<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Mark One
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission File Number: 333-47291
Southern Heritage Bancorp, Inc.
-----------------------------------------
(Exact name of small business issuer as specified in its charter)
Georgia 58-2352014
- ------------------------------- --------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3461 Atlanta Highway, P.O. Box 907, Oakwood, Georgia 30566
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(Address of principal executive offices)
(770) 531-1240
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(Issuer's telephone number)
N/A
--------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of November 1, 1999: 878,344; $5 par value.
Transitional Small Business Disclosure Format (Check One) Yes No X
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1
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SOUTHERN HERITAGE BANCORP, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheet - September 30, 1999........................3
Consolidated Statements of Operations and
Comprehensive Loss - Three Months and Nine Months Ended
September 30, 1999....................................................4
Consolidated Statement of Cash Flows - Nine
Months Ended September 30, 1999.......................................5
Notes to Consolidated Financial Statements.............................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............8
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K................................10
Signatures...............................................................11
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
FINANCIAL STATEMENTS
SOUTHERN HERITAGE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(Unaudited)
Assets
------
Cash and due from banks $ 889,895
Federal funds sold 4,915,000
Securities available-for-sale, at fair value 6,619,115
Loans 13,741,541
Less allowance for loan losses 206,230
------------
Loans, net 13,535,311
------------
Premises and equipment 1,950,056
Other assets 201,857
------------
Total assets $ 28,111,234
============
Liabilities and Stockholders' Equity
------------------------------------
Deposits
Demand $ 2,185,016
Interest-bearing demand 4,766,115
Savings 232,214
Time 13,247,905
------------
Total deposits 20,431,250
Other liabilities 95,724
------------
Total liabilities 20,526,974
------------
Commitments and contingent liabilities
Stockholders' equity
Common stock, par value $5; 1,000,000 shares
authorized; 878,344 shares issued
and outstanding 4,391,720
Capital surplus 4,339,985
Accumulated deficit (1,032,087)
Accumulated other comprehensive loss (115,358)
------------
Total stockholders' equity 7,584,260
------------
Total liabilities and stockholders' equity $ 28,111,234
============
The accompanying notes are an integral part of these consolidated financial
statements.
3
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SOUTHERN HERITAGE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
------------------ -------------------
<S> <C> <C>
Interest income
Loans $ 292,767 $ 530,641
Taxable securities 86,416 135,139
Federal funds sold 106,830 357,339
------------------ -------------------
Total interest income 486,013 1,023,119
Interest expense on deposits 202,917 399,907
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Net interest income 283,096 623,212
Provision for loan losses 85,830 206,230
------------------ -------------------
Net interest income after provision for loan
losses 197,266 416,982
------------------ -------------------
Other operating income 24,776 47,462
------------------ -------------------
Other expenses
Salaries and other employee benefits 146,141 409,079
Occupancy and equipment expenses 49,433 151,920
Other operating expenses 117,015 398,571
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312,589 959,570
------------------ -------------------
Net loss before income taxes (90,547) (495,126)
Income tax expense - -
------------------ -------------------
Net loss $ (90,547) $ (495,126)
Other comprehensive loss:
Unrealized losses on securities available-for-sale
arising during period (27,036 (115,358)
------------------ -------------------
Comprehensive loss $ (117,583) $ (610,484)
=================== ===================
Basic and diluted losses per common share $ (0.10) $ (0.56)
=================== ===================
Weighted average shares outstanding 878,344 878,344
=================== ===================
Cash dividends per share of common stock $ - $ -
=================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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SOUTHERN HERITAGE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
OPERATING ACTIVITIES
Net loss $ (495,126)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 41,983
Provision for loan losses 206,230
Other operating activities (121,978)
-------------
Net cash used in operating activities (368,891)
-------------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (6,734,473)
Net increase in Federal funds sold (4,915,000)
Net increase in loans (13,741,541)
Purchase of premises and equipment (1,762,299)
Decrease in interest-bearing deposits in banks 7,977,209
-------------
Net cash used in investing activities (19,176,104)
-------------
FINANCING ACTIVITIES
Net increase in deposits 20,431,250
-------------
Net cash provided by financing activities 20,431,250
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Net increase in cash and due from banks 886,255
Cash and due from banks, beginning of period 3,640
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Cash and due from banks, end of period $ 889,895
=============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid for interest $ 339,395
NONCASH TRANSACTION
Unrealized losses on securities available-for-sale $ (115,358)
The accompanying notes are an integral part of these consolidated financial
statements.
5
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SOUTHERN HERITAGE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Southern Heritage Bancorp, Inc. (the "Company") is a one-bank holding
company whose business is conducted by its wholly-owned subsidiary,
Southern Heritage Bank (the "Bank"). The Bank is a commercial bank
located in Oakwood, Hall County, Georgia. The Company completed the
sale of its common stock and obtained all necessary regulatory
approvals to commence operations in December of 1998. The Company sold
a total of $8,783,440 of common stock and capitalized the Bank with
$8,000,000. The Bank commenced operations on January 4, 1999.
The consolidated financial information included herein is unaudited;
however, such information reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the interim
period.
The results of operations for the three and nine month periods ended
September 30, 1999 is not necessarily indicative of the results to be
expected for the full year.
NOTE 2. CURRENT ACCOUNTING DEVELOPMENTS
In April of 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start
Up Activities". SOP 98-5 requires that costs of start-up activities
and organization costs be expensed as incurred. SOP 98-5 became
effective for financial statements for fiscal years beginning after
December 15, 1998. During 1998, the Company wrote off $63,175 of
unamortized organization costs upon adoption of SOP 98-5. In addition,
Bank related organization costs totaling $35,620 were expensed
immediately upon capitalization of the Bank.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" as
was amended by SFAS 137 delaying the effective date. This statement is
required to be adopted for fiscal years beginning after June 15, 2000.
However, the statement permits early adoption as of the beginning of
any fiscal quarter after its issuance. The Company expects to adopt
this statement effective January 1, 2001. SFAS No. 133 requires the
Company to recognize all derivatives as either assets or liabilities
in the balance sheet at fair value. For derivatives that are not
designated as hedges, the gain or loss must be recognized in earnings
in the period of change. For derivatives that are designated as
hedges, changes in the fair value of the hedged assets, liabilities,
or firm commitments must be recognized in earnings or recognized in
other comprehensive income until the hedged item is recognized in
earnings, depending on the nature of the hedge. The ineffective
portion of a derivative's change in fair value must be recognized in
earnings immediately. Management has not yet determined what effect
the adoption of SFAS No. 133 will have on the Company's earnings or
financial position.
6
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SOUTHERN HERITAGE BANCORP, INC. AND SUBSIDIARY
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
- --------------------------
This quarterly report contains certain forward-looking statements which are
based on certain assumptions and describe future plans, strategies and our
expectations. These forward-looking statements are generally identified by use
of the words "believe," "intend," "anticipate," "estimate," "project," or
similar expressions. Our ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse effect on our operations include, but are not limited to,
changes in interest rates, general economic conditions, legislation and
regulation, monetary and fiscal policies of the U.S. Government, including
policies of the U.S. Treasury and the Federal Reserve Board, the quality or
composition of our loan or security portfolio, demand for loans, deposit flows,
competition, demand for financial services in our market area, and accounting
principles and guidelines. You should consider these risks and uncertainties in
evaluating forward-looking statements, and should no place undue reliance on
such statements. We will not publicly release the result of any revisions which
may be made to any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Financial Condition
- -------------------
As of September 30, 1999, the Company had total assets of $28.1 million. The
Company raised $8.8 million from the sale of its common stock and has received
$20.4 million in deposits since the commencement of operations on January 4,
1999. The Company has invested the proceeds from its stock sale and deposit
growth in Federal funds sold ($4.9 million), U. S. Treasury and Agency
securities ($6.6 million), and loans ($13.7 million). The Company expects that
loan and deposit growth will be significant during its early years of
operations. The expected growth is not uncommon for de novo banks and is
consistent with management's long-term plan.
Liquidity
- ---------
As of September 30, 1999, the Bank's liquidity ratio was far in excess of its
target ratio, due to its investment in Federal funds sold and other short-term
assets. As loan growth continues to increase, the Bank's liquidity ratio will
decrease rapidly to levels more in line with its target range of 25% to 30%.
Capital
- -------
The minimum capital requirements for banks and bank holding companies require a
leverage capital to assets ratio of at least 4%, core capital to risk-weighted
assets ratio of at least 4%, and total capital to risk-weighted assets of at
least 8%. The Company and Bank's capital ratios are far in excess of these
regulatory requirements. As asset growth continues, these ratios will decrease
rapidly to levels closer to, but still in excess of the regulatory minimum
requirements.
7
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Results of Operations
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The Bank commenced its operations on January 4, 1999. Prior to commencement, the
Company was engaged in activities involving the formation of the Company,
selling its common stock and obtaining necessary regulatory approvals. The
Company incurred operating losses totaling $536,962 during its organizational
period, $56,344 in 1997, and $480,618 in 1998. The Company incurred total
organizational and stock issue costs of $150,530 of which $51,735 has been
recorded as a reduction of capital surplus. From commencement of operations to
the end of the third quarter, the Company has incurred additional operating
losses of $495,125. The Company expects that it will continue to incur operating
losses during its first full year of operations, until the increase in loans and
other interest-earning assets will generate the income necessary to cover
interest expense and other operating expenses.
The net loss for the three months ended September 30, 1999 decreased by $35,000
to a net loss of $91,000 as compared to the three months ended June 30, 1999.
The improvement in net earnings is directly related to the increase in net
interest income. Interest earning assets increased by $1,319,000 in the third
quarter. However, most significantly, loans increased during the same period by
$6,047,000. The movement from Federal funds sold to loans generated a
significantly greater return to the Company.
As of September 30, 1999 the Company had not recognized any charge-offs or
recoveries in its loan portfolio. As of September 30, 1999 there were only
$4,000 in loans between 30 and 89 days past due, and no impaired or nonaccrual
loans. The allowance for loan losses as a percentage of total loans was 1.50%.
Management has provided for potential losses based primarily on peer group
information.
As of September 30, 1999, the net interest margin was 4.34%. The net interest
margin is gradually increasing as loan volume continues to increase.
Year 2000 Issues
- ----------------
Like many financial institutions, the Company relies on computers to conduct its
business and information systems processing. Industry experts are concerned that
on January 1, 2000, some computers may not be able to interpret the new year
properly, causing computer malfunctions. As described in more detail below, we
have developed and are executing a plan to insure that our computer and
telecommunication systems do not have these year 2000 problems and we do not
anticipate that the year 2000 issue will materially impact our business or
operations. We will rely on third party vendors for our computer and
telecommunication systems and other office equipment, and we will also rely on a
third party to process our data and account information. Because we are a de
novo bank, we have chosen only those vendors who are ready for the year 2000,
and therefore will not have to address problems in older systems. We will
continue to monitor this situation up to and through the century change.
Although we believe we have addressed the year 2000 issue, we cannot be entirely
sure that the year 2000 will not have any adverse effect on the Bank.
We have prepared a comprehensive year 2000 plan to monitor and insure the year
2000 compliance of our third party vendors of computer and telecommunication
systems, data processing services, and other office equipment. We are executing
this plan under the supervision of our chief financial officer and senior vice
president of operations, with oversight from our board of directors. Under the
plan, we will investigate the year 2000 readiness of each vendor, review year
2000 testing completed by each vendor, test our own systems if necessary, and
require comprehensive year 2000 statements from each vendor. Our investigation
of each vendor has consisted of requesting and reviewing its year 2000 test
results.
8
<PAGE>
The Intercept Group, Inc. provides our mission critical computer software and
data processing services. The Intercept Group is a well-established company and
provides computer systems and data processing services to financial institutions
throughout the United States. The Intercept Group has completed testing of its
systems for year 2000 issues. Rather than test all of its customers
individually, the Intercept Group, like other vendors, performs tests of its
systems on selected financial institutions which run its systems under a variety
of conditions and configurations. The purpose of this selective testing was to
avoid the prohibitive cost and expense of testing every installed system, while
still providing a high level of comfort that its systems will perform under all
conditions. The Intercept Group system includes interfaces to other systems
provided by other vendors, such as our ATM hardware. The Intercept Group has
also tested these interfaces using the same approach.
Our year 2000 plan extends to our other less critical vendors as well, including
telephone systems, credit card processors, and suppliers of office equipment
such as copy and fax machines. Under our plan, we are reviewing the test
results, assurances and statements of all of these vendors. Based on our review
of our vendors' systems and year 2000 testing results to date, we do not believe
that any of them will have any significant year 2000 problems.
Our customers may also have year 2000 issues. Such issues could disrupt certain
businesses with high year 2000 risk and affect their deposit balances and their
ability to repay their loans. We intend to review each customer's exposure and
assess year 2000 readiness through year 2000 surveys. For those customers with
high credit risk and high potential exposure, we may require more substantial
proof of year 2000 compliance. Although these surveys will be helpful, it would
be very difficult for us to accurately assess the year 2000 readiness of any
particular borrower or depositor. Additionally, there may be a higher than usual
demand for liquidity immediately prior to the century change due to deposit
withdrawals by customers concerned about year 2000 issues. To address this
possible demand, we plan to have a higher percentage of our investment portfolio
in readily accessible funds during this time frame.
9
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
None.
10
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SOUTHERN HERITAGE BANCORP, INC.
(Registrant)
DATE: 11-12-99 BY: /s/ Gary H. Anderson
--------------------- --------------------------------------
Gary H. Anderson, President and C.E.O.
DATE: 11-12-99 BY: /s/ John Evans
--------------------- --------------------------------------
John Evans, Chief Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 890
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,915
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,619
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 13,742
<ALLOWANCE> 206
<TOTAL-ASSETS> 28,111
<DEPOSITS> 20,431
<SHORT-TERM> 0
<LIABILITIES-OTHER> 96
<LONG-TERM> 0
0
0
<COMMON> 4,392
<OTHER-SE> 3,192
<TOTAL-LIABILITIES-AND-EQUITY> 28,111
<INTEREST-LOAN> 531
<INTEREST-INVEST> 135
<INTEREST-OTHER> 357
<INTEREST-TOTAL> 1,023
<INTEREST-DEPOSIT> 400
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 623
<LOAN-LOSSES> 206
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 960
<INCOME-PRETAX> (495)
<INCOME-PRE-EXTRAORDINARY> (495)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (495)
<EPS-BASIC> (.56)
<EPS-DILUTED> (.56)
<YIELD-ACTUAL> 4.34
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 206
<ALLOWANCE-DOMESTIC> 206
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 206
</TABLE>
