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, 1999 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, 1999 were
$1,658,610.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 15, 2000 was $13,175,160 based on recent private sales at a
price of $15.00 per share, since there is no established trading market.
The number of shares outstanding of Registrant's class of common stock at March
15, 2000 was 878,344 shares of common stock.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format (check one):
Yes No X
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Page 1 of 78
Exhibit Index on Page 46
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TABLE OF CONTENTS
PART I PAGE
ITEM 1. DESCRIPTION OF BUSINESS ......................... 3
ITEM 2. DESCRIPTION OF PROPERTIES........................ 13
ITEM 3. LEGAL PROCEEDINGS................................ 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS................................. 14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS...................... 14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION ............................ 15
ITEM 7. FINANCIAL STATEMENTS ............................ 33
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ............................ 33
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS ............................. 34
ITEM 10. EXECUTIVE COMPENSATION .......................... 40
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT ................ 43
ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS ............................ 46
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ................ 47
SIGNATURES ........................................................ 48
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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.
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While 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 intra-county
branching restrictions. Effective as of 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 Bank so as to exceed the
minimum Tier 1, risk-based and leverage capital ratios.
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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 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
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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 2.08 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 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
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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 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
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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.
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
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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
a condition to obtaining the approvals and consents of regulatory authorities in
connection with such acquisitions.
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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.
Financial Services Modernization Act. Congress enacted the Gramm- Leach-Bliley
Financial Services Modernization Act in November, 1999. The Act repeals the
prohibition against affiliations between depository institutions and firms
principally engaged in the issue, floatation, underwriting, public sale, or
distribution of securities, and it permits the creation of financial holding
companies, including by bank holding companies. Under the Act, financial holding
companies are authorized to engage in activities deemed to be "financial" in
nature or "incidental" to such activities, as well as "complementary" activities
or services which do not present substantial risks. Prior law limited banks and
bank holding companies to activities determined to be "closely related to
banking."
The Act applies to the activities of both state and national banks and their
affiliates. The Federal Reserve Board ("FRB") will act as the "umbrella
regulator" for financial holding companies and state member banks and their
activities; however, the FRB will be required to coordinate its activities with
the OCC in the case of national banks and the FDIC in the case of state
non-member banks.
Bank holding companies satisfying the criteria specified by the Act may become
certified as financial holding companies by filing with the FRB. Bank holding
companies and their affiliate banks may not participate in such financial
affiliations unless the insured depository institutions are well capitalized and
well managed and have satisfactory CRA ratings.
The Act lists various activities that are "financial" in nature and in which
financial holding companies may engage, without approval, upon thirty days'
notice to the FRB. The listed activities
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include, among others: (i) underwriting, dealing in or making a market in
securities; (ii) insurance underwriting and agency activities; (iii) providing
financial, investment and economic advisory services; (iv) insurance company
portfolio investment activities; and (v) merchant banking.
The Act further provides that a national bank may control a "financial
subsidiary" or hold an interest in a "financial subsidiary" if the subsidiary
engages only in activities that are "financial" in nature or incidental to a
"financial" activity and in activities that are permitted for national banks to
engage in directly, and the subsidiary does not engage in insurance
underwriting, real estate development, or merchant banking. A "financial
subsidiary" is any company that is controlled by one or more insured depository
institutions other than a subsidiary that engages solely in activities permitted
for national banks or a subsidiary that a national bank is specifically
authorized to control by the express terms of a separate Federal statute.
A national bank may engage in these "financial" activities if: (i) the bank and
each depository institution affiliate are well capitalized and well managed;
(ii) aggregate total consolidated assets of all subsidiaries does not exceed the
lesser of 45% of consolidated total assets of the parent bank or $50 billion;
(iii) received OCC approval to engage in the activities; and (iv) satisfies CRA
rating requirements.
As for state banks, FDIC regulations continue to provide that state banks have,
at a minimum, the same powers as national banks. Subject to the authority,
consistent with the Act, of the FRB and the FDIC (as applicable) to regulate
various activities of state banks, the Act preserves the authority of states to
expand the powers of state banks beyond those permitted for national banks.
State law inconsistent with the Act is preempted, but state regulatory
authorities retain jurisdiction.
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, 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
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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, 2000, the Bank had 15 full-time employees and 2 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 have
constructed 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 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 constructed a 10,000 square foot, two- story building
on the property for the Bank. There are four teller stations inside and four
drive through stations. There is also a stand-alone automatic teller machine
accessible by automobile. The cost of construction of the building was
approximately $2,060,000. The furniture, fixtures and equipment necessary for
operation of the Bank cost approximately $236,000. Construction, equipping and
occupancy of the bank building by the Bank occurred on August 30, 1999. These
costs were paid out of capital of the Bank provided by the Company from its
initial stock offering and when the Bank was originally capitalized. The Bank
opened for business on January 4, 1999, in a temporary building located on a
portion of the site of the permanent bank building.
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In addition, one of the primary components of the Bank's loan portfolio is loans
secured by first or second mortgages on real estate. These loans generally
consist of commercial real estate loans, construction and developments loans,
and residential real estate loans. Loan terms are generally limited to five
years or less, although payments are frequently structured on a longer
amortization basis. Interest rates are fixed or adjustable, and are more likely
to be fixed in the case of shorter term loans. Management attempts to reduce
credit risk in the commercial real estate portfolio by emphasizing loans on
owner-occupied office and retail buildings where the loan-to-value ratio,
established by independent appraisals, does not exceed 85%. In addition, the
Bank typically requires personal guarantees of the principal owners of the
property backed with a review by the Bank of the personal financial statements
of the principal owners. The principal economic risk associated with each
category of loans, including real estate loans, is the creditworthiness of the
Bank's borrowers. The risks associated with real estate loans vary with many
economic factors, including employment levels and fluctuations in the value of
real estate. The Bank also originates residential real estate loans for sale
into the secondary market. The Bank limits interest rate risk and credit risk on
these loans by locking the interest rate for each loan with the secondary
investor and receiving the investor's underwriting approval prior to originating
the loan.
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.
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, 1999.
PART II
ITEM 5. MARKET FOR ISSUER'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of December 31, 1999, 878,344 shares were outstanding to approximately 1,300
shareholders. There is no established trading market for the Company's common
stock. 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
14
<PAGE>
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is a discussion of the financial condition of the Company and the
Bank at December 31, 1999 and 1998 and the results of their operations for the
years ended December 31, 1999 and 1998. The purpose of this discussion is to
focus on information about the Company's financial condition and results of
operations which are not otherwise apparent from the audited consolidated
financial statements. Reference should be made to those statements and the
selected financial data presented elsewhere in this report for an understanding
of the following discussion and analysis.
Forward-Looking Statements
The Company may from time to time make written or oral forward- looking
statements, including statements contained in the Company's filings with the
Securities and Exchange Commission and its reports to stockholders. Statements
made, other than those concerning historical information, should be considered
forward-looking and subject to various risks and uncertainties. Such
forward-looking statements are made based upon management's belief as well as
assumptions made by, and information currently available to, management pursuant
to "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. The Company's actual results may differ materially from the results
anticipated in forward-looking statements due to a variety of factors, including
governmental monetary and fiscal policies, deposit levels, loan demand, loan
collateral values, securities portfolio values, interest rate risk management;
the effects of competition in the banking business from other commercial banks,
thrifts, mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market funds and other
financial institutions operating in the Company's market area and elsewhere,
including institutions operating through the Internet, changes in governmental
regulation relating to the banking industry, including regulations relating to
branching and acquisitions, failure of assumptions underlying the establishment
of reserves for loan losses, including the value of collateral underlying
delinquent loans and other factors. The Company cautions that such factors are
not exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by, or on behalf of, the Company.
15
<PAGE>
Overview
The Company was incorporated on February 13, 1998, with the purpose of becoming
a bank holding company. Prior to 1999, the Company and Bank were in the
development stage. The Bank received preliminary approval from the Federal
Deposit Insurance Corporation ("FDIC") on March 19, 1998 and final approval from
the DBF on December 23, 1998 to begin banking operations. The Company is a bank
holding company within the meaning of the Federal Bank Holding Company Act and
the Georgia bank holding company law. On January 4, 1999, the Company acquired
all of the common stock of the Bank. The Bank opened for business on January 4,
1999. The Company's plan of operations consists primarily of gaining market
share in the Bank's primary market area of Oakwood, Georgia and Hall County.
As of December 31, 1998, the Company had completed its stock offering, and on
January 4, 1999, the Company issued its stock. The Company received $8,783,000
from the stock offering and 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 accounting rules which
require immediate recognition of such costs. The Bank began organizing their
staff in the third and fourth quarters of 1998.
Financial Condition at December 31, 1999 and 1998
Following is a summary of the Company's balance sheets for the years indicated:
<TABLE>
<CAPTION>
December 31,
1999 1998
--------------------------
(dollars in
thousands)
<S> <C> <C>
Cash and due from banks $ 1,518 $ 4
Federal funds sold 1,205 7,977
Securities 7,018 -
Loans, net 17,241 -
Premises and equipment 2,254 230
Other assets 218 225
------------- -------
$ 29,454 $ 8,436
============= =======
Total deposits $ 21,744 $ -
Other liabilities 295 241
Stockholders' equity 7,415 8,195
============= =======
$ 29,454 $ 8,436
============= =======
</TABLE>
16
<PAGE>
Financial Condition at December 31, 1999 and 1998
As of December 31, 1999, the Company had total assets of $29.5 million compared
to $8.4 million for 1998. The Company has obtained $21.7 million in deposits
since the commencement of operations on January 4, 1999. The Company invested
the proceeds from its stock sale and deposit growth in Federal funds sold ($1.2
million), securities ($7 million), loans ($17.5 million), and premises and
equipment ($2.3 million). The Company expects that loan and deposit growth will
continue to be significant during 2000. This expected growth is not uncommon for
de novo banks.
The Company's security portfolio, consisting of U.S. government and agency
securities, amounts to $7.0 million at December 31, 1999. Unrealized losses
related to these securities totaled $206,067 at December 31, 1999. Management
has not specifically identified any securities for sale in future periods which,
if so designated, would require a charge to operations if the market value would
not be reasonably expected to recover prior to the time of sale.
The Company has 41% of its loan portfolio collateralized primarily by real
estate located in the Company's primary market area of Hall County and
surrounding counties. The Company's real estate mortgage and construction
portfolio consists of loans collateralized by one- to four-family residential
properties (34%) and construction loans to build one- to four-family residential
properties (65%), and nonresidential properties consisting primarily of small
business commercial properties (1%).
The specific economic and credit risks associated with the Company's loan
portfolio, especially the real estate portfolio, include, but are not limited
to, a general downturn in the economy which could affect unemployment rates in
the Company's market area, general real estate market deterioration, interest
rate fluctuations, deteriorated or non-existing collateral, title defects,
inaccurate appraisals, financial deterioration of borrowers, fraud, and any
violation of banking protection laws. Construction lending can also present
other specific risks to the lender such as whether developers can find builders
to buy lots for home construction, whether the builders can obtain financing for
the construction, whether the builders can sell the home to a buyer, and whether
the buyer can obtain permanent financing. Currently, real estate values and
employment trends in the Company's market area are stable with no indications of
a significant downturn in the general economy.
The Company attempts to reduce these economic and credit risks not only by
adherence to loan to value guidelines, but also by investigating the
creditworthiness of the borrower and monitoring the borrower's financial
position. Also, the Company establishes and periodically reviews its lending
policies and procedures. Banking regulations limit exposure by prohibiting loan
17
<PAGE>
relationships that exceed the lesser of 25% of the Bank's statutory
capital or net assets.
Liquidity and Capital Resources
The purpose of liquidity management is to ensure that there are sufficient cash
flows to satisfy demands for credit, deposit withdrawals, and other needs of the
Company. Traditional sources of liquidity include asset maturities and growth in
core deposits. A company may achieve its desired liquidity objectives from the
management of assets and liabilities and through funds provided by operations.
Funds invested in short-term marketable instruments and the continuous maturing
of other earning assets are sources of liquidity from the asset perspective. The
liability base provides sources of liquidity through deposit growth and
accessibility to market sources of funds.
Scheduled loan payments are a relatively stable source of funds, but loan
payoffs and deposit flows fluctuate significantly, being influenced by interest
rates and general economic conditions and competition. The Company attempts to
price its deposits to meet its asset/liability objectives consistent with local
market conditions.
The liquidity and capital resources of the Company are monitored on a periodic
basis by State and Federal regulatory authorities. As determined under
guidelines established by those regulatory authorities and internal policy, the
Company's liquidity is considered satisfactory.
At December 31, 1999, the Company had loan commitments outstanding of
$5,052,000. Because these commitments generally have fixed expiration dates and
many will expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. If needed, the Company has the
ability on a short- term basis to borrow and purchase Federal funds from other
financial institutions. At December 31, 1999, the Bank has arrangements with two
commercial banks for short-term advances of $3,000,000 in aggregate.
Stockholders' equity decreased for the year ended December 31, 1999 due to a net
loss of $573,000 combined with unrealized losses on securities
available-for-sale of $206,000.
The primary source of funds available to the Company will be the payment of
dividends by its subsidiary Bank. Banking regulations limit the amount of the
dividends that may be paid without prior approval of the Bank's regulatory
agency. Currently, no dividends can be paid by the Bank to the Company without
regulatory approval.
18
<PAGE>
At December 31, 1999, The Company's and the Bank's capital ratios were
considered adequate based on regulatory minimum capital requirements. The
minimum capital requirements to be considered well capitalized and the actual
capital ratios for the Company and the Bank as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Actual
Regulatory
Company Bank Requirements
<S> <C> <C> <C>
Leverage capital ratio 26.60% 25.95% 5.00%
Risk-based capital ratios:
Tier 1 capital 34.81 33.97 6.00
Total capital 36.02 35.18 10.00
</TABLE>
These ratios will decline as asset growth continues, but are expected to remain
in excess of the regulatory minimum requirements.
During 1999, the Company completed the construction and furnishing of its main
office. The total cost of the main office including furniture, fixtures and
equipment was approximately $2.3 million. At December 31, 1999, the Company had
no material commitments for any other capital expenditures.
Management believes that its liquidity and capital resources are adequate and
will meet its foreseeable short and long-term needs. Management anticipates that
it will have sufficient funds available to meet current loan commitments and to
fund or refinance, on a timely basis, its other material commitments and
liabilities.
Except for expected growth common to a de novo bank, management is not aware of
any other known trends, events or uncertainties that will have or that are
reasonably likely to have a material effect on its liquidity, capital resources
or operations. Management is also not aware of any current recommendations by
the regulatory authorities which, if they were implemented, would have such an
effect.
Year 2000
Based on a review of the Bank's and the Company's business since January 1,
2000, the Company has not experienced any material effects of the Year 2000
problem. Although the Company has not been informed of any material risks
associated with the Year 2000 problem from third parties, there can be no
assurance that the Company will not be impacted in the future. The Company will
continuously monitor its business applications and maintain contact with its
third party vendors and key business partners to resolve Year 2000 problems that
may arise in the future.
19
<PAGE>
Effects of Inflation
The impact of inflation on banks differs from its impact on non- financial
institutions. Banks, as financial intermediaries, have assets which are
primarily monetary in nature and which tend to fluctuate in concert with
inflation. A bank can reduce the impact of inflation if it can manage its rate
sensitivity gap. This gap represents the difference between rate sensitive
assets and rate sensitive liabilities. The Company, through its asset-liability
committee, attempts to structure the assets and liabilities and manage the rate
sensitivity gap, thereby seeking to minimize the potential effects of inflation.
For information on the management of the Company's interest rate sensitive
assets and liabilities, see the "Asset/Liability Management" section.
Results of Operations For The Years Ended December 31, 1999 and
1998
Following is a summary of the Company's operations for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
---------------------------------
(dollars in thousands)
<S> <C> <C>
Interest income $ 1,579 $ 122
Interest expense 622 0
Net interest income 957 82
Provision for loan losses 265 -
Other income 79 -
Other expenses 1,344 500
Pretax loss (573) (418)
Loss before cumulative effect of
a change in accounting principle (573) (418)
Cumulative effect of a change in
accounting principle - 63
Net loss (573) (481)
</TABLE>
The Bank commenced its operations on January 4, 1999. Prior to January 4, 1999,
the Company was engaged in activities involving the formation of the Company and
Bank, selling its common stock, and obtaining necessary approvals. The Company
incurred operating losses totaling $537,000 during its organizational period
($56,000 in 1997 and $481,000 in 1998). The Company incurred total
organizational and stock issue costs of $115,000, of which $63,000 was expensed
upon adoption of SOP 98-5 for the year ended December 31, 1998. For the year
ended December 31, 1999, the Company incurred operating losses of $573,000.
As discussed earlier, operations during 1998 consisted primarily of the
Company's organizers engaging in organizational and preopening activities
necessary to obtain regulatory approvals and to prepare
20
<PAGE>
to commence business as a bank. Therefore, operational comparisons between 1999
and 1998 would not be meaningful and are not presented.
Net Interest Income
The Company's results of operations are determined by its ability to effectively
manage interest income and expense, to minimize loan and security losses, to
generate non-interest income, and to control operating expenses. Since interest
rates are determined by market forces and economic conditions beyond the control
of the Company, the Company's ability to generate net interest income is
dependent upon its ability to obtain an adequate net interest spread between the
rate paid on interest-bearing liabilities and the rate earned on
interest-earning assets.
The net yield on average interest-earning assets for the period from January 4,
1999 to December 31, 1999 was 4.58%. The rate earned on average interest-earning
assets and the rate paid on average interest-bearing liabilities was 7.56% and
4.59%, respectively, which provided a net spread of 2.97%.
Provision for Loan Losses
The provision for loan losses was $265,000 in 1999. The amount provided was due
primarily to the growth of the loan portfolio. Based upon management's
evaluation of the loan portfolio, management believes the allowance for loan
losses is adequate to absorb potential losses on existing loans that may become
uncollectible. This evaluation considers past due, classified loans, underlying
collateral values, and current economic conditions which may affect the
borrowers' ability to repay. As of December 31, 1999, the Company had
nonperforming loans of $4,500. The allowance for loan losses as a percentage of
total loans was 1.51%.
Other Income
Other operating income consists of service charges on deposit accounts and other
miscellaneous fees. Service charges on deposit accounts accounted for 79%, or
$62,000 of the total other income of $79,000.
Other Expenses
Other operating expense consists of salaries and employee benefits, equipment
and occupancy expenses, and other operating expenses, or $567,000, $250,000 and
$527,000, respectively. Salaries and employee benefits accounted for 42% of
total other expenses which is typical of financial institutions. Other
significant expenses included in other operating expenses include advertising,
data
21
<PAGE>
processing and office supplies, or $112,000, $81,000 and $51,000,
respectively.
Income Tax
The Company recognized no income tax expense due to accumulated operating losses
of $1,110,000.
Asset/Liability Management
It is the Company's objective to manage assets and liabilities to provide a
satisfactory, consistent level of profitability within the framework of
established cash, loan, investment, borrowing, and capital policies. Certain
officers are charged with the responsibility for monitoring policies and
procedures that are designed to ensure acceptable composition of the
asset/liability mix. It is the overall philosophy of management to support asset
growth primarily through growth of core deposits of all categories made by local
individuals, partnerships, and corporations.
The Company's asset/liability mix is monitored on a regular basis with a report
reflecting the interest rate-sensitive assets and interest rate-sensitive
liabilities being prepared and presented to the Board of Directors of the Bank
on a monthly basis. The objective of this policy is to monitor interest
rate-sensitive assets and liabilities so as to minimize the impact of
substantial movements in interest rates on earnings. An asset or liability is
considered to be interest rate-sensitive if it will reprice or mature within the
time period analyzed, usually one year or less. The interest rate-sensitivity
gap is the difference between the interest-earning assets and interest-bearing
liabilities scheduled to mature or reprice within such time period. A gap is
considered positive when the amount of interest rate-sensitive assets exceeds
the amount of interest rate-sensitive liabilities. A gap is considered negative
when the amount of interest rate-sensitive liabilities exceeds the interest
rate-sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income, while a positive gap would
tend to result in an increase in net interest income. Conversely, during a
period of falling interest rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap would tend to adversely
affect net interest income. If the Company's assets and liabilities were equally
flexible and moved concurrently, the impact of any increase or decrease in
interest rates on net interest income would be minimal.
A simple interest rate "gap" analysis by itself may not be an accurate indicator
of how net interest income will be affected by changes in interest rates.
Accordingly, the Company also evaluates how the repayment of particular assets
and liabilities is impacted by changes in interest rates. Income associated with
interest-earning assets and costs associated with interest-bearing
22
<PAGE>
liabilities may not be affected uniformly by changes in interest rates. In
addition, the magnitude and duration of changes in interest rates may have a
significant impact on net interest income. For example, although certain assets
and liabilities may have similar maturities or periods of repricing, they may
react in different degrees to changes in market interest rates. Interest rates
on certain types of assets and liabilities fluctuate in advance of changes in
general market rates, while interest rates on other types may lag behind changes
in general market rates. In addition, certain assets, such as adjustable rate
mortgage loans, have features (generally referred to as "interest rate caps and
floors") which limit changes in interest rates. Prepayment and early withdrawal
levels also could deviate significantly from those assumed in calculating the
interest rate gap. The ability of many borrowers to service their debts also may
decrease during periods of rising interest rates.
Changes in interest rates also affect The Company's liquidity position. The
Company currently prices deposits in response to market rates and it is
management's intention to continue this policy. If deposits are not priced in
response to market rates, a loss of deposits could occur which would negatively
affect the Company's liquidity position.
At December 31, 1999, the Company's cumulative one year interest
rate-sensitivity gap ratio was 97%. The Company's targeted ratio is 80% to 120%
in this time horizon. This indicates that the Company's interest-bearing
liabilities will reprice during this period at a rate faster than the Company's
interest-earning assets. The Company is within its targeted parameters. However,
as the Company continues to invest its excess liquidity, currently invested in
Federal funds sold and securities, the gap ratio may fluctuate further from the
current ratio. A gap ratio in the Company's current range is not unusual for a
de novo bank due to the volume of liquid funds. It is management's intention to
invest excess funds in loans, which typically yield higher returns. It is
management's belief that as long as the Company pays the prevailing market rate
on these type deposits, the Company's liquidity, while not assured, will not be
negatively affected.
The following table sets forth the distribution of the repricing of the
Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1999, the interest rate-sensitivity gap, the cumulative interest
rate-sensitivity gap, the interest rate-sensitivity gap ratio and the cumulative
interest rate- sensitivity gap ratio. The table also sets forth the time periods
in which earning assets and interest-bearing liabilities will mature or may
reprice in accordance with their contractual terms. However, the table does not
necessarily indicate the impact of general interest rate movements on the net
interest margin since the repricing of various categories of assets and
liabilities is subject to competitive pressures and the needs of the Company's
23
<PAGE>
customers. In addition, various assets and liabilities indicated as repricing
within the same period may in fact, reprice at different times within such
period and at different rates.
<TABLE>
<CAPTION>
After After
Three One
Months Year but
Within but Within After
Three Within Five Five
Months One Year Years Years Total
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 1,205 $ -- $ -- $ -- $ 1,205
Securities 1,213 2,418 1,467 1,920 7,018
Loans 7,373 4,315 1,439 4,379 17,506
---------------------------------------------------
9,791 6,733 2,906 6,299 25,729
---------------------------------------------------
Interest-bearing
liabilities:
Interest-bearing
demand deposits 4,459 -- -- -- 4,459
Savings 418 -- -- -- 418
Time deposits 7,663 4,458 979 680 13,780
-------------------------------------------------
12,540 4,458 979 680 18,657
-------------------------------------------------
Interest rate sensitivity
gap $(2,749) $2,275 $1,927 $5,619 $ 7,072
======== ====== ====== ====== =======
Cumulative interest rate
sensitivity gap $(2,749) $(474) $1,453 $7,072
======== ====== ====== ======
Interest rate sensitivity
gap ratio 0.78 1.51 2.97 9.26
======= ====== ====== ======
Cumulative interest rate
sensitivity gap ratio 0.78 0.97 1.08 1.38
==== ==== ==== ====
</TABLE>
24
<PAGE>
SELECTED FINANCIAL INFORMATION AND STATISTICAL DATA
The tables and schedules on the following pages set forth certain significant
financial information and statistical data with respect to: the distribution of
assets, liabilities and stockholders' equity of the Company, the interest rates
experienced by the Company; the security portfolio of the Company; the loan
portfolio of the Company, including types of loans, maturities, and
sensitivities of loans to changes in interest rates and information on
nonperforming loans; summary of the loan loss experience and allowance for loan
losses of the Company; types of deposits of the Company and the return on equity
and assets for the Company.
25
<PAGE>
Distribution of Assets, Liabilities, and
Stockholders' Equity:
Interest Rates and Interest Differentials
<TABLE>
<CAPTION>
1999
(Dollars in Thousands)
Average Income/ Yields/
Balances(1) Expense Rates
----------- ---------- -------
<S> <C> <C> <C>
Cash and due from banks $ 1,046 $ - -%
Taxable securities 4,135 239 5.70
Unrealized losses on securities (61) - -
Federal funds sold 7,822 389 4.97
Loans (2)(3) 8,882 951 10.71
Allowance for loan losses (119) - -
Other assets 1,199 - -
------- ------- -------
$22,965
=======
Total interest-earning assets $20,900 $1,579 7.56%
======= ------
Noninterest-bearing demand $ 1,842 $ - -%
Interest-bearing demand and savings 3,899 113 2.90
Time 9,663 509 5.27
------- ------
Total deposits $15,404 - -
-------
Other liabilities 86 - -
Stockholders' equity (4) 7,475 - -
------- ------
$22,965
Total interest-bearing liabilities $13,562 $ 622 4.59%
======= ------
Net interest income $ 957
======
Net interest spread 2.97%
Net yield on average interestning assets 4.58%
</TABLE>
[FN]
(1) Average balances were determined using the daily average balances.
(2) Included nonaccrual loans with an average balance of $285 and unearned
income of $8,800.
(3) Interest and fees on loans includes $144,000 of loan fee income for the
year ended December 31, 1999.
(4) Average unrealized losses on securities available-for-sale have been
included in stockholders' equity at $60,525.
</FN>
Rate and Volume Analysis
Because the Company commenced its banking operations in 1999, the change in net
interest income from banking operations is all due to volume. Therefore, a rate
and volume analysis table has not been presented.
26
<PAGE>
Securities Portfolio
The carrying amounts of securities at December 31, 1999, which are all
classified as available-for-sale, are summarized as follows:
(dollars in thousands)
U.S. Government and agency securities $7,018
=====
Maturities
The amounts of securities by category as of December 31, 1999 are shown in the
following table according to contractual maturity classifications (1) one year
or less, (2) after one year through five years, (3) after five years through ten
years and (4) after ten years.
<TABLE>
<CAPTION>
U.S. Government and
Agency
Amount Yield (1)
(dollars in thousands)
<S> <C> <C>
Maturity:
One year or less $ 1,458 5.18%
After one year through five years 4,833 5.88
After five years through ten years 727 7.03
After ten years - -
------
$ 7,018 6.09%
========
</TABLE>
[FN]
(1) Yields were computed using coupon interest, adding discount accretion or
subtracting premium amortization, as appropriate, on a ratable basis over
the life of each security. The weighted average yield for each maturity
range was computed using the carrying value of each security in that range.
</FN>
27
<PAGE>
Loan Portfolio
Types of Loans
The amount of loans outstanding at December 31, 1999 are shown in the following
table according to the type of loan.
<TABLE>
<CAPTION>
(dollars in
thousands)
<S> <C>
Commercial $ 5,870
Real estate-construction 4,709
Real estate-other (1) 2,557
Consumer instalment loans and other 4,370
------
17,506
Less allowance for loan losses (265)
Net loans $ 17,241
============
</TABLE>
[FN]
(1) Real estate-other loans are net of $6,500 of unearned
income.
</FN>
Maturities and Sensitivities to Changes in Interest Rates
Total loans as of December 31, 1999 are shown in the following table according
to contractual maturity classifications (1) one year or less, (2) after one year
through five years, and (3) after five years.
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Commercial
One year or less $ 3,071
After one year through five years 2,799
After five years -
-------------
5,870
Construction
One year or less 4,447
After one year through five years 262
After five years -
-------------
4,709
Other
One year or less 3,568
After one year through five years 3,327
After five years 32
-------------
6,927
-------------
$ 17,506
=============
</TABLE>
The following table summarizes loans at December 31, 1999 with the due dates
after one year which have predetermined and floating or adjustable interest
rates.
28
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Predetermined interest rates $ 5,819
Floating or adjustable interest rates 601
----------------
$ 6,420
================
</TABLE>
29
<PAGE>
Risk Elements
Information with respect to nonaccrual, past due, and restructured loans at
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
(dollars in
thousands)
<S> <C>
Nonaccrual loans $5
Loans contractually past due ninety days
or more as to interest or principal
payments and still accruing 0
Restructured loans 0
Loans, now current about which there
are serious doubts as to the ability
of the borrower to comply with loan
repayment terms 0
Interest income that would have been
recorded on nonaccrual and restructured
loans under original terms 0
Interest income that was recorded
on nonaccrual and restructured loans 0
</TABLE>
It is the policy of the Company to discontinue the accrual of interest income
when, in the opinion of management, collection of such interest becomes
doubtful. This status is accorded such interest when (1) there is a significant
deterioration in the financial condition of the borrower and full repayment of
principal and interest is not expected and (2) the principal or interest is more
than ninety days past due, unless the loan is both well- secured and in the
process of collection.
Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention that have not been included in the table above do not represent
or result from trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity, or capital resources.
These classified loans do not represent material credits about which management
is aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms.
30
<PAGE>
Summary of Loan Loss Experience
The following table summarizes average loan balances for the year determined
using the daily average balances during the year; changes in the allowance for
loan losses arising from loans charged off and recoveries on loans previously
charged off; additions to the allowance which have been charged to operating
expense; and the ratio of net charge-offs during the period to average loans.
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
(dollars in
thousands)
<S> <C>
Average amount of loans outstanding $8,882
======
Balance of allowance for loan losses
at beginning of year $ -
------
Loans charged off -
------
Recoveries of loans previously charged-off -
------
Net loan charge-offs during the year -
------
Additions to allowance charged to operating
expense during year 265
------
alance of allowance for loan losses
at end of year $ 265
======
Ratio of net loans charged off during the
year to average loans outstanding -%
======
</TABLE>
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that is deemed
appropriate by management to adequately cover all known and inherent risks in
the loan portfolio. Management's evaluation of the loan portfolio includes a
periodic review of loan loss experience, current economic conditions which may
affect the borrower's ability to pay and the underlying collateral value of the
loans.
31
<PAGE>
As of December 31, 1999, management had made no allocations of its allowance for
loan losses to specific categories of loans. Based on management's best
estimate, the allocation of the allowance for loan losses to types of loans, as
of December 31, 1999, is as follows:
<TABLE>
<CAPTION>
Percent of
loans in
each category
Amount to total loans
(dollars in thousands)
<S> <C> <C>
Commercial $ 89 33.53%
Real estate - construction 71 26.90
Real estate - other 39 14.61
Consumer instalment
loans and other 66 24.96
----------- -------
$ 265 100.00%
=========== =======
</TABLE>
Deposits
Average amounts of deposits and average rates paid thereon, classified as to
noninterest-bearing demand deposits, interest- bearing demand deposits, savings
deposits, and time deposits is presented below.(1)
<TABLE>
<CAPTION>
Year Ended December 31,
1999
Amount Percent
(dollars in thousands)
<S> <C> <C>
Noninterest-bearing
demand deposits $ 1,842 --%
Interest-bearing demand
and savings deposits 3,899 2.90
Time deposits 9,663 5.27
-------
Total deposits $15,404
=======
</TABLE>
[FN]
(1) Average balances were determined using the daily average balances.
</FN>
32
<PAGE>
The amounts of time certificates of deposit issued in amounts of $100,000 or
more as of December 31, 1999 are shown below by category, which is based on time
remaining until maturity of (1) three months or less, (2) over three through six
months, (3) over six through twelve months, and (4) over twelve months.
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Three months or less $3,055
Over three months through six months 922
Over six months through twelve months 421
Over twelve months 406
------
Total $4,804
======
</TABLE>
Return on Assets and Equity
The following rate of return information for the year indicated is
presented below.
<TABLE>
<CAPTION>
Year Ended December 31,
1999
<S> <C>
Return on assets (1) (2.50)%
Return on equity (2) (7.67)
Dividend payout ratio (3) N/A
Equity to assets ratio (4) 32.55
<FN>
(1) Net loss divided by average total assets.
(2) Net loss divided by average equity.
(3) Dividends declared per share of common stock divided by net loss per share.
(4) Average equity divided by average total assets.
</FN>
</TABLE>
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements, notes thereto and independent auditors'
report thereon are attached hereto as Exhibit 13.1 and incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There are no disagreements with accountants on accounting and financial
disclosure.
33
<PAGE>
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 in April, 2002, the present term of office of
each director in Class Two will expire at the annual shareholders meeting of the
Company to be held on May 17, 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 48 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
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 34 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
also co-owner of Jean's Bridal and
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 54 Director; Class 2. Mr. Gilleland is
a native of Hall County, having
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.
34
<PAGE>
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 46 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 50 Director; Class 2. Mr. Merritt is a
life-long 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);
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 57 Director; Class 1. Mr. Nichols is a
38-year resident of Hall County,
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
35
<PAGE>
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 63 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 44 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, Georgia
Veterinary Medical Association,
American Veterinary Medical
Association, and the Georgia Academy
of Veterinary Practice.
36
<PAGE>
M. Milton Robson 57 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 46 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 67 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
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
37
<PAGE>
Board of Trustees. Mr. Garrison has
been a member of the Gainesville and
Lakeside Civitan Clubs where he held
numerous offices.
John Evans 54 Mr. Evans serves as Treasurer, Chief
Accounting Officer and Chief
Financial Officer of the Company.
He also serves as Senior Vice
President/Chief Financial Officer of
the Bank. Mr. Evans was born in
Maidenhead, England and was reared
in Birmingham, Alabama. He is a
graduate of University of Alabama in
Birmingham and has 21 years of
banking experience. Mr. Evans and
his family first moved to Hall
County in 1976. He has served as
Vice President and Auditor for
Gainesville National Bank from 1976
to 1984, as Vice President at the
Bank of Hiawassee from 1984 to 1985,
as President and CEO of Bank of
Alabama from 1985 to 1987, and as
Chief Financial Officer of Citizens
Bank of Gianesville from 1988 to
1994. Mr. Evans has attended several
bank related schools and seminars
including the Georgia Banking School
at the University of Georgia and
Bank Administration Institute's Bank
Operations School at the University
of Wisconsin. Mr. Evans has been
involved with Lions International
since 1978 and currently serves as
President of the Gainesville Lions
Club.
Christopher D. England 42 Mr. England serves as Senior Vice
President and Chief Lending Officer
of the Bank. Mr. England is a
native of South Hall County, born in
Gainesville in 1958. He has over 16
years of banking and lending
experience in Hall County, Georgia.
Mr. England served as Vice
President of Lanier National Bank,
since February, 1992, prior to
joining the Bank. His lending
experience includes both commercial
and consumer loans. Before joining
Lanier National Bank, he was
employed by The Citizens Bank,
38
<PAGE>
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
1999, and it is anticipated he will provide legal services to the Company during
2000.
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 years 1999 and 1998. No other executive officer received annual
compensation in excess of $100,000.
39
<PAGE>
Summary Compensation Table
Annual Compensation
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
___________________
Name and Other Annual Securities All Other
Principal Fiscal Compensation Underlying Compensation
Position Year Salary ($) Bonus ($) ($) Options (#) ($)
- --------- ------ ---------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gary H.
Anderson 1999 105,000 0 --(1) -- 3175(2)
1998 105,000 0 --(1) 15,000 3120(2)
</TABLE>
[FN]
(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 1999 was $3175 and in 1998
was $3,120. In addition, pursuant to Mr. Anderson's employment
agreement, Mr. Anderson will be entitled to severance pay equal to one
month's pay for each year employed by the Bank in the event of
termination of his employment. </FN>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End(#) FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Gary H. Anderson 0 - 15,000/0 75,000(1)/-
President and
Chief Executive
Officer
</TABLE>
[FN]
(1) Based on estimated price of $15.00 per share, which is the price paid in
recent private sales known to the Company.
</FN>
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
40
<PAGE>
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 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
41
<PAGE>
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, 2000,(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
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
42
<PAGE>
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
John Evans 200(10) .02%
Treasurer, C.A.O. and
C.F.O.
3354 Clarks Bridge Road
Gainesville, GA 30506
Christopher D. England 5,800(11) .66%(12)
Senior Vice President and
Chief Lending Officer
5506 Stone Trace
Gainesville, GA 30504
All current directors 168,610 19.2%(2)(11)(12)
and executive officers as
a group (13 persons)
</TABLE>
[FN]
- ------------------------
(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
43
<PAGE>
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.
(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 200 shares held in Mr. Evans IRA, over which shares
Mr. Evans has investment and voting power.
(11) 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.
(12) In calculating percentage ownership, includes 5,000 shares
subject to options granted Mr. England in calculating total
44
<PAGE>
outstanding stock of the Company and number of shares
beneficially owned by Mr. England.
</FN>
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.
45
<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 --
13.1 Consolidated Financial Statements
of the Company 49
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 78
- ------------------------
*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, 1999.
46
<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 29, 2000.
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 29, 2000.
Signature Title
s/Gary H. Anderson Director; President and C.E.O.
Gary H. Anderson
s/John Evans Treasurer; C.A.O. and C.F.O
John Evans
_________________________ 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
_________________________ Director
Wm. David Merritt
_________________________ Director
Harold D. Nichols
[SIGNATURES CONTINUED ON NEXT PAGE]
47
<PAGE>
_________________________ Director; Secretary
James E. Palmour III
s/Dr. Edward R. Quillian Director
Dr. Edward R. Quillian
s/M. Milton Robson Director
M. Milton Robson
s/Donald W. Smith 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 proxy material with respect to an annual meeting of security holders for 2000
has been or will be sent to security holders of the registrant, since the
registrant is not presently required to provide security holders proxy material.
The registrant does intend in April, 2000 to furnish its security holders an
annual report to security holders covering the registrant's fiscal year ended
December 31, 1999 and the notice of its annual meeting of shareholders to be
held on May 17, 2000.
48
<PAGE>
EXHIBIT 13.1
SOUTHERN HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1999
49
<PAGE>
SOUTHERN HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1999
TABLE OF CONTENTS
Page
INDEPENDENT AUDITOR'S REPORT..................................... 1
FINANCIAL STATEMENTS
Consolidated balance sheets................................. 2
Consolidated statements of operations....................... 3
Consolidated statements of comprehensive loss............... 4
Consolidated statements of stockholders' equity ............ 5
Consolidated statements of cash flows....................... 6
Notes to consolidated financial statements.................. 7-27
50
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Southern Heritage Bancorp, Inc.
Oakwood, Georgia
We have audited the accompanying consolidated balance sheets
of Southern Heritage Bancorp, Inc. and subsidiary as of December 31, 1999 and
1998, and the related consolidated statements of operations, comprehensive loss,
stockholders' equity, and cash flows for the years then ended. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Southern Heritage Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Atlanta, Georgia
February 2, 2000
51
<PAGE>
SOUTHERN HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Assets 1999 1998
------
<S> <C> <C>
Cash and due from banks $ 1,517,588 $ 3,640
Interest-bearing deposits 0 7,977,209
Federal funds sold 1,205,000 0
Securities available-for-sale 7,018,048 0
Loans 17,506,204 0
Less allowance for loan losses 264,975 0
---------- -----------
Loans, net 17,241,229 0
Building and equipment 2,253,694 229,740
Other assets 218,128 225,042
----------- ------------
Total assets $29,453,687 $ 8,435,631
=========== ============
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing demand $ 3,087,144 $ 0
Interest-bearing demand 4,458,543 0
Savings 418,141 0
Time, $100,000 and over 4,803,568 0
Other time 8,976,897 0
----------- ------------
Total deposits 21,744,293 0
Other liabilities 294,053 240,888
----------- ------------
Total liabilities 22,038,346 240,888
----------- ------------
Commitments and contingent liabilities
Stockholders' equity
Common stock, par value $5; 1,000,000 shares
authorized;
878,344 issued and outstanding 4,391,720 4,391,720
Capital surplus 4,339,985 4,339,985
Accumulated deficit -1,110,297 -536,962
Accumulated other comprehensive loss -206,067 0
---------- ---------
Total stockholders' equity 7,415,341 8,194,743
---------- ---------
Total liabilities and
stockholders' equity $29,453,687 $8,435,631
=========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
52
<PAGE>
SOUTHERN HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Interest income
Loans $ 951,775 $ 0
Taxable securities 239,063 0
Federal funds sold 388,601 0
Other 0 122,226
---------- -----------
Total interest income 1,579,439 122,226
---------- -----------
Interest expense
Deposits 622,203 0
Other borrowing 0 40,157
---------- -----------
Total interest expense 622,203 40,157
---------- -----------
Net interest income 957,236 82,069
Provision for loan losses 264,975 0
---------- -----------
Net interest income after
provision for loan losses 692,261 82,069
---------- -----------
Other income
Service charges on deposit accounts 62,241 0
Other operating income 16,930 0
---------- -----------
Total other income 79,171 0
---------- -----------
Other expenses
Salaries and employee benefits 566,929 342,913
Equipment expenses 105,599 13,977
Occupancy expenses 144,841 105,115
Other operating expenses 527,398 37,507
---------- -----------
Total other expenses 1,344,767 499,512
Loss before income taxes and
cumulative effect of a change
in accounting principle -573,335 -417,443
Income tax expense 0 0
--------- -----------
Loss before cumulative effect of a
change in accounting principle -573,335 -417,443
Cumulative effect of a change in accounting
principle 0 -63,175
--------- -----------
Net loss $-573,335 $ - 480,618
========= ===========
Basic and diluted losses per share before
cumulative effect of a change in
accounting principle $ -0.65 $ -0.48
Cumulative effect of a change in accounting
principle 0.00 -0.07
--------- -----------
Basic and diluted losses per share $ -0.65 $ -0.55
========= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
53
<PAGE>
SOUTHERN HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net loss $ -573,335 $ -480,618
Other comprehensive loss:
Unrealized holding losses on
securities available-for-sale
arising during period -206,067 0
------------- ------------
Comprehensive loss $ -779,402 $ -480,618
============= ============
</TABLE>
See Notes to Consolidated Financial Statements.
54
<PAGE>
SOUTHERN HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Stock Capital Accumulated Comprehensive Stockholders'
Shares Par Value Surplus Deficit Loss Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 0 0 0 -56,344 0 -56,344
Common stock 878,344 4,391,720 4,391,720 0 0 8,783,440
subscriptions
Stock offering cost 0 0 -51,735 0 0 -51,735
Net loss 0 0 0 -480,618 0 -480,618
------- --------- --------- ---------- -------- ---------
Balance, December 31, 1998 878,344 $4,391,720 $4,339,985 $ -536,962 $ 0 $8,194,743
Net loss 0 0 0 -573,335 0 -573,335
Other comprensive loss 0 0 0 0 -206,067 -206,067
------- ---------- ---------- ----------- --------- ----------
Balance, December 31, 1999 878,344 $4,391,720 $4,339,985 $-1,110,297 $-206,067 $7,415,341
======= ========== ========== =========== ========= ==========
</TABLE>
See Notes to Consolidated
Financial Statements.
55
<PAGE>
SOUTHERN HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
OPERATING ACTIVITIES
Net loss $ -573,335 $ -480,618
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation 84,559 9,107
Write-off of organization cost 0 27,555
Provision for loan losses 264,975 0
Increase in interest receivable -209,338 0
Increase in interest payable 60,149 0
Other operating activities 209,268 76,467
------------- -----------
Net cash used in operating
activities -163,722 -367,489
------------- -----------
INVESTING ACTIVITIES
Purchases of securities available-
for-sale -7,240,729 0
Proceeds from maturities of securities
available-for-sale 16,614 0
Net increase in Federal funds sold -1,205,000 0
Net increase in loans -17,506,204 0
Purchase of building and equipment -2,108,513 -170,840
Net (increase) decrease in interest-
bearing deposits 7,977,209 -7,977,209
------------ -----------
Net cash used in investing
activities -20,066,623 -8,148,049
------------ -----------
FINANCING ACTIVITIES
Net increase in deposits 21,744,293 0
Proceeds from line of credit 0 622,539
Repayment of line of credit 0 -849,954
Proceeds from common stock subscriptions 0 8,783,440
Stock offering cost 0 -49,490
------------ -----------
Net cash provided by financing
activities 21,744,293 8,506,535
------------ -----------
Net increase (decrease) in cash and due
from banks 1,513,948 -9,003
Cash and due from banks at beginning of year 3,640 12,643
------------ ----------
Cash and due from banks at end of year $ 1,517,588 $ 3,640
============ ============
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 562,054 $ 40,157
NONCASH TRANSACTION
Unrealized losses on securities
available-for-sale $ -206,067 $ 0
See Notes to Consolidated Financial
Statements.
56
<PAGE>
SOUTHERN HERITAGE BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Southern Heritage Bancorp, Inc. (the "Company") is a bank holding company whose
business is conducted by its wholly-owned subsidiary, Southern Heritage Bank
(the "Bank"). The Bank is a commercial bank located in Oakwood, Hall County,
Georgia. The Bank provides a full range of banking services in its primary
market area of Hall County and surrounding counties. The Company commenced its
banking operations on January 3, 1999. Prior to the commencement of banking
operations, the Company's activities consisted of organizational activities and
the sale of stock.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its subsidiary. Significant intercompany transactions and accounts are
eliminated in consolidation. The financial statements for 1998 include the
accounts of the Company only.
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 as of the balance sheet date and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for loan losses and deferred tax assets.
Cash and Due From Banks
Cash on hand, cash items in process of collection, and amounts due from banks
are included in cash and due from banks.
The Company maintains amounts due from banks which, at times, may exceed
Federally insured limits. The Company has not experienced any losses in such
accounts.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities
Securities are classified based on management's intention on the date of
purchase. Securities which management has the intent and ability to hold to
maturity would be classified as held-to-maturity and recorded at amortized cost.
All other securities are classified as available-for-sale and recorded at fair
value with net unrealized gains and losses reported in other comprehensive loss.
Interest and dividends on securities, including amortization of premiums and
accretion of discounts, are included in interest income. Realized gains and
losses from the sale of securities are determined using the specific
identification method.
Loans
Loans are reported at their outstanding principal balances less unearned income
and the allowance for loan losses. Interest income is accrued based on the
principal balance outstanding.
Fees on loans and costs incurred in origination of loans are recognized at the
time the loan is placed on the books. Because the net loan fees and costs are
not significant and the majority of loans have maturities of one year or less,
the results of operations are not materially different than the results which
would be obtained by accounting for loan fees and costs in accordance with
generally accepted accounting principles.
The accrual of interest on loans is discontinued when, in management's opinion,
the borrower may be unable to meet payments as they become due. When accrual of
interest is discontinued, all unpaid accrued interest is reversed. Interest
income is subsequently recognized only to the extent cash payments are received.
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
The allowance for loan losses is maintained at a level that management believes
to be adequate to absorb potential losses in the loan portfolio. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan is confirmed. Subsequent recoveries are credited to the allowance.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, current economic conditions, volume, growth,
composition of the loan portfolio, and other risks inherent in the portfolio.
This evaluation is inherently subjective as it requires material estimates that
are susceptible to significant change including the amounts and timing of future
cash flows expected to be received on impaired loans. In addition, regulatory
agencies, as an integral part of their examination process, will periodically
review the Company's allowance for loan losses, and may require the Company to
record additions to the allowance based on their judgment about information
available to them at the time of their examinations.
A loan is considered impaired when it is probable the Company will be unable to
collect all principal and interest payments due in accordance with the
contractual terms of the loan agreement. Individually identified impaired loans
are measured based on the present value of expected payments, using the
contractual loan rate as the discount rate, the loan's observable market price
or, the fair value of the collateral, if the loan is collateral dependent. If
the recorded investment in the impaired loan exceeds the measure of fair value,
a valuation allowance is established as a component of the allowance for loan
losses. Changes to the valuation allowance are recorded as a component of the
provision for loan losses.
Building and Equipment
Building and equipment are carried at cost less accumulated depreciation
computed principally on the straight-line method over the estimated useful lives
of the assets.
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
Income tax expense consists of current and deferred taxes. Current income tax
provisions approximate taxes to be paid or refunded for the applicable year.
Deferred income tax assets and liabilities are determined using the balance
sheet method. Under this method, the net deferred tax asset or liability is
determined based on the tax effects of the differences between the book and tax
bases of the various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.
Recognition of deferred tax balance sheet amounts is based on management's
belief that it is more likely than not that the tax benefit associated with
certain temporary differences will be realized. A valuation allowance is
recorded for those deferred tax items for which it is more likely than not that
realization will not occur in the near term.
As of December 31, 1999 and 1998, the Company has not recognized any income tax
expense due to net operating losses incurred since inception. These available
net operating losses will be used to offset future income for tax purposes.
The Company and the Bank file a consolidated income tax return. Each entity
provides for income taxes based on its contribution to income taxes (benefits)
of the consolidated group.
Losses Per Share
Basic losses per share are computed by dividing net loss by the weighted average
number of shares of common stock outstanding. Diluted losses per share are
computed by dividing net loss by the sum of the weighted-average number of
shares of common stock outstanding and potential common shares. There were no
potential common shares outstanding at December 31, 1999 or 1998. The weighted
average number of shares outstanding for the years ended December 31, 1999 and
1998 was 878,344.
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
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
98-5 requires that costs of start-up activities and organization costs be
expensed as incurred. SOP 98-5 became effective for financial statements for
fiscal years beginning after December 15, 1998. During 1998, the Company wrote
off $63,175 of unamortized organization costs upon adoption of SOP 98-5.
Comprehensive Loss
Statement of Financial Accounting Standards ("SFAS") No. 130, ("Reporting
Comprehensive Income"), describes comprehensive income (loss) as the total of
all components of comprehensive income (loss), including net loss. Other
comprehensive income (loss) refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are included in comprehensive
income (loss) but excluded from net loss. Currently, the Company's other
comprehensive income (loss) consists of unrealized gains and losses on
available-for-sale securities.
Recent Accounting Pronouncements
In June 1998, Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The effective
date of this statement has been deferred by SFAS No. 137 until fiscal years
beginning after June 15, 2000. However, the statement permits early adoption as
of the beginning of any fiscal quarter after its issuance. The Company expects
to adopt this statement effective January 1, 2001. SFAS No. 133 requires the
Company to recognize all derivatives as either assets or liabilities in the
balance sheet at fair value. For derivatives that are not designated as hedges,
the gain or loss must be recognized in earnings in the period of change. For
derivatives that are designated as hedges, changes in the fair value of the
hedged assets, liabilities, or firm commitments must be recognized in earnings
or recognized in other comprehensive income until the hedged item is recognized
in earnings, depending on the nature of the hedge. The ineffective portion of a
derivative's change in fair value must be recognized in earnings immediately.
Management does not believe the adoption of SFAS No. 133 will have a significant
effect on the Company's earnings or financial position.
There are no other recent accounting pronouncements that have had, or are
expected to have, a material effect on the Company's financial statements.
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SECURITIES
The amortized cost and fair value of securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ------------ ------------ ------
<S> <C> <C> <C> <C>
Securities
Available-for-Sale
December 31, 1999:
U. S. Government and
agency securities $ 7,224,115 $ - $ (206,067) $ 7,018,048
============ ========= =========== ===========
</TABLE>
The amortized cost and fair value of debt securities as of December 31, 1999 by
contractual maturity are shown below.
<TABLE>
<CAPTION>
Securities
Available-for-Sale
------------------------
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in less than one year $1,507,047 $1,457,985
Due from one to five years 4,967,068 4,833,108
Due from five to ten years 750,000 726,955
---------- ----------
$7,224,115 $7,018,048
========== ==========
</TABLE>
Securities with a carrying value of $500,000 at December 31, 1999 were pledged
to secure public deposits and for other purposes.
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
<TABLE>
<CAPTION>
December 31,
1999
---------------------
<S> <C>
Commercial $ 5,870,000
Real estate - construction 4,709,000
Real estate - other 2,557,000
Consumer instalment and other 4,376,715
------------
17,512,715
Unearned income (6,511)
Allowance for loan losses (264,975)
-------------
Loans, net $ 17,241,229
==============
Changes in the allowance for loan losses are as follows:
Year Ended
December 31,
1999
---------------
Balance, beginning of year $ -
Provision for loan losses 264,975
Loans charged off -
Recoveries of loans previously
charged off -
-------------
Balance, end of year $ 264,975
==============
</TABLE>
61
<PAGE>
The following is a summary of information pertaining to
impaired loans:
December 31,
1999
----------------
Impaired loans without a valuation allowance $ 4,700
Impaired loans with a valuation allowance -
----------------
Total impaired loans $ 4,700
================
Valuation allowance related to impaired loans $ -
================
Average investment in impaired loans $ 285
================
Interest income recognized on impaired loans was insignificant for the year
ended December 31, 1999.
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The Company has granted loans to certain directors, executive officers, and
their related entities. The interest rates on these loans were substantially the
same as rates prevailing at the time of the transaction and repayment terms are
customary for the type of loan involved. Changes in related party loans for the
year ended December 31, 1999 are as follows:
<TABLE>
<S> <C>
Balance, beginning of year $ -
Advances 163,650
Repayments (2,401)
---------
Balance, end of year $ 161,249
==========
</TABLE>
NOTE 4. BUILDING AND EQUIPMENT
Building and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
------------ --------------
<S> <C> <C>
Leasehold improvements $ 27,354 $ 11,390
Building 2,066,781 -
Furniture and equipment 253,540 42,048
Construction in progress - 185,724
------------ --------------
2,347,675 239,162
Less accumulated depreciation (93,981) (9,422)
------------- --------------
$ 2,253,694 $ 229,740
============ ==============
</TABLE>
NOTE 5. DEPOSITS
64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES
At December 31, 1999, scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
2000 $ 12,121,331
2001 979,398
2002 179,175
2003 33,817
2004 466,744
---------------
$ 13,780,465
===============
</TABLE>
Income tax expense consists of the following:
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Current $ (253,058) $ (19,196)
Deferred 20,167 (175,732)
Change in valuation allowance 232,891 194,928
----------- ----------
Income tax expense $ - $ -
=========== ==========
</TABLE>
The Company's income tax expense differs from the amounts computed by applying
the Federal income tax statutory rates to income before income taxes. A
reconciliation of the differences is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1999 1998
--------------------- -------------------------
Amount Percent Amount Percent
---------- ------- --------- -----------
<S> <C> <C> <C> <C>
Income taxes at $(194,934) (34)% $(163,410) (34)%
statutory rate
Change in valuation 232,891 41 194,928 40
allowance
State tax benefits (34,242) (6) (31,518) (6)
Other (3,715) (1) - -
---------- ------- ---------- ----------
Income tax expense $ - -% $ - -%
========== ======= ========== ==========
</TABLE>
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES (Continued)
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $ 56,094 $ -
Depreciation 6,116 -
Securities available-for-sale 70,063 -
Preopening and organization 151,983 175,732
expenses
Net operating loss carryforward 272,254 19,196
---------- ---------
556,510 194,928
Valuation allowance (497,882) (194,928)
---------- ---------
58,628 -
---------- ---------
Deferred tax liabilities:
Accrual to cash adjustment 58,628 -
--------- --------
Net deferred taxes $ - $ -
========= =========
</TABLE>
NOTE 7. RELATED PARTY TRANSACTIONS AND LEASES
On February 4, 1998, the Company entered into a lease with an organizer and a
director of the Company for the land on which the Company's building is located.
The lease is for a twenty year term and can be extended for four additional
66
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. RELATED PARTY TRANSACTIONS AND LEASES (Continued)
periods of five years each. The base annual rent is $40,000, payable in monthly
installments of $3,333.33. 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" is 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.
The total minimum rental commitment at December 31, 1999 is due as follows:
<TABLE>
<S> <C>
During the year ending December 31,
2000 $ 40,000
2001 40,000
2002 40,000
2003 40,000
2004 40,000
Due thereafter 537,000
----------
$ 737,000
==========
</TABLE>
Total rental expense for the years ended December 31, 1999 and 1998 was $102,179
and $92,768, respectively.
NOTE 8. EMPLOYEE BENEFIT PLANS
401(k) Profit Sharing Plan
The Company has a contributory 401(k) profit sharing plan for
the benefit of its eligible employees and their beneficiaries, subject to
certain eligibility and participation rules. Currently, the Company does not
contribute to the 401(k) profit sharing plan.
NOTE 9. STOCK OPTIONS
In connection with the organization of the Company, employment contracts
were provided to the senior management granting a total of 25,000 options. These
options are exercisable at book value or $10 per share, whichever is less, and
expire five years from the grant date, unless extended by the Board of Directors
for an additional five year period.
67
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCK OPTIONS (Continued)
Other pertinent information related to the options is as
follows:
<TABLE>
<CAPTION>
December 31,
1999
---------------------------
Weighted-
average
Exercise
Number Price
----------- --------------
<S> <C> <C>
Under option, beginning of year - $ -
Granted 25,000 10.00
Exercised - -
Terminated - -
-----------
Under option and exercisable, end of year 25,000 10.00
===========
Weighted average fair value of
options granted during the year $ 2.71
===========
</TABLE>
Information pertaining to options outstanding at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------ ----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Averaged
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercise Price
----------------------- ----------- ------------ --------- -------- ----------
<S> <C> <C> <C> <C> <C>
$10.00 25,000 4 years $10.00 25,000 $ 10.00
====== ======
</TABLE>
68
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCK OPTIONS (Continued)
The Company applies APB Opinion 25 and related Interpretations in accounting for
the stock option plan. Accordingly, no compensation cost has been recognized.
Had compensation cost for the stock option plan been determined based on the
fair value at the grant dates for awards under the plan consistent with the
method prescribed by FASB Statement No. 123, net loss and losses per share would
have been adjusted to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
<S> <C> <C>
Net loss As reported $(573,335)
Pro forma $(641,150)
Losses per share As reported $(0.65)
Pro forma $(0.73)
Losses per share - As reported $(0.65)
assuming dilution Pro forma $(0.73)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
-----------
<S> <C>
Dividend yield -
Expected life 5 years
Expected volatility 0.01%
Risk-free interest rate 6.43%
</TABLE>
69
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company has entered into off-balance-sheet
financial instruments which are not reflected in the financial statements. These
financial instruments include commitments to extend credit and standby letters
of credit. Such financial instruments are included in the financial statements
when funds are disbursed or the instruments become payable. These instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. A summary of the Company's commitments is as follows:
<TABLE>
<CAPTION>
December 31
1999
-------------
<S> <C>
Letters of credit $ 78,000
Commitments to extend credit 4,974,000
----------
$5,052,000
==========
</TABLE>
Commitments to extend credit generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
credit risk involved in issuing these financial instruments is essentially the
same as that involved in extending loans to customers. The Company evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the customer. Collateral
held varies but may include real estate and improvements, marketable securities,
accounts receivable, inventory, equipment, and personal property.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. Collateral held varies as
specified above and is required in instances which the Company deems necessary.
70
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management of the Company, any liability
resulting from such proceedings would not have a material effect on the
Company's financial statements.
NOTE 11. CONCENTRATIONS OF CREDIT
The Company originates primarily commercial, residential, and consumer loans to
customers in Hall County and surrounding counties. The ability of the majority
of the Company's customers to honor their contractual loan obligations is
dependent on the economy in these areas.
Forty-one percent of the Company's loan portfolio is concentrated in loans
secured by real estate, of which a substantial portion is secured by real estate
in the Company's primary market area. Accordingly, the ultimate collectibility
of the loan portfolio is susceptible to changes in market conditions in the
Company's primary market area. The other significant concentrations of credit by
type of loan are set forth in Note 3.
The Company, as a matter of policy, does not generally extend credit to any
single borrower or group of related borrowers in excess of 25% of the lesser of
statutory capital or net assets as defined, or approximately $1,860,000.
NOTE 12. REGULATORY MATTERS
The Bank is subject to certain restrictions on the amount of dividends that may
be declared without prior regulatory approval. At December 31, 1999, no
dividends could be declared without regulatory approval.
71
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. REGULATORY MATTERS (Continued)
The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and Bank
must meet specific capital guidelines that involve quantitative measures of the
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Prompt corrective provisions are not applicable
to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Bank to maintain minimum amounts and ratios of Total and
Tier I capital to risk-weighted assets and of Tier I capital to average assets.
Management believes, as of December 31, 1999, the Company and Bank met all
capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
--------------- -------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
-------- -------- -------- ------ ------- ------
(Dollars in Thousands)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999:
Total Capital to Risk
Weighted Assets:
Consolidated $7,886 36.02% $ 1,751 8% $ N/A N/A
Bank $7,701 35.18% $ 1,751 8% $ 2,189 10%
Tier I Capital to Risk
Weighted Assets:
Consolidated $7,621 34.81% $ 876 4% $ N/A N/A
Bank $7,436 33.97% $ 876 4% $ 1,313 6%
Tier I Capital to
Average Assets:
Consolidated $7,621 26.60% $ 1,146 4% $ N/A N/A
Bank $7,436 25.95% $ 1,146 4% $ 1,433 5%
</TABLE>
72
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments. In cases where quoted market
prices are not available, fair values are based on estimates using discounted
cash flow models. Those models are significantly affected by the assumptions
used, including the discount rates and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. The use of different methodologies may have a
material effect on the estimated fair value amounts. Also, the fair value
estimates presented herein are based on pertinent information available to
management as of December 31, 1999 and 1998. Such amounts have not been revalued
for purposes of these financial statements since those dates and, therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
Cash, Due From Banks, Interest-Bearing Deposits, and Federal Funds Sold:
The carrying amounts of cash, due from banks, interest-bearing deposits, and
Federal funds sold approximate their fair value.
Securities Available-for-Sale:
Fair values for securities are based on available quoted market prices.
Loans:
For variable-rate loans that reprice frequently and have no significant change
in credit risk, fair values are based on carrying values. For other loans, the
fair values are estimated using discounted cash flow models, using current
market interest rates offered for loans with similar terms to borrowers of
similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow models or based on the fair value of the underlying
collateral.
Deposits:
The carrying amounts of demand deposits, savings deposits, and variable-rate
certificates of deposit approximate their fair values. Fair values for
fixed-rate certificates of deposit are estimated using discounted cash flow
models, using current market interest rates offered on certificates with similar
remaining maturities.
73
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Accrued Interest:
The carrying amounts of accrued interest approximate their fair values.
Off-Balance Sheet Instruments:
The fair values of the Company's off-balance sheet financial instruments
are based on fees charged to enter into similar agreements. However, commitments
to extend credit and standby letters of credit do not represent a significant
value to the Company until such commitments are funded. The Company has
determined that these instruments do not have a distinguishable fair value and
no fair value has been assigned.
The estimated fair values and related carrying amounts of the
Company's financial instruments were as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash, due from banks,
interest-bearing deposits,
and Federal funds sold $ 2,722,588 $ 2,722,588 $7,980,849 $ 7,980,849
Securities available
for sale 7,018,048 7,018,048 - -
Loans 17,241,229 17,100,000 - -
Accrued interest
receivable 209,338 209,338 - -
Financial liabilities:
Deposits 21,744,293 21,793,828 - -
Accrued interest payable 60,149 60,149 - -
</TABLE>
74
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total revenue are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Other operating expenses:
Advertising $ 111,766 $ 4,355
Office supplies 51,498 5,107
Professional and consulting fees 41,739 25,570
Data processing 80,961 -
ATM expense 18,460 -
Printing 42,117 -
</TABLE>
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheets, statements of
operations and cash flows of Southern Heritage Bancorp, Inc., as of and for the
years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
<S> <C> <C>
1999 1998
--------------- -------------
Assets
Cash $ 184,518 $ 3,640
Interest-bearing deposits - 7,977,209
Investment in subsidiary 7,230,823 -
Other assets - 454,782
----------- -------------
Total assets $ 7,415,341 $8,435,631
=========== =============
Liabilities $ - $ 240,888
Stockholders' equity 7,415,341 8,194,743
----------- -------------
Total liabilities and $ 7,415,341 $8,435,631
stockholders' equity
=========== =============
</TABLE>
75
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Interest income $ 5,180 $ 122,226
----------------- -----------------
Expenses
Interest - 40,157
Salaries and employee benefits - 342,913
Other expenses 24,828 156,599
----------------- -----------------
Total expenses 24,828 539,669
----------------- -----------------
Loss before equity in loss of (19,648) (417,443)
subsidiary
Equity in loss of subsidiary (553,687) -
----------------- -----------------
Net loss before cumulative
effect of change
in accounting principle (573,335) (417,443)
Cumulative effect of change
in accounting principle - (63,175)
----------------- -----------------
Net loss $ (573,335) $ (480,618)
================= =================
</TABLE>
76
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998
----------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (573,335) $ (480,618)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities:
Depreciation - 9,107
Write-off of organization cost - 27,555
Equity in loss of subsidiary 553,687 -
Other operating activities 213,894 76,467
----------------- ---------------
Net cash provided by (used 194,246 (367,489)
in) operating activities
----------------- ---------------
INVESTING ACTIVITIES
Purchase of building and
equipment - (170,840)
(Increase) decrease in 7,977,209 (7,977,209)
interest-bearing deposits
Investment in subsidiary (7,990,577) -
----------------- ---------------
Net cash used in investing (13,368) (8,148,049)
activities
----------------- ---------------
FINANCING ACTIVITIES
Proceeds from line of credit - 622,539
Repayment of line of credit - (849,954)
Proceeds from sale of common stock - 8,783,440
Stock issue costs - (49,490)
----------------- ---------------
Net cash provided by financing - 8,506,535
activities
----------------- ---------------
Net increase (decrease) in
cash 180,878 (9,003)
Cash at beginning of year 3,640 12,643
----------------- ---------------
Cash at end of year $ 184,518 $ 3,640
================= ===============
</TABLE>
77
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION ENTRACTED FROM THE
FINANCIAL STATEMENTS OF TEH COMPANY FOR THE FISCAL YEAR ENDED 12/31/99 FILED
ON FORM 10-KSB, AND IS QUALIFEID IN ITS ENTIRETY BY REFERENCE TO SUCH FIANNCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001056238
<NAME> SOUTHERN HERITAGE BANCORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,517
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,205
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,018
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 17,506
<ALLOWANCE> 265
<TOTAL-ASSETS> 29,453
<DEPOSITS> 21,744
<SHORT-TERM> 0
<LIABILITIES-OTHER> 294
<LONG-TERM> 0
0
0
<COMMON> 4,392
<OTHER-SE> 3,024
<TOTAL-LIABILITIES-AND-EQUITY> 29,453
<INTEREST-LOAN> 952
<INTEREST-INVEST> 239
<INTEREST-OTHER> 388
<INTEREST-TOTAL> 1,579
<INTEREST-DEPOSIT> 622
<INTEREST-EXPENSE> 622
<INTEREST-INCOME-NET> 957
<LOAN-LOSSES> 265
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,345
<INCOME-PRETAX> (573)
<INCOME-PRE-EXTRAORDINARY> (573)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (573)
<EPS-BASIC> (.65)
<EPS-DILUTED> (.65)
<YIELD-ACTUAL> 4.58
<LOANS-NON> 5
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 265
<ALLOWANCE-DOMESTIC> 265
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 265
</TABLE>
