U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
__x___ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
_____ TRANSITION REPORT UNDER 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
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(Exact name of registrant as specified in its charter)
Georgia 58-1563165
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Highway 441 N. P.O. Box 1980, Cornelia, Georgia 30531
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(Address of principal executive offices) (Zip code)
(706) 778-1000
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(Issuer's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes __x___ No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes _______ No ___X___
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
2,892,599 shares, common stock, $1.00 par value, as of April 30, 2004
Item. 1 Financial Statements
HABERSHAM BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(dollars in thousands)
ASSETS MARCH 31, 2004 DECEMBER 31, 2003
(Restated)
Cash and due from banks $ 8,268 $ 8,381
Federal funds sold 5,099 -
Investment securities available for sale
(cost of $69,517 at March 31, 2004 and
$72,565 at December 31, 2003) 70,546 72,813
Investment securities held to maturity
(estimated fair value of $5,141 at
March 31, 2004 and $5,177 at
December 31, 2003) 4,751 4,859
Other investments 1,625 1,652
Loans held for sale 1,223 1,522
Loans 258,636 265,450
Less allowance for loan losses (3,567) (3,643)
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Loans, net 255,069 261,807
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Intangible assets 2,489 2,489
Other assets 20,429 21,444
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TOTAL ASSETS $ 369,499 $ 374,967
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LIABILITIES
Noninterest-bearing deposits $ 42,408 $ 37,842
Interest-bearing deposits 235,446 241,747
Short-term borrowings 573 579
Federal funds purchased and securities
sold under repurchase agreements 8,180 12,384
Federal Home Loan Bank Advances 30,000 30,000
Other liabilities 2,912 3,186
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TOTAL LIABILITIES 319,519 325,738
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SHAREHOLDERS' EQUITY
Common Stock, $1.00 par value,
10,000,000 shares authorized;
2,874,831 shares issued at March 31, 2004
and 2,869,278 shares issued at
December 31, 2003 2,875 2,869
Additional paid-in capital 14,248 14,177
Retained earnings 32,178 32,019
Accumulated other comprehensive income 679 164
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TOTAL SHAREHOLDERS' EQUITY 49,980 49,229
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TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 369,499 $ 374,967
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See notes to condensed consolidated financial statements.
HABERSHAM BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) For the Three-Month Periods Ended March 31, 2004 and 2003
(dollars in thousands, except per share amounts)
2004 2003
INTEREST INCOME
Loans $ 4,177 $ 5,101
Investment securities 789 696
Federal funds sold 4 13
Other 32 37
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TOTAL INTEREST INCOME 5,002 5,847
INTEREST EXPENSE
Time deposits, $100,000 and over 417 654
Other deposits 803 1,134
Short-term and other borrowings, primarily
FHLB advances 447 469
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TOTAL INTEREST EXPENSE 1,667 2,257
NET INTEREST INCOME 3,335 3,590
Provision for loan losses 162 263
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,173 3,327
NONINTEREST INCOME
Gain on sale of loans 185 140
Loan fee income 84 120
Service charges on deposits 171 202
Other service charges and commissions 43 48
Investment securities gains, net 31 6
Gain on sale of other investments 18 -
Other income 350 432
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Total noninterest income 882 948
NONINTEREST EXPENSE
Salary and employee benefits 2,054 1,765
Occupancy 434 366
Computer services 100 107
General and administrative expense 1,044 1,025
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Total noninterest expense 3,632 3,263
INCOME BEFORE INCOME TAXES 423 1,012
Income tax expense 64 254
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NET INCOME 359 758
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NET INCOME PER COMMON SHARE - BASIC $ .13 $ .27
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NET INCOME PER COMMON SHARE - DILUTED $ .12 $ .26
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WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,872,234 2,818,289
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WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES OUTSTANDING 2,939,885 2,868,268
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Dividends per share $ .07 $ .06
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See notes to condensed consolidated financial statements.
HABERSHAM BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Three-Month Periods Ended March 31, 2004 and 2003
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: 2004 2003
Net income $ 359 $ 758
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 162 263
Depreciation 227 178
Investment securities gains, net (31) (6)
Loss (gain) on sale of other real estate 2 (3)
Net amortization of premium on investment
securities 121 -
Gain on sale of other investment (18) -
Deferred income tax benefit (12) (9)
Gain on sale of loans (185) (140)
Proceeds from sale of loans held for sale 8,011 5,298
Origination of loans held for sale (7,527) (9,251)
Changes in assets and liabilities:
Decrease in interest receivable 109 149
Decrease in other assets 1,081 30
Decrease in interest payable (251) (399)
Decrease in other liabilities (23) (79)
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Net cash provided by (used in) operating activities 2,025 (3,211)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from maturity 2,716 5,253
Proceeds from sale and call 5,368 3,888
Purchases (5,127) (6,924)
Investment securities held to maturity:
Proceeds from maturity 110 158
Proceeds from call - 101
Other investments:
Proceeds from sale 45 387
Loans:
Net decrease in loans 5,965 6,987
Purchases of premises and equipment (233) (221)
Proceeds from sale of other real estate 186 66
Net additions to other real estate - (47)
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Net cash provided by investing activities 9,030 9,648
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HABERSHAM BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited) For the Three-Month Periods Ended March 31, 2004 And 2003
(dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES: 2004 2003
Net decrease in deposits (1,735) (37,258)
Net decrease in short-term borrowings (6) (321)
Net (decrease) increase in federal funds purchased
and securities sold under repurchase agreements (4,204) 6,258
Issuance of common stock 77 65
Cash dividends paid (201) (169)
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Net cash used by financing activities (6,069) (31,425)
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Increase (decrease) in cash and cash equivalents 4,986 (24,988)
CASH AND CASH EQUIVALENTS: BEGINNING OF PERIOD 8,381 40,969
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CASH AND CASH EQUIVALENTS: END OF PERIOD $13,367 $ 15,981
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,919 $ 2,656
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Other real estate acquired through loan foreclosures $ 611 $ 831
Loans granted to facilitate the sale
of other real estate - 41
Unrealized gain on investment securities
available for sale, net of tax effect 516 42
See notes to condensed consolidated financial statements.
HABERSHAM BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The condensed consolidated financial statements contained in this report
are unaudited but reflect all adjustments, consisting only of normal recurring
accruals, which are, in the opinion of management, necessary for a fair
presentation of the results of the interim periods reflected. Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to applicable
rules and regulations of the Securities and Exchange Commission. The results of
operations for the interim periods reported herein are not necessarily
indicative of results to be expected for the full year.
The condensed consolidated financial statements included herein should be
read in conjunction with the Company's 2003 consolidated financial statements
and notes thereto, included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003.
2. Accounting Policies
Reference is made to the accounting policies of the Company described in
the notes to the consolidated financial statements contained in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2003. The
Company has consistently followed those policies in preparing this report.
3. Restatement of the Consolidated Balance Sheet as of December 31, 2003
In April 2004, the Company determined that it had incorrectly recorded
compensation expense in years previous to 2004 beginning in 1998 relating to
post-retirement benefit obligations included in deferred compensation agreements
the Bank has with certain members of management and its board of directors. The
estimates of expense previously recorded by the Company did not include amounts
relating to the post-retirement benefit obligations. The impact of this error,
net of tax, was $218,000, $115,000, $28,000, $21,000, $46,000 and $22,000 in
1998, 1999, 2000, 2001, 2002, and 2003 respectively The net unrecorded liability
at December 31, 2003 was $714,000 ($450,000 net of tax effects) and is not
considered material to the Company's consolidated financial statements as of
December 31, 2003. However, the Bank has been required to reflect the correction
as a prior period adjustment in its regulatory reports and, accordingly, the
accompanying Consolidated Balance Sheet as of December 31, 2003 has been
restated to conform the presentation with the regulatory filing. The Company
will record $382,000 of this amount as an adjustment to opening equity at
January 1, 2002 and will also amend its 2002 and 2003 income statements to
reduce net income by the amounts of $46,000 and $ 22,000, respectively, in its
2004 annual report on Form 10-K.
The following presents the amounts originally reported in the Company's
Annual Report on Form 10-K as of December 31, 2003 that are affected by the
restatement compared to the amounts that are reported in this Form 10-Q.
AS AS
ORIGINALLY RESTATED
REPORTED
(Amounts in thousands)
Other assets 21,180 21,444
Total assets 374,703 374,967
Other liabilities 2,472 3,186
Total liabilities 325,024 325,738
Retained earnings 32,469 32,019
Total shareholders' equity 49,679 49,229
Total liabilities and shareholders'
equity 374,703 374,967
4. Other Comprehensive Income
Other comprehensive income for the Company consists of items previously
recorded directly in equity under Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Comprehensive income for the three months ended March 31, 2004 and
2003 was $874,459 and $800,000, respectively.
5. Derivative Instruments
In the normal course of business, the Company extends interest rate lock
commitments to borrowers who applied for loan funding and met certain credit and
underwriting criteria. Such commitments were typically for short terms. Such
commitments to originate fixed-rate mortgage loans are the Company's only
derivative instruments.
6. Stock-based Compensation
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its stock option
plans. Accordingly compensation cost is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the amount
an employee must pay to acquire the stock. Compensation cost determined under
SFAS No. 123 did not differ from the compensation cost determined under APB
Opinion No. 25 for the three months ended March 31, 2004 and 2003, as no options
were granted during those periods.
Item. 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.
HABERSHAM BANCORP AND SUBSIDIARIES
Organization
Habersham Bancorp (the "Company") owns all of the outstanding stock of
Habersham Bank ("Habersham Bank") and The Advantage Group, Inc. The Advantage
Group, Inc., a non-bank subsidiary providing marketing and advertising services,
ceased operation September 30, 2001. Habersham Bank owns all of the outstanding
stock of Advantage Insurers, Inc. ("Advantage Insurers"). Advantage Insurers
offers a full line of property, casualty, and life insurance products. The
Advantage Group, Inc. and Advantage Insurers do not comprise a significant
portion of the financial position, results of operations, or cash flows of the
Company and as a result, management's discussion and analysis, which follows
relates primarily to Habersham Bank.
The Company's continuing primary business is the operations of banks in
rural and suburban communities in Habersham, White, Cherokee, Warren, and
Gwinnett counties in Georgia. The Company's primary source of revenue is
providing loans to businesses and individuals in its market area.
Executive Summary
The Company's primary source of income is interest income from loans and
investment securities. Its profitability depends largely on net interest income,
which is the difference between the interest received on interest-earning assets
and the interest paid on deposits, borrowings, and other interest-bearing
liabilities. Interest rates remained at low levels during 2003 and the first
quarter of 2004 and management expects rates to remain at these levels
throughout 2004. Maintaining a profitable net interest margin (net interest
income divided by average earning assets) in 2004 will continue to the focus of
management.
Net interest income in the first quarter of 2004 was impacted by payoffs of
construction loans generated by Habersham Bank's former mortgage subsidiary,
BancMortgage Financial Corp. (sold December 2002); by new loan dollars generated
by Habersham Bank; and by maturing certificates of deposit. The average balance
of the total loan portfolio for the first quarter of 2004 when compared to the
first quarter of 2003 decreased approximately $41 million. Approximately $63.9
million of this decrease related to payoffs of construction loans generated by
Habersham Bank's former mortgage subsidiary, which has been offset by new loans
of approximately $22.9 million generated internally by Habersham Bank. The
average balances of the deposit portfolio for the first quarter of 2004 also
decreased approximately $24.4 million when compared to first quarter of 2003.
The maturity of approximately $8.1 million of national market certificates of
deposit is reflected in this decrease.
During the first quarter of 2004, Habersham Bank made changes in its
locations in the Cherokee County area with the closing of the office at Waleska
and the opening of a new branch at Hickory Flat. Operational expenses associated
with the move to Hickory Flat and a new office at Braselton (opened November
2003) are reflected in the first quarter 2004 results.
Forward Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q and the
exhibits hereto which are not statements of historical fact constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act (the "Act"). In addition, certain statements in future
filings by the Company with the Securities and Exchange Commission, in press
releases, and in oral and written statements made by or with the approval of the
Company which are not statements of historical fact constitute forward-looking
statements within the meaning of the Act. Examples of forward-looking statements
include, but are not limited to: (1) projections of revenues, income or loss,
earnings or loss per share, the payment or non-payment of dividends, capital
structure and other financial items; (2) statements of plans and objectives of
the Company or its management or Board of Directors, including those relating to
products or services; (3) statements of future economic performance; and (4)
statements of assumptions underlying such statements. Words such as "believes,"
"anticipates," "expects," "intends," "targeted," and similar expressions are
intended to identify forward-looking statements but are not the exclusive means
of identifying such statements.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. Factors that
could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (1) the strength of the U.S. economy
in general and the strength of the local economies in which operations are
conducted; (2) the effects of and changes in trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System; (3) inflation, interest rate, market and monetary
fluctuations; (4) the timely development of and acceptance of new products and
services and perceived overall value of these products and services by users;
(5) changes in consumer spending, borrowing and saving habits; (6) acquisitions;
(7) the ability to increase market share and control expenses; (8) the effect of
changes in laws and regulations (including laws and regulations concerning
taxes, banking, securities and insurance) with which the Company and its
subsidiaries must comply; (9) the effect of changes in accounting policies and
practices, as may be adopted by the regulatory agencies as well as the Financial
Accounting Standards Board; (10) changes in the Company's organization,
compensation and benefit plans; (11) the costs and effects of litigation and of
unexpected or adverse outcomes in such litigation; and (12) the success of the
Company at managing the risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.
Critical Accounting Estimates
In reviewing and understanding financial information for the Company, you
are encouraged to read and understand the significant accounting policies which
are used in preparing the consolidated financial statements of the Company.
These policies are described in Note 1 to the consolidated financial statements
which are presented in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003. Of these policies, management believes that the
accounting for the allowance for loan losses is the most critical. This is
because of the subjective nature of the estimates used in establishing the
allowance and the effect these estimates have on the Company's earnings. Because
the allowance is replenished by means of a provision for loan losses that is
charged as an expense against net income, the estimation of the allowance
affects the Company's earnings directly. Losses on loans result from a broad
range of causes, from borrower-specific problems to industry issues to the
impact of the economic environment. The identification of the factors that lead
to default or non-performance under a loan agreement and the estimation of loss
in these situations is very subjective. In addition, a dramatic change in the
performance of one or a small number of borrowers can have a significant impact
in the estimate of losses. Management has implemented a process that has been
applied consistently to systematically consider the many variables that impact
the estimation of the allowance for loan losses.
Certain economic factors could have a material impact on the allowance for
loan losses determination and its adequacy. The depth and duration of any
economic recession would have an impact on the credit risk associated with the
loan portfolio. Another factor that can impact the determination is a
consideration for concentrations in collateral which secure the loan portfolio.
The Company's loan portfolio is secured primarily by commercial and residential
real estate with such loans comprising approximately 88.8% of the total loan
portfolio at March 31, 2004. While there is a risk that the value of the real
estate securing the loans in the portfolio could decrease during an economic
recession, the majority of the real estate securing the loan portfolio is 1 - 4
family residential properties which are generally not as affected by downturns
in the economy. The Company also has concentrations in mortgages for
agribusiness purposes in the poultry industry and in commercial loans for the
travel accommodation industry.
The Company will from time to time make unsecured loans. The risk to the
Company is greater for unsecured loans as the ultimate repayment of the loan is
only dependent on the borrowers ability to pay. The balance of unsecured loans
at March 31, 2004 was $6.9 million which does not pose a significant risk to the
Company.
The Company is not aware of any large loan relationships that if defaulted
would have a significant impact on the allowance for loan losses.
Material Changes in Financial Condition
The Company's total assets decreased $5.5 million, to $369.5 million at
March 31, 2004 from $375.0 million at December 31, 2003. The decrease was
primarily due to a decrease in the loan and investement securities portfolios of
approximately $6.7 million and $2.3 million, respectively, offset somewhat by an
increase in Federal funds sold of $5.0 million. Decreases also occurred in
borrowings and in the deposit portfolio of approximately $4.2 million and $1.7
million, respectively.
The loan portfolio decrease was primarily the result of the continuing
payoffs and maturities of construction loans secured by 1-4 family residential
properties of approximately $4.4 million. Approximately $21 million in these
construction loans is expected to continue to payoff as construction is
completed and the principal is paid. Consumer installment loans, commercial
loans, and other real estate loans also decreased during the first quarter of
2004 by approximately $1,671,000, $401,000, and $306,000, respectively.
The decrease in the investment securities portfolio was primarily the
result of sales and calls, as well as the maturity and paydowns of investment
securities during the first quarter of 2004 totaling approximately $5.4 million
and $2.7 million, respectively. These decreases were offset by purchases of
investment securities of approximately $5.1 million and an increase in the
estimated fair value of the investment securities available for sale of
approximately $782,000.
Other investments decreased $27,000 from $1,652,000 at December 31, 2003 to
$1,625,000 at March 31, 2004 due to the sale of Georgia Community Life Insurance
Company common stock.
Borrowings decreased approximately $4.2 million during the first quarter of
2004 as a result of the repayment of Federal Funds Purchased. The deposit
portfolio decrease was primarily the result of the redemption of approximately
$7.2 million in national market certificates of deposit and of approximately
$7.3 million of other certificates of deposit offset by growth in other deposit
categories of approximately $12.8 million.
Material Changes in Results of Operations
Total interest income for the first quarter of 2004 decreased $845,000 or
14.45% when compared to the first quarter of 2003 primarily due to decreases in
the loan portfolio and interest yield on loans. Interest income from loans
decreased $924,000 or 18.11% when compared to the first quarter of 2003. The
average balance of the loan portfolio was $255.7 million with an
weighted-average yield of 6.51% for the first quarter of 2004 compared to an
average balance of $297.2 million with an weighted-average yield of 6.94% for
the first quarter of 2003.
Interest income from investment securities increased approximately $93,000
or 13.36% for the first quarter of 2004 when compared to the first quarter of
2003. The average balance of the investment securities portfolio increased
approximately $14.0 million when compared to the first quarter of 2003. The
impact on interest income from investment securities from the increase in volume
was lessened by a decrease in the yield on investment securities from 4.51%
during the first quarter of 2003 to 4.16% during the first quarter of 2004.
Total interest expense for the first quarter of 2004 decreased $590,000 or
26.14%, when compared to the first quarter of 2003. The average balance of the
deposit portfolio of approximately $233.9 million during the first quarter of
2004 decreased approximately $29.9 million when compared to the average deposit
portfolio of approximately $263.9 million during the first quarter of 2003.
Average rates on deposits declined from 2.71% during the first quarter of 2003
to 2.04% offered during first quarter of 2004.
Interest expense on short-term and other borrowings decreased $22,000 or
..47% when compared to the first quarter of 2003. Average rates on borrowings
decreased to $4.56% when compared to 4.58% for the first quarter of 2003.
Net interest income decreased approximately $255,000 or 7.10%, for the
first quarter of 2004 as a result of the items discussed above.
The net interest margin of the Company, net interest income divided by
average earning-assets, was 3.94% for the first quarter of 2004 compared to
3.99% for the first quarter of 2003.
Noninterest income decreased $66,000 or 6.96% for the first quarter of 2004
over the same period in 2003. This decrease was primarily due to decreases in
loan fee income and in service charges on deposits and other service charges
offset by increases in gain on sale of loans, investment securities, and other
securities. Habersham Mortgage, a division of Habersham Bank, posted increased
gains on sale of mortgage loans of approximately $45,000 over the same period in
2003. Sales and calls in investment securities for the first quarter of 2004
generated an increase in investment securities gain of approximately $25,000
over the first quarter of 2003. Included in other income is a gain of
approximately $18,000 resulting from the sale of Georgia Community Life
Insurance Company common stock, in which Habersham Bank had an investment of
$27,000.
Noninterest expense increased $369,000 or 11.31% for the first quarter of
2004 over the same period in 2003 primarily due to increases in salary and
employee benefits and occupancy expenses. Salary and employee benefits increased
primarily due to annual salary adjustments and the additional staffing of a new
branch in Braselton which opened in November 2003. Occupancy expenses also
increased approximately $68,000 for the first quarter of 2004 over the same
period in 2003 due to the new branch in Braselton.
Income tax expense for the three months ended March 31, 2004 and 2003 was
$64,000 and $254,000, respectively. The effective tax rate for the three months
ended March 31, 2004 and 2003 was 15.13% and 25.09%, respectively. Tax-exempt
income was a 44.44% of income for the first quarter of 2004 when compared to
21.44% for the first quarter of 2003.
Asset Quality
The allowance for loan losses represents a reserve for probable losses in
the loan portfolio. The adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant loans, with particular
emphasis on impaired, non-accruing, past due, and other loans that management
believes require special attention. The determination of the allowance for loan
losses is subjective and based on consideration of a number of factors and
assumptions. As such, the accounting policy followed in the determination of the
allowance is considered a critical accounting policy. See "Critical Accounting
Policies" for a discussion of management's methodology in determining the
allowance.
The risk associated with lending 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.
A provision for loan losses in the amount of $162,000 was charged to
expense for the quarter ended March 31, 2004 compared to $263,000 for the
quarter ended March 31, 2003. A decrease in the provision for loan losses
expense was determined to be appropriate due to the decrease in the loan
portfolio balances in real estate secured loans. The net charge-offs for the
first quarter of 2004 totaled approximately $238,000 compared to $202,000 for
the first quarter of 2003. During the first quarter of 2004, charge-offs of
commercial, consumer, and real estate secured loans totaled approximately
$100,000, $99,000, and $74,000, respectively, offset by recoveries of consumer,
commercial, and real estate secured loans of $17,000, $16,000, and $2,000,
respectively. At March 31, 2004 and December 31, 2003, the ratio of the
allowance for loan losses to total loans was 1.38% and 1.37%, respectively.
Nonperforming assets consist of nonaccrual loans, accruing loans 90 days
past due, restructured loans and other real estate owned. Nonperforming assets
decreased approximately $66,000 or 1.20% from December 31, 2003 to March 31,
2004. The decrease for the first quarter of 2004 was primarily due to a decrease
in nonaccrual loans and restructured loans of approximately $670,000 and $1,000,
respectively, offset by increases in other real estate and past due loans over
90 days of approximately $182,000 and $423,000, respectively.
The Company had impaired loans of $1,629,549 and $2,299,796 at March 31,
2004 and December 31, 2003, respectively. Impaired loans consist of loans on
nonaccrual status. The foreclosure of nonaccrual loans secured by real estate to
other real estate resulted in a decrease of approximately $680,000 and payments
and reclassification to accrual status resulted in an additional decrease of
approximately $420,000. These decreases were offset by the addition to
nonaccrual status of real estate secured loans, commercial loans, and consumer
loans of approximately $380,000, $23,000, and $26,000, respectively. The
interest income recognized on such loans for the three-month periods ended March
31, 2004 and 2003 was not material.
The Company's other real estate totaled $3,058,230 and $2,634,673 at March
31, 2004 and December 31, 2003, respectively. The increase was primarily due to
the foreclosure of four loans secured by residential properties of approximately
$611,000 offset by the sale of other real estate totaling approximately
$187,000.
Liquidity and Capital Resources
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 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 investment securities. 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 $25,000,000. At March 31,
2004, the Company had no federal funds purchased. Presently, the Company has
made arrangements with commercial banks for short-term advances up to
$22,450,000 under a repurchase agreement line of credit of which none was
advanced at March 31, 2004, in addition to a total available line of
$230,833,000 which is available to the Company, subject to available collateral,
from the Federal Home Loan Bank of which $30,000,000 was advanced at March 31,
2004.
Habersham Bank's liquidity policy requires that the ratio of cash and
certain short-term investments to net withdrawable deposit accounts be at least
20%. The Bank's liquidity ratios at March 31, 2004 and 2003 were 35.95% and
15.19%, respectively. Since the liquidity ratio at March 31, 2003 was below the
policy's requirement of 20%, management began reviewing possible options to
increase the liquidity ratio, researched the recent recommendations of the
Georgia Department of Banking and Finance and established procedures to ensure
that the liquidity is reviewed weekly.
At March 31, 2004 Habersham Bancorp and Habersham Bank were required to
have minimum Tier 1 and total capital ratios of 4% and 8%, respectively.
Additionally, the Company and the Bank are required to maintain a leverage ratio
(Tier 1 capital to average assets) of at least 4%. The Company's and the Bank's
ratios at March 31, 2004 follow:
Habersham Habersham
Bank Bancorp
Tier 1 15.02% 16.24%
Total Capital 16.27% 17.48%
Leverage 11.72% 12.62%
Commitments and Contractual Obligations
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 losses 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 amounts of those instruments. The Company uses the same credit
policies in making theses commitments as it does for on-balance-sheet
instruments and evaluates each customer's creditworthiness on a case by case
basis. At March 31, 2004, the Company had outstanding loan commitments
approximating $54,694,148 and standby letters of credit approximating
$4,500,369. 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 of the financial instrument
failed completely to perform according to the term of the contract and the
collateral proved to be of no value is equal to the face amount of the financial
instrument.
The Company's commitments are funded through internal funding sources of
scheduled repayments of loans and sales and maturities of investment securities
available for sale or external funding sources through acceptance of deposits
from customers or borrowing from other financial institutions.
The following table is a summary of the Company's commitments to extend
credit, commitments under contractual leases, as well as the Company's
contractual obligations, consisting of deposits, FHLB advances and borrowed
funds by contractual maturity date.
Due In Due In Due In Due In Due In
One Year Two Years Three Years Four Years Five Years
Commitments on lines of credit $ 54,694,148 - - - -
Standby letters of credit 4,500,369 - - - -
Commitments under lease agreements 142,572 $ 137,379 $ 68,319 $ 41,838 $ 26,562
Deposits 233,178,829 21,133,178 15,327,799 6,989,555 1,204,621
FHLB advances - 10,000,000 - - -
Short-term borrowings 572,784 - - - -
Federal funds purchased - - - - -
Securities sold under repurchase agreements 8,180,463 - - - -
Total commitments and
--------------- ----------- ------------ ----------- -----------
contractual obligations $ 301,269,165 $31,270,557 $ 15,396,118 $ 7,031,393 $ 1,231,183
=============== =========== ============ =========== ===========
Although management regularly monitors the balance of outstanding
commitments to fund loans to ensure funding availability should the need arise,
management believes that the risk of all customers fully drawing on all these
lines of credit at the same time is remote.
Interest Rate Sensitivity
The objective of asset and liability management is to manage and measure
the level and volatility of earnings and capital by controlling interest rate
risk. To accomplish this objective, management makes use of interest rate and
income simulation models to perform current and dynamic projections of interest
income and equity, as well as more traditional asset and liability management
methods.
The Company's historical performance in various economic climates is
considered by management in making long-term asset and liability decisions for
the Company.
The relative interest rate sensitivity of the Company's assets and
liabilities indicates the extent to which the Company's net interest income may
be affected by interest rate movements. The Company's ability to reprice assets
and liabilities in the same dollar amounts and at the same time minimizes
interest rate risks. One method of measuring the impact of interest rate changes
on net interest income is to measure, in a number of time frames, the interest
sensitivity gap, by subtracting interest sensitive liabilities from interest
sensitive assets, as reflected in the following table. Such interest sensitivity
gap represents the risk, or opportunity, in repricing. If more assets than
liabilities are repriced at a given time in a rising rate environment, net
interest income improves; in a declining rate environment, net interest income
deteriorates. Conversely, if more liabilities than assets are repriced while
interest rates are rising, net interest income deteriorates; if interest rates
are falling, net interest income improves.
The interest rate sensitivity analysis, calculated as of March 31, 2004,
below has a three month positive gap of approximately $5.9 million
(interest-bearing assets exceeding interest-bearing liabilities repricing within
three months).
DUE IN DUE AFTER DUE AFTER DUE AFTER DUE AFTER TOTAL
(DOLLARS IN THOUSANDS) THREE THREE THROUGH SIX THROUGH ONE THROUGH FIVE
MONTHS SIX MONTHS TWELVE MONTHS FIVE YEARS YEARS
INTEREST-EARNING ASSETS:
Federal funds sold $ 5,099 $ - $ - $ - $ - $ 5,099
Investment securities 318 168 2,373 7,003 64,756 74,618
Loans 146,626 13,988 29,112 67,847 1,063 258,636
--------- --------------- --------------- ------------- ----------- --------
Total interest-earning assets 152,043 14,156 31,485 74,850 65,819 338,353
INTEREST-BEARING LIABILITIES:
Deposits
Money Market and NOW 67,129 - - - - 67,129
Savings 9,654 - - - - 9,654
Certificates of deposit 60,542 25,100 28,334 44,655 32 158,663
Borrowings 8,753 - - 10,000 20,000 38,753
--------- --------------- --------------- ------------- ----------- --------
Total interest-bearing
liabilities 146,078 25,100 28,334 54,655 20,032 274,199
Excess(deficiency) of interest-earning
assets over(to) interest-bearing
liabilities $ 5,965 $ (10,944) $ 3,151 $ 20,195 $ 45,787 $ 64,154
========= =============== =============== ============= =========== ========
Cumulative gap $ 5,965 $ (4,979) $ (1,828) $ 18,367 $ 64,154
Ratio of cumulative gap to total
cumulative interest-earning assets 3.92% (3.00)% ( .92)% 6.74% 18.96%
Ratio of cumulative interest-earning assets
to cumulative interest-bearing
liabilities 104.08% 97.09% 99.08% 107.23% 123.40%
Management strives to maintain the ratio of cumulative interest-earning
assets to cumulative interest-bearing liabilities within a range of 80% to 120%
at the less than one-year time frame. At March 31, 2004, the Company was able to
meet such objective.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of March 31, 2004, there were no substantial changes in the composition
of the Company's market-sensitive assets and liabilities or their related market
values from that reported as of December 31, 2003. The foregoing disclosures
related to the market risk of the Company should be read in conjunction with the
Company's audited consolidated financial statements, related notes and
management's discussion and analysis of financial condition and results of
operations for the year ended December 31, 2003 included in the Company's 2003
Annual Report on Form 10K.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's
management, including the Company's Executive Officer and Chief Financial
Officer, reviewed and evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company, (including its consolidated subsidiaries) that is
required to be included in the Company's periodic filings with the Securities
and Exchange Commission.
There have not been any changes in the Company's internal control over
financial reporting during the fiscal quarter to which this report relates that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal proceedings.
None
Item 2. Changes in securities, use of proceeds and issuer purchases of equity
securities.
Issuer Purchases of Equity Securities
The following table sets forth information regarding the Company's purchases
of its common stock on a monthly basis during the first quarter of 2004.
Total Number of Maximum Number (or
Shares (or Units) Appropriate Dollar
Total Average Purchased as Part Value) of Shares (or
Number of Price of Publicly Units) that May Yet Be
Shares Paid Per Announced Plans or Purchased Under the
Period Purchased Share Programs 1 Plans or Programs
- ---------------- --------- -------- ------------------- ----------------------
January 1
through January
31, 2004 0 0 0 0
February 1
through February
29, 2004 0 0 0 0
March 1 through
March 31, 2004 0 0 0 0
Total 0 0 0 0
--------- -------- ------------------- ----------------------
The Company does not have a publicly announced stock repurchase plan and
did not otherwise repurchase any of its shares of common stock during the period
covered by this report. The Company did not terminate an existing stock
repurchase plan during the period covered by this report.
Item 3. Defaults upon senior securities.
None
Item 4. Submission of matters to a vote of security holders.
None
Item 5. Other information.
None
Item 6. Exhibits list and reports on Form 8-K
Form 8-K filed January 30, 2004 under Item 12 (reporting 2003 earnings)
(a) The registrant submits herewith as exhibits to this report on Form
10-Q the exhibits required by Item 601 of Regulation S-K, subject to Rule 12b-32
under the Securities Exchange Act of 1934.
Exhibit No. Document
- ----------- --------
11.1 Computation of Net Income Per Share.
31.1 Certificantion of Chief Executive Officer Pursuant to Section 307 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 307 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HABERSHAM BANCORP
(Registrant)
Date May 15, 2004 /S/ Annette Banks
-----------------
Chief Financial Officer
(for the Registrant and as the
Registrant's principal financial and
accounting officer)