UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
Quarterly Report Pursuant To Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1997
Commission File Number
HERITAGE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-3139645
(State or other jurisdiction of (I.R.S.employer
incorporation or organization) identification No.)
17500 South Oak Park Avenue
Tinley Park, Illinois
60477
(Address of principal executive offices)
(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 (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT MAY 6,1997
Common Shares, $.625 par value per share 8,040,571
<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,
1997 1996
-------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $40,041 $43,830
Federal funds sold and interest-bearing deposits - -
------- -------
Total cash and cash equivalents 40,041 43,830
Securities:
Held-to-maturity (market value: $113,855 in
1997 and $117,046 in 1996 113,801 115,913
Available-for-sale, at market 387,598 392,754
Trading, at market 292 262
-------- -------
Total securities 501,691 508,929
Loans, net of unearned income 655,518 639,004
Less: allowance for loan losses (9,406) (9,407)
------- -------
Net loans 646,112 629,597
Premises and equipment 19,120 18,786
Goodwill and core deposit intangibles 17,700 18,196
Other assets 11,658 9,682
--------- ---------
TOTAL ASSETS $1,236,322 $1,229,020
========= =========
LIABILITIES
Demand deposits 170,569 185,705
NOW and money market accounts 206,897 190,955
Savings deposits 201,988 203,483
Time deposits 491,730 473,160
--------- ---------
Total deposits 1,071,184 1,053,303
Federal funds purchased - 13,000
Securities sold under agreements to repurchase 43,050 40,706
Notes payable 5,000 7,000
Other liabilities 10,262 9,324
---------- ---------
TOTAL LIABILITIES 1,129,496 1,123,333
---------- ---------
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: 8,078,921 in 1997 and
7,967,032 in 1996 5,049 4,979
Surplus 18,382 17,634
Retained earnings 84,280 83,374
Net unrealized gains (losses) on securities,
net of tax (885) 1,525
Treasury stock, at cost (86,025 shares in 1996) (1,825)
------- -------
TOTAL SHAREHOLDERS' EQUITY 106,826 105,687
------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY $1,236,322 $1,229,020
========= ==========
<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
March 31,
-------- --------
1997 1996
-------- --------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $13,811 $12,831
Securities:
Taxable 6,449 5,556
Exempt from federal income taxes 1,768 1,466
Federal funds sold and interest-bearing
deposits 13 236
-------- --------
TOTAL INTEREST INCOME 22,041 20,089
-------- --------
INTEREST EXPENSE
Deposits 9,480 8,708
Short-term borrowings 496 495
Notes payable 81 144
-------- --------
TOTAL INTEREST EXPENSE 10,057 9,347
-------- --------
NET INTEREST INCOME 11,984 10,742
Provision for loan losses 150 100
-------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 11,834 10,642
-------- --------
OTHER INCOME
Service charges on deposit accounts 1,197 957
Income for trust services 193 191
Investment product fees 363 219
Other operating income 430 306
Securities gains 118 9
-------- --------
TOTAL OTHER INCOME 2,301 1,682
-------- --------
OTHER EXPENSE
Salaries and employee benefits 4,288 4,140
Net occupancy expense 855 719
Equipment expense 410 418
Data processing expense 296 276
Amortization of intangible assets 495 513
Other operating expenses 1,430 1,298
-------- --------
TOTAL OTHER EXPENSE 7,774 7,364
-------- --------
INCOME BEFORE INCOME TAXES 6,361 4,960
Income tax expense 2,030 1,483
-------- --------
NET INCOME $4,331 $3,477
======== ========
NET INCOME PER COMMON SHARE
Primary $0.52 $0.42
Fully diluted $0.52 $0.42
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Primary 8,320,159 8,324,841
Fully diluted 8,325,648 8,324,841
<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>
Three Months Ended
March 31,
------------------
1997 1996
------- ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $4,331 $3,477
Adjustments to reconcile net income
to net cash provided by operating
activities:
Discount accretion on securities (438) (314)
Deferred loan fee accretion (101) (113)
Provision for loan losses 150 100
Securities gains (118) (9)
Depreciation and amortization 457 416
Deferred income taxes (136) (145)
Net amortization of purchase accounting
adjustments 665 620
Increase in accrued interest income (971) (1,267)
Increase in accrued interest expense 159 106
Other, net 652 671
------ -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,650 3,542
------ ------
INVESTING ACTIVITIES
Securities held-to-maturity:
Proceeds from maturities, repayments
and calls 2,377 1,963
Purchases - (13,934)
Securities available-for-sale:
Proceeds from maturities, repayments
and calls 17,566 27,457
Proceeds from sales 22,635 -
Purchases (38,797) (24,735)
Net increase in loans (16,786) (9,730)
Purchases of premises and equipment (816) (719)
Proceeds from sales of other real
estate owned 572 299
Purchase price of acquired bank net of
cash and cash equivalents - (7,798)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (13,249) (27,197)
-------- --------
FINANCING ACTIVITIES
Net increase in deposits 17,860 29,185
Decrease in federal funds purchased (13,000) -
Net increase (decrease) in securities
sold under agreements to repurchase 2,344 (5,848)
Proceeds from notes payable - 14,000
Principal payments on notes payable (2,000) -
Proceeds from stock option exercises 818 133
Dividends paid (1,212) (1,035)
------- -------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 4,810 36,435
------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (3,789) 12,780
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 43,830 49,879
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $40,041 $62,659
====== ======
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 9,877 $ 9,279
Income taxes paid 175 -
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
HERITAGE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
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 months ended March 31, 1997 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 and industry
reporting practices 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 1996 Form 10-K.
EARNINGS PER SHARE
Primary and fully diluted earnings per common share for the
three months ended March 31, 1997 and 1996 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, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") 125,
"Accounting for Transfers of Financial Assets, Servicing Rights,
and Extinguishment of Liabilities". SFAS 125 sets forth accounting
and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. The standards are based
on consistent application of a financial-components approach that
focuses on control. Under the approach, after a transfer of
financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. In December, 1996,
the FASB issued SFAS 127, "Deferral of the Effective Date of
Certain Provisions of SFAS 125". SFAS 127 defers the effective
date of certain provisions of SFAS 125 for one year. The adoption
of SFAS 125 did not have a material effect on the Company's
financial condition or results of operations.
In February, 1997 the Financial Accounting Standards Board
issued SFAS 128, Earnings Per Share, which becomes effective for
the 1997 Annual Report. Early application of the new standard is
not permitted, however, restatement of all prior period information
is required. The new standard replaces primary earnings per share
(EPS) with earnings per common share (basic EPS). Basic EPS is
computed by dividing net income by the weighted average number of
common shares outstanding for the period. The standard also
requires presentation of EPS assuming dilution. This is computed
similarly to the fully diluted EPS that is now required. If the
new standard was adopted in the first quarter of 1997, basic EPS
would have been $.54 and EPS assuming dilution would have been
$.52. Similarly, basic EPS for the 1996 first quarter would have
been $.44 and EPS assuming dilution would have been $.42.
HERITAGE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
LOANS
<TABLE>
The following table summarizes loan balances by category (in
thousands):
<CAPTION>
March 31, December 31
1997 1996
--------- -----------
<S> <C> <C>
Commercial and industrial $149,864 $143,811
Commercial real estate 147,454 148,798
Construction 14,661 13,515
Residential real estate 247,873 239,380
Home equity 88,060 85,113
Other consumer 9,284 10,192
--------- ----------
Gross loans 657,196 640,809
Less: unearned income (1,678) (1,805)
--------- ----------
Total $655,518 $639,004
========= ==========
</TABLE>
COMMON SHARES
In June, 1996, the Company's Board of Directors approved a
stock repurchase program which authorized the repurchase of up to
325,000 common shares to be used for the issuance of shares under
the Company's stock option plan. The shares may be repurchased
from time to time in the open market or in private transactions.
During the three month period ended March 31, 1997, 55,001 common
shares were repurchased at a cost of $1,223,000 and 141,026
treasury shares were reissued upon the exercise of stock options.
STOCK OPTIONS
<TABLE>
A summary of stock option activity for three months ended
March 31, 1997 is presented below (in thousands):
<CAPTION>
Weighted
Option Average
Shares Price
------ ------
<S> <C> <C>
Balance, December 31, 1996 681 $8.73
Granted - -
Exercised (252) $5.90
Forfeited - -
------ ------
Balance, March 31, 1997 429 $10.40
====== ======
</TABLE>
<TABLE>
A summary of outstanding and exercisable stock options at March
31, 1997 is presented below (in thousands):
<CAPTIONS>
Outstanding Options Exercisable Options
------------------------ -------------------
Weighted Average Weighted
Option Average Remaining Option Average
Shares Price Life Shares Price
<S> <C> <C> <C> <C> <C>
Exercise Price Ranges ----- ------ -------- ----- -------
$7.10 - $10.63 299 $8.39 3.3 yrs 299 $8.39
$13.50 - $16.50 130 $15.02 6.3 yrs 109 $14.78
----- -----
Total 429 408
===== =====
</TABLE>
HERITAGE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
SUBSEQUENT EVENT
On May 14, 1997 the Board of Directors of Heritage Financial
Services, Inc. declared a three-for-two stock split, payable June
13, 1997, to shareholders of record at the close of business on May
27, 1997. The Board of Directors also voted to eliminate the par
value of common shares. As a result of the stock split,
shareholders of record as of May 27, 1997, will receive one
additional common share for every two shares owned. Shareholders
entitled to fractional shares will receive cash in lieu of
fractional shares.
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,
1997 and 1996 and its consolidated financial condition at March 31,
1997 as compared to December 31, 1996. This discussion should be
read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere in this Form 10-Q.
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.
ANALYSIS OF INCOME STATEMENTS
SUMMARY OF OPERATIONS
Net income in the first quarter of 1997 increased to
$4,331,000, up 25% from $3,477,000 earned in the same quarter of
1996. On a fully diluted basis, earnings per share for the
quarterly period increased to 52 cents per share compared to 42
cents per share earned in the first quarter of 1996. Higher
earnings in the 1997 period were principally due to increases in
net interest income and other income. First quarter earnings were
also positively affected by a pre-tax recovery of $160,000 of
interest income on a nonaccrual loan, the reimbursement of $150,000
of legal costs related to litigation settled in 1996 and securities
gains of $118,000.
NET INTEREST INCOME
<TABLE>
The following table sets forth the average balances, tax
equivalent yields and effective rates for the major categories of
earning asset and interest-bearing liabilities for the three months
ended March 31, 1997 and 1996 (in thousands):
<CAPTION>
1997 1996
----------------- -----------------
Average Average
Balance Rate Balance Rate
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Loans $647,042 8.71% $593,889 8.75%
Securities 505,359 7.36 446,158 7.02
Short-term investments 972 5.42 17,850 5.30
--------- ------ --------- ------
Total earning assets $1,153,373 8.11% $1,057,897 7.97%
========= ------ ========= ------
Time deposits $482,366 5.46% $408,678 5.54%
NOW and money market
accounts 198,353 3.29 189,350 3.25
Savings deposits 202,652 2.75 214,622 2.86
Short-term borrowings 53,731 3.74 51,356 3.88
Notes payable 5,311 6.19 9,077 6.38
--------- ----- --------- ------
Total interest-bearing
liabilities $942,413 4.33% $873,083 4.31%
========= ------ ========= ------
Net interest spread 3.78% 3.66%
Impact of non-interest bearing funds 0.80% 0.76%
------ ------
Net yield on interest earning assets 4.58% 4.42%
====== ======
</TABLE>
On a tax equivalent basis, net interest income for the first
quarter of 1997 was $13,016,000, an increase of $1,397,000 or 12%
compared with the 1996 first quarter. The increase in net interest
income was primarily attributable to a 9% increase in the volume of
average earning assets coupled with an increase in the net interest
spread. The growth in average earning assets primarily resulted
from strong internal deposit growth over the past twelve months.
To a lesser extent, the acquisition of Lockport in February, 1996
also affected the growth in average earning assets.
Average loans for the first quarter of 1997 increased $53
million or 9% compared to the first quarter in 1996. The increase
was primarily in commercial and industrial loans and residential
real estate loans. Average securities increased $59 million or 13%
compared to the first quarter in 1996. The Company continues to
purchase fixed-rate intermediate-term mortgage-backed
securities and longer-term bank-qualified tax-exempt securities.
The increase in average earning assets was primarily funded by
growth in average time deposits, which increased $74 million. The
growth resulted from a combination of premium-rate time deposit
promotions and generally higher interest rates offered on time
deposits compared to other interest-bearing deposit products.
On a taxable equivalent basis, the annualized net interest
spread in the first quarter increased .12% compared to same period
in 1996. The change in the net interest rate spread reflected an
increase of .14% in the yield on average earning assets while the
rate on interest-bearing liabilities increased by only .02%. The
increase in the yield on earning assets was primarily due to the
increase in the yield on securities, reflecting higher rates earned
on new purchases and the sale and reinvestment of lower-yielding
securities. The slight increase in the rate paid on interest
bearing-liabilities was due to the change in deposit mix, with most
growth coming in time deposits.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses is an amount which is available
to absorb potential credit losses. The allowance is comprised of
both specific and general valuation allowances and is maintained at
a level management believes to be adequate to provide for known and
potential risks inherent in the Company's loan portfolio.
Management assesses the adequacy of the allowance for loan losses
on a quarterly basis. Management's evaluation of the adequacy of
the allowance considers such factors as prior loss experience, loan
portfolio growth, loan delinquency levels and trends, 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 loans previously
charged off are credited back to the allowance.
<TABLE>
The changes in the allowance for loan losses for the three
months ended March 31, 1997 and 1996 were as follows (in
thousands):
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
------ ------
<S> <C> <C>
Balance, beginning of period $9,407 $8,477
Allowance of acquired bank - 1,179
Provision for loan losses 150 100
Loan charge-offs (197) (231)
Loan recoveries 46 57
------ ------
Balance, end of period $9,406 $9,582
====== ======
Net charge-offs to average loans .09% .12%
Allowance for loan losses to loans 1.43% 1.56%
Allowance for loan losses to nonperforming 324% 193%
loans
</TABLE>
The increase in the provision for loan losses in the 1997
first quarter primarily resulted from the growth in the Company's
loan portfolio. The amount of the provision was also influenced by
the improvement in asset quality since year-end 1996. For further
information on the Company's nonperforming loans and impaired
loans, see the Asset Quality section below.
<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>
March 31, 1997 December 31, 1996
--------------- -----------------
Amount % Amount %
------- -- ------ --
<S> <C> <C> <C> <C>
Commercial and industrial $2,156 23 $2,157 23
Commercial real estate 4,100 23 4,200 23
Construction - 2 2
Residential real estate 2,300 38 2,250 37
Home equity and other consumer 850 14 800 15
------------- ---------------
Total $9,406 100 $9,407 100
============= ================
</TABLE>
Changes in the allocation of the allowance to individual loan
categories since December 31, 1996 were primarily the result of
loan portfolio growth and 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
<TABLE>
Nonperforming Assets
The following table sets forth the Company's nonperforming assets
and asset quality ratios (in thousands):
<CAPTION>
March 31, December 31,
1997 1996
---------- ----------
<S> <C> <C>
Nonaccrual loans $2,806 $3,421
Loans past due 90 days or more 101 783
-------- --------
Total nonperforming loans 2,907 4,204
Other real estate owned 156 618
-------- --------
Total nonperforming assets $3,063 $4,822
======== ========
Restructured loans $142 -
======== ========
Nonperforming loans to loans 0.44% 0.66%
Nonperforming assets to loans plus OREO 0.47% 0.75%
</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>
March 31, 1997
Commercial and industrial $125 $581 $706 $247
Commercial real estate 1,222 126 1,348 3
Residential real estate 354 668 1,022 103
------ ------ ----- -----
Total impaired loans $1,701 $1,375 $3,076 $353
====== ====== ===== =====
<S> <C> <C> <C> <C>
December 31, 1996
Commercial and industrial $137 $646 $783 $275
Commercial real estate 816 955 1,771 200
Residential real estate 812 240 1,052 66
------ ----- ------ -----
Total impaired loans $1,765 $1,841 $3,606 $541
====== ====== ====== =====
</TABLE>
The average recorded investment in impaired loans for the
three months ended March 31, 1997 was approximately $3,341,000.
Interest income recognized on impaired loans in the 1997 first
quarter totaled $21,000 compared to $98,000 in the same period a
year ago. Included in the balance of impaired loans at March 31,
1997, are $2,430,000 of nonaccrual loans.
OTHER INCOME
Other income, excluding securities transactions, for the three
months ended March 31, 1997 increased $510,000 or 30% compared to
the same period in 1996. In the 1997 first quarter the Company
experienced strong growth in most categories of other income.
Service charges on deposits, the primary component of other
income increased $240,000 or 25% compared to the 1996 first
quarter. The increase was principally due to changes in overdraft
service charge methods. Investment product fees increased
$144,000 or 66% reflecting continued sales efforts and greater
customer demand for annuity and mutual fund products. The increase
in other operating income of $124,000 or 41% was primarily
attributable to ATM surcharge fees which were established in
December, 1996.
Net securities gains for the three months ended March 31,
1997, were $118,000 compared to net securities gains of $9,000 in
the same period of 1996. In the 1997 first quarter, the Company
recognized net gains of $88,000 on the sale of $23 million of fixed-
rate and adjustable-rate mortgage pools. The proceeds of these
sales were reinvested in longer-term, fixed rate mortgage-backed
securities and tax-exempt securities. The balance of securities
gains recognized in 1997 reflects a market value adjustment of an
investment security classified as trading.
OTHER EXPENSE
Other expense in the 1997 first quarter increased $410,000 or
6% compared to the same period in 1996. The growth in other expense
was primarily attributable to increases in salaries and benefits,
occupancy expense and other operating expenses.
Salaries and employee benefits, the largest component of other
expenses, increased $148,000 or 4% compared to the 1996 first
quarter. The increase primarily reflects normal salary increases
and higher incentive compensation expense. A reduction in staffing
levels from the year ago quarter partially limited the growth in
salaries and employee benefits. At March 31, 1997, the number of
full-time equivalent employees totaled 447 compared to 463 at March
31, 1996.
Occupancy expense increased $136,000 or 19% compared with the
1996 first quarter. The increase primarily reflects higher real
estate taxes and maintenance and supplies. Other operating
expenses increased $132,000 or 10% compared with the 1996 first
quarter. The increase primarily resulted from increases in ATM
processing costs, postage expenses and professional fees.
Partially offsetting the increase in other operating expenses was
the reimbursement of $150,000 of legal costs related to litigation
settled in 1996.
INCOME TAXES
Income tax expense for the three months ended March 31, 1997
increased $547,000 compared to the same period in 1996. The
Company's effective tax rate (income tax expense divided by net
income before taxes) increased to 31.9% in 1997 compared to 29.9%
in the same quarter a year ago. The increase in income tax expense
and the effective tax rate in 1997 was primarily due to an increase
in pre-tax earnings.
ANALYSIS OF BALANCE SHEETS
ASSETS
Total assets at March 31, 1997 were $1.236 billion, an
increase of $7 million compared to December 31, 1996. Changes in
total assets since December 31, 1996 primarily reflect an increase
of $17 million in net loans and decreases of $7 million in
securities and $4 million in cash and cash equivalents. In the
first quarter 1997 the Company continued to experience increased
loan demand as market interest rates remained generally stable
during the period. During the three month period ended March 31,
1997, residential real estate loans increased $8 million and
commercial and industrial loans increased $6 million.
LIABILITIES
The Company's funding sources, consisting of deposits and
short-term borrowings, increased $7 million since December 31,
1996. Changes in funding sources since year-end primarily reflect
increases of $16 million in NOW and money market accounts and $19
million in time deposits. Partially offsetting the growth in these
categories were decreases of $15 million in demand deposits and $13
million in federal funds purchased. Approximately $27 million of
the increase in time deposits resulted from a thirteen-month,
premium-rate certificate of deposit promotion offered in February
and March of 1997.
CAPITAL
At March 31, 1997 total shareholders' equity increased to
$106.8 million, up $1.1 million from December 31, 1996. The growth
in equity reflects the retention of current year earnings, less
dividends paid and the cost of treasury stock purchased, plus the
proceeds from the exercise of stock options. The change in equity
also reflects a $2.4 million decrease in the market value of
securities available-for-sale.
<TABLE>
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 banking regulators.
The capital ratios of the Company and Heritage Bank at March 31,
1997 and the minimum capital ratios for "well capitalized"
financial institutions are as follows:
<CAPTION>
Minimum
Well
Capitalized Company Heritage
Ratio Consolidated Bank
------- ------------ --------
<S> <C> <C> <C>
Tier I capital to average assets >5.00% 7.43% 7.37%
-
Tier I capital to risk weighted assets >6.00% 13.11% 12.95%
-
Total capital to risk weighted assets >10.00% 14.36% 14.21%
-
</TABLE>
In June, 1996, the Company's Board of Directors approved a
stock repurchase program which authorized the repurchase of up to
325,000 common shares to be used for the issuance of shares under
the Company's stock option plan. For the three months ended March
31, 1997, 55,001 common shares were repurchased at a cost of
$1,223,000 and 141,026 treasury shares were reissued upon the
exercise of stock options. 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.
The Bank's immediate liquidity needs have historically been
met by federal funds sold and cash flows from securities. At
quarter-end however, the Bank neither sold or purchased federal
funds. For the three and twelve months ended March 31, 1997, the
aggregate principal payments received on mortgage-backed and asset-
backed securities totaled approximately $15 million and and $59
million, respectively. At March 31, 1997, the Bank has $22 million of
securities having contractual maturities of one year or less and expects to
receive approximately $57 million of payments on mortgage-backed
and asset-backed securities over the next twelve months. The
cash flow projections for mortgage-backed and asset-backed
securities are based on consensus prepayment estimates of
securities brokers. In addition to cash flows from securities, the Bank
may borrow up to $55 million under informal federal funds lines
with correspondent banks. Other sources of potential liquidity
include the sale of securities classified as available-for-sale and
advances under a $139 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 March 31, 1997, the amount of
undistributed earnings of Heritage Bank available for the payment
of dividends within such limitations is sufficient to fund
the anticipated cash requirements of HFS.
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 15).
(b) There were no reports on Form 8-K filed by the registrant
during the quarter ending March 31, 1997.
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 14, 1997 by /s/ Frederick J. Sampias
Frederick J. Sampias
President
(Duly Authorized Officer)
Date: May 14, 1997 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
The calculation of the Registrant's primary and fully diluted
earnings per share required by Item 601(b)(11) of Regulation S-K is
presented below (dollars in thousands, except per share data):
Three Months Ended
March 31,
----------------
1997 1996
------- -------
Primary
Net income $4,331 $3,477
====== ======
Average common shares outstanding 8,059 7,956
Common stock equivalents - net effect of the
assumed exercise of stock options -- based
on the treasury stock method using average
market price 261 369
------- -------
Average primary shares outstanding 8,320 8,325
====== ======
Primary earnings per share $0.52 $0.42
====== ======
Fully Diluted
Net income $4,331 $3,477
Average common shares outstanding 8,059 7,956
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 267 369
------- -------
Average fully diluted shares outstanding 8,326 8,325
====== ======
Fully diluted earnings per share $0.52 $0.42
====== ======
