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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, 2002
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 S-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) Not applicable.
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2)
Yes No X
State the aggregate market value of the voting and non-voting
common equity held by nonaffiliates computed by reference to the price
at which the common equity was last sold, or the average bid and ask
price of such common equity, as of the last business day of the
registrant's must recently completed second fiscal quarter:
$2,067,024. The price is based on the price of the last sales price
known to the registrant, which occurred on September 13, 2001.
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,
2003
Common stock $1.00 par value per share 399,500
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by
reference and the part of the Form 10-K into which the documents are
incorporated: (1) any annual reports to security holders; (2) any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities
Act of 1933. None
PART 1.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING INFORMATION
Statements and financial discussion and analysis contained in this
Annual Report on Form 10-K that are not historical facts are forward-
looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking
statements describe the Company's future plans, strategies and
expectations, are based on assumptions and involve a number of risks
and uncertainties, many of which are beyond the Company's control. The
important factors that could cause actual results to differ materially
from the forward-looking statements include, without limitation:
changes in interest rates and market prices, which could
reduce the Company's net interest margins, asset valuations and
expense expectations;
changes in the levels of loan prepayments and the resulting
effects on the value of the Company's loan portfolio;
changes in local economic and business conditions which
adversely affect the Company's customers and their ability to
transact profitable business with the Company, including the
ability of its borrowers to repay their loans according to their
terms or a change in the value of the related collateral;
increased competition for deposits and loans adversely
affecting rates and terms;
the timing, impact and other uncertainties of the Company's
potential future acquisitions, including the Company's ability
to identify suitable future acquisition candidates, the success
or failure in the integration of their operations, and the
Company's ability to enter new markets successfully and
capitalize on growth opportunities;
increased credit risk in the Company's assets and increased
operating risk caused by a material change in commercial,
consumer and/or real estate loans as a percentage of the total
loan portfolio;
the failure of assumptions underlying the establishment of
and provisions made to the allowance for loan losses;
changes in the availability of funds resulting in increased
costs or reduced liquidity;
changes in the Company's ability to pay dividends on its
Common Stock;
increased asset levels and changes in the composition of
assets and the resulting impact on the Company's capital levels
and regulatory capital ratios;
the Company's ability to acquire, operate and maintain cost
effective and efficient systems without incurring unexpectedly
difficult or expensive but necessary technological changes;
the loss of senior management or operating personnel and the
potential inability to hire qualified personnel at reasonable
compensation levels;
changes in statutes and government regulations or their
interpretations applicable to bank holding companies and the
Company's present and future banking and other subsidiaries,
including changes in tax requirements and tax rates;
all written or oral forward-looking statements attributable
to the Company are expressly qualified in their entirety by
these cautionary statements.
Item 1. Business
South Banking Company (the "Registrant") is a bank holding company
organized at the direction of Alma Exchange Bank & Trust ("Alma Bank")
and Citizens State Bank ("Citizens Bank"). 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 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. Georgia
Bankshares, Inc.'s subsidiary Georgia bank, Peoples State Bank
("Peoples Bank") is now a wholly-owned subsidiary bank of the
Registrant. 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" and, collectively
with Alma Bank, Citizens Bank and Peoples Bank, the "Banks")) 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. SFP 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.
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.
Recent Developments
During the fourth quarter of 2002 and the first quarter of 2003,
the Board of Directors decided to propose an amendment to the
Registrant's articles of incorporation, which would effect a 1-for-50
reverse stock split of the Registrant's outstanding common stock,
thereby reducing the number of authorized shares of common stock from
1,000,000 to 20,000 and increasing the par value of the common stock
from $1.00 per share to $50. The Registrant is proposing the reverse
stock split in order to "go private" - meaning that the Registrant
would terminate its status as a "public" company. The Registrant can
terminate the periodic report filing and other obligations it has under
the federal Securities Exchange Act if it reduces the number of its
record shareholders below 300, which the proposed reverse stock split
is designed to do.
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.
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, 2002, 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.
Employees
On December 31, 2002, the Registrant and its subsidiaries had 95
full-time and 34 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. Many of these competitors have substantially greater resources
than do the Banks.
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
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 (i) acquire
substantially all the assets of any bank or ownership or control of any
voting shares of any bank; (ii) it may acquire directly or indirectly,
more than five percent of the voting shares of a bank; or (iii) it may
merge or consolidate with any other bank holding company.
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.
Although the activities of bank holding companies have
traditionally been limited to the business of banking and activities
closely related or incidental to banking (as discussed above), the
Gramm-Leach-Bliley Act became effective in 2000, and relaxed the
previous limitations thus permitting bank holding companies to engage
in a broader range of financial activities. Specifically, bank holding
companies may elect to become financial holding companies which may
affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. Among the activities
that will be deemed "financial in nature" include:
lending, exchanging, transferring, investing for others or
safeguarding money or securities;
insuring, guaranteeing, or indemnifying against loss, harm,
damage, illness, disability, or death, or providing and issuing
annuities, and acting as principal, agent, or broker with
respect thereto;
providing financial, investment, or economic advisory
services, including advising an investment company;
issuing or selling instruments representing interests in
pools of assets permissible for a bank to hold directly; and
underwriting, dealing in or making a market in securities.
A bank holding company may become a financial holding company
under this statute only if each of its subsidiary banks is well
capitalized, is well managed and has at least a satisfactory rating
under the Community Reinvestment Act. A bank holding company that
falls out of compliance with such requirement may be required to cease
engaging in certain activities. Any bank holding company that does not
elect to become a financial holding company remains subject to the
current restrictions of the Act.
Under this legislation, the Federal Reserve Board serves as the
primary "umbrella" regulator of financial holding companies with
supervisory authority over each parent company and limited authority
over its subsidiaries. The primary regulator of each subsidiary of a
financial holding company will depend on the type of activity conducted
by the subsidiary. For example, broker-dealer subsidiaries will be
regulated largely by securities regulators and insurance subsidiaries
will be regulated largely by insurance authorities.
The Registrant has no plans of becoming a financial holding
company.
The Registrant must also register with the Department of Banking
and Finance of the State of Georgia (the "DBF") and file periodic
information with the DBF. As part of such registration, the DBF
requires information with respect to the Registrant's financial
condition, operations, management and inter-company relationships, and
related matters. The DBF may also require such other information as is
necessary to keep itself informed as to whether the provisions of
Georgia law and the regulations and orders issued thereunder by the DBF
have been complied with, and the DBF may examine the Registrant and
each of the Banks.
The Registrant is an "affiliate" of the Banks under the Federal
Reserve Act, which imposes certain restrictions on (i) loans by the
Banks to the Registrant, (ii) investments in the stock or securities
of the Registrant by the Banks, (iii) the Banks taking the stock or
securities of an "affiliate" as collateral for loans by the Banks to a
borrower and (iv) the purchase of assets from the Registrant by the
Banks. Further, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection
with any extension of credit, lease or sale of property or furnishing
of services.
The Banks, as Georgia banks, are subject to the supervision of,
and are regularly examined by, the Federal Deposit Insurance
Corporation (the "FDIC") and the DBF. Both the FDIC and the DBF must
grant prior approval of any merger, consolidation or other corporate
reorganization involving the Banks. A bank can be held liable for any
loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with the default of a commonly-controlled institution.
Payment of Dividends and Other Restrictions
The Registrant 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 the Banks can pay
dividends or otherwise supply funds to the Registrant.
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%.
The payment of dividends by the Registrant and the Banks may also
be affected or limited by other factors, such as the requirement to
maintain adequate capital above regulatory guidelines. In addition,
if, in the opinion of the applicable regulatory authority, a bank under
its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending upon the financial condition of the
Banks, could include the payment of dividends) such authority may
require, after notice and hearing, that such bank cease and desist from
such practice. The FDIC has issued a policy statement providing that
insured banks should generally only pay dividends out of current
operating earnings. In addition to the formal statutes and
regulations, regulatory authorities consider the adequacy of each of
the Bank's total capital in relation to its assets, deposits and other
such items. Capital adequacy considerations could further limit the
availability of dividends to the Banks.
Capital Adequacy
The Federal Reserve and FDIC have adopted substantially identical
risk-based capital guidelines for banks and 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, banks and bank holding companies must also have a minimum
stockholders' equity to risk-weighted assets of 4%.
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 Federal Reserve 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.
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 Banks are "well
capitalized" institutions.
The written policies of 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, 2002, 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.
Support of Subsidiary Banks
Under the FRB policy, the Registrant is expected to act as a
source of financial strength to, and to commit resources to support,
each of the Banks. This support may be required at times when, absent
such FRB policy, the Registrant 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 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 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 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.
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 Registrant is unable to assess the impact of
any proposed legislation on its financial condition or operations at
this time.
Available Information.
The Registrant is subject to the information requirements of the
Securities Exchange Act of 1934, which means that it is required to
file certain reports and other information, all of which are available
at the Public Reference Section of the Securities and Exchange
Commission at Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549.
You may also obtain copies of the reports and other information from
the Public Reference Section of the SEC, at prescribed rates, by
calling 1-800-SEC-0330. The SEC maintains a World Wide Web site on the
Internet at www.sec.gov where you can access reports, information and
registration statements, and other information regarding registrants
that file electronically with the SEC through the EDGAR system.
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,
2002 2001 2000
ASSETS (In Thousands)
Cash and due from banks $ 7,013 $ 6,705 $ 6,283
Cash in bank - interest bearing 1,634 957 822
Taxable investment securities 16,115 16,518 16,884
Nontaxable investment securities 1,018 1,326 1,613
Others 983 1,343 1,487
Federal funds sold and securities
purchased under agreements to
resell 18,976 18,028 9,945
Loans - net 167,750 166,639 148,195
Other assets 14,285 14,555 10,762
Total Assets $ 227,774 $ 226,071 $ 195,991
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits: Demand - non-interest
bearing $ 29,724 $ 24,903 $ 22,444
Demand - interest bearing 34,293 30,600 24,959
Savings 12,001 11,809 11,122
Time 121,984 131,154 114,026
Total Deposits $ 198,002 $ 198,466 $ 172,551
Federal funds purchased 19 23 114
Other borrowed funds 6,912 6,065 4,518
Other liabilities 2,062 2,453 1,768
Total Liabilities $ 206,995 $ 207,007 $ 178,951
Shareholders' equity 20,779 19,064 17,040
Total Liabilities and
Shareholders' Equity $ 227,774 $ 226,071 $ 195,991
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.
Year Ended December 31, 2002
Average Yield/ Average
Balance Interest Rate
ASSETS (In Thousands)
Cash in banks - interest
bearing $ 1,634 $ 60 3.67%
Loans 167,750 13,614 8.11%
Taxable investments 16,115 716 4.44%
Non-taxable investments 1,018 52 5.11%
Other 983 39 3.97%
Federal funds sold and
securities purchased
under agreements to resell 18,976 307 1.62%
Total Interest-Bearing
Assets $ 206,476 $ 14,788 7.16%
LIABILITIES
Demand - interest bearing $ 34,293 $ 419 1.22%
Savings deposits 12,001 194 1.62%
Other time deposits 121,984 4,459 3.66%
Other borrowing 6,912 258 3.73%
Federal funds purchased 19 - -%
Total Interest-Bearing
Liabilities $ 175,209 $ 5,330 3.04%
Net interest earnings $ 9,458
Net interest margin 4.12%
Year Ended December 31, 2001
Average Yield/ Average
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 earning $ 9,270
Net interest margin 3.88%
Year Ended December 31, 2000
Average Yield/ Average
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 interest margin 4.77%
(1) Note: Loan fees are included for rate calculation purposes.
Loan fees included in interest amounted to approximately $1,097,015
in 2002, $1,208,871 in 2001 and $999,520 in 2000. 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.
2002 Compared to 2001
Increase (Decrease) Due to (1)
Volume Rate Change
Interest earned on: (In Thousands)
Cash in banks - interest
bearing $ 38 $( 32) $ 6
Loans 98 ( 3,221) (3,123)
Taxable investments ( 23) ( 208) ( 231)
Nontaxable investments ( 15) 1 ( 14)
Other ( 16) ( 5) ( 21)
Federal funds sold and
securities purchased under
agreement to resell 39 ( 473) ( 434)
Total Interest-Earning Assets$ 121 $( 3,938) $(3,817)
Interest paid on:
NOW deposits $ 83 $( 358) $( 275)
Savings deposits 5 ( 125) ( 120)
Other time deposits ( 552) ( 2,886) (3,438)
Other borrowing 60 ( 231) ( 171)
Federal funds purchased - ( 1) ( 1)
Total Interest-Bearing
Liabilities $( 404) $( 3,601) $(4,005)
Net Interest Earnings $ 525 $( 337) $ 188
(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.
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
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.
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
,
2002 2001 2000
(In Thousands)
U. S. Treasury and other
U. S. government agencies
and corporations $ 17,233 $ 15,691 $ 18,449
State and political
subdivisions (domestic) 933 1,131 1,529
Mortgage backed securities 20 236 399
Equities 753 262 465
Totals $ 18,939 $ 17,320 $ 20,842
B. Maturities The amounts of investment securities in each category
as of December 31, 2002 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 $ 458 3.30% $ 406 7.29% $ - -
After one year
through five years 16,012 3.92% - - - -
After five years
through ten years 763 6.00% 267 7.36% - -
After ten years - - 260 8.76% 20 7.72%
Totals $ 17,233 4.00% $ 933 7.72% $ 20 7.72%
(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,
2002 2001 2000
(In Thousands)
Commercial, financial and
agricultural $ 43,939 $ 49,558 $ 42,973
Real estate - mortgage 90,492 85,876 81,314
Real estate - construction 8,809 9,015 7,646
Installments 26,565 27,929 31,294
$ 169,805 $ 172,378 $ 163,227
Less - Unearned income 237 289 253
Reserve for possible
losses 2,893 2,756 2,728
Total Loans $ 166,675 $ 169,333 $ 160,246
B. Maturities and Sensitivity to Changes in Interest Rates The amount
of total loans by category outstanding as of December 31, 2002 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 $ 37,692 $ 5,381 $ 866 $ 43,939
Real estate
mortgage 68,206 20,762 1,524 90,492
Real estate
construction 7,661 410 738 8,809
Installment 12,762 11,136 2,667 26,565
Total loans due
after one year
with:
Predetermined
interest rate 42,447
Floating interest
rate 1,037
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,
2002 2001 2000
(In Thousands)
Loans accounted for on a
non-accrual basis $ 748 $ 1,002 $ 876
Loans contractually past
due ninety days or more
as to interest or principal
payments 466 1,028 734
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
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.
E. Rate Sensitivity Analysis
SOUTH BANKING COMPANY
DECEMBER 31, 2002
INTEREST RATE RISK
Note: Dollar amounts in columns are cumulative amounts
Total assets on this date equaled $230,758
Interest Rate Risk 0-3 0-12 0-3 0-5 0-15
Months Months Years Years Years
Rate sensitive assets:
Securities (fixed rates)$ 201 $ 864 $ 5,699 $ 16,876 $ 18,166
Securities (floating rates) 21 21 21 21 21
Mutual funds 48 48 48 48 48
CD's at banks 396 2,667 3,760 3,860 3,860
Loans (fixed rates) 19,881 41,714 70,060 80,083 87,124
Loans (floating rates) 79,079 80,699 81,042 81,736 81,736
Federal funds sold 18,600 18,600 18,600 18,600 18,600
Total rate sensitive
assets $118,226 $144,613 $ 179,230 $201,224 $209,555
Rate sensitive liabilities:
CD/IRA's under $100M $ 27,709 $ 77,882 $ 85,384 $ 85,845 $ 85,845
CD/IRA's => $100M 11,335 32,407 35,701 35,972 35,972
Regular savings/Christmas 13,061 13,061 13,061 13,061 13,061
Now/Super Now 25,597 25,597 25,597 25,597 25,597
Money market deposit 9,634 9,634 8,634 9,634 9,634
Treasury, tax & loan note 25 25 25 25 25
Federal funds purchased - - - - -
Note payable-Ford Motor - 8 16 16 16
Note payable-Banker's Bank - 375 1,275 2,375 4,400
Note payable-Waycross
Bank & Trust - - - - -
Note payable-Banker's
Bank (BDS) 54 216 619 619 619
Note payable-FHLB 3,000 3,000 3,000 3,000 3,000
Total rate sensitive
liabilities $ 90,415 $162,205 $174,312 $176,144 $178,169
Rate sensitive assets less
Rate sensitive
liabilities $ 27,811 $(17,592) $ 4,918 $ 25,080 $ 31,386
Rate sensitive assets less
Rate sensitive
liabilities/Total assets 12.05% ( 7.62%) 2.13% 10.87% 13.60%
Rate sensitive assets/
Rate sensitive liabilities 130.76% 89.15% 102.82% 114.24% 117.62%
Notes to Market Risk Sensitivity Table:
(1) Expected maturities are contractual maturities adjusted for
prepayments of principal when possible. The Company uses certain
assumptions to estimate expected maturities.
(2) 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.
(3) 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.
(4) Loans receivable includes non-performing loans.
(5) 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.
(6) The interest rate sensitivity gap represents the difference
between total interest-earning assets and total interest-bearing
liabilities.
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.
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,
2002 2001 2000
(In Thousands)
A. Average amount of loans
outstanding $ 167,750 $ 166,639 $ 148,195
B. Balance of reserve for
possible loan losses at
beginning of period $ 2,757 $ 2,728 $ 2,169
C. Loans charged off:
Commercial, financial
and agricultural $ 398 $ 398 $ 274
Real estate - mortgage 278 225 127
Installments 330 379 263
$ 1,006 $ 1,002 $ 664
D. Recoveries of loans
previously charged off:
Commercial, financial
and agricultural $ 27 $ 4 $ 83
Real estate 18 49 29
Installment 93 85 99
$ 138 $ 138 $ 211
E. Net loans charged off
during period $ 868 $ 864 $ 453
Additions to reserve
charged to operating
expense during period (1)$ 1,004 $ 893 $ 424
Addition from bank
acquisition - - 588
$ 1,004 $ 893 $ 1,012
F. Balance of reserve for
possible loan losses at
end of period $ 2,893 $ 2,757 $ 2,728
G. Ratio of net loans charged
off during the period to
average loans outstanding .52 .52 .31
(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 December 31,
2002 2001 2000
Average Average Average
Balance Interest Balance Interest Balance Interest
Rate Rate Rate
Noninterest- $29,724 - $24,903 - $22,444 -
bearing demand
Interest- 34,293 1.22% 30,600 2.27% 24,959 2.59%
bearing demand
deposits
Savings 12,001 1.62% 11,809 2.65% 11,122 3.23%
deposits
Time deposits 121,984 3.66% 131,154 6.02% 114,026 6.24%
Total deposits $198,002 2.56% $198,466 3.91% $172,551 4.71%
B. The amounts of time certificates of deposit issued in amounts
of $100,000 or more as of December 31, 2002 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 $ 11,335
Over three through twelve months 20,972
Over twelve months 3,564
Total $ 35,871
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,
2002 2001 2000
Return on assets (1) .79% .74% 1.35%
Return on equity (2) 8.61% 8.83% 15.53%
Dividend payout ratio (3) 15.63% 16.63% 10.57%
Equity to assets ratio (4) 9.12% 8.43% 8.69%
(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 two 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.
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.
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 Equity and Related
Stockholder 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, 2003, the Company had 454
shareholders with 399,500 shares outstanding.
For the years ended December 31, 2002, 2001 and 2000, South
paid cash dividends of $279,628 or $.70 per share, $279,628 or $.70
per share, and $279,628 or $.70 per share, respectively. These
dollars equate to dividend payout ratios (dividends declared
divided by net income) of 15.63%, 16.63% and 10.57% in 2002, 2001
and 2000, 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, 2002, there
were 454 shareholders of record.
SALES PRICES BY
QUARTER
High Low
Fiscal Year 2002
First Quarter $ - $ -
Second Quarter - -
Third Quarter - -
Fourth Quarter - -
SALES PRICES BY QUARTER
High Low
Fiscal Year 2001
First Quarter $ - $ -
Second Quarter - -
Third Quarter 12.00 12.00
Fourth Quarter - -
DIVIDENDS PAID PER SHARE
Fiscal Year 2002 2001
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,
2002 2001 2000 1999 1998
(In Thousands)
Total Assets $ 230,758 $ 224,791 $ 220,450 $173,807 $164,890
Operations:
Interest income$ 14,788 $ 18,605 $ 18,454 $ 14,518 $ 13,920
Interest expense 5,330 9,335 8,578 6,261 6,392
Net interest
income $ 9,458 $ 9,270 $ 9,876 $ 8,257 $ 7,528
Provision for
loan losses 1,004 893 424 503 286
Net interest
income after
provision for
loan losses $ 8,454 $ 8,377 $ 9,452 $ 7,754 $ 7,242
Other income $ 2,988 $ 3,125 $ 2,718 $ 2,298 $ 1,905
Other expenses $ 8,829 $ 9,085 $ 8,302 $ 6,906 $ 6,387
Income before
income taxes $ 2,613 $ 2,417 $ 3,868 $ 3,146 $ 2,760
Federal income
taxes 824 733 1,222 1,017 831
Net income before
extraordinary
items $ 1,789 $ 1,684 $ 2,646 $ 2,129 $ 1,929
Extraordinary
items $ - $ - $ - $ - $ -
Net income $ 1,789 $ 1,684 $ 2,646 $ 2,129 $ 1,929
Per Share Data:
Income after
extraordinary
items $ 4.48 $ 4.21 $ 6.62 $ 5.33 $ 4.83
Net income $ 4.48 $ 4.21 $ 6.62 $ 5.33 $ 4.83
Dividends
declared $ .70 $ .70 $ .70 $ .65 $ .65
Book value $ 54.37 $ 49.71 $ 45.73 $ 39.57 $ 35.56
Profitability Ratios
Net income to
average total
assets .79% .74% 1.35% 1.28% 1.23%
Net income to average
stockholders'
equity 8.61% 8.83% 15.52% 14.18% 14.45%
Net interest
Margin 4.12% 3.88% 4.77% 4.83% 4.52%
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.
Critical Accounting Policies
The accounting and reporting policies of the Registrant and its
subsidiaries conform with generally accepted accounting principles and
with practices within the banking industry. 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.
Financial Condition
The Registrant 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 the Registrant 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 the Registrant has managed its sources and uses of funds. The
Registrant used its funds primarily to support its lending activities.
The Registrant's total assets increased to $230,758,333 at year
end 2002 from $224,790,523 at year end 2001. This increase of
$5,967,810 represents a 2.6% increase in 2002 compared to 1.9%
increase in 2001. This increase is attributable to normal growth
within the banking area with limited entry into competitive situations
for large deposits. The net interest margins have remained stable in
2002 after two years of decline. 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, increase
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 the Registrant. 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
months. Loan demand has leveled after years of sustained growth with
loans decreasing $2,573,379 in 2002. 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, which
had been stable prior to 1998 has declined beginning in 1999 and
continued into 2002 especially in the agricultural and timber
industries. While the Banks are not heavy into these industries, the
decline in these areas has impacted the overall economy. Classified
loans for regulatory purposes remain at acceptable 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.
The Registrant's investment portfolio, including certificates of
deposits in other banks, increased to $22,844,919 from $18,593,836.
The increase of $4,251,083 from operations is an indication of the
declining loan demand of the banks and the desire of the banks to
utilize the assets of the Registrant in the highest yielding manner
available to the banks without creating liquidity problems. The
Registrant has maintained adequate federal funds sold and investments
available for sale to sufficiently maintain adequate liquidity. The
Registrant's securities remain primarily short term of five years or
less in maturity, enabling the Registrant to better monitor the rate
sensitivity of these assets, however, some extended terms on
securities have been secured for yield purposes. Unrealized gain and
losses on this portfolio is not material to the statement as the
Registrant maintains a slight unrealized gain of $221,257.
As the primary source of funds, aggregate deposits increased by
$3,765,403 in 2002 compared to $3,321,388 in 2001. This represents a
1.92% increase for the year compared to a 1.72% increase in 2001.
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.
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, 2002. The first 30 days there is an
excess of interest-bearing assets over interest-bearing liabilities.
The Registrant becomes more sensitive to interest rate fluctuations on
a short time period. While the cumulative gap declines during the
first twelve months, the Registrant remains within a manageable
position.
Marketable investment securities, particularly those of shorter
maturities, CD's at other banks and federal funds sold are the
principal sources of asset liquidity. Securities and CD's maturing in
one year or less amounted to $3,552,000 and federal funds sold net of
federal funds purchased with daily maturities amounted to $18,600,000
at year end 2002, an increase from prior years as deposit growth
exceeded loan demand. Maturing loans and certificates of deposits in
other banks are other sources of liquidity.
The overall liquidity of the Registrant has been enhanced by a
significant aggregate amount of core deposits. These core deposits
have remained constant during this period. The Registrant 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. The
Registrant 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 Banks' cash flow indicates a nonrepeating source
such as proceeds from borrowings utilized as sources of cash for the
purpose of acquisition or expansion. The Registrant's overall cash
flows indicate the relative stability and manageable growth of the
bank's assets. The Registrant utilized deposit growth as its primary
source of funds to handle growth. The Registrant's liquidity is
maintained at levels determined by management to be sufficient to
handle the cash needs that might arise at any given date. Outside
sources are maintained, but the Registrant looks to these sources only
on a very short term basis. The Registrant'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 Registrant 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, 2002, total loans, net of unearned discounts, were 80%
of total earning assets. Loans secured by real estate accounted for
58% of total loans as of December 31, 2002. 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.
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 the Registrant's loan loss experience is
included elsewhere in this report.
Distribution of Nonperforming Assets
2002 2001 2000
(In Thousands)
Nonaccrual loans $ 748 $ 1,002 $ 876
Past due 90 days still accruing 466 1,028 734
Other real estate (ORE) 314 1,265 725
$ 1,528 $ 3,295 $ 2,335
Nonperforming loans to year
end loans .71% 1.18% .99%
Nonperforming assets to year
end loan and ORE .90% 1.91% 1.42%
The ratio of nonperforming assets has increased each year from
1999 to 2001. However in 2002, a decrease occurred as the banks put
special attention to the problem loans. 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 even lower.
Asset-Liability Management and Market Risk Sensitivity
Market risk is the risk of loss from adverse changes in market
prices and rates. The Registrant'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 Registrant 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 Registrant'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
Registrant's business activities.
The Registrant'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
Registrant'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
Registrant 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 Registrant'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 Registrant. The Registrant
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 Registrant'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 Registrant is
influenced significantly by management's ability to manage the
relationship between rate sensitive assets and liabilities. At
December 31, 2002, approximately 69% of the Registrant's earnings
assets could be repriced within one year compared to approximately 91%
of its interest-bearing liabilities. This compares to 69% and 92% in
2001.
The Registrant's current GAP analysis reflects that in periods of
increasing interest rates, rate sensitive assets will reprice slower
than rate sensitive liabilities. The Registrant's GAP analysis also
shows that at the interest repricing of one year, the Registrant'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
Registrant 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 Registrant is able to manage the deposit side.
The Registrant generally does not raise deposit rates as fast or as
much. The Registrant also has the ability to manage its funding costs
by choosing alternative sources of funds.
The Registrant's current GAP position would also be interpreted
to mean that in periods of declining interest rates, the Registrant's
net interest margin would benefit. However, competitive pressures in
the local market may not allow the Registrant to lower rates on
deposits, but force the Registrant 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 Registrant could
undertake in response to changes in interest rates.
The rate sensitivity analysis as presented in the selected
statistical information shows the Registrant'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.
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 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.
The Registrant also measures its short-term exposure to interest
rate risk by simulating the impact to net interest income under several
rate change levels. Interest-earning assets and interest-bearing
liabilities are rate shocked to stress test the impact to the Banks'
net interest income and margin. The rate shock levels span three 100
basis point increments up and down from current interest rates. This
information is used to monitor interest rate exposure risk relative to
anticipated interest rate trends. ALM strategies are developed based
on this analysis in an effort to limit the Banks' exposure to interest
rate risk.
Results of Operations
2002 Compared to 2001
Net interest income remains an effective measurement of how well
management has balanced the Registrant's interest rate sensitive
assets and liabilities. Net interest income increased by $187,682.
The increase of 2.0% compared to a 6.1% increase in 2001. The primary
determinants of the increase were rates associated with deposits.
Loan demand decreased slightly and funds were channeled into
securities and CD's at other banks as they represent the highest
available 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. After 2001 where asset
rates decreased faster than deposits, deposit rates in 2002 stabilized
which allowed the net interest margin to increase slightly. The yield
on interest earning assets decreased to 7.16% from 9.08% while
interest bearing deposits yield decreased to 3.04% from 5.20%. The net
interest margin increased to 4.12% from 3.88%. With the rate
reduction not anticipated to continue and possible increase in late
2003 the banks anticipate that net interest margins will not change
much and margins will remain low.
Interest and fees on loans decreased $3,122,564 or 18.7% in 2002
from 2001 due to rate decreases of 193 basis points and loan demand
declining 1.5% in 2002. Interest on investment securities decreased
$251,189 or 22.3% in 2002 from 2001 due to a decrease in the yield in
investments as rates have decreased. Interest income on federal funds
sold decreased $434,001 or 58.6% due to lower rates as the rates on
federal funds sold reached lows not seen in years.
Total interest expense decreased 42.9% or $4,004,436 from 2001 to
2002. The largest component of total interest expense is interest
expense on deposits, which decreased $3,832,492 or 43.0% from 2001 to
2002 due to a substantial reduction in rates. The average rate paid
on deposits was 3.04%, 5.20% and 5.54% in 2002, 2001 and 2000,
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 $1,004,000 and $893,000, respectively,
for the years ended December 31, 2002 and 2001. The provision in 2002
reflects replenishing the allowance for loan losses to cover net
charge-offs of $867,569, plus providing for the increase as a result
of the local economies. The allowance for loan losses to total loans
outstanding is 1.70% at December 31, 2002. Net charge-offs to average
loans are 0.52% for 2002 as compared to 0.52% for 2001.
The allowance for loan losses is based on an in-depth analysis of
the loan portfolio. Specifically included in that analysis are the
following types of loans: loans determined to be of a material
amount, loans commented on by regulatory authorities, loans commented
on by internal and external auditors, loans past due more than 60
days, and loans on a nonaccrual status. The allowance for loan losses
is not allocated to specific credit risk, but rather to the overall
loan portfolio as the individual banks are relatively small and can be
looked at as a whole. The overall loan portfolio remains of good
quality, however, some deterioration has been noted in the economy
which reflects on the loan portfolio. The Banks have made provisions
where necessary to reflect the overall quality of loans.
Non-Interest Income
Non-interest income for 2002 decreased by $137,200 or 4.4% over
2001, as compared to an increase in 2001 of $407,219 or 15.0% over
2000. These increases generally resulted from increased activity in
data processing and decreased in financial services, other income loss
on sale of fixed assets and service charges on deposits. A significant
contributor to non-interest income is service charges on deposit
accounts which decreased 1.3%. Management views deposit fee income as
critical influence on profitability. Periodic monitoring of
competitive fee schedules and examination of alternative opportunities
ensure that the Registrant realizes the maximum contribution to
profits from this area.
Non-Interest Expense
Non-interest expenses totaled $8,829,471 in 2002 as compared to
$9,084,778 in 2001. This represented a 2.8% decrease from 2001 to
2002, compared to a 9.4% increase from 2000 to 2001. The overall
decreases during the year were attributable primarily to salaries and
employee benefits and includes reduction of staff and expenses of
small branch closed during 2002. Salaries and other personnel
expenses, which comprised 50% of total non-interest expenses for 2002,
were down $497,717 or 10.1% over 2001 due to staff reductions from
branch closing and from continuing operations. During 2001 and 2000,
salaries and other personnel expenses accounted for 50% and 52% of
total other operating expenses, respectively.
Combined net occupancy and furniture and equipment expenses
increased $284,255, or 21.2% from 2001 to 2002, as compared to a
decrease of $130,966, or 8.8% in 2001. The increase is primarily a
result of addition at two banks and the complete remodeling of one
bank.
Income Taxes
Income tax expense totaled $823,633 in 2002 as compared to
$733,859 in 2001. 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
Registrant works actively with outside tax consultants to minimize tax
expenses.
2001 Compared to 2000
Net interest income remains an effective measurement of how well
management has balanced the Registrant'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 interest margin 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 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 Registrant 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
Registrant works actively with outside tax consultants to minimize tax
expenses.
Results of Operations
2000 Compared to 1999
Net interest income remains an effective measurement of how well
management has balanced the Registrant'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 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 primarily the reason for the increase as
net interest margin decreased slightly to 4.77% from 4.83%. With the
low interest rate currently in the market and the Registrant's current
rate gap, the Registrant continued its efforts to channel funds into
higher yielding assets. Due to the rate sensitivity gap, the
Registrant 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 $3,744,981 or 29.13% in 2000
from 1999 due to rate increased 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 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.
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 Registrant 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 a 20.2% increase from 1999 to
2000, and an 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 the one new branch. 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
Registrant works actively with outside tax consultants to minimize tax
expenses.
Regulatory Matters
During the year 2002, federal and state regulatory agencies
completed asset quality examinations at the Registrant's subsidiary
banks. The Registrant'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 the Registrant 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.
Management and the boards of directors of the Registrant 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 the
Registrant and its affiliates. As a matter of practice, management
and the boards of directors of the Registrant 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 the Registrant'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 7A. Quantitative And Qualitative Disclosures About Market Risk
The Registrant is exposed only to U.S. dollar interest rate
changes and accordingly, the Registrant manages exposure by considering
the possible changes in the net interest margin. The Registrant does
not have any trading instruments nor does it classify any portion of
the investment portfolio as held for trading. The Registrant does not
engage in any hedging activities or enter into any derivative
instruments other than mortgage backed securities, which are commonly
pass through securities. Finally, the Registrant has no exposure to
foreign currency exchange rate risk, commodity price risk, and other
market risks.
Interest rates play a major part in the net interest income of a
financial institution. The sensitivity to rate changes is known as
"interest rate risk." The repricing of interest earning assets and
interest-bearing liabilities can influence the changes in net interest
income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset-Liability Management and
Market Risk Sensitivity."
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the Registrant
and its subsidiaries are included on pages F1 through F42 of this
Annual report on Form 10-K.
Consolidated Balance Sheets - December 31, 2002 and 2001
Consolidated Statements of Income and Other Comprehensive Income
- - Years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flow - Years ended December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
Not applicable.
Part III.
Item 10. Directors and Executive Officers of the Registrant
The name, present principal occupation or employment, five-year
employment history and ownership of common stock of the directors,
executive officers and controlling persons of the Registrant is set
forth below. Companies listed other than the Registrant are its
subsidiaries. None of the persons listed below has engaged in
transactions with respect to the common stock during the past 60 days.
During the last five years, none of the persons listed below has been
convicted in a criminal proceeding nor were any of such persons a party
to a judicial or administrative proceeding that resulted in a judgment,
decree or final order enjoining the person from future violations of,
or prohibiting activities subject to, federal or state securities laws
or finding any violation of such laws. All such persons are U.S.
citizens, and except as otherwise indicated, the address of the
corporation in which such persons conduct their present principal
occupation or employment is 501 West 12th Street, Alma, Georgia 31510.
Beneficial ownership information is given o the extent known after
reasonable inquiry, and is based on 399,500 shares of common stock
outstanding as of March 21, 2003. Each of persons named below has been
principally employed by South Banking Company or its subsidiaries for
at least five years.
Number of
Director Shares
Position with Company and (Officer) Owned
Name Principal Occupation or Since (Percent
Employment of
Outstanding)
Olivia Executive Vice President, 1969 189,372
Bennett(1)(2) Secretary and Director, South (47.40%)
Banking Company; Chairman and
Director, Alma Exchange Bank &
Trust; Director, Banker's Data
Services, Inc.; Chairman,
President and Director, Citizens
State Bank; Chairman, President
and Director, Peoples State Bank
& Trust
Paul T. President, Treasurer and 1978 19,526
Bennett(1)(3) Director, South Banking Company; (4.89%)
Vice Chairman and Director,
Citizens State Bank; Vice
Chairman and Director, Peoples
State Bank & Trust; Director and
President, Banker's Data
Services, Inc.; Vice Chairman
and Director, Alma Exchange Bank
& Trust; Director, Chairman and
President, Pineland State Bank
Lawrence Director, South Banking Company; 1987 12,814
Bennett(1)(4) President and Director, Alma (3.21%)
Exchange Bank & Trust; Director
and Secretary, Banker's Data
Services, Inc.; Director,
Peoples State Bank & Trust;
Director, Pineland State Bank
Kenneth F. Director, South Banking Company; 1980 4,934
Wade Executive Vice President and (1.24%)
Director, Alma Exchange Bank &
Trust; Director, Banker's Data
Services, Inc.
Charles Director, South Banking Company; 1990 992
Stuckey Executive Vice President and (0.25%)
Director, Peoples State Bank &
Trust; Director, Banker's Data
Services, Inc.
James W. Director, South Banking Company; 1989 279
Whiddon Executive Vice President and (0.07%)
Director, Citizens Bank;
Director, Banker's Data Services
Richard Director, South Banking Company; 2001 -
Williams Executive Vice President and
Director, Pineland State Bank;
Director, Banker's Data
Services, Inc.
(1) Olivia Bennett is the mother of Paul T. Bennett and Lawrence
Bennett.
(2) Includes 166,085 shares owned by Estate of Valene Bennett of which
Olivia Bennett is the Executrix and 23,287 shares owned by Bennett
Family Limited Partnership of which she is the general partner.
(3) The shares reported include 226 shares owned by Paul T. Bennett's
wife and 150 shares owned jointly with each of two children.
(4) Owned jointly with Lawrence Bennett's wife.
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.
Item 11. Executive Compensation
The following information is given as to the cash and cash
equivalent forms of renumeration received by South's Chief Executive
Officer and only other executive officer whose salary and bonus
exceeded $100,000 during the last fiscal year.
Long-Term Compensation
Annual Compensation
Securities All Other
Name and Underlying Annual
Principal Year Salary Bonus Options/SARS Compensation
Paul T.
Bennett
Chief 2002 203,896 31,505
Executive 2001 196,700 32,090
Officer 2000 182,848 31,440
Olivia
Bennett
Secretary 2002 202,355 21,975
2001 202,618 20,875
2000 215,099 20,915
(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.
The Registrant has no compensation plans (including individual
compensation arrangements) under which equity securities of the
Registrant are authorized for issuance.
Directors' Compensations.
The members Registrant's Board of Directors currently receive a
fee of $2,500 per year for service on the Registrants's Board of
Directors.
Agreements with Officers
The Registrant has no employment or change in control agreements
with any of its executive officers.
Compensation Committee Interlocks and Insider Participation
The Board of Directors of the Registrant reviewed the compensation
of Paul Bennett and Olivia Bennett and of the Registrant's other
executive officers for the 2002 fiscal year. Although Mr. Bennett
participated in deliberations regarding the salaries of executive
officers, he did not participate in any decisions regarding his own
compensation as an executive officer.
Report on Executive Compensation
Under rules established by the SEC, the Registrant is required to
provide certain information with respect to compensation provided to
the Registrant's President and Chief Executive Officer and other
executive officers. The SEC regulations require a report setting forth
a description of the Registrant's executive compensation policy in
general and the considerations that led to the compensation decisions
affecting Paul Bennett and Olivia Bennett. In fulfillment of this
requirement, the Board of Directors and Compensation Committee have
prepared the following report for inclusion in this Form 10-K.
The fundamental policy of the Registrant's compensation program is
to offer competitive compensation and benefits for all employees,
including the President and Chief Executive Officer and the other
officers of the Registrant, to compete for and retain talented
personnel who will lead the Registrant in achieving levels of financial
performance that enhance shareholder value. The Registrant's executive
compensation package historically has consisted of salary, annual
bonus, and other customary fringe benefits.
The members of the Board of Directors of the Registrant
participated in deliberations regarding salaries of executive officers.
Mr. Bennett did not participate in deliberations concerning his own
compensation. Although subjective in nature, factors considered by the
Board in setting the salaries of executive officers were Mr. Bennett's
recommendations (except with respect to his own salary), compensation
paid by comparable companies to their executive officers (although such
information was obtained informally and the Registrant did not attempt
to pay any certain percentage of salary for comparable positions with
other companies), each executive officer's performance, contribution to
the Registrant, tenure in his or her position, and internal
comparability considerations. The Board of Directors set the salary of
Mr. Bennett based on Mr. Bennett's salary during the preceding fiscal
year, his tenure, the salaries of chief executive officers of
comparable bank holding companies, and the increase in earnings of the
Registrant in recent years. The Board did not assign relative weights
to the factors considered in setting salaries of executive officers,
including Mr. Bennett.
The Board of Directors
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth, as of March 1, 2003, 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.
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 23,287 5.83%
ll Executive Officers and Directors
as a group (7 persons) 227,248 57.0%
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. Controls And Procedures
The Registrant's management, including the Chief Executive Officer
and Chief Financial Officer, supervised and participated in an
evaluation of its disclosure controls and procedures (as defined in
federal securities rules) within 90 days prior to the filing of this
report. Based on, and as of the date of, that evaluation, the
Registrant's Chief Executive Officer and Chief Financial Officer have
concluded that the Registrant's disclosure controls and procedures were
effective in accumulating and communicating information to management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosures of
that information under the Securities and Exchange Commission's rules
and forms and that the Registrant's disclosure controls and procedures
are designed to ensure that the information required to be disclosed in
reports that are filed or submitted by the Registrant under the
Securities Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commission's rules and forms.
There were no significant changes in the Registrant's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(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, 2002 and 2001
(ii) Consolidated Statements of Income and Other
Comprehensive Income - Years ended December 31,
2002, 2001 and 2000
(iii) Consolidated Statements of Stockholders' Equity
- Years ended December 31, 2002, 2001 and 2000
(iv) Consolidated Statements of Cash Flow - Years ended
December 31, 2002, 2001 and 2000
(b) South Banking Company (Parent Corporation Only):
(i) Balance Sheets - December 31, 2002 and 2001
(ii) Statements of Income and Other Comprehensive Income
- Periods ended December 31, 2002, 2001 and 2000
(iii) Statements of Stockholders' Equity - Periods ended
December 31, 2002, 2001 and 2000
(iv) Statements of Cash Flow - Years ended December 31,
2002, 2001, and 2000
3. Exhibits required by Item 601 of regulation S-K:
(3.1) Articles of Incorporation (included as Exhibit 3(a) 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).
(3.2) By-Laws (included as Exhibit 3(b) 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).
(21) List of the Registrant's subsidiaries:
(99.1) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(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.
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 28, 2003 By: /s/
Paul T. Bennett
President, Treasurer
and Director
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 28, 2003 /s/
Paul T. Bennett
Principal Executive,
Financial and Accounting
Officer and Director
Date: March 28, 2003 /s/
Olivia Bennett
Executive Vice President
And Director
Date: March 28, 2003 /s/
Charles Stuckey
Director
Date: March 28, 2003 /s/
James W. Whiddon
Director
Date: March 28, 2003 /s/
Kenneth F. Wade
Director
Date: March 28, 2003 /s/
Lawrence Bennett
Director
SUPPLEMENTAL INFORMATION
The proxy statement for the 2003 annual meeting of shareholders
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.
The foregoing material 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.
CERTIFICATION
I, Paul T. Bennett, certify that:
1. I have reviewed this annual report on Form 10-K of South
Banking Company, Inc.;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have identified
for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls.
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies
and material weaknesses.
Dated this 28th day of March 2003.
/s/
Paul T. Bennett
Chief Executive Officer
Chief Financial Officer
EXHIBIT INDEX
(21) List of the Registrant's subsidiaries:
(99.1) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EXHIBIT 21
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.
EXHIBIT 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
I, Paul T. Bennett, Chief Executive and Chief Financial
Officer of South Banking Company, Inc. (the "Company"), certify,
pursuant to 18 U.S.C. 1350 as adopted by 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) the Annual Report on Form 10-K of the Company for the annual
period ended December 31, 2002 (the "Report") fully complies with
the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
Dated: March 28, 2003
/s/
Paul T. Bennett
Chief Executive Officer
Chief Financial Officer
SOUTH BANKING COMPANY
ALMA, GEORGIA
FINANCIAL STATEMENTS
DECEMBER 31, 2002
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, 2002 and
2001 and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 2002. 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, 2002 and 2001 and the consolidated results of its
operations, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
Respectfully submitted,
DALTON & BENNETT, CPA'S
Waycross, Georgia
February 7, 2003
F2
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2002 2001
ASSETS
Cash and due from banks $ 9,436,272 $ 11,140,462
Deposits in other banks -
interest bearing $ 3,905,136 $ 1,273,000
Investment securities
Available for sale $ 18,892,037 $ 17,173,350
Held to maturity - market value
of $52,445 in 2002 and
$152,583 in 2001 $ 47,746 $ 147,536
Georgia Bankers stock $ 547,283 $ 547,283
Federal Home Loan Bank stock $ 438,100 $ 426,100
Federal funds sold $ 18,600,000 $ 10,252,000
Loans $169,805,432 $ 172,378,811
Less: Unearned discount ( 236,926) ( 288,968)
Reserve for loan losses ( 2,893,211) ( 2,756,780)
$166,675,295 $ 169,333,063
Bank premises and equipment $ 6,590,001 $ 6,715,813
Intangible assets $ 1,444,786 $ 1,680,572
Other assets $ 4,181,677 $ 6,101,344
Total Assets $230,758,333 $ 224,790,523
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,
2002 2001
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits: Demand - non-interest
bearing $ 31,335,371 $ 29,999,788
Demand - interest bearing 35,171,392 32,764,586
Savings 11,863,852 10,537,057
Time 121,395,391 122,699,172
$199,766,006 $ 196,000,603
Borrowing 5,035,257 5,581,251
Accrued expenses and other
liabilities 1,235,777 1,850,430
Federal funds purchased - -
N/P - Federal Home Loan Bank 3,000,000 1,500,000
Total Liabilities $209,037,040 $ 204,932,284
Stockholders' Equity
Common stock $1 par value; shares
authorized - 1,000,000, shares
issued and outstanding -
2002 and 2001 - 399,500
and 399,500, respectively $ 399,500 $ 399,500
Surplus 3,070,831 3,070,831
Undivided profits 17,800,222 16,291,126
Accumulated other comprehensive income 450,740 96,782
Total Stockholders' Equity $ 21,721,293 $ 19,858,239
Total Liabilities and
Stockholders' Equity $230,758,333 $ 224,790,523
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,
2002 2001 2000
Interest Income
Interest and other
fees on loans $ 13,614,595 $ 16,737,159 $ 16,603,948
Interest on deposits -
interest bearing 59,690 54,303 53,224
Interest on federal
funds sold 306,768 740,769 622,780
Interest on investment
securities:
U. S. Treasury 21,853 31,021 77,571
U. S. Government agencies 689,777 898,919 910,190
Mortgage backed securities 4,481 16,360 33,411
State and municipal
subdivisions 51,733 66,100 79,343
Other securities 39,011 60,031 73,017
Total Interest Income $ 14,787,908 $ 18,604,662 $ 18,453,484
Interest Expense
Interest on deposits $ 5,072,288 $ 8,904,780 $ 8,121,657
Interest - other borrowing 257,930 429,874 456,150
Total Interest Expense $ 5,330,218 $ 9,334,654 $ 8,577,807
Net interest income $ 9,457,690 $ 9,270,008 $ 9,875,677
Provision for loan losses 1,004,000 893,000 424,000
Net interest income after
provision for loan losses$ 8,453,690 $ 8,377,008 $ 9,451,677
Other Operating Income
Service charge on deposits$ 1,763,507 $ 1,787,500 $ 1,576,094
Commission on insurance 81,600 81,052 89,036
Other income 456,387 528,323 429,101
Securities gains (losses) 6,699 ( 3,684) 7
Data processing fees 615,594 537,212 459,036
Gain (Loss) on sale of fixed
assets ( 44,394) 60,333 2,019
Financial service income 108,744 134,601 162,825
Total Other Operating
Income $ 2,988,137 $ 3,125,337 $ 2,718,118
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,
2002 2001 2000
Other Operating Expenses
Salaries $ 3,530,330 $ 3,676,504 $ 3,354,689
Profit sharing and other
personnel expenses 896,401 1,247,944 875,460
Occupancy expense of bank
premises 482,441 514,595 475,452
Furniture and equipment
expense 1,143,073 826,664 996,773
Stationery and supplies 192,885 199,901 254,881
Data processing 233,800 295,852 310,141
Director fees 187,925 182,760 174,260
Other real estate expenses 171,286 92,080 13,006
Other expenses 1,991,330 2,048,478 1,847,335
Total Other Operating
Expenses $ 8,829,471 $ 9,084,778 $ 8,301,997
Income before income taxes$ 2,612,356 $ 2,417,567 $ 3,867,798
Applicable income taxes 823,633 733,859 1,221,738
Net Income $ 1,788,723 $ 1,683,708 $ 2,646,060
Other comprehensive income
before tax
Unrealized gain on
securities $ 567,603 $ 291,307 $ 151,160
Other comprehensive income
before tax $ 567,603 $ 291,307 $ 151,160
Income tax expenses related
to items of other
comprehensive income 213,645 107,708 57,048
Other comprehensive income,
net of tax $ 353,958 $ 183,599 $ 94,112
Comprehensive Income $ 2,142,681 $ 1,867,307 $ 2,740,172
Per share data based on
weighted outstanding shares:
Weighted average
outstanding 399,500 399,500 399,500
Net Income $ 4.48 $ 4.21 $ 6.62
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
Compre- Stock-
Common Undivided hensive holders'
Stock Surplus Profits Income Equity
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
Net income - - 1,788,723 - 1,788,723
Cash dividends - - ( 279,627) - ( 279,627)
Unrealized gain
(loss) on securities
available for sale - - - 353,958 353,958
Redemption of shares - - - - -
Balance,
December 31,2002 $399,500 $3,070,831 $17,800,222 $450,740 $21,721,293
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,
2002 2001 2000
Cash Flows From Operating
Activities:
Net income $ 1,788,723 $ 1,683,708 $ 2,646,060
Add expenses not
requiring cash:
Provision for depreciation
and amortization 1,126,529 1,080,954 930,972
Provision for loan losses 1,004,000 893,000 424,000
Provision for loss on ORE 75,518 52,000 3,408
Bond portfolio losses
(gains) ( 6,699) 3,685 -
(Gain) loss on sale of
premises & equipment 44,395 ( 60,070) ( 2,019)
(Gain) loss on sale of
other real estate owned 48,099 20,625 23,040
Increase (decrease) in
taxes payable ( 33,749) 136,792 ( 236,230)
Increase (decrease) in
interest payable ( 429,046) ( 403,513) 568,654
Increase (decrease) in
other liabilities ( 151,858) ( 119,749) 324,957
(Increase) decrease in
interest receivable 384,228 341,390 ( 460,066)
(Increase) decrease in
prepaid expenses 145,737 ( 175,310) ( 80,167)
(Increase) decrease in
other assets 179,195 260,171 ( 284,686)
Recognition of unearned
loan income ( 52,042) 60,094 -
Net Cash Provided By
Operating Activities $ 4,123,030 $ 3,773,777 $ 3,857,923
Cash Flows From Investing
Activities:
Proceeds from maturities
of securities held to
maturity $ 100,000 $ - $ 600,000
Purchase of securities
held to maturity - - -
Proceeds from maturity of
securities available for
sale 18,714,220 25,668,030 2,101,866
Net loans to customers 1,087,543 ( 11,476,813) (13,197,595)
Proceeds from sale of
securities available for sale - 295,094 -
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,
2002 2001 2000
Cash Flows From Investing
Activities: (con't)
Purchase of securities
available for sale $( 19,851,099) $( 22,139,058) $( 4,339,254)
Purchase of premises and
equipment ( 833,062) ( 2,044,019) ( 1,645,225)
Proceeds from sale of
premises and equipment 16,020 639,520 29,970
Proceeds from sale of
other real estate owned 1,491,512 659,090 885,084
Purchase of Bank stock - - -
Purchase of FHLB stock ( 12,000) - -
Purchase of Bank Branches - - ( 4,193,634)
Net Cash Provided By
Investing Activities $ 713,134 $( 8,398,156) $(19,758,788)
Cash Flows From Financing
Activities:
Net increase (decrease) in
demand deposits, NOW and
money markets $ 3,742,389 $ 11,061,093 $ 1,686,060
Net increase in savings
and time deposits 23,014 ( 7,739,705) 19,819,341
Proceeds from borrowing 1,500,000 1,523,810 4,756,750
Payments on borrowing ( 545,994) ( 1,705,722) ( 256,463)
Dividends paid ( 279,627) ( 279,628) ( 279,628)
Payments to retire stock - - -
Increase in federal funds
purchased - - ( 1,140,000)
Net Cash Provided By
Financing Activities $ 4,439,782 $ 2,859,648 $ 24,586,060
Net increase (decrease)in
Cash and Cash Equivalents$ 9,275,946 $( 1,764,731) $ 8,685,195
Cash and Cash Equivalents
at Beginning of Year 22,665,462 24,430,193 15,744,998
Cash and Cash Equivalents
at End of Year $ 31,941,408 $ 22,665,462 $ 24,430,193
The accompanying notes are an integral part of these financial
statements.
F9
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note 1. Significant Accounting Policies
The accounting and reporting policies of South
Banking Company, Inc. and its subsidiaries conform with
generally accepted accounting principles and with practices
within the banking industry.
(a) Basis of Presentation
During 1996, Pineland State Bank was acquired by
South Banking Company. The transaction was accounted for
using the purchase method. During 2000, Pineland State Bank
acquired, in its immediate vicinity, three branches of
Flag, Inc. The transaction was accounted for using the purchase
method.
(b) Principles of Consolidation
The consolidated financial statements include the accounts
of South Banking Company, Alma, Georgia (The Bank) and its
wholly owned bank subsidiaries, Alma Exchange Bank, Alma,
Georgia; Peoples State Bank, Baxley, Georgia; Citizens
State Bank, Kingsland, Georgia; Pineland State Bank, Metter,
Georgia; and its wholly owned computer center, Bankers' Data
Services, Inc., Alma, Georgia. All significant intercompany
transactions and balances have been eliminated in
consolidation.
(c) Nature of Operations:
The Banks provide a variety of banking services to
individuals and businesses through its offices in Alma,
Georgia; Kingsland, Georgia; Baxley, Georgia; Metter, Georgia;
Cobbtown, Georgia; and Statesboro, Georgia. Its primary source
of revenue is loans to customers who are primarily low to
middle income individuals and small to mid size businesses.
(d) Use of Estimates:
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
F10
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note 1. Significant Accounting Policies (Con't)
(d) Use of Estimates (Con't)
Material estimates that are particularly susceptible to
significant change relate to the determination of the
allowance 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
judgments about information available to them at the time of
their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans and foreclosed real
estate may change materially in the near term. However, the
amount of the change that is reasonably possible cannot be
estimated.
(e) Securities:
The Bank's investments in securities are classified in two
categories and accounted for as follows.
Securities to be Held to Maturity. Bonds, notes and
debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted
for amortization of premiums and accretion of discounts
which are recognized in interest income using the interest
method over the period to maturity.
Securities Available for Sale. Securities available for
sale consist of bonds, notes, debentures, and certain equity
securities not classified as trading securities or as
securities to be held to maturity.
Declines in fair value of individual held-to-maturity
and available-for-sale securities below their cost that are
other than temporary have resulted in write-downs of the
individual securities to their fair value. The related
write-downs have been included in earnings as realized losses.
F11
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
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 $438,100 and
$426,100 at December 31, 2002 and 2001, respectively.
No ready market exists for this stock and it has no quoted
market value. However, redemption of this stock has
historically been at par value.
(f) Loans Receivable:
Loans and Interest Income
Loans are carried at principal amounts outstanding
reduced by unearned discounts. Interest income on all loans
is recorded on an accrual basis. The accrual of interest
is generally discontinued on loans which become 90 days
past due as to principal or interest. The accrual of interest
on some loans, however, may continue even though they are 90
days past due, if the loans are well secured, in the process
of collection, and management deems inappropriate. If
non-accrual loans decrease their past due status to 60 days or
less, they are reviewed individually by management to determine
if they should be returned to accrual status.
Impaired Loans
The Bank accounts for its impaired loans in accordance
with SFAS No. 114, Accounting by Creditors for Impairment of
a Loan, which requires that all creditors value all
specifically
F12
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note 1. Significant Accounting Policies (Con't)
Impaired Loans (Con't)
reviewed nonhomogeneous loans for which it is probable that
the creditor will be unable to collect all amounts due
according to the terms of the loan agreement at the loan's
fair value. Fair value may be determined based upon the
present value of expected cash flows, market price of the
loan, if available, or value of the underlying collateral.
Expected cash flows are required to be discounted at the
loan's effective interest rate. SFAS No. 114 was amended
by SFAS No. 118 to allow a creditor to use existing methods
for recognizing interest 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.
Loan Fees and Costs
Nonrefundable fees and certain direct costs associated
with originating or acquiring loans are recognized as yield
adjustment over the contractual life of the related loans, or
if the related loan is held for resale, until the loan is
sold. Recognition of deferred fees and costs is discontinued
on non-accrual loans until they return to accrual status or
are charged-off. Commitment fees associated with lending are
deferred and if the commitment is exercised, the fee is
F13
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note 1. Significant Accounting Policies (Con't)
Loan Fees and Costs (Con't)
recognized over the life of the related loan as a yield
adjustment. If the commitment expires unexercised, the amount
is recognized upon expiration of the commitment.
(g) Allowances for Loan Losses:
The allowance for loan losses is maintained at a level
which, in management's judgment, is adequate to absorb
credit losses inherent in the loan portfolio. The amount of
the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of
the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, economic conditions, and
other risks inherent in the portfolio. Allowances for impaired
loans are generally determined based on collateral values or
the present value of estimated cash flows. Although management
uses available information to recognize losses on loans,
because of uncertainties associated with local economic
conditions, collateral values, and future cash flows on
impaired loans, it is reasonably possible that a material
change could occur in the allowance for loan losses in the
near term. However, the amount of the change that is
reasonably possible cannot be estimated. The allowance is
increased by a provision for loan losses, which is charged to
expense and reduced by charge-offs, net of recoveries. Changes
in the allowance relating to impaired loans are charged or
credited to the provision for loan losses.
(h) Premises and Equipment:
Land is carried at cost. Other premises and equipment are
carried at cost net of accumulated depreciation. Depreciation
is computed using the straight-line and the declining balance
methods based principally on the estimated useful lives of the
assets. Maintenance and repairs are expensed as incurred
while major additions and improvements are capitalized. Gains
and losses on dispositions are included in current operations.
(i) Other Real Estate (ORE)
Real estate acquired in satisfaction of a loan and in-
substance foreclosures are reported in other assets. In-
substance foreclosures are properties in which a borrower
with
F14
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note 1. Significant Accounting Policies (Con't)
(i)Other Real Estate (ORE) (Con't)
little or no equity in the collateral, effectively abandons
control of the property or has no economic interest to
continue involvement in the property. The borrower's ability
to rebuild equity based on current financial conditions also
is considered doubtful. Properties acquired by foreclosure or
deed in lieu of foreclosure and properties classified as in-
substance foreclosures are transferred to ORE and recorded at
the lower of cost of fair market value based on appraised
value at the date actually or constructively received. Loan
losses arising from the acquisition of such property are
charged against the allowance for loan losses. Losses on ORE
due to subsequent valuation adjustments are recorded on a
specific property basis.
(j) Income Taxes
Income taxes are provided for the tax effects of
the transactions reported in the financial statements and
consist of taxes currently due plus deferred taxes related
primarily to differences between the basis of the allowance for
loan losses and accumulated depreciation. The deferred tax
assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable
or deductible when the assets and liabilities are recovered
or settled. Deferred tax assets and liabilities are
reflected at income tax rates applicable to the period in
which the deferred tax assets or liabilities are
expected to be realized or settled. As changes in tax laws
or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes. The Bank
files a consolidated federal income tax return with its
subsidiaries. Each subsidiary provides for income taxes on a
separate return basis and remits to the parent company amounts
determined to be currently payable.
(k) Intangibles
The intangibles (Goodwill 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.
F15
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,2002
Note 1. Significant Accounting Policies (Con't)
(m) Comprehensive Income
Comprehensive income includes net income and all other
changes in equity during a period except those resulting from
investments by owners and distributions to owners. Other
comprehensive income includes revenues, expenses, gains,
and losses that under generally accepted accounting principles
are included in comprehensive income but excluded from net
income.
Comprehensive income and accumulated other comprehensive
income are reported net of related income taxes. Accumulated
other comprehensive income for the Bank consists solely of
unrealized holding gains or losses on available-for-sale
securities. In accordance with SFAS No. 130, the Company
elected to disclose changes in comprehensive income in its
Consolidated Statements of Income and Comprehensive Income.
(n) Cash Flow Information
For purposes of the statements of cash flows, the Company
considers cash, federal funds sold and due from banks as cash
and cash equivalents. Cash paid during the years ended
December 31, 2002, 2001 and 2000 for interest was $5,759,264,
$9,738,167, and $8,117,741, respectively. Total income tax
payments during 2002, 2001 and 2000 were $790,000, $844,223,
and $1,552,939, 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.
F16
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,2002
Note 1. Significant Accounting Policies (Con't)
(o) Recent Pronouncements and Accounting Changes (Con't)
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.
The Company's intangible assets at December 31, 2002
are classified as intangible assets other than goodwill.
Approximately $1.393 million of the intangibles recorded on
the balance sheet at December 31, 2002 represents the
remaining unamortized intangible related to the Company's 2000
acquisition of three branch offices from another bank. The
balance of $52 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.
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.
F17
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,2002
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, 2002:
U.S. Government
and agency
securities $17,042,611 $ 190,160 $ - $17,232,771
State and municipal
securities 848,460 37,063 - 885,523
Mortgage backed
securities 20,453 190 - 20,643
Equity securities 259,253 500,000 6,153 753,100
Totals $18,170,777 $ 727,413 $ 6,153 $18,892,037
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
Securities to be
Held to Maturity -
December 31, 2002:
U.S. Government
and agency
securities $ - $ - $ - $ -
State and municipal
securities 47,746 4,699 - 52,445
Mortgage backed
securities - - - -
Totals $ 47,746 $ 4,699 $ - $ 52,445
F18
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note 2. Investment Securities (Con't)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
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
Gross realized gains and loses on sales of available-for-
sale securities were $6,699 and $-0- in 2002, respectively and
$-0- and $(3,685), respectively for 2001 and $-0- and $-0-,
respectively in 2000. 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 2002
and 2000, no securities were sold. Securities called in 2002
resulted in gain of $6,699.
Assets, principally securities carried at approximately
$13,265,987 at December 31, 2002 and $11,615,367 at December
31, 2001, were pledged to secure public deposits and for
other purposes required or permitted by law.
The scheduled contractual maturities of securities to be
held to maturity and securities available for sale at December
31, 2002 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 $ - $ - $ 852,634 $ 864,704
Due from one year
to five years - - 15,839,960 16,011,428
Due from five
years to ten years - - 1,000,000 1,030,502
Due after ten
years 47,746 52,445 218,930 232,303
$ 47,746 $ 52,445 $17,911,524 $18,138,937
F19
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note 2. Investment Securities (Con't)
The market value of State and Other Political
Subdivision Obligations is established with the assistance of
an outside bond department and is based on available market
data which often reflects transactions of relatively small
size and is not necessarily indicative of prices at
which large amounts of particular issues could readily be
sold or purchased.
Expected maturities will differ from contractual
maturities because issuers may have the right to call on
prepay obligations with or without call on prepayment
penalties.
Note 3. Loans
The composition of the bank's portfolio was as follows:
2002 2001
(In Thousands)
Commercial, financial and
agricultural $ 43,939 $ 49,558
Real estate - mortgage 90,492 85,876
Real estate - construction 8,809 9,015
Installment and consumer 26,565 27,929
Total Loans $ 169,805 $ 172,378
Less: Unearned discount ( 237) ( 289)
Reserve for loan losses ( 2,893) ( 2,756)
Loans, net $ 166,675 $ 169,333
Non-accrual loans (principally collateralized by real
estate) amounted to approximately $748,000, $1,002,000 and
$876,000 at December 31, 2002, 2001, and 2000, respectively.
Impaired loans were $-0- and $-0- at December 31, 2002 and
2001.
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 $546,892 and $805,074 at December 31,
2002 and 2001. During 2002, $232,658 of new loans were made,
and repayments totaled $490,840.
F20
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
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,
2002 2001 2000
Balance at beginning
of period $ 2,756,780 $ 2,728,219 $ 2,168,877
Additions: Provision
charged to operating
expenses $ 1,004,000 $ 893,000 $ 424,000
Balance from bank
acquisition - - 588,306
$ 3,760,780 $ 893,000 $ 1,012,306
Deductions: Loans
charged off $ 1,006,028 $ 1,002,886 $ 664,298
Less: recoveries 138,459 138,447 211,334
$ 867,569 $ 864,439 $ 452,964
Balance at end of
period $ 2,893,211 $ 2,756,780 $ 2,728,219
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 $618,267 and $1,436,843
were transferred to foreclosed real estate in 2002 and 2001,
respectively.
The bank is not committed to lend additional funds to
debtors whose loans have been modified.
F21
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note 5. Deposits
The aggregate amount of short-term jumbo CDs, each with a
minimum denomination of $100,000, was approximately
$35,871,828 in 2002 and $31,805,741 in 2001.
At December 31, 2002, the scheduled maturities of CDs are
as follows:
(In Thousands)
2003 $ 109,907
2004 and 2005 10,790
2006 and thereafter 698
$ 121,395
Note 6. Premises and Equipment
A summary of the account:
Year Ended Year Ended
December 31, December 31,
2002 2001
Land $ 684,387 $ 640,582
Buildings 5,512,798 5,971,572
Furniture and equipment 5,643,224 5,697,359
$11,840,409 $12,309,513
Less: Accumulated depreciation 5,250,408 5,593,700
$ 6,590,001 $ 6,715,813
Depreciation expense was $898,459 in 2002, $860,117 in 2001
and $803,318 in 2000.
Note 7. Borrowings
Data relating to borrowing is as follows:
Year Ended Year ended
December 31, December 31,
Parent Company - 2002 2001
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. $ 4,400,000 $ 4,725,000
F22
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note 7. Borrowings (Con't)
Year Ended Year Ended
December 31, December 31,
2002 2001
Subsidiary - Bankers Data Services, Inc.
Note payable due January 27, 2003
monthly principal amount of
$10,833.33 plus interest. Interest
accrues at prime minus 1%.
Computer equipment is pledged as
collateral for loan. 611,466 824,419
Note payable in 36 monthly payments
of $434.02. Interest accrues at
1.9% rate and is secured by vehicle. - 433
Note payable in 24 monthly payments
of $664.13. Interest accrues at
5.9% rate and is secured by vehicle. - 6,465
Note payable in 24 monthly payments
of $791.66. Interest accrues at 0%
and is secured by auto. 7,917 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
Note payable in 3 annual payments
of $7,937. Interest accrues at 0%
and is secured by auto. 15,874 23,811
Following are maturities of long term debt for each of
the next five years.
2003 $ 52,853
2004 562,937
2005 605,000
2006 655,000
2007 666,466
F23
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note 8. Income Taxes
Income tax expense (benefit) was $823,633 for 2002, (an
effective rate of 31.53%), $733,859 for 2001 (an effective rate
of 30.4%) and $1,221,738 for 2000 (an effective rate of 31.6%).
The actual expense for 2002, 2001 and 2000 differs from the
"expected" tax expense for those years (computed by applying
the federal corporate rate of 34%) as follows:
2002 2001 2000
Computed "expected"
tax expenses 34.0% 34.0% 34.0%
Alternative minimum tax - - -
Effect of State
Income Tax 1.2% ( .1%) 1.1%
Tax exempt interest
on securities and
loans ( 3.8%) ( 4.6%) ( 3.6%)
Other,net .1% 1.1% .1%
31.5% 30.4% 31.6%
The current and deferred amounts of these tax provisions
were as follows:
2002 2001 2000
Current - Federal $ 716,252 $ 725,56 $ 1,178,493
- State - - 83,299
Deferred - Federal 89,838 7,123 ( 24,534)
- State 17,543 1,170 ( 15,520)
$ 823,633 $ 733,859 $ 1,221,738
The tax effects of each type of income and expense item
that gave rise to deferred taxes are:
December 31, December 31,
2002 2001
Net unrealized appreciation on
securities available for sale $( 272,843) $( 55,726)
Depreciation ( 322,901) ( 219,899)
Deferred loan fees 83,448 101,281
Allowance for credit losses 786,372 788,595
Other 55,833 32,728
Purchase accounting treatment ( 65,820) ( 65,820)
Net deferred tax asset (liability) $ 264,089 $ 581,159
F24
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
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 2002, 2001
and 2000. The expense to the Company for 2002, 2001 and 2000
was $128,120, $140,000, and $134,297, 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
2003 $ 4,000
2004 4,000
2005 4,000
2006 4,000
2007 4,000
Subsequent to 2008 188,000
Total minimum future rental payments $208,000
In June, 1997, the parties amended the lease to allow
Pineland State Bank to sublet part of the property and
in consideration, the landlord will receive 50% of gross rental
under the sublease in addition to the minimum amount above.
Note 11. Liabilities
Standby Letters of Credit. These transactions are used by
the Company's customers as a means of improving their credit
standing in their dealings with others. Under these
agreements, the Company agrees to honor certain financial
commitments in the event that its customers are unable to do
so. As of December 31, 2002 and 2001, the Company had $622,179
and $911,779 in outstanding standby letters of credit.
Loan Commitments. As of December 31, 2002 and 2001, the
Company had commitments outstanding to extend credit totaling
$14,493,616 and $15,710,009, 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.
F25
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
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.
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 2002, 2001 or
2000.
F26
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
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, 2002, 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, 2002 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,
2002, $920,596 is carried in other assets related to this
arrangement.
F27
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
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, 2002 and 2001. Items
which are not financial instruments are not included.
2002
Carrying Estimated
Cash and due from financial Amount Fair Value
institutions $ 9,436,272 $ 9,436,272
Interest earning balances with
financial institutions 3,905,136 3,905,136
Federal funds sold 18,600,000 18,600,000
Securities available for sale 18,892,037 18,892,037
Securities held to maturity 47,746 52,445
Federal Home Loan Bank stock 438,100 438,100
Georgia Bankers Bank - stock 547,283 1,312,830
Loans - net of allowances 166,675,295 169,209,000
Demand and savings deposits 78,370,615 78,370,615
Time deposits 121,395,391 121,844,000
Federal funds purchased - -
2001
Cash and due from financial
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 - -
For purposes of the above disclosures of estimated fair
value, the following assumptions were used as of December 31,
2002 and 2001. 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
F28
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note 16. Fair Value of Financial Instruments (Con't)
Company would charge the borrowers for similar such loans
with similar maturities made at December 31, 2002 and 2001,
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, 2002 and 2001 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, 2002 and
2001, 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, 2002 and 2001.
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, 2002 and 2001, 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, 2002 and 2001 should not
necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of the Company
that are not defined as financial instruments are not included
in the above disclosures, such as property and equipment.
Also, non-financial instruments typically not recognized in
the financial statements, nevertheless, may have value but are
not included in the above disclosures. These include, among
other items, the estimated earnings power of core deposit
accounts, the earnings potential of loan servicing rights,
the trained work force, customer goodwill, and similar items.
Note 17. Regulatory Matters
The Company and its subsidiaries are subject to various
regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly
additional discretionary-actions by regulators that, if
undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital
F29
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note 17. Regulatory Matters (Con't)
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, 2002, that the
Company and its subsidiaries meet all capital adequacy
requirements to which it is subject.
As of December 31, 2002, the most recent notification from
the FDIC categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events
since that notification that, management believes, have changed
the institution's category.
The Company and its subsidiaries' actual capital amounts
and ratios are also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2002:
Total Capital
(to Risk
Weighted Assets)
Consolidated $ 22,137 12.0% > $ 14,655 > 8.0% > $ 18,320 > 10.0%
Subsidiary -
Alma 7,993 12.8% > 4,977 > 8.0% > 6,221 > 10.0%
Subsidiary -
Baxley 7,141 15.2% > 3,750 > 8.0% > 4,687 > 10.0%
Subsidiary -
Kingsland 3,343 13.4% > 1,997 > 8.0% > 2,496 > 10.0%
Subsidiary -
Metter 5,622 11.7% > 3,840 > 8.0% > 4,800 > 10.0%
F30
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note 17. Regulatory Matters (Con't)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2002:
Tier I Capital
(to Risk Weighted
Assets)
Consolidated $ 19,825 10.8% > $ 7,328 > 4.0% > $ 7,328 > 6.0%
Subsidiary -
Alma 7,207 11.6% > 2,488 > 4.0% > 3,732 > 6.0%
Subsidiary -
Baxley 6,540 13.9% > 1,875 > 4.0% > 2,812 > 6.0%
Subsidiary -
Kingsland 3,030 12.1% > 998 > 4.0% > 1,498 > 6.0%
Subsidiary -
Metter 5,019 10.5% > 1,920 > 4.0% > 2,880 > 6.0%
As of December 31, 2002:
Tier I
Capital (to
Average Assets)
Consolidated $19,825 8.7% > $ 9,123 > 4.0% > $11,404 > 5.0%
Subsidiary -
Alma 7,207 9.2% > 3,132 > 4.0% > 3,915 > 5.0%
Subsidiary -
Baxley 6,540 11.9% > 2,197 > 4.0% > 2,747 > 5.0%
Subsidiary -
Kingsland 3,030 9.1% > 1,331 > 4.0% > 1,663 > 5.0%
Subsidiary -
Metter 5,019 8.2% > 2,440 > 4.0% > 3,050 > 5.0%
F31
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note 17. Regulatory Matters (Con't)
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%
F32
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note 17. Regulatory Matters (Con't)
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%
F33
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
FINANCIAL STATEMENTS
DECEMBER 31, 2002
F34
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
South Banking Company
Alma, Georgia 31510
Under date of February 7, 2003, we reported on the
consolidated balance sheets of South Banking Company, as of
December 31, 2002 and 2001, and the related statements of income,
cash flows and stockholders' equity for the three years in the
period ended December 31, 2002.
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, 2002 and 2001 and the related statements of income,
cash flows and stockholders' equity for each of the three years
in the period ended December 31, 2002. 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, 2002 and 2001, 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,
DALTON & BENNETT, CPA'S
February 7, 2003
F35
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
BALANCE SHEETS
December 31, December 31,
2002 2001
ASSETS
Cash and due from banks
Interest bearing $1,337,688 $ 1,243,497
Non-interest bearing 43,077 36,862
Investment in bank's subsidiaries 23,386,303 22,543,800
Investment in nonbank subsidiaries 648,074 463,535
Investment-Nexity Financial-available
for sale 750,000 250,000
Other assets 63,837 16,423
Prepaid income taxes 362,355 351,370
Due from subsidiaries - -
Total Assets $26,591,334 $24,905,487
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 186 $ 186
Other liabilities 195,754 3,018
Accrued income taxes - -
Notes payable 4,400,000 4,725,000
Due to subsidiaries 274,101 319,044
Total Liabilities $ 4,870,041 $ 5,047,248
Stockholders' Equity
Common stock of $1 par value;
authorized 1,000,000 shares;
issued and outstanding, 2002 and 2001
399,500 and 399,500, respectively $ 399,500 $ 399,500
Surplus 3,070,831 3,070,831
Undivided profits 17,800,222 16,291,126
Accumulated other
comprehensive income 450,740 96,782
Total Stockholders' Equity $21,721,293 $19,858,239
Total Liabilities and
Stockholders'Equity $26,591,334 $24,905,487
The accompanying note is an integral part of these financial
statements.
F36
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
STATEMENT OF INCOME
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2002 2001 2000
Income
Dividends from bank
subsidiaries $ 978,593 $ 994,156 $ 985,387
Miscellaneous income - - 788
Interest income 25,738 45,641 23,479
Management fees 112,800 108,000 102,000
Dividends - other - 2,673 5,345
Loss on sale of stock - ( 4,906) -
Total Income $ 1,117,131 $1,145,564 $ 1,116,999
Expenses
Salaries $ 82,158 $ 80,543 $ 83,169
Amortization - 1,498 13,526
Interest 200,222 337,286 318,822
Professional fees 36,236 25,791 75,045
Other 91,840 67,837 75,621
Total Expenses $ 410,456 $ 512,955 $ 566,183
Income before income taxes
and equity in undistributed
income (loss) of subsidiaries$ 706,675 $ 632,609 $ 550,816
Provision (credit) for
income taxes ( 97,665) ( 136,526) ( 164,606)
Income before equity in
undistributed income in
subsidiaries $ 804,340 $ 769,135 $ 715,422
Equity in undistributed
income of bank subsidiaries $ 799,845 $ 792,336 $ 1,904,756
Equity in undistributed
income (loss) of nonbank
subsidiaries 184,538 122,237 25,882
$ 984,383 $ 914,573 $ 1,930,638
Net Income $ 1,788,723 $1,683,708 $ 2,646,060
The accompanying note is an integral part of these financial
statements.
F37
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,
2002 2001 2000
Other Comprehensive Income
before tax
Unrealized gain on securities $ 567,712 $ 278,166 $ 151,160
Other Comprehensive Income
before tax $ 567,712 $ 278,166 $ 151,160
Income tax expenses related
to items of other
comprehensive income 213,754 94,577 57,048
Other comprehensive income,
net of tax $ 353,958 $ 183,589 $ 94,112
Comprehensive income $ 2,142,681 $1,867,297 $ 2,740,172
Per share data based on
weighted outstanding shares:
Weighted average
outstanding 399,500 399,500 399,500
Net Income $ 4.48 $ 4.21 $ 6.62
The accompanying note is an integral part of these financial statements.
F38
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
Other Total
Compre- Stock-
Common Undivided hensive holders'
Stock Surplus Profits Income Equity
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 $19,858,239
Net income - - 1,788,723 - 1,788,723
Cash dividends - - ( 279,627) - ( 279,627)
Unrealized gain (loss) on
securities available
for sale - - - 353,958 353,958
Redemption of shares - - - - -
Balance,
December 31, 2002$ 399,500 $3,070,831$17,800,222 $450,740 $21,721,293
The accompanying note is an integral part of these financial
statements.
F39
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
STATEMENT OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December31,
2002 2001 2000
Cash Flows From Operating
Activities:
Net income $ 1,788,723 $ 1,683,708 $ 2,646,060
Add expenses not requiring
cash:
Depreciation and
Amortization 11,569 11,731 21,870
Undistributed earnings of
Subsidiaries ( 984,383) ( 914,573) ( 1,930,638)
Loss on sale of stock - 4,906 -
Increase (decrease) in
other liabilities 4,035 2,230 788
Increase (decrease) in
accrued income taxes - - ( 21,653)
(Increase) decrease in
other assets 360 1,369 725
(Increase) decrease in
prepaid income taxes ( 10,985) ( 136,793) ( 214,577)
(Increase) decrease in
due from subsidiary-taxes - - 105,672
Increase (decrease) in
due to subsidiary ( 44,943) 189,573 129,471
Net Cash Provided by Operating
Activities $ 764,376 $ 842,151 $ 737,718
Cash Flows From Investing
Activities:
Capital contribution to
Subsidiary $ - $( 200,000) $(2,700,000)
Purchase of fixed assets ( 59,343) - ( 27,532)
Sale of CB Financial - 295,094 -
Net Cash Used by Investing
Activities $( 59,343) $ 95,094 $(2,727,532)
The accompanying note is an integral part of these financial statements.
F40
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,
2002 2001 2000
Cash Flows From Financing
Activities:
Payments on note payable
Bank $( 325,000) $( 475,000) $( 60,000)
Proceeds from notes payable
to banks - - 2,900,000
Dividends paid ( 279,627) ( 279,628) ( 279,628)
Redemption of common stock - - -
Net Cash Provided (Used)
by Financing Activities $( 604,627) $( 754,628) $ 2,560,372
Net increase (decrease) in
cash and cash equivalents $ 100,406 $ 182,617 $ 570,558
Cash and Cash Equivalents at
beginning of year 1,280,359 1,097,742 527,184
Cash and Cash Equivalents
at end of year $ 1,380,765 $ 1,280,359 $ 1,097,742
The accompanying note is an integral part of these financial statements.
F41
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.
F42