<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, 1999.
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]
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:
1,762,539 Shares of Common Stock, $1.00 par value--$19,828,564 as of March 3,
2000 (based upon market value of $11.25/share).
1
<PAGE> 2
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 31, 1999:
Common Stock, $1.00 par value--2,698,746 shares
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Company's Annual Report to Shareholders for the year
ended December 31, 1999 (the "Annual Report") are incorporated by reference
into Part II.
(2) Portions of the Company's Proxy Statement relating to the 2000 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 acquired Security Bancorp,
Inc. and its subsidiary bank, Security State Bank. Effective June 30, 1999, the
Company consolidated the charters of Habersham Bank and Security State Bank. As
a result of this consolidation, Security State Bank now functions as a division
of Habersham Bank. Currently, the primary business of the Company is the same
as that of Habersham Bank and BancMortgage Financial Corp ("BancMortgage"), a
subsidiary of Habersham Bank formed in 1996. The Company also has one direct
nonbank subsidiary, The Advantage Group, Inc., and one indirect nonbank
subsidiary, Advantage Insurers, Inc. (a subsidiary of Habersham Bank).
BUSINESS OF THE BANK
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 and Cherokee Counties, 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.
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. engages in the
business of providing marketing and advertising services.
2
<PAGE> 3
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. During 1999, BancMortgage formed a wholly owned
subsidiary, BancMortgage Reinsurance LTD., a reinsurance company incorporated
in Turks and Caicos. This subsidiary provides reinsurance to companies offering
private mortgage insurance. 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. Effective September
30, 1999, the Bank ceased operations of its travel agency subsidiary.
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, White, and
Cherokee Counties, Georgia. Habersham Bank competes principally for all types
of loans, deposits and other financial services with other commercial banks
located in Habersham, White, and Cherokee Counties, Georgia.
Habersham Bank (the "Bank") also competes 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 competes
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, 1999, the Company had 337 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.
3
<PAGE> 4
SUPERVISION AND REGULATION
Both the Company and the Bank are subject to extensive state and federal
banking regulations that impose restrictions on and provide for general
regulatory oversight of our operations. These laws are generally intended to
protect depositors and not shareholders. The following discussion describes the
material elements of the regulatory framework that applies to us.
THE COMPANY
Because the Company owns all of the capital stock of the Bank, it is a bank
holding company under the federal Bank Holding Company Act of 1956. As a
result, the Company is primarily subject to the supervision, examination, and
reporting requirements of the Bank Holding Company Act and the regulations of
the Federal Reserve.
ACQUISITIONS OF BANKS. The Bank Holding Company Act requires every bank
holding company to obtain the Federal Reserve's prior approval before:
- - Acquiring 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 bank's voting shares;
- - Acquiring all or substantially all of the assets of any bank; or
- - Merging or consolidating with any other bank holding company.
Under the Bank Holding Company Act, an adequately capitalized and
adequately managed bank holding company located in Georgia may purchase a bank
located outside of Georgia. Conversely, an adequately capitalized and
adequately managed bank holding company located outside of Georgia may purchase
a bank located inside Georgia. In each case, however, restrictions may be
placed on the acquisition of a bank which has only been in existence for a
limited amount of time or an acquisition which may result in specified
concentrations of deposits.
CHANGE IN BANK CONTROL. Subject to various exceptions, the Bank Holding
Company Act and the Change in Bank Control Act, together with related
regulations, require Federal Reserve approval prior to any person or company
acquiring "control" of a bank holding company. Control is conclusively presumed
to exist if an individual or company acquires 25% or more of any class of
voting securities of the bank holding company. Control is rebuttably presumed
to exist if a person or a company acquires 10% or more, but less than 25%, of
any class of voting securities and either the bank holding company has
registered securities under Section 12 of the Securities Act of 1934, or no
other person owns a greater percentage of that class of voting securities
immediately after the transaction.
PERMITTED ACTIVITIES. Under the Bank Holding Company Act, a bank holding
company, which has not qualified or elected to become a financial holding
company is generally prohibited from engaging in or acquiring direct or
indirect control of more than 5% of the voting shares of any company engaged in
nonbanking activities unless prior to the enactment of the Gramm-Leach-Bliley
Act the Federal Reserve found those activities to be so closely related to
banking as to be a proper incident to the business of banking. Activities that
the Federal Reserve has found to be so closely related to banking to be a
proper incident to the business of banking include:
4
<PAGE> 5
- - factoring accounts receivable,
- - acquiring or servicing loans,
- - leasing personal property,
- - conducting discount securities brokerage activities,
- - performing selected data processing services,
- - acting as agent or broker in selling credit life insurance and other types
of insurance in connection with credit transactions, and
- - performing selected insurance underwriting activities.
Despite prior approval, the Federal Reserve may order a bank holding company or
its subsidiaries to terminate any of these activities or to terminate its
ownership or control of any subsidiary when it has reasonable cause to believe
that the bank holding company's continued ownership, activity or control
constitutes a serious risk to the financial safety, soundness, or stability of
any of its bank subsidiaries.
On November 12, 1999 President Clinton signed the Gramm-Leach-Bliley Act,
which amends the Bank Holding Company Act and greatly expands the activities in
which bank holding companies and affiliates of banks are permitted to engage.
The Gramm-Leach-Bliley Act eliminates many federal and state law barriers to
affiliations among banks and securities firms, insurance companies, and other
financial service providers. The provisions of the Gramm-Leach-Bliley Act
relating to permitted activities of bank holding companies and affiliates of
banks became effective on March 11, 2000.
Generally, if the Company qualifies and elects to become a financial
holding company, it may engage in activities that are financial in nature or
incidental or complementary to a financial activity. Activities that the
Gramm-Leach-Bliley Act expressly lists as financial in nature include insurance
activities, providing financial, investment and advisory services, underwriting
securities and limited merchant banking activities.
To qualify to become a financial holding company, the Bank and any other
depository institution subsidiary of the Company must be well capitalized and
well managed and must have a Community Reinvestment Act rating of at least
satisfactory. Additionally, the Company must file an election with the Federal
Reserve to become a financial holding company and must provide the Federal
Reserve with 30 days written notice prior to engaging in a permitted financial
activity. Although we are eligible to elect to become a financial holding
company, we currently have no plans to make such an election.
SUPPORT OF SUBSIDIARY INSTITUTIONS. Under Federal Reserve policy, bank
holding companies are expected to act as a source of financial strength for,
and to commit resources to support, their depository institution subsidiaries.
This support may be required at times when, without this Federal Reserve
policy, the bank holding company might not be inclined to provide it. In
addition, any capital loans by a bank holding company to a bank will be repaid
only after its deposits and other indebtedness are repaid in full. In the event
of a bank holding company's bankruptcy, any commitment by the bank holding
company to a federal bank regulatory agency to maintain the capital of a
banking subsidiary will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
THE BANK
The Bank is a commercial bank chartered under the laws of the State of
Georgia. Accordingly, the FDIC and the Georgia Department of Banking and
Finance regularly examine the operations of the Bank and have the authority to
approve or disapprove mergers, the establishment of branches, and similar
corporate actions. Both regulatory agencies also have the power to prevent the
continuance or development of unsafe or unsound banking practices or other
violations of law. Additionally, the Bank's deposits are insured by the FDIC to
the maximum extent provided by law. The Bank is also subject to numerous state
and federal
5
<PAGE> 6
statutes and regulations that affect its business, activities and operations,
and it is supervised and examined by one or more state or federal bank
regulatory agencies.
PROMPT CORRECTIVE ACTION. The Federal Deposit Insurance Corporation
Improvement Act of 1991 establishes a system of prompt corrective action to
resolve the problems of undercapitalized financial institutions. Under this
system, federal banking regulators have established five capital categories,
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, in which all institutions are
placed. The federal banking agencies have also specified by regulation the
relevant capital levels for each of the other categories. At December 31, 1999,
we qualified for the adequately capitalized category.
Federal banking regulators are required to take some mandatory supervisory
actions and are authorized to take other discretionary actions with respect to
institutions in the three undercapitalized categories. The severity of the
action depends upon the capital category in which the institution is placed.
Generally, subject to a narrow exception, the banking regulator must appoint a
receiver or conservator for an institution that is critically undercapitalized.
An institution in any of the undercapitalized categories is required to submit
an acceptable capital restoration plan to its appropriate federal banking
agency. A bank holding company must guarantee that a subsidiary depository
institution meets its capital restoration plan up to the lesser of 5% of an
undercapitalized subsidiary's assets or the amount required to meet regulatory
capital requirements. An undercapitalized institution is also generally
prohibited from increasing its average total assets, making acquisitions,
establishing any branches or engaging in any new line of business, except under
an accepted capital restoration plan or with FDIC approval. The Federal Reserve
regulations also establish procedures for downgrading an institution to a lower
capital category based on supervisory factors other than capital.
FDIC INSURANCE ASSESSMENTS. The FDIC has adopted a risk-based assessment
system for determining an insured depository institutions' insurance assessment
rate. The system that takes into account the risks attributable to different
categories and concentrations of assets and liabilities. An institution is
placed into one of three capital categories: (1) well capitalized; (2)
adequately capitalized; and (3) 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. The FDIC also assigns an institution to one of three
supervisory subgroups based on a supervisory evaluation that the institution's
primary federal regulator provides to the FDIC and information that the FDIC
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. Assessments range from 0 to 27 cents per
$100 of deposits, depending on the institution's capital group and supervisory
subgroup. In addition, the FDIC imposes assessments to help pay off the $780
million in annual interest payments on the $8 billion Financing Corporation
bonds issued in the late 1980s as part of the government rescue of the thrift
industry. This assessment rate is adjusted quarterly and ranged from 1.16 cents
to 1.22 cents per $100 of deposits in 1999.
The FDIC may terminate its insurance of deposits if it finds that the
institution has engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order, or condition imposed by the FDIC.
COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act requires the
appropriate federal regulator, in connection with their examinations of
financial institutions within their jurisdiction, to evaluate the record of
each financial institution in meeting the credit needs of its local community,
including low and moderate-income neighborhoods. The appropriate federal
regulator considers these factors in evaluating mergers, acquisitions, and
applications to open a branch or facility. Failure to adequately meet these
criteria could impose additional requirements and limitations on the Bank.
Under the Gramm-Leach-Bliley Act, banks with aggregate assets of not more than
$250 million are subject to a Community Reinvestment Act
6
<PAGE> 7
examination only once every 60 months if the bank receives an outstanding
rating, once every 48 months if it receives a satisfactory rating and as needed
if the rating is less than satisfactory. Additionally, under the
Gramm-Leach-Bliley Act, banks are required to publicly disclose the terms of
various Community Reinvestment Act-related agreements.
OTHER REGULATIONS. Interest and other charges collected or contracted for
by the Bank are subject to state usury laws and federal laws concerning
interest rates. The Bank's loan operations are also subject to federal laws
applicable to credit transactions, such as:
- - The federal Truth-In-Lending Act, governing disclosures of credit terms to
consumer borrowers;
- - The Home Mortgage Disclosure Act of 1975, requiring financial institutions
to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to
help meet the housing needs of the community it serves;
- - The Equal Credit Opportunity Act, prohibiting discrimination on the basis
of race, creed or other prohibited factors in extending credit;
- - The Fair Credit Reporting Act of 1978, governing the use and provision of
information to credit reporting agencies;
- - The Fair Debt Collection Act, governing the manner in which consumer debts
may be collected by collection agencies; and
- - The rules and regulations of the various federal agencies charged with the
responsibility of implementing these federal laws.
The deposit operations of the Bank are subject to:
- - The Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records; and
- - The Electronic Funds Transfer Act and Regulation E issued by the Federal
Reserve to implement that act, which governs automatic deposits to and
withdrawals from deposit accounts and customers' rights and liabilities
arising from the use of automated teller machines and other electronic
banking services.
CAPITAL ADEQUACY
The Company and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve, in the case of the Company, and
FDIC and Georgia Department of Banking and Finance, in the case of the Bank.
The Federal Reserve has established a risk-based and a leverage measure of
capital adequacy for bank holding companies that is substantially similar to
that adopted by the FDIC for banks under its jurisdiction.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles 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, such as letters of credit and unfunded loan commitments, are assigned to
broad risk categories, each with
7
<PAGE> 8
appropriate risk 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 of total capital to risk-weighted
assets is 8%. Total capital consists of two components, Tier 1 Capital and Tier
2 Capital. Tier 1 Capital generally consists of common shareholders' equity,
minority interests in the equity accounts of consolidated subsidiaries,
qualifying noncumulative perpetual preferred stock, and a limited amount of
qualifying cumulative perpetual preferred stock, less goodwill and other
specified intangible assets. Tier 1 Capital must equal at least 4% of
risk-weighted assets. Tier 2 Capital generally consists of subordinated debt,
other preferred stock and hybrid capital and a limited amount of loan loss
reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1
Capital. At December 31, 1999, our consolidated ratio of total capital to
risk-weighted assets was 10.71% and our consolidated ratio of Tier 1 Capital to
risk-weighted assets was 9.79%.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to average assets, less goodwill and other specified
intangible assets, of 3% for bank holding companies that meet certain specified
criteria, including having the highest regulatory rating and implementing the
Federal Reserve's risk-based capital measure for market risk. All other bank
holding companies generally are required to maintain a leverage ratio of at
least 4%. At December 31, 1999, our consolidated leverage ratio was 7.66%. 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. The Federal Reserve considers the
leverage ratio and other indicators of capital strength in evaluating proposals
for expansion or new activities.
The Bank and the Company are also both subject to other capital guidelines
issued by the Georgia Department of Banking and Finance and the Federal
Reserve, respectively, which provide for minimum ratios of total capital to
total assets.
Failure to meet capital guidelines could subject a bank or bank holding
company to a variety of enforcement remedies, including issuance of a capital
directive, the termination of deposit insurance by the FDIC, a prohibition on
accepting brokered deposits, and certain other restrictions on its business. As
described above, substantial additional restrictions can be imposed on
FDIC-insured depository institutions that fail to meet applicable capital
requirements. See "--Prompt Corrective Action."
PAYMENT OF DIVIDENDS
The Company is a legal entity separate and distinct from the Bank. The
principal source of the Company's cash flow, including cash flow to pay
dividends to its shareholders, is dividends that the Bank pays to it. Statutory
and regulatory limitations apply to the Bank's payment of dividends to the
Company as well as to the Company's payment of dividends to its shareholders.
If, in the opinion of the federal banking regulator, the Bank were engaged
in or about to engage in an unsafe or unsound practice, the federal banking
regulator could require, after notice and a hearing, that it cease and desist
from its 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, a depository institution
may not pay any dividend if payment would cause it to become undercapitalized
or if it already is undercapitalized. 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.
See "--Prompt Corrective Action" above.
8
<PAGE> 9
The Georgia Department of Banking and Finance also regulates the Bank's
dividend payments and must approve dividend payments that would exceed 50% of
the Bank's net income for the prior year. Our payment of dividends may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.
At December 31, 1999, the Bank was able to pay approximately $1,595,000 in
dividends to the Company without prior regulatory approval.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES
The Company and the Bank are subject to the provisions of Section 23A of
the Federal Reserve Act. Section 23A places limits on the amount of:
- - loans or extensions of credit to affiliates;
- - investment in affiliates;
- - the purchase of assets from affiliates, except for real and personal
property exempted by the Federal Reserve;
- - loans or extensions of credit to third parties collateralized by the
securities or obligations of affiliates; and
- - any guarantee, acceptance or letter of credit issued on behalf of an
affiliate.
The aggregate of all of the above transactions is limited in amount, as to
any one affiliate, to 10% of a bank's capital and surplus and, as to all
affiliates combined, to 20% of a bank's capital and surplus. In addition to the
limitation on the amount of these transactions, each of the above transactions
must also meet specified collateral requirements. The Company must also comply
with certain provisions designed to avoid the taking of low-quality assets.
The Company and the Bank are also subject to the provisions of Section 23B
of the Federal Reserve Act which, among other things, prohibits an institution
from engaging in the above transactions with affiliates unless the transactions
are on terms substantially the same, or at least as favorable to the
institution or its subsidiaries, as those prevailing at the time for comparable
transactions with nonaffiliated companies.
The Bank is also subject to restrictions on extensions of credit to its
executive officers, directors, certain principal shareholders and their related
interests. These extensions of credit (1) must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with third parties, and (2) must not involve
more than the normal risk of repayment or present other unfavorable features.
PRIVACY
The Gramm-Leach-Bliley Act also contains provisions regarding consumer
privacy. These provisions require financial institutions to disclose their
policy for collecting and protecting confidential information. Customers
generally may prevent financial institutions from sharing personal financial
information with nonaffiliated third parties except for third parties that
market the institutions' own products and services. Additionally, financial
institutions generally may not disclose consumer account numbers to
9
<PAGE> 10
any nonaffiliated third party for use in telemarketing, direct mail marketing
or other marketing through electronic mail to the consumer.
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. We cannot predict whether
or in what form any proposed regulation or statute will be adopted or the
extent to which our business may be affected by any new regulation or statute.
EFFECT OF GOVERNMENTAL MONETARY POLICES
Our earnings are affected by domestic economic conditions and the monetary
and fiscal policies of the United States government and its agencies. The
Federal Reserve Bank's monetary policies have had, and are likely to continue
to have, an important impact on the operating results of commercial banks
through its power to implement national monetary policy in order, among other
things, to curb inflation or combat a recession. The monetary policies of the
Federal Reserve Board have major effects upon the levels of bank loans,
investments and deposits through its open market operating in United States
government securities and through its regulation of the discount rate on
borrowings of member banks and the reserve requirements against member bank
deposits. It is not possible to predict the nature or impact of future changes
in monetary and fiscal policies.
10
<PAGE> 11
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 six full-service branch offices. 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, its Cleveland Office is located at 575 South Main Street, Cleveland,
Georgia, its Canton Office is located at 1925 Marietta Highway, Canton,
Georgia, its Waleska Office is located at 7265 Reinhardt College Parkway,
Waleska, Georgia, and its Warrenton Office is located at 217 East Main Street,
Warrenton, Georgia. Each office has a 24-hour teller machine. Habersham Bank
owns its office properties without encumbrance, with the exception of the
Warrenton Office which is leased on a month to month basis.
The Advantage Group, Inc.'s principal office is located at 1450 Washington
Street, Clarkesville, Georgia. The telephone number of that office is (706)
778-1790.
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, with a lease expiration date
of 4-1-2002.
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.
11
<PAGE> 12
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, 1999, Habersham Bancorp had
approximately 601 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>
1999 HIGH LOW
---- ---
<S> <C> <C>
Fourth quarter 14.50 12.75
Third quarter 16.00 12.625
Second quarter 18.00 12.625
First quarter 16.00 13.50
1998 HIGH LOW
---- ---
Fourth quarter 17.00 14.00
Third quarter 18.75 16.00
Second quarter 20.25 18.13
First quarter 20.50 18.50
</TABLE>
Cash dividends were paid quarterly at a rate of $.05 per share of common
stock in 1999. Cash dividends were paid quarterly at a rate of $.04 per share
of common stock in 1998.
OTHER STOCK INVESTMENT
On May 21, 1999, the Company exercised its previously acquired option to
purchase a 45.91% interest in CB Financial Corp., Warrenton, Georgia, at a
total cost of $2,963,757, including direct costs of acquisition of $115,468. In
connection with this purchase, the Company issued 207,713 shares of its common
stock valued at $2,847,883 and cash of $406 in exchange for 27,574 shares of
common stock of CB Financial Corp. The stock was issued to 21 shareholders of
CB Financial Corp in reliance on the exemption from registration provided under
Section 4(2) of the Securities Act of 1933, as amended.
12
<PAGE> 13
Item 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $ 32,144 $28,959 $26,962 $23,367 $16,556
Interest expense 16,517 15,091 13,305 11,044 7,398
Other income 15,477 15,750 8,056 2,277 1,371
Other expense 28,417 26,214 18,412 11,762 7,830
Net Income 1,754 2,058 2,157 1,908 2,021
PER SHARE AMOUNTS
Net income - diluted $ .67 $.83 $.86 $.79 $.99
Dividends .20 .16 .14 .12 .10
Weighted average number of
common and common equivalent
shares outstanding 2,609,360 2,481,630 2,497,993 2,411,687 2,032,567
AT DECEMBER 31
Total assets $461,976 $384,069 $328,197 $310,011 $229,586
Earning assets 424,663 359,838 299,301 287,850 213,035
Loans 365,499 281,898 235,764 230,867 145,434
Deposits 317,420 280,453 261,665 224,361 195,085
Shareholders' equity 35,429 32,214 30,144 27,669 25,905
RATIOS
Return on average assets .43% .57% .69% .70% 1.01%
Return on average equity 5.10% 6.63% 7.48% 7.16% 9.39%
Dividend payout ratio 29.85% 16.87% 16.28% 15.19% 9.85%
Average equity to average
assets ratio 8.35% 8.52% 9.16% 9.84% 10.74%
</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") 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"). Effective June 30, 1999, the
Company consolidated the charters of Habersham Bank and Security State Bank,
which had until that date been a wholly owned subsidiary of the Company. As a
result of
13
<PAGE> 14
this consolidation, Security State Bank now functions as a division of
Habersham Bank. Effective September 30, 1999, the Bank ceased operations of its
travel agency subsidiary, Appalachian. Net income of such business for all
periods presented is not significant. The Advantage Group, Inc. is a non-bank
subsidiary which engages in the business of providing marketing and advertising
services. 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 and BancMortgage.
BancMortgage was organized in 1996 as a full service mortgage and
construction lending company located in the northern Atlanta metropolitan area.
During 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. Concurrent to this acquisition of The Prestwick
Mortgage Group, BancMortgage also formed BancFinancial Services Corporation, a
full-service wholesale mortgage lender specializing in sub-prime mortgage
loans. These two latter subsidiaries are based in Virginia.
During 1999, BancMortgage formed a wholly owned subsidiary, BancMortgage
Reinsurance LTD., a reinsurance company incorporated in Turks and Caicos. The
subsidiary provides insurance to companies offering private mortgage insurance.
RESULTS OF OPERATIONS
The Company's net income was $1,753,969, $2,057,901, and $2,157,276 for the
years ended December 31, 1999, 1998, and 1997, respectively, with related
diluted earnings per common and common equivalent share of $.67, $.83, and
$.86, respectively, representing a decrease of 19.28% from 1998 to 1999 and a
decrease of 3.49% from 1997 to 1998.
The decrease in net income for 1999 was primarily due to a net after-tax
unrealized loss of $786,000 due to the Company marking to market the holdings
of 244,960 shares of Flag Financial Corp common stock held as trading
securities which was partially offset by a tax benefit of $409,000 resulting
from a reduction of prior years' overaccrual. 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. Net income represents a return on
average equity of 5.10%, 6.63%, and 7.48% for 1999, 1998, and 1997,
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 1999 was approximately $15.6 million compared to
$13.9 million in 1998 and $13.7 million in 1997. Net interest income for 1999
increased approximately $1,759,000 or 12.68% when compared to 1998, and net
interest income for 1998 increased approximately $211,000 or 1.55% when
compared to 1997.
Interest income increased approximately $3.2 million or 11.00% when
compared to 1998 and increased approximately $2.0 million or 7.40% in 1998 when
compared to 1997. The increase in interest income for 1999 was primarily due to
increases in the Company's loan portfolio of approximately $35 million, offset
by a reduced average yield on the loan portfolio. The increase in interest
income for 1998
14
<PAGE> 15
resulted primarily from increases in the loan portfolio of the Company, offset
by a reduced average yield on the loan portfolio.
The Company's loan portfolio, exclusive of loans held for sale, increased
approximately $107.6 million from December 31, 1998 to December 31, 1999 due to
approximately $144 million of new residential mortgage and construction loans
offset by sales of approximately $36.4 million in residential mortgages and
construction loans. BancMortgage's loan portfolio decreased by approximately
$24 million from December 31, 1998 to December 31, 1999, resulting from sales
of approximately $577 million of residential mortgage and construction loans
offset by originations of approximately $553 million.
Average interest rates on loans were 9.20%, 9.37%, and 10.03% in 1999,
1998, and 1997, respectively. Yields on variable rate residential mortgages
decreased during 1999 in response to movements on various indices.
Weighted average interest rates on investment securities were 5.36%, 5.52%,
and 5.82% in 1999, 1998, and 1997, respectively. Average interest rates on
federal funds sold were 5.74%, 5.33%, and 5.80% in 1999, 1998, and 1997,
respectively.
The increase in interest expense for 1999 of $1.4 million over 1998 was
primarily due to additional interest expense on increased average balances on
interest bearing deposits and other borrowings. Average Federal Home Loan Bank
advances, average repurchase agreement advances, and federal funds purchased
for 1999 increased approximately $16,268,000, $4,335,000, and $5,537,000,
respectively, when compared to 1998. 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 1999 decreased to
4.72% compared to 5.24% in 1998. The average interest rate paid for borrowings
increased to 5.75% compared to 5.30% in 1998.
The net interest margin of the Company was 4.11% in 1999, 4.08% in 1998,
and 4.65% in 1997. Net interest margin increased primarily due to increases in
interest income arising from the increased volume in the loan portfolio and
decreases in interest paid on certificates of deposit, offset by increases in
interest expense on other borrowings.
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS
EARNED AND RATES PAID
Average assets rose approximately $47.7 million or 13.08% in 1999 over 1998
and $49.3 million or 15.67% in 1998 over 1997. Average loan balances increased
approximately $41.6 million or 15.55% in 1999 over 1998 and approximately $31.2
million or 13.18% in 1998 over 1997. Average balances in investment securities
increased approximately $5.2 million or 8.83% in 1999 over 1998 and increased
approximately $14.8 million or 33.48% in 1998 over 1997. The average balance of
federal funds sold in 1999 decreased approximately $7.3 million or 77.87% when
compared to 1998 and increased approximately $2.4 million or 33.91% in 1998
when compared to 1997.
The average balance of deposits for 1999 increased by approximately
$19.5 million or 7.10% over 1998 and increased in 1998 by approximately $36.3
million or 15.26% over 1997.
15
<PAGE> 16
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, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
1999 1998 1999 1998 1999 1998
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 $ 41,250 $ 99,000 7.16% 6.60% $ 2,953 $ 6,534
Federal funds sold 2,078,334 9,393,451 5.74% 5.33% 119,229 500,504
Investment securities:(2)
Taxable 32,693,560 32,749,495 5.64% 5.81% 1,844,174 1,903,096
Tax exempt 23,857,174 22,633,929 4.97% 5.10% 1,186,506 1,153,956
------------ ------------
Total investment securities 56,550,734 55,383,424
Trading Securities 2,672,682 1,064,899
Other Investments 5,362,095 2,894,675
Loans, net(1) 309,502,406 267,857,590 9.20% 9.37% 28,487,996 25,088,953
Cash and due from banks 13,964,768 10,729,293
Premises & equipment 8,226,914 8,429,133
Other assets 13,452,548 8,346,333
------------ ------------ ----------- -----------
TOTAL ASSETS $411,851,731 $364,197,798 $31,640,858 $28,653,043
============ ============ =========== ===========
LIABILITIES
Money market & NOW $ 60,548,509 $ 53,598,039 2.58% 3.20% (1,565,048) (1,717,837)
Savings accounts 8,355,673 8,254,196 2.26% 2.71% (188,544) (224,025)
Certificates of deposit 197,166,960 184,802,058 5.48% 5.94% (10,801,196) (10,970,060)
Short-term and other
borrowings 68,914,796 41,073,525 5.75% 5.30% (3,962,118) (2,178,631)
Demand deposit accounts 27,967,073 27,892,056
Other liabilities 14,507,580 17,541,259
----------- -----------
(16,516,906) (15,090,553)
----------- -----------
Shareholders' equity 34,391,140 31,036,665
------------ ------------
TOTAL LIABILITIES & EQUITY $411,851,731 $364,197,798
============ ============
NET INTEREST MARGIN 4.11% 4.08% $15,123,952 $13,562,490
=========== ===========
</TABLE>
16
<PAGE> 17
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS
EARNED AND RATES PAID, CONTINUED
<TABLE>
<CAPTION>
1997 1997 1997
AVERAGE YIELD/ INCOME
BALANCE RATES (EXPENSE)
<S> <C> <C> <C>
ASSETS
Interest bearing balances
with other banks $ 168,516 6.66% $ 11,217
Federal funds sold 7,015,000 5.80% 406,956
Investment securities:(2)
Taxable 21,631,576 6.24% 1,349,570
Tax exempt 19,842,315 5.37% 1,064,947
------------
Total investment securities 41,473,891
Other investments 2,985,316
Loans, net(1) 236,673,265 10.03% 23,743,448
Cash and due from banks 8,948,696
Premises & equipment 7,827,736
Other assets 9,776,640
------------ -----------
TOTAL ASSETS $314,869,060 $26,576,138
============ ===========
LIABILITIES
Money market & NOW $ 44,119,467 3.10% (1,366,113)
Savings accounts 7,790,505 2.78% (216,384)
Certificates of deposit 161,251,544 5.86% (9,454,476)
Short-term and other
borrowings 36,501,152 6.21% (2,268,193)
Demand deposit accounts 25,026,047
Other liabilities 11,331,058
-----------
(13,305,166)
-----------
Shareholders' equity 28,849,287
-----------
TOTAL LIABILITIES & EQUITY $314,869,060
============
NET INTEREST MARGIN 4.65% $13,270,972
===========
</TABLE>
(1) Interest earnings on nonaccrual loans are included in the foregoing
analysis to the extent that such interest earnings had been recorded
during 1999, 1998, and 1997.
(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.
17
<PAGE> 18
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>
1999 AS COMPARED TO 1998 1998 AS COMPARED TO 1997
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 $ (3,580) $ 232 $ (3,812) $ (4,683) $ (53) $ (4,630)
Investment securities:
Taxable (58,923) (55,673) (3,250) 553,526 (140,232) 693,758
Tax exempt 32,550 (29,835) 62,385 89,009 (60,901) 149,910
----------- ----------- ----------- ----------- ----------- -----------
Total Investment securities (26,373) (85,508) 59,135 642,535 (201,133) 843,668
Federal funds sold (381,275) 8,621 (389,896) 93,548 (44,402) 137,950
Loans, net 3,399,043 (503,076) 3,902,119 1,345,505 (1,782,283) 3,127,788
----------- ----------- ----------- ----------- ----------- -----------
TOTAL INTEREST INCOME 2,987,815 (579,731) 3,567,546 2,076,905 (2,027,871) 4,104,776
----------- ----------- ----------- ----------- ----------- -----------
INTEREST BEARING LIABILITIES
Money market & NOW (152,789) (375,204) 222,415 351,724 57,888 293,836
Savings accounts (35,481) (38,231) 2,750 7,641 (5,250) 12,891
Certificates of deposit (168,864) (903,339) 734,475 1,515,584 135,524 1,380,060
Short-term and
other borrowings 1,783,487 307,900 1,475,587 (89,562) (373,506) 283,944
----------- ----------- ----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 1,426,353 (1,008,874) 2,435,227 1,785,387 (185,344) 1,970,731
----------- ----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME $ 1,561,462 $ 429,143 $ 1,132,319 $ 291,518 $(1,842,527) $ 2,134,045
=========== =========== =========== =========== =========== ===========
</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 1999 decreased $273,000 or 1.73% when compared to
1998 and increased $7.7 million or 95.51% in 1998 when compared to 1997.
Noninterest income in 1999 decreased primarily due to the Company's marking to
market its holding of 244,960 shares of Flag Financial Corp common stock for a
loss of approximately $1.2 million and the Company's decision to cease
operation of its travel agency subsidiary, resulting in a decrease in travel
service income of approximately $493,000. These decreases were offset by
increases in gains on sale of loans, loan fee income, deposit account fees, and
dividend income from trading securities, and earnings from the equity
investment of the Company in CB Financial Corp. of approximately $500,000,
$519,000, $379,000, $84,000, and $211,000, respectively. Noninterest income in
1998 increased primarily due to increases in gains on sale of loans and loan
fee income of approximately $5.8 million and $1 million, respectively. These
increases were attributable to the operations of BancMortgage beginning in
1996. In addition, sales income from Appalachian increased approximately
$135,000 in 1998.
Other noninterest expense in 1999 increased by approximately $2.2 million
or 8.41% as compared to 1998 and the 1998 amount increased approximately $7.8
million or 42.38% as compared to 1997. The increase for 1999 was primarily due
to increases of $1,522,000, $405,000, and $827,000 in personnel, occupancy, and
other operating expenses, respectively, offset by decreases in travel service
expense and computer services expense of Habersham Bank of approximately
$456,000 and $94,000, respectively. The increase in personnel, occupancy, and
operating expenses resulted from the opening of a loan production office in
Warrenton, GA, as well as BancMortgage expanding operations with the purchase
of selected assets of The Fidelity Group.
18
<PAGE> 19
The increase for 1998 was primarily due to increases of $6,001,000,
$472,000, and $1,027,000 in personnel, occupancy, and other operating expenses,
respectively. The increase for 1998 was primarily due to increases in
personnel, occupancy, 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.
INCOME TAX (BENEFIT) EXPENSE
The effective tax rate for the Company decreased during 1999 as a result of
a tax benefit $409,000 resulting from a reduction of prior years' overaccrual.
The effective tax rate for the Company decreased during 1998 to 24.43% from
25.08% in 1997 due to an increase in tax exempt security income as a percentage
of income before income taxes.
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 $985,800 in 1999 as compared to $692,500 in
1998 and $422,000 in 1997. The Company's allowance for loan losses was
$3,181,553 at December 31, 1999, which was l.00% of year-end loans and 136.90%
of total nonperforming loans, as compared to $2,709,570 at December 31, 1998,
which was 1.29% of year-end loans and 69.97% of total nonperforming loans.
At December 31, 1999, loans over 90 days past due and nonaccrual loans
totaled $1,542,148 or .49% of gross outstanding loans as compared to $3,022,267
or 1.44% of gross outstanding loans at December 31, 1998. The decrease in 1999
of approximately $1.5 million was primarily due to decreases in nonaccrual
loans relating to sales and paydowns of approximately $1,058,000, charge-offs
of approximately $346,000, and movement to other real estate of approximately
$348,000 offset by additions in nonaccrual mortgage loans of approximately
$946,000. Loans 90 days past due decreased approximately $674,000 in 1999.
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.
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 $513,817 in 1999 representing .16% of average
loans, as compared to $319,009 in 1998, representing .12% of average loans. Net
charge-offs were $347,327 in 1997, representing .15% of average loans.
19
<PAGE> 20
The following table summarizes, for each of the years in the five year
period ended December 31, 1999, selected information related to the allowance
for loan losses.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Balance of allowance for loan
losses at beginning of period $ 2,709,570 $ 2,336,079 $ 2,261,406 $ 2,335,788 $ 1,744,335
------------ ------------- ------------ ------------ ------------
Balance of allowance of Security
State Bank at June 30, 1995 628,371
Loans charged-off:
Commercial, financial &
agricultural (117,133) (221,048) (224,976) (183,218) (22,252)
Real estate (350,006) (77,764) (142,871) (256,126) (47,110)
Installment loans to individuals (141,661) (140,809) (145,373) (108,660) (44,242)
Other (32,059) (22,157) (34,390) (23,014) (62,230)
------------ ------------- ------------ ------------ ------------
Total charged-off loans (640,859) (461,778) (547,610) (571,018) (175,834)
------------ ------------- ------------ ------------ ------------
Recoveries:
Commercial, financial &
agricultural 4,128 59,284 22,454 32,857 5,566
Real estate 59,570 16,850 108,247 65,150 1,610
Installment loans to individuals 57,872 55,071 61,324 28,760 17,429
Other 5,472 11,564 8,258 9,869 16,268
------------ ------------- ------------ ------------ ------------
Total recoveries 127,042 142,769 200,283 136,636 40,873
------------ ------------- ------------ ------------ ------------
Net charge-offs (513,817) (319,009) (347,327) (434,382) (134,961)
Additions to allowance 985,800 692,500 422,000 360,000 98,043
------------ ------------- ------------ ------------ ------------
Balance of allowance for loan
losses at end of period $ 3,181,553 $ 2,709,570 $ 2,336,079 $ 2,261,406 $ 2,335,788
============ ============ ============ ============ ============
Average amount of loans $309,502,406 $267,857,590 $236,673,265 $188,885,803 $122,451,274
============ ============ ============ ============ ============
Ratio of net charge-offs during
the period to average loans
outstanding during the period .16% .12% .15% .23% .11%
Ratio of allowance to year-end loans 1.00% 1.29% 1.18% 1.09% 1.61%
</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 borrower's 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 that 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, 1999.
20
<PAGE> 21
The allowance for loan losses allocation is based on subjective judgment
and estimates, and therefore is not necessarily indicative of the specific
amounts or loan categories in which charge-offs may ultimately occur. The
allocation of the allowance for loan losses by loan category at December 31,
1999, 1998, and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
PERCENT OF LOANS PERCENT OF LOANS PERCENT OF LOANS
IN EACH CATEGORY IN EACH CATEGORY IN EACH CATEGORY
AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
& agricultural $ 921,585 4.5% $ 775,239 4.9% $ 720,380 6.7%
Real estate 1,619,563 76.8% 1,471,843 63.4% 1,426,477 70.5%
Installment loans
to individuals 442,005 5.5% 405,988 6.1% 189,222 6.9%
Loans held for sale 198,400 13.2% 56,500 25.6% -- 15.9%
---------- ------ ---------- ------ ---------- ------
TOTAL 3,181,553 100.0% $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 categories in 1997.
LOANS
Loans, exclusive of loans held for sale, increased approximately $107.6
million or 51.29%, in 1999 as compared to 1998 and increased approximately
$11.5 million or 5.82% in 1998 as compared to 1997. The increase in the
Company's loan portfolio in 1999 resulted primarily from approximately $144
million of new loans offset by sales of approximately $36.4 million in
construction loans and residential mortgages. 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. Loans held for sale decreased approximately $23.9
million or 33.22% in 1999 when compared to 1998 and increased approximately
$34.6 million or 92.38% in 1998 when compared to 1997.
The composition of the Company's loan portfolio changed during 1999 as a
result of increases in construction, real estate secured mortgage, and
commercial loans of approximately $40.5 million or 61.12%, $6.2 million or
54.49%, and $2.8 million or 20.20%, respectively, when compared to 1998. 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%, an increase in construction loans of approximately $4.4 million or
7.09%, and a decrease in commercial loans of approximately $2.0 million or
12.61%, as compared to 1997.
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 in any each of the last five years.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 16,623,264 $ 13,829,965 $ 15,824,792 $ 18,292,993 $17,945,695
Real estate - construction 106,915,963 66,359,030 61,965,365 50,263,496 16,512,884
Real estate - mortgage 221,857,018 184,418,653 141,857,765 146,197,001 96,361,817
Installment loans to
individuals 20,168,672 17,337,632 16,115,903 15,410,015 14,613,500
------------ ------------ ------------ ------------ ------------
Total $365,564,917 $281,945,280 $235,763,825 $230,163,505 $145,433,896
============ ============ ============ ============ ============
</TABLE>
21
<PAGE> 22
The following table sets forth the maturities and sensitivities to
changes in interest rates of loans at December 31, 1999.
<TABLE>
<CAPTION>
DUE AFTER
DUE IN ONE THROUGH DUE AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
LOAN MATURITY:
Commercial, financial
and agricultural ............. $ 11,288,850 $4,881,397 $453,017 $ 16,623,264
Real estate - construction .... 106,341,824 574,139 -- 106,915,963
------------ ---------- -------- ------------
TOTAL .................... $117,630,674 $5,455,536 $453,017 $123,539,227
============ ========== ======== ============
LOAN INTEREST RATE SENSITIVITY:
Selected loans with:
Predetermined interest rates ... $ 34,114,993 $5,312,909 $453,017 $ 39,880,919
Floating or adjustable
interest rates ................ 83,515,681 142,627 -- 83,658,308
------------ ---------- -------- ------------
TOTAL ....................... $117,630,674 $5,455,536 $453,017 $123,539,227
============ ========== ======== ============
</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 decreased $1,417,000 or 26.18% in 1999 compared to 1998 and increased
$57,127 or 1.07% in 1998 compared to 1997. The decrease for 1999 was primarily
due to decreases in nonaccrual loans, accruing loans 90 days past due, and
restructured loans of approximately $806,000, $674,000, and $68,000,
respectively, offset by increases in other real estate of approximately $131,000
from BancMortgage operations. 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 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>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NONPERFORMING ASSETS:
Accruing loans 90 days past due $ 338,677 $1,013,009 $1,282,000 $ 377,000 $ 258,000
Nonaccrual 1,203,471 2,009,258 1,251,157 981,801 1,022,683
Restructured loans 781,803 849,963 913,753 973,559 1,227,411
Other real estate owned 1,671,083 1,539,900 1,908,094 2,403,397 1,217,860
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $3,995,034 $5,412,130 $5,355,004 $4,735,757 $3,725,954
========== ========== ========== ========== ==========
RATIOS:
Nonperforming loans (excluding
restructured loans) to total loans .49% 1.44% 1.28% .66% .88%
Nonperforming assets to total loans
plus other real estate owned 1.25% 2.56% 2.68% 2.26% 2.51%
Allowance to nonperforming assets 79.64% 50.06% 43.62% 47.75% 62.69%
</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 $266,491, $401,099, and $289,782, respectively, in
1999, 1998, and 1997, compared with interest income recognized of $185,053,
$274,557, and $252,930, respectively.
22
<PAGE> 23
At December 31, 1999, 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.
Habersham Bank held a concentration in mortgages for agribusiness
purposes in the poultry industry which totaled approximately $9 million, or
approximately 2.8% of total net loans at December 31, 1999 and which totaled
approximately $10 million, or approximately 4.7% of total net loans at December
31, 1998.
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, 1999, approximately $38.8 million of investment securities were
classified as available for sale. Approximately $974,000 of net unrealized loss,
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 1998,
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. During 1999, the Company recorded an unrealized loss of $1,190,820
related to the trading securities.
The following table sets forth the carrying amounts of investment
securities at December 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Investment securities available for sale:
U.S. Treasury $ -- $ 200,812 $ 201,438
U.S. Government agencies 23,049,452 31,678,154 20,982,863
States & political subdivisions 14,430,944 13,767,110 11,345,182
Other investments 1,339,431 693,936 694,940
----------- ----------- -----------
Total $38,819,827 $46,340,012 $33,224,423
=========== =========== ===========
Investment securities held to maturity:
U.S. Government agencies $ 3,535,356 $ 3,911,279 $ 1,351,357
States & political subdivisions 10,666,346 11,600,284 9,954,423
Other investments -- 99,000 99,000
----------- ----------- -----------
Total $14,201,702 $15,610,563 $11,404,780
=========== =========== ===========
Trading securities $ 1,714,720 $ 3,495,540 --
=========== ===========
</TABLE>
23
<PAGE> 24
The following table sets forth the maturities of investment securities
at December 31, 1999 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. Government agencies $ 624,983 $ 675,131 $2,701,346 $19,047,992
States & political subdivisions 872,574 3,936,830 2,765,408 6,856,132
Other investments 1,339,431
Weighted average yields:
U.S. Government agencies 4.04% 6.05% 6.33% 6.34%
States & political subdivisions 7.15% 7.20% 7.86% 7.85%
Investment securities held to maturity:
Carrying Value:
U.S. Government agencies $ -- $ 105,622 $ 779,977 $ 2,649,757
States & political subdivisions 721,049 3,997,521 2,530,992 3,416,784
Weighted average yields:
U.S. Government agencies -- 6.29% 6.00% 7.43%
States & political subdivisions 7.53% 7.16% 7.68% 6.96%
</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,
1999.
OTHER STOCK INVESTMENT
In May 1999, the Company exercised its previously acquired option to
purchase a 45.91% interest in CB Financial Corp., Warrenton, Georgia, at a total
cost of $2,963,757, including direct costs of acquisition of $115,468. In
connection with this purchase, the Company issued 207,713 shares of its common
stock valued at $2,847,883 and cash of $406 in exchange for 27,574 shares of
common stock of CB Financial Corp. The investment in CB Financial Corp. is
accounted for using the equity method. Included in the initial investment in CB
Financial Corp. common stock was approximately $1,278,000 in excess cost over
the Company's underlying equity in the net assets of this investee. For the year
ended December 31, 1999, the Company recorded $211,279 as equity in earnings of
CB Financial Corp. Amortization of related excess cost over basis in CB
Financial Corp. common stock for 1999 totaled $49,707. The assets of CB
Financial Corp. as of December 31, 1999 totaled approximately $41,889,000 and
net income for the year ended December 31, 1999 totaled approximately $83,000.
DEPOSITS
Average deposits increased approximately $19.5 million and $36.3
million during 1999 and 1998, 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, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
AVG. AMT AVG AVG. AMT AVG AVG. AMT AVG
OUTSTANDING RATE OUTSTANDING RATE OUTSTANDING RATE
<S> <C> <C> <C> <C> <C> <C>
Interest bearing demand deposits $ 60,548,509 2.58% $ 53,598,039 3.20% $ 44,119,467 3.10%
Nonininterest bearing demand deposits 27,967,073 n/a 27,892,056 n/a 25,026,047 n/a
Time certificates of deposit 197,166,960 5.48% 184,802,058 5.94% 161,251,544 5.86%
</TABLE>
24
<PAGE> 25
At December 31, 1999, time certificates of deposit of $100,000 or more
totaled $78,399,152. The maturities of all time certificates of deposit over
$100,000 are as follows:
<TABLE>
<S> <C>
3 months or less $19,079,280
Over 3 but less than 6 months 20,333,174
Over 6 but not more than 12 months 26,182,545
Over 1 year but not more than 5 years 12,804,153
-----------
TOTAL $78,399,152
===========
</TABLE>
BORROWINGS
Borrowings increased approximately $42.5 million during 1999 as
compared to 1998 as a result of borrowings of approximately $23.4 million from
the Federal Home Loan Bank, approximately $11.2 million in repurchase agreement
advances drawn at Compass Bank, and federal funds purchased of approximately
$8.1 million, offset by repayments of $750,000 to the National Bank of Commerce
of Birmingham. 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 National Bank
of Commerce of Birmingham in connection with the purchase of Empire common stock
offset by repayments of approximately $2.5 million.
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, 1999, that
the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notifications from both the
Federal Deposit Insurance Corporation and the Federal Reserve Bank of Atlanta
categorized the Bank as adequately under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the Bank's categories.
25
<PAGE> 26
The Company's actual capital amounts and ratios as of December 31, 1999
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, 1999
Total Capital (to risk-weighted assets):
The Company $36,726 10.71% $27,422 8% N/A N/A
Habersham Bank 31,990 9.46% 27,043 8% $33,804 10%
Tier I Capital (to risk-weighted assets):
The Company $33,544 9.79% $13,711 4% N/A N/A
Habersham Bank 28,808 8.52% 13,521 4% $20,282 6%
Tier I Capital (to average assets):
The Company $33,544 7.66% $17,506 4% N/A N/A
Habersham Bank 28,808 6.58% 17,504 4% $21,880 5%
</TABLE>
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.
Cash dividends were paid at a rate of $.05 per share in March, June,
September, and December 1999. 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.
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 an 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
26
<PAGE> 27
repriced while interest rates are rising, net interest income deteriorates; if
interest rates are falling, net interest income improves.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS
DUE IN DUE AFTER DUE AFTER DUE AFTER DUE AFTER TOTAL
YIELD/ THREE THREE THROUGH SIX THROUGH ONE THROUGH FIVE
INTEREST EARNING ASSETS: RATE MONTHS SIX MONTHS TWELVE MONTHS FIVE YEARS YEARS
<S> <C> <C> <C> <C> <C> <C> <C>
Investment securities 5.36% $ 1,051,593 $ 621,983 $ 867,406 $ 11,919,230 $38,561,317 $ 53,021,529
Loans 9.20% 145,919,537 26,040,131 36,604,555 101,449,823 55,484,640 365,498,686
---- ------------ ------------- ------------- ------------ ----------- ------------
Total earning assets 8.59% 146,971,130 26,662,114 37,471,961 113,369,053 94,045,957 418,520,215
---- ------------ ------------- ------------- ------------ ----------- ------------
INTEREST BEARING LIABILITIES:
Deposits:
Money Market and NOW 2.58% 55,337,836 -- -- -- -- 55,337,836
Savings 2.26% 7,871,532 -- -- -- -- 7,871,532
Certificates of
deposit 5.48% 48,767,995 65,693,804 65,972,034 48,637,912 -- 229,071,745
Short-term
borrowings 5.75% 97,233,020 -- 1,950,000 -- -- 99,183,020
---- ------------ ------------- ------------- ------------ ----------- ------------
Total interest bearing
liabilities 4.93% 209,210,383 65,693,804 67,922,034 48,637,912 -- 391,464,133
---- ------------ ------------- ------------- ------------ ----------- ------------
INTEREST RATE MARGIN 4.11%
====
Excess (deficiency) of interest earning
assets over (to) interest
bearing liabilities $(62,239,253) $ (39,031,690) $ (30,450,073) $ 64,731,141 $94,045,957 $ 27,056,082
============ ============= ============= ============ =========== ============
Cumulative gap $(62,239,253) $(101,270,943) $(131,721,016) $(66,989,875) $27,056,082
Ratio of cumulative gap to
total cumulative earning assets (42.35)% (58.32)% (62.40)% (20.65)% 6.46%
Ratio of interest earning assets to
interest bearing liabilities 70.25% 63.16% 61.58% 82.89% 106.91%
</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, 1999, the Company was able to
meet such objective. The interest rate sensitivity analysis has a negative one
year gap of approximately $131.7 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 $63.2
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 Company is also subject
to equity risk as a result of changes in market values on the trading
securities.
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, 1999. The expected maturity
categories take into consideration historical prepayments experience as well as
27
<PAGE> 28
management's expectations based on the interest rate environment as of December
31, 1999.
MARKET RISK INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL/NOTIONAL AMOUNT MATURING IN: FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE-SENSITIVE ASSETS:
Fixed interest rate
loans $ 59,523 $ 15,200 $12,202 $ 5,269 $ 8,030 $55,850 $156,074 $156,529
Average interest rate 7.95% 9.17% 9.18% 8.83% 8.71% 9.12% 8.65%
Variable interest rate
loans 149,043 10,247 4,245 14,485 31,405 -- 209,425 204,334
Average interest rate 9.37% 7.49% 7.49% 6.63% 6.63% --% 8.64%
Fixed interest rate
securities 1,754 2,067 2,127 2,653 1,585 40,977 51,163 50,653
Average interest rate 6.25% 5.04% 4.58% 4.79% 5.28% 5.95% 5.78%
Variable interest rate
securities 595 -- -- 180 -- 1,084 1,859 1,831
Average interest rate 4.25% --% --% 4.08% -- 5.96% --%
RATE-SENSITIVE LIABILITIES:
Savings and interest
bearing checking 63,209 -- -- -- -- -- 63,209 63,209
Average interest rate 2.55% --% --% --% --% --% 2.55%
Fixed interest rate
time deposits 180,230 25,806 13,298 8,855 664 -- 228,853 234,809
Average interest rate 5.63% 5.84% 6.09% 5.75% 5.52% --% 5.68%
Variable interest rate
time deposits 183 35 -- -- -- -- 218 223
Average interest rate 5.44% 5.31% --% --% --% --% 5.42%
Variable interest rate
borrowings 99,183 -- -- -- -- -- 99,183 99,183
Average interest rate 5.75% --% --% --% --% --% 5.75%
</TABLE>
The trading securities of $1,714,720 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
Liquidity management involves the matching of the cash flow
requirements of customers, either depositors withdrawing funds or borrowers
needing loans, and the ability of the Company to meet those requirements.
The Company's liquidity program is designed and intended to provide
guidance in funding the credit and investment activities of the Company while at
the same time ensuring that the deposit obligations of the Company 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.
The Company's liquidity position depends primarily upon the liquidity
of its assets relative to its need to respond to short-term demand for funds
caused by
28
<PAGE> 29
withdrawals from deposit accounts and loan funding commitments. Primary sources
of liquidity are scheduled repayments on the Company's loans and interest on and
maturities of its investments. Sales of investment securities available for sale
represent another source of liquidity to the Company. The Company may also
utilize its cash and due from banks and federal funds sold to meet liquidity
requirements as needed.
The Company also has the ability, on a short-term basis, to purchase
federal funds from other financial institutions up to $20,000,000. Presently,
the Company has made arrangements with commercial banks for short-term advances
up to $12,000,000 under a repurchase agreement line of credit, in addition to a
total available line of $133,000,000 which is available to the Company, subject
to available collateral, from the Federal Home Loan Bank.
Habersham Bank's liquidity policy requires a minimum ratio of 20% of
cash and certain short-term investments to net withdrawable deposit accounts.
The Bank's liquidity ratios at December 31, 1999 and 1998 were 23.72% and
23.97%, respectively.
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. In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No, 133", an amendment of FASB Statement No. 133. SFAS No. 133, as
amended, is now effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. The Company does not believe the provisions of SFAS No. 133
will have a significant impact on the financial statements upon adoption.
YEAR 2000
The Company's Year 2000 Committee, the Year 2000 Contingency Committee,
and the Customer Awareness Committee were responsible for the implementation of
various phases of the Year 2000 Action Plan.
Habersham Bank opened for business January 1, 2000, completing a
successful Year 2000 transition. No disruption in services was noted; however,
monitoring of all systems will continue well into 2000. No problems relating to
borrowers or vendors have been noted.
Costs incurred related to Year 2000 readiness of approximately $108,000
were incurred during 1999. These costs consisted primarily of capital
expenditures to upgrade computer systems. For the year ended December 31, 1998,
costs incurred for Year 2000 related upgrades of computer equipment and software
totaled approximately $15,000 and were included in other operating expenses.
29
<PAGE> 30
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) QUARTER ENDED
MARCH 30 JUNE 30 SEPT. 30 DEC. 31
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
1999:
Interest income $7,157 $7,609 $8,303 $9,075
Net interest income 3,511 3,807 4,138 4,171
Net income 204 548 495 507
Per share - basic .08 .21 .18 .19
Per share - diluted .08 .21 .18 .19
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
</TABLE>
Cash dividends were paid on a quarterly basis at a rate of $.05 per
share of common stock in 1999 and $.04 per share of common stock in 1998.
The common stock of the Company is traded on the Nasdaq Stock Market
("NASDAQ") under the symbol HABC. At December 31, 1999 the Company had
approximately 601 shareholders of record. The following table sets forth the
high and low sales prices of the Company's common stock on a quarterly basis for
the last two fiscal years.
<TABLE>
<CAPTION>
1999: HIGH LOW
<S> <C> <C>
Fourth Quarter 14.50 12.75
Third Quarter 16.00 12.625
Second Quarter 18.00 12.625
First Quarter 16.00 13.50
1998: HIGH LOW
Fourth Quarter 17.00 14.00
Third Quarter 18.75 16.00
Second Quarter 20.25 18.13
First Quarter 20.50 18.50
</TABLE>
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" included in the Company's
annual report to shareholders and incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets of the Company and subsidiaries as
of December 31, 1999 and 1998, 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-year period ended December 31, 1999, and the reports issued thereon by
the Company's independent public accountants are attached hereto as Exhibit 13
and are incorporated herein by reference.
30
<PAGE> 31
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Company's directors and executive officers
appears in the Proxy Statement under the headings "Election of
Directors-Nominees" and "--Compliance with Section 16(a) of the Exchange Act"
and "Executive Officers" and is incorporated by reference herein.
Item 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)
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C>
10.3* Habersham Bancorp Outside Directors Stock Option Plan. (5)
10.4* Habersham Bancorp 1996 Incentive Stock Option Plan, as amended by the
First Amendment thereto dated January 29, 2000. (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 1999 Annual Report.
21.0 Subsidiaries of Habersham Bancorp.
23.1 Independent Accountants' Consent
27.0 Financial Data Schedule (for SEC use only).
</TABLE>
(1) Incorporated herein by reference to exhibit 3(a) in Amendment No. 1 to
Registrant's Registration Statement on Form S-4 (Regis. No. 33-57915).
(2) Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1989
(File No. 0-13153).
(3) Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1991
(File No. 0-13153).
(4) Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1993
(File No. 0-13153).
(5) Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1994
(File No. 0-13153).
(6) Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1995
(File No. 0-13153).
(7) Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 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, 1999.
32
<PAGE> 33
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)
/s/ David D. Stovall Date: March 29, 2000
-------------------- -----------------
By: 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 29, 2000
- ---------------------------- and Director
/s/ Thomas A. Arrendale, III Vice Chairman of the Board March 29, 2000
- ---------------------------- and Director
/s/ David D. Stovall Director, President and March 29, 2000
- ---------------------------- Chief Executive Officer *
/s/ James Holcomb Director March 29, 2000
- ----------------------------
/s/ James A. Stapleton, Jr. Director March 29, 2000
- ----------------------------
/s/ Calvin R. Wilbanks Director March 29, 2000
- ----------------------------
</TABLE>
* Principal financial officer, principal executive officer, controller and
principal accounting officer.
33
<PAGE> 34
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. (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, as amended by the
First Amendment thereto dated January 29, 2000. (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 1999 Annual Report.
21.0 Subsidiaries of Habersham Bancorp.
23.1 Independent Accountants' Consent
27.0 Financial Data Schedule (for SEC use only).
</TABLE>
(1) Incorporated herein by reference to exhibit 3(a) in Amendment No. 1 to
Registrant's Registration Statement on Form S-4 (Regis. No. 33-57915).
(2) Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1989
(File No. 0-13153).
(3) Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1991
(File No. 0-13153).
34
<PAGE> 35
(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).
* Indicates the Registrant's plans, management contracts and compensatory
arrangements.
36
<PAGE> 1
EXHIBIT 10.4
FIRST AMENDMENT TO THE
HABERSHAM BANCORP
1996 INCENTIVE STOCK OPTION PLAN
THIS FIRST AMENDMENT is made as of January 29, 2000, by Habersham Bancorp, a
Georgia corporation (the "Company").
WHEREAS, the Company maintains the Habersham Bancorp 1996 Incentive
Stock Option Plan (the "Plan"); and
WHEREAS, the Company desires to amend the Plan to increase the number
of shares reserved for issuance under the Plan.
NOW, THEREFORE, BE IT RESOLVED, that the Company does hereby amend the
Plan, effective as of the date first set forth above, by deleting the existing
Section 2.2 and replacing it with the following new Section 2.2:
"2.2 Stock Subject to the Plan. Subject to adjustment in
accordance with Section 4.1, 600,000 shares of Stock (the "Maximum Plan
Shares") are hereby reserved exclusively for issuance pursuant to
Options. At no time shall the Company have outstanding Options subject
to Section 16 of the Securities Exchange Act of 1934 and shares of
stock issued in respect of Options in excess of the Maximum Plan
Shares."
Except as specifically amended hereby, the remaining provisions of the
Plan shall remain in full force and effect as prior to the adoption of this
First Amendment.
IN WITNESS WHEREOF, the Company has caused this First Amendment to be
duly executed under seal on its behalf, effective as of the date first above
written.
ATTEST: HABERSHAM BANCORP
By: /s/ Edward D. Ariail By: /s/ David D. Stovall
------------------------------ ---------------------------------------
Title: Vice President and Title: President and Chief
Corporate Secretary Executive Officer
<PAGE> 1
EXHIBIT 13
HABERSHAM BANCORP AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Habersham Bancorp:
We have audited the accompanying consolidated balance sheets of Habersham
Bancorp and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1999. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Habersham Bancorp
and subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Atlanta, Georgia
January 28, 2000
<PAGE> 3
HABERSHAM BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------- ------------
<S> <C> <C>
Cash and due from banks (note 4) $ 14,517,283 5,798,796
Federal funds sold -- 8,300,000
Investment securities available for sale (note 5) 38,819,827 46,340,012
Investment securities held to maturity (estimated fair
values of $13,664,089 in 1999 and $15,888,697
in 1998) - (note 6) 14,201,702 15,610,563
Trading securities 1,714,720 3,495,540
Other investments (notes 7 and 12) 7,553,563 4,193,934
Loans held for sale 48,186,934 72,162,620
Loans (notes 8, 12, and 19) 317,311,752 209,735,350
Less allowance for loan losses (note 8) (3,181,553) (2,709,570)
------------- ------------
Loans, net 314,130,199 207,025,780
------------- ------------
Premises and equipment, net (note 9) 8,930,448 8,206,169
Accrued interest receivable 2,852,125 2,299,992
Other real estate 1,671,083 1,539,900
Goodwill and other intangible assets, net of accumulated
amortization of $1,317,271 in 1999 and $848,170 in 1998 -
(note 3) 2,892,242 3,321,338
Other assets 6,505,607 5,774,690
------------- ------------
Total assets $ 461,975,733 384,069,334
============= ============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 4
<TABLE>
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------- ------------
Deposits (notes 10 and 19):
Noninterest-bearing demand $ 25,139,196 28,408,215
Money market and NOW accounts 55,337,836 55,419,227
Savings 7,871,532 8,634,374
Time ($100,000 and over) 78,399,152 58,885,476
Other time 150,672,593 129,106,007
------------- ------------
Total deposits 317,420,309 280,453,299
Short-term borrowings (note 10) 692,185 139,659
Other borrowings (note 10) 1,950,000 2,700,000
Federal funds purchased and securities sold
under repurchase agreements (note 11) 19,290,000 --
Federal Home Loan Bank advances (note 12) 77,250,835 53,810,571
Accrued interest payable 3,175,684 3,168,311
Other liabilities 6,768,039 11,583,567
------------- ------------
Total liabilities 426,547,052 351,855,407
------------- ------------
Shareholders' equity (notes 14 and 16):
Common stock, $1.00 par value; 10,000,000 shares
authorized; 2,698,746 and 2,448,267 shares issued and
outstanding in 1999 and 1998, respectively 2,698,746 2,448,267
Additional paid-in capital 12,417,064 9,444,576
Retained earnings 21,286,509 20,057,968
Accumulated other comprehensive (loss) income (973,638) 263,116
------------- ------------
Total shareholders' equity 35,428,681 32,213,927
Commitments (notes 8 and 9)
------------- ------------
Total liabilities and shareholders' equity $ 461,975,733 384,069,334
============= ============
</TABLE>
3
<PAGE> 5
HABERSHAM BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- -----------
<S> <C> <C> <C>
Interest income:
Loans $ 28,487,996 25,088,953 23,743,448
Investments:
Taxable securities 1,844,174 1,903,096 1,349,570
Tax exempt securities 1,186,506 1,153,956 1,064,947
Other investments 506,235 312,179 397,235
Federal funds sold 119,229 500,504 406,956
------------ ---------- -----------
Total interest income 32,144,140 28,958,688 26,962,156
------------ ---------- -----------
Interest expense:
Time deposits, $100,000 and over 3,441,025 3,264,884 2,144,502
Other deposits 9,113,763 9,647,038 8,892,471
Federal funds purchased and securities sold under
repurchase agreements 559,299 -- --
Short-term and other borrowings, primarily
FHLB advances 3,402,819 2,178,631 2,268,193
------------ ---------- -----------
Total interest expense 16,516,906 15,090,553 13,305,166
------------ ---------- -----------
Net interest income 15,627,234 13,868,135 13,656,990
------------ ---------- -----------
Provision for loan losses (note 8) 985,800 692,500 422,000
------------ ---------- -----------
Net interest income after provision for loan
losses 14,641,434 13,175,635 13,234,990
------------ ---------- -----------
Noninterest income:
Gain on sale of loans 10,403,623 9,903,982 4,107,804
Loan fee income 2,892,289 2,372,906 1,363,160
Service charges on deposit accounts 665,859 615,320 672,223
Other service charges and commissions 295,615 244,984 216,013
Securities gains (losses), net (note 5) 19,898 76,614 (12,972)
Realized gain on trading securities 7,378 -- --
Unrealized (loss) gain on trading securities (1,190,820) 478,134 --
Equity in earnings of investee (note 7) 211,279 -- --
Travel service income 765,858 1,258,772 1,123,785
Other income 1,406,511 799,757 586,249
------------ ---------- -----------
Total noninterest income 15,477,490 15,750,469 8,056,262
------------ ---------- -----------
Noninterest expense:
Salaries and employee benefits (note 16) 18,225,097 16,703,020 10,702,002
Occupancy expenses 3,010,796 2,605,898 2,133,520
Travel service expense 684,818 1,141,055 1,031,194
Computer services 516,616 610,707 418,624
Other (note 17) 5,980,121 5,153,269 4,126,433
------------ ---------- -----------
Total noninterest expense 28,417,448 26,213,949 18,411,773
------------ ---------- -----------
Income before income taxes 1,701,476 2,712,155 2,879,479
Income tax (benefit) expense (note 13) (52,493) 654,254 722,203
------------ ---------- -----------
Net income $ 1,753,969 2,057,901 2,157,276
============ ========== ===========
Net income per common share - basic $ .67 .85 .91
============ ========== ===========
Net income per common share - diluted $ .67 .83 .86
============ ========== ===========
Weighted-average number of common shares outstanding 2,609,360 2,413,474 2,370,423
============ ========== ===========
Weighted-average number of common and common
equivalent shares outstanding 2,609,360 2,481,630 2,497,993
============ ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 6
HABERSHAM BANCORP AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMPREHENSIVE COMMON PAID-IN RETAINED
INCOME STOCK CAPITAL EARNINGS
------------- ----------- ----------- -----------
Balance at December 31, 1996 $ 2,403,974 8,897,758 16,560,893
Comprehensive income:
Net income $ 2,157,276 -- -- 2,157,276
Unrealized gains on investment
securities, net of taxes (note 15) 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 --
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
Comprehensive income:
Net income $ 2,057,901 -- -- 2,057,901
Unrealized gains on investment securities,
net of taxes (note 15) 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
Comprehensive income:
Net income $ 1,753,969 -- -- 1,753,969
Unrealized losses on investment
securities, net of taxes (note 15) (1,236,754) -- -- --
-----------
Total comprehensive income $ 517,215
===========
Cash dividends, $.20 per share -- -- (525,428)
Issuance of common stock in business
acquisition 207,713 2,640,170 --
Purchase and retirement of common stock (10,500) (153,560) --
Issuance of common stock upon exercise
of stock options 53,266 485,878 --
------------- ----------- -------------
Balance at December 31, 1999 $ 2,698,746 12,417,064 21,286,509
============= =========== =============
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE TREASURY
INCOME (LOSS) STOCK TOTAL
-------------- ------------- ------------
<S> <C> <C> <C>
Balance at December 31, 1996 56,511 (250,347) 27,668,789
Comprehensive income:
Net income -- -- 2,157,276
Unrealized gains on investment
securities, net of taxes (note 15) 183,935 -- 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 -- 250,347 428,315
Issuance of common stock upon exercise of
stock options -- -- 37,843
---------- ----------- -----------
Balance at December 31, 1997 240,446 -- 30,144,339
Comprehensive income:
Net income -- -- 2,057,901
Unrealized gains on investment securities,
net of taxes (note 15) 22,670 -- 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 263,116 -- 32,213,927
Comprehensive income:
Net income -- -- 1,753,969
Unrealized losses on investment
securities, net of taxes (note 15) (1,236,754) -- (1,236,754)
Total comprehensive income
Cash dividends, $.20 per share -- -- (525,428)
Issuance of common stock in business
acquisition -- -- 2,847,883
Purchase and retirement of common stock -- -- (164,060)
Issuance of common stock upon exercise
of stock options -- -- 539,144
---------- ----------- -----------
Balance at December 31, 1999 (973,638) -- 35,428,681
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
HABERSHAM BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,753,969 2,057,901 2,157,276
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 985,800 692,500 422,000
Write-down of ORE 89,348 54,154 56,672
Depreciation expense 1,277,252 1,215,368 1,027,786
Loss (gain) on sale of premises and equipment -- 3,913 (491)
(Gain) loss on sale of securities (19,898) (76,614) 12,972
Write-down of other investment 1,000 -- --
Purchase of trading securities -- (3,017,406) --
Unrealized holding loss (gain) on trading securities 1,190,820 (478,134) --
Equity in earnings of investee (211,279) -- --
Proceeds from sale of trading securities 597,378 -- --
Gain on sale of trading securities (7,378) -- --
Gain on sale of other real estate (9,887) (17,309) (23,314)
Net gain on sale of loans (10,403,623) (9,903,982) (4,107,804)
Amortization of intangible assets 518,834 262,270 254,405
Deferred income tax (benefit) expense (760,613) 251,837 160,853
Proceeds from sale of loans held for sale 577,364,770 639,906,369 265,100,688
Net increase in loans held for sale (543,199,530) (665,196,493) (276,287,255)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (552,133) 47,679 (97,173)
Decrease (increase) in other assets 1,066,565 (1,116,167) (357,410)
Increase in accrued interest payable 7,373 350,501 9,390
(Decrease) increase in other liabilities (4,815,528) 6,043,002 (1,220,442)
------------- ------------ ------------
Net cash provided by (used in) operating activities 24,873,240 (28,920,611) (12,891,847)
------------- ------------ ------------
Cash flows from investing activities:
Investment securities available for sale:
Proceeds from maturity 9,377,232 17,821,254 10,375,214
Proceeds from sale 5,663,079 5,273,486 7,062,644
Purchases (9,373,851) (36,099,366) (18,758,632)
Investment securities held to maturity:
Proceeds from maturity 1,607,827 2,396,413 4,114,174
Purchases (198,966) (6,602,196) (1,011,002)
Other investments:
Proceeds from sale 7,854,400 5,196,600 3,881,999
Purchases (8,205,574) (7,222,400) (1,802,700)
Business acquisitions (390,031) -- (435,329)
Loans:
Proceeds from sale of loans 36,443,223 58,684,944 36,629,843
Net increase in loans (144,980,474) (70,239,158) (27,590,160)
Purchases of premises and equipment (1,751,531) (910,440) (3,355,415)
Proceeds from sales of premises and equipment -- 79,282 28,361
Purchase of company-owned life insurance (300,000) (3,150,000) --
Net additions of other real estate -- -- (7,610)
Proceeds from sale of other real estate 450,457 585,138 799,633
------------- ------------ ------------
Net cash (used in) provided by investing activities (103,804,209) (34,186,443) 9,931,020
------------- ------------ ------------
(Continued)
</TABLE>
6
<PAGE> 8
HABERSHAM BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 36,967,010 18,788,300 37,303,501
Net increase (decrease) in short-term borrowings 552,526 (2,487,721) 2,125,324
Net (decrease) increase in other borrowings (750,000) 2,700,000 --
Net increase in federal funds purchased and securities sold
under repurchase agreements 19,290,000 -- --
Proceeds from (repayment of) Federal Home Loan Bank advances, net 23,440,264 28,408,579 (22,507,225)
Payment of cash dividends (525,428) (386,283) (331,819)
Sale of treasury stock -- -- 428,315
Purchase and retirement of common stock (164,060) -- --
Issuance of common stock upon exercise of stock options 539,144 375,300 37,843
------------ ----------- -----------
Net cash provided by financing activities 79,349,456 47,398,175 17,055,939
------------ ----------- -----------
Increase (decrease) in cash and cash equivalents 418,487 (15,708,879) 14,095,112
Cash and cash equivalents at beginning of year 14,098,796 29,807,675 15,712,563
------------ ----------- -----------
Cash and cash equivalents at end of year $ 14,517,283 14,098,796 29,807,675
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 16,509,533 14,740,052 13,295,776
Income taxes 515,000 285,000 735,000
Supplemental disclosure of noncash investing activities:
Other real estate acquired through loan foreclosures 870,701 711,289 599,016
Loans granted to facilitate the sale of other real estate 209,600 457,500 282,275
Unrealized (loss) gain on investment securities available
for sale, net of tax effect (1,236,754) 22,670 183,935
Common stock issued for purchase of CB Financial Corp.
common stock 2,847,883 -- --
</TABLE>
7
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(1) ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements of Habersham Bancorp and
subsidiaries (the "Company") include the financial statements of
Habersham Bancorp and its wholly owned subsidiaries: Habersham Bank
(the "Bank") and The Advantage Group, Inc. The following are wholly
owned subsidiaries of the Bank: BancMortgage Financial Corp.
("BancMortgage"), Advantage Insurers, Inc. and Appalachian Travel
Service, Inc. All intercompany accounts and transactions have been
eliminated in consolidation.
Effective June 30, 1999, the Company consolidated the charters of
Habersham Bank and Security State Bank, a former separate subsidiary.
As a result, the assets and liabilities of Security State Bank now are
maintained as a division of Habersham Bank. Effective September 30,
1999, the Bank ceased operations of its travel agency subsidiary,
Appalachian Travel Service, Inc. Net income of such business for all
periods presented is not significant.
During 1999, BancMortgage formed a wholly owned subsidiary,
BancMortgage Reinsurance Ltd., a reinsurance company incorporated in
Turks and Caicos. The subsidiary provides reinsurance to companies
offering private mortgage insurance.
The Company's primary business is the operation of banks in rural and
suburban communities in Habersham and Cherokee counties in Georgia and
of a full-service, single-family mortgage and construction lender
located 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to
significant change in the near term relate to the
determination of the allowance for loan losses and the
valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with
the determination of the allowance for loan losses and the
valuation of other real estate, management obtains independent
appraisals for significant properties. A substantial portion
of the Company's loans is secured by real estate in the
Atlanta, Georgia metropolitan area and in Habersham and
Cherokee Counties. Accordingly, the ultimate collectibility of
a substantial portion of the Company's loan portfolio is
susceptible to changes in real estate market conditions in
these areas.
INTEREST RATE RISK
The Company's assets and liabilities are generally monetary in
nature and interest rates have an impact on the Company's
performance. The Company decreases the effect of interest
rates on its performance by striving to match maturities and
interest sensitivity between loans, investment
8
<PAGE> 10
securities, deposits, and other borrowings. However, a
significant change in interest rates could have an effect on
the Company's results of operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with
generally accepted accounting principles and with general practice
within the banking industry. The following is a summary of the more
significant accounting policies:
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 and an investment in common
stock of CB Financial Corp., a bank holding company, which is
not publicly traded.
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.
9
<PAGE> 11
The Company's investment in CB Financial Corp. is accounted
for using the equity method. Under the equity method, the
investment was initially recorded at cost. Subsequently, the
carrying amount of the investment is increased to reflect the
Company's share of income of the investee and reduced to
reflect the Company's share of losses of the investee or
dividends received from the investee.
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 December 31, 1999 and
1998, there were no valuation allowances 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.
10
<PAGE> 12
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 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 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.
GOODWILL AND OTHER INTANGIBLE ASSETS
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 intangible assets consist of an amount assigned to core
deposits representing the difference between fair value at
date
11
<PAGE> 13
of acquisition and recorded amounts which is amortized on a
straight-line basis over five years. Carrying values of
goodwill and other intangible assets 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 intangible assets exists at December 31,
1999.
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." The Company adopted SFAS No. 130 effective
January 1, 1998.
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. The Company adopted
SFAS No. 131 effective January 1, 1998.
12
<PAGE> 14
RECENT ACCOUNTING PRONOUNCEMENT
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. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133," an amendment of FASB
Statement No. 133. SFAS No. 133, as amended, is now effective
for all fiscal quarters of all fiscal years beginning after
June 15, 2000. 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
During the fourth quarter of 1999, BancMortgage acquired the assets of
Fidelity Group. This acquisition was accounted for as a purchase with a
purchase price of $390,031. The fair value of net assets acquired
approximated $350,000, resulting in goodwill of approximately $40,000
which is being amortized over 15 years. The pro forma effect of this
acquisition on earnings for periods prior to acquisition is not
significant.
Effective March 31, 1997, Advantage Insurers, Inc., a subsidiary of
Habersham Bank, acquired substantially all of the assets of
Dillard-Scruggs Insurance Services of Cornelia, Inc. d/b/a Cornelia
Insurance Agency. 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
intangible assets of approximately $300,000 and $80,000, respectively,
which are being amortized over 15 and 5 years, respectively. During 1999,
as a result of an assessment of projected cash flows of this business
unit, the Company wrote off $150,000 of the remaining goodwill.
During the third quarter of 1997, Habersham Bancorp expanded its
mortgage-related services with the acquisition by BancMortgage of the
assets and certain liabilities of The Prestwick Mortgage Group, a
national investment banking and advisory firm specializing in the
brokerage and evaluation of mortgage-related assets such as loans and
servicing, for approximately $60,000. As a result of the acquisition,
BancMortgage is doing business as The Prestwick Financial Group and as
BancFinancial Services Corporation ("BancFinancial"), a full-service
wholesale mortgage lender specializing in subprime mortgage loans in the
mid-Atlantic and southeastern states. Both of these operating divisions
are based in McLean, Virginia.
(4) RESERVE REQUIREMENTS
At December 31, 1999 and 1998, the Federal Reserve Bank required that the
banks maintain average reserve balances of $3,400,000 and $1,800,000,
respectively.
13
<PAGE> 15
(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>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1999:
U.S. Government agencies $23,818,162 30,304 799,014 23,049,452
States and political
Subdivisions 14,891,874 71,644 532,574 14,430,944
Other investments 1,585,000 -- 245,569 1,339,431
----------- ------- --------- ----------
Total $40,295,036 101,948 1,577,157 38,819,827
=========== ======= ========= ==========
December 31, 1998:
U.S. Treasury $ 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
=========== ======= ========= ==========
</TABLE>
Proceeds from sales of available for sale securities during 1999, 1998,
and 1997 were $5,663,079, $5,273,486, and $7,062,644, respectively.
Gross gains of $27,676, $76,614, and $40,207 were recognized on those
sales for 1999, 1998, and 1997, respectively. Gross losses of $7,778 and
$53,179 were recognized on those sales for 1999 and 1997, respectively.
The amortized cost and estimated fair values of investment securities
available for sale, exclusive of equity investments, at December 31,
1999, 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 $ 1,500,080 1,497,557
Due after one year through five years 4,608,587 4,611,961
Due after five years through ten years 5,574,715 5,466,754
Due after ten years 28,611,654 27,243,555
----------- ----------
Total $40,295,036 38,819,827
=========== ==========
</TABLE>
Investment securities available for sale with carrying values of
approximately $14,734,000 and $20,880,000 were pledged as collateral at
December 31, 1999 and 1998, respectively, for Federal Home Loan Bank
advances, public deposits, and other deposits, as required by law.
14
<PAGE> 16
(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>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1999:
U.S. Government agencies $ 3,535,356 5,672 292,170 3,248,858
States and political
subdivisions 10,666,346 33,403 284,518 10,415,231
----------- ------- ------- ----------
Total $14,201,702 39,075 576,688 13,664,089
=========== ======= ======= ==========
December 31, 1998:
U.S. Government agencies $ 3,911,279 18,667 52,899 3,877,046
States and political
subdivisions 11,600,284 319,044 6,678 11,912,651
Other investments 99,000 -- -- 99,000
----------- ------- ------- ----------
Total $15,610,563 337,711 59,577 15,888,697
=========== ======= ======= ==========
</TABLE>
The amortized cost and estimated fair values of securities held to
maturity at December 31, 1999, 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 $ 721,049 721,388
Due after one year through five years 4,103,143 4,106,375
Due after five years through ten years 3,310,969 3,241,414
Due after ten years 6,066,541 5,594,912
----------- ----------
Total $ 14,201,702 13,664,089
=========== ==========
</TABLE>
Investment securities held to maturity with book values of approximately
$8,155,000 and $9,054,000 were pledged as collateral at December 31, 1999
and 1998, respectively, for public deposits and other deposits, as
required by law.
15
<PAGE> 17
(7) OTHER INVESTMENTS
Other investments at December 31, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ ----------
<S> <C> <C>
Federal Home Loan Bank stock $ 4,076,200 3,840,900
CB Financial Corp. common stock 3,125,329 --
Georgia Community Life Insurance Company
common stock
27,000 27,000
Community Financial Services, Inc. common
stock 100,000 100,000
Southeast Bankcard Association, Inc. common
stock 25,000 25,000
Forsyth Bancshares, Inc. common stock 100,000 101,000
Greater Rome Bancshares, Inc. common stock 100,000 100,000
Federal National Mortgage Association common stock
34 34
------------ ----------
Total $ 7,553,563 4,193,934
============ ==========
</TABLE>
In May 1999, the Company exercised its previously acquired option to
purchase a 45.91% interest in CB Financial Corp., Warrenton, Georgia, at
a total cost of $2,963,757, including direct costs of acquisition of
$115,468. In connection with this purchase, the Company issued 207,713
shares of its common stock valued at $2,847,883 and cash of $406 in
exchange for 27,574 shares of common stock of CB Financial Corp. The
investment in CB Financial Corp. is accounted for using the equity
method. Included in the initial investment in CB Financial Corp common
stock was approximately $1,278,000 in excess cost over the Company's
underlying equity in the net assets of this investee. For the year ended
December 31, 1999, the Company recorded $211,279 as equity in earnings of
CB Financial Corp. Amortization of related excess cost over basis in CB
Financial Corp. common stock for 1999 totaled $49,707. The assets of CB
Financial Corp. as of December 31, 1999 totaled approximately
$41,889,000, and net income for the year ended December 31, 1999 totaled
approximately $83,000.
(8) LOANS
Loans at December 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- ------------
<S> <C> <C>
Real estate:
Construction $ 106,915,963 66,359,030
Other 174,601,397 113,021,310
Commercial, financial, and
agricultural 16,623,264 13,829,965
Consumer installment 20,168,672 16,972,980
Other -- 364,652
-------------- -------------
318,309,296 210,547,937
Less:
Unamortized loan origination
fees, net 871,572 652,275
Unearned credit life premiums 66,231 47,310
Unamortized discount on SBA
loans sold 59,741 113,002
Allowance for loan losses 3,181,553 2,709,570
-------------- -------------
Total $ 314,130,199 207,025,780
============== =============
</TABLE>
16
<PAGE> 18
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Balance, January 1 $ 2,709,570 2,336,079 2,261,406
Provision for loan losses 985,800 692,500 422,000
Loans charged off (640,859) (461,778) (547,610)
Recoveries 127,042 142,769 200,283
------------ --------- ---------
Balance, December 31 $ 3,181,553 2,709,570 2,336,079
============ ========= =========
</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 $1,203,471 and $2,011,108 as of December 31, 1999 and
1998, respectively, which included all of its nonaccrual loans. The
average amount of impaired loans during 1999, 1998, and 1997 was
$1,887,609, $1,950,265, and $1,719,920, respectively. The interest income
recognized on such loans was $112,990 in 1999, $191,405 in 1998, and
$165,686 in 1997, which approximated the amount of interest received on
the cash basis.
There were no specific allowances attributable to impaired loans at
December 31, 1999 and 1998.
Restructured loans not considered impaired totaled $781,803 and $849,963
at December 31, 1999 and 1998, respectively. Interest income that would
have been recorded on such restructured loans in accordance with their
original terms totaled $76,727 and $87,767 in 1999 and 1998,
respectively, compared with amounts recognized of $72,064 and $83,152 in
1999 and 1998, respectively.
As of December 31, 1999 and 1998, Habersham Bank's loans to customers for
agribusiness purposes in the poultry industry were approximately $9
million and $10 million, respectively. There is no other significant
concentration of loans to customers in a particular industry.
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of its lending activities to meet the financing
needs of its customers. These financial instruments include commitments
to extend credit and standby letters of credit. The Company's exposure to
credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making these commitments as
it does for on-balance-sheet instruments and evaluates each customer's
creditworthiness on a case-by-case basis. At December 31, 1999 and 1998,
the Company had outstanding loan commitments exclusive of mortgage loan
commitments of BancMortgage approximating $88,404,000 and $77,813,000,
respectively, and standby letters of credit approximating $1,521,000 and
$1,891,000, 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, 1999, the Company has commitments, primarily at a fixed
rate, to originate mortgage loans in the amount of approximately $19.9
million. At December 31, 1999, the Company has commitments to sell
mortgage loans in the amount of $49.3 million.
17
<PAGE> 19
(9) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Land $ 801,169 801,169
Buildings 6,330,885 6,118,261
Furniture and equipment 9,960,299 7,982,719
------------- -------------
Total 17,092,353 14,902,149
Less accumulated depreciation 8,161,905 6,695,980
------------- -------------
Premises and equipment, net $ 8,930,448 8,206,169
============= =============
</TABLE>
The Company has entered into operating lease agreements for property and
equipment through 2004. Approximate minimum rentals under such leases are
as follows:
<TABLE>
<S> <C>
2000 $ 1,333,608
2001 810,907
2002 548,010
2003 546,569
2004 331,850
-----------
$ 3,570,944
===========
</TABLE>
Rental expense was $1,248,932 in 1999, $923,340 in 1998, and $589,392 in
1997.
(10) DEPOSITS AND BORROWINGS
At December 31, 1999, the scheduled maturities of certificates of
deposits are as follows:
<TABLE>
<S> <C>
6 months or less $ 114,461,799
Over 6 through 12 months 65,972,034
Over 1 year through 5 years 48,637,912
---------------
Total $ 229,071,745
===============
</TABLE>
Short-term borrowings of $692,185 and $139,659 at December 31, 1999 and
1998, respectively, consists of a U.S. Treasury, tax, and loan deposit
note.
Other borrowings of $1,950,000 and $2,700,000 at December 31, 1999 and
1998, respectively, consists of a note due to the National Bank of
Commerce, Birmingham, Alabama. The note bears interest at a variable rate
(7.93% and 6.80% at December 31, 1999 and 1998, respectively) and matures
on September 2, 2000.
18
<PAGE> 20
(11) FEDERAL FUNDS PURCHASED AND SECURITIES
SOLD UNDER REPURCHASE AGREEMENTS
The Company's activity related to securities sold under repurchase
agreements is summarized as follows:
<TABLE>
<CAPTION>
1999
---------------
<S> <C>
Balance at year-end $ 11,200,000
Maximum outstanding during year 11,200,000
Average outstanding during year 4,388,493
Average interest rate 5.63%
</TABLE>
At December 31, 1999, the Company had available repurchase agreement line
of credit commitments with Compass Bank totaling $12,000,000 of which
$11,200,000 was advanced. The securities sold under repurchase agreements
mature in 2000 and bear interest at a variable rate. All securities sold
under repurchase agreements are held by independent trustees.
Federal funds purchased at December 31, 1999 amounted to $8,090,000.
(12) FHLB ADVANCES
At December 31, 1999, the Company had available line of credit
commitments with the Federal Home Loan Bank ("FHLB") totaling
$133,000,000 of which $77,250,835 was advanced (weighted-average interest
rate of 5.74% and maturing in 2000) and $55,749,165 was available.
At December 31, 1998, the Company had available line of credit
commitments with the 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.
At December 31, 1999, 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 $70,159,249.
(13) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1999, 1998,
and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 629,665 402,417 561,350
State 78,455 -- --
--------- ------- -------
Total current 708,120 402,417 561,350
--------- ------- -------
Deferred:
Federal (760,613) 251,837 160,853
State -- -- --
--------- ------- -------
Total deferred (760,613) 251,837 160,853
--------- ------- -------
Total $ (52,493) 654,254 722,203
========= ======= =======
</TABLE>
19
<PAGE> 21
The provision for income taxes is less than that computed by applying the
Federal statutory rate of 34% to income before income taxes as indicated
by the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ------- -------
<S> <C> <C> <C>
Income tax at statutory rate $ 578,502 922,133 979,023
Effect of tax-exempt income (456,850) (337,390) (308,366)
Amortization of intangible
assets 150,637 74,044 83,508
State income tax, net of
Federal tax effect 51,780 -- --
Reduction of prior years'
overaccrual (409,477) -- --
Other 32,915 (4,533) (31,962)
--------- ------- -------
Income tax (benefit) expense $ (52,493) 654,254 722,203
========= ======= =======
</TABLE>
At December 31, 1999 and 1998, the significant components of the
Company's net deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Deferred tax assets:
Unrealized loss on investment securities
available for sale $ 501,571 --
Unrealized loss on trading securities 242,240 --
Allowance for loan losses 1,029,701 691,401
Allowance for other real estate 77,832 73,088
Deferred loan fees 230,166 212,598
Deferred compensation 18,862 --
Unearned credit life commissions 22,520 16,087
Other -- 10,835
---------- ---------
2,122,892 1,004,009
---------- ---------
Deferred tax liabilities:
Unrealized gain on investment securities
available for sale -- (135,298)
Unrealized gain on trading securities -- (162,566)
Equity in earnings of investee (71,835) --
Prepaid expenses (204,408) (225,679)
Furniture, fixtures, and equipment due to
differences in depreciation methods (58,762) (92,364)
Other (2,303) --
---------- ---------
(337,308) (615,907)
---------- ---------
Net deferred tax asset $1,785,584 388,102
========== =========
</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.
20
<PAGE> 22
(14) SHAREHOLDERS' EQUITY
The approval of the Georgia Department of Banking and Finance is required
if dividends declared by the Bank to the Company in any year will exceed
50% of the net income of the Bank for the previous calendar year. As of
December 31, 1999, the Bank could declare dividends to the Company up to
approximately $1,595,000 without regulatory approval.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's
consolidated financial statements. Under capital adequacy guidelines, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital
amounts and the Bank's classifications under the regulatory framework for
prompt corrective action are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank 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, 1999, that the Company and the Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notifications from both the
Federal Deposit Insurance Corporation and the Federal Reserve Bank of
Atlanta categorized the Bank as adequately capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management
believes have changed the Bank's capital categories.
21
<PAGE> 23
During 1999, Security State Bank, a former subsidiary of Habersham
Bancorp, was merged into Habersham Bank, resulting in additional capital
for the Bank. The Company's and the Bank's actual capital amounts and
ratios as of December 31, 1999 and 1998 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, 1999
Total Capital (to risk-weighted assets):
The Company $36,726 10.71% $27,422 8% N/A N/A
Habersham Bank 31,990 9.46% 27,043 8% $33,804 10%
Tier I Capital (to risk-weighted assets):
The Company $33,544 9.79% $13,711 4% N/A N/A
Habersham Bank 28,808 8.52% 13,521 4% $20,282 6%
Tier I Capital (to average assets):
The Company $33,544 7.66% $17,506 4% N/A N/A
Habersham Bank 28,808 6.58% 17,504 4% $21,880 5%
As of December 31, 1998
Total Capital (to risk-weighted assets):
The Company $31,270 12.16% $20,576 8% N/A N/A
Habersham Bank 21,636 10.34% 16,738 8% $20,923 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%
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%
</TABLE>
22
<PAGE> 24
(15) COMPREHENSIVE INCOME
Comprehensive income includes net income and other comprehensive income
which is defined as non-owner related transactions in shareholders'
equity. 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, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
TAX NET OF
PRETAX (EXPENSE) TAX
AMOUNT BENEFIT AMOUNT
----------- --------- ----------
<S> <C> <C> <C>
1999:
Net unrealized holding losses on
investment securities available
for sale arising during the year $(1,853,971) 630,350 (1,223,621)
Less reclassification adjustment
for net gains realized in net
income 19,898 (6,765) 13,133
----------- --------- ----------
Other comprehensive loss $(1,873,869) 637,115 (1,236,754)
=========== ========= ==========
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
=========== ========= ==========
</TABLE>
(16) 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 not to exceed the amount allowed by the IRS. At its
discretion, the Company may make matching contributions in an amount not
to exceed 100% of each participant's first 3% of compensation
contributed. The Company's contributions to the plan totaled $269,521 in
1999, $212,417 in 1998, and $151,483 in 1997.
During 1998, the Bank's board of directors approved the Director's
Retirement Plan (the "Plan"), a noncontributory retirement plan. In
connection with the implementation of the Plan, the Bank purchased
company-owned life insurance at a cost of $3,150,000. In 1999, the Bank
purchased additional life insurance at a cost of $300,000. Amounts earned
on the life insurance policies purchased by the Bank over
23
<PAGE> 25
the rate, as defined in the Plan, to be retained for the benefit of the
Bank are to be deferred and paid to the directors upon retirement. As of
December 31, 1999 and 1998, the cash surrender values of the life
insurance policies totaled $3,548,826 and $3,150,000, respectively.
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
81,250 at December 31, 1999.
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
266,265 at December 31, 1999.
A summary of the status of the Company's stock option plans and changes
during 1999, 1998, and 1997 is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- -----------------------
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 413,226 $ 14.79 381,476 $ 14.25 345,004 $ 12.45
Granted 70,000 12.75 74,500 14.61 80,000 19.00
Exercised (53,266) 10.12 (39,750) 9.44 (41,528) 8.33
Terminated (72,438) 15.46 (3,000) 12.46 (2,000) 8.33
-------- -------- -------- -------- -------- --------
Outstanding and exercisable
at end of year 357,522 $ 14.94 413,226 $ 14.79 381,476 $ 14.25
======== ======== =======
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER REMAINING
RANGE OF OUTSTANDING CONTRACTUAL LIFE
EXERCISE PRICES AT 12/31/99 IN YEARS EXERCISE PRICE
--------------- ----------- -------- --------------
<S> <C> <C> <C>
$ 10.00 - 11.00 25,272 3.70 $ 10.63
12.75 70,000 5.00 12.75
13.00 - 14.00 66,500 4.75 13.56
14.25 66,000 4.00 14.25
16.88 58,750 5.90 16.88
18.00 - 19.00 71,000 3.30 18.98
--------- ---- --------
357,522 4.53 $ 14.94
=========
</TABLE>
The estimated fair value of options granted during 1999, 1998 and 1997
was $4.37, $4.96, and $6.54, respectively, per share. The Company applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations in accounting for its stock
option plans. Accordingly, no compensation cost has been recognized for
its Incentive Stock Option Plan and its Outside Directors Stock Option
Plan. Had compensation cost for the Company's incentive stock option plan
and its outside directors 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 1999,
1998, and 1997 would have been reduced to the pro forma amounts indicated
below:
24
<PAGE> 26
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Net income:
As reported $ 1,753,969 2,057,901 2,157,276
Pro forma 1,548,422 1,829,586 1,805,686
Net income per common share - basic:
As reported .67 .85 .91
Pro forma .59 .76 .76
Net income per common share - diluted:
As reported .67 .83 .86
Pro forma .59 .74 .72
</TABLE>
The fair value of options granted under the Company's fixed stock option
plans during 1999, 1998, and 1997 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% in 1999 and 1998 and 33% in 1997;
weighted-average risk-free interest rate of 6.25%, 5.30%, and 5.45% in
1999, 1998, and 1997, respectively; and an expected weighted-average life
of 4.5 years in 1999, 1998, and 1997.
(17) OTHER EXPENSES
Items comprising other expenses for the years ended December 31, 1999,
1998, and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Outside services $ 1,077,184 932,450 824,515
Advertising and public relations 992,019 1,001,276 893,604
Office supplies 853,039 806,518 593,051
Other 3,057,879 2,413,025 1,815,263
----------- --------- ---------
Total $ 5,980,121 5,153,269 4,126,433
=========== ========= =========
</TABLE>
Outside services include charges for FDIC insurance, legal and professional
services, insurance, director fees, and State of Georgia Department of
Banking fees.
(18) 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.
25
<PAGE> 27
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------
CARRYING AMOUNT FAIR VALUE
--------------- ------------
<S> <C> <C>
Assets:
Cash and due from banks $ 14,517,283 14,517,283
Investment securities available for sale 38,819,827 38,819,827
Investment securities held to maturity 14,201,702 13,664,089
Trading securities 1,714,720 1,714,720
Other investments 7,553,563 7,553,563
Loans held for sale 48,186,934 48,401,202
Loans 314,130,199 312,261,954
Liabilities:
Deposits 317,420,309 323,380,371
Short-term borrowings 692,185 692,185
Other borrowings 1,950,000 1,950,000
Federal funds purchased and securities
sold under repurchase agreements 19,290,000 19,290,000
FHLB advances 77,250,835 77,250,835
<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
</TABLE>
The carrying amounts of cash and due from banks, federal funds sold,
interest-bearing demand and savings accounts, short-term borrowings,
other borrowings, federal funds purchased and securities sold under
repurchase agreements, 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 Bank 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. For uncommitted
loans, fair value is determined on the basis of relevant delivery prices
in the secondary mortgage market.
The fair value of Federal Home Loan Bank stock approximates carrying
value. The common stock in CB Financial Corp. is not publicly traded;
therefore, it is not practical to estimate its value. Management expects
that the fair value would exceed the carrying value.
26
<PAGE> 28
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, 1999 and 1998.
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.
(19) 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 1999 and 1998 of loans to executive officers, directors, and
principal shareholders is as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Balance, January 1 $ 3,397,006 3,173,109
Amounts advanced 5,497,198 5,145,704
Repayments (6,083,232) (4,921,807)
------------ ------------
Balance, December 31 $ 2,810,972 3,397,006
============ ============
</TABLE>
At December 31, 1999, time deposits of $945,000 of a business controlled
by the principal shareholders of the Company were pledged as collateral
for loans with a principal balance of $945,000 made to unrelated parties.
On January 2, 1996, a Mortgage Banking Agreement (the "Agreement") was
entered into between Habersham Bank, BancMortgage, Habersham Bancorp, and
BancMortgage's two principal executives/inside directors. The Agreement
provides, among other things, organizational structure of BancMortgage,
buy-out arrangements, and certain compensation terms, including bonuses
as a percentage of BancMortgage's net income.
27
<PAGE> 29
(20) CONDENSED FINANCIAL STATEMENTS OF HABERSHAM BANCORP (PARENT ONLY)
The parent company only condensed financial statements are presented
below:
CONDENSED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Cash $ 106,876 318,757
Investment in subsidiaries, primarily banks 30,983,635 30,150,444
Trading securities 1,714,720 3,495,540
Investment in CB Financial Corp. 3,125,329 --
Other investments 200,000 201,000
Equipment, net 118,602 129,929
Other assets 1,214,565 785,327
------------ ------------
Total assets $ 37,463,727 35,080,997
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings $ 1,950,000 2,700,000
Accounts payable 85,046 167,070
------------ ------------
Total liabilities 2,035,046 2,867,070
------------ ------------
Shareholders' equity:
Common stock 2,698,746 2,448,267
Additional paid-in capital 12,417,064 9,444,576
Retained earnings 21,286,509 20,057,968
Accumulated other comprehensive (loss) income (973,638) 263,116
------------ ------------
Total shareholders' equity 35,428,681 32,213,927
------------ ------------
Total liabilities and shareholders' equity $ 37,463,727 35,080,997
============ ============
</TABLE>
28
<PAGE> 30
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
----------- -------- ----------
<S> <C> <C> <C>
INCOME:
Dividends from banks $ 832,750 1,010,000 1,288,000
Equity in earnings of investee 211,279 -- --
Management fees from subsidiaries 1,278,816 1,165,131 768,083
Gain on sale of trading securities 7,378 -- --
Unrealized (loss) gain on trading securities (1,190,820) 478,134 --
Dividend income 84,108 -- --
Other income 1,922 -- --
----------- -------- ----------
Total income 1,225,433 2,653,265 2,056,083
EXPENSES - general and administrative 2,232,833 2,115,241 1,863,032
----------- -------- ----------
(Loss) income before income taxes
and equity in undistributed
earnings of subsidiaries (1,007,400) 538,024 193,051
Income tax benefit 574,034 100,136 297,821
----------- -------- ----------
(Loss) income before equity in
undistributed earnings of
subsidiaries (433,366) 638,160 490,872
Equity in undistributed earnings of
subsidiaries 2,187,335 1,419,741 1,666,404
----------- -------- ----------
Net income $ 1,753,969 2,057,901 2,157,276
=========== ========= ==========
</TABLE>
29
<PAGE> 31
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,753,969 2,057,901 2,157,276
Depreciation 57,958 38,811 12,479
Write-down of other investments 1,000 -- 8,559
Amortization of intangible assets 167,097 212,327 212,327
Purchase of trading securities -- (3,017,406) --
Proceeds from sale of trading securities 597,378 -- --
Gain on sale of trading securities (7,378) -- --
Unrealized loss (gain) on trading securities 1,190,820 (478,134) --
Increase in other assets (529,238) (260,667) (365,622)
(Decrease) increase in other liabilities (82,024) 5,966 20,977
Equity in earnings of investee (211,279) -- --
Equity in undistributed earnings of
Subsidiaries (2,187,335) (1,419,741) (1,666,404)
------------ ------------ ------------
Net cash provided by (used in)
Operating activities 750,968 (2,860,943) 379,592
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of other investments -- -- 3,599
Net cash paid in connection with acquisition
of CB Financial Corp. common stock (15,874) (100,000) --
Purchase of equipment (46,631) (122,638) (44,357)
------------ ------------ ------------
Net cash used in investing activities (62,505) (222,638) (40,758)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings -- 2,700,000 --
Payment of borrowings (750,000) -- --
Payment of cash dividends (525,428) (386,283) (331,819)
Proceeds from sale of treasury stock -- -- 428,315
Purchase and retirement of common stock (164,060) -- --
Proceeds from issuance of common stock
upon exercise of stock options 539,144 375,300 37,843
------------ ------------ ------------
Net cash (used in) provided
by financing activities (900,344) 2,689,017 134,339
------------ ------------ ------------
(Decrease) increase in cash (211,881) (394,564) 473,173
CASH AT BEGINNING OF YEAR 318,757 713,321 240,148
------------ ------------ ------------
CASH AT END OF YEAR $ 106,876 318,757 713,321
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING ACTIVITIES:
Common stock issued for purchase of
CB Financial Corp. common stock $ 2,847,883 -- --
============ ============ ============
Pushdown of intangible assets to bank
subsidiary $ 2,783,634 -- --
============ ============ ============
</TABLE>
30
<PAGE> 32
At December 31, 1999, approximately $29,344,000 of the parent
company's investment in the Bank is restricted as to dividend payments
from the Bank to the parent company.
31
<PAGE> 33
(21) SEGMENT AND RELATED INFORMATION
The Company has two significant reportable segments: banking and
mortgage banking. The Company offers traditional banking services
through the bank subsidiary, Habersham 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 accounting policies. The
Company evaluates performance based on net income of the respective
segments.
<TABLE>
<CAPTION>
MORTGAGE
BANKING BANKING ELIMINATIONS(B) OTHER(A) ELIMINATIONS CONSOLIDATED
---------------------- ---------- --------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income 1999 $ 28,938,322 3,933,973 (812,263) 84,108 -- 32,144,140
1998 26,069,654 4,062,500 (1,171,091) -- (2,375) 28,958,688
1997 25,552,812 2,059,223 (648,289) -- (1,590) 26,962,156
Interest expense 1999 14,807,323 2,356,038 (811,594) 165,437 (298) 16,516,906
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
Provision for loan losses 1999 500,000 485,800 -- -- -- 985,800
1998 636,000 56,500 -- -- -- 692,500
1997 422,000 -- -- -- -- 422,000
Gain on sale of loans 1999 397,782 10,005,841 -- -- -- 10,403,623
1998 541,468 9,362,514 -- -- -- 9,903,982
1997 532,792 3,575,012 -- -- -- 4,107,804
Other noninterest income 1999 2,365,625 4,989,100 (2,290,556) 26,234 (16,536) 5,073,867
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
Depreciation on premises 1999 785,965 424,454 -- 66,833 -- 1,277,252
and equipment 1998 797,777 367,007 -- 50,584 -- 1,215,368
1997 738,864 269,894 -- 19,028 -- 1,027,786
Other noninterest expense 1999 11,297,644 15,731,164 (3,174,871) 3,300,227 (13,968) 27,140,196
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
Income tax expense (benefit) 1999 665,589 56,637 (135,129) (639,590) -- (52,493)
1998 444,910 460,935 (74,168) (177,423) -- 654,254
1997 930,374 117,860 82,422 (408,453) -- 722,203
Net income (loss) 1999 3,175,233 344,795 (262,311) (1,503,748) -- 1,753,969
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
Total assets 1999 425,758,743 52,115,055 (21,171,084) 5,418,649 (145,630) 461,975,733
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
</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. provides marketing and
advertising services. The corporate headquarters includes primarily
the elimination of inter-business unit transactions and certain
investments in other bank holding companies.
(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
amounts 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.
32
<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. and Advantage Insurers, Inc., which are wholly owned
subsidiaries of Habersham Bank.
Name and Jurisdiction
Habersham Bank, a Georgia state bank.
The Advantage Group, Inc. a Georgia corporation.
BancMortgage Financial Corp., a Georgia corporation.
Advantage Insurers, Inc., a Georgia corporation.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
Habersham Bancorp:
We consent to the incorporation by reference in Registration Statement Nos.
33-64149, 33-61587, 33-61589, 333-48507 on Forms S-8 and Registration Statement
No. 333-18023 on Form S-3 of Habersham Bancorp of our report dated January 20,
2000 with respect to the consolidated balance sheets of Habersham Bancorp and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity and comprehensive income, and cash
flows for each of the years in the three-year period ended December 31, 1999,
which report appears in the December 31, 1999 annual report on Form
10-K of Habersham Bancorp.
/s/ KPMG LLP
------------------------------
KPMG LLP
Atlanta, Georgia
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HABERSHAM BANCORP FOR THE YEAR ENDED DECEMBER
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 14,517,283
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 1,714,720
<INVESTMENTS-HELD-FOR-SALE> 38,819,827
<INVESTMENTS-CARRYING> 14,201,702
<INVESTMENTS-MARKET> 13,664,089
<LOANS> 365,498,686
<ALLOWANCE> 3,181,553
<TOTAL-ASSETS> 461,975,733
<DEPOSITS> 317,420,309
<SHORT-TERM> 99,183,020
<LIABILITIES-OTHER> 9,943,723
<LONG-TERM> 0
0
0
<COMMON> 2,698,746
<OTHER-SE> 32,729,935
<TOTAL-LIABILITIES-AND-EQUITY> 461,975,733
<INTEREST-LOAN> 28,487,996
<INTEREST-INVEST> 3,536,915
<INTEREST-OTHER> 119,229
<INTEREST-TOTAL> 32,144,140
<INTEREST-DEPOSIT> 12,554,788
<INTEREST-EXPENSE> 16,516,906
<INTEREST-INCOME-NET> 15,627,234
<LOAN-LOSSES> 985,800
<SECURITIES-GAINS> 19,898
<EXPENSE-OTHER> 28,417,448
<INCOME-PRETAX> 1,701,476
<INCOME-PRE-EXTRAORDINARY> 1,701,476
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,753,969
<EPS-BASIC> .67
<EPS-DILUTED> .67
<YIELD-ACTUAL> 4.11
<LOANS-NON> 1,203,471
<LOANS-PAST> 338,677
<LOANS-TROUBLED> 781,803
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,709,570
<CHARGE-OFFS> 640,859
<RECOVERIES> 127,042
<ALLOWANCE-CLOSE> 3,181,553
<ALLOWANCE-DOMESTIC> 3,181,553
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
