<PAGE> 2
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
<CAPTION>
March 31 December 31
1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks $39,490 $36,870
Federal funds sold and interest bearing deposits 51,671 49,286
-------- --------
Total cash and cash equivalents 91,161 86,156
Securities:
Held-to-maturity (market value: $267,611 in
1995 and $228,416 in 1994) 271,678 236,810
Available-for-sale (at market value) 73,564 71,478
-------- --------
Total securities 345,242 308,288
Loans, net of unearned income 528,593 524,815
Less: allowance for loan losses (8,672) (8,720)
-------- --------
Net loans 519,921 516,095
Premises and equipment 16,730 17,079
Goodwill and core deposit intangibles 14,756 15,080
Other assets 11,256 10,152
-------- --------
TOTAL ASSETS $999,066 $952,850
======== ========
LIABILITIES
Demand deposits $137,667 $143,378
NOW accounts 75,449 78,654
Money market accounts 77,749 66,889
Savings deposits 211,379 232,100
Time deposits 361,579 302,569
-------- --------
Total deposits 863,823 823,590
Securities sold under agreements to repurchase 37,331 33,018
Notes payable 4,500 6,500
Other liabilities 7,262 6,631
-------- --------
TOTAL LIABILITIES 912,916 869,739
-------- --------
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: 7,937,222 in 1995
and 7,915,972 in 1994 4,961 4,947
Surplus 17,488 17,385
Retained earnings 65,067 62,879
Net unrealized gains (losses) on securities,
net of tax (1,366) (2,100)
-------- --------
TOTAL SHAREHOLDERS' EQUTIY 86,150 83,111
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $999,066 $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 Three Months Ended March 31, 1995 and 1994
(in thousands, except per share data)
(unaudited)
<CAPTION>
1995 1994
<S> <C> <C>
INTEREST INCOME
Loans, including fees $11,507 $9,136
Securities:
Taxable 3,951 2,699
Exempt from federal income taxes 989 1,057
Federal funds sold and interest bearing
deposits 694 299
------- ------
TOTAL INTEREST INCOME 17,141 13,191
------- ------
INTEREST EXPENSE
Deposits 6,749 4,509
Other borrowings 416 103
------- ------
TOTAL INTEREST EXPENSE 7,165 4,612
------- ------
NET INTEREST INCOME 9,976 8,579
Provision for loan losses 50 50
------- ------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 9,926 8,529
------- ------
OTHER INCOME
Service charges on deposit accounts 1,012 915
Income for trust services 183 165
Investment product fees 271 167
Other operating income 261 254
Securities gains 4 7
------- ------
TOTAL OTHER INCOME 1,731 1,508
------- ------
OTHER EXPENSES
Salaries and employee benefits 3,895 3,391
Net occupancy expense 655 564
Equipment expense 382 339
Federal deposit insurance premiums 457 401
Data processing expense 194 171
Amortization of intangible assets 399 275
Other operating expenses 1,114 860
------- ------
TOTAL OTHER EXPENSES 7,096 6,001
------- ------
INCOME BEFORE INCOME TAXES 4,561 4,036
Income tax expense 1,500 1,229
------- ------
NET INCOME $3,061 $2,807
======= ======
Net income per common share:
Primary $ .37 $ .34
Fully diluted $ .37 $ .34
Weighted average common and common equivalent
shares outstanding:
Primary 8,284 8,259
Fully diluted 8,292 8,259
<FN>
See accompanying notes to the consolidated financial statements
</TABLE>
<PAGE> 4
<TABLE>
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1995 and 1994
(dollars in thousands)
(unaudited)
<CAPTION>
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net income $3,061 $2,807
Adjustments to reconcile net income to net cash
provided by operating activities:
Discount accretion on securities (248) (181)
Deferred loan fee accretion (88) (97)
Provision for loan losses 50 50
Securities gains (4) (7)
Depreciation and amortization 425 368
Deferred income taxes (109) (146)
Net amortization of purchase accounting adjustments 495 364
Increase in accrued interest income (791) (360)
Increase (decrease) in accrued interest expense 318 (40)
Other, net (316) (363)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,793 2,395
------- -------
INVESTING ACTIVITIES
Securities held-to-maturity:
Proceeds from maturities, repayments and calls 7,545 7,902
Purchases (42,270) (33,175)
Securities available-for-sale:
Proceeds from maturities, repayments and calls 3,451 25,910
Purchases (4,214) -
Net increase in loans (3,898) 14
Purchases of premises and equipment (345) (178)
Proceeds from the sale of premises and equipment 15 249
Proceeds from sales of foreclosed assets 102 122
------- -------
NET CASH USED IN INVESTING ACTIVITIES (39,614) 844
------- -------
FINANCING ACTIVITIES
Net decrease in demand deposits, NOW and money
market accounts and savings deposits (18,777) (11,587)
Net increase in time deposits 59,046 2,324
Net increase (decrease) in securities sold under
agreements to repurchase 4,313 (2,028)
Principal payments on notes payable (2,000) -
Proceeds from stock option exercises 117 629
Dividends paid (873) (712)
------- -------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 41,826 (11,374)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,005 (8,135)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 86,156 63,504
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $91,161 $55,369
======= =======
Supplemental disclosures:
Interest paid to depositors and creditors $6,883 $4,652
Income taxes paid 14 10
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 5
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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, the 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 months ended March 31, 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
conform to prevailing practices within the banking industry.
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.
2. 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" and 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 impaired 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
generally based on the fair value of collateral securing an
impaired loan. 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. At March 31, 1995, the total recorded investment
in loans that are considered impaired was $7.0 million (of which
$4.3 million were nonaccrual loans). Included in the total amount
of impaired loans is $3.9 million of loans for which a related
valuation allowance of $670,000 was determined. The average
recorded investment in impaired loans for the quarter ended March
31, 1995, was approximately $7.0 million.
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 the 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.
3. Primary and fully diluted earnings per common share for the
three months ended March 31, 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.
4. In January, 1995, the Company issued 21,250 common shares
pursuant to the exercise of stock options. The options were
exercised at $5.55.
<PAGE> 6
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 month periods ended March 31,
1995 and 1994 and its consolidated financial condition at March 31,
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 first quarter of 1995 increased to
$3,061,000, up 9% from $2,807,000 earned in the same quarter of
1994. On a fully diluted basis, earnings per share for the
quarterly period increased to 37 cents per share compared to 34
cents per share earned in the first quarter of 1994. Higher
earnings in the 1995 period were primarily due to an increase in
net interest income.
Net Interest Income
First quarter net interest income was $9,976,000, an increase
of $1,397,000 or 16% compared with the first quarter of 1994. The
growth in net interest income in 1995 was attributable to an
increase in the volume of average earning assets, partially offset
by a reduction in the net interest spread.
For the three months ended March 31, 1995, average earning
assets increased $119 million, or 15%, compared to the same quarter
a year ago. Growth in average earning assets primarily resulted
from the July, 1994 acquisition of Midlothian State Bank
("Midlothian").
On a taxable equivalent basis, the annualized net interest
spread for the 1995 three month period decreased to 4.13% compared
to 4.30% in the 1994 period. The decline in the net interest
spread primarily resulted from an increase in short-term market
interest rates, which have increased over 250 basis points since
year-end 1993. In the 1995 first quarter the volume and extent of
rate sensitive liabilities which repriced were relatively greater
than rate sensitive assets which resulted in a contraction in the
net interest spread. Overall, the decline in the net interest
spread reflected an increase of .81% in the yield on earning assets
which was more than offset by a .98% increase in the rate paid on
interest-bearing liabilities. The increase in the yield on
earnings assets primarily resulted from higher rates earned on
interest rate sensitive assets such as federal funds sold and
floating rate securities and loans. The increase in rates paid on
interest-bearing liabilities was primarily due to increases in
interest rates paid on most interest-bearing liabilities, including
money market accounts, time deposits and short-term borrowings.
Higher rates paid on interest-bearing liabilities also resulted
from the shift of some savings deposits to time deposits as the
interest differential between these accounts continued to widen.
Provision and Allowance 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
leveldeemed 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.
<PAGE> 7
The Company recorded provisions for loan losses of $50,000 for
the three months ended March 31, 1995 and 1994. Net loan charge-
offs for the 1995 first quarter were $98,000 compared to $31,000
for the same period in 1994. At March 31, 1995 the allowance for
loan losses was $8,672,000 compared to $8,720,000 at December 31,
1994. As a percentage of loans, the allowance for loan losses was
1.64% at March 31, 1995 compared to 1.66% at year-end 1994.
Nonperforming loans, comprised of loans 90 days or more past
due and nonaccrual loans, were $5.0 million at March 31, 1995, a
decrease of $500,000 from year-end 1994. The reduction in
nonperforming loans since year-end reflected an increase of
approximately $500,000 in nonaccrual loans and a decrease of $1
million in loans 90 days or more past due. As a percent of loans,
nonperforming loans were .94% at March 31, 1995 compared to 1.04%
at December 31, 1994. The allowance for loan losses coverage of
nonperforming loans at March 31, 1995 increased to 174% compared to
159% at December 31, 1994.
Other Income
Other income, excluding securities transactions, for the three
months ended March 31, 1995 increased $226,000 or 15% compared to
the same period in 1994. Service charges on deposit accounts, the
primary component of other income, increased $97,000 or 11%
primarily due to the additional service fee income of Midlothian.
The increase in other operating income also resulted from the
growth in investment product fees which increased $104,000 or 62%
from the year ago quarter. The growth reflects an increase in
customer demand for annuities and mutual funds and the Company's
continuing marketing efforts and emphasis on the sale of such
products.
Other Expenses
Other expenses in the 1995 first quarter increased $1,095,000
or 18% compared to the same period in 1994. The growth in other
operating expense categories was largely attributable to the
additional operating expenses of Midlothian. Salaries and employee
benefits, the largest component of other expenses, increased
$504,000 or 15% compared to the 1994 first quarter. At March 31,
1995, the number of full time equivalent employees totaled 431
compared to 440 at December 31, 1994 and 378 at March 31, 1994.
Income Taxes
Income tax expense for the three months ended March 31, 1995
increased $271,000 compared to the same period in 1994. The
Company's effective tax rate (income tax expense divided by net
income before taxes) increased to 32.9% in 1995 compared to 30.5%
in the same period a year ago. Higher income tax expense in 1995
primarily resulted from an increase in pre-tax earnings.
ANALYSIS OF BALANCE SHEETS
Assets
Consolidated assets at March 31, 1995 were $999 million, an
increase of $46 million compared to December 31, 1994. The change
in the composition of assets since year-end reflects increases of
$5 million in cash and cash equivalents, $37 million in securities
and $4 million in net loans. As market interest rates stabilized
during the 1995 first quarter, the Company purchased $29 million of
fixed-rate CMOs and REMICs with average maturities of 4 to 6 years.
Other investment purchases included $9 million of tax-exempt
securities, primarily "non-rated" issues of local communities.
<PAGE> 8
Liabilities
The Company's funding sources, consisting of deposits and other
borrowings, increased $43 million since December 31, 1994. The
growth in funding sources was due entirely to an increase in time
deposits, which grew $59 million from year-end. Approximately $39
million or two-thirds of the increase in time deposits resulted
from a seven-month, premium-rate certificate of deposit promotion
offered in March, 1995. The remaining growth in time deposits was
primarily due to a shift of $20 million from savings deposits to
time deposits. The shift was principally due to an increase in
interest rates paid on time deposits during the quarter making
these deposits relatively more attractive. The Company anticipates
that further shifting of 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 March 31, 1995 total shareholders' equity increased to $86.1
million, up $3.0 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 21,250
common shares pursuant to the exercise of stock options. The
change in equity also reflects a net unrealized gain adjustment
(net of tax) of $734,000 relating to the application of SFAS 115.
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
March 31, 1995, the consolidated Tier 1 and total risk-based
capital ratios (excluding the SFAS 115 net loss adjustment) were
12.66% and 13.92%, respectively. The Company's leverage ratio at
quarter-end was 7.68%. Presently the Company has no commitments
for material capital expenditures. Management believes that the
Company has sufficient financing options available to fund other
commitments that may arise in the future.
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 $67 million at March 31, 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 three months of 1995 the aggregate
principal payments received on these securities totaled
approximately $9 million. For the year ended December 31, 1994 the
total principal payments received on mortgage-backed and asset-
backed securities were approximately $72 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 March 31, 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> 9
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 10).
(b) During the quarter ended March 31, 1995, the registrant
filed a report on Form 8-K, dated February 15, 1995, reporting a
change in the registrant's certifying accountant, pursuant to Item
4 of that Form.
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: May 12, 1995 by /s/ Frederick J. Sampias
Frederick J. Sampias
President
(Duly Authorized Officer)
Date: May 12, 1995 by /s/ Paul A. Eckroth
Paul A. Eckroth
Executive Vice President
and Treasurer
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):
Three Months Ended
March 31
------------------
1995 1994
-------- --------
PRIMARY
Net Income $3,061 $2,807
======== ========
Average common shares outstanding 7,931 7,890
Common stock equivalents - net effect
of the assumed exercise of stock
options -- based on the treasury
stock method using average market
price 353 369
-------- --------
Average primary shares outstanding 8,284 8,259
======== ========
Primary earnings per share $.37 $.34
======== ========
FULLY DILUTED EARNINGS PER SHARE
Net Income $3,061 $2,807
======== ========
Average common shares outstanding 7,931 7,890
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 361 369
-------- --------
Average fully diluted shares
outstanding 8,292 8,259
======== ========
Fully diluted earnings per share $.37 $.34
======== ========
