<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
Commission file number: 0-31825
HERITAGE FINANCIAL HOLDING CORPORATION
(Exact name of small business issuer as specified in its charter)
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<S> <C>
Delaware 63-1259533
(State of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
211 Lee Street, N.E.
Decatur, Alabama 35601
(Address of principal executive offices)
(256) 355-9500
(Issuer's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
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<S> <C> <C>
Common Stock, $0.01 par value Outstanding at October 31, 2000: 8,475,822 shares
</TABLE>
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FORM 10-QSB
HERITAGE FINANCIAL HOLDING CORPORATION
SEPTEMBER 30, 2000
TABLE OF CONTENTS
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<CAPTION>
PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at September 30, 2000
and December 31, 1999........................................................ 3
Consolidated Statements of Income For the Three Months Ended
September 30, 2000 and 1999.................................................. 4
Consolidated Statements of Comprehensive Income For the Three Months Ended
September 30, 2000 and 1999.................................................. 5
Consolidated Statements of Income For the Nine Months Ended
September 30, 2000 and 1999.................................................. 6
Consolidated Statements of Comprehensive Income For the Nine Months
Ended September 30, 2000 and 1999............................................ 7
Consolidated Statement of Shareholders' Equity For the Nine Months
Ended September 30, 2000..................................................... 8
Consolidated Statements of Cash Flows For the Nine Months Ended
September 30, 2000 and 1999.................................................. 9
Notes to Consolidated Financial Statements...................................... 10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations................................ 12
PART II - OTHER INFORMATION
Item 5 - Other Information............................................................... 18
Item 6 - Exhibits and Reports on Form 8-K................................................ 18
SIGNATURES
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
HERITAGE FINANCIAL HOLDING CORPORATION
SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
Consolidated Heritage
September 30, Bank
2000 December 31,
(Unaudited) 1999
----------- ----
<S> <C> <C>
ASSETS
Cash and due from banks ..................................................... $ 5,885,878 $ 6,357,183
Interest-bearing deposits with other banks .................................. 871,018 9,533,139
Federal funds sold and securities purchased under agreements to resale ...... 38,140,000 13,185,000
Securities available-for-sale ............................................... 25,998,976 19,969,134
Loans, net of unearned income ............................................... 371,111,204 244,619,907
Allowance for loan losses ................................................... (4,650,701) (3,035,549)
Premises and equipment, net ................................................. 5,360,712 3,666,891
Accrued interest ............................................................ 4,223,088 2,082,411
Other real estate owned ..................................................... 212,875 212,875
Other assets ................................................................ 1,335,226 1,361,019
------------- -------------
TOTAL ASSETS ............................................................ $ 448,488,276 $ 297,952,010
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits .............................................. $ 11,925,377 $ 13,689,904
Interest-bearing deposits ................................................. 388,285,386 235,342,259
------------- -------------
TOTAL DEPOSITS .......................................................... 400,210,763 249,032,163
Accrued interest ............................................................ 3,378,880 1,472,898
FHLB advances ............................................................... 12,000,043 25,000,000
Other liabilities ........................................................... 700,740 526,899
------------- -------------
TOTAL LIABILITIES ....................................................... 416,290,426 276,031,960
SHAREHOLDERS' EQUITY
Common stock ($0.01 par value; 40,000,000 shares authorized, 8,475,822 issued
and outstanding at September 30, 2000; 7,581,044 issued and outstanding
at December 31, 1999) ..................................................... 84,758 75,810
Capital surplus ............................................................. 30,141,727 21,554,250
Retained earnings ........................................................... 2,613,462 1,182,807
Accumulated comprehensive income (loss): net unrealized holding gains
(losses) on securities available-for-sale, net of deferred income tax ..... (642,097) (892,817)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY .............................................. 32,197,850 21,920,050
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............................. $ 448,488,276 $ 297,952,010
============= =============
</TABLE>
See notes to consolidated financial statements
3
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CONSOLIDATED STATEMENTS OF INCOME
HERITAGE FINANCIAL HOLDING CORPORATION
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
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<CAPTION>
Heritage Bank
Consolidated Only
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans ...................................... $ 8,496,716 $ 4,028,317
Interest and dividends on securities:
Taxable securities ............................................ 404,050 292,388
Nontaxable securities ......................................... 30,904 26,100
Interest earned on deposits with other banks .................... 129,000 30,000
Interest earned on federal funds sold and securities purchased
under agreements to resale .................................... 820,415 137,117
----------- -----------
TOTAL INTEREST INCOME ....................................... 9,881,085 4,513,922
----------- -----------
INTEREST EXPENSE
Interest on deposits ............................................ 6,100,641 2,398,856
Interest on borrowed funds ...................................... 250,073 184,170
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TOTAL INTEREST EXPENSE ...................................... 6,350,714 2,583,026
----------- -----------
NET INTEREST INCOME ................................................ 3,530,371 1,930,896
Provision for loan losses ....................................... 763,200 457,870
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ....................................... 2,767,171 1,473,026
NONINTEREST INCOME
Service charges on deposit accounts ............................. 185,038 135,999
Other operating income .......................................... 77,113 40,214
Securities gains (losses) ....................................... -- 904
----------- -----------
TOTAL NONINTEREST INCOME .................................... 262,151 177,117
----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits .................................. 1,151,927 788,004
Net occupancy expense ........................................... 198,145 160,516
Other operating expense ......................................... 727,780 433,567
----------- -----------
TOTAL NONINTEREST EXPENSES .................................. 2,077,852 1,382,087
----------- -----------
Income before income taxes ......................................... 951,470 268,056
Provision for income taxes ......................................... 378,956 123,490
----------- -----------
NET INCOME ......................................................... $ 572,514 $ 144,566
=========== ===========
Basic earnings per common share .................................... $ .07 $ .02
Earnings per common share assuming dilution ........................ .06 .02
Basic weighted average shares outstanding .......................... 8,474,144 7,200,804
Weighted average shares outstanding assuming dilution .............. 10,387,216 8,633,282
</TABLE>
See notes to consolidated financial statements
4
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
HERITAGE FINANCIAL HOLDING CORPORATION
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
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<CAPTION>
Heritage Bank
Consolidated Only
2000 1999
<S> <C> <C>
NET INCOME ............................................................... $ 572,514 $ 144,566
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during the period ......... 220,679 (183,528)
Less: reclassification adjustments for gains included in net income . -- (904)
--------- ---------
Net unrealized losses ............................................... 220,679 (184,432)
Income tax related to items of other comprehensive income ............. (88,272) 73,773
--------- ---------
Other comprehensive income (loss) ........................................ 132,407 (110,659)
--------- ---------
COMPREHENSIVE INCOME ..................................................... $ 704,921 $ 33,907
========= =========
</TABLE>
See notes to consolidated financial statements
5
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CONSOLIDATED STATEMENTS OF INCOME
HERITAGE FINANCIAL HOLDING CORPORATION
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
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<CAPTION>
Heritage Bank
Consolidated Only
2000 1999
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans .......................................... $22,128,226 $10,206,705
Interest and dividends on securities:
Taxable securities ................................................ 1,158,341 883,253
Nontaxable securities ............................................. 92,712 58,191
Interest earned on deposits with other banks ........................ 356,000 93,937
Interest earned on federal funds sold and securities purchased under
agreements to resale .............................................. 1,354,486 423,506
----------- -----------
TOTAL INTEREST INCOME ........................................... 25,089,765 11,665,592
----------- -----------
INTEREST EXPENSE
Interest on deposits ................................................ 14,269,574 6,235,802
Interest on borrowed funds .......................................... 994,229 440,023
----------- -----------
TOTAL INTEREST EXPENSE .......................................... 15,263,803 6,675,825
----------- -----------
NET INTEREST INCOME .................................................... 9,825,962 4,989,767
Provision for loan losses ........................................... 2,399,120 1,055,170
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ........................................... 7,426,842 3,934,597
NONINTEREST INCOME
Service charges on deposit accounts ................................. 544,269 360,248
Other operating income .............................................. 203,607 101,437
Securities gains .................................................... -- 1,110
----------- -----------
TOTAL NONINTEREST INCOME ........................................ 747,876 462,795
----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits ...................................... 3,343,419 1,934,853
Occupancy and equipment expense ..................................... 572,712 374,873
Other operating expense ............................................. 1,915,041 1,064,958
----------- -----------
TOTAL NONINTEREST EXPENSES ...................................... 5,831,172 3,374,684
----------- -----------
Income before income taxes ............................................. 2,343,546 1,022,708
Provision for income taxes ............................................. 912,890 430,285
----------- -----------
NET INCOME ............................................................. $ 1,430,656 $ 592,423
=========== ===========
Basic earnings per common share ........................................ $ .17 $ .08
Earnings per common share assuming dilution ............................ .14 .07
Basic weighted average shares outstanding .............................. 8,263,346 7,196,366
Weighted average shares outstanding assuming dilution .................. 10,072,414 8,291,434
</TABLE>
See notes to consolidated financial statements
6
<PAGE> 7
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
HERITAGE FINANCIAL HOLDING CORPORATION
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
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<CAPTION>
Heritage Bank
Consolidated Only
2000 1999
<S> <C> <C>
NET INCOME ....................................................................... $ 1,430,656 $ 592,423
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ................. 417,867 (1,078,101)
Less: reclassification adjustments for gains included in net income ......... -- (1,110)
----------- -----------
Net unrealized losses ....................................................... 417,867 (1,079,211)
Income tax related to items of other comprehensive income ..................... (167,147) 431,685
----------- -----------
Other comprehensive income (loss) ................................................ 250,720 (647,526)
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COMPREHENSIVE INCOME (LOSS) ...................................................... $ 1,681,376 $ (55,103)
=========== ===========
</TABLE>
See notes to financial statements
7
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
HERITAGE FINANCIAL HOLDING CORPORATION
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
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<CAPTION>
Accumulated
Common Capital Retained Comprehensive
Stock Surplus Earnings Income (Loss) Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 ............ $ 75,810 $21,554,250 $ 1,182,806 $ (892,817) $21,920,049
Net change in unrealized gains
(losses) on securities ............... -- -- -- 250,720 250,720
Issuance of shares under
Employee Stock Purchase Plan ......... 48 29,630 -- -- 29,678
Issuance of shares from stock options ... 400 66,347 -- -- 66,747
Issuance of shares from stock offering .. 8,500 8,491,500 -- --
8,500,000
Net income - September 30, 2000 ......... -- -- 1,430,656 -- 1,430,656
----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 2000 ........... $ 84,758 $30,141,727 $ 2,613,462 $ (642,097) $32,197,850
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
8
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CONSOLIDATED STATEMENTS OF CASH FLOWS
HERITAGE FINANCIAL HOLDING CORPORATION
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
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<CAPTION>
Heritage Bank
Consolidated Only
2000 1999
<S> <C> <C>
OPERATING ACTIVITIES
Net Income .................................................................. $ 1,430,656 $ 592,423
Adjustments To Reconcile Net Income to Net Cash
Provided By Operating Activities:
Provision for loan losses ................................................. 2,399,120 1,055,170
Depreciation, amortization and accretion, net ............................. 194,442 191,448
Realized investment security gains ........................................ -- (1,110)
Increase in accrued interest receivable ................................... (2,140,677) (602,778)
Increase in accrued interest payable ...................................... 1,905,982 109,312
Other, net ................................................................ 57,148 (521,687)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................... 3,846,671 822,778
------------- -------------
INVESTING ACTIVITIES
Net (increase) decrease in securities available-for-sale .................... (5,611,975) 900,586
Net increase in loans to customers .......................................... (127,275,265) (84,044,185)
Capital expenditures, net ................................................... (1,888,205) (774,597)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES ................................... (134,775,445) (83,918,196)
------------- -------------
FINANCING ACTIVITIES
Net increase in demand deposits, NOW
accounts and savings accounts ............................................. 7,294,858 12,946,855
Net increase in certificates of deposit ..................................... 143,883,742 57,458,326
Issuance of shares .......................................................... 8,596,425 697,227
Receipt of stock subscriptions .............................................. -- 948,968
Net decrease in short-term borrowings ....................................... (24,720) (26,418)
Net increase (decrease) in FHLB advances .................................... (12,999,957) 7,000,000
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............................... 146,750,348 79,024,958
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... 15,821,574 (4,070,460)
Cash and Cash Equivalents At Beginning of Period ............................... 29,075,322 24,797,024
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 44,896,896 $ 20,726,564
============= =============
</TABLE>
See notes to consolidated financial statements
9
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HERITAGE FINANCIAL HOLDING CORPORATION
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Heritage Financial
Holding Corporation (the "Company") and its subsidiary, Heritage Bank (the
"Bank"). The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended September 30, 2000, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
During the quarter ended September 30, 2000, the Company acquired all the
outstanding stock of the Bank through a 100% one-for-one stock exchange
utilizing pooling-of-interest accounting treatment. The Company was formed
during 2000 and prior to the acquisition of the Bank had no operations. All
financial information prior to the third quarter of 2000 represents the
operations of the Bank.
The statement of financial condition at December 31, 1999, has been derived from
the audited financial statements of the Bank at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
For further information, refer to the financial statements and footnotes thereto
for the Bank for the year ended December 31, 1999, included in Form 10-KSB filed
in April 2000.
NOTE B - INCOME TAXES
The effective tax rate of 39.0 percent for the nine months ended September 30,
2000 differs from the statutory rate principally because of the effect of state
income taxes. The effective rate of 42.1 percent for the nine months ended
September 30, 1999 differs from the statutory rate due primarily to the effect
of state income taxes and nondeductible items.
NOTE C - SECURITIES
The Bank applies the accounting and reporting requirements of Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities ("SFAS 115"). This pronouncement requires that all
investments in debt securities be classified as either "held-to-maturity"
securities, which are reported at amortized cost; trading securities, which are
reported at fair value, with unrealized gains and losses included in earnings;
or "available-for-sale" securities, which are reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a separate
component of shareholders' equity (net of deferred tax effect).
At September 30, 2000, the Bank had net unrealized gains/losses of $1,070,162 in
available-for-sale securities which are reflected in the presented assets and
resulted in a decrease in shareholders' equity of $642,097, net of deferred tax
benefit. There were no trading securities. The net increase in shareholders'
equity as a result of the SFAS 115 adjustment from December 31, 1999 to
September 30, 2000 was $250,720.
10
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HERITAGE FINANCIAL HOLDING CORPORATION
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE D - SHAREHOLDER'S EQUITY
In November 1999, the Bank issued a 2-for-1 stock split (the "split"). All
references to weighted average shares outstanding, per share amounts, option
shares, and exercise prices included in the accompanying financial statements
and notes reflect the split and its retroactive effect.
NOTE E - REORGANIZATION
On July 17, 2000, the Federal Deposit Insurance Corporation issued a combined
Order and Basis for Corporation Approval approving the Interagency Bank Merger
Application submitted on behalf of the Bank for consent to merge with Heritage
Interim Corporation under the charter and title of the Bank. On July 20, 2000,
the Board of Governors of the Federal Reserve System approved the application by
the Company to become a bank holding company by acquiring the Bank pursuant to
the Bank Holding Company Act. The Bank and the Company consummated the
reorganization and merger in August 2000.
NOTE F - SEGMENT INFORMATION
All of the Bank's offices offer similar products and services, are located in
the same geographic region, and serve the same customer segments of the market.
As a result, management considers all units as one operating segment and
therefore feels that the basic financial statements and related footnotes
provide details related to segment reporting.
11
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HERITAGE FINANCIAL HOLDING CORPORATION
SEPTEMBER 30, 2000
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion is intended to assist an understanding of the Company's
financial condition and results of operations. This analysis should be read in
conjunction with the financial statements and related notes appearing in Item 1
of the September 30, 2000 Form 10-QSB.
FINANCIAL CONDITION
September 30, 2000 compared to December 31, 1999
LOANS
Loans comprised the largest single category of the Company's earning assets on
September 30, 2000. Loans, net of unearned income and allowance for loan losses,
were 81.7% of total assets at September 30, 2000 and 81.1% of total assets at
December 31, 1999. Total net loans were $366,460,503 at September 30, 2000,
representing a 51.7% increase from the December 31, 1999 total of $241,584,358.
This increase is the result of increased loan demand and expansion into new
markets.
INVESTMENT SECURITIES AND OTHER EARNING ASSETS
The investment securities portfolio is used to make various term investments, to
provide a source of liquidity and to serve as collateral to secure certain
government deposits. Federal funds sold and securities purchased under
agreements to resell are tools in managing the daily cash position of the Bank.
Investment securities, federal funds sold and securities purchased under
agreements to resale increased $30,984,842 (93.5%) from December 31, 1999 to
September 30, 2000. The increase was due primarily to the large federal funds
position made available through the significant deposit growth.
ASSET QUALITY
Between December 31,1999 and September 30, 2000, the Bank experienced a slight
decline in the quality of its assets as measured by three key ratios. The ratio
of loan loss allowance to total nonperforming assets (defined as nonaccrual
loans, loans past due 90 days or greater, restructured loans, nonaccruing
securities, and other real estate) decreased from 2.59 to 1.68. The ratio of
nonperforming assets to total assets increased from .004 to .006, the ratio of
nonperforming loans to total loans increased to .007 from .004. These ratios
declined due to the Bank's growth during the past nine months. All three ratios
are favorable as compared to industry averages, and management is aware of no
factors that would suggest that they are prone to erosion in future periods.
DEPOSITS
Total deposits of $400,210,763 at September 30, 2000 increased $151,178,600
(60.7%) over total deposits of $249,032,163 at year-end 1999. Deposits are the
Bank's primary source of funds with which to support its earning assets.
Noninterest-bearing deposits decreased $1,764,527 or 12.9% from year-end 1999 to
September 30, 2000, and interest-bearing deposits increased $152,943,127 (65.0%)
from year-end 1999.
12
<PAGE> 13
HERITAGE FINANCIAL HOLDING CORPORATION
SEPTEMBER 30, 2000
FINANCIAL CONDITION - CONTINUED
SHAREHOLDERS' EQUITY
Shareholders' equity increased $10,277,801 from December 31, 1999 to September
30, 2000, due to net income of $1,430,656, the issuance of shares under the
Employee Stock Purchase Plan totaling $29,678, the issuance of shares under a
public stock offering totaling $8,500,000, the exercise of stock options
totaling $66,747 and the decrease of unrealized losses on securities available
for sale totaling $250,720, net of deferred tax liability.
LIQUIDITY MANAGEMENT
Liquidity is defined as the ability of a company to convert assets into cash or
cash equivalents without significant loss. Liquidity management involves
maintaining the Bank's ability to meet the day-to-day cash flow requirements of
its customers, whether they are depositors wishing to withdraw funds or
borrowers requiring funds to meet their credit needs. Without proper liquidity
management, the Bank would not be able to perform the primary function of a
financial intermediary and would, therefore, not be able to meet the production
and growth needs of the communities it serves.
The primary function of asset and liability management is not only to assure
adequate liquidity in order for the Bank to meet the needs of its customer base,
but to maintain an appropriate balance between interest-sensitive assets and
interest-sensitive liabilities so that the Bank can also meet the investment
requirements of its shareholders. Daily monitoring of the sources and uses of
funds is necessary to maintain an acceptable cash position that meets both
requirements. In the banking environment, both assets and liabilities are
considered sources of liquidity funding and both are, therefore, monitored on a
daily basis.
The asset portion of the balance sheet provides liquidity primarily through loan
principal repayments and sales and maturities of securities. Loans that mature
in one year or less equaled approximately $153,504,000 or 41.4% of the total
loan portfolio at September 30, 2000. Other sources of liquidity include
short-term investments such as federal funds sold and repurchase agreements.
The liability portion of the balance sheet provides liquidity through various
customers' interest-bearing and noninterest-bearing deposit accounts. Funds are
also available through the purchase of federal funds from correspondent
commercial banks. The Bank is also a member of the Federal Home Loan Bank of
Atlanta. Membership provides the Bank with additional lines of credit for
liquidity needs.
CAPITAL RESOURCES
A strong capital position is vital to the continued profitability of the Company
and the Bank because it promotes depositor and investor confidence and provides
a solid foundation for future growth of the organization. The Bank has provided
the majority of its capital requirements through the retention of earnings.
Bank regulatory authorities are placing increased emphasis on the maintenance of
adequate capital. In 1990, new risk-based capital requirements became effective.
The guidelines take into consideration risk factors, as defined by regulators,
associated with various categories of assets, both on and off the balance sheet.
Under the guidelines, capital strength is measured in two tiers which are used
in conjunction with
13
<PAGE> 14
HERITAGE FINANCIAL HOLDING CORPORATION
SEPTEMBER 30, 2000
FINANCIAL CONDITION - CONTINUED
risk-adjusted assets to determine the risk-based capital ratios. The Bank's Tier
I capital, which consists of common equity less goodwill, amounted to
$32,839,947 at September 30, 2000. Tier II capital components include
supplemental capital components such as qualifying allowance for loan losses and
qualifying subordinated debt. Tier I capital plus the Tier II capital components
is referred to as Total Risk-Based capital and was $37,490,648 at September 30,
2000.
The Bank's current capital positions exceed the regulatory guidelines.
Management has reviewed and will continue to monitor the Bank's asset mix and
product pricing, and the loan loss allowance, which are the areas determined to
be most affected by these new requirements.
RESULTS OF OPERATIONS
Three months and nine months ended September 30, 2000 and 1999
SUMMARY
Net earnings of the Company for the quarter ended September 30, 2000 was
$572,514, compared to $144,566 for the same period in 1999, representing a
296.0% increase. Net earnings of the Company for the nine months ended September
30, 2000 were $1,430,656 compared to $592,423 for the same period in 1999,
representing a 141.5% increase. These increases were due principally to the
Bank's growth, especially in the area of loans.
NET INTEREST INCOME
Net interest income, the difference between interest earned on assets and the
cost of interest-bearing liabilities, is the largest component of the Company's
net income. Revenue from earning assets of the Company during the nine months
ended September 30, 2000 increased $13,424,173 (115.1%) from the same period in
1999. This increase was due to increases in loan interest income across all loan
categories due to the significant increase in loan volume. Interest expense for
the nine months ended September 30, 2000 increased $8,587,978 or 128.6% over the
corresponding period of 1999 due to increased deposit growth. As a result of
these factors, net interest income increased $4,836,195 or 96.9% in the nine
months ended September 30, 2000, compared to the same period of 1999. Net
interest income for the quarter ended September 30, 2000 increased $1,599,475 or
82.8% compared to the second quarter of 1999 due again to increases in loans and
deposits.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents the charge against current earnings
necessary to maintain the reserve for loan losses at a level which management
considers appropriate. This level is determined based upon Bank's historical
charge-offs, management's assessment of current economic conditions, the
composition of the loan portfolio and the levels of nonaccruing and past due
loans. The provision for loan losses was $2,399,120 for the nine months ended
September 30, 2000 compared to $1,055,170 for the same period of 1999.
Charge-offs exceeded recoveries by $783,968 for the nine months ended September
30, 2000.
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HERITAGE FINANCIAL HOLDING CORPORATION
SEPTEMBER 30, 2000
RESULTS OF OPERATIONS - CONTINUED
The provision for loan losses was $763,200 for the three months ended September
30, 2000 compared to $457,870 for the same period of 1999. Charge-offs exceeded
recoveries by $124,502 for the three months ended September 30, 2000.
The reserve for loan losses as a percent of outstanding loans, net of unearned
income, was 1.25% at September 30, 2000 and 1.24% at year-end 1999.
NONINTEREST INCOME
Noninterest income for the third quarter of 2000 increased $85,034 (48.0%)
compared to the same period of 1999. Noninterest income for the nine months
ended September 30, 2000 was $747,876 compared to $462,795 for the same period
of 1999, a 61.6% increase. These increases were primarily due to increased NSF
charges, underwriting fees and safe deposit box revenue.
NONINTEREST EXPENSES
Noninterest expenses for the quarter ended September 30, 2000 were $2,077,852,
reflecting an increase of $695,765 or 50.3% over the same period of 1999.
Noninterest expenses for the nine months ended September 30, 2000 were
$5,831,172 reflecting a 72.8% increase over the same period of 1999. The primary
components of noninterest expenses are salaries and employee benefits, which
increased to $3,343,419 for the nine months ended September 30, 2000, 72.8%
higher than in the same period of 1999. Occupancy and equipment costs for the
nine months ended September 30, 2000 increased $197,839 over the same period of
1999 primarily because of increased depreciation due to the additional locations
becoming fully operative.
INCOME TAXES
The Bank attempts to maximize its net income through active tax planning. The
provision for income taxes of $912,890 for the nine months ended September 30,
2000 increased $482,605 compared to the same period of 1999, due to higher
earnings. Taxes as a percent of earnings decreased from 42.1% to 39.0% for the
nine months ended September 30, 2000. The effective tax rate of approximately
39.0% is more than the statutory rate principally because of state income taxes.
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HERITAGE FINANCIAL HOLDING CORPORATION
SEPTEMBER 30, 2000
FORWARD-LOOKING INFORMATION
Certain statements in this section and elsewhere in this report are
forward-looking in nature and relate to trends and events that may affect the
Company's future financial position and operating results. Such statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The terms "expect," "anticipate," "intend," and "project"
and similar words or expressions are intended to identify forward-looking
statements. These statements speak only as of the date of this report. The
statements are based on current expectations, are inherently uncertain, are
subject to risks, and should be viewed with caution. Actual results and
experience may differ materially from the forward-looking statements as a result
of many factors, including changes in economic conditions in the markets served
by the Company, increasing competition, fluctuations in raw materials and energy
prices, and other unanticipated events and conditions. It is not possible to
foresee or identify all such factors. The Company makes no commitment to update
any forward-looking statement or to disclose any facts, events, or circumstances
after the date hereof that may affect the accuracy of any forward-looking
statement.
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HERITAGE FINANCIAL HOLDING CORPORATION
SEPTEMBER 30, 2000
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
On July 17, 2000, the Federal Deposit Insurance Corporation issued a
combined Order and Basis for Corporation Approval approving the
Interagency Bank Merger Application submitted on behalf of the Bank
for consent to merge with Heritage Interim Corporation under the
charter and title of the Bank. On July 20, 2000, the Board of
Governors of the Federal Reserve System approved the application by
the Company to become a bank holding company by acquiring the Bank
pursuant to the Bank Holding Company Act. The Bank and the Company
consummated the reorganization and merger in August 2000.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 - Statements Re: Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule (SEC use only)
(b) Reports on Form 8-K
During the quarter ended September 30, 2000, no reports were filed
for Heritage Financial Holding Corporation on Form 8-K.
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HERITAGE FINANCIAL HOLDING CORPORATION
SEPTEMBER 30, 2000
SIGNATURES
Pursuant to the requirements 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.
<TABLE>
<CAPTION>
HERITAGE FINANCIAL HOLDING CORPORATION
<S> <C>
By: /s/ Reginald D. Gilbert November 13, 2000
------------------------------------- ---------------------------
Reginald D. Gilbert Date
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ John E. Whitley November 13, 2000
------------------------------------- ---------------------------
John E. Whitley Date
Vice President
(Principal Financial and
Accounting Officer)
</TABLE>
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