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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
Commission file number 2-71249
SOUTH BANKING COMPANY
(Exact name of registrant as specified in its charter)
Georgia 58-1418696
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
104 North Dixon Street, Alma, Georgia 31510
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (912) 632-8631
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation 5-K is not contained herein and will not be
contained to the best of registrant's knowledge in definitive proxy on
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (X)
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant: There is no established market for the
outstanding common stock of the registrant.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the most recent practicable
date.
Class Outstanding at February 28,
2001
Common stock $1.00 par value per 399,500
Share
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference
and the part of the Form 10-K into which the documents are incorporated:
(1) any annual reports to security holders; (2) any prospectus filed
pursuant to Rule 424(b) or (c) under the Securities Act of 1933. None
PART 1.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING INFORMATION
Statements and financial discussion and analysis contained in this
Annual Report on Form 10-K that are not historical facts are forward-
looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking
statements describe the Company's future plans, strategies and
expectations, are based on assumptions and involve a number of risks and
uncertainties, many of which are beyond the Company's control. The
important factors that could cause actual results to differ materially
from the forward-looking statements include, without limitation:
changes in interest rates and market prices, which could reduce the
Company's net interest margins, asset valuations and expense
expectations;
changes in the levels of loan prepayments and the resulting effects
on the value of the Company's loan portfolio;
changes in local economic and business conditions which adversely
affect the Company's customers and their ability to transact
profitable business with the Company, including the ability of its
borrowers to repay their loans according to their terms or a change
in the value of the related collateral;
increased competition for deposits and loans adversely affecting
rates and terms;
the timing, impact and other uncertainties of the Company's
potential future acquisitions, including the Company's ability to
identify suitable future acquisition candidates, the success or
failure in the integration of their operations, and the Company's
ability to enter new markets successfully and capitalize on growth
opportunities;
increased credit risk in the Company's assets and increased
operating risk caused by a material change in commercial, consumer
and/or real estate loans as a percentage of the total loan
portfolio;
the failure of assumptions underlying the establishment of and
provisions made to the allowance for loan losses;
changes in the availability of funds resulting in increased costs
or reduced liquidity;
changes in the Company's ability to pay dividends on its Common
Stock;
increased asset levels and changes in the composition of assets and
the resulting impact on the Company's capital levels and regulatory
capital ratios;
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the Company's ability to acquire, operate and maintain cost
effective and efficient systems without incurring unexpectedly
difficult or expensive but necessary technological changes;
the loss of senior management or operating personnel and the
potential inability to hire qualified personnel at reasonable
compensation levels;
changes in statutes and government regulations or their
interpretations applicable to bank holding companies and the
Company's present and future banking and other subsidiaries,
including changes in tax requirements and tax rates;
all written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by these
cautionary statements.
Item 1. Business
South Banking Company (the "Registrant") is a business corporation
organized at the direction of Alma Exchange Bank & Trust ("Alma Bank")
and Citizens State Bank ("Citizens Bank") (collectively, the "Banks") in
1980 under the Georgia Business Corporation Code. It was formed to
obtain all the issued and outstanding shares of Common Stock of the
Banks. Pursuant to the terms and provisions of a Plan of Reorganization
and Agreement of Merger, dated as of January 13, 1981 and approved by
the shareholders of the Banks on June 24, 1981, the Banks were
reorganized into a holding company structure by merging the Banks with
wholly-owned subsidiaries of the Registrant, which transaction was
consummated on July
28, 1981. In connection with those mergers, the outstanding shares of
Common Stock of the Banks were converted into shares of the Registrant
at specified ratios and the Banks became wholly-owned subsidiaries of
the Registrant. Pursuant to the terms and provision of an agreement of
merger dated June 12, 1989 between South Banking and Georgia Peoples
Bankshares, Inc. and approved by shareholders of Georgia Peoples on
February 26, 1990, Georgia Peoples Bankshares and its subsidiary,
Peoples State Bank, were merged into South Banking Company. In
connection with the merger, the outstanding shares of Georgia Peoples
Bankshares were converted into shares of the Registrant at specified
ratios. During 1993, South Banking Company formed Banker's Data
Services, Inc. ("Banker's Data") for the purpose of handling all the
computer functions of the banks. Operations began in April, 1994.
South Banking entered into an agreement in October of 1995 to acquire
all the stock of Pineland State Bank ("Pineland Bank") in Metter,
Georgia. On January 11, 1996, the transaction was completed. On August
1, 2000, Pineland Bank acquired branches from Flag Inc. in Metter,
Georgia, Cobbtown, Georgia, and Statesboro, Georgia.
During 1998, Alma Bank formed South Financial Products, Inc. (SFP)
as a vehicle to enter the financial services market and provide service
to its customers. South Financial Products, Inc. offers a complete
array of investment options including stocks, bonds, mutual funds,
financial and retirement planning, tax advantaged investments and asset
allocations. SFP offers securities through Unvest, a North Carolina
based independent clearing firm. SFP is licensed and regulated through
the National Association of Securities Dealers, the Securities and
Exchange Commission and various state and federal banking authorities.
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The maturing of the baby boomer generation is creating a market for
asset management services. The Company expects growth in this department
and anticipates that resulting fees will provide a stable stream of
income.
The Banks
The Banks operate full service banking business in Bacon, Appling,
Candler, Tattnall, Bulloch, and Camden Counties, Georgia, providing such
customary banking services as checking and savings accounts, various
other types of time deposits, safe deposit facilities and money
transfers. The Banks also finance commercial and agricultural
transactions, make secured and unsecured loans, and provide other
financial services to its customers. The Banks do not conduct trust
activities. On December 31, 1999, Alma Bank and Peoples Bank ranked, on
the basis of total deposits, as the 211th and 282nd largest banks among
345 banks in Georgia. Citizens Bank, one of five banking operations in
Camden County, ranked the 318th largest bank among 345 banks in Georgia;
and Pineland Bank, one of two banking operations in Metter, Georgia,
ranked the 295th largest bank among 345 banks in Georgia, Sheshunoff's
Banks of Georgia (2000 edition).
The Banks make and service both secured and unsecured loans to
individuals, firms, and corporations. Commercial lending operations
include various types of credit for the Banks' customers. The Banks'
installment loan departments make direct loans to individuals and, to a
limited extent, purchase installment obligations from retailers both
with and without recourse. The Banks make a variety of residential,
industrial, commercial, and agricultural loans secured by real estate,
including interim construction financing. Each bank has established
desired mixes of real estate, commercial, agricultural, and consumer
lending depending upon activities within the local area. The ratios are
established in accordance with risk diversification goals. All banks
are located in small rural areas with low to moderate income levels.
The banks primarily look to real estate lending as a major portion of
portfolio. Real estate values have remained fairly stable over the past
few years to give stability to lending activities. Loan to value ratios
are maintained in the 60% to 80% level for various real estate lending.
Loan to value ratio of non real estate loans vary from 50% for the
inventory or receivables to 90% for vehicles and other consumer lending.
The economy of the area remains fairly constant without great
fluctuation. The national economy will effect the area primarily in the
timber and other agricultural products; however, the movement is not as
wide locally as national movement indicates. Citizens Bank, Pineland
Bank and Peoples Bank act as agents for another bank in offering "Master
Card" and "VISA" credit cards to its customers and does not assume the
credit risk on these transactions. Alma Bank offers "Master Card"
credit cards to its customers.
At December 31, 2000, the Banks had correspondent relationships
with 6 other commercial banks. These correspondent banks provide
certain services to the banks such as processing checks and other items,
buying and selling federal funds, handling money transfers and
exchanges, shipping coins and currency, providing security and
safekeeping of funds or other valuable items and furnishing limited
management information and advice. As compensation for the services,
the Banks maintain certain balances with its correspondents in
noninterest bearing accounts.
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Employees
On December 31, 2000, the Registrant and its subsidiaries had 101
full-time and 11 part-time employees. The Registrant is not a party to
any collective bargaining agreement and employee relations are deemed to
be good.
Competition
The Banking business is highly competitive. The Banks compete
primarily with other commercial banks operating in Bacon, Camden,
Appling, Tattnall, Bulloch, and Candler Counties. In addition, the
Banks compete with other financial institutions, including savings and
loan associations, credit unions and finance companies and, to a lesser
extent, insurance companies and certain governmental agencies. The
banking industry is also experiencing increased competition for deposits
from less traditional sources such as money-market mutual funds.
Customers
The majority of the Banks' customers are individuals and small to
medium-sized businesses headquartered within its service area. The
Banks
are not dependent upon a single or a very few customers, the loss of
which would have a material adverse effect on the Banks. No customer
accounts for more than 5% of the Banks' total deposits at any time.
Management does not believe that the Banks' loan portfolio is dependent
on a single customer or group of customers concentrated in a particular
industry whose loss or insolvency would have a material adverse effect
on the Banks.
Monetary Policies
The results of operations of the Banks, and therefore of the
Registrant, are affected by credit policies of monetary authorities,
particularly the Board of Governors of the Federal Reserve System (the
"Board of Governors"), even though the Banks are not members of the
Federal Reserve.
The instruments of monetary policy employed by the Federal Reserve
include open market operations in U. S. Government securities and
changes in the discount rate on member bank borrowing changes in reserve
requirements against member bank deposits. In view of changing
conditions in the national economy and in the money markets, as well as
the effect of action by monetary and fiscal authorities, including the
Federal Reserve System, no prediction can be made as to possible future
changes in interest rates, deposit levels, loan demand or the business
and earnings of the Banks.
Supervision and Regulations
The Registrant is a bank holding company within the meaning of the
Bank Holding Company Act of 1956, as amended (the "Act"), and is
required
to register as such with the Board of Governors. The Registrant is
required to file with the Board of Governors an annual report and such
other information as may be required to keep the Board of Governors
4
informed with respect to the Registrant's compliance with the provisions
of the Act. The Board of Governors may also make examinations of the
Registrant and its subsidiaries from time to time.
The Act requires every bank holding company to obtain the prior
approval of the Board of Governors before it may acquire substantially
all the assets of any bank or ownership or control of any voting shares
of any bank, if, after such acquisition, it would own or control,
directly or indirectly, more than five percent of the voting shares of
such bank. In no case, however, may the Board of Governors approve the
acquisition by the Registrant of the voting shares of any bank located
outside Georgia, unless such acquisition is specifically authorized by
the laws of the state in which the bank to be acquired is located.
In addition, a bank holding company is generally prohibited from
engaging in or acquiring direct or indirect control of voting shares of
any company engaged in nonbanking activities. One of the principal
exceptions to this prohibition is for activities found by the Board of
Governors, by order or regulation, to be so closely related to banking,
managing or controlling banks as to be a proper incident thereto. Some
of the activities that the Board of Governors has determined by
regulation to be closely related to banking are: making or servicing
loans and certain types of leases; performing certain data processing
services; acting as fiduciary, investment or financial advisor; making
investments in corporations or projects designed primarily to promote
community welfare.
In January, 1989, the Board of Governors issued final regulations
which implement risk-based rules for assessing bank and bank holding
company capital adequacy. The regulations revise the definition of
capital and establish minimum capital standards in relation to assets
and off-balance sheet exposures, as adjusted for credit risk.
Payment of Dividends and Other Restrictions
South is a legal entity separate and distinct from its
subsidiaries. There are various legal and regulatory limitations under
federal and state law on the extent to which South's subsidiaries can
pay dividends or otherwise supply funds to South.
The principal source of South's cash revenues is dividends from its
subsidiaries. The prior approval of the FRB or the Georgia Department
of Bankers, as the case may be, is required if the total of all
dividends declared by any state member bank of the Federal Reserve
System in any calendar year exceeds the Bank's net profits (as defined)
for that year combined with its retained net profits for the preceding
two calendar years, less any required transfers to surplus or a fund for
the retirement of any preferred stock. The relevant federal and state
regulatory agencies also have authority to prohibit a state member bank
or bank holding company, which would include South and the Subsidiary
Banks from engaging in what, in the opinion of such regulatory body,
constitutes an unsafe or unsound practice in conducting its business.
The payment of dividends could, depending upon the financial condition
of the subsidiary, be deemed to constitute such an unsafe or unsound
practice.
5
Under Georgia law, the prior approval of the DBF is required before
any cash dividends may be paid by a state bank if: (i) total classified
assets at the most recent examination of such bank exceed 80% of the
equity capital (as defined, which includes the reserve for loan losses)
of such bank; (ii) the aggregate amount of dividends declared or
anticipated to be declared in the calendar year exceeds 50% of the net
profits (as defined) for the previous calendar year; or (iii) the ratio
of equity capital to adjusted total assets is less than 6%.
In addition, the Banks are subject to limitations under Section 23A
of the Federal Reserve Act with respect to extensions of credit to,
investments in, and certain other transactions with South. Furthermore,
loans and extensions of credit are also subject to various collateral
requirements.
Capital Adequacy
The FRB has adopted risk-based capital guidelines for bank holding
companies. The minimum ratio of total capital ("Total Capital") to risk-
weighted assets (including certain off-balance sheet items, such as
standby letters of credit) is 8%. At least half of the Total Capital is
to be composed of common stock, minority interests in the equity
accounts of consolidated subsidiaries, noncumulative perpetual preferred
stock and a limited amount of perpetual preferred stock, less goodwill
("Tier I Capital"). The remainder may consist of subordinated debt,
other preferred stock and a limited amount of loan loss reserves.
In addition, the FRB has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a
minimum ratio of Tier I Capital to total assets, less goodwill (the
"Leverage Ratio") of 3% for bank holding companies that meet certain
specified criteria, including those having the highest regulatory
rating. All other bank holding companies generally are required to
maintain a Leverage Ratio of at least 3% plus an additional cushion of
100 to 200 basis points. The guidelines also provide that bank holding
companies experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the
minimum supervisory levels without significant reliance on intangible
assets. Furthermore, the FRB has indicated that it will consider a
"tangible Tier I capital leverage ratio" (deducting all intangibles) and
other indications of capital strength in evaluating proposals for
expansion or new activities.
Effective December 19, 1992, a new Section 38 to the Federal
Deposit Insurance Act implemented the prompt corrective action
provisions that Congress enacted as a part of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (the "1991 Act"). The
"prompt corrective action" provisions set forth five regulatory zones in
which all banks are placed largely based on their capital positions.
Regulators are permitted to take increasingly harsh action as a Bank's
financial condition declines.
Regulators are also empowered to place in receivership or require the
sale of a bank to another depository institution when a bank's capital
leverage ratio reaches two percent. Better capitalized institutions are
generally subject to less onerous regulation and supervision than banks
with less amounts of capital.
6
The FDIC has adopted regulations implementing the prompt corrective
action provisions of the 1991 Act, which place financial institutions in
the following five categories based upon capitalization ratios: (i) a
"well capitalized" institution has a total risk-based capital ratio of
at least 10%, a Tier I risk-based ratio of at least 6% and a leverage
ratio of at least 5%; (ii) an "adequately capitalized" institution has a
total risk-based capital ratio of at least 8%, a Tier I risk-based ratio
of at least 4% and a leverage ratio of at least 4%, (iii) an
"undercapitalized" institution has a total risk-based capital ratio of
under 8%, a Tier I risk-based ratio of under 4% or a leverage ratio of
under 4%; (iv) a "significantly undercapitalized" institution has a
total risk-based capital ratio of under 6%, a Tier I risk-based ratio of
under 3% or a leverage ratio of under 3%; and (v) a "critically
undercapitalized" institution has a leverage ratio of 2% or less.
Institutions in any of the three undercapitalized categories would be
prohibited from declaring dividends or making capital distributions.
The FDIC regulations also establish procedures for "downgrading" an
institution to a lower capital category based on supervisory factors
other than capital.
The downgrading of an institution's category is automatic in two
situations: (i) whenever an otherwise well-capitalized institution is
subject to any written capital order or directive; and (ii) where an
undercapitalized institution fails to submit or implement a capital
restoration plan or has its plan disapproved. The Federal banking
agencies may treat institutions in the well-capitalized, adequately
capitalized and undercapitalized categories as if they were in the next
lower level based on safety and soundness considerations relating to
factors other than capital levels.
All insured institutions regardless of their level of
capitalization are prohibited by the Federal Deposit Insurance
Corporation Improvement Act of 1991 (the "FDIC Act") from paying any
dividend or making any other kind of capital distribution or paying any
management fee to any controlling person if following the payment or
distribution the institution would be undercapitalized. While the
prompt corrective action provisions of the FDIC Act contain no
requirements or restrictions aimed specifically at adequately
capitalized institutions, other provisions of the FDIC Act and the
agencies' regulations relating to deposit insurance assessments,
brokered deposits and interbank liabilities treat adequately capitalized
institutions less favorably than those that are well-capitalized.
Under the FDIC's regulations, all of the Subsidiary Banks are "well
capitalized" institutions.
The written policies of the Georgia Department of Banking and
Finance (the "DBF") require that state banks in Georgia generally
maintain a minimum ratio of primary capital to total assets of 6.0%. At
December 31, 2000, the Banks were in compliance with these requirements.
In addition, the DBF is likely to compute capital obligations in
accordance with the risk-based capital rules while continuing to require
a minimum absolute level of capital.
7
It is not anticipated that such minimum capital requirements will
affect the business operations of the Banks. However, the Board, in
connection with granting approval for bank holding companies to
acquire other banks and bank holding companies or to engage in non-
banking activities, requires bank holding companies to maintain tangible
capital ratios at approximate peer group levels. This requirement can
result in
a bank holding company maintaining more capital than it would otherwise
maintain. At the present time, South Banking Company's tangible primary
capital ratios are equal or above their peer group level.
The laws of Georgia require annual registration with the DBF by all
Georgia bank holding companies. Such registration includes information
with respect to the financial condition, operations and management of
intercompany relationships of the bank holding company and its
subsidiaries and related matters. The DBF may also require such other
information as is necessary to keep informed as to whether the
provisions of Georgia law and the regulations and orders issued
thereunder by the DBF have been in compliance with and the DBF may make
examinations of the bank holding company and each bank subsidiary
thereof.
The banks are also subject to examination by the DBF and the FDIC.
The DBF regulates and monitors all areas of the operations of the banks,
including reserves, loans, mortgages, issuances of securities, payment
of dividends, interest rates, and establishment of branches. Interest
and certain other charges collected or contracted for by the Banks are
also subject to state usury laws and certain federal laws concerning
interest rates. The Banks' deposits are insured by the FDIC up to the
maximum permitted by law.
Legislation has passed that would allow banks to branch statewide
subject to certain restrictions. This law became effective July 1,
1996.
Georgia banking laws permit bank holding companies to own more than
one bank, subject to the prior approval of the Georgia Department of
Banking and Finance; thereby, in effect, permitting statewide banking
organizations. Such banks may be acquired as subsidiaries of the
Registrant or merged into its existing bank subsidiaries.
Support of Subsidiary Banks
Under the FRB policy, South is expected to act as a source of
financial strength to, and to commit resources to support, each of the
Subsidiary Banks. This support may be required at times when, absent
such FRB policy, South may not be inclined to provide it. In the event
of a bank holding company's bankruptcy, any commitment by the bank
holding company to a Federal bank regulatory agency to maintain the
capital of a subsidiary bank will be assumed by the bankruptcy trustee
and entitled to a priority of payment.
As a result of the enactment of Section 206 of the Financial
Institutions Reform, Recovery and Enforcement Act ("FIRREA") on August
9, 1989, a depository institution insured by the FDIC can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the
FDIC after August 9, 1989 in connection with (i) the default of a
commonly controlled FDIC-insured depository institution or (ii) any
assistance provided by the FDIC to any commonly controlled FDIC-insured
depository
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institution "in danger of default" is defined generally as the existence
of certain conditions indicating that a default is likely to occur in
the absence of regulator assistance.
FDIC Insurance Assessments
The Subsidiary Banks are subject to FDIC deposit insurance
assessments for the Bank Insurance Fund (the "BIF"). Since 1989, the
annual FDIC deposit insurance assessments increased from $.083 per $100
of deposits to a minimum level of $.23 per $100, an increase of 177
percent. The FDIC implemented a risk-based assessment system whereby
banks are assessed on a sliding scale depending on their placement in
nine separate supervisory categories, from $.23 per $100 of deposits for
the healthiest banks (those with the highest capital, best management
and best overall condition) to as much as $.31 per $100 of deposits for
the less-healthy institutions, for an average of $.259 per $100 of
deposits.
On August 8, 1995, the FDIC lowered the BIF premium for "healthy"
banks 83% from $.23 per $100 in deposits to $.04 per $100 in deposits,
while retaining the $.31 level for the riskiest banks. The average
assessment rate was therefore reduced from $.232 to $.044 per $100 of
deposits. The new rate took effect on September 29, 1995. On November
14, 1995, the FDIC again lowered the BIF premium for "healthy" banks
from $.04 per $100 of deposits to zero for the highest rated
institutions (92% of the industry). All of the Subsidiary Banks are
insured under the BIF fund and it is expected that they will be required
to pay only the legally required annual minimum payments during 2001.
Recent Legislative and Regulatory Action
On April 19, 1995, the four Federal bank regulatory agencies
adopted revisions to the regulations promulgated pursuant to the
Community Reinvestment Act (the "CRA"), which are intended to set
distinct assessment standards for financial institutions. The revised
regulations contain three evaluation tests: (i) 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; (ii) a services test which will evaluate the provisions of
services that promote the availability of credit to low- and moderate-
income areas; and (iii) an 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 some paperwork
requirements of the current regulations and provide regulators,
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, at which
time evaluation under streamlined procedures were scheduled to begin for
institutions with assets of less than $250 million.
These regulations have had little or no effect on South and the
Subsidiary Banks. Congress and various Federal agencies (including
Housing and Urban Development, the Federal Trade Commission and the
Department of Justice) (collectively, the "Federal Agencies")
responsible
9
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. In recent
years, 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 lending discrimination and 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 Opportunity Act and the Fair Housing Act. In
the policy statement, three methods of proving lending discrimination
were identified: (i) over evidence of discrimination, when a lender
blatantly discriminates on a prohibited basis; (ii) evidence of
disparate treatment, when a lender treats applicants differently based
on a prohibited factor even where there is no showing that the treatment
was motivated by prejudice or a conscious intention to discriminate
against a person; and (iii) evidence of disparate impact, when a lender
applies a practice uniformly to all applicants, but the practice has a
discriminatory effect, 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.
On September 23, 1994, President Clinton signed the Reigle
Community Development and Regulatory Improvement Act of 1994 (the
"Regulatory Improvement Act"). The Regulatory Improvement Act contains
funding for community development projects through banks and community
development financial institutions and also numerous regulatory relief
provisions designed to eliminate certain duplicative regulations and
paperwork requirements. On September 29, 1994, President Clinton signed
the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Federal Interstate Bill") which amended Federal law to permit bank
holding companies to acquire existing banks in any state effective
September 29, 1995, and to permit any interstate bank holding company to
merge its various bank subsidiaries into a single bank with interstate
branches after May 31, 1997. States have the authority to authorize
interstate branching prior to June 1, 1997, or, alternatively, to opt
out of interstate branching prior to that date. The Georgia Financial
Institutions Code was amended in 1994 to permit the acquisition of a
Georgia bank or bank holding company by out-of-state bank holding
companies beginning July 1, 1995. On September 29, 1995, the interstate
banking provisions of the Georgia Financial Institutions Code were
superseded by the Federal Interstate Bill.
On November 12, 1999, the Gramm-Leach-Bliley Act ("the Act"),
formerly known as the Financial Modernization Act was enacted. The new
statute is the most sweeping financial services legislation enacted in
decades. It repeals depression-era laws and eliminates the barriers
preventing affiliations among banks, insurance companies, and securities
firms. Key provisions to the Act are summarized in the following
paragraphs.
Repeal of the Glass-Stegall Act - At its core, the Act repeals,
effective 120 days after enactment, the anti-affiliation provisions in
sections 20 and 32 of the Banking Act of 1933 (also known as the Glass-
10
Stegall Act) and amends provisions in the Bank Holding Company Act of
1956 to permit financial companies to offer a broad array of banking,
insurance, securities, and other financial products, either through
financial holding companies ("FHCs") or through operating subsidiaries
qualifying under the Act.
In general, Congress decided to preserve the Federal Reserve's role
as the umbrella supervisor for holding companies. The Board will work,
however, within a system of functional regulation designed to take
advantage of the traditional strengths of the federal and state
financial supervisors. In addition, the legislation establishes a
mechanism for coordination between the Federal Reserve and Treasury
regarding the approval of new financial activities for both holding
companies and national bank financial subsidiaries.
Banking organizations are prohibited under the Act from
participating in new financial affiliations unless their depository
institution subsidiaries are well capitalized and well managed.
Regulators are required to address any failure to maintain safety and
soundness standards in a prompt manner. In addition, regulators must
prohibit holding companies from participating in new financial
affiliations if, at the time of certification, any insured depository
affiliate had received a less than "satisfactory" Community Reinvestment
Act ("CRA") rating at its most recent examination.
Affiliation Authority - The Act amends section 4 of the Bank
Holding Company Act ("BHCA") to provide a new framework for engaging in
new financial activities. Those bank holding companies ("BHCs") that
qualify to engage in the new financial activities are designated as
financial holding companies ("FHCs"). New provisions of the BHCA permit
BHCs that qualify as FHCs to engage in activities, and acquire companies
engaged in activities that are financial in nature or incidental to such
financial activities. FHCs are also permitted to engage in activities
that are "complementary" to financial activities if the Board of
Governors of the Federal Reserve Bank ("FRB Board") determines that the
activity does not pose a substantial risk to the safety or soundness of
the institution or the financial system in general.
The FRB Board may act by either regulation or order in determining
what activities are financial in nature, incidental to financial in
nature, or complementary. In doing so, the FRB must notify the Treasury
of requests to engage in new financial activities and may not determine
that an activity is financial or incidental to a financial activity if
Treasury objects.
Furthermore, Treasury may propose that the Board find a particular
activity financial in nature or incidental to a financial activity. The
Act establishes a similar procedure with regard to the Treasury's
(acting through the Office of the Comptroller of the Currency ("OCC"))
determination of financial activities and activities that are incidental
to financial activities for subsidiaries of national banks. Congress
intends for the Federal Reserve and Treasury to establish a consultative
process that will negate the need for either agency to veto a proposal
of the other agency.
11
Federal Home Loan Bank Reform - The Act reforms the Federal Home
Loan Bank System, including greatly expanding the collateral that a
community bank can pledge against FHLB System advances, thus giving
smaller banks access to a substantial new liquidity source. FHLB
members under $500 million in assets can now pledge small business and
agricultural loans (or securities representing a whole interest in such
loans) as collateral for advances.
Privacy - The Act imposes a number of new restrictions on the
ability of financial institutions - read as any entity offering
financial products, including banks, insurance companies, securities
houses, and credit unions - to share nonpublic personal information with
nonaffiliated third parties. Specifically, the bill:
requires financial institutions to establish privacy policies and
disclose them annually to all their customers, setting forth how the
institutions share nonpublic personal financial information with
affiliates and third parties
directs regulators to establish regulatory standards that ensure
the security and confidentiality of customer information
permits customers to prohibit ("opt out"of permitting) such
institutions from disclosing personal financial information to
nonaffiliated third parties
prohibits transfer of credit card or other account numbers to third-
party marketers
prohibits pretext calling (that is, makes it illegal for
information brokers to call banks to obtain customer information with
the intent to defraud the bank or customer)
protects stronger state privacy laws, as well as those not
"inconsistent" with these Federal rules
requires the Treasury and other Federal regulators to study the
appropriateness of sharing information with affiliates, including
considering both negative and positive aspects of such sharing for
consumers.
The bill also imposes an affirmative obligation on banks to respect
their customers' privacy interests. Language protects a community
bank's ability to share information with third parties selling financial
products (for example, insurance or securities) to bank customers.
Community banks can thus continue such sales practices without being
subject to the opt-out provisions contained elsewhere in the
legislation.
Bankruptcy Legislation - Although proposed bankruptcy legislation
is not finalized and signed into law, it appears that the final
legislation may assist in reducing the number of voluntary liquidation
bankruptcies. This legislation may be of long-term benefit to financial
institutions and other creditors.
12
Various legislation, including proposals to substantially change
the financial institution regulatory system and to expand or contract
the powers of banking institutions and bank holding companies, is from
time to time introduced in Congress. This legislation may change
banking statutes and the operating environment of the combined company
and its subsidiaries in substantial and unpredictable ways. If enacted,
such legislation could increase or decrease the cost of doing business,
limit or expand permissible activities or affect the competitive balance
among banks, savings associations, credit unions, and other financial
institutions. The Registrant cannot accurately predict whether any of
this potential legislation will ultimately be enacted, and, if enacted,
the ultimate effect that it, or implementing regulations, would have
upon the financial condition or results of operations of itself or any
of its subsidiaries.
Omnibus Budget Reconciliation Act of 1993
The Omnibus Budget Reconciliation Act of 1993 (the "Tax Act")
continues the recent legislation affecting banks and financial
institutions. The Tax Act was designed as a deficit reduction with
similarities to the 1990 Act which was also designed to slice $500
billion from the deficit.
Generally the Tax Act affects all corporations as to a new 35% tax
rate for income in excess of $10 million and the maximum corporate
capital gains rate was increased to 35%. The Registrant currently will
not be affected by the change due to the income level of the Registrant.
Various other provisions would restrict certain deductions and/or change
the treatment of certain transactions.
Provisions that especially affect financial institutions included
market to market Accounting for Securities. The Tax Act requires that
securities that are inventory in the hands of a dealer be inventoried at
fair market value (market to market). For the purposes of these rules,
"securities" and a "dealer" are defined more broadly than under prior
law. A "dealer" is any person who either regularly purchases securities
from or sells securities to customers in the ordinary course of business
or regularly offers to enter into, assume, offset, assign or otherwise
terminate positions in securities with customers in the ordinary course
of a trade or business. Banks have been determined to qualify as a
dealer under the new definitions. Unless securities are properly
identified as held for investment, all inventory will be required to be
market to market.
A second item affecting financial institutions is the treatment of
tax-free FSLIC Assistance that was credited on or after March 4, 1991 in
connection with the disposition of "covered" assets. Financial
institutions are required to treat that assistance as compensation for
any losses claimed on dispositions or charge-offs of these assets,
effectively denying them any tax loss for those assets. This provision
should not have any effect on the Registrant.
The third item affecting financial institutions is the amortization
of intangible assets effective for purchase after the enactment (August
10, 1993). Taxpayers are required to amortize most intangibles
(including goodwill, core deposits, going concern value and covenant not
to compete) used in a trade or business over a 15 year period.
Exception
13
to this rule includes mortgage service rights. The provision will have
significant impact on any future purchases the holding company may
decide to undertake.
Some of the other provisions such as eliminating deductions for
lobbying expense and club dues will impact the taxes payable by the
Registrant.
Recent and Proposed Changes in Accounting Rules
In June, 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income. The statement is effective for annual and
quarterly financial statements for fiscal years beginning after December
15, 1997, with earlier application permitted. For the Company, the
statement became effective in the first quarter of 1998 and required
reclassification of earlier financial statements for comparative
purposes. SFAS No. 130 requires that changes in the amounts of
comprehensive income items be shown in a primary financial statement.
Comprehensive income is defined by the statement as "the change in
equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources.
It includes all changes in equity during a period except those resulting
from investments by owners and distributions to owners." While the
adoption of this statement changed the look of the Company's financial
statements, it did not have a material effect on the Company.
Also, in June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The statement is
effective for financial statements for fiscal years beginning after
December 15, 1997, with earlier application permitted. SFAS No. 131
changes the way public companies report information about segments of
their business in their annual financial statements and requires them to
report selected segment information in their quarterly reports issued to
shareholders. A company is required to report on operating segments
based on the management approach. An operating segment is defined as
any component of an enterprise that engages in business activities from
which
it may earn revenues and incur expenses. The management approach is
based on the way that management organizes the segments within the
enterprise for making operating decisions and assessing performance.
The adoption of this standard did not have a material effect on the
Company.
In February 1998, the FASB issued SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits. The
statement is effective for fiscal years beginning after December 15,
1997. SFAS No. 132 provides additional information to facilitate
financial analysis and eliminates certain disclosures which are no
longer useful. To the extent practical, the statement also standardizes
disclosures for retiree benefits. The adoption of this standard did not
have a material effect on the Company.
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
14
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value
of a derivative depends on the intended use of the derivative and the
resulting designation.
In June of 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." This statement deferred the
effective date of SFAS No. 133 to fiscal years beginning after June 15,
2000, with early application encouraged. South is in the process of
determining the impact, if any, the implementation of SFAS No. 133 and
SFAS No. 137 will have on its results of operations.
In October 1998, the FASB issued SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by Mortgage Banking Enterprise, an amendment to SFAS
No. 65. This statement is effective for the first fiscal quarter
beginning after December 15, 1998, (or January 1, 1999 for the Company).
The statement requires that after the securitization of mortgage loans
held for sale, any retained mortgage-backed securities be classified in
accordance with SFAS No. 115, based on the entity's ability and intent
to sell or hold those investments. Prior to this statement, mortgage
banking entities were required to classify these securities as trading
only. The adoption of this standard did not have a material effect on
the Company.
Industry Developments
Certain recently-enacted and proposed legislation could have an
effect on both the costs of doing business and the competitive factors
facing the financial institution's industry. Because of the uncertainty
of the final terms and likelihood of passage of the proposed
legislation, the Company is unable to assess the impact of any proposed
legislation on its financial condition or operations at this time.
15
Selected Statistical Information
The tables and schedules on the following pages set forth certain
significant statistical data with respect to: (i) the distribution of
assets, liabilities and shareholders' equity and the interest rates and
interest differentials experienced by, the Registrant and its
subsidiaries; (ii) the investment portfolio of the Registrant and its
subsidiaries; (iii) the loan portfolio of the Registrant and its
subsidiaries, including types of loans, maturities and sensitivity to
changes in interest rates and information on nonperforming loans; (iv)
summary of the loan loss experience and reserves for loan losses of the
Registrant and its subsidiaries; (v) types of deposits of the Registrant
and its subsidiaries; and (vi) the return on assets and equity for the
Registrant and its subsidiaries.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIALS
A. The condensed average balance sheets for the periods indicated are
presented below.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2000 1999 1998
ASSETS (In Thousands)
Cash and due from banks $ 6,283 $ 7,836 $ 5,736
Cash in bank - interest bearing 822 1,355 1,411
Taxable investment securities 16,884 15,905 15,285
Nontaxable investment securities 1,613 1,825 1,945
Others 1,487 1,435 932
Federal funds sold and securities
purchased under agreements to
resell 9,945 8,757 11,354
Loans - net 148,195 121,166 111,239
Other assets 10,762 8,031 8,625
Total Assets $ 195,991 $ 166,310 $ 156,527
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits: Demand - non-interest
bearing $ 22,444 $ 20,341 $ 20,209
Demand - interest bearing 24,959 23,777 22,732
Savings 11,122 10,674 9,048
Time 114,026 92,406 86,113
Total Deposits $ 172,551 $ 147,198 $ 138,102
Federal funds purchased 114 55 -
Other borrowed funds 4,518 3,087 3,380
Other liabilities 1,768 962 1,694
Total Liabilities $ 178,951 $ 151,302 $ 143,176
Shareholders' equity 17,040 15,008 13,351
Total Liabilities and
Shareholders' Equity $ 195,991 $ 166,310 $ 156,527
B. Interest Rates. The tables below show for the periods indicated
the average amount outstanding for major categories of
interest
16
earning assets and interest bearing liabilities; the average
interest rates earned or paid; the interest income and expense
earned or paid thereon; net interest earnings and the net yield on
inteest-earning assets.
Year Ended December 31, 2000
Average Yield/
Balance Interest Rate
ASSETS (In Thousands)
Cash in banks - interest
bearing $ 822 $ 53 6.44%
Loans 148,195 16,604 11.20
Taxable investments 16,884 1,021 6.05
Non-taxable investments 1,613 79 4.90
Other 1,487 73 4.91
Federal funds sold and
securities purchased
under agreements to resell 9,945 623 6.26
Total Interest-Bearing
Assets $ 178,946 $ 18,453 10.31%
LIABILITIES
Demand - interest bearing $ 24,959 $ 648 2.59%
Savings deposits 11,122 359 3.23
Other time deposits 114,026 7,115 6.24
Other borrowing 4,518 448 9.91
Federal funds purchased 114 8 7.02
Total Interest-Bearing
Liabilities $ 154,739 $ 8,578 5.54%
Net interest earnings $ 9,875
Net yield on interest earning assets 4.77%
Year Ended December 31, 1999
Average Yield/
Balance Interest Rate
ASSETS (In Thousands)
Cash in banks - interest bearing$ 1,355 $ 78 5.75%
Loans 121,166 12,859 10.61
Taxable investments 15,905 936 5.88
Non-taxable investments 1,825 87 4.77
Other 1,435 96 6.68
Federal funds sold and
securities purchased under
agreements to resell 8,757 462 5.28
Total Interest-Bearing
Assets $ 150,443 $ 14,518 9.65%
LIABILITIES
Demand - interest bearing $ 23,777 $ 633 2.66%
Savings deposits 10,674 352 3.30
Other time deposits 92,406 5,037 5.45
Other borrowing 3,087 236 7.65
Federal funds purchased 55 3 5.45
Total Interest-Bearing
Liabilities $ 129,999 $ 6,261 4.82%
Net interest earnings $ 8,257
Net yield on interest earning assets 4.83%
17
Year Ended December 31, 1998
Average Yield/
Balance Interest Rate
ASSETS (In Thousands)
Cash in banks - interest
bearing $ 1,411 $ 82 5.81 %
Loans 111,239 12,152 10.92
Taxable investments 15,285 936 6.12
Non-taxable investments 1,945 92 4.73
Other 932 57 6.11
Federal funds sold and
securities purchased
under agreements to resell 11,354 601 5.29
Total Interest-Bearing
Assets $ 142,166 $ 13,920 9.79%
LIABILITIES
Demand - interest bearing $ 22,732 $ 678 2.98
%
Savings deposits 9,048 288 3.18
Other time deposits 86,113 5,164 5.99
Other borrowing 3,380 262 7.75
Federal funds purchased - - -
Total Interest-Bearing
Liabilities $ 121,273 $ 6,392 5.27%
Net interest earnings $ 7,528
Net yield on interest earning assets 4.52%
(1) Note: Loan fees are included for rate calculation
purposes. Loan fees included in interest amounted to approximately
$999,520 in 2000, $892,522 in 1999 and $810,462 in 1998. Non
accrual loans have been included in the average balances.
C. Interest Differentials. The following tables set forth for the
periods indicated a summary of the changes in interest earned and
interest paid resulting from changes in volume and changes in rates.
2000 Compared to 1999
Increase (Decrease) Due to (1)
Volume Rate Change
Interest earned on: (In Thousands)
Cash in banks - interest
bearing $( 31) $ 6 $( 25)
Loans 2,867 878 3,745
Taxable investments 57 28 85
Nontaxable investments ( 10 ) 2 ( 8)
Other 3 ( 26 )(
23 )
Federal funds sold and
securities purchased under
agreement to resell 63 98 161
Total Interest-Earning Assets $ 2,949 $ 986 $ 3,935
18
2000 Compared to 1999 (Con't)
Increase (Decrease) Due to (1)
Volume Rate Change
(In Thousands)
Interest paid on:
NOW deposits $ 31 $( 16 )15
Savings deposits 14 ( 7 ) 7
Other time deposits 1,178 900
2,078
Other borrowing 109 103 212
Federal funds purchased 3 2
5
Total Interest-Bearing
Liabilities $ 1,335 $ 982 $ 2,317
Net Interest Earnings $ 1,614 $ 4$
1,618
(1) (1) The change in interest due to volume has been determined by
applying the rate from the earlier year to the change in average
balances outstanding from one year to the next. The change in interest
due to rate has been determined by applying the change in rate from one
year to the next to average balances outstanding in the later year.
1999 Compared to 1998
Increase (Decrease) Due to (1)
Volume Rate Change
Interest earned on: (In Thousands)
Cash in banks - interest
bearing $( 3) $( 1) $( 4)
Loans 1,084 ( 377) 707
Taxable investments ( 38) 38 -
Nontaxable investments ( 7 ) 2
( 5 )
Other 24 14 38
Federal funds sold and
securities purchased under
agreement to resell ( 137) ( 2) ( 139)
Total Interest-Earning Assets $ 923 $( 326 )$
597
Interest paid on:
NOW deposits $ 31 $( 76 )$(
45 )
Savings deposits 52 12 64
Other time deposits 372 ( 499) ( 127)
Other borrowing ( 23) ( 3) ( 26
)
Federal funds purchased 3 -
3
Total Interest-Bearing
Liabilities $ 435 $( 566 )$(
131 )
Net Interest Earnings $ 488 $ 240 $ 728
(1) The change in interest due to volume has been determined by
applying the rate from the earlier year to the change in average
balances outstanding from one year to the next. The change in
interest due to
19
rate has been determined by applying the change in rate from one year to
the next to average balances outstanding in the later year.
1998 compared to 1997
Increase (Decrease) Due to (1)
Volume Rate Change
Interest earned on: (In Thousands)
Cash in banks - interest
bearing $ - $( 10) $( 10
)
Loans 1,624 ( 242) 1,382
Taxable investments 255 ( 260) ( 5)
Nontaxable investments 5 ( 3) 2
Other 5 10 15
Federal funds sold and
securities purchased under
agreement to resell 230 ( 22) 208
Total Interest-Earning Assets $ 2,119 $( 527) $ 1,592
Interest paid on:
NOW deposits $ 55 $( 97) $( 42)
Savings deposits 22 8
30
Other time deposits 793 297
1,090
Other borrowing ( 20) ( 23) ( 43)
Federal funds purchased ( 30) - ( 30)
Total Interest-Bearing
Liabilities $ 820 $ 185 $ 1,005
Net Interest Earnings $ 1,299 $( 712) $ 587
(1) The change in interest due to volume has been determined by
applying the rate from the earlier year to the change in average
balances outstanding from one year to the next. The change in
interest due to rate has been determined by applying the change in
rate from one year to the next to average balances outstanding in
the later year.
II. INVESTMENT PORTFOLIO
A. Types of Investments The carrying amounts of investment securities
at the dates indicated are summarized as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2000 1999 1998
(In Thousands)
U. S. Treasury and other
U. S. government agencies
and corporations $ 18,449 $ 16,292 $ 14,750
State and political
subdivisions (domestic) 1,529 1,714 1,959
Mortgage backed securities 399 502 732
Equities 465 545 300
Totals $ 20,842 $ 19,053 $ 17,741
20
B. Maturities The amounts of investment securities in each category as
of December 31, 2000 are shown in the following table according to
maturity classifications (1) one year or less, (2) after one year
through five years, (3) after five years through ten years, (4) after
ten years.
U. S. Treasury
and Other U. S.
Government State
Agencies and and Political Mortgage Backed
Corporations Subdivisions Securities
Average Average
Yield Yield Average
Amount (1) Amount (1)(2) Amount Yield
(In Thousands)
Maturity:
One year or less $ 2,391 5.64% $ 400 6.47% $ 113 6.02%
After one year
through five years 15,808 6.12 506 7.58 - -
After five years
through ten years 250 7.05 158 8.15 - -
After ten years - - 464 8.55 285 8.13
Totals $ 18,449 6.07% $ 1,528 7.64% $ 398
7.53 %
(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 acquisition price
of each security in that range.
(2) Yields on securities of state and political subdivisions are stated
on a tax equivalent basis, using a tax rate of 34%.
III. Loan Portfolio
A. Types of Loans The amount of loans outstanding at the indicated
dates are shown in the following table according to type of loan.
Year Ended Year Ended Year Ended
December 31, December 31, December 31
,
2000 1999 1998
(In Thousands)
Commercial, financial and
agricultural $ 42,973 $ 34,607 $ 29,889
Real estate - mortgage 81,314 62,829 58,005
Real estate - construction 7,646 13,413 7,909
Installments 31,294 21,433 19,157
$ 163,227 $ 132,282 $ 114,960
Less - Unearned income 253 216 154
Reserve for possible
losses 2,728 2,169 1,971
Total Loans $ 160,246 $ 129,897 $ 112,835
21
B. Maturities and Sensitivity to Changes in Interest Rates The amount
of total loans by category outstanding as of December 31, 2000 which,
based on remaining repayments of principal, are due in (1) one year or
less, (2) more than one year but less than five and (3) more than five
years are shown in the following table. The amounts due after one year
are classified according to the sensitivity to changes in interest
rates.
Maturity Classification
Over One
One Year Through Over
or Less Five Years Five Years Total
Types of Loans (In Thousands)
Commercial,
financial and
agricultural $ 34,507 $ 7,233 $ 2,240 $ 43,980
Real estate
mortgage 50,280 17,963 11,555 79,798
Real estate
construction 5,663 393 1,590 7,646
Installment 14,824 13,203 2,340 30,367
Total loans due
after one year
with:
Predetermined
interest rate 28,746
Floating interest
rate 27,471
C. Nonperforming Loans The following table presents, at the dates
indicated, the aggregate amounts of nonperforming loans for the
categories indicated.
Year Ended Year Ended Year Ended
December 31, December 31, December 31 ,
2000 1999 1998
(In Thousands)
Loans accounted for on a
non-accrual basis $ 876 $ 422 $ 557
Loans contractually past
due ninety days or more
as to interest or principal
payments 734 419 492
Loans, the terms of which
have been renegotiated to
provide a reduction or
deferral of interest or
principal because of a
deterioration in the financial
position of the borrower 8 29 37
22
C. Nonperforming Loans - (con't)
Year Ended Year Ended Year
Ended
December 31, December 31, December 31,
2000 1999 1998
(In Thousands)
Loans now current about which
there are serious doubts as
to the ability of the borrower
to comply with present loan
repayment terms - - -
Loans are placed on non-accrual basis when loans are past due
ninety days or more. Management can elect not to place loans on non-
accrual status if net realizable value of collateral is sufficient to
cover the balance and accrued interest.
D. Commitments and Lines of Credit The banks provide commitments and
lines of credit to their most worthy customers only. Commitments are
for short terms, usually not exceeding 30 days, and are provided for a
fee of 1% of the amount committed. Lines of credit are for periods
extending up to one year. No fee is usually charged with respect to the
unused portion of a line of credit. Interest rates on loans made
pursuant to commitments or under lines of credit are determined at the
time that the commitment is made or line is established.
23
E. Rate Sensitivity Analysis
SOUTH BANKING COMPANY
DECEMBER 31, 2000
+-----------------------Interest Sensitive--------------------+
0 - 91 - 1 to 3
90 Day 365 Days Years
(Thousands of Dollars)
Earning Assets:
Loans $ 79,809 $ 16,883 $ 33,668
Investment securities 399 2,791 12,984
Interest bearing deposits 349 377 -
Federal funds sold and
securities purchased under
agreement to resell 14,693 - -
Total Earning Assets $ 95,250 $ 20,051 $ 46,652
Supporting Sources of Funds
Savings $ 11,326 $ - $ -
Money market and NOW 27,405 - -
Other time deposits 23,306 58,527 9,331
CD's - $100,000 or more 7,172 27,005 3,392
Other borrowings 6,236 1,027 -
Federal funds purchased - - -
Total Interest Bearing
Deposits $ 75,445 $ 86,559 $ 12,723
Demand deposits and other funds
supporting earning assets -
non interest earning $ - $ - $ -
Total Supporting Sources
of Funds $ 75,445 $ 86,559 $ 12,723
Interest Sensitive - interest
earning assets less interest
bearing liabilities $ 19,805 $( 66,508) $ 33,929
Cumulative interest rate
sensitivity gap $ 19,805 $( 46,703) $( 12,774)
Interest rate sensitivity gap
ratio 1.26 .23 3.66
Cumulative interest rate sensitivity
gap ratio 1.26 .71 .93
+-----------------------Interest Sensitive--------------------+
3 to 5 5 Years +
Years Over Total
(Thousands of Dollars)
Earning Assets:
Loans $ 14,881 $ 17,987 $ 163,228
Investment securities 3,330 872 20,376
Interest bearing deposits 99 - 825
Federal funds sold and
securities purchased under
agreement to resell - - 14,693
Total Earning Assets $ 18,310 $ 18,859 $ 199,122
Supporting Sources of Funds
Savings $ - $ - $ 11,326
Money market and NOW - - 27,405
Other time deposits 532 384 92,080
CD's - $100,000 or more - - 37,569
Other borrowings - - 7,263
Federal funds purchased - - -
Total Interest Bearing
Deposits $ 532 $ 384 $ 175,643
Demand deposits and other funds
supporting earning assets -
non interest earning $ - $ - $ 24,299
Total Supporting Sources of
Funds $ 532 $ 384 $ 199,942
Interest Sensitive - interest
earning assets less interest
bearing liabilities $ 17,778 $ 18,475 $( 820)
Cumulative interest rate
sensitivity gap $ 5,004 $ 23,479 $( 820 )
Interest rate sensitivity gap
ratio 34.42 - 1.0
Cumulative interest rate sensitivity
gap ratio 1.02 1.14 1.0
The rate sensitivity analysis table is designed to demonstrate South's
sensitivity to changes in interest rates by setting forth in comparative
form the repricing maturities of South's assets and liabilities for the
period shown. A ratio of greater than 1.0 times interest earnings assets
to interest bearing liabilities indicates that an increase in interest
rates will generally result in an increase in net income for South and a
decrease in interest rates will result in a decrease in net income. A
ratio of less than 1.0 times earnings assets to interest-bearing
liabilities indicates that a decrease in interest rates will generally
result in a increase in net income for South and an increase in interest
rates will result in an decrease in net income.
24
IV. Summary of Loan Loss Experience
The following table summarizes loan balances at the end of each
period and average balances during the year for each category; changes
in the reverse for possible loan losses arising from loans charged off
and recoveries on loans previously charged off; additions to the reserve
which have been charged to operating expense; and the ratio of net
charge-offs during the period to average loans.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2000 1999 1998
(In Thousands)
A. Average amount of loans
outstanding $ 148,195 $ 121,166 $ 111,239
B. Balance of reserve for
possible loan losses at
beginning of period $ 2,169 $ 1,971 $ 1,822
C. Loans charged off:
Commercial, financial
and agricultural $ 274 $ 149 $ 10
Real estate - mortgage 127 67 75
Installments 263 217 172
$ 664 $ 433 $ 257
D. Recoveries of loans
previously charged off:
Commercial, financial
and agricultural $ 83 $ 2 $ 20
Real estate 29 31 2
Installment 99 95 98
$ 211 $ 128 $ 120
E. Net loans charged off
during period $ 453 $ 305 $ 137
Additions to reserve
charged to operating
expense during period (1)$ 424 $ 503 $ 286
Addition from bank
acquisition 588 - -
$ 1,012 $ 503 $ 286
F. Balance of reserve for
possible loan losses at
end of period $ 2,728 $ 2,169 $ 1,971
G. Ratio of net loans charged
off during the period to
average loans outstanding .31 .25 .12
25
(1) Although the provisions exceeded the minimum provision required
by regulatory authorities, the Board of Directors believe that the
provision has not been in excess of the amount required to maintain the
reserve at a sufficient level to cover potential losses. The amount
charged to operations and the related balance in the reserve for loan
losses is based upon periodic evaluations by management of the loan
portfolio. These evaluations consider several factors including, but not
limited to, general economic conditions, loan portfolio composition,
prior loan loss experience and management's estimation of future
potential losses.
(2) Management's review of the loan portfolio did not allocate
reserves by category due to the portfolio's small size. The
reserves were allocated on the basis of a review of the entire
portfolio. The portfolio does not contain excessive concentrations
in any industry or loan category that might expose South to
significant risk.
V. Deposits
A. Average deposits, classified as demand deposits, savings deposits
and time certificates of deposit for the periods indicated are presented
below:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2000 1999 1998
(In Thousands)
Demand deposits $ 22,444 $ 20,341 $ 20,209
NOW deposits 24,959 23,777 22,732
Savings deposits 11,122 10,674 9,048
Time certificates of
deposits 114,026 92,406 86,113
Total Deposits $ 172,551 $ 147,198 $ 138,102
B. The amounts of time certificates of deposit issued in amounts
of $100,000 or more as of December 31, 2000 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.
Three months or less $ 7,183
Over three through twelve months 26,995
Over twelve months 3,392
Total $ 37,570
26
VI. Return on Assets and Shareholders' Equity
The following rate of return information for the periods
indicated is presented below:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2000 1999 1998
Return on assets (1) 1.35% 1.28% 1.23%
Return on equity (2) 15.53 14.18 14.45
Dividend payout ratio (3) 10.57 12.20 12.20
Equity to assets ratio (4) 8.69 9.02 9.02
(1) Net income divided by average total assets.
(2) Net income divided by average equity.
(3) Dividends declared per share divided by net income per share.
(4) Average equity divided by average total assets.
Item 2. Properties
Alma Bank's main banking office and the Registrant's principal
executive offices are located at 104 North Dixon Street, Alma,
Georgia 31510. The building, containing approximately 13,040 square
feet of usable office and banking space, and the land, approximately
1.2 acres, are owned by Alma Bank. Alma Bank also has a separate
drive-in banking facility located at 505 South Pierce Street, Alma,
Georgia. The building, containing 510 square feet, in which the
branch is located and the land, approximately .4 acres, on which it
is located are owned by Alma Bank.
Citizens Bank's main banking office is located at 205 East King
Street, Kingsland, Georgia 31548. The building, containing
approximately 6,600 square feet of usable office and banking space,
and the land, approximately 2 acres, are owned by Citizens Bank.
Peoples Bank's main banking office is located at Comas and E.
Parker Streets, Baxley, Georgia 31513. The building, containing
approximately 7,800 square feet of usable office and banking space,
and the land, approximately 2.5 acres, are owned by the Peoples Bank.
The Bank does not have branches.
Pineland Bank's main banking office is located at 257 North
Broad Street, Metter, Georgia 30439. The building, containing
approximately 10,000 square feet of usable office and banking space,
and the land, approximately 1 acre, are owned by the Pineland Bank.
Pineland Bank also has three branches and an operation center.
The branch in Metter, Georgia is a limited service drive-in facility
containing approximately 500 square feet and is situated on land
covered by a long term lease. Pineland Bank acquired the operation
center which contains approximately 12,853 square feet of useable
space and is situated on .17 acres of land from Flag, Inc., in year
2000. This facility is partially rented with Pineland using the down-
27
stairs. A building acquired in the Flag acquisition houses the
branch in Cobbtown, Georgia. This facility consists of a 3,396
square foot building on a 90 x 120 ft. lot. A building in
Statesboro, Georgia is leased to accommodate a small branch. This
lease is renewed on an annual basis.
Item 3. Legal Proceedings
Neither the Registrant or its subsidiaries are parties to, nor
is any of their property the subject of, any material pending legal
proceedings, other than ordinary routine proceedings incidental to
the business of the Banks, nor to the knowledge of the management of
the Registrant are any such proceedings contemplated or threatened
against it or its subsidiaries.
Item 4. Submission of Matters to a vote of Security Holders
None applicable.
Part II.
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
There is no public market for the common stock of South or the
Banks. The last known selling price of South's common stock, based
on information available to South's management, was $12.00 per share
on August 4, 2000. As of March 1, 2001, the Company had 471
shareholders with 399,500 shares outstanding.
For the years ended December 31, 2000, 1999 and 1998, South paid
cash dividends of $279,628 or $.70 per share, $259,675 or $.65 per
share, and $259,675 or $.65 per share, respectively. These dollars
equate to dividend payout ratios (dividends declared divided by net
income) of 10.57%, 12.20% and 13.46% in 2000, 1999 and 1998,
respectively. Certain other information concerning dividends and
historical trading prices is set forth below:
QUARTERLY COMMON STOCK DATA
Set forth below is information concerning high and low sales
prices by quarter for each of the last two fiscal years and dividend
information for the last two fiscal years. The Company's common
stock is not traded on any established pubic trading market. The
Company acts as its own transfer agent, and the information
concerning sales prices set forth below is derived from the Company's
stock transfer records. As of December 31, 2000, there were 471
shareholders of record.
SALES PRICES BY
QUARTER
High Low
Fiscal Year 2000
First Quarter $12.00 $12.00
Second Quarter - -
Third Quarter 12.00 12.00
Fourth Quarter - -
28
SALES PRICES BY QUARTER
High Low
Fiscal Year 1999
First Quarter $12.00 $12.00
Second Quarter 12.00 12.00
Third Quarter 12.00 12.00
Fourth Quarter 12.00 12.00
DIVIDENDS PAID PER SHARE
Fiscal Year 2000 1999
March 31 $ .00 .00
June 30 .00 .00
September 30 .00 .00
December 31 .70 .65
Item 6. Selected Financial Data
Years Ended December 31,
2000 1999 1998 1997 1996
(In Thousands)
Total Assets $ 220,450 $ 173,807 $ 164,890 $ 149,895 $132,291
Operations:
Interest income $ 18,454 $ 14,518 $ 13,920 $ 12,328 $ 11,107
Interest expense 8,578 6,261 6,392 5,387 4,823
Net Interest
Income $ 9,876 $ 8,257 $ 7,528 $ 6,941 $ 6,284
Provision for
loan losses 424 503 286 179 202
Net interest
income after
provision for
loan losses $ 9,452 $ 7,754 $ 7,242 $ 6,762 $ 6,082
Other income $ 2,718 $ 2,298 $ 1,905 $ 1,569 $ 1,596
Other expenses $ 8,302 $ 6,906 $ 6,387 $ 6,017 $ 5,586
Income before
income taxes $ 3,868 $ 3,146 $ 2,760 $ 2,314 $ 2,092
Federal income
taxes 1,222 1,017 831 768 662
Net income before
extraordinary
items $ 2,646 $ 2,129 $ 1,929 $ 1,546 $ 1,430
Extraordinary
items $ - $ - $ - $ - $ -
Net income $ 2,646 $ 2,129 $ 1,929 $ 1,546 $ 1,430
Per Share Data:
Income after
extraordinary
items $ 6.62 $ 5.33 $ 4.83 $ 3.86 $ 3.54
Net income $ 6.62 $ 5.33 $ 4.83 $ 3.86 $ 3.54
Dividends
declared $ .70 $ .65 $ .65 $ .60 $ .55
Book value $ 45.73 $ 39.57 $ 35.56 $ 31.28 $ 27.72
29
Item 6. Selected Financial Data (con't)
Years Ended December 31,
2000 1999 1998 1997 1996
(In Thousands)
Profitability Ratios
Net income to
average total
assets 1.35% 1.28 % 1.23 %
1.13 % 1.14%
Net income to average
stockholders'
equity 15.52% 14.18% $ 14.45 $ 13.06 $ 13.29
Net interest
margin 4.77% 4.83% $ 4.52 $ 5.18 $ 4.86
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The purpose of this discussion is to focus on information about
South Banking Company's financial condition and results of operations
which is not otherwise apparent from the consolidated financial
statement included in this report. Reference should be made to those
statements, selected statistical information and the selected financial
data presented elsewhere in this report for an understanding of the
following discussion and analysis.
Financial Condition and Liquidity
Financial Condition
South functions as a financial institution and as such its
financial condition should be examined in terms of trends in its
sources and uses of funds. A comparison of daily average balances
indicate how South has managed its sources and uses of funds. Included
in the selected statistical information, the comparison of daily
average balance in the business portion of the filing indicated how
South has managed its sources and uses of funds. South used its funds
primarily to support its lending activities.
South's total assets increased to $220,450,038 at year end 2000
from $173,807,421 at year end 1999. This increase of $46,642,617
includes $21,016,182 of assets acquired in the Flag branch
acquisitions. The internal generated growth of $25,626,435 represents a
14.7% increase in 2000 compared to 5.4% increase in 1999. This
increase is attributable to
normal growth within the banking area with limited entry into
competitive situations for large deposits. Due to the increased
competition in certain markets, the net interest margins have declined.
The net interest margin is not anticipated to change much in 2001 as
the effect of the new competition and stock market has leveled off.
However, continued decreases in the prime rate could impact the
margins. The interest rate sensitivity analysis, which is a part of
this report, gives some indication of the repricing opportunities of
South. The gap ratios for
30
the first twelve months are outside the limits established by the Bank
as ideal, however, the current interest rates are not favorable to
customers purchasing certificates in excess of twelve months. Loan
demand continues to be strong with loans increasing $12,536,784 in
2000. The banks continue to look for good quality loans as loans
represent the highest yielding asset on the Bank's books. The rural
economy of the Banks' market area has been stable prior to 1998. The
Banks have noticed some decline began in 1999 and 2000 in the overall
economy, and especially in the agricultural and timber industries.
While the Banks are not heavy into these industries, the decline in
these areas have impacted the overall economy. Classified loans for
regulatory purposes remain at low levels and, despite the problem in
the local economies, do not represent any trend or uncertainties which
management reasonably expects will materially impact future operating
results, liquidity of capital resources, or represents material credits
about which management is aware that causes management to have serious
doubts as to the ability of such borrowers to comply with the loan
payment terms.
South's investment portfolio, including certificates of deposits
in other banks, increased from $19,922,578 to $21,667,660. The small
increase of $1,745,082 from operations is an indication of the loan
demand of the banks and the desire of the banks to utilize the assets
of South in the highest yielding manner available to the banks without
creating liquidity problems. South has maintained adequate federal
funds sold and investments available for sale to sufficiently maintain
adequate liquidity. South's securities are primarily short term of
three years or less in maturity, enabling South to better monitor the
rate sensitivity of these assets. Unrealized gain and losses on this
portfolio is not material to the statement as South maintains a slight
unrealized loss of $131,541.
As the primary source of funds, aggregate deposits increased by
$21,505,401 in 2000 compared to $6,810,030 in 1999. This represents a
14.07% increase for the year compared to a 4.66% increase in 1999.
This illustrates the efforts of the banks to maintain good core
deposits. However, most of the growth was from the higher paying time
certificates. One of the markets experienced new competition in 1998
which continues to have some impact on time certificate rates.
Liquidity
The primary function of asset/liability management is to assure
adequate liquidity and maintain an appropriate balance between interest
sensitive earning assets and interest bearing liabilities. Liquidity
management involves the ability to meet the cash flow requirements of
customers who may be either depositors desiring to withdraw funds
or
borrowers requiring assurance that sufficient funds will be available
to meet their credit needs. Interest rate sensitivity management seeks
to avoid fluctuating net interest margins and to enhance consistent
growth of net interest income through periods of changing interest
rates.
31
Interest rate sensitivity varies with different types of interest-
earning assets and interest bearing liabilities. Overnight federal
funds on which rates change daily and loans which are tied to prime
differ considerably from long-term investment and fixed rate loans.
Similarly, time deposits over $100,000 and money market accounts are
much more interest sensitive than passbook savings and long-term
capital notes. The shorter-term interest rate sensitivities are key to
measuring the interest sensitivity gap, or excess interest-sensitive
earning assets over interest-bearing liabilities. An interest rate
sensitivity table is included elsewhere in this document, and it shows
the interest sensitivity gaps for different time intervals as of
December 31, 2000. The first 30 days there is an excess of interest-
bearing assets over interest-bearing liabilities. South becomes more
sensitive to interest rate fluctuations on a short time period. While
the cumulative gap declines with each time interval, South remains
within a manageable position.
Marketable investment securities, particularly those of shorter
maturities, and federal funds sold are the principal sources of asset
liquidity. Securities maturing in one year or less amounted to
$2,905,273 and federal funds sold net of federal funds purchased with
daily maturities amounted to $14,693,000 at year end 2000, an increase
from prior years as deposit growth exceeded loan demand. Maturing
loans and certificates of deposits in other banks are other sources of
liquidity.
The overall liquidity of South has been enhanced by a significant
aggregate amount of core deposits. These core deposits have remained
constant during this period. South has utilized less stable short-term
funding sources to enhance liquidity such as large denomination time
deposits and money market certificates within its current customer
base, but has not attempted to acquire these type of accounts from non-
core deposit customers. South has utilized its core deposit base to
help insure it maintains adequate liquidity.
Historically, the trend in cash flows as represented in the
statement of cash flows shows a steady increase in cash generated by
operations from the last three years. This is a result of increasing
net income for each year. While income is not predictable, it is
anticipated that liquidity will continue to be enhanced by the
operations of the bank. Operations activity, however, generate only a
small portion of the cash flow activities of the bank. Primary cash
flow comes from investing activities such as sales and/or maturity of
investment securities and in the financing activity through an increase
in deposits. The primary use of cash flow includes the purchase of
securities and making new loans as investing activities. The history
of the bank's cash flow indicates a nonrepeating source such as
proceeds from borrowings utilized as sources of cash for the purpose of
acquisition or expansion. South's overall cash flows indicate the
relative stability and manageable growth of the bank's assets. South
utilized deposit growth as its primary source of funds to handle
growth. South's liquidity is maintained at levels determined by
management to be sufficient to handle the cash needs that
32
might arise at any given date. Outside sources are maintained, but
South looks to these sources only on a very short term basis. South's
long term liquidity plans include utilizing internally generated
deposits as its primary source of cash flows and utilizing the shifting
of the make up of assets to handle short term demands on cash.
Capital Resources
In January 1989, the Federal Reserve Board released new standards
for measuring capital adequacy for U. S. banking organizations. These
standards are based on the original risk-based capital requirements
first proposed in early 1986 by U. S. bank regulators and then
developed jointly by authorities from the twelve leading industrial
countries. As a result, the standards are designed to not only
provide more risk-responsive capital guidelines for financial
institutions in the U. S., but also incorporate a consistent framework
for use by financial institutions operating in the major international
financial markets.
In general, the standards require banks and bank holding companies
to maintain capital based on "risk-adjusted" assets so that categories
of assets with potentially higher credit risk will require more capital
backing than assets with lower risk. In addition, banks and bank
holding companies are required to maintain capital to support, on a
risk-adjusted basis, certain off-balance sheet activities such as loan
commitments and interest rate swaps.
The Federal Reserve Board standards classify capital into two
tiers, referred to as Tier 1 and Tier 2. Tier 1 capital consists of
common shareholders' equity, noncumulative and cumulative (BHCs only)
perpetual preferred stock and minority interest less goodwill. Tier 2
capital consists of allowance for loan and lease losses, perpetual
preferred stock (not included in Tier 1), hybrid capital instruments,
term subordinated debt and intermediate-term preferred stock. By
December 31, 1992, all banks were required to meet a minimum ratio of
8% of qualifying total capital to risk-adjusted total assets with at
least 4% Tier 1 capital. Capital that qualifies as Tier 2 capital is
limited to 100% of Tier 1 capital.
Loans and Asset Quality
Management of the Company believes that the loan portfolio is
adequately diversified. Commercial loans are spread through numerous
types of businesses with no particular industry concentrations. Loans
to individuals are made primarily to finance consumer goods purchased.
At December 31, 2000, total loans, net of unearned discounts, were 81%
of total earning assets. Loans secured by real estate accounted for
54% of total loans as of December 31, 2000. Most of the loans
classified as real estate-mortgage are commercial loans where real
estate provides additional collateral. The Banks do not participate in
the secondary loan market.
33
Nonperforming assets include nonaccrual loans, accruing loans past
due 90 days or more and other real estate, which includes foreclosures,
deeds in lieu of foreclosure and in-substance foreclosures.
A loan is generally classified as nonaccrual when full
collectibility of principal or interest is doubtful or a loan becomes
90 days past due as to principal or interest, unless management
determines that the estimated net realizable value of the collateral is
sufficient to cover the principal balance and accrued interest. When
interest accruals are discontinued, unpaid interest credited to income
in the current year is reversed and unpaid interest accrued in prior
years is charged to the allowance for loan losses. Nonperforming loans
are returned to performing status when the loan is brought current and
has performed in accordance with contract terms for a period of time.
A summary of South's loan loss experience is included elsewhere in this
report.
Distribution of Nonperforming Assets
2000 1999 1998
(In Thousands)
Nonaccrual loans $ 876 $ 442 $ 557
Past due 90 days still accruing 734 419 492
Other real estate (ORE) 725 168 163
$ 2,335 $ 1,029 $ 1,212
Nonperforming loans to year
end loans .99 % .65
% .91 %
Nonperforming assets to year
end loan and ORE 1.42% .78 %
1.05 %
The ratio of nonperforming assets has increased each year from
1994 to 1997. However in 1998 and 1999, a slight decrease occurred as
90 days past dues declined. During 2000, the economy in the banks'
market area declined with certain loans deteriorating to nonperforming
status. Management continues to work on nonperforming assets to reduce
this ratio.
Asset-Liability Management and Market Risk Sensitivity
Market risk is the risk of loss from adverse changes in market
prices and rates. The Company's market risk arises principally from
interest rate risk inherent in its lending, deposit and borrowing
activities. Management actively monitors and manages its inherent rate
risk exposure. Although the Company manages other risks, as in credit
quality and liquidity risk, in the normal course of business,
management considers interest rate risk to be its most significant
market risk and could potentially have the largest material effect on
the Company's financial condition and results of operations. Other
types of market risks, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the
Company's business activities.
34
The Company's profitability is affected by fluctuations in
interest rates. Management's goal is to maintain a reasonable balance
between exposure to interest rate fluctuations and earnings. A sudden
and substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates on interest-
earning assets and interest-bearing liabilities do not change at the
same speed, to the same extent or on the same basis. The Company
monitors the impact of changes in interest rates on its net interest
income using several tools.
The Banks' goal is to minimize interest rate risk between interest
bearing assets and liabilities at various maturities through its
Asset-
Liability Management (ALM). ALM involves managing the mix and pricing
of assets and liabilities in the face of uncertain interest rates and
an uncertain economic outlook. It seeks to achieve steady growth of
net interest income with an acceptable amount of interest rate risk and
sufficient liquidity. The process provides a framework for
determining, in conjunction with the profit planning process, which
elements of the Company's profitability factors can be controlled by
management. Understanding the current position and implications of
past decisions is necessary in providing direction for the future
financial management of the Company. The Company uses an asset-
liability model to determine the appropriate strategy for current
conditions.
Interest sensitivity management is part of the asset-liability
management process. Interest sensitivity gap (GAP) is the difference
between total rate sensitive assets and rate sensitive liabilities in a
given time period. The Company's rate sensitive assets are those
repricing within one year and those maturing within one year. Rate
sensitive liabilities include insured money market accounts, savings
accounts, interest-bearing transaction accounts, time deposits and
borrowings. The profitability of the Company is influenced
significantly by management's ability to manage the relationship
between rate sensitive assets and liabilities. At December 31, 2000,
approximately 58% of the Company's earnings assets could be repriced
within one year compared to approximately 92% of its interest-bearing
liabilities. This compares to 64% and 93% in 1999.
The Company's current GAP analysis reflects that in periods of
increasing interest rates, rate sensitive assets will reprice slower
than rate sensitive liabilities. The Company's GAP analysis also shows
that at the interest repricing of one year, the Company's net interest
margin would be adversely impacted. This analysis, however, does not
take into account the dynamics of the marketplace. GAP is a static
measurement that assumes if the prime rate increases by 100 basis
points, all assets and liabilities that are due to reprice will
increase by 100 basis points at the next opportunity. However, the
Company is actually able to experience a benefit from rising rates in
the short term because deposit rates do not follow the national money
market. They are controlled by the local market. Loans do follow the
money market; so when rates increase they reprice immediately, but the
Company is able to manage the deposit side. The Company generally does
not raise deposit rates as fast or as much. The Company also has the
ability to manage its funding costs by choosing alternative sources of
funds.
35
The Company's current GAP position would also be interpreted to
mean that in periods of declining interest rates, the Company's net
interest margin would benefit. However, competitive pressures in the
local market may not allow the Company to lower rates on deposits, but
force the Company to lower rates on loans.
Computation of prospective effects of hypothetical interest rate
changes are based on numerous assumptions including relative levels of
market interest rates, loan prepayments and deposit decay rates, and
should not be relied upon as indicative of actual results. Further,
the computations do not contemplate any actions the Company could
undertake in response to changes in interest rates.
The rate sensitivity analysis as presented in the selected
statistical information shows the Company's financial instruments that
are sensitive to changes in interest rates, categorized by expected
maturity. Market risk sensitive instruments are generally defined as
on and off balance sheet derivatives and other financial instruments.
Notes to Market Risk Sensitivity Table:
Expected maturities are contractual maturities adjusted for
prepayments of principal when possible. The Company uses certain
assumptions to estimate expected maturities.
For loans, the Company has used contractual maturities due to the
fact that the Company has no historical information on prepayment
speeds. Since most of these loans are consumer and commercial
loans, and since the Company's customer base is community-based,
the Company feels its prepayment rates are insignificant.
For mortgage-backed securities, expected maturities are based upon
contractual maturity, projected repayments and prepayment of
principal. The prepayment experience herein is based on industry
averages as provided by the Company's investment trustee.
Loans receivable includes non-performing loans.
Interest-bearing liabilities are included in the period in which
the balances are expected to be withdrawn as a result of
contractual maturities. For accounts with no stated maturities,
the balances are included in the 0 to 90 day category.
The interest rate sensitivity gap represents the difference
between total interest-earning assets and total interest-bearing
liabilities.
An important aspect of achieving satisfactory net interest income
is the composition and maturities of rate sensitive assets and
liabilities. The table generally reflects that in periods of rising
interest rates, rate sensitive liabilities will reprice faster than
rate sensitive assets, thus having a negative effect on net interest
income. It must be
understood, however, that such an analysis is only a snapshot picture
and
36
does not reflect the dynamics of the market place. Therefore,
management reviews simulated earnings statements on a monthly basis to
more accurately anticipate its sensitivity to changes in interest
rates.
Results of Operations
2000 Compared to 1999
Net interest income remains an effective measurement of how well
management has balanced South's interest rate sensitive assets and
liabilities. Net interest income increased by $1,619,133. The
increase of 25.8%, which included the results of the branch
acquisitions, compared to a 9.68% increase in 1999. The primary
determinants of the increase were loans and time deposits. As loan
demand increases, funds are channeled into higher yielding loans.
Management continues its policy of not soliciting high interest
deposits and was able to maintain stable cost of funds. The growth of
assets and liabilities was primarily the reason for the increase as net
interest yield decreased slightly to 4.77% from 4.83%. With the low
interest rate currently in the market and South's current rate gap,
South will continue its efforts to channel funds into higher yielding
assets. Due to the rate sensitivity gap, South will attempt to improve
its current position with a controlled attempt to lengthen its maturity
of interest rate sensitive liabilities although this remains difficult
without rate adjustments upward.
Interest and fees on loans increased $3,744,981 or 29.13% in 2000
from 1999 due to rate increases of 59 basis points and loan growth of
23.8% in 2000. Interest on investment securities increased $53,083 or
4.8% in 2000 from 1999 due to a slight increase in the yield in
investments as rates have increased slightly. Interest income on
federal funds sold increased $160,488 or 34.7% due to higher average
balances invested and higher rates.
Total interest expense increased 37% or $2,316,587 from 1999 to
2000. The largest component of total interest expense is interest
expense on deposits, which increased $2,109,540 or 35.1% from 1999 to
2000 due to a rate increase and growth in deposits. The average rate
paid on deposits was 5.54%, 4.82% and 5.27% in 2000, 1999 and 1998,
respectively.
The allowance for possible loan losses is established through
charges to expense in the form of a provision for loan losses. The
provision for loan losses was $424,000 and $503,000, respectively, for
the years ended December 31, 2000 and 1999. The provision in 2000
reflects replenishing the allowance for loan losses to cover net charge-
offs of $452,964, plus providing for the increase in total loans
outstanding. The allowance for loan losses to total loans outstanding
is 1.67% at December 31, 2000. Net charge-offs to average loans are
.31% for 2000 as compared to 0.25% for 1999.
The allowance for loan losses is based on an in-depth analysis of
the loan portfolio. Specifically included in that analysis are the
following types of loans: loans determined to be of a material amount,
loans commented on by regulatory authorities, loans commented on by
internal and external auditors, loans past due more than 60 days, and
37
loans on a nonaccrual status. The allowance for loan losses is not
allocated to specific credit risk, but rather to the overall loan
portfolio as the individual banks are relatively small and can be
looked at as a whole. The overall loan portfolio remains of good
quality, however, some deterioration has been noted in the economy
which reflects on the loan portfolio. The Banks have made provisions
where necessary to reflect the overall quality of loans.
Non-Interest Income
Non-interest income for 2000 increased by $420,249 or 15.5% over
1999, as compared to an increase in 1999 of $392,788 or 20.6% over
1998. These increases generally resulted from increased activity in
data processing, financial services and service charges on deposits. A
significant contributor to non-interest income is service charges on
deposit accounts which increased 24.2%. Management views deposit fee
income as critical influence on profitability. Periodic monitoring of
competitive fee schedules and examination of alternative opportunities
ensure that the Company realizes the maximum contribution to profits
from this area. The addition of the branch acquisition contributed to
the increase in fees.
Non-Interest Expense
Non-interest expenses totaled $8,301,997 in 2000 as compared to
$6,905,856 in 1999. This represented an 20.2% increase from 1999 to
2000, and a 8% increase from 1998 to 1999. The overall increases
during the year were attributable to growth in all geographic markets,
and includes operations of branches acquired during the year. Salaries
and other personnel expenses, which comprised 51% of total non-interest
expenses for 2000, were up $535,840 or 14.5% over 1999 due to normal
salary increases, benefit cost increases, and increased personnel due
to two new branches. During 1999 and 1998, salaries and other
personnel expenses accounted for 54% and 51% of total other operating
expenses, respectively.
Combined net occupancy and furniture and equipment expenses
increased $298,051, or 25.4% from 1999 to 2000, as compared to an
increase of $26,489, or 2.3% in 1999.
Income Taxes
Income tax expense totaled $1,221,738 in 2000 as compared to
$1,017,056 in 1999. The changes in net income tax expense for the
years were due to changes in taxable income for each respective year.
Taxable income is affected by net income, income on tax exempt
investment securities and loans, and the provision for loan losses.
For tax purposes, the Bank can only recognize actual loan losses. The
Company works actively with outside tax consultants to minimize tax
expenses.
38
Results of Operations
1999 Compared to 1998
Net interest income remains an effective measurement of how well
management has balanced South's interest rate sensitive assets and
liabilities. Net interest income increased by $728,607. The increase
of 9.68% compared to a 8.45% increase in 1998. The primary
determinants of the increase were loans and time deposits. As loan
demand increased, funds were channeled into higher yielding loans.
Management continues its policy of not soliciting high interest
deposits and was able to maintain stable cost of funds. The growth of
assets and liabilities was only part of the reason for the increase as
net interest yield increased to 4.83% from 4.52%. With the low
interest rates in the market and South's interest rate gap, South
continued its efforts to channel funds into higher yielding assets.
Due to the rate sensitivity gap, South attempted to improve its current
position with a controlled attempt to lengthen its maturity of interest
rate sensitive liabilities although this is difficult without rate
adjustments upward.
Interest and fees on loans increased $706,985 or 5.82% from 1998
to 1999 due to loan growth of 15.1% in 1999. Interest on investment
securities decreased $29,504 or 2.5% from 1998 to 1999 due to a
reduction in the yield in investments as rates have increased slightly.
Interest income on federal funds sold decreased $113,905 or 18.9% due
to higher average balances invested.
Total interest expense decreased 20% or $131,134 from 1998 to
1999. The largest component of total interest expense is interest
expense on deposits, which decreased $117,482 or 1.9% from 1998 to 1999
due to a rate decrease that offset growth in deposits. The average
rate paid on deposits was 4.82%, 5.27% and 5.10% in 1999, 1998 and
1997, respectively.
The allowance for possible loan losses is established through
charges to expense in the form of a provision for loan losses. The
provision for loan losses was $503,000 and $286,000, respectively, for
the years ended December 31, 1999 and 1998. The provision in 1999
reflects replenishing the allowance for loan losses to cover net charge-
offs of $432,472, plus providing for the 15.10% increase in total loans
outstanding. The allowance for loan losses to total loans outstanding
is 1.64% at December 31, 1999. Net charge-offs to average loans are
.25% for 1999 as compared to 0.12% for 1998.
The allowance for loan losses is based on an in-depth analysis of
the loan portfolio. Specifically included in that analysis are the
following types of loans: loans determined to be of a material amount,
loans commented on by regulatory authorities, loans commented on by
internal and external auditors, loans past due more than 60 days, and
loans on a nonaccrual status. The allowance for loan losses is not
allocated to specific credit risk, but rather to the overall loan
portfolio as the individual banks are relatively small and can be
looked at as a whole. The overall loan portfolio remains of good
quality, however, some deterioration was noted in the economy which
reflects on the loan portfolio. The Banks have made provisions where
necessary to reflect the overall quality of loans.
39
Non-Interest Income
Non-interest income for 1999 increased by $392,788 or 20.6% over
1998, as compared to an increase in 1998 of $335,546 or 21.4% over
1997. These increases generally resulted from increased activity in
data processing, financial services and service charges on deposits. A
significant contributor to non-interest income is service charges on
deposit accounts which increased 24.2%. Management views deposit fee
income as critical influence on profitability. Periodic monitoring of
competitive fee schedules and examination of alternative opportunities
ensure that the Company realizes the maximum contribution to profits
from this area.
Non-Interest Expense
Non-interest expenses totaled $6,905,856 in 1999 as compared to
$6,386,678 in 1998. This represented an 8% increase from 1998 to 1999,
and a 6% increase from 1997 to 1998. The overall increases during the
year were due to growth in all geographic markets, which is evidenced
by the growth in deposits of 4.7% from 1998 to 1999 and 11% from 1997
to 1998. Salaries and other personnel expenses, which comprised 54% of
total non-interest expenses for 1999, were up $410,409 or 12.5% over
1998 due to normal salary increases, benefit cost increases, and
increased personnel due to the one new branch. During 1998 and 1997,
salaries and other personnel expenses accounted for 51% and 50% of
total other operating expenses, respectively.
Combined net occupancy and furniture and equipment expenses
increased $26,489, or 2.3% from 1998 to 1999, as compared to an
increase of $102,423, or 9.8%, in 1998.
Income Taxes
Income tax expense totaled $1,017,056 in 1999 as compared to
$830,744 in 1998. The changes in net income tax expense for the years
were due to changes in taxable income for each respective year.
Taxable income is affected by net income, income on tax exempt
investment securities and loans, and the provision for loan losses.
For tax purposes, the Bank can only recognize actual loan losses. The
Company works actively with outside tax consultants to minimize tax
expenses.
Results of Operations
1998 Compared to 1997
Net interest income remains an effective measurement of how well
management has balanced South's interest rate sensitive assets and
liabilities. Net interest income increased by $586,672. The increase
of 8.45% compared to a 10.46% increase in 1997. The primary
determinants of the increase were loans and time deposits. As loan
demand increased, funds were channeled into higher yielding loans.
Management continues its policy of not soliciting high interest
deposits and was able to
40
maintain stable cost of funds. The growth of assets and liabilities was
necessary to maintain the level of net interest income as net interest
yield decreased to 4.52% from 5.18%. With the low interest rate
currently in the market and South's current interest rate gap, South
will continue its efforts to channel funds into higher yielding assets.
Due to the rate sensitivity gap, South will attempt to improve its
current position with a controlled attempt to lengthen its maturity of
interest rate sensitive liabilities although this is difficult without
rate adjustments upward.
Interest and fees on loans increased $1,382,418 or 12.83% from
1997 to 1998 due to a loan growth of 7.9% in 1998. Interest on
investment securities decreased $14,505 or 1% from 1997 to 1998 due to
a reduction in the yield in investments as rates have declined in
securities. Interest income on federal funds sold increased $208,034
or 53% due to higher average balances invested.
Total interest expense increased 18.6% or $1,005,298 from 1997 to
1998. The largest component of total interest expense is interest
expense on deposits, which increased $1,077,074 or 21% from 1997 to
1998 due to a 10% growth in deposits. The average rate paid on
deposits was 5.27%, 5.10% and 4.98% in 1998, 1997 and 1996,
respectively.
The allowance for possible loan losses is established through
charges to expense in the form of a provision for loan losses. The
provision for loan losses was $286,000 and $334,531, respectively, for
the years ended December 31, 1998 and 1997. The provision in 1998
reflects replenishing the allowance for loan losses to cover net charge-
offs of $137,066, plus providing for the 7.9% increase in total loans
outstanding. The allowance for loan losses to total loans outstanding
is 1.71% at December 31, 1998. Net charge-offs to average loans are
0.12% for 1998 as compared to 0.14% for 1997.
The allowance for loan losses is based on an in-depth analysis of
the loan portfolio. Specifically included in that analysis are the
following types of loans: loans determined to be of a material amount,
loans commented on by regulatory authorities, loans commented on by
internal and external auditors, loans past due more than 60 days, and
loans on a nonaccrual status. The allowance for loan losses is not
allocated to specific credit risk, but rather to the overall loan
portfolio as the individual banks are relatively small and can be
looked at as a whole. The overall loan portfolio remains of good
quality, however, some deterioration has been noted in the economy
which reflects on the loan portfolio. The Banks have made provisions
where necessary to reflect the overall quality of loans.
Non-Interest Income
Non-interest income for 1998 increased by $335,546 or 4% over
1997, as compared to a decrease in 1997 of $26,778 or 1.6% over 1996.
These increases generally resulted from increased SBA loan activity.
41
A significant contributor to non-interest income is service
charges on deposit accounts which decreased 2.3%. Management views
deposit fee income as a critical influence on profitability. Periodic
monitoring of competitive fee schedules and examination of alternative
opportunities ensure that the Company realizes the maximum contribution
to profits from this area.
Non-Interest Expense
Non-interest expenses totaled $6,386,678 in 1998 as compared to
$6,017,178 in 1997. This represented a 6% increase from 1997 to 1998,
and a 7.7% increase from 1996 to 1997. The overall increases during
the year were due to growth in all geographic markets, which is
evidenced by the growth in deposits of 11% from 1997 to 1998 and 9%
from 1996 to 1997. Salaries and other personnel expenses, which
comprised 51% of total non-interest expenses for 1998, were up $219,187
or 7% over 1997 due to normal salary increases and increased personnel
due to the one new branch. During 1997 and 1996, salaries and other
personnel expenses accounted for 50% and 48% of total other operating
expenses, respectively.
Combined net occupancy and furniture and equipment expenses
increased $102,423, or 9.8% from 1997 to 1998, as compared to an
increase of $117,214, or 12%, in 1997. The increase in 1998 is due to
the opening of one new branch.
Income Taxes
Income tax expense totaled $830,744 in 1998 as compared to
$767,811 in 1997. The changes in net income tax expense for the years
were due to changes in taxable income for each respective year.
Taxable income is affected by net income, income on tax exempt
investment securities and loans, and the provision for loan losses.
For tax purposes, the Bank can only recognize actual loan losses. The
Company works actively with outside tax consultants to minimize tax
expenses.
Regulatory Matters
During the year 2000, federal and state regulatory agencies
completed asset quality examinations at South's subsidiary banks.
South's level and classification of identified potential problem loans
was not revised significantly as a result of this regulatory
examination process.
Examination procedures require individual judgments about a
borrower's ability to repay loans, sufficiency of collateral values and
the effects of changing economic circumstances. These procedures are
similar to those employed by South in determining the adequacy of the
allowance for loan losses and in classifying loans. Judgments made by
regulatory examiners may differ from those made by management.
42
Management and the boards of directors of South and affiliates
evaluate existing practices and procedures on an ongoing basis. In
addition, regulators often make recommendations during the course of
their examinations that relate to the operations of South and its
affiliates. As a matter of practice, management and the boards of
directors of South and its subsidiaries consider such recommendations
promptly.
Impact of Inflation and Changing Prices
The majority of assets and liability of a financial institution
are monetary in nature; therefore, differ greatly from most commercial
and industrial companies that have significant investments in fixed
assets or inventories. However, inflation does have an important
impact on the growth of total assets in the banking industry and the
resulting need to increase equity capital at higher than normal rates
in order to maintain an appropriate equity-to-assets ratio. An
important effect of this has been the reduction of asset growth to
maintain appropriate levels. Another significant effect of inflation
is on other expenses, which tend to rise during periods of general
inflation.
Management believes the most significant impact on financial
results is South's ability to react to changes in interest rates. As
discussed previously, management is attempting to maintain an
essentially balanced position between interest sensitive assets and
liabilities in order to protect against wide interest rate
fluctuations.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the Registrant
and its subsidiaries are included on pages F-2 through F-40 of this
Annual report on Form 10-K.
Consolidated Balance Sheets - December 31, 2000 and 1999
Consolidated Statements of Income and Other Comprehensive Income -
Years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flow - Years ended December 31, 2000,
1999 and 1998
Notes to Consolidated Financial Statements
Item 9. Disagreement on Accounting and Financial Disclosures
Not applicable.
43
Part III.
Item 10. Directors and Executive Officers of the Registrant
The Directors and Executive Officers of the Registrant and their
respective ages, positions with the Registrant, principal occupation and
Common Stock of the Registrant beneficially owned as of March 1, 2000
are as follows:
Director
(Officer) of # of shares
Position with Registrator Owned
Registrant of one of Beneficiary
& Principal the Banks (Percent of
Name (Age) Occupation Since Class)
Paul T. Bennett (45) President, 1978(1)(2) 19,000
Treasurer and (3) ( 4.75%)
Director; Vice (4)
Chairman and Director,
Citizens Bank; Vice
Chairman and Director,
Peoples State Bank &
Trust, Baxley, Georgia;
President Peoples Bank,
Lyons, Georgia; Director
and President
Banker's Data Services;
Director, Alma Exchange
Bank and Trust;
Director, Chairman and
President Pineland
State Bank
Olivia Bennett (81) Executive Vice 1969(1)(2) 188,959
President, Secretary (3) ( 47.30%)
and Director; Chairman
and Director, Alma
Bank; Director,
Banker's Data Services;
Chairman of Board,
President, Citizens Bank;
Director, Peoples Bank
Lawrence Bennett (53) President and 1987(1)(2) 13,698
Director, Alma (4) ( 3.43 %)
Bank; Director,
Banker's Data Services;
Director, Peoples
Bank, Baxley; Director
Peoples Bank, Lyons
Director, Pineland State
Bank
44
Item 10. Directors and Executive Officers of the Registrant (Con't)
Director
(Officer) of # of shares
Position with Registrator Owned
Registrant of one of Beneficiary
& Principal the Banks (Percent of
Name (Age) Occupation Since Class)
Charles Stuckey (53) Director; Executive 1990(3) 992
Vice President, ( .2 %)
Peoples Bank; Director,
Banker's Data Services
James W. Whiddon (56) Director; Executive 1989(2) 279
Vice President and ( .1 %)
Director, Citizens
Bank; Director,
Banker's Data Services
Kenneth F. Wade (58) Director; Executive 1980(1) 4,934
Vice President, Director ( 1.23 %)
and Cashier, Alma Bank;
Director, Banker's
Data Services
John Rogers (53) Director, Executive 1996(4) 100
Vice President, Pineland ( - %)
State Bank; Director;
Banker's Data Services
(1) Director of Alma Bank
(2) Director of Citizens Bank
(3) Director of Peoples Bank
(4) Director of Pineland State Bank
Included in shares owned by Olivia Bennett are 175,501 shares
owned by Estate of Valene Bennett of which she is the Executrix.
None of the directors are a director of a publicly-held
corporation which is required to file reports with the Securities and
Exchange Commission.
Each of the Directors and Executive Officers have been engaged in
his or her present principal occupation for at least five years.
Olivia Bennett is the mother of Paul T. Bennett and Lawrence Bennett.
There are no other family relationships between any other Director or
Executive Officer. Directors serve until the next annual meeting of
shareholders or until their successors are elected and qualified.
Officers serve at the pleasure of the Board of Directors.
45
Item 11. Management Renumeration and Transactions
The following information is given as to the cash and cash equivalent
forms of renumeration received by South's CEO.
Long-Term Compensation
Annual Compensation Awards Payouts
(A) (B) (C) (D) (E) (F) (G) (H)
(I)
Other
All
Name and Annual Restricted Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation (2) Award SARS
# Payouts sation
Paul T.
Bennett
CEO 2000 182,848 - 31,440 - - - -
CEO 1999 164,348 - 28,910 - - - -
CEO 1998 140,956 - 26,200 - - - -
1997 125,138 - 20,235 - - - -
1996 109,480 - 22,940 - - - -
Olivia
Bennett
Secretary2000 215,099 - 20,915 - - - -
1999 205,366 - 20,345 - - - -
1998 195,935 - 22,010 - - - -
1997 182,936 - 15,135 - - - -
1996 168,748 - 15,295 - - -
(1) Does not include fees and dues for clubs and fraternal and civic
organizations paid by the Banks to certain officers for business related
purposes. Also, does not include any amounts for use of an automobile.
(2) Other compensation consists of director fees from registrant and
subsidiary banks.
Transactions with Management
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 1, 2001, the beneficial
ownership of Common Stock of Registrant by the Only "person" (as that
term is defined by the Securities and Exchange Commission), who owns of
record or is known by the Registrant to own beneficially 5% or more of
the outstanding shares of Common Stock of the Registrant and by all
Executive Officers and Directors of the Registrant as a group.
46
Number of Percent of
Shares Owned Outstanding
Name Beneficially Shares
Estate of Valene Bennett
Route 4
Alma, Georgia 31510 175,501 43.93%
Olivia Bennett
Route 4
Alma, Georgia 31510 13,458 3.37%
ll Executive Officers and Directors
as a group (7 persons) 227,962 57.1%
Item 13. Certain Relationships and Related Transactions
The Banks have had, and expect to have in the future, banking
transactions in the ordinary course of business with Directors and
Officers of the Banks and their associates, including corporations,
partnerships and other organizations in which such Directors and
Officers have an interest, on substantially the same terms (including
interest rates and collateral) as those prevailing at the time for
comparable transactions with unrelated parties. Such transactions have
not involved more than the normal risk of collectibility or presented
other unfavorable features.
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
Item 14(a) 1. and 3. and Item 14(d)
(a) The following documents are filed as part of this report:
1. Financial Statements
(a) South Banking Company and Subsidiaries:
(i ) Consolidated Balance Sheets - December 31, 2000 and
1999
(ii) Consolidated Statements of Income and Other
Comprehensive Income - Years ended December 31,
2000, 1999 and 1998
(iii) Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2000, 1999 and 1998
(iv ) Consolidated Statements of Cash Flow - Years ended
December 31, 2000, 1999 and 1998
(b) South Banking Company (Parent Corporation Only):
(i ) Balance Sheets - December 31, 2000 and 1999
(ii ) Statements of Income and Other Comprehensive Income -
Periods ended December 31, 2000, 1999 and 1998
(iii) Statements of Stockholders' Equity - Periods ended
December 31, 2000, 1999 and 1998
(iv ) Statements of Cash Flow - Years ended December 31,
2000, 1999, and 1998
47
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(Con't)
3. Exhibits required by Item 7 of regulation S-K:
(3) Articles of Incorporation and By-Laws (included as
Exhibits 3(a) and (b), respectively, to Appendix II to
Registrant's Registration Statement on Form S-14, File No. 2-
71249, previously filed with the Commission and incorporated
herein by reference).
(13) 2001 Annual Report to Shareholders of South Banking
Company (not deemed filed except to the extent that sections
thereof are specifically incorporated into this report on
Form 10-K by reference).
(22) List of the Registrant's subsidiaries:
(1) Alma Exchange Bank & Trust
(2) Citizens State Bank
(3) Peoples State Bank & Trust
(4) Bankers' Data Services, Inc.
(5) Pineland State Bank
(6) South Financial Products, Inc.
All of the Registrant's subsidiaries were incorporated under the
laws of the State of Georgia and are doing business in Georgia under
the above names.
(b) The registrant has not filed a Form 8-K during the
last quarter of the period.
(c) The response to this Item 14(c) is included in item 14(a).
(d) Financial Statements Schedules - None.
48
POWER OF ATTORNEY
Know all men by these present, that each person whose signature
appears below constitutes and appoints Paul T. Bennett, his attorney-
in-fact, to sign any amendments to this Report, and to file the same,
with exhibits thereto, and other documents in connection therewith.
The Securities and Exchange Commission hereby ratifying and
confirming all that said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) 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 and on the dates indicated.
Date: March 30, 2001
Paul T. Bennett
Principal Executive,
Financial and Accounting
Officer and Director
Date: March 30, 2001
Olivia Bennett
Executive Vice President
And Director
Date: March 30, 2001
Charles Stuckey Director
Date: March 30, 2001
James W. Whiddon Director
Date: March 30, 2001
Kenneth F. Wade
Director
Date: March 30, 2001
Lawrence Bennett Director
Date: March 30, 2001
John Rogers Director
49
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.
SOUTH BANKING COMPANY
Date: March 30, 2001 By:
Paul T. Bennett
President, Treasurer
and Director
50
SUPPLEMENTAL INFORMATION
The following supplemental information has not been sent to the
Registrant's shareholders, but will be sent subsequent to the filing
of this Annual Report on Form 10-K:
(1) 2000 annual report to shareholders.
(2) Proxy statement for 2000 annual meeting of shareholders.
The foregoing materials will be furnished to the Commission
when they are sent to the shareholders since the Registrant does not
have securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934. The foregoing materials shall not be deemed to
be "filed" with the Commission or otherwise subject to the
liabilities of Section 18 of that Act.
51
SOUTH BANKING COMPANY
ALMA, GEORGIA
FINANCIAL STATEMENTS
DECEMBER 31, 2000
F1
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
South Banking Company
Alma, Georgia 31510
We have audited the accompanying consolidated balance sheets of
South Banking Company and Subsidiaries as of December 31, 2000 and 1999
and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December
31, 2000. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit 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 consolidated
financial position of South Banking Company and Subsidiaries at December
31, 2000 and 1999 and the consolidated results of its operations,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 2000, in conformity with generally accepted
accounting principles.
Respectfully submitted,
H. H. BURNET & COMPANY, P.C.
Waycross, Georgia
February 12, 2001
F2
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2000 1999
ASSETS
Cash and due from banks $ 8,911,914 $ 11,695,998
Deposits in other banks -
interest bearing $ 825,279 $ 869,000
Investment securities
Available for sale $ 20,695,055 $ 18,306,239
Held to maturity - market value
of $151,512 in 2000 and
$749,139 in 1999 $ 147,326 $ 747,339
Georgia Bankers stock $ 547,283 $ 547,283
Federal Home Loan Bank stock $ 426,100 $ 426,100
Federal funds sold $ 14,693,000 $ 3,180,000
Loans $163,227,679
$132,282,615
Less: Unearned discount ( 253,273) ( 216,397)
Reserve for loan losses ( 2,728,219 ) (
2,168,877 )
$160,246,187 $129,897,341
Bank premises and equipment $ 6,111,361 $ 4,097,405
Goodwill $ 1,916,358 $ 208,562
Other assets $ 5,930,175 $ 3,832,154
Total Assets $220,450,038 $173,807,421
The accompanying notes are an integral part of these financial
statements.
F3
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED BALANCE SHEETS (Con't)
December 31, December 31,
2000 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits: Demand - non-interest
bearing $ 24,298,756 $ 21,462,802
Demand - interest bearing 27,404,525 23,089,387
Savings 11,326,824 10,520,013
Time 129,649,110 97,727,773
$192,679,215 $152,799,975
Borrowing 6,223,363 2,669,743
Accrued expenses and other
liabilities 2,236,900 1,294,354
Federal funds purchased - 1,140,000
N/P - Federal Home Loan Bank 1,040,000 93,333
Total Liabilities $202,179,478 $157,997,405
Stockholders' Equity
Common stock $1 par value; shares
authorized - 1,000,000, shares
issued and outstanding -
2000 and 1999 - 399,500
and 399,500, respectively $ 399,500 $ 399,500
Surplus 3,070,831 3,070,831
Undivided profits 14,887,046 12,520,614
Accumulated other comprehensive income ( 86,817) ( 180,929)
Total Stockholders' Equity $ 18,270,560 $ 15,810,016
Total Liabilities and
Stockholders' Equity $220,450,038 $173,807,421
The accompanying notes are an integral part of these financial
statements.
F4
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2000 1999 1998
Interest Income
Interest and other
fees on loans $ 16,603,948 $ 12,858,967 $ 12,151,982
Interest on deposits -
interest bearing 53,224 78,124 82,264
Interest on federal
funds sold 622,780 462,292 601,351
Interest on investment
securities:
U. S. Treasury 77,571 144,635 208,785
U. S. Government agencies 910,190 753,245 668,239
Mortgage backed securities 33,411 37,875 58,537
State and municipal
subdivisions 79,343 86,777 91,698
Other securities 73,017 95,849 57,435
Total Interest Income $ 18,453,484 $ 14,517,764 $ 13,920,291
Interest Expense
Interest on deposits $ 8,121,657 $ 6,012,117 $ 6,129,599
Interest - other borrowing 456,150 249,103 262,755
Total Interest Expense $ 8,577,807 $ 6,261,220 $ 6,392,354
Net interest income $ 9,875,677 $ 8,256,544 $ 7,527,937
Provision for loan losses 424,000 503,000 286,000
Net interest income after
provision for loan losses $ 9,451,677 $ 7,753,544 $ 7,241,937
Other Operating Income
Service charge on deposits $ 1,576,094 $ 1,446,630 $ 1,164,506
Commission on insurance 89,036 68,614 93,217
Other income 591,926 399,993 450,789
Securities gains (losses) 7 236 2,288
Data processing fees 459,036 382,396 195,701
Loss on sale of fixed
assets 2,019 - ( 1,420)
Total Other Operating
Income $ 2,718,118 $ 2,297,869 $ 1,905,081
The accompanying notes are an integral part of these financial
statements.
F5
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (Con't)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2000 1999 1998
Other Operating Expenses
Salaries $ 3,354,689 $ 2,866,950 $ 2,643,285
Profit sharing and other
personnel expenses 875,460 827,359 640,615
Occupancy expense of bank
premises 475,452 408,211 393,219
Furniture and equipment
expense 996,773 765,963 754,466
Stationery and supplies 254,881 167,909 194,675
Data processing 310,141 240,633 179,560
Director fees 174,260 170,260 156,950
Other real estate expenses 13,006 21,112 13,991
Other expenses 1,847,335 1,437,459 1,409,917
Total Other Operating
Expenses $ 8,301,997 $ 6,905,856 $ 6,386,678
Income before income taxes $ 3,867,798 $ 3,145,557 $ 2,760,340
Applicable income taxes 1,221,738 1,017,056 830,744
Net Income $ 2,646,060 $ 2,128,501 $ 1,929,596
Other Comprehensive Income
before tax
Unrealized gain on
securities $ 151,160 $( 402,268)
$ 61,798
Other Comprehensive Income
before tax $ 151,160 $( 402,268)
$ 61,798
Income tax expenses related
to items of other
comprehensive income 57,048 ( 136,771)
21,011
Other comprehensive income,
net of tax $ 94,112 $( 265,497)
$ 40,787
Comprehensive Income $ 2,740,172 $ 1,863,004 $ 1,970,383
Per share data based on
weighted outstanding shares:
Weighted average
outstanding 399,500 399,500 399,500
Net Income $ 6.62 $ 5.33 $ 4.83
The accompanying notes are an integral part of these financial
statements.
F6
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Undivided '
Stock Surplus Profits
Balance,
December 31, 1997 $ 399,500 $ 3,070,831 $ 8,981,846
Net income - - 1,929,596
Cash dividends - - ( 259,654)
Unrealized gain
(loss) on securities
available for sale - - -
Balance,
December 31, 1998 $ 399,500 $ 3,070,831 $10,651,788
Net income - - 2,128,501
Cash dividends - - ( 259,675)
Unrealized gain
(loss) on securities
available for sale - - -
Balance,
December 31, 1999 $ 399,500 $ 3,070,831 $12,520,614
Net income - - 2,646,060
Cash dividends - - ( 279,628)
Unrealized gain
(loss) on securities
available for sale - - -
Redemption of shares - - -
Balance,
December 31, 2000 $ 399,500 $ 3,070,831 $14,887,046
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other Total
Comprehen- Stockholders '
sive Income Equity
Balance,
December 31, 1997 $ 43,781 $12,495,958
Net income - 1,929,596
Cash dividends - ( 259,654)
Unrealized gain
(loss) on securities
available for sale 40,787 40,787
Balance,
December 31, 1998 $ 84,568 $ 14,206,687
Net income - 2,128,501
Cash dividends - ( 259,675)
Unrealized gain
(loss) on securities
available for sale ( 265,497) ( 265,497)
Balance,
December 31, 1999 $( 180,929) $15,810,016
Net income - 2,646,060
Cash dividends - ( 279,628)
Unrealized gain
(loss) on securities
available for sale 94,112 94,112
Redemption of shares - -
Balance,
December 31, 2000 $( 86,817) $18,270,560
The accompanying notes are an integral part of these financial
statements.
F7
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2000 1999
1998
Cash Flows From Operating
Activities:
Net income $ 2,646,060 $ 2,128,501 $ 1,929,596
Add expenses not
requiring cash:
Provision for depreciation
and amortization 930,972 668,207 643,978
Provision for loan losses 424,000 503,000 286,000
Provision for loss on ORE 3,408 5,000 8,000
Bond portfolio losses
(gains) - ( 202)
( 247 )
(Gain) loss on sale of
premises & equipment ( 2,019 ) ( 6,080)
- -
(Gain) loss on sale of
other real estate owned 23,040 34,444
( 11,336 )
Increase (decrease) in
taxes payable ( 236,230 ) 290,973
74,038
Increase (decrease) in
interest payable 568,654 ( 39,109)
171,545
Increase (decrease) in
other liabilities 324,957 ( 348,857 )(
153,424 )
(Increase) decrease in
interest receivable ( 460,066 ) 167,420
( 60,192 )
Decrease (increase) in
prepaid expenses ( 80,167 ) 17,824
( 4,947 )
(Increase) decrease in
other assets ( 284,686) ( 101,191 )(
33,042 )
Recognition of unearned
loan income - 61,852
8,202
Net Cash Provided By
Operating Activities $ 3,857,923 $ 3,381,782 $ 2,858,171
Cash Flows From Investing
Activities:
Proceeds from maturities
of securities held to
maturity $ 600,000 $ - $ 1,360,102
Purchase of securities
held to maturity - -
( 502,131 )
Proceeds from maturity of
securities available for
sale 2,101,866 6,371,028 8,074,011
Net loans to customers ( 13,197,595) (17,816,584) ( 8,810,806)
The accompanying notes are an integral part of these financial
statements.
F8
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED STATEMENTS OF CASH FLOWS (Con't)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2000 1999 1998
Cash Flows From Investing
Activities: (con't)
Purchase of securities
available for sale $( 4,339,254) $( 7,849,323)
$( 9,351,464 )
Purchase of premises and
equipment ( 1,645,225) ( 696,558)
( 576,788 )
Proceeds from sale of
premises and equipment 29,970 11,538 29,394
Proceeds from sale of
other real estate owned 885,084 163,262 198,212
Purchase of Bank stock - ( 250,000) ( 300,000
)
Purchase of FHLB stock - ( 29,900 )
( 51,700)
Purchase of Bank Branches ( 4,193,634 ) -
- -
Net Cash Provided By
Investing Activities $(19,758,788 ) $(20,096,537)
$( 9,931,170 )
Cash Flows From Financing
Activities:
Net increase (decrease) in
demand deposits, NOW and
money markets $ 1,686,060 $( 3,360,349)
$ 4,074,732
Net increase in savings
and time deposits 19,819,341 10,170,379 9,313,121
Proceeds from borrowing 4,756,750 38,812 460,000
Payments on borrowing ( 256,463 ) ( 578,499)
( 504,559 )
Dividends paid ( 279,628 ) ( 259,675)
( 259,654 )
Payments to retire stock - - -
Increase in federal funds
Purchased ( 1,140,000 ) 1,140,000
( 150,000 )
Net Cash Provided By
Financing Activities $ 24,586,060 $ 7,150,668 $ 12,933,640
Net increase (decrease) in
Cash and Cash Equivalents $ 8,685,195 $( 9,564,087) $ 5,860,641
Cash and Cash Equivalents
at Beginning of Year 15,744,998 25,309,085 19,448,444
Cash and Cash Equivalents
at End of Year $ 24,430,193 $ 15,744,998 $ 25,309,085
The accompanying notes are an integral part of these financial
statements.
F9
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 1. Significant Accounting Policies
The accounting and reporting policies of South Banking
Company, Inc. and its subsidiaries conform with generally
accepted accounting principles and with practices within the
banking industry.
(a) Basis of Presentation
During 1996, Pineland State Bank was acquired by South
Banking Company. The transaction was accounted for using
the purchase method. During 2000, Pineland State Bank
acquired, in its immediate vicinity, three branches of Flag,
Inc. The transaction was accounted for using the purchase
method.
(b) Principles of Consolidation
The consolidated financial statements include the
accounts of South Banking Company, Alma, Georgia (The Bank)
and its wholly owned bank subsidiaries, Alma Exchange Bank,
Alma, Georgia; Peoples State Bank, Baxley, Georgia; Citizens
State Bank, Kingsland, Georgia; Pineland State Bank, Metter,
Georgia; and its wholly owned computer center, Bankers' Data
Services, Inc., Alma, Georgia. All significant intercompany
transactions and balances have been eliminated in
consolidation.
(c) Nature of Operations:
The Banks provide a variety of banking services to
individuals and businesses through its offices in Alma,
Georgia; Kingsland, Georgia; Baxley, Georgia; Metter,
Georgia; Cobbtown, Georgia; and Statesboro, Georgia. Its
primary source of revenue is loans to customers who are
primarily low to middle income individuals and small to mid
size businesses.
(d) Use of Estimates:
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
F10
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 1. Significant Accounting Policies (Con't)
(d) Use of Estimates (Con't)
Material estimates that are particularly susceptible to
significant change relate to the determination of the
allowance or losses on loans and the valuation of
fore-
closed real estate. In connection with the determination of
the estimated losses on loans and foreclosed real estate,
management obtains independent appraisals for significant
properties.
While management uses available information to
recognize losses on loans and foreclosed real estate,
further reductions in the carrying amounts of loans and
foreclosed assets may be necessary based on changes in local
economic conditions. In addition, regulatory agencies, as
an integral part of their examination process, periodically
review the estimated losses on loans and foreclosed real
estate. Such agencies may require the Bank to recognize
additional losses based on their judgments about information
available to them at the time of their examination. Because
of these factors, it is reasonably possible that the
estimated losses on loans and foreclosed real estate may
change materially in the near term. However, the amount of
the change that is reasonably possible cannot be estimated.
(e) Securities:
The Bank's investments in securities are classified in two
categories and accounted for as follows.
Securities to be Held to Maturity. Bonds, notes and
debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost,
adjusted for amortization of premiums and accretion of
discounts which are recognized in interest income using
the interest method over the period to maturity.
Securities Available for Sale. Securities available for
sale consist of bonds, notes, debentures, and certain
equity securities not classified as trading securities or
as securities to be held to maturity.
Declines in fair value of individual held-to-maturity
and available-for-sale securities below their cost that are
other than temporary have resulted in write-downs of the
individual securities to their fair value. The related
write-downs have been included in earnings as realized
losses.
F11
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 1. Significant Accounting Policies (Con't)
(e) Securities (Con't)
Unrealized holding gains and losses, net of tax, on
securities available for sale are reported as a net amount
in a separate component of shareholders' equity until
realized.
Gains and losses on the sale of securities available-
for-sale are determined using the specific-identification
method.
Federal Home Loan Bank Stock
Individual banks within the holding company have
joined the Federal Home Loan Bank ("FHLB") of Atlanta to
increase the Bank's available liquidity. As a FHLB member, the
Banks are required to acquire and retain shares of capital stock
in FHLB of Atlanta in an amount equal to the greater of (1) 1.0%
of the aggregate outstanding principal amount of the residential
mortgage loans, home purchase contracts, and similar
obligations, or (2) 0.3% of total assets at the beginning of
each year. The Bank is in compliance with this requirement
with an investment in FHLB stock of $426,100 and $426,100 at
December 31, 2000 and 1999, respectively. No ready market
exists for this stock and it has no quoted market value.
However, redemption of this stock has historically been at par
value.
(f) Loans Receivable:
Loans and Interest Income
Loans are carried at principal amounts outstanding
reduced by unearned discounts. Interest income on all loans
is recorded on an accrual basis. The accrual of interest is
generally discontinued on loans which become 90 days past
due as to principal or interest. The accrual of interest on
some loans, however, may continue even though they are 90
days past due, if the loans are well secured, in the process
of collection, and management deems inappropriate. If non-
accrual loans decrease their past due status to 60 days or
less, they are reviewed individually by management to
determine if they should be returned to accrual status.
Impaired Loans
The Bank accounts for its impaired loans in accordance
with SFAS No. 114, Accounting by Creditors for Impairment of
a Loan, which requires that all creditors value all
specifically
F12
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 1. Significant Accounting Policies (Con't)
Impaired Loans (Con't)
reviewed nonhomogeneous loans for which it is probable that
the creditor will be unable to collect all amounts due
according to the terms of the loan agreement at the loan's
fair value. Fair value may be determined based upon the
present value of expected cash flows, market price of the
loan, if available, or value of the underlying collateral.
Expected cash flows are required to be discounted at the
loan's effective interest rate. SFAS No. 114 was amended by
SFAS No. 118 to allow a creditor to use existing methods
for recognizing interest in- come on impaired loans and by
requiring additional disclosures about how a creditor
recognizes interest income related to impaired loans.
The Bank determines which loans are impaired through a
loan review process. When the ultimate collectibility of an
impaired loan's principal is in doubt, wholly or partially,
all cash receipts are applied to principal. When this doubt
no longer exists, cash receipts are applied under the
contractual terms of the loan agreement first to principal
and then to interest income. Once the recorded principal
balance has been reduced to zero, future cash receipts are
applied to interest income, to the extent that any interest
has been foregone. Further cash receipts are recorded as
recoveries or any amounts previously charged off. SFAS No.
114 specifically states that it need not be applied to "large
groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment". Thus, the Company
determined that the statement does not apply to its consumer
loan, credit card, or residential mortgage loan portfolios,
except that it may choose to apply it to certain specific
larger loans determined by management. In effect, these
portfolios are covered adequately in the Company's normal
formula for determining loan loss reserves.
Loan Fees and Costs
Nonrefundable fees and certain direct costs associated
with originating or acquiring loans are recognized as
yield adjustment over the contractual life of the related
loans, or if the related loan is held for resale, until the
loan is sold. Recognition of deferred fees and costs is
discontinued on non-accrual loans until they return to
accrual status or are charged-off. Commitment fees
associated with lending are deferred and if the commitment
is exercised, the fee is
F13
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 1. Significant Accounting Policies (Con't)
Impaired Loans (Con't)
recognized over the life of the related loan as a yield
adjustment. If the commitment expires unexercised, the
amount is recognized upon expiration of the commitment.
(g) Allowances for Loan Losses:
The allowance for loan losses is maintained at a level
which, in management's judgment, is adequate to absorb credit
losses inherent in the loan portfolio. The amount of the
allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of
the portfolio, credit concentrations, trends in historical
loss experience, specific impaired loans, economic
conditions, and other risks inherent in the portfolio.
Allowances for impaired loans are generally determined based
on collateral values or the present value of estimated cash
flows. Although management uses available information to
recognize losses on loans, because of uncertainties
associated with local economic conditions, collateral values,
and future cash flows on impaired loans, it is reasonably
possible that a material change could occur in the allowance
for loan losses in the near term. However, the amount of the
change that is reasonably possible cannot be estimated. The
allowance is increased by a provision for loan losses, which
is charged to expense and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired
loans are charged or credited to the provision for loan
losses.
(h) Premises and Equipment:
Land is carried at cost. Other premises and equipment
are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line and the
declining balance methods based principally on the estimated
useful lives of the assets. Maintenance and repairs are
expensed as incurred while major additions and improvements
are capitalized. Gains and losses on dispositions are
included in current operations.
(i) Other Real Estate (ORE)
Real estate acquired in satisfaction of a loan and in-
substance foreclosures are reported in other assets. In-
substance foreclosures are properties in which a borrower
with
F14
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 1. Significant Accounting Policies (Con't)
(i) Other Real Estate (ORE) (Con't)
little or no equity in the collateral, effectively abandons
control of the property or has no economic interest to
continue involvement in the property. The borrower's
ability to rebuild equity based on current financial
conditions also is considered doubtful. Properties acquired
by foreclosure or deed in lieu of foreclosure and properties
classified as in-substance foreclosures are transferred to
ORE and recorded at the lower of cost or fair market value
based on appraised value at the date actually or
constructively received. Loan losses arising from the
acquisition of such property are charged against the
allowance for loan losses. Losses on ORE due to subsequent
valuation adjustments are recorded on a specific property
basis.
(j) Income Taxes
Income taxes are provided for the tax effects of the
transactions reported in the financial statements and consist
of taxes currently due plus deferred taxes related primarily
to differences between the basis of the allowance for loan
losses and accumulated depreciation. The deferred tax assets
and liabilities represent the future tax return consequences
of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or
settled. Deferred tax assets and liabilities are reflected at
income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. The Bank files a
consolidated federal income tax return with its subsidiaries.
Each subsidiary provides for income taxes on a separate
return basis and remits to the parent company amounts
determined to be currently payable.
(k) Intangibles
The intangibles (Goodwill) recorded by the Company in
the acquisition of Pineland State Bank and subsequent
branches are being amortized on a straight line basis over an
eight year period.
(l) Earnings Per Share
Earnings per share are based on the weighted average
number of shares outstanding.
F15
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONCOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,2000
Note 1. Significant Accounting Policies (Con't)
(m) Comprehensive Income
Comprehensive income includes net income and all other
changes in equity during a period except those resulting from
investments by owners and distributions to owners. Other
comprehensive income includes revenues, expenses, gains, and
losses that under generally accepted accounting principles
are included in comprehensive income but excluded from net
income.
Comprehensive income and accumulated other comprehensive
income are reported net of related income taxes. Accumulated
other comprehensive income for the Bank consists solely of
unrealized holding gains or losses on available-for-sale
securities. In accordance with SFAS No. 130, the Company
elected to disclose changes in comprehensive income in its
Consolidated Statements of Income and Comprehensive Income.
(n) Cash Flow Information
For purposes of the statements of cash flows, the Company
considers cash, federal funds sold and due from banks as
cash and cash equivalents. Cash paid during the years ended
December 31, 2000, 1999 and 1998 for interest was
$8,117,741, $6,300,329, and $6,220,809, respectively. Total
income tax payments during 2000, 1999 and 1998 were
$1,552,939, $1,025,000, and $879,500, respectively.
Note 2. Investment Securities
The amortized cost and estimated market values of
investments in debt securities are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities available
for sale -
December 31, 2000:
U.S. Government
and agency
securities $18,538,619 $ 13,424 $ 102,839 $18,449,204
State and municipal
securities 1,349,710 31,796 - 1,381,506
Mortgage backed
securities 394,373 5,187 975 398,585
Equity securities 550,000 - 84,240 465,760
Totals $20,832,702 $ 50,407 $ 188,054 $20,695,055
F16
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 2. Investment Securities (Con't)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1999:
U.S. Government
and agency
securities $15,997,526 $ - $ 305,658 $15,691,868
State and municipal
securities 1,550,551 20,427 3,926 1,567,052
Mortgage backed
securities 495,913 8,975 2,673 502,215
Equity securities 550,000 - 4,896 545,104
Totals $18,593,990 $ 29,402 $ 317,153 $18,306,239
Securities to be
Held to Maturity-
December 31, 2000:
U.S. Government
and agency
securities $ - $ - $ - $ -
State and municipal
securities 147,326 4,186 - 151,512
Mortgage backed
Securities - - - -
Totals $ 147,326 $ 4,186 $ - $ 151,512
December 31, 1999
U.S. Government
and agency
securities $ 600,223 $ 493 $ 841 $ 599,875
State and municipal
securities 147,116 2,148 - 149,264
Mortgage backed
securities - - - -
Totals $ 747,339 $ 2,641 $ 841 $ 749,139
F17
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 2. Investment Securities (Con't)
Gross realized gains on sales and losses of available-
for-sale securities were $-0- and $-0- in 2000, respectively
and $-0- and $-0-, respectively for 1999 and $-0- and $-0-,
respectively in 1998.
Assets, principally securities carried at approximately
$12,406,833 at December 31, 2000 and $13,588,845 at December
31, 1999, were pledged to secure public deposits and for
other purposes required or permitted by law.
The scheduled contractual maturities of securities to be
held to maturity and securities available for sale at
December 31, 2000 were as follows:
Securities to be Securities
Held to Maturity Available for Sale
Amortized Amortized
Cost Fair Value Cost Fair Value
Due in one year
or less $ - $ - $ 2,914,804 $ 2,905,273
Due from one year
to five years 100,000 100,719 16,288,466 16,214,013
Due from five
years to ten years - - 400,000 408,488
Due after ten
years 47,326 50,793 679,432 701,521
$ 147,326 $ 151,512 $20,282,702 $20,229,295
The market value of State and Other Political
Subdivision Obligations is established with the assistance of
an outside bond department and is based on available market
data which often reflects transactions of relatively small
size and is not necessarily indicative of prices at which
large amounts of particular issues could readily be sold or
purchased.
Expected maturities will differ from
contractual maturities because issuers may have the right to
call on prepay obligations with or without call on prepayment
penalties.
Note 3. Loans
The composition of the bank's portfolio was as follows:
F18
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 3. Loans (Con't)
2000 1999
(In Thousands)
Commercial, financial and
agricultural $ 42,973 $ 34,607
Real estate - mortgage 81,314 62,829
Real estate - construction 7,646 13,413
Installment and consumer 31,294 21,433
Total Loans $ 163,227 $
132,282 Less: Unearned discount (
253 ) ( 216 )
Reserve for loan losses ( 2,728 ) (
2,169 )
Loans, net $ 160,246 $ 129,897
Non-accrual loans (principally collateralized by real
estate) amounted to approximately $876,000, $442,000 and
$557,000 at December 31, 2000, 1999, and 1998, respectively.
Impaired loans were $-0- and $-0- at December 31, 2000 and
1999.
The Company and its subsidiaries have granted loans to
the officers and directors of the Company, its subsidiaries,
and to their associates. Related party loans are made on
substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve
more
than normal risk of collectibility. The aggregate dollar
amount of these loans was $633,116 and $506,787 at December
31, 2000 and 1999. During 2000, $297,951 of new loans were
made, and repayments totaled $226,308.
Note 4. Reserve for Loan Losses
Transactions in the reserve for loan losses are
summarized
as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2000 1999 1998
Balance at beginning
of period $ 2,168,877 $ 1,970,620 $ 1,821,680
Additions: Provision
charged to operating
expenses $ 424,000 $ 503,000 $ 286,000
Balance from bank
acquisition 588,306 - -
$ 1,012,306 $ 503,000 $ 286,000
F19
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 4. Reserve for Loan Losses (Con't)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2000 1999 1998
Deductions: Loans
charged off $ 664,298 $ 432,472 $ 257,163
Less: recoveries 211,334 127,729 120,103
$ 452,964 $ 304,743 $ 137,060
Balance at end of
Period $ 2,728,219 $ 2,168,877
$ 1,970,620
Additions to the reserve for loan losses are based on
management's evaluation of the loan portfolio under current
economic conditions, past loan loss experience and such other
factors which, in management's judgment, deserve recognition
in estimating loan losses. Loans are charged off when, in
the opinion of management, such loans are deemed to be
uncollectible. Recognized losses are charged to the reserve
and subsequent recoveries added.
Loans having carrying values of $833,029 and $189,070
were transferred to foreclosed real estate in 2000 and 1999,
respectively.
The bank is not committed to lend additional funds to
debtors whose loans have been modified.
Note 5. Deposits
The aggregate amount of short-term jumbo CDs, each with a
minimum denomination of $100,000, was approximately
$37,569,711 in 2000 and $24,392,234 in 1999.
At December 31, 2000, the scheduled maturities of CDs are
as follows:
(In Thousands)
2001 $ 116,446
2002 and 2003 12,824
2004 and thereafter 379
$ 129,649
F20
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 6. Premises and Equipment
A summary of the account:
Year Ended Year Ended
December 31, December 31,
2000 1999
Land $ 526,763 $ 448,148
Buildings 4,936,869 3,779,637
Furniture and equipment 5,470,568 3,989,406
$ 10,934,200 $ 8,217,191
Less: Accumulated depreciation 4,822,839 4,119,786
$ 6,111,361 $ 4,097,405
Depreciation expense was $803,318 in 2000, $614,430 in
1999 and $605,161 in 1998.
Note 7. Borrowings
Data relating to borrowing is as follows:
Year Ended Year ended
December 31, December 31,
Parent Company - 2000 1999
Note payable in 10 annual payments
with interest payable quarterly
and accrues at prime rate minus
50 basis points. Subsidiary bank
stock is pledged to secure loan. $ 5,000,000 $ -0-
Note payable in 10 annual payments
of $350,000. Interest is payable
quarterly and accrues at prime rate
and is secured by subsidiary bank
stock. -0- 2,100,000
Note payable due June 30, 2001.
Interest payable quarterly and
accrues at prime rate and is
secured by bank stock 200,000 260,000
Subsidiary - Bankers Data Services, Inc.
Note payable due January 27, 2001
monthly principal amount of
$10,833.33 plus interest. Interest
accrues at prime rate basis.
Computer equipment is pledged as
collateral for loan. 987,847 276,097
F21
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 7. Borrowings (Con't)
Year Ended Year ended
December 31, December 31,
2000 1999
Note payable in 36 monthly payments
of $434.02. Interest accrues at
1.9% rate and is secured by vehicle. 5,580 10,630
Note payable in 24 monthly payments
of $664.13. Interest accrued at
5.9% rate and is secured by vehicle. 13,816 -0-
Subsidiary - South Financial Products, Inc.
Note payable in 36 monthly payments
of $696.98. Interest accrues at
3.9% rate and is secured by vehicle. 16,120 23,016
Following are maturities of long term debt for each of
the next five years.
2001 $1,483,404
2002 389,989
2003 425,000
2004 475,000
2005 525,000
Note 8. Income Taxes
Income tax expense (benefit) was $1,221,738 for 2000, (an
effective rate of 31.6%, $1,017,056 for 1999 (an effective rate
of 32.3%) and $830,744 for 1998 (an effective rate of 30.1%).
The actual expense for 2000, 1999 and 1998 differs from the
"expected" tax expense for those years (computed by applying
the federal corporate rate of 34%) as follows:
2000 1999 1998
Computed "expected"
tax expenses 34.0% 34.0% 34.0%
Alternative minimum tax - - -
Effect of State Income Tax 1.1% 2.4% -
Tax exempt interest
on securities and loans ( 3.6%) ( 2.9% )(
4.2% )
Other, net .1% ( 1.2% )
.3%
31.6% 32.3% 30.1%
F22
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 8. Income Taxes (Con't)
The current and deferred amounts of these tax provisions
were as follows:
2000 1999 1998
Current - Federal $ 1,178,493 $ 1,140,833 $
912,639 - State 83,299
104,994 -
Deferred - Federal ( 24,534) ( 146,891 ) (
81,895 ) - State ( 15,520)
( 81,880 ) -
$ 1,221,738 $ 1,017,056 $ 830,744
The tax effects of each type of income and expense item that
gave rise to deferred taxes are:
December 31, December 31,
2000 1999
Net unrealized appreciation on
securities available for sale $ 50,833 $ 107,121
Depreciation ( 190,400 )(
185,348 ) Deferred loan fees 8
5,229 81,086 A
llowance for credit losses 806,587 5
60,611
0ther 9,626 -
Purchase accounting treatment ( 65,820 ) (
69,763 )
Net deferred tax asset (liability) $ 696,055 $ 493,707
Note 9. Employee Benefit Plans
The Company maintains a 401K deferred compensation plan
for all subsidiaries effective January 1, 1993. The Company
elected to match 75% of employee contributions for 2000,
1999 and 1998. The expense to the Company for 2000, 1999 and
1998 was $134,297, $115,297, and $87,658, respectively.
Note 10. Leases
The Pineland State Bank leases 5.35 acres of land in
Candler County under an operating lease expiring December 31,
2054 with an option to lease the land for an additional 75
years.
Minimum future rental payments under non-cancelable
operating lease having remaining term in excess of 1 year as of
December 31, 2000 for each of the next 5 years and in the aggregate
is:
F23
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 10. Leases - (Con't)
Year Ended
2001 $ 4,000
2002 4,000
2003 4,000
2004 4,000
2005 4,000
Subsequent to 2005 196,000
Total minimum future
rental payments $ 216,000
In June, 1997, the parties amended the lease to allow
Pineland State Bank to sublet part of the property and in
consideration, the landlord will receive 50% of gross rental under
the sublease in addition to the minimum amount above.
Note 11. Liabilities
Standby Letters of Credit. These transactions are used by the
Company's customers as a means of improving their credit
standing in their dealings with others. Under these
agreements, the Company agrees to honor certain financial
commitments in the event that its customers are unable to do
so. As of December 31, 2000 and 1999, the Company had $450,240
and $526,000 in outstanding standby letters of credit.
Loan Commitments. As of December 31, 2000 and 1999, the
Company had commitments outstanding to extend credit totaling
$28,328,739 and $21,211,119, respectively. These commitments
generally require the customers to maintain certain credit
standards. Management does not anticipate any material losses
as a result of these commitments.
Note 12. Financial Instruments
The Bank is a party to financial instruments with off-
balance-sheet risk in the normal course of business to meet the
financing needs of its customers and to reduce its own exposure
to fluctuations in interest rates. These financial instruments
include commitments to extend credit, and standby letters of
credit, and financial guarantees. Those instruments involve,
to varying degrees, elements of credit and interest-rate
risk in
excess of the amount recognized in the consolidated statements
of financial condition. The contract or notional amounts of
those instruments reflect the extent of the Bank's involvement
in particular classes of financial instruments.
F24
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 12.Financial Instruments - (Con't)
The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument
for commitments to extend credit, standby letters of credit,
and financial guarantees written is represented by the
contractual notional amount of those instruments. The Bank
uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet
instruments.
Commitments to Extend Credit and Financial Guarantees.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected
to
to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if it
is deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the counterparty.
Collateral held varies; but, may include accounts receivable;
inventory, property, plant and equipment; and income-producing
commercial properties.
Standby letters of credit and financial guarantees written
are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Those guarantees
are primarily issued to support private borrowing arrangements,
including commercial paper and similar transactions. The
credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan
facilities to customers. The Bank holds various assets as
collateral supporting those commitments for which collateral is
deemed necessary.
The Bank has not been required to perform on any financial
guarantees during the past two years. The Bank has not
incurred any losses on its commitments in 2000, 1999 or 1998.
Note 13. Restrictions on Subsidiary Dividends, Loans or Advances
Dividends are paid by the Company from its assets which
are mainly provided by dividends from the Banks. However,
certain restrictions exist regarding the ability of the Banks
to transfer funds to the Company in the form of cash dividends,
loans or advances. The approval of the Georgia Department of
Banking is required to pay dividends in excess of 50% of the
Bank's net profits for the prior year.
F25
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 14. Restrictions on Cash and Due from Banks
Under Federal Reserve regulation, the Bank also is limited
as to the amount it may loan to its affiliates, including the
Company, unless such loans are collateralized by specified
obligations. At December 31, 2000, the maximum amount
available for transfer from the Bank to the Company in the form
of loans approximated 20% of consolidated net equity.
The bank is required to maintain reserve balances with the
Federal Reserve Bank. The average amount of those reserve
balances for the year ended December 31, 2000 was approximately
$-0-.
Note 15. Related Party Transactions
The Company has entered into a split dollar life insurance
arrangement with a director and substantial shareholder. The
Company and director's trust each contribute toward the payment
of premium for life insurance policy. The Company records its
contribution at the present value of anticipated future return
or total cash surrender value of policy, whichever is higher;
however, the carrying amount cannot exceed the amount of
premiums paid by the Company. The Company will receive all
reimbursement from anticipated withdrawal of cash surrender
value or from the proceeds of policy in the event of the
death of the director. All cash surrender value of the policy
accrues to the benefit of the Company until such time as the
cash surrender value exceeds advances made by the Company. As
of December 31, 2000, $1,004,596 is carried in other assets
related to this arrangement.
Note 16. Fair Value of Financial Instruments
The following table shows the estimated fair value and the
related carrying values of South Banking Company's financial
instruments at December 31, 2000 and 1999. Items which are not
financial instruments are not included.
2000
Carrying Estimated
Cash and due from financial Amount Fair Value
institutions $ 8,911,914 $ 8,911,914
Interest earning balances with
financial institutions 825,279 825,279
Federal funds sold 14,693,000 14,693,000
Securities available for sale 20,695,055 20,695,055
Securities held to maturity 147,326 151,512
Federal Home Loan Bank stock 426,100 426,100
Georgia Bankers Bank - stock 547,283 784,085
Loans - net of allowances 160,246,187 158,371,357
Demand and savings deposits 63,030,105 63,030,105
Time deposits 129,649,110 132,081,000
F26
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 16. Fair Value of Financial Instruments - (Con't)
1999
Carrying Estimated
Amount Fair Value
Cash and due from financial
institutions $ 11,695,998 $ 11,695,998
Interest earning balances with
financial institutions 869,000 869,000
Federal funds sold 3,180,000 3,180,000
Securities available for sale 18,306,239 18,306,239
Securities held to maturity 747,339 749,139
Federal Home Loan Bank stock 426,100 426,100
Georgia Bankers Bank - stock 547,283 798,470
Loans - net of allowances 129,897,341 129,912,490
Demand and savings deposits 55,072,202 55,072,202
Time deposits 97,727,773 98,079,626
Federal funds purchased 1,140,000 1,140,000
For purposes of the above disclosures of estimated fair
value, the following assumptions were used as of December 31,
2000 and 1999. The estimated fair value for cash and due from
financial institutions and federal funds sold are considered to
approximate cost. The estimated fair value for interest-earning
balances with financial institutions, securities available-for-
sale, securities held-to-maturity, and Georgia Bankers Bank
stock are based on quoted market values for the individual
securities or for equivalent securities. The estimated fair
value for commercial loans is based on estimates of the
difference in interest rates the Company would charge the
borrowers for similar such loans with similar maturities made at
December 31, 2000 and 1999, applied for an estimated time period
until the loan is assumed to reprice or be paid. The estimated
fair value for other loans is based on estimates of the rate the
Company would charge for similar such loans at December 31, 2000
and 1999 applied for the time period until estimated repayment.
The estimated fair value for individual retirement account
deposits and time deposits is based on estimates of the rate the
Company would pay on such deposits or borrowings at December 31,
2000 and 1999, applied for the time period until maturity. The
estimated fair value for other financial instruments and off-
balance-sheet loan commitments are considered to approximate
cost at December 31, 2000 and 1999.
F27
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 16. Fair Value of Financial Instruments (Con't)
While these estimates of fair value are based on
management's judgment of the most appropriate factors, there is
no assurance that were the Company to have disposed of such it
ems at December 31, 2000 and 1999, the estimated fair
values would necessarily have been achieved at that date, since
market values may differ depending on various circumstances.
The estimated fair values at December 31, 2000 and 1999 should
not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of the Company
that are not defined as financial instruments are not included
in the above disclosures, such as property and equipment. Also,
non-financial instruments typically not recognized in the
financial statements, nevertheless, may have value but are not
included in the above disclosures. These include, among other
items, the estimated earnings power of core deposit accounts,
the earnings potential of loan servicing rights, the trained
work force, customer goodwill, and similar items.
Note 17. Regulatory Matters
The Company and its subsidiaries are subject to various
regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company
must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory
accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company to maintain minimum amounts
and ratios of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 2000, that the Company and its
subsidiaries meet all capital adequacy requirements to which it
is subject.
F28
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 17. Regulatory Matters (Con't)
As of December 31, 2000, the most recent notification
from the FDIC 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 table. There are no conditions or events since
that notification that, management believes, have changed the
institution's category.
The Company and its subsidiaries' actual capital amounts
and ratios are also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action
Provisions:
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2000:
Total Capital
(to Risk
Weighted
Assets)
Consolidated $ 18,647 10.7% $13,933 8.0% $17,407 10.0%
Subsidiary -
Alma 7,463 12.9% 4,597 8.0% 5,746 10.0%
Subsidiary -
Baxley 6,444 16.1% 3,324 8.0% 4,155 10.0%
Subsidiary -
Kingsland 2,914 12.7% 1,841 8.0% 2,302 10.0%
Subsidiary -
Metter 4,924 8.9% 4,435 8.0% 5,544 10.0%
As of December 31, 2000:
Tier I Capital
(to Risk Weighted
Assets)
Consolidated $ 16,441 9.4% $ 6,963 4.0% $10,444 6.0%
Subsidiary -
Alma 6,739 11.7% 2,298 4.0% 3,448 6.0%
Subsidiary -
Baxley 5,924 14.8% 1,662 4.0% 2,493 6.0%
Subsidiary -
Kingsland 2,625 11.4% 921 4.0% 1,381 6.0%
Subsidiary -
Metter 4,251 7.7% 2,217 4.0% 3,326 6.0%
F29
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 17. Regulatory Matters (Con't)
To Be
Capitalized Under
For Capital Prompt
Corrective
Actual Adequacy Purposes Action
Provisions:
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2000:
Tier I
Capital (to
Average Assets)
Consolidated 16,441 9.3% 7,038 4.0% 8,797 5.0%
Subsidiary -
Alma 6,739 9.1% 2,977 4.0% 3,721 5.0%
Subsidiary -
Baxley 5,924 12.2% 1,938 4.0% 2,422 5.0%
Subsidiary -
Kingsland 2,625 8.8% 1,182 4.0% 1,477 5.0%
Subsidiary -
Metter 4,251 6.9% 2,461 4.0% 3,077 5.0%
As of December 31, 1999:
Total Capital
(to Risk Weighted
Assets)
Consolidated $ 17,534 12.7% $11,002 8.0% $13,752 10.0%
Subsidiary -
Alma 6,698 12.3% 4,350 8.0% 5,438 10.0%
Subsidiary -
Baxley 5,808 17.0% 2,734 8.0% 3,417 10.0%
Subsidiary -
Kingsland 2,498 13.7% 1,456 8.0% 1,820 10.0%
Subsidiary -
Metter 3,384 11.0% 2,246 8.0% 3,058 10.0%
F30
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 17. Regulatory Matters (Con't)
To Be
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1999:
Tier I Capital
(to Risk
Weighted
Assets)
Consolidated 15,782 11.5% 5,501 4.0% 8,251 6.0%
Subsidiary -
Alma 6,009 11.0% 2,175 4.0% 3,263 6.0%
Subsidiary -
Baxley 5,363 15.7% 1,367 4.0% 2,050 6.0%
Subsidiary -
Kingsland 2,270 12.8% 728 4.0% 1,092 6.0%
Subsidiary -
Metter 2,999 8.3% 1,438 4.0% 1,798 6.0%
As of December 31, 1999:
Tier I
Capital (to
Average Assets)
Consolidated $ 15,782 9.3% $ 6,820 4.0% $ 8,526 5.0%
Subsidiary -
Alma 6,009 9.2% 2,623 4.0% 3,279 5.0%
Subsidiary -
Baxley 5,363 12.1% 1,779 4.0% 2,224 5.0%
Subsidiary -
Kingsland 2,270 8.8% 1,029 4.0% 1,287 5.0%
Subsidiary -
Metter 2,999 8.4% 1,438 4.0% 1,798 5.0%
F31
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
FINANCIAL STATEMENTS
DECEMBER 31, 2000
F32
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
South Banking Company
Alma, Georgia 31510
Under date of February 12, 2001, we reported on the consolidated
balance sheets of South Banking Company, as of December 31, 2000 and
1999, and the related statements of income, cash flows and stockholders'
equity for the three years in the period ended December 31, 2000.
In connection with our examination of the aforementioned
consolidated financial statements, we also audited the accompanying
balance sheets (Parent Corporation Only) as of December 31, 2000 and
1999 and the related statements of income, cash flows and stockholders'
equity for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on
the financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
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 financial statements referred to above present
fairly, in all material respects, the financial position of South
Banking Company (Parent Corporation Only) as of December 31, 2000 and
1999, and the results of its operations, stockholders' equity and its
cash flows for the three years then ended in conformity with generally
accepted accounting principles.
Respectfully submitted,
H. H. BURNET & COMPANY, P. C.
February 12, 2001
F33
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
BALANCE SHEETS
December 31, December 31
,
2000 1999
ASSETS
Cash and due from banks
Interest bearing $ 1,064,896 $ 479,315
Non-interest bearing 32,846 47,869
Investment in bank's subsidiaries 21,420,680 16,672,228
Investment in nonbank subsidiaries 341,298
315,416
Investment-Habersham Bank Corp.-available
for sale 215,760 295,104
Investment-Nexity Financial-available
for sale 250,000 250,000
Other assets 60,948 26,161
Prepaid income taxes 214,577 -
Due from subsidiaries - 105,762
Total Assets $23,601,005 $18,191,855
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 186 $ 186
Other liabilities 788 -
Accrued income taxes - 21,653
Notes payable 5,200,000 2,360,000
Due to subsidiaries 129,471 -
Total Liabilities $ 5,330,445 $ 2,381,839
Stockholders' Equity
Common stock of $1 par value;
authorized 1,000,000 shares;
issued and outstanding, 2000 and 1999
399,500 and 399,500, respectively $ 399,500 $ 399,500
Surplus 3,070,831 3,070,831
Undivided profits 14,887,046
12,520,614
Accumulated other comprehensive income ( 86,817 )
( 180,929 )
Total Stockholders' Equity $18,270,560 $15,810,016
Total Liabilities and Stockholders' Equity $23,601,005 $18,191,855
The accompanying note is an integral part of these financial statements.
F34
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
STATEMENT OF INCOME
Year Ended Year Ended Year Ended
December 31,December 31, December 31,
2000 1999 1998
Income
Dividends from bank
subsidiaries $ 985,387 $ 977,614 $ 926,568
Miscellaneous income 788 682 1,484
Interest income 23,479 18,431 21,158
Management fees 102,000 102,000 102,000
Dividends - other 5,345 10,091 -
Total Income $ 1,116,999 $ 1,108,818 $ 1,051,210
Expenses
Salaries $ 83,169 $ 79,300 $ 75,467
Amortization 13,526 13,526
13,526
Interest 318,822 212,684 235,182
Professional fees 75,045 33,045 22,621
Other 75,621 63,109 75,277
Total Expenses $ 566,183 $ 401,664 $ 422,073
Income before income taxes
and equity in undistributed
income (loss) of
subsidiaries $ 550,816 $ 707,154 $ 629,137
Provision (credit) for
income taxes ( 164,606) ( 95,172 )
( 105,360)
Income before equity in
undistributed income in
subsidiaries $ 715,422 $ 802,326 $ 734,497
Equity in undistributed
income of bank subsidiaries $ 1,904,756 $ 1,251,684 $ 1,135,934
Equity in undistributed
income (loss) of nonbank
subsidiaries 25,882 74,491 59,165
$ 1,930,638 $ 1,326,175 $ 1,195,099
Net Income $ 2,646,060 $ 2,128,501 $ 1,929,596
The accompanying note is an integral part of these financial statements.
F35
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
STATEMENT OF INCOME (con't)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2000 1999 1998
Other Comprehensive Income
before tax
Unrealized gain on securities$ 151,160 $( 402,268) $ 61,798
Other Comprehensive Income
before tax $ 151,160 $( 402,268) $
61,798
Income tax expenses related
to items of other
comprehensive income 57,048 ( 136,771) 21,011
Other comprehensive income,
net of tax $ 94,112 $( 265,497) $ 40,787
Comprehensive income $ 2,740,172 $ 1,863,004 $ 1,970,383
Per share data based on
weighted outstanding shares:
Weighted average
outstanding 399,500 399,500 399,500
Net Income $ 6.62 $ 5.33 $ 4.83
The accompanying note is an integral part of these financial statements.
F36
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
STATEMENT OF STOCKHOLDERS' EQUITY
Common Undivided
Stock Surplus Profits
Balance,
December 31, 1997 $ 399,500 $ 3,070,831 $ 8,981,846
Net income - - 1,929,596
Cash dividends - - ( 259,654)
Unrealized gain
(loss) on securities
available for
sale - - -
Balance,
December 31, 1998 $ 399,500 $ 3,070,831 $10,651,788
Net income - - 2,128,501
Cash dividends - - ( 259,675)
Unrealized gain
(loss) on securities
available for
sale - - -
Balance,
December 31, 1999 $ 399,500 $ 3,070,831 $12,520,614
Net income - - 2,646,060
Cash dividends - - ( 279,628 )
Unrealized gain
(loss) on securities
available for sale - - -
Redemption of
shares - - -
Balance,
December 31, 2000 $ 399,500 $ 3,070,831 $14,887,046
Accumulated
Other Total
Comprehensive Stockholders'
Income Equity
Balance,
December 31, 1997 $ 43,781 $ 12,495,958
Net income - 1,929,596
Cash dividends - ( 259,654)
Unrealized gain
(loss) on securities
available for
sale 40,787 40,787
Balance,
December 31, 1998 $ 84,568 $ 14,206,687
Net income - 2,128,501
Cash dividends - ( 259,675)
Unrealized gain
(loss) on securities
available for
sale ( 265,497 ) ( 265,497)
Balance,
December 31, 1999 $ ( 180,929) $ 15,810,016
Net income - 2,646,060
Cash dividends - ( 279,628)
Unrealized gain
(loss) on securities
available for sale 94,112 94,112
Redemption of
shares - -
Balance,
December 31, 2000 $ ( 86,817) $ 18,270,560
The accompanying note is an integral part of these financial statements.
F37
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
STATEMENT OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December
31,
2000 1999 1998
Cash Flows From Operating
Activities:
Net income $ 2,646,060 $ 2,128,501 $ 1,929,596
Add expenses not requiring
cash:
Depreciation and
amortization 21,870 17,649 20,697
Undistributed earnings of
subsidiaries (1,930,638) (1,326,175) (1,195,099)
Increase (decrease) in
accounts payable - - -
Increase (decrease) in
other liabilities 788 - -
Increase (decrease) in
accrued income taxes ( 21,653) 21,652 -
(Increase) decrease in
other assets 635 ( 1,979)( 435)
Increase (decrease) in
prepaid income taxes ( 214,577) 145,937 34,474
(Increase) decrease in
due from subsidiary-taxes 105,672 ( 129,928) ( 39,565)
Increase (decrease) in
due to subsidiary 129,471 - -
Net Cash Provided by Operating
Activities $ 737,718 $ 855,657 $ 749,668
Cash Flows From Investing
Activities:
Capital contribution to
subsidiary $(2,700,000) $ - $ -
Purchase of Nexity Financial
Stock - ( 250,000) -
Purchase of C B Financial
Stock - - ( 300,000)
Purchase of fixed assets ( 27,532) - -
Net Cash Used by Investing
Activities $(2,727,532) $( 250,000) $( 300,000)
The accompanying note is an integral part of these financial statements.
F38
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
STATEMENT OF CASH FLOWS (con't)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2000 1999 1998
Cash Flows From Financing
Activities:
Payments on note payable
bank $( 60,000) $( 390,000) $( 350,000)
Proceeds from notes payable
to banks 2,900,000 - 300,000
Dividends paid ( 279,628) ( 259,675) ( 259,654)
Redemption of common stock - - -
Net Cash Provided (Used)
by Financing Activities $ 2,560,372 $( 649,675) $( 309,654)
Net increase (decrease) in
cash and cash equivalents $ 570,558 $( 44,018) $ 140,014
Cash and Cash Equivalents at
beginning of year 527,184 571,202 431,188
Cash and Cash Equivalents
at end of year $ 1,097,742 $ 527,184 $ 571,202
The accompanying note is an integral part of these financial statements.
F39
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
(A) Summary of Significant Accounting Policies
General - The following notes to the financial statements of South
Banking Corporation, formed on July 28, 1981, (parent
corporation only) (the corporation) includes only that
information which is in addition to information presented in
the consolidated financial statements and notes to consolidated
financial statements.
Investment in subsidiaries - The corporation reports its investment
in the common stock of its subsidiaries at its equity in the
net assets of the subsidiaries.
Organization costs - Organization costs have been deferred and
are
being amortized on a straight-line basis over a period of
five years.
F40