U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                Annual Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

                   For the fiscal year Commission file number
ended December 31, 1999                                  333-47291

                         SOUTHERN HERITAGE BANCORP, INC.
                 (Name of small business issuer in its charter)

      Georgia                                                    58-2352014
(State of Incorporation)                                       (I.R.S. Employer
                                                            Identification No.)
3461 Atlanta Highway
P. O. Box 907
Oakwood, Georgia                                                      30566
(Address of principal executive offices)                            (Zip Code)

                                                         (770) 531-1240
                                                   (Issuer's telephone number)

Securities Registered pursuant to Section 12(b) of the Exchange Act:  None
Securities Registered pursuant to Section 12(g) of the Exchange Act:  None

Check whether Issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the  Securities  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

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the  best  of  Registrant's   knowledge,  in  definitive  Proxy  or  Information
Statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [X]

Registrant's  revenues  for  its  fiscal  year  ended  December  31,  1999  were
$1,658,610.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant at March 15, 2000 was $13,175,160  based on recent private sales at a
price of $15.00 per share, since there is no established trading market.

The number of shares  outstanding of Registrant's class of common stock at March
15, 2000 was 878,344 shares of common stock.

Documents Incorporated by Reference:  None

Transitional Small Business Disclosure Format (check one):
Yes     No X
   ---    --
                                  Page 1 of 78
                            Exhibit Index on Page 46




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                                TABLE OF CONTENTS

                                     PART I                              PAGE


ITEM 1.           DESCRIPTION OF BUSINESS .........................       3

ITEM 2.           DESCRIPTION OF PROPERTIES........................      13

ITEM 3.           LEGAL PROCEEDINGS................................      14

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF
                  SECURITY HOLDERS.................................      14

                                    PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND
                  RELATED STOCKHOLDER MATTERS......................      14

ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS
                  OR PLAN OF OPERATION ............................      15

ITEM 7.           FINANCIAL STATEMENTS ............................      33

ITEM 8.           CHANGES IN AND DISAGREEMENTS WITH
                          ACCOUNTANTS ON ACCOUNTING AND
                  FINANCIAL DISCLOSURE ............................      33


                                       PART III

ITEM 9.           DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
                  AND CONTROL PERSONS .............................      34

ITEM 10.          EXECUTIVE COMPENSATION ..........................      40

ITEM 11.          SECURITY OWNERSHIP OF CERTAIN
                  BENEFICIAL OWNERS AND MANAGEMENT ................      43

ITEM 12.          CERTAIN RELATIONSHIPS AND
                  RELATED TRANSACTIONS ............................      46

ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K ................      47

SIGNATURES ........................................................      48




                                    2

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                                     PART I

ITEM 1.           DESCRIPTION OF BUSINESS

(a)      Business Development

Southern  Heritage  Bancorp,  Inc.  (the  "Company"),   Oakwood,   Georgia,  was
incorporated  as a Georgia  business  corporation  for the purpose of becoming a
bank holding  company by acquiring all of the common stock of Southern  Heritage
Bank,  Oakwood,  Georgia  (the  "Bank") upon its  formation.  The Company  filed
applications  to the Board of  Governors  of the  Federal  Reserve  System  (the
"Board") and the Georgia Department of Banking and Finance (the "DBF") for prior
approval to become a bank holding  company.  The Company received Board approval
on April 30, 1998,  and the DBF approval on April 28, 1998. The Company became a
bank holding  company within the meaning of the federal Bank Holding Company Act
(the "Act") and the Georgia bank holding  company law (the  "Georgia  Act") upon
the  acquisition  of all of the  Common  Stock of the Bank,  which  occurred  in
January, 1999.

The Bank is the sole operating  subsidiary of the Company.  On October 31, 1997,
the Bank  received the approval of its Articles of  Incorporation  from the DBF.
Its permit to begin  business  has been  issued,  and it opened for  business on
January 4, 1999.  The  deposits at the Bank are  insured by the Federal  Deposit
Insurance  Corporation  (the "FDIC"),  initial  approval by the FDIC having been
obtained on March 19, 1998.

In April, 1998, the Company registered 1,000,000 shares of its common stock with
the  Securities  and Exchange  Commission  under the Securities Act of 1933. The
registration statement became effective on April 29, 1998, and the Company began
its stock  offering  a few days  later.  The stock  offering  was  completed  by
January,  1999 and the shares were issued as of January 4, 1999.  878,344 shares
were sold in the offering, raising total capital of $8,783,440.

(b)      Business of Issuer

The Bank conducts a general  commercial  banking business in its primary service
area,  emphasizing  the banking needs of individuals  and small to  medium-sized
businesses.  The  Company  conducts  business  from its  office  located at 3461
Atlanta Highway, Flowery Branch, Georgia 30542.

The  Company  is  authorized  to engage in any  activity  permitted  by law to a
corporation,  subject  to  applicable  Federal  regulatory  restrictions  on the
activities of bank holding companies.  The Company was formed for the purpose of
becoming  a holding  company to own 100% of the stock of the Bank.  The  holding
company structure  provides the Company with greater  flexibility than the Bank.


                                       3
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While the Company  has no present  plans to engage  actively  in any  nonbanking
business  activities,   management   anticipates  studying  the  feasibility  of
establishing or acquiring subsidiaries to engage in other business activities to
the extent permitted by law.

The principal  business of the Bank is to accept deposits from the public and to
make loans and other investments in and around Hall County,  Georgia, as well as
the geographically adjacent counties, its primary service area.

The Bank offers a full range of deposit  services that are  typically  available
from  financial  institutions.  The Bank offers  personal and business  checking
accounts,  interest-bearing  checking accounts,  savings accounts,  money market
funds and  various  types of  certificates  of  deposit.  The Bank  also  offers
installment  loans, real estate loans,  second mortgage loans,  commercial loans
and home equity lines of credit. In addition, the Bank provides such services as
official bank checks and money orders,  Mastercard  and VISA credit cards,  safe
deposit boxes,  traveler's  checks,  bank by mail, direct deposit of payroll and
social security  checks,  and US Savings Bonds. All deposit accounts are insured
by the FDIC up to the maximum amount currently permitted by law.

The Bank's lending  philosophy is to make loans,  taking into  consideration the
safety  of  the  Bank's  depositors'  funds,  the  preservation  of  the  Bank's
liquidity,  the interest of the Company's  shareholders,  and the welfare of the
community.  Interest  income  from the  Bank's  lending  operations  will be the
principal  component of the Bank's income,  so therefore prudent lending will be
essential for the prosperity of the Bank.

The principal sources of income for the Bank will be interest and fees collected
on loans,  interest and dividends  collected on other investments,  and mortgage
brokerage  fees.  The  principal  expenses of the Bank will be interest  paid on
deposits, employee compensation, office expenses, and other overhead expenses.

The Bank's business plan for its initial years of operation  relies  principally
upon local  advertising and promotional  activity and upon personal  contacts by
its directors,  officers and  shareholders  to attract  business and to acquaint
potential customers with the Bank's personalized services. The Bank emphasizes a
high degree of  personalized  client  service in order to be able to provide for
each customer's  banking needs.  The Bank's  marketing  approach  emphasizes the
advantages  of dealing  with an  independent,  locally-owned  and managed  state
chartered bank to meet the particular  needs of individuals,  professionals  and
small-to-medium-size  businesses  in the  community.  All banking  services  are
continually  evaluated  with regard to their  profitability  and efforts will be
made to modify the Bank's  business plan if the Bank does not prove  successful.
The Bank does not presently offer trust or permissible securities services.

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Supervision and Regulation

Regulation  of the Bank.  The  operations  of the Bank are  subject to state and
federal statutes  applicable to state chartered banks whose deposits are insured
by the FDIC and the  regulations  of the DBF and the  FDIC.  Such  statutes  and
regulations  relate to,  among other  things,  required  reserves,  investments,
loans,  mergers  and  consolidations,   issuances  of  securities,   payment  of
dividends, establishment of branches and other aspects of the Bank's operations.
Under the provisions of the Federal  Reserve Act, the Bank is subject to certain
restrictions  on any  extensions  of  credit to the  Company  or,  with  certain
exceptions,  other affiliates,  and on the taking of such stock or securities as
collateral on loans to any borrower.  In addition,  the Bank is prohibited  from
engaging in certain  tie-in  arrangements  in  connection  with any extension of
credit or the providing of any property or service.

The Bank, as a state  chartered  bank, is permitted to branch only to the extent
that banks are  permitted to branch  under  Georgia  law. In January  1996,  the
Georgia legislature passed a bill designed to eliminate  Georgia's  intra-county
branching  restrictions.  Effective as of July 1, 1998, full statewide branching
went into effect  permitting  Georgia  banks to  establish  new  branches in any
county  in  the  state  with  prior  approval  of  the  appropriate   regulatory
authorities.

The FDIC adopted final risk-based  capital guidelines for all FDIC insured state
chartered  banks that are not members of the Federal  Reserve  System  effective
December 31, 1990. As of December 31, 1992, all banks are required to maintain a
minimum ratio of total capital to risk weighted assets of 8 percent (of which at
least 4  percent  must  consist  of Tier 1  capital).  Tier 1  capital  of state
chartered  banks (as defined in  regulations)  generally  consists of (i) common
stockholders  equity;  (ii) noncumulative  perpetual preferred stock and related
surplus;  and (iii) minority  interests in the equity  accounts of  consolidated
subsidiaries.

In addition,  the FDIC adopted a minimum ratio of Tier 1 capital to total assets
of banks. This capital measure is generally  referred to as the leverage capital
ratio. The FDIC has established a minimum leverage capital ratio of 3 percent if
the FDIC  determines  that the  institution is not  anticipating or experiencing
significant growth and has  well-diversified  risk,  including no undue interest
rate exposure,  excellent asset quality,  high liquidity,  good earnings and, in
general,  is considered a strong banking  organization,  rated Composite 1 under
the Uniform Financial  Institutions Rating System. Other financial  institutions
are expected to maintain leverage capital at least 100 to 200 basis points above
the minimum  level.  Management  intends to operate the Bank so as to exceed the
minimum Tier 1, risk-based and leverage capital ratios.


                                        5

<PAGE>



Bank regulators continue to indicate their desire to raise capital  requirements
applicable  to banking  organizations,  including  a proposal to add an interest
rate risk component to risk-based capital requirements.

The Federal Deposit Insurance  Corporation  Improvement Act of 1991,  enacted in
December 1991  ("FDICIA"),  specifies,  among other things,  the following  five
capital standard categories for depository  institutions:  (i) well capitalized,
(ii)  adequately  capitalized,   (iii)   undercapitalized,   (iv)  significantly
under-capitalized   and  (v)   critically   undercapitalized.   FDICIA   imposes
progressively more restrictive constraints on operations, management and capital
distributions  depending on the category in which an  institution is classified.
Each of the federal banking  agencies has issued final uniform  regulations that
became  effective  December  19, 1992,  which,  among other  things,  define the
capital  levels  described  above.  Under  the  final  regulations,  a  bank  is
considered "well  capitalized" if it (i) has a total risk-based capital ratio of
10% or greater,  (ii) has a Tier 1  risk-based  capital  ratio of 6% or greater,
(iii) has a  leverage  ratio of 5% or  greater,  and (iv) is not  subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" bank is defined as one that has (i)
a total risk- based  capital  ratio of 8% or greater,  (ii) a Tier 1  risk-based
capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater,  and
an  "undercapitalized"  bank is defined  as one that has (i) a total  risk-based
capital  ratio of less than 8%, (ii) a Tier 1 risk-based  capital  ratio of less
than  4%,  and  (iii) a  leverage  ratio of less  than 4%. A bank is  considered
"significantly  undercapitalized" if the bank has (i) a total risk-based capital
ratio of less than 6%, (ii) a Tier 1 risk-based  capital  ratio of less than 3%,
and (iii) a leverage ratio of less than 3%, and "critically undercapitalized" if
the bank has a ratio of tangible  equity to total  assets  equal to or less than
2%.  The  applicable  federal  regulatory  agency  for  a  bank  that  is  "well
capitalized"   may   reclassify   it   as   an   "adequately   capitalized"   or
"undercapitalized"  institution  and  subject  it  to  the  supervisory  actions
applicable to the next lower capital category, if it determines that the Bank is
in an unsafe or unsound  condition  or deems the bank to be engaged in an unsafe
or unsound practice and not to have corrected the deficiency.

"Undercapitalized"  depository institutions,  among other things, are subject to
growth limitations, are prohibited, with certain exceptions, from making capital
distributions,  are limited in their  ability to obtain  funding  from a Federal
Reserve Bank and are required to submit a capital  restoration plan. The federal
banking agencies may not accept a capital plan without determining,  among other
things, that the plan is based on realistic assumptions and is likely to succeed
in restoring the depository  institution's  capital. In addition,  for a capital
restoration plan to be acceptable,  the depository  institution's parent holding
company

                                        6

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must guarantee that the  institution  will comply with such capital  restoration
plan  and  provide  appropriate  assurances  of  performance.  If  a  depository
institution fails to submit an acceptable plan, including if the holding company
refuses or is unable to make the guarantee  described in the previous  sentence,
it is treated as if it is "significantly undercapitalized". Failure to submit or
implement an acceptable  capital plan also is grounds for the  appointment  of a
conservator   or  a  receiver.   "Significantly   undercapitalized"   depository
institutions  may  be  subject  to  a  number  of  additional   requirements  or
restrictions,  including the  requirement  to issue  additional  voting stock to
become  adequately  capitalized  and  requirements  to reduce  total  assets and
cessation  of  receipt  of  deposits  from  correspondent   banks.   "Critically
undercapitalized"  institutions,  among other things, are prohibited from making
any payments of principal and interest on subordinated  debt, and are subject to
the appointment of a receiver or conservator.

Under  FDICIA,  the FDIC is  permitted  to provide  financial  assistance  to an
insured bank before  appointment  of a conservator  or receiver only if (i) such
assistance  would be the least  costly  method of meeting  the FDIC's  insurance
obligations,  (ii) grounds for  appointment of a conservator or a receiver exist
or are likely to exist,  (iii) it is unlikely that the bank can meet all capital
standards without  assistance and (iv) the bank's management has been competent,
has complied with applicable laws, regulations, rules and supervisory directives
and has not  engaged  in any  insider  dealing,  speculative  practice  or other
abusive activity.

The Bank is subject to FDIC deposit insurance assessments for the Bank Insurance
Fund ("BIF").  The FDIC has implemented a risk-based  assessment  system whereby
banks are  assessed on a sliding  scale  depending  on their  placement  in nine
separate  supervisory  categories.  Recent legislation provides that BIF insured
institutions,  such as the Bank, will share the Financial  Corporation  ("FICO")
bond service obligation.  Previously,  only Savings  Association  Insurance Fund
("SAIF")  insured  institutions  were  obligated to  contribute to the FICO bond
service.  The BIF deposit insurance premium for the Bank is presently 2.08 cents
per $100 of BIF insured deposits.

On April  19,  1995,  the  federal  bank  regulatory  agencies  adopted  uniform
revisions to the regulations  promulgated pursuant to the Community Reinvestment
Act (the "CRA"), which are intended to set standards for financial institutions.
The revised regulation contains three evaluation tests: (a) a lending test which
will compare the institution's  market share of loans in low and moderate income
areas to its market share of loans in its entire service area and the percentage
of a bank's  outstanding  loans to low and moderate income areas or individuals,
(b) a services  test which will  evaluate the provision of services that promote
the availability of credit to low and moderate income areas, and (c) an

                                        7

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investment test,  which will evaluate an institution's  record of investments in
organizations designed to foster community development, small and minority owned
businesses and affordable housing lending,  including state and local government
housing or revenue  bonds.  The  regulation  is designed to reduce the paperwork
requirements  of  the  current  regulations  and  provide  regulatory  agencies,
institutions,  and community groups with a more objective and predictable manner
with which to evaluate the CRA performance of financial  institutions.  The rule
became effective on January 1, 1996 when evaluation under streamlined procedures
began for  institutions  with total  assets of less than $250  million  that are
owned by a holding company with total assets of less than $1 billion.

Congress  and  various  federal  agencies  (including,  in  addition to the bank
regulatory  agencies,  the  Department  of Housing  and Urban  Development,  the
Federal  Trade  Commission  and the  Department  of Justice  (collectively,  the
"Federal Agencies")  responsible for implementing the nation's fair lending laws
have  been  increasingly  concerned  that  prospective  home  buyers  and  other
borrowers are experiencing  discrimination in their efforts to obtain loans. The
Department  of Justice has filed suit against  financial  institutions  which it
determined had  discriminated,  seeking fines and  restitution for borrowers who
allegedly  suffered from  discriminatory  practices.  Most, if not all, of these
suits have been settled (some for substantial  sums) without a full adjudication
on the merits.

On March 8, 1994, the Federal Agencies, in an effort to clarify what constitutes
discrimination  in lending and to specify the factors the agencies will consider
in  determining  if lending  discrimination  exists,  announced  a joint  policy
statement detailing specific discriminatory practices prohibited under the Equal
Credit Opportunity Act and the Fair Housing Act. In the policy statement,  three
methods of establishing  discrimination  in lending were  identified:  (a) overt
evidence  of  discrimination,   when  a  lender  blatantly  discriminates  on  a
prohibited  basis,  or (b) where  there is no  showing  that the  treatment  was
motivated  by intent to  discriminate  against a  person,  and (c)  evidence  of
disparate impact,  when a lender applies a practice uniformly to all applicants,
but the practice has a discriminatory  effect on a protected  class,  even where
such  practices  are neutral on their face and are applied  equally,  unless the
practice can be justified on the basis of business necessity.

Regulation  of the  Company.  The Company is a bank holding  company  within the
meaning of the Federal Bank Holding Company Act (the "Act") and the Georgia bank
holding company law (the "Georgia Act"). As a bank holding company,  the Company
is  required  to file with the  Federal  Reserve  Board (the  "Board") an annual
report and such additional  information as the Board may require pursuant to the
Act. The Board may also make examinations of the Company and

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each of its  subsidiaries.  Bank  holding  companies  are required by the Act to
obtain  approval  from the Board prior to  acquiring,  directly  or  indirectly,
ownership or control of more than 5% of the voting shares of a bank.

The Act also prohibits bank holding  companies,  with certain  exceptions,  from
acquiring  more than 5% of the voting  shares of any company  that is not a bank
and from  engaging in any  nonbanking  business  (other than a business  closely
related to banking as determined  by the Board) or from managing or  controlling
banks and other subsidiaries authorized by the Act or furnishing services to, or
performing  services  for, its  subsidiaries  without the prior  approval of the
Board.  The Board is  empowered to  differentiate  between  activities  that are
initiated  de novo by a bank  holding  company or a  subsidiary  and  activities
commenced  by  acquisition  of a  going  concern.  The  Company  has no  present
intention to engage in nonbanking activities.

As a bank holding company, the Company is subject to capital adequacy guidelines
as established by the Board. The Board established risk based capital guidelines
for bank holding companies  effective March 15, 1989.  Beginning on December 31,
1992,  the minimum  required  ratio for total  capital to risk  weighted  assets
became 8 percent (of which at least 4 percent  must  consist of Tier 1 capital).
Tier 1 capital (as defined in regulations  of the Board)  consists of common and
qualifying  preferred  stock  and  minority  interests  in  equity  accounts  of
consolidated subsidiaries, less goodwill and other intangible assets required to
be deducted  under the Board's  guidelines.  The Board's  guidelines  apply on a
consolidated basis to bank holding companies with total  consolidated  assets of
$150 million or more. For bank holding  companies with less than $150 million in
total consolidated assets (such as the Company),  the guidelines will be applied
on a bank only basis,  unless the bank holding  company is engaged in nonbanking
activity  involving  significant  leverage  or has  significant  amount  of debt
outstanding  that is held by the general public.  The Board has stated that risk
based  capital  guidelines  establish  minimum  standards  and that bank holding
companies generally are expected to operate well above the minimum standards.

The  Company is also a bank  holding  company  within the meaning of the Georgia
Act, which provides that,  without the prior written  approval of the DBF, it is
unlawful  (i) for any  bank  holding  company  to  acquire  direct  or  indirect
ownership or control of more than 5% of the voting shares of any bank,  (ii) for
any bank holding  company or subsidiary  thereof,  other than a bank, to acquire
all or substantially  all of the assets of a bank, or (iii) for any bank holding
company to merge or consolidate with any other bank holding company.

It is also unlawful for any company to acquire  direct or indirect  ownership or
control of more than 5% of the voting shares of any

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bank in  Georgia  unless  such  bank  has  been in  existence  and  continuously
operating or  incorporated as a bank for a period of five years or more prior to
the  date of  application  to the DBF for  approval  of such  acquisition.  Bank
holding  companies  themselves are prohibited from acquiring  another bank until
the initial bank in the bank holding company has been  incorporated for a period
of twenty-four months.

The  Reigle-Neal  Interstate  Banking and Branching  Efficiency Act of 1994 (the
"Interstate Banking Act"),  subject to certain  restrictions,  allows adequately
capitalized and managed bank holding  companies to acquire existing banks across
state lines,  regardless of state statutes that would prohibit  acquisitions  by
out-of-state  institutions.  Further,  effective  June 1, 1998,  a bank  holding
company may consolidate  interstate bank  subsidiaries  into branches and a bank
may merge with an  unaffiliated  bank across  state lines to the extent that the
applicable  states have not "opted out" of  interstate  branching  prior to such
effective date. Some states may elect to permit interstate mergers prior to June
1,  1998.  The  Interstate   Banking  Act  generally   prohibits  an  interstate
acquisition  (other  than  the  initial  entry  into a state  by a bank  holding
company)  that would  result in either  the  control of more than (i) 10% of the
total amount of insured deposits in the United States,  or (ii) 30% of the total
insured  deposits  in the  home  state  of the  target  bank,  unless  such  30%
limitation  is waived by the home state on a basis  which does not  discriminate
against out-of- state institutions. As a result of this legislation, the Company
may  become a  candidate  for  acquisition  by, or may itself  seek to  acquire,
banking organizations located in other states.

The Reigle  Community  Development  and Regulatory  Improvement Act of 1994 (the
"Improvement  Act")  provides  for  the  creation  of  a  community  development
financial  institutions'  fund to promote economic  revitalization  in community
development.  Banks and thrift  institutions  are allowed to participate in such
community  development  banks.  The Improvement Act also contains (i) provisions
designed to enhance small business capital  formation and to enhance  disclosure
with regard to high cost  mortgages for the  protection  of consumers,  and (ii)
more  than 50  regulatory  relief  provisions  that  apply to banks  and  thrift
institutions,  including the  coordination  of  examinations  by various federal
agencies,  coordination of frequency and types of reports financial institutions
are  required  to file  and  reduction  of  examinations  for  well  capitalized
institutions.

Bank holding companies may be compelled by bank regulatory authorities to invest
additional capital in the event a subsidiary bank experiences either significant
loan losses or rapid growth of loans or deposits.  In addition,  the Company may
be required to provide additional capital to any additional banks it acquires as
a condition to obtaining the approvals and consents of regulatory authorities in
connection with such acquisitions.

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The Company and the Bank are subject to the Federal  Reserve  Act,  Section 23A,
which  limits a bank's  "covered  transactions"  (generally,  any  extension  of
credit) with any single  affiliate  to no more than 10% of a bank's  capital and
surplus.  Covered  transactions  with all affiliates  combined are limited to no
more  than  20%  of a  bank's  capital  and  surplus.  All  covered  and  exempt
transactions  between a bank and its affiliates  must be on terms and conditions
consistent  with  safe  and  sound  banking  practices,   and  a  bank  and  its
subsidiaries  are prohibited  from purchasing low quality assets from the bank's
affiliates.  Finally,  Section 23A requires  that all of a bank's  extensions of
credit to an affiliate be appropriately  secured by collateral.  The Company and
the Bank are also  subject to Section  23B of the  Federal  Reserve  Act,  which
further limits  transactions  among affiliates.  Sections 22(b) and 22(h) of the
Federal Reserve Act and  implementing  regulations  also prohibit  extensions of
credit by a state non-member bank (such as the Bank) to its directors,  officers
and  controlling  shareholders  on terms  which are more  favorable  than  those
afforded  other  borrowers,  and  impose  limits  on the  amounts  of  loans  to
individual affiliates and all affiliates as a group.

Financial Services  Modernization Act. Congress enacted the Gramm-  Leach-Bliley
Financial  Services  Modernization  Act in November,  1999.  The Act repeals the
prohibition  against  affiliations  between  depository  institutions  and firms
principally  engaged in the issue,  floatation,  underwriting,  public sale,  or
distribution  of  securities,  and it permits the creation of financial  holding
companies, including by bank holding companies. Under the Act, financial holding
companies are  authorized to engage in activities  deemed to be  "financial"  in
nature or "incidental" to such activities, as well as "complementary" activities
or services which do not present  substantial risks. Prior law limited banks and
bank  holding  companies  to  activities  determined  to be "closely  related to
banking."

The Act applies to the  activities  of both state and  national  banks and their
affiliates.  The  Federal  Reserve  Board  ("FRB")  will  act as  the  "umbrella
regulator"  for  financial  holding  companies  and state member banks and their
activities;  however, the FRB will be required to coordinate its activities with
the OCC in the  case  of  national  banks  and the  FDIC  in the  case of  state
non-member banks.

Bank holding companies  satisfying the criteria  specified by the Act may become
certified as financial  holding  companies by filing with the FRB.  Bank holding
companies  and their  affiliate  banks  may not  participate  in such  financial
affiliations unless the insured depository institutions are well capitalized and
well managed and have satisfactory CRA ratings.

The Act lists various  activities  that are  "financial"  in nature and in which
financial  holding  companies may engage,  without  approval,  upon thirty days'
notice to the FRB. The listed activities

                                        11

<PAGE>



include,  among  others:  (i)  underwriting,  dealing  in or  making a market in
securities;  (ii) insurance underwriting and agency activities;  (iii) providing
financial,  investment and economic  advisory  services;  (iv) insurance company
portfolio investment activities; and (v) merchant banking.

The  Act  further  provides  that a  national  bank  may  control  a  "financial
subsidiary"  or hold an interest in a "financial  subsidiary"  if the subsidiary
engages only in  activities  that are  "financial"  in nature or incidental to a
"financial"  activity and in activities that are permitted for national banks to
engage  in  directly,   and  the   subsidiary   does  not  engage  in  insurance
underwriting,  real  estate  development,  or  merchant  banking.  A  "financial
subsidiary" is any company that is controlled by one or more insured  depository
institutions other than a subsidiary that engages solely in activities permitted
for  national  banks  or a  subsidiary  that a  national  bank  is  specifically
authorized to control by the express terms of a separate Federal statute.

A national bank may engage in these "financial"  activities if: (i) the bank and
each  depository  institution  affiliate are well  capitalized and well managed;
(ii) aggregate total consolidated assets of all subsidiaries does not exceed the
lesser of 45% of  consolidated  total  assets of the parent bank or $50 billion;
(iii) received OCC approval to engage in the activities;  and (iv) satisfies CRA
rating requirements.

As for state banks, FDIC regulations  continue to provide that state banks have,
at a minimum,  the same  powers as  national  banks.  Subject to the  authority,
consistent  with the Act,  of the FRB and the FDIC (as  applicable)  to regulate
various  activities of state banks, the Act preserves the authority of states to
expand the powers of state banks beyond  those  permitted  for  national  banks.
State  law  inconsistent  with  the  Act  is  preempted,  but  state  regulatory
authorities retain jurisdiction.

Competition

The  banking  business  is highly  competitive.  The Bank  competes  with  other
commercial banks in its primary service area.

Banks generally  compete with other financial  institutions  through the banking
products and  services  offered,  the pricing of services,  the level of service
provided,  the  convenience  and  availability  of  services,  and the degree of
expertise and the personal  manner in which  services are offered.  The Bank has
encountered  strong  competition from most of the financial  institutions in the
Bank's  primary  service  area.  In the conduct of certain  areas of its banking
business, the Bank also competes with credit unions, consumer finance companies,
insurance companies, money market mutual funds and other financial institutions,
some of which are not subject to the same degree of regulation and restrictions

                                       12

<PAGE>



imposed upon the Bank.  Many of these  competitors  have  substantially  greater
resources and lending limits than the Bank has and offer certain services,  such
as trust services, that the Bank does not provide presently. Management believes
that competitive  pricing and personalized  service provides it with a method to
compete effectively in the primary service area.

Employees

As of  March  1,  2000,  the Bank had 15  full-time  employees  and 2  part-time
employees. The Company does not have any employees who are not also employees of
the Bank. The Company and the Bank are not parties to any collective  bargaining
agreement,  and  management  believes  the  Bank  has  good  relations  with its
employees.


ITEM 2.           DESCRIPTION OF PROPERTIES

On February  4, 1998,  the Company  entered  into a ground  lease with M. Milton
Robson, one of the Company's  directors,  for a 40-year ground lease of a 1.3359
acre tract of land  located  at 3461  Atlanta  Highway  in the City of  Oakwood,
Georgia.  The  tract of land is the site  where  the  Company  and the Bank have
constructed  the main office of the Bank.  Upon  termination of the lease due to
certain  defaults  by the  lessees  or  normal  expiration,  the  real  property
improvements  (the  building)  will  revert to and  become the  property  of the
lessor.  Final termination is expected to occur in Summer, 2038, but could occur
earlier if lessees default in the payment of rent for three  consecutive  months
or fail to exercise the extension options.

The directors of the Company obtained two appraisals of the proposed site of the
bank  building and of the ground  lease.  Both  appraisals  determined  that the
rental  under the ground  lease was  reasonable  and at market  rental  rate for
comparable  ground leases.  Copies of the  appraisals,  together with the ground
lease agreement, were filed with the Department of Banking and the FDIC.

The Company and the Bank  constructed a 10,000 square foot,  two- story building
on the property  for the Bank.  There are four teller  stations  inside and four
drive through  stations.  There is also a stand-alone  automatic  teller machine
accessible  by  automobile.  The  cost  of  construction  of  the  building  was
approximately  $2,060,000.  The furniture,  fixtures and equipment necessary for
operation of the Bank cost approximately $236,000.  Construction,  equipping and
occupancy of the bank  building by the Bank  occurred on August 30, 1999.  These
costs were paid out of  capital of the Bank  provided  by the  Company  from its
initial stock  offering and when the Bank was originally  capitalized.  The Bank
opened for  business on January 4, 1999,  in a temporary  building  located on a
portion of the site of the permanent bank building.


                                       13

<PAGE>



In addition, one of the primary components of the Bank's loan portfolio is loans
secured by first or second  mortgages  on real  estate.  These  loans  generally
consist of commercial real estate loans,  construction and  developments  loans,
and  residential  real estate loans.  Loan terms are  generally  limited to five
years  or  less,  although  payments  are  frequently  structured  on  a  longer
amortization basis. Interest rates are fixed or adjustable,  and are more likely
to be fixed in the case of shorter  term  loans.  Management  attempts to reduce
credit risk in the  commercial  real estate  portfolio by  emphasizing  loans on
owner-occupied  office  and  retail  buildings  where the  loan-to-value  ratio,
established by  independent  appraisals,  does not exceed 85%. In addition,  the
Bank  typically  requires  personal  guarantees of the  principal  owners of the
property backed with a review by the Bank of the personal  financial  statements
of the principal  owners.  The  principal  economic  risk  associated  with each
category of loans,  including real estate loans, is the  creditworthiness of the
Bank's  borrowers.  The risks  associated  with real estate loans vary with many
economic factors,  including  employment levels and fluctuations in the value of
real estate.  The Bank also  originates  residential  real estate loans for sale
into the secondary market. The Bank limits interest rate risk and credit risk on
these  loans by  locking  the  interest  rate for each loan  with the  secondary
investor and receiving the investor's underwriting approval prior to originating
the loan.


ITEM 3.           LEGAL PROCEEDINGS

The Company is not a party to any pending  legal  proceedings  which  management
believes would have a material effect upon the operations or financial condition
of the Company.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was  submitted  to a vote of  security  holders  during the  Company's
fourth quarter of the fiscal year ended December 31, 1999.

                                     PART II

ITEM 5.           MARKET FOR ISSUER'S COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS

As of December 31, 1999, 878,344 shares were outstanding to approximately  1,300
shareholders.  There is no established  trading market for the Company's  common
stock. The Company has not paid and does not anticipate  paying dividends on its
common stock in the immediate future. At present,  the only source of funds from
which the Company could pay dividends  would be dividends paid to the Company by
the Bank. Certain regulatory  requirements restrict the amount of dividends that
can be paid to the Company by the Bank

                                       14

<PAGE>



without  obtaining the prior approval of the DBF. No assurance can be given that
dividends  will be declared by the Company,  or if declared,  what the amount of
the dividends will be or whether such dividends, once declared, would continue.


ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following is a discussion of the financial  condition of the Company and the
Bank at December 31, 1999 and 1998 and the results of their  operations  for the
years ended  December 31, 1999 and 1998.  The purpose of this  discussion  is to
focus on  information  about the  Company's  financial  condition and results of
operations  which  are not  otherwise  apparent  from the  audited  consolidated
financial  statements.  Reference  should  be made to those  statements  and the
selected financial data presented  elsewhere in this report for an understanding
of the following discussion and analysis.

Forward-Looking Statements

The  Company  may  from  time to time  make  written  or oral  forward-  looking
statements,  including  statements  contained in the Company's  filings with the
Securities and Exchange  Commission and its reports to stockholders.  Statements
made, other than those concerning historical  information,  should be considered
forward-looking   and  subject  to  various   risks  and   uncertainties.   Such
forward-looking  statements are made based upon  management's  belief as well as
assumptions made by, and information currently available to, management pursuant
to "safe harbor" provisions of the Private  Securities  Litigation Reform Act of
1995.  The  Company's  actual  results  may differ  materially  from the results
anticipated in forward-looking statements due to a variety of factors, including
governmental  monetary and fiscal policies,  deposit levels,  loan demand,  loan
collateral values,  securities portfolio values,  interest rate risk management;
the effects of competition in the banking business from other commercial  banks,
thrifts,  mortgage  banking firms,  consumer finance  companies,  credit unions,
securities brokerage firms,  insurance  companies,  money market funds and other
financial  institutions  operating in the Company's  market area and  elsewhere,
including institutions  operating through the Internet,  changes in governmental
regulation relating to the banking industry,  including  regulations relating to
branching and acquisitions,  failure of assumptions underlying the establishment
of  reserves  for loan  losses,  including  the value of  collateral  underlying
delinquent  loans and other factors.  The Company cautions that such factors are
not  exclusive.  The Company does not  undertake  to update any  forward-looking
statement that may be made from time to time by, or on behalf of, the Company.





                                       15

<PAGE>



Overview

The Company was  incorporated on February 13, 1998, with the purpose of becoming
a bank  holding  company.  Prior  to 1999,  the  Company  and  Bank  were in the
development  stage.  The Bank  received  preliminary  approval  from the Federal
Deposit Insurance Corporation ("FDIC") on March 19, 1998 and final approval from
the DBF on December 23, 1998 to begin banking operations.  The Company is a bank
holding  company within the meaning of the Federal Bank Holding  Company Act and
the Georgia bank holding  company law. On January 4, 1999, the Company  acquired
all of the common stock of the Bank.  The Bank opened for business on January 4,
1999.  The Company's  plan of operations  consists  primarily of gaining  market
share in the Bank's primary market area of Oakwood, Georgia and Hall County.

As of December 31, 1998,  the Company had completed its stock  offering,  and on
January 4, 1999, the Company issued its stock. The Company  received  $8,783,000
from the stock  offering and incurred  expenses of $603,000 in  connection  with
issuing  stock,  obtaining  regulatory  approvals,   organizing  the  Bank,  and
preparing Bank policies and procedures.  All organization costs and pre- opening
expenses were expensed during 1998 in accordance with the accounting rules which
require  immediate  recognition of such costs.  The Bank began  organizing their
staff in the third and fourth quarters of 1998.

Financial Condition at December 31, 1999 and 1998

Following is a summary of the Company's balance sheets for the years indicated:

<TABLE>
<CAPTION>
                                                         December 31,
                                                  1999                  1998
                                                  --------------------------
                                                           (dollars in
                                                           thousands)
<S>                                               <C>                <C>

Cash and due from banks                           $       1,518      $     4
Federal funds sold                                        1,205        7,977
Securities                                                7,018            -
Loans, net                                               17,241            -
Premises and equipment                                    2,254          230
Other assets                                                 218          225
                                                  -------------      -------
                                                  $      29,454      $ 8,436
                                                  =============      =======

Total deposits                                    $      21,744      $     -
Other liabilities                                           295          241
Stockholders' equity                                      7,415        8,195
                                                  =============      =======

                                                  $      29,454      $ 8,436
                                                  =============      =======
</TABLE>



                                       16

<PAGE>



Financial Condition at December 31, 1999 and 1998

As of December 31, 1999, the Company had total assets of $29.5 million  compared
to $8.4  million for 1998.  The Company has obtained  $21.7  million in deposits
since the  commencement  of operations on January 4, 1999. The Company  invested
the proceeds from its stock sale and deposit  growth in Federal funds sold ($1.2
million),  securities  ($7  million),  loans ($17.5  million),  and premises and
equipment ($2.3 million).  The Company expects that loan and deposit growth will
continue to be significant during 2000. This expected growth is not uncommon for
de novo banks.

The  Company's  security  portfolio,  consisting of U.S.  government  and agency
securities,  amounts to $7.0  million at December 31,  1999.  Unrealized  losses
related to these securities  totaled  $206,067 at December 31, 1999.  Management
has not specifically identified any securities for sale in future periods which,
if so designated, would require a charge to operations if the market value would
not be reasonably expected to recover prior to the time of sale.

The  Company  has 41% of its loan  portfolio  collateralized  primarily  by real
estate  located  in the  Company's  primary  market  area  of  Hall  County  and
surrounding  counties.  The  Company's  real estate  mortgage  and  construction
portfolio  consists of loans  collateralized by one- to four-family  residential
properties (34%) and construction loans to build one- to four-family residential
properties (65%), and nonresidential  properties  consisting  primarily of small
business commercial properties (1%).

The specific  economic  and credit  risks  associated  with the  Company's  loan
portfolio,  especially the real estate portfolio,  include,  but are not limited
to, a general downturn in the economy which could affect  unemployment  rates in
the Company's market area,  general real estate market  deterioration,  interest
rate  fluctuations,  deteriorated  or  non-existing  collateral,  title defects,
inaccurate  appraisals,  financial  deterioration  of borrowers,  fraud, and any
violation  of banking  protection  laws.  Construction  lending can also present
other specific risks to the lender such as whether  developers can find builders
to buy lots for home construction, whether the builders can obtain financing for
the construction, whether the builders can sell the home to a buyer, and whether
the buyer can obtain  permanent  financing.  Currently,  real estate  values and
employment trends in the Company's market area are stable with no indications of
a significant downturn in the general economy.

The  Company  attempts to reduce  these  economic  and credit  risks not only by
adherence  to  loan  to  value   guidelines,   but  also  by  investigating  the
creditworthiness  of  the  borrower  and  monitoring  the  borrower's  financial
position.  Also, the Company  establishes and  periodically  reviews its lending
policies and procedures. Banking regulations limit exposure by prohibiting loan

                                       17

<PAGE>



relationships that exceed the lesser of 25% of the Bank's statutory
capital or net assets.

Liquidity and Capital Resources

The purpose of liquidity  management is to ensure that there are sufficient cash
flows to satisfy demands for credit, deposit withdrawals, and other needs of the
Company. Traditional sources of liquidity include asset maturities and growth in
core deposits.  A company may achieve its desired liquidity  objectives from the
management of assets and  liabilities  and through funds provided by operations.
Funds invested in short-term marketable  instruments and the continuous maturing
of other earning assets are sources of liquidity from the asset perspective. The
liability  base  provides  sources  of  liquidity  through  deposit  growth  and
accessibility to market sources of funds.

Scheduled  loan  payments  are a  relatively  stable  source of funds,  but loan
payoffs and deposit flows fluctuate significantly,  being influenced by interest
rates and general economic  conditions and competition.  The Company attempts to
price its deposits to meet its asset/liability  objectives consistent with local
market conditions.

The liquidity  and capital  resources of the Company are monitored on a periodic
basis  by  State  and  Federal  regulatory  authorities.   As  determined  under
guidelines  established by those regulatory authorities and internal policy, the
Company's liquidity is considered satisfactory.

At  December  31,  1999,  the  Company  had  loan  commitments   outstanding  of
$5,052,000.  Because these commitments generally have fixed expiration dates and
many will expire without being drawn upon, the total  commitment  amounts do not
necessarily  represent future cash requirements.  If needed, the Company has the
ability on a short- term basis to borrow and purchase  Federal  funds from other
financial institutions. At December 31, 1999, the Bank has arrangements with two
commercial banks for short-term advances of $3,000,000 in aggregate.

Stockholders' equity decreased for the year ended December 31, 1999 due to a net
loss   of   $573,000    combined   with   unrealized    losses   on   securities
available-for-sale of $206,000.

The primary  source of funds  available  to the  Company  will be the payment of
dividends by its subsidiary Bank.  Banking  regulations  limit the amount of the
dividends  that may be paid  without  prior  approval  of the Bank's  regulatory
agency.  Currently,  no dividends can be paid by the Bank to the Company without
regulatory approval.



                                       18

<PAGE>



At  December  31,  1999,  The  Company's  and the  Bank's  capital  ratios  were
considered  adequate  based on  regulatory  minimum  capital  requirements.  The
minimum capital  requirements  to be considered well  capitalized and the actual
capital  ratios for the  Company  and the Bank as of  December  31,  1999 are as
follows:

<TABLE>
<CAPTION>
                                                        Actual
                                                                    Regulatory
                                  Company         Bank             Requirements

<S>                               <C>            <C>               <C>

Leverage capital ratio            26.60%         25.95%               5.00%
Risk-based capital ratios:
         Tier 1 capital           34.81          33.97                6.00
         Total capital            36.02          35.18               10.00
</TABLE>


These ratios will decline as asset growth continues,  but are expected to remain
in excess of the regulatory minimum requirements.

During 1999, the Company  completed the  construction and furnishing of its main
office.  The total cost of the main office  including  furniture,  fixtures  and
equipment was approximately $2.3 million.  At December 31, 1999, the Company had
no material commitments for any other capital expenditures.

Management  believes that its  liquidity and capital  resources are adequate and
will meet its foreseeable short and long-term needs. Management anticipates that
it will have sufficient  funds available to meet current loan commitments and to
fund or  refinance,  on a timely  basis,  its  other  material  commitments  and
liabilities.

Except for expected growth common to a de novo bank,  management is not aware of
any  other  known  trends,  events or  uncertainties  that will have or that are
reasonably likely to have a material effect on its liquidity,  capital resources
or operations.  Management is also not aware of any current  recommendations  by
the regulatory  authorities which, if they were implemented,  would have such an
effect.

Year 2000

Based on a review of the  Bank's and the  Company's  business  since  January 1,
2000,  the Company has not  experienced  any  material  effects of the Year 2000
problem.  Although  the Company  has not been  informed  of any  material  risks
associated  with the Year  2000  problem  from  third  parties,  there can be no
assurance that the Company will not be impacted in the future.  The Company will
continuously  monitor its business  applications  and maintain  contact with its
third party vendors and key business partners to resolve Year 2000 problems that
may arise in the future.

                                       19

<PAGE>



Effects of Inflation

The impact of  inflation  on banks  differs  from its  impact on non-  financial
institutions.  Banks,  as  financial  intermediaries,   have  assets  which  are
primarily  monetary  in nature  and which  tend to  fluctuate  in  concert  with
inflation.  A bank can reduce the impact of  inflation if it can manage its rate
sensitivity  gap. This gap  represents  the  difference  between rate  sensitive
assets and rate sensitive liabilities.  The Company, through its asset-liability
committee,  attempts to structure the assets and liabilities and manage the rate
sensitivity gap, thereby seeking to minimize the potential effects of inflation.
For  information  on the  management  of the Company's  interest rate  sensitive
assets and liabilities, see the "Asset/Liability Management" section.

Results of Operations For The Years Ended December 31, 1999 and
1998

Following is a summary of the Company's operations for the periods indicated.

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                              1999                         1998
                                              ---------------------------------
                                                     (dollars in thousands)
<S>                                           <C>                       <C>
Interest income                               $        1,579            $   122
Interest expense                                         622                  0
Net interest income                                      957                 82
Provision for loan losses                                265                  -
Other income                                              79                  -
Other expenses                                         1,344                500
Pretax loss                                             (573)              (418)
Loss before cumulative effect of
a change in accounting principle                        (573)              (418)
Cumulative effect of a change in
   accounting principle                                    -                 63
Net loss                                                (573)              (481)
</TABLE>

The Bank commenced its operations on January 4, 1999.  Prior to January 4, 1999,
the Company was engaged in activities involving the formation of the Company and
Bank, selling its common stock, and obtaining necessary  approvals.  The Company
incurred  operating losses totaling  $537,000 during its  organizational  period
($56,000  in  1997  and   $481,000  in  1998).   The  Company   incurred   total
organizational and stock issue costs of $115,000,  of which $63,000 was expensed
upon  adoption of SOP 98-5 for the year ended  December 31,  1998.  For the year
ended December 31, 1999, the Company incurred operating losses of $573,000.

As  discussed  earlier,  operations  during  1998  consisted  primarily  of  the
Company's  organizers  engaging  in  organizational  and  preopening  activities
necessary to obtain regulatory approvals and to prepare

                                       20

<PAGE>



to commence business as a bank. Therefore,  operational comparisons between 1999
and 1998 would not be meaningful and are not presented.
Net Interest Income

The Company's results of operations are determined by its ability to effectively
manage interest  income and expense,  to minimize loan and security  losses,  to
generate non-interest income, and to control operating expenses.  Since interest
rates are determined by market forces and economic conditions beyond the control
of the  Company,  the  Company's  ability to  generate  net  interest  income is
dependent upon its ability to obtain an adequate net interest spread between the
rate   paid  on   interest-bearing   liabilities   and  the   rate   earned   on
interest-earning assets.

The net yield on average  interest-earning assets for the period from January 4,
1999 to December 31, 1999 was 4.58%. The rate earned on average interest-earning
assets and the rate paid on average  interest-bearing  liabilities was 7.56% and
4.59%, respectively, which provided a net spread of 2.97%.

Provision for Loan Losses

The provision for loan losses was $265,000 in 1999. The amount  provided was due
primarily  to  the  growth  of  the  loan  portfolio.  Based  upon  management's
evaluation  of the loan  portfolio,  management  believes the allowance for loan
losses is adequate to absorb  potential losses on existing loans that may become
uncollectible.  This evaluation considers past due, classified loans, underlying
collateral  values,  and  current  economic  conditions  which  may  affect  the
borrowers'  ability  to  repay.  As  of  December  31,  1999,  the  Company  had
nonperforming  loans of $4,500. The allowance for loan losses as a percentage of
total loans was 1.51%.

Other Income

Other operating income consists of service charges on deposit accounts and other
miscellaneous  fees.  Service charges on deposit accounts  accounted for 79%, or
$62,000 of the total other income of $79,000.

Other Expenses

Other operating  expense consists of salaries and employee  benefits,  equipment
and occupancy expenses, and other operating expenses, or $567,000,  $250,000 and
$527,000,  respectively.  Salaries and employee  benefits  accounted  for 42% of
total  other  expenses  which  is  typical  of  financial  institutions.   Other
significant  expenses included in other operating expenses include  advertising,
data

                                       21

<PAGE>



processing and office supplies, or $112,000, $81,000 and $51,000,
respectively.

Income Tax

The Company recognized no income tax expense due to accumulated operating losses
of $1,110,000.

Asset/Liability Management

It is the  Company's  objective to manage  assets and  liabilities  to provide a
satisfactory,   consistent  level  of  profitability  within  the  framework  of
established cash, loan,  investment,  borrowing,  and capital policies.  Certain
officers  are  charged  with the  responsibility  for  monitoring  policies  and
procedures   that  are  designed  to  ensure   acceptable   composition  of  the
asset/liability mix. It is the overall philosophy of management to support asset
growth primarily through growth of core deposits of all categories made by local
individuals, partnerships, and corporations.

The Company's  asset/liability mix is monitored on a regular basis with a report
reflecting  the  interest  rate-sensitive  assets  and  interest  rate-sensitive
liabilities  being  prepared and presented to the Board of Directors of the Bank
on a  monthly  basis.  The  objective  of this  policy  is to  monitor  interest
rate-sensitive   assets  and  liabilities  so  as  to  minimize  the  impact  of
substantial  movements in interest  rates on earnings.  An asset or liability is
considered to be interest rate-sensitive if it will reprice or mature within the
time period  analyzed,  usually one year or less. The interest  rate-sensitivity
gap is the difference between the  interest-earning  assets and interest-bearing
liabilities  scheduled to mature or reprice  within such time  period.  A gap is
considered  positive when the amount of interest  rate-sensitive  assets exceeds
the amount of interest rate-sensitive  liabilities. A gap is considered negative
when the amount of interest  rate-sensitive  liabilities  exceeds  the  interest
rate-sensitive  assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest  income,  while a positive gap would
tend to result in an  increase  in net  interest  income.  Conversely,  during a
period of falling  interest  rates,  a  negative  gap would tend to result in an
increase in net  interest  income,  while a positive gap would tend to adversely
affect net interest income. If the Company's assets and liabilities were equally
flexible  and moved  concurrently,  the impact of any  increase  or  decrease in
interest rates on net interest income would be minimal.

A simple interest rate "gap" analysis by itself may not be an accurate indicator
of how net  interest  income  will be  affected  by changes in  interest  rates.
Accordingly,  the Company also evaluates how the repayment of particular  assets
and liabilities is impacted by changes in interest rates. Income associated with
interest-earning assets and costs associated with interest-bearing

                                       22

<PAGE>



liabilities  may not be  affected  uniformly  by changes in interest  rates.  In
addition,  the  magnitude  and duration of changes in interest  rates may have a
significant impact on net interest income. For example,  although certain assets
and  liabilities may have similar  maturities or periods of repricing,  they may
react in different  degrees to changes in market interest rates.  Interest rates
on certain  types of assets and  liabilities  fluctuate in advance of changes in
general market rates, while interest rates on other types may lag behind changes
in general market rates. In addition,  certain  assets,  such as adjustable rate
mortgage loans, have features  (generally referred to as "interest rate caps and
floors") which limit changes in interest rates.  Prepayment and early withdrawal
levels also could deviate  significantly  from those assumed in calculating  the
interest rate gap. The ability of many borrowers to service their debts also may
decrease during periods of rising interest rates.

Changes in interest  rates also affect The  Company's  liquidity  position.  The
Company  currently  prices  deposits  in  response  to  market  rates  and it is
management's  intention to continue  this policy.  If deposits are not priced in
response to market rates, a loss of deposits could occur which would  negatively
affect the Company's liquidity position.

At  December   31,   1999,   the   Company's   cumulative   one  year   interest
rate-sensitivity  gap ratio was 97%. The Company's targeted ratio is 80% to 120%
in this  time  horizon.  This  indicates  that  the  Company's  interest-bearing
liabilities  will reprice during this period at a rate faster than the Company's
interest-earning assets. The Company is within its targeted parameters. However,
as the Company continues to invest its excess liquidity,  currently  invested in
Federal funds sold and securities,  the gap ratio may fluctuate further from the
current ratio.  A gap ratio in the Company's  current range is not unusual for a
de novo bank due to the volume of liquid funds. It is management's  intention to
invest  excess  funds in loans,  which  typically  yield higher  returns.  It is
management's  belief that as long as the Company pays the prevailing market rate
on these type deposits, the Company's liquidity,  while not assured, will not be
negatively affected.

The  following  table  sets  forth  the  distribution  of the  repricing  of the
Company's  interest-earning  assets  and  interest-bearing   liabilities  as  of
December 31, 1999, the interest  rate-sensitivity  gap, the cumulative  interest
rate-sensitivity gap, the interest rate-sensitivity gap ratio and the cumulative
interest rate- sensitivity gap ratio. The table also sets forth the time periods
in which  earning  assets and  interest-bearing  liabilities  will mature or may
reprice in accordance with their contractual terms.  However, the table does not
necessarily  indicate the impact of general  interest rate  movements on the net
interest  margin  since the  repricing  of  various  categories  of  assets  and
liabilities is subject to competitive pressures and the needs of the Company's

                                       23

<PAGE>



customers.  In addition,  various assets and liabilities  indicated as repricing
within the same  period may in fact,  reprice at  different  times  within  such
period and at different rates.
<TABLE>
<CAPTION>

                                        After       After
                                        Three        One
                                        Months     Year but
                             Within      but        Within   After
                             Three      Within       Five    Five
                             Months    One Year     Years    Years      Total
                                            (dollars in thousands)
<S>                         <C>       <C>         <C>       <C>        <C>
Interest-earning assets:
     Federal funds sold      $ 1,205   $   --      $   --    $   --     $ 1,205
     Securities                1,213    2,418       1,467       1,920     7,018
     Loans                     7,373    4,315       1,439       4,379    17,506
                            ---------------------------------------------------

                               9,791    6,733       2,906       6,299    25,729
                            ---------------------------------------------------

Interest-bearing
  liabilities:
     Interest-bearing
     demand deposits           4,459       --          --         --      4,459
     Savings                     418       --          --         --        418
     Time deposits             7,663    4,458         979        680     13,780
                              -------------------------------------------------

                              12,540    4,458         979        680     18,657
                              -------------------------------------------------

Interest rate sensitivity
  gap                        $(2,749)   $2,275     $1,927     $5,619    $ 7,072
                             ========   ======     ======     ======    =======
Cumulative interest rate
  sensitivity gap            $(2,749)   $(474)     $1,453     $7,072
                             ========   ======     ======     ======
Interest rate sensitivity
  gap ratio                     0.78      1.51       2.97       9.26
                             =======    ======     ======     ======
Cumulative interest rate
  sensitivity gap ratio         0.78      0.97       1.08       1.38
                                ====      ====       ====       ====
</TABLE>



                                       24

<PAGE>



               SELECTED FINANCIAL INFORMATION AND STATISTICAL DATA

The tables and  schedules on the following  pages set forth certain  significant
financial  information and statistical data with respect to: the distribution of
assets,  liabilities and stockholders' equity of the Company, the interest rates
experienced  by the  Company;  the security  portfolio of the Company;  the loan
portfolio  of  the  Company,   including   types  of  loans,   maturities,   and
sensitivities  of  loans  to  changes  in  interest  rates  and  information  on
nonperforming  loans; summary of the loan loss experience and allowance for loan
losses of the Company; types of deposits of the Company and the return on equity
and assets for the Company.








                                       25

<PAGE>



                    Distribution of Assets, Liabilities, and
                              Stockholders' Equity:
                    Interest Rates and Interest Differentials

<TABLE>
<CAPTION>
                                                           1999
                                                    (Dollars in Thousands)
                                             Average       Income/     Yields/
                                            Balances(1)    Expense      Rates
                                            -----------    ----------   -------
     <S>                                    <C>            <C>          <C>

     Cash and due from banks                $ 1,046        $     -           -%
     Taxable securities                       4,135            239         5.70
     Unrealized losses on securities            (61)             -            -
     Federal funds sold                       7,822            389         4.97
     Loans (2)(3)                             8,882            951        10.71
     Allowance for loan losses                 (119)             -            -
     Other assets                             1,199              -            -
                                            -------        -------      -------
                                            $22,965
                                            =======

     Total interest-earning assets          $20,900        $1,579         7.56%
                                            =======        ------

     Noninterest-bearing demand             $ 1,842        $    -            -%
     Interest-bearing demand and savings      3,899           113          2.90
     Time                                     9,663           509          5.27
                                            -------        ------
                   Total deposits           $15,404             -             -
                                            -------
     Other liabilities                           86             -             -

     Stockholders' equity (4)                 7,475             -             -
                                            -------        ------

                                            $22,965

     Total interest-bearing liabilities     $13,562        $  622         4.59%
                                            =======        ------

     Net interest income                                   $  957
                                                                         ======
     Net interest spread                                                  2.97%
     Net yield on average interestning assets                             4.58%
</TABLE>
[FN]
(1)  Average balances were determined using the daily average balances.
(2)       Included nonaccrual loans with an average balance of $285 and unearned
          income of $8,800.
(3)  Interest  and fees on loans  includes  $144,000  of loan fee income for the
     year ended December 31, 1999.
(4)  Average  unrealized  losses  on  securities  available-for-sale  have  been
     included in stockholders' equity at $60,525.
</FN>
Rate and Volume Analysis

Because the Company commenced its banking  operations in 1999, the change in net
interest income from banking operations is all due to volume.  Therefore, a rate
and volume analysis table has not been presented.



                                       26

<PAGE>



                              Securities Portfolio

The  carrying  amounts  of  securities  at  December  31,  1999,  which  are all
classified as available-for-sale, are summarized as follows:

                                                       (dollars in thousands)

     U.S. Government and agency securities                    $7,018
                                                               =====

Maturities

The amounts of  securities  by category as of December 31, 1999 are shown in the
following table according to contractual  maturity  classifications (1) one year
or less, (2) after one year through five years, (3) after five years through ten
years and (4) after ten years.

<TABLE>
<CAPTION>

                                                         U.S. Government and
                                                                 Agency
                                                       Amount         Yield (1)
                                                        (dollars in thousands)
<S>                                                    <C>                <C>

Maturity:
   One year or less                                    $  1,458           5.18%
   After one year through five years                      4,833            5.88
   After five years through ten years                       727            7.03
   After ten years                                            -               -
                                                         ------
                                                       $  7,018           6.09%
                                                       ========
</TABLE>
[FN]
(1)  Yields were computed using coupon  interest,  adding discount  accretion or
     subtracting premium amortization,  as appropriate,  on a ratable basis over
     the life of each  security.  The weighted  average  yield for each maturity
     range was computed using the carrying value of each security in that range.
</FN>
                                       27

<PAGE>



                                 Loan Portfolio

Types of Loans

The amount of loans  outstanding at December 31, 1999 are shown in the following
table according to the type of loan.
<TABLE>
<CAPTION>

                                                             (dollars in
                                                              thousands)
     <S>                                                    <C>

     Commercial                                              $      5,870
     Real estate-construction                                       4,709
     Real estate-other (1)                                          2,557
     Consumer instalment loans and other                            4,370
                                                                   ------
                                                                   17,506
     Less allowance for loan losses                                 (265)
                   Net loans                                 $     17,241
                                                             ============
</TABLE>
[FN]
(1)  Real estate-other loans are net of $6,500 of unearned
income.
</FN>

Maturities and Sensitivities to Changes in Interest Rates

Total loans as of December 31, 1999 are shown in the following  table  according
to contractual maturity classifications (1) one year or less, (2) after one year
through five years, and (3) after five years.
<TABLE>
<CAPTION>
                                                     (dollars in thousands)
     <S>                                             <C>
     Commercial
          One year or less                              $       3,071
          After one year through five years                     2,799
          After five years                                          -
                                                        -------------
                                                                5,870
     Construction
          One year or less                                      4,447
          After one year through five years                       262
          After five years                                          -
                                                        -------------
                                                                4,709
     Other
          One year or less                                      3,568
          After one year through five years                     3,327
          After five years                                         32
                                                        -------------
                                                                6,927
                                                        -------------

                                                        $      17,506
                                                        =============
</TABLE>

The  following  table  summarizes  loans at December 31, 1999 with the due dates
after one year which have  predetermined  and  floating or  adjustable  interest
rates.


                                       28

<PAGE>
<TABLE>
<CAPTION>

                                                       (dollars in thousands)
          <S>                                            <C>
          Predetermined interest rates                    $          5,819
          Floating or adjustable interest rates                        601
                                                          ----------------
                                                          $          6,420
                                                          ================
</TABLE>



                                       29

<PAGE>



Risk Elements

Information  with respect to  nonaccrual,  past due, and  restructured  loans at
December 31, 1999 is as follows:

<TABLE>
<CAPTION>
                                                            (dollars in
                                                             thousands)
    <S>                                                        <C>
     Nonaccrual loans                                          $5
     Loans contractually past due ninety days
       or more as to interest or principal
       payments and still accruing                              0
     Restructured loans                                         0
     Loans, now current about which there
       are serious doubts as to the ability
     of the borrower to comply with loan
     repayment terms                                            0
     Interest income that would have been
       recorded on nonaccrual and restructured
       loans under original terms                               0
     Interest income that was recorded
       on nonaccrual and restructured loans                     0
</TABLE>

It is the policy of the Company to  discontinue  the accrual of interest  income
when,  in the  opinion  of  management,  collection  of  such  interest  becomes
doubtful.  This status is accorded such interest when (1) there is a significant
deterioration  in the financial  condition of the borrower and full repayment of
principal and interest is not expected and (2) the principal or interest is more
than  ninety  days past due,  unless the loan is both well-  secured  and in the
process of collection.

Loans  classified for regulatory  purposes as loss,  doubtful,  substandard,  or
special  mention that have not been included in the table above do not represent
or result from trends or uncertainties which management  reasonably expects will
materially impact future operating  results,  liquidity,  or capital  resources.
These classified loans do not represent  material credits about which management
is aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms.



                                       30

<PAGE>



                         Summary of Loan Loss Experience

The following  table  summarizes  average loan balances for the year  determined
using the daily average  balances during the year;  changes in the allowance for
loan losses  arising from loans charged off and  recoveries on loans  previously
charged  off;  additions to the  allowance  which have been charged to operating
expense; and the ratio of net charge-offs during the period to average loans.

<TABLE>
<CAPTION>
                                                              Year Ended
                                                              December 31,
                                                                 1999
                                                              ------------
                                                              (dollars in
                                                               thousands)
<S>                                                              <C>
Average amount of loans outstanding                              $8,882
                                                                 ======

Balance of allowance for loan losses
at beginning of year                                             $    -
                                                                 ------
Loans charged off                                                     -
                                                                 ------

Recoveries of loans previously charged-off                            -
                                                                 ------

Net loan charge-offs during the year                                  -
                                                                 ------

Additions to allowance charged to operating
expense during year                                                 265
                                                                 ------

alance of allowance for loan losses
at end of year                                                   $  265
                                                                 ======

Ratio of net loans charged off during the
year to average loans outstanding                                    -%
                                                                 ======
</TABLE>

Allowance for Loan Losses

The  allowance  for  loan  losses  is  maintained  at a  level  that  is  deemed
appropriate  by management to adequately  cover all known and inherent  risks in
the loan  portfolio.  Management's  evaluation of the loan portfolio  includes a
periodic review of loan loss experience,  current economic  conditions which may
affect the borrower's ability to pay and the underlying  collateral value of the
loans.



                                       31

<PAGE>



As of December 31, 1999, management had made no allocations of its allowance for
loan  losses  to  specific  categories  of  loans.  Based on  management's  best
estimate,  the allocation of the allowance for loan losses to types of loans, as
of December 31, 1999, is as follows:
<TABLE>
<CAPTION>
                                                                  Percent of
                                                                   loans in
                                                                 each category
                                             Amount              to total loans
                                                  (dollars in thousands)
<S>                                          <C>                   <C>
Commercial                                   $        89           33.53%
Real estate - construction                            71           26.90
Real estate - other                                   39           14.61
Consumer instalment
     loans and other                                  66           24.96
                                             -----------         -------
                                             $       265          100.00%
                                             ===========         =======
</TABLE>

                                    Deposits

Average  amounts of deposits and average  rates paid  thereon,  classified as to
noninterest-bearing demand deposits,  interest- bearing demand deposits, savings
deposits, and time deposits is presented below.(1)

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                           1999
                                                  Amount             Percent
                                                    (dollars in thousands)
     <S>                                          <C>                <C>
      Noninterest-bearing
      demand deposits                             $ 1,842              --%
     Interest-bearing demand
      and savings deposits                          3,899            2.90
     Time deposits                                  9,663            5.27
                                                  -------
              Total deposits                      $15,404
                                                  =======
</TABLE>
[FN]
(1)  Average balances were determined using the daily average balances.
</FN>













                                       32

<PAGE>



The  amounts of time  certificates  of deposit  issued in amounts of $100,000 or
more as of December 31, 1999 are shown below by category, which is based on time
remaining until maturity of (1) three months or less, (2) over three through six
months, (3) over six through twelve months, and (4) over twelve months.

<TABLE>
<CAPTION>
                                                         (dollars in thousands)

     <S>                                                       <C>
     Three months or less                                      $3,055
     Over three months through six months                         922
     Over six months through twelve months                        421
     Over twelve months                                           406
                                                               ------
              Total                                            $4,804
                                                               ======
</TABLE>



                           Return on Assets and Equity

     The  following  rate of  return  information  for  the  year  indicated  is
presented below.

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                             1999

     <S>                                                    <C>
     Return on assets (1)                                   (2.50)%
     Return on equity (2)                                   (7.67)
     Dividend payout ratio (3)                                N/A
     Equity to assets ratio (4)                             32.55

<FN>
(1)  Net loss divided by average total assets.
(2)  Net loss divided by average equity.
(3)  Dividends declared per share of common stock divided by net loss per share.
(4)  Average equity divided by average total assets.
</FN>
</TABLE>

ITEM 7.           FINANCIAL STATEMENTS

The consolidated  financial statements,  notes thereto and independent auditors'
report thereon are attached  hereto as Exhibit 13.1 and  incorporated  herein by
reference.

ITEM 8.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE

There  are  no  disagreements  with  accountants  on  accounting  and  financial
disclosure.





                                       33

<PAGE>



                                    PART III

ITEM 9.           DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
                  PERSONS

The following  table sets forth the name of each director and Executive  Officer
of the  Company,  his or her age,  and a brief  description  of their  principal
occupation  and business  experience  for the  preceding  five years.  Except as
otherwise indicated, each director has been or was engaged in his or her present
or last  occupation,  in the same or similar  position for more than five years.
Listed below are the  directors  and  executive  officers of the  Company.  Each
director  has served as a director of the  Company  since the  formation  of the
Company on February 13, 1998, except C. Talmadge Garrison who was elected to the
Board of Directors of the Company and the Board of Directors of the Bank on July
9, 1998.  The  Company's  Bylaws  provide that the Board of Directors is divided
into three classes, with each class being as nearly equal in number as possible,
and the directors  serve for  staggered  three-year  terms.  The present term of
office of each  director  in Class One will  expire at the  annual  shareholders
meeting of the Company to be held in April,  2002, the present term of office of
each director in Class Two will expire at the annual shareholders meeting of the
Company  to be held on May 17,  2000;  and the  present  term of  office of each
director in Class Three will  expire at the annual  shareholders  meeting of the
Company to be held in April, 2001. These persons will also serve as directors of
the Bank for the same staggered  terms. The Class in which each director belongs
is indicated  below.  The effect of the Company's  having a classified  Board of
Directors is that only  approximately  one-third of the members of the Board are
elected  each year,  which  effectively  requires  two annual  meetings  for the
Company's  shareholders  to  change a  majority  of the  members  of the  Board.
Executive  Officers of the Company and the Bank who serve at the pleasure of the
Board of  Directors of the Company and the Bank,  respectively,  will be elected
annually by the respective Boards of Directors.


Name [Class]                       Age      Principal Occupation

Gary H. Anderson                    48      Director; Class 3.  Mr. Anderson is
                                            President and C.E.O. of the Company
                                            and holds the same positions with
                                            the Bank.  He has been a resident of
                                            Oakwood, Hall County, Georgia since
                                            1963.  Mr. Anderson was born in
                                            Clarkesville, Georgia in 1951.  Mr.
                                            Anderson has over 23 years banking
                                            experience in Hall County, Georgia.
                                            Mr. Anderson served as City Vice-
                                            President for SunTrust Bank of
                                            Northeast Georgia, Gainesville,
                                            Georgia from 1981 through 1996.  Mr.
                                            Anderson is a graduate of
                                            Gainesville College and C&S
                                            Commercial Lending School.  Mr.
                                            Anderson has also attended the
                                            Georgia Banking School at the
                                            University of Georgia.  He is a
                                            member of the Oakwood Rotary Club,
                                            Councilman of the City of Oakwood,
                                            and a member of the Greater Hall
                                            Chamber of Commerce.  Mr. Anderson
                                            has previously served on many civic,
                                            social and community organizations,
                                            including Hall County Boys Club
                                            Board of Directors, Gainesville
                                            College Foundation, United Way of
                                            Hall County, Oakwood Development
                                            Authority.

Lowell S. (Casey)
 Cagle                             34       Director; Class 3.  Mr. Cagle is a
                                            native of Hall County, Georgia, a
                                            seventh generation resident.  Mr.
                                            Cagle graduated from Johnson High
                                            School and attended Gainesville
                                            College and Georgia Southern
                                            University.  A self-employed
                                            businessman, Mr. Cagle is President
                                            and co-owner of Strateia Group
                                            Atlanta, Inc., a management and
                                            business consulting firm, which he
                                            co-founded in July, 1996.  He is
                                            also co-owner of Jean's Bridal and
                                            Tux of Class, which he has operated
                                            for at least the last five years.
                                            Mr. Cagle is a member of Westside
                                            Baptist Church, Gainesville,
                                            Georgia.  Since 1994, Mr. Cagle has
                                            been a Georgia State Senator for the
                                            49th District, which includes Hall
                                            County and portions of Forsyth
                                            County.

Earl C. Gilleland                   54      Director; Class 2.  Mr. Gilleland is
                                            a native of Hall County, having
                                            lived his entire life in South Hall
                                            County.  His entire business career
                                            has been with Gilleland Concrete
                                            Company and in 1968 he became sole
                                            owner and President of the company.

                                       34

<PAGE>



                                            In 1997, Mr. Gilleland sold
                                            Gilleland Concrete to a Florida
                                            company, and he remains as manager
                                            of the local company.  He is a
                                            member of Poplar Springs Baptist
                                            Church.

A. Terry Hayes                      46      Director; Class 2.  Mr. Hayes has
                                            been a resident of Jackson County,
                                            Georgia for over 12 years.  Mr.
                                            Hayes was born in DeKalb County.  He
                                            is Manager of Hayes Chrysler-
                                            Plymouth-Dodge-Jeep in Oakwood,
                                            Georgia.  Mr. Hayes has worked in
                                            the family business of Hayes
                                            Chrysler-Plymouth-Dodge-Jeep in
                                            Gwinnett County and Hall County for
                                            over 25 years.  Mr. Hayes is a
                                            member of the South Hall Rotary Club
                                            and the Georgia Cattlemen's
                                            Association.

Wm. David Merritt                   50      Director; Class 2.  Mr. Merritt is a
                                            life-long resident of Hall
                                            County, Georgia.  Mr. Merritt is
                                            President/Owner of Merritt
                                            Contracting, Inc. since 1982;
                                            President/Owner of Lanier Leasing,
                                            Inc. (leasing construction equipment
                                            and commercial properties);
                                            Owner/Operator of
                                            Paradise Springs Farm, Inc. (a
                                            cattle farm in Hall County).  Mr.
                                            Merritt is also Vice-President of
                                            Gilleland & Merritt, LLC, a real
                                            estate development company and
                                            developer of Windmill Subdivision
                                            near Clermont, Georgia.  Mr. Merritt
                                            is a member of the Georgia Utility
                                            Contractors Association and the
                                            Georgia Highway Contractors
                                            Association.  He is a member of the
                                            Greater Hall Chamber of Commerce.

Harold D. Nichols                   57      Director; Class 1.  Mr. Nichols is a
                                            38-year resident of Hall County,
                                            Georgia.  He has been the Engineered
                                            Products Sales Manager of
                                            Macklanburg-Duncan, Gainesville,
                                            Georgia since 1969.  He serves on
                                            the Hall County Parks and Leisure

                                       35

<PAGE>



                                            Services  Board  and is an  honorary
                                            deacon of Chestnut  Mountain Baptist
                                            Church.  He  is  also  a  member  of
                                            Gainesville  Masonic  Lodge #219 and
                                            is   actively   involved   in  youth
                                            activities in the local schools.

James E. Palmour III                63      Director; Class 3.  Mr. Palmour was
                                            born in and is a resident of
                                            Gainesville, Hall County, Georgia,
                                            and has been a resident for all but
                                            four years of his life.  He
                                            graduated from Gainesville High
                                            School, University of Georgia and
                                            Atlanta Law School.  Mr. Palmour has
                                            been an attorney at law since 1964
                                            and has practiced general law since
                                            that time with the exception of the
                                            period of 1976 through 1984 during
                                            which he was Judge of the Superior
                                            Court of the Northeastern Judicial
                                            Circuit.  Mr. Palmour's major field
                                            of law is government law and he is
                                            attorney for the City of
                                            Gainesville, Georgia, White County,
                                            Georgia, and the Barrow County
                                            Airport Authority.  He is a member
                                            of the Rotary Club of Gainesville,
                                            State Bar of Georgia, Gainesville-
                                            Northeastern Bar Association, and
                                            has previously served as a member of
                                            the Lanier Area Technical School
                                            Board.

Dr. Edward R. Quillian              44      Director; Class 1.  Dr. Quillian is
                                            a native of Hall County, Georgia.
                                            He graduated from the University of
                                            Georgia School of Veterinary
                                            Medicine in 1983.  Dr. Quillian was
                                            a partner in the Cumming Veterinary
                                            Clinic from 1983 to 1987.  He has
                                            been CEO/Owner of Quillian Family
                                            Pet Clinic in Oakwood, Georgia since
                                            1987.  He is a Trustee of the
                                            Gainesville College Foundation.  He
                                            is also a member of the American
                                            Animal Hospital Association, Georgia
                                            Veterinary Medical Association,
                                            American Veterinary Medical
                                            Association, and the Georgia Academy
                                            of Veterinary Practice.


                                       36

<PAGE>



M. Milton Robson                    57      Director; Class 1.  Mr. Robson has
                                            been a resident of Hall County,
                                            Georgia for over 50 years.  He has
                                            resided in south Hall County for
                                            over 25 years.  Mr. Robson founded
                                            Milton's Institutional Foods in
                                            1962, which he sold in 1995 to
                                            Progressive Food Services.  Mr.
                                            Robson is the owner of Mule Camp
                                            Springs, a commercial retail center,
                                            in Gainesville, Georgia and is the
                                            owner/developer of Robson Crossing
                                            Shopping Center in Oakwood, Georgia.
                                            He is Vice-President of Prime Pak
                                            Foods, Inc., a wholesale frozen meat
                                            distributor, which he founded in
                                            1975.

Donald W. Smith                     46      Director; Class 3.  Mr. Smith is a
                                            native of Hall County, Georgia.  He
                                            is a 1975 graduate of West Georgia
                                            College.  Mr. Smith is President and
                                            Owner of Arrow Auto Sales, and he
                                            has over 19 years experience in
                                            retail auto sales.  He is President
                                            of Arrow Mitsubishi in Gainesville,
                                            Georgia, and he also has served as
                                            President of Oakwood Arrow Auto
                                            Auction since 1990.  Mr. Smith is a
                                            past President and serves on the
                                            Board of Directors of the Georgia
                                            Automobile Dealers Association.  Mr.
                                            Smith is a member of the Gainesville
                                            Jaycees and the Greater Hall Chamber
                                            of Commerce.

C. Talmadge Garrison                67      Director; Class 2.  Mr. Garrison, a
                                            native of Hall County and a graduate
                                            of The University of Georgia, has
                                            been in the banking industry for
                                            over 33 years.  Prior to his recent
                                            retirement he was associated with
                                            First National Bank and First
                                            National Bancorp, Inc. of
                                            Gainesville, Georgia.  He is an
                                            honor graduate of the Bank
                                            Administration Institute held at the
                                            University of Wisconsin and has
                                            passed the Uniform Examination of
                                            Certified Public Accountants.  As a
                                            member of Lakewood Baptist Church he
                                            has served as a deacon and on the

                                       37

<PAGE>



                                            Board of Trustees.  Mr. Garrison has
                                            been a member of the Gainesville and
                                            Lakeside Civitan Clubs where he held
                                            numerous offices.

John Evans                         54       Mr. Evans serves as Treasurer, Chief
                                            Accounting Officer and Chief
                                            Financial Officer of the Company.
                                            He also serves as Senior Vice
                                            President/Chief Financial Officer of
                                            the Bank.  Mr. Evans was born in
                                            Maidenhead, England and was reared
                                            in Birmingham, Alabama.  He is a
                                            graduate of University of Alabama in
                                            Birmingham and has 21 years of
                                            banking experience.  Mr. Evans and
                                            his family first moved to Hall
                                            County in 1976.  He has served as
                                            Vice President and Auditor for
                                            Gainesville National Bank from 1976
                                            to 1984, as Vice President at the
                                            Bank of Hiawassee from 1984 to 1985,
                                            as President and CEO of Bank of
                                            Alabama from 1985 to 1987, and as
                                            Chief Financial Officer of Citizens
                                            Bank of Gianesville from 1988 to
                                            1994. Mr. Evans has attended several
                                            bank related schools and seminars
                                            including the Georgia Banking School
                                            at the University of Georgia and
                                            Bank Administration Institute's Bank
                                            Operations School at the University
                                            of Wisconsin.  Mr. Evans has been
                                            involved with Lions International
                                            since 1978 and currently serves as
                                            President of the Gainesville Lions
                                            Club.

Christopher D. England              42      Mr. England serves as Senior Vice
                                            President and Chief Lending Officer
                                            of the Bank.  Mr. England is a
                                            native of South Hall County, born in
                                            Gainesville in 1958. He has over 16
                                            years of banking and lending
                                            experience in Hall County, Georgia.
                                            Mr. England served as Vice
                                            President of Lanier National Bank,
                                            since February, 1992, prior to
                                            joining the Bank.   His lending
                                            experience includes both commercial
                                            and consumer loans.  Before joining
                                            Lanier National Bank, he was
                                            employed by The Citizens Bank,

                                       38

<PAGE>



                                            Gainesville,  Georgia,  from 1984 to
                                            1992.    He    progressed    through
                                            management  serving  initially  as a
                                            collector before being promoted into
                                            lending.  His last duties there were
                                            Vice President and Branch Manager of
                                            the Main  Office.  Mr.  England is a
                                            1980   graduate  of  Georgia   Tech,
                                            receiving  his  Bachelor  of Science
                                            degree. He is also a graduate of the
                                            C&S  Consumer  Lending  School,  the
                                            Georgia   Banker's   School  at  the
                                            University   of  Georgia,   and  the
                                            Graduate  School of  Banking  of the
                                            South   at  LSU.   His   civic   and
                                            community     involvement    include
                                            serving  or  having  served  on  the
                                            boards  of the  Gainesville  College
                                            Foundation,   the   Gainesville-Hall
                                            County Neighborhood  Revitalization,
                                            Inc.,  the  Gainesville-Hall  County
                                            Board  of   Realtors,   the   Greens
                                            Committee  of  Chicopee  Woods  Golf
                                            Course, and the Hall County March of
                                            Dimes.  He has also served as McEver
                                            Elementary  School PTO Treasurer and
                                            is a member of the Gainesville Lions
                                            Club.

There are no arrangements or  understandings  between the Company and any person
pursuant  to which  any of the  above  persons  have  been or will be  elected a
director.  There  are no  family  relations  between  any of  the  directors  or
executive  officers.  No director is a director of another  bank or bank holding
company.  James E. Palmour,  III provided  legal  services to the Company during
1999, and it is anticipated he will provide legal services to the Company during
2000.


ITEM 10.          EXECUTIVE COMPENSATION

Executive Compensation

The Company does not  separately  compensate  any of its  directors or executive
officers,  except for executive  officers that were to serve also as officers of
the Bank. After the Bank commenced operations,  the Company no longer separately
compensated   such  executive   officers.   The  following  sets  forth  certain
information concerning the compensation of the Company's chief executive officer
during fiscal years 1999 and 1998. No other  executive  officer  received annual
compensation in excess of $100,000.


                                       39

<PAGE>



                           Summary Compensation Table

                               Annual Compensation

<TABLE>
<CAPTION>

                                                          Long Term
                                                        Compensation
                                                           Awards
                                                       ___________________

Name and                                     Other Annual    Securities     All Other
Principal   Fiscal                           Compensation    Underlying    Compensation
Position     Year    Salary ($)  Bonus ($)      ($)          Options (#)       ($)
---------   ------  ----------   ---------   ------------    -----------   ------------
<S>         <C>     <C>          <C>         <C>             <C>           <C>
Gary H.
  Anderson  1999    105,000          0           --(1)            --         3175(2)
            1998    105,000          0           --(1)        15,000         3120(2)
</TABLE>
[FN]
(1)      Compensation  does not  include  any  perquisites  and  other  personal
         benefits which may be derived from  business-related  expenditures that
         in the  aggregate  do not  exceed  the  lesser of $50,000 or 10% of the
         total annual salary and bonus reported for such person.
(2)      The Company  provided Mr. Anderson with a $500,000 term life insurance
          policy;  the premium paid by the Company in 1999 was $3175 and in 1998
          was  $3,120.  In  addition,  pursuant  to  Mr.  Anderson's  employment
          agreement, Mr. Anderson will be entitled to severance pay equal to one
          month's  pay for  each  year  employed  by the  Bank in the  event  of
          termination of his employment. </FN>

    Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
    ------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                      Number of
                                                      Securities     Value of
                                                      Underlying    Unexercised
                                                      Unexercised  In-the-Money
                                                      Options at    Options at
                                                      FY-End(#)      FY-End($)
                  Shares Acquired                     Exercisable/  Exercisable/
Name              on Exercise (#)  Value Realized($)  Unexercisable Unexercisable
<S>               <C>              <C>                <C>           <C>
Gary H. Anderson         0                -             15,000/0    75,000(1)/-
President and
Chief Executive
Officer
</TABLE>
[FN]
(1)  Based on estimated price of $15.00 per share, which is the price paid in
     recent private sales known to the Company.
</FN>


Employment Agreement

         Gary H. Anderson has an employment  agreement  with the Company and the
Bank  under  which he serves as  President  and Chief  Executive  Officer of the
Company and of the Bank. The employment  agreement  provides for an initial term
of three years and can be  extended  annually by the Company and the Bank at the
end of each year of the term for an additional  year, so that the remaining term
shall

                                       40
<PAGE>



continue to be three years.  Mr.  Anderson is paid an annual salary of $105,000.
Once the Bank begins operations he will also be entitled to certain  performance
bonuses. The criteria for earning performance bonuses will be established by the
Board of Directors.

         Under Mr. Anderson's employment agreement, he also has been granted, at
no cost to him for the option  grant,  the option to purchase  15,000  shares of
Common  Stock of the  Company at the price of the lesser of $10.00 or book value
of the stock during the first five (5) years of operation of the Bank.

         Mr.  Anderson also receives health  insurance with dependents  coverage
and disability  insurance paid in full by the Bank. The Company maintains a term
life insurance policy on Mr. Anderson providing for death benefits in the amount
of  $500,000  payable to the  Company  and  $500,000  payable to Mr.  Anderson's
family.  He receives a mid-size  automobile  to be used  primarily  for business
purposes,  and the Bank pays operating,  maintenance and insurance  expenses for
the  automobile.  The Bank pays monthly  membership dues for Mr. Anderson at all
service organizations and professional associations.

         If the Company terminates Mr. Anderson's  employment,  the Company will
be  obligated  to pay him  severance  pay equal to one  year's  base  salary and
insurance  benefits.  If Mr. Anderson's  employment is terminated due to a sale,
merger or other  change of control of the Company or the Bank,  the Company will
be  obligated  to pay him  severance  pay equal to two  times his then  existing
annual base salary.  Furthermore,  the Company must remove any  restrictions  on
outstanding incentive awards so that all such awards vest immediately.

         In  addition,   Mr.  Anderson's   employment  agreement  provides  that
following termination of his employment with the Bank and for a period of twelve
months  thereafter  if  terminated  without cause and for a period of six months
thereafter if terminated for cause, Mr. Anderson may not: (i) be employed in the
banking  business  or any  related  field  thereto in  Oakwood,  Georgia or Hall
County, Georgia, (ii) solicit customers of the Bank for the purpose of providing
financial  services;  (ii) solicit  employees of the Bank for  employment;  (iv)
furnish anyone or use any list of customers of the Bank for banking purposes; or
(v) furnish,  use or divulge to anyone any information  acquired by him from the
Bank relating to the Bank's methods of doing business.

     Mr. Anderson also receives other  employment  benefits under his employment
agreement  with  the  Company  and the  Bank as  spelled  out in his  employment
agreement.

Director Compensation

         The Company and the Bank presently do not compensate any of
their directors for their services as directors.  The directors of

                                       41

<PAGE>



the Company and the Bank  presently  do not  receive a fee for  attending  Board
meetings.

ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT

                             PRINCIPAL SHAREHOLDERS

         The following table sets forth certain information regarding the shares
of  voting  common  stock  of the  Company,  which  is the  only  class of stock
outstanding,  beneficially  owned as of March 15,  2000,(i)  by each  person who
beneficially owns more than 5% of shares of common stock of the Company, (ii) by
each of the Company's  directors and named  executive  officers and (iii) by all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>

                                                Amount and
                                                Nature of
Name and Address                                Beneficial      Percentage
of Beneficial Owner                             Ownership       Ownership
<S>                                             <C>             <C>
Gary H. Anderson                                21,010(1)       2.35%(2)
Director/President
and C.E.O.
4006 Covey Trail
Oakwood, GA  30566

Lowell S. (Casey)                                5,000           .57%
  Cagle
Director/Chairman
4615 Hunters Court
Gainesville, GA  30507

Earl C. Gilleland                               40,000          4.55%
Director
3997 Sloan Mill Road
Gainesville, GA  30507

A. Terry Hayes                                   5,200(3)        .59%
Director
Highway 332
P. O. Box 357
Hoschton, GA  30548

Wm. David Merritt                               20,000(4)        2.28%
Director
6620 Stringer Road
Clermont, GA  30527



                                       42

<PAGE>



Harold D. Nichols                                2,000            .23%
Director
4431 Benefield Road
Braselton, GA  30517

James E. Palmour III                             6,500(5)         .74%
Director/Secretary
255 Sorrento Circle, N.W.
Gainesville, GA  30506

Dr. Edward R. Quillian                           4,200(6)         .49%
Director
4207 Bob White Lane
Oakwood, GA  30566

M. Milton Robson                                36,200(7)        4.12%
Director
3509 Tanners Mill Circle
Gainesville, GA  30507

Donald W. Smith                                 10,500(8)        1.20%
Director/Vice Chairman
4129 Cherokee Trail
Gainesville, GA  30504

C. Talmadge Garrison                            12,000(9)        1.37%
4074 Cochran Road
Gainesville, GA  30506

John Evans                                         200(10)        .02%
Treasurer, C.A.O. and
  C.F.O.
3354 Clarks Bridge Road
Gainesville, GA  30506

Christopher D. England                           5,800(11)        .66%(12)
Senior Vice President and
  Chief Lending Officer
5506 Stone Trace
Gainesville, GA  30504

All current directors                          168,610          19.2%(2)(11)(12)
and executive officers as
a group (13 persons)
</TABLE>
[FN]
------------------------
(1)      Includes 450 shares owned jointly by Mr. Anderson and his spouse,  over
         which  shares  Mr.  Anderson  has  investment  and voting  power;  also
         includes 15,000 shares that are subject to options granted Mr. Anderson
         under his employment agreement.

(2)      In calculating percentage ownership, includes 15,000 shares
         subject to options granted Mr. Anderson in calculating total

                                       43

<PAGE>



         outstanding  stock of the  Company  and number of shares  beneficially
         owned by Mr. Anderson.
(3)      Includes  5,100  shares held in Mr.  Hayes' IRA and 100 shares held in
         the IRA of Mr.  Hayes'  wife,  over all of which  shares Mr. Hayes has
         investment and voting power.

(4)      Includes 800 shares held in Mr.  Merritt's  IRA and 800 shares held in
         the IRA of Mr.  Merritt's  wife,  over all of which shares Mr. Merritt
         has investment and voting power.

(5)      Includes 500 shares owned by Mr. Palmour's wife, over which shares Mr.
         Palmour has investment and voting power.

(6)      Includes  2,000  shares owned  jointly by Dr.  Quillian and his mother,
         2,000 shares owned jointly by Dr. Quillian and his wife, and 200 shares
         owned by Dr. Quillian as custodian for his minor children,  over all of
         which shares Dr. Quillian has investment and voting power.

(7)      Includes 1,200 shares owned by Mr. Robson's wife, over which shares Mr.
         Robson has investment and voting power. Does not include:  3,000 shares
         owned  by Mr.  Robson's  adult  children;  2,000  shares  owned  by Mr.
         Robson's  adult  son-in-law,  2,000 shares owned by Mr.  Robson's adult
         daughter-in-law,  4,500 shares owned by Mr. Robson's adult daughter, as
         custodian  for his minor  grandchildren,  and 4,500 shares owned by Mr.
         Robson's adult son as custodian for his minor  grandchildren,  over all
         of which shares Mr. Robson asserts no voting or investment power.

(8)      Includes  1,000 shares held in Mr. Smith's IRA, 200 shares owned by Mr.
         Smith's minor  daughter,  and 300 shares owned by Oakwood's  Arrow Auto
         Auction,  over all of which shares Mr. Smith has  investment and voting
         power.  Does  not  include  400  shares  owned  by  Mr.  Smith's  adult
         daughters, over which Mr. Smith asserts no voting or investment power.

(9)      Includes  2,000  shares  owned  jointly by Mr.  Garrison  and his adult
         children,  over which  shares Mr.  Garrison has  investment  and voting
         power.  Does not  include  500  shares  owned by Mr.  Garrison's  adult
         children, over which shares he asserts no voting or investment power.

(10)     Includes 200 shares held in Mr. Evans IRA, over which shares
         Mr. Evans has investment and voting power.

(11)     800 shares are held in Mr. England's IRA, over which shares Mr. England
         has  investment  and voting power;  also includes 5,000 shares that are
         subject to options granted Mr. England under his employment agreement.

(12)     In calculating percentage ownership, includes 5,000 shares
         subject to options granted Mr. England in calculating total

                                       44

<PAGE>



         outstanding stock of the Company and number of shares
         beneficially owned by Mr. England.
</FN>


ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain  executive  officers  and  directors  of the Company  and the Bank,  and
principal  shareholders of the Company and affiliates of such persons have, from
time to time, engaged in banking  transactions with the Bank. All loans or other
extensions of credit were made by the Bank to such  individuals  in the ordinary
course of business on substantially the same terms, including interest rates and
collateral,  as those  prevailing at the time for comparable  transactions  with
unaffiliated parties and are believed by management to not involve more than the
normal risk of collectibility or present other unfavorable features.



                                       45

<PAGE>



ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K

(a)      1.       Financial Statements/

         The consolidated  financial  statements,  notes thereto and independent
         auditors' report thereon,  are filed as Exhibit 99.1 hereto, and made a
         part hereof.

         2.       Exhibits

         Exhibit Numbers

                                                                 Sequential
                                                                 Page Number

         3.1*         Articles of Incorporation                      --
         3.2*         Bylaws                                         --
         10.1*+       Employment Contract between Gary H.
                      Anderson and the Company                       --
         13.1         Consolidated Financial Statements
                      of the Company                                 49
         21.1         Subsidiaries of the Company.  The
                      sole subsidiary of the Company is
                      Southern Heritage Bank,
                      Oakwood, Georgia, which is
                      wholly-owned by the Company                    --
         27.1         Financial Data Schedule                        78

------------------------
                  *Items 3.1 through  10.1,  as listed  above,  were  previously
                  filed by the  Company as  Exhibits  (with the same  respective
                  Exhibit   Numbers  as  indicated   herein)  to  the  Company's
                  Registration  Statement  (Registration  No. 33-47291) and such
                  documents are incorporated herein by reference.

                  +Item 10.1 is an employment-compensatory agreement.


!b)      Reports on Form 8-K

         No Reports on Form 8-K have been filed during the fourth quarter of the
         year ended December 31, 1999.


                                       46

<PAGE>



                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 29, 2000.


SOUTHERN HERITAGE BANCORP, INC.


By:      s/Gary H. Anderson
         Gary H. Anderson
         President and C.E.O.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities indicated on March 29, 2000.

  Signature                                            Title


s/Gary H. Anderson                          Director; President and C.E.O.
Gary H. Anderson


s/John Evans                                Treasurer; C.A.O. and C.F.O
John Evans


_________________________                   Director; Chairman
Lowell S. (Casey) Cagle


s/C. Talmadge Garrison                      Director
C. Talmadge Garrison


s/Earl C. Gilleland                         Director
Earl C. Gilleland


s/A. Terry Hayes                            Director
A. Terry Hayes


_________________________                   Director
Wm. David Merritt


_________________________                   Director
Harold D. Nichols

                       [SIGNATURES CONTINUED ON NEXT PAGE]



                                       47
<PAGE>



_________________________                   Director; Secretary
James E. Palmour III


s/Dr. Edward R. Quillian                    Director
Dr. Edward R. Quillian


s/M. Milton Robson                          Director
M. Milton Robson


s/Donald W. Smith                           Director
Donald W. Smith



Supplemental  Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Exchange Act by Non-reporting Issuers:

No proxy material with respect to an annual meeting of security holders for 2000
has  been or will be sent to  security  holders  of the  registrant,  since  the
registrant is not presently required to provide security holders proxy material.
The  registrant  does intend in April,  2000 to furnish its security  holders an
annual report to security holders  covering the  registrant's  fiscal year ended
December  31, 1999 and the notice of its annual  meeting of  shareholders  to be
held on May 17, 2000.





                                       48
<PAGE>




                                                                EXHIBIT 13.1




                         SOUTHERN HERITAGE BANCORP, INC.
                                 AND SUBSIDIARY

                         CONSOLIDATED FINANCIAL REPORT
                                DECEMBER 31, 1999












                                       49

<PAGE>





                         SOUTHERN HERITAGE BANCORP, INC.
                                 AND SUBSIDIARY

                          CONSOLIDATED FINANCIAL REPORT
                                DECEMBER 31, 1999


                                TABLE OF CONTENTS


                                                                      Page

INDEPENDENT AUDITOR'S REPORT.....................................      1

FINANCIAL STATEMENTS

     Consolidated balance sheets.................................      2
     Consolidated statements of operations.......................      3
     Consolidated statements of comprehensive loss...............      4
     Consolidated statements of stockholders' equity ............      5
     Consolidated statements of cash flows.......................      6
     Notes to consolidated financial statements..................   7-27



                                       50

<PAGE>











                        INDEPENDENT AUDITOR'S REPORT



To the Board of Directors
Southern Heritage Bancorp, Inc.
Oakwood, Georgia


                  We have audited the accompanying  consolidated  balance sheets
of Southern  Heritage  Bancorp,  Inc. and subsidiary as of December 31, 1999 and
1998, and the related consolidated statements of operations, comprehensive loss,
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 generally  accepted
auditing  standards.  Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit 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, 1999 and 1998,
and the  results  of their  operations  and their  cash flows for the years then
ended, in conformity with generally accepted accounting principles.

Atlanta, Georgia
February 2, 2000


                                       51

<PAGE>





                         SOUTHERN HERITAGE BANCORP, INC.
                                 AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                              Assets                1999              1998
                              ------
<S>                                               <C>                <C>
Cash and due from banks                           $ 1,517,588        $     3,640
Interest-bearing deposits                                  0           7,977,209
Federal funds sold                                  1,205,000                  0
Securities available-for-sale                       7,018,048                  0

Loans                                              17,506,204                  0
Less allowance for loan losses                        264,975                  0
                                                   ----------        -----------
          Loans, net                               17,241,229                  0

Building and equipment                              2,253,694            229,740
Other assets                                          218,128            225,042
                                                  -----------       ------------
          Total assets                            $29,453,687       $  8,435,631
                                                  ===========       ============

                   Liabilities and Stockholders' Equity

Deposits
    Noninterest-bearing demand                    $ 3,087,144       $          0
    Interest-bearing demand                         4,458,543                  0
    Savings                                           418,141                  0
    Time, $100,000 and over                         4,803,568                  0
    Other time                                      8,976,897                  0
                                                  -----------       ------------
           Total deposits                          21,744,293                  0
    Other liabilities                                 294,053            240,888
                                                  -----------       ------------
          Total liabilities                        22,038,346            240,888
                                                  -----------       ------------
Commitments and contingent liabilities

Stockholders' equity
    Common stock, par value $5; 1,000,000 shares
    authorized;
       878,344 issued and outstanding               4,391,720          4,391,720
    Capital surplus                                 4,339,985          4,339,985
    Accumulated deficit                            -1,110,297           -536,962
    Accumulated other comprehensive loss             -206,067                  0
                                                   ----------          ---------
          Total stockholders' equity                7,415,341          8,194,743
                                                   ----------          ---------
          Total liabilities and
           stockholders' equity                   $29,453,687         $8,435,631
                                                  ===========         ==========
</TABLE>

See Notes to Consolidated Financial Statements.
                                       52
<PAGE>

                         SOUTHERN HERITAGE BANCORP, INC.
                                 AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
                                                1999                    1998
<S>                                             <C>                  <C>
Interest income
    Loans                                       $  951,775           $         0
    Taxable securities                             239,063                     0
    Federal funds sold                             388,601                     0
    Other                                                0               122,226
                                                ----------           -----------
          Total interest income                  1,579,439               122,226
                                                ----------           -----------
Interest expense
    Deposits                                       622,203                     0
    Other borrowing                                      0                40,157
                                                ----------           -----------
          Total interest expense                   622,203                40,157
                                                ----------           -----------
          Net interest income                      957,236                82,069
Provision for loan losses                          264,975                     0
                                                ----------           -----------
          Net interest income after
          provision for loan losses                692,261                82,069
                                                ----------           -----------
Other income
    Service charges on deposit accounts             62,241                     0
    Other operating income                          16,930                     0
                                                ----------           -----------
          Total other income                        79,171                     0
                                                ----------           -----------
Other expenses
    Salaries and employee benefits                 566,929               342,913
    Equipment expenses                             105,599                13,977
    Occupancy expenses                             144,841               105,115
    Other operating expenses                       527,398                37,507
                                                ----------           -----------
          Total other expenses                   1,344,767               499,512

          Loss before income taxes and
          cumulative effect of a change
          in accounting principle                 -573,335              -417,443
Income tax expense                                       0                     0
                                                 ---------           -----------
          Loss before cumulative effect of a
            change in accounting principle        -573,335              -417,443
Cumulative effect of a change in accounting
principle                                                0               -63,175
                                                 ---------           -----------
                    Net loss                     $-573,335           $ - 480,618
                                                 =========           ===========
Basic and diluted losses per share before
   cumulative effect of a change in
   accounting principle                          $   -0.65           $     -0.48

Cumulative effect of a change in accounting
   principle                                          0.00                 -0.07
                                                 ---------           -----------
Basic and diluted losses per share               $   -0.65           $     -0.55
                                                 =========           ===========
</TABLE>

See Notes to Consolidated Financial Statements.

                                       53
<PAGE>

                         SOUTHERN HERITAGE BANCORP, INC.
                                 AND SUBSIDIARY

                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                     YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>

                                               1999                   1998
<S>                                           <C>                   <C>
Net loss                                      $    -573,335         $   -480,618

Other comprehensive loss:

        Unrealized holding losses on
        securities available-for-sale
        arising during period                      -206,067                    0
                                              -------------         ------------
Comprehensive loss                            $    -779,402         $   -480,618
                                              =============         ============
</TABLE>

See Notes to Consolidated Financial Statements.



                                       54

<PAGE>





                         SOUTHERN HERITAGE BANCORP, INC.
                                 AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                                         Accumulated
                                                                                          Other             Total
                                       Common Stock        Capital        Accumulated    Comprehensive     Stockholders'
                                     Shares    Par Value   Surplus          Deficit         Loss             Equity

<S>                                  <C>       <C>         <C>            <C>            <C>               <C>
Balance, December 31, 1997                 0           0           0        -56,344               0             -56,344
    Common stock                     878,344   4,391,720   4,391,720              0               0           8,783,440
      subscriptions
    Stock offering cost                    0           0     -51,735              0               0             -51,735
    Net loss                               0           0           0       -480,618               0            -480,618
                                     -------   ---------   ---------     ----------         --------          ---------
Balance, December 31, 1998           878,344  $4,391,720  $4,339,985    $  -536,962         $      0          $8,194,743
    Net loss                               0           0           0       -573,335                0            -573,335
    Other comprensive loss                 0           0           0              0         -206,067            -206,067
                                     -------  ----------  ----------    -----------         ---------         ----------
Balance, December 31, 1999           878,344  $4,391,720  $4,339,985    $-1,110,297         $-206,067         $7,415,341
                                     =======  ==========  ==========    ===========         =========         ==========
</TABLE>

See Notes to Consolidated
Financial Statements.


                                       55

<PAGE>





                         SOUTHERN HERITAGE BANCORP, INC.
                                 AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 1999 AND 1998

                                                 1999                   1998
OPERATING ACTIVITIES
    Net loss                                  $    -573,335          $  -480,618
    Adjustments to reconcile net loss
    to net cash used in operating
    activities:
        Depreciation                                 84,559                9,107
        Write-off of organization cost                    0               27,555
        Provision for loan losses                   264,975                    0
        Increase in interest receivable            -209,338                    0
        Increase in interest payable                 60,149                    0
        Other operating activities                  209,268               76,467
                                              -------------          -----------
              Net cash used in operating
               activities                          -163,722             -367,489
                                              -------------          -----------
INVESTING ACTIVITIES
    Purchases of securities available-
      for-sale                                   -7,240,729                    0
    Proceeds from maturities of securities
      available-for-sale                             16,614                    0
    Net increase in Federal funds sold           -1,205,000                    0
    Net increase in loans                       -17,506,204                    0
    Purchase of building and equipment           -2,108,513             -170,840
    Net (increase) decrease in interest-
      bearing deposits                            7,977,209           -7,977,209
                                               ------------          -----------
            Net cash used in investing
             activities                         -20,066,623           -8,148,049
                                               ------------          -----------
FINANCING ACTIVITIES
    Net increase in deposits                     21,744,293                    0
    Proceeds from line of credit                          0              622,539
    Repayment of line of credit                           0             -849,954
    Proceeds from common stock subscriptions              0            8,783,440
    Stock offering cost                                   0              -49,490
                                               ------------          -----------
            Net cash provided by financing
             activities                          21,744,293            8,506,535
                                               ------------          -----------
Net increase (decrease) in cash and due
  from banks                                      1,513,948               -9,003
Cash and due from banks at beginning of year          3,640               12,643
                                               ------------           ----------
Cash and due from banks at end of year         $  1,517,588         $      3,640
                                               ============         ============
SUPPLEMENTAL DISCLOSURES
    Cash paid for:
            Interest                           $    562,054         $     40,157

NONCASH TRANSACTION
    Unrealized losses on securities
       available-for-sale                      $   -206,067         $          0



See Notes to Consolidated Financial
Statements.

                                       56
<PAGE>

                         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.  The Bank  provides  a full range of banking  services  in its  primary
market area of Hall County and surrounding  counties.  The Company commenced its
banking  operations  on January 3, 1999.  Prior to the  commencement  of banking
operations,  the Company's activities consisted of organizational activities and
the sale of stock.

                  Basis of Presentation

The consolidated  financial  statements  include the accounts of the Company and
its  subsidiary.   Significant   intercompany   transactions  and  accounts  are
eliminated  in  consolidation.  The  financial  statements  for 1998 include the
accounts of the Company only.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the  reported  amounts  of assets  and  liabilities  and  disclosures  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 tax assets.

                  Cash and Due From Banks

Cash on hand,  cash items in process of  collection,  and amounts due from banks
are included in cash and due from banks.

The  Company  maintains  amounts  due from  banks  which,  at times,  may exceed
Federally  insured  limits.  The Company has not  experienced any losses in such
accounts.




                                       57

<PAGE>







                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

                  Securities

Securities  are  classified  based  on  management's  intention  on the  date of
purchase.  Securities  which  management  has the intent and  ability to hold to
maturity would be classified as held-to-maturity and recorded at amortized cost.
All other securities are classified as  available-for-sale  and recorded at fair
value with net unrealized gains and losses reported in other comprehensive loss.

Interest and dividends on  securities,  including  amortization  of premiums and
accretion of  discounts,  are included in interest  income.  Realized  gains and
losses  from  the  sale  of  securities  are   determined   using  the  specific
identification method.

                  Loans

Loans are reported at their outstanding  principal balances less unearned income
and the  allowance  for loan  losses.  Interest  income is accrued  based on the
principal balance outstanding.

Fees on loans and costs  incurred in  origination of loans are recognized at the
time the loan is placed on the  books.  Because  the net loan fees and costs are
not  significant  and the majority of loans have maturities of one year or less,
the results of operations  are not  materially  different than the results which
would be  obtained  by  accounting  for loan fees and costs in  accordance  with
generally accepted accounting principles.

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. When accrual of
interest is  discontinued,  all unpaid  accrued  interest is reversed.  Interest
income is subsequently recognized only to the extent cash payments are received.

                                       58

<PAGE>







                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

                  Loans (Continued)

The allowance for loan losses is maintained at a level that management  believes
to be adequate to absorb potential losses in the loan portfolio. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan  is  confirmed.  Subsequent  recoveries  are  credited  to  the  allowance.
Management's  determination  of the  adequacy  of the  allowance  is based on an
evaluation  of the  portfolio,  current  economic  conditions,  volume,  growth,
composition  of the loan  portfolio,  and other risks inherent in the portfolio.
This evaluation is inherently  subjective as it requires material estimates that
are susceptible to significant change including the amounts and timing of future
cash flows expected to be received on impaired  loans.  In addition,  regulatory
agencies,  as an integral part of their examination  process,  will periodically
review the Company's  allowance for loan losses,  and may require the Company to
record  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.  Individually identified impaired loans
are  measured  based  on the  present  value of  expected  payments,  using  the
contractual loan rate as the discount rate, the loan's  observable  market price
or, the fair value of the collateral,  if the loan is collateral  dependent.  If
the recorded  investment in the impaired loan exceeds the measure of fair value,
a valuation  allowance is  established  as a component of the allowance for loan
losses.  Changes to the  valuation  allowance are recorded as a component of the
provision for loan losses.

                  Building and Equipment

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

                                       59

<PAGE>







                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes

Income tax expense  consists of current and deferred  taxes.  Current income tax
provisions  approximate  taxes to be paid or refunded for the  applicable  year.
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 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.

Recognition  of deferred  tax  balance  sheet  amounts is based on  management's
belief  that it is more likely  than not that the tax  benefit  associated  with
certain  temporary  differences  will be  realized.  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.

As of December 31, 1999 and 1998,  the Company has not recognized any income tax
expense due to net operating  losses incurred since  inception.  These available
net operating losses will be used to offset future income for tax purposes.

The Company  and the Bank file a  consolidated  income tax  return.  Each entity
provides for income taxes based on its  contribution to income taxes  (benefits)
of the consolidated group.

                  Losses Per Share

Basic losses per share are computed by dividing net loss by the weighted average
number of  shares of common  stock  outstanding.  Diluted  losses  per share are
computed  by  dividing  net loss by the sum of the  weighted-average  number  of
shares of common stock  outstanding and potential  common shares.  There were no
potential  common shares  outstanding at December 31, 1999 or 1998. The weighted
average number of shares  outstanding  for the years ended December 31, 1999 and
1998 was 878,344.

                  Cumulative Effect of a Change in Accounting Principle

In April of 1998, the Accounting  Standards Executive Committee issued Statement
of Position ("SOP") 98-5,  "Reporting on the Costs of Start Up Activities".  SOP

                                       60

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

98-5  requires  that costs of  start-up  activities  and  organization  costs be
expensed as incurred.  SOP 98-5 became  effective for financial  statements  for
fiscal years beginning  after December 15, 1998.  During 1998, the Company wrote
off $63,175 of unamortized organization costs upon adoption of SOP 98-5.

                  Comprehensive Loss

Statement  of  Financial  Accounting  Standards  ("SFAS")  No. 130,  ("Reporting
Comprehensive  Income"),  describes  comprehensive income (loss) as the total of
all  components  of  comprehensive  income  (loss),  including  net loss.  Other
comprehensive income (loss) refers to revenues,  expenses, gains and losses that
under generally  accepted  accounting  principles are included in  comprehensive
income  (loss)  but  excluded  from net loss.  Currently,  the  Company's  other
comprehensive   income  (loss)  consists  of  unrealized  gains  and  losses  on
available-for-sale securities.
Recent Accounting Pronouncements

In June  1998,  Financial  Accounting  Standards  Board  issued  SFAS  No.  133,
"Accounting for Derivative  Instruments and Hedging  Activities".  The effective
date of this  statement  has been  deferred by SFAS No. 137 until  fiscal  years
beginning after June 15, 2000. However,  the statement permits early adoption as
of the beginning of any fiscal quarter after its issuance.  The Company  expects
to adopt this  statement  effective  January 1, 2001.  SFAS No. 133 requires the
Company to recognize  all  derivatives  as either assets or  liabilities  in the
balance sheet at fair value.  For derivatives that are not designated as hedges,
the gain or loss must be  recognized  in earnings  in the period of change.  For
derivatives  that are  designated  as  hedges,  changes in the fair value of the
hedged assets,  liabilities,  or firm commitments must be recognized in earnings
or recognized in other comprehensive  income until the hedged item is recognized
in earnings,  depending on the nature of the hedge. The ineffective portion of a
derivative's  change in fair value must be recognized  in earnings  immediately.
Management does not believe the adoption of SFAS No. 133 will have a significant
effect on the Company's earnings or financial position.

There are no other  recent  accounting  pronouncements  that  have  had,  or are
expected to have, a material effect on the Company's financial statements.

                                       61

<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 2.           SECURITIES

The amortized cost and fair value of securities are summarized as follows:

<TABLE>
<CAPTION>

                                                    Gross        Gross
                                     Amortized    Unrealized   Unrealized    Fair
                                        Cost        Gains        Losses      Value
                                     ---------   ------------ ------------   ------

    <S>                              <C>         <C>          <C>            <C>
    Securities
    Available-for-Sale
    December 31, 1999:
    U. S. Government and
    agency securities                $ 7,224,115  $      -     $ (206,067)    $ 7,018,048
                                     ============ =========    ===========    ===========
</TABLE>


The amortized cost and fair value of debt  securities as of December 31, 1999 by
contractual maturity are shown below.


<TABLE>
<CAPTION>
                                                             Securities
                                                        Available-for-Sale
                                                        ------------------------
                                                        Amortized        Fair
                                                         Cost            Value
                                                        -----------  -----------
     <S>                                               <C>          <C>
     Due in less than one year                          $1,507,047   $1,457,985
     Due from one to five years                          4,967,068    4,833,108
     Due from five to ten years                            750,000      726,955
                                                        ----------   ----------
                                                        $7,224,115   $7,018,048
                                                        ==========   ==========
</TABLE>



Securities  with a carrying  value of $500,000 at December 31, 1999 were pledged
to secure public deposits and for other purposes.

                                       62

<PAGE>






                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 3.           LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of loans is summarized as follows:

<TABLE>
<CAPTION>
                                                                December 31,
                                                                   1999
                                                           ---------------------

                 <S>                                        <C>
                 Commercial                                 $  5,870,000
                 Real estate - construction                    4,709,000
                 Real estate - other                           2,557,000
                 Consumer instalment and other                 4,376,715
                                                            ------------
                                                              17,512,715
                 Unearned income                                  (6,511)
                 Allowance for loan losses                      (264,975)
                                                            -------------
                 Loans, net                                 $  17,241,229
                                                            ==============
Changes in the allowance for loan losses are as follows:


                                                              Year Ended
                                                             December 31,
                                                                 1999
                                                           ---------------

                 Balance, beginning of year                $           -
                 Provision for loan losses                       264,975
                 Loans charged off                                     -
                 Recoveries of loans previously
                    charged off                                        -
                                                           -------------
                 Balance, end of year                      $     264,975
                                                           ==============
</TABLE>




61

<PAGE>


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


                                                             December 31,
                                                                1999
                                                          ----------------

      Impaired loans without a valuation allowance        $      4,700
      Impaired loans with a valuation allowance                      -
                                                          ----------------
      Total impaired loans                                $      4,700
                                                          ================
      Valuation allowance related to impaired loans       $          -
                                                          ================
      Average investment in impaired loans                $        285
                                                          ================


Interest  income  recognized on impaired  loans was  insignificant  for the year
ended December 31, 1999.

                                       63

<PAGE>







                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 3.           LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The Company has granted  loans to certain  directors,  executive  officers,  and
their related entities. 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 involved.  Changes in related party loans for the
year ended December 31, 1999 are as follows:

<TABLE>
                    <S>                                        <C>
                    Balance, beginning of year                 $      -
                       Advances                                 163,650
                       Repayments                                (2,401)
                                                               ---------
                    Balance, end of year                       $ 161,249
                                                               ==========
</TABLE>


NOTE 4.           BUILDING AND EQUIPMENT

Building and equipment are summarized as follows:


<TABLE>
<CAPTION>
                                                           December 31,
                                                   -----------------------------
                                                      1999            1998
                                                   ------------   --------------

                     <S>                           <C>            <C>
                     Leasehold improvements        $     27,354   $   11,390
                     Building                         2,066,781            -
                     Furniture and equipment            253,540       42,048
                     Construction in progress                 -      185,724
                                                   ------------   --------------
                                                      2,347,675      239,162
                     Less accumulated depreciation      (93,981)      (9,422)
                                                   -------------  --------------
                                                   $  2,253,694   $  229,740
                                                   ============   ==============
</TABLE>



NOTE 5.           DEPOSITS

                                       64

<PAGE>




                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 6.           INCOME TAXES

At December 31, 1999, scheduled maturities of time deposits are as follows:

<TABLE>
                      <S>                                        <C>
                      2000                                       $   12,121,331
                      2001                                              979,398
                      2002                                              179,175
                      2003                                               33,817
                      2004                                              466,744
                                                                 ---------------
                                                                 $   13,780,465
                                                                 ===============
</TABLE>

Income tax expense consists of the following:

<TABLE>
<CAPTION>
                                                            Years Ended
                                                            December 31,
                                           -------------------------------------
                                                 1999                 1998
                                           ----------------     ----------------

         <S>                               <C>                  <C>
         Current                           $  (253,058)         $  (19,196)
         Deferred                               20,167            (175,732)
         Change in valuation allowance         232,891             194,928
                                           -----------          ----------
         Income tax expense                $         -          $        -
                                           ===========          ==========
</TABLE>


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:


<TABLE>
<CAPTION>
                                                Years Ended December 31,
                               -------------------------------------------------
                                    1999                          1998
                               ---------------------   -------------------------
                               Amount        Percent   Amount          Percent
                               ----------    -------   ---------     -----------

<S>                            <C>            <C>      <C>               <C>
  Income taxes at              $(194,934)     (34)%    $(163,410)        (34)%
     statutory rate
  Change in valuation            232,891       41        194,928          40
     allowance
  State tax benefits             (34,242)      (6)       (31,518)         (6)
  Other                           (3,715)      (1)            -            -
                               ----------   -------    ----------   ----------
  Income tax expense           $       -        -%     $      -            -%
                               ==========   =======    ==========   ==========
</TABLE>



                                       65

<PAGE>







                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 6.           INCOME TAXES (Continued)

                    The components of deferred income taxes are as follows:


<TABLE>
<CAPTION>
                                                         December 31,
                                         ---------------------------------------
                                                1999                  1998
                                         ----------------       ----------------

       <S>                               <C>                    <C>
       Deferred tax assets:
       Loan loss reserves                $  56,094              $      -
       Depreciation                          6,116                     -
       Securities available-for-sale        70,063                     -
       Preopening and organization         151,983               175,732
         expenses
       Net operating loss carryforward     272,254                19,196
                                         ----------             ---------
                                           556,510               194,928
       Valuation allowance                (497,882)             (194,928)
                                         ----------             ---------
                                            58,628                     -
                                         ----------             ---------

       Deferred tax liabilities:
       Accrual to cash adjustment           58,628                     -
                                         ---------              --------

       Net deferred taxes                $       -              $      -
                                         =========              =========
</TABLE>



NOTE 7.           RELATED PARTY TRANSACTIONS AND LEASES

On February 4, 1998,  the Company  entered into a lease with an organizer  and a
director of the Company for the land on which the Company's building is located.
The lease is for a twenty  year  term and can be  extended  for four  additional
                                       66

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 7.           RELATED PARTY TRANSACTIONS AND LEASES (Continued)

periods of five years each. The base annual rent is $40,000,  payable in monthly
installments  of $3,333.33.  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 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. The Company is responsible for all property taxes.


The total minimum rental commitment at December 31, 1999 is due as follows:

<TABLE>
      <S>                                                            <C>
      During the year ending December 31,
         2000                                                         $ 40,000
         2001                                                           40,000
         2002                                                           40,000
         2003                                                           40,000
         2004                                                           40,000
         Due thereafter                                                537,000
                                                                      ----------
                                                                      $ 737,000
                                                                     ==========
</TABLE>


Total rental expense for the years ended December 31, 1999 and 1998 was $102,179
and $92,768, respectively.


NOTE 8.           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.  Currently,  the Company does not
contribute to the 401(k) profit sharing plan.


NOTE 9.           STOCK OPTIONS

     In connection with the  organization of the Company,  employment  contracts
were provided to the 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.
                                       67

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9.           STOCK OPTIONS (Continued)

                  Other  pertinent  information  related  to the  options  is as
follows:


<TABLE>
<CAPTION>
                                                            December 31,
                                                               1999
                                                     ---------------------------
                                                                       Weighted-
                                                                       average
                                                                      Exercise
                                                     Number            Price
                                                     -----------  --------------

  <S>                                                <C>          <C>
   Under option, beginning of year                            -   $          -
     Granted                                             25,000          10.00
     Exercised                                                -              -
     Terminated                                               -              -
                                                     -----------
     Under option and exercisable, end of year           25,000          10.00
                                                     ===========
     Weighted average fair value of
     options granted during the year                 $     2.71
                                                     ===========
</TABLE>


Information  pertaining  to  options  outstanding  at  December  31,  1999 is as
follows:

<TABLE>
<CAPTION>

                           Options Outstanding                          Options Exercisable
                     ------------------------------                    ----------------------
                                        Weighted-
                                        Average         Weighted-                 Weighted-
                                       Remaining        Average                   Averaged
       Range of             Number     Contractual      Exercise      Number      Exercise
     Exercise Prices      Outstanding     Life            Price      Exercise       Price
 -----------------------  -----------  ------------     ---------    --------     ----------

     <S>                   <C>         <C>              <C>          <C>          <C>
     $10.00                25,000        4 years         $10.00      25,000        $ 10.00
                           ======                                    ======
</TABLE>

                                       68

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9.           STOCK OPTIONS (Continued)

The Company applies APB Opinion 25 and related Interpretations in accounting for
the stock option plan.  Accordingly,  no compensation  cost has been recognized.
Had  compensation  cost for the stock option plan been  determined  based on the
fair value at the grant  dates for  awards  under the plan  consistent  with the
method prescribed by FASB Statement No. 123, net loss and losses per share would
have been adjusted to the pro forma amounts indicated below.


<TABLE>
<CAPTION>
                                                             Year Ended
                                                             December 31,
                                                               1999
                                                             ------------

     <S>                           <C>                       <C>
     Net loss                      As reported               $(573,335)
                                   Pro forma                 $(641,150)

     Losses per share              As reported               $(0.65)
                                   Pro forma                 $(0.73)

     Losses per share -            As reported               $(0.65)
     assuming dilution             Pro forma                 $(0.73)
</TABLE>

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:


<TABLE>
<CAPTION>
                                                            Year Ended
                                                            December 31,
                                                               1999
                                                            -----------
      <S>                                                   <C>
      Dividend yield                                              -
      Expected life                                            5 years
      Expected volatility                                      0.01%
      Risk-free interest rate                                  6.43%
</TABLE>


                                       69

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10.          COMMITMENTS AND CONTINGENT LIABILITIES

In the normal course of business, the Company has entered into off-balance-sheet
financial instruments which are not reflected in the financial statements. These
financial  instruments  include commitments to extend credit and standby letters
of credit. Such financial  instruments are included in the financial  statements
when funds are disbursed or the instruments  become payable.  These  instruments
involve,  to varying  degrees,  elements  of credit risk in excess of the amount
recognized in the balance sheet.

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. A summary of the Company's commitments is as follows:

<TABLE>
<CAPTION>

                                                     December 31
                                                        1999
                                                     -------------

             <S>                                     <C>
             Letters of credit                       $   78,000
             Commitments to extend credit             4,974,000
                                                     ----------
                                                     $5,052,000
                                                     ==========
</TABLE>


Commitments  to extend credit  generally  have fixed  expiration  dates or other
termination  clauses  and  may  require  payment  of a fee.  Since  many  of the
commitments  are  expected  to  expire  without  being  drawn  upon,  the  total
commitment amounts do not necessarily  represent future cash  requirements.  The
credit risk involved in issuing these  financial  instruments is essentially the
same as that  involved in extending  loans to customers.  The Company  evaluates
each  customer's  creditworthiness  on  a  case-by-case  basis.  The  amount  of
collateral  obtained,  if deemed  necessary  by the Company  upon  extension  of
credit, is based on management's  credit evaluation of the customer.  Collateral
held varies but may include real estate and improvements, marketable securities,
accounts receivable, inventory, equipment, and personal property.

Standby letters of credit are conditional  commitments  issued by the Company to
guarantee the performance of a customer to a third party.  Those  guarantees 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.

                                       70
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10.          COMMITMENTS AND CONTINGENT LIABILITIES (Continued)

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


NOTE 11.          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.

Forty-one  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 lesser of
statutory capital or net assets as defined, or approximately $1,860,000.


NOTE 12.          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,  1999,  no
dividends could be declared without regulatory approval.

                                       71

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12.          REGULATORY MATTERS (Continued)

The  Company  and Bank are subject to various  regulatory  capital  requirements
administered  by the federal banking  agencies.  Failure to meet minimum capital
requirements   can  initiate   certain   mandatory,   and  possibly   additional
discretionary  actions by regulators  that, if  undertaken,  could have a direct
material effect on the financial  statements.  Under capital adequacy guidelines
and the regulatory  framework for prompt corrective action, the Company and 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.  Prompt corrective provisions are not applicable
to bank holding companies.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Company and 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,  1999,  the Company and Bank met all
capital adequacy requirements to which they are subject.

As of December 31, 1999, 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.

<TABLE>
<CAPTION>
                                                                            To Be Well
                                                     For Capital          Capitalized Under
                                                      Adequacy           Prompt Corrective
                               Actual                 Purposes           Action Provisions
                           ---------------         --------------      ---------------------
                           Amount       Ratio      Amount   Ratio      Amount       Ratio
                          --------    --------    --------  ------    -------       ------
                                                     (Dollars in Thousands)
                          -----------------------------------------------------------------------
<S>                       <C>          <C>          <C>      <C>       <C>          <C>
December 31, 1999:
Total Capital to Risk
  Weighted Assets:
  Consolidated            $7,886       36.02%       $ 1,751     8%     $ N/A         N/A
  Bank                    $7,701       35.18%       $ 1,751     8%     $ 2,189       10%
Tier I Capital to Risk
Weighted Assets:
  Consolidated            $7,621       34.81%       $   876     4%     $ N/A         N/A
  Bank                    $7,436       33.97%       $   876     4%     $ 1,313        6%
Tier I Capital to
Average Assets:
  Consolidated            $7,621       26.60%       $ 1,146      4%    $ N/A          N/A
  Bank                    $7,436       25.95%       $ 1,146      4%    $ 1,433        5%

</TABLE>

                                       72

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13.          FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial  instruments.  In cases where quoted market
prices are not available,  fair values are based on estimates  using  discounted
cash flow models.  Those models are  significantly  affected by the  assumptions
used,  including the discount rates and estimates of future cash flows.  In that
regard,  the derived fair value estimates  cannot be substantiated by comparison
to  independent  markets and, in many cases,  could not be realized in immediate
settlement  of the  instrument.  The use of different  methodologies  may have a
material  effect on the  estimated  fair  value  amounts.  Also,  the fair value
estimates  presented  herein are based on  pertinent  information  available  to
management as of December 31, 1999 and 1998. Such amounts have not been revalued
for purposes of these  financial  statements  since those dates and,  therefore,
current  estimates  of fair  value may  differ  significantly  from the  amounts
presented herein.

       Cash, Due From Banks, Interest-Bearing Deposits, and Federal Funds Sold:

The carrying  amounts of cash, due from banks,  interest-bearing  deposits,  and
Federal funds sold approximate their fair value.

        Securities Available-for-Sale:

Fair values for securities are based on available quoted market prices.

        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 models,  using  current
market  interest  rates  offered for loans with  similar  terms to  borrowers of
similar  credit  quality.  Fair values for impaired  loans are  estimated  using
discounted  cash  flow  models  or  based on the  fair  value of the  underlying
collateral.

         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  discounted  cash flow
models, using current market interest rates offered on certificates with similar
remaining maturities.


                                       73

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 13.          FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

                  Accrued Interest:

   The carrying amounts of accrued interest approximate their fair values.
                         Off-Balance Sheet Instruments:

       The fair values of the Company's  off-balance sheet financial instruments
are based on fees charged to enter into similar agreements. However, commitments
to extend  credit and standby  letters of credit do not  represent a significant
value to the  Company  until  such  commitments  are  funded.  The  Company  has
determined that these instruments do not have a  distinguishable  fair value and
no fair value has been assigned.

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

<TABLE>
<CAPTION>

                                   December 31, 1999             December 31, 1998
                               ---------------------------  ---------------------------------
                                 Carrying          Fair       Carrying         Fair
                                  Amount           Value       Amount          Value
                               -------------  ------------  ---------------  ----------------

<S>                            <C>            <C>           <C>              <C>
Financial assets:
    Cash, due from banks,
    interest-bearing deposits,
    and Federal funds sold     $ 2,722,588     $ 2,722,588   $7,980,849       $ 7,980,849

    Securities available
      for sale                   7,018,048       7,018,048           -                 -

    Loans                       17,241,229      17,100,000           -                 -
    Accrued interest
     receivable                    209,338         209,338           -                 -

    Financial liabilities:

    Deposits                    21,744,293      21,793,828           -                 -
    Accrued interest payable        60,149          60,149           -                 -
</TABLE>

                                       74

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14.          SUPPLEMENTAL FINANCIAL DATA

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


<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                                --------------------------------
                                                    1999               1998
                                                --------------    --------------

       <S>                                      <C>               <C>
       Other operating expenses:
       Advertising                               $  111,766            $  4,355
       Office supplies                               51,498               5,107
       Professional and consulting fees              41,739              25,570
       Data processing                               80,961                -
       ATM expense                                   18,460                -
       Printing                                      42,117                -
</TABLE>


NOTE 15.          PARENT COMPANY FINANCIAL INFORMATION

The following  information presents the condensed balance sheets,  statements of
operations and cash flows of Southern Heritage Bancorp,  Inc., as of and for the
years ended December 31, 1999 and 1998:


<TABLE>
<CAPTION>
                            CONDENSED BALANCE SHEETS

          <S>                                 <C>                 <C>
                                                    1999                1998
                                               ---------------     -------------
           Assets
            Cash                               $  184,518          $    3,640
            Interest-bearing deposits                   -           7,977,209
            Investment in subsidiary            7,230,823                   -
            Other assets                                -             454,782
                                              -----------          -------------

              Total assets                    $ 7,415,341          $8,435,631
                                              ===========          =============

           Liabilities                        $         -          $  240,888

           Stockholders' equity                 7,415,341           8,194,743
                                              -----------          -------------

          Total liabilities and               $ 7,415,341          $8,435,631
          stockholders' equity
                                              ===========          =============
</TABLE>



                                       75

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 15.          PARENT COMPANY FINANCIAL INFORMATION (Continued)


                     CONDENSED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                1999                   1998
                                        -----------------      -----------------

     <S>                               <C>                    <C>
     Interest income                       $ 5,180                $ 122,226

                                        -----------------      -----------------
     Expenses
     Interest                                    -                   40,157
     Salaries and employee benefits              -                  342,913
     Other expenses                         24,828                  156,599
                                        -----------------      -----------------
     Total expenses                         24,828                  539,669

                                      -----------------      -----------------

     Loss before equity in loss of         (19,648)                (417,443)
     subsidiary

     Equity in loss of subsidiary         (553,687)                       -
                                      -----------------      -----------------

     Net loss before cumulative
     effect of change
     in accounting principle              (573,335)                (417,443)

     Cumulative effect of change
     in accounting principle                     -                  (63,175)
                                     -----------------      -----------------

     Net loss                           $ (573,335)              $ (480,618)
                                     =================      =================
</TABLE>



                                       76

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 15.          PARENT COMPANY FINANCIAL INFORMATION (Continued)


                     CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                1999               1998
                                         -----------------    ---------------

      <S>                                 <C>                 <C>
      OPERATING ACTIVITIES
      Net loss                            $ (573,335)          $  (480,618)
      Adjustments to reconcile net
        loss to net cash provided by
        (used in) operating
        activities:
        Depreciation                               -                 9,107
        Write-off of organization cost             -                27,555
        Equity in loss of subsidiary         553,687                     -
        Other operating activities           213,894                76,467

                                         -----------------     ---------------

        Net cash provided by (used           194,246              (367,489)
        in) operating activities
                                         -----------------     ---------------

        INVESTING ACTIVITIES
        Purchase of building and
          equipment                               -               (170,840)
        (Increase) decrease in            7,977,209             (7,977,209)
          interest-bearing deposits
        Investment in subsidiary         (7,990,577)                     -
                                        -----------------    ---------------

        Net cash used in investing          (13,368)            (8,148,049)
          activities
                                        -----------------    ---------------

       FINANCING ACTIVITIES
       Proceeds from line of credit              -                 622,539

       Repayment of line of credit               -                (849,954)
       Proceeds from sale of common stock        -               8,783,440
       Stock issue costs                         -                 (49,490)
                                        -----------------    ---------------

       Net cash provided by financing            -               8,506,535
        activities
                                        -----------------    ---------------

       Net increase (decrease) in
         cash                                180,878               (9,003)


       Cash at beginning of year               3,640               12,643
                                        -----------------    ---------------

       Cash at end of year                 $ 184,518             $  3,640

                                        =================    ===============
</TABLE>
                                       77
<PAGE>