-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MU9qJq1xiQbOFR4fQMS8Ql8DJKp4LUkJAeL00+YWwRIRfSTk/rGPM7yCT/Drm9uB /QS/ToUjEL0dVR4bKVYajQ== 0000950109-96-001867.txt : 19960401 0000950109-96-001867.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950109-96-001867 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERITAGE BANCORP INC /PA/ CENTRAL INDEX KEY: 0000714309 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232228542 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12506 FILM NUMBER: 96541320 BUSINESS ADDRESS: STREET 1: 120 S CENTRE ST CITY: POTTSVILLE STATE: PA ZIP: 17901 BUSINESS PHONE: 7176222320 10-K 1 FORM 10-K 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 - ------------------- ----------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $5.00 par value ----------------------------- (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 ----- ----- 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. - ----------- The number of shares of Common Stock outstanding as of March 1, 1996 was 1,921,605. - --------- 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. PART I ------ 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. - 2 - 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. --------------------------- 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. --------- 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 - 3 - 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. ---------------- 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. ------ 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 - 4 - 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. - 5 - FDICIA also sets forth Truth in Savings disclosure and advertising requirements applicable to all depository institutions. FDIC INSURANCE ASSESSMENTS. -------------------------- 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. ------------------ 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 - 6 - 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. -------------------- 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. --------- At December 31, 1995, the Corporation and the Bank employed approximately 174 persons. MERGERS AND ACQUISITIONS. ------------------------ 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. - 7 - 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 ------- 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. - 8 - PART III -------- ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS. --------- 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. ------------------------------------ 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.
Name Age Position and Business Experience During Past 5 - ---- --- ---------------------------------------------- Years ----- 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.
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. - 9 - ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. This item is incorporated by reference to Transactions with Management in the Proxy Statement. PART IV ------- 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. - 10 - 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. - 11 - 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. - 12 - SIGNATURES ---------- 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 - 13 - 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.
SIGNATURES TITLE DATE - ---------- ----- ---- /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.
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SIGNATURES TITLE DATE - ---------- ----- ---- /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
- 15 - EXHIBIT INDEX -------------
EXHIBIT SEQUENTIAL NUMBER PAGE NUMBER - ------- ----------- 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.
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EXHIBIT SEQUENTIAL NUMBER PAGE NUMBER - ------- ----------- 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).
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EXHIBIT SEQUENTIAL NUMBER PAGE NUMBER - ------- ----------- 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.
- 18 - EX-13 2 ANNUAL REPORT Exhibit 13 Financial Highlights
1995 1994 % Change -------- -------- -------- (in thousands - except per share data) 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)%
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 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.
Stock Price Range Dividends ---------------------------- Declared 1995 Low High Close Per Share ---- --- ---- ----- --------- 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
The following brokers are market makers for the Heritage Bancorp, Inc. common stock: 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
Market Value vs. Book Value [GRAPH APPEARS HERE] 2 Selected Financial Data The following table sets forth selected financial data for the last five years.
Year Ended December 31, 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (in thousands except per share) 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
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 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
1995 Increase (Decrease) 1994 Increase (Decrease) 1993 Average --------------------- Average ----------------------- Average Balance Amount % Balance Amount % Balance -------- ------- --------- -------- ------- --------- -------- (in thousands) 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 ======== ======= ======== ======= ========
4 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.
1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (in thousands) 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 ======== ======== ======== ======== ========
5 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.
Within After One But After One Year Within Five Years Five Years Total -------- ----------------- ---------- ----- (in thousands) 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 ======= =======
NONACCRUAL, PAST DUE, AND RESTRUCTURED LOANS The following table summarizes the Corporation's nonaccrual, past due, and restructured loans.
1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ (in thousands) 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%
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.
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (in thousands) 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
6 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.
1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (in thousands) 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%
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,
1995 1994 1993 1992 1991 ---------------- ---------------- ---------------- ---------------- ---------------- (in thousands) % of % of % of % of % of Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- 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% ====== ====== ====== ====== ======
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 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,
1995 1994 1993 -------- -------- -------- (in thousands) 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 ======= ======= =======
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 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.
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) 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% ========= ========= ========= =========
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 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).
1995 1994 1993 ---------------- ---------------- ---------------- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- 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 ======== ======== ========
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).
Time Other CDs Time Total -------- -------- -------- 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 ======== ======== ========
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 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 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.
0-90 91-180 181-365 1-5 Over 5 Days Days Days Years Years -------- -------- -------- -------- ------- 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 ======== ======== ======== ======== =======
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 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:
1995 1994 1993 -------- -------- -------- (thousand of dollars) 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
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 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%.
- -------------------------------------------------------------------------------- CAPITAL ADEQUACY Relationship Between Significant Financial Ratios ---------------------------- 1995 1994 1993 ---- ---- ---- 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
*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 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.
- -------------------------------------------------------------------------------- NET INTEREST INCOME (in thousands) 1995 1994 1993 ------- ------- ------- 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 ======= ======= =======
- -------------------------------------------------------------------------------- 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 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).
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) 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) ====== ====== ====== ====== ====== ======
16 Management's Discussion and Analysis (continued) AVERAGE BALANCES AND INTEREST RATES-TAX EQUIVALENT BASIS
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) 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%
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 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 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 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 Management's Discussion and Analysis (continued) OTHER INCOME AND EXPENSES (in thousands)
Changes From Prior Year --------------------------------------------- Year Ended 1995 1994 ------------------------------- -------------------- -------------------- OTHER INCOME 1995 1994 1993 Amount Percent Amount Percent ------- ------- ------- ------ ------- ------ ------- 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% ======= ======= ======= ====== ====== Changes From Prior Year --------------------------------------------- Year Ended 1995 1994 ------------------------------- -------------------- -------------------- OTHER EXPENSES 1995 1994 1993 Amount Percent Amount Percent ------- ------- ------- ------ ------- ------ ------- 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% ======= ======= ======= ====== ======
21 QUARTERLY RESULTS OF OPERATIONS The following is a summary of the quarterly results of operations for the years ended December 31, 1995 and 1994.
Quarter Ended March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- (in thousands except per share data) 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 Quarter Ended March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- (in thousands except per share data) 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
22 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 Consolidated Balance Sheets
December 31 --------------------- (in thousands except per share amounts) 1995 1994 --------- --------- 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 ========= =========
See notes to consolidated financial statements. 24 Consolidated Statements of Income
Year Ended December 31 ------------------------------------ 1995 1994 1993 -------- -------- -------- (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 ======== ======== ========
See notes to consolidated financial statements. 25 Consolidated Statements of Stockholders' Equity
Net Unrealized Appreciation (Depreciation) on Securities Common Retained Treasury Available for Stock Surplus Earnings Stock Sale Total -------- --------- ------------ ---------- ---------------- --------- (in thousands) 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 ======= ======= ======= ======= ======== =======
See notes to consolidated financial statements. 26 Consolidated Statements of Cash Flows
Year Ended December 31 -------------------------------- 1995 1994 1993 (in thousands) --------- --------- -------- 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 ======== ======== =======
See notes to consolidated financial statements. 27 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 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 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 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 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):
Net Interest Income Net Income ------------ ---------- 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 ========= =========
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 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):
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- 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 ======= ======== ======== =======
33 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)
Securities Held to Maturity Securities Available for Sale --------------------------- ----------------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- ---------- ----------- ----------- 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 ========= ========== =========== ===========
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):
1995 1994 1993 ---- ---- ---- Realized gains...... $ 88 $232 $10 Realized losses..... 98 44 0 --- ---- --- $(10) $188 $10 ==== ==== ===
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 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):
1995 1994 1993 ------ ------ ------ 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 ====== ====== ======
Information with respect to impaired loans as of and for the year ended December 31, 1995 is as follows in (000's):
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 ======
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 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):
December 31 -------------------- 1995 1994 --------- --------- 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 ======= ======
NOTE I - DEPOSITS AND BORROWED FUNDS The carrying amounts of deposits consisted of the following (in 000's):
December 31 -------------------- 1995 1994 --------- --------- 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 ======== ========
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): 1996........................ $ 69,826 1997........................ 16,855 1998........................ 7,209 1999........................ 4,360 2000........................ 2,910 Thereafter.................. 126 -------- $101,286 ========
36 Notes to Consolidated Financial Statements (continued) NOTE I - DEPOSITS AND BORROWED FUNDS (continued) BORROWED FUNDS Borrowed funds consisted of the following (in 000's):
December 31 ----------------- 1995 1994 ------- ------- Federal funds purchased and short-term borrwings........... $ 5,535 $13,326 Term borrowings................. 4,450 4,450 ------- ------- $ 9,985 $17,776 ======= =======
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):
December 31 ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- Current........................... $1,671 $1,671 $1,582 Deferred.......................... (117) (194) (327) ------ ------ ------ $1,554 $1,477 $1,255 ====== ====== ======
Significant components of the Corporation's deferred tax assets and liabilities were as follows (in 000's):
December 31 -------------------------- 1995 1994 --------- --------- 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 ====== ======
37 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):
December 31 --------------------------- 1995 1994 1993 ------ ------ ------ 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 ====== ====== ======
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:
December 31 ---------------------------- 1995 1994 1993 ------ ------ ------ 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 =======
38 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):
December 31 ------------------------------ 1995 1994 ------- ------- 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 ======= =======
Year Ended December 31 ---------------------------------------------- 1995 1994 1993 ---- ---- ---- 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) ==== ===== =====
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 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: For Capital Adequacy To Be Well Actual Purposes Capitalized --------- ------------ ----------- 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
40 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):
Contract or Notional Amount ----------------------------- 1995 1994 --------- --------- 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 ========= =========
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 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):
December 31, 1995 December 31, 1994 ----------------------- ------------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------- ------- -------- --------- 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
NOTE Q - HERITAGE BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION (in 000's)
BALANCE SHEETS December 31 ---------------------- 1995 1994 ------- -------- 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 ======== ========
42 Notes to Consolidated Financial Statements (continued) NOTE Q - HERITAGE BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION (in 000's) (continued)
STATEMENTS OF INCOME Year Ended December 31 ----------------------------- 1995 1994 1993 ------- ------- ------- 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 Year Ended December 31 ---------------------------- 1995 1994 1993 ------ ------ ------- 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 ======= ======= =======
Notes to Consolidated Financial Statements 43 EX-22 3 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 22 SUBSIDIARIES OF THE REGISTRANT ------------------------------ Heritage National Bank EX-23 4 CONSENT OF INDEPENDENT AUDITORS 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 EX-27 5 ARTICLE 9 FINANCIAL DATA SCHEDULE
9 1,000 US DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 11,356 0 0 0 82,627 26,195 26,786 175,367 3,209 303,243 253,050 5,535 2,192 4,450 0 0 10,006 28,010 303,243 16,603 6,612 15 23,230 7,990 8,777 14,453 310 (10) 10,927 4,963 4,963 0 0 3,409 1.73 1.73 5.24 1,327 1,610 0 0 3,012 183 70 3,209 1,480 0 1,729
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