EXHIBIT 13.1





































|SOUTHERN HERITAGE BANCORP, INC. AND SUBSIDIARYCONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2002
|---------------------------------------------------------------------------------------------

21

















SOUTHERN HERITAGE BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED FINANCIAL REPORT

DECEMBER 31, 2002





table of contents

Page

|INDEPENDENT AUDITOR'S REPORT | 23                                             
|---------------------------- | -----------------------------------------------
|                             |                                                
|FINANCIAL STATEMENTS         |                                                
|                             | Consolidated balance sheets                    
|                             | Consolidated statements of income              
|                             | Consolidated statements of comprehensive income
|                             | Consolidated statements of stockholders' equity
|                             | Consolidated statements of cash flows          
|                             | Notes to consolidated financial statements     



22

<PAGE>

















INDEPENDENT AUDITOR'S REPORT



To the Board of Directors

Southern Heritage Bancorp, Inc. and Subsidiary

Oakwood, Georgia



We have audited the accompanying consolidated balance sheets of Southern Heritage Bancorp, Inc. and subsidiaryas of December 31, 2002 and 2001, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southern Heritage Bancorp, Inc. and subsidiary as of December 31, 2002 and 2001, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.









s/MAULDIN & JENKINS, LLP

Atlanta, Georgia

January 17, 2003



23

<PAGE>

|SOUTHERN HERITAGE BANCORP, INC.                          
|---------------------------------------------------------
|AND SUBSIDIARY                                           
|                                                         
|CONSOLIDATED BALANCE SHEETS                              
|DECEMBER 31, 2002 AND 2001                               
|Assets                                                   
|                                                         
|Cash and due from banks                                  
|Federal funds sold                                       
|Securities available-for-sale                            
|Restricted equity securities                             
|                                                         
|Loans                                                    
|Less allowance for loan losses                           
|Loans, net                                               
|                                                         
|Premises and equipment                                   
|Other assets                                             
|                                                         
|Total assets                                             
|                                                         
|Liabilities and Stockholders' Equity                     
|                                                         
|Deposits                                                 
|Noninterest-bearing                                      
|Interest-bearing                                         
|Total deposits                                           
|Other borrowings                                         
|Other liabilities                                        
|Total liabilities                                        
|                                                         
|Commitments and contingencies                            
|                                                         
|Stockholders' equity                                     
|Common stock, par value $5; 10,000,000 shares authorized;
|878,344 issued and outstanding                           
|Capital surplus                                          
|Retained earnings (deficit)                              
|Accumulated other comprehensive income                   
|                                                         
|Total stockholders' equity                               
|                                                         
|Total liabilities and stockholders' equity               
|                                                         
|                                                         
|See Notes to Consolidated Financial Statements.          



<PAGE>

|SOUTHERN HERITAGE BANCORP, INC.                
|-----------------------------------------------
|AND SUBSIDIARY                                 
|                                               
|CONSOLIDATED STATEMENTS OF INCOME              
|YEARS ENDED DECEMBER 31, 2002 AND 2001         
|                                               
|                                               
|Interest income                                
|Loans, including fees                          
|Taxable securities                             
|Federal funds sold                             
|Other                                          
|Total interest income                          
|                                               
|Interest expense                               
|Deposits                                       
|Other borrowings                               
|Total interest expense                         
|                                               
|Net interest income                            
|Provision for loan losses                      
|Net interest income after provision for        
|loan losses                                    
|                                               
|Other income                                   
|Service charges on deposit accounts            
|Mortgage origination fees                      
|Gain on sale of securities available-for-sale  
|Other operating income                         
|Total other income                             
|                                               
|Other expenses                                 
|Salaries and employee benefits                 
|Occupancy and equipment expenses               
|Other operating expenses                       
|Total other expenses                           
|                                               
|Income before income taxes                     
|                                               
|Income tax expense                             
|                                               
|                                               
|Net income                                     
|                                               
|Basic and diluted earnings per share           
|                                               
|                                               
|See Notes to Consolidated Financial Statements.

25



|SOUTHERN HERITAGE BANCORP, INC.                                               
|------------------------------------------------------------------------------
|AND SUBSIDIARY                                                                
|                                                                              
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                               
|YEARS ENDED DECEMBER 31, 2002 AND 2001                                        
|                                                                              
|                                                                              
|                                                                              
|Net income                                                                    
|                                                                              
|Other comprehensive income (loss):                                            
|                                                                              
|Unrealized holding gains (losses) on securities available-for-sale            
|arising during period, net of tax (benefits) of $(51,951) and $0, respectively
|Reclassification adjustment for gains realized in net income, net of          
|(taxes) of $(2,012) and $0, respectively                                      
|Other comprehensive income (loss)                                             
|                                                                              
|Comprehensive income                                                          
|                                                                              
|                                                                              
|See Notes to Consolidated Financial Statements.                               

26



|SOUTHERN HERITAGE BANCORP, INC.
AND SUBSIDIARY                                        
|--------------------------------------------------------------------------------------
|                                                                                      
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
|                                                                                      
|Accumulated Other Comprehensive Income (Loss)                                         
|Retained Earnings (Deficit)                                                           
|                                                                                      
|                                                                                      
|                                                                                      
|Balance, December 31, 2000                                                            
|                                                                                      
|                                                                                      
|Balance, December 31, 2001                                                            
|                                                                                      
|                                                                                      
|Balance, December 31, 2002                                                            
|                                                                                      
|See Notes to Consolidated Financial Statements.                                       

27



|SOUTHERN HERITAGE BANCORP, INC.                          
|---------------------------------------------------------
|AND SUBSIDIARY                                           
|                                                         
|CONSOLIDATED STATEMENTS OF CASH FLOWS                    
|YEARS ENDED DECEMBER 31, 2002 AND 2001                   
|                                                         
|OPERATING ACTIVITIES                                     
|Net income                                               
|Adjustments to reconcile net income to net cash          
|provided by operating activities:                        
|Depreciation                                             
|Amortization                                             
|Gain on sale of securities available-for-sale            
|Provision for loan losses                                
|(Increase) decrease in interest receivable               
|Increase in interest payable                             
|Net other operating activities                           
|                                                         
|Net cash provided by operating activities                
|                                                         
|INVESTING ACTIVITIES                                     
|Purchases of securities available-for-sale               
|Proceeds from maturities of securities available-for-sale
|Proceeds from sale of securities available-for-sale      
|Net (increase) decrease in federal funds sold            
|Purchase of restricted equity securities                 
|Net increase in loans                                    
|Purchase of premises and equipment                       
|                                                         
|Net cash used in investing activities                    
|                                                         
|FINANCING ACTIVITIES                                     
|Net increase in deposits                                 
|Proceeds from other borrowings                           
|                                                         
|Net cash provided by financing activities                
|                                                         
|Net increase in cash and due from banks                  
|                                                         
|Cash and due from banks at beginning of year             
|                                                         
|Cash and due from banks at end of year                   
|                                                         
|SUPPLEMENTAL DISCLOSURE                                  
|Cash paid for:                                           
|Interest                                                 
|                                                         
|Income taxes                                             
|                                                         
|See Notes to Consolidated Financial Statements.          

28

SOUTHERN HERITAGE BANCORP, INC.

AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Southern Heritage Bancorp, Inc. (the "Company") is a bank holding company whose business is conducted by its wholly-owned subsidiary, Southern Heritage Bank (the "Bank"). The Bank is a commercial bank located in Oakwood, Hall County, Georgia with a branch located in Buford, Georgia. The Bank provides a full range of banking services in its primary market area of Hall County and surrounding counties.

Basis of Presentation and Accounting Estimates

The consolidated financial statements include the accounts of the Company and its subsidiary. Significant intercompany transactions and balances have been eliminated in consolidation.

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and deferred taxes.

Cash, Due From Banks and Cash Flows

For purposes of reporting cash flows, cash and due from banks include cash on hand, cash items in process of collection and amounts due from banks. Cash flows from loans, federal funds sold and deposits are reported net.

The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of those reserve balances was approximately $124,000 and $23,000 at December 31, 2002 and 2001, respectively.

Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Securities not classified as held-to-maturity, including equity securities with readily determinable fair values, are classified as available-for-sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of the related deferred tax effect. Equity securities, including restricted stock, without a readily determinable fair value are recorded at cost.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are determined using the specific identification method. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.



<PAGE>





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans

Loans are reported at their outstanding principal balances less unearned income, net deferred fees and the allowance for loan losses. Interest income is accrued on the unpaid balance.

Loan origination fees, net of certain direct loan origination costs for all loans with a maturity exceeding one year, are deferred and recognized as an adjustment of the related loan yield over the life of the loan using the straight-line method. Loan origination fees and direct origination costs of all other loans are recognized at the time the loan is placed on the books. Because the loan origination fee approximates the costs of these loans, the effect on operations is insignificant.

The accrual of interest on loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due, or when a loan becomes past due 90 days or more, unless the loan is well-secured. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. Interest income on nonaccrual loans is subsequently recognized only to the extent cash payments are received, until the loans are returned to accrual status.

The allowance for loan losses is established through a provision for loan losses charged to expense. Loan losses are charged against the allowance when management believes the collectibility of the principal is unlikely. Subsequent recoveries are credited to the allowance.

The allowance is an amount that management believes will be adequate to absorb estimated losses in the loan portfolio. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

A loan is considered impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.

Premises and Equipment

Premises and equipment are carried at cost less accumulated depreciation computed principally on the straight-line method over the estimated useful lives of the assets.

30

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes

Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is recorded for those deferred tax items for which it is more likely than not that realization will not occur in the near term.

Profit Sharing Plan

Profit sharing plan costs are based on a percentage of individual employee's salary, not to exceed the amount that can be deducted for federal income tax purposes.

Stock Compensation Plans

At December 31, 2002, the Company has two stock-based compensation plans, which are described more fully in Note 8. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

| |                                                   | Years Ended December 31,
| | ------------------------------------------------- | ------------------------
| |                                                   | 2002                    
| |                                                   |                         
| | Net income, as reported                           | $                       
| | Deduct: Total stock-based employee compensation   |                         
| | expense determined under fair value based         |                         
| | method for all awards, net of related tax effects |                         
| | Pro forma net income                              | $                       
| | Earnings per share:                               |                         
| | Basic - as reported                               | $                       
| | Basic - pro forma                                 | $                       
| | Diluted - as reported                             | $                       
| | Diluted - pro forma                               | $                       

Earnings Per Share

Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net income by the sum of the weighted-average number of shares of common stock outstanding and dilutive potential common shares. Potential common shares include stock options.

31

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component in the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Reclassifications

Certain income and expenses on the statement of income as of and for the year ended December 31, 2001 have been reclassified, with no effect on net income, to be consistent with the classifications adopted for the year ended December 31, 2002.

Accounting Standards

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. The Company has not elected to adopt the recognition provisions of this Statement for stock-based employee compensation and has elected to continue with accounting methodology in Opinion No. 25 as permitted by SFAS No. 123.



NOTE 2.	SECURITIES

The amortized cost and fair value of securities available-for-sale are summarized as follows

| |                      | Amortized
Cost |           | Gross
Unrealized
Gains |   | Gross
Unrealized
Losses |  | Fair
Value
| | -------------------- | -------------- | --------- | ---------------------- | - | ----------------------- |  | ----------
| |                      |                |           |                        |   |                         |  |           
| | December 31, 2002:   |                |           |                        |   |                         |  |           
| | U. S. Government and |                |           |                        |   |                         |  |           
| | agency securities    | $              | 5,548,774 |                        | $ | 147,478                 |  | $         
| | December 31, 2001:   |                |           |                        |   |                         |  |           
| | U. S. Government and |                |           |                        |   |                         |  |           
| | agency securities    | $              | 7,146,190 |                        | $ | 144,058                 |  | $         



32



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2.	SECURITIES (Continued)

The amortized cost and fair value of debt securities as of December 31, 2002 by contractual maturity are shown below.

| |                            |  |  |  |  |  |  | Amortized
Cost |           | Fair
Value
| | -------------------------- |  |  |  |  |  |  | -------------- | --------- | ----------
| |                            |  |  |  |  |  |  |                |           |           
| | Due in less than one year  |  |  |  |  |  |  | $              | 498,076   |           
| | Due from one to five years |  |  |  |  |  |  |                | 4,297,255 |           
| | Due from five to ten years |  |  |  |  |  |  |                | 753,443   |           
| |                            |  |  |  |  |  |  | $              | 5,548,774 |           

Securities with a carrying value of $3,380,252 and $3,037,037 at December 31, 2002 and 2001, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Gains and losses on sales of securities available-for-sale consist of the following:

| |                    | Years Ended December 31,
| | ------------------ | ------------------------
| |                    | 2002                    
| |                    |                         
| | Gross gains        | $                       
| | Gross losses       |                         
| | Net realized gains | $                       



NOTE 3.	LOANS

The composition of loans is summarized as follows:

| |                            | December 31,
| | -------------------------- | ------------
| |                            |             
| | Commercial                 | $           
| | Real estate - construction |             
| | Real estate - mortgage     |             
| | Consumer and other         |             
| |                            |             
| | Allowance for loan losses  |             
| | Loans, net                 | $           



33

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3.	LOANS (Continued)

Changes in the allowance for loan losses are as follows:

| |                                            | Years Ended December 31,
| | ------------------------------------------ | ------------------------
| |                                            |                         
| | Balance, beginning of year                 | $                       
| | Provision for loan losses                  |                         
| | Loans charged off                          |                         
| | Recoveries of loans previously charged off |                         
| | Balance, end of year                       | $                       

The following is a summary of information pertaining to impaired loans:

| |                                                       | As of and for the Years Ended
| | ----------------------------------------------------- | -----------------------------
| |                                                       | December 31,                 
| |                                                       | 2002                         
| | Impaired loans without a valuation allowance          | $                            
| | Impaired loans with a valuation allowance             |                              
| | Total impaired loans                                  | $                            
| | Valuation allowance related to impaired loans         | $                            
| | Average investment in impaired loans                  | $                            
| | Interest income recognized on impaired loans          | $                            
| | Nonaccrual loans                                      | $                            
| | Loans past due ninety days or more and still accruing | $                            

In the ordinary course of business, the Company has granted loans to certain directors, executive officers and their related affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan. Changes in related party loans for the year ended December 31, 2002 are as follows:

| | Balance, beginning of year | $ | 2,178,808  
| | -------------------------- | - | -----------
| | Advances                   |   | 1,893,868  
| | Repayments                 |   | (1,878,492)
| | Balance, end of year       | $ | 2,194,184  

34

<PAGE>





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4.	PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

| |                               |   | December 31,
| | ----------------------------- | - | ------------
| |                               |   | 2002        
| | Leasehold improvements        | $ | 140,501     
| | Building                      |   | 2,102,916   
| | Furniture and equipment       |   | 648,615     
| |                               |   | 2,892,032   
| | Less accumulated depreciation |   | (402,395)   
| |                               | $ | 2,489,637   

Leases

The Company leases the land on which its main banking facility is located under a noncancelable lease. The lease is for a twenty-year term and can be extended for four additional periods of five years each. The original base annual rent was $40,000, payable in monthly installments. Beginning on the first day of the fourth lease year and on the first day of each lease year thereafter, ("change date"), rent shall increase by the percentage by which the average CPI for the previous lease year exceeds the average CPI for the year preceding the previous change date, but not to exceed 5% in any event. In no event shall the rent be less than it was for the prior lease year. For this lease, the "average CPI" is the average monthly consumer price index for the particular lease year in question during the term of this lease. As of December 31, 2002, the monthly rent is $3,541. The Company is responsible for building and personal property taxes.

The Company also leases its branch building facility under a noncancelable lease. The lease is for a five- year term and can be extended for two additional periods of five years each. The original base annual rent was $3,200, payable in monthly installments. The rent shall increase 2.75% annually. As of December 31, 2002, the monthly rent is $3,200. The Company is responsible for its pro rata share of the operating expenses.

The total minimum rental commitment at December 31, 2002 is due as follows:

| | 2003           |  |  |  | $ | 81,505 
| | -------------- |  |  |  | - | -------
| | 2004           |  |  |  |   | 82,577 
| | 2005           |  |  |  |   | 83,675 
| | 2006           |  |  |  |   | 84,809 
| | 2007           |  |  |  |   | 60,319 
| | Due thereafter |  |  |  |   | 442,589
| |                |  |  |  | $ | 835,474

Total rental expense for the years ended December 31, 2002 and 2001 was $80,149 and $66,514, respectively. Total rental expense includes the land lease and all other equipment rental expense.

35

<PAGE>





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5.	DEPOSITS

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2002 and 2001 was $16,913,418 and $8,974,590, respectively. The scheduled maturities of time deposits at December 31, 2002 are as follows:



| | 2003 | $ | 39,199,077
| | ---- | - | ----------
| | 2004 |   | 4,557,348 
| | 2005 |   | 1,418,825 
| | 2006 |   | 149,770   
| | 2007 |   | 1,577,752 
| |      | $ | 46,902,772



NOTE 6.	OTHER BORROWINGS

Other borrowings consist of the following:

| |                                                                                                                                  | December 31,
| | -------------------------------------------------------------------------------------------------------------------------------- | ------------
| |                                                                                                                                  |             
| | Advance from Federal Home Loan Bank with interest
at 3.37%, due June 24, 2004.
Advance from Federal Home Loan Bank with interest | $           
| | at 5.84%, due October 13, 2005.                                                                                                  |             
| | Total Advances from Federal Home Loan Bank                                                                                       | $           

The Company's advances from the Federal Home Loan Bank are collateralized with $12,002,504 of the Company's residential 1-4 family first mortgage loans, commercial real estate loans and with the Company's stock in the Federal Home Loan Bank.



NOTE 7.	EMPLOYEE BENEFIT PLANS

401(k) Profit Sharing Plan

The Company has a contributory 401(k) profit sharing plan for the benefit of its eligible employees and their beneficiaries, subject to certain eligibility and participation rules. The contributions expensed were $43,584 and $37,380, respectively, for the years ended December 31, 2002 and 2001.

36

<PAGE>





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8.	STOCK COMPENSATION PLAN

In connection with the organization of the Company, employment contracts were provided to senior management granting a total of 25,000 options. These options are exercisable at book value or $10 per share, whichever is less, and expire five years from the grant date, unless extended by the Board of Directors for an additional five year period.

During 2002, the Board of Directors of the Company authorized and adopted the Southern Heritage Bancorp, Inc. Stock Option Plan (the "Plan"). Under the Plan, the Board of Directors of the Company is authorized to issue stock options from time to time to certain officers, key employees and outside directors of the Company or the Bank. Any option granted under the Plan must be granted within ten (10) years of the date of adoption of the Plan by the Board. Any options issued would be for the $5.00 par value common stock of the Company, and the aggregate amount of stock for which options may be granted under the Plan is 300,000 shares, with 120,000 shares being reserved for outside directors and 180,000 shares being reserved for officers and key employees. Options may be granted as qualified "incentive stock options," as defined in Section 422 of the Internal Revenue Code, or as nonqualified options. The purchase price for a share of stock under any option granted under the Plan shall not be less than the fair market value of the stock on the date of the grant of the option or, 110% of fair market value in the case of any ten percent (10%) shareholder.

Other pertinent information related to the options is as follows:



| |                                  | December 31,
| | -------------------------------- | ------------
| |                                  | 2002        
| |                                  | Number      
| | Outstanding at beginning of year | 25,000      
| | Granted                          | 242,500     
| | Exercised                        | -           
| | Terminated                       | -           
| | Outstanding at end of year       | 267,500     
| |                                  |             
| | Options exercisable at year-end  | 35,000      
| | Weighted average life of         |             
| | options outstanding              | 8.5 years   
| | Weighted-average fair value of   |             
| | options granted during the year  |             

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

| |                         |  | Year Ended December 31,
| | ----------------------- |  | -----------------------
| |                         |  | 2002                   
| |                         |  |                        
| | Dividend yield          |  |                        
| | Expected life           |  |                        
| | Expected volatility     |  |                        
| | Risk-free interest rate |  |                        

37

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9.	INCOME TAXES

The components of income tax expense are as follows:

| |                               | Years Ended December 31,
| | ----------------------------- | ------------------------
| |                               |                         
| | Current                       | $                       
| | Deferred                      |                         
| | Change in valuation allowance |                         
| | Income tax expense            | $                       

The Company's income tax expense differs from the amounts computed by applying the federal income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows:

| |                                | Years Ended December 31,
| | ------------------------------ | ------------------------
| |                                | 2002                    
| |                                |                         
| | Income taxes at statutory rate | $                       
| | Change in valuation allowance  |                         
| | State taxes                    |                         
| | Other                          |                         
| | Income tax expense             | $                       

The components of deferred income taxes are as follows:

|   |                                      | December 31,
|-- | ------------------------------------ | ------------
|   |                                      |             
|1  | Deferred tax assets:                 |             
|2  | Loan loss reserves                   | $           
|5  | Preopening and organization expenses |             
|6  | Net operating loss carryforward      |             
|7  | Contributions                        |             
|8  |                                      |             
|9  |                                      |             
|10 | Valuation allowance                  |             
|11 |                                      |             
|13 | Deferred tax liabilities:            |             
|14 | Depreciation                         |             
|14 | Securities available-for-sale        |             
|14 | Accrual to cash adjustment           |             
|15 |                                      |             
|   |                                      |             
|16 | Net deferred tax assets              | $           





<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10.	EARNINGS PER SHARE

Presented below is a summary of the components used to calculate basic and diluted earnings per share:

|  |                                                      | Years Ended December 31,
|- | ---------------------------------------------------- | ------------------------
|  |                                                      |                         
|1 |                                                      |                         
|2 | Net income                                           | $                       
|  |                                                      |                         
|  | Weighted average number of common shares outstanding |                         
|  | Effect of dilutive options                           |                         
|  | Weighted average number of common shares outstanding |                         
|  | used to calculate dilutive earnings per share        |                         



NOTE 11. 	COMMITMENTS AND CONTINGENCIES

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets.

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 commitments and conditional obligations as it does for on-balance-sheet instruments. A summary of the Company's commitments is as follows:



| |                              | December 31,
| | ---------------------------- | ------------
| |                              |             
| | Standby letters of credit    | $           
| | Commitments to extend credit |             
| |                              | $           

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary.

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material effect on the Company's financial statements.

39

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 12. 	CONCENTRATIONS OF CREDIT

The Company originates primarily commercial, residential and consumer loans to customers in Hall County and surrounding counties. The ability of the majority of the Company's customers to honor their contractual loan obligations is dependent on the economy in these areas.

Eighty-four percent of the Company's loan portfolio is concentrated in loans secured by real estate, of which a substantial portion is secured by real estate in the Company's primary market area. Accordingly, the ultimate collectibility of the loan portfolio is susceptible to changes in market conditions in the Company's primary market area. The other significant concentrations of credit by type of loan are set forth in Note 3.

The Company, as a matter of policy, does not generally extend credit to any single borrower or group of related borrowers in excess of 25% of the Bank's statutory capital, or approximately $2,000,000 at December 31, 2002.



NOTE 13.	REGULATORY MATTERS

The Bank is subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 2002, approximately $306,000 of retained earnings were available for dividend declaration without regulatory approval.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. Management believes, as of December 31, 2002 and 2001, the Bank met all capital adequacy requirements to which it was subject.

As of December 31, 2002, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank's category.

40

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 13.	REGULATORY MATTERS (Continued)

The Bank's actual capital amounts and ratios are presented in the following table:

| |                                        |                        |       |          |        |                   |             |       |                   |        |  | To Be Well
| | -------------------------------------- | ---------------------- | ----- | -------- | ------ | ----------------- | ----------- | ----- | ----------------- | ------ |  | ----------
| |                                        |                        |       |          |        |                   | For Capital |       | Capitalized Under
| |                                        |                        |       |          |        |                   | Adequacy    |       | Prompt Corrective
| |                                        | Actual                 |       | Purposes |        | Action Provisions
| |                                        | Amount                 |       | Ratio    |        | Amount            |             | Ratio |                   | Amount |  | Ratio     
| |                                        | (Dollars in Thousands)
| | December 31, 2002:                     |                        |       |          |        |                   |             |       |                   |        |  |           
| | Total Capital to Risk Weighted Assets  | $                      | 9,401 |          | 13.17% |                   | $           | 5,708 |                   | 8.00%  |  | $         
| | Tier I Capital to Risk Weighted Assets | $                      | 8,546 |          | 11.98% |                   | $           | 2,854 |                   | 4.00%  |  | $         
| | Tier I Capital to Average Assets       | $                      | 8,546 |          | 10.11% |                   | $           | 3,382 |                   | 4.00%  |  | $         
| |                                        |                        |       |          |        |                   |             |       |                   |        |  |           
| | December 31, 2001:                     |                        |       |          |        |                   |             |       |                   |        |  |           
| | Total Capital to Risk Weighted Assets  | $                      | 8,468 |          | 19.82% |                   | $           | 3,418 |                   | 8.00%  |  | $         
| | Tier I Capital to Risk Weighted Assets | $                      | 7,933 |          | 18.57% |                   | $           | 1,708 |                   | 4.00%  |  | $         
| | Tier I Capital to Average Assets       | $                      | 7,933 |          | 15.11% |                   | $           | 2,100 |                   | 4.00%  |  | $         



NOTE 14. 	FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS 107, Disclosures about Fair Value of Financial Instruments, excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The Company in estimating its fair value disclosures for financial instruments used the following methods and assumptions.

Cash, Due From Banks and Federal Funds Sold: The carrying amounts of cash, due from banks and federal funds sold approximate fair values.

Securities: Fair values for securities are based on available quoted market prices. The carrying values of equity securities with no readily determinable fair value approximate fair values.

41

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 14. 	FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Loans: For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For other loans, the fair values are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposits: The carrying amounts of demand deposits, savings deposits and variable-rate certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Other Borrowings:The fair values of the Company's fixed rate other borrowings are estimated using discounted cash flow models based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

Accrued Interest: The carrying amounts of accrued interest approximate their fair values.

Off-Balance-Sheet Instruments: Fair values of the Company's off-balance-sheet financial instruments are based on fees currently charged to enter into similar agreements. Since the majority of the Company's off-balance-sheet instruments consist of nonfee-producing, variable-rate commitments, the Company has determined they do not have a distinguishable fair value.

The carrying amounts and estimated fair values of the Company's financial instruments were as follows:

| |                               | December 31, 2002 |            | December 31, 2001
| | ----------------------------- | ----------------- | ---------- | -----------------
| |                               | Carrying
Amount   |            | Fair
Value       
| | Financial assets:             |                   |            |                  
| | Cash, due from banks          |                   |            |                  
| | and federal funds sold        | $                 | 6,799,043  |                  
| | Securities available-for-sale |                   | 5,695,652  |                  
| | Restricted equity securities  |                   | 185,000    |                  
| | Loans                         |                   | 70,406,014 |                  
| | Accrued interest receivable   |                   | 333,177    |                  
| |                               |                   |            |                  
| | Financial liabilities:        |                   |            |                  
| | Deposits                      |                   | 73,177,703 |                  
| | Other borrowings              |                   | 3,700,000  |                  
| | Accrued interest payable      |                   | 227,518    |                  



42



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 15.	SUPPLEMENTAL FINANCIAL DATA

Components of other operating expenses in excess of 1% of total revenue are as follows:

| |                             | Years Ended December 31,
| | --------------------------- | ------------------------
| |                             |                         
| | Other operating expenses:   |                         
| | Advertising                 | $                       
| | Legal and professional fees |                         
| | Data processing             |                         



NOTE 16.	PARENT COMPANY FINANCIAL INFORMATION

The following information presents the condensed balance sheets, statements of income and cash flows of Southern Heritage Bancorp, Inc., as of and for the years ended December 31, 2002 and 2001:

|   | CONDENSED BALANCE SHEETS                  
|-- | ------------------------------------------
|   |                                           
|1  | Assets                                    
|2  | Cash                                      
|4  | Investment in subsidiary                  
|4  | Income tax receivable                     
|   | Deferred tax assets                       
|5  |                                           
|6  | Total assets                              
|   |                                           
|1  | Liabilities                               
|4  | Deferred tax liabilities                  
|   |                                           
|9  | Stockholders' equity                      
|10 |                                           
|11 | Total liabilities and stockholders' equity



43

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 16.	PARENT COMPANY FINANCIAL INFORMATION (Continued)



|   | CONDENSED STATEMENTS OF INCOME                     
|-- | ---------------------------------------------------
|   |                                                    
|1  | Other expenses                                     
|7  |                                                    
|8  | Loss before income taxes                           
|   |                                                    
|9  | Income tax benefits                                
|   |                                                    
|   | Income (loss) before equity in income of subsidiary
|   |                                                    
|10 | Equity in income of subsidiary                     
|11 |                                                    
|12 | Net income                                         

|   | CONDENSED STATEMENTS OF CASH FLOWS             
|-- | -----------------------------------------------
|   |                                                
|1  | OPERATING ACTIVITIES                           
|2  | Net income                                     
|3  | Adjustments to reconcile net income to net cash
|4  | used in operating activities:                  
|   | Increase in income tax receivable              
|   | Increase in deferred taxes                     
|5  | Equity in earnings of subsidiary               
|7  |                                                
|8  | Net cash used in operating activities          
|9  |                                                
|16 | Net decrease in cash                           
|17 |                                                
|18 | Cash at beginning of year                      
|19 |                                                
|20 | Cash at end of year                            

44

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