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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
--- SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended December 31, 1997.
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-13153
HABERSHAM BANCORP
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(Exact name of small business issuer as specified in its charter)
Georgia 58-1563165
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Highway 441 North, P. O. Box 1980, Cornelia, Georgia 30531
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 778-1000
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $1.00 par value
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 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 disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained herein, 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
-----
State the issuer's revenues for its most recent fiscal year: $35,018,418
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State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock as of a specified date within the past 60
days:
1,435,353 Shares of Common Stock, $1.00 par value--$29,424,737 as of March 6,
1998 (based upon market value of $20.50/share).
State the number of shares outstanding of each of the issuer's classes of common
equity stock, as of December 31, 1997, covered by this report.
Common Stock, $1.00 par value--2,408,517 shares,
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Company's Annual Report to Shareholders for the year ended
December 31, 1997 (the "Annual Report") are incorporated by reference into Part
II.
(2) Portions of the Company's Proxy Statement relating to the 1998 Annual
Meeting of Shareholders (the "Proxy Statement") are incorporated by reference
into Part III.
PART I
Item 1. BUSINESS.
BUSINESS OF THE COMPANY
Habersham Bancorp (the "Company"), a Georgia corporation, was organized on
March 9, 1984. Effective December 31, 1984, the Company acquired all of the
outstanding shares of common stock of Habersham Bank ("Habersham Bank"). As a
result of this transaction, the former shareholders of Habersham Bank became
shareholders of the Company, and the Bank became the wholly-owned subsidiary of
the Company. Effective June 30, 1995, the Company consummated its acquisition of
Security Bancorp, Inc. ("Security") by agreeing to exchange 612,516 shares of
its common stock and cash of $1,990,269 for the outstanding shares of Security's
common stock in a merger of Security with and into the Company. Currently, the
primary business of the Company is the same as that of Habersham Bank, Security
State Bank ("Security State Bank") and BancMortgage Financial Corp
("BancMorgage"). The Company also has one direct nonbank subsidiary, The
Advantage Group, Inc., and three indirect nonbank subsidiaries, BancMortgage
Financial Corp., Appalachian Travel Service, Inc., and Advantage Insurers, Inc.
(each are subsidiaries of Habersham Bank).
BUSINESS OF THE BANKS
Habersham Bank is a financial institution which was organized under the laws
of the State of Georgia in 1904. Habersham Bank operates a full-service
commercial banking business based in Habersham County, Georgia, providing such
customary banking services as checking and savings accounts, various types of
time deposits, safe deposit facilities and individual retirement accounts. It
also makes secured and unsecured loans and provides other financial services to
its customers. Habersham Bank has a full-time trust officer on staff and offers
a full spectrum of trust services, including trust administration, asset
management services, estate and will probate and administration, and other
services in the area of personal trusts.
Security State Bank is a financial institution which was organized under the
laws of the State of Georgia in 1988. Security State Bank operates a
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full-service commercial banking business based in Cherokee and surrounding
counties in Georgia, providing such customary banking services as checking and
savings accounts, various types of time deposits, safe deposit facilities and
individual retirement accounts. It also makes secured and unsecured loans and
provides other financial services to its customers.
BUSINESS OF THE ADVANTAGE GROUP, INC.
The Advantage Group, Inc. was organized as a wholly-owned nonbank
subsidiary of the Company in 1987. The Advantage Group, Inc. administers the
Company's Kids' Advantage banking program and markets and develops personal
computer software and other services.
BUSINESS OF BANCMORTGAGE FINANCIAL CORP.
BancMortgage Financial Corp. was organized as a wholly-owned nonbank
subsidiary of Habersham Bank in 1996. BancMortgage Financial Corp. is a full
service mortgage and construction lending company located in the northern
Atlanta Metropolitan area. BancMortgage Financial Corp. also does business in
mid-Atlantic states as The Prestwick Mortgage Group and as BancFinancial
Services Corporation. See "Management's Discussion and Analysis or Plan of
Operation -Organization."
BUSINESS OF APPALACHIAN TRAVEL SERVICE, INC.
Appalachian Travel Service, Inc. was acquired as a wholly-owned nonbank
subsidiary of Habersham Bank in 1996. Appalachian Travel Service, Inc. is a full
service travel agency located in Cornelia, Georgia.
BUSINESS OF ADVANTAGE INSURERS, INC.
Advantage Insurers, Inc. was organized as a wholly-owned nonbank subsidiary
of Habersham Bank in 1997. Advantage Insurers, Inc. is a full service insurance
agency located in Cornelia, Georgia.
COMPETITION
The banking industry is highly competitive. Recent legislation, together
with other regulatory changes by the primary regulators of the various financial
institutions and competition from unregulated entities, has resulted in the
elimination of many traditional distinctions between commercial banks, thrift
institutions and other providers of financial services. Consequently,
competition among financial institutions of all types is virtually unlimited
with respect to legal ability and authority to provide most financial services.
Habersham Bank's primary market area consists of Habersham County, Georgia.
Habersham Bank competes principally for all types of loans, deposits and other
financial services with four other commercial banks located in Habersham County,
Georgia. As of December 31, 1997, Habersham Bank was the largest of the
commercial banks located in Habersham County based upon total assets.
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Security State Bank's primary market area consists of Cherokee County,
Georgia. Security State Bank competes principally for all types of loans,
deposits and other financial services with other commercial banks located in
Cherokee County, Georgia.
Habersham Bank and Security State Bank (collectively, the "Banks"), also
compete with other financial institutions located in Habersham and Cherokee
counties and with commercial banks, savings and loan associations and other
financial institutions located outside of Habersham and Cherokee counties. To a
lesser extent, Habersham Bank and Security State Bank compete for loans with
insurance companies, regulated small loan companies, credit unions and certain
governmental agencies.
The Company and its non-bank subsidiaries also compete with numerous other
companies and financial institutions engaged in similar lines of business, such
as other bank holding companies, mortgage companies, mortgage servicers, leasing
companies, insurance companies, companies providing data processing services and
companies providing bank consulting services.
EMPLOYEES
As of December 31, 1997, the Company had 261 full-time equivalent employees.
Neither the Company nor any of its subsidiaries is a party to any collective
bargaining agreement. In the opinion of management, the Company and its
subsidiaries enjoy satisfactory relations with their respective employees.
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SUPERVISION AND REGULATION
The following discussion sets forth the material elements of the
regulatory framework applicable to banks and bank holding companies and provides
certain specific information related to the Company.
GENERAL
The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). As such, the Company
and its non-bank subsidiaries are subject to the supervision, examination, and
reporting requirements of the BHC Act and the regulations of the Federal
Reserve.
The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before: (a) it may acquire direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, the bank holding company will directly or indirectly own or control
more than 5% of the voting shares of the bank; (b) it or any of its
subsidiaries, other than a bank, may acquire all or substantially all of the
assets of any bank; or (c) it may merge or consolidate with any other bank
holding company.
The BHC Act further provides that the Federal Reserve may not approve
any transaction that would result in a monopoly or would be in furtherance of
any combination or conspiracy to monopolize or attempt to monopolize the
business of banking in any section of the United States, or the effect of which
may be substantially to lessen competition or to tend to create a monopoly in
any section of the country, or that in any other manner would be in restraint of
trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. Consideration of financial resources generally focuses on capital
adequacy, which is discussed below.
The BHC Act, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"), which became effective on September 29, 1995,
repealed the prior statutory restrictions on interstate acquisitions of banks by
bank holding companies, such that the Company, and any other bank holding
company located in Georgia may now acquire a bank located in any other state,
and any bank holding company located outside Georgia may lawfully acquire any
Georgia-based bank, regardless of state law to the contrary, in either case
subject to certain deposit-percentage, aging requirements, and other
restrictions. The Interstate Banking Act also generally provides that, as of
June 1, 1997, national and state-chartered banks may now branch interstate
through
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acquisitions of banks in other states. By adopting legislation prior to that
date, a state has the ability either to "opt in" and accelerate the date after
which interstate branching is permissible or "opt out" and prohibit interstate
branching altogether.
In response to the Interstate Banking Act, the Georgia General Assembly
adopted the Georgia Interstate Banking Act, which was effective on July 1, 1995.
The Georgia Interstate Banking Act provides that (i) interstate acquisitions by
institutions located in Georgia will be permitted in states that also allow
national interstate acquisitions and (ii) interstate acquisitions of
institutions located in Georgia will be permitted by institutions in states that
allow national interstate acquisitions.
Additionally, on January 26, 1996, the Georgia General Assembly adopted
the Georgia Interstate Branching Act, which permits Georgia-based banks and bank
holding companies owning or acquiring banks outside of Georgia and all
non-Georgia banks and bank holding companies owning or acquiring banks in
Georgia to merge any lawfully acquired bank into an interstate branch network.
The Georgia Interstate Branching Act also allows banks to establish de novo
branches on a limited basis as of July 1, 1996. Beginning July 1, 1998, the
number of de novo branches that may be established will no longer be limited.
The BHC Act generally prohibits the Company from engaging in activities
other than banking or managing or controlling banks or other permissible
subsidiaries and from acquiring or retaining direct or indirect control of any
company engaged in any activities other than those activities determined by the
Federal Reserve to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. In determining whether a particular
activity is permissible, the Federal Reserve must consider whether the
performance of such an activity reasonably can be expected to produce benefits
to the public, such as greater convenience, increased competition, or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices. For example, factoring accounts receivable, acquiring or
servicing loans, leasing personal property, conducting discount securities
brokerage activities, performing certain data processing services, acting as
agent or broker in selling credit life insurance and certain other types of
insurance in connection with credit transactions, and performing certain
insurance underwriting activities all have been determined by the Federal
Reserve to be permissible activities of bank holding companies. The BHC Act does
not place territorial limitations on permissible non-banking activities of bank
holding companies. Despite prior approval, the Federal Reserve has the power to
order a holding company or its subsidiaries to terminate any activity or to
terminate its ownership or control of any subsidiary when it has reasonable
cause to believe that continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness, or stability of
any bank subsidiary of that bank holding company.
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Each of the bank subsidiaries of the Company is a member of the Federal
Deposit Insurance Corporation (the "FDIC"), and as such, its deposits are
insured by the FDIC to the maximum extent provided by law. Each such subsidiary
is also subject to numerous state and federal statutes and regulations that
affect its business, activities, and operations, and each is supervised and
examined by one or more state or federal bank regulatory agencies.
The FDIC and the Georgia Department of Banking and Finance (the "Georgia
Department") regularly examine the operations of the subsidiary banks and are
given authority to approve or disapprove mergers, consolidations, the
establishment of branches, and similar corporate actions. The FDIC and the
Georgia Department also have the power to prevent the continuance or development
of unsafe or unsound banking practices or other violations of law.
PAYMENT OF DIVIDENDS
The Company is a legal entity separate and distinct from its banking and
other subsidiaries. The principal sources of cash flow of the Company, including
cash flow to pay dividends to its shareholders, are dividends by its subsidiary
banks. There are statutory and regulatory limitations on the payment of
dividends by the subsidiary banks to the Company as well as by the Company to
its shareholders.
If, in the opinion of the federal banking regulator, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
depository institution, could include the payment of dividends), such authority
may require, after notice and hearing, that such institution cease and desist
from such practice. The federal banking agencies have indicated that paying
dividends that deplete a depository institution's capital base to an inadequate
level would be an unsafe and unsound banking practice. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), a depository
institution may not pay any dividend if payment would cause it to become
undercapitalized or if it already is undercapitalized. See "-- Prompt Corrective
Action." Moreover, the federal agencies have issued policy statements that
provide that bank holding companies and insured banks should generally only pay
dividends out of current operating earnings.
Under dividend restrictions imposed under federal and state laws, the
subsidiary banks, without obtaining governmental approvals, could declare
aggregate dividends to the Company of up to $1,390,000 (representing 50% of the
previous year's net income) in 1998.
The payment of dividends by the Company and the subsidiary banks may
also be affected or limited by other factors, such as the requirement to
maintain adequate capital above regulatory guidelines.
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CAPITAL ADEQUACY
The Company and its subsidiary banks are required to comply with the
capital adequacy standards established by the Federal Reserve and the
appropriate federal banking regulator in the case of its banking subsidiaries.
There are two basic measures of capital adequacy for bank holding companies that
have been promulgated by the Federal Reserve: a risk-based measure and a
leverage measure. All applicable capital standards must be satisfied for a bank
holding company to be considered in compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance-sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance-sheet items.
The minimum guideline for the ratio (the "Total Risk-Based Capital
Ratio") of total capital ("Total Capital") to risk-weighted assets (including
certain off-balance-sheet items, such as standby letters of credit) is 8%. At
least half of Total Capital must comprise common stock, minority interests in
the equity accounts of consolidated subsidiaries, noncumulative perpetual
preferred stock, and a limited amount of cumulative perpetual preferred stock,
less goodwill and certain other intangible assets ("Tier 1 Capital"). The
remainder may consist of subordinated debt, other preferred stock, and a limited
amount of loan loss reserves ("Tier 2 Capital"). At December 31, 1997, the
Company's consolidated Total Risk-Based Capital Ratio and its Tier 1 Risk-Based
Capital Ratio (i.e., the ratio of Tier 1 Capital to risk-weighted assets) were
12.88% and 11.83% respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio (the "Leverage Ratio") of Tier 1 Capital to average assets, less goodwill
and certain other intangible assets, of 3% for bank holding companies that meet
certain specified criteria, including having the highest regulatory rating. All
other bank holding companies generally are required to maintain a Leverage Ratio
of at least 3%, plus an additional cushion of 100 to 200 basis points. The
Company's Leverage Ratio at December 31, 1997 was 7.89%. The guidelines also
provide that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant reliance on intangible
assets. Furthermore, the Federal Reserve has indicated that it will consider a
"tangible Tier 1 Capital Leverage Ratio" (deducting all intangibles) and other
indicia of capital strength in evaluating proposals for expansion or new
activities.
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The subsidiary banks are subject to risk-based and leverage capital
requirements adopted by the FDIC, which are substantially similar to those
adopted by the Federal Reserve for bank holding companies.
Each of the subsidiary banks was in compliance with applicable minimum
capital requirements as of December 31, 1997. The Company has not been advised
by any federal banking agency of any specific minimum capital ratio requirement
applicable to it or its subsidiary depository institutions.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including issuance of a capital directive, the termination
of deposit insurance by the FDIC, a prohibition on the taking of brokered
deposits, and certain other restrictions on its business. As described below,
substantial additional restrictions can be imposed upon FDIC-insured depository
institutions that fail to meet applicable capital requirements. See "-- Prompt
Corrective Action."
The federal bank regulators continue to indicate their desire to raise
capital requirements applicable to banking organizations beyond their current
levels. In this regard, the Federal Reserve and the FDIC have, pursuant to
FDICIA, recently adopted final regulations requiring regulators to consider
interest rate risk (when the interest rate sensitivity of an institution's
assets does not match the sensitivity of its liabilities or its
off-balance-sheet position) in the evaluation of a bank's capital adequacy. The
bank regulatory agencies' methodology for evaluating interest rate risk requires
banks with excessive interest rate risk exposure to hold additional amounts of
capital against such exposures.
SUPPORT OF SUBSIDIARY INSTITUTIONS
Under Federal Reserve policy, the Company is expected to act as a source
of financial strength for, and to commit resources to support, each of its
banking subsidiaries. This support may be required at times when, absent such
Federal Reserve policy, the Company may not be inclined to provide it. In
addition, any capital loans by a bank holding company to any of its banking
subsidiaries are subordinate in right of payment to deposits and to certain
other indebtedness of such banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a banking subsidiary will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
Under the Federal Deposit Insurance Act ("FDIA"), a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989, in
connection with (a) the default of a commonly controlled FDIC-insured depository
institution or (b) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in danger of default." "Default"
is defined
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generally as the appointment of a conservator or receiver, and "in danger of
default" is defined generally as the existence of certain conditions indicating
that a default is likely to occur in the absence of regulatory assistance. The
FDIC's claim for damages is superior to claims of shareholders of the insured
depository institution or its holding company, but is subordinate to claims of
depositors, secured creditors, and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institution. The
subsidiary depository institutions of the Company are subject to these
cross-guarantee provisions. As a result, any loss suffered by the FDIC in
respect of these subsidiaries would likely result in assertion of the
cross-guarantee provisions, the assessment of such estimated losses against the
depository institution's banking affiliates, and a potential loss of the
Company's investment in such other subsidiary depository institutions.
PROMPT CORRECTIVE ACTION
FDICIA establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system, which became
effective in December 1992, the federal banking regulators are required to
establish five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and to take certain mandatory supervisory actions, and are
authorized to take other discretionary actions, with respect to institutions in
the three undercapitalized categories, the severity of which will depend upon
the capital category in which the institution is placed. Generally, subject to a
narrow exception, FDICIA requires the banking regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized. The federal
banking agencies have specified by regulation the relevant capital level for
each category.
The capital levels established for each of the categories are as
follows:
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<TABLE>
<CAPTION>
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Total Tier 1 Risk-
Capital Category Tier 1 Capital Risk-Based Capital Based Capital Other
====================================================================================================================
<S> <C> <C> <C> <C>
Well Capitalized 5% or more 10% or more 6% or more Not subject to a
capital directive
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Adequately Capitalized 4% or more 8% or more 4% or more --
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Undercapitalized less than 4% less than 8% less than 4% --
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Significantly less than 3% less than 6% less than 3% --
Undercapitalized
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Critically 2% or less -- -- --
Undercapitalized tangible equity
====================================================================================================================
</TABLE>
For purposes of the regulation, the term "tangible equity" includes core
capital elements counted as Tier 1 Capital for purposes of the risk-based
capital standards, plus the amount of outstanding cumulative perpetual preferred
stock (including related surplus), minus all intangible assets with certain
exceptions. A depository institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
receives an unsatisfactory examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
Under FDICIA, a bank holding company must guarantee that a subsidiary depository
institution meets its capital restoration plan, subject to certain limitations.
The obligation of a controlling holding company under FDICIA to fund a capital
restoration plan is limited to the lesser of 5% of an undercapitalized
subsidiary's assets or the amount required to meet regulatory capital
requirements. An undercapitalized institution is also generally prohibited from
increasing its average total assets, making acquisitions, establishing any
branches, or engaging in any new line of business, except in accordance with an
accepted capital restoration plan or with the approval of the FDIC. In addition,
the appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described below if it determines "that those actions are
necessary to carry out the purpose" of FDICIA.
At December 31, 1997, each subsidiary bank had the requisite capital
levels to qualify as well capitalized.
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FDIC INSURANCE ASSESSMENTS
Pursuant to FDICIA, the FDIC adopted a new risk-based assessment system
for insured depository institutions that takes into account the risks
attributable to different categories and concentrations of assets and
liabilities. The new system, which went into effect on January 1, 1994, assigns
an institution to one of three capital categories: (a) well capitalized; (b)
adequately capitalized; and (c) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. An institution is also
assigned by the FDIC to one of three supervisory subgroups within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds (which may include, if applicable, information provided by the
institution's state supervisor). An institution's insurance assessment rate is
then determined based on the capital category and supervisory category to which
it is assigned. Under the final risk-based assessment system, as well as the
prior transitional system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates for members of both the Bank
Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF") for
the first half of 1995, as they had during 1994, ranged from 23 basis points
(0.23% of deposits) for an institution in the highest category (i.e., "well
capitalized" and "healthy") to 31 basis points (0.31% of deposits) for an
institution in the lowest category (i.e., "undercapitalized" and "substantial
supervisory concern"). These rates were established for both funds to achieve a
designated ratio of reserves to insured deposits (i.e., 1.25%) within a
specified period of time.
Once the designated ratio for the BIF was reached in May 1995, the FDIC
reduced the assessment rate applicable to BIF deposits in two stages, so that,
beginning 1996, the deposit insurance premiums for 92% of all BIF members in the
highest capital and supervisory categories were set at $2,000 per year,
regardless of deposit size. The FDIC elected to retain the existing assessment
rate range of 23 to 31 basis points for SAIF members for the foreseeable future
given the undercapitalized nature of that insurance fund.
Recognizing that the disparity between the SAIF and BIF premium rates
had adverse consequences for SAIF-insured institutions and other banks with SAIF
assessed deposits, including reduced earnings and an impaired ability to raise
funds in capital markets and to attract deposits, in July 1995, the FDIC, the
Treasury Department, and the Office of Thrift Supervision released statements
outlining a proposed plan to recapitalize the SAIF, the principal feature of
which was a special one-time assessment on depository institutions holding
SAIF-insured deposits, which was intended to recapitalize the SAIF at a reserve
ratio of 1.25%. This proposal
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contemplated elimination of the disparity between the assessment rates on BIF
and SAIF deposits following recapitalization of the SAIF.
A variation of this proposal designated the Deposit Insurance Funds Act
of 1996 (the "Funds Act") was enacted by Congress as part of the omnibus budget
legislation and signed into law on September 30, 1996. As directed by the Funds
Act, the FDIC implemented a special one-time assessment of approximately 65.7
basis points (0.657%) on a depository institution's SAIF-insured deposits held
as of March 31, 1995 (or approximately 52.6 basis points on SAIF deposits
acquired by banks in certain qualifying transactions). In addition, the FDIC has
implemented a revision in the SAIF assessment rate schedule that effected, as of
October 1, 1996 (a) a widening in the assessment rate spread among institutions
in the different capital and risk assessment categories, (b) an overall
reduction of the assessment rate range assessable on SAIF deposits of from 0 to
27 basis points, and (c) a special interim assessment rate range for the last
quarter of 1996 of from 18 to 27 basis points on institutions subject to
Financing Corporation ("FICO") assessments. Effective as of January 1, 1997,
assessments to help pay off the $780 million in annual interest payments on the
$8 billion FICO bonds issued in the late 1980s as part of the government rescue
of the thrift industry are imposed on both BIF- and SAIF-insured deposits in
annual amounts presently estimated at 1.29 basis points and 6.44 basis points,
respectively. Beginning in January 2000, BIF- and SAIF- insured institutions
will share the FICO interest costs at equal rates currently estimated 2.43 basis
points.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe and unsound practices, is
in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.
PROPOSED LEGISLATION AND REGULATORY ACTION
New regulations and statutes are regularly proposed that contain
wide-ranging proposals for altering the structures, regulations and competitive
relationships of the nation's financial institutions. It cannot be predicted
whether or what form any proposed regulation or statute will be adopted or the
extent to which the business of the Company may be affected by such regulation
or statute.
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Item 2. PROPERTIES
The Company's principal office is located at Habersham Bank's Central
Habersham office, on Highway 441 North, Cornelia, Georgia. The telephone number
of that office is (706) 778-1000.
Habersham Bank's North Habersham (main) office is located at 201 Washington
Street, Clarkesville, Georgia. The telephone number of that office is (706)
778-1000. Habersham Bank also has three full-service branch offices and one
limited service office for receiving deposits. Its Central Habersham office is
located on Highway 441 North, Cornelia, Georgia, its South Habersham office is
located on Highway 441 By-Pass, Baldwin, Georgia and its Cleveland Office is
located at 575 South Main Street, Cleveland, Georgia. The Hospitality Center is
located at 802 N. Washington Street, Clarkesville, Georgia. Each office has a
24-hour teller machine. Habersham Bank owns its office properties without
encumbrance.
Security State Bank's office is located at 1600 Marietta Highway, Canton,
Georgia, and the telephone number of that office is (770) 479-2111. Security
State Bank has one full service branch office. Its Waleska Office is located at
7265 Reinhardt College Parkway, Waleska, Georgia. Security State Bank owns its
office properties without encumbrance.
The Advantage Group, Inc.'s principal office is located at Habersham Bank's
Central Habersham office, on Highway 441 North, Cornelia, Georgia. The telephone
number of that office is (706) 778-1000.
BancMortgage Financial Corp.'s principal office is located at 990 Hammond
Drive, Suite 1020, Atlanta, Georgia 30328, and the telephone number of that
office is (770) 804-7208. This office is leased.
Appalachian Travel Service, Inc.'s principal office is located at 104 Market
Centre, Cornelia, Georgia, and the telephone number of that office is (706)
778-5777. This office is leased.
Advantage Insurers, Inc. principal office is located at 1080 South Main,
Cornelia, Georgia, and the telephone number of that office is (706) 778-2277.
This office is leased.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property the subject of,
any material pending legal proceedings, other than ordinary routine litigation
incidental to its business, and no such proceedings are known to be contemplated
by governmental authorities.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
<PAGE> 15
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Habersham Bancorp is traded on the NASDAQ Stock Market
("NASDAQ") under the symbol HABC. At December 31, 1997, Habersham Bancorp had
approximately 600 shareholders of record. The following table sets forth the
high and low sale prices of the Company's common stock on a quarterly basis for
the past two fiscal years
<TABLE>
<CAPTION>
1997 High Low
---- ---- ---
<S> <C> <C>
Fourth quarter 22.00 18.50
Third quarter 21.50 19.75
Second quarter 21.50 19.75
First quarter 21.00 17.00
<CAPTION>
1996 High Low
---- ---- ---
<S> <C> <C>
Fourth quarter 17.00 15.00
Third quarter 15.50 14.50
Second quarter 15.25 14.25
First quarter 14.50 13.18
</TABLE>
Cash dividends were paid quarterly at a rate of $.14 per share of common
stock in 1997. Cash dividends were paid quarterly at a rate of $.12 per share of
common stock in 1996.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion sets forth the major factors that affect the
Company's results of operations and financial condition. These comments should
be read in conjunction with the consolidated financial statements and related
notes.
This discussion contains forward-looking statements involving risks and
uncertainties. Results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, risks involving the potential adverse effect of
changes in interest rates and the current interest rate environment, loan losses
and the adequacy of the Company's loan loss allowance, changes in regulation and
legislation, and competition.
ORGANIZATION
Habersham Bancorp owns all of the outstanding stock of Habersham Bank
("Habersham Bank"), Security State Bank ("Security Bank"), and The Advantage
Group, Inc. (collectively the "Company"). Habersham Bank owns all of the
outstanding stock of BancMortgage Financial Corp ("BancMortgage"), Appalachian
Travel Service, Inc. ("Appalachian") and Advantage Insurers, Inc. ("Advantage
Insurers"). The Advantage Group, Inc. is a non-bank subsidiary which engages
in the business of providing certain management consulting advice to depository
institutions. Advantage Insurers, which began operations March 31, 1997, offers
a full line of property, casualty and life insurance products. The Advantage
Group, Inc., Appalachian and Advantage Insurers do not comprise a significant
portion of the financial position, results of operations or cash flows of the
Company. Management's discussion and analysis, which follows, relates primarily
to Habersham Bank, Security Bank and BancMortgage.
15
<PAGE> 16
BancMortgage was organized in 1996 as a full service mortgage and
construction lending company located in the northern Atlanta Metropolitan area.
During the third quarter of 1997, BancMortgage acquired the assets and certain
liabilities of The Prestwick Mortgage Group, a national investment banking and
advisory firm specializing in the brokerage and evaluation of mortgage-related
assets for approximately $60,000. As a result of the acquisition, BancMortgage
does business as The Prestwick Mortgage Group and as BancFinancial Services
Corporation, a full-service wholesale mortgage lender specializing in sub-prime
mortgage loans, in the mid-Atlantic area.
RESULTS OF OPERATIONS
The Company's net income was $2,157,276, $1,907,849 and $2,021,012 for the
years ended December 31, 1997, 1996 and 1995, respectively, with related diluted
earnings per common and common equivalent share of $ .86, $.79 and $.99,
respectively, representing an increase of 8.86% from 1996 to 1997 and a decrease
of 20.2% from 1995 to 1996. The increase in net income for 1997 was primarily
due to the increase in revenue from BancMortgage operations. The decrease in net
income for 1996 from 1995 was primarily due to the expenses incurred to start up
BancMortgage. In addition, higher than planned loan volume was sold to Habersham
Bank by BancMortgage, which resulted no gain being recognized upon sale.
Deferred loan fees on such loans of approximately $500,000 will be recognized in
subsequent periods over the lives of the loans. Net income represents a return
on average equity of 7.48%, 7.16% and 9.39% for 1997, 1996 and 1995,
respectively.
NET INTEREST INCOME
Net interest income is the largest single source of income for the Company.
Management strives to attain a level of earning asset growth while providing a
net yield on earning assets which will cover overhead and other costs and
provide a reasonable return to our shareholders. Net interest income for 1997
was approximately $13.7 million compared to $12.3 million in 1996 and $9.2
million in 1995. Net interest income for 1997 increased approximately $1.4
million or 10.82% when compared to 1996 and increased approximately $3.1 million
or 34.57% when compared to 1995.
Interest income increased approximately $3.6 million or 15.39% in 1997 when
compared to 1996 and increased approximately $6.8 million or 41.14% in 1996 when
compared to 1995. The increase in interest income for 1997 resulted primarily
from an increase of approximately $5.6 million in the loan portfolio. The
increase in interest income for 1996 resulted primarily from the increase in the
loan portfolio of approximately $62.2 million from 1995. Habersham Bank's loan
portfolio decreased approximately $8.6 million from December 31, 1996 to
December 31, 1997 due to the sale of approximately $37 million in residential
mortgages offset by new loans of approximately $28 million. BancMortgage's loan
portfolio increased by approximately $14 million from December 31, 1996 to
December 31, 1997, net of originations of approximately $276 million offset by
sales of approximately $262 million. Average interest rates on loans were
10.03%, 10.47% and 9.81% in 1997, 1996 and 1995, respectively. Yields on
variable rate residential mortgages decreased during 1997 in response to
movements on various indices.
Average interest rates on investment securities were 6.32%, 5.90% and 5.74% in
1997, 1996 and 1995, respectively. Average interest rates on federal funds sold
were 5.80%, 5.66% and 4.75% in 1997, 1996 and 1995, respectively.
The increase in interest expense for 1997 of $2.3 million over 1996
resulted primarily from additional interest expense on increased average
balances of interest bearing deposits of approximately $26 million when
16
<PAGE> 17
compared to 1996 average balances and on increased average Federal Home Loan
Bank advances of approximately $6.2 million when compared to 1996 average
advances. The increase in interest expense for 1996 of $3.6 million over 1995
resulted primarily from additional interest expense on increased average
certificates of deposits of approximately $33.5 million and on increased average
Federal Home Loan Bank advances of approximately $26 million related to the
funding of loans originated by BancMortgage.
The net interest margin of the Company was 4.74% in 1997, 4.96% in 1996 and
4.87% in 1995. By careful management of deposit and loan growth and pricing, the
Company maintains its net interest margin. Net interest margin decreased
primarily due to increases in interest expense paid on FHLB advances, a decrease
in yields on loans, which is partially offset by an increase in yields on
taxable investments and a decrease in interest paid on certificates of deposits.
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE AND AVERAGE YIELDS
EARNED AND RATES PAID
Average assets rose approximately $43.9 million or 16.23% in 1997 and $70.5
million or 35.1% in 1996 over 1995. Average loan balances increased
approximately $47.7 million or 25.30% in 1997 over 1996 and approximately $66.5
million or 54.25% in 1996 over 1995. These increases were offset by decreases in
average balances in investment securities of approximately $8.4 million or
15.93% in 1997 over 1996 and $1.5 million or 2.74% in 1996 over 1995. The
average balance of federal funds sold in 1997 decreased approximately $1 million
or 12.80% when compared to 1996 and increased approximately $629,000 or 8.48% in
1996 when compared to 1995.
The average balance of deposits for 1997 increased by approximately $27.6
million or 13.10% over 1996 and increased by approximately $38.7 million or
22.52% over 1995. The weighted average rate paid was 5.18%, 5.62% and 4.49% in
1997, 1996 and 1995, respectively.
17
<PAGE> 18
The following table sets forth the consolidated average balance sheets for
the Company, average rates earned on interest earning assets, average rates paid
on deposits, interest income and interest expense for each category of interest
earning assets and interest bearing liabilities, and net interest margin. This
information is presented for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1997 1996 1997 1996
AVERAGE AVERAGE YIELD/ YIELD/ INCOME INCOME
BALANCE BALANCE RATES RATES (EXPENSE) (EXPENSE)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest bearing balances
with other banks $ 168,516 $ 279,148 6.66% 6.74% $ 11,217 $ 18,824
Federal funds sold 7,015,000 8,045,000 5.80% 5.66% 406,956 455,733
Investment securities:(3)
Taxable 24,616,892 32,062,428 7.05% 6.16% 1,735,588 1,975,911
Non-taxable 19,842,315 20,821,319 5.37% 5.49% 1,064,947 1,143,088
------------ ------------
Total investment securities 44,459,207 52,883,747
Loans, net (taxable)(1)(2) 236,673,265 188,885,803 10.03% 10.47% 23,743,448 19,773,296
Cash and due from banks 8,948,696 7,038,373
Premises & equipment 7,827,736 5,414,446
Other assets 9,776,640 8,346,113
------------ ------------ ----------- ------------
TOTAL ASSETS $314,869,060 $270,892,630 26,962,156 23,366,852
============ ============ ----------- ------------
LIABILITIES
Money market & NOW $ 44,119,467 $ 37,566,357 3.10% 3.04% (1,366,113) (1,140,686)
Savings accounts 7,790,505 7,639,507 2.78% 2.71% (216,384) (206,935)
Certificates of deposit 161,251,544 141,763,866 5.86% 5.75% (9,454,476) (8,153,533)
Short-term and other
borrowings 36,501,152 30,316,397 6.21% 5.09% (2,268,193) (1,542,481)
Demand deposit accounts 25,026,047 23,626,106
Other liabilities 11,331,058 3,335,003 ----------- ------------
(13,305,166) (11,043,635)
----------- ------------
Shareholders' equity 28,849,287 26,645,394
------------ ------------
TOTAL LIABILITIES & EQUITY $314,869,060 $270,892,630
============ ============
NET INTEREST MARGIN 4.74% 4.96% $13,656,990 $ 12,323,217
=========== ============
</TABLE>
18
<PAGE> 19
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE AND AVERAGE YIELDS
EARNED AND RATES PAID, CONTINUED
<TABLE>
<CAPTION>
1995 1995 1995
AVERAGE YIELD/ INCOME
BALANCE RATES (EXPENSE)
<S> <C> <C> <C>
ASSETS
Interest bearing balances
with other banks $ 847,000 4.52% $ 38,281
Federal funds sold 7,416,000 4.75% 352,521
Investment securities:(3)
Taxable 34,917,011 6.24% 2,180,683
Non-taxable 19,457,262 5.57% 1,083,349
------------
Total investment securities 54,374,273
Loans, net (taxable)(1)(2) 122,451,274 10.54% 12,901,162
Cash and due from banks 5,118,340
Premises & equipment 3,980,079
Other assets 6,195,447
------------ -----------
TOTAL ASSETS $200,382,413 16,555,996
============ -----------
LIABILITIES
Money market & NOW $ 35,706,305 3.02% (1,077,322)
Savings accounts 6,542,031 2.52% (164,639)
Certificates of deposit 108,190,308 5.43% (5,870,005)
Short-term and other
borrowings 4,339,038 6.60% (286,507)
Demand deposit accounts 21,439,056
Other liabilities 2,645,613
-----------
(7,398,473)
-----------
Shareholders' equity 21,520,062
------------
TOTAL LIABILITIES & EQUITY $200,382,413
============
NET INTEREST MARGIN 4.87% $ 9,157,523
===========
</TABLE>
(1) Interest earnings on nonaccrual loans are included in the foregoing
analysis to the extent that such interest earnings had been recorded during
1997, 1996 and 1995.
(2) Loan fees of $264,180 are included in interest income for the year ended
December 31, 1995.
(3) Average yields for available for sale securities are computed using the
historical cost balances. Such yields do not give effect to changes in fair
value that are reflected as a component of shareholders' equity.
19
<PAGE> 20
The following table sets forth a summary of the changes in interest income
and interest expense resulting from changes in volume and rates for the periods
indicated:
<TABLE>
<CAPTION>
1997 AS COMPARED TO 1996 1996 AS COMPARED TO 1995
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
NET RATE(1) VOLUME(1) NET RATE(1) VOLUME(1)
------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST BEARING ASSETS
Interest bearing balances
with other banks $ (7,607) (150) $ (7,457) $ (19,457) $ 6,210 $ (25,667)
Investment securities:
Taxable (240,323) 218,322 (458,645) (825,004) (646,878) (178,126)
Non-taxable (78,141) (24,394) (53,747) 679,971 603,993 75,978
---------- ----------- ---------- ---------- ---------- ----------
Total Investment securities (318,464) 193,928 (512,392) (145,033) (42,885) (102,148)
Federal funds sold (48,777) 9,521 (58,298) 103,212 73,334 29,878
Loans, gross (taxable) 3,970,152 (1,033,195) 5,003,347 6,872,134 (150,065) 7,022,199
---------- ----------- ---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 3,595,304 (829,896) 4,425,200 6,810,856 (113,406) 6,924,262
---------- ----------- ---------- ---------- ---------- ----------
INTEREST BEARING LIABILITIES
Money market & NOW 225,428 26,211 199,217 63,364 7,190 56,174
Savings accounts 9,449 5,357 4,092 42,296 14,640 27,656
Certificates of deposit 1,300,943 180,402 1,120,541 2,283,527 460,483 1,823,044
Short-term and
other borrowings 725,711 410,908 314,803 1,255,975 (458,531) 1,714,506
---------- ----------- ---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 2,261,531 622,878 1,638,653 3,645,162 23,782 3,621,380
---------- ----------- ---------- ---------- ---------- ----------
NET INTEREST INCOME $1,333,773 $(1,452,774) $2,786,547 $3,165,694 $ (137,188) $3,302,882
========== =========== ========== ========== ========== ==========
</TABLE>
1) The changes in interest income and/or expense not due solely to rate or
volume have been allocated to the rate component.
OTHER INCOME AND OTHER EXPENSE
Noninterest income in 1997 increased $5.8 million or 253.77% when compared
to 1996 and increased $906,000 or 66.07% when compared to 1995. These increases
were due primarily to increases in loan fee income of approximately $869,000 and
$476,000 for 1997 and 1996, respectively and gains on sale of loans of
approximately $3.8 million and $335,000 for 1997 and 1996, respectively. These
increases are attributable to the operations of BancMortgage beginning in 1996.
In addition, sales income from Appalachian Travel Services, a business acquired
in 1996, increased approximately $849,000 and $274,000 for 1997 and 1996,
respectively.
Other noninterest expense in 1997 increased by approximately $6.6 million
or 56.53% as compared to 1996 and the 1996 amount increased approximately $3.9
million or 50.21% as compared to 1995. The increase for 1997 was primarily due
to increases of $4,188,043, $639,805 and $895,347 in personnel, occupancy and
other operating expenses, respectively. These increases are the result of
staffing requirements and operating expenses for the new Cleveland Office -
Habersham Bank, the new Waleska Office - Security Bank and new offices for
BancMortgage in Cobb and Fulton counties. BancMortgage also expanded into
Virginia with the acquisition of The Prestwick Group and BancFinancial Services
Corporation. The increase for 1996 was primarily due to the addition of
$1,706,341, $179,399 and $955,001 in personnel, occupancy and other operating
expenses, respectively, related to the start up of BancMortgage.
20
<PAGE> 21
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses is intended to create an adequate
allowance for losses in the loan portfolio at the end of each reporting period.
The provision for loan losses was $422,000 in 1997 as compared to $360,000 in
1996 and $98,043 in 1995. The Company's allowance for loan losses was $2,336,079
at December 31, 1997, which was l.18% of year-end loans and 108.1% of total
nonperforming loans, as compared to $2,261,406 at December 31, 1996, which was
1.09% of year-end loans and 115.7% of total nonperforming loans.
At December 31, 1997, loans over 90 days past due and nonaccrual loans
totaled $2,533,157 or 1.07% of gross outstanding loans as compared to $1,358,801
or .59% of gross outstanding loans at December 31, 1996. The increase for 1997
was primarily due to the addition of two loans totaling approximately $1.1
million having Small Business Administration guarantees between 80% and 85%.
Management is not aware of any loans classified for regulatory purposes as
loss, doubtful, substandard or special mention that have not been disclosed
which 1) represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity or
capital resources, or 2) 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.
Net charge-offs amounted to $347,327 in 1997 representing .18% of average
loans, as compared to $434,382 in 1996, representing .23% of average loans, as
compared to $134,961 in 1995, representing .11% of average loans.
21
<PAGE> 22
The following table summarizes, for each of the years in the five year
period ended December 31, 1997, selected information related to the allowance
for loan losses:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Balance of allowance for loan
losses at beginning of period.. $ 2,261,406 $ 2,335,788 $ 1,744,335 $ 1,601,902 $ 1,703,592
------------ ------------ ------------ ------------ ------------
Balance of allowance of Security
Bank at June 30, 1995 628,371
Loans charged-off:
Commercial, financial &
agricultural (224,976) (183,218) (22,252) (37,146) (250,732)
Real estate - mortgage (142,871) (256,126) (47,110) (17,011)
Installment loans to individuals (145,373) (108,660) (44,242) (49,962) (45,433)
Other (34,390) (23,014) (62,230) (21,025) (80,262)
------------ ------------ ------------ ----------- ------------
Total charged-off loans (547,610) (571,018) (175,834) (125,144) (376,427)
------------ ------------ ------------ ----------- ------------
Recoveries:
Commercial, financial &
agricultural 22,454 32,857 5,566 1,893
Real estate - mortgage 108,247 65,150 1,610 4,772
Installment loans to individuals 61,324 28,760 17,429 15,387 11,917
Other 8,258 9,869 16,268 37,429 13,055
------------ ------------ ------------ ----------- ------------
Total recoveries 200,283 136,636 40,873 59,481 24,972
------------ ------------ ------------ ----------- ------------
Net charge-offs (347,327) (434,382) (134,961) (65,663) (351,455)
Additions to allowance ...... 422,000 360,000 98,043 208,096 249,765
------------ ------------ ------------ ----------- ------------
Balance of allowance for loan
losses at end of period .... $ 2,336,079 $ 2,261,406 $ 2,335,788 $ 1,744,335 $ 1,601,902
============ ============ ============ =========== ============
Average amount of loans ..... $236,673,265 $188,885,803 $122,451,274 $97,723,297 $103,336,660
============ ============ ============ =========== ============
Ratio of net charge-offs during
the period to average loans
outstanding during the period .15% .23% .11% .07% .034%
Ratio of allowance to year-end loans 1.18% 1.09% 1.61% 1.73% 1.54%
</TABLE>
The Company's provision for loan losses is based upon management's
continuing review and evaluation of the loan portfolio and is intended to create
an allowance adequate to absorb losses on loans outstanding as of the end of
each reporting period. For individually significant amounts, management's review
consists of evaluations of the borrowers' strength, value of the related
collateral and other factors. This evaluation is made by classifying loans based
on values assigned to each of the aforementioned variables. These
classifications are assigned by the loan reviewers and are reviewed by the Board
of Directors. Totals by loan classification, along with related historical loss
ratios, are used to determine the allowance required to provide for losses. The
review of groups of loans, which are individually insignificant, is based upon
delinquency status of the group, lending policies and previous collection
experience of each category. The effects of current conditions on specific
industries or classes of borrowers are also considered in determining allowance
for loan loss requirements. Management believes such allowance is adequate to
absorb losses on loans outstanding at December 31, 1997.
22
<PAGE> 23
The risk associated with loans varies with the creditworthiness of the
borrower, the type of loan (consumer, commercial, or real estate) and its
maturity. Cash flows adequate to support a repayment schedule is an element
considered for all types of loans. Real estate loans are impacted by market
conditions regarding the value of the underlying property used as collateral.
Commercial loans are also impacted by the management of the business as well as
economic conditions.
The allocation of allowance for loan losses by loan categories for the
period ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
PERCENT OF LOANS
IN EACH CATEGORY
AMOUNT TO TOTAL LOANS
<S> <C> <C>
Commercial, financial & agricultural $ 720,380 7.9%
Real estate - construction and mortgage 1,133,044 84.0%
Installment loans to individuals 482,655 8.1%
---------- -----
TOTAL $2,336,079 100.0%
========== =====
</TABLE>
LOANS
Loans increased approximately $5.6 million or 2.43%, in 1997 as compared to
1996 and increased approximately $85.4 million or 58.74% in 1996 as compared to
1995. Loans held for sale increased approximately $14.2 million or 60.99% in
1997 when compared to 1996. The Company's remaining loan portfolio decreased
$8.6 million in 1997 due to the sale of approximately $37 million in residential
mortgages which had been originated by BancMortgage and purchased by Habersham
Bank offset by new loans in 1997. Of the 1996 increase approximately $23.2
million is attributable to loans originated by BancMortgage held for sale as of
December 31, 1996, and approximately $67.7 million is attributable to loans
originated by BancMortgage which were sold to Habersham Bank and included in
Habersham Bank's portfolio as of December 31, 1996.
The composition of the Company's loan portfolio changed during 1997 as a
result of a decrease in real estate secured mortgage loans of approximately
$18.5 million or 15.09% as compared to 1996; construction loans increased
approximately $11.7 million or 23.28%, in 1997 as compared to 1996, and
commercial loans decreased $2.4 million or 13.49%, in 1997 as compared to 1996.
The composition of the Company's loan portfolio changed during 1996 due to the
loans originated by BancMortgage and either sold to Habersham Bank or held for
sale as of December 31, 1996. Construction loans increased by approximately
$33.7 million or 204.39%, in 1996 when compared to 1995, commercial loans
increased by approximately $350,000 or 1.94% in 1996 when compared to 1995, and
real estate secured loans increased by approximately $27.2 million in 1996 or
28.27% when compared to 1995.
The amount of loans outstanding at December 31 for each of the last five
years is set forth in the following table according to type of loan and is net
of unamortized loan origination fees and unamortized discounts. The Company had
no foreign loans at December 31 for each of the last five years.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural.. $ 15,824,792 $ 18,292,993 $ 17,945,695 $ 13,653,109 $19,006,561
Real estate - construction ............. 61,965,365 50,263,496 16,512,884 5,564,753 5,112,344
Real estate - mortgage ............... 104,347,783 122,897,806 96,361,817 68,992,708 68,830,196
Installment loans to individuals ..... 16,115,903 15,410,015 14,613,500 12,637,913 11,204,998
------------ ------------ ------------ ------------ ------------
TOTAL............................... $198,253,843 $206,864,310 $145,433,896 $100,848,483 $104,154,099
============ ============ ============ ============ ============
</TABLE>
23
<PAGE> 24
The following table sets forth the maturities and sensitivities of loans at
December 31, 1997 to changes in interest rates.
<TABLE>
<CAPTION>
DUE AFTER
DUE IN ONE THROUGH DUE AFTER
LOAN MATURITY: ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural ............ $11,593,353 $3,262,333 $ 969,106 $15,824,792
Real estate - construction ... 61,206,085 759,280 - 61,965,365
----------- ---------- ---------- ----------
TOTAL ................... $72,799,438 $4,021,613 $ 969,106 $77,790,157
=========== ========== ========== ===========
LOAN INTEREST RATE SENSITIVITY:
Selected loans with:
Predetermined interest rates .. $11,444,327 $3,047,076 $ 969,106 $15,460,509
Floating or adjustable
interest rates ............... 61,355,111 974,537 - 62,329,648
----------- ---------- ---------- -----------
TOTAL $72,799,438 $4,021,613 $ 969,106 $77,790,157
=========== ========== ========= ===========
</TABLE>
NONPERFORMING ASSETS AND PAST DUE LOANS
Nonperforming assets consist of nonaccrual loans, restructured loans and
other real estate owned. Nonperforming assets decreased $285,753 or 6.56% from
December 31, 1996 to December 31, 1997 and increased $890,803 or 25.69% from
December 31, 1995 to December 31, 1996. This increase was primarily due to the
increase in other real estate owned.
The following table sets forth the totals of nonperforming assets, selected
ratios and accruing loans past due 90 days or more at December 31 for each of
the last five years.
<TABLE>
<CAPTION>
NONPERFORMING ASSETS: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Nonaccrual $1,251,157 $ 981,801 $1,022,683 $ 568,822 $ 763,425
Restructured loans 913,753 973,559 1,227,411 1,318,790 1,169,987
Other real estate owned 1,908,094 2,403,397 1,217,860 1,165,954 1,180,431
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $4,073,004 $4,358,757 $3,467,954 $3,053,566 $3,113,843
========== ========== ========== ========== ==========
RATIOS:
Nonperforming loans to total loans 1.09% .95% 1.55% 1.87% 1.86%
Nonperforming assets to total loans
plus other real estate owned 2.04% 2.08% 2.36% 2.99% 2.96%
Allowance to nonperforming assets 57.36% 51.88% 67.35% 57.12% 51.44%
Accruing loans past due 90 days
or more $1,282,000 $ 377,000 $ 258,000 $196,017 $196,864
</TABLE>
Accrual of interest is discontinued when, in management's opinion,
collectibility of such interest is doubtful unless it is both well secured and
in the process of collection. Interest income that would have been recorded on
these nonaccrual, impaired and restructured loans in accordance with their
original terms totaled $289,782, $213,484 and $214,523, respectively, in 1997,
1996 and 1995, compared with interest income recognized of $252,930, $180,780
and $164,015 respectively.
At December 31, 1997, the Company had no significant loans which management
designated as potential problem loans which have not been disclosed above as
nonaccrual or past due loans.
24
<PAGE> 25
The Company had impaired loans of $1,251,157 and $981,801 as of December 31,
1997 and 1996, respectively. No allowance was necessary for such loans under
generally accepted accounting principles. The interest income recognized on such
loans was $165,686 and $84,646 for the years ended December 31, 1997 and 1996,
respectively.
Habersham Bank held a concentration in mortgages for agribusiness purposes
in the poultry industry which totaled approximately $12 million, or
approximately 6.34% of total net loans at December 31, 1997 and which totaled
approximately $16 million, or approximately 8.32% of total net loans at December
31, 1996.
INVESTMENT SECURITIES
The Company has classified all investment securities as either available
for sale or held to maturity depending upon whether the Company has the intent
and ability to hold the investment securities to maturity. The classification of
certain investment securities as available for sale is consistent with the
Company's investment philosophy of maintaining flexibility to manage the
securities portfolio. At December 31, 1997, approximately $33.2 million of
investment securities were classified as available for sale. Approximately
$240,000 of net unrealized gain, net of income taxes, was included in
Shareholders' Equity related to the available for sale investment securities.
The following table sets forth the carrying amounts of investment
securities at December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Investment securities available for sale:
U.S. Treasury $ 201,438 $ 801,003 $ 3,811,579
U.S. Government agencies 20,982,863 21,625,933 26,742,352
States & political subdivisions 11,345,182 8,520,859 9,059,417
Other investments 694,940 680,881 699,961
----------- ----------- -----------
Total $33,224,423 $31,628,676 $40,313,309
=========== =========== ===========
Investment securities held to maturity:
U.S. Treasury $ 199,634
U.S. Government agencies $ 1,351,357 $ 2,187,521 3,407,647
States & political subdivisions 9,954,423 12,122,431 12,545,318
Other investments 99,000 198,000 497,000
----------- ----------- -----------
Total $11,404,780 $14,507,952 $16,649,599
=========== =========== ===========
</TABLE>
In December 1995, in accordance with the "Guide to the Implementation of
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities", the Company reclassified certain
investments with an unamortized cost of $5,569,161 and a market value of
$5,848,273 as available for sale. The reclassification resulted in unrealized
gain of $279,112.
25
<PAGE> 26
THE FOLLOWING TABLE SET FORTH THE MATURITIES OF INVESTMENT SECURITIES AT
DECEMBER 31, 1997 and the related weighted yields of such securities on a tax
equivalent basis (assuming a 34% tax rate).
<TABLE>
<CAPTION>
ONE YEAR 1-5 5-10 AFTER 10
OR LESS YEARS YEARS YEARS
<S> <C> <C> <C> <C>
Investment securities available for sale:
Carrying Value:
U.S. Treasury $ 201,438
U.S. Government agencies $2,295,365 7,088,260 $5,501,379 $6,097,859
States & political subdivisions 1,893,186 4,339,067 2,289,935 2,822,994
Other investments 694,940
Weighted average yields:
U.S. Treasury 6.24%
U.S. Government agencies 5.07% 6.51% 6.44% 7.49%
States & political subdivisions 6.34% 5.65% 5.26% 5.30%
Investment securities held to maturity:
Carrying Value:
U.S. Government agencies $ 323,958 $ 619,343 $ 353,795 $ 54,261
States & political subdivisions 1,781,130 3,689,808 3,775,984 707,501
Other investments 99,000
Weighted average yields:
U.S. Government agencies 5.59% 6.26% 8.33% 10.53%
States & political subdivisions 5.35% 4.89% 4.88% 5.53%
</TABLE>
No securities were held which represent a combined total for one issuer
which is in excess of 10% of the Company's shareholders' equity at December 31,
1997.
DEPOSITS
Average deposits increased approximately $27.6 million and $38.7 million
during 1997 and 1996, respectively.
The following table sets forth the average amount of deposits for each
category which exceeds 10% of average total deposits for the years ended
December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
AVG. AMT AVG. AMT AVG. AMT
OUTSTANDING OUTSTANDING OUTSTANDING
<S> <C> <C> <C>
Interest bearing demand deposits ...... $ 44,119,467 $ 37,566,357 $35,706,305
Nonininterest bearing demand deposits. 25,026,047 23,626,106 21,439,056
Time certificates of deposits ......... 161,251,544 141,763,866 108,190,308
AVG. RATE AVG RATE AVG RATE
Interest bearing demand deposits.... 3.10% 3.04% 3.02%
Noninterest bearing demand deposits . n/a n/a n/a
Time certificates of deposits ....... 5.86% 6.46% 5.43%
</TABLE>
At December 31, 1997, time certificates of deposit of $100,000 or more
totaled $49,827,445. The maturities of all time certificates of deposit over
$100,000 are as follows:
<TABLE>
<S> <C>
3 months or less $ 14,286,540
Over 3 but less than 6 months 9,692,457
Over 6 but not more than 12 months 15,933,719
Over 1 year but not more than 5 years 9,914,729
------------
TOTAL $ 49,827,445
============
</TABLE>
26
<PAGE> 27
OTHER BORROWINGS
Other borrowings decreased approximately $20.4 million during 1997 as
compared with 1996 as a result of repayments to the Federal Home Loan Bank.
Other borrowings increased approximately $44 million during 1996 as compared
with 1995 as a result of borrowings from the Federal Home Loan Bank.
CAPITAL RESOURCES
The Company is 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 Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the
Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notifications from both the
Federal Deposit Insurance Corporation and the Federal Reserve Bank of Atlanta
categorized the Banks as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Banks must
maintain minimum total risk-based, Tier 1 risk-based and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Banks' categories.
The Company's and the Banks' actual capital amounts and ratios as of
December 31, 1997 follows (dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital(to Risk Weighted Assets):
The Company $28,584 12.88% $17,747 8% N/A N/A
Habersham Bank 20,019 11.32% 14,142 8% $17,677 10%
Security Bank 7,235 15.16% 3,819 8% 4,773 10%
Tier I Capital(to Risk Weighted Assets):
The Company $26,248 11.83% $ 8,874 4% N/A N/A
Habersham Bank 18,143 10.26% 7,071 4% $10,606 6%
Security Bank 6,775 14.19% 1,909 4% 2,864 6%
Tier I Capital(to Average Assets):
The Company $26,248 7.89% $13,301 4% N/A N/A
Habersham Bank 18,143 6.57% 11,042 4% $13,803 5%
Security Bank 6,775 12.06% 2,247 4% 2,809 5%
</TABLE>
27
<PAGE> 28
While management believes that the current level of capital is sufficient
for the current and foreseeable needs of the Company, capital needs are
continually evaluated by management.
Treasury stock activity in 1997 consisted of 36,985 shares sold upon
exercise of options at a per share price of $8.33 and 5,207 shares sold under a
dividend reinvestment plan. Treasury stock activity in 1996 consisted of 38,000
shares sold upon exercise of options at a per share price of $7.51. Treasury
stock activity in 1995 consisted of 38,000 shares sold upon exercise of options
at a per share price of $6.78 and 41,447 shares acquired from dissenters upon
the acquisition of Security Bank at a per share price of $6.33.
Cash dividends were paid at a rate of $.035 per share in March, June,
September and December of 1997. Cash dividends were paid at a rate of $.03 per
share in March, June, September and December 1996. Cash dividends were paid at a
rate of $.05 per share in June 1995 and December 1995.
Effective May 15, 1995, the Company declared a 5 for 1 stock split of its
common stock effected in the form of a 400% stock dividend. In addition,
effective April 15, 1995, the Company changed the par value of its common stock
from $2.50 to $1.00 per share and increased the number of authorized shares of
common stock to 10,000,000 shares. All references to share and per share amounts
reflect the split. Also, $875,000 has been retroactively charged to Additional
Paid-in Capital and credited to Common Stock to reflect the stock split and the
change in par value.
Management is not aware of any required regulatory changes, or any
recommendation by any regulatory authority which will have a material effect on
the Company's liquidity, capital or results of operations.
INTEREST RATE SENSITIVITY
The objective of asset and liability management is to manage and measure
the level and volatility of earnings and capital by controlling interest rate
risk. To accomplish this objective, management makes use of interest rate and
income simulation models to do current and dynamic projections of interest
income and equity, as well as more traditional asset and liability management
methods.
The Company's historical performance in various economic climates is
considered by management in making long-term asset and liability decisions for
the Company.
The interest rate sensitivity analysis below has a negative one year gap of
approximately $36.8 million (excess of interest bearing liabilities to earning
assets repricing within one year). However, the Company's experience has shown
that NOW, IMMA and Savings deposits of approximately $53.1 million are not rate
sensitive.
The time period indicated in the table represents the shorter of the time
remaining before the asset or liability either matures or can be repriced. The
principal amounts for each asset and liability are shown in the period in which
it matures or reprices. The rate indicated represents the effective yield. Funds
from loan principal payments and anticipated loan repayments are included in the
period in which they are anticipated to be received. Savings, NOW and IMMA
accounts have been included as subject to repricing within three months.
28
<PAGE> 29
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS
DUE IN DUE AFTER DUE AFTER DUE AFTER DUE AFTER TOTAL
YIELD/ THREE THREE THROUGH SIX THROUGH ONE THROUGH FIVE
EARNING ASSETS: RATE MONTHS SIX MONTHS TWELVE MONTHS FIVE YEARS YEARS
<S> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold 5.80% $ 16,740,000 $ 16,740,000
Investment securities 6.30% 1,831,390 $ 938,817 $ 3,622,432 $15,937,916 $ 22,298,648 44,629,203
Loans 10.03% 113,433,448 24,058,581 26,348,229 32,026,413 39,897,154 235,763,825
----- ------------ ------------ ------------ ----------- ------------ ------------
Total earning assets 9.35% 132,004,838 24,997,398 29,970,661 47,964,329 62,195,802 297,133,028
------------ ------------ ------------ ----------- ------------ ------------
INTEREST BEARING LIABILITIES:
Deposits:
Money Market and NOW 3.10% 45,183,589 45,183,589
Savings 2.78% 7,947,487 7,947,487
Certificates of
Deposit 5.86% 49,075,800 39,957,899 53,626,379 38,807,054 31,220 181,498,352
Short term
borrowings 6.21% 25,029,372 3,000,000 28,029,372
Total interest bearing ------------ ------------ ------------ ------------ ------------ ------------
liabilities 5.33% 127,236,248 $42,957,899 53,626,379 38,807,054 31,220 262,658,800
----- ----------- ------------ ------------ ------------ ------------ ------------
INTEREST RATE SPREAD 4.02%
=====
Excess (deficiency) of earning
assets over (to) interest
bearing liabilities $ 4,768,590 $(17,960,501) $(23,655,718)$ 9,157,275 $ 62,164,582 $ 34,474,228
=========== ============ ============ ============ ============ ============
Cumulative Gap $ 4,768,590 $(13,191,911) $(36,847,629)$(27,690,354) $ 34,474,228
Ratio of cumulative gap to
total cumulative earning assets 3.61% (8.40%) (19.71%) (11.79%) 11.60%
Ratio of earning assets to
interest bearing liabilities 103.75% 92.25% 83.54% 89.46% 113.13%
</TABLE>
Management strives to maintain the ratio of cumulative earning assets to
cumulative interest bearing liabilities within a range of 60% to 140%.
INFLATION
The Company's assets and liabilities are generally monetary in nature.
Therefore, interest rates have a greater impact on the Company's performance
than the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or magnitude as the prices of goods and
services. See "Interest Rate Sensitivity" above.
LIQUIDITY
The Company's liquidity program is designed and intended to provide
guidance in funding the credit and investment activities of the affiliate banks
while at the same time ensuring that the deposit obligations of the affiliate
banks are met on a timely basis. In order to permit active and timely management
of assets and liabilities, these accounts are monitored regularly in regard to
volume, mix and maturity. Habersham Bank's liquidity policy requires a minimum
ratio of 20% of cash and certain short-term investments to net withdrawable
deposit accounts and Security Bank's liquidity policy requires a minimum of 25%.
The following table lists the liquidity ratios for the Banks.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Habersham Bank 30.64% 21.83%
Security Bank 25.51% 26.84%
</TABLE>
The approval of the Georgia Department of Banking and Finance is required
29
<PAGE> 30
if dividends declared by the Banks to the Company in any year will exceed 50% of
the net income of the Banks for the previous calendar year. As of December 31,
the Banks could declare dividends to the Company up to approximately $1,390,000
without regulatory approval.
ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125
was amended by SFAS No. 127, which defers the effective date of certain
provisions of SFAS No. 125 until January 1, 1998. This statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Effective January 1, 1997, the Company adopted the provisions of
SFAS No. 125 on a prospective basis. The impact of SFAS No. 125 on the Company's
consolidated financial statements was not material.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 requires all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed in equal prominence with the
other financial statements. The term "comprehensive income" is used in the
statement to describe the total of all components of comprehensive income
including net income. "Other comprehensive income" refers to revenues, expenses,
gains and losses that are included in comprehensive income but excluded from
earnings under current accounting standards. Currently, other comprehensive
income for the Company consists of items previously recorded directly in equity
under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 130 is effective for financial statements for years
beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14 and
establishes new standards for the disclosures made by public business
enterprises to report information about operating segments in annual financial
statements and requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for statements
for years beginning after December 15, 1997.
YEAR 2000
The Company recognizes that there is a business risk in computerized
systems as the calendar nears the next century. The Federal Financial
Institutions Examination Council ("FFIEC") issued an interagency statement on
May 5, 1997, providing an outline for institutions to effectively manage the
Year 2000 challenges. The Company has developed an ongoing Action Plan designed
to ensure that its operational and financial systems will not be adversely
affected by software failures due to processing errors arising from calculations
using the year 2000 date. The Company has formed a Year 2000 committee assigned
to this project and the Board of Directors and senior management of the Company
have established year 2000 compliance as a strategic initiative. The Company is
well into the assessment and renovation phases of the project in which all
critical applications are identified, programing issues determined and
vendors/servicers contacted. While the Company believes
30
<PAGE> 31
that it has available resources to assure year 2000 compliance, it is to some
extent dependent on vendor cooperation.
At the present time, the Company expects its most critical application
software vendors to have all systems compliant by June 1998, at which time
testing will commence. Management expects testing to be substantially completed
by December 31, 1998. At this time, the Company has not determined the cost of
making modifications to correct any year 2000 problems; however, equipment and
software expenses are not expected to materially differ from past results. The
Company routinely upgrades and purchases technologically advanced software and
hardware on a continual basis and expects to specifically evaluate and test such
purchases for year 2000 compliance. The Company is also in the process of
addressing any loan relationships it believes could be materially affected by
the year 2000 issue.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) QUARTER ENDED
<TABLE>
<CAPTION>
MARCH 30 JUNE 30 SEPT. 30 DEC. 31
(Dollars in thousands except per share amounts)
<S> <C> <C> <C> <C>
1997:
Interest income .......... $6,487 $6,626 $6,880 $6,969
Net interest income ...... 3,243 3,520 3,499 3,395
Net income ............... 617 523 468 549
Diluted net income per common
and common equivalent share. .25 .21 .19 .21
1996:
Interest income .......... $5,002 $5,295 $6,126 $7,135
Net interest income ...... 2,727 2,863 3,153 3,771
Net income ............... 487 402 378 671
Diluted net income per common
and common equivalent share. .20 .17 .16 .26
</TABLE>
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets of the Company as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders' equity
and cash flows and notes to the consolidated financial statements for each of
the years in the three years period ended December 31, 1997, and the reports
issued thereon by the Company's independent public accountants are attached
hereto as Exhibit 13 and are incorporated herein by reference.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 25, 1997, the Company replaced its existing independent public
accounting firm, Deloitte & Touche LLP ("Deloitte"), with KPMG Peat Marwick LLP.
Neither of Deloitte's reports on the Company's financial statements for the
years ended December 31, 1995 or 1996 contained an adverse opinion or a
disclaimer of opinion or was qualified or modified as to uncertainty, audit
scope or accounting principles. The change of accountants was approved by the
Board of Directors. The Company had no disagreements with Deloitte during any of
the years ended December 31, 1995 or 1996 or during the interim period through
February 25, 1997 (date of dismissal) on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure that
would have caused that firm to make reference to the subject disagreement if it
had not been resolved to Deloitte's satisfaction.
31
<PAGE> 32
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; AND FINANCIAL DISCLOSURE
Information concerning the Company's directors and executive officers
appears in the Proxy Statement under the headings "Election of
Directors-Nominees," and "Compliance with Section 16(a) of the Exchange Act" and
"Executive Officers" and is incorporated by reference herein.
Item l0. EXECUTIVE COMPENSATION
Information concerning the compensation of the Company's management appears
in the Proxy Statement under the headings "Executive Compensation" and "Election
of Directors - Compensation of Directors" and is incorporated by reference
herein.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning beneficial owners of more than 5% of the Company's
Stock and information concerning the Stock owned by the Company's management
appears in the Proxy Statement under the heading "Ownership of Stock" and is
incorporated by reference herein.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
appears in the Proxy Statement under the heading "Certain Transactions" and is
incorporated by reference herein.
PART IV
Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) The registrant submits herewith as exhibits to this report on Form 10-KSB
the exhibits required by Item 601 of Regulation S-K, subject to Rule 12b-32
under the Securities Exchange Act of 1934.
<TABLE>
<CAPTION>
Exhibit No. Document
- ----------- --------
<S> <C>
3.1 Amended and restated Articles of Incorporation of Habersham Bancorp,
as amended. (1)
3.2 By-laws of Habersham Bancorp, as amended as of November 20, 1989 (2)
and as of March 16, 1991. (3)
10.1* Habersham Bancorp Savings Investment Plan, as amended and restated
March 17, 1990, and the related Trust Agreements, as amended March 17,
1990. (2)
10.2* Habersham Bancorp Incentive Stock Option Plan, as amended
February 26, 1994. (4)
10.3* Habersham Bancorp Outside Directors Stock Option Plan. (5)
10.4* Habersham Bancorp 1996 Incentive Stock Option Plan. (6)
10.5* Mortgage Banking Agreement Dated as of January 2, 1996 among Habersham
Bancorp, Habersham Bank, BancMortgage Financial Corp. and Robert S.
Cannon and Anthony L. Watts.
</TABLE>
32
<PAGE> 33
<TABLE>
<S> <C>
13.0 Financial statements and notes thereto contained in the Habersham
Bancorp 1997 Annual Report.
16.0 Change in Accountants. (7)
21.0 Subsidiaries of Habersham Bancorp.
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Deloitte & Touche LLP
24.0 A Power of Attorney is set forth on the signature page to this Form
10-KSB.
27.0 Financial Data Schedule (for SEC use only).
</TABLE>
(1) Incorporated herein by reference to exhibit 3(a) in Amendment No. 1 to
Registrant's Registration Statement on Form S-4 (Regis. No. 33-57915).
(2) Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1989
(File No. 0-13153).
(3) Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1991
(File No. 0-13153).
(4) Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1993
(File No. 0-13153).
(5) Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1994
(File No. 0-13153).
(6) Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1995
(File No. 0-13153).
(7) Incorporated herein by reference to exhibit of same number in the
Registrant's current report on Form 8-K dated March 4, 1997.
(File No. 0-13153).
* Indicates the Registrant's plans, management contracts and compensatory
arrangements.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the year ended
December 31, 1997.
33
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HABERSHAM BANCORP (Registrant)
By: /s/ David D. Stovall Date: March 30, 1998
----------------------- -------------------
Director, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas A. Arrendale, Jr. and David D. Stovall,
and each of them, his attorneys-in-fact, each with full power of substitution,
for him in his name, place and stead, in any and all capacities, to sign any
amendment to this Report on Form 10-KSB, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission and hereby ratifies and confirms all that each of said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas A. Arrendale, Jr Chairman of the Board March 30, 1998
- ---------------------------- and Director
/s/ Thomas A. Arrendale, III Vice Chairman of the Board March 30, 1998
and Director
/s/ David D. Stovall Director, President and March 30, 1998
- ---------------------------- Chief Executive Officer *
/s/ James Holcomb Director March 30, 1998
- ----------------------------
/s/ James A. Stapleton, Jr Director March 30, 1998
- ----------------------------
/s/ C. Kenneth White Director March 30, 1998
- ----------------------------
/s/ Calvin R. Wilbanks Director March 30, 1998
- ----------------------------
</TABLE>
* Principal financial officer, principal executive officer, controller and
principal accounting officer.
34
<PAGE> 35
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document
- ----------- --------
<S> <C>
3.1 Amended and restated Articles of Incorporation of Habersham Bancorp,
as amended. (1)
3.2 By-laws of Habersham Bancorp, as amended as of November 20, 1989 (2)
and as of March 16, 1991 March 16, 1991 (3)
10.1* Habersham Bancorp Savings Investment Plan, as amended and restated
March 17, 1990, and the related Trust Agreements, as amended March 17,
1990 (2)
10.2* Habersham Bancorp Incentive Stock Option Plan, as amended February
26, 1994 (4)
10.3* Habersham Bancorp Outside Directors Stock Plan (5)
10.4* Habersham Bancorp 1996 Incentive Stock Option Plan (6)
10.5* Mortgage Banking Agreement dated as of January 2, 1996 among Habersham
Bancorp, Habersham Bank, BancMortgage Financial Corp., and Robert S.
Cannon and Anthony L. Watts.
13.0 Financial statements and notes thereto contained in the Habersham
Bancorp 1997 Annual Report
16.0 Change in Accountants (7)
21.0 Subsidiaries of Habersham Bancorp
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Deloitte & Touche LLP
24.0 A Power of Attorney is set forth on the signature page to this
Form 10-KSB
27.0 Financial Data Schedule (for SEC use only)
</TABLE>
(1) Incorporated herein by reference to exhibit 3(a) in Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (Regis. No. 33-57915).
(2) Incorporated herein by reference to exhibit of same number in the Registrant
Annual Report on Form 10-K for the year December 31, 1989. (File No. 0-13153).
35
<PAGE> 36
(3) Incorporated herein by reference to exhibit of same number in the Registrant
Annual Report on Form 10-K for the year ended December 31, 1991.(File No.
0-13153).
(4) Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1993.
(File No. 0-13153).
(5) Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1994.
(File No. 0-13153).
(6) Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1995.
(File No. 0-13153).
(7) Incorporated herein by reference to exhibit of same number in the
Registrant's current report on Form 8-K dated March 4, 1997. (File No. 0-13153).
* Indicates the Registrant's plans, management contracts and compensatory
arrangements.
36
<PAGE> 1
EXHIBIT 10.5
MORTGAGE BANKING AGREEMENT
TIES MORTGAGE BANKING AGREEMENT (the "Agreement") is entered into as of
the 2nd day of January, 1996, by and among HABERSHAM BANCORP ("Habersham"), a
Georgia corporation, HABERSHAM BANK (the "Bank"), a bank organized under the
laws of the State of Georgia and a wholly-owned subsidiary of Habersham,
BANCMORTGAGE FINANCIAL CORP. ("BancMortgage"), a Georgia corporation to be a
wholly-owned subsidiary of the Bank, ROBERT S. CANNON ("Cannon") and ANTHONY L.
WATTS ("Watts").
WITNESSETH
WHEREAS, the parties hereto believe it in their respective best interests
to organize a mortgage banking subsidiary of the Bank;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
of the parties to this Agreement, and for other good and valuable consideration,
the parties hereto agree as follows:
1. Capital Structure.
(a) The Bank shall organize a subsidiary Georgia corporation to be
known as "BancMortgage Financial Corp." BancMortgage shall have 10,000,000
authorized shares, of which 200,000 shares shall initially be issued to
the Bank at $10 per share for an aggregate of $2,000,000.
(b) The Bank's initial investment is intended to be a maximum
investment, and any amounts in addition to this initial investment shall
be on such terms and conditions as the parties agree. In the event the
parties agree it is necessary or desirable for the Bank to invest more
than $2,000,000 in BancMortgage, the parties also agree that all of the
terms of this Agreement shall be subject to renegotiation.
(c) No additional shares of BancMortgage shall be issued to any entity
or person other than Habersham or the Bank without first offering such
shares to Cannon and Watts on the same terms and conditions as to any
third party.
2. Directors and Officers.
(a) The Board of Directors (the "Board") of BancMortgage shall consist
of five members unless otherwise agreed by the parties hereto.
(b) The initial Board of BancMortgage shall consist of Edward D.
Ariail, Robert S. Cannon, D. Michael Sleeth, David D. Stovall and Anthony
L. Watts. The
37
<PAGE> 2
initial Executive Committee of the Board and all Board members shall be
chosen by unanimous agreement among Robert S. Cannon, David D. Stovall
and Anthony L. Watts.
(c) The initial officers of BancMortgage shall be as follows: David D.
Stovall as Chairman of the Board, Anthony L. Watts as President and D.
Michael Sleeth as Secretary.
(d) It is the intention of the parties that BancMortgage shall
cooperate with the Bank relative to operations, but that BancMortgage
shall have operating autonomy.
3. Certain Compensation Terms.
(a) Each of Cannon and Watts:
(i) Shall receive an annual base salary of $150,000 paid pursuant
to the normal payroll practices of the Bank.
(H) Shall receive use of a late model luxury automobile,
gasoline, insurance and repairs. Cannon and Watts shall reimburse
BancMortgage for their personal use of such vehicle.
(iii) Shall receive dues, service fees and similar periodic charges
for their country club memberships (Cherokee Town and Country Club for
Watts and Country Club of the South for Cannon), and any service clubs
(such as Rotary International).
(iv) Shall be entitled to participate on the same basis as any
employee of the Bank in the Bank's employee benefit plans.
(v) Shall receive term life insurance at least equal to two times
his base salary to be provided to beneficiaries named by Cannon and
Watts, respectively.
(b) Cannon and Watts shall receive 25 % and 25 %, respectively, of
BancMortgage's net income before taxes. In determining net income before
taxes for this purpose, any loss carryforwards shall not be deducted, and
the determination shall be made in accordance with the business plan (the
"Business Plan") attached hereto and made a part hereof by reference.
(c) Sleeth shall be employed approximately half-time by BancMortgage
and approximately half-time by Habersham, with BancMortgage being charged
for one-half (1/2) of his cash compensation.
(d) In the future, if the parties agree to use servicing,
securitization or similar financial techniques to create value not
otherwise reflected in BancMortgage's net operating income, such value
shall also be divided as set forth in Section 3(b).
38
<PAGE> 3
(e) Determination of BancMortgage's net income before taxes shall be
made as of 11/30 of each calendar year, and the Bank shall make the income
distribution to Watts and Cannon on or before 12/31 of each calendar year.
In the event of a buy-out as described in Section 5 or the termination of
this Agreement, net income before taxes shall be calculated and paid at
the time of the buy-out or the termination.
4. Right of First Refusal to Fund Loans, Agreement to Provide Warehouse Ling,
Performance Criteria.
(a) The Bank shall provide a warehouse line of credit to BancMortgage in
sufficient amounts to meet the reasonable and necessary needs of BancMortgage's
operation at an adjustable rate agreed upon between the parties or if the
parties cannot agree, at the lower of the Federal Home Loan Bank monthly or
daily adjustable rate.
(b) The Bank shall have a right of first refusal to fund all loans
(construction, mortgage and other) originated by BancMortgage, such right to be
exercised in a commercially reasonable time period taking into account
BancMortgage's need to fund and quote rates for mortgage loans.
(c) The Bank and BancMortgage shall create underwriting criteria, policies
and procedures, and all obligations of the Bank to fund or warehouse hereunder
shall be in accordance with such criteria.
(d) The Bank's obligation to fund and the financial performance criteria
shall be at least to the levels set forth in the Business Plan.
5. Buy-Out Arrangements.
(a) Subject to Section 5(d), if the Bank or Habersham should be acquired,
Cannon and Watts shall have the right to acquire BancMortgage at a price equal
to its then book value at the time of acquisition, determined in accordance with
generally accepted accounting principles applicable to the mortgage industry.
(b) Subject to Section 5(d), (i) if the Bank receives a bona fide offer
(including an offer from Cannon/Watts) for the acquisition of BancMortgage which
it wishes to accept, the Bank shall afford Cannon and Watts a right of first
refusal to acquire BancMortgage for the same price and on the same terms as are
offered by the proposed purchaser; or (ii) if Cannon and Watts agree that the
Bank should accept the offer to acquire BancMortgage, then the total purchase
price paid for BancMortgage shall be distributed to the Bank and to Cannon/Watts
as follows: the total purchase price shall be reduced by the amount of the
Bank's total investment in BancMortgage (its original investment of $2,000,000
plus any additional investment made by the Bank), and 50% of the resulting
amount shall be paid to the Bank, and 25% of the resulting amount shall be paid
to each of Cannon and Watts.
39
<PAGE> 4
(c) Subject to Section 5(d), if the Bank should decide to discontinue the
business engaged in by BancMortgage, Cannon and Watts shall have a right of
first refusal to acquire BancMortgage for a price equal to its then book value
at the time of exercise, determined in accordance with generally accepted
accounting principles applicable to the mortgage industry.
(d) In the event one of the foregoing rights is triggered, the Bank shall
offer to sell BancMortgage to both Cannon and Watts, or to either Cannon or
Watts, as may be agreed upon by Cannon and Watts. If Cannon and Watts cannot
agree, the right of first refusal shall terminate. Cannon and Watts must
exercise their right to purchase within ninety (90) days after notice from the
Bank. They shall have up to an additional nine (9) months to close during which
time the Bank shall continue to perform its obligations hereunder. This
nine-month time period is to give Cannon/Watts sufficient time to conclude
negotiations with another partner.
6. Habersham Stock Options.
(a) Subject to approval by the Board of Directors of Habersham, Cannon and
Watts shall each be granted a one-time fully vested stock option to purchase
15,000 shares of Habersham common stock at an exercise price equal to the median
price between the bid and asked prices of such stock on the date of grant,
exercisable in whole or in part for a five year period from date of grant, all
in accordance with the terms of Habersham's Incentive Stock Option Plan.
(b) Cannon and Watts shall each be granted such other options to purchase
shares of Habersham common stock in accordance with such performance criteria as
the parties may from time to time establish.
7. Interim Operations.
(a) The parties recognize that it is to their mutual advantage to commence
BancMortgage's business as soon as practically possible and that Cannon/Watts
have already expended sums and shall continue to expend sums in reliance on
these negotiations.
(b) Accordingly, BancMortgage agrees to promptly reimburse Cannon/Watts
for the reasonable and necessary expenses they have incurred since 12/10/95 to
create BancMortgage, begin hiring employees, obtain space and otherwise to enter
into this Agreement. Further, commencing 1/2/96, BancMortgage shall promptly pay
all such expenses directly or advance the funds to pay such expenses.
8. Good Faith, Authority. Each of the parties hereto agrees to negotiate
in good faith as necessary and to consummate the transactions contemplated
herein. Each party represents to the other that it has authority to enter into
this Agreement and to pay the consideration provided herein, that it is able to
complete the transactions contemplated hereby, and that as of the date hereof it
does not know of any impediments (legal or otherwise) to the consummation of the
transactions as contemplated hereby.
40
<PAGE> 5
9. Cooperation. Each of the parties hereto agrees to cooperate in
obtaining all necessary regulatory approvals for the transactions contemplated
herein.
10. Confidentiality. The parties hereto shall each maintain the
confidentiality of all of the information received from the other party and
shall use such information only for the purposes contemplated by this Agreement
and for no other purpose. If the transactions contemplated in this Agreement are
not consummated for any reason, the parties shall promptly return to each other
all documents and other written information received from the other party and
shall not retain any copies or summaries thereof. This Section 10 shall survive
the termination of this Agreement.
11. Public Announcements. Each party agrees to consult with each other
prior to any public announcement relating to this transaction and shall mutually
approve the timing, the content and dissemination of any public announcement
except to the extent that such party is not reasonably able to consult in a
timely manner with, or obtain the approval of, the other party in situations in
which disclosures are required by applicable law.
12. Time of the Essence. Time is of the essence of this Agreement and each
and an of its provisions.
13. Laws Governing. This Agreement shall be governed by and construed
pursuant to the laws of the State of Georgia.
14. Modification and Waiver. Any term or condition of this Agreement may
be waived at any time by the party hereto which is entitled to the benefit of
such term or condition. Any waiver on one occasion shall not be deemed to be a
waiver of the same or of any other term or condition on any future occasion.
This Agreement may be modified or amended only by a writing signed by all of the
parties hereto.
15. Counterparts and Headings. This Agreement may be executed
simultaneously in any number of counterparts, each of which shall be deemed an
original, but all of which shall constitute one and the same instrument. The
headings set out in this Agreement are for convenience of reference only and
shall not be deemed to be a part of this Agreement.
41
<PAGE> 6
IN WITNESS WHEREOF, Cannon and Watts have executed this Agreement, and
Habersham, the Bank and BancMortgage have caused this Agreement to be executed
by their respective appropriate officers, under seal, all as of the date and
year first above written.
HABERSHAM BANCORP BANCMORTGAGE FINANCIAL CORP.
By:/s/ David D. Stovall By:/s/ David D. Stovall
------------------------------ -----------------------------------
David D. Stovall David D. Stovall
President Chairman of the Board
[CORPORATE SEAL] [CORPORATE SEAL]
/s/ Robert S. Cannon (SEAL)
--------------------------------
HABERSHAM BANK Robert S. Cannon
By:/s/ David D. Stovall /s/ Anthony L. Watts (SEAL)
------------------------------ --------------------------------
David D. Stovall Anthony L. Watts
President
[BANK SEAL]
42
<PAGE> 1
EXHIBIT 13
43
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Habersham Bancorp:
We have audited the accompanying consolidated balance sheet of Habersham Bancorp
and subsidiaries as of December 31, 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The consolidated financial
statements of the Company for the years ended December 31, 1996 and 1995 were
audited by other auditors whose report, dated January 17, 1997, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1997 consolidated financial statements present fairly, in
all material respects, the financial position of Habersham Bancorp and
subsidiaries at December 31, 1997, and the results of their operations and their
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
January 30, 1998
44
<PAGE> 3
HABERSHAM BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks (note 4) $ 13,067,675 $ 9,122,563
Federal funds sold 16,740,000 6,590,000
Investment securities available for sale (note 5) 33,224,423 31,628,676
Investment securities held to maturity (estimated
fair values of $11,606,286 in 1997 and
$14,564,709 in 1996)(note 6) 11,404,780 14,507,952
Other investments 2,168,134 4,255,992
Loans held for sale (note 9) 37,509,982 23,299,195
Loans (notes 7, 9 and 15) 198,212,466 206,832,633
Less allowance for loan losses (note 7) (2,336,079) (2,261,406)
------------ ------------
Loans, net 195,876,387 204,571,227
------------ ------------
Premises and equipment, net (note 8) 8,594,292 6,294,533
Accrued interest receivable 2,347,671 2,250,498
Goodwill and other intangible assets, net of accumulated
amortization of $585,900 in 1997 and $331,495
in 1996) - (note 3) 3,583,608 3,402,684
Other assets 3,680,133 4,087,667
------------ ------------
TOTAL ASSETS $328,197,085 $310,010,987
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (notes 9 and 15):
Noninterest-bearing demand $ 27,035,571 $ 23,192,377
Money market and NOW accounts 45,183,589 39,401,692
Savings 7,947,487 6,930,811
Time ($100,000 and over) 49,827,445 31,941,517
Other time 131,670,907 122,895,101
------------ ------------
Total deposits 261,664,999 224,361,498
Short-term borrowings (note 9) 2,627,380 502,056
Federal Home Loan Bank advances (note 9) 25,401,992 47,909,217
Accrued interest payable 2,817,810 2,808,420
Other liabilities 5,540,565 6,761,007
------------ ------------
TOTAL LIABILITIES 298,052,746 282,342,198
------------ ------------
Shareholders' Equity (notes 11 and 12): Common stock, $1.00 par value;
10,000,000 shares authorized; 2,408,517 and 2,403,974 shares issued
in 1997 and 1996, respectively 2,408,517 2,403,974
Additional paid-in capital 9,109,026 8,897,758
Retained earnings 18,386,350 16,560,893
Net unrealized gain on investment securities
available for sale, net of deferred income taxes 240,446 56,511
Treasury stock, at cost (42,192 shares at
December 31, 1996) - (250,347)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 30,144,339 27,668,789
Commitments (notes 7,8,12 and 15)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $328,197,085 $310,010,987
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE> 4
HABERSHAM BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans $23,743,448 $19,773,296 $12,901,162
Investments:
U.S. Treasury and Government agencies 1,349,570 1,763,320 2,044,608
States and political subdivisions
(exempt from Federal income tax) 1,064,947 1,143,088 1,083,349
Other investment securities 397,235 231,415 174,356
Federal funds sold 406,956 455,733 352,521
----------- ----------- -----------
TOTAL INTEREST INCOME 26,962,156 23,366,852 16,555,996
----------- ----------- -----------
INTEREST EXPENSE
Time deposits, $100,000 and over 2,144,502 1,819,962 1,272,056
Other deposits 8,892,471 7,681,191 5,839,910
Short-term and other borrowings,
primarily FHLB advances 2,268,193 1,542,482 286,507
----------- ----------- -----------
TOTAL INTEREST EXPENSE 13,305,166 11,043,635 7,398,473
----------- ----------- -----------
NET INTEREST INCOME 13,656,990 12,323,217 9,157,523
Provision for loan losses (note 7) 422,000 360,000 98,043
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 13,234,990 11,963,217 9,059,480
----------- ----------- -----------
NONINTEREST INCOME
Gain on sale of loans 4,107,804 334,636 -
Loan fee income 1,363,160 475,964 -
Service charges on deposit accounts 672,223 649,586 536,891
Other service charges and commissions 216,013 201,064 207,287
Securities (losses) gains, net (note 5) (12,972) (4,134) 76,842
Travel service income 1,123,785 274,610 -
Other income 586,249 345,561 550,269
----------- ----------- -----------
TOTAL NONINTEREST INCOME 8,056,262 2,277,287 1,371,289
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits (note 12) 10,702,002 6,513,959 3,781,345
Occupancy expenses 2,133,520 1,493,715 966,549
Travel service expense 1,031,194 247,561 -
Computer services 418,624 275,995 217,626
Other (Note 13) 4,126,433 3,231,086 2,864,847
----------- ----------- -----------
TOTAL NONINTEREST EXPENSE 18,411,773 11,762,316 7,830,367
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,879,479 2,478,188 2,600,402
Provision for income taxes (note 10) 722,203 570,339 579,390
----------- ----------- -----------
NET INCOME $ 2,157,276 $ 1,907,849 $ 2,021,012
=========== =========== ===========
NET INCOME PER COMMON SHARE - BASIC $ .91 $ .82 $ 1.02
=========== =========== ===========
NET INCOME PER COMMON SHARE - DILUTED $ .86 $ .79 $ .99
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC 2,370,423 2,326,704 1,988,246
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - DILUTED 2,497,993 2,411,687 2,032,567
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE> 5
HABERSHAM BANCORP AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
UNREALIZED GAIN (LOSS)
ON INVESTMENT SECURITIES
ADDITIONAL AVAILABLE FOR SALE
COMMON PAID-IN RETAINED NET OF DEFERRED TREASURY
STOCK CAPITAL EARNINGS INCOME TAXES STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $1,750,000 $2,446,028 $13,110,034 $(1,013,344) $ (442,131) $ 15,850,587
Net income 2,021,012 2,021,012
Cash dividends, $.10 per share (199,011) (199,011)
Sale of 38,000 shares of
treasury stock upon exercise
of stock options 28,904 228,820 257,724
Acquisition of Security Bancorp,
Inc., including 41,447 shares
of treasury stock (note 3) 653,974 6,362,692 - - (262,490) 6,754,176
Unrealized gain on investment
securities available for
sale, net of deferred income
taxes - - - 1,220,981 - 1,220,981
---------- ---------- ----------- ----------- ---------- ------------
Balance at December 31, 1995 2,403,974 8,837,624 14,932,035 207,637 (475,801) 25,905,469
Net income 1,907,849 1,907,849
Cash dividends, $.12 per share (278,991) (278,991)
Sale of 38,000 shares of
treasury stock upon exercise
of stock options 60,134 225,454 285,588
Unrealized loss on investment
securities available for
sale, net of deferred income
taxes - - - (151,126) - (151,126)
---------- ---------- ----------- ----------- ---------- ------------
Balance at December 31, 1996 2,403,974 8,897,758 16,560,893 56,511 (250,347) 27,668,789
Net income 2,157,276 2,157,276
Cash dividends, $.14 per share (331,819) (331,819)
Issuance of 42,192 shares of
treasury stock upon exercise
of stock options and dividend
reinvestment 177,968 250,347 428,315
Unrealized gain on investment
securities available for
sale, net of deferred income
taxes 183,935 183,935
Issuance of common stock
upon exercise of stock
options 4,543 33,300 - - - 37,843
---------- ---------- ----------- ----------- ---------- ------------
Balance at December 31, 1997 $2,408,517 $9,109,026 $18,386,350 $ 240,446 - $ 30,144,339
========== ========== =========== =========== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE> 6
HABERSHAM BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,157,276 $ 1,907,849 $ 2,021,012
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Provision for loan losses 422,000 360,000 98,043
Provision for ORE losses 56,672 35,036 217,000
Provision for depreciation 1,027,786 714,665 497,804
(Gain) loss on sale of premises and equipment (491) - -
Loss (gain) on sale of securities and other
investments 21,531 4,134 (76,842)
Gain on sale of other real estate (23,314) - -
Net gain on sale of loans (4,107,804) (334,637) -
Amortization of intangible assets 254,405 226,183 108,251
Deferred income tax expense (benefit) 160,853 (249,205) (158,663)
Proceeds from sale of loans held for sale 265,100,688 101,715,905 -
Net increase in loans held for sale (275,754,463) (124,738,195) -
Changes in assets and liabilities, net of effects
of purchase of Security Bancorp, Inc.:
Increase in interest receivable (97,173) (235,258) (668,298)
(Increase) decrease in other assets (357,410) (533,117) 190,255
Increase in interest payable 9,390 431,042 1,377,276
(Decrease) increase in other liabilities (1,220,442) 5,583,003 ( 474,021)
------------ ------------- ------------
Net cash (used in) provided by operating activities (12,350,496) (15,112,595) 3,131,817
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from maturity 10,375,214 12,939,548 4,396,036
Proceeds from sale 7,054,085 5,354,342 7,263,903
Purchases (18,758,632) (9,842,371) (10,894,483)
Investment securities held to maturity:
Proceeds from maturity 4,114,174 7,601,838 4,524,864
Purchases (1,011,002) (5,460,191) (5,381,720)
Other investments:
Proceeds from sale 3,881,999 751,800 -
Purchases (1,802,700) (4,159,200) -
Business acquisitions (435,329) - -
Loans:
Proceeds from sale of loans 36,629,843 16,302,265 -
Net increase in loans (28,122,952) (80,012,163) (12,372,090)
Purchases of premises and equipment (3,355,415) (2,105,824) (248,155)
Proceeds from sales of premises and equipment 28,361 - -
Net additions of other real estate (7,610) (70,339) -
Proceeds from sale of other real estate 799,633 740,208 226,269
Cash and cash equivalents acquired upon acquisition of
Security Bancorp, Inc., net of cash payments - - 3,219,000
------------ ------------- ------------
Net cash provided by (used in)investing activities 9,389,669 (57,960,087) (9,266,376)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 37,303,501 $29,276,169 $14,197,882
Net increase (decrease) in short-term borrowings 2,125,324 (1,094,545) 594,859
(Repayment) proceeds from Federal Home
Loan Bank advances, net (22,507,225) 44,209,217 2,200,000
Cash dividends (331,819) (278,991) (199,011)
Issuance of treasury stock 428,315 285,588 257,724
Issuance of common stock 37,843 - -
------------ ------------- ----------
Net cash provided by financing activities 17,055,939 72,397,438 17,051,454
------------ ------------- ----------
Increase (decrease) in cash and cash equivalents 14,095,112 (675,244) 10,916,895
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,712,563 16,387,807 5,470,912
------------ ------------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 29,807,675 $15,712,563 $16,387,807
============ ============= ===========
</TABLE>
48
<PAGE> 7
HABERSHAM BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $13,295,776 $10,612,593 $6,208,061
Income taxes 735,000 924,000 634,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Other real estate acquired through loan foreclosures $ 599,016 $ 1,904,871 $ 280,277
Loans granted to facilitate the sale of other
real estate 282,275 14,091 16,000
Unrealized gain (loss) on investment securities
available for sale, net of tax effect 183,935 (151,126) 1,220,981
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE> 8
HABERSHAM BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements of Habersham Bancorp and subsidiaries (the
"Company") include the financial statements of Habersham Bancorp and its wholly
owned subsidiaries Habersham Bank ("Habersham Bank") and its wholly owned
subsidiaries BancMortgage Financial Corp. ("BancMortgage"), Advantage Insurers,
Inc., and Appalachian Travel Service, Inc.; Security State Bank ("Security
Bank"); and The Advantage Group, Inc. All intercompany accounts and transactions
have been eliminated in consolidation. Habersham Bank and Security Bank are
collectively referred to herein as the "Banks."
The Company's primary business is the operation of banks in rural and suburban
communities in Habersham and Cherokee counties in Georgia and of a full-service,
single-family mortgage and construction lender located in the north Atlanta
metropolitan area. The Company's primary source of revenue is providing loans to
businesses and individuals in its market area.
USE OF ESTIMATES
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
loan losses and the valuation of other real estate, management obtains
independent appraisals for significant properties. A substantial portion of the
Company's loans is secured by real estate in the Atlanta, Georgia metropolitan
area and in Habersham and Cherokee Counties. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan portfolio is
susceptible to changes in real estate market conditions in these areas.
INTEREST RATE RISK
The Company's assets and liabilities are generally monetary in nature and
interest rates have an impact on the Company's performance. The Company
decreases the effect of interest rates on its performance by striving to match
maturities and interest sensitivity between loans, investment securities,
deposits and other borrowings. However, a significant change in interest rates
could have an effect on the Company's results of operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and with general practice within the banking
industry. The following is a summary of the more significant accounting
policies:
50
<PAGE> 9
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and overnight federal funds sold.
INVESTMENT SECURITIES
The Company classifies certain investments as available for sale. In December
1995, in accordance with the Guide to the Implementation of SFAS No. 115, the
Company reclassified certain investments classified as held to maturity with an
unamortized cost of $5,569,161 and a fair value of $5,848,273, to available for
sale. The reclassification resulted in an unrealized gain of approximately
$279,112.
Investment securities classified as available for sale are carried at fair
value. The related unrealized gain or loss, net of deferred income taxes, is
included as a separate component of shareholders' equity. Gains and losses from
dispositions are based on the net proceeds and the adjusted carrying amounts of
the securities sold, using the specific identification method.
Investment securities classified as held to maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts. The Company
has the intent and ability to hold these investment securities to maturity.
Purchase premiums and discounts on investment securities are amortized and
accreted to interest income using the level yield method on the outstanding
principal balances, taking into consideration prepayment assumptions.
A decline in the fair value of any security below cost that is deemed other than
temporary is charged to income resulting in the establishment of a new cost
basis for the security.
OTHER INVESTMENTS
Other investments are primarily comprised of stock of the Federal Home Loan Bank
of Atlanta. Investment in stock of a Federal Home Loan Bank is required of every
federally insured institution that utilizes its services. Federal Home Loan Bank
stock is considered restricted stock, as defined in Statement of Financial
Accounting Standards (SFAS) No. 115; accordingly, the provisions of SFAS No. 115
are not applicable to this investment. The Federal Home Loan Bank stock is
reported in the consolidated financial statements at cost. Dividend income is
recognized when earned.
LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of cost or market
determined on an aggregate basis. Market values are determined on the basis of
open purchase commitments from independent buyers for committed loans. For
uncommitted loans, market is determined on the basis of current delivery prices
in the secondary mortgage market. At December 31, 1997 and 1996, there were no
valuation adjustments on mortgage loans held for sale.
LOANS
Loans are stated at the amount of unpaid principal, reduced by unearned income
and the allowance for loan losses.
51
<PAGE> 10
Interest on loans is generally recorded over the term of the loans using the
simple interest method on the unpaid principal balance. Accrual of interest is
discontinued when in management's opinion, reasonable doubt exists as to the
full collection of interest or principal. Income on such loans is then
recognized only to the extent that cash is received and where the future
collection of principal is probable.
Loan origination fees and certain direct origination costs are deferred and
capitalized, respectively, and recognized over the life of the loan as an
adjustment of the yield on the related loan based on the interest method.
Impaired loans are measured based on the present value of expected future cash
flows, discounted at the loan's effective interest rate, or at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Loans that are determined to be impaired require a
valuation allowance equivalent to the amount of the impairment. The valuation
allowance is established through the provision for loan losses.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Cash receipts on impaired loans
for which the accrual of interest has been discontinued are applied to reduce
the principal amount of such loans until the required principal payments have
been brought current and, if the future collection of principal is probable, are
recognized as interest income thereafter.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level estimated to be adequate
to provide for potential losses in the loan portfolio. Management determines the
adequacy of the allowance based upon reviews of individual loans, recent loss
experience, current economic conditions, the risk characteristics of the various
categories of loans and other pertinent factors. Loans deemed uncollectible are
charged to the allowance. Provisions for loan losses and recoveries on loans
previously charged off are added to the allowance.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions, the financial condition of borrowers and other factors. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
OTHER REAL ESTATE
Other real estate includes real estate acquired through foreclosure. Other real
estate is carried at the lower of its recorded amount at date of foreclosure or
its estimated fair value less costs to sell. Any excess of carrying value of the
related loan over the fair value of the real estate at date of foreclosure is
charged against the allowance for loan losses. Any expense incurred in
connection with holding such real estate or resulting from any writedowns
subsequent to foreclosure is included in other noninterest expense.
52
<PAGE> 11
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using primarily the straight-line method over the
estimated useful lives of the assets.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of acquisition costs over the fair value of net
assets of businesses acquired and is amortized on a straight-line basis
primarily over 25 years. Other intangibles consist of an amount assigned to core
deposits representing the difference between fair value at date of acquisition
and recorded amounts which is amortized on a straight-line basis over five
years. Carrying values of goodwill and other intangibles are periodically
reviewed to assess recoverability based on expected undiscounted cash flows and
operating income for the related business unit. Impairments would be recognized
in operating results if a permanent diminution in value was expected. The
Company also evaluates the amortization periods of intangible assets to
determine whether events or circumstances warrant revised estimates of useful
lives. The Company believes that no impairment of goodwill or other intangibles
exists at December 31,1997.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Provisions
for income taxes are based upon amounts reported in the statements of income
(after exclusion of nontaxable income such as interest on state and municipal
securities) and include deferred taxes on temporary differences between
financial statement and tax bases of assets and liabilities measured using
enacted tax rates expected to apply to taxable income in the year in which the
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, Earnings Per Share. SFAS No. 128 supersedes Accounting Principles Board
Opinion No. 15, Earnings Per Share, and specifies the computation, presentation,
and disclosure requirements for earnings per share (EPS). SFAS No. 128 replaces
the presentation of primary EPS and fully diluted EPS with a presentation of
basic EPS and diluted EPS, respectively. SFAS No. 128 also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures. All prior period EPS data has been
restated to conform with SFAS No. 128.
Basic EPS excludes dilution and is computed by dividing net income by
weighted-average shares outstanding. Diluted EPS is computed by dividing net
income by weighted-average shares outstanding plus potential common stock
resulting from dilutive stock options.
RECLASSIFICATIONS
Certain 1996 and 1995 amounts have been reclassified for comparative purposes in
order to conform the prior periods to the 1997 presentation. Such
reclassifications had no impact on net income or shareholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125
was amended by SFAS No. 127, which defers the effective date of certain
provisions of SFAS No. 125 until January 1, 1998. This statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
53
<PAGE> 12
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Effective January 1, 1997, the Company adopted the provisions of
SFAS No. 125 on a prospective basis. The impact of SFAS No. 125 on the Company's
consolidated financial statements upon adoption was not material.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This
statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
SFAS No. 130 requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed in equal prominence with the other
financial statements. The term "comprehensive income" is used in the statement
to describe the total of all components of comprehensive income including net
income. "Other comprehensive income" refers to revenues, expenses, gains and
losses that are included in comprehensive income but excluded from earnings
under current accounting standards. Currently, other comprehensive income for
the Company consists of items previously recorded directly in equity under SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS
No. 130 is effective for financial statements for years beginning after December
15, 1997.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 supersedes SFAS No. 14 and
establishes new standards for the disclosures made by public business
enterprises to report information about operating segments in annual financial
statements and requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for financial
statements for years beginning after December 15, 1997.
(3) BUSINESS ACQUISITIONS
Effective June 30, 1995, Habersham Bancorp consummated its acquisition of
Security Bancorp, Inc. ("Security") by agreeing to exchange 612,516 shares of
its common stock and cash of $1,990,269 for the outstanding shares of Security's
common stock in a merger of Security with and into the Company. Habersham
Bancorp had previously acquired 5% of the outstanding shares of Security. The
total purchase price, including expenses, totaled approximately $9,257,000. The
fair value of the assets acquired totaled $49,468,281 and liabilities assumed
totaled $40,211,187. The merger was accounted for as a purchase and the
operations of Security were included in the Company's operations after June 30,
1995. Intangible assets consisting of a premium on core deposits of $416,000 and
goodwill of $3,084,000 were recorded in connection with the merger and are being
amortized over a five- and twenty-five year period, respectively.
Effective March 31, 1997, Advantage Insurers, Inc., a newly formed subsidiary of
Habersham Bank, acquired substantially all of the assets of Dillard-Scruggs
Insurance Services of Cornelia, Inc. d/b/a Cornelia Insurance Agency. Advantage
Insurers, Inc. will continue to offer a full line of property, casualty and life
insurance products. This acquisition was accounted for as a purchase with a
purchase price of $380,000. The fair values of assets acquired and liabilities
assumed were not significant, resulting in goodwill and other intangibles of
approximately $300,000 and $80,000, respectively, which are being amortized over
fifteen and five years, respectively. The pro forma effect of this acquisition
on earnings is not significant.
54
<PAGE> 13
During the third quarter of 1997, Habersham Bancorp expanded its
mortgage-related services with the acquisition by BancMortgage of the assets and
certain liabilities of The Prestwick Mortgage Group, a national investment
banking and advisory firm specializing in the brokerage and evaluation of
mortgage-related assets such as loans and servicing for approximately $60,000.
As a result of the acquisition, BancMortgage is doing business as The Prestwick
Financial Group and as BancFinancial Services Corporation ("BancFinancial"), a
full-service wholesale mortgage lender specializing in subprime mortgage loans.
Initially, BancFinancial plans to purchase loans in the mid-atlantic and
southeastern states. Both of these operating divisions are based in McLean,
Virginia. The 1997 results of operations of these divisions were not
significant.
Effective September 1, 1996, Habersham Bank acquired all of the outstanding
stock of Appalachian Travel Service, Inc., Cornelia, Georgia for $50,000 in
cash. The acquisition was accounted for as a purchase and no significant amounts
of intangible assets were recorded.
(4) RESERVE REQUIREMENTS
At December 31, 1997 and 1996, the Federal Reserve Bank required that the Banks
maintain average reserve balances of $1.3 million and $1.1 million,
respectively.
(5) INVESTMENT SECURITIES AVAILABLE FOR SALE
Amortized cost, estimated fair values and gross unrealized gains and losses of
investment securities available for sale are as follows:
<TABLE>
<CAPTION>
AMORTIZED GROSS UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Treasuries $ 200,000 $ 1,438 - $ 201,438
U.S. Government agencies 20,891,234 204,071 $112,442 20,982,863
States and political subdivisions 11,019,124 326,908 850 11,345,182
Other investments 750,000 - 55,060 694,940
----------- -------- -------- -----------
Total $32,860,358 $532,417 $168,352 $33,224,423
=========== ======== ======== ===========
December 31, 1996:
U.S. Treasuries $ 799,859 $ 1,619 $ 475 $ 801,003
U.S. Government agencies 21,757,632 139,733 271,432 21,625,933
States and political subdivisions 8,236,506 289,568 5,215 8,520,859
Other investments 750,000 - 69,119 680,881
----------- -------- -------- -----------
Total $31,543,997 $430,920 $346,241 $31,628,676
=========== ======== ======== ===========
</TABLE>
Proceeds from sales of available-for-sale securities during 1997, 1996 and 1995
were $7,054,085, $5,354,342 and $7,263,903, respectively.
Gross gains of $40,207, $31,980 and $114,153 and gross losses of $53,179,
$36,114 and $37,311 were recognized on those sales for 1997, 1996 and 1995,
respectively.
55
<PAGE> 14
The amortized cost and estimated fair values of investment securities available
for sale at December 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Callable securities and mortgage-backed securities are
included in the year of their final original maturity. Equity investments are
included in the due after ten years category.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED COST FAIR VALUE
<S> <C> <C>
Due in one year or less $ 4,183,008 $ 4,188,551
Due after one year through five years 11,463,441 11,628,765
Due after five years through ten years 7,743,818 7,791,314
Due after ten years 9,470,091 9,615,793
----------- -----------
Total $32,860,358 $33,224,423
=========== ===========
</TABLE>
Investment securities available for sale with fair values of approximately
$16,374,000 and $11,552,000 were pledged as collateral at December 31, 1997 and
1996, respectively, for public deposits and other deposits, as required by law.
(6) INVESTMENT SECURITIES HELD TO MATURITY
Amortized cost, estimated fair values and gross unrealized gains and losses of
investment securities held to maturity are as follows:
<TABLE>
<CAPTION>
AMORTIZED GROSS UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Government agencies $ 1,351,357 $ 13,691 $ 8,068 $ 1,356,980
States and political subdivisions 9,954,423 202,199 6,316 10,150,306
Other investments 99,000 - - 99,000
----------- -------- ------- -----------
Total $11,404,780 $215,890 $14,384 $11,606,286
=========== ======== ======= ===========
December 31, 1996:
U.S. Government agencies $ 2,187,521 $ 17,780 $26,460 $ 2,178,841
States and political subdivisions 12,122,431 114,053 48,616 12,187,868
Other investments 198,000 - - 198,000
----------- -------- ------- -----------
Total $14,507,952 $131,833 $75,076 $14,564,709
=========== ======== ======= ===========
</TABLE>
The amortized cost and estimated fair values of investment securities held to
maturity at December 31,1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties. Callable securities and mortgage-backed securities are included in
the year of their final original maturity.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED COST FAIR VALUE
<S> <C> <C>
Due in one year or less $ 2,204,088 $ 2,212,651
Due after one year through five years 4,309,151 4,352,369
Due after five years through ten years 4,129,779 4,236,762
Due after ten years 761,762 804,504
----------- -----------
Total $11,404,780 $11,606,286
=========== ===========
</TABLE>
Investment securities held to maturity with fair values of approximately
56
<PAGE> 15
$7,210,000 and $8,013,000 were pledged as collateral at December 31, 1997 and
1996, respectively, for public deposits and other deposits, as required by law.
(7) LOANS
Loans at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Real estate:
Construction $ 61,965,365 $ 50,263,496
Other 105,176,566 124,014,196
Commercial, financial and agricultural 15,824,792 18,292,993
Consumer installment 15,511,437 14,601,409
Other 604,466 808,606
------------ ------------
199,082,626 207,980,700
Less:
Unamortized loan origination fees, net 656,784 855,964
Unearned credit life premiums 41,377 31,677
Unamortized discounts 171,999 260,426
Allowance for loan losses 2,336,079 2,261,406
------------ ------------
Total $195,876,387 $204,571,227
============ ============
</TABLE>
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance, January 1 $2,261,406 $2,335,788 $1,744,335
Acquired in acquisition - - 628,371
Provision for loan losses 422,000 360,000 98,043
Loans charged off (547,610) (571,018) (175,834)
Recoveries 200,283 136,636 40,873
---------- ---------- ----------
Balance, December 31 $2,336,079 $2,261,406 $2,335,788
========== ========== ==========
</TABLE>
The Company considers a loan to be impaired when it is probable that it will be
unable to collect all amounts due according to the original terms of the loan
agreement. The Company measures impairment of a loan on a loan-by-loan basis for
real estate, commercial and agricultural loans. Installment and other consumer
loans are considered smaller balance, homogenous loans which are not evaluated
individually for impairment. Amounts of impaired loans that are not probable of
collection are charged off immediately. The Company had impaired loans of
$1,251,157 and $981,801 as of December 31, 1997 and 1996, respectively, which
included all of its nonaccrual loans. The average amount of impaired loans
during 1997, 1996 and 1995 was $1,719,920, $870,559 and $1,015,818,
respectively. The interest income recognized on such loans was $165,686 in 1997,
$84,646 in 1996 and $57,416 in 1995, which approximated the amount of interest
received on the cash basis.
There was no specific allowance attributable to impaired loans at December 31,
1997 and 1996.
Restructured loans not considered impaired totaled $913,753 at December 31, 1997
and $973,559 at December 31, 1996. Interest income that would have been recorded
on such restructured loans in accordance with their original terms totaled
$92,124 in 1997 and $109,919 in 1996, compared with amounts recognized of
$87,244 in 1997 and $96,134 in 1996.
As of December 31, 1997 and 1996, Habersham Bank's loans to customers for
57
<PAGE> 16
agribusiness purposes in the poultry industry were approximately $12 million and
$16 million, respectively. There is no other significant concentration of loans
to customers in a particular industry.
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of its lending activities to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. 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. The Company uses the same credit policies in making
these commitments as it does for on-balance-sheet instruments and evaluates each
customer's creditworthiness on a case-by-case basis. At December 31, 1997 and
1996, the Company had outstanding loan commitments (exclusive of mortgage loan
commitments of BancMortgage) approximating $57,047,000 and $43,212,000,
respectively, and standby letters of credit approximating $1,852,000 and
$446,000, respectively. The amount of collateral obtained, if deemed necessary,
for these financial instruments by the Company, upon extension of credit, is
based on management's credit evaluation of the customer. Collateral held, if
any, varies but may include inventory, equipment, real estate or other property.
The accounting loss the Company would incur if any party to the financial
instrument failed completely to perform according to the terms of the contract
and the collateral proved to be of no value is equal to the face amount of the
financial instrument.
At December 31, 1997, BancMortgage has commitments to originate mortgage loans
in the amount of approximately $22.4 million with $11.4 million having fixed
rates. At December 31, 1997, BancMortgage has commitments to sell mortgage loans
in the amount of $33 million.
(8) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
<S> <C> <C>
Land $ 807,157 $ 807,157
Buildings 6,107,249 4,550,366
Furniture and equipment 7,265,865 5,583,403
----------- -----------
Total 14,180,271 10,940,926
Less accumulated depreciation 5,585,979 4,646,393
----------- -----------
Premises and equipment, net $ 8,594,292 $ 6,294,533
=========== ===========
</TABLE>
The Company has entered into operating lease agreements for equipment through
2001. Approximate minimum rentals under such leases are as follows:
<TABLE>
<S> <C>
1998 $763,681
1999 318,198
2000 251,958
2001 112,147
</TABLE>
Rental expense was $589,392 in 1997, $430,303 in 1996 and $41,389 in 1995.
58
<PAGE> 17
(9) DEPOSITS AND OTHER BORROWINGS
At December 31,1997, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
6 months or less $ 88,865,426
Over 6 through 12 months 53,726,379
Over 1 year through 5 years 38,875,327
Over 5 years 31,220
------------
Total $181,498,352
</TABLE>
Short-term borrowings of $2,627,380 and $502,056 at December 31, 1997 and 1996,
respectively, consist of federal funds purchased and U. S. Treasury, tax and
loan deposit notes.
At December 31, 1997, the Company had available line of credit commitments with
the Federal Home Loan Bank ("FHLB") totaling $40,000,000 of which $22,401,992
was advanced (interest rate of 6.75% and maturing in 1998) and $17,598,008 was
available. In addition, the Company had a $3,000,000 advance from the FHLB at
December 31, 1997 with interest at 5.85% and maturing in 1998.
The Company had FHLB advances of $47,909,217 at December 31, 1996 with a
weighted average interest rate of 5.75%.
At December 31, 1997, the Company has pledged, under a blanket lien with the
FHLB, all stock of the FHLB and certain qualifying first mortgage loans.
(10) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1997, 1996 and
1995 are as follows: 1997 1996 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current $561,350 $819,544 $738,053
Deferred 160,853 (249,205) (158,663)
-------- ------- -------
Total $722,203 $570,339 $579,390
======== ======== ========
</TABLE>
The provision for income taxes is less than that computed by applying the
Federal statutory rate of 34% to income before income taxes as indicated by the
following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Income tax at statutory rate $979,023 $843,989 $884,137
Effect of tax-exempt income (308,366) (347,804) (336,991)
Amortization of intangibles 83,508 72,191 35,114
Other (31,962) 1,963 (2,870)
-------- -------- --------
Provision for income taxes $722,203 $570,339 $579,390
======== ======== ========
</TABLE>
59
<PAGE> 18
At December 31, 1997 and 1996, the significant components of the Company's net
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses $592,051 $ 582,467
Allowance for other real estate 74,800 74,800
Deferred loan fees 248,217 273,434
Other - 75,073
-------- ----------
915,068 1,005,774
-------- ----------
Deferred tax liabilities:
Unrealized gain on investment securities
available for sale (123,619) (28,168)
Prepaid expenses (131,893) (69,684)
Other (7,938) -
-------- ----------
(263,450) (97,852)
-------- ----------
Net deferred tax asset $651,618 $ 907,922
======== ==========
</TABLE>
No valuation allowance has been recorded by the Company as management considers
it more likely than not that all deferred tax assets will be realized. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
amounts of taxes paid in carryback periods, the scheduled reversal of deferred
tax liabilities, projected future taxable income and tax planning strategies in
making this assessment.
(11) SHAREHOLDERS' EQUITY
Effective May 15, 1995, the Company declared a 5-for-1 stock split of its common
stock effected in the form of a 400% stock dividend. In addition, effective
April 15, 1995, the Company changed the par value of its common stock from $2.50
to $1.00 per share and increased the number of authorized shares of common stock
to 10,000,000 shares. All references to share and per share amounts reflect the
split. Also, $875,000 has been retroactively charged to additional paid-in
capital and credited to common stock to reflect the stock split and the change
in par value.
The approval of the Georgia Department of Banking and Finance is required if
dividends declared by the Banks to the Company in any year will exceed 50% of
the net income of the Banks for the previous calendar year. As of December 31,
1997, the Banks could declare dividends to the Company up to approximately
$1,390,000 without regulatory approval.
The Company and the Banks 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 Company's consolidated financial statements. Under
capital adequacy guidelines, the Company and the Banks must meet specific
capital guidelines that involve quantitative measures of the Company's and the
Banks' assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Company's and
60
<PAGE> 19
the Banks' capital amounts and the Banks' classifications under the regulatory
framework for prompt corrective action are also subject to qualitative judgments
by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997, that the Company and the Banks meet all capital adequacy requirements to
which they are subject.
As of December 31, 1997 and 1996, the most recent notifications from both the
Federal Deposit Insurance Corporation and the Federal Reserve Bank of Atlanta
categorized the Banks as well capitalized under the regulatory framework for
prompt corrective action. To be categorized, as well capitalized, the Banks must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Banks' capital
categories.
The Company's and the Banks' actual capital amounts and ratios as of December
31, 1997 and 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital (to risk-weighted assets):
Company $28,584 12.88% $17,747 8% N/A N/A
Habersham Bank 20,019 11.32% 14,142 8% $17,677 10%
Security Bank 7,235 15.16% 3,819 8% 4,773 10%
Tier I Capital (to risk-weighted assets):
Company $26,248 11.83% $ 8,874 4% N/A N/A
Habersham Bank 18,143 10.26% 7,071 4% $10,606 6%
Security Bank 6,775 14.19% 1,909 4% 2,864 6%
Tier I Capital (to average assets):
Company $26,248 7.89% $13,301 4% N/A N/A
Habersham Bank 18,143 6.57% 11,042 4% $ 13,803 5%
Security Bank 6,775 12.06% 2,247 4% 2,809 5%
As of December 31, 1996:
Total capital (to risk-weighted assets):
Company $26,665 10.23% $20,854 8% N/A N/A
Habersham Bank 18,443 10.67% 13,833 8% $ 17,291 10%
Security Bank 7,024 15.58% 3,606 8% 4,508 10%
Tier I Capital (to risk-weighted assets):
Company $24,403 9.36% $10,427 4% N/A N/A
Habersham Bank 16,921 9.79% 6,916 4% $ 10,375 6%
Security Bank 6,459 14.33% 1,803 4% 2,705 6%
Tier I Capital (to average assets):
Company 24,403 9.01% $10,836 4% N/A N/A
Habersham Bank 16,921 6.78% 9,980 4% $ 12,475 5%
Security Bank 6,459 11.62% 2,223 4% 2,779 5%
</TABLE>
61
<PAGE> 20
(12) EMPLOYEE BENEFIT AND STOCK OPTION PLANS
The Company has a contributory profit sharing plan under Internal Revenue Code
Section 401(k) - (the "401(k) Plan"). The 401(k) Plan covers substantially all
employees. Employees may contribute up to 15% of their annual salaries up to the
amount allowed by the IRS. The Company will contribute amounts at its discretion
as specified in the plan agreement. The Company's contributions to the plan
totaled $151,483 in 1997, $104,020 in 1996 and $88,652 in 1995.
The Company has an Incentive Stock Option Plan that provides that officers and
certain employees of the Company may be granted options to purchase shares of
common stock of the Company at an amount equal to the fair market value of the
stock at the date of grant. The options, which may be exercised immediately,
expire five years from the date of grant. Shares reserved for future grants
under this plan are approximately 200,000 at December 31, 1997.
The Company's Outside Directors Stock Option Plan provides that outside
directors of Habersham Bancorp and its subsidiaries may be granted options to
purchase shares of common stock of the Company at an amount equal to the fair
market value of the stock at the date of grant. The options are fully vested on
the date of grant, exercisable six months from the date of grant and expire ten
years from the date of grant. There are 350,000 shares reserved for issuance
under this plan.
A summary of the status of the Company's stock option plans and changes during
1997, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 345,004 $12.45 269,754 $10.16 168,000 $ 8.12
Granted 80,000 19.00 115,250 16.04 139,754 11.71
Exercised (41,528) 8.33 (38,000) 7.52 (38,000) 6.74
Forfeited or expired (2,000) 8.33 (2,000) 7.47 - -
------- ------- -------
Outstanding and exercisable at end of year 381,476 $14.25 345,004 $12.45 269,754 $10.16
======= ======= =======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE REMAINING
RANGE OF OUTSTANDING CONTRACTUAL LIFE WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/97 IN YEARS EXERCISE PRICE
<S> <C> <C> <C>
$ 9.19 65,000 1.1 $ 9.19
10.00 - 11.00 56,226 4.6 10.50
13.00 - 14.00 95,000 3.8 13.54
16.88 84,000 4.8 16.88
18.00 - 19.00 81,250 5.1 18.99
-------
381,476 4.0 14.25
=======
</TABLE>
The estimated fair value of options granted during 1997, 1996 and 1995 was
$6.54, $8.59 and $6.84, respectively, per share. The Company applies Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its stock option plans. Accordingly,
no compensation cost has been recognized for its Incentive Stock Option Plan and
its Outside Directors Stock Option Plan. Had compensation cost for the Company's
incentive stock option plan and its
62
<PAGE> 21
outside director stock option plan been determined based on the fair value at
the grant dates for awards under those plans consistent with a method included
in SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net
income and earnings per share for 1997, 1996 and 1995 would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net income:
As reported $2,157,276 $1,907,849 $2,021,012
Pro forma 1,805,686 1,261,537 1,727,576
Net income per common share - basic:
As reported $ .91 $ .82 $ 1.02
Pro forma .76 .54 .87
Net income per common share - diluted:
As reported $ .86 $ .79 $ .99
Pro forma .72 .52 .85
</TABLE>
The fair value of options granted under the Company's fixed stock option plans
during 1997, 1996 and 1995 was estimated on the date of grant using the
Black-Sholes option-pricing model with the following weighted average
assumptions used: expected dividend yield of less than 1%; expected volatility
of 33%, 22% and 32% in 1997, 1996 and 1995, respectively; weighted average risk
free interest rate of 5.45%, 5.90% and 5.90% in 1997, 1996 and 1995,
respectively; and an expected weighted average life of 4.5 years in 1997 and
1996 and 5 years in 1995.
63
<PAGE> 22
(13) OTHER EXPENSES
Items comprising other expenses for the years ended December 31, 1997, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Outside services $ 824,515 $ 615,765 $ 612,838
Advertising and public relations 893,604 788,040 621,524
Office supplies 593,051 524,925 349,775
Other 1,815,263 1,302,356 1,280,710
---------- ---------- ----------
Total $4,126,433 $3,231,086 $2,864,847
========== ========== ==========
</TABLE>
Outside services include charges for FDIC insurance, legal and professional
services, insurance, director fees and State of Georgia Department of Banking
fees.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, Disclosures about Fair
Value of Financial Instruments. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
64
<PAGE> 23
<TABLE>
<CAPTION>
DECEMBER 31, 1997
CARRYING AMOUNT FAIR VALUE
<S> <C> <C>
Assets:
Cash and due from banks $ 13,067,675 $ 13,067,675
Federal funds sold 16,740,000 16,740,000
Investment securities available for sale 33,224,423 33,224,423
Investment securities held to maturity 11,404,780 11,606,286
Other investments 2,168,134 2,168,134
Loans held for sale 37,509,982 37,959,982
Loans 195,876,387 191,182,197
Liabilities:
Deposits 261,664,999 265,739,563
Short-term borrowings 2,627,380 2,627,380
Other borrowings 25,401,992 25,401,992
<CAPTION>
DECEMBER 31, 1996
CARRYING AMOUNT FAIR VALUE
<S> <C> <C>
Assets:
Cash and due from banks $ 9,122,563 $ 9,122,563
Federal funds sold 6,590,000 6,590,000
Investment securities available for sale 31,628,676 31,628,676
Investment securities held to maturity 14,507,952 14,564,709
Other investments 4,255,992 4,255,992
Loans held for sale 23,299,195 23,299,195
Loans 204,571,227 200,673,702
Liabilities:
Deposits 224,361,498 227,780,172
Short-term borrowings 502,056 502,056
Other borrowings 47,909,217 47,909,217
</TABLE>
The carrying amounts of cash and due from banks, federal funds sold,
interest-bearing demand and savings accounts, short-term borrowings and other
borrowings are a reasonable estimate of their fair value due to the short-term
nature or short-term to maturity of these financial instruments. The fair value
of investment securities available for sale, investment securities held to
maturity and loans held for sale is based on quoted market prices and dealer
quotes. The fair value of loans and time deposits is estimated by discounting
the future cash flows using interest rates currently charged/paid by the Banks
for such financial instruments with similar credit risks and maturities.
As required by SFAS No. 107, demand deposits are shown at their carrying value.
No value has been ascribed to core deposits, which generally bear a low rate of
interest or no interest and do not fluctuate in response to changes in interest
rates.
The carrying values and fair values of commitments to extend credit and standby
letters of credit are not significant.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1997 and 1996. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date and, therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
65
<PAGE> 24
(15) RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company extends loans to its directors,
executive officers and principal stockholders and their affiliates at terms and
rates comparable to those prevailing at the time for comparable transactions
with other customers. In the opinion of management, these loans do not involve
more than the normal credit risk nor present other unfavorable features. An
analysis of the activity during 1997 and 1996 of loans to executive officers,
directors and principal shareholders is as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Balance, January 1, $5,065,261 $4,139,208
Amounts advanced 4,790,503 6,013,837
Repayments (6,682,655) (5,087,784)
---------- ----------
Balance, December 31, $3,173,109 $5,065,261
========== ==========
</TABLE>
Certain directors of Security Bank received fees related to appraisal services
and loan closings. These fees were collected from loan customers. Management
believes the services obtained from these directors were on terms as favorable
to the Bank as could have been obtained from unaffiliated parties. Total fees
paid to these directors for these services were $43,250 for 1997, $46,375 for
1996 and $40,305 for 1995.
At December 31, 1997, time deposits of $978,000 of a business controlled by the
principal shareholders of the Company were pledged as collateral for loans with
a principal balance of $978,000 made to unrelated parties.
On January 2, 1996, a Mortgage Banking Agreement (the "Agreement") was entered
into between Habersham Bank, BancMortgage, Habersham Bancorp and BancMortgage's
two principal executives/inside directors. The Agreement provides, among other
things, organizational structure of BancMortgage, certain compensation terms,
including bonuses as a percentage of BancMortgage's net income and buy-out
arrangements.
66
<PAGE> 25
(16) CONDENSED FINANCIAL STATEMENTS OF HABERSHAM BANCORP (PARENT ONLY)
The parent company only condensed financial statements are presented below:
<TABLE>
<CAPTION>
DECEMBER 31
CONDENSED BALANCE SHEETS 1997 1996
<S> <C> <C>
ASSETS:
Cash $ 713,321 $ 240,148
Investment in subsidiaries, primarily banks 25,807,009 23,933,109
Other investments 201,000 213,159
Equipment 46,102 14,224
Goodwill and other intangible assets 3,113,351 3,325,678
Other assets 424,660 82,598
----------- -----------
Total assets $30,305,443 $27,808,916
=========== ===========
LIABILITY - Accounts Payable $ 161,104 $ 140,127
SHAREHOLDERS' EQUITY:
Common stock 2,408,517 2,403,974
Additional paid-in capital 9,109,026 8,897,758
Retained earnings 18,386,350 16,560,893
Net unrealized gain on investment securities
available for sale 240,446 56,511
Treasury stock, at cost - (250,347)
----------- -----------
Total shareholders' equity 30,144,339 27,668,789
----------- -----------
Total liability and shareholders' equity $30,305,443 $27,808,916
=========== ===========
</TABLE>
67
<PAGE> 26
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
INCOME
Dividends from bank subsidiaries $1,288,000 $ 364,000 $1,677,750
Other income - management fees from subsidiaries 768,083 743,940 324,328
---------- ---------- ----------
Total income 2,056,083 1,107,940 2,002,078
EXPENSES - general and administrative 1,863,032 1,314,893 488,916
---------- ---------- ----------
Income (loss) before income taxes and equity
in undistributed earnings of subsidiaries 193,051 (206,953) 1,513,162
Income tax benefit 297,821 130,675 19,338
---------- ---------- ----------
Income (loss) before equity in undistributed
earnings of subsidiaries 490,872 (76,278) 1,532,500
Equity in undistributed earnings of subsidiaries 1,666,404 1,984,127 488,512
---------- ---------- ----------
Net income $2,157,276 $1,907,849 $2,021,012
========== ========== ==========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $2,157,276 $1,907,849 $2,021,012
Depreciation 12,479 2,845 -
Loss on sale of other investment 8,559 - -
Amortization of intangible assets 212,327 212,326 103,277
Deferred income taxes (31,431) -
Increase in other assets (365,622) (7,185) -
Increase in other liabilities 20,977 (46,682) -
Equity in undistributed earnings
of subsidiaries (1,666,404) (1,984,127) (488,512)
---------- ---------- ----------
Net cash provided by operating activities 379,592 53,595 1,635,777
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash payment in acquisition of Security Bancorp,
Inc., including expenses of $345,717 - - (2,335,987)
Proceeds from sale of other investment 3,599 - -
Purchase of other investments - (100,000) -
Purchase of equipment (44,357) (17,070) -
--------- ---------- ----------
Net cash used in investing activities (40,758) (117,070) (2,335,987)
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of cash dividends (331,819) (278,991) (199,011)
Proceeds from sale of treasury stock 428,315 285,588 257,724
Proceeds from issuance of common stock 37,843 - -
---------- ---------- ----------
Net cash provided by financing activities 134,339 6,597 58,713
---------- ---------- ----------
Increase (decrease) in cash 473,173 (56,878) (641,497)
CASH AT BEGINNING OF YEAR 240,148 297,026 938,523
---------- ---------- ----------
CASH AT END OF YEAR $ 713,321 $ 240,148 $ 297,026
========== ========== ==========
</TABLE>
At December 31, 1997, approximately $24,417,000 of the parent company's
investment in the Banks is restricted as to dividend payments from the Banks to
the parent company.
68
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
The following list contains the names and jurisdictions of organization of
Habersham Bancorp's direct and indirect subsidiaries. Habersham Bancorp owns
100% of the outstanding stock of each listed entity, except for BancMortgage
Financial Corp., Appalachian Travel Service and Advantage Insurers, Inc., which
are wholly owned subsidiaries of Habersham Bank.
Name and Jurisdiction
Habersham Bank, a Georgia state bank.
Security State Bank, a Georgia state bank.
The Advantage Group, Inc. a Georgia corporation.
BancMortgage Financial Corp., a Georgia corporation.
Appalachian Travel Service, Inc., a Georgia corporation.
Advantage Insurers, Inc., a Georgia corporation.
69
<PAGE> 1
EXHIBIT 23.1
CONSENT OF KPMG PEAT MARWICK
The Board of Directors
Habersham Bancorp:
We consent to the incorporation by reference in Registration Statement Nos.
33-64149, 33-61587, 33-61589, 333-48507 on Forms S-8 and Registration Statement
No. 333-18023 on Form S-3 of Habersham Bancorp of our report dated January 30,
1998, with respect to the consolidated balance sheet of Habersham Bancorp and
subsidiaries as of December 31, 1997, and the related consolidated statements of
income, shareholders' equity, and cash flows for the year then ended, which
report appears in the December 31, 1997 annual report on Form 10-KSB of
Habersham Bancorp.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Atlanta, Georgia
March 26, 1998
70
<PAGE> 1
EXHIBIT 23.2
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the incorporation by reference in Registration Statement No.
33-61587, 33-61589, and 33-64149 of Habersham Bancorp on Forms S-8 and
Registration Statement No. 333-18023 of Habersham Bancorp on Form S-3 of our
report dated January 17, 1997, appearing in this Annual Report on Form 10-KSB of
Habersham Bancorp for the year ended December 31, 1997.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 25, 1998
71
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HABERSHAM BANCORP FOR THE YEAR ENDED DECEMBER 31, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,067,675
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 16,740,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,224,423
<INVESTMENTS-CARRYING> 11,404,780
<INVESTMENTS-MARKET> 11,606,286
<LOANS> 235,722,448
<ALLOWANCE> 2,336,079
<TOTAL-ASSETS> 328,197,085
<DEPOSITS> 261,664,999
<SHORT-TERM> 28,029,372
<LIABILITIES-OTHER> 8,358,375
<LONG-TERM> 0
0
0
<COMMON> 2,408,517
<OTHER-SE> 27,735,822
<TOTAL-LIABILITIES-AND-EQUITY> 328,197,085
<INTEREST-LOAN> 23,743,448
<INTEREST-INVEST> 2,811,752
<INTEREST-OTHER> 406,956
<INTEREST-TOTAL> 26,962,156
<INTEREST-DEPOSIT> 11,036,973
<INTEREST-EXPENSE> 13,305,166
<INTEREST-INCOME-NET> 13,656,990
<LOAN-LOSSES> 422,000
<SECURITIES-GAINS> (12,972)
<EXPENSE-OTHER> 18,411,773
<INCOME-PRETAX> 2,879,479
<INCOME-PRE-EXTRAORDINARY> 2,879,479
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,157,276
<EPS-PRIMARY> .91
<EPS-DILUTED> .86
<YIELD-ACTUAL> 4.74
<LOANS-NON> 1,251,157
<LOANS-PAST> 1,282,000
<LOANS-TROUBLED> 913,753
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,261,406
<CHARGE-OFFS> 547,610
<RECOVERIES> 200,283
<ALLOWANCE-CLOSE> 2,336,079
<ALLOWANCE-DOMESTIC> 2,336,079
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
