UNITED STATES
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 MARCH 31, 2003
[_] 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.)
1323 Stratford Road, S.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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [_] No [X]
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 April 30, 2003: 10,438,948 Shares
Form 10-Q
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
March 31, 2003
TABLE OF CONTENTS
Page No.
Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of
March 31, 2003 and December 31, 2002........................................................... 3
Consolidated Statements of Income for the Three Months
Ended March 31, 2003 and 2002.................................................................. 4
Consolidated Statements of Comprehensive Income For the
Three Months Ended March 31, 2003 and 2002..................................................... 5
Consolidated Statement of Stockholders' Equity For the
Three Months Ended March 31, 2003.............................................................. 6
Consolidated Statements of Cash Flows For the
Three Months Ended March 31, 2003 and 2002..................................................... 7
Notes to Consolidated Financial Statements..................................................... 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................. 15
Item 3 - Quantitative and Qualitative Disclosures about Market Risk..................................... 23
Item 4 - Controls and Procedures........................................................................ 25
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K............................................................... 26
Signatures
Certification of Periodic Financial Reports
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2003 (Unaudited) and December 31, 2002
March 31,
2003 December 31,
---------------- -----------------
(Unaudited) 2002
Assets
Cash and due from banks................................................... $ 12,811,380 $ 4,759,310
Interest bearing deposits with other banks................................ 107,318 97,707
Federal funds............................................................. 9,058,784 14,681,498
---------------- -----------------
Cash and Cash Equivalents............................................... 21,977,482 19,538,515
Securities available-for-sale............................................. 38,145,311 36,761,802
Mortgage loans held-for-sale.............................................. 9,562,217 12,343,440
Loans, net of unearned income............................................. 481,904,100 523,849,502
Allowance for loan losses................................................. (24,881,429) (26,990,594)
Premises and equipment, net............................................... 7,067,069 7,105,706
Accrued interest.......................................................... 3,026,456 3,404,344
Foreclosed real estate.................................................... 7,168,015 5,428,047
Other assets.............................................................. 12,053,246 11,501,035
---------------- -----------------
Total Assets.......................................................... $ 556,022,467 $ 592,941,797
================ =================
Liabilities and Stockholders' Equity
Liabilities
Deposits
Noninterest bearing..................................................... $ 24,548,708 $ 21,961,197
Interest-bearing........................................................ 459,392,261 503,669,662
---------------- -----------------
Total Deposits........................................................ 483,940,969 525,630,859
Short-term borrowings..................................................... 7,480,000 6,650,000
Accrued interest.......................................................... 2,527,694 3,288,749
FHLB advances............................................................. 23,000,000 23,000,000
Guaranteed preferred beneficial interest in the Company's
subordinated debentures................................................. 10,000,000 10,000,000
Other liabilities......................................................... 1,284,080 669,143
---------------- -----------------
Total Liabilities..................................................... 528,232,743 569,238,751
---------------- -----------------
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,
10,288,868 issued and outstanding at March 31, 2003, and;
40,000,000 shares authorized, 8,821,144 issued and outstanding
at December 31, 2002)................................................... 102,889 88,211
Paid-in capital........................................................... 36,614,882 32,234,654
Subscriptions receivable.................................................. (873,978) --
Retained earnings......................................................... (8,126,466) (8,676,525)
Accumulated other comprehensive income (loss): net unrealized
holding gains (losses) on securities available-for-sale, net of
deferred income tax..................................................... 72,397 56,706
---------------- -----------------
Total Stockholders' Equity............................................ 27,789,724 23,703,046
---------------- -----------------
Total Liabilities and Stockholders' Equity............................ $ 556,022,467 $ 592,941,797
================ =================
See notes to consolidated financial statements
3
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2003 and 2002
(Unaudited)
Three Months Ended
March 31,
-----------------------------------
2003 2002
---------------- -----------------
Interest Income
Interest and fees on loans................................................ $ 8,607,586 $ 10,112,777
Interest and dividends on securities:
Taxable securities...................................................... 369,486 300,454
Nontaxable securities................................................... 17,069 34,830
Interest on deposits with other banks..................................... 1,500 1,567
Interest earned on federal funds sold and securities purchased............ 42,742 46,450
---------------- -----------------
Total Interest Income................................................... 9,038,383 10,496,086
---------------- -----------------
Interest Expense
Interest on deposits...................................................... 3,944,050 5,021,987
Interest on FHLB borrowings............................................... 244,500 222,849
Interest on short-term borrowings......................................... 56,588 --
Interest on guaranteed preferred beneficial interest in
the Company's subordinated debentures................................... 255,000 247,029
---------------- -----------------
Total Interest Expense.................................................. 4,500,138 5,491,865
---------------- -----------------
Net Interest Income.......................................................... 4,538,245 5,004,221
Provision for loan losses................................................. 100,000 608,894
---------------- -----------------
Net Interest Income After Provision for Loan Losses.......................... 4,438,245 4,395,327
Noninterest Income
Customer service fees..................................................... 229,285 232,250
Mortgage banking fee income............................................... 204,621 161,223
Investment security gains................................................. 222,345 75,402
Other operating income.................................................... (57,518) 73,460
---------------- -----------------
Total Noninterest Income................................................ 598,733 542,335
---------------- -----------------
Noninterest Expenses
Salaries and employee benefits............................................ 1,994,636 3,349,375
Occupancy and equipment expense........................................... 557,576 320,143
Other operating expenses.................................................. 1,604,740 1,215,364
---------------- -----------------
Total Noninterest Expenses.............................................. 4,156,952 4,884,882
---------------- -----------------
Income before income taxes................................................... 880,026 52,780
Provision for income tax (expense) benefit................................... (329,967) 17,797
---------------- -----------------
Net Income................................................................... $ 550,059 $ 70,577
================ =================
Earnings Per Common Share
Basic..................................................................... $ 0.06 $ 0.01
Diluted................................................................... 0.05 0.01
Cash Dividends Declared
Cash dividends declared per common share.................................. $ 0.00 $ 0.00
Weighted Average Shares Outstanding
Basic..................................................................... 8,936,614 8,515,147
Diluted................................................................... 10,241,236 10,419,546
See notes to consolidated financial statements
4
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31, 2003 and 2002
(Unaudited)
Three Months Ended
March 31,
-----------------------------------
2003 2002
---------------- -----------------
Net Income .................................................................. $ 550,059 $ 70,577
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during the period............. 248,496 (358,805)
Reclassification adjustments for gains included in net income........... (222,345) (75,402)
---------------- -----------------
Net unrealized gains (losses)........................................... 26,151 (434,207)
Income tax related to items of other comprehensive income (loss).......... (10,460) 173,682
---------------- -----------------
Other comprehensive income (loss)............................................ 15,691 (260,525)
---------------- -----------------
Comprehensive Income (Loss).................................................. $ 565,750 $ (189,948)
================ =================
See notes to consolidated financial statements
5
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2003
(Unaudited)
Accumulated
Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
----------- ------------- ------------ ---------------- --------------
Balance at December 31, 2002.......... $ 88,211 $ 32,234,654 $ (8,676,525) $ 56,706 $ 23,703,046
Net gain - March 31, 2003............. -- -- 550,059 -- 550,059
Unrealized gains on securities
available-for-sale, net of
reclassification adjustment,
net of tax of $(10,460)............ -- -- -- 15,691 15,691
--------------
Comprehensive income.................. -- -- -- -- 565,750
--------------
Compensatory options - tax benefit
forfeited.......................... -- (5,803) -- -- (5,803)
Stock offering........................ 5,388 1,794,021 -- -- 1,799,409
Subscriptions receivable.............. -- (873,978) -- -- (873,978)
Stock option exercise................. 10,265 3,380,641 -- -- 3,390,906
Stock used by optionees to
purchase options................... (975) (788,631) -- -- (789,606)
----------- ------------- ------------ ---------------- --------------
Balance at March 31, 2003............. $ 102,889 $ 35,740,904 $ (8,126,466) $ 72,397 $ 27,789,724
=========== ============= ============= ================ ==============
See notes to consolidated financial statements
6
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2003 and 2002
(Unaudited)
Three Months Ended
March 31
---------------------------------
2003 2002
--------------- ----------------
Operating Activities
Net Income .................................................................. $ 550,059 $ 70,577
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses.................................................. 100,000 608,894
Depreciation, amortization, and accretion, net............................. 166,059 119,996
Deferred tax expense (benefit)............................................. 29,557 (491,329)
Realized investment security gains......................................... (222,345) (75,402)
Decrease in accrued interest receivable.................................... 377,888 176,469
Decrease in accrued interest payable....................................... (761,055) (1,041,019)
Increase in mortgage loans held-for-sale................................... 2,781,223 7,477,283
Other, net................................................................. 22,711 1,088,190
--------------- ----------------
Net Cash Provided By Operating Activities................................ 3,044,097 7,933,659
--------------- ----------------
Investing Activities
Net increase in investment securities available-for-sale..................... (1,135,013) (3,492,975)
Net (increase) decrease in loans to customers................................ 37,996,268 (17,054,069)
Purchase of premises and equipment........................................... (127,422) (329,810)
--------------- ----------------
Net Cash Provided By (Used In) Investing Activities...................... 36,733,833 (20,876,854)
--------------- ----------------
Financing Activities
Compensatory options (tax benefit forfeited).................................. (5,803) 1,106,129
Net (decrease) increase in demand deposits, NOW
accounts and savings accounts.............................................. (11,042,928) 8,978,127
Net (decrease) increase in certificates of deposit........................... (30,646,962) 15,082,881
Net proceeds from issuance of stock.......................................... 1,799,408 --
Net proceeds from FHLB loans................................................. -- 10,000,000
Net proceeds from short-term debt............................................ 830,000 --
Net proceeds from exercise of stock options.................................. 2,601,300 --
Subscriptions receivable..................................................... (873,978) --
--------------- ----------------
Net Cash Provided By (Used In) Financing Activities...................... (37,338,963) 35,167,137
--------------- ----------------
Net Increase in Cash and Cash Equivalents....................................... 2,438,967 22,223,942
Cash and Cash Equivalents at Beginning of Period................................ 19,538,515 13,701,768
--------------- ----------------
Cash and Cash Equivalents at End of Period...................................... $ 21,977,482 $ 35,925,710
=============== ================
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest................................................................... $ 5,261,193 $ 6,532,884
Taxes...................................................................... -- --
See notes to consolidated financial statements
7
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
Note A - Basis of Presentation
The consolidated 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 three-month period ended March 31, 2003, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
The consolidated statement of financial condition at December 31, 2002, 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, 2002, included in the Company's Annual Report on
Form 10-K.
Note B - Income Taxes
The effective tax rates of approximately 37.5 percent and 33.7 percent for the
three months ended March 31, 2003 and 2002, respectively, differ from the
statutory rate principally because of the effect of state income taxes.
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 March 31, 2003, the Company had net unrealized gains of approximately
$120,659 in available-for-sale securities which are reflected in the presented
assets and resulted in an increase in stockholders' equity of $72,397, net of
deferred tax liability. There were no held-to-maturity or trading securities at
March 31, 2003 or December 31, 2002.
8
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
Note D - Stockholders' Equity
Equity increased by $4,087,000 primarily due to a net gain of $550,000, stock
option exercise totaling a net increase of $2,601,000, the issuance of shares
generating $925,000, and the increase in unrealized gain on securities
available-for-sale totaling $16,000, 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.
Note G - Recent Developments
Management recently conducted an extensive review of the Bank's loan portfolio.
In connection with such review, the Company and the Bank took steps to charge
off or establish additional loan loss reserves for specified assets and to
adjust the Bank's levels of loan loss provisions.
The Board of Directors of the Company and the Bank have imposed certain
restriction on the operations of the Company and the Bank in order to address
asset quality concerns, operational controls and procedures, and capital
deficiencies. The Bank has also committed to take certain actions including not
to declare or pay cash dividends without the prior written approval of its
regulators and to meet certain
9
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
Note G - Recent Developments - Continued
capital guidelines. In addition, the Bank has undertaken to hire and retain
qualified lending and operational personnel with the specific written authority
by the Board of Directors to implement sound lending, recordkeeping and
accounting practices. The Bank also has undertaken to develop an educational
program for board members and to create a written review of the Bank's staffing
requirements. Our management and staff are working toward meeting all of these
requirements and implementing policies which will make the Company and the Bank
stronger and more efficient.
The Board of Directors of the Bank has determined to improve and increase the
capital ratios of the Bank, which have declined as a result of the increase in
the Bank's loan loss reserves. The Board of Directors of the Company took steps
to attain and maintain a Tier 1 leverage ratio of 8 percent and to be
"well-capitalized" as defined by the FDIC by March 31, 2003. The Bank failed to
achieve a Tier 1 leverage ratio of 8 percent, as the Bank's Tier 1 leverage
ratio was 7.43% percent at March 31, 2003. The Board of Directors and Management
are continuing to press forward with efforts to increase the Tier 1 leverage
ratio to 8 percent.
The management of the Company and the Bank has aggressively addressed asset
quality, loan and audit issues. The Bank has charged off the balance of any
assets classified Loss and one-half of those assets classified Doubtful by any
of the regulatory authorities, and has gone further by conducting additional
reviews of the Bank's loan portfolio to increase management's knowledge of the
Bank's asset quality issues. The Bank must reduce the balance of assets
classified Substandard or Doubtful in accordance with a specific timetable, and
may not extend additional credit to any borrower obligated to the Bank on any
extension of credit that has been charged off by the Bank or classified Loss or
Doubtful as long as such credit remains uncollected. In addition, the Bank is
obligated to review its existing written loan policies and to adopt new internal
loan review systems to address problems with the Bank's loan portfolio.
As a result of the declining quality of the Bank's loan portfolio, related
reductions in the capital levels of the Bank, and other operational factors, the
Board of Directors and management is re-evaluating its lending strategy. The
Board of Directors and management are actively taking steps to improve the
underwriting and credit administration practices of the Bank in order to improve
overall asset quality. In addition, in October 2002 the Bank hired a new chief
lending officer to oversee the administration of the Bank's loan portfolio with
primary emphasis on improving overall credit quality of the portfolio. New
policies with respect to loan originations have been formulated which management
believes should enhance the quality of future loan production. Management
intends to continue efforts to originate new loans consistent with improving
overall credit quality, although significant emphasis is now being given to
problem loan administration.
In light of the increased level of classified assets of the Bank and
management's decision to increase its allowance for loan losses, the Company is
taking steps to implement enhanced risk management and internal control
procedures. These steps include increasing the Company's investment in its
infrastructure to enhance its technology, its management information systems,
its internal audit function and the formal documentation of its policies and
procedures. In this regard, the Company is taking steps to expand its
10
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
Note G - Recent Developments - Continued
internal audit function and has engaged an outside consulting firm to assist the
Company to ensure that the Company's policies, procedures, systems and controls
are appropriate to its operations. Such review and enhancement of the policies,
procedures, systems and controls of the Company and the Bank are being overseen
by Larry R. Mathews, the new President and Chief Executive Officer of the Bank
and Thomas E. Hemmings, the new Chief Financial Officer of the Company and the
Bank.
Management has commenced a comprehensive review of the Company's and the Bank's
internal control structures and procedures. In the course of this review,
management has identified significant weaknesses in the Company's internal
controls and procedures, particularly with respect to the Bank's lending
functions, including credit underwriting and loan review. Furthermore,
management has determined that certain internal controls and procedures relating
to loan policies and procedures have not been followed by Bank personnel. This
review is ongoing and further adjustments to loan loss reserves may be made as a
result of the continuation of management's review and assessment of the Bank's
loan portfolio and the adequacy of the allowance for loan losses.
On March 31, 2003, certain directors of the Company exercised options on 720,000
shares of Company common stock, at an exercise price of $3.34 per share, for net
proceeds of approximately $2.4 million. Additionally, in April 2003, a director
of the Company exercised options on 60,000 shares of Company common stock at an
exercise price of $3.34 per share, generating net proceeds of approximately
$200,000. These options had all been granted in 1998 or 1999.
As previously reported on Form 8-K, the Company commenced a private placement of
up to 1,000,000 shares on March 26, 2003. The offering expired on April 14,
2003, with a total of 688,825 shares subscribed. The common stock was issued at
a purchase price of $3.34 per share pursuant to an independent third party
appraisal, which was a premium over the $2.69 book value per share at December
31, 2002. The offering resulted in net proceeds of approximately $2.3 million.
The majority of these shares were issued to senior management of the Company and
its subsidiary, with the remainder being issued to accredited investors.
Note H - Stock-Based Compensation
The Company has long-term incentive stock option plans and an employee stock
purchase plan. The Company accounts for those plans under the recognition and
measurement principles of APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations using the intrinsic value based method,
as permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-based Compensation. In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
This statement amends SFAS No. 123 to provide alternative methods of transition
for an entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. It amends the disclosure
provisions of that Statement to require prominent disclosure about the effects
on reported net income of an entity's accounting policy decisions with respect
to stock-based employee compensation. This Statement also amends APB Opinion
11
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
Note H - Stock-Based Compensation - Continued
No. 28 to require disclosure about those effects in interim financial
information. This Statement is effective for financial statements for fiscal
years ending after December 15, 2002 and for financial reports containing
condensed financial statements for interim periods beginning after December 15,
2002. No stock-based employee compensation cost is reflected in net income for
these plans.
Pro forma information regarding net income and earnings per share is presented
as if the Company had accounted for its employee stock options under the fair
value method, as prescribed by SFAS No. 123. The fair value for these options
was estimated at the dates of grant using the Black-Scholes option pricing
model.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
[The remainder of this page intentionally left blank]
12
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
Note H - Stock-Based Compensation - Continued
The Company's actual and pro forma information follows:
Three Months Ended
March 31,
-----------------------------------
2003 2002
---------------- -----------------
Net Income
As Reported.................................................................. $ 550,059 $ 70,577
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of tax................................................................ -- --
---------------- -----------------
Pro forma net income......................................................... $ 550,059 $ 70,577
================ =================
Basic earnings per share:
As Reported.................................................................. $ 0.06 $ 0.01
================ ================
Pro forma.................................................................... $ 0.06 $ 0.01
================ ================
Diluted earnings per share:
As Reported.................................................................. $ 0.05 $ 0.01
================ ================
Pro forma.................................................................... $ 0.05 $ 0.01
================ ================
Note I - Commitments and Contingencies
In the normal course of business the Company enters into commitments to extend
credit, which are agreements to lend to customers as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and generally require a
payment of fees. Since many of the commitments are expected to expire without
being drawn upon, the total amounts do not necessarily represent expected future
cash flows.
Standby letters of credit are commitments issued by the Company to guarantee the
performance of a customer to a third party. These guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions, and expire in
decreasing amounts with terms ranging from one to four years. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
13
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
Note I - Commitments and Contingencies - Continued
The following represents the Company's commitments to extend credit and standby
letters of credit as of March 31, 2003 and December 31, 2002:
Period Ended
-----------------------------------
March 31, December 31,
2003 2002
---------------- -----------------
Commitments to extend credit................................................. $ 41,257,000 $ 75,574,000
Standby and commercial letters of credit..................................... 2,946,000 3,259,000
---------------- -----------------
Total commitments and contingencies.......................................... $ 44,203,000 $ 78,833,000
================ =================
14
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
March 31, 2003
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Heritage Financial Holding Corporation (the "Company") is primarily engaged in
the business of directing and planning the activities of its wholly owned
subsidiary, Heritage Bank (the "Bank"). The Company's primary asset is comprised
of its investment in the Bank.
The consolidated operating results of the Company include those of the Bank. All
significant intercompany transactions and balances have been eliminated in
consolidation. The operating results of the Company depend primarily on net
interest income, which is the difference between interest income on
interest-earning assets, primarily loans and investment securities, and interest
expense on interest-bearing liabilities, primarily deposits and advances from
the Federal Home Loan Bank ("FHLB") and other sources. Net earnings are also
affected by non-interest income and non-interest expenses, such as loan fees,
compensation and benefits, building and occupancy expense, and other expenses.
The discussion and analysis included herein covers material changes in financial
condition, liquidity and capital resources that have occurred since December 31,
2002, as well as certain material changes in results of operations during the
three months ended March 31, 2003 as compared to the same period in 2002.
This discussion is intended to assist in 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 Company's
Quarterly Report on Form 10-Q for the period ended March 31, 2003, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
FINANCIAL CONDITION
March 31, 2003 compared to December 31, 2002
Loans
Loans comprised the largest single category of the Company's earning assets on
March 31, 2003. Loans, net of unearned income and allowance for loan losses,
were 83.9% of total assets at March 31, 2003, and 85.9% of total assets at
December 31, 2002. Total net loans were $466,585,000 at March 31, 2003,
representing an 8.4% decrease from the December 31, 2002 total of $509,202,000.
This decrease was the result of management's intentional reduction in total
assets. Management intends to continue efforts to originate new loans consistent
with the Bank's strengthened credit standards.
Allowance for Loan Losses
When determining the adequacy of the allowance for loan losses, management
considers changes in the size and character of the loan portfolio, changes in
non-performing and past due loans, regulatory classification of assets,
historical loan loss experience, the existing risk of individual loans,
concentrations
15
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
March 31, 2003
of loans to specific borrowers or industries, existing and prospective economic
conditions, and other factors. The allowance for loan losses decreased
$2,109,000 during the three months ended March 31, 2003 to $24,882,000 at March
31, 2003 from $26,991,000 at December 31, 2002. Chargeoffs in an aggregate
amount of $2.3 million accounted for the bulk of the decrease in the allowance
for loan losses. The allowance for loan losses represented 5.06% and 5.03% of
loans receivable at March 31, 2003 and December 31, 2002, respectively. (See
further discussion in "Provision for Loan Losses" below.)
In the opinion of management, the allowance for loan losses was adequate at
March 31, 2003 to provide for potential loan losses in the loan portfolio at
that date. Management is concerned about the results of its continuing review of
the loan portfolio, as well as the impact a decline in the local economy could
have upon the Bank's ability to improve the quality of its loan portfolio. While
management believes it has established its existing allowance for loan losses in
accordance with generally accepted accounting principles, there can be no
assurance that the Bank will not be required to increase the allowance in the
future. Such increases could have a material adverse affect on the Bank's
financial condition and results of operations. Losses ultimately confirmed will
vary from original estimates as adjustments are made in the period in which
these factors and other considerations become known.
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 decreased
$4,239,000 from December 31, 2002 to $47,204,000 at March 31, 2003.
Asset Quality
Between December 31, 2002 and March 31, 2003, 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 $26,698,000 to $28,815,000
during this period. The ratio of nonperforming assets to total assets increased
from 4.5% to 5.2% and the ratio of nonperforming loans to total loans increased
from 4.1% to 4.5% during the first quarter. The ratio of loan loss allowance to
total nonperforming assets decreased from 101.1% to 86.4% during this same
period. The Company believes that due to a continuing weak economy both on a
national and statewide 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, Alabama 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 and the Bank have taken steps to intensively
monitor its overall loan portfolio; including the hiring of additional personnel
to monitor credit quality and adherence to credit policies and procedures. The
Bank has hired a seasoned bank executive as its chief lending officer, and has
retained a manager of loan review. Management believes that these additions, as
well as additional recently retained personnel, will provide the Bank with the
necessary resources to improve controls over the lending functions, identify any
potential areas of concern in a more timely manner, and ensure that future loans
comply with the Bank's lending policies and procedures.
16
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
March 31, 2003
Deposits
Total deposits of $483,941,000 at March 31, 2003 decreased $41,690,000, or 7.9%,
over total deposits of $525,631,000 at year-end 2002 primarily due to a
reduction in brokered deposits. Deposits are the Company's primary source of
funds with which to support its earning assets. Noninterest-bearing deposits
increased $2,588,000, or 11.8%, from year-end 2002 to March 31, 2003, and
interest-bearing deposits decreased $44,277,000, or 8.8%, from year-end 2002.
Stockholders' Equity
Stockholders' equity increased $4,087,000 from December 31, 2002 to March 31,
2003, primarily due to the net earnings of $550,000, the increase from an
unrealized loss to an unrealized gain on securities available for sale totaling
$16,000, net of deferred taxes, the exercise of stock options, net of shares
surrendered, of $2,600,000, and the stock offering, net of subscriptions
receivable, of $925,000.
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 not, therefore, 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
$156,306,000 or 31.8% of the total loan portfolio at March 31, 2003. Other
sources of liquidity include short-term investments such as federal funds sold
which amounted to $9,059,000 at March 31, 2003.
The liability portion of the balance sheet provides liquidity through various
customers' interest-bearing and noninterest-bearing deposit accounts. At March
31, 2003, 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. This line of credit with the Federal Home Loan Bank of Atlanta is
collateralized by a blanket lien on the Bank's single-family mortgage portfolio,
as well as certain commercial real estate mortgages. As of March 31, 2003, the
17
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
March 31, 2003
Federal Home Loan Bank line of credit permitted borrowings of up to
approximately $65 million and as of March 31, 2003, the Bank had borrowed $23
million.
Capital Resources
A strong capital position is vital to the 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.
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 1 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
approximately $36,679,000 at March 31, 2003. The Company's Tier 2 capital
components are comprised solely of the allowance for loan losses subject to
certain limitations. Tier 1 capital plus the Tier 2 capital components is
referred to as Total Risk-Based capital and was approximately $44,023,000 at
March 31, 2003.
The Company intends to take steps to attain and maintain a Tier 1 capital ratio
at the Bank of 8%. Although the Company cannot assure that it will be successful
in achieving these capital ratios, management believes that the steps it is
taking to access additional capital, implement management changes and enhance
internal controls and procedures will enable the Company to achieve these
objectives. The Board of Directors and management of the Company and the Bank
are actively engaged in the preparation and implementation of strategic business
plans for the Company and the Bank, to address, among other things, the
immediate and anticipated future capital requirements of the Company and the
Bank, taking into account the mix of loans in the Bank's loan portfolio,
earnings, and alternative sources of capital.
18
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
March 31, 2003
As of March 31, 2003 and December 31, 2002, the capital ratios of the Bank were
as follows:
Regulatory March 31, December 31,
Minimum 2003 2002
----------------- ------------------ ------------------
Tier 1 leverage ratio 4% 7.43% 5.99%
Tier 1 Risk-based capital ratio 6% 9.23% 7.68%
Total Risk-based capital ratio 8% 10.53% 8.98%
RESULTS OF OPERATIONS
Three months ended March 31, 2003 and 2002
Summary
Net earnings of the Company for the quarter ended March 31, 2003 was $550,000,
compared to $71,000 for the same period in 2002, representing a $479,000
increase from prior period income. The earnings for the current period continue
to be negatively impacted by ongoing costs associated with poor asset quality.
Earnings for the prior year were impacted by severance and retirement payments
and benefits to the former chief executive officer of the Company, which
resulted in a pre-tax charge to the Company in 2002 of approximately $2.0
million.
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 three months
ended March 31, 2003 decreased $1,458,000, or 13.9%, from the same period in
2002. This decrease was largely a result of the decrease in interest and fee
income on loans. Interest expense for the three months ended March 31, 2003
decreased $992,000, or 18.1%, over the corresponding period of 2002 due to
decreases in interest expense paid on interest-bearing deposits and borrowed
funds. These decreases were due to the impact of rapidly declining interest
rates which outpaced the related loan and deposit volume growth. As a result of
these factors, net interest income decreased $466,000, or 9.3%, for the three
months ended March 31, 2003, compared to the same period of 2002.
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 $100,000 for the three months ended
March 31, 2003, compared to $609,000 for the same period of 2002. The allowance
for loan losses as a percent of outstanding loans, net of unearned income, was
5.06% at March 31, 2003 compared to 5.03% at year-end 2002.
19
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
March 31, 2003
Noninterest Income
Noninterest income for the three months ended March 31, 2003 was $599,000
compared to $542,000 for the same period of 2002. This 10.4% increase primarily
was due to an increase in mortgage banking fee income.
Noninterest Expenses
Noninterest expenses for the three months ended March 31, 2003 were $4,157,000,
reflecting a 14.9% decrease over the same period of 2002. The primary component
of noninterest expenses is salaries and employee benefits, which decreased to
$1,995,000 for the three months ended March 31, 2003, 40.0% lower than in the
same period of 2002. Occupancy costs increased $237,000, or 74.2%, and other
operating expenses increased $389,000, or 32.0%, from the same period of 2002.
The Company's noninterest expense for the first quarter of 2002 included a
pre-tax expense of approximately $2.0 million attributable to the retirement
agreement with the former president and chief executive officer of the Company,
which included a retirement obligation in the form of salary and compensatory
stock option expense. Occupancy costs for the current period have increased
primarily due to the addition of three new facilities.
Income Taxes
The Company attempts to maximize its net income through active tax planning. The
provision for income taxes of ($330,000) for the three months ended March 31,
2003 increased $348,000 compared to the same period of 2002. Taxes as a percent
of earnings increased from 33.8% to 37.5%. The effective tax rate of
approximately 37.5% for the three months ended March 31, 2003, is more than the
federal statutory rate principally because of state income taxes.
Recently Issued Accounting Standards
In September 2002, the Auditing Standards Board issued SAS No. 98, Omnibus
Statement on Auditing Standards - 2002. This statement revises and amends
several previously issued Statements on Auditing Standards. The changes required
impose enhanced quality controls and audit considerations on a firm of
independent auditors in the conduct of their audit of a company's financial
statements. The additional requirements primarily relate to more descriptive
guidance on the application of auditing procedures, the auditors report and
related disclosures and supplementary information. This SAS No. 98 was effective
upon issuance except for the amendment to SAS No. 70, which is effective for
reports issued on or after January 1, 2003. The impact on the audit of the
Company's consolidated financial statements resulting from the issuance of this
auditing standard was not material.
In January 2003, the Auditing Standards Board issued SAS No. 101, Auditing Fair
Value Measurements and Disclosures. This statement establishes standards on
auditing the measurement and disclosure of assets, liabilities, and specific
components of equity presented or disclosed at fair value in financial
statements. This SAS is effective for audits of financial statements for periods
beginning on or after June 15, 2003. 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.
20
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
March 31, 2003
In January 2003, the FASB issued FIN 46, which clarifies the application of
Accounting Research Bulletin ("ARB") 51, Consolidated Financial Statements, to
certain entities (called variable interest entities) in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The disclosure
requirements of this Interpretation are effective for all financial statements
issued after January 31, 2003. The consolidation requirements apply to all
variable interest entities created after January 31, 2003. In addition, public
companies must apply the consolidation requirements to variable interest
entities that existed prior to February 1, 2003 and remain in existence as of
the beginning of annual or interim periods beginning after June 15, 2003.
Management is currently assessing the impact of FIN 46, and does not expect this
Interpretation to have a material effect on the Company's consolidated financial
statements.
On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. The provisions of SFAS No. 149 are effective for fiscal quarters
beginning after June 15, 2003. Management does not believe the provisions of
this standard will have a material effect on the Company's consolidated
financial statements.
Critical Accounting Policies
The accounting and financial reporting policies of the Company conform to
accounting principles generally accepted in the United States of America and to
general practices within the banking industry. Following is a description of the
accounting policies applied by the Company which are deemed "critical." In
determining which accounting policies are "critical" in nature, the Company has
identified the policies that require significant judgment or involve complex
estimates. The application of these policies has a significant impact on the
Company's financial statements. Financial results could differ significantly if
different judgments or estimates are applied.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses
charged to operations. Loans are charged against the allowance for loan losses
when management believes that the collection of principal is unlikely.
Subsequent recoveries are added to the allowance. Management's evaluation of the
adequacy of the allowance for loan losses is based on a formal analysis which
assesses the risk within the loan portfolio. This analysis includes
consideration of historical performance, current economic conditions, level of
nonperforming loans, loan concentrations, and review of certain individual
loans. Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance for loan losses may be necessary based on changes in
economic conditions and the results of management's ongoing review of the loan
portfolio. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the bank's allowances for loan
losses. Such agencies may require the bank to recognize additions to the
allowance for loan losses based on their judgments.
21
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
March 31, 2003
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.
Any forward-looking statements are subject to numerous assumptions, risks and
uncertainties because of the possibility of changes in underlying factors and
assumptions. Actual results could differ materially from those contained in or
implied by such forward-looking statements for a variety of factors including:
recommendations made by or actions taken by banking regulatory authorities;
significant changes in the economic scenario from the current anticipated
scenario which could materially change anticipated credit quality trends; the
value of investment securities and the ability to generate loans; significant
delay in or inability to execute strategic initiatives designed to increase
capital, reduce non-performing loans and classified assets, grow revenues and
control expenses; ability to maintain sufficient liquidity and cash flow and
significant changes in accounting, tax or regulatory practices or requirements;
changes in interest rates; financial, legal, regulatory or other changes
affecting the banking and financial services industries in general; continued
intense competition from numerous providers of products and services which
compete with the Company's businesses, and other factors listed from time to
time in the Company's SEC reports, including, but not limited to, the Annual
Report on Form 10-K for the year ended December 31, 2002.
Whenever possible, the Company has identified these forward-looking statements
(as defined in Section 21E of the Securities Exchange Act of 1934) by words such
as "anticipates," "may," "believes," "estimates," "projects," "expects,"
"intends," and words of similar import. In addition to the statements included
in this Quarterly Report on Form 10-Q, the Company and its representatives may
from time to time make other oral or written statements that are also
forward-looking statements.
The Company expressly disclaims any obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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.
22
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
March 31, 2003
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.
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.
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23
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
March 31, 2003
As of March 31, 2003, 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.................................... $ 205,190 $ 186,053 $ 217,948 $ 179,674
Deposits in banks........................ 109 109 109 109
Federal funds sold....................... 8,958 8,958 8,958 8,958
Securities............................... 15,551 11,494 16,093 10,331
--------- --------- --------- ---------
Total Rate Sensitive Assets............ 229,808 206,614 243,108 199,072
--------- --------- --------- ---------
Rate Sensitive Liabilities
Deposits - Demand........................ 35,527 35,527 35,527 35,527
Deposits - Time.......................... 225,146 225,146 225,146 225,146
Other borrowings......................... -- -- -- 13,000
-- -- -- --
--------- --------- --------- ---------
Total Rate Sensitive Liabilities....... 260,673 260,673 260,673 273,673
--------- --------- --------- ---------
Rate Sensitivity Gap........................ $ (30,865) $ (54,059) $ (17,565) $ (74,601)
========= ========= ========= =========
Change in Amount of Net Interest Margin..... $ (30,865) $ (541) $ 351 $ (1,492)
========= ========= ========= =========
Change in Percent of Net Interest Margin.... 1.61% (2.82)% 1.83% (7.79)%
========= ========= ========= =========
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24
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
March 31, 2003
Item 4. Controls and Procedures
(a) Within the 90 days prior to the date of filing this Quarterly Report on
Form 10-Q, the Company carried out an evaluation, under the supervision and
participation of its management, including the Chief Executive Officer and
the Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rules 13a-14(c) and 15d-14(c). Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's
periodic SEC filings. However, the Company recently has experienced several
changes in top management, and the effectiveness of such disclosure
controls and procedures is dependent on the Company's personnel to report
any issues or matters required to be disclosed in the Company's SEC filings
to the appropriate management personnel on a timely basis.
(b) Management commenced a comprehensive review of the Company's internal
control structures. Management's review of the internal control structures
of the Company and the Bank indicated significant weaknesses in the
Company's and the Bank's internal controls and procedures, particularly
with respect to the Bank's lending functions, including credit underwriting
and loan review. As a result of the information gathered in the course of
these reviews, management of both the Company and the Bank have taken steps
to modify and supplement internal controls and procedures in order to
augment the Company's reporting and to ensure timely evaluation of
reporting regarding the operations of the Bank, particularly with respect
to the credit and asset quality of the Bank. Furthermore, in the course of
these reviews, the Company and the Bank determined that certain internal
controls relating to loan policies and procedures have not been followed by
Bank personnel, and have taken steps to correct these matters, including
the dismissal of certain employees of the Bank. The Bank has retained a new
President and Chief Executive Officer, and, additionally, the Company has
changed outside legal counsel. Management of the Company is continuing to
review and modify the Company's internal controls and procedures. This
review process is currently ongoing and is not complete as of the date of
the filing of this Quarterly Report on Form 10-Q. Management has disclosed
the control weaknesses to its Audit Committee and to the outside auditors
of the Company, and is continuing to seek their advice and support in
revising and supplementing the internal controls and procedures of the
Company and the Bank.
25
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
March 31, 2003
Part II - Other Information
Item 1 - Legal Proceedings
Reference is made to the legal proceedings previously reported in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2002, under the heading "Item 3 - Legal Proceedings." Subsequent to the
filing of the Company's Form 10-K, the Company received notice that a suit
had been filed by a second former officer and director in the Circuit Court
of Jefferson County, Alabama, alleging similar causes of action against the
Bank. Both of these suits have since been removed to the United States
District Court for the Northern District of Alabama, and the Bank intends
to vigorously defend this and any other action brought against the Bank by
either of the officers, and does not believe that the final outcome will
have a material impact on the Bank or the Company.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Exhibit Page
10.1 Employment Contract for Don H. Pruett 28
10.2 Employment Contract for Robert Harwell 42
11 Computation of Per Share Earnings 58
99.1 Chief Executive Officer - Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 59
99.2 Chief Financial Officer - Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 60
(b) Reports on Form 8-K
During the quarter ended March 31, 2003, the Company filed the
following Current Report on Form 8-K:
Form 8-K filed on March 27, 2003, to disclose under Item 5 the
commencement of a private placement of up to 1,000,000 shares of
common stock.
26
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
March 31, 2003
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 May 15, 2003
--------------------------------------------- -------------
Harold B. Jeffreys Date
Interim President and Chief Executive Officer
By: /s/ Thomas E. Hemmings May 15, 2003
--------------------------------------------- -------------
Thomas E. Hemmings Date
Chief Financial Officer
27
Exhibit 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT (this "Agreement"), is made and entered into this ___ day of
February, 2003, but effective as of October 25, 2002, by and among Heritage
Bank, an Alabama state banking corporation (the "Bank"), and Don H. Pruett (the
"Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Bank desires to employ the Executive as its Executive Vice
President and Chief Lending Officer on the terms and conditions hereinafter
provided, and the Executive desires to accept such employment on the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements set forth in this Agreement, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
SECTION 1: EMPLOYMENT OF EXECUTIVE; DUTIES AND RESPONSIBILITIES
1.1 Employment of Executive. The Company and the Bank shall employ the
Executive, and the Executive shall provide services to the Company and the
Bank, upon and subject to the terms and conditions of this Agreement.
1.2 Term of Employment of Executive. Subject to the provisions of Section 3
hereof, the employment of the Executive by the Company and the Bank
pursuant to this Agreement shall be for an initial term of three (3) years
commencing on October 25, 2002, and ending on October 24, 2005; provided
that such term may be renewed annually by mutual agreement of the Board of
Directors of the Bank for one additional year on each anniversary of the
effective date of this Agreement such that, if such renewal election is
made by the Bank and the Company, on each of such anniversary dates the
remaining term hereunder will be three years. The period of the Executive's
employment hereunder is referred to herein as the "Employment Period."
28
1.3 Offices and Positions of Executive. Except as otherwise mutually agreed by
the Company, the Bank and the Executive and subject to Section 1.4 hereof,
the Executive shall serve as Executive Vice President and Chief Lending
Officer and any other position agreed upon by the parties.
1.4 Duties and Responsibilities. During the Employment Period, the Executive
shall report directly to the Chief Executive Officer ("CEO") of the Bank
and shall perform such duties and responsibilities as the CEO of the Bank
shall reasonably assign to the Executive from time to time and as are
commensurate with his position and which may be set forth in the Bank's
bylaws. During the Employment Period, Executive shall devote his full
business time, attention, skill and efforts to the performance of his
duties hereunder, except during periods of illness or periods of vacation
and leaves of absence consistent with the Company and Bank policies. The
Executive may devote reasonable periods of time to serve as a director or
advisor to other organizations, to charitable and community activities and
to managing his personal investments, provided that such activities do not
materially interfere with the performance of his duties to the Company or
the Bank and are not in conflict or competitive with, or adverse to, the
interests of the Company or the Bank.
SECTION 2: COMPENSATION; REIMBURSEMENT; AND BENEFITS
2.1 Base Salary and Bonus. During the Employment Period, the Bank shall pay to
the Executive the annual base salary (the "Base Salary") at the rate of
$125,000 per year beginning October 25, 2002 and continuing at such rate
until December 31, 2003. Beginning with calendar year 2004, the Base Salary
shall be reviewed no less frequently than annually by the CEO of the Bank
for the year 2004 and for each subsequent calendar year; if the CEO in his
discretion should modify the Base Salary upon any such review then, for
purposes of this Agreement, the term Base Salary shall thereafter mean such
modified amount.
In addition to the Base Salary, the Bank may pay the Executive such bonus
or bonuses, if any, as the Board of Directors of the Bank, or the Board of
Directors of Heritage Financial Holding Corporation, a Delaware corporation
and sole shareholder of the Bank (the
29
"Company"), may from time to time determine. The Executive shall be
eligible for bonuses under the Executive Management Bonus Program of the
Company and/or the Bank, and specific criteria will be developed for the
position of Executive Vice President and Chief Lending Officer of the Bank
under the terms of such Executive Management Bonus Program.
2.2 Payment of Base Salary and Bonus. The Bank shall pay the Base Salary and
bonuses, if any, due the Executive in accordance with the policy or
policies of the Bank as in effect from time to time for the payment of
salary and bonuses to senior executive personnel.
2.3 Incentive Stock Option. Within one hundred eighty (180) days after the
effective date of this Agreement, the Company shall grant to Executive
stock options (the "Option") to acquire up to an aggregate of fifty
thousand (50,000) shares of the common stock of the Company, par value
$0.01 per share, pursuant to and in accordance with the terms and
conditions of the Heritage Financial Holding Corporation Incentive Stock
Compensation Plan (the "Plan"), and the Option shall be an Incentive Stock
Option (as defined in the Plan) as to the greatest number of shares
permitted pursuant to the Plan and shall be a Supplemental Stock Option (as
defined in the Plan) with respect to the remaining shares. The per share
exercise price of the Option shall be not less than the fair market value
of a share of common stock of the Company as of the date of the grant, as
required under the terms of the Plan. The Option shall vest according to
the following schedule: (i) 8,500 shares shall vest immediately upon the
date of the grant; (ii) 8,500 shall vest on the first anniversary of the
date of the grant; (iii) 8,500 shall vest on the second anniversary of the
date of the grant; (iv) 8,500 shall vest on the third anniversary of the
date of the grant; and (v) 8,500 shall vest on the fourth anniversary of
the date of the grant; and (vi) 7,500 shares shall vest on the fifth
anniversary of the date of the grant. Notwithstanding the foregoing, in the
event of a Change of Control (as defined in Section 3.1(d) of this
Agreement), the Option shall become fully vested immediately upon the
effective time of such Change of Control, as provided by the terms of the
Plan.
2.4 Insurance. The Bank shall purchase, and shall be the owner of, a term life
insurance policy in the face amount of $400,000 for Executive, the
beneficiary of which shall be designated by the Executive; provided that
upon the termination of Executive's employment hereunder for any reason
other than death, the Executive may purchase such policy from the
30
Bank on such terms as may be agreed upon by the parties at such time or
else the Bank may terminate such policy or otherwise permit it to lapse if
the Executive does not purchase such policy. The Bank shall provide
disability insurance for the benefit of the Executive in amount not less
than one times Base Salary.
2.5 Other Benefits. The Executive shall be entitled to participate on the same
basis as other similarly situated employees of the Bank in all incentive
and benefit programs or arrangements made available to such employees.
2.6 Automobile; Cellular Telephone. During the Employment Period, the Bank will
make available for use by the Executive an automobile in accordance with
the Bank's Executive Automobile Program dated as of May 28, 2002, subject
to the policies and procedures of the Bank with respect to the personal use
of such automobile. During the Employment Period, the Bank will make
available for use by the Executive a cellular telephone, subject to the
policies and procedures of the Company or the Bank, as applicable, with
respect to the personal use of such telephone.
2.7 Business Expenses. The Bank shall reimburse the Executive for all
reasonable expenses incurred by him in accordance with the standard
policies and procedures of the Bank in the course of rendering his services
pursuant to this Agreement; provided, however, that the Executive shall
promptly submit such reasonable documentation as may be requested by the
Bank to verify such expenditures.
2.8 Country Club and Civic Club Dues. The Bank shall reimburse the Executive's
reasonable expenses for initiation fees, dues and capital assessments for
membership in a country club or social club and for other civic club
memberships, as authorized by the compensation committee, entered by the
Executive during the Employment Period; provided that if the Executive
during the Employment Period ceases his membership in any such clubs and
any bonds or other capital payments made by the Bank are repaid to the
Executive, the Executive shall pay over such payments to the Bank; and
provided further, that upon the termination of the Executive's employment
hereunder, Executive shall either terminate such memberships and return to
the Bank any bonds or other capital payments made by the Bank that are
repaid to the
31
Executive by such country club or civic clubs or organizations, or purchase
such memberships from the Bank and reimburse the Bank for any and all
initiation fees and bonds or other capital payments made by the Bank with
respect to such memberships.
2.9 Vacation. The Executive shall be entitled to three (3) weeks of paid
vacation per year. The vacation to which the Executive is entitled pursuant
to this Section 2.9 shall be available under the same terms and conditions
as are applicable to similarly situated executive personnel of the Bank.
The Executive shall take into consideration the needs of the Bank in
setting his vacation schedule.
2.10 Indemnification. The Executive shall be entitled to indemnification (and to
reimbursement of expenses incurred in connection with such indemnified
claims, etc.) as an officer and director of the Bank to the full extent
provided for in the Articles of Incorporation and Bylaws of the Bank, as
the same may be amended from time to time, and subject to applicable law.
The Bank shall also use its best efforts to obtain coverage for the
Executive under any insurance policy now in force or hereinafter obtained
during the term of this Agreement covering the other officers and directors
of the Bank against lawsuits.
SECTION 3: TERMINATION OF EMPLOYMENT
3.1 Termination of Employment Period. The Employment Period may be terminated
in the following manner:
(a) Termination on Death or Disability. The Employment Period shall
automatically terminate upon the death or Disability of the Executive.
The term "Disability" shall mean the Executive's physical or mental
incapacity that renders him incapable of performing the essential
functions of the duties required of him by this Agreement for one
hundred eighty (180) or more consecutive days, even with reasonable
accommodation. In the case of termination upon the Disability of the
Executive, there shall be a determination by the Board of Directors of
the Bank that such grounds for termination exist.
32
(b) Termination upon Notice. The Employment Period may be terminated by
the Executive at any time, upon thirty (30) days' written notice to
the Bank. The Employment Period may be terminated by the Bank, by
resolution of its Board of Directors, for any other reason other than
for "Cause" (as defined in Section 3.1(c) of this Agreement), upon
thirty (30) days written notice to the Executive.
(c) Termination for Cause. The Employment Period may be terminated by the
Bank for "Cause" at any time during the Employment Period immediately
upon written notice to the Executive, which notice shall state the
facts constituting such "Cause." For the purpose of this Section , the
term "Cause" shall mean (i) intentional misconduct or gross
malfeasance, or an act or acts of gross negligence in the course of
employment or any material breach of Executive's obligations contained
herein, including, without limitation, acts competitive with or
deliberately harmful to the business of the Company or the Bank; (ii)
any intentional misstatement or omission to the directors or executive
officers of the Company or the Bank with respect to any matter; (iii)
the intentional failure of the Executive to follow the reasonable
instructions and policies of the Company or the Bank; (iv) the
Executive's conviction, admission or confession of any felony or an
unlawful act involving active and willful fraud or moral turpitude; or
(v) the violation by the Executive of applicable state and federal
regulations, rules, or statutes. The Bank shall have the power to
temporarily suspend Executive (with such pay, if any, as the Bank may
determine) from duty if there is substantial evidence of probable
Cause until Cause is either proved or disproved; if disproved, full
reinstatement with pay will immediately be effected.
(d) Termination for Good Reason. The Employment Period may be terminated
by the Executive for "Good Reason," as hereinafter defined, at any
time during the Employment Period upon thirty (30) days' written
notice to the Bank, which notice shall state the facts constituting
such "Good Reason." For the purpose of this Section 3.1(d), the term
"Good Reason" shall mean (i) the occurrence of a Change in Control (as
hereinafter defined), (ii) a reduction in the Executive's base salary
without his consent, or (iii) following a Change in Control, a
reduction in the Executive's base salary or any failure to pay the
Executive any compensation or benefits to which he is entitled within
five days of the date due, or the failure by the Bank to (A) continue
in effect (without reduction in benefit level and/or reward
33
opportunities) any material compensation or employee benefit plan in
which the Executive was participating at any time within ninety days
preceding the date of a Change in Control or at any time thereafter,
unless such plan is replaced with a plan that provides substantially
equivalent compensation or benefits to the Executive or (B) provide
the Executive with compensation and benefits, in the aggregate, at
least equal (in terms of benefit levels and/or reward opportunities)
to those provided for under each other employee benefit plan, program
and practice in which the Executive was participating at any time
within ninety days preceding the date of a Change in Control or at any
time thereafter. For the purpose of this Section 3.1(d), the term
"Change in Control" means (A) the acquisition at any time by a
"person" or "group" (as such terms are used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act"))
who or which are the beneficial owners (as defined in Rule 13(d)-3
under the Exchange Act), directly or indirectly, of securities
representing more than 35% of the combined voting power in the
election of directors of the then outstanding securities of the
Company or any successor of the Company; (B) if during any period (an
"Applicable Period") of two (2) years or less, with the first day (the
"Start Date") for any such Applicable Period to be no earlier than the
effective date of this Agreement, there shall occur the termination
(except by reason of death, disability, voluntary resignation or
retirement) of the service of the Required Number of the persons
serving as of the Start Date as directors of the Board of Directors of
the Company (as used herein, the "Required Number" of directors shall
be that number which, as of the Start Date, constituted a majority of
the Board of Directors of the Company); (C) the sale or disposition (
which shall not include a pledge by the Company of the capital stock
of the Bank as security for obligations of the Company unless and
until the pledgee thereof exercises remedies against said stock to
effect a sale or disposition) by the Company of any of the capital
stock of the Bank or approval by the shareholders of the Company of
any sale or disposition of substantially all of the assets or earning
power of the Company; (D) approval by the shareholders of the Company
of any merger, consolidation, or statutory share exchange to which the
Company is a party as a result of which the persons who were
shareholders immediately prior to the effective date of the merger,
consolidation or share exchange shall have beneficial ownership of
less than 35 % of the combined voting power in the election of
directors of the surviving corporation.
34
3.2 Consequences of Termination.
(a) By the Bank for Cause or By Executive other than for Good Reason. In the
event Executive's employment is terminated (i) by the Bank for Cause under
Section 3.1(c) hereof, (ii) by the Executive other than for Good Reason
under Section 3.1(d) hereof, or (iii) as a result of the Executive's death
or Disability under Section 3.1(a) hereof, neither the Company or the Bank
shall be under any further obligation to make any payments or provide any
benefits to the Executive, except for Base Salary earned but unpaid at the
time of such termination, expenses otherwise reimbursable herein incurred
by, but not yet reimbursed to, the Executive at the time of such
termination, any earned but unpaid incentive awards due to the Executive,
and group health coverage that is required to be continued by applicable
law.
(b) By the Bank other than for Cause or By Executive for Good Reason. In the
event the Employment Period is terminated by the Executive for Good Reason
under Section 3.1(d) hereof or by the Bank for a reason other than Cause
pursuant to Section 3.1(b) hereof, the Bank shall pay to the Executive (i)
an aggregate amount equal to two (2) times the Base Salary, payable in
monthly installments each equal to one-twelfth of the Base Salary, for the
twenty-four months following such termination, and (ii) Base Salary earned
but unpaid at the time of such termination, expenses otherwise reimbursable
herein incurred by, but not yet reimbursed to, the Executive at the time of
such termination, any earned but unpaid incentive awards due to the
Executive, and group health coverage that is required to be continued by
applicable law; provided, however, that, at the election of the Bank by
decision of its Board of Directors, the Bank may pay to the Executive, in
lieu of the payment provided for by (i) above, an aggregate amount equal to
one (1) times the Base Salary, payable in monthly installments each equal
to one-twelfth of the Base Salary, for the twelve months following such
termination and, if the Bank makes such election, the non-competition
period under Section 4.3(a) shall be reduced to a period of one (1) year
following such termination; provided further, however, the Bank shall have
no right to make any such election in anticipation of or following a Change
in Control. In addition, in the event the Employment Period is terminated
by the Executive for Good Reason under Section 3.1(d) hereof or by the Bank
for a reason other than Cause pursuant to Section 3.1(b) hereof, the Option
granted pursuant to Section 2.3 hereof shall become fully vested
immediately upon the effective time of such termination.
35
(c) Obligation of the Bank to make the payments under Section 3.2(b) of this
Agreement. Compliance by the Executive with Section 4 of this Agreement is
a condition precedent to the Bank's obligation to make, or to continue to
make, the payments referred to in Section 3.2(b) of this Agreement.
(d) Payments made to the Executive net of Taxes. All payments made to the
Executive pursuant to this Agreement shall be received by the Executive net
of all applicable withholding and payroll taxes.
(e) Certain Litigation Expenses. If litigation after a Change in Control should
be brought to enforce or interpret any provision contained in this
Agreement and the Executive shall prevail in such litigation, the Bank
shall, to the full extent permitted by applicable law, indemnify Executive
for Executive's reasonable attorneys' fees and disbursements incurred in
such litigation to the extent the Executive has prevailed therein.
SECTION 4: CONFIDENTIALITY PROVISIONS; PROHIBITION OF INSIDER TRADING AND
TIPPING; NON-COMPETITION
4.1 Confidentiality. (a) The Executive hereby acknowledges that during the
Employment Period he will have contacts with and develop and service the
customers of the Company, the Bank and their affiliates and that in all of
his activities, and through the nature of complying with his obligations
pursuant to this Agreement, he will have access to and will acquire
confidential and proprietary information, including, but not limited to,
information relating to the business, assets, operations, customers,
suppliers, contractual parties and other persons with whom the Company, the
Bank and their affiliates do business. The Executive hereby acknowledges
and confirms that such information constitutes the exclusive and unique
property of the Company, the Bank or their affiliates, as the case may be,
and that such information is proprietary and confidential in nature.
(b) The Executive agrees that he shall not at any time during the term of
Employment or thereafter disclose to other persons or entities (except as
permitted in writing and
36
as directed by the Board of Directors of the Company or the Board of
Directors of the Bank or only as to the extent required pursuant to a
subpoena or order of a court of competent jurisdiction) any such
information referred to in Section 4.1(a) of this Agreement.
4.2 Prohibition of Insider Trading and Tipping. The Executive acknowledges that
during the Employment Period he may become aware of or be provided with
material non-public information concerning the Company. The Executive
acknowledges and agrees that the trading in, purchase or sale of any
security of the Company while in possession of any material non-public
information concerning the Company is prohibited as is the unauthorized
communication of any such information to any person or entity. The
Executive agrees to abide by these prohibitions and shall use all
reasonable efforts to cause his affiliates to abide by these prohibitions.
4.3 Non-Competition...
(a) In the event the Executive's employment under this Agreement shall be
terminated during the Employment Period by the Executive for Good
Reason under Section 3.1(d) hereof or by the Bank for a reason other
than Cause pursuant to Section 3.1(b) hereof, then for two (2) years
following such termination (subject to the proviso contained in
Section 3.2(b) hereof), and in the event the Executive's employment
under this Agreement shall terminate for any other reason pursuant to
Section 3.1 of this Agreement during the Employment Period then for
one (1) year following such termination, the Executive shall not, in
any county where the Company, the Bank or any of their majority-owned
subsidiaries has a bank branch that
37
accepts deposits that are insured by the Federal Deposit Insurance
Corporation ("FDIC") at the time of such termination (each a "Branch
County"), or in Shelby County, Alabama (which is contiguous to a
Branch County), physically work or perform services as a consultant
to, or serve as a member of management or as an employee of, a
financial institution whose deposits are insured by the FDIC. Bank
branches of successors and assigns of the Company or the Bank shall
not be considered in determining the prohibited geographical area.
Notwithstanding the foregoing, this Section 4.3 shall not apply at any
time after a Change in Control shall have occurred. In the event that
the Bank is obligated to pay to the Executive the payments provided
for in Section 3.2(b) of this Agreement and the Bank fails to make, or
fails to continue to make, the payments referred to in Section 3.2(b)
within ten (10) days of such payments or portions thereof becoming due
under Section 3.2(b), then the Executive shall thereafter cease to be
subject to the provisions of this Section 4.3, provided that nothing
in this sentence shall be construed to release the Executive from the
obligations set forth in this Section 4.3 in the event that
Executive's employment is terminated in a manner which does not give
rise to the payment obligations under Section 3.2(b) (including,
without limitation, termination by the Bank for Cause under Section
3.1(c) hereof or by the Executive other than for Good Reason under
Section 3.1(d) hereof)
(b) The parties have entered into this Section 4.3 in good faith and for
the reasons set forth in the recitals hereto and assume that this
Agreement is legally binding. If, for any reason, this Agreement is
not binding because of its geographical scope or because of its term,
then the parties agree that this Agreement shall be deemed effective
to the widest geographical area and/or the longest period of time (but
not in excess of two years) as may be legally enforceable.
4.4 Specific Performance. The Executive agrees that in the event of a breach or
threatened breach of Section 4.1, 4.2 or 4.3 of this Agreement, that the
Bank is likely to suffer, and will suffer, immediate and irreparable injury
for which there is no adequate remedy at law. Therefore, in addition to any
other rights or remedies which the Bank may have under this Agreement, the
Bank will be entitled to enforce the specific performance of this Agreement
by the Executive and to obtain a preliminary injunction, without the
requirement of posting a bond, enjoining the Executive from engaging in any
activity in violation thereof.
SECTION 5: ADDITIONAL CONDITIONS
5.1 Condition to Executive's Employment. The initial employment of Executive
under this Agreement is subject to the Bank's receipt and review of
Executive's credit history and subject to the information contained therein
being satisfactory to the Bank in its sole discretion.
38
SECTION 6: GENERAL PROVISIONS
6.1 Non-assignability. Neither this Agreement nor any of the rights,
obligations or interest arising hereunder may be assigned by the Executive
without the prior written consent of the Bank; provided, however, that
nothing in this Section 6.1 shall preclude the Executive from designating,
in writing, a beneficiary to receive any compensation payable to him or any
other benefit receivable by him under this Agreement upon the death or
incapacity of the Executive, nor shall it preclude the executors,
administrators or any other legal representatives of the Executive or his
estate from assigning any rights hereunder to the person or persons
entitled thereto. Neither this Agreement nor any of the rights, obligations
or interest arising hereunder may be assigned by the Bank without the prior
written consent of the Executive to a person other than (1) an affiliate of
the Bank or the Company, or (2) any party with which the Company or the
Bank merges or consolidates, or to whomever the Company or the Bank may
sell all or substantially all of its assets; provided, however, that any
such affiliate or successor shall expressly assume all of the Bank's
obligations and liabilities to the Executive under this Agreement.
6.2 Severability. This Agreement shall be deemed severable and any part hereof
which may be held invalid by a court or other entity of competent
jurisdiction shall be deemed automatically excluded from this Agreement and
the remaining parts shall remain in full force and effect.
6.3 Merger. This Agreement contains the entire understanding of the parties
hereto and constitutes the only agreement between the Bank and the
Executive regarding the employment of the Executive by the Bank. This
Agreement supersedes all prior agreements, either express or implied,
between the parties hereto regarding the employment of the Executive by the
Bank.
6.4 Amendment. None of the terms and conditions of this Agreement shall be
amended or modified unless expressly consented to in writing and signed by
each of the parties hereto.
39
6.5 Governing Law. This Agreement shall be governed by and construed under the
laws of the State of Alabama without regard to provisions thereof governing
conflicts of law.
6.6 Notices. All notices or other communications to be given by the parties
among themselves pursuant to this Agreement shall be in writing, and all
payments to be made hereunder shall be deemed to have been duly made if
mailed by certified mail or hand delivered to either of the parties at
their respective addresses as they appear on the records of the Bank. Any
of the parties hereto may change their respective addresses upon written
notice to the other given in the manner provided in this Section.
6.7 Waiver. No waiver by any of the parties to this Agreement of any condition,
term or provision of this Agreement shall be deemed to be a waiver of any
preceding or subsequent breach of the same or any other condition, term or
provision hereof.
6.8 Survival. Notwithstanding anything in this Agreement to the contrary, and
notwithstanding any termination of the Employment Period, the provisions of
this Agreement intended to govern the obligations of the parties hereto
upon the termination of the Executive's employment hereunder for any
reason, including, but not limited to Section 3 (inclusive of each of the
subsections thereof) and Section 4, shall continue in full force and
effect.
40
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
at the date and year first above written.
HERITAGE BANK
- ------------------------------
By:
---------------------------
Its:
----------------------
EXECUTIVE
- ------------------------------
Don H. Pruett
41
Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS AGREEMENT (this "Agreement"), is made and entered into this ___ day of
January, 2003, by and among Heritage Bank, an Alabama state banking corporation
(the "Bank"), and Robert F. Harwell, Jr. (the "Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Bank desires to employ the Executive as its regional President
of North Alabama on the terms and conditions hereinafter provided, and the
Executive desires to accept such employment on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements set forth in this Agreement, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
SECTION 1: EMPLOYMENT OF EXECUTIVE; DUTIES AND RESPONSIBILITIES
1.1 Employment of Executive. The Company and the Bank shall employ the
Executive, and the Executive shall provide services to the Company and the
Bank, upon and subject to the terms and conditions of this Agreement.
1.2 Term of Employment of Executive. Subject to the provisions of Section 3
hereof, the employment of the Executive by the Company and the Bank
pursuant to this Agreement shall be for an initial term of three (3) years
commencing on January ___, 2003, and ending on January ___, 2006; provided
that such term may be renewed annually by mutual agreement of the Board of
Directors of the Bank for one additional year on each anniversary of the
effective date of this Agreement such that, if such renewal election is
made by the Bank and the Company, on each of such anniversary dates the
remaining term hereunder will be three years. The period of the Executive's
employment hereunder is referred to herein as the "Employment Period."
42
1.3 Offices and Positions of Executive. Except as otherwise mutually agreed by
the Company, the Bank and the Executive and subject to Section hereof, the
Executive shall serve as regional President of North Alabama and any other
position agreed upon by the parties.
1.4 Duties and Responsibilities. During the Employment Period, the Executive
shall report directly to the Chief Executive Officer ("CEO") of the Bank
and shall perform such duties and responsibilities as the CEO of the Bank
shall reasonably assign to the Executive from time to time and as are
commensurate with his position and which may be set forth in the Bank's
bylaws. During the Employment Period, Executive shall devote his full
business time, attention, skill and efforts to the performance of his
duties hereunder, except during periods of illness or periods of vacation
and leaves of absence consistent with the Company and Bank policies. The
Executive may devote reasonable periods of time to serve as a director or
advisor to other organizations, to charitable and community activities and
to managing his personal investments, provided that such activities do not
materially interfere with the performance of his duties to the Company or
the Bank and are not in conflict or competitive with, or adverse to, the
interests of the Company or the Bank.
SECTION 2: COMPENSATION; REIMBURSEMENT; AND BENEFITS
2.1 Base Salary and Bonus. During the Employment Period, the Bank shall pay to
the Executive the annual base salary (the "Base Salary") at the rate of
$140,000 per year beginning January ___, 2003 and continuing at such rate
until December 31, 2003. Beginning with calendar year 2004, the Base Salary
shall be reviewed no less frequently than annually by the CEO of the Bank
for the year 2004 and for each subsequent calendar year; if the CEO in his
discretion should modify the Base Salary upon any such review then, for
purposes of this Agreement, the term Base Salary shall thereafter mean such
modified amount.
In addition to the Base Salary, the Bank may pay the Executive such bonus
or bonuses, if any, as the Board of Directors of the Bank, or the Board of
Directors of Heritage Financial Holding Corporation, a Delaware corporation
and sole shareholder of the Bank (the "Company"), may from time to time
determine. The Executive shall be eligible to be considered for bonuses
under
43
the Executive Management Bonus Program of the Company and/or the Bank, and
specific criteria will be developed for the position of the regional
President of North Alabama Alabama Bank under the terms of such Executive
Management Bonus Program. The Executive shall be paid a bonus of not less
than $40,000 for the services provided by the Executive for the calendar
year ended December 31, 2003.
2.2 Payment of Base Salary and Bonus. The Bank shall pay the Base Salary and
bonuses, if any, due the Executive in accordance with the policy or
policies of the Bank as in effect from time to time for the payment of
salary and bonuses to senior executive personnel.
2.3 Incentive Stock Option. Within ninety (90) days after the effective date of
this Agreement, the Company shall grant to Executive stock options (the
"Option") to acquire up to an aggregate of fifty thousand (50,000) shares
of the common stock of the Company, par value $0.01 per share, pursuant to
and in accordance with the terms and conditions of the Heritage Financial
Holding Corporation Incentive Stock Compensation Plan (the "Plan"), and the
Option shall be an Incentive Stock Option (as defined in the Plan) as to
the greatest number of shares permitted pursuant to the Plan and shall be a
Supplemental Stock Option (as defined in the Plan) with respect to the
remaining shares. The per share exercise price of the Option shall be not
less than the fair market value of a share of common stock of the Company
as of the date of the grant, as required under the terms of the Plan. The
Option shall vest according to the following schedule: (i) 8,500 shares
shall vest immediately upon the date of the grant; (ii) 8,500 shall vest on
the first anniversary of the date of the grant; (iii) 8,500 shall vest on
the second anniversary of the date of the grant; (iv) 8,500 shall vest on
the third anniversary of the date of the grant; and (v) 8,500 shall vest on
the fourth anniversary of the date of the grant; and (vi) 7,500 shares
shall vest on the fifth anniversary of the date of the grant.
Notwithstanding the foregoing, in the event of a Change of Control (as
defined in Section 3.1(d) of this Agreement), the Option shall become fully
vested immediately upon the effective time of such Change of Control, as
provided by the terms of the Plan
2.4 Insurance. The Bank shall purchase, and shall be the owner of, a term life
insurance policy in the face amount of $250,000 for Executive, the
beneficiary of which shall be designated by the Executive; provided that
upon the termination of Executive's employment
44
hereunder for any reason other than death, the Executive may purchase such
policy from the Bank on such terms as may be agreed upon by the parties at
such time or else the Bank may terminate such policy or otherwise permit it
to lapse if the Executive does not purchase such policy. The Bank shall
provide disability insurance for the benefit of the Executive.
2.5 Other Benefits. The Executive shall be entitled to participate on the same
basis as other similarly situated employees of the Bank in all incentive
and benefit programs or arrangements made available to such employees.
2.6 Automobile; Cellular Telephone. During the Employment Period, the Bank will
make available for use by the Executive an automobile in accordance with
the Bank's Executive Automobile Program dated as of May 28, 2002, subject
to the policies and procedures of the Bank with respect to the personal use
of such automobile. During the Employment Period, the Bank will make
available for use by the Executive a cellular telephone, subject to the
policies and procedures of the Company or the Bank, as applicable, with
respect to the personal use of such telephone.
2.7 Business Expenses. The Bank shall reimburse the Executive for all
reasonable expenses incurred by him in accordance with the standard
policies and procedures of the Bank in the course of rendering his services
pursuant to this Agreement; provided, however, that the Executive shall
promptly submit such reasonable documentation as may be requested by the
Bank to verify such expenditures.
2.8 Country Club and Civic Club Dues. The Bank shall reimburse the Executive's
reasonable expenses for initiation fees, dues and capital assessments for
membership in the Valley Hill Country Club and for other civic club
memberships, as authorized by the compensation committee, entered by the
Executive during the Employment Period; provided that if the Executive
during the Employment Period ceases his membership in any such clubs and
any bonds or other capital payments made by the Bank are repaid to the
Executive, the Executive shall pay over such payments to the Bank; and
provided further, that upon the termination of the Executive's employment
hereunder, Executive shall either terminate such memberships and return to
the Bank any bonds or other capital payments made by the Bank that are
repaid to the Executive by such country club or civic clubs or
organizations, or purchase such memberships from the Bank and reimburse the
Bank for any and all initiation fees and bonds or other capital payments
made by the Bank with respect to such memberships.
45
2.9 Vacation. The Executive shall be entitled to three (3) weeks of paid
vacation per year. The vacation to which the Executive is entitled pursuant
to this Section 2.9 shall be available under the same terms and conditions
as are applicable to similarly situated executive personnel of the Bank.
The Executive shall take into consideration the needs of the Bank in
setting his vacation schedule.
2.10 Indemnification. The Executive shall be entitled to indemnification (and to
reimbursement of expenses incurred in connection with such indemnified
claims, etc.) as an officer and director of the Bank to the full extent
provided for in the Articles of Incorporation and Bylaws of the Bank, as
the same may be amended from time to time, and subject to applicable law.
The Bank shall also use its best efforts to obtain coverage for the
Executive under any insurance policy now in force or hereinafter obtained
during the term of this Agreement covering the other officers and directors
of the Bank against lawsuits.
SECTION 3 TERMINATION OF EMPLOYMENT
3.1 Termination of Employment Period. The Employment Period may be terminated
in the following manner:
(e) Termination on Death or Disability. The Employment Period shall
automatically terminate upon the death or Disability of the Executive.
The term "Disability" shall mean the Executive's physical or mental
incapacity that renders him incapable of performing the essential
functions of the duties required of him by this Agreement for one
hundred eighty (180) or more consecutive days, even with reasonable
accommodation. In the case of termination upon the Disability of the
Executive, there shall be a determination by the Board of Directors of
the Bank that such grounds for termination exist.
46
(f) Termination upon Notice. The Employment Period may be terminated by
the Executive at any time, upon thirty (30) days' written notice to
the Bank. The Employment Period may be terminated by the Bank, by
resolution of its Board of Directors, for any other reason other than
for "Cause" (as defined in Section 3.1(c) of this Agreement), upon
thirty (30) days written notice to the Executive.
(g) Termination for Cause. The Employment Period may be terminated by the
Bank for "Cause" at any time during the Employment Period immediately
upon written notice to the Executive, which notice shall state the
facts constituting such "Cause." For the purpose of this Section , the
term "Cause" shall mean (i) intentional misconduct or gross
malfeasance, or an act or acts of gross negligence in the course of
employment or any material breach of Executive's obligations contained
herein, including, without limitation, acts competitive with or
deliberately harmful to the business of the Company or the Bank; (ii)
any intentional misstatement or omission to the directors or executive
officers of the Company or the Bank with respect to any matter; (iii)
the intentional failure of the Executive to follow the reasonable
instructions and policies of the Company or the Bank; (iv) the
Executive's conviction, admission or confession of any felony or an
unlawful act involving active and willful fraud or moral turpitude; or
(v) the violation by the Executive of applicable state and federal
regulations, rules, or statutes. The Bank shall have the power to
temporarily suspend Executive (with such pay, if any, as the Bank may
determine) from duty if there is substantial evidence of probable
Cause until Cause is either proved or disproved; if disproved, full
reinstatement with pay will immediately be effected.
(h) Termination for Good Reason. The Employment Period may be terminated
by the Executive for "Good Reason," as hereinafter defined, at any
time during the Employment Period upon thirty (30) days' written
notice to the Bank, which notice shall state the facts constituting
such "Good Reason." For the purpose of this Section 3.1(d), the term
"Good Reason" shall mean (i) the occurrence of a Change in Control (as
hereinafter defined), (ii) a reduction in the Executive's base salary
without his consent, or (iii) following a Change in Control, a
reduction in the Executive's base salary or any failure to pay the
Executive any compensation or benefits to which he is entitled within
five days of the date due, or the failure by the Bank to (A) continue
in effect (without reduction in benefit level and/or reward
opportunities) any material compensation or employee benefit plan in
which the Executive was participating at any time within ninety days
preceding the date of a Change in Control or at any time thereafter,
unless such plan is replaced with a plan that provides substantially
equivalent compensation or benefits to the Executive or (B) provide
the Executive with compensation and benefits, in the aggregate, at
least equal (in terms of benefit levels and/or reward
47
opportunities) to those provided for under each other employee benefit
plan, program and practice in which the Executive was participating at
any time within ninety days preceding the date of a Change in Control
or at any time thereafter. For the purpose of this Section 3.1(d), the
term "Change in Control" means (A) the acquisition at any time by a
"person" or "group" (as such terms are used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act"))
who or which are the beneficial owners (as defined in Rule 13(d)-3
under the Exchange Act), directly or indirectly, of securities
representing more than 35% of the combined voting power in the
election of directors of the then outstanding securities of the
Company or any successor of the Company, unless the acquisition of
securities resulting in such ownership by such person or group had
been approved by the Board of Directors of the Company; (B) the
termination of service of directors, for any reason other than death,
disability or retirement from the Board of Directors, during any
period of two consecutive years or less, of individuals who at the
beginning of such period constituted a majority of the Board of
Directors of the Company, unless the election of or nomination for
election of each new director during such period was approved by a
vote of at least a majority of the directors still in office who were
directors at the beginning of the period; (C) the sale or disposition
( which shall not include a pledge by the Company of the capital stock
of the Bank as security for obligations of the Company unless and
until the pledgee thereof exercises remedies against said stock to
effect a sale or disposition) by the Company of any of the capital
stock of the Bank or approval by the shareholders of the Company of
any sale or disposition of substantially all of the assets or earning
power of the Company; (D) approval by the shareholders of the Company
of any merger, consolidation, or statutory share exchange to which the
Company is a party as a result of which the persons who were
shareholders immediately prior to the effective date of the merger,
consolidation or share exchange shall have beneficial ownership of
less than 35 % of the combined voting power in the election of
directors of the surviving corporation.
48
3.2 Consequences of Termination.
(e) By the Bank for Cause or By Executive other than for Good Reason. In
the event Executive's employment is terminated (i) by the Bank for
Cause under Section 3.1(c) hereof, (ii) by the Executive other than
for Good Reason under Section 3.1(d) hereof, or (iii) as a result of
the Executive's death or Disability under Section hereof, neither the
Company or the Bank shall be under any further obligation to make any
payments or provide any benefits to the Executive, except for Base
Salary earned but unpaid at the time of such termination, expenses
otherwise reimbursable herein incurred by, but not yet reimbursed to,
the Executive at the time of such termination, any earned but unpaid
incentive awards due to the Executive, and group health coverage that
is required to be continued by applicable law.
(f) By the Bank other than for Cause or By Executive for Good Reason. In
the event the Employment Period is terminated by the Executive for
Good Reason under Section 3.1(d) hereof or by the Bank for a reason
other than Cause pursuant to Section 3.1(b) hereof, the Bank shall pay
to the Executive (i) an aggregate amount equal to two (2) times the
Base Salary, payable in monthly installments each equal to one-twelfth
of the Base Salary, for the twenty-four months following such
termination, and (ii) Base Salary earned but unpaid at the time of
such termination, expenses otherwise reimbursable herein incurred by,
but not yet reimbursed to, the Executive at the time of such
termination, any earned but unpaid incentive awards due to the
Executive, and group health coverage that is required to be continued
by applicable law; provided, however, that, at the election of the
Bank by decision of its Board of Directors, the Bank may pay to the
Executive, in lieu of the payment provided for by (i) above, an
aggregate amount equal to one (1) times the Base Salary, payable in
monthly installments each equal to one-twelfth of the Base Salary, for
the twelve months following such termination and, if the Bank makes
such election, the non-competition period under Section 4.3(a) shall
be reduced to a period of one (1) year following such termination;
provided further, however, the Bank shall have no right to make any
such election in anticipation of or following a Change in Control. In
addition, in the event the Employment Period is terminated by the
Executive for Good Reason under Section 3.1(d) hereof or by the Bank
for a reason other than Cause pursuant to Section 3.1(b) hereof, the
Option granted pursuant to Section 2.3 hereof shall become fully
vested immediately upon the effective time of such termination.
49
(g) Obligation of the Bank to make the payments under Section 3.2(b) of
this Agreement. Compliance by the Executive with Section 4 of this
Agreement is a condition precedent to the Bank's obligation to make,
or to continue to make, the payments referred to in Section 3.2(b) of
this Agreement.
(h) Payments made to the Executive net of Taxes. All payments made to the
Executive pursuant to this Agreement shall be received by the
Executive net of all applicable withholding and payroll taxes.
(e) Certain Litigation Expenses. If litigation after a Change in Control
should be brought to enforce or interpret any provision contained in
this Agreement and the Executive shall prevail in such litigation, the
Bank shall, to the full extent permitted by applicable law, indemnify
Executive for Executive's reasonable attorneys' fees and disbursements
incurred in such litigation to the extent the Executive has prevailed
therein.
SECTION 4: CONFIDENTIALITY PROVISIONS; PROHIBITION OF INSIDER TRADING AND
TIPPING; NON-COMPETITION
4.1 Confidentiality. (a) The Executive hereby acknowledges that during the
Employment Period he will have contacts with and develop and service the
customers of the Company, the Bank and their affiliates and that in all of
his activities, and through the nature of complying with his obligations
pursuant to this Agreement, he will have access to and will acquire
confidential and proprietary information, including, but not limited to,
information relating to the business, assets, operations, customers,
suppliers, contractual parties and other persons with whom the Company, the
Bank and their affiliates do business. The Executive hereby acknowledges
and confirms that such information constitutes the exclusive and unique
property of the Company, the Bank or their affiliates, as the case may be,
and that such information is proprietary and confidential in nature.
(b) The Executive agrees that he shall not at any time during the term of
Employment or thereafter disclose to other persons or entities (except
as permitted in writing and
50
as directed by the Board of Directors of the Company or the Board of
Directors of the Bank or only as to the extent required pursuant to a
subpoena or order of a court of competent jurisdiction) any such
information referred to in Section 4.1(a) of this Agreement.
4.2 Prohibition of Insider Trading and Tipping. The Executive acknowledges that
during the Employment Period he may become aware of or be provided with
material non-public information concerning the Company. The Executive
acknowledges and agrees that the trading in, purchase or sale of any
security of the Company while in possession of any material non-public
information concerning the Company is prohibited as is the unauthorized
communication of any such information to any person or entity. The
Executive agrees to abide by these prohibitions and shall use all
reasonable efforts to cause his affiliates to abide by these prohibitions.
4.3 Non-Competition...
(a) In the event the Executive's employment under this Agreement shall be
terminated during the Employment Period by the Executive for Good
Reason under Section 3.1(d) hereof or by the Bank for a reason other
than Cause pursuant to Section 3.1(b) hereof, then for two (2) years
following such termination (subject to the proviso contained in
Section 3.2(b) hereof), and in the event the Executive's employment
under this Agreement shall terminate for any other reason pursuant to
Section 3.1 of this Agreement during the Employment Period then for
one (1) year following such termination, the Executive shall not, in
any county where the Company, the Bank or any of their majority-owned
subsidiaries has a bank branch that accepts deposits that are insured
by the Federal Deposit Insurance Corporation ("FDIC") at the time of
such termination (each a "Branch County"), or in Shelby County,
Alabama (which is contiguous to a Branch County), physically work or
perform services as a consultant to, or serve as a member of
management or as an employee of, a financial institution whose
deposits are insured by the FDIC. Bank branches of successors and
assigns of the Company or the Bank shall not be considered in
determining the prohibited geographical area. Notwithstanding the
foregoing, this Section 4.3 shall not apply at any time after a Change
in Control shall have occurred. In the event that the Bank is
obligated to pay to the Executive the payments provided for in Section
3.2(b) of this Agreement and the Bank fails to make, or fails to
continue to make, the payments
51
referred to in Section 3.2(b) within ten (10) days of such payments or
portions thereof becoming due under Section 3.2(b), then the Executive
shall thereafter cease to be subject to the provisions of this Section
4.3, provided that nothing in this sentence shall be construed to
release the Executive from the obligations set forth in this Section
4.3 in the event that Executive's employment is terminated in a manner
which does not give rise to the payment obligations under Section
3.2(b) (including, without limitation, termination by the Bank for
Cause under Section 3.1(c) hereof or by the Executive other than for
Good Reason under Section 3.1(d) hereof)
(b) The parties have entered into this Section 4.3 in good faith and for
the reasons set forth in the recitals hereto and assume that this
Agreement is legally binding. If, for any reason, this Agreement is
not binding because of its geographical scope or because of its term,
then the parties agree that this Agreement shall be deemed effective
to the widest geographical area and/or the longest period of time (but
not in excess of two years) as may be legally enforceable.
4.4 Specific Performance. The Executive agrees that in the event of a breach or
threatened breach of Section 4.1, 4.2 or 4.3 of this Agreement, that the
Bank is likely to suffer, and will suffer, immediate and irreparable injury
for which there is no adequate remedy at law. Therefore, in addition to any
other rights or remedies which the Bank may have under this Agreement, the
Bank will be entitled to enforce the specific performance of this Agreement
by the Executive and to obtain a preliminary injunction, without the
requirement of posting a bond, enjoining the Executive from engaging in any
activity in violation thereof.
SECTION 5: ADDITIONAL CONDITIONS
5.1 Condition to Executive's Employment. The initial employment of Executive
under this Agreement is subject to the Bank's receipt and review of
Executive's credit history and subject to the information contained therein
being satisfactory to the Bank in its sole discretion.
52
SECTION 6: GENERAL PROVISIONS
6.1 Non-assignability. Neither this Agreement nor any of the rights,
obligations or interest arising hereunder may be assigned by the Executive
without the prior written consent of the Bank; provided, however, that
nothing in this Section 6.1 shall preclude the Executive from designating,
in writing, a beneficiary to receive any compensation payable to him or any
other benefit receivable by him under this Agreement upon the death or
incapacity of the Executive, nor shall it preclude the executors,
administrators or any other legal representatives of the Executive or his
estate from assigning any rights hereunder to the person or persons
entitled thereto. Neither this Agreement nor any of the rights, obligations
or interest arising hereunder may be assigned by the Bank without the prior
written consent of the Executive to a person other than (1) an affiliate of
the Bank or the Company, or (2) any party with which the Company or the
Bank merges or consolidates, or to whomever the Company or the Bank may
sell all or substantially all of its assets; provided, however, that any
such affiliate or successor shall expressly assume all of the Bank's
obligations and liabilities to the Executive under this Agreement.
6.2 Severability. This Agreement shall be deemed severable and any part hereof
which may be held invalid by a court or other entity of competent
jurisdiction shall be deemed automatically excluded from this Agreement and
the remaining parts shall remain in full force and effect.
6.3 Merger. This Agreement contains the entire understanding of the parties
hereto and constitutes the only agreement between the Bank and the
Executive regarding the employment of the Executive by the Bank. This
Agreement supersedes all prior agreements, either express or implied,
between the parties hereto regarding the employment of the Executive by the
Bank.
6.4 Amendment. None of the terms and conditions of this Agreement shall be
amended or modified unless expressly consented to in writing and signed by
each of the parties hereto.
53
6.5 Governing Law. This Agreement shall be governed by and construed under the
laws of the State of Alabama without regard to provisions thereof governing
conflicts of law.
6.6 Notices. All notices or other communications to be given by the parties
among themselves pursuant to this Agreement shall be in writing, and all
payments to be made hereunder shall be deemed to have been duly made if
mailed by certified mail or hand delivered to either of the parties at
their respective addresses as they appear on the records of the Bank. Any
of the parties hereto may change their respective addresses upon written
notice to the other given in the manner provided in this Section.
6.7 Waiver. No waiver by any of the parties to this Agreement of any condition,
term or provision of this Agreement shall be deemed to be a waiver of any
preceding or subsequent breach of the same or any other condition, term or
provision hereof.
6.8 Survival. Notwithstanding anything in this Agreement to the contrary, and
notwithstanding any termination of the Employment Period, the provisions of
this Agreement intended to govern the obligations of the parties hereto
upon the termination of the Executive's employment hereunder for any
reason, including, but not limited to Section 3 (inclusive of each of the
subsections thereof) and Section 4, shall continue in full force and
effect.
54
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as at the date and year first above written.
HERITAGE BANK
- ------------------------------
By:
---------------------------
Its:
----------------------
EXECUTIVE
- ------------------------------
Robert F. Harwell
55
CERTIFICATIONS
I, Harold B. Jeffreys, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Heritage Financial
Holding Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Harold B. Jeffreys
- ---------------------------------------------
Harold B. Jeffreys
Interim President and Chief Executive Officer
56
CERTIFICATIONS
I, Thomas E. Hemmings, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Heritage Financial
Holding Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Thomas E. Hemmings
- ---------------------------------------------
Thomas E. Hemmings
Chief Financial Officer
57
Exhibit 11 - Statements Re:
Computation of Per Share Earnings
HERITAGE FINANCIAL HOLDING CORPORATION
AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
The following tabulation presents the calculation of basic and diluted earnings
per common share for the three-month period ended March 31, 2003 and 2002.
Three Months
Ended March 31,
---------------------------
2003 2002
------------- ------------
Basic Earnings Per Share:
Net income............................... $ 550,059 $ 70,577
============= ============
Earnings common shares................... $ 550,059 $ 70,577
============= ============
Weighted average common shares
outstanding - basic.................... 8,936,614 8,515,147
============= ============
Basic earnings per common share.......... $ 0.06 $ 0.01
============= ============
Diluted Earnings Per Share:
Net income .............................. $ 550,059 $ 70,577
============= ============
Weighted average common shares
outstanding - diluted.................. 10,241,236 10,419,546
============= ============
Diluted earnings per common share........ $ 0.05 $ 0.01
============= ============
58
Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with Heritage Financial Holding Corporation's ("Company")
Quarterly Report on Form 10-Q for the period ended March 31, 2003 ("Report"),
the undersigned certifies that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: May 15, 2003
By: /s/ Harold B. Jeffreys
---------------------------------------------
Harold B. Jeffreys
Interim President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to Heritage Financial Holding Corporation and will be retained by
Heritage Financial Holding Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
59
Exhibit 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with Heritage Financial Holding Corporation's ("Company")
Quarterly Report on Form 10-Q for the period ended March 31, 2003 ("Report"),
the undersigned certifies that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: May 15, 2003
By: /s/ Thomas E. Hemmings
---------------------------------------------
Thomas E. Hemmings
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to Heritage Financial Holding Corporation and will be retained by
Heritage Financial Holding Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
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