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 and Investment Services 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.
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, five percent or more 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.
HERITAGE BANCORP, INC.
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 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 $5,014,000, plus an additional amount equal to the Bank's net profit for 1998, 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, 1997, 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. 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.
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.
HERITAGE BANCORP, INC.
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 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, 1997, 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.
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
HERITAGE BANCORP, INC.
(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 cents for every $100 of deposits.
In the second quarter of 1995, the BIF reached its statutory reserve ratio requirement. Consequently, the FDIC 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. In the case of the Bank, for the second half of 1995, it was assessed at the rate of 4 cents for every $100 of deposits. During 1996, the Bank was assessed a flat charge of $500 per quarter by the FDIC in lieu of any deposit based assessment.
SAIF Recapitalization Plan - --------------------------
On September 30, 1996, Congress enacted a SAIF Recapitalization Plan and a plan for banks insured by the fully capitalized BIF to share the burden of repaying outstanding Finance Corporation (FICO) bonds issued to fund SAIF's predecessor (the "FSLIC") in the late 1980s. The legislation enacted by Congress containing the Recapitalization Plan is entitled the Deposit Insurance Funds Act of 1996.
Under the Recapitalization Plan, SAIF insured institutions were required to pay a one time special assessment in the fourth quarter of 1996 equivalent to 65.7 cents for every $100 of insured deposits as of March 31, 1995. The one time special assessment on SAIF insured deposits is intended to result in a major decrease in annual insurance premiums paid by SAIF insured institutions. At the end of 1996, SAIF insured institutions generally paid 23 cents for each $100 of deposit insurance coverage while BIF insured banks insured by the fully capitalized BIF paid virtually zero assessments.
As part of the legislation, a new formula was adopted whereby BIF insured institutions, such as the Bank, would be required to share in the burden of repayment of the FICO bonds issued to finance the FSLIC in the 1980s. Commencing in calendar year 1997, the only deposit insurance cost for most well-capitalized, well-managed BIF insured and SAIF insured institutions will be FICO bond payments. For years 1997 through 1999, SAIF insured institutions will pay approximately 6.5 cents per $100 in deposits toward the FICO bond payments while BIF insured institutions will pay approximately 1.3 cents per $100 in deposits. During 1997, the Bank paid $31,000 to the FDIC based on average deposits of approximately $250 million. From the year 2000 to 2017, both SAIF insured institutions and BIF insured institutions will pay approximately 2.43 cents per $100 in deposits toward retirement of the FICO obligations.
The legislation also contains certain restrictions on the ability of SAIF insured institutions to transfer deposits to BIF insured affiliates over the next three years and a requirement that Congress must eliminate the thrift charter before merging SAIF into BIF. Finally, the legislation also contained a prohibition against the FDIC assessing any deposit insurance premiums against well-managed, well-capitalized banks when BIF reserves are at or above the statutory reserve requirement of 1.25% of total insured deposits. This resulted in the Bank paying $0 for deposit insurance premiums in 1997.
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
HERITAGE BANCORP, INC.
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 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. 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.
Employees - ---------
At December 31, 1997, the Corporation and the Bank employed approximately 178 persons.
Mergers and Acquisitions - ------------------------
On November 18, 1997, the Corporation entered into an Agreement and Plan of Consolidation (the "Consolidation Agreement") with BCB Financial Services Corporation ("BCB"), pursuant to which BCB and the Corporation will be consolidated (the "Consolidation") into a new and as yet unnamed Pennsylvania business corporation ("Holding Company"). The Consolidation Agreement was approved by the Boards of Directors of both BCB and the Corporation on November 18, 1997.
In the Consolidation, each outstanding share of BCB Common Stock, $2.50 par value per share ("BCB Common Stock"), other than perfected dissenting shares and except as otherwise provided in the Consolidation Agreement, will be converted into 1.3335 shares of Holding Company Common Stock, $1.00 par value per share ("Holding Company Common Stock"), and each outstanding share of Corporation Common Stock, $5.00 par value per share, other than perfected dissenting shares and except as otherwise provided in the Consolidation Agreement, will be converted into 1.05 shares of Holding Company Common Stock. Cash will be paid in lieu of fractional shares. Consummation of the Consolidation is subject to certain terms and conditions, including, among other things, approval by various regulatory authorities and BCB and Corporation shareholders. The foregoing summary of the Consolidation Agreement is qualified in its entirety by reference to the Consolidation Agreement which is incorporated hereby by reference to Exhibit 2.
BCB and the Corporation also entered into reciprocal Stock Option Agreements dated November 18, 1997 (the "Stock Option Agreements") pursuant to which (i) BCB has granted to the Corporation an option to purchase, under certain circumstances set forth in the BCB Stock Option Agreement, up to 690,515 shares of BCB Common Stock, which represents approximately 19.9% of the number of currently issued and outstanding shares of BCB Common Stock, at a purchase price per share of $22.375, subject to adjustment as provided in the Stock Option Agreement; and (ii) the Corporation has granted to BCB an option to purchase, under certain circumstances set forth in the Heritage Stock Option Agreement, up to 947,041 shares of Heritage Common Stock, which represents approximately 19.9% of the number of currently issued and outstanding shares of Heritage Common Stock, at a purchase price per share of $22.875, subject to adjustment as provided in the Stock Option Agreement. The foregoing summary of the BCB Stock Option Agreement and the Heritage Stock Option Agreement is qualified in its entirety by reference to the Stock Option Agreements which are incorporated herein by reference to Exhibits 99.1 and 99.2, respectively.
Year 2000 Action Plan - ---------------------
The Corporation uses software and other computer-related technologies throughout its business that will be affected by the date change in the year 2000. The Corporation's directors, senior management and operations staff are aware of these year 2000 issues and have appointed an internal technology steering committee to study and direct the project to bring all of the Corporation's computer systems into year 2000 compliance during 1998 and 1999. The technology steering committee commenced its activities on September 25, 1996. The Corporation does not do its own in-house programming and therefore is dependent upon outside vendors to make their software year 2000 compliant. The technology steering committee has identified application software and hardware and letters have been sent to all of the Corporation's vendors requesting certification of their year 2000 readiness and plans. Critical vendors that have been
HERITAGE BANCORP, INC.
identified have indicated that they are aware of the issues and, according to their plans, will be in compliance during 1998. The Corporation, through the technology steering committee, has determined to work with current vendors and monitor their efforts to become year 2000 compliant. This option was selected over purchasing new systems because it is less costly and vendors' plans appear to be on track. Any new software to be purchased by the Corporation will be certified as year 2000 compliant prior to purchase. Although final cost estimates have yet to be determined, management believes that such cost will not have a material impact on the Corporation's results of operations during 1998 and 1999.
HERITAGE BANCORP, INC.
Item 2.
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.
Item 3.
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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II -------
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information provided below reflects the actual high, low, and closing prices and the dividends declared for each share of the Corporation's common stock for each quarter of 1997 and 1996. The common stock of Heritage Bancorp, Inc. is traded in the over-the-counter market under the symbol HBCI and is listed on The NASDAQ Stock Market.
Stock Price Range Dividends ---------------------------- Closing Declared High Low Price Per Share -------------- ------------ ------------- ------------- ---- First Quarter $ 13.50 $ 11.13 $ 13.50 $ 0.12 Second Quarter 17.25 12.75 16.38 0.12 Third Quarter 19.00 15.75 18.75 0.13 Fourth Quarter 24.50 18.88 20.38 0.14
---- First Quarter $ 10.40 $ 9.70 $ 9.90 $ 0.10 Second Quarter 11.38 9.90 10.88 0.10 Third Quarter 11.38 10.25 11.19 0.11 Fourth Quarter 12.00 10.75 11.13 0.12
Note: Per share data has been restated to give effect to a 2-for-1 stock split, in the form of a 100% stock dividend, issued May 23, 1997 and a 5-for-4 stock split, in the form of a 25% stock dividend, issued on May 24, 1996.
As of January 31, 1998, there were approximately 1,268 holders of record of the Corporation's common stock.
HERITAGE BANCORP, INC.
Item 6.
Item 6. Selected Financial Data
Note: Included in other expenses for 1995 is $1,078,000 in merger and restructuring expenses related to the business combination with Bankers' Financial Services Corporation. Net income, ROA, ROE and earnings per share were $4,231,000, 1.40%, 11.53% and $0.86 per share, respectively, excluding the net after tax effect of merger and restructuring expenses. The merger has been accounted for as a pooling of interests and, accordingly, all prior financial statements have been restated to include Bankers.
The earnings per share amounts prior to 1997 have been restated as required to comply with FASB Statement No. 128, Earnings Per Share. For further discussion of earnings per share and the impact of Statement No. 128, see Note 1 to the consolidated financial statements which are included as part of this report.
Per share information has been restated to reflect a 2-for-1 stock split, in the form of a 100% stock dividend, issued in 1997 and 5-for-4 stock splits, in the form of 25% stock dividends, issued in 1996, 1994 and 1993.
HERITAGE BANCORP, INC.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Heritage Bancorp, Inc. recorded net income of $6,028,000 ($1.26 per share) for 1997, compared to $4,980,000 ($1.04 per share) in 1996, and $3,409,000 ($0.69 per share) in 1995. Return on average assets was 1.72%, 1.58%, and 1.13% for 1997, 1996 and 1995, respectively. In 1995 the Corporation incurred $822,000, net of taxes, in merger and restructuring costs related to the merger with Bankers. Excluding these costs, net income, earnings per share, and ROA would have been $4,231,000, $0.86, and 1.40%, respectively, in 1995. The increase in net income in 1997 of $1,048,000 is primarily due to an 18.5% increase in average loan volume over 1996.
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 the volume and mix of 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. Table 1 presents the net interest income on a fully tax-equivalent basis for each of the three years ending December 31, 1997, 1996 and 1995.
Table 1 - Net Interest Income
1997 vs. 1996 - -------------
During 1997, the average yield on earning assets increased 9 basis points and the average cost of funds increased 28 basis points. The increase in the yield on earning assets is due to loans, which generally have a higher yield associated with them, comprising 66.0% of average earning assets in 1997 compared to 62.0% in 1996. Actual yields on securities and loans decreased during 1997. The increase in loan volume was primarily funded through borrowings from the Federal Home Loan Bank. Borrowings funded 15.5% of earning assets in 1997 compared to 7.56% in 1996. While borrowings are a more expensive source of funds and the primary reason for the 28 basis point increase in the cost of funds, proper leveraging has allowed the Corporation to increase net interest income by $1,284,000, or 8.2%, in 1997 compared to 1996. Table 2 analyzes the factors contributing to the increase in net interest income in 1997. The average balances, tax-equivalent interest income and expense, and the average rates earned and paid for assets and liabilities are found in Table 3.
Competitive pressures continued to drive loan rates down despite an increase in the average prime rate in 1997 to 8.44% compared to 8.26% in 1996. Average yields on loans in 1997 have decreased 8 basis points since 1996 and 46 basis points since 1995. However, the negative impact that declining loan yields had on net interest income have been more than offset by the $34,180,000, or 18.5%, increase in average loan volume in 1997 compared to 1996. As a result, interest income on the loan portfolio increased $2,998,000. A sustained low rate environment in 1998 should provide for continued growth in the loan portfolio.
Due to the high demand for loan volume and virtually no increase in average deposits, the Corporation did not grow the security portfolio in 1997. Average securities increased only $40,000, or 0.1%, compared to 1996. However, there was a significant change in the mix of securities between taxable and tax-exempt securities. In 1997, the investment securities
HERITAGE BANCORP, INC.
were 81.8% taxable and 18.2% tax-exempt compared to 1996 when the ratio was 86.8% taxable and 13.2% tax-exempt. On a tax-equivalent basis, the average yield on the tax-exempt portfolio was 141 basis points higher than the yield on the taxable portfolio. This is due to the tax-exempt portfolio being a fixed rate portfolio that is generally longer in average life than the taxable portfolio. The change in the mix of the security portfolio resulted in a $108,000 increase in interest income from 1996 to 1997, on a tax-equivalent basis.
Average demand deposits, interest bearing demand deposits, and savings deposits decreased again in 1997 by $3,204,000, or 2.1%, in 1997 compared to 1996. The decrease is attributable to lackluster deposit growth within the entire market area and a shift to time deposits which offer a higher rate of interest. In addition, competition for corporate deposits has resulted in the Corporation offering cash management services, mostly through the use of repurchase agreements (repo accounts). Repo accounts are not considered deposits of the Corporation and are included in short-term borrowings on the balance sheet. Interest expense on non-time deposits decreased $46,000 in 1997 compared to 1996. Overall market rates and competition have allowed the Corporation to maintain a lower level of rates on these products as more emphasis is placed on short-term time deposits.
Average time deposits grew again in 1997 to $106,705,000, a $5,235,000, or 5.2% increase over 1996. The average rate paid on time deposits increased 4 basis points. The increased average volume and average rate resulted in an additional $283,000 in interest expense on time deposits in 1997 versus 1996. The Corporation closely monitors the rates paid on time deposits relative to market rates, competitor rates, and the cost of alternative sources of funding.
Average short-term and long-term borrowings increased $28,990,000, or 128.9%, in 1997 compared to 1996. This was the result of the decision made in 1996 to use funding from the Federal Home Loan Bank as a source of funds for growth in the loan portfolio to the extent deposit growth was insufficient. The average rate paid on the borrowings decreased slightly, however interest expense increased $1,575,000 in 1997 as a result of the increased volume. The increase in average borrowings was the primary funding source to support the increase in average loan volume. The net difference between the increased interest income due to loan volume and the increased interest expense due to increased borrowings was $1,545,000 in 1997.
1996 vs. 1995
Net interest income on a fully tax-equivalent basis increased $722,000, or 4.9%, in 1996 compared to 1995. An increase in the volume of average earning assets resulted in increased interest revenue of $1,330,000 which was offset by a $540,000 decrease as the result of lower yields. Also, an increase in the volume of interest bearing liabilities resulted in increased interest expense of $649,000 offset by a $581,000 decrease as the result of a lower cost of funds.
During 1996, both the average yield on earning assets and the average cost of funds decreased 12 basis points. The decrease in the yield on loans of 38 basis points is attributable to lower market rates in addition to competitive pricing. The prime rate averaged 8.26% in 1996 compared to 8.84% in 1995. The lower rate environment resulted in a decrease of $702,000 in interest income on loans. However, a $10,295,000, or 5.9%, increase in average loan volume during 1996 resulted in additional interest income of $994,000.
The Corporation increased the size of the securities portfolio through the purchase of tax-exempt state and municipal securities during 1996. A slight increase in yield and the increased volume of securities resulted in $567,000 in additional interest income. The yield on the taxable investments increased by 14 basis points, however, fewer funds were invested in the taxable portfolio resulting in a decrease in interest income on taxable securities of $65,000.
Average demand deposits, interest bearing demand deposits, and savings deposits decreased a moderate 0.4% in 1996 compared to 1995. The slight decline in volume, a 65 basis point decrease on interest bearing demand deposits, and a 36 basis point decrease on savings accounts resulted in a decrease of $580,000 in interest expense.
Average time deposits grew 3.0%, or $2,940,000, in 1996 compared to 1995. The higher rates offered on time deposits in 1995 adversely impacted interest expense in 1996. The cost of funds on these products increased by 5 basis points, even though the overall interest rate environment in 1996 was lower. The increase in volume and increased average rates resulted in an increase in interest expense of $195,000.
The Corporation decided to use funding from the Federal Home Loan Bank as a source of funds for the growth in its loan portfolio beginning in 1996. Average borrowings increased $9,355,000, or 71.2%, in 1996 and the average cost of these
HERITAGE BANCORP, INC.
borrowings decreased by 48 basis points. The net result was an increase in interest expense of $453,000 in 1996 compared to 1995.
Table 2 - Volume/Rate Analysis - Tax-Equivalent Basis
Note: The changes not due solely to change in volume or solely to change in rate are allocated to the change in rate. The actual increase (decrease) in net interest income solely due to the change in rate was ($247,000) for 1997 and $31,000 for 1996.
HERITAGE BANCORP, INC.
Table 3 - Average Balances and Interest Rates - Tax-Equivalent Basis
Note: For the purpose of computing average loan balances, nonaccruing loans are included in the daily average loan amount outstanding.
Yields on tax-exempt assets have been computed on a fully tax-equivalent basis assuming a tax rate of 34%.
HERITAGE BANCORP, INC.
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 charge-offs. 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.
At December 31, 1997, the allowance for loan losses represents 1.3% of loans outstanding, compared to 1.5% at December 31, 1996. Nonperforming loans, which include loans past due greater than 90 days, increased from $1,166,000 in 1996 to $2,027,000 in 1997. The allowance for loan losses to nonperforming loans in 1997 and 1996 was 154.7% and 263.4%, respectively. Management believes the current level of the allowance is adequate, and anticipates future provisions for loan losses will be consistent with 1997 levels adjusted for increased loan volume.
Other Income
Other income consists of trust revenues, service charges, other income, and securities gains (losses). Table 4 analyzes the increase in other income of $373,000, or 17.6%, in 1997 compared to 1996.
Table 4 - Other Income
The trust and investment services department provides traditional trust and estate settlement services, as well as investment management for individuals, businesses, and local governments. Trust department income reached another record level of $875,000, an increase of $94,000, or 12.0%, in 1997. This compares to $781,000 earned in 1996 and $683,000 in 1995. The additional income is the direct result of a 24.9% increase in total trust assets in 1997 to $251,686,000.
Service charges for 1997 were $690,000, an increase of $20,000, or 3.0%, compared to $670,000 in 1996. The service charges in 1996 had declined $9,000, or 1.3%, from $679,000 in 1995. During 1997, the Corporation offered a free checking with no minimum balances product to customers who agreed not to get cancelled checks returned with their statement. This resulted in a decrease in service charges on demand deposit accounts of approximately $36,000. However, the reduction was more than offset by a $60,000 increase in NSF charges as a result of more overdrafts on the accounts because the customers were not required to maintain a minimum balance. In 1996, service charges had declined as a result of fewer NSF charges.
In 1997, other income increased $78,000, or 11.6%, to $750,000 compared to $672,000 in 1996 and $395,000 in 1995. 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 officers and directors, gains on the sale of mortgages to Freddie Mac, commissions on life and disability insurance sold with installment and mortgage loans, safe deposit box rentals, interest forfeited, fees charged on bank checks, and fees charged on U.S. Series EE Bonds. The most significant increase was from two new sources of revenue, ATM surcharging and debit card fee income, totalling $72,000. In addition, annual income from the increase of the cash surrender value of life insurance policies increased $31,000 (prior to the one-time actuarial adjustment made in 1996 of $100,000), late charges on credit cards increased by $29,000, and gains on sales
HERITAGE BANCORP, INC.
of Freddie Mac loans increased $57,000. In 1996, the increase in other income was primarily due to an increase in the cash surrender value on life insurance policies of $176,000 ($100,000 related to an actuarial adjustment for years prior to 1996 and $76,000 related to the increase for 1996). Additionally, insurance commissions on retail loans and late fees increased in 1996 by $62,000 and $20,000, respectively.
Securities gains (losses) are generally the result of restructuring the available for sale portfolio for asset/liability reasons. Securities gains were $181,000 in 1997 compared to $0 in 1996. The gains were primarily from the sale of equity securities of a Pennsylvania financial services corporation that was purchased by an international corporation. There was restructuring done in the debt portfolio, however all gains and losses on individual transactions netted to a $1,000 gain. The restructuring was done to eliminate underperforming investments and improve earnings within portfolio. There was not any significant activity in the securities portfolio in 1996 or 1995.
Other Expenses
Other expenses increased $75,000, or .8%, in 1997 to $10,126,000 compared to $10,051,000 in 1996 and $10,927,000 in 1995. In 1995, the Corporation incurred $1,078,000 in merger and restructuring expenses relating to the combination with Bankers' Financial Services Corporation. These expenses were incurred for investment banking, legal, consulting, and accounting costs related to the merger, as well as system conversion costs, re-engineering costs, severance packages, advertising costs, and various office supplies. Table 5 is a summary of other expenses by category for 1997, 1996 and 1995.
Table 5 - Other Expenses
Salaries and employee benefits totalled $5,273,000 in 1997, an increase of $158,000, or 3.1%, from 1996. The increase was due mostly as a result of increased salaries and a $25,000 increase in employee performance compensation. The 1996 increase was primarily due to a $196,000 increase in employee performance compensation, compared to 1995, as a result of achieving record levels of profitability. The increase related to performance compensation in 1996 was partially offset by decreases in medical insurance premiums.
Occupancy expense decreased $118,000, or 13.8%, in 1997 compared to $855,000 for 1996 and $897,000 in 1995. In 1996, Schuylkill County real estate taxes were reassessed which resulted in a $92,000 decrease in the assessment for bank owned properties in 1997, or approximately 50%. In addition, the cleaning contracts were renegotiated at the end of 1997 and resulted in approximately $10,000 in cost savings. In 1996, the real estate tax reassessment reduced the expense by $23,000. Also in 1996, building insurance premiums were $14,000 lower than in 1995 as a result of an overall decrease in premiums and the consolidation of insurance policies.
HERITAGE BANCORP, INC.
Equipment expense was $796,000 in 1997 compared to $774,000 in 1996 and $783,000 in 1995. Expenses primarily include depreciation on equipment, maintenance contracts, and repair costs. The increase in 1997 relates primarily to increased depreciation costs as a result of significant technology upgrades made in 1997.
Communications and supplies increased $16,000, or 2.4%, to $674,000 in 1997 compared to $658,000 and $692,000 in 1996 and 1995, respectively. A reduction in long distance rates provided for a decrease in expense of approximately $10,000. These savings were offset by an $8,000 increase in postage and a $17,000 increase in the cost of office supplies. In 1996, decreases in the cost of office supplies versus 1995 were somewhat offset by an increase in telephone expense of $21,000. The increased telephone expense in 1996 was a result of adding several additional phone lines to utilize the features of a new phone system.
Professional fees and outside services include legal expenses, examination fees, and consulting fees. The total expense was $1,013,000 in 1997, $1,011,000 in 1996, and $954,000 in 1995. In 1997, the Corporation incurred consulting costs of $114,000 primarily related to market research studies, branch site selection studies, and system studies. Included in the legal and accounting costs for 1997 are costs related strategic planning issues. In 1996, the $57,000, or 6.0%, increase compared to 1995 was primarily the result of a $101,000 increase in legal and consulting costs for various corporate and operational matters. These costs were offset by a decrease in examination fees of $49,000 in 1996 compared to 1995.
Marketing and advertising costs decreased $73,000, or 18.4%, to $324,000 in 1997 compared to $397,000 in 1996 and $114,000 in 1995. In 1996, extensive marketing programs were initiated in an attempt to gain additional market share. Expenses included costs for consulting for development of a marketing plan, market research costs, and a significant increase in the amount of direct advertising. The plan continued into 1997, however a significant portion of the related market research was performed in 1996 resulting in lower overall costs for 1997.
Federal deposit insurance premiums were $31,000 in 1997 compared to $2,000 and $294,000 in 1996 and 1995, respectively. 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 rates. The FDIC restructured its assessment schedule in 1995, after the Bank Insurance Fund (BIF) was determined to be adequately funded. The assessment for 1997 and 1996 was $0 and $2,000, respectively. In 1995, the Bank was assessed at $.04 per $100 of deposits, resulting in a cost of $294,000. On September 30, 1996, President Clinton signed into law the Omnibus spending bill which includes provisions for assessing BIF and Savings Association Insurance Fund (SAIF) insured institutions in preparation for merging the two funds. The assessment schedule defines a rate of 1.29 basis points for the years 1997 to 2000 and 2.43 basis points for the years 2000 to 2017. This assessment resulted in the increase to $31,000 in expense for 1997. Based on current levels of deposits and capitalization ratios, the Corporation is estimating $32,000 in premiums for 1998.
Other expenses increased $42,000, or 4.9%, during 1997 and $63,000, or 7.9%, in 1996. In 1997, the Corporation included in Director compensation a $2,000 annual retainer which resulted in a $30,000 increase in the annual expense. In 1996, third party dealer processing costs increased by $57,000, or 90.4%, as a result of a 63.0% increase in the size of the portfolio.
Federal Income Taxes
The provision for income taxes in 1997 was $2,449,000 compared $1,995,000 in 1995. The effective tax rate, which is the ratio of income tax expense to income, before income taxes, was 28.9% in 1997, compared to 28.6% in 1996. The tax rate for both periods was less than the federal statutory rate of 34% primarily due to tax-exempt securities and loan income. Refer to Note 11 of the Notes to Consolidated Financial Statements included as part of this report for further analysis of federal income tax expense for 1997.
HERITAGE BANCORP, INC.
Table 6 - Quarterly Results of Operations
The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with FASB Statement No. 128, Earnings Per Share. For further discussion, see Note 1 to the consolidated financial statements which are included as part of this report.
The 1996 earnings per share amounts have been adjusted for the 2-for-1 stock split distributed in 1997.
HERITAGE BANCORP, INC.
FINANCIAL CONDITION
The Corporation's financial condition can be evaluated in terms of trends in its sources and uses of funds. Table 7 illustrates how the Corporation has managed its sources and uses of funds which are directly affected by outside economic factors, such as interest rate fluctuations.
Table 7 - Sources and Uses of Funds
Note: Other sources, net, include other liabilities and stockholders' equity less noninterest earning assets.
HERITAGE BANCORP, INC.
Loans Receivable
Average loans receivable, net of loan reserves, increased $34,180,000, or 18.5%, in 1997 compared to an increase of $10,295,000, or 5.9%, in 1996. The increase in loans was directly attributable to increased marketing efforts, favorable economic conditions in our market area, competitive pricing, and increased participation of loans with other banks. Management is expecting this kind of loan growth to continue into 1998, however changes in the economy such as increasing interest rates can have a negative impact on the rate of growth.
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 include increased fee income and decreased interest rate risk. The average loans sold for the year ended December 31, 1997 was $8,593,000, an increase of $3,379,000, or 64.8% over the average balance for 1996. Gains on the sale of these loans, which are included in other income, increased $57,000, or 142.5%, in 1997.
Consumer loans include credit card borrowings, personal lines of credit, installment loans, and home equity loans to individuals. These loans can be either secured or unsecured and are generally used for purposes such as automobile financing, home improvement, recreational loans, and educational purposes. The Corporation contracts with a third party dealer for indirect auto lending that is currently working with 24 dealerships in our marketplace.
Table 8 - Loan Portfolio
Loan Portfolio
Table 9 - Loan Maturities
Note: Excludes residential mortgages and consumer loans.
Nonperforming Loans
Table 10 reflects the Corporation's nonaccrual, past due, and restructured loans for each of the past five years. A loan is generally placed on nonaccrual 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 nonaccrual status if it is in the process of collection and is either guaranteed or well secured. Potential problem loans not included in Table 10, which management has identified through its analysis of the
HERITAGE BANCORP, INC.
portfolio credit quality, totalled $570,000 and $329,000 at December 31, 1997 and 1996, respectively. The related allowance for loan losses was $120,000 and $60,000 for December 31, 1997 and 1996, respectively.
Table 10 - Nonperforming Loans
Table 11 - Nonaccrual and Restructured Loans - Related Information
Allowance for Loan Losses
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. Management believes that the allowance for loan losses is adequate. Table 12 is an analysis of the allowance for loan losses for the past five years.
Table 12 - Summary of Loan Loss Experience
HERITAGE BANCORP, INC.
While charge-offs decreased in 1997, consumer loan charge-offs increased by $125,000, or 100%. This trend is one which that is effecting the industry as more individuals are filing for bankruptcy. The majority of charge-offs occurred on indirect auto loans, credit cards, and unsecured installment loans. As a result, management has increased its allocation of the allowance for loan losses to installment loans as of December 31, 1997. The increase in charge-offs in 1996 of $364,000 was primarily due to charging off $350,000 on two commercial loans that were on nonaccrual in 1995. As of year-end 1997, management does not believe that there will be significant charge-offs to any individual loans currently outstanding during 1998.
The specific allocations of the allowance for loan losses to any particular category of the loan portfolio may prove excessive or inadequate and therefore be allocated to/from another category in the future. Table 13 reflects the allocations of the allowance for loan losses for each of the past five years.
Table 13 - Allocation of the Allowance for Loan Losses
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, 1997 that qualified as HLT's.
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, but not necessarily to maturity, 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 on the balance sheet.
On July 1, 1997 securities with an amortized cost of $17,395,000 were transferred from held to maturity to available for sale in order to provide flexibility for management to implement new investment strategies. This transfer included all U.S. Treasury securities and state and political subdivisions securities previously classified as held to maturity. The transfer resulted in a $193,000 adjustment to fair value on the securities previously classified as held to maturity with a corresponding adjustment to equity of $127,000 for unrealized gains, net of taxes. It is the intent of management to classify all future purchases as available for sale. In addition, the transfer does not meet the requirements for transfer pursuant to paragraphs 8(a) to 8(f) of SFAS 115 and therefore the Corporation is required to classify all purchases of securities through July 1, 1999 as available for sale.
The securities portfolio is structured to provide maximum return on investments while providing a consistent source of liquidity and meeting strict risk standards. Average investments, including federal funds sold, decreased $144,000, or 0.1% in 1997 compared to 1996. The Corporation generally increases investment activity when there are excess funds available. In 1996, the Corporation utilized an increased amount of short-term, variable rate borrowings from the Federal Home Loan Bank to fund the loan growth. This provided additional core deposits for management to use in the investment portfolio. Loan volume continued to be strong in 1997 and additional purchases of securities were not necessary. However, there was significant restructuring done within the portfolio in order to enhance the future performance of the portfolio.
HERITAGE BANCORP, INC.
Table 14 - Securities
Table 15 sets forth the maturities and the weighted average yields of securities by contractual maturities or call dates at December 31, 1997. Mortgage-backed securities with contractual maturities after ten years from December 31, 1997, feature regular repayments of principal and average lives of three to seven years.
Table 15 - Analysis of Securities
Note: Yields on tax-exempt securities are adjusted on a tax-equivalent basis.
Deposits
The Corporation's primary source of funds continues to be core deposit accounts which include both interest and noninterest bearing demand, savings, and time deposits under $100,000. Average core deposits increased $2,084,000, or 0.8%, in 1997 compared to an increase of $2,043,000, or 0.8%, in 1996. 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 provide slightly higher interest rates. The average balance of these funds increased $5,288,000, or 5.5%, in 1997 and $2,701,000, or 2.9%, in 1996. The majority of the increase was in certificates of deposit due to large promotions that were run during the second half of 1997.
Interest bearing demand accounts, consisting of N.O.W. accounts, decreased $1,163,000, or 4.2%, in 1997 and decreased $1,676,000, or 5.7%, in 1996. 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 to higher yielding time deposit products. Market rates on N.O.W. accounts have continued to decline to the point where some competitors have discontinued offering the product and moved these customers into regular checking accounts while others have reduced their rate as low as 1.0%.
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Table 16 - Average Deposits and Average Rates by Major Classification
Table 17 - Maturities of Time Deposits of $100,000 or More
Short-Term and Term Borrowings
Borrowed funds are utilized when timing differences occur between the purchase of new assets and the maturity of existing assets. Management also uses borrowings as an asset/liability tool to match the repricing characteristics of certain earning assets, allowing for core funds to be used for additional loan volume or security purchases.
The Corporation has an arrangement with the Federal Home Loan Bank (FHLB) which allows for borrowings up to a percentage of qualifying assets. At December 31, 1997 and 1996 the Corporation had a maximum borrowing capacity of $132,257,000 and $138,784,000, respectively. Borrowings from the FHLB include a flexible line of credit, repurchase agreements, and term borrowings.
In addition, the Bank enters into agreements with customers as part of cash management services where the Bank sells securities to the customer overnight with the agreement to repurchase them back at par. The securities underlying the agreements are under the Bank's control. Generally these agreements mature within 1 day.
Table 18 - Borrowed Funds
Information concerning short-term debt is summarized as follows at December 31,:
HERITAGE BANCORP, INC.
Information concerning securities sold under agreements to repurchase is summarized as follows: at December 31,:
Information concerning the long-term debt is summarized as follows at December 31,:
(1) - These notes contain a convertible option which allows the FHLB, at quarterly intervals, to change the note to an adjustable-rate advance at three-month LIBOR (5.81% at December 31, 1997) plus 3 to 8 basis points. If the notes are converted, the option allows the Bank to put the funds back to the FHLB at no charge. The `5 yr/6 mo.' refers to the maturity of the note (5 years) and the term until the first convertible date (6 months). All of these notes have passed the original convertible date.
Capital Requirements/Ratios
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 maintained steady growth during 1997.
Current capital guidelines, issued by federal regulatory authorities require both banks and bank holding companies to meet minimum risk-based capital 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 re-define the components of capital, categorize assets into 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.
The Corporation and Bank are also subject to leverage capital requirements. This requirement compares capital (using the definition of Tier 1 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, 1997 the Corporation had a leverage ratio of 12.26%.
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Table 19 - Capital Ratios
Note: Any unrealized appreciation and depreciation on securities available for sale was excluded from regulatory capital computations of risk-based capital and leverage ratios.
Capital Analysis
On May 23, 1997, the Corporation issued a 2-for-1 stock split in the form of a 100% stock dividend. Accordingly, issued shares of common stock outstanding increased 2,501,052 shares and $12,506,000, representing the par value of the additional shares issued, of retained earnings was capitalized to common stock.
On May 24, 1996, the Corporation issued a 5-for-4 stock split in the form of a 25% stock dividend. Accordingly, issued shares of common stock increased 499,879 shares and a transfer of $2,499,000, representing the par value of additional shares issued, was made to the common stock account. In order to effect this transfer, the Corporation capitalized $2,500,000 in retained earnings to surplus.
During 1997, the Corporation paid cash dividends to its stockholders amounting to $2,431,000 compared to $2,060,000 in 1996. On a per share basis, dividends for 1997 increased 18.6% to $.51 from $.43 in 1996. The indicated rate for 1998 is $.56 per share, representing a 9.8% increase over 1997 dividends.
Stockholders' equity is adjusted for the effect of unrealized appreciation or depreciation, net of tax, on securities classified available for sale. At December 31, 1997 and 1996, stockholders' equity included $1,657,000 and $395,000 respectively, in unrealized appreciation.
The return on average equity increased to 14.51% from 12.98% in 1996. Management has managed capital through increased dividends and $851,000 in stock repurchases under a stock repurchase plan in 1997. In 1997, the Corporation was able to grow its average assets at 1.3 times the rate of growth in average equity compared to 0.9 in 1996, which contributed to the increase in return on average equity.
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Table 20 - Capital Analysis
Relationship Between Signficant Financial Ratios ------------------------------------------ 1997 1996 1995 ---------- ------------- ---------------
Return on average equity ............ 14.51 % 12.98 % 9.29 % Earnings retained ................... 59.67 58.43 48.11 Internal capital growth ............ 8.66 7.58 4.47 Change in average assets ............ 10.93 4.35 (1.15) Equity to average assets ............ 11.85 12.15 12.12 Growth in average equity ............ 8.23 4.57 3.55
Note - Internal capital growth is equal to return on average equity multiplied by earnings retained.
Liquidity
Liquidity management involves meeting the funds flow requirements of customers who may either be depositors wanting to withdraw funds, or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Liquid assets consist of vault cash, 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 4 of the Consolidated Financial Statements, the carrying value of securities maturing in less than one year equals $3,020,000. In addition to those maturities, the Corporation receives monthly principal repayments on agencies and mortgage-backed securities, which totalled $9,402,000 in 1997 and, as noted above in 1997 the Corporation transferred all of its securities to the available for sale portfolio.
Other sources of funds are principal paydowns and maturities in the loan portfolio. The loan maturity schedule (Table 9) illustrates the maturities of commercial loans. Liquidity can also be managed by maintaining a capability to borrow funds. The Corporation has arranged for short-term borrowings through the Federal Home Loan Bank, as discussed in the Short-Term Borrowings and Term Borrowings section of this report.
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.
Year 2000 Issues
The Corporation uses software and other computer-related technologies throughout its business that will be affected by the date change in the year 2000. The Corporation's directors, senior management and operations staff are aware of these year 2000 issues and have appointed an internal technology steering committee to study and direct the project to bring all of the Corporation's computer systems into year 2000 compliance during 1998 and 1999. The technology steering committee commenced its activities on September 25, 1996. The Corporation does not do its own in-house programming and therefore is dependent upon outside vendors to make their software year 2000 compliant. The technology steering committee has identified application software and hardware and letters have been sent to all of the Corporation's vendors requesting certification of their year 2000 readiness and plans. Critical vendors that have been
HERITAGE BANCORP, INC.
identified have indicated that they are aware of the issues and, according to their plans, will be in compliance during 1998. The Corporation, through the technology steering committee, has determined to work with current vendors and monitor their efforts to become year 2000 compliant. This option was selected over purchasing new systems because it is less costly and vendors' plans appear to be on track. Any new software to be purchased by the Corporation will be certified as year 2000 compliant prior to purchase. Although final cost estimates have yet to be determined, management believes that such cost will not have a material impact on the Corporation's results of operations during 1998 and 1999.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
This section contains certain forward-looking statements which may involve significant risks and uncertainties. Although management believes that the expectations reflected in the forward-looking statements are reasonable, actual results may differ materially from the tables and discussion included in this section.
Market Risk
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. The Corporation's market risk is composed primarily of interest rate risk. The Corporation's Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate sensitivity position of the Corporation and establishing policies to monitor and limit exposure to interest rate risk. The operations of the Corporation do no subject it to foreign currency exchange or commodity price risk. Also, the Corporation and the Bank do not utilize interest rate swaps, caps, or other hedging transactions.
Interest Rate Sensitivity
Interest rate sensitivity is a function of 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.
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; 3) interest rate gaps reflect the Corporation's position on a single day (December 31, 1997 in the case of Table 21) while the Corporation continually adjusts its interest sensitivity throughout the year; and 4) the actual performance of assets and liabilities may differ with varying interest rate scenarios compared to their original contractual terms (ie. the repayment of mortgage loans increases as interest rates fall).
Another way management reviews its interest sensitivity position is through "simulation". In simulation, the Corporation projects future net interest streams in light of the current gap position. Various interest rate scenarios are used to measure levels of 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.
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Table 21 - Gap Analysis
The Corporation's asset/liability reporting format incorporates interest bearing demand deposits and savings deposits as rate sensitive in various time frames to account for the fact that a change in interest rates will not affect the rates paid on these products as it would to products more closely tied to a market index, such as variable rate commercial loans tied to the prime rate.
As of December 31, 1997 the gap analysis would indicate that net income would not be significantly influenced by small fluctuations in interest rates, either up or down. However, market rates on interest bearing demand deposits and savings deposits are currently very low, and management feels that it would be unlikely that these rates could be reduced significantly. Conversely, 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 demand deposits). In addition, $40,000,000 in long-term borrowings which have a fixed rate, contain a conversion option that allows the Federal Home Loan Bank (FHLB) to convert these borrowings to a floating rate instrument on a quarterly basis and a put option that allows the Bank to prepay the borrowings in the event that the FHLB exercises its option. For purposes of the GAP table above, these borrowings were included in the "3 Month" category because they could reprice quarterly. Changes in interest rates will determine whether or not the fixed rates are converted to variable rates and will also impact the interest rate risk of the Corporation.
Interest Rate Sensitivity - Cash Flow Analysis
Table 22 illustrates the cash flows expected from earning assets for each of the next five years and the fair value these assets at December 31, 1997. Cash flows from loans are based on contractual payments and actual cash flows will most likely vary based on the fluctuation of interest rates. Generally, loans will prepay faster in a decreasing rate environment. This will result in lower interest income since there is more cash flows to reinvest at lower interest rates. Cash flows from bullet securities, which include U.S. Treasury securities, obligations of states and political subdivisions, and other securities are based on the earlier of the contractual maturity or the call date if the security is likely to be called with little or no change in interest rates from December 31, 1997. Equity securities are excluded from this table since the income derived from these investments is not directly tied to interest rates. Cash flows from mortgage-backed securities are based on consensus prepayment speeds under an unchanged rate environment over the next five years. Similar to loans, prepayments on mortgage-backed securities tend to increase as interest rates fall and slow as rates rise.
Also included on the table is the contractual maturities of all interest bearing liabilities. Interest bearing demand and savings deposits are included as maturing in 1998. These customers have no obligation to keep their money with the Corporation for any period of time. In order to determine the effect of market interest rates on these products, the
HERITAGE BANCORP, INC.
Corporation uses a simulation model. While the entire balance of these products is affected immediately when there is an interest rate change, the interest rate change is generally not equal to the change in Fed funds or the prime rate. The Corporation has noted that competitive pressures drive this rate more than small changes in market rates. Time deposits are presented by contractual maturity. Short-term borrowings consist of repurchase agreements and overnight borrowings from the FHLB. Generally, the funds mature within 1 business day. Long-term borrowings are presented by contractual maturity. Several of the notes contain conversion options which are discussed in Note 10 under the Notes to Consolidated Financial Statements included as part of this report.
Table 22 - Interest Rate Sensitivity - Cash Flow Analysis
Note: Cash flow information for loans does not include deferred mortgage fees, overdrafts, the allowance for loans losses, or unearned income on installment loans.
As of December 31, 1997, the Corporation has evaluated its exposure to interest rate risk and has concluded it to be less than 10% of net interest income for a 200 basis point rate shock for rates up or down. The Corporation has slightly more risk in a rates down environment due to increased cash flows from loans and mortgage-backed investments and a perceived floor on interest bearing demand deposit accounts and savings accounts.
Recently Issued Accounting Guidance
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. Statement No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Corporation will adopt Statement No. 130 in its March 31, 1998 Form 10-Q. Reclassification of financial statements for earlier periods provided for comparative purposes will be required. Adoption of Statement No. 130 is not expected to have a material impact of the Corporation.
In June 1997, FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Statement No. 131 supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise." The Corporation will adopt Statement No. 131 in its March 31, 1998 Form 10-Q, and comparative information for earlier years will be restated. Adoption of Statement No. 131 is not expected to have a material impact on the Corporation.
HERITAGE BANCORP, INC.
Item 8.
Item 8. Financial Statements and Supplementary Data
The following audited consolidated financial statements and documents are set forth in this Annual Report on Form 10-K on the following pages:
Page ---- Heritage Bancorp Inc. and Subsidiary Consolidated Balance Sheets ................................. 32 Consolidated Statements of Income ........................... 33 Consolidated Statements of Stockholders' Equity ............. 34 Consolidated Statements of Cash Flows ....................... 35 Notes to Consolidated Financial Statements .................. 36 Independent Auditor's Report ......................................... 55 Management's Statement of Responsibility for Financial Information ... 56
Heritage Bancorp, Inc. and Subsidiary CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996
See accompanying notes to consolidated financial statements.
Heritage Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1997, 1996 and 1995
See accompanying notes to consolidated financial statements.
Heritage Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1997, 1996 and 1995
See accompanying notes to consolidated financial statements.
Heritage Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1997, 1996 and 1995
See accompanying notes to consolidated financial statements.
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Heritage Bancorp, Inc. (the Corporation) and its wholly-owned subsidiary, Heritage National Bank (the 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, northern Dauphin, Lehigh, and western Carbon counties in Pennsylvania.
Estimates
The preparation of financial statements in conformity with general 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 the period to maturity.
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 designations as of each balance sheet date. Equity securities consist primarily of Pennsylvania community banks, 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.
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 and 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
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1997, 1996 and 1995
Note 1 - Summary of Significant Accounting Policies - (continued)
Loans Receivable - (continued)
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 judgment 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.
The allowance for loan losses related to impaired loans, that are identified for evaluation, is based on discounted cash flows using the loans' initial effective interest rate or the fair value, less selling costs, of the collateral for certain collateral dependent loans. By the time a loan becomes probable of foreclosure, it has been charged down to fair value, less estimated costs to sell.
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 requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed principally on the straight-line method over the estimated useful lives of the assets.
Marketing and Advertising Costs
The Corporation follows the policy of charging marketing and advertising costs to expense as incurred.
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.
Earnings Per Share
The Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" in 1997. The Corporation adopted the provisions of the new standard as of December 31, 1997. Accordingly, all earnings per share amounts for reported periods have been presented in accordance with the requirements of Statement 128. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share.
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1997, 1996 and 1995
Note 1 - Summary of Significant Accounting Policies - (continued)
Earnings Per Share - (continued)
Basic earnings per share is based on the weighted average outstanding shares (adjusted for stock dividends) which are as follows: 1997 - 4,769,000 shares; 1996 - 4,800,000 shares; 1995 - 4,922,000 shares. Diluted earnings per share is based on the weighted average outstanding shares (adjusted for stock dividends) plus the additional weighted average number of shares that would need to be issued to satisfy all potentially dilutive securities which were as follows: 1997 - 4,790,000 shares; 1996 - 4,806,000 shares; 1995 - 4,930,000 shares.
Trust Assets
Assets held by the Bank in a fiduciary capacity for customers are not included in the consolidated financial statements since such items are not assets of the Bank. Trust income is reported on the accrual method.
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 purchased and sold for one-day periods. Cash paid for interest during the years ended December 31, 1997, 1996, and 1995 was $10,570,000, $8,968,000, and $8,547,000, respectively. Income taxes paid were $2,440,000 in 1997, $2,219,000 in 1996 and $1,685,000 in 1995.
Stock Dividends
On May 23, 1997, the Corporation issued a 2-for-1 stock split in the form of a 100% stock dividend. Accordingly, issued shares of common stock outstanding increased 2,501,052 shares and $12,506,000, representing the par value of the additional shares issued, of retained earnings was capitalized to common stock. On May 24, 1996, the Corporation issued a 5-for-4 stock split in the form of a 25% stock dividend. Accordingly, issued shares of common stock increased 499,879 shares and a transfer of $2,499,000, representing the par value of additional shares issued, was made to the common stock account. In order to effect the transfer, the Corporation capitalized $2,500,000 in retained earnings to surplus. 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
Management uses its best judgment in estimating the fair value of the Corporation's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year ends, and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end. The information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the total assets. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation's disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Corporation's financial instruments at December 31, 1997 and 1996:
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.
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995
Note 1 - Summary of Significant Accounting Policies - (continued)
Fair Values of Financial Instruments - (continued)
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 discounting cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Accrued interest: The carrying amount of accrued interest receivable and accrued - ----------------- interest payable approximate their fair values.
Deposits: 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 and securities sold under agreements to repurchase, 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.
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 marketplace. Additionally, the commitments are at variable interest rates and include an "escape clause" if the customer's credit quality deteriorates.
Note 2 - Mergers
On November 18, 1997, the Corporation entered into an agreement to consolidate with BCB Financial Services Corporation ("BCB"), a one bank holding company located in Reading, Pennsylvania. Under the terms of the Agreement, the Corporation and BCB propose to combine into a new Pennsylvania business corporation, with a name yet to be determined. Upon the effective date, which is expected to occur during the second quarter of 1998 pending regulatory and shareholder approval, the new corporation will be the holding company for the independent bank subsidiaries, Heritage National Bank and Berks County Bank. There are no plans to merge the two banking subsidiaries at this time. Stockholders of the Corporation would receive 1.05 shares of the new corporation for each share of the Corporation held on the record date. Stockholders of BCB will receive 1.3335 shares of common stock of the new corporation for each share held on the record date. The new corporation will be issuing approximately 9,640,000 shares. The transaction will be accounted for as a pooling of interests.
The following table provides a summary of the consolidated operating results and financial condition on a pro forma basis as of and for the year ended December 31, 1997:
BCB Financial Corporation Services Combined (in thousands) (as reported) Corporation Pro forma ------------- ------------- ---------
Net interest income ................ $ 16,287 $ 12,117 $ 28,404 Net income ......................... 6,028 3,301 9,329 Total assets ....................... 366,269 447,594 813,863 Total stockholders' equity ......... 44,619 44,101 88,720
The pro forma combined results are not necessarily indicative of the combined results of future operations.
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995
Note 2 - Mergers - (continued)
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 was accounted for as a pooling of interests.
Note 3 - 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, 1997 and 1996 was approximately $1,872,000 and $1,607,000, respectively.
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1997, 1996 and 1995
Note 4 - Securities
The Corporation transferred securities with an amortized cost of $17,395,000 from held to maturity to available for sale on July 1, 1997 in order to provide flexibility for management to implement new investment strategies. The transfer resulted in a $193,000 adjustment to fair value on the securities previously classified as held to maturity with a corresponding adjustment to equity of $127,000 for unrealized gains, net of taxes. All securities at December 31, 1997 were classified as available for sale. It is the intent of management to classify all future purchases as available for sale. In addition, the transfer does not meet the requirements for transfer pursuant to FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities", and therefore the Corporation is required to classify all purchases of securities through July 1, 1999 as available for sale.
The amortized cost and fair values of securities at December 31, 1997 and 1996 were as follows:
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1997, 1996 and 1995
Note 4 - Securities (continued)
The amortized cost and fair value of securities as of December 31, 1997 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.
Gross realized gains and losses from the sale of securities available for sale for each of the three years ended December 31, were as follows:
(in thousands) 1997 1996 1995 ----------- ----------- -----------
Realized gains .............. $ 389 $ 0 $ 88 Realized losses ............. (208) (0) (98) ----------- ----------- ----------- $ 181 $ 0 $ (10) =========== =========== ===========
Securities having a carrying value of $19,665,000 and $10,335,000 at December 31, 1997 and 1996, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes.
Note 5 - 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:
Heritage Bancorp, Inc. NOTED TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1997, 1996 and 1995
Note 5 - Loans Receivable and Allowance for Loan Losses (continued)
Information with respect to impaired loans as of and for the year ended December 31, is as follows:
Note 6 - 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 $3,007,000 and $3,549,000 at December 31, 1997 and 1996 respectively. During 1997, $5,535,000 of new loans and advances on lines of credit were made, and repayments totalled $6,077,000.
Note 7 - 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.
Note 8 - Premises and Equipment
The components of premises and equipment at December 31, were as follows:
(in thousands) 1997 1996 -------- --------
Land ............................................... $ 593 $ 593 Buildings and improvements ......................... 6,637 6,456 Furniture, fixtures and equipment .................. 4,402 5,262 Leasehold improvements ............................. 47 47 Bank vehicles ...................................... 135 136 -------- -------- 11,814 12,494 Less accumulated depreciation ...................... (6,702) (7,163) -------- -------- $ 5,112 $ 5,331 ======== ========
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1997, 1996 and 1995
Note 9 - Deposits
The carrying amounts of deposits at December 31, consisted of the following:
(in thousands) 1997 1996 ------------ ------------
Demand ........................................ $ 35,519 $ 31,458 Interest bearing demand ....................... 28,047 26,977 Savings ....................................... 89,364 91,448 Time .......................................... 113,326 104,361 ------------ ------------ $ 266,256 $ 254,244 ============ ============
At December 31, 1997 and 1996, time certificates of deposit of $100,000 or more aggregated $5,705,000 and $7,889,000, respectively. Interest expense on these time deposits amounted to approximately $273,000 in 1997, $264,000 in 1996 and $256,000 in 1995.
At December 31,1997, the scheduled maturities of time deposits for the years ending December 31, are as follows:
(in thousands)
1998 ................................................ $ 85,875 1999 ................................................ 17,072 2000 ................................................ 5,753 2001 ................................................ 2,284 2002 ................................................ 2,182 Thereafter .......................................... 160 ============ $ 113,326 ============
Note 10- Borrowed Funds
The Bank has an arrangement with the Federal Home Loan Bank (FHLB) which allows for borrowings up to a percentage of qualifying assets. At December 31, 1997 and 1996 the Bank had a maximum borrowing capacity of $132,257,000 and $138,784,000, respectively. Borrowings from the FHLB include a flexible line of credit, repurchase agreements, and term borrowings and are collateralized by certain qualifying assets of the Bank. In addition, the Bank enters into agreements with customers as part of cash management services where the bank sells securities to the customer overnight with the agreement to repurchase them at par. Securities sold under agreements to repurchase generally mature 1 day from the transaction date. The securities underlying the agreements were under the Bank's control.
Short-term borrowings at December 31, consist of the following:
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1997, 1996 and 1995
Note 10- Borrowed Funds - (continued)
Information concerning securities sold under agreements to repurchase and repurchase agreements with the FHLB is summarized as follows at December 31,:
Term funds borrowed at December 31, consist of the following:
(1) - These notes contain a convertible option which allows the FHLB, at quarterly intervals, to change the note to an adjustable-rate advance at three-month LIBOR (5.81% at December 31, 1997) plus 3 to 8 basis points. If the notes are converted, the option allows the Bank to put the funds back to the FHLB at no charge. The `5 yr/6 mo.' refers to the maturity of the note (5 years) and the term until the first convertible date (6 months). All of these notes have passed the original convertible date.
Note 11 - Federal Income Taxes
Significant components of the provision for income taxes for the years ended December 31, were as follows:
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1997, 1996 and 1995
Note 11 - Federal Income Taxes - (continued)
Significant components of the Corporation's deferred tax assets and liabilities at December 31, were as follows:
A reconciliation of the provision for income taxes and the amount that would have been provided at statutory rates for the years ended December 31, is as follows:
The income tax provision includes $61,000 in 1997, $0 in 1996 and $(3,000) in 1995, of income tax expense (benefit) related to securities gains (losses) of $181,000, $0 and ($10,000), respectively.
Note 12 - 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. 475,000 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 500 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.
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1997, 1996 and 1995
Note 12 - Stock Option Plans - (continued)
Stock option transactions under the plan for December 31, were as follows:
Exercise prices for options outstanding at December 31, 1997 ranged from $4.80 to $10.25. The weighted average remaining contractual life of these options is approximately 8 years.
Effective January 1, 1996, the Corporation elected to continue to follow current accounting rules under Accounting Principles Board Opinion No. 25 as provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation". Under the statement, pro forma net income and earnings per share are required to be disclosed as if the options were accounted for at their fair value and the expense was recognized as compensation expense over the service period. In order to provide this information, the Black-Scholes model was used to calculate the current fair value of the stock options issued, with the following weighted average assumptions for 1997, 1996, and 1995, respectively: risk free interest rates of 6.5%, 5.2%, 6.0%; dividend yields of 3.6%, 4.0%, 3.7%; volatility factors of the expected market price of the Corporation's common stock of .12, .12, .11; and a weighted average expected life of the option of 7.5 years.
Pro forma net income and pro forma earnings per share effected for the compensation expense related to the issuance of stock options under the Black-Scholes model as of December 31, were as follows:
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1997, 1996 and 1995
Note 13 - 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 status and amounts recognized in the consolidated financial statements at and for the years ended December 31,:
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, 1997 and 1996. The expected long-term rate of return on plan assets was 7.50% in 1997, 1996, and 1995.
The Corporation has 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 in 1997, 1996, and 1995. Funding for the ESOP consisted of cash contributions of $80,000, $65,000, and $50,000, for the years ended December 31, 1997, 1996 and 1995, respectively. The Plan purchases shares of common stock in the open market and from Treasury 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 17,646, 17,596, and 10,360 shares at costs of $202,000, $184,000, and $104,000 for 1997, 1996 and 1995, respectively. Future contributions will be made at the discretion of the Board of Directors, and will be expensed at the time amounts are committed.
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1997, 1996 and 1995
Note 13 - 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, 1997, the Plan covered 17 officers, and was being funded by life insurance carried on the lives of these officers. For the years ended December 31, 1997, 1996 and 1995, $16,000, $16,000 and $8,000 respectively, was charged to operations in connection with this plan.
Note 14 - 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 $5,014,000, plus an additional amount equal to the Bank's net profit for 1998, up to the date 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, 1997, 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 Corporation and Bank are 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 Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 1997, that the Corporation and Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, 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. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank's category.
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1997, 1996 and 1995
Note 14 - Regulatory Matters (continued)
The Corporation's and Bank's actual capital ratios as of December 31, and the minimum ratios required for capital adequacy purposes and to be well capitalized under the prompt corrective action provisions are as follows:
Note 15 - Stockholders' Equity
The Corporation has 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: 23,559 in 1997, 13,193 in 1996 and 7,722 in 1995.
In January 1995, the Board of Directors approved a plan to repurchase shares of the Corporation's common stock in an amount not to exceed $2,500,000. The Plan was reapproved in January 1996 and 1997. Total shares repurchased under the Plan in 1997 were 61,628 at a total cost of $851,000. Total shares repurchased under the Plan in 1996 were 49,507 at a total cost of $1,011,000. Total shares repurchased under the Plan in 1995 were 64,248 at a total cost of $1,285,000. When treasury shares are reissued, any excess of the average acquisition cost of the shares over the proceeds from reissuance is charged to surplus.
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1997, 1996 and 1995
Note 16 - 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:
The Bank generally does not charge a fee to enter into standby letters of credit and unfunded loan commitments. Those commitments at December 31, 1997, if drawn upon, will be funded at current market rates.
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1997, 1996 and 1995
Note 17 - Fair Value of Financial Instruments
A summary of the estimated fair values of the Corporation's financial instruments are as follows:
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1997, 1996 and 1995
Note 18 - Heritage Bancorp, Inc. (Parent Company Only)
Balance Sheets
Heritage Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1997, 1996 and 1995
Note 18 - Heritage Bancorp, Inc. (Parent Company Only) - (continued)
Statements of Cash Flows
Note 19 - Subsequent Event
On January 28, 1998, the Corporation sold its 19.9% investment in a closely held community bank for $3,364,000 resulting in a pre-tax gain of $1,682,000. At December 31, 1997, the investment was carried in the Corporation's financial statements at its cost of $1,682,000 since it did not have a readily determinable fair value as defined by FASB Statement No. 115.
[LETTERHEAD OF BEARD & COMPANY INC. APPEARS HERE]
INDEPENDENT AUDITOR'S REPORT
To 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, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
BEARD & COMPANY, INC.
Reading, Pennsylvania January 28, 1998
HERITAGE BANCORP, INC.
Management's Statement of Responsibility for Financial Information
The management of Heritage Bancorp, Inc. is responsible for the preparation, content, and integrity of financial statements in this annual report. Management has prepared these financial statements in conformity with generally accepted accounting principles applied on a consistent basis. These financial statements include amounts that must be based on management's judgments and estimates. The financial information appearing throughout management's discussion and analysis of financial condition and results of operations is consistent with the information contained in these financial statements.
In meeting its responsibility for financial information, management has designed systems of internal accounting controls which provide reasonable assurance that assets are safeguarded, transactions are properly executed and recorded in accordance with management's authorization, and accounting records are reliable for preparing financial statements. Management uses its judgment in assessing and balancing the cost of these systems of internal accounting controls and the expected benefits to be derived from them. The systems of internal controls are modified and improved in response to changes in business conditions and operations.
The effectiveness of Heritage's systems of internal accounting controls is monitored throughout the year by the internal audit department. The professional staff of internal auditors serves as an integral part of these systems of controls. The internal audit staff reports directly to the Audit Committee of the board of directors.
The Audit Committee of the board of directors meets periodically with management, our internal auditors, and our independent auditors, Beard & Company, Inc. The committee discusses the scope of the independent annual audit, the internal audit program, internal accounting controls, financial accounting and reporting matters and regulatory reports. The internal auditors and the independent auditors have direct access to the Audit Committee.
The financial statements are audited each year by Beard & Company, Inc., which renders their independent professional opinion on the fairness of presentation of the statements and their conformity with generally accepted accounting principles. Their opinion on the 1997 financial statements is included in this annual report.
In addition, Heritage and its subsidiary are examined periodically by various regulatory agencies. Management considers carefully any reports that arise from such examinations and takes appropriate action.
/s/ Allen E. Kiefer - ----------------------------------- Allen E. Kiefer President & Chief Executive Officer
/s/ Richard A. Ketner - ----------------------------------- Richard A. Ketner Executive Vice President & Secretary
/s/ David L. Scott - ----------------------------------- David L. Scott, CPA Vice President & Treasurer
HERITAGE BANCORP, INC.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III --------
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Directors of the Registrant
* Prior to March 1, 1995, named person served as a Director of Bankers' Financial Services Corporation, which merged into Miners National Bancorp, Inc. ("Miners") on March 1, 1995, at which time Miners changed its name to Heritage Bancorp, Inc.
HERITAGE BANCORP, INC.
Executive Officers of the Registrant
The names, ages and positions of all of the Corporation's executive officers as of December 31, 1997 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires that directors and certain officers of the Corporation file reports of ownership and changes in ownership with the Securities and Exchange Commission as to the shares of Corporation common stock beneficially owned by them.
Based solely on its review of copies of such forms received by it, the Corporation believes that during the Corporation's fiscal year ending on December 31, 1997, all filing requirements applicable to its directors and officers were complied with in a timely fashion.
HERITAGE BANCORP, INC.
Item 11.
Item 11. Executive Compensation
Compensation
The following table shows, for the years ending December 31, 1997, 1996 and 1995, the cash compensation paid or accrued, as well as certain other compensation paid or accrued for those years, to Allen E. Kiefer, President and Chief Executive Officer of the Corporation and Richard A. Ketner, Executive Vice President and Secretary of the Corporation. Pursuant to the executive compensation disclosure rules of the Securities and Exchange Commission, information is not required as to the compensation of the Corporation's other executive officers because the total salary and bonus earned by such executive officers during 1997 did not exceed $100,000.
SUMMARY COMPENSATION TABLE
(1) Reflects bonus earned during the fiscal year, including a portion of which is paid during the next fiscal year.
(2) Consists of $1,600 in Bank-matching contributions to the Corporation's 401(k) Profit Sharing Plan and approximately $4,058 allocated to Mr. Kiefer's account under the Corporation's Employee Stock Ownership Plan.
(3) Consists of $1,344 in Bank-matching contributions to the Corporation's 401(k) Profit Sharing Plan and approximately $3,410 allocated to Mr. Ketner's account under the Corporation's Employee Stock Ownership Plan.
HERITAGE BANCORP, INC.
Stock Options
The following table contains information concerning the grant of stock options under the Corporation's 1995 Stock Incentive Plan to the Chief Executive Officer and the other named executive officer during the year ending December 31, 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(1) Illustrates value that would be realized upon exercise of the options immediately prior to the expiration of their term, assuming the specified compounded rates of appreciation of the Corporation's common stock over the term of the options.
(2) The date of grant for all options is March 25, 1997. All options granted are non-qualified stock options without SAR's. All options vest one year from the date of grant becoming exercisable for shares on the anniversary of the date of grant. To the extent not already exercisable, the options become automatically exercisable in the event of a merger or consolidation of the Corporation in which the Corporation is not the surviving entity, or the sale of all or substantially all of the assets of the Corporation, or an offer to purchase made by a party, other than the Corporation, to all stockholders of the Corporation for at least 35% of the outstanding stock. In addition, the Personnel Committee of the Board of Directors may, in its discretion, accelerate the vesting schedule, upon such terms and conditions as it may impose.
(3) The exercise price of all options granted is equal to the market price of the common stock on the date of grant. The exercise price shall be paid in cash, provided, however, that the Personnel Committee, in its sole discretion, may permit the payment of the exercise price in shares of common stock owned by the option holder prior to exercising the option, provided such shares have a fair market value on the date of payment equal to the option exercise price for the shares of common stock being purchased, or partly in cash and partly in such shares of common stock.
(4) All options expire 10 years from the date of grant. Notwithstanding the foregoing: (1) In the event of retirement, death or disability prior to the end of the option term, the option shall remain exercisable for a period of one year from the date of retirement, death or disability (but not later than the end of the option term) to the extent the option was vested, by acceleration or otherwise, at the time of retirement; and (2) in the event an option holder ceases to be employed other than by reason of retirement, death or disability, the option shall remain exercisable for three months from the date of cessation of employment (but not later than the end of the option term) to the extent the option was exercisable at the time of cessation of employment.
HERITAGE BANCORP, INC.
Option Exercises and Holdings
The following table sets forth information with respect to the Chief Executive Officer and the other named executive officer of the Corporation concerning the exercise of options during the year ending December 31, 1997 and unexercised options held as of the end of 1997.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
- ----------------------------------------
(1) Fair market value of common stock at exercise, minus the exercise price.
(2) Fair market value of common stock at year-end ($20.38 per share).
HERITAGE BANCORP, INC.
Defined Benefit Pension Plan
The Bank has a Defined Benefit Pension Plan for all eligible employees (age 21 plus one year of service). All the costs of the Plan, as determined by the Plan actuaries, are paid by the Bank. Employees do not and cannot contribute to the Plan. A plan participant's pension benefit, which becomes fully vested after 5 years of service, is determined by multiplying years of service by 1% by career average salary.
The following table indicates sample pension benefits which would be payable under this Plan to a retiring participant at age 65. Various levels of compensation and years of service are shown.
PENSION PLAN TABLE
Years of Service Career Average ---------------------------------------------- Compensation 10 20 30 40 - --------------------------------- ---------- ---------- ---------- ----------
$ 15,000 .................... $ 1,500 $ 3,000 $ 4,500 $ 6,000 30,000 .................... 3,000 6,000 9,000 12,000 45,000 .................... 4,500 9,000 13,500 18,000 60,000 .................... 6,000 12,000 18,000 24,000 75,000 .................... 7,500 15,000 22,500 30,000 90,000 .................... 9,000 18,000 27,000 36,000 105,000 .................... 10,500 21,000 31,500 42,000 120,000 .................... 12,000 24,000 36,000 48,000 135,000 .................... 13,500 27,000 40,500 54,000 150,000 .................... 15,000 30,000 45,000 60,000 165,000 .................... 16,500 33,000 49,500 66,000 180,000 .................... 18,000 36,000 54,000 72,000 195,000 .................... 19,500 39,000 58,500 78,000 210,000 .................... 21,000 42,000 63,500 84,000 225,000 .................... 22,500 45,000 67,500 90,000
The Benefit amounts set forth in the table are not subject to reduction for social security benefits. With respect to the named executive officers, the annual compensation set forth in the Summary Compensation Table does not differ substantially from the remuneration which would be covered under the Plan. For purposes of the Plan at December 31, 1997, Mr. Kiefer had 28 years and 8 months of service and Mr. Ketner had 3 years of service.
The amount of contribution, payment or accrual in respect of a specified person is not and cannot readily be separately or individually calculated by the regular actuaries for the Plan. The Bank made no pension contribution in 1997 due to the Full Funding Limitation under the Employee Retirement Income Security Act of 1974, as amended.
Executive Supplemental Income Plan
The Board of Directors adopted a nonqualified Executive Supplemental Income Benefit Plan ("ESI Plan") effective as of January 1, 1989. The ESI Plan provides death benefits and supplemental retirement benefits for selected officers of the Bank.
Under the ESI Plan, the Bank enters into individual agreements with participants. The agreements provide for annual payments to the participant's designated beneficiary for a specified period of years following the participant's death. The ESI Plan also provides for supplemental retirement benefits for a participant who has attained age 65 and who has remained in the continuous employment of the Bank until his retirement; however, in the case of the sale of the stock or assets, merger, or substantial change in the ownership of the Bank, continuous employment of the participant is required only until the date the participant voluntarily terminates his employment or is discharged by the Bank or its successor without just cause.
HERITAGE BANCORP, INC.
Under the supplemental retirement provisions, participants are eligible for supplemental benefits up to 75% of the participant's final average salary. Those supplemental retirement benefits are subject to reduction for social security benefits and benefits received under the Defined Benefit Pension Plan. Subject to the approval of the Bank Board of Directors, a participant can elect early retirement at age 55. However, a participant can elect early retirement without Board approval at age 55 if there is a sale of the stock or assets, merger, or substantial change in ownership of the Bank. The retirement benefits payable to a participant who has elected early retirement will be actuarially reduced. Mr. Kiefer's yearly supplemental pension benefit, commencing at his normal retirement and payable for 15 years, is $37,605. Mr. Ketner does not participate in the ESI Plan.
Director Compensation
Directors of the Corporation and Directors of the Bank receive an annual retainer of $2,000, provided, however, that an individual serving as both a Corporation and Bank Director receives only one $2,000 annual retainer. The Chairman receives an additional $2,000 retainer. Directors of the Corporation and the Bank receive $600 for attendance at each regular monthly meeting of the Corporation Board and Bank Board, respectively, and the Chairman receives $960 for attendance at each regular monthly meeting of the Corporation Board and Bank Board, respectively. The chairman of each Board Committee receives an additional $1,000 retainer. Directors of the Corporation and Bank are paid $50 per hour for each Board Committee meeting attended.
Change in Control and Employment Agreements
The Corporation has entered into Change in Control Agreements with the named executive officers. Under the terms of the agreements, in the event the executive officer's employment with the Corporation or Bank is terminated by the Corporation, Bank or the executive officer, pursuant to a change in control of the Bank or the Corporation, the executive officer's cash compensation in effect prior to the change in control will continue for a period of three (3) years. Cash compensation is defined to include base salary plus the incentive bonus earned for the preceding calendar year. A termination pursuant to a change in control may occur in connection with a merger, consolidation, acquisition, reorganization, sale of assets or significant stock acquisition of the Corporation or Bank. The Change in Control Agreements also provide that the Corporation will continue to provide the executive officer with available insurance coverages in effect at the time of executive's termination pursuant to a change in control for a period of three (3) years, offset by coverage from any subsequent employment, or until the executive attains age 65.
The Corporation also has entered into Employment Agreements with the named executive officers. Pursuant to the Employment Agreements, which were amended during 1997, each of the executive officers will continue employment with the Corporation and Bank in their current positions until September 30, 2000. The Employment Agreements provide that each of the executive officers shall be entitled to receive as compensation their respective base salaries in effect on the consummation date of the merger of Bankers' Financial Services Corporation into the Corporation on March 1, 1995, subject to increase based on merit review, plus participation in the Corporation's Incentive Compensation Plan and participation in the Corporation's employee benefit plans.
Compensation Committee Interlocks and Insider Participation
As reported in the "Board of Directors' Report On Executive Information", the entire Board of Directors of the Corporation is responsible for establishing, implementing and monitoring compensation policies. Messrs. Kiefer and Ketner, each of whom is a member of the Board, also serve as executive officers of the Corporation and the Bank. While Messrs. Kiefer and Ketner participated during 1997 in Board decisions regarding the compensation of subordinate executive officers, they did not participate in any Board decisions regarding their own compensation and were excused from Board meetings at which their respective compensation was discussed.
Board of Directors' Report on Executive Compensation
The Corporation does not have a Compensation Committee. The full Board of Directors of the Corporation is responsible for establishing, implementing and monitoring all compensation policies of the Corporation and its primary operating subsidiary, Heritage National Bank (the "Bank"). The Board of Directors is also responsible for evaluating the performance of the Chief Executive Officer of the Corporation and recommending appropriate compensation levels. The Chief Executive Officer evaluates the performance of subordinate officers of the Corporation and recommends individual compensation levels to the Board of Directors. The Chief Executive Officer does not participate in any Board decisions
HERITAGE BANCORP, INC.
regarding his own compensation as an executive officer. The Board of Directors meets without the Chief Executive Officer present to evaluate his performance under the Corporation's executive compensation program.
In 1997, the key elements of the Corporation's executive compensation package consisted of base salary, annual incentive bonus pursuant to the Heritage National Bank Incentive Plan (the "Incentive Bonus Plan") and stock option grants pursuant to the Corporation's 1995 Stock Incentive Plan (the "Stock Option Plan"). In addition, at various times in the past, the Corporation has adopted certain broad-based employee benefit plans in which executive officers have been permitted to participate including a defined benefit pension plan, an Employee Stock Ownership Plan, a 401(k) Profit Sharing Plan and a non-qualified Executive Supplemental Income Benefit Plan.
The Corporation's executive compensation program, particularly the incentive bonus, is designed to be closely linked to corporate performance and returns to shareholders. To this end, the Corporation, in conjunction with its independent compensation consultants, has developed an overall compensation strategy and compensation plan that ties a portion of the executive compensation to the Corporation's success in meeting specified performance goals. The objective of this strategy is to attract and retain the best possible executive talent, to motivate these executives to achieve the goals inherent in the Corporation's business strategy and to provide a compensation package that recognizes individual contributions as well as overall business results.
Base Compensation
The Chief Executive Officer initially recommends annual base salary levels for other executive officers to the Personnel Committee of the Board, taking into account performance and level of responsibility of the respective officers and overall corporate performance for the prior year. In making recommendations, the Chief Executive Officer also considers the competitive market place for executive talent, including a comparison to base compensation for comparable positions at competing financial institutions in the Corporation's geographic market area as compiled by the Human Resources Department of the Bank. Following review and approval by the Personnel Committee, the annual base salary levels are then presented to the full Board for final approval.
The base compensation of the Chief Executive Officer is set annually by the Board of Directors at a meeting which is not attended by the Chief Executive Officer. In determining the base compensation of the Chief Executive Officer, the Board treats overall corporate performance as the primary factor. The Board also takes into account the base compensation of presidents and chief executive officers at other similarly sized financial institutions as set forth in surveys subscribed to by the Corporation, along with salary information compiled by the Human Resource Department of the Bank with regard to the chief executive officer salaries at competitor institutions located within the Corporation's geographic market area.
During 1997, the base compensation of Allen E. Kiefer, President and Chief Executive Officer of the Corporation, was $143,800, which amount represents an increase of $6,000 or 4.4% over Mr. Kiefer's 1996 base compensation of $137,800.
Incentive Bonus Plan
The Incentive Bonus Plan (the "Plan") was implemented effective January 1, 1997. The purpose of the Plan is to increase shareholder value through a balanced increase in the growth and earnings of the Corporation by providing an opportunity for all employees, including executive officers of the Corporation, to earn additional cash renumeration in the form of a year-end bonus award if the Corporation's performance for the year exceeds certain "key performance indicators." The Plan is based on pre-defined, weighted goals (key performance indicators) which include loan and deposit growth, the margin, nonoperating income, the efficiency ratio, and asset quality. These key performance indicators are set at the beginning of each calendar year. The key performance indicators are weighted based on the relative amount of additional revenues achieving a goal for an individual indicator would generate. The overall theory is that a minimum level of achievement is necessary for any bonus to be paid out and after that level is achieved a percentage of the increase in net income would go into a bonus pool to be allocated to the employees of the Corporation. The minimum level of achievement is referred to as a baseline for each key performance indicator and is generally equal to the actual results of the Corporation from the prior year. If the Corporation performs below baseline for all key performance indicators, no bonus will be rewarded for that year. For the year ended December 31, 1997, the Plan generated a bonus pool equal to $517,890, which represents 32.6% of the increase in net income after giving effect for income taxes. The bonus plan is allocated to the employees based on a percentage of base salary. The percentage is based on the employee's position in the Corporation's salary administration program, where higher salary levels receive a
HERITAGE BANCORP, INC.
higher percentage of base salary for purposes of determining the bonus amount. For 1997, the percentage of the bonus pool applicable to the Chief Executive Officer was 10.9%, resulting in an incentive bonus for Mr. Kiefer totalling $56,429.
Stock Option Plan
Under the 1995 Stock Option Plan, incentive stock options, non-qualified stock options and stock appreciation rights in conjunction with such options, may be granted to executive officers of the Corporation or its subsidiaries. The Personnel Committee sets guidelines for the size of stock option awards based on a recommendation each year from management. Although the size of awards is largely a subjective determination based on the particular executive officer, factors considered include competitive compensation data from the list of peer group companies compiled by the Human Resources Department of the Bank, the amount of options previously awarded to an executive officer and the value of unexercised in-the-money options at year end. In the event of poor corporate performance, the Personnel Committee can elect not to award options.
Stock options during 1997 were granted with an exercise price equal to 100% of the fair market value of the common stock on the date of grant and vest in full one year from the date of grant. All options granted were non-qualified stock options. No stock appreciation rights were granted during 1997.
In 1997, Mr. Kiefer received options to purchase 10,000 shares of common stock with an exercise price of $13.38 per share. Mr. Kiefer presently is the beneficial owner, directly or indirectly, of 19,648 shares of common stock and also holds presently exercisable options to purchase an additional 10,624 shares and presently unexercisable options to purchase an additional 10,000 shares. The Board of Directors believes that significant equity interests in the Corporation held by the Corporation's senior management are beneficial to the common interests of shareholders and management.
Board of Directors
Albert L. Evans, Jr., Chairman Ermano O. Agosti Richard D. Biever Richard T. Fenstermacher Frederick A. Gosch Richard A. Ketner Allen E. Kiefer Robert F. Koehler Joanne C. McCloskey Raman V. Patel Joseph P. Schlitzer William J. Zimmerman
HERITAGE BANCORP, INC.
Performance Graph - --------------------------------------------------------------------------------
Total Return Performance
[LINE GRAPH APPEARS HERE]
HERITAGE BANCORP, INC.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Beneficial Owners
As of December 31, 1997, Heritage National Bank (the "Bank", all of the outstanding stock of which is held by the Corporation) held, either directly or by way of its nominees, approximately 8.29%, or approximately 395,776 shares of the outstanding stock of the Corporation in its trust department as fiduciary for certain trusts, estates and agency accounts which beneficially own such shares. Of these shares, the Bank had sole voting and investment power with respect to 239,151 shares, and shared voting and investment power with respect to 34,213 shares.
To the best of the Corporation's information and belief, no other person holds beneficially or of record, directly or indirectly, five percent (5%) or more of the outstanding shares of the Corporation's common stock.
Security Ownership of Management
The following table sets forth information relating to beneficial ownership of shares of common stock of the Corporation by all of the Corporation's present Directors, each named executive officer of the Corporation set forth in the Summary Compensation Table, and by all of the Corporation's Directors and executive officers as a group, without naming them, as of December 31, 1997. Unless otherwise indicated in a footnote below, each individual holds sole voting and investment power over the shares listed in the table. For purposes of the table, beneficial ownership also includes any shares which the individual has the right to acquire within 60 days of December 31, 1997 through the exercise of outstanding stock options granted pursuant to the Corporation's stock option plans.
HERITAGE BANCORP, INC.
(1) Includes 4,867 shares held jointly with spouse and 1,500 shares which may be acquired upon exercise of stock options.
(2) Includes 1,300 shares which may be acquired upon exercise of stock options.
(3) Includes 21,593 shares held jointly with spouse and 1,590 shares which may be acquired upon exercise of stock options.
(4) 7,846 of the shares reported as beneficially owned by Mr. Fenstermacher are owned directly by Sonric, a partnership. Also includes 1,500 shares which may be acquired upon exercise of stock options.
(5) Includes 12,636 shares held jointly with spouse, 1,472 shares held by Pflueger Insurance Agency and 1,500 shares which may be acquired upon exercise of stock options.
(6) Includes 9,070 shares held jointly with spouse, 23,248 shares which may be acquired upon exercise of stock options and 733 shares allocated to the account of Mr. Ketner under the Heritage's Employee Stock Ownership Plan and 401(k) Profit Sharing Plan.
(7) Includes 9,154 shares held jointly with spouse, 20,624 shares which may be acquired upon exercise of stock options and 4,078 shares allocated to the account of Mr. Kiefer under the Heritage's Employee Stock Ownership Plan and 401(k) Profit Sharing Plan.
(8) Includes 6,816 shares held jointly with spouse, 22,662 shares held directly by spouse and 1,500 shares which may be acquired upon exercise of stock options. Mr. Koehler disclaims beneficial ownership of the shares held directly by his spouse.
(9) Includes 16,698 shares held jointly with spouse, 1,450 shares held in a self-directed IRA, 2,712 shares held by spouse in a self-directed IRA, 1,500 shares which may be acquired upon exercise of stock options and 500 shares held as co-trustee. Mrs. McCloskey disclaims beneficial ownership of the 500 shares held in trust.
(10) Includes 11,710 shares held jointly with spouse and 1,500 shares which may be acquired upon exercise of stock options.
(11) Includes 27,351 shares held jointly with spouse, 1,500 shares which may be acquired upon exercise of stock options and 5,860 shares held by Higgins Insurance Associates, Inc., a corporation of which Mr. Schlitzer is a controlling person.
(12) Includes 2,065 shares held jointly with spouse and 1,500 shares which may be acquired upon exercise of stock options.
Item 13.
Item 13. Certain Relationships and Related Transactions
The Bank has had in the past and expects to have in the future, transactions in the ordinary course of its business, with directors and officers of the Bank and the Corporation and their associates, on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with other persons, which do not involve more than the normal risk of collectibility, or present other unfavorable features.
HERITAGE BANCORP, INC.
PART IV -------
Item 15.
Item 15. 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 of this Annual Report on Form 10-K are filed as a part of this Annual Report.
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
2 The Agreement and Plan of Consolidation, dated as of November 18, 1997, between Heritage Bancorp, Inc. (the "Corporation") and BCB Financial Services Corporation is incorporated herein by reference to Exhibit 2 to the Corporation's Current Report on Form 8-K, dated November 18, 1997.
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 Heritage National Bank Incentive Plan.
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) 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(d) 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(e) 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.
HERITAGE BANCORP, INC.
10(f) First Amendment to Employment Agreement between the Corporation and Allen E. Kiefer, President and Chief Executive Officer, is incorporated herein by reference to Exhibit 10(a) to the Corporation's Form 10-Q for the quarter ended September 30, 1997.
10(g) Employment Agreement between the Corporation and Richard A. Ketner, Executive Vice President and Secretary, 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(h) First Amendment to Employment Agreement between the Corporation and Richard A. Ketner, Executive Vice President and Secretary is incorporated herein by reference to Exhibit 10(b) to the Corporation's Form 10-Q for the quarter ended September 30, 1997.
10(i) Amended and Restated Change in Control Agreement between the Corporation and Allen E. Kiefer, President and Chief Executive Officer, is incorporated herein by reference to Exhibit 10(c) to the Corporation's Form 10-Q for the quarter ended September 30, 1997.
10(j) Amended and Restated Change in Control Agreement between the Corporation and Richard A. Ketner, Executive Vice President and Secretary, is incorporated herein by reference to Exhibit 10(d) to the Corporation's Form 10-Q for the quarter ended September 30, 1997.
10(k) Change in Control Agreement between the Corporation and David L. Snyder, Vice President and Senior Commercial Loan Officer, is incorporated herein by reference to Exhibit 10(e) to the Corporation's Form 10-Q for the quarter ended September 30, 1997.
10(l) Change in Control Agreement between the Corporation and David L. Scott, Vice President and Treasurer, is incorporated herein by reference to Exhibit 10(f) to the Corporation's Form 10-Q for the quarter ended September 30, 1997.
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).
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
99.1 Stock Option Agreement dated November 18, 1997 by and between BCB Financial Services Corporation ("BCB Stock Option Agreement") is incorporated herein by reference to Exhibit 99.1 to the Corporation's Current Report on Form 8-K dated November 18, 1997.
99.2 Stock Option Agreement dated November 18, 1997 by and between BCB Financial Services Corporation ("Heritage Stock Option Agreement") is incorporated herein by reference to Exhibit 99.2 to the Corporation's Current Report on Form 8-K dated November 18, 1997.
HERITAGE BANCORP, INC.
(b) Reports on Form 8-K.
The Corporation filed a current report on Form 8-K with the Securities and Exchange Commission on November 18, 1997, relating to the execution by the Corporation of an Agreement and Plan of Consolidation (the "Agreement") between the Corporation and BCB Financial Services Corporation ("BCB") and pursuant to which the Corporation and BCB will consolidate into a new and as yet unnamed Pennsylvania business corporation and two bank holding company. The Agreement was approved by the Boards of Directors of BCB and the Corporation on November 18, 1997 and is subject to shareholder and regulatory approval.
There were no other filings on Form 8-K during the quarter ending December 31, 1997.
HERITAGE BANCORP, INC.
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 5, 1998 By: /s/ Allen E. Kiefer ------------------------------------- Allen E. Kiefer President and Chief Executive Officer
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 5, 1998 - ----------------------------- and Director Allen E. Kiefer
/s/ Richard A. Ketner Executive Vice President, March 5, 1998 - ----------------------------- Secretary and Director Richard A. Ketner
/s/ David L. Scott Vice President and Treasurer March 5, 1998 - ----------------------------- (Principal Financial Officer) David L. Scott, CPA
/s/ Ermano O. Agosti Director March 5, 1998 - ----------------------------- Ermano O. Agosti
/s/ Richard D. Biever Director March 5, 1998 - ----------------------------- Richard D. Biever
/s/ Albert L. Evans, Jr. Chairman of the Board March 5, 1998 - ----------------------------- Albert L. Evans, Jr.
/s/ Richard T. Fenstermacher Director March 5, 1998 - ----------------------------- Richard T. Fenstermacher
/s/ Frederick A. Gosch Director March 5, 1998 - ----------------------------- Frederick A. Gosch
HERITAGE BANCORP, INC.
SIGNATURES TITLE DATE - ---------- ----- ----
/s/ Robert F. Koehler Director March 5, 1998 - ----------------------------- Robert F. Koehler
/s/ Joanne C. McCloskey Director March 5, 1998 - ----------------------------- Joanne C. McCloskey
/s/ Raman V. Patel Director March 5, 1998 - ----------------------------- Raman V. Patel
/s/ Joseph P. Schlitzer Director March 5, 1998 - ----------------------------- Joseph P. Schlitzer
/s/ William J. Zimmerman Director March 5, 1998 - ----------------------------- William J. Zimmerman
HERITAGE BANCORP, INC.
EXHIBIT INDEX -------------
Exhibit Sequential Number Page Number - ------ -----------
2 The Agreement and Plan of Consolidation, dated as of November 18, 1997, between Heritage Bancorp, Inc. (the "Corporation") and BCB Financial Services Corporation is incorporated herein by reference to Exhibit 2 to the Corporation's Current Report on Form 8-K, dated November 18, 1997.
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 Heritage National Bank Incentive Plan. 76
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) 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(d) 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(e) 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(f) First Amendment to Employment Agreement between the Corporation and Allen E. Kiefer, President and Chief Executive Officer, is incorporated herein by reference to Exhibit 10(a) to the Corporation's Form 10-Q for the quarter ended September 30, 1997.
10(g) Employment Agreement between the Corporation and Richard A. Ketner, Executive Vice President and Secretary, 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(h) First Amendment to Employment Agreement between the Corporation and Richard A. Ketner, Executive Vice President and Secretary is incorporated herein by reference to Exhibit 10(b) to the Corporation's Form 10-Q for the quarter ended September 30, 1997.
10(i) Amended and Restated Change in Control Agreement between the Corporation and Allen E. Kiefer, President and Chief Executive Officer, is incorporated herein by reference to Exhibit 10(c) to the Corporation's Form 10-Q for the quarter ended September 30, 1997.
HERITAGE BANCORP, INC.
Exhibit Sequential Number Page Number - ------ -----------
10(j) Amended and Restated Change in Control Agreement between the Corporation and Richard A. Ketner, Executive Vice President and Secretary, is incorporated herein by reference to Exhibit 10(d) to the Corporation's Form 10-Q for the quarter ended September 30, 1997.
10(k) Change in Control Agreement between the Corporation and David L. Snyder, Vice President and Senior Commercial Loan Officer, is incorporated herein by reference to Exhibit 10(e) to the Corporation's Form 10-Q for the quarter ended September 30, 1997.
10(l) Change in Control Agreement between the Corporation and David L. Scott, Vice President and Treasurer, is incorporated herein by reference to Exhibit 10(f) to the Corporation's Form 10-Q for the quarter ended September 30, 1997.
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).
21 Subsidiaries of the Registrant. 78
23 Consent of Independent Auditors. 79
27 Financial Data Schedule. 80
99.1 Stock Option Agreement dated November 18, 1997 by and between BCB Financial Services Corporation ("BCB Stock Option Agreement") is incorporated herein by reference to Exhibit 99.1 to the Corporation's Current Report on Form 8-K dated November 18, 1997.
99.2 Stock Option Agreement dated November 18, 1997 by and between BCB Financial Services Corporation ("Heritage Stock Option Agreement") is incorporated herein by reference to Exhibit 99.2 to the Corporation's Current Report on Form 8-K dated November 18, 1997.