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<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 June 30,1996 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, 533,475 shares
as of August 7, 1996.
Traditional small business disclosure format (check one):
Yes No X
----- -----
<PAGE> 2
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<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>
JUNE 30, DECEMBER 31,
1996 1995
--------- ---------
(Unaudited) (Note)
ASSETS:
<S> <C> <C>
Cash and due from banks $ 3,737 $ 4,513
Available-for-sale securities, at fair value 18,214 21,781
Mortgage loans held for sale 2,573 1,696
Loans 92,079 80,570
Allowance for loan losses (1,430) (1,267)
--------- ---------
Net loans 90,649 79,303
Premises and equipment 2,296 2,363
Accrued interest receivable 1,053 943
Deferred income taxes 550 436
Real estate and other repossessed collateral 53 247
Other assets 918 680
--------- ---------
TOTAL ASSETS $ 120,043 $ 111,962
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 16,040 $ 16,999
Interest-bearing 88,638 83,059
--------- ---------
Total deposits 104,678 100,058
Federal funds purchased 4,065 1,400
Advances from Federal Home Loan Bank 202 221
Accrued interest payable 414 419
Other liabilities 426 517
--------- ---------
TOTAL LIABILITIES 109,785 102,615
STOCKHOLDERS' EQUITY:
Common stock, $2 par value 1,069 1,059
Authorized 1,000,000 shares; issued 534,664 shares at
June 30, 1996 and 529,622 shares at December 31, 1995
Additional paid-in capital 4,603 4,495
Retained Earnings 4,846 3,801
Unrealized gains (losses) on
available-for-sale securities, net (228) (8)
Less 1,189 treasury shares at cost (32) -
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 10,258 9,347
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 120,043 $ 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 Six Months Ended
June 30, June 30,
------------------- ----------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $2,364 $1,772 $4,565 $3,427
Investment securities:
Taxable 223 294 462 581
Tax-Exempt 45 48 92 98
------ ------ ------ ------
TOTAL INTEREST INCOME 2,632 2,114 5,119 4,106
------ ------ ------ ------
INTEREST EXPENSE:
Deposits 1,081 905 2,105 1,707
Other 40 8 77 30
------ ------ ------ ------
TOTAL INTEREST EXPENSE 1,121 913 2,182 1,737
------ ------ ------ ------
NET INTEREST INCOME 1,511 1,201 2,937 2,369
Provision for loan losses 110 116 215 206
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,401 1,085 2,722 2,163
------ ------ ------ ------
OTHER INCOME:
Service charges on deposit accounts 348 327 664 640
Mortgage banking activities 215 103 396 194
Net securities gains 3 - 77 -
Brokerage fees 88 4 146 17
Other 222 154 393 266
------ ------ ------ ------
TOTAL OTHER INCOME 876 588 1,676 1,117
------ ------ ------ ------
OTHER EXPENSES:
Salaries and employee benefits 775 533 1,497 1,087
Occupancy 120 90 233 166
Furniture and equipment 93 90 193 183
Data processing fees 100 84 194 159
Advertising and public relations 83 53 152 108
Other 240 224 484 447
------ ------ ------ ------
TOTAL OTHER EXPENSES 1,411 1,074 2,753 2,150
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 866 599 1,645 1,130
Income taxes 317 227 600 406
------ ------ ------ ------
NET INCOME $ 549 $ 372 $1,045 $ 724
====== ====== ====== ======
NET INCOME PER SHARE $ .99 $ 0.68 $ 1.89 $ 1.34
====== ====== ====== ======
</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>
Six Months Ended
June 30,
----------------------
1996 1995
------- -------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 169 $ 853
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available-for-sale securities 3,429 947
Maturities and redemptions of available-for-sale securities 1,006 362
Maturities and redemptions of held-to-maturity securities - 174
Purchase of available-for-sale securities (1,063) (980)
Purchase of held-to-maturity securities - (118)
Advances to limited liability company - (180)
Net increase in loans (11,561) (8,176)
Other, net (109) (492)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (8,298) (8,463)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 4,620 7,249
Increase (decrease) in federal funds purchased 2,665 (220)
Decrease in advances from Federal Home Loan Bank (19) -
Net proceeds from issuance of common stock 113 104
Purchase of treasury shares (31) -
Exercise of stock options 5 -
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,353 7,133
------- -------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (776) (477)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 4,513 4,352
------- -------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 3,737 $ 3,875
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for interest $ 2,187 $ 1,874
Cash paid during period for income taxes $ 728 $ 561
</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 and six month
periods ended June 30, 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 six months ended
June 30, 1996 and 1995, were 552,579 and 540,308 respectively.
3. INVESTMENT SECURITIES
Following is a summary of investment securities at June 30, 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 $10,721 $ - $ (315) $10,406
Mortgage-backed:
U.S. agencies 4,248 18 (85) 4,181
Tax-exempt securities 3,207 52 (17) 3,242
Equity securities 385 - - 385
------- -------- ------- -------
$18,561 $ 70 $ (417) $18,214
======= ======== ======= =======
</TABLE>
6
<PAGE> 7
4. LOANS
A summary of loans outstanding by category follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(in thousands)
<S> <C> <C>
Commercial, financial and agricultural $38,398 $34,508
Real estate - construction 14,384 9,164
Real estate - 1 to 4 family residential properties 20,072 21,984
Real estate - other 7,785 4,709
Consumer 11,453 10,249
------- -------
92,092 80,614
Less unearned interest (13) (44)
------- -------
Total loans $92,079 $80,570
======= =======
</TABLE>
5. ALLOWANCE FOR LOAN LOSSES
The following tables set forth the changes in the allowance for loan losses:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $1,330 $1,088 $1,267 $1,023
Provision charged to operating 110 116 215 206
Loan losses:
Loans charged off (18) (58) (61) (84)
Recoveries on loans previously
charged off 8 5 9 6
------ ------ ------ ------
Balance at end of period $1,430 $1,151 $1,430 $1,151
====== ====== ====== ======
</TABLE>
6. DEPOSITS
A summary of deposits follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Noninterest-bearing demand $ 16,040 $ 16,999
Interest-bearing demand 27,182 28,051
Savings 4,890 4,806
Certificates of deposit of $100,000 or more 6,842 4,435
Other time deposits 49,724 45,767
-------- --------
$104,678 $100,058
======== ========
</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 and benefits, and other general and
administrative expenses.
FINANCIAL CONDITION
EARNING ASSETS. At June 30, 1996, earning assets were $112.9 million, compared
to $104 million at December 31, 1995. This increase is due to an $11.5 million
increase in portfolio loans and a $0.9 million increase in mortgage loans held
for sale, partially offset by a $3.6 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 six months of 1996 were 81.8% of total earning assets compared to 74.8%
during the first six months of 1995. The increase is attributable to the
continuation of strong loan demand in the market the Company serves.
Securities available-for-sale declined during the six months ended June 30,
1996, as proceeds from securities sold or maturing were mostly reinvested in
portfolio loans. During the first six months of 1996, $77,000 of security
gains were realized. 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. The shift to loans in the earning mix allowed
the Company to achieve higher yields than would have been obtained by leaving
these funds invested in securities.
NONPERFORMING ASSETS. The following table sets forth information regarding the
Company's nonperforming assets at the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
(in thousands)
<S> <C> <C>
Nonperforming loans:
Nonaccrual loans $ 58 $ 120
Accruing loans that are contractually
past due 90 days or more 163 16
Restructured loans 62 77
----- -----
Total nonperforming loans 283 213
Real estate and other repossessed collateral 53 247
----- -----
Total nonperforming assets $ 336 $ 460
===== =====
Nonperforming assets to loans and real estate and
other repossessed collateral 0.35% 0.56%
Allowance for loan losses to nonperforming assets 426% 275%
</TABLE>
8
<PAGE> 9
FUNDING SOURCES. Deposits totaled $104.7 million at June 30, 1996, an increase
of $4.6 million since December 31, 1995. Local markets for deposits are highly
competitive, and during the first six months of 1996 federal funds purchased
was utilized to partially fund loan demand. Due to strong loan demand, it is
anticipated that additional alternative funding sources (Federal funds
purchased and FHLB advances) will be utilized for the remainder of 1996.
CAPITAL. Because of solid performance and conservative capital management, the
Company has a strong capital position. Stockholders' equity was $10.3 million
or 8.55% of total assets at June 30, 1996, compared to $9.3 million or 8.35% of
total assets at December 31, 1995.
RESULTS OF OPERATIONS
For the three months ended June 30, 1996, the Company's net income was
$549,000, compared to net income of $372,000 for the three months ended June
30, 1995. For the six months ended June 30, 1996, net income was $1,045,000,
compared to net income of $724,000 in the same 1995 period. Net income per
share for the first six months of 1996, increased 41% to $1.89, from $1.34 for
the same 1995 period.
The substantial improvement in earnings from last year resulted largely from
growth in earning assets, an increase in other income, and to a lesser extent,
an increase in net interest margin.
NET INTEREST INCOME. For the second quarter of 1996, net interest income was
$1,511,000, up $310,000 (25.8%) from the $1,201,000 for the second quarter last
year. For the six months ended June 30, 1996, net interest income increased
24.0% or $568,000 to $2,937,000 as compared to $2,369,000 for the six months
ended June 30, 1995. The increase is primarily attributable to an increase in
average earning assets. Average earnings assets for the first six months of
1996 were 18.0% or $16.3 million greater than the same period in 1995.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $110,000 in the
second quarter of 1996, compared to $116,000 in the second quarter of 1995.
Net chargeoffs were $10,000 for the three months ended June 30, 1996, and
$53,000 for the comparable period in 1995. For the first six months of 1996,
the provision for loan losses was $215,000, compared to $206,000 for the same
period in 1995. Net chargeoffs to average loans outstanding was .06% ($52,000)
and .12% ($78,000) for the first six months of 1996 and 1995, respectively.
OTHER INCOME. Substantial increases in revenue from mortgage banking and
brokerage services was the primary cause of the increase in other income in the
three and six months ended June 30, 1996 compared to the same periods last
year. For the second quarter of 1996, other income was $288,000 (49.0%)
greater than the same period in 1995. Other income increased $559,000 (50.0%)
for the first six months of 1996 as compared to the same period in 1995.
OTHER EXPENSES. Other expenses was $1,411,000 during the second quarter of
1996, up $337,000 (31.4%) from the total for the second quarter of 1995. For
the first six months of 1996, other expenses increased $603,000 (28.0%) to
$2,753,000 compared to the same period last year. As a percentage of average
assets, other expenses was 2.42% and 2.21% for the first six months of 1996 and
1995, respectively.
PROVISION FOR INCOME TAXES. The effective income tax rate for the second
quarter of 1996 was 36.6% compared to 37.9 % for the second quarter of 1995.
For the six months ended June 30, 1996, the effective income tax rate was 36.5%
as compared to 35.9% for the same period in 1995.
9
<PAGE> 10
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
<TABLE>
<S> <C>
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 June 30, 1996
</TABLE>
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 August 8, 1996 By /s/ Earl O. Bradley, III
---------------------------- ----------------------------------
Earl O. Bradley, III
President and Chief
Executive Officer
Date August 8, 1996 By /s/ Jack L. Graham
---------------------------- ----------------------------------
Jack L. Graham
Senior Vice President
and Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,737
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,214
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 92,079
<ALLOWANCE> 1,430
<TOTAL-ASSETS> 120,043
<DEPOSITS> 104,678
<SHORT-TERM> 4,065
<LIABILITIES-OTHER> 840
<LONG-TERM> 202
0
0
<COMMON> 1,069
<OTHER-SE> 9,189
<TOTAL-LIABILITIES-AND-EQUITY> 120,043
<INTEREST-LOAN> 4,565
<INTEREST-INVEST> 554
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,119
<INTEREST-DEPOSIT> 2,105
<INTEREST-EXPENSE> 2,182
<INTEREST-INCOME-NET> 2,937
<LOAN-LOSSES> 215
<SECURITIES-GAINS> 77
<EXPENSE-OTHER> 2,753
<INCOME-PRETAX> 1,645
<INCOME-PRE-EXTRAORDINARY> 1,045
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,045
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 0
<YIELD-ACTUAL> 9.42
<LOANS-NON> 58
<LOANS-PAST> 163
<LOANS-TROUBLED> 62
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,267
<CHARGE-OFFS> 61
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 1,430
<ALLOWANCE-DOMESTIC> 1,430
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
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