<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 June 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
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(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 August 1, 1999: 878,344; $5.00 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
- -------------------------------------------------------------------------------
INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - June 30, 1999.........................3
Consolidated Statement of Operations and
Comprehensive Loss - Three Months and Six Months Ended
June 30, 1999.....................................................4
Consolidated Statement of Cash Flows - Six
Months Ended June 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 4 - Submission of Matters to a Vote of Security Holders.........11
Item 6 - Exhibits and Reports on Form 8-K............................11
Signatures...........................................................12
2
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PART I - FINANCIAL INFORMATION
FINANCIAL STATEMENTS
SOUTHERN HERITAGE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(Unaudited)
Assets
------
Cash and due from banks $ 469,528
Federal funds sold 11,370,000
Securities available-for-sale, at fair value 4,892,194
Loans 7,694,098
Less allowance for loan losses 120,400
---------------------
Loans, net 7,573,698
---------------------
Premises and equipment 1,182,983
Other assets 116,857
---------------------
Total assets $ 25,605,260
=====================
Liabilities and Stockholders' Equity
------------------------------------
Deposits
Demand $ 1,966,952
Interest-bearing demand 4,277,012
Savings 184,222
Time 11,419,481
---------------------
Total deposits 17,847,667
Other liabilities 55,751
---------------------
Total liabilities 17,903,418
---------------------
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 (941,541)
Accumulated other comprehensive loss (88,322)
---------------------
Total stockholders' equity 7,701,842
---------------------
Total liabilities and stockholders' equity $ 25,605,260
=====================
The accompanying notes are an integral part of these consolidated financial
statements.
3
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SOUTHERN HERITAGE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------------ -------------------
Interest income
<S> <C> <C>
Loans $ 164,765 $ 237,874
Taxable securities 46,738 48,723
Federal funds sold 144,695 250,509
---------------------------- -----------------------------
Total interest income 356,198 537,106
Interest expense on deposits 159,878 196,990
---------------------------- -----------------------------
Net interest income 196,320 340,116
Provision for loan losses 58,400 120,400
---------------------------- -----------------------------
Net interest income after provision for loan losses 137,920 219,716
---------------------------- -----------------------------
Other operating income 14,518 22,686
---------------------------- -----------------------------
Other expenses
Salaries and other employee benefits 136,496 262,938
Occupancy and equipment expenses 53,884 102,487
Other operating expenses 87,541 281,556
---------------------------- -----------------------------
277,921 646,981
---------------------------- -----------------------------
Net loss before income taxes (125,483) (404,579)
Income tax expense - -
---------------------------- -----------------------------
Net loss $ (125,483) $ (404,579)
Other comprehensive income:
Unrealized losses on securities available-for-sale
arising during period (89,119) (88,322)
---------------------------- -----------------------------
Comprehensive loss $ (214,602) $ (492,901)
============================ =============================
Basic and diluted losses per common share $ (0.14) $ (0.46)
============================ =============================
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
SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
OPERATING ACTIVITIES
Net loss $ (404,579)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 22,986
Provision for loan losses 120,400
Other operating activities (66,862)
----------------------
Net cash used in operating activities (328,055)
----------------------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (4,980,516)
Net increase in Federal funds sold (11,370,000)
Net increase in loans (7,704,188)
Purchase of premises and equipment (976,229)
Decrease in interest-bearing deposits in banks 7,977,209
----------------------
Net cash used in investing activities (17,053,724)
----------------------
FINANCING ACTIVITIES
Net increase in deposits 17,847,667
----------------------
Net cash provided by financing activities 17,847,667
----------------------
Net increase in cash and due from banks 465,888
Cash and due from banks, beginning of period 3,640
----------------------
Cash and due from banks, end of period $ 469,528
======================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid for interest $ 150,700
NONCASH TRANSACTION
Unrealized losses on securities available-for-sale $ (88,322)
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 six month period ended June 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. CONSTRUCTION IN PROCESS
The Company is currently in process of constructing its banking
facility. The estimated costs to construct and furnish the facility is
approximately $2,000,000. The new facility is scheduled to be completed
and occupied in the third quarter of 1999.
7
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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
- --------------------------
The Management's Discussion and Analysis which follows, contains forward-looking
statements in addition to historical information, including, but not limited to
statements regarding Management's beliefs, current expectations, estimates and
projections about the financial services industry, the economy, and about the
Company and the Bank in general. Such forward-looking statements are subject to
certain factors that could cause actual results to differ materially from
historical results or anticipated events, trends or results.
Financial Condition
- -------------------
As of June 30, 1999, the Company had total assets of $25.6 million. The Company
raised $8.8 million from the sale of its common stock and has received $17.8
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 ($11.4 million), U. S. Treasury and Agency securities ($4.9
million), and loans ($7.7 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 June 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 the 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.
8
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Results of Operations
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The Bank commenced its operations on January 4, 1999. Prior to the 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 second quarter, the Company has incurred additional operating
losses of $404,579. 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.
As of June 30, 1999 the Company had not recognized any charge-offs or recoveries
in its loan portfolio. In addition, as of June 30, 1999 there were no past due
loans over 30 days, impaired loans, or nonaccrual loans. The allowance for loan
losses as a percentage of total loans was 1.56%. Management has provided for
potential losses based primarily on peer group information.
The Company has continued to grow interest-earning assets in the second quarter,
which increased by $7.5 million. Total loans grew by $3.7 million and securities
grew by $3.1 million, both of which were funded primarily by the $7.5 million
increase in deposits. The Company continues to maintain a significant amount of
Federal funds sold, $11.4 million, in order to fund new loan growth. As of June
30, 1999, the net interest margin was 4.21% on an annualized basis. The net
interest margin will gradually increase as loan volume increases.
The Company was in its organizational stage as of June 30, 1998. For the six
months ended June 30, 1998, the Company had incurred $193,000 of organizational
expenses and $81,000 of costs related to the construction of its main office.
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.
9
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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.
10
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The annual meeting of the stockholders of the Company was held on
June 9, 1999.
(b) The following directors were elected at the meeting to serve terms
through the year indicated:
Harold D. Nichols 2002
Edward R. Quillian 2002
M. Milton Robson 2002
(c) Mauldin & Jenkins, LLC was ratified as the Company's independent
auditors for fiscal year 1999.
The shares represented at the meeting (548,857 shares or 62.48%)
voted as follows:
Item (b) For Against Abstain Total
Harold D. Nichols 533,637 - 15,220 548,857
Edward R. Quillian 539,237 - 9,620 548,857
M. Milton Robson 539,237 - 9,620 548,857
Item (c) For Against Abstain Total
Ratification of
Mauldin & Jenkins, LLC 546,067 1,100 1,690 548,857
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
None.
11
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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: August 13, 1999 BY: /s/ Gary H. Anderson
--------------------- --------------------------------------
Gary H. Anderson, President and C.E.O.
DATE: August 13, 1999 BY: /s/ John Evans
--------------------- --------------------------------------
John Evans, Banking Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1999 FINANCIAL STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 470
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,370
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,892
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 7,694
<ALLOWANCE> 120
<TOTAL-ASSETS> 25,605
<DEPOSITS> 17,848
<SHORT-TERM> 0
<LIABILITIES-OTHER> 55
<LONG-TERM> 0
0
0
<COMMON> 4,392
<OTHER-SE> 3,310
<TOTAL-LIABILITIES-AND-EQUITY> 25,605
<INTEREST-LOAN> 238
<INTEREST-INVEST> 49
<INTEREST-OTHER> 250
<INTEREST-TOTAL> 537
<INTEREST-DEPOSIT> 197
<INTEREST-EXPENSE> 197
<INTEREST-INCOME-NET> 340
<LOAN-LOSSES> 120
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 647
<INCOME-PRETAX> (404)
<INCOME-PRE-EXTRAORDINARY> (404)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (404)
<EPS-BASIC> (.46)
<EPS-DILUTED> (.46)
<YIELD-ACTUAL> 4.21
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 120
<ALLOWANCE-DOMESTIC> 120
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 120
</TABLE>
