<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 March 31, 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
1,915,356 shares outstanding as of March 31, 1996
<PAGE>
Heritage Bancorp, Inc.
and its wholly owned subsidiary
Consolidated Balance Sheets (Unaudited)
- ---------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,546 $ 11,356
Securities:
Held to maturity (fair value 1996 - $25,344;
fair value 1995 - $26,786) 25,247 26,195
Available for sale 81,855 82,627
-------------- --------------
107,102 108,822
Loans:
Commercial, financial, and agricultural 77,374 75,378
Real estate - mortgage and construction 62,573 62,018
Consumer 38,987 38,880
-------------- --------------
178,934 176,276
Less: Unearned income (726) (909)
Allowance for loan losses (3,180) (3,209)
-------------- --------------
Net loans 175,028 172,158
Premises and equipment, net of accumulated depreciation 5,371 5,380
Accrued income receivable and other 6,038 5,527
-------------- --------------
$ 303,085 $ 303,243
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest bearing $ 31,889 $ 30,400
Interest bearing 224,743 222,650
-------------- --------------
Total deposits 256,632 253,050
Federal funds purchased and securities sold under
agreements to repurchase 2,475 5,535
Term funds borrowed 4,450 4,450
Other liabilities 2,123 2,192
-------------- --------------
Total liabilities 265,680 265,227
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 2,001,173 shares 10,006 10,006
Surplus 651 660
Retained earnings 28,765 28,064
Treasury stock, at cost (1996 - 85,817 shares;
1995 - 55,527 shares) (2,060) (1,298)
Net unrealized appreciation on securities available
for sale, net of tax 43 584
-------------- --------------
Total stockholders' equity 37,405 38,016
-------------- --------------
$ 303,085 $ 303,243
============== ==============
</TABLE>
2
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Heritage Bancorp, Inc.
and its wholly owned subsidiary
Consolidated Statements of Income (Unaudited)
- ----------------------------------------------------
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1996 1995
----------- -----------
<S> <C> <C>
Interest income:
Loans, including fees $ 4,027 $ 4,104
Investment and mortgage-backed securities:
Taxable 1,507 1,532
Tax-exempt 168 88
Other 3 3
----------- -----------
Total interest income 5,705 5,727
Interest expense:
Deposits 1,955 1,887
Borrowings:
Short-term 57 179
Long-term 62 61
----------- -----------
Total interest expense 2,074 2,127
----------- -----------
Net interest income 3,631 3,600
Provision for loan losses 45 130
----------- -----------
Net interest income after provision for loan losses 3,586 3,470
Other income:
Trust department 227 213
Service charges 160 152
Other income 100 88
Securities gains 0 5
----------- -----------
Total other income 487 458
----------- -----------
Other expenses:
Salaries and employee benefits 1,214 1,316
Occupancy, net 246 227
Equipment 186 200
Communications and supplies 167 148
Professional fees and outside services 277 272
Taxes other than income 99 89
FDIC insurance premiums 1 143
Merger - 495
Other 220 237
----------- -----------
Total other expenses 2,410 3,127
----------- -----------
Income before income taxes 1,663 801
Federal income taxes 482 215
----------- -----------
Net income $ 1,181 $ 586
=========== ===========
Net income per common share $ 0.49 $ 0.24
=========== ===========
</TABLE>
3
<PAGE>
Heritage Bancorp, Inc.
and its wholly owned subsidiary
Consolidated Statements of Cash Flows (Unaudited)
- -------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31
1996 1995
----------- ------------
<S> <C> <C>
Operating Activities
- --------------------
Net income $ 1,181 $ 586
Adjustments to reconcile net cash provided by
operating activities:
Provisions for loan losses 45 130
Depreciation 163 154
Gains on sales of equipment (1) -
Amortization of securities' premiums and
accretion of discounts 29 27
Realized gains on sales of securities - (5)
Increase in accrued income receivable
and other assets (180) (489)
Decrease in interest payable and other
liabilities (123) (452)
----------- ------------
Net cash provided by / (used in) operating activities 1,114 (49)
----------- ------------
Investing Activities
- --------------------
Securities held to maturity:
Proceeds from called / matured securities 950 1,475
Purchases - (3,296)
Securities available for sale:
Proceeds from called / matured securities
principal repayments 3,205 2,368
Proceeds from sales - 2,255
Purchases (3,282) (1,597)
Net (increase) decrease in loans (2,915) 5,904
Proceeds from sales of bank equipment 3 -
Purchases of premises and equipment (156) (110)
----------- -----------
Net cash provided by / (used in) investing activities (2,195) 6,999
----------- -----------
Financing Activities
- --------------------
Net increase (decrease) in demand deposits, N.O.W. 2,226 (9,866)
accounts, and savings accounts
Net increase in time deposits 1,356 2,548
Net decrease in short-term borrowings (3,060) (252)
Purchase of treasury stock (839) -
Issuance of treasury stock 68 38
Cash dividends (480) (419)
----------- ------------
Net cash used in financing activities (729) (7,951)
----------- ------------
Decrease in cash and cash equivalents (1,810) (1,001)
Cash and cash equivalents at the beginning of the year 11,356 10,803
----------- ------------
Cash and cash equivalents at March 31 $ 9,546 $ 9,802
=========== ============
</TABLE>
4
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Heritage Bancorp, Inc.
and its wholly-owned subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 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 month period ended March 31,
1996 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1996.
Note B - SIGNIFICANT ACCOUNTING POLICIES
Earnings per share:
Earnings per share is based on the weighted average shares outstanding as
follows:
1996 1995
---- ----
Weighted average shares * 2,414,885 2,482,808
* 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 declared April 8, 1996.
Recently issued FASB statements:
The Financial Accounting Standards Board issued Statement No. 122 "Accounting
for Mortgage Servicing Rights" in 1995. The Corporation adopted the provisions
of the new standard on January 1, 1996. The impact of adopting the statement on
the financial position and results of operations was immaterial.
Note C - STOCK OPTION PLANS
The Financial Accounting Standards Board issued Statement No. 123 "Accounting
for Stock-Based Compensation" in 1995. The Corporation adopted the provisions
of the new standard on January 1, 1996 and will continue to follow current
accounting rules under Accounting Principles Board Opinion No. 25 for options
granted in 1996. In accordance with the statement, the Corporation is required
to disclose pro forma net income and earnings per share information as if it
were accounting for stock options at their fair value and recognizing the
expense over the service period in its annual financial statements.
Effective March 26, 1996, under the terms of the 1995 Stock Incentive Plan, the
Corporation awarded certain officers 9,938 options at $20.30 per share which was
the closing price per share on that day, after being adjusted for the stock
split.
5
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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
prime lending rate dropped 25 basis points in January which followed a 25 basis
point decrease in December of 1995. The Corporation maintains a positive GAP
position, therefore the lower interest rate trend is expected to have a
negative impact on net interest income. However, our current GAP position is
very conservative and is positioned so that interest rate risk is approximately
3% of net interest income for a 200 basis point rate shock. Also, in a lower
interest rate environment, loan demand generally increases and somewhat offsets
the decrease in net interest income.
LOANS RECEIVABLE
Net loans increased $2,870,000 or 1.67% during the first quarter of 1996 to
$175,028,000. Commercial loans increased $1,996,000 or 2.65%. The commercial
loan portfolio was positively impacted by the decrease in interest rates and
increased marketing efforts. Real estate loans increased $555,000 or .89%
due to customers refinancing loans in the low interest rate environment. Real
estate loans sold to Freddie Mac during the first quarter of 1996 totalled
$578,000, a 14.43% increase.
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the three months ended March
31,1996 and 1995 were as follows (in 000's):
1996 1995
---------- ----------
Balance at beginning of year $ 3,209 $ 3,012
Recoveries of loans 155 30
Provision charged to operations 45 130
Loans charged off (229) (12)
---------- ----------
Balance at end of period $ 3,180 $ 3,160
========== ==========
The following table summarizes the Corporation's nonaccrual, past due, and
restructured loans at March 31, 1996 and December 31, 1995 (in 000's).
1996 1995
--------- ---------
Loans on nonaccrual $ 959 $ 1,327
Accruing loans past due 90+ days 1,412 1,610
Restructured loans - -
--------- ---------
Total $2,371 $ 2,937
========= =========
6
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Information with respect to impaired loans through March 31, 1996 and 1995
(in 000's):
1996 1995
-------- ---------
Loans receivable for which there is a related
allowance for loan losses $ 481 $ 177
Loans receivable for which there is no
related allowance for loan losses 478 726
-------- ---------
Total impaired loans $ 959 $ 903
======== =========
Related allowance for loan losses $ 179 $ 104
======== =========
Interest income recognized on these impaired
loans $ 28 $ 15
======== =========
The provision for loan losses for the three months ended March 31,1996 was
$45,000 compared to $130,000 for the same period in 1995. The provision was
reduced to $15,000 per month during the second quarter of 1995 based on an
analysis of the portfolio credit quality. The conclusion of the analysis was
that the allowance for loan losses was adequate. Management monitors the credit
quality of its portfolio on an ongoing basis to determine sufficient levels of
reserve. The allowance for loan losses was 1.82% of net loans outstanding at
March 31, 1996 and 1995.
SECURITIES
The securities portfolio decreased $1,720,000 or 1.58% when compared to the
December 31, 1995 ending balance of $108,822,000. In general, the Corporation
will increase investment activity when there are excess funds available. The
Corporation used excess funds from increased deposits to fund loan demand and
maintain lower overnight borrowings.
DEPOSITS
Total deposits increased $3,582,000 or 1.42% to $256,632,000 at March 31, 1996.
The increase was in both demand and interest bearing deposits. The excess funds
were used to reduce short term borrowings which improved the interest margin.
The Bank was able to maintain stable deposit levels throughout the first quarter
where historically there has been run-off. In 1995, there was a 2.8% decline in
deposits in the first quarter. However, a significant portion of the run-off
from 1995 can be attributed to the merger which occurred March 1, 1995.
SHORT TERM BORROWINGS
Federal funds purchased decreased $3,060,000 or 55.28% compared to the December
31, 1995 balance of $5,535,000. This decrease was primarily due to the
additional funds provided by increased deposits.
LIQUIDITY
The Corporation has a one month negative maturity gap of $10,529,000. 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 Board of Directors approved a stock buy-back program at the January meeting.
The program authorizes the Corporation to repurchase up to $2,500,000 of its own
stock. In excess of $826,000 of stock has been repurchased as of March 31, 1995
in connection with the stock buy-back program.
Effective March 26, 1996, under the terms of the 1995 Stock Incentive Plan, the
Corporation awarded certain officers 9,938 options at $20.30 per share which was
the closing price per share on that day restated for the 5-for-4 stock split in
the form of a 25% stock dividend declared April 8, 1996.
The Corporation is required to maintain minimum amounts of capital to total
"risk-weighted" assets, as defined by the banking regulators. At March 31, 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
21.42% and 22.67%, respectively, which significantly exceed the requirements.
The Corporation's leverage ratio at March 31, 1996 was 12.42%.
RESULTS OF OPERATIONS
Net income for the first quarter of 1996 was $1,181,000 ($.49 per share)
compared to $586,000 ($.24 per share) in 1995, a 102% increase. In addition to
an overall increase in profitability, the Corporation benefited form a reduction
in FDIC premiums of $94,000, net of tax, and the fact there were $327,000, net
of tax, in merger expenses incurred in 1995. Per share information has been
restated to give effect for a 5-for-4 stock split in the form of a 25% stock
dividend declared April 8, 1996.
NET INTEREST INCOME
Net interest income was $3,631,000 for the three months ended March 31, 1996, an
increase of 31,000 or .86%, over the same period in 1995. The increase was
primarily due to a decrease in overnight borrowings required to fund loan
demand.
Interest income and interest expense declined $22,000 and $53,000, respectively,
for the first quarter of 1996 compared to the same period in 1995. A decrease of
$6,310,000 in average earning assets reduced interest income by $126,000 while
an improved yield increased interest income by $104,000. Interest expense on
deposits increased $68,000 due to a change in mix to CD's and IRA's which bear a
higher rate of interest. Average overnight borrowing decreased by $7,487,000 in
addition to the cost of these funds declining 34 basis points resulted in a
decrease in interest expense of $122,000.
OTHER INCOME
Other income increased $29,000 or 6.33% for the three months ended March 31,
1996 compared to the respective period in 1995. Trust department income
increased $14,000 or 6.57%, due to an increase in the number of personal trust
and investment accounts under management compared to the same period last year.
The "other" category increased $12,000 or 13.64%. This increase is primarily due
to an increase of gains on sales of mortgage loans to Freddie Mac. The
Corporation anticipates increased activity during the remainder of 1996.
The Corporation adopted FASB Statement No. 122, "Accounting for Stock-Based
Compensation", on January 1, 1996. The effect on net income for the first
quarter of 1996 was immaterial.
8
<PAGE>
OTHER EXPENSES
Other expenses were $2,410,000 for the three months ended March 31, 1996, a
decrease of $717,000 or 22.93% from the respective period in 1995. The most
significant decrease, as mentioned previously, was the merger related expenses
incurred in 1995.
Salaries and employee benefits decreased $102,000, or 7.75%, compared to the
respective periods in 1995. This is due to the Corporation having 158 FTE's
(Full Time Equivalents) compared to 174 at March 31,1995. Average cost per
employee for 1996 and 1995 are comparable.
Occupancy expense increased $19,000 or 8.37% in 1996 compared to the respective
period in 1995. Increases in utilities and repairs and maintenance are the
result of the inclement weather conditions experienced in the first quarter of
1996.
Communications and supplies increased $19,000 or 12.84% for the three months
ended March 31, 1996. The increase is the result of timing differences of supply
purchases coupled with an increase in the cost of paper products compared to
last year. Also contributing to the increase, was a one time expense for the
installation of wires for a new telephone system at a cost of approximately
$2,600.
FDIC insurance premium expenses totalled $1,000 for the three months ended March
31, 1996 which represents a decrease of $142,000 or 99.30%. 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 $2,000 for 1996 compared to $.23 per $100 of deposits for the first
quarter of 1995.
The "other" category decreased $44,000 or 18.57%, for the three months ended
March 31, 1996 compared to the same period in 1995. Insurance premiums decreased
$10,000 due to consolidation of insurance policies. Directors fees decreased
$15,000 since there are fewer directors after the merger. Loan and collection
expense was $35,000 lower due to the Bank selling ORE properties and recovering
the majority of these costs in 1996. Offsetting the decreases in these expenses
were increases in credit card and third party dealer processing costs of
$21,000.
FEDERAL INCOME TAXES
The provision for federal income taxes was $482,000 for the three months ended
March 31, 1996 which represents an increase of $267,000 compared to the
respective periods in 1995. This variance is due to increased earnings in 1996.
Effective tax rates were 28.98% and 26.84% for the three month period ended
March 31,1996 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>
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
The Corporation filed a current report on Form 8-K with the Securities and
Exchange Commission on January 30, 1996 announcing a stock buy-back program that
authorizes the Corporation to repurchase up to $2,500,000 of its own stock.
No other reports on Form 8-K were filed during the three months ended
March 31, 1996.
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)
5/3/96 /s/ Allen E. Kiefer
- ---------- ---------------------------------------
(Date) Allen E. Kiefer, President and C.E.O.
5/3/96 /s/ Guy H. Boyer
- ---------- ---------------------------------------
(Date) Guy H. Boyer, Secretary/Treasurer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 9,546
<INT-BEARING-DEPOSITS> 224,743
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 81,855
<INVESTMENTS-CARRYING> 25,247
<INVESTMENTS-MARKET> 25,344
<LOANS> 178,028
<ALLOWANCE> 3,180
<TOTAL-ASSETS> 303,085
<DEPOSITS> 256,632
<SHORT-TERM> 2,475
<LIABILITIES-OTHER> 2,123
<LONG-TERM> 4,450
0
0
<COMMON> 10,006
<OTHER-SE> 27,399
<TOTAL-LIABILITIES-AND-EQUITY> 303,085
<INTEREST-LOAN> 4,027
<INTEREST-INVEST> 1,675
<INTEREST-OTHER> 3
<INTEREST-TOTAL> 5,705
<INTEREST-DEPOSIT> 1,955
<INTEREST-EXPENSE> 2,074
<INTEREST-INCOME-NET> 3,631
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,923
<INCOME-PRETAX> 1,663
<INCOME-PRE-EXTRAORDINARY> 1,663
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,181
<EPS-PRIMARY> .49
<EPS-DILUTED> .49
<YIELD-ACTUAL> 5.17
<LOANS-NON> 959
<LOANS-PAST> 1,412
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 818
<ALLOWANCE-OPEN> 3,209
<CHARGE-OFFS> 229
<RECOVERIES> 155
<ALLOWANCE-CLOSE> 3,180
<ALLOWANCE-DOMESTIC> 983
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,197
</TABLE>
