<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) of the
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1996
Commission file number 0-12506
Heritage Bancorp, Inc.
Pennsylvania 23-2228542
120 South Centre Street, Pottsville, PA 17901
(717) 622-2320
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 report(s), 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.
Common stock, par value $5.00 per share
2,396,776 shares outstanding as of June 30, 1996
<PAGE>
Heritage Bancorp, Inc.
and its wholly owned subsidiary
-------------------------------
<TABLE>
<CAPTION>
Consolidated Balance Sheets (Unaudited)
- - -------------------------------------------------------------------------
(Dollars in thousands) June 30 December 31
1996 1995
------------ ------------
ASSETS
- - ------
<S> <C> <C>
Cash and due from banks $ 11,621 $ 11,356
Securities:
Held to maturity (fair value 1996 - $24,311;
fair value 1995 - $26,786) 24,179 26,195
Available for sale 90,296 82,627
------------ ------------
114,475 108,822
Loans:
Commercial, financial, and agricultural 83,633 75,378
Real estate - mortgage and construction 64,762 62,018
Consumer 40,617 38,880
------------ ------------
189,012 176,276
Less: Unearned income (583) (909)
Allowance for loan losses (3,236) (3,209)
------------ ------------
Net loans 185,193 172,158
Premises and equipment, net of accumulated depreciation
(1996 - $6,834; 1995 - $6,622) 5,470 5,380
Accrued income receivable and other 6,598 5,527
------------ ------------
$ 323,357 $ 303,243
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
Deposits:
Noninterest bearing $ 31,732 $ 30,400
Interest bearing 223,078 222,650
------------ ------------
Total deposits 254,810 253,050
Federal funds purchased and securities sold under
agreements to repurchase 24,154 5,535
Term funds borrowed 4,450 4,450
Other liabilities 1,960 2,192
------------ ------------
Total liabilities 285,374 265,227
Stockholders' Equity:
Preferred stock, $25 par value; 10,000,000 shares
authorized and unissued - -
Common stock, $5 par value; authorized 10,000,000 shares
issued 1996-2,501,052; 1995-2,001,173 12,505 10,006
Surplus 658 660
Retained earnings 27,009 28,064
Treasury stock, at cost (1996- 104,276 shares;
1995 - 55,527 shares) (2,003) (1,298)
Net unrealized appreciation (depreciation) on securities available
for sale, net of tax (benefit) 1996 - ($65); 1995 - $331 (186) 584
------------ ------------
Total stockholders' equity 37,983 38,016
------------ ------------
$ 323,357 $ 303,243
============ ============
</TABLE>
2
<PAGE>
Heritage Bancorp, Inc.
and its wholly owned subsidiary
-------------------------------
<TABLE>
<CAPTION>
Consolidated Statements of Income (Unaudited)
- - ---------------------------------------------------------------------
(Dollars in thousands) Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 4,146 $ 4,173 $ 8,173 $ 8,277
Investment and mortgage-backed securities:
Taxable 1,501 1,568 3,008 3,100
Tax-exempt 196 103 364 191
Other 6 - 9 3
------------ ------------ ------------ ------------
Total interest income 5,849 5,844 11,554 11,571
Interest expense:
Deposits 1,885 1,967 3,840 3,854
Borrowings:
Short-term 164 171 221 350
Long-term 63 68 125 129
------------ ------------ ------------ ------------
Total interest expense 2,112 2,206 4,186 4,333
------------ ------------ ------------ ------------
Net interest income 3,737 3,638 7,368 7,238
Provision for loan losses 45 70 90 200
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 3,692 3,568 7,278 7,038
Other income:
Trust department 194 127 421 340
Service charges 158 179 318 331
Other income 105 54 205 142
Security gains - 1 - 6
------------ ------------ ------------ ------------
Total other income 457 361 944 819
------------ ------------ ------------ ------------
Other expenses:
Salaries and employee benefits 1,237 1,276 2,451 2,592
Occupancy, net 200 224 446 451
Equipment 194 210 380 410
Communications and supplies 154 206 321 354
Professional fees and outside services 333 280 610 552
Taxes other than income 90 87 189 176
FDIC insurance premiums - 144 1 287
Merger - 192 - 687
Restructuring - 391 - 391
Other 207 238 427 475
------------ ------------ ------------ ------------
Total other expenses 2,415 3,248 4,825 6,375
------------ ------------ ------------ ------------
Income before income taxes 1,734 681 3,397 1,482
Federal income taxes 503 183 985 398
------------ ------------ ------------ ------------
Net income $ 1,231 $ 498 $ 2,412 $ 1,084
============ ============ ============ ============
Net income per common share $ 0.51 $ 0.20 $ 1.00 $ 0.44
============ ============ ============ ============
</TABLE>
3
<PAGE>
Heritage Bancorp, Inc.
and its wholly owned subsidiary
-------------------------------
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (Unaudited)
- - -------------------------------------------------------------------------
(Dollars in thousands)
Six Months Ended June 30
1996 1995
------------ ------------
OPERATING ACTIVITES
- - -------------------
<S> <C> <C>
Net income $ 2,412 $ 1,084
Adjustments to reconcile net cash provided by
operating activities:
Provisions for loan losses 90 200
Depreciation 324 313
Gains on sales of equipment (6) -
Amortization of securities' premiums and
accretion of discounts 55 55
Realized gains on sales of securities - (6)
Increase in accrued income receivable
and other assets (674) (731)
Decrease in interest payable and other
liabilities (232) (180)
------------ ------------
Net cash provided by operating activities 1,969 735
------------ ------------
Investing Activities
- - --------------------
Securities held to maturity:
Proceeds from called / matured securities 4,015 2,121
Purchases (1,998) (4,744)
Securities available for sale:
Proceeds from called / matured securities and
principal repayments 6,027 3,911
Proceeds from sales 8 3,260
Purchases (14,927) (3,616)
Net (increase) decrease in loans (13,125) 4,956
Proceeds from sales of equipment 8 -
Purchases of equipment (416) (233)
------------ ------------
Net cash provided by / (used in) investing activities (20,408) 5,655
------------ ------------
Financing Activities
- - --------------------
Net increase (decrease) in demand deposits, N.O.W. 1,483 (9,593)
accounts, and savings accounts
Net increase in time deposits 277 1,833
Net increase in short-term borrowings 18,619 1,875
Purchase of treasury stock (839) (224)
Issuance of treasury stock 131 86
Cash dividends (967) (875)
------------ ------------
Net cash provided by / (used in) financing activities 18,704 (6,898)
------------ ------------
Increase (decrease) in cash and cash equivalents 265 (508)
Cash and cash equivalents at the beginning of the year 11,356 10,803
------------ ------------
Cash and cash equivalents at June 30 $ 11,621 $ 10,295
============ ============
</TABLE>
4
<PAGE>
Heritage Bancorp, Inc.
and its wholly-owned subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1996
Note A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month period ended June
30, 1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996.
Note B - SIGNIFICANT ACCOUNTING POLICIES
Earnings per share:
Earnings per share is based on the weighted average shares outstanding as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Second quarter 2,393,321 2,473,934 *
Year-to-date 2,404,103 2,478,371 *
</TABLE>
* Weighted average shares outstanding have been restated to give effect to a 5-
for-4 stock split in the form of a 25% stock dividend issued May 24, 1996.
Note C- STOCK OPTION PLANS
Effective April 16, 1996, under the terms of the 1995 Stock Option Plan for Non-
employee Directors, the Corporation awarded certain directors a total of 3,750
options at $20.50 per share which was the closing price per share on that day,
after being adjusted for the stock split.
5
<PAGE>
Management's Discussion and Analysis
FINANCIAL CONDITION
The Corporation functions as a financial intermediary, therefore trends in its
sources and uses of funds should be examined when reviewing financial condition.
Interest rates are a primary economic factor that affect these trends. The
average prime lending rate dropped 65 basis points to 8.27% for the six months
ended June 30, 1996 compared to 8.92% for the same period in 1995. The
Corporation maintains a positive GAP position, therefore the lower interest rate
trend has had a negative impact on net interest income. However, in the lower
interest rate environment, loan demand has increased which has more than offset
this decrease.
LOANS RECEIVABLE
Net loans increased $13,035,000 or 7.57% during the first half of 1996 to
$185,193,000. Commercial loans increased $8,255,000 or 10.95%. The commercial
loan portfolio was positively impacted by the decrease in interest rates and
increased marketing efforts. Real estate loans increased $2,744,000 or 4.42%
as customers are refinancing loans in the low interest rate environment.
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the six months ended June 30, 1996
and 1995 were as follows (in 000's):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Balance at beginning of year $ 3,209 $ 3,012
Recoveries of loans 211 36
Provision charged to operations 90 200
Loans charged off (274) (100)
---------- ----------
Balance at end of period $ 3,236 $ 3,148
========== ==========
</TABLE>
The following table summarizes the Corporation's nonaccrual, past due, and
restructured loans at June 30, 1996 and December 31, 1995 (in 000's).
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Loans on nonaccrual $ 935 $ 1,327
Accruing loans past due 90+ days 1,627 1,610
Restructured loans - -
---------- ----------
Total $ 2,562 $ 2,937
========== ==========
</TABLE>
6
<PAGE>
Information with respect to impaired loans through June 30, 1996 and 1995 (in
000's):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Loans receivable for which there is a related allowance for loan losses $ 564 $ 554
Loans receivable for which there is no related allowance for loan losses 371 740
---------- ----------
Total impaired loans $ 935 $ 1,294
========== ==========
Related allowance for loan losses $ 195 $ 180
========== ==========
Average recorded balance of these impaired loans $ 1,101 $ 1,242
========== ==========
Interest income recognized on these impaired loans $ 36 $ 24
========== ==========
</TABLE>
The provision for loan losses for the three and six months ended June 30, 1996
was $45,000 and $90,000 compared to $70,000 and $200,000 for respective periods
in 1995. Management monitors the credit quality of its portfolio on an ongoing
basis to determine sufficient levels of reserve. The allowance for loan losses
was 1.75% and 1.80% of net loans outstanding at June 30, 1996 and 1995. As of
June 30, 1996, management has concluded that the allowance is adequate.
SECURITIES
The securities portfolio increased $5,653,000 or 5.19% compared to the December
31, 1995 balance of $108,822,000. The Corporation purchased $16,925,000 in
securities during the first six months of 1996. The majority of these purchases
were to replace matured/called securities and to utilize funds from principal
paydowns on mortgage-backed securities. In addition, the Corporation purchased
$5,130,000 in tax-exempt state and municipal securities to take advantage of
positive spreads over short-term borrowings. This action improved our GAP
position and lowered our already conservative interest rate risk. These
investments are classified as available for sale, therefore they can be sold if
the Corporation would change the current investment strategy.
DEPOSITS
Total deposits increased $1,760,000, or .70%, to $254,810,000 at June 30, 1996.
The Corporation was able to maintain stable deposit levels throughout the first
half of 1996 compared to the 3.01% decline in deposits during the same period in
1995. A significant portion of the run-off in 1995 can be attributed the merger
which occurred March 1, 1995.
SHORT-TERM BORROWINGS
Federal funds purchased increased $18,619,000, or 336.39%, compared to the
December 31, 1995 balance of $5,535,000. This increase was necessary to fund
loan demand and security purchases which increased significantly more than
deposits during the first six months of 1996.
LIQUIDITY
The Corporation has a one month negative maturity gap of $38,598,000. The
Corporation maintains liquidity through its available for sale securities
portfolio, which management considers extremely liquid. The liquidity of this
portfolio, the Bank's core deposits, credit facilities which have been arranged
through the Federal Home Loan Bank and potential repurchase agreements with a
major investment firm provide the Corporation with funds necessary to meet loan
demand or deposit run-off.
7
<PAGE>
CAPITAL
The Corporation is required to maintain minimum amounts of capital to total
"risk-weighted" assets, as defined by the banking regulators. At June 30, 1996,
the Corporation is required to have minimum Tier 1 and total capital ratios of
4.00% and 8.00%, respectively. The Corporation's actual ratios at that date
were 19.19% and 20.44%, respectively, which significantly exceed the
requirements. The Corporation's leverage ratio at June 30, 1996 was 12.48%.
RESULTS OF OPERATIONS
Net income for the second quarter of 1996 was $1,231,000 ($.51 per share)
compared to $498,000 ($.20 per share) in 1995. Earnings for the six month
period ended June 30, 1996 were $2,412,000 ($1.00 per share), a 123% increase
over 1995 results of $1,084,000 ($.44 per share). A decrease in noninterest
expenses of $472,000 during the first six months of 1996, a result of increased
operating efficiencies and lower FDIC premiums, increased earnings per share by
$0.13. In addition, the Corporation incurred nonrecurring merger and
restructuring expenses in 1995 totalling $1,078,000, of which $583,000 was
incurred in the second quarter.
NET INTEREST INCOME
Net interest income was $3,737,000 for the three months and $7,368,000 for the
six months ended June 30, 1996, an increase of $99,000, or 2.72%, and $130,000,
or 1.80%, over the respective periods in 1995. Interest income for the three
and six month periods in 1996 increased $5,000 and decreased $17,000,
respectively. A year-to-date increase of $1,417,000 in average earning assets
increased interest income by $57,000, which was offset by a decrease in average
rates that reduced interest income by $74,000.
Interest expense decreased $94,000, or 4.26%, and $147,000, or 3.39%, for the
three and six month periods ended June 30, 1996. The primary reason for the
decrease was a $3,356,000 decrease in average borrowings in addition to a 62
basis point decrease in the cost of these funds. The remaining decrease in
interest expense is due to a slightly lower average rate paid on interest
bearing deposits.
OTHER INCOME
Other income increased $96,000, or 26.59%, and $125,000, or 15.26%, for the
three and six months ended June 30, 1996 compared to the same periods in 1995.
Trust department income increased $67,000, or 52.76%, for the three months and
$81,000, or 23.82%, for the six months ended June 30, 1996. The increase can be
attributed to an increase in the number of personal trust and investment
accounts under management in addition to a $42,000 increase in estate fees in
1996.
Service charges decreased $21,000, or 11.73%, and $13,000, or 3.93%, for the
three and six month periods ended June 30, 1996. Demand deposit related service
charges decreased $6,000. Also, service charges on a specific deposit product
decreased $7,000 as a result of a decrease in the number of this type of
accounts compared to last year.
The "other" category increased $51,000, or 94.44%, and $63,000, or 44.37%, for
the three and six months ended June 30, 1996, compared to the respective periods
in 1995. This increase is primarily due to an increase in late fees on loans,
loan related commissions and in gains on sales of mortgage loans to Freddie Mac.
8
<PAGE>
OTHER EXPENSES
Other expenses were $2,415,000 and $4,825,000 respectively for the three and six
months ended June 30, 1996, a decrease of $833,000, or 25.65%, and $1,550,000,
or 24.31%, from the respective periods in 1995. Reasons for the decrease
include increased operating efficiencies and lower FDIC insurance premiums. In
addition, the Corporation incurred nonrecurring merger and restructuring
expenses in the first half of 1995 totalling $1,078,000, of which $583,000 were
incurred in the second quarter.
Salaries and employee benefits decreased $39,000, or 3.06%, and $141,000, or
5.44%, for the respective three and six month periods ended June 30, 1996,
compared to the same periods in 1995. This is due to the Corporation having 169
FTE's at June 30, 1996 as compared to 178 at June 30, 1995. Average costs per
employee for 1996 and 1995 are comparable.
Professional fees and other outside services increased $53,000, or 18.93%, and
$58,000, or 10.51%, for the three and six months ended June 30, 1996. The
majority of this increase relates to an increase in marketing related expenses
as a result of the Corporation implementing a more aggressive marketing
campaign.
Communications and supplies decreased $52,000, or 25.24%, and $33,000, or 9.32%,
for the three and six months ended June 30, 1996. The majority of the decrease
relates to significant supply purchases and write-offs that were necessary in
1995 due to the name change of the Corporation.
FDIC insurance premium expenses totalled $1,000 for the six months ended June
30, 1996, representing a decrease of $286,000, or 99.65% . During 1995, the
FDIC restructured its assessment schedule after the Bank Insurance Fund was
determined to be adequately funded. The Bank was assessed at the statutory
minimum of $1,000 for the first six months of 1996 compared to $.23 per $100 of
deposits for the first six months of 1995.
The "other" category decreased $31,000, or 13.03%, and $48,000, or 10.11%, for
the three and six month periods ended June 30, 1996, compared to the same
periods in 1995. Insurance premiums for the six months ended June 30, 1996
decreased $13,000 due to the consolidation of policies. Loan and collection
expense decreased $32,000 as a result of the Corporation recovering the majority
of these costs incurred in 1996 through the sale of ORE properties. Offsetting
these decreases were increases in credit card and third party dealer processing
costs of $29,000 as a result of increased volume.
The Corporation adopted FASB Statement No. 123, "Accounting for Stock-Based
Compensation", on January 1, 1996. This standard provides companies with a
choice of how to account for stock options and other stock grants. The standard
encourages companies to account for stock options at their fair value and
recognize the expense as compensation expense over the service period, but also
permits companies to follow current accounting rules under Accounting Principles
Board Opinion No. 25. Companies electing to follow current rules will be
required to disclose pro forma net income and earnings per share information as
if the new fair value approach had been adopted. The Corporation has decided to
follow the current accounting rules under Accounting Principles Board Opinion
No. 25 for options granted in 1996. The effect on net income for the first six
months of 1996 was immaterial.
FEDERAL INCOME TAXES
The provision for federal income taxes was $503,000 and $985,000 for the three
and six month periods ended June 30, 1996, representing an increase of $320,000
and $587,000 compared to the respective periods in 1995. This increase is due
to increased earnings in 1996. Effective tax rates were 29.00% and 26.86% for
the six month periods ended June 30, 1996 and 1995, respectively. The increase
in effective rates is due to tax-exempt interest income from loans and
securities comprising a lower percentage of income before income taxes in 1996
compared to 1995.
9
<PAGE>
<TABLE>
<S> <C>
PART II OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K - Not Applicable
</TABLE>
10
<PAGE>
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 there unto duly authorized.
HERITAGE BANCORP, INC.
( Registrant)
- - ------------ ----------------------------------------
(Date) Allen E. Kiefer, President and C.E.O.
- - ------------ ----------------------------------------
(Date) Guy H. Boyer, Secretary/Treasurer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 11,621
<INT-BEARING-DEPOSITS> 223,078
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 90,296
<INVESTMENTS-CARRYING> 24,179
<INVESTMENTS-MARKET> 24,311
<LOANS> 188,429
<ALLOWANCE> 3,236
<TOTAL-ASSETS> 323,357
<DEPOSITS> 254,810
<SHORT-TERM> 24,154
<LIABILITIES-OTHER> 1,960
<LONG-TERM> 4,450
0
0
<COMMON> 12,505
<OTHER-SE> 25,478
<TOTAL-LIABILITIES-AND-EQUITY> 323,357
<INTEREST-LOAN> 8,173
<INTEREST-INVEST> 3,372
<INTEREST-OTHER> 9
<INTEREST-TOTAL> 11,554
<INTEREST-DEPOSIT> 3,840
<INTEREST-EXPENSE> 4,186
<INTEREST-INCOME-NET> 7,368
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,881
<INCOME-PRETAX> 3,397
<INCOME-PRE-EXTRAORDINARY> 3,397
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,412
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 5.14
<LOANS-NON> 935
<LOANS-PAST> 1,626
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 403
<ALLOWANCE-OPEN> 3,209
<CHARGE-OFFS> 274
<RECOVERIES> 211
<ALLOWANCE-CLOSE> 3,236
<ALLOWANCE-DOMESTIC> 1,107
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,129
</TABLE>
