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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, 2001
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,
2002
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:
o changes in interest rates and market prices, which could reduce the
Company's net interest margins, asset valuations and expense
expectations;
o changes in the levels of loan prepayments and the resulting effects
on the value of the Company's loan portfolio;
o 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;
o increased competition for deposits and loans adversely affecting
rates and terms;
o 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;
o 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;
o the failure of assumptions underlying the establishment of and
provisions made to the allowance for loan losses;
o changes in the availability of funds resulting in increased costs
or reduced liquidity;
o changes in the Company's ability to pay dividends on its Common
Stock;
o 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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o the Company's ability to acquire, operate and maintain cost
effective and efficient systems without incurring unexpectedly
difficult or expensive but necessary technological changes;
o the loss of senior management or operating personnel and the
potential inability to hire qualified personnel at reasonable
compensation levels;
o 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;
o 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, 2000, Alma Bank and Peoples Bank ranked, on
the basis of total deposits, as the 202nd and 272nd largest banks among
338 banks in Georgia. Citizens Bank, one of five banking operations in
Camden County, ranked the 303rd largest bank among 338 banks in Georgia;
and Pineland Bank, one of two banking operations in Metter, Georgia,
ranked the 220th largest bank among 338 banks in Georgia, Sheshunoff's
Banks of Georgia (2001 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, 2001, 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 non-
interest bearing accounts.
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Employees
On December 31, 2001, the Registrant and its subsidiaries had 94
full-time and 20 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
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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, 2001, 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 2002.
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
for implementing
9
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:
o 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
o directs regulators to establish regulatory standards that ensure
the security and confidentiality of customer information
o permits customers to prohibit (opt-out-of permitting) such
institutions from disclosing personal financial information to
nonaffiliated third parties
o prohibits transfer of credit card or other account numbers to third-
party marketers
o 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)
o protects stronger state privacy laws, as well as those not
"inconsistent" with these Federal rules
o 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 to this rule
13
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
requires that
14
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.
In September 2000, the FASB issued Statement of Financial
Accounting Standards No. 140, "Accounting for transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - a Replacement of
FASB Statement No. 125" ("SFAS 140"). SFAS 140 revises the criteria for
accounting for securitizations and other transfers of financial assets
and collateral. In addition, SFAS 140 requires certain additional
disclosures. Except for the new disclosure provisions, which were
effective for the year ended December 31, 2000, SFAS 140 was effective
for the transfer of financial assets occurring after March 31, 2001.
The provisions of SFAS 140 did not have a significant effect on the
company.
In July 2001, the FASB issued Statements of Financial Accounting
Standards No. 141, "Business Combinations" ("FAS 141") and No. 142,
"Goodwill and Other Intangible Assets"("FAS 142"). These standards
change the accounting for business combinations by, among other things,
prohibiting the prospective use of pooling-of-interests accounting and
requiring companies to stop amortizing goodwill and certain intangible
assets with an indefinite useful life created by business combinations
accounted for using the purchase method of accounting. Instead,
goodwill and intangible assets deemed to have an indefinite useful life
will be subject to an annual review for impairment. The new standards
generally will be effective in the first quarter of 2002. The
provisions of these statements did not have an 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,
2001 2000 1999
ASSETS (In Thousands)
Cash and due from banks $ 6,705 $ 6,283 $ 7,836
Cash in bank - interest
bearing 957 822 1,355
Taxable investment
securities 16,518 16,884 15,905
Nontaxable investment
securities 1,326 1,613 1,825
Ohers 1,343 1,487 1,435
Federal funds sold and securities
purchased under agreements to
resell 18,028 9,945 8,757
Loans - net 166,639 148,195 121,166
Other assets 14,555 10,762 8,031
Total Assets $ 226,071 $ 195,991 $ 166,310
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits: Demand - non-interest
bearing $ 24,903 $ 22,444 $ 20,341
Demand - interest
bearing 30,600 24,959 23,777
Savings 11,809 11,122 10,674
Time 131,154 114,026 92,406
Total Deposits $ 198,466 $ 172,551 $ 147,198
Federal funds purchased 23 114 55
Other borrowed funds 6,065 4,518 3,087
Other liabilities 2,453 1,768 962
Total Liabilities $ 207,007 $ 178,951 $ 151,302
Shareholders' equity 19,064 17,040 15,008
Total Liabilities and
Shareholders' Equity $ 226,071 $ 195,991 $ 166,310
B. Interest Rates. The tables below show for the periods indicated
the average amount outstanding for major categories of
interest
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 interest-earning assets.
16
Year Ended December 31, 2001
Average Yield/
Balance Interest Rate
ASSETS (In Thousands)
Cash in banks - interest
bearing $ 957 $ 54 5.64%
Loans 166,639 16,737 10.04%
Taxable investments 16,518 947 5.73%
Non-taxable investments 1,326 66 4.97%
Other 1,343 60 4.47%
Federal funds sold and
securities purchased
under agreements to resell 18,028 741 4.11%
Total Interest-Bearing
Assets $ 204,811 $ 18,605 9.08%
LIABILITIES
Demand - interest bearing $ 30,600 $ 694 2.27%
Savings deposits 11,809 314 2.65%
Other time deposits 131,154 7,897 6.02%
Other borrowing 6,065 429 7.07%
Federal funds purchased 23 1 4.34%
Total Interest-Bearing
Liabilities $ 179,651 $ 9,335 5.20%
Net interest earnings $ 9,270
Net yield on interest earning assets 3.88%
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%
17
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%
(1) Note: Loan fees are included for rate calculation purposes.
Loan fees included in interest amounted to approximately $1,208,871 in
2001, $999,520 in 2000 and $892,522 in 1999. 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.
2001 Compared to 2000
Increase (Decrease) Due to (1)
Volume Rate Change
Interest earned on: (In Thousands)
Cash in banks - interest
bearing $ 9 $( 8) $ 1
Loans 2,066 ( 1,933) 133
Taxable investments ( 22) ( 52) ( 74)
Nontaxable investments ( 14) 1 ( 13)
Other ( 7) ( 6) ( 13)
Federal funds sold and
securities purchased under
agreement to resell 505 ( 387) 118
Total Interest-Earning Assets $ 2,537 $( 2,385) $ 152
18
2001 Compared to 2000 (Con't)
Increase (Decrease) Due to (1)
Volume Rate Change
(In Thousands)
Interest paid on:
NOW deposits $ 144 $( 98) $ 46
Savings deposits 22 ( 67) ( 45)
Other time deposits 1,070 ( 288) 782
Other borrowing 153 ( 172) ( 19)
Federal funds purchased ( 6) ( 1) ( 7)
Total Interest-Bearing
Liabilities $ 1,383 $( 626) $ 757
Net Interest Earnings $ 1,154 $( 1,759) $( 605)
(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.
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
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) 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.
19
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 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,
2001 2000 1999
(In Thousands)
U. S. Treasury and other
U. S. government agencies
and corporations $ 15,691 $ 18,449 $ 16,292
State and political
subdivisions (domestic) 1,131 1,529 1,714
Mortgage backed securities 236 399 502
Equities 262 465 545
Totals $ 17,320 $ 20,842 $ 19,053
20
B. Maturities The amounts of investment securities in each category as
of December 31, 2001 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 $ 1,962 4.46% $ 359 8.14%$ - -
After one year
through five years 10,815 5.00 309 7.35 - -
After five years
through ten years 2,914 4.92 103 7.33 - -
After ten years - - 360 9.14 236 7.27
Totals $ 15,691 4.92% $ 1,131 8.17% $ 236 7.27%
(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,
2001 2000 1999
(In Thousands)
Commercial, financial and
agricultural $ 49,558 $ 42,973 $ 34,607
Real estate - mortgage 85,876 81,314 62,829
Real estate - construction 9,015 7,646 13,413
Installments 27,929 31,294 21,433
$ 172,378 $ 163,227 $ 132,282
Less - Unearned income 289 253 216
Reserve for possible
losses 2,756 2,728 2,169
Total Loans $ 169,333 $ 160,246 129,897
21
B. Maturities and Sensitivity to Changes in Interest Rates The amount
of total loans by category outstanding as of December 31, 2001 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 $ 21,309 $ 13,789 $ 14,460 $ 49,558
Real estate
mortgage 37,159 29,669 19,048 85,876
Real estate
construction 4,178 1,331 3,506 9,015
Installment 8,736 13,320 5,873 27,929
Total loans due
after one year
with:
Predetermined
interest rate 50,484
Floating interest
rate 48,512
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,
2001 2000 1999
(In Thousands)
Loans accounted for on a
non-accrual basis $ 1,002 $ 876 $ 422
Loans contractually past
due ninety days or more
as to interest or principal
payments 1,028 734 419
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 4 8 29
22
C. Nonperforming Loans - (con't)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
(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, 2001
INTEREST RATE RISK
Note: Dollar amounts in columns are cumulative amounts
Total assets on this date equaled $224,791
Interest Rate Risk 0 - 3 0 - 12 0 to 3 0 to 5 0 - 15
Months Months Years Years Years
Rate sensitive assets:
Securities (fixed rates)$ - $ 4,483 $7,837 $ 15,711 $ 16,823
Securities (floating rates) 236 236 236 236 236
Mutual funds @ UVEST 57 45 57 57 57
CD's at banks 797 1,174 1,273 1,273 1,273
Loans (fixed rates) 19,975 44,265 73,030 83,519 93,379
Loans (floating rates) 74,473 75,893 75,893 75,893 75,893
Federal funds sold 10,252 10,252 10,252 10,252 10,252
Total rate sensitive
assets $105,790 $136,348 $168,578 $ 186,941 $ 197,913
Rate sensitive liabilities:
CD/IRA's under $100M $ 30,333 $ 83,714 $ 90,930 $ 91,426 $ 91,426
CD/IRA's => $100M 8,589 30,200 31,760 31,760 31,760
Regular savings/Christmas11,510 11,510 11,510 11,510 11,510
Now/Super Now 23,382 23,382 23,382 23,382 23,382
Money market deposit 7,923 7,923 7,923 7,923 7,923
Treasury, tax & loan note 35 35 35 35 35
Federal funds purchased 0 0 0 0 0
Note payable-Ford Motor 3 7 7 7 7
Note payable-Banker's Bank 0 325 1,125 2,125 4,725
Note payable-Waycross
Bank & Trust 0 0 0 0 0
Note payable-Banker's
Bank (BDS) 51 204 612 849 849
Note payable-FHLB 1,500 1,500 1,500 1,500 1,500
Total rate sensitive
liabilities $ 83,326 $158,800 $168,784 $ 170,517 $ 173,117
Rate sensitive assets
less Rate sensitive
liabilities $ 22,464 $(22,452) $( 206)$ 16,424 $ 24,796
Rate sensitive assets
less Rate sensitive
liabilities/Total assets 9.99% (9.99%) ( 0.09%) 7.31% 11.03%
Rate sensitive assets/
Rate sensitive liabilities 126.96% 85.86% 99.88% 109.63% 114.32%
24
E. Rate Sensitivity Analysis
SOUTH BANKING COMPANY
DECEMBER 31, 2001
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 an increase in net
income for South and an increase in interest rates will result in a
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,
2001 2000 1999
(In Thousands)
A. Average amount of loans
outstanding $ 166,639 $ 148,195 $ 121,166
B. Balance of reserve for
possible loan losses at
beginning of period $ 2,728 $ 2,169 $ 1,971
C. Loans charged off:
Commercial, financial
and agricultural $ 398 $ 274 $ 149
Real estate - mortgage 225 127 67
Installments 379 263 217
$ 1,002 $ 664 $ 433
D. Recoveries of loans
previously charged off:
Commercial, financial
and agricultural $ 4 $ 83 $ 2
Real estate 49 29 31
Installment 85 99 95
$ 138 $ 211 $ 128
E. Net loans charged off
during period $ 864 $ 453 $ 305
Additions to reserve
charged to operating
expense during period (1)$ 893 $ 424 $ 503
Addition from bank
acquisition - 588 -
$ 893 $ 1,012 $ 503
F. Balance of reserve for
possible loan losses at
end of period $ 2,757 $ 2,728 $ 2,169
G. Ratio of net loans charged
off during the period to
average loans outstanding .52 .31 .25
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,
2001 2000 1999
(In Thousands)
Demand deposits $ 24,903 $ 22,444 $ 20,341
NOW deposits 30,600 24,959 23,777
Savings deposits 11,809 11,122 10,674
Time certificates of
deposits 131,154 114,026 92,406
Total Deposits $ 198,466 $ 172,551 $ 147,198
B. The amounts of time certificates of deposit issued in amounts
of $100,000 or more as of December 31, 2001 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 $ 8,741
Over three through twelve months 21,505
Over twelve months 1,560
Total $ 31,806
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,
2001 2000 1999
Return on assets (1) .74% 1.35% 1.28%
Return on equity (2) 8.83% 15.53% 14.18%
Dividend payout ratio (3) 16.63% 10.57% 12.20%
Equity to assets ratio (4) 8.43% 8.69% 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. 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.
27
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 September 13, 2001. As of March 1, 2002, the Company had 469
shareholders with 399,500 shares outstanding.
For the years ended December 31, 2001, 2000 and 1999, South paid
cash dividends of $279,628 or $.70 per share, $279,628 or $.70 per
share, and $259,675 or $.65 per share, respectively. These dollars
equate to dividend payout ratios (dividends declared divided by net
income) of 16.63%, 10.57% and 12.20% in 2001, 2000 and 1999,
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, 2001, there were 469
shareholders of record.
SALES PRICES BY
QUARTER
High Low
Fiscal Year 2001
First Quarter $ - $ -
Second Quarter - -
Third Quarter 12.00 12.00
Fourth Quarter - -
28
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 - -
DIVIDENDS PAID PER SHARE
Fiscal Year 2001 2000
March 31 $ .00 .00
June 30 .00 .00
September 30 .00 .00
December 31 .70 .70
Item 6. Selected Financial Data
Years Ended December 31,
2001 2000 1999 1998 1997
(In Thousands)
Total Assets $ 224,791 $ 220,450 $ 173,807 $164,890 $149,895
Operations:
Interest income $ 18,605 $ 18,454 $ 14,518 $ 13,920 $12,328
Interest expense 9,335 8,578 6,261 6,392 5,387
Net interest
income $ 9,270 $ 9,876 $ 8,257 $ 7,528 $ 6,941
Provision for
loan losses 893 424 503 286 179
Net interest
income after
provision for
loan losses $ 8,377 $ 9,452 $ 7,754 $ 7,242 $ 6,762
Other income $ 3,125 $ 2,718 $ 2,298 $ 1,905 $ 1,569
Other expenses $ 9,085 $ 8,302 $ 6,906 $ 6,387 $ 6,017
Income before
income taxes $ 2,417 $ 3,868 $ 3,146 $ 2,760 $ 2,314
Federal income
taxes 733 1,222 1,017 831 768
Net income before
extraordinary
items $ 1,684 $ 2,646 $ 2,129 $ 1,929 $ 1,546
Extraordinary
items $ - $ - $ - $ - $ -
Net income $ 1,684 $ 2,646 $ 2,129 $ 1,929 $ 1,546
Per Share Data:
Income after
extraordinary
items $ 4.21 $ 6.62 $ 5.33 $ 4.83 $ 3.86
Net income $ 4.21 $ 6.62 $ 5.33 $ 4.83 $ 3.86
Dividends
declared $ .70 $ .70 $ .65 $ .65 $ .60
Book value $ 49.71 $ 45.73 $ 39.57 $ 35.56 $ 31.28
29
Item 6. Selected Financial Data (con't)
Years Ended December 31,
2001 2000 1999 1998 1997
(In Thousands)
Profitability Ratios
Net income to
average total
assets .74% 1.35% 1.28% 1.23% 1.13%
Net income to average
stockholders'
equity 8.83% 15.52% 14.18% 14.45% 13.06%
Net interest
Margin 3.88% 4.77% 4.83% 4.52% 5.18%
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 $224,790,523 at year end 2001
from $220,450,038 at year end 2000. This increase of $4,340,485
represents a 1.9% increase in 2001 compared to 14.7% increase in 2000.
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 2002 as the effect of the new competition and rate
reductions have 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 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
30
months. Loan demand continues to be strong with loans increasing
$9,151,132 in 2001. 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 beginning in 1999, 2000 and 2001 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, decreased to $18,593,836 from $21,667,660. The
decrease of $3,073,824 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 gain of $158,707.
As the primary source of funds, aggregate deposits increased by
$3,321,388 in 2001 compared to $21,505,401 in 2000. This represents a
1.72% increase for the year compared to a 14.07% increase in 2000.
This illustrates the efforts of the banks to maintain good core
deposits. Most of the growth was from the demand accounts which have
lower interest rates as time certificate rates have dropped to levels
customers do not wish to lock-in rates for extended periods.
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, 2001. 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
$2,062,259 and federal funds sold net of federal funds purchased with
daily maturities amounted to $10,252,000 at year end 2001, a decrease
from prior years as loan demand exceeded deposit growth. 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 until 2001. 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 might arise
at
32
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, 2001, total loans, net of unearned discounts, were 85%
of total earning assets. Loans secured by real estate accounted for
55% of total loans as of December 31, 2001. 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
2001 2000 1999
(In Thousands)
Nonaccrual loans $ 1,002 $ 876 $ 442
Past due 90 days still accruing 1,028 734 419
Other real estate (ORE) 1,265 725 168
$ 3,295 $ 2,335 $ 1,029
Nonperforming loans to year
end loans 1.18% .99% .65%
Nonperforming assets to year
end loan and ORE 1.91% 1.42% .78%
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 and 2001, 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, 2001,
approximately 69% of the Company's earnings assets could be repriced
within one year compared to approximately 92% of its interest-bearing
liabilities. This compares to 58% and 92% in 2000.
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:
n Expected maturities are contractual maturities adjusted for
prepayments of principal when possible. The Company uses certain
assumptions to estimate expected maturities.
n 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.
n 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.
n Loans receivable includes non-performing loans.
n 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.
n 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
2001 Compared to 2000
Net interest income remains an effective measurement of how well
management has balanced South's interest rate sensitive assets and
liabilities. Net interest income decreased by $605,669. The decrease
of 6.1%, which included a full year of the 2000 branch acquisitions,
compared to a 25.8% increase in 2000 when the branch acquisitions were
included after August. The primary determinants of the decrease were
loans and time deposits. Loan demand increased slightly and funds were
channeled into loans as they represent the highest yielding asset.
Management continued its policy of limited solicitation of high
interest deposits. The drastic reduction in rates by the Federal
Reserve system resulted in repricing of most of interest rate sensitive
assets and deposits. As the tables presented earlier demonstrate the
assets rates decreased faster than deposits therefore, the margins were
squeezed resulting in the decrease in net interest income. The yield
on interest earning assets decreased to 9.08% from 10.31% while
interest bearing deposits yield decreased to 5.20% from 5.54%. The net
yield decreased to 3.88% from 4.77%. With the rate reduction not
anticipated to continue this trend should correct itself during 2002;
however, with the low rates currently in the market, this margin will
remain low.
Interest and fees on loans increased only $133,211 or .8% in 2001
from 2000 due to rate decreases of 123 basis points and loan growth of
5.6% in 2001. Interest on investment securities decreased $131,101 or
11.1% in 2001 from 2000 due to a slight decrease in the yield in
investments as rates have decreased. Interest income on federal funds
sold increased $117,989 or 18.9% due to higher average balances
invested and lower rates.
Total interest expense increased 8.8% or $756,847 from 2000 to
2001. The largest component of total interest expense is interest
expense on deposits, which increased $783,123 or 9.6% from 2000 to 2001
due to a growth in deposits. The average rate paid on deposits was
5.13%, 5.54% and 4.82% in 2001, 2000 and 1999, 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 $893,000 and $424,000, respectively, for
the years ended December 31, 2001 and 2000. The provision in 2001
reflects replenishing the allowance for loan losses to cover net charge-
offs of $864,439, plus providing for the increase in total loans
outstanding. The allowance for loan losses to total loans outstanding
is 1.60% at December 31, 2001. Net charge-offs to average loans are
.52% for 2001 as compared to 0.31% for 2000.
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 2001 increased by $407,219 or 15.0% over
2000, as compared to an increase in 2000 of $420,249 or 15.5% over
1999. 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 13.4%. 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 $9,084,778 in 2001 as compared to
$8,301,997 in 2000. This represented a 9.4% increase from 2000 to
2001, and a 20.2% increase from 1999 to 2000. The overall increases
during the year were attributable to growth in all geographic markets,
and includes operations of branches acquired during 2000. Salaries and
other personnel expenses, which comprised 54% of total non-interest
expenses for 2001, were up $694,299 or 16.4% over 2000 due to normal
salary increases, benefit cost increases, and increased personnel due
to two new branches. During 2000 and 1999, salaries and other
personnel expenses accounted for 52% and 54% of total other operating
expenses, respectively.
Combined net occupancy and furniture and equipment expenses
decreased $130,966, or 8.8% from 2000 to 2001, as compared to an
increase of $298,051, or 25.4% in 2000.
Income Taxes
Income tax expense totaled $733,859 in 2001 as compared to
$1,221,738 in 2000. 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
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
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.
39
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.
40
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.
41
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.
Regulatory Matters
During the year 2001, 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. However, one bank has seen some increase in
classified loans as a result of branch acquisitions in the year 2000.
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 F1 through F47 of this Annual
report on Form 10-K.
Consolidated Balance Sheets - December 31, 2001 and 2000
Consolidated Statements of Income and Other Comprehensive Income -
Years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flow - Years ended December 31,
2001, 2000 and 1999
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, 2001
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 (46) 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 (82) Executive Vice 1969(1)(2) 189,307
President, Secretary (3) ( 47.39%)
and Director; Chairman
and Director, Alma
Bank; Director,
Banker's Data Services;
Chairman of Board,
President, Citizens Bank;
Director, Peoples Bank
Lawrence Bennett (54) President and 1987(1)(2) 12,498
Director, Alma (4) ( 3.13%)
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 (54) Director; Executive 1990(3) 992
Vice President, ( .2%)
Peoples Bank; Director,
Banker's Data Services
James W. Whiddon (57) Director; Executive 1989(2) 279
Vice President and ( .1%)
Director, Citizens
Bank; Director,
Banker's Data Services
Kenneth F. Wade (59) Director; Executive 1980(1) 4,934
Vice President, Director ( 1.23%)
and Cashier, Alma 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 166,085 shares
owned by Estate of Valene Bennett of which she is the Executrix and
22,983 shares owned by Bennett Family Limited Partnership of which she
is the general partner.
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 2001 196,700 - 32,090 - - - -
CEO 2000 182,848 - 31,440 - - - -
CEO 1999 164,348 - 28,910 - - - -
CEO 1998 140,956 - 26,200 - - - -
1997 125,138 - 20,235 - - - -
Olivia
Bennett
Secretary2001 202,618 - 20,875 - - - -
2000 215,099 - 20,915 - - - -
1999 205,366 - 20,345 - - - -
1998 195,935 - 22,010 - - - -
1997 182,936 - 15,135 - - - -
(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, 2002, 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 166,085 41.57%
Olivia Bennett
Route 4
Alma, Georgia 31510 23,222 5.81%
ll Executive Officers and Directors
as a group (7 persons) 227,248 56.9%
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, 2001 and
2000
(ii) Consolidated Statements of Income and Other
Comprehensive Income - Years ended December 31,
2001, 2000 and 1999
(iii)Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2001, 2000 and 1999
(iv) Consolidated Statements of Cash Flow - Years ended
December 31, 2001, 2000 and 1999
(b) South Banking Company (Parent Corporation Only):
(i) Balance Sheets - December 31, 2001 and 2000
(ii)Statements of Income and Other Comprehensive Income -
Periods ended December 31, 2001, 2000 and 1999
(iii)Statements of Stockholders' Equity - Periods ended
December 31, 2001, 2000 and 1999
(iv) Statements of Cash Flow - Years ended December 31,
2001, 2000, and 1999
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) 2002 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 29, 2002
Paul T. Bennett
Principal Executive,
Financial and Accounting
Officer and Director
Date: March 29, 2002
Olivia Bennett
Executive Vice President
And Director
Date: March 29, 2002
Charles Stuckey
Director
Date: March 29, 2002
James W. Whiddon
Director
Date: March 29, 2002
Kenneth F. Wade
Director
Date: March 29, 2002
Lawrence Bennett
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 29, 2002 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) 2001 annual report to shareholders.
(2) Proxy statement for 2001 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, 2001
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, 2001 and 2000
and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December
31, 2001. 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 auditing standards
generally accepted in the United States. 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, 2001 and 2000 and the consolidated results of its operations,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
Respectfully submitted,
H. H. BURNET & COMPANY, P.C.
Waycross, Georgia
February 6, 2002
F2
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2001 2000
ASSETS
Cash and due from banks $ 11,140,462 $ 8,911,914
Deposits in other banks -
interest bearing $ 1,273,000 $ 825,279
Investment securities
Available for sale $ 17,173,350 $ 20,695,055
Held to maturity - market value
of $152,583 in 2001 and
$151,512 in 2000 $ 147,536 $ 147,326
Georgia Bankers stock $ 547,283 $ 547,283
Federal Home Loan Bank stock $ 426,100 $ 426,100
Federal funds sold $ 10,252,000 $ 14,693,000
Loans $ 172,378,811 $ 163,227,679
Less: Unearned discount ( 288,968) ( 253,273)
Reserve for loan losses ( 2,756,780) ( 2,728,219)
$ 169,333,063 $ 160,246,187
Bank premises and equipment $ 6,715,813 $ 6,111,361
Intangible assets $ 1,680,572 $ 1,916,358
Other assets $ 6,101,344 $ 5,930,175
Total Assets $ 224,790,523 $ 220,450,038
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,
2001 2000
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits: Demand - non-interest
bearing $ 29,999,788 $ 24,298,756
Demand - interest bearing 32,764,586 27,404,525
Savings 10,537,057 11,326,824
Time 122,699,172 129,649,110
$ 196,000,603 $ 192,679,215
Borrowing 5,581,251 6,223,363
Accrued expenses and other
liabilities 1,850,430 2,236,900
Federal funds purchased - -
N/P - Federal Home Loan Bank 1,500,000 1,040,000
Total Liabilities $ 204,932,284 $ 202,179,478
Stockholders' Equity
Common stock $1 par value; shares
authorized - 1,000,000, shares
issued and outstanding -
2001 and 2000 - 399,500
and 399,500, respectively $ 399,500 $ 399,500
Surplus 3,070,831 3,070,831
Undivided profits 16,291,126 14,887,046
Accumulated other comprehensive income 96,782 ( 86,817)
Total Stockholders' Equity $ 19,858,239 $ 18,270,560
Total Liabilities and
Stockholders' Equity $ 224,790,523 $ 220,450,038
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,
2001 2000 1999
Interest Income
Interest and other
fees on loans $ 16,737,159 $ 16,603,948 $ 12,858,967
Interest on deposits -
interest bearing 54,303 53,224 78,124
Interest on federal
funds sold 740,769 622,780 462,292
Interest on investment
securities:
U. S. Treasury 31,021 77,571 144,635
U. S. Government agencies 898,919 910,190 753,245
Mortgage backed securities 16,360 33,411 37,875
State and municipal
subdivisions 66,100 79,343 86,777
Other securities 60,031 73,017 95,849
Total Interest Income $ 18,604,662 $ 18,453,484 $ 14,517,764
Interest Expense
Interest on deposits $ 8,904,780 $ 8,121,657 $ 6,012,117
Interest - other borrowing 429,874 456,150 249,103
Total Interest Expense $ 9,334,654 $ 8,577,807 $ 6,261,220
Net interest income $ 9,270,008 $ 9,875,677 $ 8,256,544
Provision for loan losses 893,000 424,000 503,000
Net interest income after
provision for loan losses$ 8,377,008 $ 9,451,677 $ 7,753,544
Other Operating Income
Service charge on deposits$ 1,787,500 $ 1,576,094 $ 1,446,630
Commission on insurance 81,052 89,036 68,614
Other income 528,323 429,101 399,993
Securities gains (losses) ( 3,684) 7 236
Data processing fees 537,212 459,036 382,396
Gain (Loss) on sale of fixed
assets 60,333 2,019 -
Financial service income 134,601 162,825 -
Total Other Operating
Income $ 3,125,337 $ 2,718,118 $ 2,297,869
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,
2001 2000 1999
Other Operating Expenses
Salaries $ 3,676,504 $ 3,354,689 $ 2,866,950
Profit sharing and other
personnel expenses 1,247,944 875,460 827,359
Occupancy expense of bank
premises 514,595 475,452 408,211
Furniture and equipment
expense 826,664 996,773 756,963
Stationery and supplies 199,901 254,881 167,909
Data processing 295,852 310,141 240,633
Director fees 182,760 174,260 170,260
Other real estate expenses 92,080 13,006 21,112
Other expenses 2,048,478 1,847,335 1,437,459
Total Other Operating
Expenses $ 9,084,778 $ 8,301,997 $ 6,905,856
Income before income taxes$ 2,417,567 $ 3,867,798 $ 3,145,557
Applicable income taxes 733,859 1,221,738 1,017,056
Net Income $ 1,683,708 $ 2,646,060 $ 2,128,501
Other comprehensive income
before tax
Unrealized gain on
securities $ 291,307 $ 151,160 $( 402,268)
Other comprehensive income
before tax $ 291,307 $ 151,160 $( 402,268)
Income tax expenses related
to items of other
comprehensive income 107,708 57,048 ( 136,771)
Other comprehensive income,
net of tax $ 183,599 $ 94,112 $( 265,497)
Comprehensive Income $ 1,867,307 $ 2,740,172 $ 1,863,004
Per share data based on
weighted outstanding shares:
Weighted average
outstanding 399,500 399,500 399,500
Net Income $ 4.21 $ 6.62 $ 5.33
The accompanying notes are an integral part of these financial
statements.
F6
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other Total
Common Undivided Comprehensive Stockholders'
Stock Surplus Profits Income Equity
Balance,
December 31,
1998 $399,500 $3,070,831 $10,651,788 $ 84,568 $14,206,687
Net income - - 2,128,501 - 2,128,501
Cash dividends - - ( 259,675) - ( 259,675)
Unrealized gain
(loss) on securities
available for
sale - - - ( 265,497) ( 265,497)
Balance,
December 31,
1999 $399,500 $3,070,831 $12,520,614 $( 180,929) $ 15,810,016
Net income - - 2,646,060 - 2,646,060
Cash dividends - - ( 279,628) - ( 279,628)
Unrealized gain
(loss) on securities
available for
sale - - - 94,112 ( 94,112)
Redemption of shares - - - - -
Balance,
December 31,
2000 $399,500 $3,070,831 $14,887,046 $( 86,817) $ 18,270,560
Net income - - 1,683,708 - 1,683,708
Cash dividends - - ( 279,628) - ( 279,628)
Unrealized gain
(loss) on securities
available for
sale - - - 183,599 183,599
Redemption of shares - - - - -
Balance,
December 31,
2001 $399,500 $3,070,831 $16,291,126 $ 96,782 $ 19,858,239
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,
2001 2000 1999
Cash Flows From Operating
Activities:
Net income $ 1,683,708 $ 2,646,060 $ 2,128,501
Add expenses not
requiring cash:
Provision for depreciation
and amortization 1,080,954 930,972 668,207
Provision for loan losses 893,000 424,000 503,000
Provision for loss on ORE 52,000 3,408 5,000
Bond portfolio losses
(gains) 3,685 - ( 202)
(Gain) loss on sale of
premises & equipment ( 60,070) ( 2,019) ( 6,080)
(Gain) loss on sale of
other real estate owned 20,625 23,040 34,444
Increase (decrease) in
taxes payable 136,792 ( 236,230) 290,973
Increase (decrease) in
interest payable ( 403,513) 568,654 ( 39,109)
Increase (decrease) in
other liabilities ( 119,749) 324,957 (348,857)
(Increase) decrease in
interest receivable 341,390 ( 460,066) 167,420
(Increase) decrease in
prepaid expenses ( 175,310) ( 80,167) 17,824
(Increase) decrease in
other assets 260,171 ( 284,686) ( 101,191)
Recognition of unearned
loan income 60,094 - 61,852
Net Cash Provided By
Operating Activities $ 3,773,777 $ 3,857,923 $ 3,381,782
Cash Flows From Investing
Activities:
Proceeds from maturities
of securities held to
maturity $ - $ 600,000 $ -
Purchase of securities
held to maturity - - -
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,
2001 2000 1999
Cash Flows From Investing
Activities: (con't)
Proceeds from maturity of
securities available for
sale $ 25,668,030 2,101,866 6,371,028
Net loans to customers ( 11,476,813) ( 13,197,595) (17,816,584)
Proceeds from sale of
securities available for
sale 295,094 - -
Purchase of securities
available for sale ( 22,139,058) $( 4,339,254) $( 7,849,323)
Purchase of premises and
equipment ( 2,044,019) ( 1,645,225) ( 696,558)
Proceeds from sale of
premises and equipment 639,520 29,970 11,538
Proceeds from sale of
other real estate owned 659,090 885,084 163,262
Purchase of Bank stock - - ( 250,000)
Purchase of FHLB stock - - ( 29,900)
Purchase of Bank Branches - ( 4,193,634) -
Net Cash Provided By
Investing Activities $( 8,398,156) $( 19,758,788) $(20,096,537)
Cash Flows From Financing
Activities:
Net increase (decrease) in
demand deposits, NOW and
money markets $ 11,061,093 $ 1,686,060 $( 3,360,349)
Net increase in savings
and time deposits ( 7,739,705) 19,819,341 10,170,379
Proceeds from borrowing 1,523,810 4,756,750 38,812
Payments on borrowing ( 1,705,922) ( 256,463) ( 578,499)
Dividends paid ( 279,628) ( 279,628) ( 259,675)
Payments to retire stock - - -
Increase in federal funds
purchased - ( 1,140,000) 1,140,000
The accompanying notes are an integral part of these financial
statements.
F9
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
Cash Flows From Financing
Activities: (con't)
Net Cash Provided By
Financing Activities $ 2,859,648 $ 24,586,060 $ 7,150,668
Net increase (decrease) in
Cash and Cash
Equivalents $( 1,764,731) $ 8,685,195 $( 9,564,087)
Cash and Cash Equivalents
at Beginning of Year 24,430,193 15,744,998 25,309,085
Cash and Cash Equivalents
at End of Year $ 22,665,462 $ 24,430,193 $ 15,744,998
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.
F10
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 1. Significant Accounting Policies (Con't)
(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.
Material estimates that are particularly susceptible to
significant change relate to the determination of the
allowance for 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
F11
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 1. Significant Accounting Policies (Con't)
(d) Use of Estimates: (Con't)
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.
F12
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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, 2001 and 2000, 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.
F13
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 1. Significant Accounting Policies (Con't)
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
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 income 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.
F14
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 1. Significant Accounting Policies (Con't)
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
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.
F15
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 1. Significant Accounting Policies (Con't)
(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 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
condition 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
F16
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,2001
Note 1. Significant Accounting Policies (Con't)
(j) Income Taxes (Con't)
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 and Core Deposits) recorded
by the Company in the acquisition of Pineland State Bank
and subsequent branches are being amortized on a straight
line basis over eight to ten years.
(l) Earnings Per Share
Earnings per share are based on the weighted average
number of shares outstanding.
(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.
F17
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,2001
Note 1. Significant Accounting Policies (Con't)
(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, 2001, 2000 and 1999 for interest
was $9,738,167, $8,117,741, and $6,300,329, respectively.
Total income tax payments during 2001, 2000 and 1999 were
$844,223, $1,552,939, and $1,025,000, respectively.
(o) Recent Pronouncements and Accounting Changes
The Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets, on July 20, 2001.
SFAS No. 141 provides that all business combinations
shall be accounted for using the purchase method of
accounting; the use of the pooling-of-interests method is
now prohibited. The provisions of SFAS No. 141 apply to
all business combinations initiated after June 30, 2001 or
to all business combinations accounted for by the purchase
method that are completed after June 30, 2001. The Company
has not been involved in any recent business combination
discussions.
SFAS No. 142 provides that goodwill shall not be
amortized but should be tested for impairment on an annual
basis, using criteria prescribed in the statement. If the
carrying amount of goodwill exceeds its implied fair value,
as recalculated, an impairment loss equal to the excess
shall be recognized. Recognized intangible assets other
than goodwill should be amortized over their useful lives
and reviewed for impairment in accordance with SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of (superseded by SFAS
No. 144, see discussion which follows). SFAS No. 142 will
be effective for fiscal years beginning after December 15,
2001.
F18
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,2001
Note 1. Significant Accounting Policies (Con't)
(o) Recent Pronouncements and Accounting Changes (Con't)
The Company's intangible assets at December 31, 2001
are classified as intangible assets other than
goodwill. Approximately $1.576 million of the intangibles
recorded on the balance sheet at December 31, 2001
represents the remaining unamortized intangible related to
the Company's 2000 acquisition of three branch offices from
another bank. The balance of $104 thousand is the
remaining intangibles from the original purchase of the
bank in 1996. The intangible are being amortized over
eight to ten years in accordance with SFAS No. 72,
Accounting for Certain Acquisitions of Banking or Thrift
Institutions, which was not superseded by SFAS No. 142.
During December 2001, the FASB announced it will undertake
a limited-scope project to reconsider part of the guidance
in SFAS No. 72. Issuance of a final statement is not
expected until the fourth quarter of 2002.
SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, was issued by the FASB on October 3, 2001 and
is effective for fiscal years beginning after December 15,
2001. This statement effectively supersedes SFAS No. 121
and Accounting Principles Board (APB) Opinion No. 30 and
requires that long-lived assets, including discontinued
operations, that are to be disposed of by sale be measured
at the lower of carrying amount or fair value less cost to
sell. The statement also resolves certain implementation
issues regarding SFAS No. 121. This statement is not
expected to have a material impact on the Company's
statements of financial condition or results of operations.
F19
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,2001
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, 2001:
U.S. Government
and agency
securities $15,583,819 $ 165,042 $57,519 $ 15,691,342
State and municipal
securities 948,774 34,883 - 983,657
Mortgage backed
securities 227,844 8,207 - 236,051
Equity securities 259,253 3,047 - 262,300
Totals $17,019,690 $ 211,179 $57,519 $ 17,173,350
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
F20
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 2. Investment Securities (Con't)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities to be
Held to Maturity -
December 31, 2001:
U.S. Government
and agency
securities $ - $ - $ - $ -
State and municipal
securities 147,536 5,047 - 152,583
Mortgage backed
securities - - - -
Totals $ 147,536 $ 5,047 $ - $ 152,583
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
Gross realized gains and loses on sales of available-
for-sale securities were $-0- and $(3,685) in 2001,
respectively and $-0- and $-0-, respectively for 2000 and $-
0- and $-0-, respectively in 1999. During the year ended
December 31, 2001, investment securities available for
sale, with a fair value at the date of sale of $295,094,
were sold. In the years 2000 and 1999, no securities were
sold.
Assets, principally securities carried at
approximately $11,615,367 at December 31, 2001 and
$12,406,833 at December 31, 2000, were pledged to secure
public deposits and for other purposes required or
permitted by law.
F21
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 2. Investment Securities (Con't)
The scheduled contractual maturities of securities to
be held to maturity and securities available for sale at
December 31, 2001 were as follows:
Securities Securities
To Be Held Available
To Maturity for Sale
Amortized Amortized
Cost Fair Value Cost Fair Value
Due in one year
or less $ 100,000 $ 100,836 $ 1,931,605 $ 1,962,259
Due from one
year to five
years - - 11,103,871 11,227,555
Due from five
years to ten
years - - 3,198,257 3,173,119
Due after ten
years 47,536 51,747 526,704 548,117
$ 147,536 $ 152,583 $16,760,437 $16,911,050
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.
F22
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 3. Loans
The composition of the bank's portfolio was as follows:
2001 2000
(In Thousands)
Commercial, financial and
agricultural $ 49,558 $ 42,973
Real estate - mortgage 85,876 81,314
Real estate - construction 9,015 7,646
Installment and consumer 27,929 31,294
Total Loans $ 172,378 $ 163,227
Less: Unearned discount ( 289) ( 253)
Reserve for loan losses ( 2,756) ( 2,728)
Loans, net $ 169,333 $ 160,246
Non-accrual loans (principally collateralized by real
estate) amounted to approximately $1,002,000, $876,000 and
$442,000 at December 31, 2001, 2000, and 1999,
respectively. Impaired loans were $-0- and $-0- at December
31, 2001 and 2000.
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 $520,150 and
$633,116 at December 31, 2001 and 2000. During 2001,
$358,381 of new loans were made, and repayments totaled
$471,347.
F23
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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,
2001 2000 1999
Balance at beginning
of period $ 2,728,219 $ 2,168,877 $ 1,970,620
Additions: Provision
charged to operating
expenses $ 893,000 $ 424,000 $ 503,000
Balance from bank
acquisition - 588,306 -
$ 893,000 $ 1,012,306 $ 503,000
Deductions: Loans
charged off $ 1,002,886 $ 664,298 $ 432,472
Less: recoveries 138,447 211,334 127,729
$ 864,439 $ 452,964 $ 304,743
Balance at end of
period $ 2,756,780 $ 2,728,219 $ 2,168,877
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 $1,436,843 and
$833,029 were transferred to foreclosed real estate in 2001
and 2000, respectively.
The bank is not committed to lend additional funds to
debtors whose loans have been modified.
F24
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 5. Deposits
The aggregate amount of short-term jumbo CDs, each with
a minimum denomination of $100,000, was approximately
$31,805,741 in 2001 and $37,569,711 in 2000.
At December 31, 2001, the scheduled maturities of CDs
are as follows:
(In Thousands)
2002 $ 113,427
2003 and 2004 8,777
2005 and thereafter 495
$ 122,699
Note 6. Premises and Equipment
A summary of the account:
Year Ended Year Ended
December 31, December 31,
2001 2000
Land $ 640,582 $ 526,763
Buildings 5,971,572 4,936,869
Furniture and equipment 5,697,359 5,470,568
$12,309,513 $10,934,200
Less: Accumulated
depreciation 5,593,700 4,822,839
$ 6,715,813 $ 6,111,361
Depreciation expense was $860,117 in 2001, $803,318 in
2000 and $614,430 in 1999.
F25
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 7. Borrowings
Data relating to borrowing is as follows:
Year Ended Year ended
December 31, December 31,
Parent Company - 2001 2000
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. $ 4,725,000 $ 5,000,000
Note payable due June 30, 2001.
Interest payable quarterly and
accrues at prime rate and is
secured by bank stock - 200,000
Subsidiary - Bankers Data Services, Inc.
Note payable due January 27, 2002
monthly principal amount of
$10,833.33 plus interest. Interest
accrues at prime minus 1%.
Computer equipment is pledged as
collateral for loan. 824,419 987,847
Note payable in 36 monthly payments
of $434.02. Interest accrues at
1.9% rate and is secured by vehicle. 433 5,580
Note payable in 24 monthly payments
of $664.13. Interest accrues at
5.9% rate and is secured by vehicle. 6,465 13,816
Note payable in 24 monthly payments
of $791.66. Interest accrues at 0%
and is secured by auto. 17,416 -
Subsidiary - Alma Exchange Bank
Note payable in 36 monthly payments
of $696.98. Interest accrues at
3.9% rate and is secured by vehicle. 7,517 16,120
F26
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 7. Borrowings (Con't)
Year Ended Year ended
December 31, December 31,
2001 2000
Note payable in 3 annual payments
of $7,937. Interest accrues at 0%
and is secured by auto. 23,811 -
Following are maturities of long term debt for each of
the next five years.
2002 $ 486,851
2003 520,853
2004 562,937
2005 605,000
2006 655,000
Note 8. Income Taxes
Income tax expense (benefit) was $733,859 for 2001, (an
effective rate of 30.4%), $1,221,738 for 2000 (an effective
rate of 31.6%) and $1,017,056 for 1999 (an effective rate of
32.3%). The actual expense for 2001, 2000 and 1999 differs
from the "expected" tax expense for those years (computed by
applying the federal corporate rate of 34%) as follows:
2001 2000 1999
Computed "expected"
tax expenses 34.0% 34.0% 34.0%
Alternative minimum tax - - -
Effect of State
Income Tax ( .1%) 1.1% 2.4%
Tax exempt interest
on securities and
loans ( 4.6%) ( 3.6%) ( 2.9%)
Other, net 1.1% .1% ( 1.2%)
30.4% 31.6% 32.3%
F27
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 8. Income Taxes (Con't)
The current and deferred amounts of these tax provisions
were as follows:
2001 2000 1999
Current - Federal $ 725,566 $1,178,493 $1,140,833
- State - 83,299 104,994
Deferred - Federal 7,123 ( 24,534) ( 146,891)
- State 1,170 ( 15,520) ( 81,880)
$ 733,859 $1,221,738 $1,017,056
The tax effects of each type of income and expense item
that gave rise to deferred taxes are:
December 31, December 31,
2001 2000
Net unrealized appreciation on
securities available for sale $( 55,726) $ 50,833
Depreciation ( 219,899) ( 190,400)
Deferred loan fees 101,281 85,229
Allowance for credit losses 788,595 806,587
Other 32,728 9,626
Purchase accounting treatment ( 65,820) ( 65,820)
Net deferred tax asset (liability) $ 581,159 $ 696,055
F28
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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 2001,
2000 and 1999. The expense to the Company for 2001, 2000 and
1999 was $140,000, $134,297, and $115,297, 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, 2001 for each of the next 5 years and in the
aggregate is:
Year Ended
2002 $ 4,000
2003 4,000
2004 4,000
2005 4,000
2006 4,000
Subsequent to 2007 192,000
Total minimum future
rental payments $ 212,000
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.
F29
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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, 2001 and 2000, the Company had
$911,779 and $450,240 in outstanding standby letters of
credit.
Loan Commitments. As of December 31, 2001 and 2000, the
Company had commitments outstanding to extend credit
totaling $15,710,009 and $28,328,739, 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.
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.
F30
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 12. Financial Instruments (Con't)
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 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 2001, 2000 or
1999.
F31
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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.
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, 2001, 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, 2001 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, 2001, $962,596 is carried in other assets
related to this arrangement.
F32
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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, 2001 and 2000. Items
which are not financial instruments are not included.
2001
Carrying Estimated
Cash and due from financial Amount Fair Value
institutions $ 11,140,462 $11,140,462
Interest earning balances with
financial institutions 1,273,000 1,273,000
Federal funds sold 10,252,000 10,252,000
Securities available for sale 17,173,350 17,173,350
Securities held to maturity 147,536 152,583
Federal Home Loan Bank stock 426,100 426,100
Georgia Bankers Bank - stock 547,283 770,240
Loans - net of allowances 169,333,063 161,938,092
Demand and savings deposits 73,301,431 73,301,431
Time deposits 122,699,172 123,606,169
Federal funds purchased - -
2000
Cash and due from financial
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
Federal funds purchased - -
F33
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 16. Fair Value of Financial Instruments (Con't)
For purposes of the above disclosures of estimated fair
value, the following assumptions were used as of December 31,
2001 and 2000. 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, 2001 and 2000, 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, 2001 and 2000 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, 2001 and 2000,
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, 2001 and 2000.
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
items at December 31, 2001 and 2000, 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, 2001
and 2000 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.
F34
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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, 2001, that the Company
and its subsidiaries meet all capital adequacy requirements to
which it is subject.
As of December 31, 2001, 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.
F35
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 17. Regulatory Matters (Con't)
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, 2001:
Total Capital
(to Risk
Weighted
Assets)
Consolidated$ 20,435 10.9% >$ 15,041 > 8.0% >$ 18,801 > 10.0%
Subsidiary -
Alma 7,775 11.5% > 5,384 > 8.0% > 6,730 > 10.0%
Subsidiary -
Baxley 6,737 15.9% > 3,381 > 8.0% > 4,227 > 10.0%
Subsidiary -
Kingsland 3,192 12.4% > 2,065 > 8.0% > 2,581 > 10.0%
Subsidiary -
Metter 5,410 10.4% > 4,159 > 8.0% > 5,199 > 10.0%
As of December 31, 2001:
Tier I Capital
(to Risk Weighted
Assets)
Consolidated $ 18,080 9.6% >$ 7,520 > 4.0% >$ 11,280 > 6.0%
Subsidiary -
Alma 6,924 10.3% > 2,692 > 4.0% > 4,038 > 6.0%
Subsidiary -
Baxley 6,207 14.7% > 1,691 > 4.0% > 2,536 > 6.0%
Subsidiary -
Kingsland 2,868 11.1% > 1,032 > 4.0% > 1,549 > 6.0%
Subsidiary -
Metter 4,769 9.2% > 2,080 > 4.0% > 3,120 > 6.0%
F36
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2001:
Tier I
Capital (to
Average Assets)
Consolidated $ 18,080 8.1% >$ 8,924 > 4.0% >$ 11,155 > 5.0%
Subsidiary -
Alma 6,924 8.9% > 3,104 > 4.0% > 3,881 > 5.0%
Subsidiary -
Baxley 6,207 12.1% > 2,052 > 4.0% > 2,565 > 5.0%
Subsidiary -
Kingsland 2,868 9.1% > 1,266 > 4.0% > 1,583 > 5.0%
Subsidiary -
Metter 4,769 7.8% > 2,435 > 4.0% > 3,043 > 5.0%
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%
F37
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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:
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%
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%
F38
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
FINANCIAL STATEMENTS
DECEMBER 31, 2001
F39
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
South Banking Company
Alma, Georgia 31510
Under date of February 14, 2002, we reported on the
consolidated balance sheets of South Banking Company, as of
December 31, 2001 and 2000, and the related statements of income,
cash flows and stockholders' equity for the three years in the
period ended December 31, 2001.
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, 2001 and 2000 and the related statements of income,
cash flows and stockholders' equity for each of the three years
in the period ended December 31, 2001. 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 auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, 2001 and 2000, and the results of its operations,
stockholders' equity and its cash flows for the three years then
ended in conformity with accounting principles generally accepted
in the United States of America.
Respectfully submitted,
H. H. BURNET & COMPANY, P. C.
February 14, 2002
F40
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
BALANCE SHEETS
December 31, December 31,
2001 2000
ASSETS
Cash and due from banks
Interest bearing $ 1,243,497 $ 1,064,896
Non-interest bearing 36,862 32,846
Investment in bank's subsidiaries 22,543,800 21,420,680
Investment in nonbank subsidiaries 463,535 341,298
Investment-Habersham Bank Corp.-available
for sale - 215,760
Investment-Nexity Financial-available
for sale 250,000 250,000
Other assets 16,423 60,948
Prepaid income taxes 351,370 214,577
Due from subsidiaries - -
Total Assets $24,905,487 $23,601,005
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 186 $ 186
Other liabilities 3,018 788
Accrued income taxes - -
Notes payable 4,725,000 5,200,000
Due to subsidiaries 319,044 129,471
Total Liabilities $ 5,047,248 $ 5,330,445
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 16,291,126 14,887,046
Accumulated other comprehensive income 96,782 ( 86,807)
Total Stockholders' Equity $19,858,239 $ 18,270,560
Total Liabilities and Stockholders'Equity $24,905,487 $ 23,601,005
The accompanying note is an integral part of these financial statements.
F41
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
STATEMENT OF INCOME
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
Income
Dividends from bank
Subsidiaries $ 994,156 $ 985,387 $ 977,614
Miscellaneous income - 788 682
Interest income 45,641 23,479 18,431
Management fees 108,000 102,000 102,000
Dividends - other 2,673 5,345 10,091
Loss on sale of stock ( 4,906) - -
Total Income $ 1,145,564 $1,116,999 $ 1,108,818
Expenses
Salaries $ 80,543 $ 83,169 $ 79,300
Amortization 1,498 13,526 13,526
Interest 337,286 318,822 212,684
Professional fees 25,791 75,045 33,045
Other 67,837 75,621 63,109
Total Expenses $ 512,955 $ 566,183 $ 401,664
Income before income taxes
and equity in undistributed
income (loss) of subsidiaries $ 632,609 $ 550,816 $ 707,154
Provision (credit) for
income taxes ( 136,526) ( 164,606) ( 95,172)
Income before equity in
undistributed income in
subsidiaries $ 769,135 $ 715,422 $ 802,326
Equity in undistributed
income of bank subsidiaries $ 792,336 $1,904,756 $ 1,251,684
Equity in undistributed
income (loss) of nonbank
subsidiaries 122,237 25,882 74,491
$ 914,573 $1,930,638 $ 1,326,175
Net Income $ 1,683,708 $2,646,060 $ 2,128,501
The accompanying note is an integral part of these financial statements.
F42
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,
2001 2000 1999
Other Comprehensive Income
before tax
Unrealized gain on securities $ 278,166 $ 151,160 $( 402,268)
Other Comprehensive Income
before tax $ 278,166 $ 151,160 $( 402,268)
Income tax expenses related
to items of other
comprehensive income 94,577 57,048 ( 136,771)
Other comprehensive income,
net of tax $ 183,589 $ 94,112 $( 265,497)
Comprehensive income $ 1,867,297 $2,740,172 $ 1,863,004
Per share data based on
weighted outstanding shares:
Weighted average
outstanding 399,500 399,500 399,500
Net Income $ 4.21 $ 6.62 $ 5.33
The accompanying note is an integral part of these financial statements.
F43
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
Other Total
Common Undivided Comprehensive Stockholders'
Stock Surplus Profits Income Equity
Balance,
December 31,
1998 $ 399,500 $3,070,831 $10,651,788 $ 84,568 $ 14,206,687
Net income - - 2,128,501 - 2,128,501
Cash dividends - - ( 259,675) - ( 259,497)
Unrealized gain
(loss) on
securities
available for
sale - - - (265,497) ( 265,497)
Balance,
December 31,
1999 $ 399,500 $3,070,831 $12,520,614 $( 180,929) $ 15,810,016
Net income - - 2,646,060 - 2,646,060
Cash dividends - - ( 279,628) - ( 279,628)
Unrealized gain
(loss) on
securities
available for
sale - - - 94,112 94,112
Redemption of shares - - - - -
Balance,
December 31,
2000 $ 399,500 $3,070,831 $14,887,046 $( 86,817) $ 18,270,560
Net income - - 1,683,708 - 1,683,708
Cash dividends - - ( 279,628) - ( 279,628)
Unrealized gain
(loss) on
securities
available for
sale - - - 183,599 183,599
Redemption of shares - - - - -
Balance,
December 31,
2001 $ 399,500 $3,070,831 $16,291,126 $ 96,782 $ 19,858,239
The accompanying note is an integral part of these financial statements.
F44
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
STATEMENT OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
Cash Flows From Operating
Activities:
Net income $ 1,683,708 $ 2,646,060 $ 2,128,501
Add expenses not requiring
cash:
Depreciation and
Amortization 11,731 21,870 17,649
Undistributed earnings of
Subsidiaries ( 914,573) (1,930,638) ( 1,326,175)
Loss on sale of stock ( 4,906) - -
Increase (decrease) in
other liabilities 2,230 788 -
Increase (decrease) in
accrued income taxes - ( 21,653) 21,652
(Increase) decrease in
other assets 1,369 635 ( 1,979)
(Increase) decrease in
prepaid income taxes ( 136,793) ( 214,577) 145,937
(Increase) decrease in
due from subsidiary-taxes - 105,672 ( 129,928)
Increase (decrease) in
due to subsidiary 189,573 129,471 -
Net Cash Provided by Operating
Activities $ 842,151 $ 737,718 $ 855,657
Cash Flows From Investing
Activities:
Capital contribution to
Subsidiary $( 200,000) $(2,700,000) $ -
Purchase of Nexity Financial
Stock - - ( 250,000)
Purchase of C B Financial
Stock
Purchase of fixed assets - ( 27,532) -
Sale of CB Financial 295,094 - -
Net Cash Used by Investing
Activities $ 95,094 $( 2,727,532) $( 250,000)
The accompanying note is an integral part of these financial
statements.
F45
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,
2001 2000 1999
Cash Flows From Financing
Activities:
Payments on note payable
bank $( 475,000) $( 60,000) $( 390,000)
Proceeds from notes payable
to banks - 2,900,000 -
Dividends paid ( 279,628) ( 279,628) ( 259,675)
Redemption of common stock - - -
Net Cash Provided (Used)
by Financing Activities $( 754,628) $ 2,560,372 $( 649,675)
Net increase (decrease) in
cash and cash equivalents $ 182,617 $ 570,558 $( 44,018)
Cash and Cash Equivalents at
beginning of year 1,097,742 527,184 571,202
Cash and Cash Equivalents
at end of year $ 1,280,359 $ 1,097,742 $ 527,184
The accompanying note is an integral part of these financial
statements.
F46
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.
F47