SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 000-31825
HERITAGE FINANCIAL HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 63 - 1259533
(State of Incorporation) (IRS Employer Identification No.)
211 Lee St., N.E.
Decatur, Alabama 35601
(Address of principal executive office)
(256) 355-9500
(Issuer's telephone number, including area code)
(Former name,former address and former fiscal year,if changed since last report)
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 stock, as of the latest practicable date.
Common Stock, $0.01 par value Outstanding at August 1, 2002: 8,811,674 Shares
Form 10-Q
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
June 30, 2002
TABLE OF CONTENTS
Page No.
Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of
June 30, 2002 and December 31, 2001............................................................ 3
Consolidated Statements of Income For the Three Months
Ended June 30, 2002 and 2001................................................................... 4
Consolidated Statements of Comprehensive Income For the
Three Months Ended June 30, 2002 and 2001...................................................... 5
Consolidated Statements of Income For the Six Months Ended
June 30, 2002 and 2001......................................................................... 6
Consolidated Statements of Comprehensive Income For the
Six Months Ended June 30, 2002 and 2001........................................................ 7
Consolidated Statement of Stockholders' Equity For the
Six Months Ended June 30, 2002................................................................. 8
Consolidated Statements of Cash Flows For the
Six Months Ended June 30, 2002 and 2001........................................................ 9
Notes to Consolidated Financial Statements..................................................... 10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................. 13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk..................................... 20
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders............................................ 22
Item 6 - Exhibits and Reports on Form 8-K............................................................... 22
Signatures
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
June 30, 2002 (Unaudited) and December 31, 2001
June 30,
2002 December 31,
(Unaudited) 2001
Assets
Cash and due from banks................................................... $ 3,786,092 $ 6,660,032
Interest bearing deposits with other banks................................ 37,456 325,736
Federal funds............................................................. 14,778,000 6,716,000
Cash and Cash Equivalents............................................... 18,601,548 13,701,768
Securities available-for-sale............................................. 30,107,463 25,893,863
Mortgage loans held-for-sale.............................................. 6,587,620 12,548,322
Loans, net of unearned income............................................. 544,490,842 505,380,611
Allowance for loan losses................................................. (8,524,847) (6,074,230)
Premises and equipment, net............................................... 6,709,651 6,407,022
Accrued interest.......................................................... 3,572,904 3,873,413
Foreclosed real estate.................................................... 3,173,378 4,227,926
Other assets.............................................................. 3,394,043 2,332,392
Total Assets.......................................................... $ 608,112,602 $ 568,291,087
Liabilities and Stockholders' Equity
Liabilities
Deposits
Noninterest bearing..................................................... $ 24,649,186 $ 21,295,986
Interest-bearing........................................................ 508,802,418 483,013,752
Total Deposits........................................................ 533,451,604 504,309,738
Accrued interest.......................................................... 3,052,300 4,204,515
FHLB advances............................................................. 23,000,000 13,000,000
Guaranteed preferred beneficial interest in the Company's
subordinated debentures................................................. 10,000,000 10,000,000
Other liabilities......................................................... 579,906 652,954
Total Liabilities..................................................... 570,083,810 532,167,207
Stockholders' Equity
Preferred stock - par value $0.01 per share; 10,000,000
authorized, none issued................................................. -- --
Common stock ($.001 par value; 40,000,000 shares authorized,
8,811,674 issued and outstanding at June 30, 2002; 40,000,000
shares authorized, 8,515,147 issued and outstanding
at December 31, 2001)................................................... 88,117 85,151
Paid-in capital........................................................... 32,254,456 30,359,218
Retained earnings......................................................... 5,574,685 5,736,259
Accumulated other comprehensive income (loss): net unrealized
holding gains (losses) on securities available-for-sale, net of
deferred income tax..................................................... 111,534 (56,748)
Total Stockholders' Equity............................................ 38,028,792 36,123,880
Total Liabilities and Stockholders' Equity............................ $ 608,112,602 $ 568,291,087
See notes to consolidated financial statements
3
CONSOLIDATED STATEMENTS OF INCOME
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
Three Months Ended June 30, 2002 and 2001
(Unaudited)
Three Months Ended
June 30,
2002 2001
Interest Income
Interest and fees on loans................................................ $ 10,122,436 $ 10,476,017
Interest and dividends on securities:
Taxable securities...................................................... 350,009 382,164
Nontaxable securities................................................... 31,167 30,938
Interest on deposits with other banks..................................... 1,696 9,500
Interest on federal funds sold and securities purchased................... 86,449 159,704
Total Interest Income................................................... 10,591,757 11,058,323
Interest Expense
Interest on deposits...................................................... 4,738,730 6,856,843
Interest on FHLB borrowings............................................... 244,500 248,700
Interest on short-term borrowings......................................... -- 900
Interest on guaranteed preferred beneficial interest in
the Company's subordinated debentures................................... 255,000 262,905
Total Interest Expense.................................................. 5,238,230 7,369,348
Net Interest Income.......................................................... 5,353,527 3,688,975
Provision for loan losses................................................. 3,086,592 980,891
Net Interest Income After Provision for Loan Losses.......................... 2,266,935 2,708,084
Noninterest Income
Customer service fees..................................................... 251,012 204,003
Mortgage banking fee income............................................... 147,872 116,208
Investment security gains (losses)........................................ (3,641) 18,383
Other operating income.................................................... 63,095 31,619
Total Noninterest Income................................................ 458,338 370,213
Noninterest Expenses
Salaries and employee benefits............................................ 1,579,486 1,425,455
Occupancy and equipment expense........................................... 388,088 301,710
Other operating expenses.................................................. 1,048,492 733,028
Total Noninterest Expenses.............................................. 3,016,066 2,460,193
Income (loss) before income taxes............................................ (290,793) 618,104
Provision for income tax expense (benefit)................................... (58,642) 187,793
Net Income (Loss)............................................................ $ (232,151) $ 430,311
Earnings (Loss) Per Common Share
Basic..................................................................... $ (0.03) $ 0.05
Diluted................................................................... (0.02) 0.04
Cash Dividends Declared
Cash dividends declared per common share.................................. $ 0.00 $ 0.00
Weighted Average Shares Outstanding
Basic..................................................................... 8,712,174 8,481,901
Diluted................................................................... 10,372,333 10,549,628
See notes to consolidated financial statements
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
Three Months Ended June 30, 2002 and 2001
(Unaudited)
Three Months Ended
June 30,
2002 2001
Net Income (Loss)............................................................ $ (232,151) $ 430,311
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during the period............. 711,036 (23,369)
Reclassification adjustments for (gains) losses included
in net income......................................................... 3,641 (18,383)
Net unrealized gains (losses)........................................... 714,677 (41,752)
Income tax related to items of other comprehensive income (loss).......... (285,870) 17,101
Other comprehensive income (loss)............................................ 428,807 (24,651)
Comprehensive Income......................................................... $ 196,656 $ 405,660
See notes to consolidated financial statements
5
CONSOLIDATED STATEMENTS OF INCOME
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
Six Months Ended June 30, 2002 and 2001
(Unaudited)
Six Months Ended
June 30,
2002 2001
Interest Income
Interest and fees on loans................................................ $ 20,235,213 $ 20,753,148
Interest and dividends on securities:
Taxable securities...................................................... 650,463 785,793
Nontaxable securities................................................... 66,005 61,842
Interest on deposits with other banks..................................... 3,263 20,000
Interest on federal funds sold and securities purchased................... 132,899 390,711
Total Interest Income................................................... 21,087,843 22,011,494
Interest Expense
Interest on deposits...................................................... 9,760,717 13,604,748
Interest on FHLB borrowings............................................... 467,349 475,700
Interest on short-term borrowings......................................... -- 1,888
Interest on guaranteed preferred beneficial interest in
the Company's subordinated debentures................................... 502,029 370,988
Total Interest Expense.................................................. 10,730,095 14,453,324
Net Interest Income.......................................................... 10,357,748 7,558,170
Provision for loan losses................................................. 3,695,486 2,026,698
Net Interest Income After Provision for Loan Losses.......................... 6,662,262 5,531,472
Noninterest Income
Customer service fees..................................................... 483,262 413,903
Mortgage banking fee income............................................... 309,095 218,003
Investment securities gains............................................... 71,761 18,383
Other operating income.................................................... 136,555 56,585
Total Noninterest Income................................................ 1,000,673 706,874
Noninterest Expenses
Salaries and employee benefits............................................ 4,928,861 2,770,754
Occupancy and equipment expense........................................... 708,231 567,976
Other operating expenses.................................................. 2,263,856 1,590,479
Total Noninterest Expenses.............................................. 7,900,948 4,929,209
Income (loss) before income taxes............................................ (238,013) 1,309,137
Provision for income tax expense (benefit)................................... (76,439) 460,344
Net Income (Loss)............................................................ $ (161,574) $ 848,793
Earnings (Loss) Per Common Share
Basic..................................................................... $ (0.02) $ 0.10
Diluted................................................................... (0.02) 0.08
Cash Dividends Declared
Cash dividends declared per common share.................................. $ 0.00 $ 0.00
Weighted Average Shares Outstanding
Basic..................................................................... 8,614,340 8,478,974
Diluted................................................................... 10,570,720 10,489,509
See notes to consolidated financial statements
6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
Six Months Ended June 30, 2002 and 2001
(Unaudited)
Six Months Ended
June 30,
2002 2001
Net Income (Loss)............................................................ $ (161,574) $ 848,793
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during the period...................... 352,231 230,476
Reclassification adjustments for gains included in net income........... (71,761) (18,383)
Net unrealized gains.................................................... 280,470 212,093
Income tax related to items of other comprehensive income................. (112,188) (84,837)
Other comprehensive income................................................... 168,282 127,256
Comprehensive Income......................................................... $ 6,708 $ 976,049
See notes to consolidated financial statements
7
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
Six Months Ended June 30, 2002
(Unaudited)
Accumulated
Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
Balance at December 31, 2001................ $ 85,151 $ 30,359,218 $ 5,736,259 $ (56,748) $ 36,123,880
Net loss - June 30, 2002.................... -- -- (161,574) -- (161,574)
Unrealized gains (losses) on securities
available-for- sale, net of
reclassification adjustment,
net of tax of $(112,188)................. -- -- -- 168,282 168,282
Comprehensive income........................ -- -- -- -- 6,708
Compensatory options........................ -- 1,113,057 -- -- 1,113,057
Stock option exercise....................... 4,391 1,691,936 -- -- 1,696,327
Stock used by optionees to purchase options. (1,430) (1,677,885) -- -- (1,679,315)
Tax benefit on stock options................ -- 762,500 -- -- 762,500
Issuance of shares under
employee stock purchase plan............. 5 5,630 -- -- 5,635
Balance at
June 30, 2002............................ $ 88,117 $ 32,254,456 $ 5,574,685 $ 111,534 $ 38,028,792
See notes to consolidated financial statements
8
CONSOLIDATED STATEMENTS OF CASH FLOWS
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
Six Months Ended June 30, 2002 and 2001
(Unaudited)
Six Months Ended
June 30,
2002 2001
Operating Activities
Net income (loss)......................................................... $ (161,574) $ 848,793
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses............................................... 3,695,486 2,026,698
Depreciation, amortization, and accretion, net.......................... 261,223 209,574
Deferred tax benefit.................................................... (1,000,409) --
Realized security gains................................................. (71,761) --
Decrease (increase) in accrued interest receivable...................... 300,509 (27,807)
Increase (decrease) in accrued interest payable......................... (1,152,215) 183,399
Other, net.............................................................. 516,021 (572,601)
Net Cash Provided by Operating Activities............................. 2,387,280 2,668,056
Investing Activities
Decrease in mortgage loans held-for-sale.................................. 5,960,702 --
Net (increase) decrease in securities available-for-sale.................. (3,861,368) (67,731)
Net increase in loans to customers........................................ (40,355,100) (66,047,836)
Capital expenditures, net................................................. (563,852) (1,050,130)
Proceeds from disposition of foreclosed real estate....................... 1,054,548 --
Net Cash Used In Investing Activities................................... (37,765,070) (67,165,697)
Financing Activities
Net increase in demand deposits, NOW
accounts and savings accounts........................................... 14,255,393 17,348,550
Net increase in certificates of deposit................................... 14,886,473 71,633,843
Issuance of shares........................................................ 22,647 46,132
Net proceeds from FHLB loans.............................................. 10,000,000 8,000,000
Issuance of guaranteed preferred beneficial interest
in the Company's subordinated debentures................................ -- 10,000,000
Compensatory options...................................................... 1,113,057 --
Net Cash Provided By Financing Activities............................... 40,277,570 107,028,525
Net Increase in Cash and Cash Equivalents.................................... 4,899,780 42,530,884
Cash and Cash Equivalents at Beginning of Period............................. 13,701,768 15,640,016
Cash and Cash Equivalents at End of Period................................... $ 18,601,548 $ 58,170,900
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest.................................................................. $ 11,882,310 $ 14,269,925
Taxes..................................................................... 305,256 770,781
See notes to consolidated financial statements
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
June 30, 2002
(Unaudited)
Note A - Basis of Presentation
The financial statements include the accounts of Heritage Financial Holding
Corporation and its subsidiaries Heritage Bank (the "Bank") and Heritage
Financial Statutory Trust I ("Heritage Trust"), collectively, the Company. The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete 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 six-month period ended June 30, 2002, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
The consolidated statement of financial condition at December 31, 2001, has been
derived from the audited consolidated financial statements 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 consolidated financial statements and
footnotes thereto for Heritage Financial Holding Corporation and subsidiaries
for the year ended December 31, 2001, included in Form 10-K/A filed in April
2002.
Note B - Income Taxes
The effective tax rates of approximately 32.1 percent and 35.2 percent for the
six months ended June 30, 2002 and 2001, respectively, differ from the statutory
rate principally because of the effect of state income taxes and the impact of
tax-free income.
Note C - Securities
The Company 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 stockholders' equity (net of deferred tax effect).
At June 30, 2002, the Company had net unrealized gains of approximately $185,889
in available-for-sale securities which are reflected in the presented assets and
resulted in an increase in stockholders' equity of $111,534, net of deferred tax
liability. There were no held-to-maturity or trading securities at June 30, 2002
or December 31, 2001. The net increase in stockholders' equity as a result of
the SFAS 115 adjustment from December 31, 2001 to June 30, 2002, was $168,282.
See also Note D - Stockholders' Equity.
10
Note D - Stockholders' Equity
Equity increased by $1,904,912 due to net loss of $161,574, the effects of
compensatory stock options totaling an increase of $1,113,057, stock option
exercise totaling a net increase of $17,012, tax benefit on stock options
totaling an increase of $762,500, the issuance of shares under the employee
stock purchase plan of $5,635, and the increase from an unrealized loss to an
unrealized gain on securities available for sale totaling $168,282, net of
deferred taxes.
Note E - Segment Information
All of the Company's offices offer similar products and services, are located in
the same geographic region, and serve similar 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
sufficient details related to segment reporting.
Note F - Guaranteed Preferred Beneficial Interests in the Company's
Subordinated Debentures
On February 22, 2001, Heritage Financial Statutory Trust I ("Heritage Trust"), a
Connecticut statutory trust established by the Company, received $10,000,000 in
proceeds in exchange for $10,000,000 principal amount of Heritage Trust's 10.20%
cumulative trust preferred securities (the "preferred securities") in a pooled
trust preferred private placement. The proceeds of that transaction were then
used by Heritage Trust to purchase an equal amount of 10.20% subordinated
debentures (the "subordinated debentures") of the Company. The Company has fully
and unconditionally guaranteed all obligations of Heritage Trust on a
subordinated basis with respect to the preferred securities. The Company
accounts for Heritage Trust as a minority interest. Subject to certain
limitations, the preferred securities qualify as Tier 1 capital and are
presented in the Consolidated Statements of Financial Condition as "Guaranteed
preferred beneficial interests in the Company's subordinated debentures." The
sole asset of Heritage Trust is the subordinated debentures issued by the
Company. Both the preferred securities of Heritage Trust and the subordinated
debentures of the Company each have 30-year lives. However, both the Company and
Heritage Trust have a call option of ten years, subject to regulatory approval,
or earlier, depending upon certain changes in tax or investment company laws, or
regulatory capital requirements.
[The remainder of this page intentionally left blank]
11
Note G - Recent Developments
On July 24, 2002, the FDIC informed the Company and the Bank of its desire to
immediately perform a targeted, limited scope review of the Bank's loan
portfolio based upon certain information it recently received involving certain
loans. The FDIC has also informed the Bank that instead of waiting until October
2002 to conduct its routine safety and soundness audit, it planned to proceed
directly with that audit concurrent with the limited scope review. The FDIC
review is currently ongoing, and the overall impact, if any, on the Company's
financial statements is unquantifiable as of the current date.
In conjunction with the FDIC review, the Company and the Bank have discovered
that one of its non-executive employees had improperly advanced monies on
certain loans. This employee offered to resign, and the Bank has accepted the
resignation, based on violations of the Bank's loan policies. The Company and
the Bank are cooperating fully with the FDIC with their review and are
implementing certain recommendations from the FDIC based on their initial
findings.
With the hiring of a new chief financial officer (see below) and a restructuring
of executive management during the past several months, the Bank has conducted a
comprehensive review of its entire loan portfolio based on all of the
aforementioned events and in an abundance of caution in the current economic and
corporate environment. Upon the recent conclusion of this loan review,
management recommended and the Board of Directors agreed to increase its
"Allowance for loan losses" on the Company's consolidated balance sheet by
$2,000,000 to account for potential loan losses due to a variety of events
including a discrete erosion of asset quality in certain loans in the Bank's
portfolio. Such action will adversely affect the Company's earnings for this
quarter and the entire year 2002.
The Company and the Bank are reviewing and assessing all of their insurance and
legal options in order to attempt to recover any losses from the parties
responsible in the matter described above. Neither the Company nor the Bank have
brought any independent causes of action related to these potential losses,
though such action may be brought in the future. It is not possible to determine
at this time whether any litigation will be commenced, or if commenced, what
such outcome will be.
On March 12, 2002, Reginald D. Gilbert, President, Chief Executive Officer and
Director of the Company and the Bank, elected to voluntarily retire as an
employee and sever his relationship with the Company and the Bank. In
conjunction with his retirement and severance, the Company and Reginald D.
Gilbert ("Gilbert") entered into an "Amended and Restated Retirement, Release
and Settlement Agreement" (the "Agreement"), providing for severance pay and
certain other nonqualified retirement benefits in consideration of his
retirement, his years of service and certain non-competition and other
agreements and covenants. Our independent accountants have notified us that
current accounting regulations require that substantially all of the benefits to
be received by Gilbert from the Company, as provided for in the Agreement must
be reflected as compensation cost in our 2002 consolidated financial statements.
The aggregate amount of compensation cost, net of tax benefit, to be recognized
by us as a charge against 2002 earnings, due solely to the provisions of the
Agreement, is estimated to be approximately $1.3 million or $0.15 per common
share. Although our earnings will be adversely affected, the nature of Gilbert's
benefits allows for an offsetting increase in stockholders' equity of
approximately $1.1 million, thereby only decreasing stockholders' equity by
approximately $200,000. Net book value per share would therefore decrease by
12
approximately $0.02 per common share due solely to the provisions of the
Agreement. The Board of Directors has begun a formal search process for a new
President and Chief Executive Officer of the companies. In the meantime, the
Board of Directors has elected Harold B. Jeffreys, a Director, as Interim
President and Chief Executive Officer.
On April 9, 2002, the Board of Directors voted to terminate all merger and
related discussion activities. The Board decided to focus on selecting a new
President and Chief Executive Officer and other senior management officers of
the Company including a Chief Financial Officer, and take steps to generate
growth for the Company along all lines of business. Subsequently, Thomas E.
Hemmings was hired as the Chief Financial Officer during the 2nd quarter of
2002.
At the same meeting on April 9, 2002, the Board of Directors also accepted the
resignations of all the current inside directors from the Board, including: John
W. Whitley, President, Heritage Bank Decatur, Vernon C. Bice, President,
Heritage Bank Huntsville, and Michael R. Washburn, President, Heritage Bank
Birmingham. These individuals believed it would benefit the Company on many
levels if they would remove themselves from the direct oversight responsibility
of the Board of Directors. The city presidents plan to focus going forward on
growing the Company and the Bank at the operations level and provide support and
information to the Board of Directors in order to increase overall stockholder
value.
Note H - Recently Passed Legislation
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
("the Act"), which immediately impacts Securities and Exchange Commission
registrants, public accounting firms, lawyers and securities analysts. This
legislation is the most comprehensive since the passage of the Securities Acts
of 1933 and 1934. It has far reaching effects on the standards of integrity for
corporate management, board of directors, and executive management. Additional
disclosures, certifications and possibly procedures will be required of the
company. We do not expect any material adverse effect on our company as a result
of the passage of this legislation, however, the full scope of the Act has not
been determined. The Act provides for additional regulations and requirements of
publicly-traded companies which have yet to be issued.
13
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 and its
subsidiaries' financial condition and results of operations. Unless the context
otherwise indicates, "the Company" shall include the Company and its
subsidiaries. This analysis should be read in conjunction with the consolidated
financial statements and related notes appearing in Item 1 of the March 31,
2002, Form 10-Q, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," appearing in the Company's Annual Report
on Form 10-K/A for the year ended December 31, 2001.
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by us or on our behalf. Some of the disclosures
in this Quarterly Report on Form 10-Q, including any statements preceded by,
followed by or which include the words "may," "could," "should," "will,"
"would," "hope," "might," "believe," "expect," "anticipate," "estimate,"
"intend," "plan," "assume" or similar expressions constitute forward-looking
statements.
These forward-looking statements, implicitly and explicitly, include the
assumptions underlying the statements and other information with respect to our
beliefs, plans, objectives, goals, expectations, anticipations, estimates,
intentions, financial condition, results of operations, future performance and
business, including our expectations and estimates with respect to our revenues,
expenses, earnings, return on equity, return on assets, efficiency ratio, asset
quality and other financial data and capital and performance ratios.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, these statements involve risks and uncertainties
which are subject to change based on various important factors (some of which
are beyond our control). The following factors, among others, could cause our
financial performance to differ materially from our goals, plans, objectives,
intentions, expectations, and other forward-looking statements: (1) the strength
of the United States economy in general and the strength of the regional and
local economies in which we conduct operations; (2) the effects of, and changes
in, trade, monetary and fiscal policies and laws, including interest rate
policies of the Board of Governors of the Federal Reserve System; (3) inflation,
interest rate, market and monetary fluctuations; (4) our timely development of
new products and services to a changing environment, including the features,
pricing and quality compared to the products and services of our competitors;
(5) the willingness of users to substitute competitors' products and services
for our products and services; (6) the impact of changes in financial services
policies, laws and regulations, including laws, regulations and policies
concerning taxes, banking, securities and insurance, and the application thereof
by regulatory bodies; (7) technological changes; (8) changes in consumer
spending and savings habits; and (9) regulatory, legal or judicial proceedings.
If one or more of the factors affecting our forward-looking information and
statements proves incorrect, then our actual results, performance or
achievements could differ materially from those expressed in, or implied by,
forward-looking information and statements contained in this Quarterly Report.
Therefore, we caution you not to place undue reliance on our forward-looking
information and statements. We do not intend to update our forward-looking
information and statements, whether written or oral, to reflect change. All
forward-looking statements attributable to us are expressly qualified by these
cautionary statements.
14
FINANCIAL CONDITION
June 30, 2002 compared to December 31, 2001
Loans
Loans comprised the largest single category of the Company's earning assets on
June 30, 2002. Loans, net of unearned income and allowance for loan losses, were
88.1% of total assets at June 30, 2002, and 87.9% of total assets at December
31, 2001. Total net loans were $535,965,995 at June 30, 2002, representing a
7.3% increase from the December 31, 2001, total of $499,306,381. This increase
is the result of increased loan demand.
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 are a tool in managing the daily cash
position of the Company. Investment securities and federal funds sold increased
$12,275,600 from December 31, 2001 to June 30, 2002. This increase was due
primarily to deposit growth. Investment securities and federal funds sold at
June 30, 2002, were $44,885,463 compared with $32,609,863 at December 31, 2001.
Asset Quality
Between December 31, 2001 and June 30, 2002, the Company experienced an increase
in nonperforming assets, (defined as nonaccrual loans, loans past due 90 days or
greater, restructured loans, nonaccruing securities and other real estate).
Total nonperforming assets increased from $12.415 million to $16.730 million.
The ratio of nonperforming assets to total assets increased from 2.18% to 2.75%
and the ratio of nonperforming loans to total loans increased from 1.62% to
2.49%. The ratio of loan loss allowance to total nonperforming assets increased
from 48.92% to 50.96%. The Company believes that due to a continuing weak
economy both on a national and state-wide basis, these ratios could further
erode over the next several quarters. Moreover, the Company competes for loans,
and has made certain loans to businesses, along the
Birmingham-Huntsville-Decatur high-tech corridor. During the past year, the high
tech industry segment has experienced, and continues to experience, a more
significant downturn compared with other sectors of the economy. The Company has
taken steps to intensively monitor its overall loan portfolio and is prepared to
take further action upon a further weakening in the general economy.
Deposits
Total deposits of $533,451,604 at June 30, 2002, increased $29,141,866 (5.8%)
over total deposits of $504,309,738 at year-end 2001. Deposits are the Company's
primary source of funds with which to support its earning assets.
Noninterest-bearing deposits increased $3,353,200 or 15.7% from year-end 2001 to
June 30, 2002, and interest-bearing deposits increased $25,788,666 (5.3%) from
year-end 2001.
15
Stockholders' Equity
Stockholders' equity increased $1,904,912 from December 31, 2001 to June 30,
2002, due to a net loss of $161,574, the issuance of shares under the Employee
Stock Purchase Plan totaling $5,635, the increase from an unrealized loss to an
unrealized gain on securities available-for-sale totaling $168,282, net of
deferred taxes, the exercise of stock options, net of shares surrendered, of
$17,012, the recognition of compensatory options of $1,113,057, and the tax
benefit on stock options of $762,500.
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 Company'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 Company 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 Company 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 Company can also meet the
investment requirements of its stockholders. 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 and sales of investment
securities. Loans that mature in one year or less equaled approximately $170.750
million or 31.4% of the total loan portfolio at June 30, 2002. Other sources of
liquidity include short-term investments such as federal funds sold, which
amounted to $14.778 million at June 30, 2002.
The liability portion of the balance sheet provides liquidity through various
customers' interest-bearing and noninterest-bearing deposit accounts. At June
30, 2002, funds were also available through the purchase of federal funds from
correspondent commercial banks from available lines of up to an aggregate of
$13,500,000. The Bank is also a member of the Federal Home Loan Bank of Atlanta.
Such 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.
16
On February 22, 2001, Heritage Financial Statutory Trust I ("Heritage Trust"), a
Connecticut statutory trust established by the Company, received $10,000,000 in
proceeds in exchange for $10,000,000 principal amount of Heritage Trust's 10.20%
cumulative trust preferred securities (the "preferred securities") in a pooled
trust preferred private placement. The proceeds of that transaction were then
used by Heritage Trust to purchase an equal amount of 10.20% subordinated
debentures (the "subordinated debentures") of the Company. The Company has fully
and unconditionally guaranteed all obligations of Heritage Trust on a
subordinated basis with respect to the preferred securities. The Company
accounts for the Heritage Trust preferred securities as a minority interest.
Subject to certain limitations, the preferred securities qualify as Tier 1
capital and are presented in the Consolidated Statements of Financial Condition
as "Guaranteed preferred beneficial interests in the Company's subordinated
debentures." The sole asset of Heritage Trust is the subordinated debentures
issued by the Company. Both the preferred securities of Heritage Trust and the
subordinated debentures of the Company each have 30-year lives. However, both
the Company and Heritage Trust have a call option of ten years, subject to
regulatory approval, or earlier, depending upon certain changes in tax or
investment company laws, or regulatory capital requirements.
Regulatory authorities are placing increased emphasis on the maintenance of
adequate capital. Capital strength is measured in two tiers that are used in
conjunction with risk-adjusted assets to determine the risk-based capital
ratios. The Company's Tier I capital, which consists of common equity less
goodwill and the newly issued guaranteed preferred beneficial interest in the
Company's subordinated debentures, subject to limitations, amounted to
$47,917,258 at June 30, 2002. The Company's Tier II capital components are
comprised solely of the allowance for loan losses subject to certain
limitations. Tier I capital plus the Tier II capital components is referred to
as Total Risk-Based capital and was $54,446,105 at June 30, 2002.
The Company's and the Bank's current capital positions exceed the
"well-capitalized" 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 capital
requirements.
RESULTS OF OPERATIONS
Three months and six months ended June 30, 2002 and 2001
Summary
Net loss of the Company for the quarter ended June 30, 2002, was $232,151,
compared to earnings of $430,311 for the same period in 2001, representing a
153.9% decrease. Net loss of the Company for the six months ended June 30, 2002,
was $161,574 compared to earnings of $848,793 for the same period in 2001,
representing a 119.0% decrease. Decreased profits during the periods are
primarily the result of the cost of the retirement and severance agreement with
the Company's former president and chief executive officer and an increase in
the provision for loan losses due to a weakening in the general economy, which
flowed to specific bank loans. The Company constantly monitors its loan
portfolio and decided it was prudent to increase its allowance for loan losses
this period.
17
Provision for loan losses for the six months ended June 30, 2002, increased
$1,668,788 or 82.3% compared to the same period in 2001. Net interest income for
the six months ended June 30, 2002, increased $2,799,578 or 37.0% compared to
the same period in 2001. Non-interest income for the six months ended June 30,
2002, increased by $293,799 or 41.6% compared to the same period in 2001.
Interest margins have improved and resulted in improved net interest income.
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 six months
ended June 30, 2002, decreased $923,651 (4.2%) from the same period in 2001.
This decrease was largely a result of the decrease in interest and fee income on
loans. Interest expense for the six months ended June 30, 2002, decreased
$3,723,229 or 25.8% from the corresponding period of 2001 due to decreases in
interest expense paid on interest-bearing deposits and borrowed funds. These
decreases were due to the impact of rapid declining interest rates which
outpaced the related loan and deposit volume growth. As a result of these
factors, net interest income increased $2,799,578 or 37.0% in the six months
ended June 30, 2002, compared to the same period of 2001.
Provision for Loan Losses
The provision for loan losses represents the charge against current earnings
necessary to maintain the allowance for loan losses at a level which management
considers appropriate. This level is determined based upon the 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 $3,695,486 for the six months ended
June 30, 2002, compared to $2,026,698 for the same period of 2001, an 82.3%
increase. See Note G - Recent Developments. Charge-offs exceeded recoveries by
$1,244,869 for the six months ended June 30, 2002, compared to $1,250,991 for
the same period of 2001. The reserve for loan losses as a percent of outstanding
loans, net of unearned income, was 1.6% at June 30, 2002 and 1.2% at year end
2001.
Noninterest Income
Noninterest income for the six months ended June 30, 2002, was $1,000,673
compared to $706,874 for the same period of 2001. This 41.6% increase was
primarily due to an increase in mortgage banking fee income and in other
operating income.
Noninterest Expenses
Noninterest expenses for the six months ended June 30, 2002 were $7,900,948
reflecting a 60.3% increase over the same period of 2001. The primary component
of noninterest expenses is salaries and employee benefits, which increased to
$4,928,861 for the six months ended June 30, 2002, 77.9% higher than in the same
period of 2001. Occupancy costs increased $140,255 (24.7%) and other operating
expenses increased $673,377 (42.3%). The primary cause for the noninterest
expense increase is because of the retirement agreement with the former
president and chief executive officer which allowed for a retirement obligation
in the form of salary and compensatory stock option expense of an aggregate
pre-tax amount of approximately $2.0 million.
18
Income Taxes
The Company attempts to maximize its net income through active tax planning. The
provision for income taxes of $(76,439) for the six months ended June 30, 2002,
decreased $536,783 compared to the same period of 2001. Taxes as a percent of
earnings decreased from 35.2% to 32.1%. The effective tax rate of approximately
32.1% for the six months ended June 30, 2002, is less than the federal statutory
rate principally because of the effects of tax-free income.
Recently Issued Accounting Standards
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a replacement
of FASB Statement No. 125. While SFAS No. 140 carries over most of the
provisions of SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, it provides new standards for
reporting financial assets transferred as collateral and new standards for the
derecognition of financial assets, in particular transactions involving the use
of special purpose entities. SFAS No. 140 also prescribes additional disclosures
for collateral transactions and for securitization transactions accounted for as
sales. The new collateral standards and disclosure requirements are effective
for fiscal years ending after December 15, 2000, while the new standards for the
derecognition of financial assets are effective for transfers made after March
31, 2001. The adoption of this statement did not have a material effect on the
Company's consolidated financial statements.
In May 2001, the Auditing Standards Board issued Statement on Auditing Standards
("SAS") No. 94, The Effect of Information Technology on the Auditor's
Consideration of Internal Control in a Financial Statement Audit. This statement
amends SAS No. 55, Consideration of Internal Control in a Financial Statement
Audit, by providing additional guidance related to the understanding by the
auditor of an entity's use of information technology relevant to the audit. This
auditing standard is effective for audits of financial statements for periods
beginning on or after June 1, 2001. The impact on the audit of the Company's
consolidated financial statements resulting from the issuance of this auditing
standard is not expected to be material.
In June 2001, the FASB issued SFAS No. 141, Business Combinations. This
statement addresses financial accounting and reporting for business combinations
and supersedes APB Opinion No. 16, Business Combinations, and SFAS No. 38,
Accounting for Preacquisition Contingencies of Purchased Enterprises. All
business combinations in the scope of SFAS No. 141 are to be accounted for using
one method, the purchase method. Prior to the issuance of this statement,
subject to certain criteria, business combinations were accounted for using one
of two methods, the pooling-of-interests method or the purchase method. The two
methods produce different financial statement results. The single-method
approach used in SFAS No. 141 reflects the conclusion that virtually all
business combinations are acquisitions and therefore should be accounted for in
the same manner as other asset acquisitions based on the values exchanged. This
statement provides expanded and revised guidance related to the allocation of
the purchase price to goodwill and other intangibles arising from the business
combination. The provisions of SFAS No. 141 apply to all business combinations
initiated after June 30, 2001.
Also in June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which addresses financial accounting and reporting for acquired goodwill
and other intangible assets and
19
supersedes APB Opinion No. 17, Intangible Assets. SFAS No. 142 provides new
standards for accounting relating to intangible assets after initial recognition
in the financial statements. This statement proscribes the accounting practice
of amortizing or expensing intangibles ratably over a prescribed period of time
and imposes new guidance requiring that goodwill and certain other intangibles
be tested for impairment at least annually by comparing fair values of those
assets with their recorded amounts. Additional disclosure requirements also are
provided. The provisions of SFAS No. 142 are required to be applied in fiscal
years beginning after December 15, 2001.
The adoption of SFAS No. 141 and SFAS No. 142 are not expected to have a
material effect on the Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. This statement is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The adoption of this statement
is not expected to have a material effect on the Company's consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that opinion).
This statement also amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The major changes
resulting from this statement relate to the establishment of a single method for
the recognition of impairment losses on long-lived assets to be held and used
whether from discontinuance of a business segment or otherwise. This statement
is effective for financial statements issued for fiscal years beginning after
December 15, 2001. The adoption of this statement is not expected to have a
material effect on the Company's consolidated financial statements.
In December 2001, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 01-6, Accounting by Certain Entities (Including Entities
With Trade Receivables) That Lend to or Finance the Activities of Others. This
statement reconciles and conforms the accounting and financial reporting
provisions for similar transactions as applied to different entities within the
financial services industry. It eliminates differences in disclosure practices
where not warranted and should provide greater consistency in reporting by
entities in the financial services industry. This statement is effective for
annual and interim financial statements issued for fiscal years beginning after
December 15, 2001. The adoption of SOP 01-6 is not expected to have a material
effect on the Company's consolidated financial statements.
In December 2001, the Auditing Standards Board issued SAS No. 95, Generally
Accepted Auditing Standards. This statement supersedes Generally Accepted
Auditing Standards of SAS No. 1 and generally provides additional guidance to
the independent auditor in the conduct of an audit engagement, primarily
20
by addressing authoritative and nonauthoritative publications for audit
consideration and guidance. This SAS is effective for audits of financial
statements for periods beginning on or after December 15, 2001.
In January 2002, the Auditing Standards Board issued SAS No. 96, Audit
Documentation. This statement supersedes SAS No. 41, Working Papers and amends
SAS No. 47, Audit Risk and Materiality in Conducting an Audit, SAS No. 56,
Analytical Procedures and SAS No. 59, The Auditor's Consideration of an Entity's
Ability to Continue as a Going Concern. This statement provides revised guidance
to the independent auditor as to the type, purpose and requirements of audit
documentation. This SAS is effective for audits of financial statements for
periods beginning on or after May 15, 2002.
The impact of SAS No. 95 and SAS No. 96 on the audit of the Company's
consolidated financial statements resulting from the issuance of these auditing
standards is not expected to be material.
Recently Passed Legislation
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
("the Act"), which immediately impacts Securities and Exchange Commission
registrants, public accounting firms, lawyers and securities analysts. This
legislation is the most comprehensive since the passage of the Securities Acts
of 1933 and 1934. It has far reaching effects on the standards of integrity for
corporate management, board of directors, and executive management. Additional
disclosures, certifications and possibly procedures will be required of the
company. We do not expect any material adverse effect on our company as a result
of the passage of this legislation, however, the full scope of the Act has not
been determined. The Act provides for additional regulations and requirements of
publicly-traded companies which have yet to be issued.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk arising from adverse changes in the fair value of
financial instruments due to a change in interest rates, exchange rates and
equity prices. The Company's primary market risk is interest rate variations in
the short-term time horizons also known as interest rate risk.
The primary objective of Asset/Liability Management at the Company is to manage
interest rate risk and achieve reasonable stability in net interest income
throughout interest rate cycles. This is achieved by maintaining the proper
balance of rate sensitive earning assets and rate sensitive liabilities. The
relationship of rate sensitive earning assets to rate sensitive liabilities is
the principal factor in projecting the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning assets and
interest-bearing liabilities are those that can be repriced to current market
rates within a relatively short time period. Management monitors the rate
sensitivity of securities over the entire life of these instruments, but places
particular emphasis on the first year. The Company's Asset/Liability Management
policy requires risk assessment relative to interest pricing and related terms.
21
The Company uses additional tools to monitor and manage interest rate
sensitivity. One of the primary tools is simulation analysis. Simulation
analysis is the primary method of estimating earnings at risk and capital at
risk under varying interest rate conditions. Simulation analysis is used to test
the sensitivity of the Company's net interest income and stockholders' equity to
both the level of interest rates and the slope of the yield curve. Simulation
analysis accounts for the expected timing and magnitude of assets and liability
cash flows, as well as the expected timing and magnitude of deposits that do not
reprice on a contractual basis. In addition, simulation analysis includes
adjustments for the lag between movements in market interest rates on loans and
interest-bearing deposits. These adjustments are made to reflect more accurately
possible future cash flows, repricing behavior and ultimately net interest
income.
As of June 30, 2002, the Company's simulation analysis reflected that the
Company is at greatest risk in a decreasing interest rate environment. The table
below depicts the results of the simulation assuming one and two percent
decreases and increases in the prime interest rates in a one year time horizon.
Interest Rate Risk
(Amounts in thousands)
One Year Time Horizon
Estimated Repricing Amounts
Down Up Down Up
1 Percent 1 Percent 2 Percent 2 Percent
Rate Sensitive Assets:
Loans......................................... $ 299,310 $ 282,267 $ 310,672 $ 276,586
Deposits in banks............................. 35 35 35 35
Federal funds sold............................ 14,778 14,778 14,778 14,778
Securities.................................... 20,784 18,074 22,272 17,763
Total Rate Sensitive Assets................. 334,907 315,154 347,757 309,162
Rate Sensitive Liabilities
Deposits - Demand............................. 23,520 32,128 23,520 32,128
Deposits - Time............................... 225,933 225,933 225,933 225,933
Other borrowings.............................. 33,000 33,000 33,000 33,000
Total Rate Sensitive Liabilities............ 282,453 291,061 282,453 291,061
Rate Sensitivity Gap............................. $ 52,454 $ 24,093 $ 65,304 $ 18,101
Change in Amount of Net Interest Margin.......... $ (855) $ 571 $ (1,966) $ 862
Change in Percent of Net Interest Margin......... (0.14)% 0.09% (0.32)% 0.14%
22
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
On June 11, 2002, the Company held its Annual Meeting of
Stockholders. The following items were presented to a vote of
holders (the "Stockholders") of the Company's outstanding Common
Stock.
1. The Stockholders elected three Directors, each to serve a
term of three years scheduled to expire at the annual
meeting of stockholders held the third year following the
year of their election or until their respective successors
are elected and qualified.
2. The Stockholders ratified the appointment of Schauer,
Taylor, Cox, Vise & Morgan, P.C. as independent auditors of
the Company for the year ending December 31, 2002.
The number of votes for the above items are summarized in
the table below.
Broker
Item Submitted To Stockholders For Against Abstain Non-Votes Total
(1) Election of Directors
Bingham D. Edwards 5,077,082 -0- 120,852 -0- 5,197,934
Gregory B. Parker 4,835,449 -0- 362,485 -0- 5,197,934
Timothy A. Smalley 4,835,314 -0- 362,620 -0- 5,197,934
(2) Ratification of Independent
Auditors 4,828,895 335,439 33,600 -0- 5,197,934
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
11 - Computation of per Share Earnings
(b) Reports on Form 8-K
During the quarter ended June 30, 2002, no reports were
filed for the Company on Form 8-K.
23
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.
HERITAGE FINANCIAL HOLDING CORPORATION
By: /s/ Harold B. Jeffreys August 19, 2002
---------------------------------------------- --------------------
Harold B. Jeffreys Date
Interim President and
Chief Executive Officer
By: /s/ Thomas E. Hemmings August 19, 2002
---------------------------------------------- --------------------
Thomas E. Hemmings Date
Chief Financial Officer
24
Exhibit 11 - Statements Re: Computation of Per Share Earnings
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
The following tabulation presents the calculation of basic and diluted earnings
per common share for the three-month and six-month periods ended June 30, 2002
and 2001.
Three Months Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
Basic Earnings (Loss) Per Share:
Net income (loss)............................. $ (232,151) $ 430,311 $ (161,574) $ 848,793
Earnings (loss) on common shares.............. $ (232,151) $ 430,311 $ (161,574) $ 848,793
Weighted average common shares
outstanding - basic......................... 8,712,174 8,481,901 8,614,340 8,478,974
Basic earnings (loss) per common share........ $ (0.03) $ 0.05 $ (0.02) $ 0.10
Diluted Earnings (Loss) Per Share:
Net income (loss)............................. $ (232,151) $ 430,311 $ (161,574) $ 848,793
Weighted average common shares
outstanding - diluted....................... 10,372,333 10,549,628 10,570,720 10,489,509
Diluted earnings (loss) per common share...... $ (0.02) $ 0.04 $ (0.02) $ 0.08
25