SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number: 0-16181 ABC BANCORP (A GEORGIA CORPORATION) I.R.S. EMPLOYER IDENTIFICATION NUMBER 58-1456434 310 FIRST STREET, S.E., MOULTRIE, GEORGIA 31768 TELEPHONE NUMBER: (912) 890-1111 Securities registered pursuant to Section 12(b) of the Act None Securities registered pursuant to Section 12(g) of the Act Common Stock, Par Value $1 Per Share Check 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 _________ -------- Check 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 or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 1, 1998, registrant had outstanding 7,252,365 shares of common stock, $1 par value per share, which is registrant's only class of common stock. The aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $110,391,000. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this Annual Report is incorporated by reference from the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report.
PART I ITEM 1. BUSINESS OF THE COMPANY AND SUBSIDIARY BANKS ABC Bancorp ("ABC" or the "Company") was organized as a bank holding company under the Federal Bank Holding Company Act of 1956, as amended, in 1981 (the"BHCA"), and the bank holding company laws of Georgia. The Company provides, through its commercial bank subsidiaries described below sometimes (hereinafter referred to as the "Subsidiary Banks" or the "Banks", banking services to individuals and businesses in southwestern and southcentral Georgia and southeastern Alabama. The Company's executive office is located at 310 First Street, S.E., Moultrie, Georgia 31768, and its telephone number is (912) 890-1111. As a registered bank holding company, the Company is subject to the applicable provisions of the BHCA and the Georgia Bank Holding Company Act, as well as to supervision by the Board of Governors of the Federal Reserve System and the State of Georgia Department of Banking and Finance. The Company's primary business as a bank holding company is to manage the business and affairs of the Banks. The Banks provide a broad range of retail and commercial banking services to its customers, including checking, savings, NOW and money market accounts and time deposits of various types; loans for business, agriculture, real estate, personal uses, home improvement and automobiles, credit cards; letters of credit; trust services; discount brokerage services; through a correspondent bank; IRA's; safe deposit box rentals; bank money orders; and electronic funds transfer services, including wire transfers and automated teller machines. The Company maintains a diversified loan portfolio and makes no foreign or energy-related loans. While the Company has decentralized certain of its management responsibilities, it maintains efficient centralized operating systems. As a result, corporate policy, strategy and certain administrative policies are established by the Board of Directors of the Company, while lending and community-specific marketing decisions are made primarily by each Bank to allow it to respond to differing needs and demands of its own market. Data processing functions are centralized in the Company's data processing division located in Moultrie, Georgia. Within this framework, the Banks focus on providing personalized services and quality products to their customers to meet the needs of the communities they serve. The Company's objective is to establish itself as a major financial institution in south Georgia and southeast Alabama. Management has pursued this objective through an acquisition-oriented growth strategy and a prudent operating strategy. As a bank holding company, ABC performs central data processing functions, purchasing functions and other common functions and provides certain management services for its subsidiaries. Normal banking services are conducted by its nine wholly-owned bank subsidiaries. 1
AMERICAN BANKING COMPANY American Banking Company ("American Bank") was incorporated on August 3, 1971 and operates a full-service banking business in Moultrie, Colquitt County, Georgia, providing such banking services as checking and savings accounts, various other types of time deposits and money transfers. As of December 31, 1997, American Bank ranked as the second of three banks in Colquitt County on the basis of total deposits. American Bank finances various commercial, agricultural and consumer transactions and makes and services both secured and unsecured loans to individuals, firms and corporations. American Bank offers several credit card products to its customers. American Bank makes a variety of residential, industrial, commercial and agricultural loans secured by real estate, including interim construction financing. American Bank also offers individual trust services. At December 31, 1997, American Bank had correspondent relationships with twelve other commercial banks in Georgia. American Bank's principal correspondent bank is SunTrust Bank, Atlanta, Georgia. These correspondent banks provide certain services to American Bank such as processing checks and other items, buying and selling Federal funds, handling money transfers and exchanges, shipping coin and currency, providing security and safekeeping of funds or other valuable items, and furnishing limited management information and advice. As compensation for these services, American Bank maintains certain balances with its correspondents in noninterest-bearing accounts. Heritage Community Bank (Formerly The Bank of QUITMAN) Heritage Community Bank ("Heritage Bank") was founded on December 26, 1888, and operates a full-service banking business in the city of Quitman and Brooks County, Georgia. In 1997, The Bank of Quitman changed its name to Heritage Community Bank. On December 31, 1997, Heritage Bank ranked as the largest of four banks in Brooks County on the basis of total deposits. Among the services provided by Heritage Bank are checking accounts and savings accounts, certificates of deposit and money transfers. Heritage Bank finances a variety of agricultural, commercial and consumer transactions and also makes secured and unsecured loans, including loans secured by real estate, to individuals, firms and corporations and purchases installment obligations from retailers without recourse. Quitman Bank also offers several credit card products to its customers. Heritage Bank does not conduct trust activities. As of December 31, 1997, Heritage Bank had correspondent relationships with seven other commercial banks. Heritage Bank's principal correspondent bank is SunTrust Bank, Atlanta, Georgia. These correspondent banks provide certain services to Heritage Bank such as processing checks and other items, buying and selling Federal funds, handling money transfers and exchanges, shipping coin and currency, providing security and safekeeping of funds or other valuable items, and furnishing limited management information and advice. As compensation for these services, Heritage Bank maintains certain balances with its correspondents in noninterest-bearing accounts. 2
Bank of Thomas County The Bank of Thomas County ("Thomas Bank") was incorporated in 1911 and operates a full service banking business in the cities of Coolidge and Thomasville and Thomas County, Georgia, providing such banking services as checking and savings accounts, other types of time deposits and money transfers. As of December 31, 1997, Thomas Bank ranked as the sixth largest of eight banks in Thomas County on the basis of total deposits. Thomas Bank finances commercial, agricultural and consumer transactions and makes and services both secured and unsecured loans to individuals, firms and corporations. Thomas Bank also offers several credit card products to its customers. Thomas Bank makes a variety of residential, industrial, commercial and agricultural loans secured by real estate, including interim construction financing. Thomas Bank does not conduct trust activities. At December 31, 1997, Thomas Bank had a correspondent relationship with three other commercial banks. Thomas Bank's principal correspondent bank is SunTrust Bank, Atlanta, Georgia. These correspondent banks provide certain services to Thomas Bank, such as processing checks and other items, buying and selling Federal funds, handling money transfers and exchanges, shipping coin and currency, providing security and safekeeping of funds or other valuable items and furnishing limited management information and advice. As compensation for these services, Thomas Bank maintains certain balances with its correspondents in noninterest-bearing accounts. CITIZENS SECURITY BANK (FORMERLY THE CITIZENS BANK OF TIFTON) Citizens Security Bank ("Security Bank") was incorporated in 1945 and operates a full service banking business in the city of Tifton and Tift County, the city of Ocilla and Irwin County, and the city of Douglas and Coffee County Georgia, providing such banking services as checking and savings accounts, other types of time deposits and money transfers. As of December 31, 1997, Security Bank ranked as the third largest of six banks in Tift County on the basis of total deposits. As a result acquisitions completed during 1997, Security Bank now has a full service branches in the cities of Ocilla and Douglas, Georgia. Security Bank finances commercial, agricultural and consumer transactions and makes and services both secured and unsecured loans to individuals, firms and corporations. Security Bank also offers several credit card products to its customers. Security Bank makes a variety of residential, industrial, commercial and agricultural loans secured by real estate, including interim construction financing. Security Bank does not conduct trust activities. At December 31, 1997, Security Bank had correspondent relationships with seven other commercial banks. Security Bank's principal correspondent bank is SunTrust Bank, Atlanta, Georgia. These correspondent banks provide certain services to Security Bank, such as processing checks and other items, buying and selling Federal funds, handling money transfers and exchanges, shipping coin and currency, providing security and safekeeping of funds or other valuable items and furnishing limited management information and advice. As compensation for these services, Security Bank maintains certain balances with its correspondents in noninterest-bearing accounts. 3
CAIRO BANKING COMPANY Cairo Banking Company ("Cairo Bank") was incorporated in 1900 and operates a full-service banking business in the city of Cairo and Grady County and Thomas County, Georgia, providing such banking services as checking and savings accounts, other types of time deposits and money transfers. As of December 31, 1997, Cairo Bank ranked as the second largest of five banks in Grady County on the basis of total deposits. Cairo Bank also finances commercial, agricultural and consumer transactions and makes and services both secured and unsecured loans to individuals, firms and corporations. Cairo Bank offers several credit card products to its customers. Cairo Bank makes a variety of residential, industrial, commercial and agricultural loans secured by real estate, including interim construction financing. Cairo Bank does not conduct trust activities. At December 31, 1997, Cairo Bank had correspondent relationships with five other commercial banks. Cairo Bank's principal correspondent is The Bankers Bank, Atlanta, Georgia. These correspondent banks provide certain services to Cairo Bank, such as processing checks and other items, buying and selling Federal funds, providing security and safekeeping of funds or other valuable items and furnishing limited management information and advice. As compensation for these services, Cairo Bank maintains certain balances with its correspondents in noninterest-bearing accounts. SOUTHLAND BANK Southland Bank opened in 1887 through its predecessor, Clayton Banking Company (now a branch of Southland Bank). The Abbeville branch was opened in 1983, followed by the Headland branch in 1984. The main office is located in Dothan, Alabama. Southland Bank's branches are located in the Alabama cities of Abbeville, Clayton, Eufaula and Headland. All Southland Bank locations offer full service banking including checking and savings accounts, various types of time deposits and money transfers. Southland Bank offers agricultural, commercial, consumer and real estate lending on both secured and unsecured basis to individuals, businesses and corporations. Southland Bank also provides mortgage loan production and full brokerage capabilities through PFIC Securities. Southland Bank is also a Certified SBA Lender. As of December 31, 1997, Southland Bank had correspondent relationships with Federal Home Loan Bank of Atlanta (FHLB), SunTrust Bank, Atlanta, Georgia and Compass Bank, with the principal correspondent being the FHLB. These corespondent banks provide certain services to Southland Bank such as processing checks and other items, buying and selling Federal funds, handling money transfers and exchanges, shipping coin and currency, providing security and safekeeping of funds or other valuable items, and furnishing limited management information and advice. As compensation for these services, Southland Bank maintains certain balances with its correspondents in noninterest-bearing accounts. 4
CENTRAL BANK & TRUST Central Bank & Trust ("Central Bank") was incorporated in 1986 and operates a full-service banking business in the city of Cordele and Crisp County, Georgia, providing such banking services as checking and savings accounts, other types of time deposit and money transfers. As of December 31, 1997, Central Bank was ranked as the smallest of the three banks in Crisp County on the basis of total deposits. Central Bank also finances commercial, agricultural, consumer and mortgage transactions and makes and services both secured and unsecured loans to individuals, firms and corporations. Central Bank makes a variety of residential, industrial, commercial and agricultural loans secured by real estate, including interim construction financing. Central Bank does not conduct trust activities. At December 31, 1997, Central Bank had correspondent relationships with four other commercial banks. Central Bank's principal correspondent is The Bankers Bank, Atlanta, Georgia. These correspondent banks provide certain services to Central Bank, such as processing checks and other items, buying and selling Federal funds, providing security and safekeeping of funds or other valuable items and furnishing limited management information and advice. As compensation for these services, Central Bank maintains certain balances with its correspondents in noninterest-bearing accounts. FIRST NATIONAL BANK OF SOUTH GEORGIA First National Bank of South Georgia ("First National Bank") commenced operations on May 29, 1991 in an 8,750 square foot facility located on a 1.73 acre tract of land located at the corner of Dawson Road and Westover Boulevard in Albany, Georgia. First National Bank is a full service commercial bank without trust powers. First National Bank offers a full range of deposit accounts including interest-bearing and noninterest-bearing checking for commercial and retail customers, regular savings accounts, money market accounts, certificates of deposit and individual retirement accounts. First National Bank originates a variety of loans such as commercial, real estate, home equity and consumer/instalment loans. In addition, First National Bank provides such consumer services as travelers checks, official checks, U.S. Savings bonds, safe deposit boxes, direct deposit services and automated teller services. At December 31, 1997, First National Bank maintained correspondent relationships with six commercial banks. First National Bank's principal correspondent bank is The Bankers Bank, Atlanta, Georgia. These correspondent banks provide certain services to First National Bank such as clearing checks and other items, buying and selling Federal funds, handling money transfers and exchanges, shipping coin and currency, providing security and safekeeping of funds or other valuable items. As compensation for these services, First National Bank maintains certain balances with its correspondents in noninterest- bearing accounts. 5
MERCHANTS & FARMERS BANK Merchants & Farmers Bank ("M & F Bank") was incorporated on September 24, 1925, and operates a full service banking business in the city of Donalsonville and Seminole County, Georgia, providing such banking services as checking and savings accounts, other types of time deposits and money transfers. As of December 31, 1997, M & F Bank was the smallest of the three commercial banks in Seminole County on the basis of total deposits. M & F Bank finances commercial, agricultural and consumer transactions and makes and services both secured and unsecured loans to individuals, firms and corporations. M & F Bank also offers several credit card products to its customers. M & F Bank makes a variety of residential, industrial, commercial and agricultural loans secured by real estate, including interim construction financing. M & F Bank does not conduct trust activities. At December 31, 1997, M & F Bank had corresponding relationships with five other banks. M & F Bank's primary correspondent bank is The Bankers Bank, Atlanta, Georgia. These correspondent banks provide certain services to M & F Bank, 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 these services, M & F Bank pays analysis charges based on services rendered. MARKET AREA AND COMPETITION The Company's market area is located in South Georgia and Southeastern Alabama. The Banks' main offices are located in the southern Georgia cities of Moultrie, Quitman, Thomasville, Tifton, Cairo, Cordele, Albany and Donalsonville, and the southern Alabama cities of Abbeville, Clayton, Dothan, Eufaula and Headland. The Banks have a total of 27 offices located in either the cities or counties in which the main offices are located, or in smaller cities nearby. ABC's banking facilities are located in communities whose economies are based primarily on agriculture, manufacturing and light industry. Textiles, meat processing and aluminum processing are among the leading manufacturing industries in the Company's market area. The banking industry in Georgia and Alabama is highly competitive. In recent years, intense market demands, economic pressures, fluctuating interest rates and increased customer awareness of product and service differences among financial institutions have forced banks to diversify their services and become more cost effective. Each of the Banks faces strong competition in attracting deposits and making loans. Their most direct competition for deposits comes from other commercial banks, thrift institutions, credit unions and issuers of securities such as shares in money market funds. Interest rates, convenience of office locations and marketing are all significant factors in the Banks' competition for deposits. Competition for loans comes from other commercial banks, thrift institutions, savings banks, insurance companies, consumer finance companies, credit unions and other institutional lenders. The Banks compete for loan originations through the interest rates and loan fees they charge and the efficiency and quality of services they provide. Competition is affected by the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors that are not readily predictable. Management expects that competition will become more intense in the future due to changes in state and Federal laws and regulations and the entry of additional bank and nonbank competitors. See "Supervision and Regulation". 6
LENDING POLICY The Company has sought to maintain a comprehensive lending policy that meets the credit needs of each of the communities served by the Banks, including low- and moderate-income customers, and to employ lending procedures and policies consistent with this approach. All loans are subject to the Company's written loan policy, which is updated annually and which provides that lending officers have sole authority to approve loans of various maximum amounts depending upon their seniority and experience. Each Bank's president has sole discretion to approve loans in varying principal amounts up to specified limits for each president. Each Bank's Board of Directors reviews and approves loans that exceed management's lending authority and, in certain instances, other types of loans. New credit extensions are reviewed daily by each Bank's senior management and at least monthly by its Board of Directors. The lending officers at each Bank have authority to make loans only in the county in which the Bank is located and its contiguous counties. The Company's lending policy requires analysis of the borrower's projected cash flow and ability to service the debt. For agricultural loans, which constitute a significant portion of the Company's loan portfolio, the lending officer visits the borrower regularly during the growing season and re-evaluates the loan in light of the borrower's updated cash flow projections. Under the Company's ongoing loan review program, each loan is assigned to a lending officer other than the originating lending officer for review and analysis. The Company actively markets its services to qualified lending customers in both the commercial and consumer sectors. The Company's commercial lending officers actively solicit the business of new companies entering the market as well as longstanding members of that market's business community. Through personalized professional service and competitive pricing, the Company has been successful in attracting new commercial lending customers. At the same time, the Company actively advertises its consumer loan products and continually seeks to make its lending officers more accessible. Each Bank continually monitors its loan portfolio to identify areas of concern and to enable management to take corrective action when necessary. Each Bank's lending officers and Board of Directors meet periodically to review all past due loans, the status of large loans and certain other matters. Individual lending officers are responsible for reviewing collection of past due amounts and monitoring any changes in the financial status of the borrowers. LENDING ACTIVITIES General. The Company provides a broad range of commercial and retail lending services to corporations, partnerships and individuals, including agricultural, commercial business loans, commercial and residential real estate construction and mortgage loans, loan participations, consumer loans, revolving lines of credit and letters of credit. The loan department of each Bank makes direct and indirect loans to consumers and originates and services residential mortgages. In addition, each of the Banks has loan officers who specialize in originating and servicing agricultrual-related loans. Agricultural-Related Loans. A significant portion of the Company's consolidated loan portfolio is comprised of agricultural loans, described below, and real estate mortgage loans secured by farmland. In addition, due to the predominance of the agricultural industry in the Company's market area, management believes that a significant portion of the Company's commercial and industrial loans are agricultural-related. The Company has not attempted to quantify the amount of its commercial and industrial loans which should be considered agricultural-related loans because virtually all such loans are agricultrual-related to some extent. 7
LENDING ACTIVITIES (CONTINUED) Agricultural Loans. The Company classifies loans as agricultural loans if such loans are made for crop production expenses or to finance the purchase of farm-related equipment. Agricultural loans typically involve significant seasonal fluctuations in principal amounts. Although the Company typically looks to an agricultural borrower's cash flow as the principal source of repayment, agricultural loans are also generally secured by a security interest in the crops or the farm-related equipment and, in some cases, an assignment of crop insurance or a mortgage on real estate. In addition, a portion of the Company's agricultural loans are guaranteed by the FmHA Guaranteed Loan Program, described below. Agricultural loans are made with the Company's loan documentation in accordance with the Company's lending policies and are serviced by the Company's loan officers who visit the borrowers at least three times during the growing season to re-evaluate the loan in light of the borrowers' updated cash flows projections. See "Lending Policy." The Company maintains average crop production yield statistics on its agricultural borrowers which allows the Company to more accurately evaluate the borrowers' cash flow projections. In order to minimize the risk of fluctuating commodity prices, the Company encourages its agricultural borrowers to forward contract for the sale of their crops. All of the Banks participate in the FmHA Guaranteed Loan Program. The FmHA guarantees 90% of the principal of and interest on loans made for the purpose of buying or improving farms; purchasing items necessary for farm operations; and developing or conserving land and water resources. The Company has generally been able to obtain FmHA approval of loans within 10 days after submitting an application. Commercial and Industrial Loans. General commercial and industrial loans consist of loans made primarily to manufacturers, wholesalers and retailers of goods, service companies and other industries. Management believes that a significant portion of these loans are, to varying degrees, agricultural- related. See "--Agricultural-Related Loans." The Banks have also generated loans which are guaranteed by the U. S. Small Business Administration. Management believes that making such loans helps the local community and also provides the Company with a source of income and solid future lending relationships as such businesses grow and prosper. The primary repayment risk for commercial loans is the failure of the business due to economic or financial factors. Although the Company typically looks to a commercial borrower's cash flow as the principal source of repayment for such loans, many commercial loans are secured by inventory, equipment, accounts receivable and other assets. Real Estate Loans. The Company's real estate loans are for a term of years, although rarely more than ten, over which period the principal thereof is amortized, and are generally secured by residential real estate, farmland or commercial real estate. Consumer Lending. The Company's consumer loans include motor vehicle, home improvement, home equity, student and signature loans and small personal credit lines. Many of the Banks also offer credit cards to their customers. Trust Services. The Company provides personal trust services to its customers through American Bank. 8
LENDING ACTIVITIES (CONTINUED) Compliance with Community Reinvestment Act. Each of the Banks has a Community Reinvestment Act Officer who develops and oversees that Bank's Community Reinvestment Act program and makes monthly reports to that Bank's Board of Directors. The Banks regularly sponsor or participate in community programs designed to ascertain and meet the credit needs of each of the communities they serve, including low and moderate income neighborhoods. Some of these activities include sponsoring minority festivals during Black History Month, participating in community meetings to explain the availability of Small Business Administration, Farmers' Home Loan Administration and Regional Development Center loans, and sponsoring educational seminars for area farmers. In addition, each of the Banks participate in the Georgia Residential Finance Authority program which makes low interest rate loans to rehabilitate low income rental housing. DEPOSITS Checking, savings and money market accounts and other time accounts are the primary sources of the Banks' funds for loans and investments. The Banks obtain most of their deposits from individuals and from businesses in their respective market areas. The Banks have not had to attract new or retain old deposits by paying depositors rates of interest on certificates of deposit, money market and other interest-bearing accounts significantly above rates paid by other banks in the Banks' respective market areas. In the future, increasing competition among banks in the Banks' market areas may cause the Banks' interest margins to shrink. The Banks have never accepted deposits for which a broker's commission was paid. Investment Activities The Company's investment policy is designed to maximize income from funds not needed to meet loan demand in a manner consistent with appropriate liquidity and risk objectives. Under this policy, the Banks may invest in Federal, state and municipal obligations, public housing authority bonds, industrial development revenue bonds and Government National Mortgage Association ("GNMA") securities. The Banks' investments must satisfy certain investment quality criteria. The Bank's investments must be rated at least "Baa" by Moody's or "BAA" by Standard and Poor's. Securities rated below "A" are periodically reviewed for creditworthiness. The Banks may purchase non-rated municipal bonds only if the issuer of such bonds is located in a Bank's general market area and such bonds are determined by the purchasing Bank to have a credit risk no greater than the minimum ratings referred to above. Industrial development authority bonds, which normally are not rated, are purchased only if the issuer is located in the Company's market area and if the bonds are considered to possess a high degree of credit soundness. The Banks typically have not purchased a significant amount of GNMA securities, which normally have higher yields than the Banks' other investments. While the Company's investment policy permits the Banks to trade securities to improve the quality of yields or marketability or to realign the composition of the portfolio, the Banks historically have not done so to any significant extent. The Company's investment officers implement the investment policy, monitor the portfolio and, reporting to each Bank's investment committee, recommend portfolio strategies. Reports on all purchases, sales, net profits or losses and market appreciation or depreciation of the bond portfolio are reviewed by the Company's Board of Directors each month. Once a year, the written investment policy is reviewed by the Company's Board of Directors. Each Bank's securities are kept in safekeeping accounts at correspondent banks. 9
ASSET/LIABILITY MANAGEMENT It is the objective of the Company to manage its assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established cash, loan, investment, borrowing and capital policies. It is the overall philosophy of the Company's management to support asset growth primarily through growth of core deposits, which include deposits of all categories made by individuals, partnerships, corporations and other entities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." PROPERTIES The table below sets forth the location, size and other information with respect to the Company's real properties. All properties are owned by the Company or the Subsidiary Banks and are unencumbered. <TABLE> <CAPTION> APPROXIMATE SQUARE Offices Used By Footage - ---------------------------------------------------------- ------------------------ ------------------ <S> <C> <C> 310 First Street, S.E., Moultrie, GA ABC Bancorp 7,000 225 South Main Street, Moultrie, GA American Bank 9,000 1707 First Avenue, S.E., Moultrie, GA American Bank 5,500 137 Broad Street, Doerun, GA American Bank 3,860 1000 West Screven Street, Quitman, GA Heritage Bank 11,530 Eastern Brooks County, GA Heritage Bank 1,100 529 Pine Avenue, Coolidge, GA Thomas Bank 4,000 111 E. Eighth Street, Tifton, GA Security Bank 11,700 804 W. Second Street, Tifton, GA Security Bank 2,000 301 South Irwin Avenue, Ocilla, GA Security Bank 10,000 100 South Pearle Avenue, Douglas, GA Security Bank 3,100 201 South Broad Street, Cairo, GA Cairo Bank 10,000 Hwy. 84 Drive-in, Cairo, GA Cairo Bank 1,000 12 East Depot Street, Meigs, GA Cairo Bank 2,700 2484 East Pinetree Boulevard, Thomasville, GA Thomas Bank 4,800 3299 Ross Clark Circle, Dothan, AL Southland Bank 21,918 3090 Ross Clark Circle, Dothan, AL Southland Bank 419 1817 S. Oates St., Dothan, AL Southland Bank 2,500 204 Kirkland St., Abbeville, AL Southland Bank 5,300 33 Eufaula St., Clayton, AL Southland Bank 4,500 1094 S. Eufaula Ave., Eufaula, AL Southland Bank 2,240 208 Main St., Headland, AL Southland Bank 2,037 502 Second Street South, Cordele, GA Central Bank 5,800 1302 Sixteenth Avenue East, Cordele, GA Central Bank 300 2627 Dawson Road, Albany, GA First National Bank 8,750 1607 U.S. Highway 19 South, Leesburg, GA First National Bank 7,000 109 W. Third St., Donalsonville, GA M & F Bank 8,800 Hwy 374 and 253, Donalsonville, GA M & F Bank 840 </TABLE> 10
EMPLOYEES At December 31, 1997, ABC and its subsidiaries employed 376 full-time employees and 33 part-time employees. ABC considers its relationship with its employees to be excellent. ABC has adopted a simplified employee pension plan covering substantially all employees. The Company and the Banks made contributions for all eligible employees in 1997. ABC also maintains a comprehensive employee benefits program providing, among other benefits, hospitalization and major medical insurance and life insurance. Management considers these benefits to be competitive with those offered by other financial institutions in south Georgia and southeast Alabama. The Company's employees are not represented by any collective bargaining group. SUPERVISION AND REGULATION GENERAL As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board (the "FRB") and the Georgia Department of Banking and Finance (the "DBF"). The Subsidiary Banks are subject to supervision and examination by applicable state and Federal banking agencies, including the FRB, the Office of the Comptroller of the Currency (the "OCC"), the Federal Deposit Insurance Corporation (the "FDIC"), the DBF and the State of Alabama Department of Banking. The Subsidiary Banks are also subject to various requirements and restrictions under Federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Subsidiary Banks. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the FRB as it attempts to control the money supply and credit availability in order to influence the economy. The BHCA requires every bank holding company to obtain the prior approval of the FRB before (i) it may acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that it does not already control; (ii) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of a bank; and (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 the voting shares of any company engaged in non-banking activities. This prohibition does not apply to activities found by the FRB, by order or regulation, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the FRB has determined by regulation or order to be closely related to banking are: (i) operating a savings institution, mortgage company, finance company, credit card company or factoring company; (ii) making or servicing loans and certain types of leases; (iii) performing certain data processing services; (iv) acting as fiduciary or investment or financial advisor; (v) providing discount brokerage services; (vi) underwriting bank eligible securities; (vii) underwriting debt and equity securities on a limited basis through separately capitalized subsidiaries; and (viii) making investments in corporations or projects designed primarily to promote community welfare. 11
In addition, the DBF requires information with respect to the financial condition, operations, management and intercompany relationships of ABC and the Subsidiary Banks 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 ABC. ABC is an "affiliate" of the Subsidiary Banks under the Federal Reserve Act, which imposes certain restrictions on (i) loans by the Subsidiary Banks to ABC; (ii) investments in the stock or securities of ABC by the Subsidiary Banks; (iii) the Subsidiary Bank's taking the stock or securities of an "affiliate" as collateral for loans by the Subsidiary Banks to a borrower; and (iv) the purchase of assets from ABC by the Subsidiary 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. PAYMENT OF DIVIDENDS AND OTHER RESTRICTIONS ABC 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 ABC's subsidiaries can pay dividends or otherwise supply funds to ABC. The principal source of ABC's cash revenues is dividends from its subsidiaries and there are certain limitations under Federal and state laws on the payment of dividends by such subsidiaries. The prior approval of the FRB or the applicable state commissioner, as the case may be, is required if the total of all dividends declared by any state member bank of the Federal Reserve System in any calendar year exceeds the Bank's net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years, less any required transfers to surplus or a fund for the retirement of any preferred stock. The relevant Federal and state regulatory agencies also have authority to prohibit a state member bank or bank holding company, which would include ABC and the Subsidiary Banks from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or unsound practice in conducting its business. The payment of dividends could, depending upon the financial condition of the subsidiary, be deemed to constitute such an unsafe or unsound practice. Under Georgia law (which would apply to any payment of dividends by the Georgia Subsidiary Banks to ABC), 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%. Retained earnings of the Banks available for payment of cash dividends under all applicable regulations without obtaining governmental approval were approximately $5 million as of December 31, 1997. In addition, the Banks are subject to limitations under Section 23A of the Federal Reserve Act with respect to extensions of credit to, investments in, and certain other transactions with, ABC. Furthermore, loans and extensions of credit are also subject to various collateral requirements. 12
The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRB's view that a bank holding company should pay cash dividends only to the extent that the holding company's net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the holding company's capital needs, asset quality and overall financial condition. The FRB also indicated that it would be inappropriate for a holding company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulatins adopted by the FRB, the FRB may prohibit a bank holding company from paying any didivends if one or more of the holding company's bank subsidiaries are classified as "undercapitalized". Bank holding companies are required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would continue an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by, or written agreement with, the FRB. This notification requirement does not apply to any company that meets the well-capitalized standard for commercial banks, has a safety and soundness examination rating of at least a "2" and is not subject to any unresolved supervisory issues. CAPITAL ADEQUACY The FRB has adopted risk-based capital guidelines for bank holding companies. The minimum ratio of total capital ("Total Capital") to risk- weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8%. At least half of the Total Capital is to be composed of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock and a limited amount of perpetual preferred stock, less goodwill ("Tier I Capital"). The remainder may consist of subordinated debt, other preferred stock and a limited amount of loan loss reserves. In addition, the FRB has established minimum leverage ratio guidelines for bank holding companies. These guidelines for a minimum ratio of Tier I Capital to total assets, less goodwill (the "Leverage Ratio") of 3% for bank holding companies that meet certain specified criteria, including those having the highest regulatory rating. All other bank holding companies generally are required to maintain a Leverage Ratio of at least 3% plus an additional cushion of 100 to 200 basis points. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the FRB has indicated that it will consider a "tangible Tier I capital leverage ratio" (deducting all intangibles) and other indications of capital strength in evaluating proposals for expansion or new activities. 13
Section 38 to the Federal Deposit Insurance Act, as revised in December 1992, implements the prompt corrective action provisions that Congress enacted as a part of the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC 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. Under the regulations of the FDIC implementing the prompt corrective action provisions of the FDIC Act, financial institutions are placed 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 FDIC Act from paying any dividend or making any other kind of capital distribution or paying any management fee to any controlling person if following the payment or distribution the institution would be undercapitalized. While the prompt corrective action provisions of the FDIC Act contain no requirements or restrictions aimed specifically at adequately capitalized institutions, other provisions of the FDIC Act and the agencies' regulations relating to deposit insurance assessments, brokered deposits and interbank liabilities treat adequately capitalized institutions less favorably than those that are well-capitalized. Under the FDIC's regulations, all of the Subsidiary Banks are "well capitalized" institutions. The OCC's regulations establish two capital standards for national banks: a leverage requirement and a risk-based capital requirement. In addition, the OCC may, on a case-by-case basis, establish individual minimum capital requirements for a national bank that vary from the requirements which would otherwise apply under OCC regulations. A national bank that fails to satisfy the capital requirements established under the OCC's regulations will be subject to such administrative action or sanctions as the OCC deems appropriate. 14
The leverage ratio adopted by the OCC requires a minimum Leverage Ratio of 3% for national banks rated composite 1 under the CAMEL rating system for banks. National banks not rated composite 1 under the CAMEL rating system for banks are required to maintain a minimum Leverage Ratio of 4% to 5%, depending upon the level and nature of risks of their operations. For purposes of the OCC's leverage requirement, Tier I Capital generally consists of common stockholders' equity and retained income and certain non-cumulative perpetual preferred stock and related income, except that no intangibles and certain purchased mortgage servicing rights and purchased credit card relationships may be included in capital. The risk-based capital requirements established by the OCC's regulations require national banks to maintain Total Capital equal to at least 8% of total risk-weighted assets. For purposes of the risk-based capital requirement, Total Capital means Tier 1 Capital plus "Tier 2 Capital", provided that the amount of Tier 2 Capital may not exceed the amount of Tier 1 Capital, less certain assets. The components of Tier 2 capital include certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk- weighted assets. The OCC has revised its risk-based capital requirements to permit the OCC to require higher levels of capital for an institution in light of its interest rate risk. In addition, the OCC has proposed that a bank's interest rate risk exposure would be qualified using either the measurement system set forth in the proposal or the institution's internal model for measuring such exposure, if such model is determined to be adequate by the institution's examiner. Small institutions that are highly capitalized and have minimum interest rate risk would be exempt from the rule unless otherwise determined by the OCC. The Company has not determined what effect, if any, the OCC's proposed interest rate risk component would have on the Company's national bank subsidiary's capital if adopted as proposed. SUPPORT OF SUBSIDIARY BANKS Under the FRB policy, ABC is expected to act as a source of financial strength to, and to commit resources to support, each of the Subsidiary Banks. This support may be required at times when, absent such FRB policy, ABC 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. Under the Financial Institutions Reform, Recovery and Enforcement Act, 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 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". "Default" is defined generally as the appointment of a conservator or receiver, and "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. The FDIC's claim for damages is superior to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution. 15
FDIC INSURANCE ASSESSMENTS The Subsidiary Banks are subject to FDIC deposit insurance assessments for the Bank Insurance Fund (the "BIF"). Since 1989, the annual FDIC deposit insurance assessments increased from $.083 per $100 of deposits to a minimum level of $.23 per $100 of deposits, an increase of 177%. 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 over condition) to as much as $.31 per $100 of deposits for the less healthy institutions, for an average $.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). As a result, the Subsidiary Banks paid only the legally required annual minimum payment of $10,000 per year for insurance as of January 1997. On September 30, 1996, the President signed the Deposit Insurance Fund Act of 1996 ("DIFA") which was part of the omnibus spending bill enacted by Congress at the end of its 1996 session. DIFA provides that the FDIC may not set semi-annual assessments with respect to the BIF in excess of the amount needed to maintain the 1.25% designated reserve ratio or, if the reserve ratio is less than the designated reserve ratio, to increase the reserve ratio to the designated reserve ratio. In addition, DIFA mandates the merger of BIF and the Savings Association Insurance Fund (the "SAIF"), effective January 1, 1999, only if no insured depository institution is a savings association on that date. The combined deposit insurance fund would be called the "deposit insurance fund" or "DIF". DIFA also imposes assessments against both SAFI and BIF deposits to avoid predicted default on the bonds issued by the Financing Corporation ("FICO"), which is predicted to occur as early as 1998, as deposits in savings institutions continue to decline. DIFA amends the Federal Home Loan Bank Act to impose the FICO assessment against both SAIF and BIF deposits beginning after December 31, 1996. The assessment imposed on insured depository institutions with respect to any BIF-assessable deposit will be assessed at a range equal to one-fifth of the rate (approximately 1.3 basis points) of the assessments imposed on insured depository institutions with respect to any SAIF-asssessable deposit (approximately 6.7 basis points). The FICO assessment for 1996 was paid entirely by SAIF-insured institutions, but BIF-insured banks will pay the same FICO assessment as SAIF-insured institutions beginning as of the earlier of December 31, 1999, or the date as of which the last savings association ceases to exist. 16
RECENT LEGISLATIVE AND REGULATORY ACTION On April 19,1995, the four Federal bank regulatory agencies adopted revisions to the regulations promulgated pursuant to the Community Reinvestment Act (the "CRA"), which are intended to set distinct assessment standards for financial institutions. The revised regulations contains three evaluation tests: (i) a lending test which will compare the institution's market share of loans in low- and moderate-income areas to its market share of loans in its entire service area and the percentage of a bank's outstanding loans to low- and moderate-income areas or individuals; (ii) a services test which will evaluate the provisions of services that promote the availability of credit to low- and moderate-income areas; and (iii) an investment test, which will evaluate an institution's record of investments in organizations designed to foster community development, small- and minority-owned businesses and affordable housing lending, including state and local government housing or revenue bonds. The regulation is designed to reduce some paperwork requirements of the current regulations and provide regulators, institutions and community groups with a more objective and predictable manner with which to evaluate the CRA performance of financial institutions. The rule became effective on January 1, 1996, at which time evaluation under streamlined procedures were schedule to begin for institutions with assets of less than $250 million that are owned by a holding company with total assets of less than $1 billion. Until the regulators release guidelines for examiners that interpret the rules, it is unclear what effect, if any, these regulations will have on ABC and the Subsidiary Banks. Congress and various Federal agencies (including, in addition to the bank regulatory agencies, the Department of Housing and Urban Development, the Federal Trade Commission and the Department of Justice) (collectively, the "Federal Agencies") responsible for implementing the nation's fair lending laws have been increasingly concerned that prospective home buyers and other borrowers are experiencing discrimination in their efforts to obtain loans. In recent years, the Department of Justice has filed suit against financial institutions, which it determined had discriminated, seeking fines and restitution for borrowers who allegedly suffered from discriminatory practices. Nearly all of these suits have been settled (some for substantial sums) without a full adjudication on the merits. On March 8, 1994, the Federal Agencies, in an effort to clarify what constitutes lending discrimination and specify the factors the agencies will consider in determining if lending discrimination exists, announced a joint policy statement detailing specific discriminatory practices prohibited under the Equal Opportunity Act and the Fair Housing Act. In the policy statement, three methods of proving lending discrimination were identified: (i) over evidence of discrimination, when a lender blatantly discriminates on a prohibited basis; (ii) evidence of disparate treatment, when a lender treats applicants differently based on a prohibited factor even where there is no showing that the treatment was motivated by prejudice or a conscious intention to discriminate against a person; and (iii) evidence of disparate impact, when a lender applies a practice uniformly to all applicants, but the practice has a discriminatory effect, even where such practices are neutral on their face and are applied equally, unless the practice can be justified on the basis of business necessity. 17
On September 23, 1994, President Clinton signed the Reigle Community Development and Regulatory Improvement Act of 1994 (the "Regulatory Improvement Act"). The Regulatory Improvement Act contains funding for community development projects through banks and community development financial institutions and also numerous regulatory relief provisions designed to eliminate certain duplicative regulations and paperwork requirements. On September 29, 1994, President Clinton signed the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Federal Interstate Bill") which amended Federal law to permit bank holding companies to acquire existing banks in any state effective September 29, 1995, and to permit any interstate bank holding company to merge its various bank subsidiaries into a single bank with interstate branches after May 31, 1997. States have the authority to authorize interstate branching prior to June 1, 1997, or, alternatively, to opt out of interstate branching prior to that date. The Georgia Financial Institutions Code was amended in 1994 to permit the acquisition of a Georgia bank or bank holding company by out-of-state bank holding companies beginning July 1, 1995. On September 29, 1995, the interstate banking provisions of the Georgia Financial Institutions Code were superseded by the Federal Interstate Act. The Federal Interstate Act authorizes the OCC and FDIC to approve interstate branching de novo by national and state banks, respectively, only in states which specifically allow for such branching. The Federal Interstate Act also requires the appropriate Federal banking agencies to prescribe regulations by June 1, 1997 which prohibit any out-of-state bank from using the interstate branching authority primarily for the purpose of deposit production. These regulations must include guidelines to ensure that interestate branches operated by an out-of-state bank in a host state are reasonably helping to meet the credit needs of the communities which they serve. Other legislative proposals are pending before Congress, the effect of which would reform the Glass-Steagall Act to allow banks and bank holding companies to engage in additional types of non-banking activities as well as effect regulatory relief for financial institutions. The regulatory relief provisions contained in several bills would, if enacted, eliminate or reduce and simplify disclosures and reporting requirements contained in current statues and regulations. The likelihood of enactment of any of the pending or proposed legislation is unknown. In February 1996, Georgia adopted the "Georgia Interstate Branching Act," which permits Georgia-based banks and bank holding companies owning or acquiring banks outside of Georgia and all non-Georgia banks and bank holding companies owning or acquiring banks in Georgia the right to merge any lawfully acquired bank into an interstate branch network. The Georgia Interstate Branching Act also allows banks to establish de novo branch banks on a limited basis between July 1, 1996 and June 30, 1998. Beginning July 1, 1998, the number of de novo bank branches which may be established will no longer be limited. 18
MONETARY POLICY The earnings of ABC are affected by domestic and foreign economic conditions, particularly by the monetary and fiscal policies of the United States government and its agencies. The FRB has had, and will continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to mitigate recessionary and inflationary pressures by regulating the national money supply. The techniques used by the Federal Reserve Bank include setting the reserve requirements of member banks and establishing the discount rate on member bank borrowings. The FRB also conducts open market transactions in United States government securities. FEDERAL HOME LOAN BANK SYSTEM Certain of the Subsidiary Banks have correspondent relationships with the Federal Home Loan Bank of Atlanta ("FHLB Atlanta"), which is one of 12 regional Federal Home Loan Banks ("FHLBs") that administer the home financing credit function of savings companies. Each FHLB serves as a reserve or central bank for its members within its assigned region. FHLBs are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System and make loans to members (i.e., advances) in accordance with policies and procedures, established by the Board of Directors of the FHLB which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. FHLB Atlanta provides certain services to certain Subsidiary Banks such as processing checks and other items, buying and selling Federal funds, handling money transfers and exchanges, shipping coin and currency, providing security and safekeeping of funds or other valuable items, and furnishing limited management information and advice. As compensation for these services, such Subsidiary Banks maintain certain balances with FHLB Atlanta in noninterest-bearing accounts. Under Federal law, the FHLBs are required to provide funds for the resolution of troubled savings companies and to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. FUTURE REQUIREMENTS Statutes and regulations are regularly introduced which contain wide- ranging proposals for altering the structure, regulations and competitive relationships of the nation's financial institutions. It cannot be predicted whether or in what form any proposed statute or regulation will be adopted or the extent to which the business of ABC or any of the Subsidiary Banks may be affected by such statute or regulation. 19
ITEM 2. PROPERTIES The principal properties of the Company consist of the properties of the Banks. For a description of the properties of the Banks, see "Item 1 - Business of the Company and Subsidiary Banks - Properties" included elsewhere in this Annual Report. ITEM 3. LEGAL PROCEEDINGS Neither the Company nor any of its subsidiary banks is a party 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 Company, are any such proceedings contemplated or threatened against the Company or its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS No matters were submitted to a vote of the Company's shareholders during the fourth quarter of 1997. ITEM 4.5 EXECUTIVE OFFICERS The following table sets forth certain information with respect to the executive officers of the Company. <TABLE> <CAPTION> NAME, AGE AND POSITION WITH THE PRINCIPAL OCCUPATION FOR THE LAST FIVE YEARS Term AS OFFICER REGISTRANT and Other Directorships - ------------------------------- --------------------------- ------------------------------------------------------------ <S> <C> <C> Kenneth J. Hunnicutt; 62; President, Chief Chief Executive Officer of ABC Bancorp since 1994 and Officer since 1981 Executive Officer and President since 1981. Mr. Hunnicutt served as Senior Director President of American Bank from 1989 to 1991 and as President of American Bank from 1975 to 1989 and currently serves as a director of each of the Company's subsidiary banks. W. Edwin Lane, Jr; 44: Executive Vice President Executive Vice President and Chief Financial Officer of Officer since January 1, 1995 and Chief Financial ABC Bancorp since January 1, 1995. Mr. Lane served as Officer Controller of First Liberty Bank, Macon, Georgia from August 1992 to December 1994. Mr. Lane was associated with Mauldin & Jenkins, Certified Public Accountants, from 1985 to 1992, where he served as an audit manager from 1989 to 1992. </TABLE> Officers serve at the discretion of the Board of Directors. 20
PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS (a) The following table sets forth: (a) the high and low bid prices for the common stock as quoted on Nasdaq-NMS during 1996 and 1997; and (b) the amount of quarterly dividends declared on the common stock during the periods indicated. <TABLE> <CAPTION> CASH CALENDAR PERIOD BID PRICES DIVIDENDS -------------------------------- ---------------------------------- 1996 LOW HIGH DECLARED -------------------------------- --------------- --------------- --------------- <S> <C> <C> <C> First quarter $ 11.250 $ 12.00 $ .08 Second quarter 11.250 15.00 .08 Third quarter 14.250 15.75 .08 Fourth quarter 13.375 15.75 .08 </TABLE> <TABLE> <CAPTION> CASH CALENDAR PERIOD BID PRICES DIVIDENDS -------------------------------- ---------------------------------- 1997 LOW HIGH DECLARED -------------------------------- --------------- --------------- --------------- <S> <C> <C> First quarter $ 13.375 $ 16.375 $ .08 Second quarter 15.500 17.250 .10 Third quarter 16.000 17.375 .10 Fourth quarter 15.625 19.875 .10 </TABLE> (b) As of March 1, 1998, there were approximately 7,750 holders of record of the Common Stock. (c) The Company paid an annual dividend on its Common Stock of $.38 and $.32 per share for fiscal years 1997 and 1996, respectively. 21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION The following table presents selected consolidated financial information for the Company. The data set forth below are derived from the audited consolidated financial statements of the Company. The selected financial data should be read in conjunction with, and are qualified in their entirety by, the Consolidated Financial Statements and the Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ------------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> SELECTED BALANCE SHEET DATA: Total assets $ 691,886 $ 673,162 $ 531,243 $ 464,084 $ 426,380 Total loans 490,244 452,844 319,471 285,575 246,480 Total deposits 600,711 577,905 466,317 409,645 378,303 Investment securities 123,219 135,266 101,695 96,200 94,181 Shareholders' equity 68,153 62,970 51,955 45,753 34,631 SELECTED INCOME STATEMENT DATA: Interest income $ 58,668 $ 50,586 $ 40,951 $ 33,021 $ 30,315 Interest expense 25,969 22,324 17,367 12,717 12,199 ------------ ---------- ---------- ---------- ---------- Net interest income 32,699 28,262 23,584 20,304 18,116 Provision for loan losses 2,731 1,919 1,241 988 1,621 Other income 7,736 6,532 4,904 4,466 4,212 Other expenses 27,139 22,878 18,127 17,072 15,868 ------------ ---------- ---------- ---------- ---------- Income before tax 10,565 9,997 9,120 6,710 4,839 Income tax expense 3,119 2,839 2,752 1,945 1,190 ------------ ---------- ---------- ---------- ---------- Net income before minority interest and cumulative effect 7,446 7,158 6,368 4,765 3,649 Minority interest - - - - 76 ------------ ---------- ---------- ---------- ---------- Net income before cumulative effect 7,446 7,158 6,368 4,765 3,573 Cumulative effect - - - - 551 ------------ ---------- ---------- ---------- ---------- Net income $ 7,446 $ 7,158 $ 6,368 $ 4,765 $ 4,124 ============ ========== ========== ========== ========== PER SHARE DATA: Net income before cumulative effect $ 1.03 $ 1.01 $ 0.95 $ 0.76 $ 0.61 Net income - basic 1.03 1.01 0.95 0.76 0.71 Net income - diluted 1.02 1.01 0.95 0.76 0.70 Book value 9.40 8.69 7.76 6.87 5.85 Tangible book value 8.12 7.69 7.40 6.46 5.34 Dividends 0.38 0.32 0.28 0.23 0.23 PROFITABILITY RATIOS: Net income to average total assets 1.10% 1.21% 1.34% 1.11% 1.02% Net income to average stockholders' equity 11.35 12.19 13.01 12.83 12.32 Net interest margin 5.37 5.24 5.43 5.14 4.95 </TABLE> 22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------ ------------ ----------- ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) --------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> LOAN QUALITY RATIOS: Net charge-offs to total loans 0.48% 0.39% 0.16% 0.25% 0.73% Reserve for loan losses to total loans and OREO 1.55 1.60 1.84 1.81 1.98 Nonperforming assets to total loans and OREO 2.41 1.39 1.08 1.50 1.91 Reserve for loan losses to nonperforming loans 75.86 135.34 215.91 124.53 129.58 Reserve for loan losses to total nonperforming assets 64.38 115.59 170.68 120.97 103.49 LIQUIDITY RATIOS: Loans to total deposits 81.61% 78.36% 68.51% 69.71% 65.15% Loans to average earnings assets 80.45 84.04 73.53 72.32 67.36 Noninterest-bearing deposits to total deposits 15.00 15.06 17.56 17.14 14.70 CAPITAL ADEQUACY RATIOS: Common stockholders' equity to total assets 9.85% 9.35% 9.78% 9.86% 8.12% Total stockholders' equity to total assets 9.85 9.35 9.78 9.86 8.12 Dividend payout ratio 36.89 31.68 29.47 30.26 32.39 </TABLE> 23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED) SELECTED QUARTERLY FINANCIAL DATA: <TABLE> <CAPTION> QUARTERS ENDED DECEMBER 31, 1997 ------------------------------------------------------------------------ 4 3 2 1 --------------- --------------- --------------- --------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ------------------------------------------------------------------------ <S> <C> <C> <C> <C> SELECTED INCOME STATEMENT DATA: Interest income $ 14,990 $ 14,858 $ 14,570 $ 14,231 Net interest income 8,397 8,107 8,125 8,070 Net income 2,037 1,528 2,022 1,859 PER SHARE DATA: Net income - basic 0.28 0.21 0.28 0.26 Net income - diluted 0.28 0.20 0.28 0.25 Dividends 0.10 0.10 0.10 0.08 </TABLE> <TABLE> <CAPTION> QUARTERS ENDED DECEMBER 31, 1996 ------------------------------------------------------------------------ 4 3 2 1 --------------- --------------- --------------- --------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ------------------------------------------------------------------------ <S> <C> <C> <C> <C> SELECTED INCOME STATEMENT DATA: Interest income $ 14,204 $ 14,005 $ 11,555 $ 10,822 Net interest income 7,864 7,675 6,679 6,044 Net income 1,549 1,807 1,979 1,823 PER SHARE DATA: Net income - basic 0.21 0.25 0.28 0.27 Net income - diluted 0.21 0.25 0.28 0.27 Dividends 0.08 0.08 0.08 0.08 </TABLE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Regarding Forward-Looking Information The Company's 1997 Annual Report contains forward-looking statements in addition to historical information. The Company cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated result will be realized. These factors include legislative and regulatory initiatives regarding deregulation and restructuring of the banking industry; the extent and timing of the entry of additional competition in the Company's markets; potential business strategies, including acquisitions or dispositions of assets or internal restructuring, that may be pursued by the Company; state and Federal banking regulations; changes in or application of environmental and other laws and regulations to which the Company is subject; political, legal and economic conditions and developments; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather, natural disasters and other catastrophic events; and other factors discussed in the Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K. The words "believe", "expect", "anticipate", "project", and similar expressions signify forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements made by or on behalf of the Company. Any such statement speaks only as of the date the statement was made. The Company undertakes no obligation to update or revise any forward looking statements. Additional information with respect to factors that may cause results to differ materially from those contemplated by such forward- looking statements is included in the Company's current and subsequent filings with the Securities and Exchange Commission. GENERAL The Company's principal asset is its ownership of the Subsidiary Banks. Accordingly, its results of operations are primarily dependent upon the results of operations of the Subsidiary Banks. The Subsidiary Banks conduct a commercial banking business which consists of attracting deposits from the general public and applying those funds to the origination of commercial, consumer and real estate loans (including commercial loans collateralized by real estate). The Subsidiary Banks' profitablity depends primarily on net interest income, which is the difference between interest income generated from interest-earning assets (i.e., loans and investments) less the interest expense incurred on interest-bearing liabilities (i.e., customer deposits and borrowed funds). Net interest income is affected by the relative amounts of interest- earning assets and interest-bearing liabilities, and the interest rate paid and earned on these balances. Net interest income is dependent upon the Subsidiary Banks' interest rate spread, which is the difference between the average yield earned on its interest-earning assets and the average rate paid on its interest- bearing liabilities. When interest-earning assets approximates or exceeds interest-bearing liabilities, any positive interest rate spread will generate interest income. The interest rate spread is impacted by interest rates, deposit flows and loan demand. Additionally, and to a lesser extent, the profitability of the Subsidiary Banks is affected by such factors as the level of noninterest income and expenses, the provision for loan losses and the effective tax rate. Noninterest income consists primarily of service charges on deposit accounts and other fees and income from the sale of loans and investment securities. Noninterest expenses consist of compensation and benefits, occupancy-related expenses, deposit insurance premiums paid to the FDIC and other operating expenses. 25
The results of operations for the years ended December 31, 1997, 1996 and 1995 include the operations of Central Bank, First National Bank and M & F Bank which were acquired in 1996 and accounted for as poolings of interest and the operations of Irwin Bankcorp, Inc. which was acquired in 1997 and accounted for as a pooling of interest. The results of operations for the year ended December 31, 1996 also include the operations of Southland Bank since June 21, 1996, the date of its acquisition, which transaction was accounted for as a purchase. Because the acquisition of Southland Bank was accounted for as a purchase transaction, significant amounts of increases in average balances and income and expense data are attributable to the inclusion of the operations of Southland Bank from June 21, 1996, whereas no operations of Southland Bank have been included in the consolidated financial data for 1995. RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 ABC's results of operations are determined by its ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense. Since interest rates are determined by market forces and economic conditions beyond the control of ABC, the ability to generate net interest income is dependent upon the ability of the Subsidiary Banks to obtain an adequate spread between the rate earned on interest-earning assets and the rate paid on interest-bearing liabilities. Thus, the key performance measure for net interest income is the interest margin or net yield, which is taxable-equivalent net interest income divided by average earning assets. The primary component of consolidated earnings is net interest income, or the difference between interest income on interest-earning assets and interest paid on interest-bearing liabilities. The net interest margin is net interest income expressed as a percentage of average interest-earning assets. Interest-earning assets consist of loans, investment securities and Federal funds sold. Interest-bearing liabilities consist of deposits, Federal Home Loan Bank borrowings and other short-term borrowings. A portion of interest income is earned on tax-exempt investments such as state and municipal bonds. In an effort to state this tax-exempt income and its resultant yields on a basis comparable to all other taxable investments, an adjustment is made to analyze this income on a taxable-equivalent basis. The net interest margin increased 13 basis points or 2.43% to 5.47% in 1997 as compared to 5.34% in 1996. This increase in net interest margin resulted from an increase of 23 basis points in average yield earned on interest-earning assets accompanied by an increase of 6 basis points in average rate paid on interest-bearing liabilities. Interest earned on loans decreased 6 basis points; interest earned on Federal funds sold increased 75 basis points; interest earned on securities, including interest-bearing deposits in banks increased 18 basis points; while interest paid on interest-bearing liabilities increased 6 basis points. Net interest income on a taxable-equivalent basis was $33,320,000 in 1997 as compared to $28,790,000 in 1996, representing an increase of $4,530,000 or 15.73%. Net interest income on a taxable-equivalent basis was $28,790,000 in 1996 as compared to $24,063,000 in 1995, representing an increase of $4,727,000 or 19.64%. Taxable-equivalent net interest income of Southland Bank accounted for $2,782,000 or approximately 59% of the total increase in net interest income in 1996. Net interest margin decreased 3.61% to 5.34% in 1996 from 5.54% in 1995 on an increase of 24.03% in average interest-earning assets and an increase of 26.62% in average interest-bearing liabilities. Interest earned on average interest-earning assets decreased 5 basis points to 9.49% in 1996 as compared to 9.54% in 1995, while interest paid on interest-bearing liabilities increased 7 basis points to 4.88% in 1996 compared to 4.81% in 1995. 26
Average interest-earning assets increased $70,659,000 or 13.11% to $609,500,000 in 1997 from $538,841,000 in 1996. Average loans increased $79,225,000; average investments, including interest-bearing deposits in banks increased $10,704,000; while average Federal funds sold decreased $19,270,000. The increase in average interest-earning assets was funded by an increase in average deposits of $73,336,000 or 14.59% to $575,979,000 in 1997 from $502,643,000 in 1996. By comparison, average interest-earning assets increased $104,389,000 or 24.03% to $538,841,000 in 1996 from $434,452,000 in 1995. Average interest-earning assets of Southland Bank accounted for $58,454,000 or 56% of the total increase in average interest-earning assets in 1996. The increase in average interest-earning assets in 1996 was funded by an increase if average deposits of $89,008,000, or 21.52%. Average deposits of Southland Bank accounted for $49,406,000 or approximately 56% of the total increase in average deposits in 1996. In 1997 and 1996, approximately 14% of the average deposits were noninterest-bearing deposits. The allowance for loan losses represents a reserve for potential losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, with a particular emphasis on nonaccruing, past due and other loans that management believes require attention. The provision for loan losses is a charge to earnings in the current period to replenish the allowance and maintain it at a level management has determined to be adequate. The provision for loan losses charged to earnings amounted to $2,731,000 in 1997, $1,919,000 in 1996 and $1,241,000 in 1995. The increase in the provision for loan losses in 1997 of $812,000, or 42.31%, as compared with 1996 was accompanied by an increase of 8.26% in total loans in 1997 and an increase in the allowance for loan losses of 4.87%. The allowance for loan losses increased $354,000 to $7,627,000 at December 31, 1997 from $7,273,000 at December 31, 1996. Net charge-offs represented 87.04% of the provision for loan losses in 1997 as compared to 91.04% in 1996. The loan charge-offs for 1997 represented .50% of average loans outstanding during the year as compared to .44% for 1996 and .17% for 1995. At December 31, 1997, the allowance for loan losses was 1.56% of total loans outstanding as compared to an allowance for loan losses of 1.61% of total loans outstanding at December 31, 1996 and 1.84% of total loans outstanding at December 31, 1995. The allowance for loan losses increased $1,383,000 to $7,273,000 in 1996 from $5,890,000 in 1995. The addition of $1,211,000 to the allowance for loan losses upon acquisition of Southland Bank accounted for the major portion of the increase in the allowance. The determination of the allowance rests upon management's judgment about factors affecting loan quality and assumptions about the local and national economy. Management considers the year-end allowance for loan losses adequate to cover potential losses in the consolidated loan portfolio. Although management believes that the consolidated allowance for loan losses was adequate to cover losses in the consolidated loan portfolio at December 31, 1997, economic conditions have developed in the first quarter of 1998 that will require additions of $850,000 to $1,300,000 to the allowance for loan losses to cover possible losses associated with certain loans. Management is carefully monitoring the economic conditions, the collateral associated with selected loans and the ability of the customers to repay specific loans in accordance with the negotiated loan agreements. The additions to the allowance for loan losses required to cover potential losses will be recorded on the books of the related subsidiary banks in the first quarter of 1998. 27
Average total assets increased $86,204,000 or 14.61% to $676,581,000 in 1997 as compared to $590,377,000 in 1996. The increase in average total assets was accompanied by an increase in average deposits of $73,336,000 or 14.59%. Average total assets increased $113,588,000 or 23.82% to $590,377,000 in 1996 as compared to $476,789,000 in 1995. Average total assets of Southland Bank accounted for $66,295,000 or approximately 58% of the increase in average total assets. The increase in average total assets was accompanied by an increase in average total deposits of $89,008,000 or 21.52% to $502,643,000 in 1996 from $413,635,000 in 1995. Average total deposits of Southland Bank accounted for $49,406,000 or approximately 56% of the increase in average total deposits ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed only to U.S. Dollar interest rate changes and, accordingly, the Company manages exposure by considering possible changes in net interest margin. The Company does not have any trading instruments, nor does it classify any portion of its investment portfolio as held for trading. The Company does not engage in any hedging activities or invest in any derivative instruments with a higher degree of risk than mortgage backed securities, which are commonly pass through securities. Finally, the Company has no exposure to foreign currency exchange rate risk, commodity price risk or other market risks. Interest rates play a major part in the net interest income of a financial institution. The sensitivity to interest 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. As part of the Company's asset/liability management program, the timing of repriced assets and liabilities is referred to as Gap management. It is the policy of the Company to maintain a Gap ratio in the one-year time horizon of .80 to 1.20. As indicated by the Gap analysis included in this annual report, the Company is somewhat liability sensitive in relation to changes in market interest rates. Being liability sensitive would result in net interest income decreasing in a rising interest rate environment and increasing in a declining interest rate environment. See "Asset/Liability Management" included in SELECTED STATISTICAL INFORMATION OF ABC BANCORP. The Company uses simulation analysis to monitor changes in net interest income due to changes in market interest rates. The simulation of rising, declining and flat interest rate scenarios allow management to monitor and adjust interest rate sensitivity to minimize the impact of market interest rate swings. The analysis of the impact on net interest income over a twelve- month period is subjected to a gradual 200 basis point increase or decrease in market rates on net interest income and is monitored on a quarterly basis. The most recent simulation model projects that net interest income would increase 6.09% if interest rates rise gradually over the next year. On the other hand, the model projects that net interest income would decline by 6.19% if interest rates decline gradually over the next year. 28
SELECTED STATISTICAL INFORMATION OF ABC BANCORP The following statistical information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and the financial statements and related notes included elsewhere in this Annual Report and in the documents incorporated herein by reference. AVERAGE BALANCES AND NET INCOME ANALYSIS The following tables set forth the amount of the ABC's interest income or interest expense for each category of interest-earning assets and interest- bearing liabilities and the average interest rate for total interest-earning assets and total interest-bearing liabilities, net interest spread and net yield on average interest-earning assets. Federally tax-exempt income is presented on a taxable-equivalent basis assuming a 34% Federal tax rate. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------- ------------------------------- ----------------------------------- INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE PAID BALANCE EXPENSE RATE PAID BALANCE EXPENSE RATE PAID --------- --------- --------- ---------- --------- ---------- ----------- -------- ---------- (DOLLARS IN THOUSANDS) ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> ASSETS Interest-earning assets: Loans, net of unearned interest $ 475,047 $ 50,502 10.63% $ 395,822 $ 42,322 10.69% $ 308,405 $ 33,547 10.88 % Investment securities: Taxable 104,161 6,511 6.25 99,734 6,100 6.12 82,742 4,839 5.85 Nontaxable 22,872 1,826 7.98 20,559 1,553 7.55 15,377 1,410 9.17 Interest-bearing deposits in banks 3,964 232 5.85 - - - - - - Federal funds sold 3,456 199 5.76 22,726 1,139 5.01 27,928 1,634 5.85 ---------- --------- ---------- --------- ---------- --------- Total interest-earning assets 609,500 59,270 9.72 538,841 51,114 9.49 434,452 41,430 9.54 ---------- --------- ---------- --------- ---------- --------- Noninterest-earning assets: Cash 28,620 25,336 21,355 Allowance for loan losses (7,458) (6,776) (5,650) Unrealized gain (loss) on available for sale securities (121) (338) (194) Other assets 46,040 33,314 26,826 ---------- ---------- ---------- Total noninterest-earning assets 67,081 51,536 42,337 ---------- ---------- ---------- Total assets $ 676,581 $ 590,377 $ 476,789 ========== ========== ========== </TABLE> 29
AVERAGE BALANCES AND NET INCOME ANALYSIS (CONTINUED) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------- 1997 1996 -------------------------------------- ------------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE PAID BALANCE EXPENSE RATE PAID --------- -------- --------- --------- -------- ---------- (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Savings and interest-bearing demand deposits $ 166,877 $ 5,089 3.05 % $ 149,503 $ 4,558 3.05% Time deposits 330,621 19,139 5.79 283,054 16,377 5.79 Other short-term borrowings 2,804 154 5.49 5,713 221 3.87 Other borrowings 25,080 1,568 6.25 19,113 1,168 6.11 ------------ ----------- ---------- ----------- Total interest-bearing liabilities 525,382 25,950 4.94 457,383 22,324 4.88 ------------ ----------- ---------- ----------- Noninterest-bearing liabilities and stockholders' equity: Demand deposits 78,481 70,086 Other liabilities 7,118 4,168 Stockholders' equity 65,600 58,740 ------------ ---------- Total noninterest-bearing liabilities and stockholders' equity 151,199 132,994 ------------ ---------- Total liabilities and stockholders' equity $ 676,581 $ 590,377 ============ ========== Interest rate spread 4.78 % 4.61% ========== ========== Net interest income $ 33,320 $ 28,790 =========== ========== Net interest margin 5.47 % 5.34% ========== ========== </TABLE> 30
<TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------------- 1995 ---------------------------------- INTEREST AVERAGE AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE PAID -------- -------- ------- (DOLLARS IN THOUSANDS) ---------------------------------- <S> <C> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Savings and interest-bearing demand deposits $ 124,638 $ 3,843 3.08% Time deposits 226,688 12,912 5.70 Other short-term borrowings 5,560 301 5.41 Other borrowings 4,332 311 7.18 ---------- ----------- Total interest-bearing liabilities 361,218 17,367 4.81 ---------- ----------- Noninterest-bearing liabilities and stockholders' equity: Demand deposits 62,309 Other liabilities 4,321 Stockholders' equity 48,941 ---------- Total noninterest-bearing liabilities and stockholders' equity 115,571 ---------- Total liabilities and stockholders' equity $ 476,789 ========== Interest rate spread 4.73% ======== Net interest income $ 24,063 =========== Net interest margin 5.54% ======== </TABLE> RATE AND VOLUME ANALYSIS The following table reflects the changes in net interest income resulting from changes in interest rates and from asset and liability volume. Federally tax-exempt interest is presented on a taxable-equivalent basis assuming a 34% Federal tax rate. The change in interest attributable to rate has been determined by applying the change in rate between years to average balances outstanding in the later year. 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 between years. Thus, changes that are not solely due to volume have been consistently attributed to rate. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 1997 VS. 1996 1996 VS. 1995 --------------------------------------------------------------------------- INCREASE CHANGES DUE TO INCREASE CHANGES DUE TO --------------------- --------------------- (DECREASE) RATE VOLUME (DECREASE) RATE VOLUME ------------- -------- ---------- ----------- --------- --------- (DOLLARS IN THOUSANDS) --------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Increase (decrease) in: Income from earning assets: Interest and fees on loans $ 8,180 $ (291) $ 8,471 $ 8,775 $ (734) $ 9,509 Interest on securities: Taxable 411 140 271 1,261 267 994 Nontaxable 273 98 175 143 (332) 475 Interest-bearing deposits in banks 232 - 232 - - - Interest on Federal funds (940) 26 (966) (495) (191) (304) -------- ------- --------- -------- ------- --------- Total interest income 8,156 (27) 8,183 9,684 (990) 10,674 -------- ------- --------- -------- ------- --------- Expense from interest-bearing liabilities: Interest on savings and interest- bearing demand deposits 531 1 530 715 (52) 767 Interest on time deposits 2,762 10 2,752 3,465 254 3,211 Interest on short-term borrowings (67) 46 (113) (80) (88) 8 Interest on other borrowings 400 35 365 857 (204) 1,061 -------- ------- --------- -------- ------- --------- Total interest expense 3,626 92 3,534 4,957 (90) 5,047 -------- ------- --------- -------- ------- --------- Net interest income $ 4,530 $ (119) $ 4,649 $ 4,727 $ (900) $ 5,627 ======== ======= ========= ======== ======= ========= </TABLE> NONINTEREST INCOME The most significant increase in noninterest income were increases in service charges on deposit accounts and other income. The increase in service charges on deposit accounts resulted from on increase in average deposits of $73,336,000, of which $47,862,000 was attributable to the average deposits of Southland Bank and $12,562,000 was attributable to the average deposits of the Douglas branch of Security Bank. The increase in service charges on deposit accounts of $903,000 (23.64%), in 1996 over 1995 resulted from an increase in average deposits of $89,008,000, of which $49,406,000 was attributable to the average deposits of Southland Bank. Total other income increased $443,000 in 1997 over 1996, of which $270,000 was attributable to the Company starting a mortgage origination function and $127,000 was attributable to the sale of servicing rights in one of the subsidiary banks. Total other income increased $647,000 in 1996 over 1995, of which $505,000 was attributable to other income of Southland Bank. 31
NONINTEREST INCOME (CONTINUED) Following is a comparison of noninterest income for 1997, 1996 and 1995. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1997 1996 1995 ----------------- ----------------- ----------------- (DOLLARS IN THOUSANDS) ------------------------------------------------------------ <S> <C> <C> <C> Service charges on deposit accounts $ 5,509 $ 4,722 $ 3,819 Other service charges, commissions and fees 474 500 422 Other income 1,753 1,310 663 ----------------- ----------------- ----------------- $ 7,736 $ 6,532 $ 4,904 ================= ================= ================= </TABLE> NONINTEREST EXPENSE Salaries and employee benefits increased $2,388,000 or 21.03% in 1997 over 1996, of which $875,000 was attributable to Southland Bank and $226,000 was attributable to the acquisition of the Douglas branch of Security Bank. The remaining increase in salaries and employee benefits resulted from normal increases in salaries and bonuses and the addition of several employees by the parent company, including three senior executives. Equipment and occupancy expense increased $795,000 or 25.13% in 1997 over 1996, of which $311,000 was attributable to Southland Bank and $50,000 was attributable to the Douglas branch of Security Bank. The remaining increase was due to normal expansion within its banking subsidiaries. Amortization of intangible assets increased $257,000 in 1997 over 1996. The entire amount of the increase resulted from the amortization of the excess of purchase price over net book value of assets acquired upon the acquisitions of Southland Bank and the Douglas branch which were accounted for as purchase transactions. Merger and acquisition expense of $406,000 in 1997 resulted from the acquisition of one financial institutions and one branch acquisition during 1997. All other noninterest expense increased $1,123,000 in 1997 over 1996, of which $770,000 was attributable to Southland Bank and $74,000 was attributable to Douglas. Salaries and employee benefits increased $2,154,000 or 23.41% in 1996 over 1995, of which $1,202,000 was attributable to Southland Bank. The remaining increase in salaries and employee benefits resulted from normal increases in salaries and bonuses and the addition of several employees by the parent company, including three senior executives. Equipment and occupancy expense increased $500,000 or 18.78% in 1996 over 1995, of which $366,000 was attributable to Southland Bank. Amortization of intangible assets increased $177,000 in 1996 over 1995. The entire amount of the increase resulted from the amortization of the excess of purchase price over net book value of assets acquired upon the acquisition of Southland Bank which was accounted for as a purchase transaction. Merger and acquisition expense of $708,000 in 1996 resulted from the acquisition of four financial institutions during 1996. Stationery and supplies expense increased $225,000 in 1996 over 1995, of which $81,000 was attributable to Southland Bank. Also contributing to the increase in stationery and supplies expense was the implementation of an innovative system for rendering customer account statements known as an "image item processing system". All other noninterest expense increased $987,000 in 1996 over 1995, of which $526,000 was attributable to Southland Bank. Following is an analysis of noninterest expense for 1997, 1996 and 1995. 32
NONINTEREST EXPENSE (CONTINUED) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1997 1996 1995 ----------------- ----------------- ----------------- (DOLLARS IN THOUSANDS) ------------------------------------------------------------ <S> <C> <C> <C> Salaries and employee benefits $ 13,742 $ 11,354 $ 9,200 Equipment and occupancy 3,958 3,163 2,663 Merger and acquisition expense 406 708 - Amortization of intangible assets 744 487 310 Data processing fees 528 586 551 Directors fees 555 562 530 FDIC premiums 111 378 528 Stationery and supplies expense 560 616 391 Other expense 6,535 5,024 3,954 ----------------- ----------------- ----------------- $ 27,139 $ 22,878 $ 18,127 ================= ================= ================= </TABLE> ASSET/LIABILITY MANAGEMENT A principal objective of ABC's asset/liability management strategy is to minimize its exposure to changes in interest rates by matching the maturity and repricing horizons of interest-earning assets and interest-bearing liabilities. This strategy is overseen in part through the direction of ABC's Asset and Liability Committee (the "ALCO Committee") which establishes policies and monitors results to control interest rate sensitivity. As part of ABC's interest rate risk management policy, the ALCO Committee examines the extent to which its assets and liabilities are "interest rate- sensitive" and monitors its interest rate-sensitivity "gap". An asset or liability is considered to be interest rate sensitive if it will reprice or mature within the time period analyzed, usually one year or less. The interest rate-sensitivity gap is the difference between the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within such time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the interest rate-sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If ABC's assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal. 33
ASSET/LIABILITY MANAGEMENT (CONTINUED) A simple interest rate "gap" analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates. Accordingly, the ALCO Committee also evaluates how the repayment of particular assets and liabilities is impacted by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may not react identically to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market interest rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as "interest rate caps") which limit changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the interest-rate gap. The ability of many borrowers to service their debts also may decrease in the event of an interest-rate increase. The following table sets forth the distribution of the repricing of ABC's earning assets and interest-bearing liabilities as of December 31, 1997, the interest rate sensitivity gap (i.e., interest rate sensitive assets divided by interest rate sensitivity liabilities), the cumulative interest rate sensitivity gap ratio (i.e., interest rate sensitive assets divided by interest rate sensitive liabilities) and the cumulative sensitivity gap ratio. The table also sets forth the time periods in which earning assets and liabilities will mature or may reprice in accordance with their contractual terms. However, the table does not necessarily indicate the impact of general interest rate movements on the net interest margin since the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of ABC's customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times within such period and at different rates. 34
<TABLE> <CAPTION> AT DECEMBER 31, 1997 ----------------------------------------------------------------------- MATURING OR REPRICING WITHIN ----------------------------------------------------------------------- ZERO TO THREE THREE MONTHS TO ONE TO OVER MONTHS ONE YEAR THREE YEARS THREE YEARS TOTAL ------------- ------------ ------------- ------------- ---------- (DOLLARS IN THOUSANDS) ----------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> EARNING ASSETS: Interest-bearing deposits in banks $ 2,288 $ - $ - $ - $ 2,288 Federal funds sold 890 - - - 890 Investment securities 8,730 19,729 31,280 63,480 123,219 Loans 218,770 55,496 96,530 119,448 490,244 ------------- ------------ ------------- ------------- ---------- 230,678 75,225 127,810 182,928 616,641 ------------- ------------ ------------- ------------- ---------- INTEREST-BEARING LIABILITIES: Interest-bearing demand deposits/(1)/ - 40,830 87,464 - 128,294 Savings/(1)/ - - 46,715 - 46,715 Certificates less than $100,000 75,826 130,006 36,825 6,999 249,656 Certificates, $100,000 and over 28,958 42,852 11,965 2,162 85,937 Other short-term borrowings 660 - - - 660 Other borrowings 15,000 - - 400 15,400 ------------- ------------ ------------- ------------- ---------- 120,444 213,688 182,969 9,561 526,662 ------------- ------------ ------------- ------------- ---------- INTEREST RATE SENSITIVITY GAP $ 110,234 $ (138,463) $ (55,159) $ 173,367 $ 89,979 ============= ============ ============= ============= ========== CUMULATIVE INTEREST RATE SENSITIVITY GAP $ 110,234 $ (28,229) $ (83,388) $ 89,979 ============= ============ ============= =========== INTEREST RATE SENSITIVITY GAP RATIO 1.92 0.35 0.70 19.13 ============= ============ ============= =========== CUMULATIVE INTEREST RATE SENSITIVITY GAP RATIO 1.92 0.92 0.84 1.17 ============= ============ ============= =========== </TABLE> /(1)/ The Company has found that NOW checking accounts and savings deposits are generally not sensitive to changes in interest rates and, therefore, it has placed such liabilities in the "One to Three Years" category. It has also found that the money-market checking deposits reprice between three months to one year, on the average. 35
INVESTMENT PORTFOLIO The Company manages the mix of asset and liability maturities in an effort to control the effects of changes in the general level of interest rates on net interest income. See "--Asset/Liability Management." Except for its effect on the general level of interest rates, inflation does not have a material impact on the Company due to the rate variability and short-term maturities of its earning assets. In particular, approximately 56% of the loan portfolio is comprised of loans which mature or reprice within one year or less. Mortgage loans, primarily with five to fifteen year maturities, are also made on a variable rate basis with rates being adjusted every one to five years. Additionally, 23% of the investment portfolio matures within one year. TYPES OF INVESTMENTS The amortized cost and fair value of investments in securities at December 31, 1997 and 1996 were as follows: <TABLE> <CAPTION> GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS) -------------------------------------------------------------- <S> <C> <C> <C> <C> SECURITIES AVAILABLE FOR SALE DECEMBER 31, 1997: U. S. GOVERNMENT AND AGENCY SECURITIES $ 79,636 $ 287 $ (101) $ 79,822 MORTGAGE-BACKED SECURITIES 6,984 120 (19) 7,085 STATE AND MUNICIPAL SECURITIES 5,660 174 - 5,834 OTHER SECURITIES 525 - (67) 458 ------------- ------------- ------------- ------------- $ 92,805 $ 581 $ (187) $ 93,199 ============= ============= ============= ============= December 31, 1996: U. S. Government and agency securities $ 84,744 $ 251 $ (468) $ 84,527 Mortgage-backed securities 12,555 135 (52) 12,638 State and municipal securities 5,529 127 - 5,656 Other securities 525 - (70) 455 ------------- ------------- ------------- ------------- $ 103,353 $ 513 $ (590) $ 103,276 ============= ============= ============= ============= SECURITIES HELD TO MATURITY DECEMBER 31, 1997: U. S. GOVERNMENT AND AGENCY SECURITIES $ 8,995 $ 1 $ (10) $ 8,986 MORTGAGE-BACKED SECURITIES 2,951 27 (10) 2,968 STATE AND MUNICIPAL SECURITIES 18,074 557 (8) 18,623 ------------- ------------- ------------- ------------- $ 30,020 $ 585 $ (28) $ 30,577 ============= ============= ============= ============= December 31, 1996: U. S. Government and agency securities $ 11,238 $ - $ (200) $ 11,038 Mortgage-backed securities 4,326 27 (44) 4,309 State and municipal securities 16,426 493 (28) 16,891 ------------- ------------- ------------- ------------- $ 31,990 $ 520 $ (272) $ 32,238 ============= ============= ============= ============= </TABLE> 36
MATURITIES The amounts of investments in securities in each category as of December 31, 1997 are shown in the following table according to contractual maturity classifications (1) one year or less, (2) after one year through five years, (3) after five years through ten years, and (4) after ten years. <TABLE> <CAPTION> U. S. TREASURY AND OTHER U. S. GOVERNMENT AGENCIES STATE AND AND CORPORATIONS POLITICAL SUBDIVISIONS YIELD YIELD AMOUNT (1) AMOUNT (1) (2) --------------- -------------- --------------- --------- (DOLLARS IN THOUSANDS) -------------------------------------------------------------- <S> <C> <C> <C> <C> MATURITY: One year or less $ 24,867 5.83% $ 2,715 8.77% After one year through five years 64,946 6.29 9,192 7.25 After five years through ten years 9,392 6.46 9,462 7.58 After ten years 106 6.04 2,539 7.37 --------------- -------------- --------------- --------- $ 99,311 6.19% $ 23,908 7.57% =============== ============== =============== ========= </TABLE> (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 taxable-equivalent basis, using a tax rate of 34%. 37
LOAN PORTFOLIO TYPES OF LOANS Management believes that the Company's loan portfolio is adequately diversified. The loan portfolio contains no foreign or energy-related loans or significant concentrations in any one industry, with the exception of residential and commercial real estate mortgages, which constituted approximately 48% of the Company's loan portfolio as of December 31, 1997. The amount of loans outstanding at the indicated dates is shown in the following table according to type of loans. <TABLE> <CAPTION> DECEMBER 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ------------ ------------- ------------ ---------- (DOLLARS IN THOUSANDS) -------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Commercial and financial $ 72,171 $ 69,772 $ 48,031 $ 40,185 $ 32,784 Agricultural 41,882 35,525 22,716 24,304 15,667 Real estate - construction 13,117 13,612 3,756 3,886 6,143 Real estate - mortgage, farmland 55,245 52,978 48,411 42,458 36,687 Real estate - mortgage, commercial 108,339 89,708 61,806 50,461 39,772 Real estate - mortgage, residential 127,767 121,448 74,671 69,129 65,918 Consumer instalment loans 68,959 67,572 58,615 53,419 47,048 Other 2,764 2,229 1,465 1,733 2,461 ------------ ------------ ---------- ---------- ---------- 490,244 452,844 319,471 285,575 246,480 Less reserve for possible loan losses 7,627 7,273 5,890 5,168 4,889 ----------- ------------ ---------- ---------- ---------- Loans, net $ 482,617 $ 445,571 $ 313,581 $ 280,407 $ 241,591 ============ ============ ========== ========== ========== </TABLE> MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES Total loans as of December 31, 1997 are shown in the following table according to maturity or repricing opportunities (1) one year or less, (2) after one year through three years, and (3) after three years. <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) ----------------- <S> <C> MATURITY OR REPRICING WITHIN: One year or less $ 274,266 After one year through three years 96,530 After three years 119,448 ----------------- $ 490,244 ================= </TABLE> 38
The following table summarizes loans at December 31, 1997 with the due dates after one year which (1) have predetermined interest rates and (2) have floating or adjustable interest rates. <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) ----------------- <S> <C> Predetermined interest rates $ 213,385 Floating or adjustable interest rates 1,593 ----------------- $ 214,978 ================= </TABLE> Records were not available to present the above information in each category listed in the first paragraph above and could not be reconstructed without undue burden. NONPERFORMING LOANS A loan is placed on nonaccrual status when, in management's judgment, the collection of the interest income appears doubtful. Interest receivable that has been accrued in prior years and is subsequently determined to have doubtful collectibility is charged to the allowance for possible loan losses. Interest on loans that are classified as nonaccrual is recognized when received. Past due loans are loans whose principal or interest is past due 90 days or more. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the original contractual terms. <TABLE> <CAPTION> DECEMBER 31, ----------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- --------- --------- ---------- -------- (DOLLARS IN THOUSANDS) ----------------------------------------------------------- <S> <C> <C> <C> <C> <C> Loans accounted for on a nonaccrual basis $ 10,101 $ 4,977 $ 2,271 $ 3,518 $ 3,260 Instalment loans and term loans contractually 59 397 457 274 513 past due ninety days or more as to interest or principal payments and still accruing Loans, the terms of which have been renegotiated - - - 358 - to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower Loans now current about which there are serious - - - - - doubts as to the ability of the borrower to comply with present loan repayment terms </TABLE> In the opinion of management, any loans classified by regulatory authorities as doubtful, substandard or special mention that have not been disclosed above do not (i) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. Any loans classified by regulatory authorities as loss have been charged off. 39
SUMMARY OF LOAN LOSS EXPERIENCE The provision for possible loan losses is created by direct charges to operations. Losses on loans are charged against the allowance in the period in which such loans, in management's opinion, become uncollectible. Recoveries during the period are credited to this allowance. The factors that influence management's judgment in determining the amount charged to operating expense are past loan experience, composition of the loan portfolio, evaluation of possible future losses, current economic conditions and other relevant factors. The Company's allowance for loan losses was approximately $7,627,000 at December 31, 1997, representing 1.56% of year end total loans outstanding, compared with $7,273,000 at December 31, 1996, which represented 1.61% of year end total loans outstanding. The allowance for loan losses is reviewed quarterly based on management's evaluation of current risk characteristics of the loan portfolio, as well as the impact of prevailing and expected economic business conditions. Management considers the allowance for loan losses adequate to cover possible loan losses on the loans outstanding. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The following table sets forth the breakdown of the allowance for loan losses by loan category for the periods indicated. Management believes the allowance can be allocated only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any other category. <TABLE> <CAPTION> AT DECEMBER 31, ------------------------------------------------------------------------------------------ 1997 1996 1995 ---------------------------- ----------------------------- -------------------------- PERCENT OF PERCENT OF PERCENT OF LOANS IN LOANS IN LOANS IN CATEGORY CATEGORY CATEGORY TO TOTAL TO TOTAL TO TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ----------- ------------ ------------- -------------- ------------ ----------- (DOLLARS IN THOUSANDS) ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Commercial, financial, industrial and agricultural $ 1,792 23 % $ 1,661 23% $ 1,364 22% Real estate 3,274 62 2,928 62 2,032 59 Consumer 1,112 15 1,446 15 1,206 19 Unallocated 1,449 - 1,238 - 1,288 - ------------ ------------- ----------- -------------- ------------ ----------- $ 7,627 100 % $ 7,273 100% $ 5,890 100% ============ ============= =========== ============== ============ =========== </TABLE> 40
The following table presents an analysis of the Company's loan loss experience for the periods indicated: <TABLE> <CAPTION> DECEMBER 31, ------------------------------------------------------------------------ 1997 1996 1995 1994 1993 -------------- ----------- ----------- ------------ ---------- (DOLLARS IN THOUSANDS) ------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Average amount of loans outstanding $ 475,047 $ 395,822 $ 308,405 $ 271,970 $ 243,607 ============== =========== =========== =========== ========== Balance of reserve for possible loan losses at beginning of period $ 7,273 $ 5,890 $ 5,169 $ 4,889 $ 5,075 -------------- ----------- ----------- ----------- ---------- Charge-offs: Commercial, financial and agricultural (759) (768) (309) (479) (573) Real estate (1,981) (1,242) (108) (338) (1,883) Consumer (383) (279) (573) (481) (518) Recoveries: Commercial, financial and agricultural 168 89 116 100 336 Real estate 512 275 128 265 556 Consumer 66 178 226 225 275 -------------- ------------ ----------- ----------- ---------- Net charge-offs (2,377) (1,747) (520) (708) (1,807) -------------- ------------ ----------- ----------- ---------- Additions to reserve charged to operating expenses 2,731 1,919 1,241 988 1,621 -------------- ------------ ----------- ----------- ---------- Allowance for loan losses of acquired subsidiary - 1,211 - - - -------------- ------------ ----------- ----------- ---------- Balance of reserve for possible loan losses $ 7,627 $ 7,273 $ 5,890 $ 5,169 $ 4,889 ============== ============ =========== =========== ========== Ratio of net loan charge-offs to average loans .50% .44% .17% .26% .74% ============== ============ =========== =========== ========== </TABLE> 41
DEPOSITS Average amount of deposits and average rate paid thereon, classified as to noninterest-bearing demand deposits, interest-bearing demand and savings deposits and time deposits, for the periods indicated are presented below. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- 1997 1996 ----------------------------------- ----------------------------------- AMOUNT RATE AMOUNT RATE ----------------- --------------- ----------------- --------------- (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------- <S> <C> <C> <C> <C> Noninterest-bearing demand deposits $ 78,481 -% $ 70,086 -% Interest-bearing demand and savings deposits 166,877 3.05 149,503 3.05 Time deposits 330,621 5.79 283,054 5.79 ----------------- ----------------- Total deposits $ 575,979 $ 502,643 ================= ================= </TABLE> ABC has a large, stable base of time deposits with little or no dependence on volatile deposits of $100,000 or more. The time deposits are principally certificates of deposit and individual retirement accounts obtained for individual customers. The amounts of time certificates of deposit issued in amounts of $100,000 or more as of December 31, 1997, are shown below by category, which is based on time remaining until maturity of (1) three months or less, (2) over three through twelve months and (3) over twelve months. <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) --------------- <S> <C> Three months or less $ 28,958 Over three through twelve months 42,852 Over twelve months 14,127 --------------- Total $ 85,937 =============== </TABLE> 42
RETURN ON ASSETS AND SHAREHOLDERS' EQUITY The following rate of return information for the periods indicated is presented below. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 1997 1996 1995 ------------------ ------------------- -------------- <S> <C> <C> <C> Return on assets (1) 1.10% 1.21% 1.34% Return on equity (2) 11.35 12.19 13.01 Dividends payout ratio (3) 36.89 31.68 29.47 Equity to assets ratio (4) 9.70 9.95 10.27 </TABLE> (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. LIQUIDITY AND CAPITAL RESOURCES Liquidity management involves the matching of the cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs, and the ability of ABC and the Subsidiary Banks to meet those needs. ABC and the Subsidiary Banks seek to meet liquidity requirements primarily through management of short-term investments (principally Federal funds sold) and monthly amortizing loans. Another source of liquidity is the repayment of maturing single payment loans. In addition, the Subsidiary Banks maintain relationships with correspondent banks which could provide funds to them on short notice, if needed. The liquidity and capital resources of ABC and the Subsidiary Banks are monitored on a periodic basis by state and Federal regulatory authorities. At December 31, 1997, the Subsidiary Banks' short-term investments were adequate to cover any reasonable anticipated immediate need for funds. During 1997, ABC increased its capital $110,000 by the exercise of options by shareholders of pooled subsidiaries prior to merger. It also increased its capital by retaining net earnings of $4,781,000 after payment of dividends. After recording an increase in capital of $299,000 for unrealized gains on securities available for sale, net of taxes, total capital increased $5,183,000 during 1997. At December 31, 1997, total capital of ABC amounted to $68,153,000. ABC and the Subsidiary Banks are aware of no events or trends likely to result in a material change in their liquidity. 43
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) At December 31, 1997, ABC had no binding commitments for capital expenditures. However, management estimates that approximately $600,000 will be required for completion of banking facilities in 1998. In accordance with risk capital guidelines issued by the Federal Reserve Board, ABC is required to maintain a minimum standard of total capital to weighted risk assets of 8%. Additionally, all member banks must maintain "core" or "Tier 1" capital of at least 4% of total assets ("leverage ratio"). Member banks operating at or near the 4% capital level are expected to have well-diversified risks, including no undue interest rate risk exposure, excellent control systems, good earnings, high asset quality, and well managed on- and off-balance sheet activities; and, in general, be considered strong banking organizations with a composite 1 rating under the CAMEL rating system of banks. For all but the most highly rated banks meeting the above conditions, the minimum leverage ratio is to be 4% plus an additional 100 to 200 basis points. The following table summarizes the regulatory capital levels of the Company at December 31, 1997. <TABLE> <CAPTION> ACTUAL REQUIRED EXCESS ------------------------------- --------------------------------- ----------------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------------- --------------- -------------- ---------------- ----------------------------- (DOLLARS IN THOUSANDS) ------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Leverage capital $ 58,137 8.60% $ 27,039 4.00% $ 31,098 4.60% Risk-based capital: Core capital 58,137 12.07 19,267 4.00 38,870 8.07 Total capital 64,178 13.32 38,534 8.00 25,644 5.32 </TABLE> Each Bank also met its individual regulatory capital requirements at December 31, 1997. YEAR 2000 ISSUE COSTS Based on a preliminary study by management of ABC, ABC expects to incur approximately $500,000, of which $300,000 has been budgeted for 1998 and $200,000 for 1999, to modify its information systems appropriately to accurately process information in the year 2000 and beyond. ABC continues to evaluate appropriate courses of corrective action, including replacement of certain systems whose associated costs would be recorded as assets and amortized. Management expects that the costs to convert ABC's information systems to year 2000 compliance will not have a material impact on ABC's consolidated financial statements. 44
COMMITMENTS AND LINES OF CREDIT In the ordinary course of business, the Banks have granted commitments to extend credit to approved customers. Generally, these commitments to extend credit have been granted on a temporary basis for seasonal or inventory requirements and have been approved by the Banks' Board of Directors. The Banks have also granted commitments to approved customers for standby letters of credit. These commitments are recorded in the financial statements when funds are disbursed or the financial instruments become payable. The Banks use the same credit policies for these off balance sheet commitments as they do for financial instruments that are recorded in the consolidated financial statements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitment amounts expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Following is a summary of the commitments outstanding at December 31, 1997 and 1996. <TABLE> <CAPTION> 1997 1996 --------------- --------------- (DOLLARS IN THOUSANDS) ---------------------------------- <S> <C> <C> Commitments to extend credit $ 81,682 $ 64,904 Credit card commitments 7,153 3,077 Standby letters of credit 1,584 1,436 --------------- --------------- $ 90,419 $ 69,417 =============== =============== </TABLE> IMPACT OF INFLATION The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with generally accepted accounting principles and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. 45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the Company and its subsidiaries are included on pages F-1 through F-42 of this Annual Report on Form 10-K: Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Income - Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements. ITEM 9. DISAGREEMENT ON ACCOUNTING AND FINANCIAL DISCLOSURE During 1997 and 1996, the Company did not change its accountants and there was no disagreement on any matter of accounting principles or practices for financial statement disclosure that would have required the filing of a current report on Form 8-K. 46
PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The information required by this Item is incorporated by reference to the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report ("ABC's Proxy Statement"). Information concerning the Company's executive officers is included in Item 4.5 of Part I of this Annual Report. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to ABC's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to ABC's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to ABC's Proxy Statement. 47
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial statements: (a) ABC Bancorp and Subsidiaries: (i) Consolidated Balance Sheets - December 31, 1997 and 1996 (ii) Consolidated Statements of Income - Years ended December 31, 1997, 1996 and 1995 (iii) Consolidated Statements of Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995 (iv) Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 (v) Notes to Consolidated Financial Statements (b) ABC Bancorp (Parent Company Only): Parent Company only financial information has been included in Note 16 of Notes to Consolidated financial statements. 2. Financial statement schedules: All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. 48
3. Exhibits required by Item 601 of Regulation S-K: EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ------------- ------------------------------------------------------ 3.1 Articles of Incorporation of ABC, as amended (incorporated by reference to Exhibit 2.1 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630) filed August 14, 1987). 3.2 Amendment to Amended Articles of Incorporation dated May 26, 1995 (incorporated by reference to Exhibit 3.1.1 to ABC's Form 10-K filed March 28, 1996). 3.3 Amendment to Amended Articles of Incorporation (filed as Exhibit 4.3 to ABC's Registration on Form S-4 (Registration No. 333-08301), filed with the Commission on July 17, 1996 and incorporated herein by reference). 3.4 Bylaws of ABC, as amended (incorporated by reference to Exhibit 2.2 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630) filed August 14, 1987. 3.5 Form of Articles of Amendment to the Articles of Incorporation, filed herewith electronically. 3.6 Form of Amendment to Bylaws, filed herewith electronically. 10.1 1985 Incentive Stock Option Plan (filed as Exhibit 5.1 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630), filed with the Commission on August 14, 1987 and incorporated herein by reference). 10.2 Incentive Stock Option Agreement with Kenneth J. Hunnicutt dated October 17, 1985 (filed as Exhibit 5.2 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630), filed with the Commission on August 14, 1987 and incorporated herein by reference). 10.3 Deferred Compensation Agreement for Kenneth J. Hunnicutt dated December 16, 1986 (filed as Exhibit 5.3 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630), filed with the Commission on August 14, 1987 and incorporated herein by reference). 10.4 Security Deed in favor of M.I.A., Co. dated December 31, 1984 (filed as Exhibit 5.4 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630), filed with the Commission on August 14, 1987 and incorporated herein by reference). 10.5 Loan Agreement and Master Term Note dated December 30, 1986 (filed as Exhibit 5.5 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630), filed with the Commission on August 14, 1987 and incorporated herein by reference). 10.6 Executive Salary Continuation Agreement dated February 14, 1984 (filed as Exhibit 10.6 to ABC's Annual Report on Form 10-KSB (File Number 2-71257), filed herewith with the Commission on March 27, 1989 and incorporated herein by reference. 49
EXHIBIT NO DESCRIPTION ------------- ------------------------------------------------------ 10.7 1992 Incentive Stock Option Plan and Option Agreement for K. J. Hunnicutt (filed as Exhibit 10.7 to ABC's Annual Report on Form 10-KSB (File Number 0- 16181), filed with the Commission on March 30, 1993 and incorporated herein by reference). 10.8 Executive Employment Agreement with Kenneth J. Hunnicutt dated September 20, 1994 (filed as Exhibit 10.8 to ABC's Annual Report on Form 10-KSB (File Number 0-016181), filed with the Commission on March 30, 1995 and incorporated herein by reference). 10.9 Executive Consulting Agreement with Eugene M. Vereen dated September 20, 1994 (filed as Exhibit 10.9 to ABC's Annual Report on Form 10-KSB (File Number 0- 016181), filed with the Commission on March 30, 1995 and incorporated herein by reference). 10.10 Agreement and Plan of Merger by and between ABC and Southland Bancorporation dated as of December 18, 1995 (filed as Exhibit 10.10 to ABC's Annual Report on Form 10-K (File No. 0-16181), filed with the Commission on March 28, 1996 and incorporated herein by reference), and Amendment No. 1 thereto dated as of April 16,1996 (filed as part of Appendix A to Amendment No. 1 to ABC's Registration on Form S-4 (Registration No. 333- 2387), filed with the Commission on May 21, 1996 and incorporated herein by reference). 10.11 Agreement and Plan of Merger by and between ABC and Central Bankshares, Inc., dated as of December 29, 1995 (filed as Exhibit 10.11 to ABC's Annual Report on Form 10-K (File No. 0-16181), filed with the Commission on March 28, 1996 and incorporated herein by reference), and Amendment No. 1 thereto dated as April 26, 1996 (filed as part of Appendix A to ABC's Registration on Form S-4 (Registration No. 333-05861), filed with the Commission on June 12, 1996 and incorporated herein by reference). 10.12 Agreement and Plan of Merger by and between ABC and First National Financial Corporation dated as of April 15, 1996 (filed as Exhibit 10.12 to Amendment No. 1 to ABC's Registration on Form S-4 (Registration No. 333- 2387), filed with the Commission on May 21, 1996 and incorporated herein by reference). 10.13 Agreement and Plan of Merger by and between ABC and M & F Financial Corporation dated as of September 12, 1996 (filed as Appendix A to ABC's Registration on Form S-4 (Registration No. 333-14649), filed with the Commission on October 23, 1996 and incorporated herein by reference). 10.15 Form of Purchase and Assumption Agreement by and between NationsBank, N.A. (South) and ABC Bancorp dated as of February 26, 1997 and filed herewith electronically. 50
EXHIBIT NO DESCRIPTION ------------ ------------------------------------------------------ 10.16 Form of Agreement and Plan of Merger by and between ABC Bancorp and Irwin Bankcorp, Inc. dated as of May 15, 1997, filed herewith electronically. 10.17 Form of Omnibus Stock Ownership and Long-term Incentive Plan, filed herewith electronically. 10.18 Form of Rights Agreement between ABC Bancorp and SunTrust Bank dated as of February 17, 1998, filed herewith electronically. 21.1 Schedule of subsidiaries of ABC Bancorp. 24.1 Power of Attorney relating to this Form 10-K is set forth on the signature pages of this Form 10-K. 27 Financial Data Schedule. (b) No Current Reports on Form 8-K have been filed during the quarterly period ended December 31, 1997. (c) See Item 14(a). (d) See Item 14(a). 51
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. <TABLE> <CAPTION> ABC BANCORP <S> <C> Date: 3/17/98 By: /s/ Kenneth J. Hunnicutt -------------------------- __________________________________________________________________________________ Kenneth J. Hunnicutt, President, Chief Executive Officer and Director Date: 3/17/98 By: /s/ W. Edwin Lane, Jr. -------------------------- __________________________________________________________________________________ W. Edwin Lane, Jr., Executive Vice President and Chief Financial Officer </TABLE> POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kenneth J. Hunnicutt as his attorney-in- fact, acting with full power of substitution for him in his name, place and stead, in any and all capacities, to sign any amendments to this Form 10-K and to file the same, with exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission and hereby ratifies and confirms all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue thereof. Pursuant to the requirements of the Exchange Act, this Form 10-K has been signed by the following persons in the capacities and on the dates indicated. <TABLE> <S> <C> Date: 3/17/98 /s/ Kenneth J. Hunnicutt ----------------------- ------------------------------------------------------------------------ Kenneth J. Hunnicutt, President, Chief Executive Officer and Director Date: 3/17/98 /s/ W. Edwin Lane, Jr. ----------------------- ------------------------------------------------------------------------ W. Edwin Lane, Jr., Executive Vice President and Chief Financial Officer Date: 3/17/98 /s/ Johnny W. Floyd ----------------------- ------------------------------------------------------------------------ Johnny W. Floyd, Director Date: 3/17/98 /s/ J. Raymond Fulp ----------------------- ------------------------------------------------------------------------ J. Raymond Fulp, Director Date: 3/17/98 /s/ Daniel B. Jeter ----------------------- ------------------------------------------------------------------------ Daniel B. Jeter, Director Date: /s/ /s/ Willard E. Lasseter ----------------------- ------------------------------------------------------------------------ Willard E. Lasseter, Director and Chairman of the Board </TABLE> 52
<TABLE> <S> <C> Date: 3/17/98 /s/ Bobby B. Lindsey ----------------------- -------------------------------------------- Bobby B. Lindsey, Director Date: 3/17/98 /s/ Hal L. Lynch ----------------------- -------------------------------------------- Hal L. Lynch, Director Date: 3/17/98 /s/ Eugene M. Vereen ----------------------- -------------------------------------------- Eugene M. Vereen, Jr., Director Date: 3/17/98 /s/ Dogle Weltzbarker ----------------------- -------------------------------------------- Doyle Weltzbarker, Director and Vice Chairman of the Board Date: 3/17/98 /s/ Henry Wortman ----------------------- -------------------------------------------- Henry Wortman, Director </TABLE> 53
ABC BANCORP INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Consolidated financial statements: Independent Auditor's Report Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Income - Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. F-1
INDEPENDENT AUDITOR'S REPORT ================================================================================ To the Board of Directors ABC BANCORP Moultrie, GEORGIA We have audited the accompanying consolidated balance sheets of ABC BANCORP AND SUBSIDIARIES as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of First National Financial Corporation and Irwin Bankcorp, Inc., which statements reflect total revenues of $4.6 million and $2.9 million, respectively, for the year ended December 31, 1995. These statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for First National Financial Corporation and Irwin Bankcorp, Inc. for the year ended December 31, 1995 is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based upon our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ABC Bancorp and Subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Mauldin or Jenkins, LLC Albany, Georgia January 23, 1998 F-2
ABC BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (Dollars in Thousands) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Assets 1997 1996 - ------ ---------- ----------- <S> <C> <C> Cash and due from banks $ 33,973 $ 42,901 Interest-bearing deposits in banks 2,288 - Federal funds sold 890 8,620 Securities available for sale, at fair value 93,199 103,276 Securities held to maturity, at cost (fair value $30,577 and $32,238) 30,020 31,990 Loans 490,244 452,844 Less allowance for loan losses 7,627 7,273 ---------- ----------- Loans, net 482,617 445,571 ---------- ----------- Premises and equipment, net 19,054 16,198 Excess of cost over net assets of banks acquired 9,291 7,239 Other assets 20,554 17,367 ---------- ----------- $ 691,886 $ 673,162 ========== =========== Liabilities and Stockholders' Equity - ------------------------------------ Deposits Noninterest-bearing demand $ 90,109 $ 87,006 Interest-bearing demand 128,294 125,255 Savings 46,715 45,269 Time, $100,000 and over 85,937 82,535 Other time 249,656 237,840 ---------- ----------- Total deposits 600,711 577,905 Federal funds purchased and securities sold under agreements to repurchase 660 997 Other borrowings 15,400 24,200 Other liabilities 6,962 7,090 ---------- ----------- Total liabilities 623,733 610,192 ---------- ----------- COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS' EQUITY Common stock, par value $1; 15,000,000 shares authorized, 7,524,718 and 6,114,443 shares issued 7,525 6,114 Capital surplus 29,677 30,985 Retained earnings 32,264 27,483 Unrealized gains (losses) on securities available for sale, net of taxes 242 (57) ---------- ----------- 69,708 64,525 Less cost of shares acquired for the treasury, 272,353 and 217,882 shares (1,555) (1,555) ---------- ----------- Total stockholders' equity 68,153 62,970 ---------- ----------- $ 691,886 $ 673,162 ========== =========== </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3
ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in Thousands) ________________________________________________________________________________ <TABLE> <CAPTION> 1997 1996 1995 --------- --------- --------- <S> <C> <C> <C> Interest income Interest and fees on loans $ 50,502 $ 42,322 $ 33,547 Interest on taxable securities 6,511 6,092 4,811 Interest on nontaxable securities 1,205 1,025 931 Interest on deposits in other banks 232 8 28 Interest on Federal funds sold 199 1,139 1,634 --------- ---------- --------- 58,649 50,586 40,951 --------- ---------- --------- Interest expense Interest on deposits 24,229 20,935 16,755 Interest on other borrowings 1,721 1,389 612 --------- ---------- --------- 25,950 22,324 17,367 --------- ---------- --------- Net interest income 32,699 28,262 23,584 Provision for loan losses 2,731 1,919 1,241 --------- ---------- --------- Net interest income after provision for loan losses 29,968 26,343 22,343 --------- ---------- --------- Other income Service charges on deposit accounts 5,509 4,722 3,819 Other service charges, commissions a 474 500 422 Gain (loss) on sale of securities (22) (5) 1 Other 1,775 1,315 662 --------- ---------- --------- 7,736 6,532 4,904 --------- ---------- --------- Other expenses Salaries and employee benefits 13,742 11,354 9,200 Equipment expense 2,305 1,783 1,561 Occupancy expense 1,653 1,380 1,102 Merger and acquisition expense 406 708 - Amortization of intangible assets 744 487 310 Data processing fees 528 586 551 Directors fees 555 562 530 FDIC premiums 111 378 528 Stationary and supplies expense 560 616 391 Other operating expenses 6,535 5,024 3,954 --------- ---------- --------- 27,139 22,878 18,127 --------- ---------- --------- </TABLE> F-4
ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in Thousands) ________________________________________________________________________________ <TABLE> <CAPTION> 1997 1996 1995 -------- -------- -------- <S> <C> <C> <C> Income before income taxes $ 10,565 $ 9,997 $ 9,120 Applicable income taxes 3,119 2,839 2,752 -------- -------- -------- Net income $ 7,446 $ 7,158 $ 6,368 ======== ======== ======== Income per common share - Basic $ 1.03 $ 1.01 $ 0.95 ======== ======== ======== Income per common share - Diluted $ 1.02 $ 1.01 $ 0.95 ======== ======== ======== </TABLE> See Notes to Consolidated Financial Statements. F-5
ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in Thousands) ================================================================================ <TABLE> <CAPTION> UNREALIZED GAINS (LOSSES) ON SECURITIES AVAILABLE COMMON STOCK CAPITAL RETAINED FOR SALE, ------------------------- SHARES PAR VALUE SURPLUS EARNINGS NET OF TAXES ------------------------- ---------- ---------- -------------- <S> <C> <C> <C> <C> <C> BALANCE, DECEMBER 31, 1994 4,658,084 $ 4,658 $ 26,142 $ 17,418 $ (784) Net income - - - 6,368 - Cash dividends declared, $.28 per share - - - (1,176) - Cash dividends paid by pooled subsidiary - - - (355) - Exercise of options by shareholders of pooled subsidiaries 10,038 10 75 - - Four-for-three common stock split 899,087 899 899 - - Purchase of fractional shares - - (3) - - Net treasury stock transactions of pooled subsidiary - - (1) - - Stock issued under stock option purchase plan - - - - - Net change in unrealized losses on securities available for sale, net of taxes - - - - 1,158 ---------- -------- --------- ---------- ------------ BALANCE, DECEMBER 31, 1995 5,567,209 5,567 25,314 22,255 374 Net income - - - 7,158 - Cash dividends declared, $.32 per share - - - (1,682) - Cash dividends paid by pool subsidiary - - - (248) - Adjustments to record acquisition of a purchased subsidiary 402,271 402 5,543 - (196) Exercise of options and capital contributions by shareholders of pooled subsidiaries prior to merger 144,963 145 109 - - Purchase of fractional shares - - (7) - - Net treasury stock transactions of pooled subsidiary - - 26 - - Net change in unrealized gains on securities available for sale, net of taxes - - - - (235) ---------- -------- --------- ---------- ------------ BALANCE, DECEMBER 31, 1996 6,114,443 6,114 30,985 27,483 (57) Net income - - - 7,446 - Cash dividends declared, $.38 per share - - - (2,665) - Five-for-four common stock split 1,403,241 $ 1,403 (1,403) - - Exercise of options by shareholders of pooled subsidiaries 7,034 8 102 - - Purchase of fractional shares - - (7) - - Net change in unrealized losses on securities available for sale, net of taxes - - - - 299 ---------- -------- --------- ---------- ------------ BALANCE, DECEMBER 31, 1997 7,542,718 $ 7,525 $ 29,677 $ 32,264 $ 242 ========== ======== ========= ========== ============ <CAPTION> TREASURY STOCK ----------------------- SHARES COST TOTAL ---------- ----------- ---------- <S> <C> <C> BALANCE, DECEMBER 31, 1994 183,412 $ (1,680) $ 45,754 Net income - - 6,368 Cash dividends declared, $.28 per share - - (1,176) Cash dividends paid by pooled subsidiary - - (355) Exercise of options by shareholders of pooled subsidiaries - - 85 Four-for-three common stock split 61,137 - - Purchase of fractional shares - - (3) Net treasury stock transactions of pooled subsidiary - - (1) Stock issued under stock option purchase plan (26,667) 125 125 Net change in unrealized losses on securities available for sale, net of taxes - - 1,158 --------- ----------- ---------- BALANCE, DECEMBER 31, 1995 217,882 (1,555) 51,955 Net income - - 7,158 Cash dividends declared, $.32 per share - - (1,682) Cash dividends paid by pool subsidiary - - (248) Adjustments to record acquisition of a purchased subsidiary - - 5,749 Exercise of options and capital contributions by shareholders of pooled subsidiaries prior to merger - - 254 Purchase of fractional shares - - (7) Net treasury stock transactions of pooled subsidiary - - 26 Net change in unrealized gains on securities available for sale, net of taxes - - (235) --------- ----------- ---------- BALANCE, DECEMBER 31, 1996 217,882 (1,555) 62,970 Net income - - 7,446 Cash dividends declared, $.38 per share - - (2,665) Five-for-four common stock split 54,471 - - Exercise of options by shareholders of pooled subsidiaries - - 110 Purchase of fractional shares - - (7) Net change in unrealized losses on securities available for sale, net of taxes - - 299 --------- ----------- ---------- BALANCE, DECEMBER 31, 1997 272,353 $ (1,555) $ 68,153 ========= =========== ========== </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6
ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in Thousands) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> 1997 1996 1995 -------- -------- -------- <S> <C> <C> <C> OPERATING ACTIVITIES Net income $ 7,446 $ 7,158 $ 6,368 -------- --------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,000 1,576 1,409 Amortization of intangible assets 744 487 310 Net (gains) losses on securities available for sale 22 5 (1) Provision for loan losses 2,731 1,919 1,241 Provision for deferred taxes (449) (382) (193) Increase in interest receivable (1,435) (513) (1,092) Increase (decrease) in interest pay 56 (113) 487 Increase (decrease) in taxes payable 463 (528) 100 Other prepaids, deferrals and accruals, net (2,048) 1,499 (761) -------- -------- -------- Total adjustments 2,084 3,950 1,500 -------- -------- -------- Net cash provided by operating activities 9,530 11,108 7,868 -------- -------- -------- INVESTING ACTIVITIES (Increase) decrease in interest-bearing deposits in banks (2,288) 199 199 Purchases of securities available for sale (48,972) (45,123) (40,536) Purchases of securities held to maturity (6,102) (2,871) (2,653) Proceeds from maturities of securities available for sale 48,633 31,064 13,615 Proceeds from sale of securities available for sale 10,851 4,638 8,430 Proceeds from maturities of securities held to maturity 8,072 1,894 17,146 (Increase) decrease in Federal funds so sold 7,730 48,235 (23,863) Increase in loans, net (32,550) (53,968) (34,415) Net cash paid for purchased subsidiary - (3,947) - Net cash received from acquisition of deposits 16,398 - - Purchase of premises and equipment (4,598) (3,728) (920) Proceeds from the sale of premises and equipment - 48 24 -------- -------- -------- Net cash used in investing activities (2,826) (23,559) (62,973) -------- -------- -------- </TABLE> F-7
ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in Thousands) ================================================================================ <TABLE> <CAPTION> 1997 1996 1995 ---------- --------- --------- <S> <C> <C> <C> FINANCING ACTIVITIES Increase (decrease) in deposits $ (3,965) $ 20,092 $ 56,672 Decrease in Federal funds purchased and securities sold under agreements to repurchase (337) (2,690) (451) Proceeds from other borrowings 34,678 12,600 4,600 Repayment of other borrowings (43,478) (5,200) (150) Dividends paid (2,633) (1,763) (1,395) Proceeds from sale of stock of pooled subsidiary 110 324 102 Proceeds from exercise of stock options - - 125 Purchase of fractional shares (7) (7) (3) Purchase of treasury shares of pooled subsidiary - (44) (18) --------- --------- --------- Net cash provided by (used in) financing activities (15,632) 23,312 59,482 --------- --------- --------- Net (decrease) increase in cash and due from banks (8,928) 10,861 4,377 Cash and due from banks at beginning of year 42,901 32,040 27,663 --------- --------- --------- Cash and due from banks at end of year $ 33,973 $ 42,901 $ 32,040 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 25,894 $ 22,437 $ 16,880 Income taxes $ 3,105 $ 3,749 $ 2,845 NONCASH TRANSACTION Net change in unrealized gains (losses) on securities available for sale $ 471 $ (340) $ 1,278 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. </TABLE> F-8
ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS ABC Bancorp, (the "Company") is a multi-bank holding company whose business is presently conducted by its subsidiary banks (the "Banks"). Through the Banks, the Company operates a full service banking business and offers a broad range of retail and commercial banking services to its customers located in a market area which includes South Georgia and Southeast Alabama. The Company and the Banks are subject to the regulations of certain Federal and state agencies and are periodically examined by those regulatory agencies. BASIS OF PRESENTATION The accounting and reporting policies of the Company conform to generally accepted accounting principles and general practices within the financial services industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The Company's consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. Results of operations of purchased banks are included from the dates of acquisition. Following the purchase method of accounting, the assets and liabilities of purchased banks are stated at estimated fair values at the date of acquisition. The principles which significantly affect the determination of financial position, results of operations and cash flows are summarized below. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and due from banks includes cash on hand and amounts due from banks (including cash items in process of clearing). Cash flows from loans originated by the Banks, deposits, interest-bearing deposits and Federal funds purchased and sold are reported net. The Company maintains amounts due from banks which, at times, may exceed Federally insured limits. The Company has not experienced any losses in such accounts. F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SECURITIES Securities are classified based on management's intention on the date of purchase. Securities which management has the intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. All other debt securities are classified as available for sale and carried at fair value with net unrealized gains and losses included in stockholders' equity, net of tax. Marketable equity securities are carried at fair value with net unrealized gains and losses included in stockholders' equity. Other equity securities without a readily determinable fair value are carried at cost. Interest and dividends on securities, including amortization of premiums and accretion of discounts, are included in interest income. Realized gains and losses from the sales of securities are determined using the specific identification method. A decline in the fair value below cost of any security that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. LOANS HELD FOR SALE Loans held for sale include mortgage and other loans and are carried at the lower of aggregate cost or fair value. LOANS Loans are carried at their principal amounts outstanding less unearned income and the allowance for loan losses. Interest income on loans is credited to income based on the principal amount outstanding. Loan origination fees and certain direct costs of most loans are recognized at the time the loan is recorded. Loan origination fees and costs incurred for other loans are deferred and recognized as income over the life of the loan. Because net origination loan fees and costs are not material, the results of operations are not materially different than the results which would be obtained by accounting for loan fees and costs in accordance with generally accepted accounting principles. F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Loans (Continued) The allowance for loan losses is maintained at a level that management believes to be adequate to absorb potential losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, growth, composition of the loan portfolio, and other risks inherent in the portfolio. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses, and may require the Company to record additions to the allowance based on their judgment about information available to them at the time of their examinations. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When accrual of interest is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. A loan is impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the terms of the loan agreement. Individually identified impaired loans are measured based on the present value of payments expected to be received, using the contractual loan rate as the discount rate. Alternatively, measurement may be based on observable market prices or, for loans that are solely dependent on the collateral for repayment, measurement may be based on the fair value of the collateral. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally by the straight- line method over the following estimated useful lives: <TABLE> <CAPTION> YEARS ------------ <S> <C> <C> Buildings and improvements 15-40 Furniture and equipment 5-7 </TABLE> F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) OTHER REAL ESTATE OWNED Other real estate owned (OREO) represents properties acquired through foreclosure or other proceedings. OREO is held for sale and is recorded at the lower of the recorded amount of the loan or fair value of the properties less estimated costs of disposal. Any write- down to fair value at the time of transfer to OREO is charged to the allowance for loan losses. Property is evaluated regularly to ensure the recorded amount is supported by its current fair value and valuation allowances to reduce the carrying amount to fair value less estimated costs to dispose are recorded as necessary. Subsequent decreases in fair value and increases in fair value, up to the value established at foreclosure, are recognized as charges or credits to noninterest expense. OREO is reported net of allowance for losses in the Company's financial statements. INTANGIBLE ASSETS Intangible assets, arising from excess of purchase price over net assets acquired of purchased banks, are being amortized on the straight-line method over various periods not exceeding 25 years for banks acquired prior to 1996. Excess acquisition cost of Southland Bank acquired in 1996 and the Douglas branch of Citizens Security Bank acquired in 1997 are being amortized on the straight-line method over 15 years. INCOME TAXES Income tax expense consists of current and deferred taxes. Current income tax provisions approximate taxes to be paid or refunded for the applicable year. Deferred tax assets and liabilities are recognized on the temporary differences between the bases of assets and liabilities as measured by tax laws and their bases as reported in the financial statements. Deferred tax expense or benefit is then recognized for the change in deferred tax assets or liabilities between periods. Recognition of deferred tax balance sheet amounts is based on management's belief that it is more likely than not that the tax benefit associated with certain temporary differences, tax operating loss carryforwards, and tax credits will be realized. A valuation allowance is recorded for those deferred tax items for which it is more likely than not that realization will not occur. The Company and its subsidiaries file a consolidated income tax return. Each subsidiary provides for income taxes based on its contribution to income taxes (benefits) of the consolidated group. F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS PER SHARE Basic earnings per share are calculated on the basis of the weighted average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the sum of the weighted average number of common shares outstanding and potential common shares. Earnings per common share for the prior periods have been restated to reflect the adoption of FASB 128. All per share data for prior years have been adjusted to reflect the five-for-four stock split effected in the form of a 25% stock dividend to shareholders of record as of April 15, 1997. CURRENT ACCOUNTING DEVELOPMENTS In June 1996, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"). This statement provides standards for distinguishing transfers of financial assets that are sales from those that are secured borrowings, and provides guidance on the recognition and measurement of asset servicing contracts and on debt extinguishments. As issued, SFAS No. 125 is effective for transactions occurring after December 31, 1996. However, as a result of an amendment to SFAS No. 125 by the FASB in December 1996, certain provision of SFAS No. 125 are deferred for an additional year. Adoption of the new accounting standard is not expected to have a material impact on the Company's financial statements. In February 1997, the FASB issued SFAS No. 128, "Earnings per Share". This statement simplifies the standards for computing earnings per share previously set forth in APB Opinion No. 15, "Earnings per Share", and makes them comparable to international earnings per Share ("EPS") standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted- average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB Opinion No. 15. This statement is effective for financial statements issued for periods ending after December 15, 1997. The adoption of this statement did not have a material impact on the Company's financial statements. F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CURRENT ACCOUNTING DEVELOPMENTS (CONTINUED) In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". This statement establishes standards for reporting and display of comprehensive income and its components (revenues. expenses, gains and losses) in a full set of general-purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. This statement requires that an enterprise classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance or other comprehensive income by their nature in a financial statement and display the accumulated balance or other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. This statement is effective for fiscal years beginning after December 15, 1997. The adoption of this statement is not expected to have a material impact on the Company's financial statements. In June 1997, The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. The statement requires that a business enterprise report a measure of segment profit or loss, certain specific revenue and expense items and segment assets. It requires reconciliations of total segment revenues, total segment profit or loss, total segment assets and other amounts disclosed for segments to corresponding amounts in the enterprise's general purpose financial statements. It requires that the enterprise report information about the revenues derived from the enterprise's products or services, about the countries in which the enterprise earns revenues and hold assets and about major customers. This statement is effective for financial statements for periods beginning after December 15, 1997. The adoption of this statement is not expected to have a material impact on the Company's financial statements. F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 2. ACQUISITIONS On June 21, 1996, the Company acquired all of the outstanding common stock of Southland Bancorporation ("Southland") in exchange for 402,271 shares of the Company's common stock and $5,880,000 in cash. The excess of purchase price over net book value of assets acquired amounted to $5,310,000. The fair value of assets acquired was deemed to approximate their recorded value; therefore, the excess cost has been accounted for as goodwill and is being amortized over a period of 15 years. Immediately following the merger, Southland was liquidated and its wholly-owned subsidiary, Southland Bank, became a wholly-owned subsidiary of the Company. The acquisition has been accounted for as a purchase transaction and, accordingly, the operations of Southland Bank have been included in the consolidated financial statements of the Company only from June 21, 1996, the date of acquisition. Had the acquisition of Southland Bank occurred on January 1, 1995, pro forma unaudited consolidated results of operations (after restatement for the poolings of interest described below) for the years ended December 31, 1996 and 1995 would have been as follows: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 --------------- -------------- (DOLLARS IN THOUSANDS) ----------------------------------- <S> <C> <C> Net interest income $ 30,591 $ 27,519 Other income 7,099 6,486 Net income 7,348 6,803 Net income per share - basic 1.01 0.96 Net income per share - diluted 1.01 0.96 </TABLE> F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 2. ACQUISITIONS (CONTINUED) On July 31, 1996, the Company acquired all of the outstanding common stock of Central Bankshares, Inc. ("Central") in exchange for 524,300 shares of the Company's common stock and a nominal amount of cash in lieu of fractional shares. Immediately following the merger, Central was liquidated and its wholly-owned subsidiary, Central Bank & Trust, became a wholly-owned subsidiary of the Company. On August 31, 1996, the Company acquired all of the outstanding common stock of First National Financial Corporation ("First National") in exchange for 725,772 shares of the Company's common stock and a nominal amount of cash in lieu of fractional shares. Immediately following the merger, First National was liquidated and its wholly-owned subsidiary, First National Bank of South Georgia, became a wholly-owned subsidiary of the Company. On December 31, 1996, the Company acquired all of the outstanding common stock of M & F Financial Corporation ("M & F") in exchange for 365,026 shares of the Company's common stock and a nominal amount of cash in lieu of fractional shares. Immediately following the merger, M & F was liquidated and its wholly-owned subsidiary, Merchants & Farmers Bank, became a wholly-owned subsidiary of the Company. On August 31, 1997, the Company acquired all of the outstanding common stock of Irwin Bankcorp, Inc ("Irwin") in exchange for 507,034 shares of the Company's common stock and a nominal amount of cash in lieu of fractional shares, Immediately following the merger, Irwin was liquidated and its wholly-owned subsidiary, The Bank of Ocilla, became a branch of Citizens Security Bank, a wholly-owned subsidiary of the Company. The acquisitions of Central, First National, M & F and Irwin have been accounted for as poolings of interests and, accordingly, all prior financial statements have been restated to include the accounts and operations of the pooled companies. Net interest income and net income of the separate companies for periods preceding the mergers are summarized as follows: F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 2. ACQUISITIONS (CONTINUED) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 --------------- ------------- (DOLLARS IN THOUSANDS) ---------------------------------- <S> <C> <C> Net interest income: ABC $ 26,641 $ 16,030 Central - 2,182 First National - 2,152 M & F - 1,642 Irwin 1,621 1,578 ------------- ------------ Combined $ 28,262 $ 23,584 ============= ============ Net income: ABC $ 6,701 $ 4,341 Central - 499 First National - 612 M & F - 465 Irwin 457 451 ------------- ------------ Combined $ 7,158 $ 6,368 ============= ============ </TABLE> NOTE 3. INVESTMENTS IN SECURITIES The amortized cost and approximate fair values of investments in securities at December 31, 1997 and 1996 were as follows: <TABLE> <CAPTION> GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE -------------- ------------- -------------- ------------- (DOLLARS IN THOUSANDS) --------------------------------------------------------------- <S> <C> <C> <C> <C> SECURITIES AVAILABLE FOR SALE DECEMBER 31, 1997: U. S. GOVERNMENT AND AGENCY SECURITIES $ 79,636 $ 287 $ (101) $ 79,822 MORTGAGE-BACKED SECURITIES 6,984 120 (19) 7,085 STATE AND MUNICIPAL SECURITIES 5,660 174 - 5,834 OTHER SECURITIES 525 - (67) 458 -------------- ------------- ------------- ------------- $ 92,805 $ 581 $ (187) $ 93,199 ============== ============= ============= ============= </TABLE> F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ________________________________________________________________________________ NOTE 3. INVESTMENTS IN SECURITIES (CONTINUED) <TABLE> <CAPTION> AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS) -------------------------------------------------------------- <S> <C> <C> <C> <C> December 31, 1996: U. S. Government and agency securities $ 84,744 $ 251 $ (468) $ 84,527 Mortgage-backed securities 12,555 135 (52) 12,638 State and municipal securities 5,529 127 - 5,656 Other securities 525 - (70) 455 ------------- ------------- ------------- ------------- $ 103,353 $ 513 $ (590) $ 103,276 ============= ============= ============= ============= Securities Held to Maturity December 31, 1997: U. S. Government and Agency Securities $ 8,995 $ 1 $ (10) $ 8,986 Mortgage-backed Securities 2,951 27 (10) 2,968 State and Municipal Securities 18,074 557 (8) 18,623 ------------- ------------- ------------- ------------- $ 30,020 $ 585 $ (28) $ 30,577 ============= ============= ============= ============= December 31, 1996: U. S. Government and agency securities $ 11,238 $ - $ (200) $ 11,038 Mortgage-backed securities 4,326 27 (44) 4,309 State and municipal securities 16,426 493 (28) 16,891 ------------- ------------- ------------- ------------- $ 31,990 $ 520 $ (272) $ 32,238 ============= ============= ============= ============= </TABLE> F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ________________________________________________________________________________ NOTE 3. INVESTMENTS IN SECURITIES (CONTINUED) The amortized cost and fair value of securities as of December 31, 1997 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary. <TABLE> <CAPTION> SECURITIES AVAILABLE FOR SALE SECURITIES HELD TO MATURITY ---------------------------------- ---------------------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------------- --------------- --------------- --------------- (DOLLARS IN THOUSANDS) ------------------------------------------------------------------------ <S> <C> <C> <C> <C> Due in one year or less $ 25,022 $ 25,067 $ 2,057 $ 2,063 Due from one year to five years 52,641 52,809 11,293 11,439 Due from five to ten years 5,755 5,834 13,020 13,365 Due after ten years 1,878 1,946 699 742 Mortgage-backed securities 6,984 7,085 2,951 2,968 Marketable equity securities 525 458 - - --------------- --------------- --------------- --------------- $ 92,805 $ 93,199 $ 30,020 $ 30,577 =============== =============== =============== =============== </TABLE> Securities with a carrying value of $69,033,000 and $79,946,000 at December 31, 1997 and 1996, respectively, were pledged to secure public deposits and for other purposes. Gains and losses on sales of securities available for sale consist of the following: <TABLE> <CAPTION> DECEMBER 31, ------------------------------------------------- 1997 1996 1995 ------------ ------------- ------------ (DOLLARS IN THOUSANDS) ------------------------------------------------- <S> <C> <C> <C> Gross gains on sales of securities $ 26 $ 13 $ 37 Gross losses on sales of securities (48) (18) (36) ------------- -------------- ------------- Net realized gains (losses) on sales of securities available for sale $ (22) $ (5) $ 1 ============= ============== ============= </TABLE> F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of loans is summarized as follows: <TABLE> <CAPTION> DECEMBER 31, ----------------------------------- 1997 1996 --------------- --------------- (DOLLARS IN THOUSANDS) ----------------------------------- <S> <C> <C> Commercial and financial $ 72,171 $ 69,772 Agricultural 41,882 35,525 Real estate - construction 13,117 13,612 Real estate - mortgage, farmland 55,245 52,978 Real estate - mortgage, commercial 108,339 89,708 Real estate - mortgage, residential 127,767 121,448 Consumer instalment loans 68,959 67,572 Other 2,764 2,229 --------------- --------------- 490,244 452,844 Allowance for loan losses 7,627 7,273 --------------- --------------- $ 482,617 $ 445,571 =============== =============== </TABLE> The total recorded investment in impaired loans was $10,054,000 and $5,130,000 at December 31, 1997 and 1996, respectively. Included in these loans were $5,680,000 and $2,408,000 that had related allowances for loan losses of $1,060,000 and $609,000 at December 31, 1997 and 1996, respectively. The average recorded investment in impaired loans for 1997 and 1996 was $7,686,000 and $4,024,000, respectively. Interest income on impaired loans of $383,000 and $159,000 was recognized for cash payments received for the years ended 1997 and 1996, respectively. F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) The Company has granted loans to certain directors, executive officers, and related entities of the Company and the Banks. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan involved. Changes in related party loans for the years ended December 31, 1997 and 1996 are as follows: <TABLE> <CAPTION> DECEMBER 31, ----------------------------------- 1997 1996 --------------- --------------- (DOLLARS IN THOUSANDS) ----------------------------------- <S> <C> <C> BALANCE, BEGINNING OF YEAR $ 21,235 $ 13,153 Advances 18,708 16,310 Repayments (14,593) (8,609) Transactions due to change(s) in related parties (1,708) 381 --------------- --------------- BALANCE, END OF YEAR $ 23,642 $ 21,235 =============== =============== </TABLE> Changes in the allowance for loan losses are as follows: <TABLE> <CAPTION> DECEMBER 31, ------------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- (DOLLARS IN THOUSANDS) ------------------------------------------------- <S> <C> <C> <C> BALANCE, BEGINNING OF YEAR $ 7,273 $ 5,890 $ 5,169 Allowance for loan losses of acquired subsidiary - 1,211 - Provision charged to operations 2,731 1,919 1,241 Loans charged off (3,338) (2,291) (988) Recoveries 961 544 468 ------------- ------------- ------------- BALANCE, END OF YEAR $ 7,627 $ 7,273 $ 5,890 ============= ============= ============= </TABLE> F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 5. PREMISES AND EQUIPMENT, NET Major classifications of these assets are summarized as follows: <TABLE> <CAPTION> DECEMBER 31, ------------------------------- 1997 1996 ------------- ------------- (DOLLARS IN THOUSANDS) ------------------------------- <S> <C> <C> Land $ 4,535 $ 3,777 Buildings 13,761 11,978 Equipment 14,291 13,553 Construction in progress 649 732 ------------- ------------- 33,236 30,040 Accumulated depreciation 14,182 13,842 ------------- ------------- $ 19,054 $ 16,198 ============= ============= </TABLE> Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was $1,923,000, $1,465,000 and $1,283,000, respectively. NOTE 6. EMPLOYEE BENEFIT PLANS The Company and its subsidiaries have adopted simplified employee pension plans for substantially all employees. These plans are SEP- IRA defined contribution plans. Contributions to these plans charged to expense during 1997, 1996 and 1995 amounted to $1,093,000, $879,000 and $588,000, respectively. F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 7. DEFERRED COMPENSATION PLANS The Company and two subsidiary banks have entered into separate deferred compensation arrangements with certain executive officers and directors. The plans call for certain amounts payable at retirement, death or disability. The estimated present value of the deferred compensation is being accrued over the remaining expected term of active employment. The Company and Banks have purchased life insurance policies which they intend to use to finance this liability. Aggregate compensation expense under the plans were $70,000, $12,000 and $55,000 for 1997, 1996 and 1995, respectively, and is included in other operating expenses. NOTE 8. STOCK OPTION PLANS The Company has three fixed stock option plans under which it has granted options to its Chief Executive Officer to purchase common stock at the fair market price on the date of grant. All of the options are intended to be incentive stock options qualifying under Section 422 of the Internal Revenue Code for favorable tax treatment. Under the 1985 plan, options to purchase 26,667 shares were granted. All of these options were exercised in 1995. Under the 1992 plan, options to purchase 8,334 shares were granted. None of these options have been exercised, however, all of the options were exercisable as of December 31, 1997. Options under the 1992 Plan expire in 2002. Under the 1997 Plan, options to purchase 56,250 shares were granted. Options under the 1997 Plan are fully vested and are exercisable over a period of ten years subject to certain limitations as to aggregate fair market value (determined as of the date of the grant) of all options exercisable for the first time by the optionee during any calendar year (the "$100,000 Per-year Limitation"). Under The 1997 Plan, options to purchase 6,625 shares were exercisable. F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 8. STOCK OPTION PLANS (CONTINUED) A summary of the status of the three fixed plans at December 31, 1997, 1996 and 1995 and changes during the years ended on those dates is as follows: <TABLE> <CAPTION> 1997 1996 1995 ------------------------------ --------------------------- ----------------------------- WEIGHTED- WEIGHTED- WEIGHTED- Average Average Average EXERCISE EXERCISE EXERCISE NUMBER Price NUMBER PRICE NUMBER PRICE ------------- ------------- ---------- ------------- ---------- -------------- <S> <C> <C> <C> <C> <C> <C> Under option, beginning of the year 8,334 $ 5.40 8,334 $ 5.40 35,001 $ 4.86 Granted 56,250 13.60 - - - - Exercised - - - - (26,667) 4.69 Forfeited - - - - - - ------------- ---------- ---------- Under option, end of year 64,584 12.54 8,334 5.40 8,334 5.40 ============= ========== ========== Exercisable at end of year 14,959 6,668 5,002 ============= ========== ========== Weighted-average fair value per option of options granted during year $ 4.11 - - ============= ========== ========== </TABLE> A FURTHER SUMMARY ABOUT OPTIONS OUTSTANDING AT DECEMBER 31, 1997 IS AS FOLLOWS: <TABLE> <CAPTION> OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------------------------- -------------------------------- WEIGHTED- Average WEIGHTED- WEIGHTED- Range of Contractual Average Average Exercise Number Life in Exercise Number Exercise Prices Outstanding Years Price Outstanding Price --------------- ------------- ------------- --------------- ------------- --------------- <S> <C> <C> <C> <C> <C> $ 5.40 8,334 5.0 $ 5.40 8,334 $ 5.40 13.60 56,250 9.3 13.60 6,625 13.60 ------------- ------------- 64,584 8.75 12.54 14,959 9.03 ============= ============= </TABLE> F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 8. STOCK OPTION PLANS (CONTINUED) As permitted by Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), the Company recognizes compensation cost for stock-based employee compensation awards in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees". The Company recognized no compensation cost for stock-based employee compensation awards for the years ended December 31, 1997, 1996 and 1995. If the Company had recognized compensation cost in accordance with SFAS No. 123, net income and net income per share would have been reduced as follows: <TABLE> <CAPTION> DECEMBER 31, -------------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------- ------------------------------ ------------------------------ BASIC BASIC BASIC NET NET INCOME NET NET INCOME NET NET INCOME INCOME PER SHARE INCOME PER SHARE INCOME PER SHARE ------------ --------------- ------------ --------------- ------------ --------------- <S> <C> <C> <C> <C> <C> <C> As reported $ 7,446 $ 1.03 $ 7,158 $ 1.01 $ 6,368 $ 0.95 Stock based compensation, net of related tax effect (153) (0.02) - - - - ------------ --------------- ------------ --------------- ------------ --------------- As adjusted $ 7,293 $ 1.01 $ 7,158 $ 1.01 $ 6,368 $ 0.95 ============ =============== ============ =============== ============ =============== </TABLE> <TABLE> <CAPTION> DECEMBER 31, -------------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------- ------------------------------ ------------------------------ DILUTED DILUTED DILUTED NET NET INCOME NET NET INCOME NET NET INCOME INCOME PER SHARE INCOME PER SHARE INCOME PER SHARE ------------ --------------- ------------ --------------- ------------ --------------- <S> <C> <C> <C> <C> <C> <C> As reported $ 7,446 $ 1.02 $ 7,158 $ 1.01 $ 6,368 $ 0.95 Stock based compensation, net of related tax effect (153) (0.02) - - - - ------------ --------------- ------------ --------------- ------------ --------------- As adjusted $ 7,293 $ 1.00 $ 7,158 $ 1.01 $ 6,368 $ 0.95 ============ =============== ============ =============== ============ =============== </TABLE> F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 8. STOCK OPTION PLANS (CONTINUED) The fair value of the options granted in 1997 was based upon the discounted value of future cash flows of the options using the following assumptions: <TABLE> <S> <C> Risk-free interest rate 6.13% Expected life of the options 10 years Expected dividends (as a percent of the fair value of the stock) 1.92% Expected volatility 13.17% </TABLE> At the annual meeting on April 15, 1997, the shareholders approved the ABC Bancorp Omnibus Stock Ownership and Long-Term Incentive Plan (the "Omnibus Plan"). Awards granted under the Omnibus Plan may be in the form of Qualified or Nonqualified Stock Options, Restricted Stock, Stock Appreciation Rights ("SARS"), Long-Term Incentive Compensation Units consisting of a combination of cash and Common Stock, or any combination thereof within the limitations set forth in the Omnibus Plan. The Omnibus Plan provides that the aggregate number of shares of the Company's Common Stock which may be subject to award may not exceed 531,250, subject to adjustment in certain circumstances to prevent dilution. As of December 31, 1997, no awards have been granted under the Omnibus Plan. NOTE 9. OTHER BORROWINGS Other borrowings consist of the following: <TABLE> <CAPTION> DECEMBER 31, ------------------------------------ 1997 1996 ---------------- ---------------- <S> <C> <C> (DOLLARS IN THOUSANDS) ------------------------------------ Advances under revolving credit agreement with $ 5,000 $ 5,000 SunTrust Bank with interest at the three month LIBOR rate plus .9% (6.86% at December 31, 1997) due on March 30, 1998; unsecured. Advances from Federal Home Loan Bank with interest 10,000 10,000 at adjustable rates (ranging from 5.72% to 6.22% at December 31, 1997) due at various dates from from April 1, 1998 to March 21, 2002. Advance from Federal Home Loan Bank with interest at a 400 9,200 fixed rate (6.48% at December 31, 1997) due in annual installments of $50,000 through June 5, 2005. ---------------- ---------------- $ 15,400 $ 24,200 ================ ================ </TABLE> F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 9. OTHER BORROWINGS (CONTINUED) The advances from the Federal Home Loan Bank are collateralized by the pledging of first mortgage loans and other specific loans. One subsidiary bank has also pledged mortgage-backed securities having an aggregate market value of approximately $1,628,000 at December 31, 1997. Other borrowings at December 31, 1997 have maturities in future years as follows: <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) -------------- <S> <C> 1998 $ 9,050 1999 3,050 2000 2,050 2001 50 2002 1,050 Later years 150 -------------- $ 15,400 ============== </TABLE> NOTE 10. INCOME TAXES The total income taxes in the consolidated statements of income are as follows: <TABLE> <CAPTION> DECEMBER 31, --------------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- (DOLLARS IN THOUSANDS) --------------------------------------------------- <S> <C> <C> <C> Current $ 3,568 $ 3,221 $ 2,945 Deferred (449) (382) (193) ------------- ------------- ------------- $ 3,119 $ 2,839 $ 2,752 ============= ============= ============= </TABLE> F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 10. INCOME TAXES (CONTINUED) The Company's provision for income taxes differs from the amounts computed by applying the Federal income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows: <TABLE> <CAPTION> DECEMBER 31, ----------------------------------------------------------------------------------------- 1997 1996 1995 ---------------------------- ---------------------------- ------------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------------ ------------ ------------ ------------ ------------ --------- (DOLLARS IN THOUSANDS) ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Tax provision at statutory rate $ 3,592 34 % $ 3,399 34 % $ 3,100 34 % Increase (decrease) resulting from: Tax-exempt interest (439) (4) (359) (4) (336) (4) Amortization of excess cost over assets acquired 167 2 82 1 30 1 Changes in valuation allowance for deferred taxes (94) (1) (228) (2) (67) (1) Other (107) (1) (55) (1) 25 - ------------ ------------ ------------ ------------ ------------ --------- Provision for income taxes $ 3,119 30 % $ 2,839 28 % $ 2,752 30 % ============ ============ ============ ============ ============ ========= </TABLE> Net deferred income tax assets of $1,814,000 and $1,517,000 at December 31, 1997 and 1996, respectively, are included in other assets. The components of deferred income taxes are as follows: <TABLE> <CAPTION> DECEMBER 31, ------------------------------ 1997 1996 ------------- ------------- (DOLLARS IN THOUSANDS) ------------------------------ <S> <C> <C> DEFERRED TAX ASSETS: Loan loss reserves $ 1,853 $ 1,641 Deferred compensation 192 271 Unrealized loss on securities available for sale - 18 Other 78 - Net operating loss tax carryforward 237 261 Alternative minimum tax credits 142 142 Less valuation allowance - (94) ------------- ------------- 2,502 2,239 ------------- ------------- DEFERRED TAX LIABILITIES: Deprecation and amortization 554 690 Other - 32 Unrealized gain on securities available for sale 134 - ------------- ------------- 688 722 ------------- ------------- Net deferred tax assets $ 1,814 $ 1,517 ============= ============= </TABLE> F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 11. EARNINGS PER COMMON SHARE The following is a reconciliation of net income (the numerator) and the weighted average shares outstanding (the denominator) used in determining basic and diluted earnings per share. All amounts are presented in thousands, except per share amounts. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1997 ------------------------------------------------------- INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ---------------- -------------- ---------------- <S> <C> <C> <C> BASIC EARNINGS PER SHARE Net income $ 7,446 7,252 $ 1.03 EFFECT OF DILUTIVE SECURITIES Stock options - 13 ---------------- -------------- DILUTIVE EARNINGS PER SHARE Net income $ 7,446 7,265 $ 1.02 ================ ============== ================ </TABLE> <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------------- INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ---------------- -------------- ---------------- <S> <C> <C> <C> BASIC EARNINGS PER SHARE Net income $ 7,158 7,056 $ 1.01 ================ EFFECT OF DILUTIVE SECURITIES Stock options - 5 ---------------- -------------- DILUTIVE EARNINGS PER SHARE Net income $ 7,158 7,061 $ 1.01 ================ ============== ================ </TABLE> <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1995 ------------------------------------------------------- INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ---------------- -------------- ---------------- <S> <C> <C> <C> BASIC EARNINGS PER SHARE Net income $ 6,368 6,679 $ 0.95 ================ EFFECT OF DILUTIVE SECURITIES Stock options - 15 ---------------- -------------- DILUTIVE EARNINGS PER SHARE Net income $ 6,368 6,694 $ 0.95 ================ ============== ================ </TABLE> F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, the Company has entered into off- balance-sheet financial instruments which are not reflected in the financial statements. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are included in the financial statements when funds are disbursed or the instruments become payable. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit and collateral policies for these off-balance-sheet financial instruments as it does for on-balance-sheet financial instruments. A summary of the Company's commitments is as follows: <TABLE> <CAPTION> DECEMBER 31, ------------------------------- 1997 1996 ------------- ------------- (DOLLARS IN THOUSANDS) ------------------------------- <S> <C> <C> Commitments to extend credit $ 81,682 $ 64,904 Credit card commitments 7,153 3,077 Standby letters of credit 1,584 1,436 ------------- ------------- $ 90,419 $ 69,417 ============= ============= </TABLE> Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The credit risk involved in issuing these financial instruments is essentially the same as that involved in extending loans to customers. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include real estate and improvements, marketable securities, accounts receivable, crops, livestock, inventory, equipment and personal property. Credit card commitments are unsecured. F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary. In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management for the Company, any liability resulting from such proceedings would not have a material adverse effect on the Company's financial statements. NOTE 13. CONCENTRATIONS OF CREDIT The Banks make agricultural, agribusiness, commercial, residential and consumer loans to customers primarily in counties in south Georgia and southeast Alabama. A substantial portion of the Company's customers' abilities to honor their contracts is dependent on the business economy in the geographical area served by the Banks. Although the Company's loan portfolio is diversified, there is a relationship in this region between the agricultural economy and the economic performance of loans made to nonagricultural customers. The Company's lending policies for agricultural and nonagricultural customers require loans to be well-collateralized and supported by cash flows. Collateral for agricultural loans include equipment, crops, livestock and land. Credit losses from loans related to the agricultural economy is taken into consideration by management in determining the allowance for loan losses. A substantial portion of the Company's loans are secured by real estate in the Company's primary market area. In addition, a substantial portion of the real estate owned is located in those same markets. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of a substantial portion of the carrying amount of real estate owned are susceptible to changes in market conditions in the Company's primary market area. The Company has a concentration of funds on deposit at its primary correspondent banks at December 31, 1997, as follows: Noninterest-bearing accounts $ 20,062,000 ================ F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 14. REGULATORY MATTERS The Banks are subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 1997, approximately $4,960,000 of retained earnings were available for dividend declaration without regulatory approval. The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Banks must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and Banks 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 and the Banks to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. Management believes, as of December 31, 1997, the Company and the Banks meet all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the regulatory authorities categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks 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 Banks' category. F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 14. REGULATORY MATTERS (CONTINUED) The Company and Banks' actual capital amounts and ratios are presented in the following table. <TABLE> <CAPTION> TO BE WELL FOR CAPITAL CAPITALIZED UNDER ADEQUACY PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS -------------------------- -------------------------- -------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------------- ---------- ------------- ---------- ------------- ---------- (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> AS OF DECEMBER 31, 1997 TOTAL CAPITAL (TO RISK WEIGHTED ASSETS): CONSOLIDATED $ 64,178 13.32% $ 38,534 8.00% $ 48,169 10.00% AMERICAN BANKING COMPANY $ 11,298 11.55% $ 7,824 8.00% $ 9,780 10.00% HERITAGE COMMUNITY BANK $ 3,785 13.11% $ 2,309 8.00% $ 2,887 10.00% BANK OF THOMAS COUNTY $ 3,317 12.63% $ 2,101 8.00% $ 2,627 10.00% CITIZENS SECURITY BANK $ 14,350 18.79% $ 6,110 8.00% $ 7,637 10.00% CAIRO BANKING COMPANY $ 7,066 15.10% $ 3,743 8.00% $ 4,679 10.00% SOUTHLAND BANK $ 11,511 11.16% $ 8,249 8.00% $ 10,312 10.00% CENTRAL BANK AND TRUST $ 5,474 12.68% $ 3,453 8.00% $ 4,316 10.00% FIRST NATIONAL BANK OF SOUTH GEORGIA $ 4,841 12.38% $ 3,128 8.00% $ 3,909 10.00% MERCHANTS AND FARMERS BANK $ 3,946 14.34% $ 2,202 8.00% $ 2,752 10.00% TIER I CAPITAL (TO RISK WEIGHTED ASSETS): CONSOLIDATED $ 58,137 12.07% $ 19,267 4.00% $ 28,901 6.00% AMERICAN BANKING COMPANY $ 10,075 10.30% $ 3,912 4.00% $ 5,868 6.00% HERITAGE COMMUNITY BANK $ 3,424 11.86% $ 1,155 4.00% $ 1,732 6.00% BANK OF THOMAS COUNTY $ 2,988 11.38% $ 1,051 4.00% $ 1,576 6.00% CITIZENS SECURITY BANK $ 13,395 17.54% $ 3,055 4.00% $ 4,582 6.00% CAIRO BANKING COMPANY $ 6,471 13.83% $ 1,872 4.00% $ 2,808 6.00% SOUTHLAND BANK $ 10,218 9.91% $ 4,125 4.00% $ 6,187 6.00% CENTRAL BANK AND TRUST $ 4,933 11.43% $ 1,726 4.00% $ 2,590 6.00% FIRST NATIONAL BANK OF SOUTH GEORGIA $ 4,351 11.13% $ 1,564 4.00% $ 2,346 6.00% MERCHANTS AND FARMERS BANK $ 3,602 13.09% $ 1,101 4.00% $ 1,651 6.00% </TABLE> F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 14. REGULATORY MATTERS (CONTINUED) <TABLE> <CAPTION> TO BE WELL FOR CAPITAL CAPITALIZED UNDER ADEQUACY PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS --------------------------- -------------------------- -------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------------- ---------- ------------- ---------- ------------- ---------- (DOLLARS IN THOUSANDS) --------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> AS OF DECEMBER 31, 1997 (CONTINUED) TIER I CAPITAL (TO AVERAGE ASSETS): CONSOLIDATED $ 58,137 8.60% $ 27,039 4.00% $ 33,799 5.00% AMERICAN BANKING COMPANY $ 10,075 8.46% $ 4,792 4.00% $ 5,990 5.00% HERITAGE COMMUNITY BANK $ 3,424 8.53% $ 1,617 4.00% $ 2,022 5.00% BANK OF THOMAS COUNTY $ 2,988 8.25% $ 1,443 4.00% $ 1,804 5.00% CITIZENS SECURITY BANK $ 13,395 10.89% $ 4,975 4.00% $ 6,219 5.00% CAIRO BANKING COMPANY $ 6,471 8.66% $ 3,029 4.00% $ 3,786 5.00% SOUTHLAND BANK $ 10,218 7.37% $ 5,543 4.00% $ 6,929 5.00% CENTRAL BANK AND TRUST $ 4,933 8.36% $ 2,345 4.00% $ 2,931 5.00% FIRST NATIONAL BANK OF SOUTH GEORGIA $ 4,351 8.28% $ 2,101 4.00% $ 2,626 5.00% MERCHANTS AND FARMERS BANK $ 3,602 8.45% $ 1,724 4.00% $ 2,156 5.00% </TABLE> F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 14. REGULATORY MATTERS (CONTINUED) <TABLE> <CAPTION> TO BE WELL FOR CAPITAL CAPITALIZED UNDER ADEQUACY PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS -------------------------- -------------------------- -------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------------- ---------- ------------- ---------- ------------- ---------- (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> As of December 31, 1996 Total Capital (to Risk Weighted Assets): Consolidated $ 62,996 13.93% $ 36,184 8.00% $ 45,230 10.00% American Banking Company $ 10,851 11.74% $ 7,394 8.00% $ 9,243 10.00% Heritage Community Bank $ 3,778 13.15% $ 2,298 8.00% $ 2,873 10.00% Bank of Thomas County $ 3,071 10.69% $ 2,298 8.00% $ 2,873 10.00% Citizens Security Bank $ 11,952 18.44% $ 5,184 8.00% $ 6,481 10.00% Cairo Banking Company $ 7,317 15.31% $ 3,823 8.00% $ 4,779 10.00% Southland Bank $ 10,125 11.11% $ 7,291 8.00% $ 9,113 10.00% Central Bank and Trust $ 5,254 13.11% $ 3,206 8.00% $ 4,008 10.00% First National Bank of South Georgia $ 5,625 18.74% $ 2,401 8.00% $ 3,002 10.00% Merchants and Farmers Bank $ 4,503 15.59% $ 2,311 8.00% $ 2,889 10.00% Tier I Capital (to Risk Weighted Assets): Consolidated $ 57,322 12.67% $ 18,092 4.00% $ 27,138 6.00% American Banking Company $ 9,767 10.56% $ 3,700 4.00% $ 5,549 6.00% Heritage Community Bank $ 3,418 11.90% $ 1,149 4.00% $ 1,723 6.00% Bank of Thomas County $ 2,757 9.60% $ 1,149 4.00% $ 1,723 6.00% Citizens Security Bank $ 11,137 17.19% $ 2,592 4.00% $ 3,888 6.00% Cairo Banking Company $ 6,707 14.03% $ 1,912 4.00% $ 2,868 6.00% Southland Bank $ 8,985 9.86% $ 3,645 4.00% $ 5,468 6.00% Central Bank and Trust $ 4,753 11.86% $ 1,603 4.00% $ 2,405 6.00% First National Bank of South Georgia $ 5,249 17.49% $ 1,201 4.00% $ 1,801 6.00% Merchants and Farmers Bank $ 4,195 14.52% $ 1,156 4.00% $ 1,733 6.00% </TABLE> F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 14. REGULATORY MATTERS (CONTINUED) <TABLE> <CAPTION> TO BE WELL FOR CAPITAL CAPITALIZED UNDER ADEQUACY PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS --------------------------- -------------------------- -------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------------- ---------- ------------- ---------- ------------- ---------- (DOLLARS IN THOUSANDS) --------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> As of December 31, 1996 (Continued) Tier I Capital (to Average Assets): Consolidated $ 57,322 9.40% $ 24,648 4.00% $ 30,856 5.00% American Banking Company $ 9,767 8.30% $ 4,707 4.00% $ 5,884 5.00% Heritage Community Bank $ 3,418 8.72% $ 1,568 4.00% $ 1,960 5.00% Bank of Thomas County $ 2,757 7.62% $ 1,447 4.00% $ 1,809 5.00% Citizens Security Bank $ 11,137 9.64% $ 4,622 4.00% $ 5,777 5.00% Cairo Banking Company $ 6,707 8.95% $ 2,998 4.00% $ 3,747 5.00% Southland Bank $ 8,985 7.16% $ 5,020 4.00% $ 6,274 5.00% Central Bank and Trust $ 4,753 8.54% $ 2,226 4.00% $ 2,783 5.00% First National Bank of South Georgia $ 5,249 9.46% $ 2,219 4.00% $ 2,774 5.00% Merchants and Farmers Bank $ 4,195 10.13% $ 1,656 4.00% $ 2,071 5.00% </TABLE> NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow methods. Those methods are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different methodologies may have a material effect on the estimated fair value amounts. Also, the fair value estimates presented herein are based on pertinent information available to management as of December 31, 1997 and 1996. Such amounts have not been revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein: CASH, DUE FROM BANKS, AND FEDERAL FUNDS SOLD: The carrying amounts of cash, due from banks, and Federal funds sold approximate their fair value. AVAILABLE FOR SALE AND HELD TO MATURITY SECURITIES: Fair values for securities are based on quoted market prices. The carrying values of equity securities with no readily determinable fair value approximate fair values. LOANS: For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For other loans, the fair values are estimated using discounted cash flow methods, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow methods or underlying collateral values. DEPOSITS: The carrying amounts of demand deposits, savings deposits, and variable-rate certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using discounted cash flow methods, using interest rates currently being offered on certificates. OTHER BORROWINGS: The carrying amounts of the Company's other borrowings approximate their fair value. F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) OFF-BALANCE SHEET INSTRUMENTS: Fair values of the Company's off-balance sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit and standby letters of credit do not represent a significant value to the Company until such commitments are funded. The Company has determined that these instruments do not have a distinguishable fair value and no fair value has been assigned. The carrying value and estimated fair value of the Company's financial instruments were as follows: <TABLE> <CAPTION> DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------------------ ------------------------------ CARRYING FAIR CARRYING FAIR AMOUNT Value AMOUNT Value ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS) ---------------------------------------------------------------- <S> <C> <C> <C> <C> Financial assets: Cash and short-term investments $ 37,151 $ 37,151 $ 51,521 $ 51,521 ============= ============= ============= ============= Investments in securities $ 123,219 $ 123,776 $ 135,266 $ 135,514 ============= ============= ============= ============= Loans $ 490,244 $ 505,637 $ 452,844 $ 438,263 Allowance for loan losses (7,627) - (7,273) - ------------- ------------- ------------- ------------- Loans, net $ 482,617 $ 505,637 $ 445,571 $ 438,263 ============= ============= ============= ============= Financial liabilities: Noninterest-bearing demand $ 90,109 $ 90,109 $ 87,006 $ 87,006 Interest-bearing demand 128,294 128,294 125,255 125,255 Savings 46,715 46,715 45,269 45,269 Time deposits 335,593 343,990 320,375 322,450 ------------- ------------- ------------- ------------- Total deposits $ 600,711 $ 609,108 $ 577,905 $ 579,980 ============= ============= ============= ============= Federal funds purchased and securities sold under agreements to repurchase $ 660 $ 660 $ 997 $ 997 ============= ============= ============= ============= Other borrowings $ 15,400 $ 15,400 $ 24,200 $ 24,200 ============= ============= ============= ============= </TABLE> F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 16. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY) <TABLE> <CAPTION> CONDENSED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (DOLLARS IN THOUSANDS) 1997 1996 ------------- ------------- <S> <C> <C> ASSETS Cash $ 2,262 $ 2,081 Investment in subsidiaries 67,172 62,043 Other assets 5,189 5,160 ------------- ------------- Total assets $ 74,623 $ 69,284 ============= ============= LIABILITIES Other borrowings $ 5,000 $ 5,000 Other liabilities 1,470 1,314 ------------- ------------- Total liabilities 6,470 6,314 ------------- ------------- STOCKHOLDERS' EQUITY 68,153 62,970 ------------- ------------- Total liabilities and stockholders' equity $ 74,623 $ 69,284 ============= ============= </TABLE> F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 16. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY) (CONTINUED) <TABLE> <CAPTION> CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) 1997 1996 1995 ------------- ------------- ------------- <S> <C> <C> <C> INCOME Dividends from subsidiaries $ 7,911 $ 5,358 $ 2,423 Interest 63 44 145 Fee income 5,392 2,953 2,772 Other income 446 111 25 ------------- ------------- ------------- Total income 13,812 8,466 5,365 ------------- ------------- ------------- EXPENSE Interest 353 230 114 Amortization and depreciation 567 477 485 Merger and acquisition expense 406 708 - Other expense 6,365 4,408 2,997 ------------- ------------- ------------- Total expense 7,691 5,823 3,596 ------------- ------------- ------------- Income before income tax benefits and equity in undistributed earnings of subsidiaries 6,121 2,643 1,769 INCOME TAX BENEFITS 828 889 117 ------------- ------------- ------------- Income before equity in undistributed earnings of subsidiaries 6,949 3,532 1,886 EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 497 3,626 4,482 ------------- ------------- ------------- Net income $ 7,446 $ 7,158 $ 6,368 ============= ============= ============= </TABLE> F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 16. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY) (CONTINUED) <TABLE> <CAPTION> CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) 1997 1996 1995 ------------- ------------- ------------- <S> <C> <C> <C> OPERATING ACTIVITIES Net income $ 7,446 $ 7,158 $ 6,368 ------------- ------------- ------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 208 117 175 Amortization of intangible assets 359 360 310 Undistributed earnings of subsidiaries (497) (3,626) (4,482) (Increase) decrease in interest receivable 6 10 (9) Decrease in interest payable 79 (11) - Increase (decrease) in taxes payable 199 (169) (148) Provision for deferred taxes (231) (38) 14 (Increase) decrease in due from subsidiaries 136 (333) (56) Other prepaids, deferrals and accruals, net 51 (240) (87) ------------- ------------- ------------- Total adjustments 310 (3,930) (4,283) ------------- ------------- ------------- Net cash provided by operating activities 7,756 3,228 2,085 ------------- ------------- ------------- INVESTING ACTIVITIES (Increase) decrease in interest-bearing deposits - 2,060 (560) in banks Purchases of premises and equipment (935) (482) (281) Proceeds from sale of premises - 10 17 Contribution of capital to subsidiary bank (4,200) - - Cash paid for purchased subsidiary - (6,216) - Proceeds from maturities of securities held t0 maturity 200 - - ------------- ------------- ------------- Net cash used in investing activities (4,935) (4,628) (824) ------------- ------------- ------------- </TABLE> F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 16. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY) (CONTINUED) <TABLE> <CAPTION> CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) 1997 1996 1995 ------------- ------------- ------------- <S> <C> <C> <C> FINANCING ACTIVITIES Proceeds from other borrowings $ - $ 5,000 $ - Repayment of other borrowings - (2,200) (150) Proceeds from exercise of stock options - - 125 Proceeds from exercise of stock options of pooled subsidiaries - 254 85 Treasury stock transactions, net - 26 (1) Purchase of fractional shares (7) (7) (3) Dividends paid (2,633) (1,763) (1,395) ------------- ------------- ------------- Net cash provided by (used in) financing activities (2,640) 1,310 (1,339) ------------- ------------- ------------- Net increase (decrease) in cash 181 (90) (78) Cash at beginning of year 2,081 2,171 2,249 ------------- ------------- ------------- Cash at end of year $ 2,262 $ 2,081 $ 2,171 ============= ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest $ 274 $ 241 $ 114 </TABLE> F-42