<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) of the
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1996
Commission file number 0-12506
Heritage Bancorp, Inc.
Pennsylvania 23-2228542
120 South Centre Street, Pottsville, PA 17901
(717) 622-2320
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common stock, par value $5.00 per share
2,396,716 shares outstanding as of September 30, 1996
<PAGE>
Heritage Bancorp, Inc.
and its wholly owned subsidiary
-------------------------------
<TABLE>
<CAPTION>
Consolidated Balance Sheets (Unaudited)
- ------------------------------------------------------
(Dollars in thousands) September 30, December 31,
1996 1995
--------------- --------------
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 10,175 $ 11,356
Securities:
Held to maturity (fair value 1996 - $21,650;
fair value 1995 - $26,414) 21,475 26,195
Available for sale 93,387 82,627
--------------- --------------
114,862 108,822
Loans:
Commercial, financial, and agricultural 84,756 75,378
Real estate - mortgage and construction 66,870 62,018
Consumer 43,661 38,880
--------------- --------------
195,287 176,276
Less: Unearned income (469) (909)
Allowance for loan losses (3,246) (3,209)
--------------- --------------
Net loans 191,572 172,158
Premises and equipment, net of accumulated depreciation
(1996 - $6,983; 1995 - $6,465) 5,464 5,380
Accrued income receivable and other 6,554 5,527
--------------- --------------
$ 328,627 $ 303,243
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest bearing $ 30,723 $ 30,400
Interest bearing 219,965 222,650
--------------- --------------
Total deposits 250,688 253,050
Short term borrowings and and securities sold under
agreements to repurchase 32,713 5,535
Term funds borrowed 4,450 4,450
Other liabilities 2,037 2,192
--------------- --------------
Total liabilities 289,888 265,227
Stockholders' Equity:
Preferred stock, $25 par value; 10,000,000 shares
authorized and unissued
Common stock, $5 par value; authorized 10,000,000 shares
issued 1996 - 2,501,052; 1995 - 2,001,173 12,505 10,006
Surplus 669 660
Retained earnings 27,755 28,064
Treasury stock, at cost (1996 - 104,336 shares;
1995 - 60,593 shares) (2,013) (1,298)
Net unrealized appreciation (depreciation ) on securities
available for sale, net of tax 1996 - ($60); 1995 - $159 (177) 584
--------------- --------------
Total stockholders' equity 38,739 38,016
--------------- --------------
$ 328,627 $ 303,243
=============== ==============
</TABLE>
2
<PAGE>
Heritage Bancorp, Inc.
and its wholly owned subsidiary
-------------------------------
<TABLE>
<CAPTION>
Consolidated Statements of Income (Unaudited)
- -------------------------------------------------------------
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 4,287 $ 4,172 $ 12,460 $ 12,449
Investment and mortgage-backed securities:
Taxable 1,559 1,577 4,567 4,677
Tax-exempt 217 110 581 301
Other 2 - 11 3
---------- ---------- ---------- ----------
Total interest income 6,065 5,859 17,619 17,430
Interest expense:
Deposits 1,879 2,047 5,719 5,901
Borrowings:
Short-term 309 137 530 487
Long-term 63 64 188 193
---------- ---------- ---------- ----------
Total interest expense 2,251 2,248 6,437 6,581
---------- ---------- ---------- ----------
Net interest income 3,814 3,611 11,182 10,849
Provision for loan losses 45 65 135 265
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 3,769 3,546 11,047 10,584
Other income:
Trust department 176 134 597 474
Service charges 173 179 491 510
Other income 151 82 356 224
Security gains - (13) - (7)
---------- ---------- ---------- ----------
Total other income 500 382 1,444 1,201
---------- ---------- ---------- ----------
Other expenses:
Salaries and employee benefits 1,244 1,192 3,695 3,784
Occupancy, net 213 229 659 680
Equipment 192 178 572 588
Communications and supplies 153 174 474 528
Professional fees and outside services 379 281 989 833
Taxes other than income 102 83 291 259
FDIC insurance premiums 1 (17) 2 270
Merger - - - 687
Restructuring - - - 391
Other 196 175 623 650
---------- ---------- ---------- ----------
Total other expenses 2,480 2,295 7,305 8,670
---------- ---------- ---------- ----------
Income before income taxes 1,789 1,633 5,186 3,115
Federal income taxes 515 470 1,500 868
---------- ---------- ---------- ----------
Net income $ 1,274 $ 1,163 $ 3,686 $ 2,247
========== ========== ========== ==========
Net income per common share $ 0.53 $ 0.47 $ 1.54 $ 0.91
========== ========== ========== ==========
</TABLE>
3
<PAGE>
Heritage Bancorp, Inc.
and its wholly owned subsidiary
-------------------------------
Consolidated Statements of Cash Flows (Unaudited)
- ------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30
1996 1995
----------- -----------
<S> <C> <C>
Operating Activities
- --------------------
Net income $ 3,686 $ 2,247
Adjustments to reconcile net cash provided by
operating activities:
Provisions for loan losses 135 265
Depreciation 492 461
Losses on sales of equipment 2 -
Amortization of securities' premiums and
accretion of discounts 78 80
Realized losses on sales of securities - 7
Increase in accrued income receivable
and other assets (636) (427)
Decrease in interest payable and other
liabilities (155) (256)
----------- -----------
Net cash provided by operating activities 3,602 2,377
----------- -----------
Investing Activities
- --------------------
Securities held to maturity:
Proceeds from called / matured securities 6,715 5,146
Purchases (1,998) (5,774)
Securities available for sale:
Proceeds from called / matured securities and
principal repayments 8,222 6,496
Proceeds from sales 401 8,343
Purchases (20,610) (11,613)
Net (increase) decrease in loans (19,549) 6,607
Proceeds from sales of equipment 8 -
Purchases of equipment (586) (248)
----------- -----------
Net cash provided by / (used in) investing activities (27,397) 8,957
----------- -----------
Financing Activities
- --------------------
Net decrease in demand deposits, N.O.W. (2,874) (14,711)
accounts, and savings accounts
Net increase in time deposits 512 7,954
Net increase (decrease) in short-term borrowings 27,178 (4,438)
Purchase of treasury stock (927) (1,285)
Issuance of treasury stock 220 156
Cash dividends (1,495) (1,324)
----------- -----------
Net cash provided by / (used in) financing activities 22,614 (13,648)
----------- -----------
Decrease in cash and cash equivalents (1,181) (2,314)
Cash and cash equivalents at the beginning of the year 11,356 10,803
----------- -----------
Cash and cash equivalents at September 30 $ 10,175 $ 8,489
=========== ===========
</TABLE>
4
<PAGE>
Heritage Bancorp, Inc.
and its wholly-owned subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
Note A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. It is suggested that they be read in conjunction with the
financial statements and notes thereto incorporated by reference in the
Corporation's 1995 Annual Report and on Form 10-K. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and nine month periods ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996.
Note B - SIGNIFICANT ACCOUNTING POLICIES
Earnings per share:
Earnings per share is based on the weighted average shares outstanding as
follows:
<TABLE>
<CAPTION>
1996 1995
----- ----
<S> <C> <C>
Third quarter 2,393,391 2,450,308 *
Year-to-date 2,400,432 2,453,789 *
</TABLE>
* Weighted average shares outstanding have been restated to give effect to a
5-for-4 stock split in the form of a 25% stock dividend issued May 24, 1996.
5
<PAGE>
Management's Discussion and Analysis
FINANCIAL CONDITION
The Corporation functions as a financial intermediary, therefore, trends in its
sources and uses of funds should be examined when reviewing financial condition.
Interest rates are a primary economic factor that affect these trends. In 1996,
the average prime rate dropped 53 basis points to 8.28% compared to 8.81% for
the nine months ended September 30, 1995. The Corporation maintains a slightly
positive GAP position, therefore the lower interest rate trend has had a
negative impact on net interest income. However, the increased volume in loans
has generated interest income in excess of the negative impact that the lower
market rates and competitive pricing have had.
LOANS
Net loans increased $19,414,000, or 11.28%, during the nine months ended
September 30, 1996 to $191,572,000. Increased marketing efforts and a
favorable rate environment have provided significant opportunities to generate
new loan volume. Commercial and retail loans have increased $9,378,000, or
12.44%, and $9,633,000, or 9.55%, respectively.
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the nine months ended September 30,
1996 and 1995 were as follows (in 000's):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Balance at beginning of year $ 3,209 $ 3,012
Recoveries of loans 216 62
Provision charged to operations 135 265
Loans charged off (314) (140)
-------- --------
Balance at end of period $ 3,246 $ 3,199
======== ========
</TABLE>
The following table summarizes the Corporation's nonaccrual, past due, and
restructured loans at September 30, 1996 and December 31, 1995 (in 000's).
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Loans on nonaccrual $ 969 $ 1,327
Accruing loans past due 90+ days 1,318 1,610
Restructured loans - -
-------- --------
Total $ 2,287 $ 2,937
======== ========
</TABLE>
As of September 30, 1996 management has identified $367,000 in loans that are
considered potential problem loans. A potential problem loan is any loan
specifically identified in management's reserve analysis that is not included
in the above table.
6
<PAGE>
Information with respect to impaired loans through September 30, 1996 and 1995
(in 000's):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Loans receivable for which there is a related allowance for loan losses $ 896 $ 131
Loans receivable for which there is no related allowance for loan losses 73 499
--------- ---------
Total impaired loans $ 969 $ 630
========= =========
Related allowance for loan losses $ 335 $ 35
========= =========
Average recorded balance of these impaired loans $ 1,051 $ 623
========= =========
Interest income recognized on these impaired loans $ 9 $ 28
========= =========
</TABLE>
The provision for loan losses for the three and nine months ended September 30,
1996 was $45,000 and $135,000, respectively, compared to $65,000 and $265,000
for the same periods in 1995. Management monitors the credit quality of its
portfolio on an ongoing basis to determine sufficient levels of reserve. The
process includes an evaluation of 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. As of September 30, 1996, management has concluded that the
allowance is adequate. The allowance for loan losses was 1.69% and 1.85% of
net loans outstanding at September 30, 1996 and 1995.
SECURITIES
The securities portfolio increased $6,040,000 or 5.55% compared to the December
31, 1995 balance of $108,822,000. The increase was primarily due to strategic
balance sheet management through leveraging, whereby security purchases were
funded through borrowings from the Federal Home Loan Bank. The remainder of
purchases in 1996 were to replace called/matured securities. In prior years,
state and municipal securities were classified as held to maturity. In order to
increase flexibility for portfolio management, the securities purchased this
year are being classified in the available for sale category.
DEPOSITS
Total deposits decreased $2,362,000, or .93%, to $250,688,000 during the nine
months ended September 30, 1996. During the last quarter, deposits declined
$4,122,000. The majority of the decrease can be attributed to a few customers
operating in their normal course of business. In addition, there were a large
number of accounts that declined as the result of tax payments during the
quarter. Management is focusing on marketing efforts and possible rate changes
to attract new depositors. The lower level of deposits has resulted in the use
of borrowings from the Federal Home Loan Bank in order to fund the significant
level of loan volume and investment purchases.
SHORT TERM BORROWINGS
Federal Home Loan Bank borrowings increased $27,049,000 compared to the December
31, 1995 balance of $5,200,000. As mentioned above, the level of borrowings
was necessary for the funding of loan demand and security purchases. This
source of funds carry a higher cost than deposits, therefore, the margin was
slightly lower in the third quarter.
7
<PAGE>
LIQUIDITY
The Corporation monitors its liquidity position as a percent of net liquid
assets to total assets. At September 30, 1996 the liquidity ratio was 6.36%,
which exceeds the minimum target of 3.00%. The Corporation maintains liquidity
through its available for sale securities portfolio, which management considers
extremely liquid. The liquidity of this portfolio, the Bank's core deposits,
credit facilities which have been arranged through the Federal Home Loan Bank
and potential repurchase agreements with a major investment firm provide the
Corporation with funds necessary to meet loan demand or deposit run-off.
CAPITAL
The Corporation is required to maintain minimum amounts of capital to total
"risk-weighted" assets, as defined by the banking regulators. At September 30,
1996, the Corporation is required to have minimum Tier 1 and total capital
ratios of 4.00% and 8.00%, respectively. The Corporation's actual ratios at
that date were 19.35% and 20.60%, respectively, which significantly exceed the
requirements. The Corporation's leverage ratio at September 30, 1996 was
12.51%.
RESULTS OF OPERATIONS
Net income for the third quarter of 1996 was $1,274,000 ($.53 per share)
compared to $1,163,000 ($.47 per share) in 1995. Nine month earnings were
$3,686,000 ($1.54 per share), a 64.04% increase over 1995 results of $2,247,000
($.91 per share). In 1995 the Corporation incurred $822,000, net of taxes, in
merger and restructuring costs. Increased loan volume, efficiencies gained from
the merger with Banker's Financial Services Corporation and a reduction in FDIC
premiums contributed to the increase in earnings in 1996.
NET INTEREST INCOME
Net interest income was $3,814,000 for the three months and $11,182,000 for the
nine months ended September 30, 1996. This represents an increase of $203,000,
or 5.62%, and $333,000, or 3.07%, over the same periods in 1995. While interest
rates decreased, average loan volume increased by $6,000,000. This increase in
loan volume offset the decrease in yield of 28 basis points on the loan
portfolio from competitive pricing and lower market rates. Average investments
increased slightly, however purchases of state and municipal securities were
made to replace maturing Agency and US Treasury securities. This was a primary
reason for the improved yield, on a fully taxable equivalent basis, of 24 basis
points on the portfolio. Funding sources were less expensive for the
Corporation in 1996. The local market maintained very low deposit rates which
allowed the Corporation to sustain a strong margin. Also, the average rate on
overnight borrowings was 62 basis points lower in 1996, which kept the related
interest expense to an increase of only $43,000 through September, despite an
increase in the average balance of over $2,000,000.
OTHER INCOME
Trust income increased $42,000, or 31.34%, for the three months and $123,000, or
25.95%, for the nine months ended September 30, 1996. This was the result of
increased fees due to higher asset values of existing trust accounts, a $57,000
increase in estate fees, and additional fees on new accounts opened in 1996.
8
<PAGE>
The "other" category increased $69,000, or 84.15% and $132,000, or 58.93% for
the three and nine month periods ended September 30, 1996, compared to the same
periods in 1995. In the third quarter the Corporation recognized $38,000 in
income for the increase in the cash surrender value of officer life insurance
policies. The Corporation did not record any of the income related to several
policies in 1995 due to the uncertainty of their level of earnings. The
remaining increase is primarily due to an increase in late fees on loans and
loan related commissions.
OTHER EXPENSES
Other expenses were $2,480,000 and $7,305,000 for the three and nine months
ended September 30,1996. This represents an increase of $185,000, or 8.06%, and
a decrease of $1,365,000, or 15.74%, from the respective periods in 1995.
Salaries and employee benefits increased $52,000, or 4.36%, and decreased
$89,000, or 2.35%, for the three and nine months ended September 30, 1996,
compared to the respective periods in 1995. The expense for the year is lower
because the Corporation offered an early-retirement package at the beginning of
the third quarter of 1995 as part of a re-engineering plan. Therefore, the
Corporation has had fewer employees for the first half of 1996 than in 1995.
The quarterly increase is attributed to an increase in the number of employees
compared to the third quarter of 1995, inflationary increases in wages, and
additional performance compensation associated with higher earnings.
Professional fees and other outside services increased $98,000, or 34.88%, and
$156,000, or 18.73%, for the three and nine months ended September 30, 1996.
The majority of this increase relates to an increase in advertising expense
compared to the respective periods in 1995. The Corporation has initiated an
aggressive marketing campaign which began with significant training of employees
and market research. The Corporation enlisted outside consultants to aide in
this process.
Communications and supplies decreased $21,000, or 12.07%, and $54,000, or
10.23%, for the three and nine months ended September 30, 1996. The majority of
the decrease relates to significant supply purchases and write-offs that were
necessary in 1995 as a result of the name change of the Corporation.
FDIC insurance premiums totalled $2,000 for the nine months ended September 30,
1996 which represents a decrease of $268,000. During 1995, the FDIC
restructured its assessment schedule after the Bank Insurance Fund was
determined to be adequately funded. The Bank was assessed at the statutory
minimum for the nine months ended September 30, 1996. On September 30, 1996,
President Clinton signed into law the Omnibus spending bill which includes
provisions for assessing BIF and SAIF insured institutions in preparation for
merging the two insurance funds. The assessment schedule defines a rate of 1.29
basis points for the years 1997 to 2000 and 2.43 basis points for the years 2000
to 2017. Based on current levels of deposits and capitalization ratios, the
Corporation is estimating $37,000 in FDIC premiums for 1997.
The merger and restructuring expenses incurred in 1995 were a result of the
merger with Banker's Financial Services Corporation. There were no such
expenses incurred in 1996.
The "other" category increased $21,000, or 12.00%, and decreased $27,000, or
4.15%, for the three and nine months ended September 30, 1996 compared to the
respective periods in 1995. During the third quarter, the Corporation incurred
a $7,000 loss as the result of a robbery at one of the community office
locations. For the year, lower insurance premiums due to the consolidation of
insurance policies resulted in $24,000 in savings. ORE related expenses were
$39,000 lower in 1996 compared to the same period in 1995 because the majority
of the selling expenses were offset by the sale of the properties. Offsetting
these decreases were increases in credit card point redemptions and in credit
report costs compared to 1995.
9
<PAGE>
FEDERAL INCOME TAXES
The provision for federal income taxes was $515,000 and $1,500,000 for the three
and nine months ended September 30, 1996 which represents an increase of $45,000
or 9.57% and $632,000 or 72.81% compared to the respective periods in 1995.
This variance is due to increased earnings in 1996. Effective tax rates were
28.92% and 27.87% for the nine month periods ended September 30, 1996 and 1995
respectively. The increase in effective rates is due to tax-exempt interest
income from loans and securities comprising a lower percentage of income before
income taxes in 1996 compared to 1995.
10
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K - Not Applicable
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
HERITAGE BANCORP, INC.
(Registrant)
- ---------------- ------------------------------------
(Date) Allen E. Kiefer, President and C.E.O.
- ---------------- ------------------------------------
(Date) Guy H. Boyer, Secretary/Treasurer
- ---------------- ------------------------------------
(Date) David L. Scott, Chief Accounting Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 10,175
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 93,387
<INVESTMENTS-CARRYING> 21,475
<INVESTMENTS-MARKET> 21,650
<LOANS> 194,818
<ALLOWANCE> 3,246
<TOTAL-ASSETS> 328,627
<DEPOSITS> 250,688
<SHORT-TERM> 32,713
<LIABILITIES-OTHER> 2,037
<LONG-TERM> 4,450
0
0
<COMMON> 12,505
<OTHER-SE> 26,234
<TOTAL-LIABILITIES-AND-EQUITY> 328,627
<INTEREST-LOAN> 12,460
<INTEREST-INVEST> 5,148
<INTEREST-OTHER> 11
<INTEREST-TOTAL> 17,619
<INTEREST-DEPOSIT> 5,719
<INTEREST-EXPENSE> 6,437
<INTEREST-INCOME-NET> 11,182
<LOAN-LOSSES> 135
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,861
<INCOME-PRETAX> 5,186
<INCOME-PRE-EXTRAORDINARY> 5,186
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,686
<EPS-PRIMARY> 1.54
<EPS-DILUTED> 1.54
<YIELD-ACTUAL> 5.09
<LOANS-NON> 969
<LOANS-PAST> 1,318
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 367
<ALLOWANCE-OPEN> 3,209
<CHARGE-OFFS> 314
<RECOVERIES> 216
<ALLOWANCE-CLOSE> 3,246
<ALLOWANCE-DOMESTIC> 1,114
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,132
</TABLE>
