<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996 Commission file number 33-45240
-------------- --------
HERITAGE FINANCIAL SERVICES, INC.
---------------------------------
(exact name of Small Business Issuer as Specified in Its Charter)
TENNESSEE 62-1484807
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 JEFFERSON STREET, CLARKSVILLE, TENNESSEE 37040
-------------------------------------------------
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (615) 553-0500
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: Common Stock, 533,653
shares as of May 6, 1996.
Traditional small business disclosure format (check one):
Yes No X
----- -----
<PAGE> 2
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION 10
SIGNATURES 11
</TABLE>
2
<PAGE> 3
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- -----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 6,325 $ 4,513
Available-for-sale securities, at fair value 19,184 21,781
Mortgage loans held for sale 3,262 1,696
Loans 84,904 80,570
Allowance for loan losses (1,329) (1,267)
--------- --------
Net loans 83,575 79,303
Premises and equipment 2,357 2,363
Accrued interest receivable 972 943
Deferred income taxes 432 436
Other real estate 17 207
Other assets 971 720
--------- --------
TOTAL ASSETS $ 117,095 $111,962
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 16,342 $ 16,999
Interest-bearing 86,576 83,059
--------- --------
Total deposits 102,918 100,058
Federal funds purchased 3,180 1,400
Advances from Federal Home Loan Bank 212 221
Accrued interest payable 460 419
Other liabilities 476 517
--------- --------
TOTAL LIABILITIES 107,246 102,615
STOCKHOLDERS' EQUITY:
Common stock, $2 par value 1,069 1,059
Authorized 1,000,000 shares; issued 534,664 shares at
March 31, 1996 and 529,622 shares at December 31, 1995
Additional paid-in capital 4,603 4,495
Retained earnings 4,296 3,801
Unrealized gains (losses) on
available-for-sale securities, net (99) (8)
Less 811 treasury shares at cost (20) -
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 9,849 9,347
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 117,095 $ 111,962
========= =========
</TABLE>
(Note) The consolidated balance sheet at December 31, 1995, has been
derived from the audited financial statements at that date.
See notes to consolidated financial statements.
3
<PAGE> 4
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands,except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
INTEREST INCOME:
Loans, including fees $2,222 $1,697
Investment securities:
Taxable 239 287
Tax-exempt 47 50
------ ------
TOTAL INTEREST INCOME 2,508 2,034
------ ------
INTEREST EXPENSE:
Deposits 1,024 820
Other 37 4
------ ------
TOTAL INTEREST EXPENSE 1,061 824
------ ------
NET INTEREST INCOME 1,447 1,210
Provision for loan losses 105 90
NET INTEREST INCOME AFTER ------ ------
PROVISION FOR LOAN LOSSES 1,342 1,120
------ ------
OTHER INCOME:
Service charges on deposit accounts 316 313
Mortgage banking activities 181 91
Net securities gains 74 -
Brokerage fees 58 13
Other 150 70
------ ------
TOTAL OTHER INCOME 779 487
------ ------
OTHER EXPENSES:
Salaries and employee benefits 679 548
Occupancy 90 61
Furniture and equipment 127 113
Data processing fees 94 54
Advertising and public relations 69 55
Other 283 245
------ ------
TOTAL OTHER EXPENSES 1,342 1,076
------ ------
INCOME BEFORE INCOME TAXES 779 531
Income taxes 283 179
------ ------
NET INCOME $ 496 $ 352
====== ======
NET INCOME PER SHARE $ 0.90 $ 0.66
====== ======
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION> Three Months Ended
March 31,
------------------
1996 1995
--------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $(1,020) $ 398
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in federal funds sold - (1,600)
Proceeds from sale of available-for-sale securities 2,431 -
Maturities and redemptions of available-for-sale securities 203 68
Maturities and redemptions of held-to-maturity securities - 25
Purchase of available-for-sale securities (73) -
Purchase of held-to-maturity securities - (118)
Net increase in loans (4,376) (2,943)
Other, net (82) (65)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,897) (4,633)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 2,860 4,302
Increase (decrease) in federal funds purchased 1,780 (1,120)
Decrease in advances from Federal Home Loan Bank (9) -
Net proceeds from issuance of common stock 113 101
Purchase of treasury shares (20) -
Exercise of stock options 5 -
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,729 3,283
NET INCREASE IN CASH AND DUE FROM BANKS 1,812 (952)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 4,513 4,352
------- -------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 6,325 $ 3,400
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for interest $ 1,020 $ 985
Cash paid during period for income taxes $ 146 $ 56
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Heritage Financial Services, Inc. (Heritage Financial or Company) through its
subsidiary, Heritage Bank (the Bank) and its subsidiaries, provides a full
range of banking services to individual and corporate customers in Montgomery
County, Tennessee and the adjoining counties in Tennessee and Kentucky.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete consolidated financial
statements. The accompanying consolidated financial statements should be read
in conjunction with the notes to the consolidated financial statements
contained in the 1995 annual report on Form 10-KSB. In preparing financial
statements, management is required to make assumptions and estimates which
affect the Company's reported amounts of assets, liabilities and results of
operations. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the three month period ended
March 31, 1996, are not necessarily indicative of the results that may be
expected for the entire year.
2. PER SHARE DATA
Net income per share is determined by dividing net income by the weighted
average number of common shares actually outstanding and common stock
equivalents pertaining to common stock options. The weighted average number of
shares outstanding including common stock equivalents for the three months
ended March 31, 1996 and 1995, were 551,333 and 535,016, respectively.
3. INVESTMENT SECURITIES
Following is a summary of investment securities at March 31, 1996, all of which
are classified as available-for-sale:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
(in thousands)
<S> <C> <C> <C> <C>
U.S. agencies $10,419 $ 5 $(204) $10,220
Mortgage-backed:
U.S. agencies 4,743 44 (69) 4,718
Tax-exempt securities 3,793 84 (10) 3,867
Equity securities 379 - - 379
------- ---- ----- -------
$19,334 $133 $(283) $19,184
======= ==== ===== =======
</TABLE>
6
<PAGE> 7
4. LOANS
A summary of loans outstanding by category at March 31, 1996 follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Commercial, financial and agricultural $35,852
Real estate - construction 11,255
Real estate - 1 to 4 family residential properties 20,129
Real estate - other 6,764
Consumer 10,930
-------
84,930
Less unearned interest (26)
-------
Total loans $84,904
=======
</TABLE>
5. ALLOWANCE FOR LOAN LOSSES
The following table sets forth the changes in the allowance for loan losses:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------
1996 1995
------ -------
(in thousands)
<S> <C> <C>
Balance at beginning of period $1,267 $1,023
Provision charged to operating expenses 105 90
Loan losses:
Loans charged off (44) (26)
Recoveries on loans previously charged off 1 1
------ ------
Balance at end of period $1,329 $1,088
====== ======
</TABLE>
6. DEPOSITS
A summary of deposits at March 31, 1996 follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Noninterest-bearing demand $ 16,342
Interest-bearing demand 28,237
Savings 4,737
Certificates of deposit of $100,000 or more 6,615
Other time deposits 46,987
--------
$102,918
========
</TABLE>
7. RECLASSIFICATIONS
Certain amounts have been reclassified in the previous year's financial
statements to conform with the current year's classifications.
7
<PAGE> 8
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's consolidated results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
interest-earning assets, such as loans and investments, and the interest
expense incurred on interest-bearing liabilities, such as deposits and other
borrowings. The Company also generates non-interest income such as
transactional fees, gain on sale of mortgage loans and commissions from
investment brokerage services. The Company's operating expenses consist
primarily of employee compensation, occupancy expenses and other general and
administrative expenses.
FINANCIAL CONDITION
EARNING ASSETS. At March 31, 1996, earning assets were $107.3 million,
compared to $104 million at December 31, 1995. This increase is due to a $4.3
million increase in portfolio loans and a $1.6 million increase in mortgage
loans held for sale, partially offset by a $2.6 million reduction in
available-for-sale securities.
Loans are the Company's primary earning asset. Management has focused on
increasing the loan composition to total earning assets. Average loans for the
first three months of 1996 were 80.5% of total earning assets compared to 74.5%
during the first three months of 1995.
Low market interest rates prompted the sale of $2.4 million of
available-for-sale securities. Most of the securities sold were
mortgage-backed securities and were backed by higher than market rate loans,
making them more susceptible to prepayment risk. Net gains on the sale of
securities amounted to $74,000. Solid loan demand prompted the reinvestment of
the sales proceeds into portfolio loans.
FUNDING SOURCES. Deposits totaled $102.9 million at March 31, 1996, an
increase of $2.9 million since December 31, 1995. Local markets for deposits
are highly competitive, and during the first three months of 1996 federal funds
purchased was utilized to partially fund loan demand.
NONPERFORMING ASSETS. The level of nonperforming assets at March 31, 1996,
remains low, improving from the level reported at December 31, 1995.
Nonperforming assets at March 31, 1996, were .25% of total loans and other real
estate, down from .52% at December 31, 1995.
CAPITAL. Because of solid performance and conservative capital management, the
Company has a strong capital position. Stockholders' equity was $9.8 million
or 8.41% of total assets at March 31, 1996, compared to $9.3 million or 8.35%
of total assets at December 31, 1995.
8
<PAGE> 9
RESULTS OF OPERATIONS
For the first three months of 1996, the Company reported net income of
$496,000, compared to net income of $352,000 for the first three months of
1995. Net income per share for the first three months of 1996, increased 36%
to $.90, from $.66 for the same 1995 period.
Annualized return on average stockholders' equity for the first three months of
1996 was 20.33% compared to 18.24% for the same 1995 period. Annualized return
on average assets for the first three months of 1996 was 1.78% compared to
1.47% for the same 1995 period.
NET INTEREST INCOME. For the three months ended March 31, 1996, net interest
income increased 19.6% or $237,000 to $1,447,000 as compared to $1,210,000 for
the three months ended March 31, 1995. The increase is primarily attributable
to an increase in average earning assets. Average earnings assets for the
first three months of 1996 were 17.6% or $15.7 million greater than the same
period in 1995.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $105,000 and
$90,000 for the first three months of 1996 and 1995, respectively. Net
chargeoffs to average loans outstanding was .05% ($43,000) and .04% ($25,000)
for the first three months of 1996 and 1995, respectively.
OTHER INCOME. Other income increased $292,000 (60.0%) for the first three
months of 1996 as compared to the same period in 1995. As a percentage of
average assets, other income was .70% and .51% for the first three months of
1996 and 1995, respectively.
OTHER EXPENSES. Other expenses increased $266,000 (24.7%) for the first three
months of 1996 as compared to the same period in 1995. As a percentage of
average assets, other expenses was 1.21% and 1.12% for the first three months
of 1996 and 1995, respectively.
PROVISION FOR INCOME TAXES. Income tax expense of $283,000 for the first three
months of 1996 resulted in an effective income tax rate of 36.3% on pre-tax
income of $779,000. For the same period of 1995, income tax expense of
$179,000 resulted in an effective tax rate of 33.7% on pre-tax income of
$531,000.
9
<PAGE> 10
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule (for SEC use only)
(b) There have been no reports filed on form 8-K during
the quarterly period ended March 31, 1996
10
<PAGE> 11
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
HERITAGE FINANCIAL SERVICES, INC.
(Registrant)
Date May 6, 1996 By /s/ Earl O. Bradley, III
-------------------------- --------------------------------------
Earl O. Bradley, III
President and Chief
Executive Officer
Date May 6, 1996 By /s/ Jack L. Graham
-------------------------- ---------------------------------------
Jack L. Graham
Senior Vice President
and Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HERITAGE FINANCIAL SERVICES, INC. FOR THE THREE MONTHS
ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 6,325
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,184
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 84,904
<ALLOWANCE> (1,330)
<TOTAL-ASSETS> 117,095
<DEPOSITS> 102,918
<SHORT-TERM> 3,180
<LIABILITIES-OTHER> 936
<LONG-TERM> 212
0
0
<COMMON> 1,069
<OTHER-SE> 8,780
<TOTAL-LIABILITIES-AND-EQUITY> 117,095
<INTEREST-LOAN> 2,222
<INTEREST-INVEST> 286
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,508
<INTEREST-DEPOSIT> 1,024
<INTEREST-EXPENSE> 1,061
<INTEREST-INCOME-NET> 1,447
<LOAN-LOSSES> 105
<SECURITIES-GAINS> 74
<EXPENSE-OTHER> 1,342
<INCOME-PRETAX> 779
<INCOME-PRE-EXTRAORDINARY> 779
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 496
<EPS-PRIMARY> .90
<EPS-DILUTED> 0
<YIELD-ACTUAL> 9.34
<LOANS-NON> 120
<LOANS-PAST> 6
<LOANS-TROUBLED> 63
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,267
<CHARGE-OFFS> 44
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 1,329
<ALLOWANCE-DOMESTIC> 1,329
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
