<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
------ SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998.
------ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----- -------
Commission file number 0-13153
HABERSHAM BANCORP
(Exact name of registrant as specified in its charter)
Georgia 58-1563165
- ---------------------------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or Identification Number)
organization)
282 Historic Highway 441 North, P. O. Box 1980, Cornelia, Georgia 30531
- -------------------------------------------------------------------------------
(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
----
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $1.00 par value
-----------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the 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
----- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to
this Form 10-K. X
-----
<PAGE> 2
Indicate the aggregate market value of the voting and non-voting common stock
held by non-affiliates of the registrant computed by reference to the price at
which the common stock was sold, or the average bid and asked prices of such
common stock; as of a specified date within 60 days prior to the date of
filing:
1,447,494 Shares of Common Stock, $1.00 par value--$20,626,790 as of March 5,
1999 (based upon market value of $14.25/share).
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 31, 1998:
Common Stock, $1.00 par value--2,448,267 shares
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Company's Annual Report to Shareholders for the year ended
December 31, 1998 (the "Annual Report") are incorporated by reference into Part
II.
(2) Portions of the Company's Proxy Statement relating to the 1999 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
("BancMortgage"), a subsidiary of Habersham Bank formed in 199?. The Company
also has one direct nonbank subsidiary, The Advantage Group, Inc., and two other
indirect nonbank subsidiaries, 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.
<PAGE> 3
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
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 provides marketing and banking
services to other institutions.
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
the mid-Atlantic states as The Prestwick Mortgage Group and as BancFinancial
Services Corporation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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 and White
Counties, Georgia. Habersham Bank competes principally for all types of loans,
deposits and other financial services with three other commercial banks located
in Habersham County, Georgia. As of December 31, 1998, Habersham Bank was the
largest of the commercial banks located in Habersham County based upon total
assets.
<PAGE> 4
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, 1998, the Company had 298 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.
<PAGE> 5
SUPERVISION AND REGULATION
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 Federal
Reserve's prior approval before: (a) it may acquire direct or indirect
ownership or control of any voting shares of any bank if, after the
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: (a) would result in a monopoly; (b) would be in furtherance
of any combination or conspiracy to monopolize or attempt to monopolize the
business of banking anywhere in the United States; (c) could substantially
lessen competition or to tend to create a monopoly in any section of the
country; or (d) would otherwise be in restraint of trade. The Federal Reserve
could, however, approve a proposed transaction if its anticompetitive effects
were 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
participants in the transaction 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"), repealed the prior statutory restrictions on
interstate acquisitions of banks by bank holding companies. As a result, 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 restrictions. The Interstate
Banking Act also generally provides that national and state-chartered banks may
now branch interstate through acquisitions of banks in other states. By
adopting legislation prior to June 1, 1997, states could either "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
<PAGE> 6
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 an acquired bank into an interstate branch network. The
Georgia Interstate Branching Act also allows banks to establish de novo
branches on an unlimited basis.
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 incidental to banking or managing or
controlling banks. In determining whether a particular activity is permissible,
the Federal Reserve must consider whether the performance of the 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 bank holding company activities. The BHC Act does not place
territorial limitations on permissible non-banking activities of bank holding
companies. Despite prior approval, the Federal Reserve may order a holding
company or its subsidiaries to terminate any activity or its ownership or
control of any subsidiary when it has reasonable cause to believe that
continuation of the activity, ownership or control constitutes a serious risk
to the financial safety, soundness, or stability of any bank subsidiary of that
bank holding company.
Each of the Company's bank subsidiaries 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 bank 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.
<PAGE> 7
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 a federal banking regulator believes that a depository institution
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the institution's financial condition,
could include the payment of dividends), it could require, after notice and
hearing, that the institution cease and desist from that 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 $1,128,000 (representing 50% of the
previous year's net income) in 1999.
The payment of dividends by the Company and its subsidiary banks may
also be affected or limited by other factors, such as the requirement to
maintain adequate capital above regulatory guidelines.
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
<PAGE> 8
standby letters of credit) is 8%. At least half of Total Capital must consist
of 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, 1998, 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 12.16% and 11.10% 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, 1998 was 7.46%. 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.
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, 1998. 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, adopted 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.
<PAGE> 9
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 when, absent this
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, the bankruptcy trustee will assume any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of
a banking subsidiary and will be entitled to a priority of payment.
Under the Federal Deposit Insurance Act, 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 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
Company's subsidiary banks 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 its other subsidiary banks.
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.
<PAGE> 10
The capital levels established for each of the categories are as
follows:
<TABLE>
<CAPTION>
==============================================================================================================-
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
- ---------------------------------------------------------------------------------------------------------------
Adequately 4% or more 8% or more 4% or more --
Capitalized
- ---------------------------------------------------------------------------------------------------------------
Undercapitalized less than 4% less than 8% less than 4% --
- ---------------------------------------------------------------------------------------------------------------
Significantly less than 3% less than 6% less than 3% --
Undercapitalized
- ---------------------------------------------------------------------------------------------------------------
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.
At December 31, 1998, each subsidiary bank had the requisite capital
levels to qualify as well capitalized.
FDIC INSURANCE ASSESSMENTS
The FDIC has adopted a 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 system
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. The FDIC also assigns
an institution 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 that the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds. The FDIC then determines an institution's insurance assessment
rate based on the capital category and supervisory category to which it is
assigned. There are nine assessment risk classifications (i.e., combinations of
capital groups and supervisory subgroups) to which different assessment rates
are applied.
<PAGE> 11
Since 1996, the deposit insurance premiums for 92% of all Bank
Insurance Fund ("BIF") members in the highest capital and supervisory
categories have been set at $2,000 per year, regardless of deposit size.
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 were imposed on
BIF-insured deposits in annual amounts presently estimated at 1.29 basis
points. Beginning in January 2000, these rates will increase to an estimated
2.43 basis points.
The FDIC may terminate its insurance of deposits upon a finding that
an 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 our business may be affected by such regulations or statutes.
<PAGE> 12
Item 2. PROPERTIES
The Company's principal office is located at Habersham Bank's Central
Habersham office, 282 Historic Highway 441, Cornelia, Georgia. The telephone
number of that office is (706) 778-1000.
Habersham Bank's North Habersham (main) office is located at 1151
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 at 282 Historic Highway 441, Cornelia, Georgia, its South
Habersham office is located at 186 441 By-Pass, Baldwin, Georgia and its
Cleveland Office is located at 575 South Main Street, Cleveland, Georgia. The
Hospitality Center is located at 1450 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 1925 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, at 282 Historic Highway 441, 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 282
Historic Highway 441, Cornelia, Georgia, and the telephone number of that
office is (706) 778-5777.
Advantage Insurers, Inc.'s principal office is located at 282 Historic
Highway 441, Cornelia, Georgia, and the telephone number of that office is
(706) 778-2277.
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.
<PAGE> 13
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, 1998, Habersham
Bancorp had approximately 577 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>
1998 HIGH LOW
---- ---- ---
<S> <C> <C>
Fourth quarter 17.00 14.00
Third quarter 18.75 16.00
Second quarter 20.25 18.13
First quarter 20.50 18.50
<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
</TABLE>
Cash dividends were paid quarterly at a rate of $.04 per share of
common stock in 1998. Cash dividends were paid quarterly at a rate of $.035 per
share of common stock in 1997.
<PAGE> 14
Item 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $ 28,959 $ 26,962 $ 23,367 $ 16,556 $ 12,435
Interest expense 15,091 13,305 11,044 7,398 4,801
Other income 15,750 8,056 2,277 1,371 1,207
Other expense 26,214 18,412 11,762 7,830 6,620
Net Income 2,058 2,157 1,908 2,021 1,658
PER SHARE AMOUNTS
Net income-diluted $ .83 $ .86 $ .79 $ .99 $ .98
Dividends .16 .14 .12 .10 .08
Weighted average number of
common and common equivalent
shares outstanding 2,481,630 2,497,993 2,411,687 2,032,567 1,689,795
AT DECEMBER 31
Total assets $ 384,069 $ 328,197 $ 310,011 $ 229,586 $ 161,327
Earning assets 359,838 299,301 287,850 213,035 152,018
Loans 281,898 235,764 230,867 145,434 100,848
Deposits 280,453 261,665 224,361 195,085 141,615
Shareholders' equity 32,214 30,144 27,669 25,905 15,851
RATIOS
Return on average assets .57% .69% .70% 1.01% 1.02%
Return on average equity 6.63% 7.48% 7.16% 9.39% 10.50%
Dividend payout ratio 16.87% 16.28% 15.19% 9.85% 8.02%
Average equity to average
assets ratio 8.52% 9.16% 9.84% 10.74% 9.76%
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 that 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 (the "Company") owns all of the outstanding stock of
Habersham Bank ("Habersham Bank"), Security State Bank ("Security Bank"), and
The Advantage Group, Inc. 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.
<PAGE> 15
Advantage Insurers, which began operations on 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.
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 for approximately
$60,000 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. 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 $2,057,901, $2,157,276 and $1,907,849 for
the years ended December 31, 1998, 1997 and 1996, respectively, with related
diluted earnings per common and common equivalent share of $ .83, $.86 and
$.79, respectively, representing a decrease of 3.49% from 1997 to 1998 and an
increase of 8.86% from 1997 to 1996. The decrease in net income for 1998 was
primarily due to a decrease in net yield on interest earning assets and
increases in other operating expenses. The increase in net income for 1997 was
primarily due to the increase in revenue from BancMortgage operations. Net
income represents a return on average equity of 6.63%, 7.48% and 7.16% for
1998, 1997 and 1996, 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 1998 was approximately $13.9 million compared to $13.7 million in 1997 and
$12.3 million in 1996. Net interest income for 1998 increased approximately
$211,000 or 1.55% when compared to 1997 and increased approximately $1.3
million or 10.82% when compared to 1996.
Interest income increased approximately $2.0 million or 7.40% in 1998
when compared to 1997 and increased approximately $3.6 million or 15.39% in
1997 when compared to 1996. The increase in interest income for 1998 resulted
primarily from increases in the loan portfolio of the Company, offset by a
reduced average yield on the loan portfolio. The increase in interest income
for 1997 resulted primarily from an increase of approximately $5.6 million in
the loan portfolio, offset by a reduced average yield on the loan portfolio.
The Company's loan portfolio increased approximately $11.5 million from
December 31, 1997 to December 31, 1998 due to approximately $70.2 million of
new loans offset by sales of approximately $58.7 million in residential
mortgages and construction loans. BancMortgage's loan portfolio increased by
approximately $35 million from December 31, 1997 to December 31, 1998,
resulting from originations of approximately $665 million and sales of
approximately $630 million. Average interest rates on loans were 9.37%, 10.03%
and 10.47% in 1998, 1997 and 1996, respectively. Yields on variable rate
residential mortgages decreased during 1998 in response to movements on various
indices.
<PAGE> 16
Weighted average interest rates on investment securities were 5.52%,
5.82% and 5.78% in 1998, 1997 and 1996, respectively. Average interest rates on
federal funds sold were 5.33%, 5.80% and 5.66% in 1998, 1997 and 1996,
respectively.
The increase in interest expense for 1998 of $1.8 million over 1997
resulted primarily from additional interest expense on increased average
balances of interest bearing deposits of approximately $33.4 million when
compared to 1997 average balances and on increased average Federal Home Loan
Bank advances of approximately $4.6 million when compared to 1997 average
advances. The weighted average interest rate paid on deposits in 1998 increased
to 5.24% compared to 5.18% in 1997. The average interest rate paid on Federal
Home Loan Bank advances decreased to 5.30% compared to 6.21% in 1997. 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 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 weighted
average interest rate paid on deposits in 1997 decreased to 5.18% when compared
to 5.62% in 1996. The average interest rate paid on Federal Home Loan Bank
advances increased to 6.21% compared to 5.09% in 1996.
The net interest margin of the Company was 4.08% in 1998, 4.65% in
1997 and 4.89% in 1996. Net interest margin decreased primarily due to
increases in interest expense paid on certificates of deposits and a decrease
in yields on loans.
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE AND AVERAGE YIELDS
EARNED AND RATES PAID
Average assets rose approximately $49.3 million or 15.67% in 1998 and
$43.9 million or 16.23% in 1997 over 1996. Average loan balances increased
approximately $31.2 million or 13.18% in 1998 over 1997 and approximately $47.7
million or 25.30% in 1997 over 1996. Average balances in investment securities
increased approximately $14.8 million or 33.48% in 1998 over 1997 and decreased
approximately $8.4 million or 15.93% in 1997 over 1996. The average balance of
federal funds sold in 1998 increased approximately $716,667 or 10.22% when
compared to 1997 and decreased approximately $1 million or 12.80% in 1997 when
compared to 1996.
The average balance of deposits for 1998 increased by approximately
$36.3 million or 15.26% over 1997 and increased by approximately $27.6 million
or 13.10% over 1996.
<PAGE> 17
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 and borrowed funds, 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, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1998 1997 1998 1997
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 $ 99,000 $ 168,516 6.60% 6.66% $ 6,534 $ 11,217
Federal funds sold 9,393,451 7,015,000 5.33% 5.80% 500,504 406,956
Investment securities:(2)
Taxable 32,749,495 21,631,576 5.71% 6.24% 1,869,012 1,349,570
Non-taxable 22,633,929 19,842,315 5.25% 5.37% 1,188,040 1,064,947
------------ ------------
Total investment securities 55,383,424 41,473,891
Trading Securities 1,064,899
Other Investments 2,894,675 2,985,316
Loans, net (taxable)(1) 267,857,590 236,673,265 9.37% 10.03% 25,088,953 23,743,448
Cash and due from banks 10,729,293 8,948,696
Premises & equipment 8,429,133 7,827,736
Other assets 8,346,333 9,776,640
------------ ------------ ------------ ------------
TOTAL ASSETS $364,197,798 $314,869,060 28,653,043 26,576,138
============ ============ ============ ============
LIABILITIES
Money market & NOW $ 53,598,039 $ 44,119,467 3.20% 3.10% (1,717,837) (1,366,113)
Savings accounts 8,254,196 7,790,505 2.71% 2.78% (224,025) (216,384)
Certificates of deposit 184,802,058 161,251,544 5.94% 5.86% (10,970,060) (9,454,476)
Short-term and other
borrowings 41,073,525 36,501,152 5.30% 6.21% (2,178,631) (2,268,193)
Demand deposit accounts 27,892,056 25,026,047
Other liabilities 17,541,259 11,331,058
------------ ------------
(15,090,553) (13,305,166)
------------ ------------
Shareholders' equity 31,036,665 28,849,287
------------ ------------
TOTAL LIABILITIES & EQUITY $364,197,798 $314,869,060
============ ============
NET INTEREST MARGIN 4.08% 4.65% $13,562,490 $13,270,972
=========== ===========
</TABLE>
<PAGE> 18
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE AND AVERAGE YIELDS
EARNED AND RATES PAID, CONTINUED
<TABLE>
<CAPTION>
1996 1996 1996
AVERAGE YIELD/ INCOME
BALANCE RATES (EXPENSE)
<S> <C> <C> <C>
ASSETS
Interest bearing balances
with other banks $ 279,148 6.74% $ 18,824
Federal funds sold 8,045,000 5.66% 455,733
Investment securities:(2)
Taxable 29,121,828 5.99% 1,744,496
Non-taxable 20,821,319 5.49% 1,143,088
------------
Total investment securities 49,943,147
Other investments 2,940,600
Loans, net (taxable)(1) 188,885,803 10.47% 19,773,296
Cash and due from banks 7,038,373
Premises & equipment 5,414,446
Other assets 8,346,113
------------ -----------
TOTAL ASSETS $270,892,630 23,135,437
============ ===========
LIABILITIES
Money market & NOW $ 37,566,357 3.04% (1,140,686)
Savings accounts 7,639,507 2.71% (206,935)
Certificates of deposit 141,763,866 5.75% (8,153,533)
Short-term and other
borrowings 30,316,397 5.09% (1,542,481)
Demand deposit accounts 23,626,106
-----------
Other liabilities 3,335,003 (11,043,635)
-----------
Shareholders' equity 26,645,394
------------
TOTAL LIABILITIES & EQUITY $270,892,630
============
NET INTEREST MARGIN 4.89% $12,091,802
===========
</TABLE>
(1) Interest earnings on nonaccrual loans are included in the foregoing
analysis to the extent that such interest earnings had been recorded
during 1998, 1997 and 1996.
(2) 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.
<PAGE> 19
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>
1998 AS COMPARED TO 1997 1997 AS COMPARED TO 1996
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 $ (4,683) $ (53) $ (4,630) $ (7,607) $ (150) $ (7,457)
Investment securities:
Taxable 519,442 (174,316) 693,758 (394,926) 53,740 (448,666)
Non-taxable 123,093 (26,817) 149,910 (78,141) (24,394) (53,747)
------------ ------------ ------------ ------------ ------------ ------------
Total Investment securities 642,535 (201,133) 843,668 (473,067) 29,346 (502,413)
Federal funds sold 93,548 (44,402) 137,950 (48,777) 9,521 (58,298)
Loans, net (taxable) 1,345,505 (1,782,283) 3,127,788 3,970,152 (1,033,195) 5,003,347
------------ ------------ ------------ ------------ ------------ ------------
TOTAL INTEREST INCOME 2,076,905 (2,027,871) 4,104,776 3,440,701 (994,478) 4,435,179
------------ ------------ ------------ ------------ ------------ ------------
INTEREST BEARING LIABILITIES
Money market & NOW 351,724 57,888 293,836 225,428 26,211 199,217
Savings accounts 7,641 (5,250) 12,891 9,449 5,357 4,092
Certificates of deposit 1,515,584 135,524 1,380,060 1,300,943 180,402 1,120,541
Short-term and
other borrowings (89,562) (373,506) 283,944 725,711 410,908 314,803
------------ ------------ ------------ ------------ ------------ ------------
TOTAL INTEREST EXPENSES 1,785,387 (185,344) 1,970,731 2,261,531 622,878 1,638,653
------------ ------------ ------------ ------------ ------------ ------------
NET INTEREST INCOME $ 291,518 $ (1,842,527) $ 2,134,045 $ 1,179,170 $ (1,617,356) $ 2,796,526
============ ============ ============ ============ ============ ============
</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 1998 increased $7.7 million or 95.51% when
compared to 1997 and increased $5.8 million or 253.77% when compared to 1996.
These increases were due primarily to increases in loan fee income of
approximately $1 million and $869,000 for 1998 and 1997, respectively and
increases in gains on sale of loans of approximately $5.8 million and $3.8
million for 1998 and 1997, 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 $135,000 and $849,000 for 1998 and 1997, respectively.
Other noninterest expense in 1998 increased by approximately $7.8
million or 42.38% as compared to 1997 and the 1997 amount increased
approximately $6.6 million or 56.53% as compared to 1996. The increase for 1998
was primarily due to increases of $6,001,018, $472,378 and $1,026,836 in
personnel, occupancy and other operating expenses, respectively. The increase
for 1998 was primarily due to increases in personnel, occupancy expenses and
other operating expenses resulting from a full year of operations in banking
and mortgage banking locations which began mid-year 1997. These expenses were
increased further by the opening of new locations in Hall and Fayette Counties
by BancMortgage. 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.
<PAGE> 20
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 $692,500 in 1998 as
compared to $422,000 in 1997 and $360,000 in 1996. The Company's allowance for
loan losses was $2,709,570 at December 31, 1998, which was l.29% of year-end
loans and 115.54% of total nonperforming loans, as compared to $2,336,079 at
December 31, 1997, which was 1.18% of year-end loans and 108.1% of total
nonperforming loans.
At December 31, 1998, loans over 90 days past due and nonaccrual loans
totaled $3,022,267 or 1.44% of gross outstanding loans as compared to
$2,533,157 or 1.28% of gross outstanding loans at December 31, 1997. The
increase for 1998 was primarily due to the addition of nonaccrual and past due
real estate mortgages of approximately $980,000 and $234,000, respectively,
from BancMortgage operations offset by decreases in 90 days past due loans,
other real estate, nonaccrual and restructured loans of approximately $503,000,
$367,000, $225,000 and $64,000, respectively. 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 $319,009 in 1998 representing .12% of
average loans, as compared to $347,327 in 1997, representing .15% of average
loans, as compared to $434,382 in 1996, representing .23% of average loans.
<PAGE> 21
The following table summarizes, for each of the years in the five year
period ended December 31, 1998, selected information related to the allowance
for loan losses:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Balance of allowance for loan
losses at beginning of period $ 2,336,079 $ 2,261,406 $ 2,335,788 $ 1,744,335 $ 1,601,902
------------ ------------ ------------ ------------ ------------
Balance of allowance of Security
Bank at June 30, 1995 628,371
Loans charged-off:
Commercial, financial &
agricultural (221,048) (224,976) (183,218) (22,252) (37,146)
Real estate (77,764) (142,871) (256,126) (47,110) (17,011)
Installment loans to individuals (140,809) (145,373) (108,660) (44,242) (49,962)
Other (22,157) (34,390) (23,014) (62,230) (21,025)
------------ ------------ ------------ ------------ ------------
Total charged-off loans (461,778) (547,610) (571,018) (175,834) (125,144)
------------ ------------ ------------ ------------ ------------
Recoveries:
Commercial, financial &
agricultural 59,284 22,454 32,857 5,566 1,893
Real estate 16,850 108,247 65,150 1,610 4,772
Installment loans to individuals 55,071 61,324 28,760 17,429 15,387
Other 11,564 8,258 9,869 16,268 37,429
------------ ------------ ------------ ------------ ------------
Total recoveries 142,769 200,283 136,636 40,873 59,481
------------ ------------ ------------ ------------ ------------
Net charge-offs (319,009) (347,327) (434,382) (134,961) (65,663)
Additions to allowance 692,500 422,000 360,000 98,043 208,096
------------ ------------ ------------ ------------ ------------
Balance of allowance for loan
losses at end of period $ 2,709,570 $ 2,336,079 $ 2,261,406 $ 2,335,788 $ 1,744,335
============ ============ ============ ============ ============
Average amount of loans $267,857,590 $236,673,265 $188,885,803 $122,451,274 $ 97,723,297
============ ============ ============ ============ ============
Ratio of net charge-offs during
the period to average loans
outstanding during the period .12% .15% .23% .11% .07%
Ratio of allowance to year-end loans 1.29% 1.18% 1.09% 1.61% 1.73%
</TABLE>
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 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, regulatory requirements and specific Collateral
evaluations, are used to determine the allowance required to provide for losses
on the classified loans. 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 the general allowances for loan losses on this non-classified
portion of the loan portfolio. Management believes its allowance for loan
losses is adequate to absorb losses on loans outstanding at December 31, 1998.
<PAGE> 22
The allocation of the allowance for loan losses by loan category at
December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
PERCENT OF LOANS PERCENT OF LOANS
IN EACH CATEGORY IN EACH CATEGORY
AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS
<S> <C> <C> <C> <C>
Commercial, financial & agricultural $ 440,776 6.6% $ 720,380 7.9%
Real estate 2,026,139 85.2% 1,133,044 84.0%
Installment loans to individuals 186,155 8.2% 482,655 8.1%
Loans held for sale 56, 500 0.0% -- 0.0%
---------- ----- ---------- -----
TOTAL $2,709,570 100.0% $2,336,079 100.0%
========== ===== ========== =====
</TABLE>
Prior to 1997, the Company used an alternative method to determine the
allowance for loan losses. The Company began the allocation of the allowance
for loan losses by loan categories in 1997.
LOANS
Loans, exclusive of loans held for sale, increased approximately $11.5
million or 5.82%, in 1998 as compared to 1997 and decreased approximately $8.6
million or 4.17% in 1997 as compared to 1996. The increase in the Company's
loan portfolio in 1998 resulted primarily from approximately $70.2 million of
new loans offset by sales of approximately $58.7 million in construction loans
and residential mortgages. The Company's 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. Loans held for sale increased approximately $34.6
million or 92.38% in 1998 when compared to 1997 and increased approximately
$14.2 million or 60.99% in 1997 when compared to 1996 due to continued
increased mortgage banking activity.
The composition of the Company's loan portfolio changed during 1998 as
a result of an increase in real estate secured mortgage loans of approximately
$8.7 million or 8.31% as compared to 1997; construction loans increased
approximately $4.4 million or 7.09%, in 1998 as compared to 1997, and
commercial loans decreased $2.0 million or 12.61%, in 1998 as compared to 1997.
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 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>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 13,829,965 $ 15,824,792 $ 18,292,993 $ 17,945,695 $ 13,653,109
Real estate - construction 66,359,030 61,965,365 50,263,496 16,512,884 5,564,753
Real estate - mortgage 112,256,033 104,347,783 122,897,806 96,361,817 68,992,708
Installment loans to individuals 17,337,632 16,115,903 15,410,015 14,613,500 12,637,913
------------ ------------ ------------ ------------ ------------
Total $209,782,660 $198,253,843 $206,864,310 $145,433,896 $100,848,843
============ ============ ============ ============ ============
</TABLE>
<PAGE> 23
The following table sets forth the maturities and sensitivities to
changes in interest rates of loans at December 31, 1998.
<TABLE>
<CAPTION>
DUE AFTER
DUE IN ONE THROUGH DUE AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
LOAN MATURITY
Commercial, financial
and agricultural ..................................... $ 8,218,014 $4,575,014 $ 1,036,937 $13,829,965
Real estate - construction ............................ 64,641,241 1,717,789 -- 66,359,030
----------- ---------- ----------- -----------
TOTAL ............................................ $72,859,255 $6,292,803 $ 1,036,937 $80,188,995
=========== ========== =========== ===========
LOAN INTEREST RATE SENSITIVITY:
Selected loans with:
Predetermined interest rates ........................... $18,533,584 $4,662,814 $ 246,080 $23,442,478
Floating or adjustable
interest rates ........................................ 54,325,671 1,629,989 790,857 56,746,517
----------- ---------- ----------- -----------
TOTAL ............................................... $72,859,255 $6,292,803 $ 1,036,937 $80,188,995
=========== ========== =========== ===========
</TABLE>
NONPERFORMING ASSETS AND PAST DUE LOANS
Nonperforming assets consist of nonaccrual loans, accruing loans 90
days past due, restructured loans and other real estate owned. Nonperforming
assets increased $57,127 or 1.07% from December 31, 1997 to December 31, 1998
and increased $619,247 or 13.08% from December 31, 1996 to December 31, 1997.
The increase for 1998 was primarily due to the addition of nonaccrual and past
due real estate mortgages of approximately $980,000 and $234,000, respectively,
from BancMortgage operations offset by decreases in 90 days past due loans,
other real estate, nonaccrual and restructured loans of approximately $503,000,
$367,000, $225,000 and $64,000, respectively. The increase for 1997 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: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Accruing loans 90 days past due $1,013,009 $1,282,000 $ 377,000 $ 258,000 $ 196,017
Nonaccrual 2,009,258 1,251,157 981,801 1,022,683 568,822
Restructured loans 849,963 913,753 973,559 1,227,411 1,318,790
Other real estate owned 1,539,900 1,908,094 2,403,397 1,217,860 1,165,954
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $5,412,130 $5,355,004 $4,735,757 $3,725,954 $3,249,583
========== ========== ========== ========== ==========
RATIOS:
Nonperforming loans (excluding
restructured loans) to total loans 1.44% 1.28% .66% .88% .76%
Nonperforming assets to total loans
plus other real estate owned 2.56% 2.68% 2.26% 2.51% 3.19%
Allowance to nonperforming assets 50.06% 43.62% 47.75% 62.69% 53.68%
</TABLE>
Accrual of interest is discontinued when either principal or interest
becomes 90 days past, due unless the loan is both well secured and in the
process of collection, or in management's opinion, when reasonable doubt exists
as to the full collection of interest or principal. Interest income that would
have been recorded on these nonaccrual and restructured loans in accordance
with their original terms totaled $401,099, $289,782 and $213,484,
respectively, in 1998, 1997 and 1996, compared with interest income recognized
of $274,557, $252,930 and $180,780, respectively.
At December 31, 1998, 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.
<PAGE> 24
Habersham Bank held a concentration in mortgages for agribusiness
purposes in the poultry industry which totaled approximately $10 million, or
approximately 4.67% of total net loans at December 31, 1998 and which totaled
approximately $12 million, or approximately 6.34% of total net loans at
December 31, 1997.
INVESTMENT SECURITIES
The Company has classified its investment securities as available for
sale, held to maturity, or trading. 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, 1998, approximately $46.3 million of investment securities were
classified as available for sale. Approximately $263,000 of net unrealized
gain, net of income taxes, was included in shareholders' equity related to the
available for sale investment securities.
On September 30, 1998, the Company exercised its previously acquired
option to purchase a 26.5% interest in Empire Bank Corp. ("Empire"),
Homerville, Georgia at a total cost of $3,017,406. Subsequent to the Company
acquiring its option to purchase this interest in Empire, Empire entered into a
definitive agreement to be acquired by FLAG Financial Corp. ("FLAG"). Upon the
exchange of its common stock in Empire for the common stock of FLAG during
December, the Company recorded the investment in the common stock of FLAG as a
trading security and recorded an unrealized gain of $478,134 which is reflected
in earnings.
The following table sets forth the carrying amounts of investment
securities at December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Investment securities available for sale:
U.S. Treasury $ 200,812 $ 201,438 $ 801,003
U.S. Government agencies 31,678,154 20,982,863 21,625,933
States & political subdivisions 13,767,110 11,345,182 8,520,859
Other investments 693,936 694,940 680,881
----------- ----------- -----------
Total $46,340,012 $33,224,423 $31,628,676
=========== =========== ===========
Investment securities held to maturity:
U.S. Government agencies $ 3,911,279 $ 1,351,357 $ 2,187,521
States & political subdivisions 11,600,284 9,954,423 12,122,431
Other investments 99,000 99,000 198,000
----------- ----------- -----------
Total $15,610,563 $11,404,780 $14,507,952
=========== =========== ===========
Trading securities $ 3,495,540 -- --
===========
</TABLE>
<PAGE> 25
The following table sets forth the maturities of investment securities
at December 31, 1998 and the related weighted yields of such securities on a
tax equivalent basis (assuming a 34% tax rate).
<TABLE>
<CAPTION>
MATURING IN
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 $ 200,812
U.S. Government agencies 1,245,367 $11,779,850 $ 684,946 $17,967,991
States & political subdivisions 1,170,817 5,218,286 2,586,366 4,791,641
Other investments 693,936
Weighted average yields:
U.S. Treasury 6.15%
U.S. Government agencies 6.42% 5.76% 5.94% 6.67%
States & political subdivisions 6.45% 4.96% 5.10% 5.05%
Investment securities held to maturity:
Carrying Value:
U.S. Government agencies $ 101,792 $ 1,224,232 $ 517,984 $ 2,067,271
States & political subdivisions 883,113 4,047,508 3,159,112 3,510,551
Other investments 99,000
Weighted average yields:
U.S. Government agencies 7.42% 6.12% 6.92% 7.24%
States & political subdivisions 4.37% 4.85% 4.96% 6.12%
Other Investments 6.60%
</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, 1998.
DEPOSITS
Average deposits increased approximately $36.3 million and $27.6
million during 1998 and 1997, respectively.
The following table sets forth the average amount of deposits and
average rate paid on such deposits for each category which exceeds 10% of
average total deposits for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1998
AVG. AMT AVG AVG. AMT AVT AVG. AMT AVG
OUTSTANDING RATE OUTSTANDING RATE OUTSTANDING RATE
<S> <C> <C> <C> <C> <C> <C>
Interest bearing demand deposits $ 53,598,039 3.20% $ 44,119,467 3.10% $ 37,566,357 3.04%
Noninterest bearing demand deposits 27,892,056 n/a 25,026,047 n/a 23,626,106 n/a
Time certificates of deposits 184,802,058 5.94% 161,251,544 5.86% 141,763,866 5.75%
</TABLE>
At December 31, 1998, time certificates of deposit of $100,000 or more
totaled $58,885,476. The maturities of all time certificates of deposit over
$100,000 are as follows:
<TABLE>
<S> <C>
3 months or less $19,046,198
Over 3 but less than 6 months 12,519,527
Over 6 but not more than 12 months 18,884,387
Over 1 year but not more than 5 years 8,435,364
-----------
TOTAL $58,885,476
===========
</TABLE>
OTHER BORROWINGS
Other borrowings increased approximately $28.6 million during 1998 as
compared with 1997 as a result of borrowings of approximately $28.4 million
from the Federal Home Loan Bank and a $2.7 million note payable to the
<PAGE> 26
National Bank of Commerce of Birmingham in connection with the purchase of
Empire common stock offset by repayments of approximately $2.5 million. Other
borrowings decreased approximately $20.4 million during 1997 as compared with
1996 as a result of repayments to 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 minimal 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
below in the table) 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, 1998, that
the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, 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' categories.
The Company's actual capital amounts and ratios as of December 31,
1998 follows (in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
CORRECTIVE
FOR CAPITAL ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to risk-weighted assets):
The Company $30,292 12.16% $20,576 8% N/A N/A
Habersham Bank 21,636 10.34% 16,738 8% $20,923 10%
Security Bank 7,466 14.48% 4,124 8% 5,155 10%
Tier I Capital (to risk-weighted assets):
The Company $28,561 11.10% $10,288 4% N/A N/A
Habersham Bank 19,459 9.30% 8,369 4% $12,554 6%
Security Bank 6,934 13.45% 2,062 4% 3,093 6%
Tier I Capital (to average assets):
The Company $28,561 7.46% $15,315 4% N/A N/A
Habersham Bank 19,459 6.09% 12,783 4% $15,979 5%
Security Bank 6,934 10.97% 2,529 4% 3,161 5%
</TABLE>
<PAGE> 27
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 $7.52.
Cash dividends were paid at a rate of $.04 per share in March, June,
September and December of 1998. Cash dividends were paid at a rate of $.035 per
share in March, June, September and December 1997. Cash dividends were paid at
a rate of $.03 per share in March, June, September and December 1996.
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 perform 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 relative interest rate sensitivity of the Company's assets and
liabilities indicates the extent to which the Company's net interest income may
be affected by interest rate movements. The Company's ability to reprice assets
and liabilities in the same dollar amounts and at the same time minimizes
interest rate risks. One method of measuring the impact of interest rate
changes on net interest income is to measure, in a number of time frames, the
interest sensitivity gap, by subtracting interest sensitive liabilities from
interest sensitive assets, as reflected in the following table. Such interest
sensitivity gap represents the risk, or opportunity, in repricing. If more
assets than liabilities are repriced at a given time in a rising rate
environment, net interest income improves; in a declining rate environment, net
interest income deteriorates. Conversely, if more liabilities than assets are
repriced while interest rates are rising, net interest income deteriorates; if
interest rates are falling, net interest income improves.
<PAGE> 28
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
DUE IN DUE AFTER DUE AFTER DUE AFTER DUE AFTER
YIELD/ THREE THREE THROUGH SIX THROUGH ONE THROUGH FIVE
INTEREST EARNING ASSETS: RATE MONTHS SIX MONTHS TWELVE MONTHS FIVE YEARS YEARS
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold 5.32% $ 8,300,000
Investment securities 5.70% 799,514 $ 886,639 $ 2,014,747 $ 21,269,876 $ 36,979,799
Loans 9.37% 96,570,894 27,526,605 33,219,078 46,726,284 77,855,109
----- ----------- ------------ ------------- ------------ ------------
Total earning assets 8.64% 105,670,408 28,413,244 35,233,825 67,996,160 114,834,908
----- ----------- ------------ ------------- ------------ ------------
INTEREST BEARING LIABILITIES:
Deposits:
Money Market and NOW 3.20% 55,419,227
Savings 2.71% 8,634,374
Certificates of
Deposit 5.94% 70,022,596 34,157,231 49,549,736 34,247,061 14,859
Short term
borrowings 5.30% 53,950,230 2,700,000
----- ----------- ------------ ------------- ------------ ------------
Total interest bearing
liabilities 5.33% 188,026,427 $ 34,157,231 49,549,736 36,947,061 14,859
------ ------------ ------------ -------------- ------------ ------------
INTEREST RATE MARGIN 4.08%
====
Excess (deficiency) of interest earning
assets over (to) interest
bearing liabilities $(82,356,019) $( 5,743,987) $ (14,315,911) $ 31,049,099 $114,820,049
============ ============ ============= ============ ============
Cumulative Gap $(82,356,019) $(88,100,006) $(102,415,917) $(71,366,818) $ 43,453,231
Ratio of cumulative gap to
total cumulative earning assets (77.94)% (65.71)% (60.49%) (30.07%) 12.34%
Ratio of interest earning assets to
interest bearing liabilities 56.20% 60.35% 62.31% 76.88% 114.08%
<CAPTION>
TOTAL
INTEREST EARNING ASSETS:
<S> <C>
Federal funds sold $ 8,300,000
Investment securities 61,950,575
Loans 281,897,970
------------
Total earning assets 352,148,545
------------
INTEREST BEARING LIABILITIES:
Deposits:
Money Market and NOW 55,419,227
Savings 8,634,374
Certificates of
Deposit 187,991,483
Short term
borrowings 56,650,230
------------
Total interest bearing
liabilities $308,695,314
------------
INTEREST RATE MARGIN
Excess (deficiency) of interest earning
assets over (to) interest
bearing liabilities $ 43,453,231
============
Cumulative Gap
Ratio of cumulative gap to
total cumulative earning assets
Ratio of interest earning assets to
interest bearing liabilities
</TABLE>
The Company's strategy is to maintain a ratio of interest sensitive
assets to interest sensitive liabilities in the range of 60% to 140% at the
less than one year time frame. At December 31, 1998, the Company was able to
meet such objective. The interest rate sensitivity analysis has a negative one
year gap of approximately $102.4 million (excess of interest bearing
liabilities to interest 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 less sensitive to short term rate movements.
MARKET RISK
Market risk reflects the risk of economic loss resulting from adverse
changes in market prices and interest rates. The risk of loss can be reflected
in either diminished current market values or reduced potential net interest
income in future periods.
Market risk arises primarily from interest rate risk inherent in the
Company's lending and deposit taking activities. The structure of the Company's
loan and deposit portfolios is such that a significant decline in the prime
rate may adversely impact net market values and interest income. Management
seeks to manage this risk through the use of its investment securities
portfolio. The composition and size of the investment portfolio is managed so
as to reduce the interest rate risk in the deposit and loan portfolios while at
the same time maximizing the yield generated from the portfolio.
The table below presents in tabular form the contractual balances and
the estimated fair value of the Company's balance sheet financial instruments
and their expected maturity dates as of December 31, 1998. The expected
maturity categories take into consideration historical prepayments experience
as well as management's expectations based on the interest rate environment as
of December 31, 1998.
<PAGE> 29
MARKET RISK INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL/NOTIONAL AMOUNT MATURING IN: FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE-SENSITIVE ASSETS:
Fixed interest rate loans $ 50,258 $10,100 $11,775 $5,389 $5,816 $75,576 $158,914 $155,285
Average interest rate 8.81% 9.23% 9.15% 8.62% 8.43% 7.12% 8.56%
Variable interest rate loans 65,559 3,214 4,820 1,336 1,171 46,884 122,984 117,435
Average interest rate 8.54% 9.13% 9.17% 9.32% 9.28% 10.09% 9.25%
Fixed interest rate securities 1,491 2,490 2,320 2,682 2,920 45,860 57,763 58,301
Average interest rate 5.30% 4.84% 5.60% 5.15% 5.05% 6.07% 5.33%
Variable interest rate securities -- 248 -- -- -- 3,940 4,188 4,188
Average interest rate -- 5.01% -- -- -- 6.15% 5.58%
RATE-SENSITIVE LIABILITIES:
Savings and interest bearing checking 64,054 -- -- -- -- -- 64,054 64,054
Average interest rate 2.74% -- -- -- -- -- 2.74%
Fixed interest rate time deposits 139,270 17,967 8,293 9,310 1,216 144 176,200 184,235
Average interest rate 5.78% 5.89% 6.07% 6.04% 6.35% 6.10% 5.78%
Variable interest rate time deposits 11,720 71 -- -- -- -- 11,791 12,086
Average interest rate 5.04% 4.78% -- -- -- -- 4.91%
Variable interest rate borrowings 56,650 -- -- -- -- -- 56,650 56,650
Average interest rate 5.40% -- -- -- -- -- 5.40%
</TABLE>
The trading securities of $3,495,540 are subject to changes in market values.
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>
1998 1997
----- -----
<S> <C> <C>
Habersham Bank 23.97% 30.64%
Security Bank 30.24% 25.51%
</TABLE>
One of the sources of funds for Habersham Bancorp is dividends from
the subsidiary banks. The approval of the Georgia Department of Banking and
Finance is required if dividends declared by the Banks to the Company in any
<PAGE> 30
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 $1,128,000 without regulatory approval.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 is effective for
financial statements for all fiscal quarters of all fiscal years beginning
after June 15, 1999. The Company does not believe the provisions of SFAS No.
133 will have a significant impact on the financial statements, as the Company
does not have a material amount of derivative instruments.
YEAR 2000
The Company recognizes that there is a business risk in computerized
systems as the next century approaches. The Company has defined Year 2000
readiness as computerized systems used by the Company having the ability to: 1)
correctly process dates before and after the year 2000, 2) recognize the year
2000 as a leap year, 3) accept and display dates unambiguously, and 4) process
logic dates that are used for "non-date function."
The Company has developed an ongoing Action Plan designed to ensure
that its operational and financial systems will not be adversely affected by
failures due to processing errors arising from calculations using the year 2000
date or other operations that are date sensitive. The Action Plan consists of
five phases: Awareness, Assessment, Remediation, Validation and Implementation.
The Company has formed a Year 2000 committee assigned to this project and the
Boards of Directors and senior management of the Company have established year
2000 compliance as a strategic initiative. The Year 2000 Committee meets on a
monthly basis to monitor testing progress as well as all other aspects of the
Year 2000 issue.
During 1998, the Year 2000 Committee successfully completed the
Awareness, Assessment and Remediation Phases of our Year 2000 Action Plan.
Validation is also substantially completed. All remaining testing will be
concluded by June 30, 1999. The Implementation Phase is also well under way.
The activities involved in each phase are described below.
Assessment Phase - In the Assessment Phase, the Company inventoried all
hardware, software and non-computerized systems. Each inventory item has been
prioritized as to its Year 2000 compliance.
Awareness Phase - A Customer Awareness Committee was formed to develop a plan
for communication tools to be utilized throughout 1999 in an effort to ensure
that our customers are aware of the impact that Year 2000 issues may have on
their individual businesses and also to assure our customers that we are making
every effort to ensure the stability and continued service to our customers
into the next millennium. Communications tools used by the Customer Awareness
Committee include informational brochures, newsletters, seminars, toll free
telephone numbers, and contact personnel identified for each subsidiary.
Remediation and Validation Phase - As a part of the remediation phase, a Year
2000 Contingency Committee developed a business resumption contingency plan as
well as a business remediation contingency plan. This Year 2000 Contingency
Plan has been completed and approved by the Boards of Directors. Validation of
the Plan should be complete by June 30, 1999. The Plan addresses worst case
scenarios such as total or partial failure of our mainframe operating system as
well as other software that plays an integral part in the day to day
<PAGE> 31
operations of our Company. The Plan details the resources and procedures
necessary to manually process transactions in the event the core systems do not
function on January 1, 2000. Alternative methods of providing service in the
event of other disasters, such as a power failure, are addressed in the plan
also. In addition, the Company has made every attempt to address external
risks, primarily credit and liquidity, associated with our major customers and
businesses. The way that these material customers approach and comply with the
Year 2000 will have a potential significant impact on the Company. In an effort
to identify and manage the risks posed by those customers, the Company has
identified material customers; evaluated their Year 2000 preparedness through
questionnaires and interviews; assessed their Year 2000 risk to the Company;
and implemented appropriate controls to manage and mitigate their Year 2000
risk to the Company. Currently, there are no significant customers which are
rated as "high" Year 2000 risk and which the Company believes present a
significant risk of loss. This Year 2000 Contingency Plan has been completed
and approved by the Boards of Directors. Validation of the Plan should be
complete by June 30, 1999.
Implementation Phase - Testing of our systems was substantially complete as of
December 31, 1998. All testing appears to have been successful. However, the
Company's information technology ("IT") systems are comprised of third party
application and operating systems used in accounting functions related to
lending and deposit activities. The IT systems also consist of hardware, both
including main frame computer equipment and personal computers. Since we are
not the manufacturer of the products and systems on which we rely, we have also
been working with our third party vendors to determine whether there are any
outstanding Year 2000 problems. All systems identified as mission critical have
been certified as Year 2000 compliant by vendors providing the software
applications or hardware. Non-IT systems, such as door security and vault time
locks which may be date sensitive, have been identified as well and have been
included in the testing program of the Company. These efforts are scheduled to
be completed well in advance of December 31, 1999.
Cost - At December 31, 1998, costs incurred for Year 2000 related upgrades of
computer equipment and software totaled approximately $15,000 and are included
in other operating expenses. A Year 2000 budget of less than $100,000 has been
established for systems that must be upgraded or remediated during 1999.
Approximately 60% of the budgeted Year 2000 cost is anticipated to be
capitalized. This amount is not expected to have a material effect on the
Company's financial condition or results of operations for 1999.
Liquidity - In an attempt to ensure that the Banks have sufficient liquidity to
cover potential cash withdrawals prior to the Year 2000, the Year 2000
Contingency Plan requires monitoring of cash levels, communication with
depositors regarding Year 2000 readiness and the availability of FDIC deposit
insurance and ensuring that the Banks have available lines of credit to meet
immediate cash requirements.
Based on information currently available, while management anticipates there
could be isolated and intermittent disruptions of various services, there is no
expectations of extensive system failures that would have a material adverse
effect on the financial condition or results of operations of the Company.
<PAGE> 32
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>
1998:
Interest income $6,910 $7,226 $7,366 $7,457
Net interest income 3,420 3,446 3,513 3,489
Net income 443 419 604 592
Per share - basic .18 .17 .25 .24
Per share - diluted .18 .17 .24 .24
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
Per share - basic .26 .22 .20 .23
Per share - diluted .25 .21 .19 .21
</TABLE>
Cash dividends were paid on a quarterly basis at a rate of $.04 per
share of common stock in 1998 and $.035 per share of common stock in 1997.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Market Risk" under Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and incorporated herein by
reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets of the Company as of December 31, 1998
and 1997, and the related consolidated statements of income, shareholders'
equity and comprehensive income and cash flows and notes to the consolidated
financial statements for each of the years in the three years ended December 31,
1998, 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 9. 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 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.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Company's directors and executive officers
<PAGE> 33
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 11. 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 12. 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 13. 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 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) See Item 8 for a list of the financial statements as filed as a part
of this report.
(b) No financial statement schedules are applicable as the required
information is included in the financial statements in Item 8.
(c) The registrant submits herewith as exhibits to this report on Form
10-K 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. (7)
</TABLE>
<PAGE> 34
<TABLE>
<S> <C>
13.0 Financial statements and notes thereto contained in the
Habersham Bancorp 1998 Annual Report.
16.0 Letter Regarding Change in Accountants. (8)
21.0 Subsidiaries of Habersham Bancorp.
23.1 Consent of KPMG LLP
23.2 Consent of Deloitte & Touche LLP
27.0 Financial Data Schedule (for SEC use only).
99.0 Independent Auditors Opinion dated January 17, 1997 on consolidated
financial statements for the year ended December 31, 1996.
</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 Annual Report on Form 10-KSB for the year ended December 31, 1997
(File No. 0-13153).
(8) 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, 1998.
<PAGE> 35
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, 1999
------------------------- -----------------
Director, President and
Chief Executive Officer
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, 1999
- ------------------------------ and Director
/s/ Thomas A. Arrendale, III Vice Chairman of the Board March 30, 1999
- ------------------------------ and Director
/s/ David D. Stovall Director, President and March 30, 1999
- ------------------------------ Chief Executive Officer *
/s/ James Holcomb Director March 30, 1999
- ------------------------------
/s/ James A. Stapleton, Jr Director March 30, 1999
- ------------------------------
/s/ C. Kenneth White Director March 30, 1999
- ------------------------------
/s/ Calvin R. Wilbanks Director March 30, 1999
- ------------------------------
</TABLE>
* Principal financial officer, principal executive officer, controller and
principal accounting officer.
<PAGE> 36
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. (7)
13.0 Financial statements and notes thereto contained in the
Habersham Bancorp 1998 Annual Report
16.0 Letter Regarding Change in Accountants (8)
21.0 Subsidiaries of Habersham Bancorp
23.1 Consent of KPMG LLP
23.2 Consent of Deloitte & Touche LLP
27.0 Financial Data Schedule (for SEC use only)
99.0 Independent Auditor Opinion dated January 17, 1997 on
consolidated financial statements for the year ended
December 31, 1996.
</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).
(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).
<PAGE> 37
(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 be reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1997.
(File No. 0-13153).
(8) 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.
<PAGE> 1
EXHIBIT 13.0
<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, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and comprehensive
income, 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 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 1998 and 1997 consolidated financial statements present
fairly, in all material respects, the financial position of Habersham Bancorp
and subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
KPMG LLP
Atlanta, Georgia
February 5, 1999
<PAGE> 3
HABERSHAM BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks (note 4) $ 5,798,796 $ 13,067,675
Federal funds sold 8,300,000 16,740,000
Investment securities available for sale (note 5) 46,340,012 33,224,423
Investment securities held to maturity (estimated
fair values of $15,888,697 in 1998 and
$11,606,286 in 1997)(note 6) 15,610,563 11,404,780
Trading securities 3,495,540 --
Other investments (note 10) 4,193,934 2,168,134
Loans held for sale (note 10) 72,162,620 37,509,982
Loans (notes 7, 10 and 17) 209,735,350 198,212,466
Less allowance for loan losses (note 7) (2,709,570) (2,336,079)
------------ ------------
Loans, net 207,025,780 195,876,387
------------ ------------
Premises and equipment, net (note 8) 8,206,169 8,594,292
Accrued interest receivable 2,299,992 2,347,671
Other real estate 1,539,900 1,908,094
Goodwill and other intangible assets, net of accumulated
amortization of $848,170 in 1998 and $585,900
in 1997) - (note 3) 3,321,338 3,583,608
Other assets (note 14) 5,774,690 1,772,039
------------ ------------
TOTAL ASSETS $384,069,334 $328,197,085
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (notes 9 and 17):
Noninterest-bearing demand $ 28,408,215 $ 27,035,571
Money market and NOW accounts 55,419,227 45,183,589
Savings 8,634,374 7,947,487
Time ($100,000 and over) 58,885,476 49,827,445
Other time 129,106,007 131,670,907
------------ ------------
Total deposits 280,453,299 261,664,999
Short-term borrowings (note 9) 139,659 2,627,380
Other borrowings (note 9) 2,700,000 --
Federal Home Loan Bank advances (note 10) 53,810,571 25,401,992
Accrued interest payable 3,168,311 2,817,810
Other liabilities 11,583,567 5,540,565
------------ ------------
TOTAL LIABILITIES 351,855,407 298,052,746
------------ ------------
Shareholders' Equity (notes 12, 13 and 14):
Common stock, $1.00 par value; 10,000,000 shares
authorized; 2,448,267 and 2,408,517 shares issued
in 1998 and 1997, respectively 2,448,267 2,408,517
Additional paid-in capital 9,444,576 9,109,026
Retained earnings 20,057,968 18,386,350
Accumulated other comprehensive income 263, 116 240,446
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 32,213,927 30,144,339
Commitments (notes 7 and 8)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $384,069,334 $328,197,085
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
HABERSHAM BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME
Loans $25,088,953 $23,743,448 $19,773,296
Investments:
U.S. Treasury and Government agencies 1,869,012 1,349,570 1,763,320
States and political subdivisions
(exempt from Federal income tax) 1,188,040 1,064,947 1,143,088
Other investments 312,179 397,235 231,415
Federal funds sold 500,504 406,956 455,733
----------- ----------- -----------
TOTAL INTEREST INCOME 28,958,688 26,962,156 23,366,852
----------- ----------- -----------
INTEREST EXPENSE
Time deposits, $100,000 and over 3,264,884 2,144,502 1,819,962
Other deposits 9,647,038 8,892,471 7,681,191
Short-term and other borrowings,
primarily FHLB advances 2,178,631 2,268,193 1,542,482
----------- ----------- -----------
TOTAL INTEREST EXPENSE 15,090,553 13,305,166 11,043,635
----------- ----------- -----------
NET INTEREST INCOME 13,868,135 13,656,990 12,323,217
Provision for loan losses (note 7) 692,500 422,000 360,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 13,175,635 13,234,990 11,963,217
----------- ----------- -----------
NONINTEREST INCOME
Gain on sale of loans 9,903,982 4,107,804 334,636
Loan fee income 2,372,906 1,363,160 475,964
Service charges on deposit accounts 615,320 672,223 649,586
Other service charges and commissions 244,984 216,013 201,064
Securities (losses) gains, net (note 4) 76,614 (12,972) (4,134)
Unrealized gain on trading securities 478,134 -- --
Travel service income 1,258,772 1,123,785 274,610
Other income 799,757 586,249 345,561
----------- ----------- -----------
TOTAL NONINTEREST INCOME 15,750,469 8,056,262 2,277,287
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits (note 14) 16,703,020 10,702,002 6,513,959
Occupancy expenses 2,605,898 2,133,520 1,493,715
Travel service expense 1,141,055 1,031,194 247,561
Computer services 610,707 418,624 275,995
Other (note 15) 5,153,269 4,126,433 3,231,086
----------- ----------- -----------
TOTAL NONINTEREST EXPENSE 26,213,949 18,411,773 11,762,316
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,712,155 2,879,479 2,478,188
Provision for income taxes (note 11) 654,254 722,203 570,339
----------- ----------- -----------
NET INCOME $ 2,057,901 $ 2,157,276 $ 1,907,849
=========== =========== ===========
NET INCOME PER COMMON SHARE - BASIC $ .85 $ .91 $ .82
=========== =========== ===========
NET INCOME PER COMMON SHARE - DILUTED $ .83 $ .86 $ .79
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC 2,413,474 2,370,423 2,326,704
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - DILUTED 2,481,630 2,497,993 2,411,687
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
HABERSHAM BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
INCOME STOCK CAPITAL EARNINGS INCOME STOCK
TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $2,403,974 $8,837,624 $14,932,035 $207,637 $(475,801)
Comprehensive income:
Net income $1,907,849 -- -- 1,907,849 -- --
Unrealized losses on investment
Securities, net of taxes (note 13) (151,126) -- -- -- (151,126) --
----------
Total comprehensive income $1,756,723
==========
Cash dividends, $.12 per share -- -- (278,991) -- --
Sale of 38,000 shares of
treasury stock upon exercise
of stock options -- 60,134 -- -- 225,454
---------- ---------- ----------- -------- ---------
Balance at December 31, 1996 2,403,974 8,897,758 16,560,893 56,511 (250,347)
Comprehensive income:
Net income $2,157,276 -- -- 2,157,276 -- --
Unrealized losses on investment
Securities, net of taxes (note 13) 183,935 -- -- -- 183,935 --
----------
Total comprehensive income $2,341,211
==========
Cash dividends, $.14 per share -- -- (331,819)
Sale of 42,192 shares of treasury
stock upon exercise of stock options
and dividend reinvestment -- 177,968 -- -- 250,347
428,315
Issuance of common stock
Upon exercise of stock options 4,543 33,300 -- -- --
---------- ---------- ----------- -------- --------
Balance at December 31, 1997 2,408,517 9,109,026 18,386,350 240,446 --
Comprehensive income:
Net income $2,057,901 -- -- 2,057,901 -- --
Unrealized losses on investment
Securities, net of taxes (note 13) 22,670 -- -- -- 22,670 --
----------
Total comprehensive income $2,080,571
==========
Cash dividends, $.16 per share -- -- (386,283) -- --
Issuance of common stock
Upon exercise of stock options 39,750 335,550 -- -- --
---------- ---------- ----------- -------- ---------
Balance at December 31, 1998 $2,448,267 $9,444,576 $20,057,968 $263,116 $ --
========== ========== =========== ======== =========
<CAPTION>
TOTAL
<S> <C>
Balance at December 31, 1995 $25,905,469
Comprehensive income:
Net income 1,907,849
Unrealized losses on investment
Securities, net of taxes (note 13) (151,126)
Total comprehensive income
Cash dividends, $.12 per share (278,991)
Sale of 38,000 shares of
treasury stock upon exercise
of stock options 285,588
-----------
Balance at December 31, 1996 27,668,789
Comprehensive income:
Net income 2,157,276
Unrealized losses on investment
Securities, net of taxes (note 13) 183,935
Total comprehensive income
Cash dividends, $.14 per share (331,819)
Sale of 42,192 shares of treasury
stock upon exercise of stock options
and dividend reinvestment
428,315
Issuance of common stock
Upon exercise of stock options 37,843
-----------
Balance at December 31, 1997 30,144,339
Comprehensive income:
Net income 2,057,901
Unrealized losses on investment
Securities, net of taxes (note 13) 22,670
Total comprehensive income
Cash dividends, $.16 per share (386,283)
Issuance of common stock
Upon exercise of stock options 375,300
-----------
Balance at December 31, 1998 $32,213,927
===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
HABERSHAM BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,057,901 $ 2,157,276 $ 1,907,849
Adjustments to reconcile net income to net
cash used in operating activities:
Provision for loan losses 692,500 422,000 360,000
Provision for ORE losses 54,154 56,672 35,036
Depreciation expense 1,215,368 1,027,786 714,665
Loss (gain) on sale of premises and equipment 3,913 (491) --
(Gain) loss on sale of securities (76,614) 12,972 4,134
Purchase of trading securities (3,017,406) -- --
Unrealized holding gain on trading securities (478,134) -- --
Gain on sale of other real estate (17,309) (23,314) --
Net gain on sale of loans (9,903,982) (4,107,804) (334,636)
Amortization of intangible assets 262,270 254,405 226,183
Deferred income tax expense (benefit) 251,837 160,853 (249,205)
Proceeds from sale of loans held for sale 639,906,369 265,100,688 101,715,906
Net increase in loans held for sale (665,196,493) (276,287,255) (124,795,927)
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable 47,679 (97,173) (235,258)
Increase in other assets (1,116,167) (357,410) (533,117)
Increase in accrued interest payable 350,501 9,390 431,042
Increase (decrease) in other liabilities 6,043,002 (1,220,442) 5,583,003
------------- ------------- -------------
Net cash used in operating activities (28,920,611) (12,891,847) (15,170,325)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from maturity 17,821,254 10,375,214 12,939,548
Proceeds from sale 5,273,486 7,062,644 5,354,342
Purchases (36,099,366) (18,758,632) (9,842,371)
Investment securities held to maturity:
Proceeds from maturity 2,396,413 4,114,174 7,601,838
Purchases (6,602,196) (1,011,002) (5,460,191)
Other investments:
Proceeds from sale 5,196,600 3,881,999 751,800
Purchases (7,222,400) (1,802,700) (4,159,200)
Business acquisitions -- (435,329) --
Loans:
Proceeds from sale of loans 58,684,944 36,629,843 16,302,265
Net increase in loans (70,239,158) (27,590,160) (79,954,431)
Purchases of premises and equipment (910,440) (3,355,415) (2,105,824)
Proceeds from sales of premises and equipment 79,282 28,361 --
Purchase of company-owned life insurance (3,150,000) -- --
Net additions of other real estate -- (7,610) (70,339)
Proceeds from sale of other real estate 585,138 799,633 740,208
------------- ------------- -------------
Net cash (used in) provided by investing activities (34,186,443) 9,931,020 (57,902,355)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 18,788,300 37,303,501 29,276,169
Net (decrease) increase in short-term borrowings (2,487,721) 2,125,324 (1,094,545)
Net increase in other borrowings 2,700,000 -- --
Proceeds (repayment) from Federal Home
Loan Bank advances, net 28,408,579 (22,507,225) 44,209,217
Payment of cash dividends (386,283) (331,819) (278,991)
Sale of treasury stock -- 428,315 285,588
Issuance of common stock 375,300 37,843 --
------------- ------------- -------------
Net cash provided by financing activities 47,398,175 17,055,939 72,397,438
------------- ------------- -------------
(Decrease) increase in cash and cash equivalents (15,708,879) 14,095,112 (675,242)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 29,807,675 15,712,563 16,387,807
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 14,098,796 $ 29,807,675 $ 15,712,565
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 14,740,052 $ 13,295,776 $ 10,612,593
Income taxes 285,000 735,000 924,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Other real estate acquired through loan foreclosures $ 711,289 $ 599,016 $ 1,904,871
Loans granted to facilitate the sale of other
real estate 457,700 282,275 14,091
Unrealized gain (loss) on investment securities
available for sale, net of tax effect 22,670 183,935 (151,126)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
HABERSHAM BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(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 the
following wholly owned subsidiaries: Habersham Bank ("Habersham Bank") and the
following 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 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 primarily
in the north Atlanta metropolitan area. The Company also does business in the
mid-Atlantic area as BancFinancial Services Corporation, which specializes in
subprime lending. The Company's primary source of revenue is providing loans to
businesses and individuals in its market area.
(a) 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.
(b) 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.
<PAGE> 8
(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:
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, and federal funds sold.
Federal funds are generally sold for one-day periods.
INVESTMENT SECURITIES
The Company classifies its investment securities into one of three
categories: available for sale, held to maturity, or trading.
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.
Investment securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities. Unrealized holding gains and losses are included in
earnings.
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 relevant delivery prices in the secondary mortgage market. At
<PAGE> 9
December 31, 1998 and 1997, there were no valuation adjustments
relating to 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. Unearned income,
primarily arising from discount basis installment loans, is recognized
as interest income over the terms of the loans by the interest method.
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 either principal or interest
becomes 90 days past due, unless the loan is both well secured and in
the process of collection, or 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 note agreement.
Cash receipts on impaired loans which are accruing interest are
applied to principal and interest under 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 probable losses in the loan portfolio.
Management follows a consistent procedural discipline and accounts for
loan loss contingencies in accordance with Statement of Financial
Accounting Standards No. 5, Accounting for Contingencies ("SFAS No.
5"). The following is a description of how each portion of the
allowance for loan losses is determined.
For the purposes of determining the required allowance for loan losses
and resulting periodic provisions, the Company segregates the loan
portfolio into broad segments, such as: commercial real estate;
residential real estate; construction; commercial business; and
consumer loans. The Company provides for a general allowance for
losses inherent in the portfolio by the above categories. The general
allowance for
<PAGE> 10
losses on problem loans in these categories is based on a review and
evaluation of these loans, taking into consideration financial
condition and strengths of the borrower, related collateral, cash
flows available for debt repayment, and known and expected economic
trends and conditions. General loss percentages for the problem loans
are determined based upon minimum loss percentages by loan
classification as well as historical loss experience. Specific
allowances are provided in the event that the specific collateral
analysis on each problem loan indicates that the probable loss upon
liquidation of collateral would be in excess of the general percentage
allocation. For the remainder of the portfolio, general allowances for
losses are calculated based on estimates of inherent losses which
probably exist as of the evaluation date even though they might not
have been identified by the more objective processes used for the
portion of the allowance described above. Loss percentages used for
this portion of the portfolio are generally based on historical loss
factors adjusted where necessary for the qualitative factors. This
portion of the allowance is particularly subjective and requires
judgments based on qualitative factors which do not lend themselves to
exact mathematical calculations, such as: trends in delinquencies and
nonaccruals; migration trends in the portfolio; trends in volume,
terms, and portfolio mix; changes in lending policies and procedures;
evaluations of the risk identification process; changes in the outlook
for local and regional economic conditions; concentrations of credit;
and peer group comparisons.
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 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.
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.
<PAGE> 11
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 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 material impairment of
goodwill or other intangibles exists at December 31, 1998.
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
Basic earnings per share excludes dilution and is computed by dividing
net income by weighted-average shares outstanding. Diluted earnings
per share is computed by dividing net income by weighted-average
shares outstanding plus common share equivalents resulting from
dilutive stock options, determined using the treasury stock method.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (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 recorded directly in equity
under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". SFAS No. 130 is effective for both interim and
annual financial statement periods beginning after December 15, 1997.
The Company adopted SFAS No. 130 effective January 1, 1998.
<PAGE> 12
SEGMENT INFORMATION
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 statement periods beginning after December 15, 1997. The
Company adopted SFAS No. 131 effective January 1, 1998. See (note 19).
RECLASSIFICATIONS
Certain 1997 and 1996 amounts have been reclassified for comparative
purposes in order to conform the prior periods to the 1998
presentation. Such reclassifications had no impact on net income or
shareholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for
financial statements for all fiscal quarters of all fiscal years
beginning after June 15, 1999. The Company does not believe the
provisions of SFAS No. 133 will have a significant impact on the
financial statements upon adoption.
(3) BUSINESS ACQUISITIONS
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 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 15 and 5 years, respectively. The pro forma effect of this acquisition on
earnings for periods prior to acquisition is not significant.
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. 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. These operating divisions are based in McLean and Alexandria, Virginia.
The 1997 results of operations of these divisions were not significant.
<PAGE> 13
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, 1998 and 1997, the Federal Reserve Bank required that the Banks
maintain average reserve balances of $1,800,000 and $1,300,000, 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>
ESTIMATED
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Treasuries $ 200,000 $ 812 $ -- $ 200,812
U.S. Government agencies 31,627,070 224,542 173,458 31,678,154
States and political subdivisions 13,364,528 422,108 19,526 13,767,110
Other investments 750,000 -- 56,064 693,936
----------- -------- -------- -----------
Total $45,941,598 $647,462 $249,048 $46,340,012
=========== ======== ======== ===========
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
=========== ======== ======== ===========
</TABLE>
Proceeds from sales of available for sale securities during 1998, 1997 and 1996
were $5,273,486, $7,062,644 and $5,354,342, respectively.
Gross gains of $76,614, $40,207 and $31,980 were recognized on those sales for
1998, 1997 and 1996, respectively. Gross losses of $53,179 and $36,114 were
recognized on those sales for 1997 and 1996, respectively.
The amortized cost and estimated fair values of investment securities available
for sale, exclusive of equity investments, at December 31, 1998, 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 contractual
maturity date.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
<S> <C> <C>
Due in one year or less $ 2,581,862 $ 2,616,996
Due after one year through five years 16,885,459 16,998,136
Due after five years through ten years 3,173,443 3,271,312
Due after ten years 22,550,834 22,759,632
----------- -----------
Total $45,191,598 $45,646,076
=========== ===========
</TABLE>
<PAGE> 14
Investments securities available for sale with carrying values of approximately
$20,880,000 and $16,374,000 were pledged as collateral at December 31, 1998 and
1997, 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>
ESTIMATED
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Government agencies $ 3,911,279 $ 18,667 $ 52,899 $ 3,877,047
States and political subdivisions 11,600,284 319,044 6,678 11,912,650
Other investments 99,000 -- -- 99,000
----------- -------- -------- -----------
Total $15,610,563 $337,711 $ 59,577 $15,888,697
=========== ======== ======== ===========
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
=========== ======== ======== ===========
</TABLE>
The amortized cost and estimated fair values of securities held to maturity at
December 31,1998, 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 contractual maturity date.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
<S> <C> <C>
Due in one year or less $ 1,083,905 $ 1,090,251
Due after one year through five years 5,271,740 5,382,272
Due after five years through ten years 3,677,096 3,818,943
Due after ten years 5,577,822 5,597,231
----------- -----------
Total $15,610,563 $15,888,697
=========== ===========
</TABLE>
Investment securities held to maturity with fair values of approximately
$9,054,000 and $7,210,000 were pledged as collateral at December 31, 1998 and
1997, respectively, for public deposits and other deposits, as required by law.
<PAGE> 15
(7) LOANS
Loans at December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Real Estate:
Construction $ 66,359,030 $ 61,965,365
Other 113,021,310 105,176,566
Commercial, financial and agricultural 13,829,965 15,824,792
Consumer installment 16,972,980 15,511,437
Other 364,652 604,466
----------- -----------
210,547,937 199,082,626
Less:
Unamortized loan origination fees, net 652,275 656,784
Unearned credit life premiums 47,310 41,377
Unamortized discount on SBA loans sold 113,002 171,999
Allowance for loan losses 2,709,570 2,336,079
------------ ------------
Total $207,025,780 $195,876,387
============ ============
</TABLE>
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance, January 1 $2,336,079 $2,261,406 $2,335,788
Provision for loan losses 692,500 422,000 360,000
Loans charged off (461,778) (547,610) (571,018)
Recoveries 142,769 200,283 136,636
---------- ---------- ----------
Balance, December 31 $2,709,570 $2,336,079 $2,261,406
========== ========== ==========
</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 commercial real estate, commercial business, and agricultural loans.
Residential mortgages, 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 $2,011,108 and
$1,251,157 as of December 31, 1998 and 1997, respectively, which included all
of its nonaccrual loans. The average amount of impaired loans during 1998,
1997, and 1996 was $1,950,265, $1,719,920, and $870,559, respectively. The
interest income recognized on such loans was $191,405 in 1998, $165,686 in
1997, and $84,646 in 1996, which approximated the amount of interest received
on the cash basis.
There were no specific allowances attributable to impaired loans at December
31, 1998 and 1997.
Restructured loans not considered impaired totaled $849,963 at December 31,
1998 and $913,753 at December 31, 1997. Interest income that would have been
recorded on such restructured loans in accordance with their original terms
totaled $87,767 in 1998 and $92,124 in 1997, compared with amounts recognized
of $83,152 in 1998 and $87,244 in 1997.
As of December 31, 1998 and 1997, Habersham Bank's loans to customers for
agribusiness purposes in the poultry industry were approximately $10 million
and $12 million, respectively. There is no other significant concentration of
loans to customers in a particular industry.
<PAGE> 16
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, 1998 and 1997, the Company had outstanding loan
commitments exclusive of mortgage loan commitments of BancMortgage
approximating $77,813,000 and $57,047,000, respectively, and standby letters of
credit approximating $1,891,000 and $1,852,000, 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, 1998, the Company has commitments, primarily at a fixed rate,
to originate mortgage loans in the amount of approximately $31.3 million. At
December 31, 1998, the Company has commitments to sell mortgage loans in the
amount of $82.0 million.
(8) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
<S> <C> <C>
Land $ 801,169 $ 807,157
Buildings 6,118,261 6,107,249
Furniture and Equipment 7,982,719 7,265,865
----------- -----------
Total 14,902,149 14,180,271
Less: accumulated depreciation 6,695,980 5,585,979
----------- -----------
Premises and equipment, net $ 8,206,169 $ 8,594,292
=========== ===========
</TABLE>
The Company has entered into operating lease agreements for property and
equipment through 2003. Approximate minimum rentals under such leases are as
follows:
<TABLE>
<S> <C>
1999 $ 743,356
2000 366,569
2001 146,465
2002 48,738
2003 30,023
----------
$1,335,151
==========
</TABLE>
Rental expense was $923,340 in 1998, $589,392 in 1997, and $430,303 in 1996.
<PAGE> 17
(9) DEPOSITS AND OTHER BORROWINGS
At December 31,1998, the scheduled maturities of certificates of deposits are
as follows:
<TABLE>
<S> <C>
6 months of less $104,179,827
Over 6 through 12 months 49,549,736
Over 1 year through 5 years 34,247,061
Over 5 years 14,859
------------
Total $187,991,483
============
</TABLE>
Short-term borrowings of $139,659 at December 31, 1998 consist of a U.S.
Treasury, tax, and loan deposit note. Short-term borrowings of $2,627,380 at
December 31, 1997 consist of federal funds purchased and U. S. Treasury, tax,
and loan deposit notes.
Other borrowings of $2,700,000 at December 31, 1998 consists of a note due to
the National Bank of Commerce, Birmingham, Alabama. The note bears interest at
a variable rate (6.80% at December 31, 1998) and matures on September 2, 2000.
(10) FHLB ADVANCES
At December 31, 1998, the Company had available line of credit commitments with
the Federal Home Loan Bank ("FHLB") totaling $93,000,000 of which $53,810,571
was advanced (weighted-average interest rate of 5.40% and maturing in 1999) and
$39,189,429 was available.
The Company had FHLB advances, under the same line, of $22,401,992 at December
31, 1997 with a weighted average interest rate of 6.75%. In addition, the
Company had a $3,000,000 advance from the FHLB at December 31, 1997 with
interest at 5.85% which matured in 1998.
At December 31, 1998, the Company has pledged, under a blanket lien with the
FHLB, all stock of the FHLB and certain qualifying first mortgage loans with an
outstanding balance of $80,167,224.
(11) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1998, 1997, and
1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current $ 402,417 $ 561,350 $ 819,544
Deferred 251,837 160,853 (249,205)
--------- --------- ---------
Total $ 654,254 $ 722,203 $ 570,339
========= ========= =========
</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:
<PAGE> 18
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Income tax at statutory rate $ 922,133 $ 979,023 $ 843,989
Effect of tax-exempt income (337,390) (308,366) (347,804)
Amortization on intangibles 74,044 83,508 72,191
Other (4,533) (31,962) 1,963
--------- --------- ---------
Provision for income taxes $ 654,254 $ 722,203 $ 570,339
========= ========= =========
</TABLE>
At December 31, 1998 and 1997, the significant components of the Company's net
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 691,401 $ 592,051
Allowance for other real estate 73,088 74,800
Deferred loan fees 212,598 248,217
Unearned credit life commissions 16,087 14,069
Other 10,835 --
---------- ---------
1,004,009 929,137
---------- ---------
Deferred tax liabilities:
Unrealized gain on investment securities
available for sale (135,298) (123,619)
Unrealized gain on trading securities (162,566) --
Prepaid expense (225,679) (131,893)
Furniture, fixtures and equipment due to
differences in depreciation methods (92,364) (21,004)
Other -- (1,003)
---------- ---------
(615,907) (277,519)
---------- ---------
Net deferred tax asset $ 388,102 $ 651,618
========== =========
</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 the
scheduled reversal of tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment.
(12) SHAREHOLDERS' EQUITY
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,
1998, the Banks could declare dividends to the Company up to approximately
$1,128,000 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 the Banks' capital
amounts and the Banks' classifications under the regulatory
<PAGE> 19
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, 1998, that the Company and the Banks meet all capital adequacy requirements
to which they are subject.
As of December 31, 1998 and 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 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 actual capital amounts and ratios as of December 31, 1998 and
1997 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
CORRECTIVE
FOR CAPITAL ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to risk-weighted assets):
Company $30,292 12.16% $20,576 8% N/A N/A
Habersham Bank 21,636 10.34% 16,738 8% $20,923 10%
Security Bank 7,466 14.48% 4,124 8% 5,155 10%
Tier I Capital (to risk-weighted assets):
Company $28,561 11.10% $10,288 4% N/A N/A
Habersham Bank 19,459 9.30% 8,369 4% $12,554 6%
Security Bank 6,934 13.45% 2,062 4% 3,093 6%
Tier I Capital (to average assets):
Company $28,561 7.46% $15,315 4% N/A N/A
Habersham Bank 19,459 6.09% 12,783 4% $15,979 5%
Security Bank 6,934 10.97% 2,529 4% 3,161 5%
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%
</TABLE>
<PAGE> 20
(13) COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, was adopted by the Company on
January 1, 1998. SFAS No. 130 establishes standards for reporting comprehensive
income. Comprehensive income includes net income and other comprehensive income
which is defined as nonowner related transactions in shareholders' equity.
Prior period amounts have been added to reflect the application of the
provisions of SFAS No. 130. The following table sets forth the amounts of other
comprehensive income included in shareholders' equity along with the related
tax effect for the years ended December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
TAX NET OF
PRETAX (EXPENSE) TAX
AMOUNT BENEFIT AMOUNT
<S> <C> <C> <C>
1998:
Net unrealized holding gains on
investment securities available
for sale arising during the year $ 110,962 $ (37,727) $ 73,235
Less reclassification adjustment
for net gains realized in net income 76,614 (26,049) 50,565
--------- --------- ---------
Other comprehensive income $ 34,348 $ (11,678) $ 22,670
========= ========= =========
1997:
Net unrealized holding gains on
investment securities available
for sale arising during the year $ 265,717 $ (90,344) $ 175,373
Add reclassification adjustment
for net losses realized in net income 12,972 (4,410) 8,562
--------- --------- ---------
Other comprehensive income $ 278,689 $ (94,754) $ 183,935
========= ========= =========
1996:
Net unrealized holding losses on
investment securities available
for sale arising during the year $(233,113) $ 79,259 $(153,854)
Less reclassification adjustment
for net losses realized in net income 4,134 (1,406) 2,728
--------- --------- ---------
Other comprehensive income $(228,979) $ 77,853 $(151,126)
========= ========= =========
</TABLE>
(14) 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 as specified
in the plan agreement. The Company's contributions to the plan totaled $212,417
in 1998, $151,483 in 1997 and $104,020 in 1996.
<PAGE> 21
During 1998, the Banks' boards of directors approved the Director's Retirement
Plan (the "Plan"), a noncontributory retirement plan. In connection with the
implementation of the Plan, the Banks purchased company-owned life insurance at
a cost of $3,150,000. Amounts earned on the life insurance policies purchased
by the Banks over the rate, as defined in the Plan, to be retained for the
benefit of the Banks are to be deferred and paid to the directors upon
retirement. As of December 31, 1998, the cash surrender values of the life
insurance policies totaled $3,150,000.
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 96,500 at December 31, 1998.
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. Shares reserved for future grants under this
plan are approximately 251,000 at December 31, 1998.
A summary of the status of the Company's stock option plans and changes during
1998, 1997, and 1996 is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
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 381,476 $14.25 345,004 $12.45 269,754 $10.16
Granted 74,500 14.61 80,000 19.00 115,250 16.04
Exercised (39,750) 9.44 (41,528) 8.33 (38,000) 7.52
Terminated (3,000) 12.46 (2,000) 8.33 (2,000) 7.47
------- ------ ------- ------ ------- ------
Outstanding and exercisable at end of year 413,226 $14.79 381,476 $14.25 345,004 $12.45
======= ======= =======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE REMAINING
RANGE OF OUTSTANDING CONTRACTUAL LIFE
EXERCISE PRICES AT 12/31/98 IN YEARS EXERCISE PRICE
<S> <C> <C> <C>
$ 9.19 25,000 .03 $ 9.19
10.00 - 11.00 56,226 4.3 10.45
13.00 - 14.00 94,000 5.2 13.54
14.25 68,500 5.0 14.25
16.88 83,250 6.6 16.88
18.00 - 19.00 86,250 6.1 18.77
------- --- ------
413,226 5.5 $14.79
=======
</TABLE>
The estimated fair value of options granted during 1998, 1997, and 1996 was
$4.96, $6.54, and $8.59, respectively, per share. The Company applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
<PAGE> 22
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 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 1998, 1997, and 1996 would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income:
As reported $2,057,901 $2,157,276 $1,907,849
Pro forma 1,829,586 1,805,686 1,261,537
Net income per common share - basic:
As reported $ .85 $ .91 $ .82
Pro forma .76 .76 .54
Net income per common share - diluted:
As reported $ .83 $ .86 $ .79
Pro forma .74 .72 .52
</TABLE>
The fair value of options granted under the Company's fixed stock option plans
during 1998, 1997 and 1996 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 35%, 33% and 22% in 1998, 1997 and 1996, respectively; weighted-average
risk-free interest rate of 5.30%, 5.45% and 5.90% in 1998, 1997 and 1996,
respectively; and an expected weighted-average life of 4.5 years in 1998, 1997
and 1996.
(15) OTHER EXPENSES
Items comprising other expenses for the years ended December 31, 1998, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Outside services $ 932,450 $ 824,515 $ 615,765
Advertising and public relations 1,001,276 893,604 788,040
Office supplies 806,518 593,051 524,925
Other 2,413,025 1,815,263 1,302,356
---------- ---------- ----------
Total $5,153,269 $4,126,433 $3,231,086
========== ========== ==========
</TABLE>
Outside services include charges for FDIC insurance, legal and professional
services, insurance, director fees, and State of Georgia Department of Banking
fees.
<PAGE> 23
(16) 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.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
CARRYING AMOUNT FAIR VALUE
<S> <C> <C>
Assets:
Cash and due from banks $ 5,798,796 $ 5,798,796
Federal funds sold 8,300,000 8,300,000
Investment securities available for sale 46,340,012 46,340,012
Investment securities held to maturity 15,610,563 15,888,697
Trading securities 3,495,540 3,495,540
Other investments 4,193,934 4,193,934
Loans held for sale 72,162,620 72,516,373
Loans 207,025,780 200,204,092
Liabilities:
Deposits 280,453,299 289,098,397
Short-term borrowings 139,659 139,659
Other borrowings 2,700,000 2,700,000
FHLB advances 53,810,571 53,810,571
<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
</TABLE>
The carrying amounts of cash and due from banks, federal funds sold,
interest-bearing demand and savings accounts, short-term borrowings, other
borrowings, and FHLB advances 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 trading securities 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. The fair value for loans held for sale is
determined on the basis of open commitments from independent buyers for
committed loans.
<PAGE> 24
For uncommitted loans, fair value is determined on the basis of relevant
delivery prices in the secondary mortgage market.
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, 1998 and 1997. 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.
(17) 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 1998 and 1997 of loans to
executive officers, directors, and principal shareholders is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Balance, January 1 $3,173,109 $5,065,261
Amounts advanced 5,145,704 4,790,503
Repayments (4,921,807) (6,682,655)
---------- ----------
Balance, December 31 $3,397,006 $3,173,109
========== ==========
</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 $9,106 in 1998, $43,250 for
1997, and $46,375 for 1996.
At December 31, 1998, time deposits of $960,000 of a business controlled by the
principal shareholders of the Company were pledged as collateral for loans with
a principal balance of $960,050 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, buy-out
arrangements, and certain compensation terms, including bonuses as a percentage
of BancMortgage's net income.
<PAGE> 25
(17) CONDENSED FINANCIAL STATEMENTS OF HABERSHAM BANCORP (PARENT ONLY)
The parent company only condensed financial statements are presented below:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS: 1998 1997
<S> <C> <C>
Cash $ 318,757 $ 713,321
Investment in subsidiaries, primarily banks 27,249,420 25,807,009
Trading securities 3,495,540 --
Other investments 201,000 201,000
Equipment 129,929 46,102
Goodwill and other intangible assets 2,901,024 3,113,351
Other assets 785,327 424,660
------------ ------------
Total assets $ 35,080,997 $ 30,305,443
============ ============
LIABILITIES:
Other borrowings $ 2,700,000 $ --
Accounts payable 167,070 161,104
------------ ------------
Total Liabilities 2,867,070 161,104
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock 2,448,267 2,408,517
Additional paid-in capital 9,444,576 9,109,026
Retained earnings 20,057,968 18,386,350
Accumulated other comprehensive income 263,116 240,446
------------ ------------
Total shareholders' equity 32,213,927 30,144,339
------------ ------------
Total liability and shareholders' equity $ 35,080,997 $ 30,305,443
============ ============
</TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
INCOME
Dividends from bank subsidiaries $1,010,000 $1,288,000 $ 364,000
Management fees from subsidiaries 1,165,131 768,083 743,940
Unrealized gain on trading securities 478,134 -- --
---------- ---------- ----------
Total income 2,653,265 2,056,083 1,107,940
EXPENSES - general and administrative 2,115,241 1,863,032 1,314,893
---------- ---------- ----------
Income (loss) before income taxes and equity in
undistributed earnings of subsidiaries 538,024 193,051 (206,953)
Income tax benefit 100,136 297,821 130,675
---------- ---------- ----------
Income (loss) before equity in
undistributed earnings of subsidiaries 638,160 490,872 (76,278)
Equity in undistributed earnings of subsidiaries 1,419,741 1,666,404 1,984,127
---------- ---------- ----------
Net income $2,057,901 $2,157,276 $1,907,849
========== ========== ==========
</TABLE>
<PAGE> 26
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,057,901 $ 2,157,276 $ 1,907,849
Depreciation 38,811 12,479 2,845
Loss on sale of other investments -- 8,559 --
Amortization of intangible assets 212,327 212,327 212,326
Deferred income taxes -- -- (31,431)
Purchase of trading securities (3,017,406) -- --
Unrealized gain on trading securities (478,134) -- --
Increase in other assets (360,667) (365,622) (7,185)
Increase in other liabilities 5,966 20,977 (46,682)
Equity in undistributed earnings of subsidiaries (1,419,741) (1,666,404) (1,984,127)
----------- ----------- -----------
Net cash (used in) provided by operating activities (2,960,943) 379,592 53,595
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of other investments -- 3,599 --
Purchase of other investments -- -- (100,000)
Purchase of equipment (122,638) (44,357) (17,070)
----------- ----------- -----------
Net cash used in investing activies (122,638) (40,758) (117,070)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from other borrowings 2,700,000 -- --
Payment of cash dividends (386,283) (331,819) (278,991)
Proceeds from sale of treasury stock -- 428,315 285,588
Proceeds from issuance of common stock 375,300 37,843 --
----------- ----------- -----------
Net cash provided by financing activities 2,689,017 134,339 6,597
----------- ----------- -----------
(Decrease) increase in cash (394,564) 473,173 (56,878)
CASH AT BEGINNING OF YEAR 713,321 240,148 297,026
----------- ----------- -----------
CASH AT END OF YEAR $ 318,757 $ 713,321 $ 240,148
=========== =========== ===========
</TABLE>
At December 31, 1998, approximately $25,889,000 of the parent company's
investment in the Banks is restricted as to dividend payments from the Banks to
the parent company.
<PAGE> 27
(19) SEGMENT AND RELATED INFORMATION
The Company has two significant reportable segments: banking and mortgage
banking. The Company offers traditional banking services through the two bank
subsidiaries, Habersham Bank and Security State Bank. The Company originates
and sells loans in the secondary market through its mortgage banking segment,
BancMortgage Financial Corp.
The accounting policies of the segments are the same as those described in the
summary of significant account policies. The Company evaluates performance
based on net income of the respective segments.
<TABLE>
<CAPTION>
MORTGAGE (b) (a)
BANKING BANKING ELIMINATIONS OTHER ELIMINATIONS CONSOLIDATED
------- ------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income 1998 $26,069,654 $4,062,500 $(1,171,091) -- (2,375) $29,958,688
1997 25,552,812 2,059,223 (648,289) -- (1,590) 26,962,156
1996 22,546,235 1,010,822 (190,205) -- -- 23,366,852
Interest expense 1998 13,490,864 2,724,092 (1,171,091) 49,063 (2,375) 15,090,553
1997 12,492,661 1,460,794 (648,289) 1,590 (1,590) 13,305,166
1996 10,782,957 450,883 (190,205) -- -- 11,043,635
Gain on sale of loans 1998 541,468 9,362,514 -- -- -- 9,903,982
1997 532,792 3,575,012 -- -- -- 4,107,804
1996 57,732 276,904 -- -- -- 334,636
Other noninterest income 1998 2,071,320 4,211,451 (2,124,925) 1,708,141 (19,500) 5,846,487
1997 1,633,379 2,816,350 (1,744,200) 1,264,810 (21,881) 3,948,458
1996 1,475,218 1,708,451 (1,534,715) 293,697 -- 1,942,651
Depreciation on premises 1998 797,777 367,007 -- 50,584 -- 1,215,368
and equipm 1997 738,864 269,894 -- 19,028 -- 1,027,786
1996 602,460 109,146 -- 3,059 -- 714,665
Other noninterest expense 1998 11,344,154 13,272,378 (2,142,810) 3,709,490 (1,184,631) 24,998,581
1997 10,434,958 6,373,203 (2,190,606) 3,346,638 (580,206) 17,383,987
1996 8,176,615 2,731,596 (731,538) 1,614,918 (743,940) 11,047,651
Income tax expense (benefit) 1998 444,910 460,935 (74,168) (177,423) -- 654,254
1997 930,374 117,860 82,422 (408,453) -- 722,203
1996 1,063,335 (91,641) (273,080) (128,275) -- 570,339
Net income (loss) 1998 1,968,736 755,551 (143,973) (522,413) -- 2,057,901
1997 2,718,499 228,835 159,996 (950,054) -- 2,157,276
1996 3,093,603 (203,806) 213,843 (1,195,791) -- 1,907,849
Total assets 1998 340,350,517 74,571,376 (34,258,971) 3,858,934 (452,522) 384,069,334
1997 299,090,602 39,421,952 (10,884,488) 1,345,220 (776,201) 328,197,085
1996 290,596,079 26,379,949 (8,199,812) 1,757,317 (522,546) 310,010,987
</TABLE>
(a) Segment information below the quantitative thresholds for significance
are attributable to four business units (Advantage Insurers, Inc.,
Appalachian Travel Service, Inc., The Advantage Group, Inc. and the
corporate headquarters. The Company offers a full range of home, life,
auto and health insurance through Advantage Insurers, Inc. Appalachian
Travel Service, Inc. provides travel services to the community and The
Advantage Group, Inc. offers consulting advice to depository
institutions in small communities. The corporate headquarters includes
the elimination of inter-business unit transactions, the core deposit
premium recorded as a result of the Security State Bank merger in
1995, and an investment in Flag Financial Corp. common stock.
(b) BancMortgage Financial Corp., the mortgage banking segment, is a
subsidiary of Habersham Bank which is a portion of the banking
segment. BancMortgage Financial Corp. originates and sells certain
loans to Habersham Bank and Habersham Bank funds the origination of
those loans through a warehouse line. The amounts eliminated in total
assets, interest income and interest expense relate primarily to the
warehouse line and the related interest income and expense. The amount
eliminated in other noninterest income and other noninterest expense
relate to the loan fees associated with the loans sold to Habersham
Bank, which are recorded in income by BancMortgage Financial Corp. and
deferred and amortized into income for consolidated purposes through
entries on Habersham Bank's records.
<PAGE> 1
EXHIBIT 21.0
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.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF KPMG LLP
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 February 5,
1999 with respect to the consolidated balance sheets of Habersham Bancorp and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity and comprehensive income, and cash
flows for the years then ended, which report appears in the December 31, 1998
annual report on Form 10-K of Habersham Bancorp.
/s/ KPMG LLP
------------
KPMG LLP
Atlanta, Georgia
March 30, 1999
<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-K of
Habersham Bancorp for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HABERSHAM BANCORP FOR THE PERIOD ENDED DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,798,796
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,300,000
<TRADING-ASSETS> 3,495,540
<INVESTMENTS-HELD-FOR-SALE> 46,340,012
<INVESTMENTS-CARRYING> 15,610,563
<INVESTMENTS-MARKET> 15,888,697
<LOANS> 281,897,970
<ALLOWANCE> 2,709,570
<TOTAL-ASSETS> 384,069,334
<DEPOSITS> 280,453,299
<SHORT-TERM> 53,950,230
<LIABILITIES-OTHER> 14,751,878
<LONG-TERM> 2,700,000
0
0
<COMMON> 2,448,267
<OTHER-SE> 29,765,660
<TOTAL-LIABILITIES-AND-EQUITY> 384,069,334
<INTEREST-LOAN> 25,088,953
<INTEREST-INVEST> 3,369,231
<INTEREST-OTHER> 500,504
<INTEREST-TOTAL> 28,958,688
<INTEREST-DEPOSIT> 12,911,922
<INTEREST-EXPENSE> 15,090,553
<INTEREST-INCOME-NET> 13,868,135
<LOAN-LOSSES> 692,500
<SECURITIES-GAINS> 76,614
<EXPENSE-OTHER> 26,213,949
<INCOME-PRETAX> 2,712,155
<INCOME-PRE-EXTRAORDINARY> 2,712,155
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,057,901
<EPS-PRIMARY> .85
<EPS-DILUTED> .83
<YIELD-ACTUAL> 4.08
<LOANS-NON> 2,009,258
<LOANS-PAST> 1,013,009
<LOANS-TROUBLED> 849,963
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,336,079
<CHARGE-OFFS> 461,778
<RECOVERIES> 142,769
<ALLOWANCE-CLOSE> 2,709,570
<ALLOWANCE-DOMESTIC> 2,709,570
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.0
Independent Auditors' Opinion for year ended December 31, 1996 as provided by
Deloitte & Touche LLP.
Habersham Bancorp
Its Shareholders and Directors
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows of Habersham Bancorp for the year ended
December 31, 1996. These financial statements are the responsibility of
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Habersham
Bancorp for the year ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
January 17, 1997
