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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X]
For the fiscal year ended December 31, 1995
OR
[_]
For the transition period from _______________ to _______________
Commission file number 0-12506
HERITAGE BANCORP, INC.
(Exact name of registrant as specified in its charter)
120 South Centre Street 23-2228542
Pottsville, Pennsylvania (I.R.S. Employer Identification No.)
(Address of principal executive offices) 17901
(Zip Code)
Registrant's telephone number, including area code: (717) 622-2320
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $5.00 par value
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(Title of class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant based on the closing sale price on March 1, 1996 was approximately
$40,891,851.
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The number of shares of Common Stock outstanding as of March 1, 1996 was
1,921,605.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Heritage Bancorp, Inc. 1995 Annual Report to
Stockholders and the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on April 16, 1996 are incorporated herein by reference
into Parts II-IV of this Report.
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PART I
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ITEM 1 BUSINESS.
Heritage Bancorp, Inc. (the "Corporation") is a Pennsylvania business
corporation formed in 1983 with its headquarters located in Pottsville,
Schuylkill County, Pennsylvania. Prior to March 1, 1995, the name of the
Corporation was Miners National Bancorp, Inc. ("Miners"). As a result of the
merger on March 1, 1995 between Miners and Bankers' Financial Services
Corporation ("Bankers"), a one bank holding company located in Schuylkill Haven,
Pennsylvania, Miners exchanged 560,173 shares of its common stock for all of the
outstanding common stock of Bankers and simultaneously changed its name to
Heritage Bancorp, Inc. The merger has been accounted for as a pooling of
interests. Accordingly, all prior financial information presented has been
restated to include Bankers.
The Corporation is a bank holding company as defined in the Bank
Holding Company Act of 1956, as amended. Heritage National Bank (the "Bank") is
a wholly-owned subsidiary of the Corporation which includes the former Miners
National Bank and Bankers' subsidiary, The Schuylkill Haven Trust Company.
Through the Bank, the Corporation acts as a community financial service
provider, and offers traditional banking and related financial services to
individual, business, and government customers. The Bank, which is the oldest
commercial bank in its trade area, was originated under a state bank charter in
1828 and also is the third largest commercial bank in Schuylkill County.
The Bank currently operates a network of fourteen full service
community offices throughout Schuylkill and northern Dauphin counties. The
Corporation is a member of the MAC Regional and Cirrus National ATM networks,
operating a network of nine automated teller machines which are installed at
community offices. Through its community banking offices, the Bank offers a
full array of commercial and retail financial services, including the taking of
time, savings, and demand deposits, the making of commercial, consumer, and
mortgage loans, the providing of credit cards, automated teller machine services
and safe deposit services. The Bank also performs personal, corporate, pension
and other fiduciary services through its Trust division. Through its
correspondent banking relationships, the Bank also is capable of offering a
variety of collection and funds transfer services.
The deposit base of the Bank is such that the loss of one depositor or
a related group of depositors would not have a materially adverse effect on the
Corporation's business. In addition, the Bank's loan portfolio is well
diversified, so that one industry or group of related industries does not
comprise a material portion of total loans outstanding. The Corporation's
business is not seasonal, nor does it have any risks attendant to foreign
sources.
The financial services industry in the Bank's trade area continues to
be extremely competitive, both among commercial banks and with other financial
service providers such as consumer finance companies, thrifts, investment firms,
mutual funds, credit unions and mortgage companies. The increased competition
has resulted from a changing legal and regulatory climate, as well as from the
current economic climate.
During 1993, the Corporation's other subsidiary, Miners Life Insurance
Company, ceased operations. The financial results of Miners Life Insurance
Company were not material in relation to consolidated results.
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SUPERVISION AND REGULATION.
--------------------------
The Corporation is subject to regulation by the Pennsylvania
Department of Banking, the Federal Reserve Board and the Securities and Exchange
Commission. The deposits of the Bank are insured by the FDIC and the Bank is a
member of the Bank Insurance Fund which is administered by the FDIC. The Bank
is subject to regulation by the Pennsylvania Department of Banking and the FDIC,
but, as a national bank, is regulated and examined by the Office of the
Comptroller of the Currency.
The Corporation is required to file with the Federal Reserve Board an
annual report and such additional information as the Federal Reserve Board may
require pursuant to the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). The Federal Reserve Board may also make examinations of the Corporation.
The BHC Act requires each bank holding company to obtain the approval of the
Federal Reserve Board before it may acquire substantially all the assets of any
bank, or before it may acquire ownership or control of any voting shares of any
bank if, after such acquisition, it would own or control, directly or
indirectly, more than five percent of the voting shares of such bank.
Pursuant to provisions of the BHC Act and regulations promulgated by
the Federal Reserve Board thereunder, the Corporation may only engage in or own
companies that engage in activities deemed by the Federal Reserve Board to be so
closely related to the business of banking or managing or controlling banks as
to be a proper incident thereto, and the Corporation must gain permission from
the Federal Reserve Board prior to engaging in most new business activities.
A bank holding company and its subsidiaries are subject to certain
restrictions imposed by the BHC Act on any extensions of credit to the bank
holding company or any of its subsidiaries, investments in the stock or
securities thereof, and on the taking of such stock or securities as collateral
for loans to any borrower. A bank holding company and its subsidiaries are also
prevented from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
SOURCE OF STRENGTH DOCTRINE.
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Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving
as a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board regulations or both. This doctrine is commonly known as the
"source of strength" doctrine.
DIVIDENDS.
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Dividends are paid by the Corporation from its assets, which are
mainly provided by dividends from the Bank. However, certain regulatory
restrictions exist regarding the ability of the Bank to transfer funds to the
Corporation in the form of cash dividends, loans or advances. The approval of
the Comptroller of the Currency is required if the total of all dividends
declared by a national bank in any
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calendar year exceeds the Bank's net profits (as defined) for that year combined
with its retained net profits for the preceding two calendar years. Under this
restriction, the Bank, without prior regulatory approval, can declare dividends
to the Corporation totaling $2,796,000, plus an additional amount equal to the
Bank's net profit for 1996, up to the date of any such dividend declaration.
Under Federal Reserve regulations, the Bank also is limited as to the
amount it may lend to its affiliates, including the Corporation, unless such
loans are collateralized by specified obligations. At December 31, 1995, the
maximum amount available for transfer from the Bank to the Corporation in the
form of loans approximated 20% of capital stock and surplus.
CAPITAL ADEQUACY.
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The Federal banking regulators have adopted risk-based capital
guidelines for bank holding companies, such as the Corporation. The guidelines
were phased in over a two year period ended December 31, 1992. Currently, the
required minimum ratio of total capital to risk-weighted assets (including off-
balance sheet activities, such as standby letters of credit) is 8%. At least
half of the total capital is required to be Tier 1 capital, consisting
principally of common shareholders' equity, noncumulative perpetual preferred
stock, a limited amount of cumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries, less goodwill.
The remainder (Tier 2 capital) may consist of a limited amount of subordinated
debt and intermediate-term preferred stock, certain hybrid capital instruments
and other debt securities, perpetual preferred stock and a limited amount of the
general loan loss allowance. During the two-year phase-in period, a limited
portion of Tier 2 capital was permitted to be included as Tier 1 capital.
In addition to the risk-based capital guidelines, the Federal banking
regulators established minimum leverage ratio (Tier 1 capital to total assets)
guidelines for bank holding companies. These guidelines provide for a minimum
leverage ratio of 3% for those bank holding companies which have the highest
regulatory examination ratings and are not contemplating or experiencing
significant growth or expansion. All other bank holding companies are required
to maintain a leverage ratio of at least 1% to 2% above the 3% stated minimum.
The Corporation and the Bank exceed all applicable capital requirements.
FDICIA.
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In 1991, the Federal Deposit Insurance Corporation Improvement Act
("FDICIA") was signed into law. FDICIA established five different levels of
capitalization of financial institutions, with "prompt corrective actions" and
significant operational restrictions imposed on institutions that are capital
deficient under the categories. The five categories are: Well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized.
To be considered well capitalized, an institution must have a total
risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of
at least 6%, a leverage capital ratio of 5%, and must not be subject to any
order or directive requiring the institution to improve its capital level. An
institution falls within the adequately capitalized category if it has a total
risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at
least 4%, and a leverage capital ratio of at least 4%. Institutions with lower
capital levels are deemed to be undercapitalized, significantly undercapitalized
or critically undercapitalized, depending on their actual capital levels. In
addition, the appropriate federal regulatory agency may downgrade an institution
to the next lower capital category upon a determination that the
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institution is in an unsafe or unsound condition, or is engaged in an unsafe or
unsound practice. Institutions are required under FDICIA to closely monitor
their capital levels and to notify their appropriate regulatory agency of any
basis for a change in capital category. On December 31, 1995, the Corporation
and the Bank exceeded the minimum capital levels of the well capitalized
category.
Regulatory oversight of an institution becomes more stringent with
each lower capital category, with certain "prompt corrective actions" imposed
depending on the level of capital deficiency.
OTHER PROVISIONS OF FDICIA.
--------------------------
Each depository institution must submit audited financial statements
to its primary regulator and the FDIC, which reports are made publicly
available. In addition, the audit committee of each depository institution must
consist of outside directors and the audit committee at "large institutions" (as
defined by FDIC regulation) must include members with banking or financial
management expertise. The audit committee at "large institutions" must also
have access to independent outside counsel. In addition, an institution must
notify the FDIC and the institution's primary regulator of any change in the
institution's independent auditor, and annual management letters must be
provided to the FDIC and the depository institution's primary regulator. The
regulations define a "large institution" as one with over $500 million in
assets, which does not include the Bank. Also, under the rule, an institution's
independent auditor must examine the institution's internal controls over
financial reporting and perform agreed-upon procedures to test compliance with
laws and regulations concerning safety and soundness.
Under FDICIA, each federal banking agency must prescribe certain
safety and soundness standards for depository institutions and their holding
companies. Three types of standards must be prescribed: Asset quality and
earnings, operational and managerial, and compensation. Such standards would
include a ratio of classified assets to capital, minimum earnings, and, to the
extent feasible, a minimum ratio of market value to book value for publicly
traded securities of such institutions and holding companies. Operational and
managerial standards must relate to: (i) internal controls, information systems
and internal audit systems, (ii) loan documentation, (iii) credit underwriting,
(iv) interest rate exposure, (v) asset growth, and (vi) compensation, fees and
benefits. In November, 1993, the federal banking agencies released proposed
rules setting forth some of the required safety and soundness standards. Under
such proposed rules, if the primary federal regulator determines that any
standard has not been met, the regulator can require the institution to submit a
compliance plan that describes the steps the institution will take to eradicate
the deficiency. Failure to adopt or implement a compliance plan could lead to
further sanctions by the responsible regulator. Pursuant to the Riegle
Community Development and Regulatory Improvement Act of 1994, federal banking
agencies have been given the discretion to adopt safety and soundness guidelines
rather than regulations.
Provisions of FDICIA relax certain requirements for mergers and
acquisitions among financial institutions, including authorization of mergers of
insured institutions that are not members of the same insurance fund, and
provide specific authorization for a federally chartered savings association or
national bank to be acquired by an insured depository institution.
Under FDICIA, all depository institutions must provide 90 days notice
to their primary federal regulator of branch closings, and penalties are imposed
for false reports by financial institutions. Depository institutions with
assets in excess of $250 million must be examined on-site annually by their
primary federal or state regulator or the FDIC.
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FDICIA also sets forth Truth in Savings disclosure and advertising
requirements applicable to all depository institutions.
FDIC INSURANCE ASSESSMENTS.
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The Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") created two deposit insurance funds to be administered by the
FDIC: The Savings Association Insurance Fund (SAIF) and the Bank Insurance Fund
(BIF). The Bank's deposits are insured under BIF. The FDIC has implemented a
risk-related premium schedule for all insured depository institutions that
results in the assessment of premiums based on capital and supervisory measures.
Under the risk-related premium schedule, the FDIC assigns, on a
semiannual basis, each institution to one of three capital groups (well
capitalized, adequately capitalized or undercapitalized) and further assigns
such institution to one of three subgroups within a capital group. The
institution's subgroup assignment is based upon the FDIC's judgment of the
institution's strength in light of supervisory evaluations, including
examination reports, statistical analyses and other information relevant to
gauging the risk posed by the institution. Only institutions with a total
capital to risk-adjusted assets ratio of 10.00% or greater, a Tier 1 capital to
risk-adjusted assets ratio of 6.0% or greater and a Tier 1 leverage ratio of
5.0% or greater are assigned to the well-capitalized group. Prior to BIF being
fully funded during 1995, the Bank was subject to FDIC deposit insurance
assessments at the rate of $.23 for every $100 of deposits.
In the second quarter of 1995, the BIF reached its statutory reserve
ratio requirement. Consequently, the FDIC has significantly reduced the
assessment rates applicable to BIF members and refunded to BIF members that
portion of the assessment for the second and third quarters of 1995 which
represented an overpayment once the BIF had achieved full funding in accordance
with the statutory reserve ratio requirement. The Bank received a refund from
the FDIC in September 1995 in the amount of $158,000, which amount also includes
interest on the refund from June 1 to September 14, 1995. According to the new
rate schedule, BIF institutions deemed to have the highest risk will pay up to
$0.31 for every $100 of deposits annually while those deemed to have the least
risk will pay $0.04 for every $100 of deposits annually. In the case of the
Bank, it presently is assessed $.04 for ever $100 of deposits annually.
However, the FDIC has waived the Bank's premiums for 1996, except for a $2,000
minimum payment.
INTERSTATE BANKING.
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Prior to the passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") in September 1994, interstate
acquisitions were prohibited under the terms of the Douglas Amendment to the BHC
Act unless the acquisition was specifically authorized by a reciprocal
interstate banking statute, such as the statute adopted in Pennsylvania in 1990.
Similarly, interstate branching was prohibited for national banks and state-
chartered member banks by the McFadden Act, although some states, not including
Pennsylvania, had passed laws permitting limited interstate branching by non-
Federal Reserve member state banks. The Riegle-Neal Act permits an adequately
capitalized, adequately managed bank holding company to acquire a bank in
another state as of September 29, 1994, whether or not the state permits the
acquisition, subject to certain deposit concentration caps and the Federal
Reserve Board's approval. A state may not impose discriminatory requirements on
acquisitions by out-of-state holding companies. In addition, beginning on June
1, 1997, under the Riegle-Neal Act, a bank can expand interstate by merging with
a bank in another state and also
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may consolidate the acquired bank into new branch offices of the acquiring bank,
unless the other state affirmatively opts out of the legislation before that
date. A state may also opt into the legislation earlier than June 1, 1997 if it
wishes to do so. The Riegle-Neal Act also permits de novo interstate branching
as of June 1, 1997 but only if a state affirmatively opts in by appropriate
legislation. Once a state opts in to interstate branching, it may not opt out
at a later date. The Riegle-Neal Act also allows foreign banks to branch by
merger or de novo branch to the same extent as banks from the foreign bank's
home state. The Riegle-Neal Act also subjects foreign banks to some additional
requirements, including extending obligations under the Community Reinvestment
Act to certain foreign bank acquisitions and regulating the types of activities
off-shore branches of foreign banks may conduct. The Pennsylvania Legislature
amended the Pennsylvania Banking Code of 1965 in July, 1995, to opt in to all of
the provisions of the Riegle-Neal Act, including interstate bank mergers and de
novo interstate branching. Management of the Corporation cannot predict with
any reasonable degree of certainty the effects, if any, which the Riegle-Neal
Act may have on the Corporation.
PROPOSED LEGISLATION.
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Legislation has been introduced in Congress to recapitalize the SAIF
via a one-time special assessment on SAIF deposits and thereafter to merge the
SAIF with the BIF. Legislation also is pending in Congress which would repeal
certain aspects of the Glass-Steagall Act, which prohibits commercial banks from
engaging in securities underwriting activities. It is not anticipated that the
enactment of such legislation, in its current form, would have a material effect
on the financial condition or results of operations of the Corporation.
EMPLOYEES.
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At December 31, 1995, the Corporation and the Bank employed
approximately 174 persons.
MERGERS AND ACQUISITIONS.
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On March 1, 1995, Miners National Bancorp, Inc. consummated its merger
with Bankers' Financial Services Corporation and its wholly-owned subsidiary,
The Schuylkill Haven Trust Company. The merger, valued at approximately
$15,000,000, was accounted for as a pooling of interests. The combined
companies conduct business under the new name Heritage Bancorp, Inc., with the
wholly-owned bank subsidiary being Heritage National Bank. The merger enhances
both banks' presence in the market, giving the Corporation greater strength in
community banking with over $300 million in assets.
ITEM 2 PROPERTIES.
The Corporation's executive offices are located at 120 South Centre
Street, Pottsville, Pennsylvania. The Bank operates 14 full service offices.
Of the 14 offices, 13 are owned and 1 is leased from independent owners. There
are no encumbrances on the offices owned and the rental expense on the leased
property is immaterial in relation to operating expenses.
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ITEM 3 LEGAL PROCEEDINGS.
Although the Corporation and/or the Bank are defendants in various
legal proceedings arising in the course of their business, there are no legal
proceedings pending or threatened which, in the opinion of management and
counsel, will have a material effect on the consolidated financial condition or
results of operations of the Corporation.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
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ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
This item is incorporated by reference to information under the heading
Market and Dividend Information, found on page 9 of the Corporation's 1995
Annual Report to Stockholders (Exhibit 13, page 2).
ITEM 6 SELECTED FINANCIAL DATA.
This item is incorporated by reference to information under the headings
Financial Highlights and Selected Financial Data, found on pages 2 and 10 of the
Corporation's 1995 Annual Report to Stockholders (Exhibit 13, pages 1 and 3).
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This item is incorporated by reference to Management's Discussion and
Analysis of Financial Condition and Results of Operations, found on pages 11
through 28 of the Corporation's 1995 Annual Report to Stockholders (Exhibit 13,
pages 4 through 21).
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
This item is incorporated by reference to information under the heading
Quarterly Results of Operations and to the Consolidated Financial Statements,
Notes to Consolidated Financial Statements and Independent Auditor's Report, set
forth on pages 29 through 50 of the Corporation's 1995 Annual Report to
Stockholders (Exhibit 13, pages 22 through 43).
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
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ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS.
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Information relative to directors of the Corporation is incorporated
herein by reference to Election of Directors in the Corporation's definitive
Proxy Statement for the Annual Meeting of Stockholders to be held on April 16,
1996 (the "Proxy Statement") and information required by Item 405 of Regulation
S-K is incorporated herein by reference to Section 16(a) of the Exchange Act in
the Proxy Statement.
EXECUTIVE OFFICERS OF THE REGISTRANT.
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The names, ages and positions of all of the Corporation's executive
officers as of March 1, 1996 are listed below along with their business
experience during the past five years. Executive officers are appointed by the
Board of Directors. There are no family relationships among these executive
officers, nor any arrangement or understanding between any executive officer and
any other person pursuant to which the executive officer was selected.
<TABLE>
<CAPTION>
Name Age Position and Business Experience During Past 5
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Years
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<S> <C> <C>
Allen E. Kiefer 52 President and Chief Executive Officer of
Corporation and Bank.
Guy H. Boyer 41 Executive Vice President of Corporation and Bank
(March, 1995 to date), Secretary/Treasurer of
Corporation and Treasurer of Bank (1983 to date),
Chief Financial Officer of Bank (1983 to 1995).
Richard A. Ketner 41 Executive Vice President of Corporation and Bank
(March, 1995 to date), formerly President and
Chief Executive Officer of Bankers' Financial
Services Corporation and The Schuylkill Haven
Trust Company.
David L. Scott 25 Assistant Vice President of Bank and Chief
Accounting Officer of Bank and Corporation (1995
to date), formerly certified public accountant
with Beard and Company, Inc., Reading,
Pennsylvania.
</TABLE>
ITEM 11 EXECUTIVE COMPENSATION.
This item is incorporated by reference to Executive Compensation in
the Proxy Statement.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This item is incorporated by reference to Outstanding Stock and
Principal Holders Thereof and Security Ownership of Management in the Proxy
Statement.
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ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This item is incorporated by reference to Transactions with Management
in the Proxy Statement.
PART IV
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ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The Consolidated Financial Statements to be included in Part
II, Item 8 are incorporated by reference to pages 30 through
50 of the 1995 Annual Report to Stockholders (Exhibit 13,
pages 23 through 43).
2. Financial Statement Schedules.
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instruction, or
are inapplicable or pertain to items as to which the required
disclosures have been made elsewhere in the Consolidated
Financial Statements and Notes thereto, and therefore have been
omitted.
3. Exhibits.
3(a) The Articles of Incorporation, as amended, of Heritage
Bancorp, Inc., formerly, prior to change of name,
Miners National Bancorp, Inc. (the "Corporation"), are
incorporated herein by reference to Exhibit 3(a) to the
Corporation's Annual Report on Form 10-K for the year
ended December 31, 1994.
3(b) The By-Laws, as amended, of the Corporation are
incorporated herein by reference to Exhibit 3(b) to the
Corporation's Annual Report on Form 10-K for the year
ended December 31, 1994.
10(a) The Corporation's Executive Incentive Compensation Plan
is incorporated herein by reference to Exhibit 10(a) to
the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1992.
10(b) Executive Supplemental Income Agreement, including
Addendum thereto, both dated as of January 30, 1990,
between Heritage National Bank, formerly, prior to change
of name, The Miners National Bank (the "Bank") and Allen
E. Kiefer, is incorporated herein by reference to Exhibit
10(b) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1992.
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10(c) Executive Supplemental Income Agreement, including
Addendum thereto, both dated as of March 1, 1990, between
the Bank and Guy H. Boyer, is incorporated herein by
reference to Exhibit 10(c) to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1992.
10(d) Deferred Income Agreement, dated as of January 1, 1985,
between the Bank and Allen E. Kiefer, is incorporated
herein by reference to Exhibit 10(f) to the Corporation's
Annual Report on Form 10-K for the year ended December
31, 1992.
10(e) Deferred Income Agreement, dated as of December 1, 1990,
between the Bank and Allen E. Kiefer, is incorporated
herein by reference to Exhibit 10(g) to the Corporation's
Annual Report on Form 10-K for the year ended December
31, 1992.
10(f) Deferred Income Agreement, dated as of January 1, 1985,
between the Bank and Guy H. Boyer, is incorporated herein
by reference to Exhibit 10(h) to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1992.
10(g) Employment Agreement between the Corporation and Allen E.
Kiefer, President and Chief Executive Officer, is
incorporated herein by reference to Exhibit 10(g) to the
Corporation's Annual Report on Form 10-K for the year
ended December 31, 1994.
10(h) Employment Agreement between the Corporation and Guy H.
Boyer, Executive Vice President, is incorporated herein
by reference to Exhibit 10(h) to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1994.
10(i) Employment Agreement between the Corporation and Richard
A. Ketner, Executive Vice President, is incorporated
herein by reference to Exhibit 10(i) to the Corporation's
Annual Report on Form 10-K for the year ended December
31, 1994.
10(j) Change in Control Agreement between the Corporation and
Allen E. Kiefer, President and Chief Executive Officer,
is incorporated herein by reference to Exhibit 10(j) to
the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1994.
10(k) Change in Control Agreement between the Corporation and
Guy H. Boyer, Executive Vice President, is incorporated
herein by reference to Exhibit 10(k) to the Corporation's
Annual Report on Form 10-K for the year ended December
31, 1994.
10(l) Change in Control Agreement between the Corporation and
Richard A. Ketner, Executive Vice President, is
incorporated herein by reference to Exhibit 10(l) to the
Corporation's Annual Report on Form 10-K for the year
ended December 31, 1994.
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10(m) The Corporation's 1995 Stock Incentive Plan is
incorporated by reference to Exhibit 4.1 to the
Corporation's Registration Statement on Form S-8, as
filed with the Commission on April 14, 1995 (Commission
File Number 33-91208).
10(n) The Corporation's 1995 Stock Option Plan for Non-Employee
Directors is incorporated by reference to Exhibit 4.1 to
the Corporation's Registration Statement on Form S-8, as
filed with the Commission on April 14, 1995 (Commission
File Number 33-91224).
13 Page 2 and pages 9 through 50 of the Registrant's 1995
Annual Report to Stockholders.
22 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
There were no Reports on Form 8-K filed during the three months
ended December 31, 1995.
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SIGNATURES
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Pursuant to the requirements of Section 13 or 15(d) 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 BANCORP, INC.
March 27, 1996 By: /s/ Allen E. Kiefer
-------------------------------------
Allen E. Kiefer
President and Chief Executive Officer
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ Allen E. Kiefer
- ---------------------- President, Chief Executive Officer March 26, 1996
Allen E. Kiefer and Director
/s/ Guy H. Boyer
- ---------------------- Executive Vice March 26, 1996
Guy H. Boyer President, Secretary/Treasurer
and Director
(Principal Financial Officer)
/s/ Richard A. Ketner
- ---------------------- Executive Vice President and March 26, 1996
Richard A. Ketner Director
/s/ David L. Scott
- ---------------------- Assistant Vice President and March 28, 1996
David L. Scott Chief Accounting Officer
/s/ Ermano O. Agosti
- ---------------------- Director March 26, 1996
Ermano O. Agosti
- ---------------------- Director March ____, 1996
Richard D. Biever
/s/ Jane C. Deibert
- ---------------------- Director March 26, 1996
Jane C. Deibert
- ---------------------- Vice Chairman of the Board March ____, 1996
Albert L. Evans, Jr.
</TABLE>
- 14 -
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ Richard T. Fenstermacher
- ---------------------------- Director March 26, 1996
Richard T. Fenstermacher
/s/ Frederick A. Gosch
- ---------------------------- Director March 26, 1996
Frederick A. Gosch
/s/ Robert F. Koehler
- ---------------------------- Director March 26, 1996
Robert F. Koehler
/s/ Joanne C. McCloskey
- ---------------------------- Director March 26, 1996
Joanne C. McCloskey
/s/ Ramon Patel
- ---------------------------- Director March 26, 1996
Ramon Patel
/s/ Spencer G. Pope
- ---------------------------- Chairman of the Board March 26, 1996
Spencer G. Pope
/s/ Joseph P. Schlitzer
- ---------------------------- Director March 26, 1996
Joseph P. Schlitzer
/s/ William J. Zimmerman
- ---------------------------- Director March 26, 1996
William J. Zimmerman
</TABLE>
- 15 -
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER PAGE NUMBER
- ------- -----------
<S> <C> <C>
3(a) The Articles of Incorporation, as amended, of Heritage Bancorp,
Inc., formerly, prior to change of name, Miners National Bancorp,
Inc. (the "Corporation"), are incorporated herein by reference to
Exhibit 3(a) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1994.
3(b) The By-Laws, as amended, of the Corporation are incorporated
herein by reference to Exhibit 3(b) to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1994.
10(a) The Corporation's Executive Incentive Compensation Plan is
incorporated herein by reference to Exhibit 10(a) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1992.
10(b) Executive Supplemental Income Agreement, including Addendum
thereto, both dated as of January 30, 1990, between Heritage
National Bank, formerly, prior to change of name, The Miners
National Bank (the "Bank") and Allen E. Kiefer, is incorporated
herein by reference to Exhibit 10(b) to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1992.
10(c) Executive Supplemental Income Agreement, including Addendum
thereto, both dated as of March 1, 1990, between the Bank and Guy
H. Boyer, is incorporated herein by reference to Exhibit 10(c) to
the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1992.
10(d) Deferred Income Agreement, dated as of January 1, 1985, between
the Bank and Allen E. Kiefer, is incorporated herein by reference
to Exhibit 10(f) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1992.
10(e) Deferred Income Agreement, dated as of December 1, 1990, between
the Bank and Allen E. Kiefer, is incorporated herein by reference
to Exhibit 10(g) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1992.
</TABLE>
- 16 -
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER PAGE NUMBER
- ------- -----------
<S> <C> <C>
10(f) Deferred Income Agreement, dated as of January 1, 1985, between
the Bank and Guy H. Boyer, is incorporated herein by reference to
Exhibit 10(h) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1992.
10(g) Employment Agreement between the Corporation and Allen E. Kiefer,
President and Chief Executive Officer, is incorporated herein by
reference to Exhibit 10(g) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1994.
10(h) Employment Agreement between the Corporation and Guy H. Boyer,
Executive Vice President, is incorporated herein by reference to
Exhibit 10(h) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1994.
10(i) Employment Agreement between the Corporation and Richard A.
Ketner, Executive Vice President, is incorporated herein by
reference to Exhibit 10(i) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1994.
10(j) Change in Control Agreement between the Corporation and Allen E.
Kiefer, President and Chief Executive Officer, is incorporated
herein by reference to Exhibit 10(j) to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1994.
10(k) Change in Control Agreement between the Corporation and Guy H.
Boyer, Executive Vice President, is incorporated herein by
reference to Exhibit 10(k) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1994.
10(l) Change in Control Agreement between the Corporation and Richard
A. Ketner, Executive Vice President, is incorporated herein by
reference to Exhibit 10(l) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1994.
10(m) The Corporation's 1995 Stock Incentive Plan is incorporated by
reference to Exhibit 4.1 to the Corporation's Registration
Statement on Form S-8, as filed with the Commission on April 14,
1995 (Commission File Number 33-91208).
</TABLE>
- 17 -
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER PAGE NUMBER
- ------- -----------
<S> <C> <C>
10(n) The Corporation's 1995 Stock Option Plan for Non-Employee
Directors is incorporated by reference to Exhibit 4.1 to the
Corporation's Registration Statement on Form S-8, as filed with
the Commission on April 14, 1995 (Commission File Number 33-
91224).
13 Page 2 and pages 9 through 50 of the Registrant's 1995 Annual
Report to Stockholders.
22 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
</TABLE>
- 18 -
<PAGE>
Exhibit 13
Financial Highlights
<TABLE>
<CAPTION>
1995 1994 % Change
-------- -------- --------
(in thousands - except per share data)
<S> <C> <C> <C>
For the Year:
Interest income............. $ 23,230 $ 21,158 9.79%
Interest expense............ 8,777 7,267 20.78
Net interest income......... 14,453 13,891 4.05
Net income.................. 3,409 3,712 (8.16)
Return on:
Average assets............. 1.13% 1.21% (6.61)%
Average equity............. 9.29 10.47 (11.27)
At Year End:
Assets...................... $303,243 $313,489 (3.27)%
Deposits.................... 253,050 257,565 (1.75)
Loans....................... 172,158 179,822 (4.26)
Stockholders' equity........ 38,016 35,578 6.85
Per Share Data:
Net income.................. $ 1.73 $ 1.87 (7.49)%
Dividends................... .90 .84 7.14
Book value.................. 19.54 17.92 9.04
Stockholders of record...... 1206 1244 (3.05)%
Employees-
full time equivalent....... 155 179 (13.41)%
</TABLE>
On March 1, 1995, Miners National Bancorp, Inc. combined with Bankers' Financial
Services Corporation. Simultaneously, Miners amended its Articles of
Incorporation and changed its name to Heritage Bancorp, Inc. The combination
was accounted for as a pooling of interests, and accordingly all prior years'
financial information has been restated to include Bankers.
Per share data has been restated to give effect to the 5-for-4 stock split, in
the form of a 25% stock dividend, issued on April 27, 1994.
Dividends per Share
[CHART APPEARS HERE]
Earnings per Share
[CHART APPEARS HERE]
1
<PAGE>
Market and Dividend Information
The common stock of Heritage Bancorp, Inc. is traded in the over-the-counter
market under the symbol HBCI and is listed in the National Market System of
NASDAQ.
The following table sets forth the approximate range of high and low bid prices,
and the closing price, for the holding company common stock and dividends
declared for each quarter of 1995 and 1994.
<TABLE>
<CAPTION>
Stock Price
Range Dividends
---------------------------- Declared
1995 Low High Close Per Share
---- --- ---- ----- ---------
<S> <C> <C> <C> <C>
First Quarter........ $24.50 - $26.25 $24.50 $.21
Second Quarter....... 24.00 - 26.00 25.00 .23
Third Quarter........ 24.06 - 25.75 24.25 .23
Fourth Quarter....... 24.00 - 25.50 25.25 .23
1994
----
First Quarter........ $21.20 - $23.60 $22.80 $.21
Second Quarter....... 23.00 - 25.50 25.50 .21
Third Quarter........ 23.50 - 25.50 24.50 .21
Fourth Quarter....... 24.50 - 26.00 25.25 .21
</TABLE>
The following brokers are market makers for the Heritage Bancorp, Inc. common
stock:
<TABLE>
<S> <C> <C>
F. J. Morrissey & Co., Inc. Hopper Soliday & Co., Inc. Carr Securities Corp.
Telephone: (800) 842-8928 Telephone: (800) 562-6371 Telephone: (800) 221-2243
Legg Mason Wood Walker Inc. Fahnestock & Co., Inc. McConnell, Budd, & Downes, Inc.
Telephone: (800) 643-1892 Telephone: (800) 221-5588 Telephone: (800) 538-6957
Sandler O'Neill & Partners Janney Montgomery Scott, Inc.
Telephone: (800) 635-6851 Telephone: (800) 526-6397
</TABLE>
Market Value vs. Book Value
[GRAPH APPEARS HERE]
2
<PAGE>
Selected Financial Data
The following table sets forth selected financial data for the last five years.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(in thousands except per share)
<S> <C> <C> <C> <C> <C>
Interest income.......................... $ 23,230 $ 21,158 $ 20,829 $ 21,628 $ 23,131
Interest expense......................... (8,777) (7,267) (7,401) (9,028) (11,790)
-------- -------- -------- -------- --------
Net interest income................... 14,453 13,891 13,428 12,600 11,341
Provision for loan losses................ (310) (622) (764) (677) (248)
Other income............................. 1,747 1,864 1,669 1,652 1,556
Other expense............................ (10,927) (9,944) (9,489) (9,069) (8,804)
-------- -------- -------- -------- --------
Income before income taxes............ 4,963 5,189 4,844 4,506 3,845
Income taxes............................. 1,554 1,477 1,255 1,278 986
-------- -------- -------- -------- --------
Net Income............................ $ 3,409 $ 3,712 $ 3,589 $ 3,228 $ 2,859
======== ======== ======== ======== ========
Per share data:
Net income............................ $ 1.73 $ 1.87 $ 1.82 $ 1.64 $ 1.45
Cash dividends........................ 0.90 0.84 0.77 0.72 0.69
Book value - December 31.............. 19.54 17.92 17.61 16.52 15.55
Market price - December 31............ 25.25 25.25 21.20 16.32 15.36
Cash dividends........................... $ 1,766 $ 1,572 $ 1,447 $ 1,377 $ 1,231
Total assets............................. $303,243 $313,489 $301,103 $294,006 $272,806
Total deposits........................... 253,050 257,565 252,891 247,784 238,890
Total equity............................. 38,016 35,578 34,495 32,235 30,275
</TABLE>
Per share data has been restated to give effect to the 5-for-4 stock splits in
the form of a 25% stock dividend issued on April 16, 1993 and April 27, 1994.
Assets
[GRAPH APPEARS HERE]
Capital
[GRAPH APPEARS HERE]
3
<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.
The following comparison of daily average balances indicates how the Corporation
has managed its sources and uses of funds.
SOURCES AND USES OF FUNDS TRENDS
<TABLE>
<CAPTION>
1995 Increase (Decrease) 1994 Increase (Decrease) 1993
Average --------------------- Average ----------------------- Average
Balance Amount % Balance Amount % Balance
-------- ------- --------- -------- ------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Funding uses:
Interest earning assets:
Loans:
Commercial................ $ 79,151 $(3,813) (4.60)% $ 82,964 $ (752) (0.90)% $ 83,716
Mortgage.................. 61,599 1,792 3.00 59,807 1,901 3.28 57,906
Consumer.................. 36,591 3,223 9.66 33,368 2,652 8.63 30,716
-------- ------- -------- ------- --------
177,341 1,202 0.68 176,139 3,801 2.21 172,338
Less: Allowance for
loan losses........ (3,157) (461) 17.10 (2,696) (604) 28.87 (2,092)
-------- ------- -------- ------- --------
174,184 741 0.43 173,443 3,197 1.88 170,246
Securities:
Taxable................... 101,123 (2,344) (2.27) 103,467 9,420 10.02 94,047
Tax-exempt................ 7,929 (31) (0.39) 7,960 (3,288) (29.23) 11,248
-------- ------- -------- ------- --------
109,052 (2,375) (2.13) 111,427 6,132 5.82 105,295
Federal funds sold........... 250 (2,100) (89.36) 2,350 1,744 287.79 606
-------- ------- -------- ------- --------
109,302 (4,475) (3.93) 113,777 7,876 7.44 105,901
-------- ------- -------- ------- --------
Total interest earning
assets.................. 283,486 (3,734) (1.30) 287,220 11,073 4.01 276,147
Other assets................. 19,350 216 1.13 19,134 80 0.42 19,054
-------- ------- -------- ------- --------
Total uses................ $302,836 $(3,518) (1.15)% $306,354 $11,153 3.78% $295,201
======== ======= ======== ======= ========
Funding sources:
Deposits & funds borrowed:
Deposits:
Demand.................... $ 28,817 $ (76) (0.26)% $ 28,893 $ 1,464 5.34% $ 27,429
Interest bearing demand... 66,048 (6,414) (8.85) 72,462 3,813 5.55 68,649
Savings................... 57,321 (1,876) (3.17) 59,197 3,359 6.02 55,838
Time under $100,000....... 93,411 1,988 2.17 91,423 316 0.35 91,107
-------- ------- -------- ------- --------
Total core deposits..... 245,597 (6,378) (2.53) 251,975 8,952 3.68 243,023
Time over $100,000........ 5,119 794 18.36 4,325 284 7.03 4,041
-------- ------- -------- ------- --------
Total deposits............ 250,716 (5,584) (2.18) 256,300 9,236 3.74 247,064
Funds borrowed:
Short-term.............. 8,682 2,762 46.66 5,920 461 8.44 5,459
Long-term............... 4,450 (1,854) (29.41) 6,304 (443) (6.57) 6,747
-------- ------- -------- ------- --------
Total funds borrowed...... 13,132 908 7.43 12,224 18 0.15 12,206
Total deposits and
funds borrowed......... 263,848 (4,676) (1.74) 268,524 9,254 3.57 259,270
Other liabilities.............. 2,283 (100) (4.20) 2,383 (15) (0.63) 2,398
Stockholders' equity........... 36,705 1,258 3.55 35,447 1,914 5.71 33,533
-------- ------- -------- ------- --------
Total sources............. $302,836 $(3,518) (1.15)% $306,354 $11,153 3.78% $295,201
======== ======= ======== ======= ========
</TABLE>
4
<PAGE>
Management's Discussion and Analysis
(continued)
FINANCIAL CONDITION
The Corporation's financial condition can be evaluated in terms of trends in its
sources and uses of funds. Interest rates are a primary economic factor that
effect these trends. During 1994, the Federal Reserve increased the prime rate
five times totalling 250 basis points. This upward trend continued into 1995
with another 50 basis point increase in February to 9.00%. In an effort to spur
what appeared to be a sluggish economy, the Federal Reserve reduced the prime
rate 25 basis points during July and December of this year. These fluctuations
in interest rates directly impact the financial condition of the Corporation.
The comparison of average balances on page 11 indicates how the Corporation has
managed these elements.
LOANS RECEIVABLE
Average loans receivable, net of loan reserves increased $741,000 or .43%
compared to an increase of $3,197,000, or 1.88% in 1994. The increase in the
average prime rate for 1995 had a negative impact on loan demand. However,
management expects this trend to reverse with the decrease in interest rates
late in 1995 and expected decreases in 1996.
Average commercial loans decreased $3,813,000 or 4.60% compared to a decrease of
$752,000 in 1994. The continued decline is primarily the result of the
increased interest rate environment. Also, there were significant payoffs late
in 1995 which will negatively impact average loan volume for the early part of
1996. Management has adopted new objectives in its strategic planning which are
specifically designed to increase the commercial loan portfolio.
The Corporation began selling mortgages in the secondary market through Freddie
Mac in December 1993 in order to become more competitive in fixed rate, long-
term mortgages. The benefits of selling these mortgages are increased fee
income and decreased interest rate risk. The average loans sold as of December
31, 1995 were $2,883,000, an increase of $2,037,000 over 1994. Average
residential mortgages increased by $1,792,000, or 3.00% compared to an increase
of $1,901,000, or 3.28% in 1994.
The Corporation was able to maintain a consistent growth rate in the consumer
loan portfolio of $3,223,000, or 9.66% compared to an increase in 1994 of
$2,652,000, or 8.63%. Consumer loans include credit card borrowings, personal
lines of credit, installment loans, and home equity loans to individuals. These
types of loans include both secured and unsecured loans and are generally used
for various purposes such as automobile financing, home improvement,
recreational loans and educational purposes.
LOAN PORTFOLIO
The following table shows the Corporation's loan distribution at the end of each
of the last five years.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Commercial.................. $ 75,378 $ 82,201 $ 86,388 $ 79,930 $ 56,208
Real estate mortgage........ 62,018 64,264 59,546 56,062 51,362
Consumer:
Installment............... 20,342 19,606 15,550 15,023 15,974
Personal lines of credit.. 10,205 10,348 10,061 9,128 7,593
Student loans............. 5,900 5,209 4,594 4,440 4,806
Credit cards.............. 2,433 2,346 2,258 2,460 2,651
-------- -------- -------- -------- --------
38,880 37,509 32,463 31,051 31,024
-------- -------- -------- -------- --------
Total loans................. $176,276 $183,974 $178,397 $167,043 $138,594
======== ======== ======== ======== ========
</TABLE>
5
<PAGE>
LOAN MATURITY
This table shows the maturity of loans (excluding residential mortgages of 1-4
family residences and consumer loans) outstanding as of December 31, 1995. Also
provided are the amounts due after one year, classified according to current
interest rates.
<TABLE>
<CAPTION>
Within After One But After
One Year Within Five Years Five Years Total
-------- ----------------- ---------- -----
(in thousands)
<S> <C> <C> <C> <C>
Commercial........................... $14,252 $39,274 $21,852 $75,378
======= ======= ======= =======
Loans maturing after one year with:
Fixed interest rates............... $ 4,666 $ 1,144
Variable interest rates............ 34,608 20,708
------- -------
Total............................. $39,274 $21,852
======= =======
</TABLE>
NONACCRUAL, PAST DUE, AND RESTRUCTURED LOANS
The following table summarizes the Corporation's nonaccrual, past due, and
restructured loans.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual (cash basis)... $1,327 $1,581 $ 953 $1,224 $1,955
Accruing loans past due 90+ days... 1,610 742 644 658 863
Restructured loans................. 0 0 0 0 0
------ ------ ------ ------ ------
Total non-performing loans....... $2,937 $2,323 $1,597 $1,882 $2,818
====== ====== ====== ====== ======
Ratio of non-performing loans to
average loans outstanding........ 1.69% 1.34% 0.94% 1.26% 2.19%
</TABLE>
A loan is generally placed on nonaccrual status when the contractual payment of
principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan is currently performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. $1,285,000
of the nonaccrual loans and $1,324,000 of the accruing loans past due 90+ days
are secured by real estate at December 31, 1995. There are not any other
potentially troubled loans not included in the schedule above.
Information with respect to nonaccrual and restructured loans at December 31.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Interest income that would have been
recorded under original terms............. $136 $132 $81 $96 $147
Interest income recorded during the period.. 37 80 73 89 58
Commitments to lend additional funds........ 0 0 0 0 0
</TABLE>
6
<PAGE>
Management's Discussion and Analysis
(continued)
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Corporation's loan loss experience for each
of the five years ended December 31.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Average loans outstanding......... $174,184 $173,443 $170,246 $148,930 $130,610
======== ======== ======== ======== ========
Allowance for loan losses
January 1........................ $ 3,012 $ 2,453 $ 1,800 $ 1,529 $ 1,540
Losses charged to allowance
Commercial...................... 61 80 93 354 56
Real estate mortgage............ 0 52 11 0 37
Consumer........................ 122 76 68 122 190
-------- -------- -------- -------- --------
183 208 172 476 283
-------- -------- -------- -------- --------
Recoveries credited to allowance
Commercial...................... 44 126 33 31 3
Real estate mortgage............ 0 2 0 0 1
Consumer........................ 26 17 28 39 20
-------- -------- -------- -------- --------
70 145 61 70 24
-------- -------- -------- -------- --------
Net charge-offs................... (113) (63) (111) (406) (259)
Provision for loan losses......... 310 622 764 677 248
-------- -------- -------- -------- --------
Allowance for loan
losses-December 31............... $ 3,209 $ 3,012 $ 2,453 $ 1,800 $ 1,529
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans outstanding........ 0.06% 0.04% 0.07% 0.27% 0.20%
</TABLE>
The amount charged to operations and the related balance in the allowance for
loan losses is based upon periodic evaluations of the loan portfolio by
management. These evaluations consider several factors including, but not
limited to, current economic conditions, loan portfolio composition, prior loan
loss experience, trends in portfolio volume, and management's estimation of
future potential losses.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
This table shows an allocation of the allowance for loan losses at December 31,
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------------- ---------------- ---------------- ---------------- ----------------
(in thousands)
% of % of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $1,148 42.76% $1,094 44.68% $ 854 48.42% $ 782 47.85% $ 853 40.56%
Real estate mortgages 133 35.18 138 34.93 140 33.38 105 33.56 67 37.06
Consumer 201 22.06 194 20.39 220 18.20 220 18.59 228 22.38
Unallocated 1,727 N/A 1,586 N/A 1,239 N/A 693 N/A 381 N/A
------ ------ ------ ------ ------
$3,209 100.00% $3,012 100.00% $2,453 100.00% $1,800 100.00% $1,529 100.00%
====== ====== ====== ====== ======
</TABLE>
Highly leveraged transactions (HLT's) generally include loans and commitments
made in connection with recapitalizations, acquisitions, and leveraged buyouts,
and result in the borrower's debt-to-total assets ratio exceeding 75%. The
Corporation had no loans at December 31, 1995 that qualified as HLT's.
7
<PAGE>
SECURITIES
The Corporation's securities portfolio is classified as either "held to
maturity" or "available for sale". Securities classified as held to maturity
are carried at amortized cost and are those securities that the Corporation has
both the intent and ability to hold to maturity. Securities classified as
available for sale, which are those securities that the Corporation intends to
hold for an indefinite amount of time, are carried at fair value with the
unrealized holding gains or losses, net of taxes, reported as a component of the
Corporation's stockholders' equity section on the balance sheet.
The following table sets forth the carrying amount of held to maturity and
available for sale securities, at December 31,
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Held to maturity:
U.S. Treasury............................ $18,149 $18,268 $ 16,563
State and municipal...................... 8,046 5,038 12,884
U.S. Government corporate and agency..... 0 500 13,952
Other.................................... 0 0 4,468
Mortgage-backed securities
GNMA.................................... 0 0 15,683
SBA..................................... 0 0 12,915
FNMA.................................... 0 0 14,996
FHLMC................................... 0 0 12,474
CMO's................................... 0 0 1,457
------- ------- -------
0 0 57,525
------- ------- -------
Total held to maturity securities....... $26,195 $23,806 $105,392
======= ======= =======
Available for sale:
U.S. Treasury............................ $ 0 $ 1,660 $ 0
State and municipal...................... 3,128 2,958 0
U.S. Government corporate and agency..... 7,473 4,509 0
Other.................................... 1,142 1,437 0
Equity securities........................ 4,006 3,699 0
Mortgage-backed securities:
GNMA.................................... 16,405 17,466 0
SBA..................................... 14,073 15,609 0
FNMA.................................... 21,496 20,681 0
FHLMC................................... 14,904 18,206 0
------- ------- -------
66,878 71,962 0
------- ------- -------
Total available for sale securities..... $82,627 $86,225 $ 0
======= ======= =======
</TABLE>
The Corporation adopted the Financial Accounting Standards Board Statement No.
115, "Accounting for Certain Investments in Debt and Equity Securities" in the
first quarter of 1994. Prior to the adoption of Statement No. 115, all
securities had been classified as "Held to Maturity".
In connection with the business combination with Bankers' Financial Services
Corporation, the Corporation re-evaluated the appropriateness of all securities
held by Bankers on March 1, 1995 in order to ensure the securities were
presented as available for sale or held to maturity in a manner which is
consistent with the Corporation's intentions. Securities previously carried as
available for sale of $5,588,000 were transferred to held to maturity, and
securities previously carried as held to maturity of $500,000 were transferred
to available for sale.
8
<PAGE>
Management's Discussion and Analysis
(continued)
SECURITIES (continued)
A total of $26,195,000 of securities having a fair value of $26,786,000 was
designated as held to maturity by the Corporation at December 31, 1995. The
Corporation included all of its U.S. Treasury securities and most obligations of
state and political subdivisions in this category. Securities with a carrying
value of $82,627,000 were designated as available for sale as of December 31,
1995. This category includes: U.S. Government Agencies obligations, a portion
of the state and political subdivisions portfolio, other debt securities, equity
securities and mortgage-backed securities. In 1995, the Corporation revised its
policy regarding classification of obligations of state and political
subdivisions to allow management to classify future security purchases on an
individual basis. Management will take into consideration the maturity date of
the security and generally classify longer maturities as available for sale.
The portfolio is structured to provide a maximum return on investments while
providing a consistent source of liquidity and meeting strict risk standards.
The decrease in the average investment balances, including federal funds sold,
of $4,475,000 from 1994 is primarily due to a decrease in core deposits during
1995. Generally, the Corporation will only increase investment activity when
there are excess funds available, as in 1994 when average investments increased
$7,876,000.
The following table sets forth the maturities of securities at December 31,
1995, and the weighted average yields of such securities by contractual
maturities or call dates. Mortgage-backed securities with contractual
maturities after ten years from December 31, 1995, feature regular repayments of
principal and average lives of three to seven years.
<TABLE>
<CAPTION>
Within After 1 Year After 5 Years After
1 Year Within 5 Years Within 10 Years 10 Years
------------------- ------------------- ------------------- -------------------
Principal Yield Principal Yield Principal Yield Principal Yield
--------- ----- --------- ----- --------- ----- --------- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury.................. $ 8,289 5.48% $ 9,860 6.28% $ 0 0.00% $ 0 0.00%
Obligations of state and
political subdivisions........ 400 4.45 3,871 4.61 1,840 6.05 1,935 6.30
--------- --------- --------- ---------
8,689 13,731 1,840 1,935
Available for sale:
Obligations of state and
political subdivisions........ 0 0.00 821 5.62 2,307 5.51 0 0.00
U.S. Government corporate
and agency.................... 1,484 5.32 3,840 5.78 2,149 6.33 0 0.00
Other.......................... 5 5.50 1,036 7.60 0 0.00 101 7.36
Mortgage-backed securities..... 0 0.00 2,207 5.54 4,053 6.64 60,618 6.79
--------- --------- --------- ---------
1,489 7,904 8,509 60,719
--------- --------- --------- ---------
$ 10,178 5.43% $ 21,635 5.85% $ 10,349 6.22% $ 62,654 6.78%
========= ========= ========= =========
</TABLE>
Yields on tax exempt securities represent the actual yield and are not adjusted
on a fully-taxable equivalent basis.
DEPOSITS
The Corporation's primary source of funds continues to be core deposit accounts
which include both interest and non-interest bearing demand, savings and time
deposits under $100,000. Core deposits decreased on average $6,378,000 or 2.53%
in 1995 compared to an increase of $8,952,000 reported in 1994. The largest
category of core deposits and the primary source of funds continues to be time
deposits under $100,000. This category includes certificates of deposit, which
allow customers to invest their funds at selected maturity ranges from three
months to six years, individual retirement accounts, and the Bank's VIP savings
account which provides slightly higher interest rates. The average balance of
these funds increased $1,988,000, or 2.17% over the total in 1994 of
$91,423,000.
9
<PAGE>
DEPOSITS (continued)
Interest bearing demand deposits include N.O.W, Super N.O.W and the insured
money market account. These accounts recorded the largest decrease in the
Corporation's core deposits of $6,414,000 or 8.85%, compared to an increase of
$3,813,000, or 5.55% in 1994. During 1995, average demand accounts decreased
$76,000 or .26% compared to a $1,464,000, or 5.34% increase in 1994. Management
believes that these declines are the result of consumers looking for a higher
return on their deposits as evidenced by the shift of money into our higher
yielding time deposit products.
The average daily amount of deposits and rates paid on such deposits is
summarized for the periods indicated in the following table (in 000's).
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ---------------- ----------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Demand deposits........... $ 28,817 $ 28,893 $ 27,429
Interest bearing
demand deposits.......... 66,048 2.95% 72,462 2.42% $ 68,649 2.48%
Savings deposits.......... 57,321 2.53 59,197 2.25 55,838 2.53
Time deposits............. 98,530 4.66 95,748 3.70 95,148 3.92
-------- -------- --------
Total.................. $250,716 $256,300 $247,064
======== ======== ========
</TABLE>
Maturities of time certificates of deposit and other time deposits of $100,000
or more, outstanding at December 31, 1995, are summarized as follows (in 000's).
<TABLE>
<CAPTION>
Time Other
CDs Time Total
-------- -------- --------
<S> <C> <C> <C>
90 days or less........ $ 2,223 $ 0 $ 2,223
91 to 180 days......... 1,785 0 1,785
181 to 365 days........ 400 114 514
over 1 year............ 1,505 0 1,505
-------- -------- --------
Total............... $ 5,913 $ 114 $ 6,027
======== ======== ========
</TABLE>
BORROWINGS
Borrowed funds are utilized when timing differences occur between the purchase
of new assets and the maturity of existing assets. The level of funds borrowed
is dependent upon the Corporation's deposit growth and demand for loans.
Average funds borrowed increased $908,000, or 7.43% during 1995, compared with a
$18,000, or .15% increase in 1994. The increase was primarily due to the
decline in deposits net of the decrease in average investments and federal funds
sold. Average funds borrowed are comprised of both overnight and term funds
from the Federal Loan Home Bank (FHLB). In July 1994, a two year fixed rate
note from FHLB in the amount of $4,500,000 matured and was replaced with
overnight borrowings for the remainder of 1994.
RECENTLY ISSUED FASB STATEMENTS
In 1995, the Financial Accounting Standards Board (FASB) issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" which establishes accounting and measurement standards
for the impairment of long-lived assets such as property and equipment, certain
identifiable intangibles and goodwill related to those assets. The Corporation
is required to adopt the Statement effective January 1, 1996 and the effect of
its implementation is not expected to have a material impact on the
Corporation's financial position or results of operations.
10
<PAGE>
Management's Discussion and Analysis
(continued)
RECENTLY ISSUED FASB STATEMENTS (continued)
In 1995, the FASB issued Statement No. 122, "Accounting for Mortgage Servicing
Rights", which amends Statement No. 65, "Accounting for Certain Mortgage Banking
Activities." The Statement applies to all mortgage banking activities in which
a mortgage loan is originated or purchased and then sold or securitized with the
right to service the loan retained by the seller. The total cost of the
mortgage loans is allocated between the mortgage servicing rights and the
mortgage loans based on their relative fair values. The mortgage servicing
rights are capitalized as assets and amortized over the period of estimated net
servicing income. Additionally, they are subject to an impairment analysis
based on their fair value in future periods. The Statement is effective for
transactions in which mortgage loans are sold or securitized in fiscal years
beginning after December 15, 1995 and is not expected to have a material impact
on the Corporation's financial position or results of operations.
In 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation." 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 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
proforma net income and earnings per share information as if the new fair value
approach had been adopted. The Corporation plans to continue to follow current
accounting rules under Accounting Principles Board Opinion No. 25 for options
granted in 1996.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is a function of the repricing characteristics of the
Corporation's assets and liabilities. Each asset and liability reprices either
at maturity or during the life of the instrument. Interest rate sensitivity is
measured as the difference between the volume of assets and liabilities that are
subject to repricing at a future period of time. These differences are known as
interest sensitivity gaps.
The principal objectives of asset/liability management are to manage the
sensitivity of the net interest margin to potential movements in interest rates
and to enhance profitability through returns from managed levels of interest
rate risk. The Corporation actively manages the interest rate sensitivity of
its assets and liabilities. Several techniques are used for measuring interest
rate sensitivity. The traditional maturity "gap" analysis, which reflects the
volume difference between interest rate sensitive assets and liabilities during
a given time period, is reviewed regularly by management. A positive gap occurs
when the amount of interest sensitive assets exceeds interest sensitive
liabilities. This position would contribute positively to net income in a
rising interest rate environment. Conversely, if the balance sheet has more
liabilities repricing than assets, the balance sheet is liability sensitive or
negatively gapped. Management continues to monitor sensitivity in order to
avoid overexposure to changing interest rates.
Another way management reviews its interest sensitivity position is through
"simulation". In simulation, the Corporation projects future net interest
income streams in light of the current gap position. Various interest rate
scenarios are used to measure levels of net interest income associated with
potential changes in our operating environment. Management cannot predict the
direction of interest rates or how the mix of assets and liabilities will
change. The use of this information will help formulate strategies to
minimize the unfavorable effect on net interest income caused by interest rate
changes.
Limitations of gap analysis in the following gap schedule include: 1) assets
and liabilities which contractually reprice within the same period may not, in
fact, reprice at the same time or to the same extent; 2) changes in market
interest rates do not affect all assets and liabilities to the same extent or at
the same time, and 3) interest rate gaps reflect the Corporation's position on a
single day (December 31, 1995 in the case of the following schedule) while the
Corporation continually adjusts its interest sensitivity throughout the year.
11
<PAGE>
INTEREST RATE SENSITIVITY (continued)
The Corporation's asset/liability reporting format incorporates interest bearing
demand deposits and savings deposits as rate sensitive in the 0 to 90 day time
frame. The result is a negative gap in the 0 to 90 day time frame of
($43,931,000). The negative gap would normally increase net interest income if
rates continued to decline in 1996. It is the opinion of management that net
interest income will actually decrease if rates continue to decline due to the
degree of sensitivity of the assets and liabilities repricing. Variable rate
loans are tied to an index and therefore will decline in proportion to decreases
in interest rates by the Federal Reserve. In contrast, rates offered on
interest bearing demand deposits and savings deposits, which comprise 76% of the
$159,796,000 repricing in the 0 to 90 day time period, will not reprice in the
same proportion as the variable rate loans. Management feels that current rates
offered are too low to sustain significant reductions that might result in
customers moving their money into products offering higher rates of return and a
decrease in net interest income. The rate sensitivity of these liabilities will
increase in a rising rate environment due to market competition until rates
return to pre-1992 levels (approximately 5% for savings and N.O.W. deposits).
It is the opinion of management that the above interpretation gives a better
representation of the true rate sensitivity of its assets and liabilities.
The following schedule illustrates interest sensitivity gaps of five different
time intervals (in 000's) as of December 31, 1995.
<TABLE>
<CAPTION>
0-90 91-180 181-365 1-5 Over 5
Days Days Days Years Years
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Loans.............................................. $ 75,448 $ 2,907 $ 9,467 $ 42,410 $41,926
Securities:
Held to maturity.................................. 950 3,050 4,700 14,429 3,066
Available for sale................................ 39,467 8,212 8,884 8,186 17,878
-------- -------- -------- -------- -------
Total interest bearing assets...................... 115,865 14,169 23,051 65,025 62,870
Interest bearing liabilities:
Interest bearing demand deposits................... 65,117 0 0 0 0
Savings deposits................................... 56,247 0 0 0 0
Time deposits...................................... 32,897 20,425 18,479 29,485 0
Short-term borrowings.............................. 5,535 0 0 0 0
Long-term borrowings............................... 0 0 0 4,450 0
-------- -------- -------- -------- -------
Total interest bearing liabilities.................. 159,796 20,425 18,479 33,935 0
-------- -------- -------- -------- -------
Interest sensitivity gap............................. $(43,931) $ (6,256) $ 4,572 $ 31,090 $62,870
======== ======== ======== ======== =======
Cumulative sensitivity gap........................... $(43,931) $(50,187) $(45,615) $(14,525) $48,345
======== ======== ======== ======== =======
</TABLE>
LIQUIDITY
Liquidity management involves meeting the funds flow requirements of customers
who may be either depositors wanting to withdraw funds, or borrowers needing
assurance that sufficient funds will be available to meet their credit needs.
Liquid assets consist of cash and due from banks, securities available for sale,
and maturities of earning assets.
The Corporation's principal source of asset liquidity is the securities
portfolio. As disclosed in Note D to the Financial Statements, the carrying
value of securities maturing in less than one year equals $10,194,000. In
addition to those maturities, the Corporation receives monthly principal
repayments on agencies and mortgage-backed securities. Securities designated
"available for sale", which are also a source of liquidity, totalled $82,627,000
at December 31, 1995.
Other sources of funds are principal paydowns and maturities in the loan
portfolio. The loan maturity schedule on page 13 illustrates the maturities of
commercial loans.
12
<PAGE>
Management's Discussion and Analysis
(continued)
LIQUDITY (continued)
From a funding standpoint, the Corporation has been able to rely over the years
on a stable base of "core" deposits. The average core deposits decreased
$6,378,000 or 2.53% to $245,597,000 in 1995. As discussed above, management
believes that this trend is primarily due to current economic conditions.
Liquidity can also be managed by maintaining a capability to borrow funds. The
Corporation has arranged federal funds lines of credit with corresponding banks
to provide for short-term fundings when necessary. A flexible line of credit
has been established with the Federal Home Loan Bank through which Heritage
National Bank can borrow an amount not to exceed 10% of total assets, as needed.
CAPITAL
The Corporation places a significant emphasis on maintaining an extremely strong
capital base. The capital resources of the Corporation consist of two major
components of regulatory capital, stockholders' equity and the allowance for
loan losses. The Corporation's capital displayed a continued steady growth
during 1995.
Current capital guidelines, issued by federal regulatory authorities require
both banks and bank holding companies to meet minimum risk-based capial ratios
in an effort to make regulatory capital more responsive to the risk exposures
related to a bank's on and off balance sheet items.
Risk-based capital guidelines redefine the components of capital, categorize
assets into different risk classes, and include certain off balance sheet items
in the calculation of capital requirements. The components of risk-based
capital are segregated as Tier I and Tier II capital. Tier I capital is
composed of total stockholders' equity reduced by goodwill and other intangible
assets. Tier II capital is comprised of the allowance for loan losses and any
qualifying debt obligations. Regulators also have adopted minimum requirements
of 4% of Tier I capital and 8% of risk-adjusted assets in total capital.
- --------------------------------------------------------------------------------
CAPITAL ANALYSIS
The capital analysis for the Corporation as of December 31 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(thousand of dollars)
<S> <C> <C> <C>
Tier I
Common stockholders' equity....... $ 37,432 $ 36,812 $ 34,495
Tier II
Allowable portion of allowance
for loan losses................. 2,255 2,281 2,256
-------- -------- --------
Risk-based capital.............. $ 39,687 $ 39,093 $ 36,751
======== ======== ========
Risk adjusted assets (including
off-balance-sheet exposures)...... $180,362 $182,481 $180,482
======== ======== ========
Tier I risk-based capital ratio...... 20.75% 20.17% 19.11%
Total risk-based capital ratio....... 22.00 21.42 20.36
Leverage ratio....................... 12.36 12.02 11.81
</TABLE>
Unrealized appreciation and depreciation on securities available for sale were
excluded from regulatory capital computations of risk-based capital and leverage
ratio for 1995 and 1994, respectively.
13
<PAGE>
CAPITAL (continued)
The Corporation is also subject to leverage capital requirements. This
requirement compares capital (using the definition of Tier I capital) to total
balance sheet assets and is intended to supplement the risk-based capital ratio
in measuring capital adequacy. The guidelines set a minimum leverage ratio of
3% for institutions that are highly rated in terms of safety and soundness, and
which are not experiencing or anticipating any significant growth. Other
institutions are expected to maintain capital levels of at least 1 or 2% above
the minimum. As of December 31, 1995, the Corporation had a leverage capital
ratio of 12.36%.
CAPITAL ADEQUACY
Total stockholders' equity increased $2,438,000, or 6.85% during the year-ended
December 31, 1995 compared to a $1,083,000, or 3.14% increase recorded in 1994.
Retained earnings and unrealized appreciation on securities available for sale,
net of tax, accounted for the major portion of the increase.
Stockholders' equity is adjusted for the effect of unrealized appreciation or
depreciation, net of tax, on securities classified available for sale. At
December 31, 1995 and 1994, stockholders' equity included $584,000 in unrealized
appreciation and $1,234,000 in unrealized depreciation, respectively.
During 1995, the Corporation paid cash dividends to its shareholders, including
amounts paid to the prior Bankers shareholders, amounting to $1,766,000 compared
to $1,572,000 paid in 1994. On a per share basis, dividends for 1995 increased
7.14% to $.90 from $.84 in 1994. The indicated rate for 1996 is $1.00 per
share, representing an 11.11% increase.
The return on average equity decreased to 9.29% for 1995, compared to 10.47% for
1994, and 10.70% in 1993. This decrease is primarily the result of merger and
restructuring costs incurred in 1995, and the Corporation's continued growth in
capital that exceeds its growth in earning assets and resulting net income.
Without merger and restructuring costs in 1995, return on average equity would
have been 11.53%.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CAPITAL ADEQUACY
Relationship Between Significant
Financial Ratios
----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Return on average equity.................. 9.29% 10.47% 10.70%
Earnings retained......................... 48.11 57.38 59.68
Internal capital growth*.................. 4.47 6.01 6.39
Change in average assets.................. (1.15) 3.78 5.41
Equity to average assets.................. 12.12 11.57 11.36
Growth in average equity.................. 3.55 5.71 6.14
</TABLE>
*Return on average equity multiplied by earnings retained.
- --------------------------------------------------------------------------------
EFFECTS OF INFLATION
The majority of assets and liabilities of a financial institution are monetary
in nature, and, therefore, differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories. The
precise impact of inflation upon the Corporation is difficult to measure.
Inflation may affect the borrowing needs of consumers, thereby impacting the
growth rate of the Corporation's assets. Inflation may also affect the general
level of interest rates, which can have a direct bearing on the Corporation.
Management believes the most significant impact on financial results is the
Corporation's ability to react to changes in interest rates. As discussed
previously, management is attempting to maintain an essentially balanced
position between interest sensitive assets and liabilities in order to protect
against wide interest rate fluctuations.
14
<PAGE>
Management's Discussion and Analysis
(continued)
RESULTS OF OPERATIONS
Heritage Bancorp, Inc., recorded net income of $3,409,000 ($1.73 per share) for
1995, compared to $3,712,000 ($1.87 per share) in 1994, and $3,589,000 ($1.82
per share) in 1993. Return on average total assets was 1.13%, 1.21% and 1.22%
for 1995, 1994, and 1993, respectively. The decrease in these performance
ratios in 1995 is primarly due to the merger and restructuring costs incurred in
the first two quarters of the year. Without these expenses, net income,
earnings per share, and return on average assets would have been $4,231,000,
$2.15, and 1.40%, respectively.
NET INTEREST INCOME
Net interest income is the primary source of operating income for the
Corporation. Net interest income is the difference between interest earned on
loans and securities and interest paid on deposits and other funding sources.
The factors that influence net interest income include changes in interest rates
and changes in asset and liability balances.
For analytical purposes, net interest income is reported on a tax equivalent
basis which recognizes the income tax savings on tax-exempt items such as
interest on state and municipal securities and tax exempt loans.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET INTEREST INCOME
(in thousands)
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Total interest income $23,230 $21,158 $20,829
Tax equivalent adjustment 417 378 460
------- ------- -------
23,647 21,536 21,289
Total interest expense 8,777 7,267 7,401
------- ------- -------
Net interest income
(tax equivalent basis) $14,870 $14,269 $13,888
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
Net interest income, on a fully tax equivalent basis, totalled $14,870,000, an
increase of $601,000 from 1994's amount of $14,269,000. The increase in net
interest income was primarily due to higher interest rates in 1995 which were
offset by a decrease in average earning assets.
The volume/rate analysis schedule on the following page illustrates factors
relating to the $601,000 increase of net interest income in 1995. A decrease in
the volume of earning assets resulted in decreased interest revenue of $151,000
which was offset by a $2,262,000 increase as the result of higher interest
rates. Also, a decrease in the volume of interest bearing liabilities resulted
in decreased interest expense of $69,000 which was offset by a $1,579,000
increase as the result of higher interest rates.
During 1995, the average yield on earning assets increased 84 basis points and
the average cost of funds increased 57 basis points. This resulted in a 27
basis point increase in the interest rate spread. These results reflect the
changes made by the Federal Reserve over the course of 1995. The prime rate for
1995 averaged 8.84% compared to 7.17% in 1994. The increase in rates had a
positive effect on net interest income. However, the Federal Reserve reduced
the prime rate in July and December of 1995 by 25 basis points each time. This
reduction in rates, which is expected to have a negative impact on net interest
income in 1996, should be somewhat offset by increased loan demand as the
economy is expected to improve.
Average loans outstanding increased only slightly during 1995, while average
securities and average funds sold decreased by $2,375,000 and $2,100,000,
respectively. The Corporation was in a borrowing position for the majority of
1995 due to a decline in average total deposits of $5,584,000. Demand, interest
bearing demand, and savings deposits decreased $8,366,000 while time deposits
increased by $2,782,000. This shift in deposit mix, along with the increased
interest rate environment, resulted in a higher cost of funds for 1995.
15
<PAGE>
NET INTEREST INCOME (continued)
In 1994, there was a $381,000 increase in net interest income. An increase in
the volume of interest bearing uses and interest bearing sources resulted in a
net increase of $636,000 in interest revenue and a $198,000 increase in interest
expense, respectively. At the same time, lower rates on reinvested funds
resulted in a $389,000 decrease in interest revenues, and lower rates offered on
deposits reduced interest expense by $332,000.
During 1994, the average yield on earning assets decreased 21 basis points and
the cost of funds decreased by 15 basis. This resulted in a net reduction in the
interest spread of 6 basis points. Conversely, the average prime rate in 1994
rose to 7.17% compared to 6.00% in 1993. The yield on earning assets decreased
primarily due to a significantly lower rate on the reinvestment funds from
securities that repriced in 1994. This resulted in a decrease in interest
revenue of $533,000. The increased average prime rate had a favorable impact on
interest revenues on loans which increased $122,000. The rates on average
deposits decreased 21 basis points resulting in a decrease in interest expense
of $428,000. This was offset by an increase of rates on borrowings, which
resulted in a $96,000 increase in interest expense.
The increase in the average balance of securities, loans, and Fed funds sold of
$6,132,000, $3,197,000, and $1,744,000, respectively, resulted in an increase in
interest revenues of $636,000. This increase was offset by an increase in
interest expense of $198,000 from an increase of average deposits and borrowings
totalling $9,254,000. The majority of the increase in deposits was in the
demand, interest bearing demand, and savings deposits which have a lower rate
associated with them.
VOLUME/RATE ANALYSIS -- TAXABLE-EQUIVALENT BASIS
The volume/rate analysis that follows identifies changes in interest income and
interest expense in relation to changes in specific asset and liability account
balances (volume) and corresponding interest rates (rate).
<TABLE>
<CAPTION>
Change From 1995 Change 1994 Change
Prior Year From 1994 From 1993
------------------- ------------------- -------------------
Due to Due to Due to Due to
1995 1994 Volume Rate Volume Rate
------ ------ ------ ------ ------ ------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Interest revenue:
Securities:
Taxable.................. $ 753 $ 38 $ (123) $ 876 $ 541 $ (503)
Tax exempt............... 51 (277) (2) 53 (247) (30)
Loans..................... 1,395 404 66 1,329 282 122
Funds sold................ (88) 82 (92) 4 60 22
------ ------ ------ ------ ------ ------
Total................. 2,111 247 (151) 2,262 636 (389)
Interest expense:
Interest bearing
demand deposits......... 195 50 (155) 350 95 (45)
Savings deposits.......... 121 (83) (42) 163 85 (168)
Time deposits............. 1,048 (191) 103 945 24 (215)
Short-term borrowings..... 251 75 131 120 17 58
Long-term borrowings...... (105) 15 (106) 1 (23) 38
------ ------ ------ ------ ------ ------
Total................. 1,510 (134) (69) 1,579 198 (332)
------ ------ ------ ------ ------ ------
Net interest revenue........ $ 601 $ 381 $ (82) $ 683 $ 438 $ (57)
====== ====== ====== ====== ====== ======
</TABLE>
16
<PAGE>
Management's Discussion and Analysis
(continued)
AVERAGE BALANCES AND INTEREST RATES-TAX EQUIVALENT BASIS
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------- ----------------------------- -----------------------------
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance REV/EXP Rate Balance REV/EXP Rate Balance REV/EXP Rate
-------- ------- ---- -------- ------- ---- -------- ------- ----
(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Taxable securities........ $101,123 $ 6,188 6.12% $103,467 $ 5,435 5.25% $ 94,047 $ 5,397 5.74%
Tax-exempt
securities............... 7,929 618 7.79 7,960 567 7.12 11,248 844 7.50
Loans, net of reserves.... 174,184 16,826 9.66 173,443 15,431 8.90 170,246 15,027 8.83
Federal funds sold........ 250 15 6.00 2,350 103 4.38 606 21 3.47
-------- ------- -------- ------- -------- -------
Total earning
assets................... $283,486 $23,647 8.34% $287,220 $21,536 7.50% $276,147 $21,289 7.71%
======== ======== ========
Source of funds:
Interest bearing
demand deposits.......... $ 66,048 $ 1,949 2.95% $ 72,462 $ 1,754 2.42% $ 68,649 $ 1,704 2.48%
Savings deposits.......... 57,321 1,453 2.53 59,197 1,332 2.25 55,838 1,415 2.53
Time deposits............. 98,530 4,588 4.66 95,748 3,540 3.70 95,148 3,731 3.92
Short-term borrowings..... 8,682 531 6.12 5,920 280 4.73 5,459 205 3.76
Long-term borrowings...... 4,450 256 5.75 6,304 361 5.73 6,747 346 5.13
-------- ------- -------- ------- -------- -------
Total interest bearing
sources................... 235,031 8,777 3.73 239,631 7,267 3.03 231,841 7,401 3.19
Demand deposits............. 28,817 28,893 27,429
Cash and due
from banks................ (7,241) (7,554) (7,252)
Other sources, net.......... 26,879 26,250 24,129
-------- ------- -------- ------- -------- -------
Total sources of
funds.................. $283,486 8,777 3.10% $287,220 7,267 2.53% $276,147 7,401 2.68%
======== ------- ======== ------- ======== -------
Net interest revenue........ $14,870 $14,269 $13,888
======= ======= =======
Net interest revenue to
earning assets............ 5.24% 4.97% 5.03%
</TABLE>
For the purpose of computing average loan balances, nonaccruing loans are
included in the daily average loan amounts outstanding.
Yields on tax-exempt assets have been computed on a fully tax-equivalent basis
assuming a tax rate of 34 percent.
17
<PAGE>
PROVISION FOR LOAN LOSSES
The provision and allowance for loan losses are based on management's ongoing
assessment of the Corporation's credit exposure and consideration of other
relevant factors. The allowance for loan losses is a valuation reserve which is
available to absorb future loan chargeoffs. The provision for loan losses is
the amount charged to earnings on an annual basis. The factors considered in
management's assessment of the reasonableness of the allowance for loan losses
include: prevailing and anticipated economic conditions, assigned risk ratings
on loan exposures, the results of examinations and appraisals of the loan
portfolio conducted by federal regulatory authorities and an independent loan
review firm, the diversification and size of the loan portfolio, the level of,
and risk inherent in, nonperforming assets, and any other factors deemed
relevant by management.
In 1995, the Corporation experienced a decline of $7,664,000 in actual
outstanding loans as the result of significant payoffs during the year. Due in
part to the resulting decrease in total exposure to the Corporation during the
year, management recommended a reduction in the provision for loan losses. This
reduction was based on an analysis of the portfolio credit quality, in which it
was determined the current level of the allowance was adequate. The provision
was $310,000 for 1995 compared to $622,000 and $764,000 for 1994 and 1993,
respectively.
At its current level, the allowance for loan losses represents 1.86% of net
loans outstanding compared to 1.67% at December 31, 1994. The loans on
nonaccrual at December 31, 1995 totalled $1,327,000, a 16% decrease from the
total at December 31, 1994 of $1,581,000. Loans past due 90+ days and still
accruing increased from $742,000 in 1994 to $1,610,000 in 1995, however
$1,324,000 of these loans are secured by real estate and therefore, management
does not believe they represent a significant credit risk.
OTHER INCOME
Other income consists of trust revenues, service charges, other income and
securities gains (losses). In total, other income decreased $117,000, or 6.28%
from the 1994 total of $1,864,000.
The Trust department provides traditional trust and estate settlement services
as well as investment management for individuals, businesses, and local
governments. Trust department income reached a record level of $683,000, an
increase of $96,000, or 16.35% in 1995. This compares to $587,000 earned in
1994, and $562,000 in 1993. This increase is due to the department
restructuring its fee schedule and an increase in the number of personal trusts
and investment accounts under management.
Service charges were $679,000, a slight decline of $8,000, or 1.16% in 1995
compared to $687,000 in 1994, which was a decrease of $10,000, or 1.43% from
1993's results. The 1995 decline occurred primarily in the area of service
charges on demand deposit accounts. The Corporation offers an earnings credit to
certain business checking accounts to offset service charges. This credit is
tied to the 90 day Treasury bill rate which rose during 1994 and remained at a
higher level throughout most of 1995. This resulted in a higher earnings credit
for our customers and lower service charges for the Corporation. Management
continuously monitors the fee structure of the Corporation and makes the
necessary changes when appropriate.
18
<PAGE>
Management's Discussion and Analysis
(continued)
OTHER INCOME (continued)
The decrease in other operating revenues was primarily due to the reduction in
the amount of gains realized on sales of securities. Securities gains and sales
are generally the result of restructuring of the available for sale portfolio
for asset/liability reasons. There was not any significant activity in the
securities portfolio in 1995. In 1994, the Corporation restructured its debt
and equity portfolios which resulted in gains on these securities of $142,000
and $46,000, respectively.
Other income decreased $7,000 or 1.74% to $395,000 in 1995 compared to $402,000
reported in 1994. Revenues categorized as "other", include income generated
from the increase in the cash surrender value of life insurance policies owned
by the Corporation on certain directors and officers, safe deposit box rentals,
fees charged on bank checks, and fees charged on U. S. Series EE Bonds.
OTHER EXPENSES
Other expenses increased $983,000, or 9.89% to $10,927,000 during 1995. This
follows an increase of $455,000, or 4.80% during 1994. The most significant
increase resulted from merger and restructuring expenses which totalled
$1,078,000 in 1995. These expenses were incurred for investment banking, legal,
consulting, and accounting costs related to the merger as well as system
conversion, re-engineering costs, severance packages, advertising costs, and
various office supplies subsequent to the merger consumation. These costs were
the primary reason for the decrease in net income in 1995.
Salaries and employee benefits totalled $4,978,000 in 1995, decreasing $55,000
or 1.09% from 1994. The decrease was primarily due to fewer employees as the
result of the merger. Approximately $263,000 of severance packages are included
in restructuring expense for 1995. Therefore, total salaries and employee
benefits, including severance packages, would have increased 4% in 1995 as a
result of normal pay increases. The majority of the increase experienced in
1994 is due to normal pay raises of approximately 5%.
Equipment expense totalled $783,000 for 1995, a decrease of $75,000 or 8.74%
from the $858,000 incurred in 1994. The decrease is primarily due to a decrease
in depreciation expense of $36,000, and the elimination of certain system
software agreements for six months in 1995 totalling $28,000. The remainder of
the decrease was due to a decrease in repairs and maintenance expense. In 1994,
the equipment expense increased $24,000 or 2.88% over 1993 due to expenses
related to a major expansion of the Pottsville office.
19
<PAGE>
OTHER EXPENSES (continued)
Communications and supplies expense increased $146,000 or 26.74% in 1995. The
increase was primarily the result of costs incurred related to the merger.
Significant supply purchases were necessary due to the name change of the
Corporation and any supplies with the former name were written off.
Additionally, a large increase in the cost of paper in 1995 added to the
increased expense.
Professional fees and outside services are comprised of several categories,
including legal expenses, examination fees, consulting fees and advertising
expense. Total charges were $1,068,000 in 1995, compared to $953,000 and
$913,000 in 1994 and 1993, respectively. The 12.07% increase is primarily due
to an increase in temporary help and outside consulting used during 1995. These
expenses were related to, but not directly attributable to the merger. Also, a
portion of the increase is due to charges for consultants to assist in strategic
planning and marketing, legal expenses related to problem loan workout
activities, and increased safekeeping fees.
FDIC insurance premiums are applied to all financial institutions based on a
risk-based premium assessment system. Under this system, bank strength is based
on three factors: 1) asset quality, 2) capital strength, and 3) management.
Premium assessments are then assigned based on the institutions overall rating
with the stronger institutions paying lower premium rates. During 1995, the
FDIC restructured its assessment schedule after the Bank Insurance Fund was
determined to be adequately funded. The Bank was assessed at $.04 per $100 of
deposits, down from $.23 in 1994. For 1995, the total savings as a result of
the lower premium was $279,000 or 48.69%. The FDIC premium for 1996 for the
Bank will be at the statutory minimum of $2,000.
FEDERAL INCOME TAX
The provision for income taxes for 1995 was $1,554,000 compared to $1,477,000 in
1994. The effective tax rate, which is the ratio of income tax expense to
income-before-income-taxes, was 31.31% in 1995, up from 28.46% in 1994. The tax
rate for both periods was less than the federal statutory rate of 34% due to tax
exempt securities and loan income. The increase in the effective tax rate for
1995 was due to merger and restructuring expenses totalling $325,000 that were
deemed to be non-deductible. This increased the effective tax rate by 2.23% for
1995. The increase in 1994 over the 1993 effective tax rate of 25.91% was
primarily due to the Corporation selling a significant portion of its tax-exempt
state and municipal securities portfolio.
Please refer to Note J of the Notes to Consolidated Financial Statements for
further analysis of federal income tax expense for 1995.
20
<PAGE>
Management's Discussion and Analysis
(continued)
OTHER INCOME AND EXPENSES
(in thousands)
<TABLE>
<CAPTION>
Changes From Prior Year
---------------------------------------------
Year Ended 1995 1994
------------------------------- -------------------- --------------------
OTHER INCOME 1995 1994 1993 Amount Percent Amount Percent
------- ------- ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Trust department........................ $ 683 $ 587 $ 562 $ 96 16.35% $ 25 4.45%
Service charges......................... 679 687 697 (8) (1.16) (10) (1.43)
Other income............................ 395 402 400 (7) (1.74) 2 0.50
Securities gains (losses)............... (10) 188 10 (198) (105.31) 178 1,780.00
------- ------- ------- ------ ------
Total operating revenue................ $ 1,747 $ 1,864 $ 1,669 $ (117) (6.28)% $ 195 11.68%
======= ======= ======= ====== ======
<CAPTION>
Changes From Prior Year
---------------------------------------------
Year Ended 1995 1994
------------------------------- -------------------- --------------------
OTHER EXPENSES 1995 1994 1993 Amount Percent Amount Percent
------- ------- ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits.......... $ 4,978 $ 5,033 $ 4,788 $ (55) (1.09)% $ 245 5.12%
Occupancy expense, net.................. 897 897 830 0 0.00 67 8.07
Equipment expense....................... 783 858 834 (75) (8.74) 24 2.88
Communication and supplies.............. 692 546 549 146 26.74 (3) (0.55)
Professional fees and outside services.. 1,068 953 913 115 12.07 40 4.38
Taxes, other than income................ 344 317 312 27 8.52 5 1.60
Federal deposit insurance premium....... 294 573 553 (279) (48.69) 20 3.62
Merger.................................. 687 0 0 687 100.00 0 0.00
Restructuring........................... 391 0 0 391 100.00 0 0.00
Other................................... 793 767 710 26 3.39 57 8.03
------- ------- ------- ------ ------
Total operating expense............... $10,927 $ 9,944 $ 9,489 $ 983 9.89% $ 455 4.80%
======= ======= ======= ====== ======
</TABLE>
21
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the quarterly results of operations for the years
ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
Quarter Ended
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(in thousands except per share data)
<S> <C> <C> <C> <C>
1995
----
Interest income................ $ 5,727 $ 5,844 $ 5,859 $ 5,800
Interest expense............... (2,127) (2,206) (2,248) (2,196)
------- ------- ------- -------
Net interest income............ 3,600 3,638 3,611 3,604
Provision for loan losses...... (130) (70) (65) (45)
Securities gains (losses)...... 5 1 (13) (3)
Other income................... 453 360 395 549
Other expenses................. (3,127) (3,248) (2,295) (2,257)
------- ------- ------- -------
Income before income taxes..... 801 681 1,633 1,848
Income taxes................... (215) (183) (470) (686)
------- ------- ------- -------
Net income..................... $ 586 $ 498 $ 1,163 $ 1,162
======= ======= ======= =======
Per common share:
Primary....................... $ 0.30 $ 0.25 $ 0.59 $ 0.59
<CAPTION>
Quarter Ended
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(in thousands except per share data)
<S> <C> <C> <C> <C>
1994
----
Interest income................ $ 4,971 $ 5,121 $ 5,364 $ 5,702
Interest expense............... (1,723) (1,751) (1,834) (1,959)
------- ------- ------- -------
Net interest income............ 3,248 3,370 3,530 3,743
Provision for loan losses...... (175) (142) (99) (206)
Securities gains............... 8 118 62 0
Other income................... 441 411 401 423
Other expenses................. (2,455) (2,479) (2,531) (2,479)
------- ------- ------- -------
Income before income taxes..... 1,067 1,278 1,363 1,481
Income taxes................... (274) (385) (418) (400)
------- ------- ------- -------
Net income..................... $ 793 $ 893 $ 945 $ 1,081
======= ======= ======= =======
Per common share:
Primary...................... $ 0.40 $ 0.45 $ 0.48 $ 0.54
</TABLE>
22
<PAGE>
Financial Reporting Responsibility
The financial report section of this Annual Report has been prepared and
presented by management for evaluation by its readers.
Management believes that the financial statements have been prepared in
conformity with generally accepted accounting principles, that the principles
selected are appropriate in the circumstances and have been consistently
applied, that the financial statements reflect, in all material respects, the
substance of events and transactions that should be included, and that the
amounts contained in the financial statements are based on management's best
estimates and judgement. Other supporting financial statistics and
discussions have been presented in an effort to provide the reader with an
insight into how management's perception of major events took place and how
actions by management, competition, and regulation affected Heritage Bancorp,
Inc. in the year under review.
Report of Beard & Company, Inc.
Independent Auditors
The Stockholders and Board of Directors
Heritage Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Heritage
Bancorp, Inc. and subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Heritage
Bancorp, Inc. and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As described in Note D to the consolidated financial statements, the
Corporation changed its method of accounting for investments in certain debt
and equity securities, effective January 1, 1994.
Reading, Pennsylvania
January 19, 1996
/s/ Beard & Company, Inc.
23
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
---------------------
(in thousands except per share amounts) 1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks............................. $ 11,356 $ 10,803
Securities:
Held to maturity (fair value 1995 - $26,786;
1994 - $23,253)................................. 26,195 23,806
Available for sale............................... 82,627 86,225
--------- ---------
108,822 110,031
Loans receivable:
Commercial, financial, and agricultural.......... 75,378 82,201
Real estate - mortgage and construction.......... 62,018 64,264
Consumer......................................... 38,880 37,509
--------- ---------
176,276 183,974
Less: Unearned income.............................. (909) (1,140)
Allowance for loan losses.................... (3,209) (3,012)
--------- ---------
NET LOANS.................................. 172,158 179,822
Premises and equipment, net of accumulated
depreciation (1995 - $6,622; 1994 - $6,013)........ 5,380 5,722
Accrued income receivable and other................. 5,527 7,111
--------- ---------
TOTAL ASSETS............................... $ 303,243 $ 313,489
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing.............................. $ 30,400 $ 31,210
Interest bearing................................. 222,650 226,355
--------- ---------
TOTAL DEPOSITS............................. $253,050 257,565
Federal funds purchased and short-term borrowings. 5,535 13,326
Term funds borrowed............................... 4,450 4,450
Other liabilities................................. 2,192 2,570
--------- ---------
TOTAL LIABILITIES.......................... 265,227 277,911
STOCKHOLDERS' EQUITY
Preferred Stock, $25 par value:
10,000,000 shares authorized and unissued........ 0 0
Common Stock, $5 par value:
Authorized 10,000,000 shares; issued
2,001,173 shares................................. 10,006 10,006
Surplus........................................... 660 647
Retained earnings................................. 28,064 26,424
Treasury Stock, at cost, 1995 - 55,527 shares;
1994 - 15,691 shares............................. (1,298) (265)
Net unrealized appreciation (depreciation) on
securities available for sale, net of tax
(benefit), 1995 - $331; 1994 - $(636)............ 584 (1,234)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY................. 38,016 35,578
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY...................... $ 303,243 $ 313,489
========= =========
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
(in thousands except per share data)
Interest income:
Loans receivable, including fees....... $ 16,603 $ 15,232 $ 14,836
Securities:
Taxable............................... 6,188 5,435 5,397
Tax-exempt............................ 424 388 575
Other.................................. 15 103 21
-------- -------- --------
TOTAL INTEREST INCOME................ 23,230 21,158 20,829
Interest expense:
Deposits............................... 7,990 6,626 6,850
Borrowings:
Short-term............................ 531 280 205
Long-term............................. 256 361 346
-------- -------- --------
TOTAL INTEREST EXPENSE............... 8,777 7,267 7,401
-------- -------- --------
NET INTEREST INCOME.................. 14,453 13,891 13,428
Provision for loan losses................ 310 622 764
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES............ 14,143 13,269 12,664
Other income:
Trust Department....................... 683 587 562
Service charges........................ 679 687 697
Other income........................... 395 402 400
Securities gains (losses).............. (10) 188 10
-------- -------- --------
TOTAL OTHER INCOME................... 1,747 1,864 1,669
Other expenses:
Salaries and employee benefits......... 4,978 5,033 4,788
Occupancy, net......................... 897 897 830
Equipment.............................. 783 858 834
Communication and supplies............. 692 546 549
Professional fees and outside services. 1,068 953 913
Taxes, other than income............... 344 317 312
Federal deposit insurance premiums..... 294 573 553
Merger................................. 687 0 0
Restructuring.......................... 391 0 0
Other.................................. 793 767 710
-------- -------- --------
TOTAL OTHER EXPENSES................ 10,927 9,944 9,489
-------- -------- --------
INCOME BEFORE INCOME TAXES.......... 4,963 5,189 4,844
Income taxes............................. 1,554 1,477 1,255
-------- -------- --------
NET INCOME.......................... $ 3,409 $ 3,712 $ 3,589
======== ======== ========
Per share data:
Net income............................. $ 1.73 $ 1.87 $ 1.82
======== ======== ========
Cash dividends......................... $ .90 $ .84 $ .77
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
(Depreciation)
on Securities
Common Retained Treasury Available for
Stock Surplus Earnings Stock Sale Total
-------- --------- ------------ ---------- ---------------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993................ $ 6,403 $ 1,934 $24,372 $ (474) $ 0 $32,235
5-for-4 stock split in the form of a
25% stock dividend....................... 1,601 (1,601) 0
Net income................................ 3,589 3,589
Treasury stock acquired................... (34) (34)
Treasury stock issued..................... 35 114 149
Cash dividends............................ (1,447) (1,447)
5-for-4 stock split in the form of a
25% stock dividend....................... 2,001 (2,001) 0
Issuance of common stock upon
exercise of stock options................ 1 2 3
Transfer from retained earnings........... 2,220 (2,220) 0
------- ------- ------- ------- ------- -------
Balance at December 31, 1993.............. 10,006 589 24,294 (394) 0 34,495
Cash paid in lieu of fractional shares.... (10) (10)
Adjustment to beginning balance for
change in accounting method,
net of taxes........................... 931 931
Net income................................ 3,712 3,712
Treasury stock issued..................... 58 129 187
Cash dividends............................ (1,572) (1,572)
Net change in unrealized depreciation
on securities available for sale,
net of taxes............................. (2,165) (2,165)
------- ------- ------- ------- ------- -------
Balance at December 31, 1994.............. 10,006 647 26,424 (265) (1,234) 35,578
Cash paid in lieu of fractional shares.... (3) (3)
Net income................................ 3,409 3,409
Treasury stock acquired................... (1,285) (1,285)
Treasury stock issued..................... 3 252 255
Cash dividends............................ (1,766) (1,766)
Tax benefit upon exercise of
stock options............................ 10 10
Net change in unrealized appreciation
on securities available for sale,
net of taxes........................... 1,818 1,818
------- ------- ------- ------- ------- -------
Balance at December 31, 1995.............. $10,006 $ 660 $28,064 $(1,298) $ 584 $38,016
======= ======= ======= ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1995 1994 1993
(in thousands) --------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................... $ 3,409 $ 3,712 $ 3,589
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses................ 310 622 764
Depreciation............................. 624 660 636
Gains on sales of equipment.............. (2) 0 (46)
Realized (gains) losses on sales
of securities........................... 10 (188) (10)
Amortization of securities premiums and
accretion of discounts, net............. 115 209 242
Deferred federal income taxes............ (117) (194) (327)
(Increase) decrease in accrued
income receivable and other assets...... 744 (1,135) (316)
Increase (decrease) in interest
payable and other liabilities........... (378) 395 (177)
-------- -------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES...................... 4,715 4,081 4,355
INVESTING ACTIVITIES
Securities held to maturity:
Proceeds from called/matured securities. 8,156 9,112 38,976
Purchases............................... (8,813) (14,601) (35,240)
Securities available for sale:
Proceeds from called/matured
securities.............................. 9,899 14,440 0
Proceeds from sales..................... 12,961 12,600 0
Purchases............................... (18,334) (28,437) 0
Net (increase) decrease in loans.......... 7,354 (5,521) (11,720)
Net (increase) decrease in
interest bearing deposits with banks.... 0 100 (100)
Proceeds from sales of bank equipment..... 2 0 104
Purchases of premises and equipment....... (282) (147) (1,835)
-------- -------- -------
NET CASH PROVIDED/(USED) BY
INVESTING ACTIVITIES...................... 10,943 (12,454) (9,815)
FINANCING ACTIVITIES
Net increase (decrease) in demand
deposits, N.O.W. accounts, and
savings accounts........................ (10,841) 5,359 3,374
Net increase (decrease) in time deposits. 6,326 (685) 1,733
Net increase (decrease) in short-term
borrowings.............................. (7,791) 11,180 (4,190)
Term funds borrowed...................... 0 0 4,450
Term funds repayment..................... 0 (4,500) 0
Issuance of treasury stock............... 255 187 149
Purchase of treasury stock............... (1,285) 0 (34)
Payments on liability under capital
leases.................................. 0 (90) (75)
Proceeds from exercise of stock options
for common stock........................ 0 0 3
Cash dividends........................... (1,766) (1,572) (1,447)
Cash paid in lieu of fractional shares... (3) (10) 0
-------- -------- -------
NET CASH PROVIDED/(USED) BY
FINANCING ACTIVITIES..................... (15,105) 9,869 3,963
-------- -------- -------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS............. 553 1,496 (1,497)
Cash and cash equivalents at beginning of year 10,803 9,307 10,804
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR... $ 11,356 $ 10,803 $ 9,307
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
Notes to Consolidated Financial Statements
HERITAGE BANCORP, INC. AND SUBSIDIARY - December 31, 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Heritage
Bancorp, Inc. (the Corporation), previously known as Miners National
Bancorp, Inc., and its wholly-owned subsidiary, Heritage National Bank
(the Bank) previously known as Miners National Bank. All significant
intercompany transactions and accounts have been eliminated. The
investment in the subsidiary is carried at the parent company's equity in
the underlying net assets.
Nature of Operations
The Bank operates under a national bank charter and provides full banking
services, including trust services. As a national bank, the Bank is
subject to regulation of the Office of the Comptroller of the Currency and
the Federal Deposit Insurance Corporation. The Corporation is subject to
regulation of the Federal Reserve Bank. The area served by the Bank is
principally Schuylkill and northern Dauphin counties in Pennsylvania.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Securities
Securities classified as held to maturity are those debt securities the
Corporation has both the intent and ability to hold to maturity regardless
of changes in market conditions, liquidity needs or changes in general
economic conditions. These securities are carried at cost and adjusted
for amortization of premium and accretion of discount, computed by the
interest method over their contractual lives.
Securities classified as available for sale are those debt securities that
the Corporation intends to hold for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a security classified as
available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of
the Corporation's assets and liabilities, liquidity needs, regulatory
capital considerations, and other similar factors. Securities available
for sale are carried at fair value.
Unrealized gains or losses are reported as increases or decreases in
stockholders' equity, net of the related tax effect. Realized gains or
losses, determined on the basis of the cost of specific securities sold,
are included in earnings. Management determines the appropriate
classification of securities at the time of purchase and re-evaluates the
designation as of each balance sheet date. Equity securities consist
primarily of Pennsylvania community bank, Federal Home Loan Bank, and
Federal Reserve Bank stock.
Loans Receivable
Loans generally are stated at their outstanding unpaid principal balances
net of an allowance for loan losses and any deferred fees or costs.
Interest income is accrued on the unpaid principal balance. Loan
origination fees net of certain direct origination costs are deferred and
recognized as an adjustment of the yield (interest income) of the related
loans. The Corporation is generally amortizing these amounts over the
contractual life of the loan.
28
<PAGE>
Notes to Consolidated Financial Statements (continued)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans Receivable (continued)
A loan is generally considered impaired when it is probable the
Corporation will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement.
The accrual of interest is discontinued when the contractual payment of
principal or interest has become 90 days past due or management has
serious doubts about further collectibility of principal or interest, even
though the loan is currently performing. A loan may remain on accrual
status if it is in the process of collection and is either guaranteed or
well secured. When a loan is placed on nonaccrual status, unpaid interest
credited to income in the current year is reversed and unpaid interest
accrued in prior years is charged against the allowance for loan losses.
Interest received on nonaccrual loans generally is either applied against
principal or reported as interest income, according to management's
judgement as to the collectibility of principal. Generally, loans are
restored to accrual status when the obligation is brought current, has
performed in accordance with the contractual terms for a reasonable period
of time and the ultimate collectibility of the total contractual principal
and interest is no longer in doubt.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan
losses charged against income. Loans deemed to be uncollectible are
charged against the allowance for loan losses, and subsequent recoveries,
if any, are credited to the allowance.
Beginning in 1995, the Corporation adopted Financial Accounting Standards
Board Statement No. 114, "Accounting by Creditors for Impairment of a
Loan", as amended by Statement No. 118. Under the new standard, the 1995
allowance for loan losses related to loans that are identified for
evaluation in accordance with Statement No. 114 is based on discounted
cash flows using the loan's initial effective rate or the fair value of
the collateral for certain collateral dependent loans. Prior to 1995, the
allowance for loan losses related to these loans was based on undiscounted
cash flows or the fair value of the collateral for collateral dependent
loans.
The allowance for loan losses is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. Management's
periodic evaluation of the adequacy of the allowance is based on the
Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, composition of
the loan portfolio, current economic conditions, and other relevant
factors. This evaluation is inherently subjective as it required material
estimates that may be susceptible to significant change.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation,
computed principally on the straight-line method over the estimated useful
lives of the assets.
Income Taxes
The provision for income taxes is based on income reported for financial
statement purposes, adjusted principally for tax-exempt income. Deferred
income taxes are provided using the liability method whereby deferred tax
assets are recognized for deductible temporary differences and deferred
tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amount of
assets and liabilities and their tax bases.
29
<PAGE>
Notes to Consolidated Financial Statements (continued)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings and Dividends Per Share
Earnings per share are based on the weighted average outstanding shares as
follows: 1995 - 1,968,000 shares; 1994 - 1,981,000 shares; 1993 -
1,971,000 shares. Dividends per share represent the historical dividends
of the Corporation, which excludes the dividends of Bankers' Financial
Services Corporation. Total dividends paid by Bankers in 1994 and 1993
were $382,000 and $361,000, respectively, and are included in the cash
dividends on the statement of stockholders' equity.
Cash Flow Information
For purposes of the statements of cash flows, the Corporation considers
cash and due from banks and federal funds sold as cash and cash
equivalents. Generally, federal funds are purchases and sold for one-day
periods. Cash paid for interest during the years ended December 31, 1995,
1994, and 1993 was $8,547,000, $7,135,000, and $7,519,000, respectively.
Income taxes paid were $1,685,000, in 1995, $1,532,000 in 1994, and
$1,462,000 in 1993.
Stock Dividend
On April 16, 1993 a 5-for-4 stock split was issued in the form of a 25%
stock dividend. Accordingly, issued shares of common stock increased
320,128 shares, and a transfer of $1,601,000, representing the par value
of additional shares issued, was made from surplus to the common stock
account. On April 27, 1994, the Corporation issued a 5-for-4 stock split
in the form of a 25% stock dividend. Accordingly, issued shares of common
stock increased 400,235 shares and a transfer of $2,001,000, representing
the par value of additional shares issued, was made to the common stock
account. In order to effect the transfer, the Corporation capitalized
$2,220,000 in retained earnings to surplus. The effect of this 5-for-4
stock split and the capitalization of retained earnings has been recorded
as of December 31, 1993. References in the consolidated financial
statements and notes thereto with regard to per share and related data
have been restated to give effect to these transactions.
Fair Values of Financial Instruments
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement
of the instrument. Statement 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent
the underlying value of the Corporation. The following methods and
assumptions were used by the Corporation in estimating its fair value
disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
--------------------------
balance sheet for cash and short-term instruments approximate those
assets' fair values.
Securities: Fair values of securities are based on quoted market
-----------
prices, where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable
instruments.
Loans receivable: For variable-rate loans that reprice frequently and
----------------
with no significant change in credit risk, fair values are based on
carrying values. The fair values for fixed rate loans are estimated
using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar
credit quality.
30
<PAGE>
Notes to Consolidated Financial Statements (continued)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accrued interest: The carrying amount of accrued interest receivable
-----------------
and accrued interest payable approximate their fair values.
Off-balance sheet instruments: In the ordinary course of business, the
------------------------------
Bank has entered into off-balance sheet financial instruments
consisting of commitments to extend credit and letters of credit. Such
financial instruments are recorded in the consolidated financial
statements when they become a receivable. The Bank generally does not
assess fees for commitments to extend credit or standby letters of
credit, which is consistent with the terms offered in the market place.
Additionally, the commitments are at variable interest rates and
include an "escape clause" if the customer's credit quality
deteriorates.
Deposit liabilities: The fair values disclosed for demand, savings,
--------------------
and interest-bearing demand deposits are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected maturities on time deposits.
Short-term borrowings: The carrying amounts of short-term borrowings,
----------------------
including federal funds purchased, approximate their fair values.
Long-term borrowings: The fair values of the Bank's long-term
---------------------
borrowings (other than deposits) are estimated using discounted cash
flow analyses, based on the Bank's current incremental borrowing rates
for similar types of borrowing arrangements.
Recently Issued FASB Statements
In 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of" which establishes accounting and
measurement standards for the impairment of long-lived assets such as
property and equipment, certain identifiable intangibles and goodwill
related to those assets. The Corporation is required to adopt the
Statement effective January 1, 1996 and the effect of its implementation
is not expected to have a material impact on the Corporation's financial
position or results of operations.
In 1995, the FASB issued Statement No. 122, "Accounting for Mortgage
Servicing Rights", which amends Statement No. 65, "Accounting for Certain
Mortgage Banking Activities." The Statement applies to all mortgage
banking activities in which a mortgage loan is originated or purchased and
then sold or securitized with the right to service the loan retained by
the seller. The total cost of the mortgage loans is allocated between the
mortgage servicing rights and the mortgage loans based on their relative
fair values. The mortgage servicing rights are capitalized as assets and
amortized over the period of estimated net servicing income.
Additionally, they are subject to an impairment analysis based on their
fair value in future periods. The Statement is effective for transactions
in which mortgage loans are sold or securitized in fiscal years beginning
after December 15, 1995 and is not expected to have a material impact on
the Corporation's financial position or results of operations.
In 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation." 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 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 proforma net income and earnings per share
information as if the new fair value approach had been adopted. The
Corporation plans to continue to follow current accounting rules under
Accounting Principles Board Opinion No. 25 for options granted in 1996.
31
<PAGE>
Notes to Consolidated Financial Statements (continued)
NOTE B - MERGER
On March 1, 1995, Miners National Bancorp, Inc. (Miners) effected a business
combination with Bankers' Financial Services Corporation (Bankers), a one bank
holding company located in Schuylkill Haven, Pennsylvania, by exchanging
560,173 shares of its common stock for all of the outstanding common stock of
Bankers except for the 28,869 shares of Bankers held by Miners which were
cancelled. Simultaneously, Miners amended its Articles of Incorporation and
changed its name to Heritage Bancorp, Inc. The combination has been accounted
for as a pooling of interests and, accordingly, all prior financial statements
have been restated to include Bankers. The results of operations of the
separate Corporations for periods prior to the combination are summarized as
follows (in 000's):
<TABLE>
<CAPTION>
Net Interest
Income Net Income
------------ ----------
<S> <C> <C>
Two months ended February 28, 1995:
Heritage Bancorp, Inc................ $ 1,750 $ 446
Bankers.............................. 660 193
--------- ---------
$ 2,410 $ 639
========= =========
Year ended December 31, 1994:
Heritage Bancorp, Inc................ $ 10,129 $ 2,680
Bankers.............................. 3,762 1,032
--------- ---------
$ 13,891 $ 3,712
========= =========
Year ended December 31, 1993:
Heritage Bancorp, Inc................ $ 9,950 $ 2,660
Bankers.............................. 3,478 929
--------- ---------
$ 13,428 $ 3,589
========= =========
</TABLE>
NOTE C - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank and in the form of cash on hand. The average amount of these
restricted balances for the year ended December 31, 1995, was approximately
$1,319,000.
32
<PAGE>
Notes to Consolidated Financial Statements (continued)
NOTE D - SECURITIES
The Financial Accounting Standards Board issued Statement No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" in May 1993. The
Corporation adopted the provisions of the new standard for investments held as
of or acquired after January 1, 1994. The opening balance of stockholders'
equity was increased by $931,000 (net of $480,000 in deferred income taxes) to
reflect the net unrealized appreciation on securities classified as available
for sale previously carried at amortized cost.
The amortized cost and fair values of securities at December 31, were as
follows (in 000's):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Securities held to maturity:
December 31, 1995:
U.S. Treasury securities........ $18,149 $ 259 $ (16) $18,392
Obligations of states and
political subdivisions....... 8,046 361 (13) 8,394
------- -------- -------- -------
$26,195 $ 620 $ (29) $26,786
======= ======== ======== =======
December 31, 1994:
U.S. Treasury securities........ $18,268 $ 28 $ (419) $17,877
U.S. Government Corporate and
Agency Obligations............ 500 0 (5) 495
Obligations of states and
political subdivisions....... 5,038 4 (161) 4,881
------- -------- -------- -------
$23,806 $ 32 $ (585) $23,253
======= ======== ======== =======
Securities available for sale:
December 31, 1995:
Obligations of states and
political subdivisions....... $ 3,089 $ 49 $ (10) $ 3,128
U.S. Government Corporate and
Agency Obligations............ 7,408 90 (25) 7,473
Other securities................ 1,105 37 (0) 1,142
Mortgage-backed securities...... 66,372 923 (417) 66,878
Equity securities............... 3,738 268 (0) 4,006
------- -------- -------- -------
$81,712 $ 1,367 $ (452) $82,627
======= ======== ======== =======
December 31, 1994:
U.S. Treasury securities........ $ 1,726 $ 1 $ (67) $ 1,660
Obligations of states and
political subdivisions....... 2,959 16 (17) 2,958
U.S. Government Corporate and
Agency Obligations............ 4,769 0 (260) 4,509
Other securities................ 1,460 3 (26) 1,437
Mortgage-backed securities...... 73,673 45 (1,756) 71,962
Equity securities............... 3,509 190 (0) 3,699
------- -------- -------- -------
$88,096 $ 255 $(2,126) $86,225
======= ======== ======== =======
</TABLE>
33
<PAGE>
Notes to Consolidated Financial Statements (continued)
NOTE D - SECURITIES (continued)
In connection with the business combination with Bankers' Financial Services
Corporation, the Corporation re-evaluated the appropriateness of all
securities held by Bankers on March 1, 1995 in order to ensure the securities
were presented as available for sale or held to maturity in a manner
consistent with the Corporation's intentions. As a result, securities
previously carried as available for sale of $5,588,000 were transferred to
held to maturity, and securities previously carried as held to maturity of
$500,000 were transferred to available for sale.
The amortized cost and fair value of securities for the year ended December
31, 1995 by contractual maturity or call date, are shown below. Expected
maturities will differ from contractual maturities or call dates because
borrowers may have the right to prepay obligations with or without call or
prepayment penalties, or elect not to prepay the obligation at call date. (in
000's)
<TABLE>
<CAPTION>
Securities Held to Maturity Securities Available for Sale
--------------------------- -----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less........ $ 8,689 $ 8,703 $ 1,505 $ 1,489
Due after one year through
five years.................. 13,731 13,998 5,628 5,697
Due after five years
through ten years........... 1,840 1,984 4,369 4,456
Due after ten years............ 1,935 2,101 100 101
Mortgage-backed securities..... 0 0 66,372 66,878
Equity securities.............. 0 0 3,738 4,006
--------- ---------- ----------- -----------
$26,195 $26,786 $81,712 $82,627
========= ========== =========== ===========
</TABLE>
Gross realized gains and losses from the sale of securities available for sale
for the years ended December 31, 1995 and 1994, and calls of securities held
to maturity for the year ended December 31, 1993 are as follows (in 000's):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Realized gains...... $ 88 $232 $10
Realized losses..... 98 44 0
--- ---- ---
$(10) $188 $10
==== ==== ===
</TABLE>
Securities having a carrying value of $10,633,000 and $11,661,000 at December
31, 1995 and 1994, respectively, were pledged to secure public deposits and
for other purposes.
34
<PAGE>
Notes to Consolidated Financial Statements (continued)
NOTE E - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for each of the three years ended
December 31, were as follows in (000's):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year $3,012 $2,453 $1,800
Recoveries on loans 70 145 61
Provision charged to operations 310 622 764
Loans charged off (183) (208) (172)
------ ------ ------
Balance at end of year $3,209 $3,012 $2,453
====== ====== ======
</TABLE>
Information with respect to impaired loans as of and for the year ended
December 31, 1995 is as follows in (000's):
<TABLE>
<CAPTION>
<S> <C>
Loans receivable for which there is a related
allowance for loan losses.......................................... $ 786
Loans receivable for which there is no related
allowance for loan losses.......................................... 539
------
Total impaired loans..................................... $1,325
======
Related allowance for loan losses................................... $ 400
======
Average recorded balance of these impaired loans.................... $1,477
======
Interest income recognized on these impaired loans.................. $ 37
======
</TABLE>
Non-accruing loans totalled $1,581,000 at December 31, 1994 (all of which
would be considered impaired under Statement No. 114). Interest income that
would have been recorded under the original terms of the loan agreements
amounted to $132,000 for the year then ended. Interest income on these loans,
which is recorded only when received, amounted to $80,000 for the year ended
December 31, 1994.
NOTE F - LOANS TO RELATED PARTIES
The Bank has granted loans to certain directors and executive officers of the
Corporation and to their associates. Related party loans are made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than the normal risk of collectibility. The
aggregate dollar amount of these loans was $3,664,000 and $4,209,000 at
December 31, 1995 and 1994, respectively. During 1995, $2,374,000 of new loans
were made, and repayments totalled $2,919,000.
NOTE G - CONCENTRATIONS OF CREDIT RISK
Most of the Corporation's business activity, including loans and loan
commitments, is with customers located within Schuylkill, Lehigh, western
Carbon, and northern Dauphin counties of Pennsylvania. The portfolio is well
diversified, with no industry comprising greater than ten percent of the total
loans outstanding. However, its debtors' ability to honor their contracts is
influenced by the region's economy.
35
<PAGE>
Notes to Consolidated Financial Statements
(continued)
NOTE H - PREMISES AND EQUIPMENT
The main classes of premises and equipment and the total accumulated
depreciation were as follows in (000's):
<TABLE>
<CAPTION>
December 31
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Land.............................. $ 593 $ 593
Building and improvements......... 6,448 6,448
Furniture, fixtures and equipment. 4,793 4,543
Leasehold improvements............ 47 47
Bank vehicles..................... 121 104
------- ------
12,002 11,735
Less accumulated depreciation..... (6,622) (6,013)
------- ------
$ 5,380 $5,722
======= ======
</TABLE>
NOTE I - DEPOSITS AND BORROWED FUNDS
The carrying amounts of deposits consisted of the following (in 000's):
<TABLE>
<CAPTION>
December 31
--------------------
1995 1994
--------- ---------
<S> <C> <C>
DEPOSITS
Demand........................... $ 30,400 $ 31,210
Interest bearing demand.......... 65,117 71,678
Savings.......................... 56,247 59,717
Time............................. 101,286 94,960
-------- --------
$253,050 $257,565
======== ========
</TABLE>
At December 31, 1995 and 1994, time certificates of deposit of $100,000 or
more aggregated $5,913,000 and $5,143,000, respectively. Interest expense on
these time deposits amounted to approximately $256,000 in 1995, $165,000 in
1994 and $136,000 in 1993.
At December 31, 1995, the scheduled maturities of time deposits are as
follows:
Year ending December 31 (in 000's):
<TABLE>
<S> <C>
1996........................ $ 69,826
1997........................ 16,855
1998........................ 7,209
1999........................ 4,360
2000........................ 2,910
Thereafter.................. 126
--------
$101,286
========
</TABLE>
36
<PAGE>
Notes to Consolidated Financial Statements
(continued)
NOTE I - DEPOSITS AND BORROWED FUNDS (continued)
BORROWED FUNDS
Borrowed funds consisted of the following (in 000's):
<TABLE>
<CAPTION>
December 31
-----------------
1995 1994
------- -------
<S> <C> <C>
Federal funds purchased and
short-term borrwings........... $ 5,535 $13,326
Term borrowings................. 4,450 4,450
------- -------
$ 9,985 $17,776
======= =======
</TABLE>
Federal funds purchased were $0 and $1,350,000 at December 31, 1995 and 1994,
respectively. Short-term borrowings include advances on a flexible line of
credit commitment from the Federal Home Loan Bank (FHLB) for borrowings up to
10% of the Bank's assets. The interest rate on these funds at December 31,
1995 and 1994 was 6.05% and 6.11%, respectively. Advances from the FHLB were
$5,200,000 and $11,450,000 at December 31, 1995 and 1994, respectively and
are secured by qualifying assets of the Bank. Also included in short-term
borrowings are customer repurchase agreements that totalled $335,000 and
$526,000 at December 31, 1995 and 1994, respectively.
Term borrowings are term funds from the Federal Home Loan Bank (FHLB) under
various notes which carry an average fixed rate of interest of 5.75% and
mature in 1998.
NOTE J - FEDERAL INCOME TAXES
Significant components of the provision for income taxes attributable to
operations were as follows (in 000's):
<TABLE>
<CAPTION>
December 31
----------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Current........................... $1,671 $1,671 $1,582
Deferred.......................... (117) (194) (327)
------ ------ ------
$1,554 $1,477 $1,255
====== ====== ======
</TABLE>
Significant components of the Corporation's deferred tax assets and
liabilities were as follows (in 000's):
<TABLE>
<CAPTION>
December 31
--------------------------
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets:
Unrealized depreciation on securities........ $ 0 $ 636
Allowance for loan losses.................... 762 694
Deferred loan fees........................... 64 83
Deferred compensation........................ 176 167
Other........................................ 44 14
------ ------
Total deferred tax assets................. 1,046 1,594
Valuation allowance for deferred
tax assets.................................. (100) (64)
------ ------
Net deferred tax assets................... 946 1,530
------ ------
Deferred tax liabilities:
Unrealized appreciation on securities........ (331) 0
Premises and equipment....................... (246) (233)
Unearned income on loans..................... (116) (154)
Prepaid expenses............................. (83) (123)
------ ------
Total deferred tax liabilities............ (776) (510)
------ ------
Net deferred tax asset......................... $ 170 $1,020
====== ======
</TABLE>
37
<PAGE>
Notes to Consolidated Financial Statements (continued)
NOTE J - FEDERAL INCOME TAXES (continued)
A reconciliation of the provision for income taxes and the amount that would
have been provided at statutroy rates is as follows (in 000's):
<TABLE>
<CAPTION>
December 31
---------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Provision at statutory rates on pretax income... $1,687 $1,764 $1,647
Effect of tax-exempt income..................... (275) (250) (303)
Effect of non-deductible merger expenses........ 111 0 0
Other........................................... 31 (37) (89)
------ ------ ------
$1,554 $1,477 $1,255
====== ====== ======
</TABLE>
The income tax provision includes $(3,000) in 1995, $63,000 in 1994, and
$3,000 in 1993, of income tax expenses (benefits) related to securities gains
(losses) of $(10,000), $188,000 and $10,000, respectively.
NOTE K - STOCK OPTION PLANS
The Corporation adopted the 1995 Stock Option Plan for Non-Employee Directors
and the 1995 Stock Incentive Plan on March 28, 1995. 190,000 shares of common
stock are covered by the Plans. The Stock Option Plan for Non-Employee
Directors provides for each director of the Corporation, who is not an
employee, to receive each year an option to purchase 200 shares of common
stock at an exercise price of 100% of the fair market value of the stock on
such date. The options are exercisable immediately upon grant. The Stock
Incentive Plan provides for the granting of awards by a committee of the Board
to officers and other employees of the Corporation to purchase shares of
common stock at an exercise price of 100% of the fair market value of the
stock on such date. Options are deemed 100% vested one year after the date of
the grant.
Bankers granted 8,899 and 4,820 options in 1994 and 1993 respectively to
directors and certain executive officers. These options to purchase Bankers
common stock were converted into options to acquire shares of the Corporation
as set forth under the terms of the merger agreement.
Stock option transactions under the plan were as follows:
<TABLE>
<CAPTION>
December 31
----------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Options outstanding at beginning of year................... 13,505 4,606 0
Options granted during year................................ 8,300 8,899 4,820
Options exercised at $12.00 to $18.14 per share............ (3,437) 0 (214)
------ ------ -----
Options outstanding at end of year......................... 18,368 13,505 4,606
====== ====== =====
Options exercisable at December 31 at $12.00
to $25.13 per share....................................... 12,468
======
Options available for grant at December 31................. 181,700
=======
</TABLE>
38
<PAGE>
Notes to Consolidated Financial Statements (continued)
NOTE L - PENSION PLAN AND OTHER EMPLOYEE BENEFIT PLANS
The Corporation has a noncontributory pension plan covering eligible
employees. Benefits are based on the employee's compensation and years of
service. The Corporation's funding policy is to contribute annually amounts
not to exceed the maximum amount deductible for federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future.
The following table sets forth the plan's funded status and amounts recognized
in the consolidated financial statements (in 000's):
<TABLE>
<CAPTION>
December 31
------------------------------
1995 1994
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $1,489 in 1995 and $1,422 in 1994................... $(1,515) $(1,443)
======= =======
Projected benefit obligation for service rendered to date....... $(1,795) $(1,739)
Plan assets at fair value, primarily listed stocks and
U.S. government obligations...................................... 2,277 2,351
------- -------
Plan assets in excess of projected benefit obligation............. 482 612
Unrecognized net gain from past experience different
from that assumed............................................... (72) (184)
Unrecognized net transition asset................................. (164) (190)
------- -------
Prepaid pension cost included in other assets..................... $ 246 $ 238
======= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net pension expense included the following components:
Service cost - benefits earned during the period..................... $ 56 $ 56 $ 53
Interest cost on projected benefit obligation........................ 119 115 103
Actual return on plan assets......................................... (156) (160) (158)
Net amortization and deferral........................................ (26) (27) (33)
---- ----- -----
Net periodic pension cost (income)................................... $ (7) $ (16) $ (35)
==== ===== =====
</TABLE>
The weighted-average discount rate and the rate of increase of future
compensation levels used in determining the actuarial present value of the
projected benefit obligation was 7.25% and 6.00% respectively at December 31,
1995 and 1994. The expected long-term rate of return on plan assets was 7.50%
in 1995, 1994, and 1993.
In 1989, the Corporation established an Employee Stock Ownership Plan (ESOP)
with deferred salary savings (401K) provisions. Employees who qualify may
elect to participate in the 401K portion of the plan. A participating employee
may contribute a maximum of 15% of his/her compensation. The Corporation will
contribute $.25 for each $1.00 up to 4% of compensation that each employee
contributes. Costs charged to expense for the 401K portion of the plan were
$24,000, $17,000, and $15,000 in 1995, 1994, and 1993, respectively. Funding
for the ESOP consisted of cash contributions of $50,000, for each of the years
ended December 31, 1995, 1994, and 1993. The Plan is expected to purchase
shares of Common Stock in the open market as contributions are made to it.
Funding includes contributions from the employees and the Corporation into the
401K portion of the plan and corporate contributions into the ESOP. Purchases
consisted of 4,144, 3,822, and 3,021, shares, at costs of $104,000, $105,000,
and $90,000, for 1995, 1994, and 1993, respectively. Future contributions will
be made at the discretion of the Board of Directors, and will be expensed at
the time amounts are committed.
39
<PAGE>
Notes to Consolidated Financial Statements (continued)
NOTE L - PENSION PLAN AND OTHER EMPLOYEE BENEFIT PLANS (continued)
The Corporation has implemented a nonqualified Executive Supplemental Income
(ESI) Plan for a certain group of officers. Under the provisions of the ESI
Plan, the participating officers of the Corporation have executed agreements
providing each officer a retirement annuity benefit, or beneficiary a salary
continuation benefit in the event of pre-retirement death. At December 31,
1995, the Plan covered 28 officers, and was being funded by life insurance
carried on the lives of these officers. For the years ended December 31, 1995,
1994, and 1993, $8,000, $10,000, and $-0-, respectively, was charged to
operations in connection with this plan.
NOTE M - REGULATORY MATTERS
Dividends are paid by the Corporation from its assets, which are mainly
provided by dividends from the Bank. However, certain regulatory restrictions
exist regarding the ability of the Bank to transfer funds to the Corporation
in the form of cash dividends, loans, or advances. The approval of the
Comptroller of the Currency is required if the total of all dividends declared
by a national bank in any calendar year exceeds the Bank's net profits (as
defined) for that year combined with its retained net profits for the
preceding two calendar years. Under this restriction, the Bank, without prior
regulatory approval, can declare dividends to the Corporation totalling
$2,796,000, plus an additional amount equal to the Bank's net profit for 1996,
up to the date of any such dividend declaration.
Under Federal Reserve regulations, the Bank also is limited as to the amount
it may lend to its affiliates, including the Corporation, unless such loans
are collateralized by specified obligations. At December 31, 1995, the
maximum amount available for transfer from the Bank to the Corporation in the
form of loans approximated 20% of capital stock and surplus.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgements by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth beow) of
total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes, as of
December 31, 1995, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1995, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
Bank's category.
The Bank's actual capital ratios as of December 31, 1995 and the minimum
ratios required for capital adequacy purposes and to be well capitalized under
the prompt corrective action provisions are as follows:
<TABLE>
For Capital
Adequacy To Be Well
Actual Purposes Capitalized
--------- ------------ -----------
<S> <C> <C> <C>
Total capital (to risk weighted assets)............. 20.36% 8.00% 10.00%
Tier 1 capital (to risk weighted assets)............ 19.13 4.00 6.00
Tier 1 capital (to average assets).................. 11.48 3.00 to 5.00 5.00
</TABLE>
40
<PAGE>
Notes to Consolidated Financial Statements
(continued)
NOTE N - STOCKHOLDERS' EQUITY
In 1989, the Corporation established a dividend reinvestment and stock
purchase plan. Common stockholders may participate in the plan, which
provides that additional shares of Common Stock may be purchased with
reinvested dividends at prevailing market prices. To the extent that shares
are not available in Treasury or open market, the Corporation has reserved
200,000 shares of Common Stock to be issued under the dividend reinvestment
plan. The following number of Treasury shares were purchased by the plan:
7,722 in 1995, 7,032 in 1994, and 5,671 in 1993.
In March 1995, the Board of Directors approved a plan to repurchase up to
100,000 shares of the Corporation's common stock in an amount not to exceed
$2,000,000. Repurchases under this program totalled $1,202,000 during 1995.
When treasury shares are reissued, any excess of the average acquisition cost
of the shares over the proceeds from reissuance is charged to surplus.
NOTE O - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of the Bank's
customers. Financial instruments include commitments to extend credit and
standby letters of credit. Standby letters of credit commit the Bank to make
payments on behalf of customers when certain specified future events occur.
Commitments to extend credit are agreements to lend to the customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. Since many of the commitments are expected to expire in one year or
less without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
The Bank's exposure to credit loss is essentially the same for these items as
that involved in extending loans to customers. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
loans to customers. Collateral is obtained based on management's credit
assessment of the particular customer.
The risk of credit loss on off-balance sheet items is considered when
determining the adequacy of the allowance for loan losses. The Bank's maximum
exposure to credit loss for loan commitments (unfunded loans and unused lines
of credit) and standby letters of credit outstanding at December 31, was as
follows (in 000's):
<TABLE>
<CAPTION>
Contract or Notional Amount
-----------------------------
1995 1994
--------- ---------
<S> <C> <C>
Commitments to extend credit:
Consumer............................... $ 17,961 $ 9,822
Real estate and commercial............. 17,850 19,858
Standby letters of credit................ 1,855 1,520
--------- ---------
$ 37,666 $ 31,200
========= =========
</TABLE>
The Bank generally does not charge a fee to enter into standby letters of
credit and unfunded loan commitments. Those commitments at December 31, 1995,
if drawn upon, will be funded at current market rates.
41
<PAGE>
Notes to Consolidated Financial Statements
(continued)
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary of the estimated fair values of the Corporation's financial
instruments are as follows (in 000's):
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks.................... $ 11,356 $ 11,356 $ 10,803 $ 10,803
Securities................................. 108,822 109,413 110,031 109,478
Loans, net of allowance.................... 172,158 173,667 179,822 172,714
Accrued interest receivable................ 2,016 2,016 1,729 1,729
Financial liabilities:
Deposits................................... 253,050 254,093 257,565 254,433
Federal funds purchased and
short-term borrowings..................... 5,535 5,535 13,326 13,326
Term funds borrowed........................ 4,450 4,454 4,450 4,425
Accrued interest payable................... 881 881 1,032 1,032
Off-balance sheet financial instruments:
Commitments to extend credit................ 0 0 0 0
Standby letters of credit................... 0 0 0 0
</TABLE>
NOTE Q - HERITAGE BANCORP, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (in 000's)
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31
----------------------
1995 1994
------- --------
<S> <C> <C>
ASSETS
Cash.............................................. $ 360 $ 653
Securities available for sale..................... 2,855 2,739
Investment in Bank subsidiary..................... 34,923 32,312
-------- --------
TOTAL ASSETS.................................. $ 38,138 $ 35,704
======== ========
LIABILITIES
Other liabilities................................ $ 122 $ 126
STOCKHOLDERS' EQUITY............................... 38,016 35,578
======== ========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.... $ 38,138 $ 35,704
======== ========
</TABLE>
42
<PAGE>
Notes to Consolidated Financial Statements
(continued)
NOTE Q - HERITAGE BANCORP, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (in 000's) (continued)
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Year Ended December 31
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Dividends from Bank subsidiary..................................... $ 2,566 $ 1,612 $ 1,561
Other income....................................................... 37 51 108
Security gains..................................................... 0 126 0
Other expense...................................................... (19) (48) (70)
------- ------- -------
Income before equity in undistributed net income of
subsidiaries ..................................................... 2,584 1,741 1,599
Equity in net income less dividends of Bank subsidiary............. 825 1,971 1,990
------- ------- -------
NET INCOME....................................................... $ 3,409 $ 3,712 $ 3,589
======= ======= =======
STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31
----------------------------
1995 1994 1993
------ ------ -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................................... $ 3,409 $ 3,712 $ 3,589
Undistributed earnings of subsidiary............................... (825) (1,971) (1,990)
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized (gain) on sale of securities............................ 0 (126) 0
Increase (decrease) in other liabilities......................... (38) 44 7
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................ 2,546 1,659 1,606
INVESTING ACTIVITIES
Purchase of securities............................................. (40) (227) (42)
Sales and maturities of securities................................. 0 176 0
Dissolution of non-bank subsidiary................................. 0 0 126
------- ------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES............................................ (40) (51) 84
FINANCING ACTIVITIES
Purchase of treasury stock........................................ (1,285) 0 (34)
Issuance of treasury stock........................................ 255 187 149
Cash dividends.................................................... (1,766) (1,572) (1,447)
Cash paid in lieu of fractional shares............................ (3) (10) 0
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES............................ (2,799) (1,395) (1,332)
------- ------- -------
Increase (decrease) in cash........................................ (293) 213 358
Cash at beginning of year.......................................... 653 440 82
------- ------- -------
CASH AT END OF YEAR............................................... $ 360 $ 653 $ 440
======= ======= =======
</TABLE>
Notes to Consolidated Financial Statements
43
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
------------------------------
Heritage National Bank
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 Number 33-27728 and Form S-8 Numbers 33-34198, 33-91212,
33-91214, 33-91208 and 33-91224 and in the related Prospectuses of our report,
dated January 19, 1996, with respect to the consolidated financial statements of
Heritage Bancorp, Inc., incorporated by reference in the Annual Report on Form
10-K for the year ended December 31, 1995.
BEARD & COMPANY, INC.
Reading, Pennsylvania
March 21, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 11,356
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 82,627
<INVESTMENTS-CARRYING> 26,195
<INVESTMENTS-MARKET> 26,786
<LOANS> 175,367
<ALLOWANCE> 3,209
<TOTAL-ASSETS> 303,243
<DEPOSITS> 253,050
<SHORT-TERM> 5,535
<LIABILITIES-OTHER> 2,192
<LONG-TERM> 4,450
0
0
<COMMON> 10,006
<OTHER-SE> 28,010
<TOTAL-LIABILITIES-AND-EQUITY> 303,243
<INTEREST-LOAN> 16,603
<INTEREST-INVEST> 6,612
<INTEREST-OTHER> 15
<INTEREST-TOTAL> 23,230
<INTEREST-DEPOSIT> 7,990
<INTEREST-EXPENSE> 8,777
<INTEREST-INCOME-NET> 14,453
<LOAN-LOSSES> 310
<SECURITIES-GAINS> (10)
<EXPENSE-OTHER> 10,927
<INCOME-PRETAX> 4,963
<INCOME-PRE-EXTRAORDINARY> 4,963
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,409
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.73
<YIELD-ACTUAL> 5.24
<LOANS-NON> 1,327
<LOANS-PAST> 1,610
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,012
<CHARGE-OFFS> 183
<RECOVERIES> 70
<ALLOWANCE-CLOSE> 3,209
<ALLOWANCE-DOMESTIC> 1,480
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,729
</TABLE>
