<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) of the
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1997
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
4,773,927 shares outstanding as of June 30, 1997
<PAGE>
Heritage Bancorp, Inc.
and its wholly owned subsidiary
-------------------------------
<TABLE>
<CAPTION>
Consolidated Balance Sheets (Unaudited)
- -----------------------------------------------------------------
(Dollars in thousands) June 30, December 31,
1997 1996
------------ ------------
ASSETS
- ------
<S> <C> <C>
Cash and due from banks $ 9,339 $ 9,463
Securities:
Held to maturity (fair value 1997 - $17,588;
fair value 1996 - $19,717) 17,395 19,460
Available for sale 95,047 95,222
------------ ------------
112,442 114,682
Loans receivable:
Commercial, financial, and agricultural 101,495 95,135
Real estate - mortgage and construction 70,939 68,102
Consumer 48,544 45,830
------------ ------------
220,978 209,067
Less: Unearned income (232) (354)
Allowance for loan losses (3,106) (3,071)
------------ ------------
Net loans 217,640 205,642
Premises and equipment, net of accumulated
depreciation 5,133 5,331
Accrued income receivable and other 7,037 6,836
------------ ------------
$ 351,591 $ 341,954
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest bearing $ 32,608 $ 31,458
Interest bearing 224,975 222,786
------------ ------------
Total deposits 257,583 254,244
Short term borrowings and securities sold under
agreements to repurchase 15,942 15,952
Term funds borrowed 34,450 29,450
Other liabilities 2,233 2,227
------------ ------------
Total liabilities 310,208 301,873
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 1997 - 5,002,104; 1996 - 2,501,052
shares 25,011 12,505
Surplus 728 668
Retained earnings 17,506 28,474
Treasury stock, at cost (1997 - 228,177 shares;
1996 - 100,791 shares) (2,342) (1,961)
Net unrealized appreciation on securities
available for sale, net of tax 480 395
------------ ------------
Total stockholders' equity 41,383 40,081
------------ ------------
$ 351,591 $ 341,954
============ ============
</TABLE>
2
<PAGE>
Heritage Bancorp, Inc.
and its wholly owned subsidiary
-------------------------------
Consolidated Statements of Income (Unaudited)
- --------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 4,907 $ 4,146 $ 9,609 $ 8,173
Investment and mortgage-backed securities:
Taxable 1,507 1,501 3,023 3,008
Tax-exempt 256 196 495 364
Other 1 6 1 9
------------ ------------ ------------ ------------
Total interest income 6,671 5,849 13,128 11,554
Interest expense:
Deposits 1,888 1,885 3,748 3,840
Borrowings:
Short-term 279 164 531 221
Long-term 470 63 851 125
------------ ------------ ------------ ------------
Total interest expense 2,637 2,112 5,130 4,186
------------ ------------ ------------ ------------
Net interest income 4,034 3,737 7,998 7,368
Provision for loan losses 45 45 90 90
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 3,989 3,692 7,908 7,278
Other income:
Trust department 184 194 477 421
Service charges 178 158 349 318
Other income 151 105 259 205
Security gains 8 0 141 0
------------ ------------ ------------ ------------
Total other income 521 457 1,226 944
------------ ------------ ------------ ------------
Other expenses:
Salaries and employee benefits 1,334 1,237 2,642 2,451
Occupancy, net 194 200 422 446
Equipment 199 194 403 380
Communications and supplies 172 154 356 321
Professional fees and outside services 263 257 624 456
Marketing and advertising 99 76 177 154
Taxes other than income 91 90 182 189
FDIC insurance premiums 9 0 16 1
Other 224 207 510 427
------------ ------------ ------------ ------------
Total other expenses 2,585 2,415 5,332 4,825
------------ ------------ ------------ ------------
Income before income taxes 1,925 1,734 3,802 3,397
Federal income taxes 574 503 1,119 985
------------ ------------ ------------ ------------
Net income $ 1,351 $ 1,231 $ 2,683 $ 2,412
============ ============ ============ ============
Net income per common share $ 0.28 $ 0.26 $ 0.56 $ 0.50
============ ============ ============ ============
</TABLE>
3
<PAGE>
Heritage Bancorp, Inc.
and its wholly owned subsidiary
-------------------------------
Consolidated Statements of Cash Flows (Unaudited)
- --------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997 1996
------------ ------------
<S> <C> <C>
Operating Activities
- --------------------
Net income $ 2,683 $ 2,412
Adjustments to reconcile net cash provided by
operating activities:
Provision for loan losses 90 90
Depreciation 358 324
(Gains)/losses on sales of equipment 6 (6)
Amortization of securities' premiums and
accretion of discounts, net 24 55
Realized gains on sales of securities (141) 0
Increase in accrued income receivable
and other assets (255) (674)
Increase (decrease) in interest payable and other liabilities 6 (232)
------------ ------------
Net cash provided by operating activities 2,771 1,969
------------ ------------
Investing Activities
- --------------------
Securities held to maturity:
Proceeds from called/matured securities 2,055 4,015
Purchases 0 (1,998)
Securities available for sale:
Proceeds from called/matured securities and
principal repayments 5,640 6,027
Proceeds from sales 2,966 8
Purchases (8,165) (14,927)
Net increase in loans receivable (12,088) (13,125)
Proceeds from sales of equipment 30 8
Purchases of equipment (196) (416)
------------ ------------
Net cash used in investing activities (9,758) (20,408)
------------ ------------
Financing Activities
- --------------------
Net increase in demand deposits, N.O.W 787 1,483
accounts, and savings accounts
Net increase in time deposits 2,552 277
Net increase (decrease) in short-term borrowings (10) 18,619
Term borrowings 5,000 0
Purchase of treasury stock (571) (839)
Issuance of treasury stock 250 131
Cash dividends (1,145) (967)
------------ ------------
Net cash provided by financing activities 6,863 18,704
------------ ------------
Increase (decrease) in cash and cash equivalents (124) 265
Cash and cash equivalents at the beginning of the year 9,463 11,356
------------ ------------
Cash and cash equivalents at June 30 $ 9,339 $ 11,621
============ ============
</TABLE>
4
<PAGE>
Heritage Bancorp, Inc.
and its wholly-owned subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1997
Note A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended
June 30, 1997 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1997.
Note B - SIGNIFICANT ACCOUNTING POLICIES
Earnings per share:
Earnings per share is based on the weighted average shares outstanding as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Second quarter* 4,770,399 4,786,642
Year-to-date* 4,776,453 4,808,206
</TABLE>
*Weighted average shares outstanding have been restated to give effect to a 2-
for-1 stock split in the form of a 100% stock dividend declared April 8, 1997,
paid May 23, 1997.
Note C - STOCK OPTION PLANS
Effective April 15, 1997, under the terms of the 1995 Stock Option Plan for Non-
employee Directors, the Corporation awarded certain directors a total of 7,000
stock options at an exercise price of $13.25, per share which was the closing
market price on that day, after being adjusted for the stock split.
5
<PAGE>
Management's Discussion and Analysis
FINANCIAL CONDITION
The Corporation functions as a financial intermediary, therefore trends in its
sources and uses of funds should be examined when reviewing financial condition.
The primary reason for the increased profitability is the additional income
generated from the significant loan growth that occurred in the second half of
1996 and the early part of 1997. It is important to note that credit quality
standards were not compromised to achieve this growth, which is evidenced by a
16.3% decrease in non-performing loans since June 30, 1996.
LOANS RECEIVABLE
Net loans increased $11,998,000 or 5.83% first the first half of 1997 to
$217,640,000. The increase in loans was directly attributable to increased
marketing efforts, favorable economic conditions in our market area, and
competitive pricing. Management expects this trend to continue throughout the
second half of 1997 providing that the economic environment remains relatively
stable.
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the six months ended June 30, 1997
and 1996 were as follows (in 000's):
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Balance at beginning of year $ 3,071 $ 3,209
Recoveries of loans 16 211
Provision charged to operations 90 90
Loans charged off (71) (274)
---------- -----------
Balance at end of period $ 3,106 $ 3,236
========== ===========
</TABLE>
The following table summarizes the Corporation's nonaccrual, past due, and
restructured loans at June 30, 1997 and December 31, 1996 (in 000's).
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Loans on nonaccrual status $ 954 $ 893
Accruing loans past due 90+ days 1,190 273
Restructured loans - -
---------- -----------
Total $ 2,144 $ 1,166
========== ===========
</TABLE>
Included in accruing loans past due 90 plus days as of June 30, 1997 is a loan
with an outstanding balance of $572,325 that was brought current during the
first week of July.
As of June 30, 1997 and 1996, management has identified $391,000 and $403,000,
respectively, 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 June 30, 1997 and 1996
(in 000's):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Impaired loans for which there is a related allowance for loan losses $ 487 $ 564
Impaired loans for which there is no related allowance for loan losses 467 371
----------- -----------
Total impaired loans $ 954 935
=========== ===========
Related allowance for loan losses $ 165 $ 195
=========== ===========
Average recorded balance of these impaired loans $ 992 $ 1,101
=========== ===========
Interest income recognized on these impaired loans $ 36 $ 36
=========== ===========
</TABLE>
The provision for loan losses was $90,000 for the six months ended June 30, 1997
and 1996. 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 June
30, 1997, management believes the current level of the allowance is adequate,
and anticipates future provisions for loan losses will be consistent with 1996
levels. The allowance for loan losses was 1.43% and 1.75% of net loans
outstanding at June 30, 1997 and 1996. The allowance for loan losses to
nonperforming loans was 144.85% and 126.34% at June 30, 1997 and 1996,
respectively.
SECURITIES
The securities portfolio decreased $2,240,000 or 1.95% compared to the
December 31, 1996 ending balance of $114,682,000. The proceeds from the
maturities and principal repayments has primarily been used to fund loan growth.
DEPOSITS
The Corporation was able the maintain stable deposit levels throughout the first
half of 1997. Total deposits increased $3,339,000 or 1.31% to $257,583,000 as
of June 30, 1997 compared to December 31, 1996. During the same period last
year deposits increased $1,760,000 or .70%.
BORROWINGS
Federal Home Loan Bank term funds borrowed increased $5,000,000 or 16.98%
compared to December 31, 1996 of $29,450,000. This increase was primarily due
to fund increased loan demand as deposit growth and security repayments were not
sufficient to cover the increase in loan volume. Borrowings from the FHLB have
provided an alternative source of funds at a lower cost then paying premium
rates to attract deposits that would be deemed volatile in nature.
LIQUIDITY
The Corporation maintains liquidity through its available for sale securities
portfolio, which management considers extremely liquid. The liquidity of this
portfolio, the Bank's core deposits, credit facilities which have been arranged
through the Federal Home Loan Bank and potential repurchase agreements with a
major investment firm provide the Corporation with funds necessary to meet loan
demand or deposit run-off.
7
<PAGE>
CAPITAL
The Corporation is required to maintain minimum amounts of capital to total
"risk-weighted" assets, as defined by the banking regulators. At June 30, 1997,
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 18.41% and 19.67%, respectively, which significantly exceed the
requirements. The Corporation's leverage ratio at June 30, 1997 was 11.72%.
RESULTS OF OPERATIONS
Net income for the second quarter of 1997 was $1,351,000 ($.28 per share)
compared to $1,231,000 ($.26 per share) in 1996, a 9.75% increase. Earnings for
the six month period ended June 30, 1997 were $2,683,000 ($.56 per share), a
11.24 % increase over 1996 results of $2,412,000 ($.50 per share). The primary
reason for the increased profitability is the additional income generated from
the significant loan growth throughout 1996 and during the first half of 1997.
Increases in overhead expenses were for outside consulting engagements designed
to increase the profitability levels of all income producing departments within
the Corporation. These costs were offset by increases in trust fees, other
income and security gains.
NET INTEREST INCOME
Net interest income was $4,034,000 and $7,998,000 for the three and six months
ended June 30, 1997, an increase of $297,000 or 7.95% and $630,000 or 8.55%,
over the same period in 1996. The increase in interest income was primarily due
an average increase in net loan volume of $33,976,000 or 19.2%. This increase
resulted in $1,436,000 in additional interest income. Average investments also
increased $3,882,000 in addition to a 14 basis point increase in the yield,
resulting in $138,000 in additional interest income for the six months ended
June 30, 1997. Average borrowings, used to fund loan demand, increased
$39,192,000 which resulted in an increase in interest expense of $1,080,000.
The Corporation was able to benefit from a decrease in rate on these borrowed
funds by 16 basis points resulting in a $44,000 decrease in expense. Average
deposits decreased $4,631,000 resulting in a decrease in interest expense of
$92,000 for the six months ended June 30, 1997.
OTHER INCOME
Other income increased $64,000 or 14.00%, for the three months ended June 30,
1997 and $282,000 or 29.87% for the six months ended June 30, 1997 compared to
the respective periods in 1996. Trust department income increased $56,000 or
13.30%, for the six months ended June 30, 1997. The majority of the increase is
the result of an increase in trust assets under management this year versus the
same period last year.
The "other" category increased $46,000 or 43.81% and $54,000 or 26.34% for the
three and six months ended June 30, 1997. The majority of the increase relates
to an increase in gains from the sale of loans to Freddie Mac in addition to
increased commissions on the sale of insurance on mortgage and installment
loans. Also contributing to the increase is fee income from our debit card
program which was introduced during the fourth quarter of 1996.
Security gains increased $8,000 and $141,000 or 100% for the three and six
months ended June 30, 1997. The majority of the gains was the result of a sale
of stock of another financial Corporation that was purchased by a foreign
company.
8
<PAGE>
OTHER EXPENSES
Other expenses were $2,585,000 and $5,332,000 for the three and six months ended
June 30, 1997, an increase of $170,000 or 7.04% and $507,000 or 10.51%, over
the respective period in 1996.
Salaries and employee benefits increased $97,000 or 7.84% and $191,000 or 7.79%
for the three and six months ended June 30, 1997, compared to the respective
periods in 1996. This is due to normal annual salary increases and an increase
in the accrual for employee performance compensation of $87,000 which is based
on projected increase in earnings this year compared to last year.
Professional fees and other outside services increased $6,000 or 2.33% and
$168,000 or 36.84%, for the three and six months ended June 30, 1997 compared to
1996. For the three months ended June 30, 1997 expenses are comparable to the
respective period in 1996. The year-to-date increase over 1996 relates to the
utilization of outside consultants for the reorganization of various
departments. This is in an effort to increase the operating efficiencies and
overall profitability in these areas.
The "other" category increased $17,000 or 8.21% and $83,000 or 19.44% for the
three and six months ended June 30, 1997 compared to the same period in 1996.
The majority of the increase for the three and six months ended June 30, 1997
relates to loan and collection expense. Year-to-date this category increased
$42,000 primarily due to the write-down of ORE assets. Also, directors fees
increased $31,000 due to implementation of a retainer fee during the first
quarter of 1997.
FEDERAL INCOME TAXES
The provision for federal income taxes was $574,000 and $1,119,000 for the three
and six months ended June 30, 1997 which represents an increase of $71,000 or
14.12% and $134,000 or 13.60% over the June 30, 1996 respective periods. This
variance is due to increased earnings in 1997. Effective tax rates were 29.43%
and 29.00% for the six months ended June 30, 1997 and 1996.
9
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K - Not Applicable
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
HERITAGE BANCORP, INC.
(Registrant)
August 13, 1997 /s/ Allen E. Kiefer
- ------------------------ ------------------------------------------
(Date) Allen E. Kiefer,
President & Chief Executive Officer
August 13, 1997 /s/ David L. Scott
- ------------------------ ------------------------------------------
(Date) David L. Scott, CPA
Vice President & Chief Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 9,339
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 95,047
<INVESTMENTS-CARRYING> 17,395
<INVESTMENTS-MARKET> 17,588
<LOANS> 220,746
<ALLOWANCE> 3,106
<TOTAL-ASSETS> 351,591
<DEPOSITS> 257,583
<SHORT-TERM> 15,942
<LIABILITIES-OTHER> 2,233
<LONG-TERM> 34,450
0
0
<COMMON> 25,011
<OTHER-SE> 16,372
<TOTAL-LIABILITIES-AND-EQUITY> 351,591
<INTEREST-LOAN> 9,609
<INTEREST-INVEST> 3,518
<INTEREST-OTHER> 1
<INTEREST-TOTAL> 13,128
<INTEREST-DEPOSIT> 3,748
<INTEREST-EXPENSE> 5,130
<INTEREST-INCOME-NET> 7,998
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 141
<EXPENSE-OTHER> 4,247
<INCOME-PRETAX> 3,802
<INCOME-PRE-EXTRAORDINARY> 3,802
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,683
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
<YIELD-ACTUAL> 4.93
<LOANS-NON> 954
<LOANS-PAST> 1,190
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 391
<ALLOWANCE-OPEN> 3,071
<CHARGE-OFFS> 71
<RECOVERIES> 16
<ALLOWANCE-CLOSE> 3,106
<ALLOWANCE-DOMESTIC> 1,319
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,787
</TABLE>
