000 compared to
the nine month period in 1994. The increase in income for the nine
month period was primarily due to an increase in deposit service
charges.
<PAGE> 11
In the 1995 second quarter the Company realized security gains
of $177,000 from the sale of $8 million of adjustable-rate mortgage
("ARM") pools classified as available-for-sale. Year-to-date, the
Company has also realized net gains of $28,000 from calls of
municipal securities. The sale of ARM securities was made to
reduce the prepayment risk of certain pools which were scheduled to
reprice within six months. The risk primarily pertained to those
ARM pools that were expected to have reset coupons which would
exceed rates available for fixed-rate mortgages of comparable
terms. Generally under these conditions, ARM customers would be
more likely to refinance adjustable-rate mortgages and lock into fixed-rate
mortgages. The Company continues to monitor interest rates and may sell
additional selected ARM pools if prepayment expectations remain high.
Other Expenses
Other expenses in the 1995 third quarter decreased $350,000 or
5% compared to the same period in 1994. The decrease in expenses
was due to a reduction in the FDIC assessment rate from 23 cents
per $100 of deposits to 4 cents, retroactive to June 1, 1995. The
reduction in deposit insurance premiums reduced third quarter
operating expenses by $526,000.
For the nine months ended September 30, 1995, other expenses
increased $1,717,000 or 9% compared to the same period a year ago.
The growth in other operating expense categories was largely
attributable to the additional operating expenses of Midlothian,
partially offset by the reduction in deposit insurance premiums.
Salaries and employee benefits, the largest component of other
expenses, increased $828,000 or 8% compared to the 1994 nine month
period. At September 30, 1995, the number of full-time equivalent
employees totaled 437 compared to 440 at December 31, 1994 and 435
at September 30, 1994.
Income Taxes
Income tax expense for the nine months ended September 30,
1995 increased $397,000 compared to the same period in 1994. The
Company's effective tax rate (income tax expense divided by net
income before taxes) increased to 32.6% in 1995 compared to 31.8%
in the same period a year ago. Higher income tax expense in 1995
resulted from an increase in pre-tax earnings.
ANALYSIS OF BALANCE SHEETS
Assets
Consolidated assets at September 30, 1995 were $1.052 billion,
an increase of $100 million compared to December 31, 1994. The
changes in the Company's assets since December 31, 1994 reflect
increases of $69 million in securities, $43 million in net loans
and a $12 million decrease in cash and cash equivalents. As market
interest rates stabilized in 1995, the Company purchased $74
million of fixed-rate CMOs and REMICs with average lives of 3 to 6
years. In the nine month period, investment purchases also
included $25 million of bank-qualified tax-exempt securities. The
Company has experienced an increase in loan demand in 1995,
reflecting lower interest rates, seasonal building factors and the
continued development within the markets the Company serves. Year-
to-date, residential real estate loans increased $26 million,
commercial and industrial loans increased $11 million and
commercial real estate and construction loans increased $8 million.
Liabilities
The Company's funding sources, consisting of deposits and
other borrowings, increased $90 million since December 31, 1994.
The increase in funding sources was principally due to the growth
in time deposits, which increased $75 million from year-end.
Approximately $51 million or two-thirds of the increase in time
deposits resulted from a seven-month, premium-rate certificate of
deposit promotion offered in March and April, 1995.
<PAGE> 12
The remaining growth in time deposits was attributable to a shift of
$24 million from savings deposits to time deposits. The shift was
principally due to the widening of the interest rate differential between time
and savings deposits. As time deposit rates increased in 1995, the yield on
these deposits became relatively more attractive. The Company expects that
further shifting of savings deposits will occur based on the current level of
market interest rates offered on time deposits and the interest rate
differential between savings and time deposits.
Capital
At September 30, 1995 total shareholders' equity increased to
$92 million, up $9 million from December 31, 1994. The growth in
equity reflects the retention of current year earnings, less
dividends paid, plus the proceeds from the issuance of 23,250
common shares pursuant to the exercise of stock options. The
change in equity also reflects a net unrealized gain adjustment
(net of tax) of $1,613,000 relating to the application of SFAS 115.
On September 28, 1995 the Company entered into a definitive
agreement to acquire all of the issued and outstanding shares of
the First National Bank of Lockport ("Lockport") for $16.8 million
in cash. At June 30, 1995, Lockport had assets of approximately
$107 million. In connection with the acquisition, the Company
intends to borrow funds under a line of credit to finance a
majority of the purchase price. The transaction, which is subject
to regulatory approval, will be accounted for as a purchase.
The capital ratios of the Company and Heritage Bank are
presently in excess of the requirements necessary to meet the "well
capitalized" capital category established by bank regulators. At
September 30, 1995, the consolidated Tier 1 and total risk-based
capital ratios (excluding the SFAS 115 net loss adjustment) were
12.92% and 14.17%, respectively. The Company's leverage ratio at
quarter-end was 7.59%. While the Company's risk-based capital and
leverage ratios will decline with the consummation of its pending
acquisition of Lockport, its ratios will exceed the ratios required
to be considered "well capitalized".
Liquidity
Liquidity management in banking involves the ability to meet
cash flow requirements of customers and other obligations.
Liquidity of the Company's subsidiary bank, Heritage Bank, is
primarily maintained by daily investments in federal funds sold,
monthly cash flows from mortgage-backed and asset-backed securities
and maturities of other securities. As an additional source of
liquidity, Heritage Bank may purchase federal funds from certain
correspondents on a limited basis, borrow funds on a collateralized
basis from the Federal Home Loan Bank or sell securities classified
as available- for-sale. For the parent company, liquidity means
having cash available to pay shareholder dividends, to service debt
and to fund operating expenses.
As an indication of Heritage Bank's liquidity, federal funds
sold and securities (excluding mortgage-backed and asset-backed
securities) having contractual maturities of one year or less
totaled $47 million at September 30, 1995 as compared to $64
million at year-end 1994. In addition to these funds, the Bank
expects to receive certain cash flows from mortgage-backed and
asset-backed securities. For the first nine months of 1995 the
aggregate principal payments received on these securities totaled
approximately $29 million.
Heritage Financial Services, Inc. ("parent company") funds its
operations and shareholder dividends through dividends received from Heritage
Bank. Bank regulatory authorities limit the amount of dividends which may be
paid by Heritage Bank to the parent company. At September 30, 1995, the amount
of undistributed earnings of Heritage Bank available for the payment of
dividends within such limitations is more than adequate to fund anticipated
cash requirements of the parent company.
<PAGE> 13
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8 K.
(a) Exhibit 11 - Statement Re Computation of Per Share Earnings
(included at page 14).
(b) There were no reports on Form 8-K filed by the registrant
during the quarter ending September 30, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HERITAGE FINANCIAL SERVICES, INC.
(Registrant)
Date: November 14, 1995 by /s/ Frederick J. Sampias
Frederick J. Sampias
President
(Duly Authorized Officer)
Date: November 14, 1995 by /s/ Paul A. Eckroth
Paul A. Eckroth
Executive Vice President and
Treasurer
(Principal Financial and Chief
Accounting Officer)
<TABLE>
<PAGE> 14
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
The calculation of the Registrant's primary and fully diluted
earnings per share required by Item 601(b)(11) of Regulations S-K
is presented below (dollars in thousands, except per share data):
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1995 1994 1995 1994
-------- -------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY
Net Income $3,445 $3,241 $9,721 $9,220
======== ======== ======= ======
Average common shares outstanding 7,939 7,905 7,936 7,900
Common stock equivalents - net effect
of the assumed exercise of stock
options -- based on the treasury
stock method using average market
price 392 397 367 388
-------- -------- ------- ------
Average primary shares outstanding 8,331 8,302 8,303 8,288
======== ======== ======= =======
PRIMARY EARNINGS PER SHARE $.41 $.39 $1.17 $1.11
======== ======== ======= =======
FULLY DILUTED EARNINGS PER SHARE
Net Income $3,445 $3,241 $9,721 $9,220
======== ======== ======= =======
Average common shares outstanding 7,939 7,905 7,936 7,900
Common stock equivalents - net effect
of the assumed exercise of stock
options -- based on the treasury
stock method using average market
price or period-end market price,
whichever was higher 392 403 392 403
-------- -------- ------- -------
Average fully diluted shares
outstanding 8,331 8,308 8,328 8,303
======== ======== ======== =======
FULLY DILUTED EARNINGS PER SHARE $.41 $.39 $1.17 $1.11
======== ======== ======== =======
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 36094
<INT-BEARING-DEPOSITS> 202
<FED-FUNDS-SOLD> 37845
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 87403
<INVESTMENTS-CARRYING> 289591
<INVESTMENTS-MARKET> 292391
<LOANS> 567695
<ALLOWANCE> 8713
<TOTAL-ASSETS> 1052470
<DEPOSITS> 903026
<SHORT-TERM> 49703
<LIABILITIES-OTHER> 7789
<LONG-TERM> 0
<COMMON> 4962
0
0
<OTHER-SE> 86990
<TOTAL-LIABILITIES-AND-EQUITY> 1052470
<INTEREST-LOAN> 12302
<INTEREST-INVEST> 6205
<INTEREST-OTHER> 607
<INTEREST-TOTAL> 19114
<INTEREST-DEPOSIT> 8375
<INTEREST-EXPENSE> 8906
<INTEREST-INCOME-NET> 10208
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 6678
<INCOME-PRETAX> 5175
<INCOME-PRE-EXTRAORDINARY> 5175
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3445
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
<YIELD-ACTUAL> 4.46
<LOANS-NON> 3538
<LOANS-PAST> 1277
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3382
<ALLOWANCE-OPEN> 8692
<CHARGE-OFFS> 92
<RECOVERIES> 63
<ALLOWANCE-CLOSE> 8713
<ALLOWANCE-DOMESTIC> 8713
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
