1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
------------------
Commission file number 33-45240
----------
HERITAGE FINANCIAL SERVICES, INC.
---------------------------------
(exact name of Small Business Issuer as Specified in Its Charter)
TENNESSEE 62-1484807
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 JEFFERSON STREET, CLARKSVILLE, TENNESSEE 37040
-------------------------------------------------
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (615)553-0500
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- --- -------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: Common Stock, 552,086
shares as of October 27, 1997.
Traditional small business disclosure format (check one):
Yes No X
---- ---- ------
2
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION 12
SIGNATURES 13
2
3
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1997 1996 1996
------------- ------------ ------------
(Unaudited) (Unaudited) (Note)
ASSETS:
Cash and due from banks $ 4,309 $ 3,668 $ 3,598
Securities available-for-sale, at fair value 19,249 18,841 19,145
Mortgage loans held for sale 1,709 4,248 2,333
Loans 128,301 96,575 103,777
Allowance for loan losses (1,764) (1,485) (1,544)
-------- -------- --------
Net loans 126,537 95,090 102,233
Premises and equipment 3,870 2,327 2,491
Accrued interest receivable 1,382 1,189 1,293
Deferred income taxes 528 514 572
Foreclosed and repossessed assets 140 61 73
Other assets 955 816 1,045
-------- -------- --------
TOTAL ASSETS $158,679 $126,754 $132,783
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Noninterest-bearing $ 17,268 $ 16,526 $ 17,185
Interest-bearing 112,434 94,845 98,127
-------- -------- --------
Total deposits 129,702 111,371 115,312
Federal funds purchased 5,600 3,250 4,850
Advances from Federal Home Loan Bank 8,952 193 183
Accrued interest payable 577 450 443
Other liabilities 881 588 732
-------- -------- --------
TOTAL LIABILITIES 145,712 115,852 121,520
STOCKHOLDERS' EQUITY;
Common stock 1,104 1,070 1,103
Additional paid-in capital 4,916 4,642 4,868
Retained earnings 6,903 5,350 5,333
Unrealized gains (losses) on securities
available-for-sale, net 44 (160) (41)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY 12,967 10,902 11,263
-------- -------- --------
TOTAL Liabilities AND STOCKHOLDERS' EQUITY $158,679 $126,754 $132,783
======== ======== ========
Common shares issued and outstanding 552,086 535,066 551,367
(Note) The consolidated balance sheet at December 31, 1996, has been derived
from the audited financial statements at that date.
See notes to consolidated financial statements.
3
4
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
INTEREST INCOME:
Loans, including fees $3,284 $2,544 $8,968 $7,109
Investment securities:
Taxable 262 235 758 697
Tax-exempt 41 41 120 133
------ ------ ------ ------
TOTAL INTEREST INCOME 3,587 2,820 9,846 7,939
------ ------ ------ ------
INTEREST EXPENSE:
Deposits 1,419 1,174 4,006 3,279
Other 149 39 287 116
------ ------ ------ ------
TOTAL INTEREST EXPENSE 1,568 1,213 4,293 3,395
------ ------ ------ ------
NET INTEREST INCOME 2,019 1,607 5,553 4,544
Provision for loan losses 187 150 465 365
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,832 1,457 5,088 4,179
------ ------ ------ ------
NONINTEREST INCOME:
Service charges on deposit accounts 407 352 1,141 1,016
Mortgage banking activities 169 270 534 667
Net securities gains (losses) 1 - (9) 77
Brokerage services 107 77 273 223
Premiums from life and
disability insurance 59 - 204 -
Other 187 204 576 596
------ ------ ------ ------
TOTAL NONINTEREST INCOME 930 903 2,719 2,579
------ ------ ------ ------
NONINTEREST EXPENSE:
Salaries and employee benefits 937 846 2,650 2,343
Occupancy 146 124 406 357
Furniture and equipment 190 109 538 302
Data processing fees 121 109 351 303
Advertising and public relations 59 64 208 216
Life and disability insurance benefits and expenses 37 - 153 -
Other 331 270 909 754
------ ------ ------ ------
TOTAL NONINTEREST EXPENSES 1,821 1,522 5,215 4,275
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 941 838 2,592 2,483
Income taxes 344 310 946 910
------ ------ ------ ------
NET INCOME $ 597 $ 528 $1,646 $1,573
====== ====== ====== ======
NET INCOME PER SHARE $ 1.05 $ 0.95 $ 2.89 $ 2.84
====== ====== ====== ======
See notes to consolidated financial statements.
4
5
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
----- ----
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 3,127 $ (633)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of securities available-for-sale 927 3,429
Maturities and redemptions of securities available-for-sale 1,543 1,018
Purchase of securities available-for-sale (2,345) (1,563)
Net increase in loans (24,768) (16,152)
Purchases of premises and equipment (1,655) (214)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (26,298) (13,482)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 14,390 11,314
Net increase in short-term borrowings 903 1,850
Proceeds from long-term borrowings 8,646 -
Repayments of long-term borrowings (30) (28)
Proceeds from issuance of common stock 68 172
Reacquisition of common stock (95) (38)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 23,882 13,270
-------- --------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 711 (845)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 3,598 4,513
-------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 4,309 $ 3,668
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for interest $ 4,202 $ 3,364
Cash paid during period for income taxes $ 1,077 $ 1,093
See notes to consolidated financial statements.
5
6
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF PRESENTATION
Heritage Financial Services, Inc. (Heritage Financial or Company) through its
subsidiary, Heritage Bank (the Bank) and its subsidiaries, provides a full range
of banking services to individual and corporate customers in Montgomery County,
Tennessee and the surrounding counties in Tennessee and Kentucky.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete consolidated financial
statements. The accompanying consolidated financial statements should be read in
conjunction with the notes to the consolidated financial statements contained in
the 1996 annual report on Form 10-KSB. In preparing financial statements,
management is required to make assumptions and estimates which affect the
Company's reported amounts of assets, liabilities and results of operations. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results of operations for the three month and nine month periods ended September
30, 1997, are not necessarily indicative of the results that may be expected for
the entire year.
2. PER SHARE DATA
Net income per share is determined by dividing net income by the weighted
average number of common shares outstanding and common stock equivalents arising
from the assumed exercise of outstanding common stock options. The weighted
average number of shares outstanding including common stock equivalents for the
nine months ended September 30, 1997 and 1996, were 568,610 and 553,735,
respectively.
3. INVESTMENT SECURITIES
The following table reflects the amortized cost and fair values of investment
securities held at September 30, 1997, all of which are classified as
available-for-sale.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
U.S. agencies $10,911 $ 56 $ (74) $10,893
Mortgage-backed:
U.S. agencies 4,098 52 (44) 4,106
Tax-exempt securities 3,346 81 (1) 3,426
Equity securities 824 - - 824
------- ---- ----- -------
$19,179 $189 $(119) $19,249
======= ==== ===== =======
6
7
4. LOANS
A summary of loans by category follows:
September 30, September 30, December 31,
1997 1996 1996
------------ ------------ -----------
(in thousands)
Real estate:
1-4 family residential properties $ 28,427 $20,286 $ 22,336
Construction 18,785 15,784 16,729
Commercial 35,942 24,338 26,077
Commercial, financial and agricultural 22,478 18,538 20,291
Consumer 22,823 17,636 18,379
-------- ------- --------
128,455 96,582 103,812
Less unearned interest (154) (7) (35)
-------- ------- --------
Total loans $128,301 96,575 $103,777
======== ======= ========
5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(in thousands)
Balance at beginning of period $1,700 $1,430 $1,544 $1,267
Provision charged to operations 187 150 465 365
Loan losses:
Loans charged off (130) (97) (267) (158)
Recoveries on loans previously charged off 7 2 22 11
------ ------ ------ ------
Balance at end of period $1,764 $1,485 $1,764 $1,485
====== ====== ====== ======
6. DEPOSITS
A summary of deposits follows:
September 30, September 30, December 31,
1997 1996 1996
------------ ------------ -----------
(in thousands)
Noninterest-bearing demand $ 17,268 $ 16,525 $ 17,185
Interest checking 9,600 8,487 9,468
Money market accounts 22,694 20,407 20,756
Savings 5,153 5,011 5,471
Retirement accounts 3,607 3,247 3,298
Certificates of deposit of $100,000 or more 8,834 6,223 6,210
Other time deposits 62,546 51,471 52,924
-------- ------- -------
$129,702 $111,371 $115,312
======== ======== ========
7
8
7. STOCKHOLDERS' EQUITY
The Bank's capital amounts and ratios were as follows:
September 30, September 30, December 31,
1997 1996 1996
------------- ------------- ------------
(in thousands)
Amount:
Tier 1 leverage 12,046 10,269 10,403
Tier 1 risk-based 12,046 10,269 10,403
Total risk-based 13,646 11,488 11,711
Ratio:
Tier 1 leverage 7.62% 8.13% 7.88%
Tier 1 risk-based 9.42% 10.56% 9.96%
Total risk-based 10.67% 11.81% 11.21%
8. RECLASSIFICATIONS
Certain amounts have been reclassified in the previous year's financial
statements to conform with the current year's classifications.
8
9
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's consolidated results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
interest-earning assets, such as loans and investments, and the interest expense
incurred on interest-bearing liabilities, such as deposits and other borrowings.
The Company also generates noninterest income, including service charges on
deposit accounts and fees from mortgage banking activities and brokerage
services. The Company's noninterest expenses consist primarily of employee
compensation and benefits and other general and administrative expenses.
FINANCIAL CONDITION
EARNING ASSETS. Average earning assets of the Company for the first nine months
of 1997 increased 23%, or $25.3 million, to $135.4 million from $110.1 million
for the first nine months of 1996. This compares to average earning asset growth
of 23% for the first nine months of 1996 over the first nine months of 1995. The
Company has maintained a consistently favorable ratio of average earning assets
to average total assets of 94.2% for the first nine months of both 1997 and
1996.
A vibrant local economy has enabled the Company to achieve continued loan growth
(the primary earning asset). Average loans for the first nine months of 1997
increased 28%, or $25.3 million, to $116.2 million from $90.9 million for the
first nine months of 1996. This compares to average loan growth of 29% for the
first nine months of 1996 over the same 1995 period. The changing mix of earning
assets was favorable during the first nine months of 1997. Average loans for the
first nine months of 1997 were 86% of total average earning assets, compared to
83% during the same 1996 period.
Average securities for the first nine months of 1997 were 14% of total average
earning assets, compared to 17% during the same 1996 period. Average securities
as a percent of average earning assets declined for the first nine months of
1997 and 1996 to fund loan growth.
PREMISES AND EQUIPMENT. Premises and equipment increased $1,379,000 during the
first nine months of 1997. This increase is primarily attributable to the
construction of the new main office building scheduled for completion in the
spring of 1998, with an estimated construction cost of $4 million.
FUNDING SOURCES. Management relies on local area deposits as its primary funding
source. Average deposits for the first nine months of 1997 increased 20%, or
$20.4 million, to $123.4 million from $103.1 million for the first nine months
of 1996. This compares to average deposit growth of 15% for the first nine
months of 1996 over the same period in 1995. The local deposit base is
supplemented with alternative funding sources, Federal funds purchased and
Federal Home Loan Bank (FHLB) advances, to fund loan growth. During the second
quarter of 1997, the Company borrowed $8.6 million of long-term FHLB advances to
fund loan growth. The average balances of Federal funds purchased and FHLB
advances amounted to $6.9 million and $2.8 million for the first nine months of
1997 and 1996, respectively. Due to the highly competitive local market for
deposits, management anticipates increased use of alternative funding sources to
partially fund loan growth.
NONPERFORMING ASSETS, PAST DUE LOANS, POTENTIAL PROBLEM ASSETS AND THE ALLOWANCE
FOR LOAN LOSSES. The following table sets forth information regarding the
Company's nonperforming assets, past due loans, potential problem assets and the
allowance for loan losses:
9
10
September 30, September 30, December 31,
1997 1996 1996
------------- ------------- ------------
(in thousands)
Nonperforming assets:
Nonaccrual loans $ 136 $ 58 $173
Restructured loans 81 90 87
Foreclosed and repossessed assets 140 61 73
------ ----- ----
Total nonperforming assets $ 357 209 $333
====== ===== ====
Accruing loans that are contractually
pass due 90 days or more $ 479 $ 405 $935
====== ===== ====
Potential problem assets not included
in nonperforming assets $1,356 $ 984 $766
====== ===== ====
Nonperforming assets to loans and
foreclosed and repossessed assets 0.27% 0.21% 0.31%
Allowance for loan losses to portfolio loans 1.37% 1.54% 1.49%
Allowance for loan losses to nonperforming
assets 494% 711% 464%
Allowance for loan losses to nonperforming
assets and potential problem loans 103% 124% 140%
CAPITAL. Stockholders' equity to total assets of the Company was $13.0 million,
or 8.17%, at September 30, 1997, compared to $11.3 million, or 8.48%, at
December 31, 1996, and $10.9 million, or 8.60%, at September 30, 1996. On
September 30, 1997, Heritage Bank had sufficient capital to qualify as
well-capitalized institutions under the regulatory capital standards.
RESULTS OF OPERATIONS
Net income for the third quarter of 1997 was $597,000, or $1.05 per share,
compared to $528,000, or $.95 per share, in the third quarter of 1996. Return on
average assets was 1.53% and return on average equity was 18.69% for the third
quarter of 1997 compared with 1.70% and 19.72%, respectively, for the same
period in 1996.
For the first nine months, net income in 1997 totaled $1,646,000, or $2.89 per
share, compared with $1,573,000, or $2.84 per share, for the same period in
1996. Return on average assets for the first nine months of 1997 was 1.53% and
return on average equity was 18.21%, compared with 1.80% and 20.60%,
respectively, for the same period in 1996.
NET INTEREST INCOME. For the third quarter of 1997, net interest income, on a
taxable equivalent basis, increased 25%, or $412,000, over the third quarter of
1996. For the first nine months of 1997, net interest income, on a taxable
equivalent basis, increased 22%, or $999,000, over the same 1996 period. These
increases were primarily due to a larger balance sheet with increased levels of
average earning assets. For the third quarter of 1997, average earning assets
increased 25%, or $29 million, while the net interest margin increased 1 basis
points from 5.55% to 5.56%, as compared to the same period in 1996. For the
first nine months of 1997, average earning assets increased 23%, or $25.3
million, while the net interest margin decreased 5 basis points from 5.58% to
5.53%, as compared to the same period last year.
Net interest income is the amount of income generated by earning assets reduced
by the interest cost of funding those assets. Net interest margin is computed by
dividing net interest income (on a taxable equivalent basis) by average earning
assets.
10
11
PROVISION FOR LOAN LOSSES. The provision for loan losses increased 25% from
$150,000 for the third quarter of 1996 to $187,000 for the third quarter of
1997. For the first nine months of 1997, the provision increased 27% over the
same period last year. The higher provision reflects a higher level of allowance
for loan losses commensurate with loan growth. In addition, the level of
provision was increased due to inherent losses reflecting economic trends. The
annualized ratio of net chargeoffs to average loans amounted to .39% for the
third quarter of both 1997 and 1996. For the first nine months of 1997, the
annualized ratio of net chargeoffs to average loans increased to .28% from .22%
for the same period last year.
NONINTEREST INCOME. For the third quarter of 1997, noninterest income (excluding
securities gains or losses) grew 3%, or $26,000, from the same period in 1996.
Excluding securities gains or losses, noninterest income contributed 31% and 36%
of taxable equivalent revenues for the third quarter of 1997 and 1996,
respectively.
For the first nine months of 1997, noninterest income (excluding securities
gains or losses) increased 9%, or $226,000, over the same period last year.
Excluding securities gains or losses, noninterest income contributed 33% and 35%
of taxable equivalent revenues for the first nine months of 1997 and 1996,
respectively.
NONINTEREST EXPENSE. Total noninterest expense for the third quarter of 1997,
increased 20%, or $299,000, over the same period in 1996. Salaries and benefits,
the largest category, increased 11%, or $91,000. Furniture and equipment expense
increased 74%, or $81,000. Management expected a significant increase in
equipment expense in 1997, due to additional lease expense for automated cash
dispensers and advanced technological equipment. Also, for the 1997 period, the
Company incurred $37,000 of expense related to the Bank's reinsurance subsidiary
which began operations in December, 1996.
For the first nine months of 1997, noninterest expense increased 22%, or
$940,000, over the same period last year. Salaries and benefits increased 13%,
or $307,000; furniture and equipment expense increased 78%, or $236,000; and the
reinsurance subsidiary incurred $153,000 of expense.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate was 37% for
the 1997 and 1996 periods.
11
12
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule (for SEC use only)
(b) There have been no reports filed on form 8-K during the
quarterly period ended September 30, 1997
12
13
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HERITAGE FINANCIAL SERVICES, INC.
(Registrant)
Date October 28, 1997 By Earl O. Bradley, III
---------------- ----------------------------
Earl O. Bradley, III
President and Chief
Executive Officer
Date October 28, 1997 By Jack L. Graham
---------------- -----------------------------
Jack L. Graham
Senior Vice President
and Chief Financial Officer
13