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 June 30, 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 AUGUST 8,1997
Common Shares, $.625 par value per share 12,022,813
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
June 30, December31
1997 1996
<S> <C> <C>
ASSETS ------- -------
Cash and due from banks $48,651 $43,830
Federal funds sold and interest-bearing deposits
------- -------
Total cash and cash equivalents 48,651 43,830
Securities:
Held-to-maturity (market value: $115,086 in
1997 and $117,046 in 1996 113,213 115,913
Available-for-sale, at market 389,627 392,754
Trading, at market 321 262
------- -------
Total securities 503,161 508,929
Loans, net of unearned income 685,302 639,004
Less: allowance for loan losses (9,538) (9,407)
------- -------
Net loans 675,764 629,597
Premises and equipment 19,262 18,786
Goodwill and core deposit intangibles 17,200 18,196
Other assets 10,006 9,682
------- -------
TOTAL ASSETS $1,274,044 $1,229,020
========= =========
LIABILITIES
Demand deposits 177,244 185,705
NOW and money market accounts 226,970 190,955
Savings deposits 193,221 203,483
Time deposits 497,038 473,160
------- -------
Total deposits 1,094,473 1,053,303
Federal funds purchased 8,000 13,000
Securities sold under agreements to repurchase 49,105 40,706
Notes payable 2,500 7,000
Other liabilities 8,338 9,324
------- -------
TOTAL LIABILITIES 1,162,416 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: 12,128,313 in 1997 and
11,946,464 in 1996 - 4,979
Surplus 23,564 17,634
Retained earnings 87,319 83,374
Net unrealized gains (losses) on securities,
net of tax 1,870 1,525
Treasury stock, at cost (67,500 shares in 1997
and 129,038 shares in 1996) (1,125) (1,825)
------- -------
TOTAL SHAREHOLDERS' EQUITY 111,628 105,687
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY $1,274,044 $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)
Six Months Ended
June 30,
-------- --- --------
1997 1996
-------- --------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $28,120 $26,194
Securities:
Taxable 12,726 11,537
Exempt from federal income taxes 3,686 3,023
Federal funds sold and interest-bearing
deposits 84 350
-------- --------
TOTAL INTEREST INCOME 44,616 41,104
-------- --------
INTEREST EXPENSE
Deposits 19,472 17,643
Short-term borrowings 970 900
Notes payable 134 324
-------- --------
TOTAL INTEREST EXPENSE 20,576 18,867
-------- --------
NET INTEREST INCOME 24,040 22,237
Provision for loan losses 300 200
-------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 23,740 22,037
-------- --------
OTHER INCOME
Service charges on deposit accounts 2,496 2,032
Income for trust services 410 393
Investment product fees 700 611
Other operating income 829 570
Securities gains 100 12
-------- --------
TOTAL OTHER INCOME 4,535 3,618
-------- --------
OTHER EXPENSE
Salaries and employee benefits 8,616 8,435
Net occupancy expense 1,668 1,452
Equipment expense 820 818
Data processing expense 595 581
Amortization of intangible assets 996 1,087
Other operating expenses 3,010 2,742
-------- --------
TOTAL OTHER EXPENSE 15,705 15,115
-------- --------
INCOME BEFORE INCOME TAXES 12,570 10,540
Income tax expense 3,987 3,294
-------- --------
NET INCOME $8,583 $7,246
======== ========
NET INCOME PER COMMON SHARE
Primary $0.69 $0.58
Fully diluted $0.69 $0.58
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Primary 12,474,285 12,511,046
Fully diluted 12,520,699 12,556,913
<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)
Three Months Ended
June 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $14,309 $13,363
Securities:
Taxable 6,277 5,981
Exempt from federal income taxes 1,918 1,557
Federal funds sold and interest-bearing
deposits 71 114
-------- --------
TOTAL INTEREST INCOME 22,575 21,015
-------- --------
INTEREST EXPENSE
Deposits 9,992 8,935
Short-term borrowings 474 405
Notes payable 53 180
-------- --------
TOTAL INTEREST EXPENSE 10,519 9,520
-------- --------
NET INTEREST INCOME 12,056 11,495
Provision for loan losses 150 100
-------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 11,906 11,395
-------- --------
OTHER INCOME
Service charges on deposit accounts 1,299 1,075
Income for trust services 217 202
Investment product fees 337 392
Other operating income 399 264
Securities gains (losses) (18) 3
-------- --------
TOTAL OTHER INCOME 2,234 1,936
-------- --------
OTHER EXPENSE
Salaries and employee benefits 4,328 4,295
Net occupancy expense 813 733
Equipment expense 410 400
Data processing expense 299 305
Amortization of intangible assets 501 574
Other operating expenses 1,580 1,444
-------- --------
TOTAL OTHER EXPENSE 7,931 7,751
-------- --------
INCOME BEFORE INCOME TAXES 6,209 5,580
Income tax expense 1,957 1,811
-------- --------
NET INCOME $4,252 $3,769
======== ========
NET INCOME PER COMMON SHARE
Primary $0.34 $0.30
Fully diluted $0.34 $0.30
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Primary 12,468,381 12,534,831
Fully diluted 12,502,593 12,562,541
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30
-----------------
1997 1996
------- ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $8,583 $7,246
Adjustments to reconcile net income
to net cash provided by operating
activities:
Discount accretion on securities (937) (700)
Deferred loan fee accretion (209) (258)
Provision for loan losses 300 200
Securities gains (100) (12)
Depreciation and amortization 914 841
Deferred income taxes (266) (317)
Net amortization of purchase accounting
adjustments 1,313 1,339
Increase in accrued interest income (478) (645)
Increase in accrued interest expense (120) 451
Other, net 650 (443)
NET CASH PROVIDED BY OPERATING ------ ------
ACTIVITIES 8,350 7,702
------ ------
INVESTING ACTIVITIES
Securities held-to-maturity:
Proceeds from maturities, repayments
and calls 3,910 2,565
Purchases (640) (18,679)
Securities available-for-sale:
Proceeds from maturities, repayments
and calls 36,331 50,489
Proceeds from sales 36,817 -
Purchases (69,065) (45,535)
Net increase in loans (46,939) (22,412)
Purchases of premises and equipment (1,447) (1,249)
Proceeds from sales of other real
estate owned 651 670
Purchase price of acquired bank net of
cash and cash equivalents - (7,798)
------- --------
NET CASH USED IN INVESTING ACTIVITIES (40,382) (41,949)
-------- --------
FINANCING ACTIVITIES
Net increase in deposits 41,127 30,092
Decrease in federal funds purchased (5,000) -
Net increase (decrease) in securities
sold under agreements to repurchase 8,399 (2,094)
Proceeds from notes payable - 14,000
Principal payments on notes payable (4,500) (3,250)
Proceeds from stock option exercises 376 147
Dividends paid (2,424) (2,080)
Purchases of common stock (1,125) -
------ ------
NET CASH PROVIDED FROM FINANCING
ACTIVITIES 36,853 36,815
------- ------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 4,821 2,568
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 43,830 49,879
------ ------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $48,651 $52,447
====== ======
SUPPLEMENTAL DISCLOSURES:
Interest paid $20,653 $18,476
Income taxes paid 4,465 3,305
<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 and six months ended June 30, 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 and six months ended June 30, 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. Average common and common equivalent shares have
been adjusted to reflect the Company's 1997 three-for-two stock
split.
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.
HERITAGE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
If SFAS 128 was adopted in 1997, basic EPS for the second
quarter would have been $.35 and EPS assuming dilution would have
been $.34. Year-to-date, basic EPS for the first six months of 1997
would have been $.71 and EPS assuming dilution would have been
$.69. Similarly, basic EPS for the 1996 second quarter would have
been $.32 and EPS assuming dilution would have been $.30.
Year-to-date, basic EPS for the first six months of 1996 would have
been $.61 and EPS assuming dilution would have been $.58.
LOANS
<TABLE>
The following table summarizes loan balances by category (in
thousands):
<CAPTION>
June 30, December 31
1997 1996
--------- ---------
<S> <C> <C>
Commercial and industrial $166,756 $143,811
Commercial real estate 143,881 148,798
Construction 15,049 13,515
Residential real estate 260,002 239,380
Home equity 92,288 85,113
Other consumer 8,726 10,192
--------- ---------
Gross loans 686,702 640,809
Less: unearned income (1,400) (1,805)
--------- ---------
Total $685,302 $639,004
========= =========
</TABLE>
COMMON SHARES
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, received one additional common share for
every two shares owned. Shareholders entitled to fractional shares
received cash in lieu of fractional shares. Per share information
included in the financial statements has been adjusted to reflect
the split.
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. In May, 1997, the Board of
Directors authorized the repurchase of an additional 68,850 shares
as a result of the Company's 1997 three-for-two stock split. The
shares may be repurchased from time to time in the open market or
in private transactions. During the six month period ended June
30, 1997, 150,002 common shares were repurchased at a cost of
$2,348,000 and 211,539 treasury shares were reissued upon the
exercise of stock options.
HERITAGE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
STOCK OPTIONS
<TABLE>
A summary of stock option activity for the six months ended
June 30, 1997 is presented below (in thousands):
<CAPTION>
Weighted
Option Average
Shares Price
------ ------
<S> <C> <C>
Balance, December 31, 1996 1,022 $5.82
Granted - -
Exercised (389) $4.11
Forfeited - -
------
Balance, June 30, 1997 633 $6.87
======
</TABLE>
<TABLE>
A summary of outstanding and exercisable stock options at
June 30, 1997 is presented below (in thousands):
<CAPTION>
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 ----- ----- ----- ----- -----
$4.73 - $7.08 448 $5.59 3.1 yrs 448 $5.59
$9.00 - $11.00 185 $9.97 6.1 yrs 182 $9.95
----- -----
Total 633 630
===== =====
</TABLE>
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, 1997 and 1996 and its consolidated financial
condition at June 30, 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 second quarter of 1997 increased to
$4,252,000, up 13% from $3,769,000 earned in the same quarter of
1996. On a fully diluted basis, earnings per share for the
quarterly period increased to 34 cents per share compared to 30
cents per share earned in the second quarter of 1996. For the six
months ended June 30, 1997, net income was $8,583,000, up 18%
compared to $7,246,000 in the same period of 1996. Earnings per
share for the six month period were 69 cents, up 19% compared to 58
cents in the 1996 period.
Higher earnings in the three and six month periods were
principally due to increases in net interest income and other
operating income. Growth in year-to-date earnings was also
positively affected by a pre-tax recovery of $160,000 of interest
income on a nonaccrual loan and the reimbursement of $150,000 of
legal costs related to litigation settled in 1996. The Company
also recognized net securities gains of $100,000 in the first six
months of 1997.
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 and six
months ended June 30, 1997 and 1996 (in thousands):
<CAPTION>
Three Months Ended June 30,
1997 1996
----------------- -----------------
Average Average
Balance Rate Balance Rate
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Loans $670,044 8.61% $619,777 8.73%
Securities 501,867 7.37 475,676 7.08
Short-term investments 5,422 5.33 8,966 5.16
--------- ------ --------- ------
Total earning assets $1,177,333 8.07% $1,104,419 7.99%
========= ------ ========= ------
Time deposits $489,164 5.52% $439,776 5.43%
NOW and money market
accounts 221,513 3.46 191,884 3.13
Savings deposits 198,376 2.74 218,920 2.76
Short-term borrowings 51,541 3.69 47,208 3.45
Notes payable 2,927 7.26 11,285 6.42
--------- ------ --------- ------
Total interest-bearing
liabilities $963,521 4.38% $909,073 4.21%
========= ------ ========= ------
Net interest spread 3.74% 3.78%
Impact of non-interest bearing funds 0.79% 0.74%
------ ------
Net yield on interest earning assets 4.53% 4.52%
====== ======
Six months Ended June 30,
<CAPTION>
1997 1996
----------------- -----------------
Average Average
Balance Rate Balance Rate
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Loans $658,543 8.66% $606,833 8.74%
Securities 503,613 7.37 460,917 7.06
Short-term investments 3,197 5.36 13,408 5.26
--------- ------ --------- ------
Total earning assets $1,165,353 8.09% $1,081,158 7.98%
========= ------ ========= ------
Time deposits $485,765 5.49% $424,227 5.49%
NOW and money market
accounts 209,888 3.38 190,617 3.20
Savings deposits 200,514 2.74 216,771 2.81
Short-term borrowings 52,636 3.72 49,282 3.67
Notes payable 4,119 6.56 10,181 6.40
--------- ------ --------- ------
Total interest-bearing
liabilities $952,922 4.35% $891,078 4.26%
========= ------ ========= ------
Net interest spread 3.69% 3.72%
Impact of non-interest bearing funds 0.80% 0.75%
------ ------
Net yield on interest earning assets 4.49% 4.47%
====== ======
</TABLE>
On a tax equivalent basis, net interest income for the second
quarter of 1997 was $13,169,000, an increase of $748,000 or 6%
compared with the 1996 second quarter. For the six months ended
June 30, 1997, net interest income increased $2,143,000 or 9%
compared to 1996. The growth in net interest income for the three
and six month periods was primarily due to increases in the volume
of average earning assets. The growth in average earning assets
primarily resulted from strong internal deposit growth over the
past twelve months.
Average loans for the first six months of 1997 were $659
million, an increase of $52 million or 9% compared to the same
period in 1996. The increase was primarily in commercial and
industrial loans and residential real estate loans. Average
securities increased $43 million or 9% compared to 1996 six month
period. 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 $62 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 second quarter decreased .09% compared to same period
in 1996. For the first six months of 1997 the net interest spread
increased to 3.74% from 3.72% in the year ago period. On a
year-to-date basis, the change in the net interest rate spread
reflected an increase of .11% in the yield on average earning
assets while the rate on interest-bearing liabilities increased by
only .09%. 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 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. Managements 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 and
six months ended June 30, 1997 and 1996 were as follows (in
thousands):
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
----- ---- ---- ----
<S> <C> <C> <C> <C>
Balance, beginning of period $9,406 $9,582 $9,407 $8,477
Allowance of acquired bank - 0 0 1,179
Provision for loan losses 150 100 300 200
Loan charge-offs (178) (257) (375) (488)
Loan recoveries 160 31 206 88
------ ------ ------ ------
Balance, end of period $9,538 $9,456 $9,538 $9,456
====== ====== ====== ======
Net charge-offs to average loans 0.01% 0.14% 0.05% 0.13%
Allowance for loan losses to loans 1.39% 1.51% 1.39% 1.51%
Allowance for loan losses to
nonperforming loans 411% 243% 411% 243%
</TABLE>
Higher provisions for loan losses were recorded for the three
and six month periods of 1997 primarily due to the growth in the
Company's loan portfolio. The provisions were 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>
June 30, 1997 December 31, 1996
------------- -----------------
Amount % Amount %
------- ---- -------- ----
<S> <C> <C> <C> <C>
Commercial and industrial $2,288 24 $2,157 23
Commercial real estate 4,000 21 4,200 23
Construction - 2 2
Residential real estate 2,400 38 2,250 37
Home equity and other consumer 850 15 800 15
------ --- ------ ---
Total $9,538 100 $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
Nonperforming Assets
<TABLE>
The following table sets forth the Company's nonperforming
assets and asset quality ratios (in thousands):
<CAPTION>
June 30, December 31,
1997 1996
-------- --------
<S> <C> <C>
Nonaccrual loans $1,633 $3,421
Loans past due 90 days or more 685 783
-------- --------
Total nonperforming loans 2,318 4,204
Other real estate owned 473 618
-------- --------
Total nonperforming assets $2,791 $4,822
======== ========
Restructured loans $141 -
======== ========
Nonperforming loans to loans 0.34% 0.66%
Nonperforming assets to loans plus
OREO 0.41% 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>
June 30, 1997
Commercial and industrial $ 26 $492 $518 $144
Commercial real estate 641 121 762 46
Residential real estate 350 399 749 83
-------- ------- ------ ------
Total impaired loans $ 1,017 $1,012 $2,029 $273
======== ======= ====== ======
<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 six
months ended June 30, 1997 was approximately $2,904,000. Interest
income recognized on impaired loans for the first six months of
1997 totaled $43,000 compared to $160,000 in the same period a year
ago. Included in the balance of impaired loans at June 30, 1997,
are $106,000 of loans 90 days or more past due and $1,282,000 of
nonaccrual loans.
Other Income
Other income, excluding securities transactions, for the three
months ended June 30, 1997 increased $319,000 or 17% compared to
the same period in 1996. On a year-to-date basis, other income,
excluding securities transactions, increased $829,000 or 23%
compared to the six month period in 1996.
Year-to-date, service charges on deposits increased $464,000 or
23% in 1997 compared to the same period in 1996. The increase was
principally due to changes in overdraft service charge methods.
Other operating income increased $259,000 or 45% in first six
months of 1997 primarily due to ATM surcharge fees which were
established in December, 1996.
In the 1997 second quarter the Company recognized net
securities losses of $18,000 compared to securities gains of $3,000
in the second quarter in 1996. For the six months ended June 30,
1997, securities gains of $100,000 were recognized compared to
securities gains of $12,000 in the same period of 1996. In 1997
the Company recognized net gains of $40,000 on the sale of $37
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 second quarter increased $180,000 or
2% compared to the same period in 1996. For the six months ended
June 30, 1997, other expenses increased $590,000 or 4% compared to
the same period a year ago. 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 $181,000 or 2% for first six months of 1997
compared to the same period a year ago. The increase primarily
reflects normal salary increases and higher incentive compensation
expense. A reduction in staffing levels from the year ago period
partially limited the growth in salaries and employee benefits. At
June 30, 1997, the number of full-time equivalent employees totaled
453 compared to 476 at June 30, 1996.
Occupancy expense for the first six months of 1997 increased
$216,000 or 15% compared with the same period in 1996. The
increase primarily reflects higher real estate taxes and
maintenance and supplies. Other operating expenses increased
$268,000 or 10% in 1997 compared with the 1996 six month period.
The increase primarily resulted from increases in FDIC insurance
premiums, ATM processing costs, postage expense 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 six months ended June 30, 1997
increased $639,000 compared to the same period in 1996. The
Company's effective tax rate (income tax expense divided by net
income before taxes) increased to 31.7% in 1997 compared to 31.3%
in the same period 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 June 30, 1997 were $1.274 billion, an increase
of $45 million compared to December 31, 1996. Changes in total
assets since December 31, 1996 primarily reflect an increase of $46
million in net loans and a decrease of $6 million in securities.
In the first half of 1997 the Company continued to experience
increased loan demand in most loan categories as market interest
rates remained generally stable. During the six month period,
residential real estate loans increased $21 million, commercial and
industrial loans increased $23 million and home equity loans
increased $7 million.
Liabilities
The Company's funding sources, consisting of deposits and
short-term borrowings, increased $45 million since December 31,
1996. Changes in funding sources since year-end primarily reflect
increases of $36 million in NOW and money market accounts, $24
million in time deposits and $8 million in securities sold under
agreements to repurchase. Partially offsetting the growth in these
categories were decreases of $8 million in demand deposits, $10
million in savings deposits and $5 million in federal funds
purchased. The growth in NOW and money market accounts was
primarily due to the promotion of the Company's Premier money
market account in the 1997 second quarter. The increase in time
deposits primarily resulted from premium-rate certificate of deposit
promotions offered in the first half of 1997.
Capital
At June 30, 1997 total shareholders' equity increased to
$111.6 million, up $5.9 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 $345,000 increase 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 June 30,
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% 7.47% 7.27%
Tier I capital to risk weighted
assets >6.00% 13.05% 12.65%
Total capital to risk weighted
assets >10.00% 14.30% 13.91%
</TABLE>
On May 14, 1997 the Board of Directors of Heritage Financial
Services, Inc. declared a threefortwo 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, received one additional common share for
every two shares owned. Shareholders entitled to fractional shares
received cash in lieu of fractional shares. Per share information
included in the financial statements has been adjusted to reflect
the split.
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. In May, 1997, the Board of
Directors authorized the repurchase of an additional 68,850 shares
as a result of the Company's 1997 three-for-two stock split. The
shares may be repurchased from time to time in the open market or
in private transactions. During the six month period ended June
30, 1997, 150,002 common shares were repurchased at a cost of
$2,348,000 and 211,539 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 purchased $8 million of federal funds
to meet temporary funding needs. For the three and twelve months
ended June 30, 1997, the aggregate principal payments received on
mortgage-backed and asset-backed securities totaled approximately $14
million and $64 million, respectively. At June 30, 1997, the Bank
has $17 million of securities having contractual maturities of one
year or less and expects to receive approximately $56 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 $143 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, 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.
Exhibit 4
CERTIFICATE OF STOCK (front)
COMMON SHARES LOGO COMMON SHARES
NUMBER SHARES
Heritage Financial Services
See reverse for certain definitions
INCORPORATED UNDER THE LAWS OF THE STATE OF ILLINOIS
This Certifies that CUSIP 42723H 10 0
is the record holder of
FULLY PAID AND NONASSESSABLE COMMON SHARES, WITHOUT PAR VALUE, OF
Heritage Financial Services, Inc.
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This
Certificate is not valid unless countersigned and registered by the Transfer
Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ Ronald P. Groebe SEAL /s/ Frederick J. Sampias
Secretary President
Countersigned and Registered:
HARRIS TRUST AND SAVINGS BANK
Transfer Agent and Registrar
By
Authorized Signature
CERTIFICATE OF STOCK (back)
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM as tenants in common UNIF GIFT MIN ACT ___Custodian__
TEN ENT as tenants by the entireties (Cust) (Minor)
JT TEN as joint tenants with right of under Uniform Gifts
survivorship and not as tenants to
in common Minors Act_________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received,_________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________________________________________________
(Please print or typewrite name and address, including zip code, of assignee)
______________________________________________________________________________
______________________________________________________________________________
__________________________________________________________________________Shar
es of the common shares represented by the within Certificate, and do hereby
irrevocably constitute and
appoint______________________________________Attorney to transfer the said
shares on the books of the within named Corporation with full power of
substitution in the premises.
Dated_____________________________________
__________________________________________________________
NOTICE: The signature to this assignment must correspond
with the name as written upon the face of the
certificate in every particular, without alteration
or enlargement or any change whatever.
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 22, 1997.
(b) At the annual meeting the shareholders elected three Class I
directors as follows: elected Ronald P. Groebe
with 6,668,194 votes FOR (and 46,545 withheld); elected John L.
Sterling with 6,670,394 votes FOR (and 44,345 withheld);
and elected Chester Stranczek with 6,491,399 votes FOR
(and 223,340 withheld).
Item 5. Other Information.
Effective May 14, 1997, the registrant amended its Articles of Incorporation
to eliminate the par value of all Common Shares of the registrant without any
change in the paid-in capital of the registrant. As part of the amendment,
each issued Common Share, par value $.625 per share, was converted into one
Common Share, without par value, of the registrant. A specimen of the
resulting Certificate for Common Shares, without par value, is attached to this
Report on Form 10-Q as Exhibit 4.
On May 13, 1997, the registrant declared a three-for-two stock split payable
June 13, 1997 to shareholders of record at the close of business on
May 27, 1997. As a result, effective June 13, 1997, the number of
outstanding Common Shares, without par value, of the registrant was increased
from 8,040,571 to 12,060,813. No fractional shares were issued but were
instead paid in cash.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 4 - Specimen Common Share Certificate (included at page 17).
(b) Exhibit 11 - Statement Re Computation of Per Share Earnings
(included at page 19).
(c) There were no reports on Form 8-K filed by the registrant during the quarter
ending June 30, 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: August 12, 1997 /s/Frederick J. Sampias
Frederick J. Sampias
President
(Duly Authorized Officer)
Date: August 12, 1997 /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>
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):
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------- ----------------
1997 1996 1997 1996
------- ------- ------ -----
<S> <C> <C> <C> <C>
Primary
Net income $4,252 $3,769 $8,583 $7,246
====== ====== ====== ======
Average common shares outstanding 12,080 11,946 12,084 11,940
Common stock equivalents - net
effect of the assumed exercise of
stock options -- based on the
treasury stock method using average
market price 388 589 390 571
------- ------- ------ -----
Average primary shares
outstanding 12,468 12,535 12,474 12,511
======= ====== ====== ======
Primary earnings per share $0.34 $0.30 $.69 $.58
====== ====== ====== ======
Fully Diluted
Net income $4,252 $3,769 $8,583 $7,246
Average common shares outstanding 12,080 11,946 12,084 11,940
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 423 617 437 617
------- ------- ------- -------
Average fully diluted shares
outstanding 12,503 12,563 12,521 12,557
====== ====== ====== ======
Fully diluted earnings per share $0.34 $0.30 $.69 $.58
====== ====== ====== ======
Per share data has been adjusted for a three-for-two stock split
paid in June 1997.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 48651
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 321
<INVESTMENTS-HELD-FOR-SALE> 389627
<INVESTMENTS-CARRYING> 113213
<INVESTMENTS-MARKET> 115086
<LOANS> 685302
<ALLOWANCE> 9538
<TOTAL-ASSETS> 1274044
<DEPOSITS> 1094473
<SHORT-TERM> 59605
<LIABILITIES-OTHER> 8338
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 111628
<TOTAL-LIABILITIES-AND-EQUITY> 1274044
<INTEREST-LOAN> 28120
<INTEREST-INVEST> 16412
<INTEREST-OTHER> 84
<INTEREST-TOTAL> 44616
<INTEREST-DEPOSIT> 19472
<INTEREST-EXPENSE> 20576
<INTEREST-INCOME-NET> 24040
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 100
<EXPENSE-OTHER> 15705
<INCOME-PRETAX> 12570
<INCOME-PRE-EXTRAORDINARY> 12570
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8583
<EPS-PRIMARY> .69
<EPS-DILUTED> .69
<YIELD-ACTUAL> 4.49
<LOANS-NON> 1633
<LOANS-PAST> 685
<LOANS-TROUBLED> 141
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9407
<CHARGE-OFFS> 375
<RECOVERIES> 206
<ALLOWANCE-CLOSE> 9538
<ALLOWANCE-DOMESTIC> 9538
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
