- ------------------------------------------------------------------
- ------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1996,
------------------------
COMMISSION FILE NUMBER 0-15059
------------------------
HERITAGE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
ILLINOIS
(State or other jurisdiction of
incorporation or organization)
17500 SOUTH OAK PARK AVENUE,
TINLEY PARK, ILLINOIS
(Address of principal executive offices)
36-3139645
(IRS Employer Identification Number)
60477
(Zip Code)
(708) 532-8000
(Registrant's telephone number, including area code)
Former name, former address and former fiscal year, if changed from
last report: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90
days.
Yes X No
The number of shares outstanding of each of the issuer's classes of
common stock was 7,914,809 shares of common stock, par value $.625,
outstanding at AUGUST 1, 1996.
- -----------------------------------------------------------------
- -----------------------------------------------------------------
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
<CAPTION>
June 30, December 31
1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks $40,806 $44,268
Federal funds sold and
interest-bearing deposits 11,641 5,611
------ ------
Total cash and cash equivalents 52,447 49,879
------ ------
Securities:
Held-to-maturity
(market value: $114,448 in 1996
and $99,306 in 1995) 115,879 97,456
Available-for-sale, at market 357,564 318,159
------- -------
Total securities 473,443 415,615
Loans, net of unearned income 626,963 569,494
Less: allowance for loan losses (9,456) (8,477)
------- -------
Net loans 617,507 561,017
Premises and equipment 18,858 16,304
Goodwill and core deposit intangibles 19,308 13,554
Other assets 11,686 9,999
---------- ----------
TOTAL ASSETS $1,193,249 $1,066,368
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $172,460 $161,400
NOW accounts 76,191 71,467
Money market accounts 109,286 103,940
Savings deposits 216,208 201,542
Time deposits 452,348 376,943
--------- -------
Total deposits 1,026,493 915,292
Securities sold under agreements
to repurchase 48,817 47,002
Notes payable 10,750 -
Other liabilities 8,266 7,291
--------- -------
TOTAL LIABILITIES 1,094,326 969,585
--------- -------
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: 7,964,309 in 1996
and 7,939,359 in 1995 4,978 4,962
Surplus 17,630 17,499
Retained earnings 77,847 72,681
Net unrealized gains (losses)
on securities, net of tax (1,532) 1,641
Less: Treasury stock - -
------ ------
TOTAL SHAREHOLDERS' EQUITY 98,923 96,783
------ ------
TOTAL LIABILITIES AND ---------- ----------
SHAREHOLDERS' EQUITY $1,193,249 $1,066,368
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
(unaudited)
<CAPTION>
Six Months Ended
June 30,
---------------------
1996 1995
-------- -------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $26,194 $23,408
Securities:
Taxable 11,537 8,778
Exempt from federal income taxes 3,023 2,067
Federal funds sold and interest-bearing
deposits 350 1,265
------- -------
TOTAL INTEREST INCOME 41,104 35,518
------- -------
INTEREST EXPENSE
Deposits 17,643 14,729
Short-term borrowings 900 688
Notes payable 324 145
------- -------
TOTAL INTEREST EXPENSE 18,867 15,562
------- -------
NET INTEREST INCOME 22,237 19,956
Provision for loan losses 200 100
------- -------
Net interest income after provision
for loan losses 22,037 19,856
------- -------
OTHER INCOME
Service charges on deposit accounts 2,032 2,036
Income for trust services 393 370
Investment product fees 611 440
Other operating income 570 495
Securities gains 12 198
------- -------
TOTAL OTHER INCOME 3,618 3,539
------- -------
OTHER EXPENSE
Salaries and employee benefits 8,435 7,661
Net occupancy expense 1,452 1,266
Equipment expense 818 783
Federal deposit insurance premiums 8 915
Data processing expense 581 415
Amortization of intangible assets 1,087 801
Other operating expenses 2,734 2,313
------- -------
TOTAL OTHER EXPENSE 15,115 14,154
------- -------
Income before income taxes 10,540 9,241
Income tax expense 3,294 2,965
------- -------
NET INCOME $7,246 $6,276
======= =======
Net income per common share:
Primary $0.87 $0.76
Fully diluted $0.87 $0.76
Weighted average common and common equivalent
shares outstanding:
Primary 8,340,697 8,288,510
Fully diluted 8,370,759 8,294,116
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
(unaudited)
<CAPTION>
Three Months Ended
June 30,
--------------------
1996 1995
------- ------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $13,363 $11,901
Securities:
Taxable 5,981 4,827
Exempt from federal income taxes 1,557 1,078
Federal funds sold and interest-bearing
deposits 114 571
------ ------
TOTAL INTEREST INCOME 21,015 18,377
------ ------
INTEREST EXPENSE
Deposits 8,935 7,980
Short-term borrowings 405 361
Notes payable 180 56
----- -----
TOTAL INTEREST EXPENSE 9,520 8,397
----- -----
NET INTEREST INCOME 11,495 9,980
------ -----
Provision for loan losses 100 50
------ -----
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 11,395 9,930
------ -----
OTHER INCOME
Service charges on deposit accounts 1,075 1,024
Income for trust services 202 187
Investment product fees 392 169
Other operating income 264 234
Securities gains 3 194
----- -----
TOTAL OTHER INCOME 1,936 1,808
----- -----
OTHER EXPENSE
Salaries and employee benefits 4,295 3,766
Net occupancy expense 733 611
Equipment expense 400 401
Federal deposit insurance premiums 4 458
Data processing expense 305 221
Amortization of intangible assets 574 402
Other operating expenses 1,440 1,199
----- -----
TOTAL OTHER EXPENSE 7,751 7,058
----- -----
INCOME BEFORE INCOME TAXES 5,580 4,680
----- -----
Income tax expense 1,811 1,465
----- -----
NET INCOME $3,769 $3,215
====== ======
Net income per common share:
Primary $0.45 $0.39
Fully diluted $0.45 $0.39
Weighted average common and common equivalent
shares outstanding:
Primary 8,356,554 8,292,840
Fully diluted 8,374,511 8,295,323
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended
June 30,
-----------------
1996 1995
------ ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $7,246 $6,276
Adjustments to reconcile net income to
net cash provided by operating activities:
Discount accretion on securities (700) (492)
Deferred loan fee accretion (258) (137)
Provision for loan losses 200 100
Securities gains (12) (198)
Depreciation and amortization 841 851
Deferred income taxes (317) (220)
Net amortization of purchase accounting
adjustments 1,339 987
Increase in accrued interest income (645) (686)
Increase in accrued interest expense 451 481
Other, net (445) (1,576)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,700 5,386
------- -------
INVESTING ACTIVITIES
Securities held-to-maturity:
Proceeds from maturities, repayments
and calls 2,565 16,159
Purchases (18,679) (69,743)
Securities available-for-sale:
Proceeds from sales - 7,962
Proceeds from maturities, repayments
and calls 50,489 11,433
Purchases (45,535) (10,440)
Net increase in loans (22,412) (21,248)
Purchases of premises and equipment (1,249) (596)
Proceeds from the sale of premises and
equipment 2 15
Proceeds from sales of other real estate
owned 670 102
Purchase price of acquired bank net of
cash and cash equivalents (7,798) -
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (41,947) (66,356)
-------- --------
FINANCING ACTIVITIES
Net decrease in demand deposits, NOW and money
market accounts and savings deposits (11,578) (6,294)
Net increase in time deposits 41,670 72,702
Net increase (decrease) in securities sold
under agreements to repurchase (2,094) 12,948
Proceeds from notes payable 14,000 -
Principal payments on notes payable (3,250) (3,500)
Proceeds from stock option exercises 147 128
Dividends paid (2,080) (1,747)
-------- --------
NET CASH PROVIDED FROM FINANCING
ACTIVITIES 36,815 74,237
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,568 13,267
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 49,879 86,156
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $52,447 $99,423
======= =======
SUPPLEMENTAL DISCLOSURES:
Interest paid $18,476 $15,153
Income taxes paid 3,305 3,131
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Loans transferred to other real estate owned $205 $0
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
HERITAGE FINANCIAL SERVICES, INC.
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 six months ended June 30, 1996 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 1995 Form 10-K.
EARNINGS PER SHARE
Primary and fully diluted earnings per common share for the
three and six months ended June 30, 1996 and 1995 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.
NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". SFAS 121 requires that long-lived assets
and certain identifiable intangibles that are used in operations be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of assets might not be recoverable.
The adoption of SFAS 121 did not effect the Company's financial condition
or results of operations.
As of January 1, 1996, the Company adopted the provisions SFAS
122, "Accounting for Mortgage Servicing Rights". SFAS 122 provides
guidance on the accounting for mortgage servicing rights and the
evaluation and recognition of impairment of mortgage servicing
rights. The provisions of SFAS 122 do not currently impact the
Company since it sells mortgage loans to investors on a servicing
released basis.
As of January 1, 1996, the Company adopted SFAS 123,
"Accounting for Stock-Based Compensation". SFAS 123 encourages,
but does not require, companies to recognize compensation expense for
grants of stock, stock options and other equity instruments based
on the fair value of those instruments. The Company has elected to
continue to account for employee stock compensation plans under APB
Opinion 25 and related Interpretations.
HERITAGE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
ACQUISITION
On February 2, 1996, the Company acquired all of the common
shares of the First National Bank of Lockport ("Lockport") for
$16.8 million in cash. The acquisition was accounted for as a purchase
and, accordingly, the results of operations of Lockport have been
included in the consolidated statement of income from the date of
acquisition. In connection with the acquisition, the Company
acquired assets with an aggregate fair value of $104,375,000 and
assumed deposits and other liabilities of $87,555,000.
<TABLE>
LOANS
The following table summarizes loan balances by category (in
thousands):
<CAPTION> June 30, December 31,
1996 1995
-------- --------
<S> <C> <C>
Commercial and industrial $141,067 $130,508
Commercial real estate 146,627 145,080
Construction 15,761 8,645
Residential real estate 231,301 200,323
Home equity 81,795 73,525
Other consumer 12,331 13,782
--------- --------
Gross loans 628,882 571,863
Less: unearned income (1,919) (2,369)
--------- ---------
Total $626,963 $569,494
========= ========
</TABLE>
COMMON SHARES
On June 19, 1996, the Company's Board of Directors approved a
stock repurchase program which authorized the repurchase of up to
325,000 shares of common shares to be used for the issuance of
shares under the Company's stock option plan. The shares will be
repurchased from time to time in the open market or in private
transactions. At June 30, 1996, no shares were repurchased under
the program.
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 is vigorously
defending 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.
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 six month periods ended
June 30, 1996 and 1995 and its consolidated financial condition at June
30, 1996 as compared to December 31, 1995. This discussion should
be read in conjunction with the consolidated financial statements
and notes thereto appearing elsewhere in this Form 10Q.
On February 2, 1996, the Company acquired all of the common
shares of the First National Bank of Lockport ("Lockport") for
$16.8 million in cash. At the acquisition date Lockport had total assets
of approximately $104 million. The acquisition was accounted for as
a purchase and, accordingly, the results of operations of Lockport
have been included in the consolidated statement of income from the
date of acquisition.
ANALYSIS OF INCOME STATEMENTS
SUMMARY OF OPERATIONS
Net income in the second quarter of 1996 increased to
$3,769,000, up 17% from $3,215,000 earned in the same quarter of
1995. On a fully diluted basis, earnings per share for the
quarterly period increased to 45 cents per share, up 15% from 39
cents per share earned in the second quarter of 1995. For the six
months ended June 30, 1996, net income was $7,246,000, up 15%
compared to $6,276,000 in the first half of 1995. Earnings per
share for the six month period were 87 cents, up 14% compared to 76
cents in the same period in 1995. Higher earnings in both periods
were primarily due to increases in net interest income and lower
FDIC deposit insurance premiums.
NET INTEREST INCOME
Second quarter net interest income was $11,495,000, an
increase of $1,515,000 or 15% compared with the second quarter of 1995. For
the six months ended June 30, 1996, net interest income increased
$2,281,000 or 11% compared to 1995. The growth in net interest
income for the three and six month periods was due to increases in
the volume of average earning assets, partially offset by
reductions in net interest spreads.
For the six months ended June 30, 1996, average earning assets
increased $169 million or 19% compared to the same period in 1995.
The growth in average earning assets reflects strong internal
deposit growth over the past twelve months and the additional
earning assets of Lockport.
On a taxable equivalent basis, the annualized net interest
spread in the 1996 second quarter decreased to 3.78% compared to
3.83% in the 1995 quarter. For the first six months of 1996 the
net interest spread decreased to 3.72% from 3.97% in the year ago
period. On a year-to-date basis, the change in the net interest
spread reflected a decrease of .17% in the yield on average earning
assets and an increase of .08% in the rate paid on interest-bearing
liabilities. The decline in the yield on earning assets was
primarily due to lower rates earned on prime-based floating-rate
loans and new tax-exempt securities and residential real estate loans.
The slight increase in the rate paid on interest-bearing liabilities was
primarily due to higher interest rates paid on time deposits and
money market accounts. Changes in the deposit mix and premium
rates paid on short-term time deposit promotions contributed to the
increase in funding costs for the first six months in 1996.
Another factor contributing to lower net interest spreads for
the three and six month periods was a flattening of the treasury
yield curve. Throughout 1995, the yield curve flattened as the
spreads between long-term and short-term market interest rates
compressed. In general, a flattening yield curve reduces the
interest spreads earned on new loans and securities compared to the
cost of funds. During the first half of 1996, the yield curve
steepened as intermediate and long-term market interest rates
increased while short-term interest rates remained relatively
unchanged. The Company cannot predict whether the recent changes
in the yield curve environment will continue or be sustained.
However, changes in the yield curve will continue to impact the spread
earned on average earning assets.
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
six months ended June 30, 1996 and 1995 were as follows (in
thousands):
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Balance at beginning of period $9,582 $8,672 $8,477 $8,720
Allowance of acquired bank - - 1,179 -
Provision for loan losses 100 50 200 100
Loan charge-offs (257) (143) (488) (288)
Loan recoveries 31 113 88 160
-------- ------ ------ ------
Balance at end of period $9,456 $8,692 $9,456 $8,692
======== ====== ====== ======
Net charge-offs to average loans 0.15% 0.02% 0.13% 0.05%
Allowance for loan losses to
loans 1.51% 1.59% 1.51% 1.59%
Allowance for loan losses to
nonperforming loans 243% 148% 243% 148%
</TABLE>
The higher provisions for loan losses for the three and six
month periods of 1996 were primarily due to higher net chargeoffs.
<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 (in
thousands)
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
Amount % Amount %
----- --- ------ ---
<S> <C> <C> <C> <C>
Commercial and industrial $2,306 22 $2,077 23
Commercial real estate 4,350 23 4,100 25
Construction - 3 - 2
Residential real estate 2,000 37 1,550 35
Home equity and other consumer 800 15 750 15
----- --- ----- ---
$9,456 100 $8,477 100
===== === ===== ===
</TABLE>
Changes in the allocation of the allowance to individual loan
categories since December 31, 1995 were primarily the result of
changes in management's risk assessment and assignment of
unallocated reserves. Notwithstanding management's allocation of
the allowance, the entire allowance for loan losses is available to
absorb losses in any particular category of loans.
ASSET QUALITY
Nonperforming Assets
<TABLE>
The following table sets forth the Company's nonperforming
assets and asset quality ratios (in thousands):
<CAPTION>
June 30, December 31,
1996 1995
-------- -----------
<S> <C> <C>
Nonaccrual loans $3,796 $3,919
Loans past due 90 days or more 98 938
------ ------
Total nonperforming loans 3,894 4,857
------ ------
Other real estate owned 295 760
------ ------
Total nonperforming assets $4,189 $5,617
====== ======
Restructured loans - -
====== ======
Nonperforming loans to loans 0.62% 0.85%
Nonperforming assets to loans plus OREO 0.67% 0.98%
</TABLE>
Impaired Loans
<TABLE>
The following table sets forth the recorded investment in
impaired loans and the related valuation allowance for each loan
category (in thousands):
<CAPTION>
Amount of Impaired Loans
-------------------------------
No Valuation Valuation Amount of
Allowance Allowance Valuation
Required Required Total Allowance
------------ --------- ----- ---------
<S> <C> <C> <C> <C>
June 30, 1996
Commercial and industria $156 $756 $912 $169
Commercial real estate 3,259 682 3,941 150
Residential real estate 999 68 1,067 33
------ ------ ------ ----
Total impaired loans $4,414 $1,506 $5,920 $352
====== ====== ====== ====
<S> <C> <C> <C> <C>
December 31, 1995
Commercial and industrial $271 $796 $1,067 $285
Commercial real estate 3,312 1,410 4,722 486
Residential real estate 1,104 134 1,238 51
------ ------ ------ ----
Total impaired loans $4,687 $2,340 $7,027 $822
====== ====== ====== ====
</TABLE>
The average recorded investment in impaired loans for the six
months ended June 30, 1996 was approximately $6,698,000. Interest
income recognized on impaired loans in the 1996 first half totaled
$160,000 compared to $173,000 in the same period a year ago.
Included in the balance of impaired loans at June 30, 1996, are
$12,000 of loans 90 days or more past due and $3,341,000 of
nonaccrual loans.
OTHER INCOME
Other income, excluding securities transactions, for the three
months ended June 30, 1996 increased $319,000 or 20% compared to
the same period in 1995. On a year-to-date basis, other income,
excluding securities transactions, increased $265,000 or 8% compared to the
six month period in 1995. The growth in other income in both
periods was primarily due to higher investment product fees
resulting from increases in the volumes of products sold.
Net securities gains for the three and six months ended June
30, 1996, were $3,000 and $12,000, respectively, compared to
securities gains of $194,000 and $198,000 in the same periods of
1995. In 1996 securities gains were limited to calls of municipal
securities. In 1995 the Company recognized securities gains of
$177,000 from the sale of $8 million of adjustable-rate mortgage
pools classified as available-for-sale.
OTHER EXPENSE
Other expenses in the 1996 second quarter increased $693,000
or 10% compared to the same period in 1995. For the six months ended
June 30, 1996, other expenses increased $961,000 or 7% compared to
the same period a year ago. The growth in other expense categories
was largely attributable to the additional operating expenses of
Lockport, partially offset by reductions in deposit insurance
premiums.
Salaries and employee benefits, the largest component of other
expenses, increased $774,000 or 10% in first half of 1996 compared
to the same period a year ago. At June 30, 1996, the number of
full-time equivalent employees totaled 476 compared to 434 at
December 31, 1995 and 445 at June 30, 1995.
For the three and six months ended June 30, 1996, FDIC deposit
insurance premiums decreased $454,000 and $907,000, respectively,
compared with the same periods in 1995. The decreases reflect a
reduction in the BIF assessment rate from 23 cents per $100 in the
first half of 1995 to zero in the same period of 1996. The FDIC
recently announced that the BIF assessment rate will remain at zero
for the semiannual assessment period ending December 31, 1996.
However, there are no assurances that assessment rates beyond 1996
will remain at that level.
INCOME TAXES
Income tax expense for the six months ended June 30, 1996
increased $329,000 compared to the same period in 1995. The
Company's effective tax rate (income tax expense divided by net
income before taxes) decreased to 31.3% in 1996 compared to 32.1%
in the same period a year ago. The decrease in the effective rate in
1996 was primarily due to an increase in the amount of tax-exempt
income earned on state and municipal securities.
ANALYSIS OF BALANCE SHEETS
ASSETS
Total assets at June 30, 1996 were $1.193 billion, an increase
of $127 million compared to December 31, 1995. The growth in all
asset categories was primarily due to the acquisition of Lockport
in February, 1996. Including Lockport balances, changes in total
assets since December 31, 1995 reflect increases of $58 million in
securities, $56 million in net loans and a $3 million in cash and
cash equivalents. In the first half of 1996 the Company purchased
$27 million of fixed-rate CMOs and REMICs with average lives of 3
to 5 years and $19 million of bank-qualified tax-exempt securities. The
Company continued to experience increased loan demand despite
higher market interest rates in the first six months of 1996. Excluding
the loans acquired from Lockport, net loans increased approximately
$22 million from the yearend 1995 with most growth coming in
residential real estate loans.
LIABILITIES
The Company's funding sources, consisting of deposits and
securities sold under agreement to repurchase, increased $113
million since December 31, 1995. The increase in funding sources
was primarily due to the additional deposits provided by Lockport.
Including Lockport balances, changes in funding sources since
year-end reflect increases of $16 million in demand deposits and NOW
accounts, $20 million in money market accounts and savings deposits
and $75 million in time deposits. Approximately $27 million of the
increase in time deposits resulted from a five-month, premium-rate
certificate of deposit promotion offered in first quarter of 1996.
To fund a majority of the Lockport purchase price, the Company
borrowed $14 million under an unsecured $20 million revolving line
of credit established with an unrelated financial institution. The
borrowings are structured as revolving notes and bear interest at
either prime floating or may, at the Company's option, be fixed at
1% above LIBOR for periods up to one year. Periodic interest
payments are required on revolving notes. On January 1, 1998, the
unpaid principal balance of the revolving notes will convert into
a term loan. The Company is required to make quarterly principal
reductions beginning January 1, 1998. At June 30, 1996 the balance
of the notes payable was $10,750,000, reflecting a principal
reduction of $3,250,000 made in the second quarter. The weighted
average interest rate on notes payable at June 30, 1996 was 6.50%.
CAPITAL
At June 30, 1996 total shareholders' equity increased to $98.9
million, up $2.1 million from December 31, 1995. The growth in
equity reflects the retention of current year earnings, less
dividends paid, plus the proceeds from the issuance of 24,950
common shares pursuant to the exercise of stock options. The change in
equity also reflects a $3,173,000 decrease in the market value of
securities available-for-sale.
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
June 30, 1996, the Company's consolidated Tier 1 and total risk-
based capital ratios were 12.09% and 13.34%, respectively. The
Company's leverage ratio at quarter-end was 6.90%.
On June 18, 1996, the Company's Board of Directors approved a
stock repurchase program which authorized the repurchase of up to
325,000 shares of common shares to be used for the issuance of
shares under the Company's stock option plan. The shares will be
repurchased from time to time in the open market or in private
transactions. At June 30, 1996, no shares were repurchased under
the program. The Company intends to fund the cost of repurchased
shares with dividends from Heritage Bank. Presently the Company
has no other commitments for material capital expenditures. Management
believes that the Company has sufficient financing options
available to fund commitments that may arise in the future.
LIQUIDITY
Liquidity management in banking involves the ability to
generate funds to support asset growth and meet cash flow
requirements of customers and other obligations. Liquidity of
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. At June
30, 1996 federal funds sold and securities having contractual
maturities of one year or less totaled $27 million. In addition to
these funds, the Bank expects to receive approximately $87 million
of payments on mortgage-backed and asset-backed securities over the
next twelve months. These cash flow projections are based on the
consensus prepayment estimates of securities brokers. For the
three and twelve months ended June 30, 1996, the aggregate principal
payments received on these securities totaled approximately $23
million and $65 million, respectively.
The Bank's immediate liquidity needs have historically been
met by federal funds sold and cash flows from securities. Other sources
of potential liquidity include the sale of securities classified as
available-for-sale, borrowings up to $35 million under informal
federal funds lines with correspondent banks and advances under a
$112 million credit facility with the Federal Home Loan Bank.
For the parent company, Heritage Financial Services,
Inc.("HFS"), liquidity means having cash available to pay
shareholder dividends, to service debt and to fund operating
expenses. The ability of HFS to pay dividends, as well as fund its
operations and service debt, is dependent upon receipt of dividends
from Heritage Bank. Regulatory authorities limit the amount of
dividends which can be paid by Heritage Bank without prior approval
from such authorities. At June 30, 1996, the amount of
undistributed earnings of Heritage Bank available for the payment
of dividends within such limitations is more than adequate to fund
the anticipated cash requirements of HFS.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Heritage Financial Services, Inc. held its annual
Shareholder meeting on April 23, 1996.
(b) At the annual meeting the shareholders elected four Class
III directors as follows: elected Richard T. Wojcik with 7,079,453
votes FOR (and 46,232 withheld); elected Jack Payan with 7,079,453
votes FOR (and 46,232 withheld); elected Arthur G. Tichenor with
7,079,453 votes FOR (and 46,232 withheld); and elected Dominick J.
Velo with 7,074,353 votes FOR (and 51,332 withheld).
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 June 30, 1996.
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: August 6, 1996 by /s/ Frederick J. Sampias
Frederick J. Sampias
President
(Duly Authorized Officer)
Date: August 6, 1996 by /s/ Paul A. Eckroth
Paul A. Eckroth
Executive Vice President and Treasurer
(Principal Financial and Chief Accounting
Officer)
Exhibit 11 - Statement Re: Computation of Per Share Earnings
<TABLE>
Presented below is the calculation of the Registrant's primary and
fully diluted earnings per share required by Item 601(b)(11) of
Regulation S-K (dollars in thousands, except per share data):
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
1996 1995 1996 1995
------- ------ ------ ------
<S> <C> <C> <C> <C>
PRIMARY
Net income $3,769 $3,215 $7,246 $6,276
====== ====== ====== ======
Average common shares outstanding 7,964 7,939 7,960 7,935
Common stock equivalents - net effect
of the assumed exercise of stock options
- -- based on the treasury stock method
using average market price 393 354 381 354
------ ------ ------ ------
Average primary shares outstanding 8,357 8,293 8,341 8,289
====== ====== ====== ======
Primary earnings per share $0.45 $0.39 $0.87 $0.76
====== ====== ====== ======
FULLY DILUTED
Net income $3,769 $3,215 $7,246 $6,276
====== ====== ====== ======
Average common shares outstanding 7,964 7,939 7,960 7,935
Common stock equivalents - net effect
of the assumed exercise of stock options
- -- based on the treasury stock method
using average market price or year-end
market price, whichever was higher 411 356 411 359
------ ------ ------ ------
Average fully diluted shares
outstanding 8,375 8,295 8,371 8,294
====== ====== ====== ======
Fully diluted earnings per share $0.45 $0.39 $0.87 $0.76
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 40806
<INT-BEARING-DEPOSITS> 141
<FED-FUNDS-SOLD> 11500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 357564
<INVESTMENTS-CARRYING> 115879
<INVESTMENTS-MARKET> 472012
<LOANS> 626963
<ALLOWANCE> 9456
<TOTAL-ASSETS> 1193249
<DEPOSITS> 1026493
<SHORT-TERM> 59567
<LIABILITIES-OTHER> 8266
<LONG-TERM> 0
0
0
<COMMON> 4978
<OTHER-SE> 93945
<TOTAL-LIABILITIES-AND-EQUITY> 1193249
<INTEREST-LOAN> 13363
<INTEREST-INVEST> 7538
<INTEREST-OTHER> 114
<INTEREST-TOTAL> 21015
<INTEREST-DEPOSIT> 8935
<INTEREST-EXPENSE> 9520
<INTEREST-INCOME-NET> 11495
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 7751
<INCOME-PRETAX> 5580
<INCOME-PRE-EXTRAORDINARY> 5580
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3769
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
<YIELD-ACTUAL> 4.52
<LOANS-NON> 3796
<LOANS-PAST> 98
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2567
<ALLOWANCE-OPEN> 9582
<CHARGE-OFFS> 257
<RECOVERIES> 31
<ALLOWANCE-CLOSE> 9456
<ALLOWANCE-DOMESTIC> 9456
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
