U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year Commission file number
ended December 31, 1998 333-47291
SOUTHERN HERITAGE BANCORP, INC.
(Name of small business issuer in its charter)
Georgia 58-2352014
(State of Incorporation) (I.R.S. Employer
Identification No.)
3461 Atlanta Highway
P. O. Box 907
Oakwood, Georgia 30566
(Address of principal executive offices) (Zip Code)
(770) 531-1240
(Issuer's telephone number)
Securities Registered pursuant to Section 12(b) of the Exchange Act: None
Securities Registered pursuant to Section 12(g) of the Exchange Act: None
Check whether Issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive Proxy or
Information Statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Registrant's revenues for its fiscal year ended December 31, 1998 were $122,226.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 15, 1999 was $7,199,340 based on the offering price
of $10.00 per share, since there is no established trading market. The
Registrant completed its offering by January, 1999.
The number of shares outstanding of Registrant's class of common stock at March
15, 1999 was 878,344 shares of common stock.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format (check one):
Yes No X
Page 1 of 47
Exhibit Index on Page 29
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TABLE OF CONTENTS
PART I Page
ITEM 1. DESCRIPTION OF BUSINESS ......................... 3
ITEM 2. DESCRIPTION OF PROPERTIES........................ 12
ITEM 3. LEGAL PROCEEDINGS................................ 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS................................. 13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS...................... 13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION ............................ 14
ITEM 7. FINANCIAL STATEMENTS ............................ 15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ............................ 16
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS ............................. 16
ITEM 10. EXECUTIVE COMPENSATION .......................... 23
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT ................ 25
ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS ............................ 28
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ................ 29
SIGNATURES ........................................................ 30
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) Business Development
Southern Heritage Bancorp, Inc. (the "Company"), Oakwood, Georgia, was
incorporated as a Georgia business corporation for the purpose of becoming a
bank holding company by acquiring all of the common stock of Southern Heritage
Bank, Oakwood, Georgia (the "Bank") upon its formation. The Company filed
applications to the Board of Governors of the Federal Reserve System (the
"Board") and the Georgia Department of Banking and Finance (the "DBF") for prior
approval to become a bank holding company. The Company received Board approval
on April 30, 1998, and the DBF approval on April 28, 1998. The Company became a
bank holding company within the meaning of the federal Bank Holding Company Act
(the "Act") and the Georgia bank holding company law (the "Georgia Act") upon
the acquisition of all of the Common Stock of the Bank, which occurred in
January, 1999.
The Bank is the sole operating subsidiary of the Company. On October 31, 1997,
the Bank received the approval of its Articles of Incorporation from the DBF.
Its permit to begin business has been issued, and it opened for business on
January 4, 1999. The deposits at the Bank are insured by the Federal Deposit
Insurance Corporation (the "FDIC"), initial approval by the FDIC having been
obtained on March 19, 1998.
In April, 1998, the Company registered 1,000,000 shares of its common stock with
the Securities and Exchange Commission under the Securities Act of 1933. The
registration statement became effective on April 29, 1998, and the Company began
its stock offering a few days later. The stock offering was completed by
January, 1999 and the shares were issued as of January 4, 1999. 878,344 shares
were sold in the offering, raising total capital of $8,783,440.
(b) Business of Issuer
The Bank conducts a general commercial banking business in its primary service
area, emphasizing the banking needs of individuals and small to medium-sized
businesses. The Company conducts business from its office located at 3461
Atlanta Highway, Flowery Branch, Georgia 30542.
The Company is authorized to engage in any activity permitted by
law to a corporation, subject to applicable Federal regulatory
restrictions on the activities of bank holding companies. The
Company was formed for the purpose of becoming a holding company to
own 100% of the stock of the Bank. The holding company structure
provides the Company with greater flexibility than the Bank. While
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the Company has no present plans to engage actively in any nonbanking business
activities, management anticipates studying the feasibility of establishing or
acquiring subsidiaries to engage in other business activities to the extent
permitted by law.
The principal business of the Bank is to accept deposits from the public and to
make loans and other investments in and around Hall County, Georgia, as well as
the geographically adjacent counties, its primary service area.
The Bank offers a full range of deposit services that are typically available
from financial institutions. The Bank offers personal and business checking
accounts, interest-bearing checking accounts, savings accounts, money market
funds and various types of certificates of deposit. The Bank also offers
installment loans, real estate loans, second mortgage loans, commercial loans
and home equity lines of credit. In addition, the Bank provides such services as
official bank checks and money orders, Mastercard and VISA credit cards, safe
deposit boxes, traveler's checks, bank by mail, direct deposit of payroll and
social security checks, and US Savings Bonds. All deposit accounts are insured
by the FDIC up to the maximum amount currently permitted by law.
The Bank's lending philosophy is to make loans, taking into consideration the
safety of the Bank's depositors' funds, the preservation of the Bank's
liquidity, the interest of the Company's shareholders, and the welfare of the
community. Interest income from the Bank's lending operations will be the
principal component of the Bank's income, so therefore prudent lending will be
essential for the prosperity of the Bank.
The principal sources of income for the Bank will be interest and fees collected
on loans, interest and dividends collected on other investments, and mortgage
brokerage fees. The principal expenses of the Bank will be interest paid on
deposits, employee compensation, office expenses, and other overhead expenses.
The Bank's business plan for its initial years of operation relies principally
upon local advertising and promotional activity and upon personal contacts by
its directors, officers and shareholders to attract business and to acquaint
potential customers with the Bank's personalized services. The Bank emphasizes a
high degree of personalized client service in order to be able to provide for
each customer's banking needs. The Bank's marketing approach emphasizes the
advantages of dealing with an independent, locally-owned and managed state
chartered bank to meet the particular needs of individuals, professionals and
small-to-medium-size businesses in the community. All banking services are
continually evaluated with regard to their profitability and efforts will be
made to modify the Bank's business plan if the Bank does not prove successful.
The Bank does not presently offer trust or permissible securities services.
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Supervision and Regulation
Regulation of the Bank. The operations of the Bank are subject to state and
federal statutes applicable to state chartered banks whose deposits are insured
by the FDIC and the regulations of the DBF and the FDIC. Such statutes and
regulations relate to, among other things, required reserves, investments,
loans, mergers and consolidations, issuances of securities, payment of
dividends, establishment of branches and other aspects of the Bank's operations.
Under the provisions of the Federal Reserve Act, the Bank is subject to certain
restrictions on any extensions of credit to the Company or, with certain
exceptions, other affiliates, and on the taking of such stock or securities as
collateral on loans to any borrower. In addition, the Bank is prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit or the providing of any property or service.
The Bank, as a state chartered bank, is permitted to branch only to the extent
that banks are permitted to branch under Georgia law. In January 1996, the
Georgia legislature passed a bill designed to eliminate Georgia's current
intra-county branching restrictions. The new legislation provides that effective
after July 1, 1996, banks in Georgia, with prior approval of the DBF (and the
appropriate federal regulatory authority), may establish additional branches in
up to three new counties in the state per year. On July 1, 1998, full statewide
branching went into effect permitting Georgia banks to establish new branches in
any county in the state with prior approval of the appropriate regulatory
authorities.
The FDIC adopted final risk-based capital guidelines for all FDIC insured state
chartered banks that are not members of the Federal Reserve System effective
December 31, 1990. As of December 31, 1992, all banks are required to maintain a
minimum ratio of total capital to risk weighted assets of 8 percent (of which at
least 4 percent must consist of Tier 1 capital). Tier 1 capital of state
chartered banks (as defined in regulations) generally consists of (i) common
stockholders equity; (ii) noncumulative perpetual preferred stock and related
surplus; and (iii) minority interests in the equity accounts of consolidated
subsidiaries.
In addition, the FDIC adopted a minimum ratio of Tier 1 capital to total assets
of banks. This capital measure is generally referred to as the leverage capital
ratio. The FDIC has established a minimum leverage capital ratio of 3 percent if
the FDIC determines that the institution is not anticipating or experiencing
significant growth and has well-diversified risk, including no undue interest
rate exposure, excellent asset quality, high liquidity, good earnings and, in
general, is considered a strong banking organization, rated Composite 1 under
the Uniform Financial Institutions Rating System. Other financial institutions
are expected to maintain leverage capital at least 100 to 200 basis points above
the minimum level. Management intends to operate the
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Bank so as to exceed the minimum Tier 1, risk-based and leverage capital ratios.
Bank regulators continue to indicate their desire to raise capital requirements
applicable to banking organizations, including a proposal to add an interest
rate risk component to risk-based capital requirements.
The Federal Deposit Insurance Corporation Improvement Act of 1991, enacted in
December 1991 ("FDICIA"), specifies, among other things, the following five
capital standard categories for depository institutions: (i) well capitalized,
(ii) adequately capitalized, (iii) undercapitalized, (iv) significantly
under-capitalized and (v) critically undercapitalized. FDICIA imposes
progressively more restrictive constraints on operations, management and capital
distributions depending on the category in which an institution is classified.
Each of the federal banking agencies has issued final uniform regulations that
became effective December 19, 1992, which, among other things, define the
capital levels described above. Under the final regulations, a bank is
considered "well capitalized" if it (i) has a total risk-based capital ratio of
10% or greater, (ii) has a Tier 1 risk-based capital ratio of 6% or greater,
(iii) has a leverage ratio of 5% or greater, and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" bank is defined as one that has (i)
a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based
capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater, and
an "undercapitalized" bank is defined as one that has (i) a total risk-based
capital ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio of less
than 4%, and (iii) a leverage ratio of less than 4%. A bank is considered
"significantly undercapitalized" if the bank has (i) a total risk-based capital
ratio of less than 6%, (ii) a Tier 1 risk-based capital ratio of less than 3%,
and (iii) a leverage ratio of less than 3%, and "critically undercapitalized" if
the bank has a ratio of tangible equity to total assets equal to or less than
2%. The applicable federal regulatory agency for a bank that is "well
capitalized" may reclassify it as an "adequately capitalized" or
"undercapitalized" institution and subject it to the supervisory actions
applicable to the next lower capital category, if it determines that the Bank is
in an unsafe or unsound condition or deems the bank to be engaged in an unsafe
or unsound practice and not to have corrected the deficiency.
"Undercapitalized" depository institutions, among other things, are subject to
growth limitations, are prohibited, with certain exceptions, from making capital
distributions, are limited in their ability to obtain funding from a Federal
Reserve Bank and are required to submit a capital restoration plan. The federal
banking agencies may not accept a capital plan without determining, among other
things, that the plan is based on realistic assumptions and
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is likely to succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution will
comply with such capital restoration plan and provide appropriate assurances of
performance. If a depository institution fails to submit an acceptable plan,
including if the holding company refuses or is unable to make the guarantee
described in the previous sentence, it is treated as if it is "significantly
undercapitalized". Failure to submit or implement an acceptable capital plan
also is grounds for the appointment of a conservator or a receiver.
"Significantly undercapitalized" depository institutions may be subject to a
number of additional requirements or restrictions, including the requirement to
issue additional voting stock to become adequately capitalized and requirements
to reduce total assets and cessation of receipt of deposits from correspondent
banks. "Critically undercapitalized" institutions, among other things, are
prohibited from making any payments of principal and interest on subordinated
debt, and are subject to the appointment of a receiver or conservator.
Under FDICIA, the FDIC is permitted to provide financial assistance to an
insured bank before appointment of a conservator or receiver only if (i) such
assistance would be the least costly method of meeting the FDIC's insurance
obligations, (ii) grounds for appointment of a conservator or a receiver exist
or are likely to exist, (iii) it is unlikely that the bank can meet all capital
standards without assistance and (iv) the bank's management has been competent,
has complied with applicable laws, regulations, rules and supervisory directives
and has not engaged in any insider dealing, speculative practice or other
abusive activity.
The Bank is subject to FDIC deposit insurance assessments for the Bank Insurance
Fund ("BIF"). The FDIC has implemented a risk-based assessment system whereby
banks are assessed on a sliding scale depending on their placement in nine
separate supervisory categories. Recent legislation provides that BIF insured
institutions, such as the Bank, will share the Financial Corporation ("FICO")
bond service obligation. Previously, only Savings Association Insurance Fund
("SAIF") insured institutions were obligated to contribute to the FICO bond
service. The BIF deposit insurance premium for the Bank is presently 4.3 cents
per $100 of BIF insured deposits.
On April 19, 1995, the federal bank regulatory agencies adopted uniform
revisions to the regulations promulgated pursuant to the Community Reinvestment
Act (the "CRA"), which are intended to set standards for financial institutions.
The revised regulation contains three evaluation tests: (a) a lending test which
will compare the institution's market share of loans in low and moderate income
areas to its market share of loans in its entire service area and the percentage
of a bank's outstanding loans to low and
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moderate income areas or individuals, (b) a services test which will evaluate
the provision of services that promote the availability of credit to low and
moderate income areas, and (c) an investment test, which will evaluate an
institution's record of investments in organizations designed to foster
community development, small and minority owned businesses and affordable
housing lending, including state and local government housing or revenue bonds.
The regulation is designed to reduce the paperwork requirements of the current
regulations and provide regulatory agencies, institutions, and community groups
with a more objective and predictable manner with which to evaluate the CRA
performance of financial institutions. The rule became effective on January 1,
1996 when evaluation under streamlined procedures began for institutions with
total assets of less than $250 million that are owned by a holding company with
total assets of less than $1 billion.
Congress and various federal agencies (including, in addition to the bank
regulatory agencies, the Department of Housing and Urban Development, the
Federal Trade Commission and the Department of Justice (collectively, the
"Federal Agencies") responsible for implementing the nation's fair lending laws
have been increasingly concerned that prospective home buyers and other
borrowers are experiencing discrimination in their efforts to obtain loans. The
Department of Justice has filed suit against financial institutions which it
determined had discriminated, seeking fines and restitution for borrowers who
allegedly suffered from discriminatory practices. Most, if not all, of these
suits have been settled (some for substantial sums) without a full adjudication
on the merits.
On March 8, 1994, the Federal Agencies, in an effort to clarify what constitutes
discrimination in lending and to specify the factors the agencies will consider
in determining if lending discrimination exists, announced a joint policy
statement detailing specific discriminatory practices prohibited under the Equal
Credit Opportunity Act and the Fair Housing Act. In the policy statement, three
methods of establishing discrimination in lending were identified: (a) overt
evidence of discrimination, when a lender blatantly discriminates on a
prohibited basis, or (b) where there is no showing that the treatment was
motivated by intent to discriminate against a person, and (c) evidence of
disparate impact, when a lender applies a practice uniformly to all applicants,
but the practice has a discriminatory effect on a protected class, even where
such practices are neutral on their face and are applied equally, unless the
practice can be justified on the basis of business necessity.
Regulation of the Company. The Company is a bank holding company within the
meaning of the Federal Bank Holding Company Act (the "Act") and the Georgia bank
holding company law (the "Georgia Act"). As a bank holding company, the Company
is required to file
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with the Federal Reserve Board (the "Board") an annual report and such
additional information as the Board may require pursuant to the Act. The Board
may also make examinations of the Company and each of its subsidiaries. Bank
holding companies are required by the Act to obtain approval from the Board
prior to acquiring, directly or indirectly, ownership or control of more than 5%
of the voting shares of a bank.
The Act also prohibits bank holding companies, with certain exceptions, from
acquiring more than 5% of the voting shares of any company that is not a bank
and from engaging in any nonbanking business (other than a business closely
related to banking as determined by the Board) or from managing or controlling
banks and other subsidiaries authorized by the Act or furnishing services to, or
performing services for, its subsidiaries without the prior approval of the
Board. The Board is empowered to differentiate between activities that are
initiated de novo by a bank holding company or a subsidiary and activities
commenced by acquisition of a going concern. The Company has no present
intention to engage in nonbanking activities.
As a bank holding company, the Company is subject to capital adequacy guidelines
as established by the Board. The Board established risk based capital guidelines
for bank holding companies effective March 15, 1989. Beginning on December 31,
1992, the minimum required ratio for total capital to risk weighted assets
became 8 percent (of which at least 4 percent must consist of Tier 1 capital).
Tier 1 capital (as defined in regulations of the Board) consists of common and
qualifying preferred stock and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and other intangible assets required to
be deducted under the Board's guidelines. The Board's guidelines apply on a
consolidated basis to bank holding companies with total consolidated assets of
$150 million or more. For bank holding companies with less than $150 million in
total consolidated assets (such as the Company), the guidelines will be applied
on a bank only basis, unless the bank holding company is engaged in nonbanking
activity involving significant leverage or has significant amount of debt
outstanding that is held by the general public. The Board has stated that risk
based capital guidelines establish minimum standards and that bank holding
companies generally are expected to operate well above the minimum standards.
The Company is also a bank holding company within the meaning of the Georgia
Act, which provides that, without the prior written approval of the DBF, it is
unlawful (i) for any bank holding company to acquire direct or indirect
ownership or control of more than 5% of the voting shares of any bank, (ii) for
any bank holding company or subsidiary thereof, other than a bank, to acquire
all or substantially all of the assets of a bank, or (iii) for any bank holding
company to merge or consolidate with any other bank holding company.
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It is also unlawful for any company to acquire direct or indirect ownership or
control of more than 5% of the voting shares of any bank in Georgia unless such
bank has been in existence and continuously operating or incorporated as a bank
for a period of five years or more prior to the date of application to the DBF
for approval of such acquisition. Bank holding companies themselves are
prohibited from acquiring another bank until the initial bank in the bank
holding company has been incorporated for a period of twenty-four months.
The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"), subject to certain restrictions, allows adequately
capitalized and managed bank holding companies to acquire existing banks across
state lines, regardless of state statutes that would prohibit acquisitions by
out-of-state institutions. Further, effective June 1, 1998, a bank holding
company may consolidate interstate bank subsidiaries into branches and a bank
may merge with an unaffiliated bank across state lines to the extent that the
applicable states have not "opted out" of interstate branching prior to such
effective date. Some states may elect to permit interstate mergers prior to June
1, 1998. The Interstate Banking Act generally prohibits an interstate
acquisition (other than the initial entry into a state by a bank holding
company) that would result in either the control of more than (i) 10% of the
total amount of insured deposits in the United States, or (ii) 30% of the total
insured deposits in the home state of the target bank, unless such 30%
limitation is waived by the home state on a basis which does not discriminate
against out-of-state institutions. As a result of this legislation, the Company
may become a candidate for acquisition by, or may itself seek to acquire,
banking organizations located in other states.
The Reigle Community Development and Regulatory Improvement Act of 1994 (the
"Improvement Act") provides for the creation of a community development
financial institutions' fund to promote economic revitalization in community
development. Banks and thrift institutions are allowed to participate in such
community development banks. The Improvement Act also contains (i) provisions
designed to enhance small business capital formation and to enhance disclosure
with regard to high cost mortgages for the protection of consumers, and (ii)
more than 50 regulatory relief provisions that apply to banks and thrift
institutions, including the coordination of examinations by various federal
agencies, coordination of frequency and types of reports financial institutions
are required to file and reduction of examinations for well capitalized
institutions.
Bank holding companies may be compelled by bank regulatory authorities to invest
additional capital in the event a subsidiary bank experiences either significant
loan losses or rapid growth of loans or deposits. In addition, the Company may
be required to provide additional capital to any additional banks it acquires as
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a condition to obtaining the approvals and consents of regulatory authorities in
connection with such acquisitions.
The Company and the Bank are subject to the Federal Reserve Act, Section 23A,
which limits a bank's "covered transactions" (generally, any extension of
credit) with any single affiliate to no more than 10% of a bank's capital and
surplus. Covered transactions with all affiliates combined are limited to no
more than 20% of a bank's capital and surplus. All covered and exempt
transactions between a bank and its affiliates must be on terms and conditions
consistent with safe and sound banking practices, and a bank and its
subsidiaries are prohibited from purchasing low quality assets from the bank's
affiliates. Finally, Section 23A requires that all of a bank's extensions of
credit to an affiliate be appropriately secured by collateral. The Company and
the Bank are also subject to Section 23B of the Federal Reserve Act, which
further limits transactions among affiliates. Sections 22(b) and 22(h) of the
Federal Reserve Act and implementing regulations also prohibit extensions of
credit by a state non-member bank (such as the Bank) to its directors, officers
and controlling shareholders on terms which are more favorable than those
afforded other borrowers, and impose limits on the amounts of loans to
individual affiliates and all affiliates as a group.
The United States Congress and the Georgia General Assembly periodically
consider and adopt legislation that results in, and could further result in,
deregulation, among other matters, of banks and other financial institutions.
Such legislation could modify or eliminate geographic restrictions on banks and
bank holding companies and current prohibitions restricting competition with
other financial institutions, including mutual funds, securities brokerage
firms, insurance companies, banks from other states and investment banking
firms. The effect of any such legislation on the business of the Company or the
Bank cannot be accurately predicted. The Company cannot predict what legislation
might be enacted or what other implementing regulations might be adopted, and if
enacted or adopted, the effect thereof.
Competition
The banking business is highly competitive. The Bank competes with other
commercial banks in its primary service area.
Banks generally compete with other financial institutions through the banking
products and services offered, the pricing of services, the level of service
provided, the convenience and availability of services, and the degree of
expertise and the personal manner in which services are offered. The Bank has
encountered strong competition from most of the financial institutions in the
Bank's primary service area. In the conduct of certain areas of its banking
business, the Bank also competes with credit unions,
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consumer finance companies, insurance companies, money market mutual funds and
other financial institutions, some of which are not subject to the same degree
of regulation and restrictions imposed upon the Bank. Many of these competitors
have substantially greater resources and lending limits than the Bank has and
offer certain services, such as trust services, that the Bank does not provide
presently. Management believes that competitive pricing and personalized service
provides it with a method to compete effectively in the primary service area.
Employees
As of March 1, 1999, the Bank had 10 full-time employees and no part-time
employees. The Company does not have any employees who are not also employees of
the Bank. The Company and the Bank are not parties to any collective bargaining
agreement, and management believes the Bank has good relations with its
employees.
ITEM 2. DESCRIPTION OF PROPERTIES
On February 4, 1998, the Company entered into a ground lease with M.
Milton Robson, one of the Company's directors, for a 40- year ground lease of a
1.3359 acre tract of land located at 3461 Atlanta Highway in the City of
Oakwood, Georgia. The tract of land is the site where the Company and the Bank
intend to construct the main office of the Bank. Upon termination of the lease
due to certain defaults by the lessees or normal expiration, the real property
improvements (the building) will revert to and become the property of the
lessor. Final termination is expected to occur in Summer, 2038, but could occur
earlier if lessees default in the payment of rent for three consecutive months
or fail to exercise the extension options.
The directors of the Company have obtained two appraisals of the
proposed site of the bank building and of the ground lease. Both appraisals
determined that the rental under the ground lease was reasonable and at market
rental rate for comparable ground leases. Copies of the appraisals, together
with the ground lease agreement, were filed with the Department of Banking and
the FDIC.
The Company and the Bank plan to have a 10,000 square foot, two-story
building constructed on the property for the Bank. There will be four teller
stations inside and four drive through stations. There will also be a
stand-alone automatic teller machine accessible by automobile. Management
estimates that the cost of construction of the building will be approximately
$1,389,874. The furniture, fixtures and equipment necessary for operation of the
Bank are projected to cost approximately $350,000. Construction, equipping and
occupancy of the bank building is projected to occur by September 1, 1999. The
Bank opened for
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business on January 4, 1999, in a temporary building located on a portion of the
site of the permanent bank building.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings which management
believes would have a material effect upon the operations or financial condition
of the Company. The Bank commenced banking activities on January 4, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the Company's
fourth quarter of the fiscal year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR ISSUER'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of December 31, 1998, there was only one shareholder of record of the
Company's common stock. As of January 4, 1999, 878,344 shares were issued to
approximately 1,316 shareholders. There is no established trading market for the
Company's common stock. The Company had one share of its common stock
outstanding as of December 31, 1998 and 878,344 shares outstanding as of January
4, 1999. The Company has not paid and does not anticipate paying dividends on
its common stock in the immediate future. At present, the only source of funds
from which the Company could pay dividends would be dividends paid to the
Company by the Bank. Certain regulatory requirements restrict the amount of
dividends that can be paid to the Company by the Bank without obtaining the
prior approval of the DBF. No assurance can be given that dividends will be
declared by the Company, or if declared, what the amount of the dividends will
be or whether such dividends, once declared, would continue.
The Company completed its initial stock offering by January, 1999, and
878,344 shares were sold in the offering, raising total capital of $8,783,440.
From the capital raised, the Company paid the organizational debt incurred by
the organizers, as well as the $85,000 originally loaned to the Company by the
organizers. This debt repayment represented the payment of $51,735 of stock
offering expenses, $49,975 of organization costs for the Company, and $552,869
of pre-opening operating expenses allocated to the Company. The pre-opening
expenses were offset by $122,226 of income earned on stock subscriptions held in
escrow during the stock offering. In addition, the Company capitalized the bank
on
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January 4, 1999 with $8,000,000 in return for 800,000 shares of common stock of
the Bank, which is all of the Bank's outstanding stock.
The Bank expended a portion of its capital to pay organizational costs
and expenses incurred by the Company on behalf of the Bank prior to January 4,
1999. These expenses represented the payment of $35,620 of organizational
expenses of the Bank, $185,724 for construction in process of the bank building,
$44,016 for the purchase of equipment, and $9,422 of pre-opening operating
expenses allocated to the Bank. Since opening in January, 1999, the bank has
used the remainder of its capital in its normal banking operations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company was incorporated on February 13, 1998, for the purpose of
becoming a bank holding company for the Bank. The Company filed applications to
the Board of Governors of the Federal Reserve System (the "Board") and the
Georgia Department of Banking and Finance (the "DBF") for prior approval to
become a bank holding company. The Company received Board approval on April 30,
1998, and DBF approval on April 28, 1998. The Company became a bank holding
company within the meaning of the federal Bank Holding Company Act and the
Georgia bank holding company law upon the acquisition of all of the Common Stock
of the Bank. The Bank opened for business on January 4, 1999. The Company's plan
of operation for 1999 consists primarily of gaining market share in the Bank's
primary service area.
During 1999, the Bank will continue to offer a full range of commercial
banking services to individual, professional and business customers in its
primary service area. These services will include personal and business checking
accounts and savings and other time certificates of deposit. The transaction
accounts and time certificates will be at rates competitive with those offered
in the Bank's primary service area. Customer deposits with the Bank will be
insured to the maximum extent provided by law through the FDIC. The Bank will
continue to issue credit cards to act as a merchant depository for cardholder
drafts under both Visa and Mastercard. The Bank will continue to offer night
depository and bank-by-mail services and to sell traveler's checks (issued by an
independent entity) and cashier's checks. The Bank does not anticipate offering
trust and fiduciary services during 1999 and will rely on trust and fiduciary
services offered by correspondent banks until the Bank determines that it is
profitable to offer such services directly.
During 1999, the Bank anticipates deriving its income principally from interest
charged on loans and, to a lesser extent, from interest earned on investments,
from fees received in connection with the origination of loans and from other
services. The Bank's
14
<PAGE>
principal expenses are anticipated to be interest expense on deposits and
operating expenses.
Management believes the Company and Bank can satisfy future cash requirements
indefinitely, and will not have to raise additional capital during 1999 or in
the foreseeable future. The Bank will accept deposits and make loans and
investments in accordance with an asset and liability management framework that
emphasizes appropriate levels of liquidity and interest rate risk.
The Bank expects to complete construction of its banking facility by September
1, 1999. Construction costs are expected to be $1,389,874. In addition,
furnishings and equipment cost are expected to be approximately $350,000. As of
December 31, 1998, construction in process amounted to $186,000 which consisted
primarily of architect fees and site preparation costs.
At December 31, 1998, the Company had completed an initial stock offering and
had received $8,734,000 in stock subscriptions. These funds were held in escrow
during the offering period. During this period, the Company earned $122,000 in
interest on the escrow deposits.
During 1998, the Company incurred expenses of $603,000 in connection with
issuing stock, obtaining regulatory approvals, organizing the Bank, and
preparing Bank policies and procedures. All organization costs and pre-opening
expenses were expensed during 1998 in accordance with the new accounting rules
which require immediate recognition of such costs. The Bank began organizing
their staff in the third and fourth quarters of 1998 in anticipation of opening
the Bank. Salaries and benefits totaling $343,000 accounted for 57% of the
expenses incurred in 1998. Other significant expenses included interest expense
of $40,000, total lease expense of $93,000, and organization costs of $50,000.
The accumulated deficit since inception is $537,000.
The Bank presently employs 10 full-time employees and no part-time employees.
Management expects the Bank to employ approximately 13 employees and 1 part-time
employee by the end of 1999. Significant increases in the number of employees
above this level are not expected in the foreseeable future.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements, notes thereto and independent auditors'
report thereon are attached hereto as Exhibit 99.1 and incorporated herein by
reference.
15
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There are no disagreements with accountants on accounting and financial
disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
The following table sets forth the name of each director and Executive Officer
of the Company, his or her age, and a brief description of their principal
occupation and business experience for the preceding five years. Except as
otherwise indicated, each director has been or was engaged in his or her present
or last occupation, in the same or similar position for more than five years.
Listed below are the directors and executive officers of the Company. Each
director has served as a director of the Company since the formation of the
Company on February 13, 1998, except C. Talmadge Garrison who was elected to the
Board of Directors of the Company and the Board of Directors of the Bank on July
9, 1998. The Company's Bylaws provide that the Board of Directors is divided
into three classes, with each class being as nearly equal in number as possible,
and the directors serve for staggered three-year terms. The present term of
office of each director in Class One will expire at the annual shareholders
meeting of the Company to be held on June 9, 1999; the present term of office of
each director in Class Two will expire at the annual shareholders meeting of the
Company to be held in April, 2000; and the present term of office of each
director in Class Three will expire at the annual shareholders meeting of the
Company to be held in April, 2001. These persons will also serve as directors of
the Bank for the same staggered terms. The Class in which each director belongs
is indicated below. The effect of the Company's having a classified Board of
Directors is that only approximately one-third of the members of the Board are
elected each year, which effectively requires two annual meetings for the
Company's shareholders to change a majority of the members of the Board.
Executive Officers of the Company and the Bank who serve at the pleasure of the
Board of Directors of the Company and the Bank, respectively, will be elected
annually by the respective Boards of Directors.
Name [Class] Age Principal Occupation
Gary H. Anderson 47 Director; Class 3. Mr.
Anderson is President and
C.E.O. of the Company and
holds the same positions
with the Bank. He has been
a resident of Oakwood,
Hall County, Georgia since
16
<PAGE>
1963. Mr. Anderson was born
in Clarkesville, Georgia in
1951. Mr. Anderson has over
23 years banking experience
in Hall County, Georgia.
Mr. Anderson served as City
Vice-President for SunTrust
Bank of Northeast Georgia,
Gainesville, Georgia from
1981 through 1996. Mr.
Anderson is a graduate of
Gainesville College and C&S
Commercial Lending School.
Mr. Anderson has also
attended the Georgia
Banking School at the
University of Georgia. He
is a member of the Oakwood
Rotary Club, Councilman of
the City of Oakwood, and a
member of the Greater Hall
Chamber of Commerce. Mr.
Anderson has previously
served on many civic,
social and community
organizations, including
Hall County Boys Club Board
of Directors, Gainesville
College Foundation, United
Way of Hall County, Oakwood
Development Authority.
Lowell S. (Casey)
Cagle 33 Director; Class 3. Mr.
Cagle is a native of Hall
County, Georgia, a seventh
generation resident. Mr.
Cagle graduated from
Johnson High School and
attended Gainesville
College and Georgia
Southern University. A
self-employed businessman,
Mr. Cagle is President
and co-owner of Strateia
Group Atlanta, Inc., a
management and business
consulting firm, which he
co-founded in July, 1996.
He is Tux of Class, which
he has operated for at
least the last five years.
Mr. Cagle is a member of
Westside Baptist Church,
Gainesville, Georgia.
Since 1994, Mr. Cagle has
been a Georgia State
Senator for the 49th
District, which includes
Hall County and portions
of Forsyth County.
Earl C. Gilleland 53 Director; Class 2. Mr.
Gilleland is a native of
Hall County, having
17
<PAGE>
lived his entire life in
South Hall County. His
entire business career has
been with Gilleland
Concrete Company and in
1968 he became sole owner
and President of the
company. In 1997, Mr.
Gilleland sold Gilleland
Concrete to a Florida
company, and he remains as
manager of the local
company. He is a member of
Poplar Springs Baptist
Church.
A. Terry Hayes 45 Director; Class 2. Mr.
Hayes has been a resident
of Jackson County, Georgia
for over 12 years. Mr.
Hayes was born in DeKalb
County. He is Manager of
Hayes Chrysler-Plymouth-
Dodge-Jeep in Oakwood,
Georgia. Mr. Hayes has
worked in the family
business of Hayes Chrysler-
Plymouth-Dodge-Jeep in
Gwinnett County and Hall
County for over 25 years.
Mr. Hayes is a member of
the South Hall Rotary Club
and the Georgia Cattlemen's
Association.
Wm. David Merritt 49 Director; Class 2. Mr.
Merritt is a long-time (40
year) resident of Hall
County, Georgia. Mr.
Merritt is President/Owner
of Merritt Contracting,
Inc. since 1982; President
/Owner of Lanier Leasing,
Inc. (leasing construction
equipment and commercial
properties); President of
MCI Management Company
since 1989; Owner/Operator
of Paradise Springs Farm,
Inc. (a cattle farm in Hall
County). Mr. Merritt is
also Vice-President of
Gilleland & Merritt, LLC,
a real estate development
company and developer of
Windmill Subdivision near
Clermont, Georgia. Mr.
Merritt is a member of the
Georgia Utility Contractors
Association and the Georgia
Highway Contractors
Association. He is a
member of the Greater Hall
Chamber of Commerce.
Harold D. Nichols 56 Director; Class 1. Mr.
Nichols is a 38-year
resident of Hall County,
18
<PAGE>
Georgia. He has been the
Engineered Products Sales
Manager of
Macklanburg-Duncan,
Gainesville, Georgia since
1969. He serves on the Hall
County Parks and Leisure
Services Board and is an
honorary deacon of Chestnut
Mountain Baptist Church. He
is also a member of
Gainesville Masonic Lodge
#219 and is actively
involved in youth
activities in the local
schools.
James E. Palmour III 62 Director; Class 3. Mr.
Palmour was born in and is
a resident of Gainesville,
Hall County, Georgia,
and has been a resident for
all but four years of his
life. He graduated from
Gainesville High School,
University of Georgia and
Atlanta Law School. Mr.
Palmour has been an
attorney at law since 1964
and has practiced general
law since that time with
the exception of the
period of 1976 through
1984 during which he was
Judge of the Superior Court
of the Northeastern
Judicial Circuit. Mr.
Palmour's major field of
law is government law and
he is attorney for the
City of Gainesville,
Georgia, White County,
Georgia, and the Barrow
County Airport Authority.
He is a member of the
Rotary Club of Gainesville,
State Bar of Georgia,
Gainesville- Northeastern
Bar Association, and has
previously served as a
member of the Lanier Area
Technical School Board.
Dr. Edward R. Quillian 43 Director; Class 1. Dr.
Quillian is a native of
Hall County, Georgia. He
graduated from the
University of Georgia
School of Veterinary
Medicine in 1983. Dr.
Quillian was a partner in
the Cumming Veterinary
Clinic from 1983 to 1987.
He has been CEO/Owner of
Quillian Family Pet Clinic
in Oakwood, Georgia since
1987. He is a Trustee of
the Gainesville College
Foundation. He is also a
member of the American
Animal Hospital Association
19
<PAGE>
Georgia Veterinary Medical
Association, American
Veterinary Medical
Association, and the
Georgia Academy of
Veterinary Practice.
M. Milton Robson 56 Director; Class 1. Mr.
Robson has been a resident
of Hall County, Georgia
for over 50 years. He
has resided in south Hall
County for over 25 years.
Mr. Robson founded Milton's
Institutional Foods in
1962, which he sold in 1995
to Progressive Food
Services. Mr. Robson is
the owner of Mule Camp
Springs, a commercial
retail center, in
Gainesville, Georgia and
is the owner/developer of
Robson Crossing Shopping
Center in Oakwood, Georgia.
He is Vice-President of
Prime Pak Foods, Inc., a
wholesale frozen meat
distributor, which he
founded in 1975.
Donald W. Smith 45 Director; Class 3. Mr.
Smith is a native of Hall
County, Georgia. He is a
1975 graduate of West
Georgia College. Mr.
Smith is President and
Owner of Arrow Auto Sales,
and he has over 19 years
experience in retail auto
sales. He is President
of Arrow Mitsubishi in
Gainesville, Georgia, and
he also has served as
President of Oakwood Arrow
Auto Auction since 1990.
Mr. Smith is a past
President and serves on the
Board of Directors of the
Georgia Automobile Dealers
Association. Mr. Smith is
a member of the Gainesville
Jaycees and the Greater
Hall Chamber of Commerce.
C. Talmadge Garrison 66 Director; Class 2. Mr.
Garrison, a native of Hall
County and a graduate of
The University of
Georgia, has been in the
banking industry for over
33 years. Prior to his
recent retirement he was
associated with First
National Bank and First
National Bancorp, Inc.
of Gainesville, Georgia.
He is an honor graduate of
the Bank Administration
Institute held at the
20
<PAGE>
University of Wisconsin and has
passed the Uniform Examination of
Certified Public Accountants. As
a member of Lakewood Baptist
Church he has served as a
deacon and on the Board of
Trustees. Mr. Garrison has been
a member of the Gainesville and
Lakeside Civitan Clubs where he
held numerous offices.
Jeanie Bridges 51 Ms. Bridges serves as Treasurer,
Chief Accounting Officer and Chief
Financial Officer of the Company.
She also serves as Senior Vice
President/Chief Operations Officer
of the Bank. Ms. Bridges was born
in Guilford County, North Carolina
but has lived in Georgia since her
teens. She resided in the metro
Atlanta area for 20 years, Hall
County for 10 years and now lives
in White County. She attended
Gainesville College and the
Georgia Banking School at the
University of Georgia. She served
on the Gainesville Planning
Commission and the Gainesville
Park and Recreation Board of
Directors. Until resigning
to take her position with the
Company, Ms. Bridges was employed
with SunTrust Bank, Northeast
Georgia, N.A. since March, 1986 in
many capacities, from lender of
consumer and mortgage loans to
Branch Administrator. Prior to her
resignation, she was First Vice
President, Security Officer, and
Compliance Officer. Ms. Bridges is
a member of the First Baptist
Church of Cleveland and the Truth
Seekers Sunday School Class. She
is also a member of the Georgia
Department of Labor Advisory
Council and is involved in
Financial Women International
(formerly NABW) and the White
County League of Women
Voters.
Christopher D. England 41 Mr. England serves as Senior Vice
President and Chief Lending
Officer of the Bank. Mr. England
is a native of South Hall County,
21
<PAGE>
born in Gainesville in 1958.
He has
over 13 years of banking
and lending experience in
Hall County, Georgia. Mr.
England has served as Vice
President of Lanier
National Bank since
February, 1992. His lending
experience includes both
commercial and consumer
loans. Before joining
Lanier National Bank, he
was employed by The
Citizens Bank, Gainesville,
Georgia, from 1984 to 1992.
He progressed through
management serving
initially as a collector
before being promoted into
lending. His last duties
there were Vice President
and Branch Manager of the
Main Office. Mr. England is
a 1980 graduate of Georgia
Tech, receiving his
Bachelor of Science degree.
He is also a graduate of
the C&S Consumer Lending
School, the Georgia
Banker's School at the
University of Georgia, and
the Graduate School of
Banking of the South at
LSU. His civic and
community involvement
include serving or having
served on the boards of the
Gainesville College Foundation,
the Gainesville-Hall County
Neighborhood Revitalization,
Inc., the Gainesville-Hall
County Board of Realtors, the
Greens Committee of
Chicopee Woods Golf Course,
and the Hall County March
of Dimes. He has also
served as McEver Elementary
School PTO Treasurer and is
a member of the Gainesville
Lions Club.
There are no arrangements or understandings between the Company and any person
pursuant to which any of the above persons have been or will be elected a
director. There are no family relations between any of the directors or
executive officers. No director is a director of another bank or bank holding
company. James E. Palmour, III provided legal services to the Company during
1998, and it is anticipated he will provide legal services to the Company during
1999.
22
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation
The Company does not separately compensate any of its directors or executive
officers, except for executive officers that were to serve also as officers of
the Bank. After the Bank commenced operations, the Company no longer separately
compensated such executive officers. The following sets forth certain
information concerning the compensation of the Company's chief executive officer
during fiscal year 1998. No other executive officer received compensation in
excess of $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Long Term
Compensation
Awards
Name and Other Annual Securities All Other
Principal Fiscal Compensation Underlying Compensation
Position Year Salary ($) Bonus ($) ($) Options (#) ($)
- - --------- ------ ---------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gary H.
Anderson 1998 105,000 0 --(1) 3120(2)
</TABLE>
(1) Compensation does not include any perquisites and other personal
benefits which may be derived from business-related expenditures that
in the aggregate do not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus reported for such person.
(2) The Company provided Mr. Anderson with a $500,000 term life insurance
policy; the premium paid by the Company in 1998 was $3,120. In
addition, pursuant to Mr. Anderson's employment agreement, Mr. Anderson
will be entitled to severance pay equal to one month's pay for each
year employed by the Bank in the event of termination of his
employment.
23
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End(#) FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Gary H. Anderson 0 - 15,000/0 0/-
President and
Chief Executive
Officer
</TABLE>
Employment Agreement
Gary H. Anderson has an employment agreement with the Company and the
Bank under which he serves as President and Chief Executive Officer of the
Company and of the Bank. The employment agreement provides for an initial term
of three years and can be extended annually by the Company and the Bank at the
end of each year of the term for an additional year, so that the remaining term
shall continue to be three years. Mr. Anderson is paid an annual salary of
$105,000. Once the Bank begins operations he will also be entitled to certain
performance bonuses. The criteria for earning performance bonuses will be
established by the Board of Directors.
Under Mr. Anderson's employment agreement, he also has been granted, at
no cost to him for the option grant, the option to purchase 15,000 shares of
Common Stock of the Company at the price of the lesser of $10.00 or book value
of the stock during the first five (5) years of operation of the Bank.
Mr. Anderson also receives health insurance with dependents coverage
and disability insurance paid in full by the Bank. The Company maintains a term
life insurance policy on Mr. Anderson providing for death benefits in the amount
of $500,000 payable to the Company and $500,000 payable to Mr. Anderson's
family. He receives a mid-size automobile to be used primarily for business
purposes, and the Bank pays operating, maintenance and insurance expenses for
the automobile. The Bank pays monthly membership dues for Mr. Anderson at all
service organizations and professional associations.
If the Company terminates Mr. Anderson's employment, the Company will be
obligated to pay him severance pay equal to one year's base salary and insurance
benefits. If Mr. Anderson's employment is terminated due to a sale, merger or
24
<PAGE>
other change of control of the Company or the Bank, the Company will be
obligated to pay him severance pay equal to two times his then existing annual
base salary. Furthermore, the Company must remove any restrictions on
outstanding incentive awards so that all such awards vest immediately.
In addition, Mr. Anderson's employment agreement provides that
following termination of his employment with the Bank and for a period of twelve
months thereafter if terminated without cause and for a period of six months
thereafter if terminated for cause, Mr. Anderson may not: (i) be employed in the
banking business or any related field thereto in Oakwood, Georgia or Hall
County, Georgia, (ii) solicit customers of the Bank for the purpose of providing
financial services; (ii) solicit employees of the Bank for employment; (iv)
furnish anyone or use any list of customers of the Bank for banking purposes; or
(v) furnish, use or divulge to anyone any information acquired by him from the
Bank relating to the Bank's methods of doing business.
Mr. Anderson also receives other employment benefits under his employment
agreement with the Company and the Bank as spelled out in his employment
agreement.
Director Compensation
The Company and the Bank presently do not compensate any of their
directors for their services as directors. The directors of the Company and the
Bank presently do not receive a fee for attending Board meetings.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the shares
of voting common stock of the Company, which is the only class of stock
outstanding, beneficially owned as of March 15, 1999,(i) by each person who
beneficially owns more than 5% of shares of common stock of the Company, (ii) by
each of the Company's directors and named executive officers and (iii) by all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address Beneficial Percentage
of Beneficial Owner Ownership Ownership
<S> <C> <C>
Gary H. Anderson 21,010(1) 2.35%(2)
Director/President
and C.E.O.
4006 Covey Trail
Oakwood, GA 30566
25
<PAGE>
Lowell S. (Casey) 5,000 .57%
Cagle
Director/Chairman
4615 Hunters Court
Gainesville, GA 30507
Earl C. Gilleland 40,000 4.55%
Director
3997 Sloan Mill Road
Gainesville, GA 30507
A. Terry Hayes 5,200(3) .59%
Director
Highway 332
P. O. Box 357
Hoschton, GA 30548
Wm. David Merritt 20,000(4) 2.28%
Director
6620 Stringer Road
Clermont, GA 30527
Harold D. Nichols 2,000 .23%
Director
4431 Benefield Road
Braselton, GA 30517
James E. Palmour III 6,500(5) .74%
Director/Secretary
255 Sorrento Circle, N.W.
Gainesville, GA 30506
Dr. Edward R. Quillian 4,200(6) .49%
Director
4207 Bob White Lane
Oakwood, GA 30566
M. Milton Robson 36,200(7) 4.12%
Director
3509 Tanners Mill Circle
Gainesville, GA 30507
Donald W. Smith 10,500(8) 1.20%
Director/Vice Chairman
4129 Cherokee Trail
Gainesville, GA 30504
C. Talmadge Garrison 12,000(9) 1.37%
4074 Cochran Road
Gainesville, GA 30506
26
<PAGE>
Jeanie Bridges 10,000(10) 1.13%(11)
Treasurer, C.A.O. and
C.F.O.
100 Sang Road
Cleveland, GA 30528
Christopher D. England 5,800(12) .66%(13)
Senior Vice President and
Chief Lending Officer
5506 Stone Trace
Gainesville, GA 30504
All current directors 178,410 19.86%(2)(11)(13)
and executive officers as
a group (13 persons)
</TABLE>
- - ------------------------
(1) Includes 450 shares owned jointly by Mr. Anderson and his spouse, over
which shares Mr. Anderson has investment and voting power; also
includes 15,000 shares that are subject to options granted Mr. Anderson
under his employment agreement.
(2) In calculating percentage ownership, includes 15,000 shares subject to
options granted Mr. Anderson in calculating total outstanding stock of
the Company and number of shares beneficially owned by Mr. Anderson.
(3) Includes 5,100 shares held in Mr. Hayes' IRA and 100 shares held in the
IRA of Mr. Hayes' wife, over all of which shares Mr. Hayes has
investment and voting power.
(4) Includes 800 shares held in Mr. Merritt's IRA and 800 shares held in
the IRA of Mr. Merritt's wife, over all of which shares Mr. Merritt has
investment and voting power.
(5) Includes 500 shares owned by Mr. Palmour's wife, over which shares Mr.
Palmour has investment and voting power.
(6) Includes 2,000 shares owned jointly by Dr. Quillian and his mother,
2,000 shares owned jointly by Dr. Quillian and his wife, and 200 shares
owned by Dr. Quillian as custodian for his minor children, over all of
which shares Dr. Quillian has investment and voting power.
(7) Includes 1,200 shares owned by Mr. Robson's wife, over which
shares Mr. Robson has investment and voting power. Does not
include: 3,000 shares owned by Mr. Robson's adult children;
2,000 shares owned by Mr. Robson's adult son-in-law, 2,000
shares owned by Mr. Robson's adult daughter-in-law, 4,500
shares owned by Mr. Robson's adult daughter, as custodian for
his minor grandchildren, and 4,500 shares owned by Mr.
Robson's adult son as custodian for his minor grandchildren,
over all of which shares Mr. Robson asserts no voting or
investment power.
27
<PAGE>
(8) Includes 1,000 shares held in Mr. Smith's IRA, 200 shares owned by Mr.
Smith's minor daughter, and 300 shares owned by Oakwood's Arrow Auto
Auction, over all of which shares Mr. Smith has investment and voting
power. Does not include 400 shares owned by Mr. Smith's adult
daughters, over which Mr. Smith asserts no voting or investment power.
(9) Includes 2,000 shares owned jointly by Mr. Garrison and his adult
children, over which shares Mr. Garrison has investment and voting
power. Does not include 500 shares owned by Mr. Garrison's adult
children, over which shares he asserts no voting or investment power.
(10) Includes 5,000 shares held in Ms. Bridges' IRA, over which shares Ms.
Bridges has investment and voting power; also includes 5,000 shares
that are subject to options granted Ms. Bridges under her employment
agreement.
(11) In calculating percentage ownership, includes 5,000 shares subject to
options granted Ms. Bridges in calculating total outstanding stock of
the Company and number of shares beneficially owned by Ms. Bridges.
(12) 800 shares are held in Mr. England's IRA, over which shares Mr. England
has investment and voting power; also includes 5,000 shares that are
subject to options granted Mr. England under his employment agreement.
(13) In calculating percentage ownership, includes 5,000 shares subject to
options granted Mr. England in calculating total outstanding stock of
the Company and number of shares beneficially owned by Mr. England.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain executive officers and directors of the Company and the Bank, and
principal shareholders of the Company and affiliates of such persons have, from
time to time, engaged in banking transactions with the Bank. All loans or other
extensions of credit were made by the Bank to such individuals in the ordinary
course of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unaffiliated parties and are believed by management to not involve more than the
normal risk of collectibility or present other unfavorable features. Since the
Bank did not begin doing business until January 4, 1999, as of December 31, 1998
there were no loans to executive officers and directors of the Company and the
Bank, principal shareholders of the Company, and affiliates of such persons.
28
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial Statements/
The consolidated financial statements, notes thereto and independent
auditors' report thereon, are filed as Exhibit 99.1 hereto, and made a
part hereof.
2. Exhibits
Exhibit Numbers
Sequential
Page Number
3.1* Articles of Incorporation --
3.2* Bylaws --
10.1*+ Employment Contract between Gary H.
Anderson and the Company --
21.1 Subsidiaries of the Company. The
sole subsidiary of the Company is
Southern Heritage Bank,
Oakwood, Georgia, which is
wholly-owned by the Company --
27.1 Financial Data Schedule 32
99.1 Consolidated Financial Statements
of the Company 47
- - ------------------------
*Items 3.1 through 10.1, as listed above, were previously
filed by the Company as Exhibits (with the same respective
Exhibit Numbers as indicated herein) to the Company's
Registration Statement (Registration No. 33-47291) and such
documents are incorporated herein by reference.
+Item 10.1 is an employment-compensatory agreement.
(b) Reports on Form 8-K
No Reports on Form 8-K have been filed during the fourth quarter of the
year ended December 31, 1998.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 31, 1999.
SOUTHERN HERITAGE BANCORP, INC.
By: s/Gary H. Anderson
Gary H. Anderson
President and C.E.O.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 31, 1999.
Signature Title
s/Gary H. Anderson Director; President and C.E.O.
Gary H. Anderson
s/Jeanie Bridges Treasurer; C.A.O. and C.F.O
Jeanie Bridges
s/Lowell S. (Casey) Cagle Director; Chairman
Lowell S. (Casey) Cagle
s/C. Talmadge Garrison Director
C. Talmadge Garrison
s/Earl C. Gilleland Director
Earl C. Gilleland
s/A. Terry Hayes Director
A. Terry Hayes
s/Wm. David Merritt Director
Wm. David Merritt
s/Harold D. Nichols Director
Harold D. Nichols
[SIGNATURES CONTINUED ON NEXT PAGE]
30
<PAGE>
s/James E. Palmour III Director; Secretary
James E. Palmour III
_______________________ Director
Dr. Edward R. Quillian
s/Milton Robson Director
M. Milton Robson
________________________ Director
Donald W. Smith
Supplemental Information to be Furnished With Reports Filed
Pursuant to Section 15(d) of the Exchange Act by Non-reporting
Issuers:
No annual report to security holders covering the registrant's 1998 fiscal year
or proxy material with respect to an annual meeting of security holders for 1999
has been or will be sent to security holders of the registrant, since the
registrant is not presently required to provide security holders an annual
report or proxy material. The registrant does intend in May, 1999 to furnish its
security holders summary financial information for its fiscal year ended
December 31, 1998 and the notice of its annual meeting of shareholders to be
held on June 9, 1999.
31
<PAGE>
EXHIBIT 99.1
SOUTHERN HERITAGE
BANCORP
(A Development Stage Company)
FINANCIAL REPORT
DECEMBER 31, 1998
32
<PAGE>
SOUTHERN HERITAGE BANCORP
(A Development Stage Company)
FINANCIAL STATEMENTS
DECEMBER 31, 1998
- - --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
INDEPENDENT AUDITOR'S REPORT..................................................1
FINANCIAL STATEMENTS
Balance sheet............................................................2
Statement of loss for year ended
December 31, 1998 and period
from February 24, 1997, date
of inception, to December 31, 1998.....................................3
Statement of stockholders' equity
(deficit) for year ended December 31, 1998
and period from February 24, 1997, date of
inception, to December 31, 1998.......................................4
Statement of cash flows for year ended
December 31, 1998 and period
from February 24, 1997, date of
inception, to December 31, 1998.......................................5
Notes to financial statements.........................................6-12
33
<PAGE>
INDEPENDENT AUDITOR'S REPORT
- - -------------------------------------------------------------------------------
To the Board of Directors
Southern Heritage Bancorp
Oakwood, Georgia
We have audited the accompanying balance sheet of Southern Heritage
Bancorp, a development stage company, as of December 31, 1998, and the related
statements of loss, stockholders' equity (deficit), and cash flows for the year
ended December 31, 1998 and the period from February 24, 1997, date of
inception, to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southern Heritage Bancorp as
of December 31, 1998, and the results of its operations and its cash flows for
the year ended December 31, 1998 and the period from February 24, 1997, date of
inception, to December 31, 1998, in conformity with generally accepted
accounting principles.
As described in Note 1 to the financial statements, the Company changed its
method of accounting for organization costs.
s/MAULDIN & JENKINS, LLC
Atlanta, Georgia
March 16, 1999
34
<PAGE>
SOUTHERN HERITAGE BANCORP
(A Development Stage Company)
BALANCE SHEET
DECEMBER 31, 1998
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets
<S> <C>
Cash $ 3,640
Interest-bearing deposits 7,977,209
Premises and equipment 229,740
Other receivables 189,422
Deferred organization costs 35,620
----------------------
Total assets $ 8,435,631
======================
Liabilities and Stockholders' Equity
Accounts payable $ 240,888
----------------------
Commitments and contingent liabilities
Stokholders' equity
Common stock, $5.00 par value; 1,000,000 shares
authorized; 878,344 subscribed $ 4,391,720
Capital surplus 4,339,985
Deficit accumulated during the development stage (536,962)
----------------------
Total stockholders' equity 8,194,743
----------------------
Total liabilities and stockholders' equity $ 8,435,631
======================
</TABLE>
See Notes to Financial Statements.
35
<PAGE>
SOUTHERN HERITAGE BANCORP
(A Development Stage Company)
STATEMENTS OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD FROM
FEBRUARY 24, 1997, DATE OF INCEPTION, TO DECEMBER 31, 1998
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
February 24, 1997,
Date of
For Year Ended Inception, to
December 31, 1998 December 31, 1998
----------------------- -------------------
<S> <C> <C>
Income $ 122,226 $ 122,226
----------------------- ------------------
Expenses
Interest expense $ 40,157 $ 44,750
Salaries and employee
benefits 342,913 360,413
Other expenses 156,599 190,850
----------------------- ------------------
539,669 596,013
----------------------- ------------------
Net loss before cumulative
effect of change in accounting
principle $ (417,443) $ (473,787)
Cumulative effect of a change
in accounting principle (63,175) (63,175)
----------------------- -------------------
Net loss $ (480,618) $ (536,962)
======================= ===================
</TABLE>
See Notes to Financial Statements.
36
<PAGE>
SOUTHERN HERITAGE BANCORP
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
PERIOD FROM FEBRUARY 24, 1997,
DATE OF INCEPTION, TO DECEMBER 31, 1998
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
During the Total
Common Stock Subscribed Capital Development Stockholders'
-----------------------------------
Shares Par Value Surplus Stage Equity (Deficit)
------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance, February 24, 1997,
(date of inception) -- $ -- $ -- $ -- $ --
Net loss -- -- -- (56,344) (56,344)
------------- ----------------- ----------------- ----------------- -----------------
Balance, December 31,
1997 -- -- -- (56,344) (56,344)
Common stock subscriptions 878,344 4,391,720 4,391,720 -- 8,783,440
Stock offering cost -- -- (51,735) -- (51,735)
Net loss -- -- -- (480,618) (480,618)
------------- ----------------- ----------------- ----------------- -----------------
Balance, December 31,
1998 878,344 $ 4,391,720 $ 4,339,985 $ (536,962) $ 8,194,743
============= ================= ================= ================= =================
</TABLE>
See Notes to Financial Statements.
37
<PAGE>
SOUTHERN HERITAGE BANCORP
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
PERIOD FROM FEBRUARY 24, 1997,
DATE OF INCEPTION, TO DECEMBER 31, 1998
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
February 24, 1997,
Date of
For Year Ended Inception, to
December 31, 1998 December 31, 1998
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (480,618) $ (536,962)
Adjustments to reconcile net
loss to net cash
used in operating activities:
Depreciation 9,107 9,422
Increase in other receivables (143,281) (189,422)
Increase in accounts payable 219,748 240,888
------------------ ------------------
Net cash used in operating activities (395,044) (476,074)
------------------ ------------------
INVESTING ACTIVITIES
Increase) decrease in deferred
organization costs 27,555 (35,620)
Purchase of premises and equipment (170,840) (239,162)
Increase in interest-bearing deposits (7,977,209) (7,977,209)
------------------ ------------------
Net cash used in investing activities (8,120,494) (8,251,991)
------------------ ------------------
FINANCING ACTIVITIES
Proceeds from line of credit 622,539 849,954
Repayment of line of credit (849,954) (849,954)
Proceeds from organizers -- 85,000
Repayment to organizers -- (85,000)
Proceeds from common stock subscriptions 8,783,440 8,783,440
Stock offering cost (49,490) (51,735)
------------------ ------------------
Net cash provided by
financing activities 8,506,535 8,731,705
------------------ ------------------
Net increase (decrease) in cash (9,003) 3,640
Cash at beginning of period 12,643 --
------------------ ------------------
Cash at end of year $ 3,640 $ 3,640
================== ==================
</TABLE>
See Notes to Financial Statements.
38
<PAGE>
SOUTHERN HERITAGE BANCORP
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Southern Heritage Bancorp, Inc. (the "Company") was formed
on February 13, 1998 for the purpose of becoming a bank
holding company. The Company acquired 100% of the
outstanding common stock of Southern Heritage Bank (the
"Bank") on January 4, 1999, which will operate as a full
service community bank in Oakwood, Georgia. The Bank
received final regulatory approvals from the Georgia
Department of Banking and Finance and the Federal Deposit
Insurance Corporation on December 23, 1998 to begin banking
operations.
Activities since inception have consisted of the Company's
and the Bank's organizers engaging in organizational and
preopening activities necessary to obtain regulatory
approvals and to prepare to commence business as a
financial institution.
Significant Accounting Policies
Basis of Presentation
The statements have been prepared on the accrual basis in
accordance with generally accepted accounting principles.
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation computed by the straight-line method over the
estimated life of the assets.
39
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Significant Accounting Policies (Continued)
Deferred Organization Costs
Costs incurred for the organization of the Bank are shown
as deferred organization costs in the balance sheet at
December 31, 1998, and will be included in the operating
results of the Bank. These costs will be expensed
immediately upon capitalization of the Bank.
Stock offering costs, consisting of direct, incremental
costs of the stock offering incurred to date, have been
charged to capital surplus.
Income Taxes
The Company will be subject to Federal and State income
taxes when taxable income is generated. No income taxes
have been accrued because of operating losses incurred
during the pre-opening period.
Losses Per Common Share
Losses per common share are computed by dividing the net
loss by the weighted average number of common shares
outstanding. There were no shares issued and outstanding
for the period from inception through December 31, 1998.
The net loss per common share, assuming all 878,344 shares
were outstanding for the period from inception through
December 31, 1998, would be $.61 per share.
Fiscal Year
The Company has adopted a calendar year for both financial
reporting and tax reporting purposes.
40
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Cumulative Effect of a Change in Accounting Principle
In April of 1998, the Accounting Standards Executive
Committee issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start Up Activities". SOP 98-5
requires that costs of start-up activities and organization
costs be expensed as incurred. SOP 98-5 becomes effective
for financial statements for fiscal years beginning after
December 15, 1998. However, early adoption is encouraged
for fiscal years in which financial statements have not
been issued. During 1998, the Company wrote off $63,175 of
unamortized organization costs upon adoption of SOP 98-5.
As of December 31, 1997, the Company had capitalized all
organization costs with the intent of amortizing the costs
over a five year period upon commencement of banking
operations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement is required to be
adopted for fiscal years beginning after June 15, 1999.
However, the statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The
Company expects to adopt this statement effective January
1, 2000. SFAS No. 133 requires the Company to recognize all
derivatives as either assets or liabilities in the balance
sheet at fair value. For derivatives that are not
designated as hedges, the gain or loss must be recognized
in earnings in the period of change. For derivatives that
are designated as hedges, changes in the fair value of the
hedged assets, liabilities, or firm commitments must be
recognized in earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings,
depending on the nature of the hedge. The ineffective
portion of a derivative's change in fair value must be
recognized in earnings immediately.
Management has not yet determined what effect the adoption
of SFAS No. 133 will have on the Company's operations or
financial position.
41
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 2. OTHER RECEIVABLES AND ACCOUNTS PAYABLE
Other receivables at December 31, 1998 consists of prepaid
expenses of $1,154, stock subscriptions receivable of
$49,500, and expenditures totaling $138,768 to be recorded
in the Bank upon capitalization. These expenditures include
premises, equipment, and prepaid amounts which will be
capitalized and amortized over the expected life of the
assets, and expenses directly related to the Bank which
will be expensed immediately upon capitalization. Accounts
payable at December 31, 1998 includes the $138,768 of
expenditures payable by the Company on behalf of the Bank,
$100,000 subscription cancellation, and $2,120 escrow agent
fees.
NOTE 3. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at
December 31, 1998:
<TABLE>
<S> <C>
Leasehold improvements $ 11,390
Furniture and equipment 42,048
Construction in progress 185,724
-----------------
239,162
Less accumulated depreciation (9,422)
-----------------
$ 229,740
=================
</TABLE>
Depreciation expense for the period from inception to
December 31, 1997 and for the year ended December 31, 1998
was $315 and $9,107, respectively.
The Company plans to build the main office building at
their current location. Expenses have been incurred related
to architectural fees for the design of this building and
for site preparation, and have been capitalized as
construction in progress. Upon final completion of the
building, the amounts will be included in premises and
equipment and will be depreciated over the estimated useful
life of the building.
42
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 4. LINE OF CREDIT
Pre-opening expenses were funded by proceeds from a line of
credit with a third party financial institution. At
December 31, 1998, there was no outstanding balance under
the line of credit. The line of credit in the amount of
$850,000 was paid in full during 1998.
NOTE 5. COMMITMENTS AND CONTINGENT LIABILITIES
Employee Agreements
The Bank entered into an employment agreement with the
President/Chief Executive Officer on November 5, 1997. The
employment agreement provides for a three year term and is
annually renewable thereafter. The President will be paid
an initial base annual salary of $105,000. Once the Bank
begins operations, he will also be entitled to certain
performance bonuses based on regulatory ratings of the Bank
and deposit growth, return on average assets ("ROA"), and
return on average equity ("ROE") of the Bank for the year.
Based on these factors, the calculated bonus may range from
0 to 50% of the base salary.
Further, the employment agreement requires the President to
purchase 6,000 shares of the initial offering of Common
Stock of the Company at the same time as the other initial
directors. The President will also have the right to
purchase an additional 15,000 shares at book value or
$10.00 per share, whichever is less, for the first five
years of employment, and if not extended by the Board, not
to exceed ten years.
The Bank also entered into an employment agreement with the
Senior Vice President/Chief Lending Officer of the Bank on
January 1, 1998. The employment agreement provides for a
two year term and is annually renewable thereafter. The
Senior Vice President/Chief Lending Officer will be paid an
initial base annual salary of $63,500. Once the Bank begins
operations, the employee will also be entitled to certain
performance bonuses based upon mutually agreed upon goals
such as a pre-determined formula consisting of regulatory
compliance, deposit growth, and other factors. Based on
these factors, the calculated bonus may range from 0 to 15%
of the base salary. Further, the contract gives the Senior
Vice President/Chief Lending Officer the right and option
to purchase 5,000 shares of the Company's common stock at
book value or $10.00 per share, whichever is less, for the
first five years of employment and if extended by the
Board, not to exceed ten years.
43
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 5. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
On January 7, 1998, the Bank entered into an employment
agreement with the Senior Vice President/Chief Operations
Officer of the Bank. The agreement provides for a three
year term and is annually renewable thereafter. The Senior
Vice President/Chief Operations Officer will receive an
annual salary of $65,000 for the first twelve months.
Thereafter, annual performance reviews will determine the
amount of increase in the initial base salary. Once the
Bank begins operations, the employee will be entitled to
performance bonuses ranging from 0 to 15% of the annual
base salary. In addition, the employee shall have the right
and option to purchase 5,000 shares of the Company's common
stock at book value or $10.00 per share, whichever is less,
for the first five years of employment and, if extended by
the Board, not to exceed ten years.
Leases
On June 1, 1997, the Bank entered into a lease agreement
with Bank and Business Systems, Inc. for a temporary office
facility. The lease called for monthly rent in the amount
of $3,800 plus taxes for a twelve month term payable in
advance ($45,600). This amount was paid by the Company in
1997.
At the end of the twelve months, the Company had the option
to lease the temporary facility on a month-to-month basis
for $3,800 plus taxes of $266.
Total rental expense for the period from inception to
December 31, 1997 and for the year ended December 31, 1998
was $69,768.
In addition, the lease requires the Company to maintain
insurance on the temporary facility as well as on its
contents.
On February 4, 1998, the Company entered into a lease with
a related party (an organizer and a director of the
Company) for the land which will be the site of the
permanent facility. The lease calls for a twenty year term
(beginning on the rent commencement date) which can be
extended for four additional periods of five years each.
The base annual rent is $40,000, payable in monthly
installments of $3,333.33 each. Beginning on the first day
of the fourth Lease Year and on the first day of each Lease
Year thereafter ("Change Date"), Rent shall increase by the
percentage by which the Average CPI for the previous Lease
Year exceeds the Average CPI for the year preceding the
previous Change Date, but not to exceed 5% in any event. In
no event shall Rent be less than it was for the prior Lease
Year. For this lease, the "Average CPI" shall be the
average monthly Consumer Price Index for the particular
Lease Year in question during the Term of this Lease. The
Company is responsible for all property taxes.
44
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 5. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Leases (Continued)
Total land lease expense for the year ended December 31,
1998 and the period from inception to December 31, 1998 was
$23,000.
The total minimum rental commitment at December 31, 1998 is
due as follows:
<TABLE>
<S> <C>
During the year ending December 31,
1999 $ 40,000
2000 40,000
2001 40,000
2002 40,000
2003 40,000
Due thereafter 577,000
------------------
$ 777,000
==================
</TABLE>
NOTE 6. YEAR 2000 DISCLOSURES
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Systems that do not properly recognize the
year "2000" could generate erroneous data or cause systems to
fail. The Company is heavily dependent on computer processing
and telecommunication systems in the daily conduct of
business activities. In addition, the Company must rely on
intermediaries, vendors and customers to appropriately modify
their systems in order that all may continue normal
operations and operate without significant disruptions. The
Company has conducted a review of its computer systems to
identify the systems that could be affected by the Year 2000
issue. The Company presently believes that the Year 2000
issue will not pose significant operational problems for the
Company or have a material adverse effect on future operating
results. However, absolute assurance cannot be given that;
(1) failure of any of the Company's systems will not have a
material impact on operations, or (2) failure of any other
companies' systems with whom the Company conducts business
will not have a material impact on operations.
45
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 7. COMMON STOCK OFFERING
The Company filed a Registration Statement on Form SB-2
with the Securities and Exchange Commission offering for
sale a minimum of 800,000 and a maximum of 1,000,000 shares
of the Company's $5.00 par value common stock at $10 per
share. As of December 31, 1998, the Company had received
subscriptions to purchase 878,344 shares of its common
stock for an aggregate purchase price of $8,783,440. The
offering was completed on December 31, 1998 and all
proceeds were disbursed from escrow on January 4, 1999.
46
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION ENTRACTED FROM THE
FINANCIAL STATEMENTS OF THE COMPANY FOR THE FISCAL YEAR ENDED 12/31/98 FILED ON
FORM 10-KSB, AND IS QUALIFED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,640
<INT-BEARING-DEPOSITS> 7,977,209
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 8,435,631
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 240,888
<LONG-TERM> 0
0
0
<COMMON> 4,391,720
<OTHER-SE> 3,803,023
<TOTAL-LIABILITIES-AND-EQUITY> 8,435,631
<INTEREST-LOAN> 0
<INTEREST-INVEST> 0
<INTEREST-OTHER> 122,226
<INTEREST-TOTAL> 122,226
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 40,157
<INTEREST-INCOME-NET> 82,069
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 499,512
<INCOME-PRETAX> (417,443)
<INCOME-PRE-EXTRAORDINARY> (417,443)
<EXTRAORDINARY> 0
<CHANGES> (63,175)
<NET-INCOME> (480,618)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> (.55)
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
