SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission file number 2-71249
SOUTH BANKING COMPANY
(Exact name of registrant as specified in its charter)
Georgia 58-1418696
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
104 North Dixon Street, Alma, Georgia 31510
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (912) 632-8631
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation 5-K is not contained herein and will not be
contained to the best of registrant's knowledge in definitive proxy on
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. (X)
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant: There is no established market for the
outstanding common stock of the registrant.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the most recent practicable date.
Class Outstanding at February 28, 1999
Common stock $1.00 par value per 399,500
share
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference
and the part of the Form 10-K into which the documents are incorporated:
(1) any annual reports to security holders; (2) any prospectus filed
pursuant to Rule 424(b) or (c) under the Securities Act of 1933. None
PART 1.
Item 1. Business
South Banking Company (the "Registrant") is a business corporation
organized at the direction of Alma Exchange Bank & Trust ("Alma Bank")
and Citizens State Bank ("Citizens Bank") (collectively, the "Banks") in
1980 under the Georgia Business Corporation Code. It was formed to
obtain all the issued and outstanding shares of Common Stock of the
Banks. Pursuant to the terms and provisions of a Plan of Reorganization
and Agreement of Merger, dated as of January 13, 1981 and approved by
the shareholders of the Banks on June 24, 1981, the Banks were
reorganized into a holding company structure by merging the Banks with
wholly-owned subsidiaries of the Registrant, which transaction was
consummated on July 28, 1981. In connection with those mergers, the
outstanding shares of Common Stock of the Banks were converted into
shares of the Registrant at specified ratios and the Banks became
wholly-owned subsidiaries of the Registrant. Pursuant to the terms and
provision of an agreement of merger dated June 12, 1989 between South
Banking and Georgia Peoples Bankshares, Inc. and approved by
shareholders of Georgia Peoples on February 26, 1990, Georgia Peoples
Bankshares and its subsidiary, Peoples State Bank, were merged into
South Banking Company. In connection with the merger, the outstanding
shares of Georgia Peoples Bankshares were converted into shares of the
Registrant at specified ratios. During 1993, South Banking Company
formed Banker's Data Services, Inc. ("Banker's Data") for the purpose of
handling all the computer functions of the banks. Operations began in
April, 1994. South Banking entered into an agreement in October of 1995
to acquire all the stock of Pineland State Bank ("Pineland Bank") in
Metter, Georgia. On January 11, 1996, the transaction was completed.
During 1998, Alma Bank formed South Financial Products, Inc. as a
vehicle to enter the financial services market. A limited number of
transactions occurred in 1998 with expectations of increased business in
1999.
The Banks
The Banks operate full service banking business in Bacon, Appling,
Candler and Camden Counties, Georgia, providing such customary banking
services as checking and savings accounts, various other types of time
deposits, safe deposit facilities and money transfers. The Banks also
finance commercial and agricultural transactions, make secured and
unsecured loans, and provide other financial services to its customers.
The Banks do not conduct trust activities. On December 31, 1997, Alma
Bank and Peoples Bank ranked, on the basis of total deposits, as the
smaller of the two banks in Bacon and Appling Counties and the 225th and
282nd largest banks among 353 banks in Georgia. Citizens Bank, one of
five banking operations in Camden County, ranked the 334th largest bank
among 353 banks in Georgia and Pineland Bank, one of three banking
operations in Metter, Georgia, ranked the 312th largest bank among 353
banks in Georgia, Sheshunoff's Banks of Georgia (1998 edition).
The Banks make and service both secured and unsecured loans to
individuals, firms and corporations. Commercial lending operations
include various types of credit for the Banks' customers. The Banks'
installment loan departments make direct loans to individuals and, to a
limited extent, purchase installment obligations from retailers both
with and without recourse. The Banks make a variety of residential,
industrial, commercial and agricultural loans secured by real estate,
including interim construction financing. Each bank has established
desired mixes of real estate, commercial, agricultural and consumer
lending depending upon activities within the local area. The ratios are
established in accordance with risk diversification goals. All banks
are located in small rural areas with low to moderate income levels.
The banks primarily look to real estate lending as a major portion of
portfolio. Real estate values have remained fairly stable over the past
few years to give stability to lending activities. Loan to value ratios
are maintained in the 60% to 80% level for various real estate lending.
Loan to value ratio of non real estate loans vary from 50% for the
inventory or receivables to 90% for vehicles and other consumer lending.
The economy of the area remains fairly constant without great
fluctuation. The national economy will effect the area primarily in the
timber and other agricultural products; however, the movement is not as
wide locally as national movement indicates. Citizens Bank, Pineland
Bank and Peoples Bank act as agents for another bank in offering "Master
Card" and "VISA" credit cards to its customers and does not assume the
credit risk on these transactions. Alma Bank offers "Master Card"
credit cards to its customers.
At December 31, 1998, the Banks had correspondent relationships
with 15 other commercial banks. These correspondent banks provide
certain services to the banks such as processing checks and other items,
buying and selling federal funds, handling money transfers and
exchanges, shipping coins and currency, providing security and
safekeeping of funds or other valuable items and furnishing limited
management information and advice. As compensation for the services,
the Banks maintain certain balances with its correspondents in
noninterest bearing accounts.
Employees
On December 31, 1998, the Registrant and its subsidiaries had 91
full-time and 11 part-time employees. The Registrant is not a party to
any collective bargaining agreement and employee relations are deemed to
be good.
Competition
The Banking business is highly competitive. The Banks compete
primarily with other commercial banks operating in Bacon, Camden,
Appling and Candler Counties. In addition, the Banks compete with other
financial institutions, including savings and loan associations, credit
unions and finance companies and, to a lesser extent, insurance
companies and certain governmental agencies. The banking industry is
also experiencing increased competition for deposits from less
traditional sources such as money-market mutual funds.
Customers
The majority of the Banks' customers are individuals and small to
medium-sized businesses headquartered within its service area. The
Banks are not dependent upon a single or a very few customers, the loss
of which would have a material adverse effect on the Banks. No customer
accounts for more than 5% of the Banks' total deposits at any time.
Management does not believe that the Banks' loan portfolio is dependent
on a single customer or group of customers concentrated in a particular
industry whose loss or insolvency would have a material adverse effect
on the Banks.
Systems
During 1998, the Company completely tested all of its core application
systems for Year 2000 readiness. For further information, please see
the "General" heading in Managements' Discussion and Analysis.
Monetary Policies
The results of operations of the Banks, and therefore of the
Registrant, are affected by credit policies of monetary authorities,
particularly the Board of Governors of the Federal Reserve System (the
"Board of Governors"), even though the Banks are not members of the
Federal Reserve.
The instruments of monetary policy employed by the Federal Reserve
include open market operations in U. S. Government securities and
changes in the discount rate on member bank borrowing changes in reserve
requirements against member bank deposits. In view of changing
conditions in the national economy and in the money markets, as well as
the effect of action by monetary and fiscal authorities, including the
Federal Reserve System, no prediction can be made as to possible future
changes in interest rates, deposit levels, loan demand or the business
and earnings of the Banks.
Supervision and Regulations
The Registrant is a bank holding company within the meaning of the
Bank Holding Company Act of 1956, as amended (the "Act"), and is
required to register as such with the Board of Governors. The
Registrant is required to file with the Board of Governors an annual
report and such other information as may be required to keep the Board
of Governors informed with respect to the Registrant's compliance with
the provisions of the Act. The Board of Governors may also make
examinations of the Registrant and its subsidiaries from time to time.
The Act requires every bank holding company to obtain the prior
approval of the Board of Governors before it may acquire substantially
all the assets of any bank or ownership or control of any voting shares
of any bank, if, after such acquisition, it would own or control,
directly or indirectly, more than five percent of the voting shares of
such bank. In no case, however, may the Board of Governors approve the
acquisition by the Registrant of the voting shares of any bank located
outside Georgia, unless such acquisition is specifically authorized by
the laws of the state in which the bank to be acquired is located.
In addition, a bank holding company is generally prohibited from
engaging in or acquiring direct or indirect control of voting shares of
any company engaged in nonbanking activities. One of the principal
exceptions to this prohibition is for activities found by the Board of
Governors, by order or regulation, to be so closely related to banking,
managing or controlling banks as to be a proper incident thereto. Some
of the activities that the Board of Governors has determined by
regulation to be closely related to banking are: making or servicing
loans and certain types of leases; performing certain data processing
services; acting as fiduciary, investment or financial advisor; making
investments in corporations or projects designed primarily to promote
community welfare.
In January, 1989, the Board of Governors issued final regulations
which implement risk-based rules for assessing bank and bank holding
company capital adequacy. The regulations revise the definition of
capital and establish minimum capital standards in relation to assets
and off-balance sheet exposures, as adjusted for credit risk.
Payment of Dividends and Other Restrictions
South is a legal entity separate and distinct from its
subsidiaries. There are various legal and regulatory limitations under
Federal and state law on the extent to which South's subsidiaries can
pay dividends or otherwise supply funds to South.
The principal source of South's cash revenues is dividends from its
subsidiaries. The prior approval of the FRB or the Georgia Department
of Bankers, as the case may be, is required if the total of all
dividends declared by any state member bank of the Federal Reserve
System in any calendar year exceeds the Bank's net profits (as defined)
for that year combined with its retained net profits for the preceding
two calendar years, less any required transfers to surplus or a fund for
the retirement of any preferred stock. The relevant Federal and state
regulatory agencies also have authority to prohibit a state member bank
or bank holding company, which would include South and the Subsidiary
Banks from engaging in what, in the opinion of such regulatory body,
constitutes an unsafe or unsound practice in conducting its business.
The payment of dividends could, depending upon the financial condition
of the subsidiary, be deemed to constitute such an unsafe or unsound
practice.
Under Georgia law, the prior approval of the DBF is required before
any cash dividends may be paid by a state bank if: (i) total classified
assets at the most recent examination of such bank exceed 80% of the
equity capital (as defined, which includes the reserve for loan losses)
of such bank; (ii) the aggregate amount of dividends declared or
anticipated to be declared in the calendar year exceeds 50% of the net
profits (as defined) for the previous calendar year; or (iii) the ratio
of equity capital to adjusted total assets is less than 6%.
In addition, the Banks are subject to limitations under Section 23A
of the Federal Reserve Act with respect to extensions of credit to,
investments in, and certain other transactions with South. Furthermore,
loans and extensions of credit are also subject to various collateral
requirements.
Capital Adequacy
The FRB has adopted risk-based capital guidelines for bank holding
companies. The minimum ratio of total capital ("Total Capital") to
risk-weighted assets (including certain off-balance sheet items, such as
standby letters of credit) is 8%. At least half of the Total Capital is
to be composed of common stock, minority interests in the equity
accounts of consolidated subsidiaries, noncumulative perpetual preferred
stock and a limited amount of perpetual preferred stock, less goodwill
("Tier I Capital"). The remainder may consist of subordinated debt,
other preferred stock and a limited amount of loan loss reserves.
In addition, the FRB has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a
minimum ratio of Tier I Capital to total assets, less goodwill (the
"Leverage Ratio") of 3% for bank holding companies that meet certain
specified criteria, including those having the highest regulatory
rating. All other bank holding companies generally are required to
maintain a Leverage Ratio of at least 3% plus an additional cushion of
100 to 200 basis points. The guidelines also provide that bank holding
companies experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the
minimum supervisory levels without significant reliance on intangible
assets. Furthermore, the FRB has indicated that it will consider a
"tangible Tier I capital leverage ratio" (deducting all intangibles) and
other indications of capital strength in evaluating proposals for
expansion or new activities.
Effective December 19, 1992, a new Section 38 to the Federal
Deposit Insurance Act implemented the prompt corrective action
provisions that Congress enacted as a part of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (the "1991 Act"). The
"prompt corrective action" provisions set forth five regulatory zones in
which all banks are placed largely based on their capital positions.
Regulators are permitted to take increasingly harsh action as a Bank's
financial condition declines. Regulators are also empowered to place in
receivership or require the sale of a bank to another depository
institution when a bank's capital leverage ratio reaches two percent.
Better capitalized institutions are generally subject to less onerous
regulation and supervision than banks with less amounts of capital.
The FDIC has adopted regulations implementing the prompt corrective
action provisions of the 1991 Act, which place financial institutions in
the following five categories based upon capitalization ratios: (i) a
"well capitalized" institution has a total risk-based capital ratio of
at least 10%, a Tier I risk-based ratio of at least 6% and a leverage
ratio of at least 5%; (ii) an "adequately capitalized" institution has
a total risk-based capital ratio of at least 8%, a Tier I risk-based
ratio of at least 4% and a leverage ratio of at least 4%, (iii) an
"undercapitalized" institution has a total risk-based capital ratio of
under 8%, a Tier I risk-based ratio of under 4% or a leverage ratio of
under 4%; (iv) a "significantly undercapitalized" institution has a
total risk-based capital ratio of under 6%, a Tier I risk-based ratio of
under 3% or a leverage ratio of under 3%; and (v) a "critically
undercapitalized" institution has a leverage ratio of 2% or less.
Institutions in any of the three undercapitalized categories would be
prohibited from declaring dividends or making capital distributions.
The FDIC regulations also establish procedures for "downgrading" an
institution to a lower capital category based on supervisory factors
other than capital.
The downgrading of an institution's category is automatic in two
situations: (i) whenever an otherwise well-capitalized institution is
subject to any written capital order or directive; and (ii) where an
undercapitalized institution fails to submit or implement a capital
restoration plan or has its plan disapproved. The Federal banking
agencies may treat institutions in the well-capitalized, adequately
capitalized and undercapitalized categories as if they were in the next
lower level based on safety and soundness considerations relating to
factors other than capital levels.
All insured institutions regardless of their level of
capitalization are prohibited by the Federal Deposit Insurance
Corporation Improvement Act of 1991 (the "FDIC Act") from paying any
dividend or making any other kind of capital distribution or paying any
management fee to any controlling person if following the payment or
distribution the institution would be undercapitalized. While the
prompt corrective action provisions of the FDIC Act contain no
requirements or restrictions aimed specifically at adequately
capitalized institutions, other provisions of the FDIC Act and the
agencies' regulations relating to deposit insurance assessments,
brokered deposits and interbank liabilities treat adequately capitalized
institutions less favorably than those that are well-capitalized.
Under the FDIC's regulations, all of the Subsidiary Banks are "well
capitalized" institutions.
The written policies of the Georgia Department of Banking and
Finance (the "DBF") require that state banks in Georgia generally
maintain a minimum ratio of primary capital to total assets of 6.0%. At
December 31, 1998, the Banks were in compliance with these requirements.
In addition, the DBF is likely to compute capital obligations in
accordance with the risk-based capital rules while continuing to require
a minimum absolute level of capital.
It is not anticipated that such minimum capital requirements will
affect the business operations of the Banks. However, the Board, in
connection with granting approval for bank holding companies to acquire
other banks and bank holding companies or to engage in non-banking
activities, requires bank holding companies to maintain tangible capital
ratios at approximate peer group levels. This requirement can result in
a bank holding company maintaining more capital than it would otherwise
maintain. At the present time, South Banking Company's tangible primary
capital ratios are equal or above their peer group level.
The laws of Georgia require annual registration with the DBF by all
Georgia bank holding companies. Such registration includes information
with respect to the financial condition, operations and management of
intercompany relationships of the bank holding company and its
subsidiaries and related matters. The DBF may also require such other
information as is necessary to keep informed as to whether the
provisions of Georgia law and the regulations and orders issued
thereunder by the DBF have been in compliance with and the DBF may make
examinations of the bank holding company and each bank subsidiary
thereof.
The banks are also subject to examination by the DBF and the FDIC.
The DBF regulates and monitors all areas of the operations of the banks,
including reserves, loans, mortgages, issuances of securities, payment
of dividends, interest rates and establishment of branches. Interest
and certain other charges collected or contracted for by the Banks are
also subject to state usury laws and certain federal laws concerning
interest rates. The Banks' deposits are insured by the FDIC up to the
maximum permitted by law.
Legislation has passed that would allow banks to branch statewide
subject to certain restrictions. This law became effective July 1,
1996.
Georgia banking laws permit bank holding companies to own more than
one bank, subject to the prior approval of the Georgia Department of
Banking and Finance; thereby, in effect, permitting statewide banking
organizations. Such banks may be acquired as subsidiaries of the
Registrant or merged into its existing bank subsidiaries.
Support of Subsidiary Banks
Under the FRB policy, South is expected to act as a source of
financial strength to, and to commit resources to support, each of the
Subsidiary Banks. This support may be required at times when, absent
such FRB policy, South may not be inclined to provide it. In the event
of a bank holding company's bankruptcy, any commitment by the bank
holding company to a Federal bank regulatory agency to maintain the
capital of a subsidiary bank will be assumed by the bankruptcy trustee
and entitled to a priority of payment.
As a result of the enactment of Section 206 of the Financial
Institutions Reform, Recovery and Enforcement Act ("FIRREA") on August
9, 1989, a depository institution insured by the FDIC can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the
FDIC after August 9, 1989 in connection with (i) the default of a
commonly controlled FDIC-insured depository institution or (ii) any
assistance provided by the FDIC to any commonly controlled FDIC-insured
depository institution "in danger of default" is defined generally as
the existence of certain conditions indicating that a default is likely
to occur in the absence of regulator assistance.
FDIC Insurance Assessments
The Subsidiary Banks are subject to FDIC deposit insurance
assessments for the Bank Insurance Fund (the "BIF"). Since 1989, the
annual FDIC deposit insurance assessments increased from $.083 per $100
of deposits to a minimum level of $.23 per $100, an increase of 177
percent. The FDIC implemented a risk-based assessment system whereby
banks are assessed on a sliding scale depending on their placement in
nine separate supervisory categories, from $.23 per $100 of deposits for
the healthiest banks (those with the highest capital, best management
and best overall condition) to as much as $.31 per $100 of deposits for
the less-healthy institutions, for an average of $.259 per $100 of
deposits.
On August 8, 1995, the FDIC lowered the BIF premium for "healthy"
banks 83% from $.23 per $100 in deposits to $.04 per $100 in deposits,
while retaining the $.31 level for the riskiest banks. The average
assessment rate was therefore reduced from $.232 to $.044 per $100 of
deposits. The new rate took effect on September 29, 1995. On November
14, 1995, the FDIC again lowered the BIF premium for "healthy" banks
from $.04 per $100 of deposits to zero for the highest rated
institutions (92% of the industry). All of the Subsidiary Banks are
insured under the BIF fund and it is expected that they will be required
to pay only the legally required annual minimum payments during 1998.
Recent Legislative and Regulatory Action
On April 19, 1995, the four Federal bank regulatory agencies
adopted revisions to the regulations promulgated pursuant to the
Community Reinvestment Act (the "CRA"), which are intended to set
distinct assessment standards for financial institutions. The revised
regulations contain three evaluation tests: (i) a lending test which
will compare the institution's market share of loans in low- and
moderate-income areas to its market share of loans in its entire service
area and the percentage of a bank's outstanding loans to low- and
moderate-income areas or individuals; (ii) a services test which will
evaluate the provisions of services that promote the availability of
credit to low- and moderate-income areas; and (iii) an investment test,
which will evaluate an institution's record of investments in
organizations designed to foster community development, small- and
minority-owned businesses and affordable housing lending, including
state and local government housing or revenue bonds. The regulation is
designed to reduce some paperwork requirements of the current
regulations and provide regulators, institutions and community groups
with a more objective and predictable manner with which to evaluate the
CRA performance of financial institutions. The rule became effective on
January 1, 1996, at which time evaluation under streamlined procedures
were scheduled to begin for institutions with assets of less than $250
million.
These regulations have had little or no effect on South and the
Subsidiary Banks. Congress and various Federal agencies (including
Housing and Urban Development, the Federal Trade Commission and the
Department of Justice) (collectively, the "Federal Agencies")
responsible for implementing the nation's fair lending laws have been
increasingly concerned that prospective home buyers and other borrowers
are experiencing discrimination in their efforts to obtain loans. In
recent years, the Department of Justice has filed suit against financial
institutions, which it determined had discriminated, seeking fines and
restitution for borrowers who allegedly suffered from discriminatory
practices. Most, if not all, of these suits have been settled (some for
substantial sums) without a full adjudication on the merits.
On March 8, 1994, the Federal Agencies, in an effort to clarify
what constitutes lending discrimination and specify the factors the
agencies will consider in determining if lending discrimination exists,
announced a joint policy statement detailing specific discriminatory
practices prohibited under the Equal Opportunity Act and the Fair
Housing Act. In the policy statement, three methods of proving lending
discrimination were identified: (i) over evidence of discrimination,
when a lender blatantly discriminates on a prohibited basis; (ii)
evidence of disparate treatment, when a lender treats applicants
differently based on a prohibited factor even where there is no showing
that the treatment was motivated by prejudice or a conscious intention
to discriminate against a person; and (iii) evidence of disparate
impact, when a lender applies a practice uniformly to all applicants,
but the practice has a discriminatory effect, even where such practices
are neutral on their face and are applied equally, unless the practice
can be justified on the basis of business necessity.
On September 23, 1994, President Clinton signed the Reigle
Community Development and Regulatory Improvement Act of 1994 (the
"Regulatory Improvement Act"). The Regulatory Improvement Act contains
funding for community development projects through banks and community
development financial institutions and also numerous regulatory relief
provisions designed to eliminate certain duplicative regulations and
paperwork requirements. On September 29, 1994, President Clinton signed
the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Federal Interstate Bill") which amended Federal law to permit bank
holding companies to acquire existing banks in any state effective
September 29, 1995, and to permit any interstate bank holding company to
merge its various bank subsidiaries into a single bank with interstate
branches after May 31, 1997. States have the authority to authorize
interstate branching prior to June 1, 1997, or, alternatively, to opt
out of interstate branching prior to that date. The Georgia Financial
Institutions Code was amended in 1994 to permit the acquisition of a
Georgia bank or bank holding company by out-of-state bank holding
companies beginning July 1, 1995. On September 29, 1995, the interstate
banking provisions of the Georgia Financial Institutions Code were
superseded by the Federal Interstate Bill.
In February 1996, the Georgia legislature adopted the "Georgia
Interstate Branching Act," which permitted 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
beginning July 1, 1996. Beginning July 1, 1998, the number of de novo
bank branches which may be established will no longer be limited.
The Tax Reform Act of 1986
The Tax Reform Act of 1986 (the "TRA") contains several provisions
affecting banks and financial institutions, including new provisions
governing tax rates, depreciation, investment tax credits, bad debt
reserves, interest expense allocable to tax-exempt obligations, net
operating losses and a new alternative minimum tax ("AMT"). The TRA
reduced the maximum corporate income tax rate from 46% to 34% in 1988
when the provision was fully effective. A surcharge of 5% will also
apply to income in excess of $100,000, up to a maximum surcharge of
$11,750.
For tax years beginning after 1986, the TRA imposes an AMT on
corporations. The tax is computed by applying a 20% tax rate to the sum
of (1) taxable income, (2) certain preference items and (3) 50% of the
excess of book income before taxes over the sum of (1) and (2). For a
financial institution, the principal preference items result from bad
debt deductions, accelerated depreciation and interest on certain
private purpose tax exempt bonds. The taxpayer is then required to pay
the greater of its regular tax or the AMT. South does not expect to
incur an alternative minimum tax liability based on its current
profitability and investment portfolio. If the AMT is incurred as a
result of deferral preferences, a credit is generated which may be used
against regular tax in subsequent years.
The TRA provides for disallowances of 100% of any otherwise
allowable interest expense deduction that is deemed allocable to tax-
exempt obligations acquired after August 7, 1986, except for certain
small municipal issuers. As a result, the Banks expect to primarily
invest in taxable investment securities.
Financial institutions with assets in excess of $500 million are no
longer permitted to use the reserve method for accounting for loan
losses for tax purposes. South does not exceed this asset size and,
accordingly, can continue to use the reserve method.
The TRA also eliminated investment tax credits after December 31,
1985. As investment in premises and equipment is not significant to the
assets of South, the elimination of investment tax credits is not
perceived to materially affect the tax provision expense of South.
The foregoing is only a summary of certain Federal income tax
changes caused by the TRA and is qualified in its entirety by reference
to the TRA. It does not include all aspects of the TRA as it relates to
financial institutions or state, local or other tax laws.
Omnibus Budget Reconciliation Act of 1993
The Omnibus Budget Reconciliation Act of 1993 (the "Tax Act")
continues the recent legislation affecting banks and financial
institutions. The Tax Act was designed as a deficit reduction with
similarities to the 1990 Act which was also designed to slice $500
billion from the deficit.
Generally the Tax Act affects all corporations as to a new 35% tax
rate for income in excess of $10 million and the maximum corporate
capital gains rate was increased to 35%. The Registrant currently will
not be affected by the change due to the income level of the Registrant.
Various other provisions would restrict certain deductions and/or change
the treatment of certain transactions.
Provisions that especially affect financial institutions included
market to market Accounting for Securities. The Tax Act requires that
securities that are inventory in the hands of a dealer be inventoried at
fair market value (market to market). For the purposes of these rules,
"securities" and a "dealer" are defined more broadly than under prior
law. A "dealer" is any person who either regularly purchases securities
from or sells securities to customers in the ordinary course of business
or regularly offers to enter into, assume, offset, assign or otherwise
terminate positions in securities with customers in the ordinary course
of a trade or business. Banks have been determined to qualify as a
dealer under the new definitions. Unless securities are properly
identified as held for investment, all inventory will be required to be
market to market.
A second item affecting financial institutions is the treatment of
tax-free FSLIC Assistance that was credited on or after March 4, 1991 in
connection with the disposition of "covered" assets. Financial
institutions are required to treat that assistance as compensation for
any losses claimed on dispositions or charge-offs of these assets,
effectively denying them any tax loss for those assets. This provision
should not have any effect on the Registrant.
The third item affecting financial institutions is the amortization
of intangible assets effective for purchase after the enactment (August
10, 1993). Taxpayers are required to amortize most intangibles
(including goodwill, core deposits, going concern value and covenant not
to compete) used in a trade or business over a 15 year period.
Exception to this rule includes mortgage service rights. The provision
will have significant impact on any future purchases the holding company
may decide to undertake.
Some of the other provisions such as eliminating deductions for
lobbying expense and club dues will impact the taxes payable by the
Registrant.
Recent and Proposed Changes in Accounting Rules
In June, 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income. The statement is effective for annual and
quarterly financial statements for fiscal years beginning after December
15, 1997, with earlier application permitted. For the Company, the
statement became effective in the first quarter of 1998 and required
reclassification of earlier financial statements for comparative
purposes. SFAS No. 130 requires that changes in the amounts of
comprehensive income items be shown in a primary financial statement.
Comprehensive income is defined by the statement as "the change in
equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources.
It includes all changes in equity during a period except those resulting
from investments by owners and distributions to owners." While the
adoption of this statement changed the look of the Company's financial
statements, it did not have a material effect on the Company.
Also, in June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The statement is
effective for financial statements for fiscal years beginning after
December 15, 1997, with earlier application permitted. SFAS No. 131
changes the way public companies report information about segments of
their business in their annual financial statements and requires them to
report selected segment information in their quarterly reports issued to
shareholders. A company is required to report on operating segments
based on the management approach. An operating segment is defined as
any component of an enterprise that engages in business activities from
which it may earn revenues and incur expenses. The management approach
is based on the way that management organizes the segments within the
enterprise for making operating decisions and assessing performance.
The adoption of this standard did not have a material effect on the
Company.
In February 1998, the FASB issued SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits. The
statement is effective for fiscal years beginning after December 15,
1997. SFAS No. 132 provides additional information to facilitate
financial analysis and eliminates certain disclosures which are no
longer useful. To the extent practical, the statement also standardizes
disclosures for retiree benefits. The adoption of this standard did not
have a material effect on the Company.
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The statement is
effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999, with earlier adoption permitted. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments and for hedging activities. The statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The adoption of this standard will not have a material effect on
the Company.
In October 1998, the FASB issued SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise, an amendment to
SFAS No. 65. This statement is effective for the first fiscal quarter
beginning after December 15, 1998, (or January 1, 1999 for the Company).
The statement requires that after the securitization of mortgage loans
held for sale, any retained mortgage-backed securities be classified in
accordance with SFAS No. 115, based on the entity's ability and intent
to sell or hold those investments. Prior to this statement, mortgage
banking entities were required to classify these securities as trading
only. The adoption of this standard did not have a material effect on
the Company.
Industry Developments
Certain recently-enacted and proposed legislation could have an
effect on both the costs of doing business and the competitive factors
facing the financial institution's industry. Because of the uncertainty
of the final terms and likelihood of passage of the proposed
legislation, the Company is unable to assess the impact of any proposed
legislation on its financial condition or operations at this time.
Selected Statistical Information
The tables and schedules on the following pages set forth certain
significant statistical data with respect to: (i) the distribution of
assets, liabilities and shareholders' equity and the interest rates and
interest differentials experienced by, the Registrant and its
subsidiaries; (ii) the investment portfolio of the Registrant and its
subsidiaries; (iii) the loan portfolio of the Registrant and its
subsidiaries, including types of loans, maturities and sensitivity to
changes in interest rates and information on nonperforming loans; (iv)
summary of the loan loss experience and reserves for loan losses of the
Registrant and its subsidiaries; (v) types of deposits of the Registrant
and its subsidiaries; and (vi) the return on assets and equity for the
Registrant and its subsidiaries.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIALS
A. The condensed average balance sheets for the periods indicated are
presented below.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
ASSETS (In Thousands)
Cash and due from banks $ 5,736 $ 8,723 $ 5,421
Cash in bank - interest
bearing 1,411 1,412 2,138
Taxable investment securities 15,285 12,026 14,598
Nontaxable investment securities 1,945 1,833 1,947
Others 932 833 556
Federal funds sold and
securities purchased under
agreements to resell 11,354 7,202 9,593
Loans - net 111,239 96,657 84,023
Other assets 8,625 7,944 7,523
Total Assets $ 156,527 $ 136,630 $ 125,799
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits: Demand - non-interest
bearing $ 20,209 $ 18,052 $ 17,379
Demand - interest bearing 22,732 21,118 20,380
Savings 9,048 8,327 7,903
Time 86,113 72,070 64,401
Total Deposits $ 138,102 $ 119,567 $ 110,063
Federal funds purchased - 507 343
Other borrowed funds 3,380 3,614 3,741
Other liabilities 1,694 1,102 888
Total Liabilities $ 143,176 $ 124,790 $ 115,035
Shareholders' equity 13,351 11,840 10,764
Total Liabilities and
Shareholders' Equity $ 156,527 $ 136,630 $ 125,799
B. Interest Rates. The tables below show for the periods indicated the
average amount outstanding for major categories of interest earning
assets and interest bearing liabilities; the average interest rates
earned or paid; the interest income and expense earned or paid thereon;
net interest earnings and the net yield on interest-earning assets. (1)
Year Ended December 31, 1998
Average Yield/
Balance Interest Rate
ASSETS (In Thousands)
Cash in banks - interest
bearing $ 1,411 $ 82 5.81%
Loans 111,239 12,152 10.92
Taxable investments 15,285 936 6.12
Non-taxable investments 1,945 92 4.73
Other 932 57 6.11
Federal funds sold and
securities purchased
under agreements to resell 11,354 601 5.29
Total Interest-Bearing
Assets $ 142,166 $ 13,920 9.79%
LIABILITIES
Demand - interest bearing $ 22,732 $ 678 2.98%
Savings deposits 9,048 288 3.18
Other time deposits 86,113 5,164 5.99
Other borrowing 3,380 262 7.75
Federal funds purchased - - -
Total Interest-Bearing
Liabilities $ 121,273 $ 6,392 5.27%
Net interest earnings $ 7,528
Net yield on interest earning assets 4.52%
Year Ended December 31, 1997
Average Yield/
Balance Interest Rate
ASSETS (In Thousands)
Cash in banks - interest
bearing $ 1,412 $ 92 6.50%
Loans 96,657 10,770 11.14
Taxable investments 12,026 941 7.82
Non-taxable investments 1,833 90 4.91
Other 833 42 5.04
Federal funds sold and
securities purchased
under agreements to resell 7,202 393 5.45
Total Interest-Bearing Assets $ 119,963 $ 12,328 10.28%
LIABILITIES
Demand - interest bearing $ 21,118 $ 720 3.41%
Savings deposits 8,327 258 3.10
Other time deposits 72,070 4,074 5.65
Other borrowing 3,614 305 8.44
Federal funds purchased 507 30 5.91
Total Interest-Bearing
Liabilities $ 105,636 $ 5,387 5.10%
Net interest earnings $ 6,941
Net yield on interest earning assets 5.18%
Year Ended December 31, 1996
Average Yield/
Balance Interest Rate
ASSETS (In Thousands)
Cash in banks - interest
bearing $ 2,138 $ 119 5.57%
Loans 84,023 9,479 11.28
Taxable investments 14,598 879 6.02
Non-taxable investments 1,947 95 4.88
Other 556 28 5.04
Federal funds sold and
securities purchased
under agreements to resell 9,593 506 5.27
Total Interest-Bearing Assets $ 112,855 $ 11,106 9.84%
LIABILITIES
Demand - interest bearing $ 20,380 $ 579 2.84%
Savings deposits 7,903 231 2.92
Other time deposits 64,401 3,703 5.75
Other short term borrowing 3,741 292 7.81
Federal funds purchased 343 18 5.25
Total Interest-Bearing
Liabilities $ 96,768 $ 4,823 4.98%
Net interest earnings $ 6,283
Net yield on interest earning assets 4.86%
(1) Note: Loan fees are included for rate calculation purposes. Loan fees
included in interest amounted to approximately $810,462 in 1998, $732,852
in 1997 and $723,885 in 1996. Non accrual loans have been included in the
average balances.
C. Interest Differentials. The following tables set forth for the
periods indicated a summary of the changes in interest earned and interest
paid resulting from changes in volume and changes in rates.
1998 compared to 1997
Increase (Decrease) Due to (1)
Volume Rate Change
Interest earned on: (In Thousands)
Cash in banks - interest
bearing $ - $( 10) $( 10)
Loans 1,624 ( 242) 1,382
Taxable investments 255 ( 260) ( 5))
Nontaxable investments 5 ( 3)) 2
Other 5 10 15
Federal funds sold and
securities purchased under
agreement to resell 230 ( 22) 208
Total Interest-Earning Assets $ 2,119 $( 527) $ 1,592
1998 compared to 1997 (con't)
Increase (Decrease) Due to (1)
Volume Rate Change
Interest paid on:
NOW deposits $ 55 $( 97) $( 42)
Savings deposits 22 8 30
Other time deposits 793 297 1,090
Other borrowing ( 20)) ( 23) ( 43))
Federal funds purchased ( 30 - ( 30))
Total Interest-Bearing
Liabilities $ 820 $ 185 $ 1,005
Net Interest Earnings $ 1,299 $( 712) $ 587
(1) The change in interest due to volume has been determined by applying
the rate from the earlier year to the change in average balances
outstanding from one year to the next. The change in interest due to rate
has been determined by applying the change in rate from one year to the
next to average balances outstanding in the later year.
1997 compared to 1996
Increase (Decrease) Due to (1)
Volume Rate Change
Interest earned on: (In Thousands)
Cash in banks - interest
bearing $( 40) $ 13 $( 27)
Loans 1,426 ( 135) 1,291
Taxable investments ( 155) 217 62
Nontaxable investments ( 6) 1 ( 5)
Other 14 - 14
Federal funds sold and
securities purchased under
agreement to resell ( 126) 13 ( 113)
Total Interest-Earning Assets $ 1,113 $ 109 $ 1,222
Interest paid on:
NOW deposits $ 22 $ 119 $ 141
Savings deposits 12 15 27
Other time deposits 443 ( 72) 371
Other borrowing ( 10) 23 13
Federal funds purchased 9 3 12
Total Interest-Bearing
Liabilities $ 476 $ 88 $ 564
Net Interest Earnings $ 637 $ 21 $ 658
(1) The change in interest due to volume has been determined by applying
the rate from the earlier year to the change in average balances
outstanding from one year to the next. The change in interest due to rate
has been determined by applying the change in rate from one year to the
next to average balances outstanding in the later year.
1996 compared to 1995
Increase (Decrease) Due to (1)
Volume Rate Change
Interest earned on: (In Thousands)
Cash in banks - interest
bearing $ 65 $ 13 $ 78
Loans 2,698 ( 215) 2,483
Taxable investments 366 - 366
Nontaxable investments 50 ( 14 36)
Other 10 8 18
Federal funds sold and
securities purchased under
agreement to resell 92 ( 58) 34
Total Interest-Earning Assets $ 3,281 $( 266) $ 3,015
Interest paid on:
NOW deposits $ 139 $ 33 $ 172
Savings deposits 34 15 49
Other time deposits 1,298 ( 175) 1,123
Other borrowing 205 ( 57) 148
Federal funds purchased 17 - 17
Total Interest-Bearing
Liabilities $ 1,693 $( 184) $ 1,509
Net Interest Earnings $ 1,588 $( 82) $ 1,506
(1) The change in interest due to volume has been determined by applying
the rate from the earlier year to the change in average balances
outstanding from one year to the next. The change in interest due to rate
has been determined by applying the change in rate from one year to the
next to average balances outstanding in the later year.
II. INVESTMENT PORTFOLIO
A. Types of Investments The carrying amounts of investment securities
at the dates indicated are summarized as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
(In Thousands)
U. S. Treasury and other
U. S. government agencies
and corporations $ 14,750 $ 13,892 $ 12,381
State and political
subdivisions (domestic) 1,959 1,976 1,888
Mortgage backed securities 732 1,080 1,544
Equities 300 - -
Totals $ 17,741 $ 16,948 $ 15,813
B. Maturities The amounts of investment securities in each category as
of December 31, 1998 are shown in the following table according to
maturity classifications (1) one year or less, (2) after one year through
five years, (3) after five years through ten years, (4) after ten years.
U. S. Treasury
and Other U. S.
Government State
Agencies and and Political Mortgage Backed
Corporations Subdivisions Securities
Average Average
Yield Yield Average
Amount (1) Amount (1)(2) Amount Yield
(In Thousands)
Maturity:
One year or less $ 2,159 5.99% $ 196 6.54% $ 124 6.00
After one year
through five years 11,449 5.92 1,132 7.18 313 6.04
After five years
through ten years 1,140 5.75 - - - -
After ten years - - 632 8.85 295 6.65
Totals $14,748 5.92% $ 1,960 7.65% $ 732 6.28%
(1) Yields were computed using coupon interest, adding discount
accretion or subtracting premium amortization, as appropriate, on a
ratable basis over the life of each security. The weighted average
yield for each maturity range was computed using the acquisition price
of each security in that range.
(2) Yields on securities of state and political subdivisions are stated
on a tax equivalent basis, using a tax rate of 34%.
III. Loan Portfolio
A. Types of Loans The amount of loans outstanding at the indicated
dates are shown in the following table according to type of loan.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
(In Thousands)
Commercial, financial and
agricultural $ 29,889 $ 29,728 $ 19,565
Real estate - mortgage 58,005 52,544 53,813
Real estate - construction 7,909 6,968 3,798
Installments 19,157 17,285 11,870
$ 114,960 $ 106,525 $ 89,046
Less - Unearned income 154 149 150
Reserve for possible
losses 1,971 1,822 1,781
Total Loans $ 112,835 $ 104,554 $ 87,115
B. Maturities and Sensitivity to Changes in Interest Rates The amount
of total loans by category outstanding as of December 31, 1998 which,
based on remaining repayments of principal, are due in (1) one year or
less, (2) more than one year but less than five and (3) more than five
years are shown in the following table. The amounts due after one year
are classified according to the sensitivity to changes in interest
rates.
Maturity Classification
Over One
One Year Through Over
or Less Five Years Five Years Total
(In Thousands)
Types of Loans
Commercial,
financial and
agricultural $ 24,320 $ 5,071 $ 498 $ 29,889
Real estate
mortgage 39,144 11,192 7,669 58,005
Real estate
construction 63,647 400 1,095 7,909
Installment 7,304 8,973 2,880 19,157
Total loans due
after one year
with:
Predetermined
interest rate 37,738
Floating interest
rate 90
C. Nonperforming Loans The following table presents, at the dates
indicated, the aggregate amounts of nonperforming loans for the
categories indicated.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
(In Thousands)
Loans accounted for on a
non-accrual basis $ 557 $ 311 $ 557
Loans contractually past
due ninety days or more
as to interest or principal
payments 492 760 226
Loans, the terms of which
have been renegotiated to
provide a reduction or
deferral of interest or
principal because of a
deterioration in the financial
position of the borrower 37 36 35
C. Nonperforming Loans - (con't)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
(In Thousands)
Loans now current about which
there are serious doubts as
to the ability of the borrower
to comply with present loan
repayment terms - - -
Loans are placed on non-accrual basis when loans are past due
ninety days or more. Management can elect not to place loans on non-
accrual status if net realizable value of collateral is sufficient to
cover the balance and accrued interest.
D. Commitments and Lines of Credit The banks provide commitments and
lines of credits to their most credit worthy customers only.
Commitments are for short terms, usually not exceeding 30 days, and are
provided for a fee of 1% of the amount committed. Lines of credit are
for periods extending up to one year. No fee is usually charged with
respect to the unused portion of a line of credit. Interest rates on
loans made pursuant to commitments or under lines of credit are deter-
mined at the time that the commitment is made or line is established.
E. Rate Sensitivity Analysis
SOUTH BANKING COMPANY
DECEMBER 31, 1998
+-------Interest Sensitive-----+
0 - 91 - 1 to 3
90 Day 365 Days Years
(Thousands of Dollars)
Earning Assets:
Loans $ 57,716 $ 19,046 $ 16,167
Investment securities 1,455 1,320 5,062
Interest bearing deposits 397 863 180
Federal funds sold and
securities purchased under
agreement to resell 17,648 - -
Total Earning Assets $ 77,216 $ 21,229 $ 21,409
Supporting Sources of Funds
Savings $ 9,057 $ - $ -
Money market and NOW 24,613 - -
Other time deposits 20,059 43,236 3,886
CD's - $100,000 or more 5,700 15,003 312
Other borrowings 3,003 300 -
Total Interest Bearing
Deposits $ 62,432 $ 58,539 $ 4,198
Demand deposits and other funds
supporting earning assets -
non interest earning $ - $ - $ -
Total Supporting Sources
of Funds $ 62,432 $ 58,539 $ 4,198
Interest Sensitive - interest
earning assets less interest
bearing liabilities $ 14,784 $( 37,310) $ 17,211
Cumulative interest rate sensitivity
gap $ 14,784 $( 22,526) $( 5,315)
Interest rate sensitivity gap ratio 1.24 .36 5.09
Cumulative interest rate sensitivity
gap ratio 1.24 .81 .96
3 to 5 5 Years +
Years Over Total
$ 9,366 $ 12,664 $ 114,959
7,832 2,073 17,742
- 99 1,539
- - 17,648
$ 17,198 $ 14,836 $ 151,888
$ - $ - $ 9,057
- - 24,613
580 - 67,761
244 - 21,259
- - 3,303
$ 824 $ - $ 125,993
$ - $ - $ 23,300
$ 824 $ - $ 149,293
$ 16,374 $ 14,836 $ 2,595
$ 11,059 $ 25,895 $ 2,595
20.87 - -
1.09 1.21 1.02
The rate sensitivity analysis table is designed to demonstrate
South's sensitivity to changes in interest rates by setting forth in
comparative form the repricing maturities of South's assets and
liabilities for the period shown. A ratio of greater than 1.0 times
interest earnings assets to interest bearing liabilities indicates that
an increase in interest rates will generally result in an increase in
net income for South and a decrease in interest rates will result in a
decrease in net income. A ratio of less than 1.0 times earnings assets
to interest-bearing liabilities indicates that a decrease in interest
rates will generally result in a increase in net income for South and an
increase in interest rates will result in an decrease in net income.
IV. Summary of Loan Loss Experience
The following table summarizes loan balances at the end of each
period and average balances during the year for each category; changes
in the reverse for possible loan losses arising from loans charged off
and recoveries on loans previously charged off; additions to the reserve
which have been charged to operating expense; and the ratio of net
charge-offs during the period to average loans.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
(In Thousands)
A. Average amount of loans
outstanding $ 111,239 $ 96,657 $ 84,023
B. Balance of reserve for
possible loan losses at
beginning of period $ 1,822 $ 1,781 $ 994
C. Loans charged off:
Commercial, financial
and agricultural $ 10 $ 44 $ 57
Real estate - mortgage 75 123 30
Installments 172 97 172
$ 257 $ 264 $ 259
D. Recoveries of loans
previously charged off:
Commercial, financial
and agricultural $ 20 $ 34 $ 161
Real estate 2 8 68
Installment 98 83 45
$ 120 $ 125 $ 274
E. Net loans charged off
during period $ 137 $ 139 $( 15)
Additions to reserve
charged to operating
expense during period (1) $ 286 $ 180 $ 201
Addition from bank
acquisition - - 571
$ 286 $ 180 $ 772
F. Balance of reserve for
possible loan losses at
end of period $ 1,971 $ 1,822 $ 1,781
G. Ratio of net loans charged
off during the period to
average loans outstanding .12 .14 ( .02)
(1) Although the provisions exceeded the minimum provision required by
regulatory authorities, the Board of Directors believe that the
provision has not been in excess of the amount required to maintain the
reserve at a sufficient level to cover potential losses. The amount
charged to operations and the related balance in the reserve for loan
losses is based upon periodic evaluations by management of the loan
portfolio. These evaluations consider several factors including, but
not limited to, general economic conditions, loan portfolio composition,
prior loan loss experience and management's estimation of future
potential losses.
(2) Management's review of the loan portfolio did not allocate reserves
by category due to the portfolio's small size. The reserves were
allocated on the basis of a review of the entire portfolio. The
portfolio does not contain excessive concentrations in any industry or
loan category that might expose South to significant risk.
V. Deposits
A. Average deposits, classified as demand deposits, savings deposits
and time certificates of deposit for the periods indicated are presented
below:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
(In Thousands)
Demand deposits $ 20,209 $ 18,052 $ 17,379
NOW deposits 22,732 21,118 20,380
Savings deposits 9,048 8,327 7,903
Time certificates of deposits 86,113 72,070 64,401
Total Deposits $ 138,102 $ 119,567 $ 110,063
B. The amounts of time certificates of deposit issued in amounts of
$100,000 or more as of December 31, 1998 are shown below by category,
which is based on time remaining until maturity of (1) three months or
less, (2) over three through six months, (3) over six through twelve
months and (4) over twelve months.
Three months or less $ 5,700
Over three through twelve months 15,003
Over twelve months 556
Total $ 21,259
VI. Return on Assets and Shareholders' Equity
The following rate of return information for the periods indicated
is presented below:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
Return on assets (1) 1.23% 1.13% 1.14%
Return on equity (2) 14.45 13.06 13.29
Dividend payout ratio (3) 13.46 15.54 15.54
Equity to assets ratio (4) 8.53 8.67 8.56
(1) Net income divided by average total assets.
(2) Net income divided by average equity.
(3) Dividends declared per share divided by net income per share.
(4) Average equity divided by average total assets.
Item 2. Properties
Alma Bank's main banking office and the Registrant's principal
executive offices are located at 104 North Dixon Street, Alma, Georgia
31510. The building, containing approximately 13,040 square feet of
usable office and banking space, and the land, approximately 1.2 acres,
are owned by Alma Bank. Alma Bank also has a separate drive-in banking
facility located at 505 South Pierce Street, Alma, Georgia. The
building, containing 510 square feet, in which the branch is located and
the land, approximately .4 acres, on which it is located are owned by
Alma Bank.
Citizens Bank's main banking office is located at 205 East King
Street, Kingsland, Georgia 31548. The building, containing
approximately 6,600 square feet of usable office and banking space, and
the land, approximately 2 acres, are owned by Citizens Bank.
Peoples Bank's main banking office is located at Comas and E.
Parker Streets, Baxley, Georgia 31513. The building, containing
approximately 7,800 square feet of usable office and banking space, and
the land, approximately 2.5 acres, are owned by the Peoples Bank. The
Bank does not have branches.
Pineland Bank's main banking office is located at 257 North Broad
Street, Metter, Georgia 30439. The building, containing approximately
10,000 square feet of usable office and banking space, and the land,
approximately 1 acre, are owned by the Pineland Bank. The Bank opened
a branch in 1998 on land under a long term lease.
Item 3. Legal Proceedings
Neither the Registrant or its subsidiaries are parties to, nor is
any of their property the subject of, any material pending legal
proceedings, other than ordinary routine proceedings incidental to the
business of the Banks, nor to the knowledge of the management of the
Registrant are any such proceedings contemplated or threatened against
it or its subsidiaries.
Item 4. Submission of Matters to a vote of Security Holders
None applicable.
Part II.
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
There is no public market for the common stock of South or the
Banks. The last known selling price of South's common stock, based on
information available to South's management, was $12.00 per share on
February 23, 1999. As of March 1, 1999, the Company had 483
shareholders with 399,500 shares outstanding.
For the years ended December 31, 1998, 1997 and 1996, South paid
cash dividends of $259,654 or $.65 per share, $239,681 or $.60 per
share, and $219,849 or $.55 per share, respectively. These dollars
equate to dividend payout ratios (dividends declared divided by net
income) of 13.46%, 15.54% and 15.54% in 1998, 1997 and 1996,
respectively. Certain other information concerning dividends and
historical trading prices is set forth below:
QUARTERLY COMMON STOCK DATA
Set forth below is information concerning high and low sales prices
by quarter for each of the last two fiscal years and dividend
information for the last two fiscal years. The Company's common stock
is not traded on any established pubic trading market. The Company acts
as its own transfer agent, and the information concerning sales prices
set forth below is derived from the Company's stock transfer records.
As of December 31, 1998, there were 484 shareholders of record.
SALES PRICES BY QUARTER
High Low
Fiscal Year 1998
First Quarter $12.00 $12.00
Second Quarter - -
Third Quarter - -
Fourth Quarter 12.00 12.00
Fiscal Year 1997
First Quarter $12.50 $12.00
Second Quarter - -
Third Quarter 12.00 12.00
Fourth Quarter 12.00 12.00
DIVIDENDS PAID PER SHARE
Fiscal Year 1998
March 31 $ .00
June 30 .00
September 30 .00
December 28 .65
Item 6. Selected Financial Data
Years Ended December 31,
1998 1997 1996 1995 1994
(In Thousands)
Total Assets $ 164,890 $ 149,895 $ 132,291 $ 97,175 $ 84,477
Operations:
Interest income $ 13,920 $ 12,328 $ 11,107 $ 8,090 $ 6,568
Interest expense 6,392 5,387 4,823 3,314 2,269
Net Interest
Income $ 7,528 $ 6,941 $ 6,284 $ 4,776 $ 4,299
Provision for
loan losses 286 179 202 62 53
Net interest
income after
provision for
loan losses $ 7,242 $ 6,762 $ 6,082 $ 4,714 $ 4,246
Other income $ 1,905 $ 1,569 $ 1,596 $ 1,371 $ 1,264
Other expenses $ 6,387 $ 6,017 $ 5,586 $ 4,345 $ 4,116
Income before
income taxes $ 2,760 $ 2,314 $ 2,092 $ 1,740 $ 1,394
Federal Income
taxes $ 831 $ 768 $ 662 $ 590 $ 405
Net income before
extraordinary
items $ 1,929 $ 1,546 $ 1,430 $ 1,150 $ 989
Extraordinary
items $ - $ - $ - $ - $ -
Net income $ 1,929 $ 1,546 $ 1,430 $ 1,150 $ 989
Per Share Data:
Income after
extraordinary
items $ 4.83 $ 3.86 $ 3.54 $ 2.84 $ 2.44
Net income $ 4.83 $ 3.86 $ 3.54 $ 2.84 $ 2.44
Dividends
Declared $ .65 $ .60 $ .55 $ .55 $ .55
Book value $ 35.56 $ 31.28 $ 27.72 $ 24.79 $ 22.20
Profitability Ratios
Net income to
average total
assets 1.23% 1.13% 1.14% 1.28% 1.19%
Net income to average
stockholders'
equity $ 14.45 $ 13.06 $ 13.29 $ 12.08 $ 11.22
Net interest
margin $ 4.52 $ 5.18 $ 4.86 $ 5.20 $ 5.21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The purpose of this discussion is to focus on information about
South Banking Company's financial condition and results of operations
which is not otherwise apparent from the consolidated financial
statement included in this report. Reference should be made to those
statements, selected statistical information and the selected financial
data presented elsewhere in this report for an understanding of the
following discussion and analysis.
Year 2000 Readiness Disclosure
The Year 2000 problem consists of the inability or potential
inability of various software and hardware, including non-computer
equipment using embedded microprocessors, to function properly or at all
when dealing with dates beyond December 31, 1999. The problem has
arisen because until recently most software and hardware was designed to
accept only two-digit date codes for the year and to assume that the
first two digits were "19."
The Company has completed a study to determine the remedial action
necessary to deal with the year 2000 problem with respect to its
information technology systems and business relationships. While most
view the project as a data processing or computer concern, every
department and function of the Company are affected and have been
included in the Company's analysis and compliance process. The
significance of the risks for noncompliance are substantial and include
both business and legal risks to the Company. The process of assessing
the problem has been completed. Year 2000 project progress has been
and will continue to be reported to the Board of Directors at least
quarterly until complete. The historical and estimated direct costs of
remediation are not expected to exceed $25,000.
Information Technology Systems
The Company's information technology ("IT") systems consist of
third-party software installed on a mainframe, with over 50 terminals,
most of which are also personal computers ("PCs"). The mainframe vendor
has assured the Company that the mainframe and its operating system
software are Year 2000 compliant. All of the Company's testing of the
network hardware and software associated with the LANs indicates that
such hardware and software is now Year 2000 ready. With respect to PCs,
the Company has identified which PC hardware and software is specified
by the manufacturer as Year 2000 compliant and is in the process of
upgrading as necessary, depending generally on the extent to which
specific hardware or software is mission critical for the Company.
The Company has successfully advanced the core application systems'
"test bank" to Year 2000, with such testing revealing no Year 2000
problems. This "test bank" emulates a production environment, involving
relevant applications software, system software, hardware and critical
internal and external interfaces. The costs of renovating the core
system to make it Year 2000 ready were included as part of the Company's
on-going maintenance agreement with the vendor.
ATMS
To address potential Year 2000 problems, the Company has
reconfigured its automatic teller machines ("ATMs") to utilize the
mainframe's Year 2000 compliant operating system.
Transactions With Third Parties
Other primary areas where Year 2000 compliance is a material issue
for the Company include transactions with the Federal Reserve, payroll
processing and management of the Company's investment portfolio.
Testing of the Company's ability to conduct transactions with the
Federal Reserve via the Fedline has not uncovered any Year 2000
problems. Finally, the Company has reviewed results of Year 2000
testing performed by the Company's agent for its portfolio account.
Those results indicate that the portfolio agent's systems are Year 2000
ready.
Year 2000 Impact On The Loan Portfolio
The Company is evaluating the Year 2000 readiness of its borrowers
and the potential effect of such readiness, or lack thereof, on the
credit quality of its loan portfolio. A Year 2000 credit risk policy
has been developed requiring that a risk assessment be performed on new
and existing borrowers, with the exception of certain borrowers that are
not significantly exposed to the Year 2000 problem or whose aggregate
outstanding debt to the Company is relatively minimal.
Business Resumption Contingency Plans
Based on the results of the system-wide testing conducted so far
and the Business Resumption Contingency Plans being developed, the
Company believes it will be Year 2000 ready by December 31, 1999. By
June 30, 1999, all Business Resumption Contingency Plans will be
completed. These contingency plans will include consideration of the
most reasonably likely worst case scenario that the Company could
encounter.
Financial Condition and Liquidity
Financial Condition
South functions as a financial institution and as such its
financial condition should be examined in terms of trends in its sources
and uses of funds. A comparison of daily average balances indicate how
South has managed its sources and uses of funds. Included in the
selected statistical information, the comparison of daily average
balance in the business portion of the filing indicated how South has
managed its sources and uses of funds. South used its funds primarily
to support its lending activities.
South's total assets increased to $164,890,742 at year end 1998
from $149,894,560 at year end 1997. This growth represents a 10.00%
increase in 1998 compared to 13.30% increase in 1997. This increase is
attributable to normal growth within the banking area with limited entry
into competitive situations for large deposits. Due to the increase
competition in certain markets, the net interest margins have declined.
The net interest margin is not anticipated to change much in 1999 as the
effect of the new competition has leveled off. However, continued
decreases in the prime rate will impact the margins. The interest rate
sensitivity analysis, which is a part of this report, gives some
indication of the repricing opportunities of South. The gap ratios for
the first twelve months are outside the limits established by the Bank
as ideal, however, the current interest rates are not favorable to
customers purchasing certificates in excess of twelve months. Loan
demand continues to be strong with loans increasing $8,434,622 in 1998.
The banks continue to look for good quality loans as loans represent the
highest yielding asset on the Bank's books. The rural economy of the
Banks' market area has been stable prior to 1998. The Banks have
noticed some decline in the overall economy, and especially in the
agricultural and timber industries. While the Banks are not heavy into
these industries, the decline in these areas have impacted the overall
economy. Classified loans for regulatory purposes remain at low levels
and, despite the problem in the local economies, do not represent any
trend or uncertainties which management reasonably expects will
materially impact future operating results, liquidity of capital
resources or represents material credits about which management is aware
that causes management to have serious doubts as to the ability of such
borrowers to comply with the loan payment terms.
South's investment portfolio, including certificates of deposits in
other banks, increased to $19,280,633 from $18,227,557. The small
increase of $1,053,076 from operations is an indication of the loan
demand of the banks and the desire of the banks to utilize the assets of
South in the highest yielding manner available to the banks without
creating liquidity problems. South has maintained adequate federal
funds sold and investments available for sale to sufficiently maintain
adequate liquidity. South's securities are primarily short term of
three years or less in maturity, enabling South to better monitor the
rate sensitivity of these assets. Unrealized gain and losses on this
portfolio is not material to the statement as South maintains a slight
unrealized gain of $128,133.
As the primary source of funds, aggregate deposits increased by
$13,387,853 in 1998 compared to $15,908,509 in 1997. This represents a
10.09% increase for the year compared to a 13.63% increase in 1997.
This illustrates the efforts of the banks to maintain good core deposit
growth and reach the higher paying time certificates. One of the markets
experienced new competition in 1998 which had some impact on time
certificate rates.
Liquidity
The primary function of asset/liability management is to assure
adequate liquidity and maintain an appropriate balance between interest
sensitive earning assets and interest bearing liabilities. Liquidity
management involves the ability to meet the cash flow requirements of
customers who may be either depositors desiring to withdraw funds or
borrowers requiring assurance that sufficient funds will be available to
meet their credit needs. Interest rate sensitivity management seeks to
avoid fluctuating net interest margins and to enhance consistent growth
of net interest income through periods of changing interest rates.
Interest rate sensitivity varies with different types of interest-
earning assets and interest bearing liabilities. Overnight federal
funds on which rates change daily and loans which are tied to prime
differ considerably from long-term investment and fixed rate loans.
Similarly, time deposits over $100,000 and money market accounts are
much more interest sensitive than passbook savings and long-term capital
notes. The shorter-term interest rate sensitivities are key to
measuring the interest sensitivity gap, or excess interest-sensitive
earning assets over interest-bearing liabilities. An interest rate
sensitivity table is included elsewhere in this document, and it shows
the interest sensitivity gaps for different time intervals as of
December 31, 1998. The first 30 days there is an excess of interest-
bearing assets over interest-bearing liabilities. South becomes more
sensitive to interest rate fluctuations on a short time period. While
the cumulative gap declines with each time interval, South remains
within a manageable position.
Marketable investment securities, particularly those of shorter
maturities, and federal funds sold are the principal sources of asset
liquidity. Securities maturing in one year or less amounted to
$2,480,921 and federal funds sold with daily maturities amounted to
$17,648,000 at year end 1998, an increase from prior years as deposit
growth exceeded loan demand. Maturing loans and certificates of
deposits in other banks are other sources of liquidity.
The overall liquidity of South has been enhanced by a significant
aggregate amount of core deposits. These core deposits have remained
constant during this period. South has utilized less stable short-term
funding sources to enhance liquidity such as large denomination time
deposits and money market certificates within its current customer base,
but has not attempted to acquire these type of accounts from non-core
deposit customers. South has utilized its core deposit base to help
insure it maintains adequate liquidity.
Historically, the trend in cash flows as represented in the
statement of cash flows shows a steady increase in cash generated by
operations from the last three years. This is a result of increasing
net income for each year. While income is not predictable, it is
anticipated that liquidity will continue to be enhanced by the
operations of the bank. Operations activity, however, generate only a
small portion of the cash flow activities of the bank. Primary cash
flow comes from investing activities such as sales and/or maturity of
investment securities and in the financing activity through an increase
in deposits. The primary use of cash flow includes the purchase of
securities and making new loans as investing activities. The history of
the bank's cash flow indicates a nonrepeating source such as proceeds
from borrowings utilized as sources of cash for the purpose of
acquisition or expansion. South's overall cash flows indicate the
relative stability and manageable growth of the bank's assets. South
utilized deposit growth as its primary source of funds to handle growth.
South's liquidity is maintained at levels determined by management to be
sufficient to handle the cash needs that might arise at any given date.
Outside sources are maintained, but South looks to these sources only on
a very short term basis. South's long term liquidity plans include
utilizing internally generated deposits as its primary source of cash
flows and utilizing the shifting of the make up of assets to handle
short term demands on cash.
Capital Resources
South does not presently have commitments for significant capital
expenditures. However, there are regulatory constraints placed on
South's capital.
In January 1989, the Federal Reserve Board released new standards
for measuring capital adequacy for U. S. banking organizations. These
standards are based on the original risk-based capital requirements
first proposed in early 1986 by U. S. bank regulators and then developed
jointly by authorities from the twelve leading industrial countries. As
a result, the standards are designed to not only provide more risk-
responsive capital guidelines for financial institutions in the U. S.,
but also incorporate a consistent framework for use by financial
institutions operating in the major international financial markets.
In general, the standards require banks and bank holding companies
to maintain capital based on "risk-adjusted" assets so that categories
of assets with potentially higher credit risk will require more capital
backing than assets with lower risk. In addition, banks and bank
holding companies are required to maintain capital to support, on a
risk-adjusted basis, certain off-balance sheet activities such as loan
commitments and interest rate swaps.
The Federal Reserve Board standards classify capital into two
tiers, referred to as Tier 1 and Tier 2. Tier 1 capital consists of
common shareholders' equity, noncumulative and cumulative (BHCs only)
perpetual preferred stock and minority interest less goodwill. Tier 2
capital consists of allowance for loan and lease losses, perpetual
preferred stock (not included in Tier 1), hybrid capital instruments,
term subordinated debt and intermediate-term preferred stock. By
December 31, 1992, all banks were required to meet a minimum ratio of 8%
of qualifying total capital to risk-adjusted total assets with at least
4% Tier 1 capital. Capital that qualifies as Tier 2 capital is limited
to 100% of Tier 1 capital.
Loans and Asset Quality
Management of the Company believes that the loan portfolio is
adequately diversified. Commercial loans are spread through numerous
types of businesses with no particular industry concentrations. Loans
to individuals are made primarily to finance consumer goods purchased.
At December 31, 1998, total loans, net of unearned discounts, were 75%
of total earning assets. Loans secured by real estate accounted for 57%
of total loans as of December 31, 1998. Most of the loans classified as
real estate-mortgage are commercial loans where real estate provides
additional collateral. The Banks do not participate in the secondary
loan market.
Nonperforming assets include nonaccrual loans, accruing loans past
due 90 days or more and other real estate, which includes foreclosures,
deeds in lieu of foreclosure and in-substance foreclosures.
A loan is generally classified as nonaccrual when full
collectibility of principal or interest is doubtful or a loan becomes 90
days past due as to principal or interest, unless management determines
that the estimated net realizable value of the collateral is sufficient
to cover the principal balance and accrued interest. When interest
accruals are discontinued, unpaid interest credited to income in the
current year is reversed and unpaid interest accrued in prior years is
charged to the allowance for loan losses. Nonperforming loans are
returned to performing status when the loan is brought current and has
performed in accordance with contract terms for a period of time. A
summary of South's loan loss experience is included elsewhere in this
report.
Distribution of Nonperforming Assets
1998 1997 1996
(In Thousands)
Nonaccrual loans $ 557 $ 311 $ 553
Past due 90 days still accruing 492 760 226
Other real estate (ORE) 163 122 346
$ 1,212 $ 1,193 $ 1,125
Nonperforming loans to year
end loans .91% 1.00% .87%
Nonperforming assets to year
end loan and ORE 1.05% 1.11% 1.26%
The ratio of nonperforming assets has increased each year since
1994. However in 1998, a slight decrease occurred as 90 days past dues
declined. This decrease is attributed to management's early review
system to grasp problems before they become unmanageable. Management
continues to work on nonperforming assets to further reduce this ratio.
Asset-Liability Management and Market Risk Sensitivity
Market risk is the risk of loss from adverse changes in market
prices and rates. The Company's market risk arises principally from
interest rate risk inherent in its lending, deposit and borrowing
activities. Management actively monitors and manages its inherent rate
risk exposure. Although the Company manages other risks, as in credit
quality and liquidity risk, in the normal course of business, management
considers interest rate risk to be its most significant market risk and
could potentially have the largest material effect on the Company's
financial condition and results of operations. Other types of market
risks, such as foreign currency exchange rate risk and commodity price
risk, do not arise in the normal course of the Company's business
activities.
The Company's profitability is affected by fluctuations in interest
rates. Management's goal is to maintain a reasonable balance between
exposure to interest rate fluctuations and earnings. A sudden and
substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates on interest-
earning assets and interest-bearing liabilities do not change at the
same speed, to the same extent or on the same basis. The Company
monitors the impact of changes in interest rates on its net interest
income using several tools.
The Banks' goal is to minimize interest rate risk between interest
bearing assets and liabilities at various maturities through its Asset-
Liability Management (ALM). ALM involves managing the mix and pricing
of assets and liabilities in the face of uncertain interest rates and an
uncertain economic outlook. It seeks to achieve steady growth of net
interest income with an acceptable amount of interest rate risk and
sufficient liquidity. The process provides a framework for determining,
in conjunction with the profit planning process, which elements of the
Company's profitability factors can be controlled by management.
Understanding the current position and implications of past decisions is
necessary in providing direction for the future financial management of
the Company. The Company uses an asset-liability model to determine the
appropriate strategy for current conditions.
Interest sensitivity management is part of the asset-liability
management process. Interest sensitivity gap (GAP) is the difference
between total rate sensitive assets and rate sensitive liabilities in a
given time period. The Company's rate sensitive assets are those
repricing within one year and those maturing within one year. Rate
sensitive liabilities include insured money market accounts, savings
accounts, interest-bearing transaction accounts, time deposits and
borrowings. The profitability of the Company is influenced
significantly by management's ability to manage the relationship between
rate sensitive assets and liabilities. At December 31, 1998,
approximately 65% of the Company's earnings assets could be repriced
within one year compared to approximately 96% of its interest-bearing
liabilities. This compares to 62% and 95% in 1997.
The Company's current GAP analysis reflects that in periods of
increasing interest rates, rate sensitive assets will reprice slower
than rate sensitive liabilities. The Company's GAP analysis also shows
that at the interest repricing of one year, the Company's net interest
margin would be adversely impacted. This analysis, however, does not
take into account the dynamics of the marketplace. GAP is a static
measurement that assumes if the prime rate increases by 100 basis
points, all assets and liabilities that are due to reprice will increase
by 100 basis points at the next opportunity. However, the Company is
actually able to experience a benefit from rising rates in the short
term because deposit rates do not follow the national money market.
They are controlled by the local market. Loans do follow the money
market; so when rates increase they reprice immediately, but the Company
is able to manage the deposit side. The Company generally does not
raise deposit rates as fast or as much. The Company also has the
ability to manage its funding costs by choosing alternative sources of
funds.
The Company's current GAP position would also be interpreted to
mean that in periods of declining interest rates, the Company's net
interest margin would benefit. However, competitive pressures in the
local market may not allow the Company to lower rates on deposits, but
force the Company to lower rates on loans.
Computation of prospective effects of hypothetical interest rate
changes are based on numerous assumptions including relative levels of
market interest rates, loan prepayments and deposit decay rates, and
should not be relied upon as indicative of actual results. Further, the
computations do not contemplate any actions the Company could undertake
in response to changes in interest rates.
The rate sensitivity analysis as presented in the selected
statistical information shows the Company's financial instruments that
are sensitive to changes in interest rates, categorized by expected
maturity. Market risk sensitive instruments are generally defined as on
and off balance sheet derivatives and other financial instruments.
Notes to Market Risk Sensitivity Table:
Expected maturities are contractual maturities adjusted for
prepayments of principal when possible. The Company uses certain
assumptions to estimate expected maturities.
For loans, the Company has used contractual maturities due to the
fact that the Company has no historical information on prepayment
speeds. Since most of these loans are consumer and commercial
loans, and since the Company's customer base is community-based,
the Company feels its prepayment rates are insignificant.
For mortgage-backed securities, expected maturities are based upon
contractual maturity, projected repayments and prepayment of
principal. The prepayment experience herein is based on industry
averages as provided by the Company's investment trustee.
Loans receivable includes non-performing loans.
Interest-bearing liabilities are included in the period in which
the balances are expected to be withdrawn as a result of
contractual maturities. For accounts with no stated maturities,
the balances are included in the 0 to 90 day category.
The interest rate sensitivity gap represents the difference between
total interest-earning assets and total interest-bearing
liabilities.
An important aspect of achieving satisfactory net interest income
is the composition and maturities of rate sensitive assets and
liabilities. The table generally reflects that in periods of rising
interest rates, rate sensitive liabilities will reprice faster than rate
sensitive assets, thus having a negative effect on net interest income.
It must be understood, however, that such an analysis is only a snapshot
picture and does not reflect the dynamics of the market place.
Therefore, management reviews simulated earnings statements on a monthly
basis to more accurately anticipate its sensitivity to changes in
interest rates.
Results of Operations
1998 Compared to 1997
Net interest income remains an effective measurement of how well
management has balanced the South's interest rate sensitive assets and
liabilities. Net interest income increased by $586,672. The increase
of 8.45% compared to a 10.46% increase in 1997. The primary
determinants of the increase were loans and time deposits. As loan
demand increased, funds were channeled into higher yielding loans.
Management continues its policy of not soliciting high interest deposits
and was able to maintain stable cost of funds. The growth of assets and
liabilities was necessary to maintain level of net interest income as
net interest yield decreased to 4.52% from 5.18%. With the low interest
rate currently in the market and South's current interest rate gap,
South will continue its efforts to channel funds into higher yielding
assets. Due to the rate sensitivity gap, South will attempt to improve
its current position with a controlled attempt to lengthen its maturity
of interest rate sensitive liabilities although this is difficult
without rate adjustments upward.
Interest and fees on loans increased $1,382,418 or 12.83% from 1997
to 1998 due to loan growth of 7.9% in 1998. Interest on investment
securities decreased $14,505 or 1% from 1997 to 1998 due to a reduction
in the yield in investments as rates have declined in securities.
Interest income on federal funds sold increased $208,034 or 53% due to
higher average balances invested.
Total interest expense increased 18.6% or $1,005,298 from 1997 to
1998. The largest component of total interest expense is interest
expense on deposits, which increased $1,077,074 or 21% from 1997 to 1998
due to a 10% growth in deposits. The average rate paid on deposits was
5.27%, 5.10% and 4.98% in 1998, 1997 and 1996, respectively.
The allowance for possible loan losses is established through
charges to expense in the form of a provision for loan losses. The
provision for loan losses was $286,000 and $334,531, respectively, for
the years ended December 31, 1998 and 1997. The provision in 1998
reflecs replenishing the allowance for loan losses to cover net charge-
offs of $137,066, plus providing for the 7.9% increase in total loans
outstanding. The allowance for loan losses to total loans outstanding
is 1.71% at December 31, 1998. Net charge-offs to average loans are
0.12% for 1998 as compared to 0.14% for 1997.
The allowance for loan losses is based on an indepth analysis of
the loan portfolio. Specifically included in that analysis are the
following types of loans: loans determined to be of a material amount,
loans commented on by regulatory authorities, loans commented on by
internal and external auditors, loans past due more than 60 days, and
loans on a nonaccrual status. The allowance for loan losses is not
allocated to specific credit risk rather to the overall loan portfolio
as the individual banks are relatively small and can be looked at as a
whole. The overall loan portfolio remains of good quality, however,
some deterioration has been noted in economy which reflects on the loan
portfolio. The Banks have made provisions where necessary to reflect
the overall quality of loans.
Non-Interest Income
Non-interest income for 1998 increased by $335,546 or 4% over 1997,
as compared to a decrease in 1997 of $26,778 or 1.6% over 1996. These
increases generally resulted from increased SBA loan activity.
A significant contributor to non-interest income is service charges
on deposit accounts which decreased 2.3%. Management views deposit fee
income as a critical influence on profitability. Periodic monitoring of
competitive fee schedules and examination of alternative opportunities
insure that the Company realizes the maximum contribution to profits
from this area.
Non-Interest Expense
Non-interest expenses totaled $6,386,678 in 1998 as compared to
$6,017,178 in 1997. This represented a 6% increase from 1997 to 1998,
and a 7.7% increase from 1996 to 1997. The overall increases during the
year were due to growth in all geographic markets, which is evidenced by
the growth in deposits of 11% from 1997 to 1998 and 9% from 1996 to
1997. Salaries and other personnel expenses, which comprised 51% of
total non-interest expenses for 1998, were up $219,187 or 7% over 1997
due to normal salary increases and increased personnel due to the one
new branch. During 1997 and 1996, salaries and other personnel expenses
accounted for 50% and 48% of total other operating expenses,
respectively.
Combined net occupancy and furniture and equipment expenses
increased $102,423, or 9.8% from 1997 to 1998, as compared to an
increase of $117,214, or 12%, in 1997. The increase in 1998 is due to
the opening of one new branch.
Income Taxes
Income tax expense totaled $830,744 in 1998 as compared to $767,811
in 1997. The changes in net income tax expense for the years were due
to changes in taxable income for each respective year. Taxable income
is affected by net income, income on tax exempt investment securities
and loans, and the provision for loan losses. For tax purposes, the
Bank can only recognize actual loan losses. The Company works actively
with outside tax consultants to minimize tax expenses.
Results of Operations
1997 Compared to 1996
Net interest income remains an effective measurement of how well
management has balanced South's interest rate sensitive assets and
liabilities. Net interest income increased by $657,643. The increase
of 10.46% compared to a 7.8% increase in 1996. The primary determinants
of the increase were loans and time deposits. As loan demand increased,
funds were channeled into higher yielding loans. Management continues
its policy of not soliciting high interest deposits and was able to
maintain stable cost of funds. The shifting of assets and liabilities
was necessary to maintain the level of net interest income as net
interest yield increased to 5.20% from 4.96%. With the low interest
rate currently in the market and South's current interest rate gap,
South will continue its efforts to channel funds into higher yielding
assets. Due to the rate sensitivity gap, South will attempt to improve
its current position with a controlled attempt to lengthen its maturity
of interest rate sensitive liabilities although this is difficult
without rate adjustments upward.
The provision for loan loss was $1,821,680 in 1997 compared to
$1,781,013 in 1996. The provision for loan losses has been sufficient
to increase the allowance for loan losses each year. During the year
1997, loan loss were held to low levels as management continues to work
its loan portfolio to minimize charge-offs and place maximum efforts to
collect previously charged off.
Other income decreased slightly from the prior year. Service
charges increased in 1997 compared to 1996. Additionally, a small loss
on securities occurred in 1997 on early calls. A loss on sale of
equipment from the computer center during a conversion accounts for the
decline in other income in 1997.
Operating cost grew at a rate of 7.72%. The increases are
primarily personnel related as bank works hard at controlling cost.
Decrease in FDIC fees and increased data processing efficiency help
maintain cost levels.
Income tax expense was $767,811 in 1997 or 33.1% of net income
compared to $662,078 in 1996 or 31.6% of net income. The nondeductible
cost attributable to the 1996 acquisition of Pineland Bank accounts for
the higher tax rate.
Results of operations can be measured by various ratio analysis.
Two widely recognized performance indicators are the return on average
equity and the returns on average assets. South's return on equity
increased from 11.66% to 13.06%. The return on assets decreased from
1.16% to 1.13%. These levels are within peer group ranges of some other
bank holding companies, management believes that 1998 can obtain
comparable ratios despite increased competition.
1996 Compared to 1995
Net interest income is an effective measurement of how well
management has balanced South's interest rate sensitive assets and
liabilities. Net interest income increased by $1,507,250 of which
$1,134,158 was a result of Pineland State Bank acquisition. The
increase, excluding bank acquisition was $373,092 or 7.8% compared to a
11.1% increase in 1995. The primary determinants of the increase were
loans and time deposits. As loan demand increased, funds were channeled
into higher yielding loans. Management did not solicit high interest
deposits and was able to maintain stable cost of funds. The shifting of
assets and liabilities was necessary to maintain level of net interest
income as net interest yield decreased to 4.96% from 4.99%. With the
low interest rate currently in the market and South's current interest
rate gap, South will continue its efforts to channel funds into higher
yielding assets. Due to the rate sensitivity gap, South will attempt to
improve its current position with a controlled attempt to lengthen its
maturity of interest rate sensitive liabilities.
The provision for loan loss was $1,781,013 in 1996 of which
$603,299 came from the Pineland State Bank acquisition compared to
$994,027 in 1995. The provision for loan losses has been sufficient to
increase the allowance for loan losses each year. During the year 1996,
loan loss recoveries exceeded the loan charged off as management
continues to work its loan portfolio to minimize charge-offs and place
maximum efforts to collect previously charged off.
Other income, excluding bank acquired, increased slightly from the
prior year. Service charges increased in 1996 compared to 1995.
Additionally, a small loss on securities occurred in 1996 as early calls
and a small number of sales resulted in a small loss.
Operating cost, excluding bank acquired, grew at a rate of 1.68%.
The increases are primarily personnel related as bank works hard at
controlling cost. Decrease in FDIC fees and increased data processing
efficiency help maintain cost levels.
Income tax expense was $662,078 in 1996 or 31.6% of net income
compared to $589,746 in 1995 or 33.9% of net income. During the year
1993, FASB 109 was adopted by South with no material effect on its
financial statements; however, some adjustments were required.
Results of operations can be measured by various ratio analysis.
Two widely recognized performance indicators are the return on average
equity and the returns on average assets. South's return on equity
increased from 11.19% to 11.66%. The return on assets increased from
1.03% to 1.16%.
Regulatory Matters
During the year 1998, federal and state regulatory agencies
completed asset quality examinations at the South's subsidiary banks.
The South's level and classification of identified potential problem
loans was not revised significantly as a result of this regulatory
examination process.
Examination procedures require individual judgments about a
borrower's ability to repay loans, sufficiency of collateral values and
the effects of changing economic circumstances. These procedures are
similar to those employed by South in determining the adequacy of the
allowance for loan losses and in classifying loans. Judgments made by
regulatory examiners may differ from those made by management.
Management and the boards of directors of South and affiliates
evaluate existing practices and procedures on an ongoing basis. In
addition, regulators often make recommendations during the course of
their examinations that relate to the operations of South and its
affiliates. As a matter of practice, management and the boards of
directors of South and its subsidiaries consider such recommendations
promptly.
Impact of Inflation and Changing Prices
The majority of assets and liability of a financial institution are
monetary in nature; therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets
or inventories. However, inflation does have an important impact on the
growth of total assets in the banking industry and the resulting need to
increase equity capital at higher than normal rates in order to maintain
an appropriate equity-to-assets ratio. An important effect of this has
been the reduction of asset growth to maintain appropriate levels.
Another significant effect of inflation is on other expenses, which tend
to rise during periods of general inflation.
Management believes the most significant impact on financial
results is South's ability to react to changes in interest rates. As
discussed previously, management is attempting to maintain an
essentially balanced position between interest sensitive assets and
liabilities in order to protect against wide interest rate fluctuations.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the Registrant
and its subsidiaries are included on pages 47 through 82 of this Annual
report on Form 10-K.
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income and Other Comprehensive Income -
Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flow - Years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
Item 9. Disagreement on Accounting and Financial Disclosures
Not applicable.
Part III.
Item 10. Directors and Executive Officers of the Registrant
The Directors and Executive Officers of the Registrant and their
respective ages, positions with the Registrant, principal occupation and
Common Stock of the Registrant beneficially owned as of March 1, 1999
are as follows:
Director
(Officer) of # of shares
Position with Registrator Owned
Registrant of one of Beneficiary
& Principal the Banks (Percent of
Name (Age) Occupation Since Class)
Paul T. Bennett (43) President, 1978(1)(2) 18,738
Treasurer and (3) ( 4.69%)
Director; Vice (4)
Chairman and Director,
Citizens Bank; Vice
Chairman and Director,
Peoples State Bank &
Trust, Baxley, Georgia;
President Peoples Bank,
Lyons, Georgia; Director,
Banker's Data Services;
Director, Alma Exchange
Bank and Trust
Olivia Bennett (79) Executive Vice 1969(1)(2) 188,258
President, Secretary (3) ( 47.12%)
and Director; Chairman
and Director, Alma
Bank; Director,
Banker's Data Services;
Chairman of Board,
President, Citizens Bank;
Director, Peoples Bank
Lawrence Bennett (51) President and 1987(1)(2) 12,298
Director, Alma (4) ( 3.08%)
Bank; Director,
Banker's Data Services;
Director, Peoples
Bank, Baxley; Director
Peoples Bank, Lyons
Charles Stuckey (51) Director; Executive 1990(3) 358
Vice President, ( .1%)
Peoples Bank; Director,
Banker's Data
Services
Item 10. Directors and Executive Officers of the Registrant (Con't)
Director
(Officer) of # of shares
Position with Registrator Owned
Registrant of one of Beneficiary
& Principal the Banks (Percent of
Name (Age) Occupation Since Class)
James W. Whiddon (54) Director; Executive 1989(2) 66
Vice President and ( -%)
Director, Citizens
Bank; Director,
Banker's Data Services
Kenneth F. Wade (56) Director; Executive 1980(1) 4,862
Vice President, Director ( 1.21%)
and Cashier, Alma Bank;
Director, Banker's
Data Services
John Rogers (51) Director, Executive 1996(4) 100
Vice President, Pineland ( -%)
State Bank; Director;
Banker's Data Services
(1) Director of Alma Bank
(2) Director of Citizens Bank
(3) Director of Peoples Bank
(4) Director of Pineland State Bank
Included in shares owned by Olivia Bennett are 175,501 shares owned
by Estate of Valene Bennett of which she is the Executrix.
None of the directors are a director of a publicly-held corporation
which is required to file reports with the Securities and Exchange
Commission.
Each of the Directors and Executive Officers have been engaged in
his or her present principal occupation for at least five years. Olivia
Bennett is the mother of Paul T. Bennett and Lawrence Bennett. There
are no other family relationships between any other Director or
Executive Officer. Directors serve until the next annual meeting of
shareholders or until their successors are elected and qualified.
Officers serve at the pleasure of the Board of Directors.
Item 11. Management Renumeration and Transactions
The following information is given as to the cash and cash equivalent
forms of renumeration received by South's CEO.
Long-Term Compensation
Annual Compensation Awards
(A) (B) (C) (D) (E) (F) (G)
Other
Name and Annual Restricted
Principal Compen- Stock Options/
Position Year Salary Bonus sation (2) Award SARS #
Valene
Bennett
CEO 1998 $ - $ - $ - $ - $ -
CEO 1997 - - - - -
1996 - - - - -
1995 72,486 - 8,985 - -
1994 83,582 - 11,795 - -
Paul T.
Bennett
CEO 1998 $140,956 $ - $ 26,200 $ - $ -
1997 125,138 - 20,235 - -
1996 109,480 - 22,940 - -
1995 87,566 - 15,310 - -
1994 79,472 - 15,115 - -
Olivia
Bennett
Secretary 1998 $195,935 $ - $ 22,010 $ - $ -
1997 182,936 - 15,135 - -
1996 168,748 - 15,295 - -
1995 100,857 - 12,200 - -
1994 84,223 - 12,200 - -
Payouts
(H) (I)
All
Other
LTIP Compen-
Payouts sation
$ - $ -
- -
- -
- -
- -
$ - $ -
- -
- -
- -
- -
$ - $ -
- -
- -
- -
- -
(1) Does not include fees and dues for clubs and fraternal and civic
organizations paid by the Banks to certain officers for business related
purposes. Also, does not include any amounts for use of an automobile.
(2) Other compensation consists of director fees from registrant and
subsidiary banks.
Transactions with Management
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 1, 1999, the beneficial
ownership of Common Stock of Registrant by the Only "person" (as that
term is defined by the Securities and Exchange Commission), who owns of
record or is known by the Registrant to own beneficially 5% or more of
the outstanding shares of Common Stock of the Registrant and by all
Executive Officers and Directors of the Registrant as a group.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(Con't)
Number of Percent of
Shares Owned Outstanding
Name Beneficially Shares
Estate of Valene Bennett
Route 4
Alma, Georgia 31510 175,501 43.93%
Olivia Bennett
Route 4
Alma, Georgia 31510 12,758 3.19%
All Executive Officers and Directors
as a group (7 persons) 224,681 56.2%
Item 13. Certain Relationships and Related Transactions
The Banks have had, and expect to have in the future, banking
transactions in the ordinary course of business with Directors and
Officers of the Banks and their associates, including corporations,
partnerships and other organizations in which such Directors and
Officers have an interest, on substantially the same terms (including
interest rates and collateral) as those prevailing at the time for
comparable transactions with unrelated parties. Such transactions have
not involved more than the normal risk of collectibility or presented
other unfavorable features.
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
Item 14(a) 1. and 3. and Item 14(d)
(a) The following documents are filed as part of this report:
1. Financial Statements
(a) South Banking Company and Subsidiaries:
(i ) Consolidated Balance Sheets - December 31, 1998 and
1997
(ii ) Consolidated Statements of Income and Other
Comprehensive Income - Years ended December
31, 1998, 1997 and 1996
(iii) Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1998, 1997 and 1996
(iv ) Consolidated Statements of Cash Flow - Years ended
December 31, 1998, 1997 and 1996
(b) South Banking Company (Parent Corporation Only):
(i ) Balance Sheets - December 31, 1998 and 1997
(ii ) Statements of Income and Other Comprehensive Income -
Periods ended December 31, 1998, 1997 and 1996
(iii) Statements of Stockholders' Equity - Periods ended
December 31, 1998, 1997 and 1996
(iv ) Statements of Cash Flow - Years ended December 31,
1998, 1997 and 1996
3. Exhibits required by Item 7 of regulation S-K:
(3) Articles of Incorporation and By-Laws (included as
Exhibits 3(a) and (b), respectively, to Appendix II to
Registrant's Registration Statement on Form S-14, File No. 2-
71249, previously filed with the Commission and incorporated
herein by reference).
(13) 1998 Annual Report to Shareholders of South Banking
Company (not deemed filed except to the extent that sections
thereof are specifically incorporated into this report on Form
10-K by reference).
(22) List of the Registrant's subsidiaries:
(1) Alma Exchange Bank & Trust
(2) Citizens State Bank
(3) Peoples State Bank & Trust
(4) Bankers' Data Services, Inc.
(5) Pineland State Bank
(6) South Financial Products, Inc.
All of the Registrant's subsidiaries were incorporated under the
laws of the State of Georgia and are doing business in Georgia under the
above names.
(b) The registrant has not filed a Form 8-K during the last
quarter of the period.
(c) The response to this Item 14(c) is included in item
14(a).
(d) Financial Statements Schedules - None.
POWER OF ATTORNEY
Know all men by these present, that each person whose signature
appears below constitutes and appoints Paul T. Bennett, his attorney-in-
fact, to sign any amendments to this Report, and to file the same, with
exhibits thereto, and other documents in connection therewith. The
Securities and Exchange Commission hereby ratifying and confirming all
that said attorney-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Date: March 29, 1999
Paul T. Bennett
Principal Executive, Financial
and Accounting Officer and
Director
Date: March 29, 1999
Olivia Bennett
Executive Vice President and
Director
Date: March 29, 1999
Charles Stuckey
Director
Date: March 29, 1999
James W. Whiddon
Director
Date: March 29, 1999
Kenneth F. Wade
Director
Date: March 29, 1999
Lawrence Bennett
Director
Date: March 29, 1999
John Rogers
Director
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SOUTH BANKING COMPANY
Date: March 29, 1999 By:
Paul T. Bennett
President, Treasurer and
Director
SUPPLEMENTAL INFORMATION
The following supplemental information has not been sent to the
Registrant's shareholders, but will be sent subsequent to the filing of
this Annual Report on Form 10-K:
(1) 1998 annual report to shareholders.
(2) Proxy statement for 1999 annual meeting of shareholders.
The foregoing materials will be furnished to the Commission when
they are sent to the shareholders since the Registrant does not have
securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934. The foregoing materials shall not be deemed to be "filed"
with the Commission or otherwise subject to the liabilities of Section
18 of that Act.
SOUTH BANKING COMPANY
ALMA, GEORGIA
FINANCIAL STATEMENTS
DECEMBER 31, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
South Banking Company
Alma, Georgia 31510
We have audited the accompanying consolidated balance sheets of
South Banking Company as of December 31, 1998 and 1997 and the related
consolidated statements of income, cash flows and shareholders' equity
for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
South Banking Company at December 31, 1998 and 1997 and the consolidated
results of its operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
Respectfully submitted,
Waycross, Georgia H. H. BURNET & COMPANY, P. C.
February 6, 1999
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1998 1997
ASSETS
Cash and due from banks $ 6,122,085 $ 8,128,444
Deposits in other banks -
interest bearing $ 1,539,000 $ 1,280,000
Investment securities
Available for sale $ 16,993,917 $ 15,341,990
Held to maturity - market value
of $765,060 in 1998 and
$1,614,424 in 1997 $ 747,716 $ 1,605,567
Georgia Bankers stock $ 547,283 $ 547,283
Federal Home Loan Bank stock $ 396,200 $ 344,500
Federal funds sold $ 17,648,000 $ 10,040,000
Loans $114,959,844 $106,525,222
Less: Unearned discount ( 154,545) ( 149,418))
Reserve for loan losses ( 1,970,620) ( 1,821,680)))))
$112,834,679 $104,554,124
Bank premises and equipment $ 4,020,735 $ 4,078,502
Goodwill $ 262,137 $ 315,514
Other assets $ 3,778,990 $ 3,658,636
Total Assets $164,890,742 $149,894,560
The accompanying notes are an integral part of these financial statements.
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED BALANCE SHEETS (con't)
December 31, December 31,
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits: Demand - non-interest
bearing $ 23,299,454 $ 22,230,080
Demand - interest bearing 24,613,084 21,996,765
Savings 9,057,678 8,668,639
Time 89,019,729 79,706,608
$145,989,945 $132,602,092
Borrowing 3,156,096 3,347,322
Accrued expenses and other
liabilities 1,391,347 1,299,188
Federal funds purchased - 150,000
N/P - Federal Home Loan Bank 146,667 -
Total Liabilities $150,684,055 $137,398,602
Stockholders' Equity
Common stock $1 par value; shares
authorized - 1,000,000, shares
issued and outstanding -
1998 and 1997 - 399,500
and 399,500, respectively $ 399,500 $ 399,500
Surplus 3,070,831 3,070,831
Undivided profits 10,651,788 8,981,846
Accumulated other comprehensive income 84,568 43,781
Total Stockholders' Equity $ 14,206,687 $ 12,495,958
Total Liabilities and
Stockholders' Equity $164,890,742 $149,894,560
The accompanying notes are an integral part of these financial statements.
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
Interest Income
Interest and other
fees on loans $ 12,151,982 $ 10,769,564 $ 9,479,255
Interest on deposits -
interest bearing 82,264 92,506 119,366
Interest on federal
funds sold 601,351 393,317 506,525
Interest on investment
securities:
U. S. Treasury 208,785 202,516 186,697
U. S. Government agencies 668,239 655,440 541,881
Mortgage backed securities 58,537 83,951 150,011
State and municipal
subdivisions 91,698 89,615 95,350
Other securities 57,435 41,412 27,623
Total Interest Income $ 13,920,291 $ 12,328,321 $ 11,106,708
Interest Expense
Interest on deposits $ 6,129,599 $ 5,052,525 $ 4,512,373
Interest - other borrowing 262,755 334,531 310,713
Total Interest Expense $ 6,392,354 $ 5,387,056 $ 4,823,086
Net interest income $ 7,527,937 $ 6,941,265 $ 6,283,622
Provision for loan losses 286,000 179,500 201,589
Net interest income after
provision for loan losses $ 7,241,937 $ 6,761,765 $ 6,082,033
Other Operating Income
Service charge on deposits $ 1,164,506 $ 1,191,927 $ 1,163,935
Commission on insurance 93,217 108,277 84,843
Other income 450,789 264,480 231,602
Securities gains (losses) 2,288 246 ( 15,708)
Data processing fees 195,701 153,811 146,598
Loss on sale of fixed
assets ( 1,420) ( 149,206) ( 14,957)
Total Other Operating
Income $ 1,905,081 $ 1,569,535 $ 1,596,313
The accompanying notes are an integral part of these financial statements.
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (Con't)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
Other Operating Expenses
Salaries $ 2,643,285 $ 2,416,589 $ 2,148,626
Profit sharing and other
personnel expenses 640,615 648,124 518,962
Occupancy expense of bank
premises 393,219 383,268 368,854
Furniture and equipment
expense 754,466 661,994 559,194
Stationery and supplies 194,675 182,727 165,697
Data processing 179,560 178,838 393,791
Director fees 156,950 137,586 143,040
Other real estate expenses 13,991 15,781 31,751
Other expenses 1,409,917 1,392,271 1,256,029
Total Other Operating
Expenses $ 6,386,678 $ 6,017,178 $ 5,585,944
Income before income taxes $ 2,760,340 $ 2,314,122 $ 2,092,402
Applicable income taxes 830,744 767,811 662,078
Net Income $ 1,929,596 $ 1,546,311 $ 1,430,324
Other Comprehensive Income
before tax
Unrealized gain on
securities $ 61,798 $ 83,074 $( 81,271)
Other Comprehensive Income
before tax $ 61,798 $ 83,074 $( 81,271)
Income tax expenses related
to items of other
comprehensive income 21,011 28,245 ( 27,632)
Other comprehensive income,
net of tax $ 40,787 $ 54,829 $( 53,639)
Comprehensive Income $ 1,970,383 $ 1,600,893 $ 1,376,685
Per share data based on
weighted outstanding shares:
Weighted average
outstanding 339,500 400,501 403,811
Net Income $ 4.83 $ 3.86 $ 3.54
The accompanying notes are an integral part of these financial statements.
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Undivided
Stock Surplus Profits
Balance,
December 31, 1995 $ 405,283 $ 3,136,238 $ 6,464,741
Net income - - 1,430,324
Cash dividends - - ( 219,849
Unrealized gain
(loss) on securities
available for sale - - -
Redemption of shares ( 1,783) ( 19,657) -
Balance,
December 31, 1996 $ 403,500 $ 3,116,581 $ 7,675,216
Net income - - 1,546,311
Cash dividends - - ( 239,681)
Unrealized gain
(loss) on securities
available for sale - - -
Redemption of shares ( 4,000) ( 45,750) -)
Balance,
December 31, 1997 $ 399,500 $ 3,070,831 $ 8,981,846
Net income - - 1,929,596
Cash dividends - - ( 259,654)
Unrealized gain
(loss) on securities
available for sale - - -
Balance,
December 31, 1998 $ 399,500 $ 3,070,831 $10,651,788
Accumulated
Other Total
Comprehen- Stockholders'
sive Income Equity
$ 42,591 $10,048,853
- 1,430,324
- ( 219,849)
( 53,639) ( 53,639)
- ( 21,440)
$( 11,048) $11,184,249
- 1,546,311
- ( 239,681)
54,829 54,829
- ( 49,750
$ 43,781 $12,495,958
- 1,929,596
- ( 259,654)
40,787 40,787
$ 84,568 $14,206,687
The accompanying notes are an integral part of these financial statements.
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
Cash Flows From Operating
Activities:
Net income $ 1,929,596 $ 1,546,311 $ 1,430,324
Add expenses not
requiring cash:
Provision for depreciation
and amortization 643,978 599,366 462,180
Provision for loan losses 286,000 179,500 201,589
Provision for loss on ORE 8,000 7,000 41,044
Bond portfolio losses
(gains) ( 247) ( 265) 15,734
(Gain) loss on sale of
premises & equipment - 153,151 14,957
Gain on sale of other
real estate owned ( 11,336) ( 19,071) ( 5,342)
Increase (decrease) in
taxes payable 74,038 ( 125,505) ( 16,610)
Increase (decrease) in
interest payable 171,545 139,213 57,433
Increase (decrease) in
other liabilities ( 153,424) 1,156 49,749
(Increase) decrease in
interest receivable ( 60,192) ( 192,363) ( 272,411)
Decrease (increase) in
prepaid expenses ( 4,947) ( 22,924) 48,322
(Increase) decrease in
other assets ( 33,042) 134,274 ( 119,537)
Recognition of unearned
loan income 8,202 ( 1,039) 29,180
Net Cash Provided From
Operating Activities $ 2,858,171 $ 2,398,804 $ 1,936,612
Cash Flows From Investing
Activities:
Proceeds from sales of
investment securities -
available for sale $ - $ - $ 4,506,015
Proceeds from maturities
of securities held to
maturity 1,360,102 1,056,813 1,635,361
The accompanying notes are an integral part of these financial statements.
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED STATEMENTS OF CASH FLOWS (con't)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
Cash Flows From Investing
Activities: (con't)
Purchase of securities
held to maturity $( 502,131) $( 398,399) $( 498,738)
Proceeds from maturity of
securities available for
sale 8,074,011 5,209,008 3,302,652
Net loans to customers ( 8,810,806) (17,755,789) (13,911,298)
Purchase of securities
available for sale ( 9,351,464) ( 6,892,671) ( 9,479,898)
Purchase of premises and
equipment ( 576,788) ( 814,681 ( 423,377)))
Proceeds from sale of
premises and equipment 29,394 19,986 18,850
Proceeds from sale of
other real estate owned 198,212 379,997 258,140
Purchase of Bank stock ( 300,000) - ( 1,839,937)
Purchase of FHLB stock ( 51,700) ( 96,900) ( 147,700)
Cash and cash equivalents
received in bank
acquisition - - 8,773,744
Net Cash Provided from
Investing Activities $( 9,931,170) $(19,292,636) $( 7,806,186)
Cash Flows From Financing
Activities:
Net increase (decrease) in
demand deposits, NOW and
money markets $ 4,074,732 $ 2,335,042 $ 2,858,872
Net increase in savings
and time deposits 9,313,121 13,574,063 4,334,112
Proceeds from borrowing 460,000 320,043 2,000,000
Payments on borrowing ( 504,559) ( 480,000) ( 469,126)
Dividends paid ( 259,654) ( 239,681) ( 219,849)
Payments to retire stock - ( 49,750) ( 21,440)
Increase in federal funds
purchased ( 150,000) 150,000 -
Net Cash Provided From
Financing Activities $ 12,933,640 $ 15,609,717 $ 8,482,569
The accompanying notes are an integral part of these financial statements.
SOUTH BANKING COMPANY
ALMA, GEORGIA
CONSOLIDATED STATEMENTS OF CASH FLOWS (con't)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
Net increase (decrease) in
cash and cash equivalents $ 5,860,641 $( 1,284,115) $ 2,612,995
Cash and Cash Equivalents
at Beginning of Year 19,448,444 20,732,559 18,119,564
Cash and Cash Equivalents
at End of Year $25,309,085 $ 19,448,444 $ 20,732,559
The accompanying notes are an integral part of these financial statements.
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 1. Significant Accounting Policies
The accounting and reporting policies of South Banking
Company, Inc. and its subsidiaries conform with generally
accepted accounting principles and with practices within the
banking industry.
(a) Basis of Presentation
During 1996, Pineland State Bank was acquired by South
Banking Company. The transaction was accounted for using the
purchase method.
(b) Principles of Consolidation
The consolidated financial statements include the accounts
of South Banking Company, Alma, Georgia (The Bank) and its
wholly owned bank subsidiaries, Alma Exchange Bank, Alma,
Georgia; Peoples State Bank, Baxley, Georgia; Citizens State
Bank, Kingsland, Georgia; Pineland State Bank, Metter, Georgia;
and its wholly owned computer center, Bankers' Data Services,
Inc., Alma, Georgia. All significant intercompany transactions
and balances have been eliminated in consolidation.
(c) Nature of Operations:
The Banks provide a variety of banking services to
individuals and businesses through its offices in Alma,
Georgia; Kingsland, Georgia; Baxley, Georgia; and Metter,
Georgia. Its primary source of revenue is loans to customers
who are primarily low to middle income individuals and small to
mid size businesses.
(d) Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance
for losses on loans and the valuation of foreclosed real
estate. In connection with the determination of the estimated
losses on loans and foreclosed real estate, management obtains
independent appraisals for significant properties.
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 1. Significant Accounting Policies (con't)
(d) Use of Estimates (con't)
While management uses available information to recognize
losses on loans and foreclosed real estate, further reductions
in the carrying amounts of loans and foreclosed assets may be
necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their
examination process, periodically review the estimated losses
on loans and foreclosed real estate. Such agencies may require
the Bank to recognize additional losses based on their
judgments about information available to them at the time of
their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans and foreclosed real
estate may change materially in the near term. However, the
amount of the change that is reasonably possible cannot be
estimated.
(e) Securities:
The Bank adopted FASB 115 effective January 1, 1994. The
Bank's investments in securities are classified in two
categories and accounted for as follows.
Securities to be Held to Maturity. Bonds, notes and
debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted
for amortization of premiums and accretion of discounts
which are recognized in interest income using the interest
method over the period to maturity.
Securities Available for Sale. Securities available for
sale consist of bonds, notes, debentures and certain equity
securities not classified as trading securities or as
securities to be held to maturity.
Declines in fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other
than temporary have resulted in write-downs of the individual
securities to their fair value. The related write-downs have
been included in earnings as realized losses.
Unrealized holding gains and losses, net of tax, on
securities available for sale are reported as a net amount in
a separate component of shareholders' equity until realized.
Gains and losses on the sale of securities available-for-
sale are determined using the specific-identification method.
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 1. Significant Accounting Policies (con't)
(e) Securities (Con't)
Federal Home Loan Bank Stock
Individual banks within the holding company have joined
the Federal Home Loan Bank ("FHLB") of Atlanta to increase the
Bank's available liquidity. As a FHLB member, the Banks are
required to acquire and retain shares of capital stock in FHLB
of Atlanta in an amount equal to the greater of (1) 1.0% of the
aggregate outstanding principal amount of the residential
mortgage loans, home purchase contracts and similar
obligations, or (2) 0.3% of total assets at the beginning of
each year. The Bank is in compliance with this requirement
with an investment in FHLB stock of $396,200 and $344,500 at
December 31, 1998 and 1997, respectively. No ready market
exists for this stock and it has no quoted market value.
However, redemption of this stock has historically been at par
value.
(f) Loans Receivable:
Loans and Interest Income
Loans are carried at principal amounts outstanding
reduced by unearned discounts. Interest income on all loans is
recorded on an accrual basis. The accrual of interest is
generally discontinued on loans which become 90 days past due
as to principal or interest. The accrual of interest on some
loans, however, may continue even though they are 90 days past
due if the loans are well secured, in the process of
collection, and management deems inappropriate. If non-accrual
loans decrease their past due status to 60 days or less, they
are reviewed individually by management to determine if they
should be returned to accrual status.
Impaired Loans
The Bank accounts for its impaired loans in accordance
with SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, which requires that all creditors value all specifically
reviewed nonhomogeneous loans for which it is probable that the
creditor will be unable to collect all amounts due according
to the terms of the loan agreement at the loan's fair value.
Fair value may be determined based upon the present value of
expected cash flows, market price of the loan, if available, or
value of the underlying collateral. Expected cash flows are
required to be discounted at the loan's effective interest
rate. SFAS No. 114 was amended by SFAS No. 118 to allow a
creditor to use existing methods for recognizing interest
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 1. Significant Accounting Policies (con't)
income on impaired loans and by requiring additional
disclosures about how a creditor recognizes interest income
related to impaired loans.
The Bank determines which loans are impaired through a
loan review process. When the ultimate collectibility of an
impaired loan's principal is in doubt, wholly or partially, all
cash receipts are applied to principal. When this doubt no
longer exists, cash receipts are applied under the contractual
terms of the loan agreement first to principal and then to
interest income. Once the recorded principal balance has been
reduced to zero, future cash receipts are applied to interest
income, to the extent that any interest has been foregone.
Further cash receipts are recorded as recoveries or any amounts
previously charged off. SFAS No. 114 specifically states that
it need not be applied to "large groups of smaller-balance
homogeneous loans that are collectively evaluated for
impairment." Thus, the Company determined that the statement
does not apply to its consumer loan, credit card or residential
mortgage loan portfolios, except that it may choose to apply it
to certain specific larger loans determined by management. In
effect, these portfolios are covered adequately in the
Company's normal formula for determining loan loss reserves.
Loan Fees and Costs
Nonrefundable fees and certain direct costs associated
with originating or acquiring loans are recognized as yield
adjustment over the contractual life of the related loans, or
if the related loan is held for resale, until the loan is sold.
Recognition of deferred fees and costs is discontinued on non-
accrual loans until they return to accrual status or are
charged-off. Commitment fees associated with lending are
deferred and if the commitment is exercised, the fee is
recognized over the life of the related loan as a yield
adjustment. If the commitment expires unexercised, the amount
is recognized upon expiration of the commitment.
(g) Allowances for Loan Losses:
The allowance for loan losses is increased by charges to
income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated
value of any underlying collateral, and current economic
conditions.
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 1. Significant Accounting Policies (con't)
(h) Premises and Equipment:
Premises and equipment are stated at cost, less
accumulated depreciation and amortization. The provision for
depreciation and amortization is computed generally by the
straight-line method.
(i) Other Real Estate (ORE)
Real estate acquired in satisfaction of a loan and in-
substance foreclosures are reported in other assets. In-
substance foreclosures are properties in which a borrower with
little or no equity in the collateral, effectively abandons
control of the property or has no economic interest to continue
involvement in the property. The borrower's ability to rebuild
equity based on current financial conditions also is considered
doubtful. Properties acquired by foreclosure or deed in lieu
of foreclosure and properties classified as in-substance
foreclosures are transferred to ORE and recorded at the lower
of cost or fair market value based on appraised value at the
date actually or constructively received. Loan losses arising
from the acquisition of such property are charged against the
allowance for loan losses. Losses on ORE due to subsequent
valuation adjustments are recorded on a specific property
basis.
(j) Income Taxes
Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in
which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. The FASB recently
issued pronouncement on accounting for income taxes which
require a change to the liabilities method for accounting for
deferred taxes. The statement includes several other
provisions that may affect the bank's accounting for income
taxes and allows restatement of as many years as deemed
appropriate. The bank adopted the new statement which required
a cumulative effect adjustment of $97,693 in 1993.
The bank files a consolidated federal income tax return
with its subsidiaries. Each subsidiary provides for income
taxes on a separate return basis and remits to the parent
company amounts determined to be currently payable.
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 1. Significant Accounting Policies (con't)
(k) Intangibles
The intangibles (Goodwill) recorded by the Company in the
acquisition of Pineland State Bank are being amortized on a
straight line basis over an eight year period.
(l) Earnings Per Share
Earnings per share are based on the weighted average
number of shares outstanding.
(m) Comprehensive Income
In 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires that changes in
the amounts of comprehensive income items be shown in a primary
financial statement. Comprehensive income is defined by the
statement as "the change in equity (net assets) of a business
enterprise during a period from transactions and other events
and circumstances from nonowner sources. It includes all
changes in equity during a period except those resulting from
investments by owners and distributions to owners." In
accordance with SFAS No. 130, the Company elected to disclose
changes in comprehensive income in its Consolidated Statements
of Income and Comprehensive Income.
(n) Cash Flow Information
For purposes of the statements of cash flows, the Company
considers cash, federal funds sold and due from banks as cash
and cash equivalents. Cash paid during the years ended
December 31, 1998, 1997 and 1996 for interest was $6,220,809,
$5,526,269 and $4,765,653, respectively. Total income tax
payments during 1998, 1997 and 1996 were $879,500, $893,316 and
$727,000, respectively.
Note 2. Investment Securities
The amortized cost and estimated market values of
investments in debt securities are as follows:
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 2. Investment Securities (Con't)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities available
for sale -
December 31, 1998:
U.S. Government
and agency
securities $14,097,093 $ 81,725 $ 29,509 $14,149,309
State and municipal
securities 1,747,121 65,315 - 1,812,436
Mortgage backed
securities 721,401 10,772 732,173
Equity securities 300,000 - - 300,000
Totals $16,865,615 $ 157,812 $ 29,509 $16,993,918
December 31, 1997:
U.S. Government
and agency
securities $12,480,161 $ 46,263 $ 27,628 $12,498,796
State and municipal
securities 1,748,433 39,839 3 1,788,269
Mortgage backed
securities 1,044,885 13,181 3,141 1,054,925
Totals $15,273,479 $ 99,283 $ 30,772 $15,341,990
Securities to be
held to maturity -
December 31, 1998:
U.S. Government
and agency
securities $ 600,809 $ 8,973 $ - $ 609,782
State and municipal
securities 146,907 8,371 - 155,278
Mortgage backed
securities - - - -
Totals $ 747,716 $ 17,344 $ - $ 765,060
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 2. Investment Securities (Con't)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1997:
U.S. Government
and agency
securities $ 1,398,742 $ 3,132 $ 1,156 $ 1,400,718
State and municipal
securities 181,692 6,555 - 188,247
Mortgage backed
securities 25,133 326 - 25,459
Totals $ 1,605,567 $ 10,013 $ 1,156 $ 1,614,424
Gross realized gains on sales and losses of available-for-
sale securities were $-0- and $-0- in 1998, respectively and
$-0- and $0-, respectively for 1997 and $9,941 and $25,677,
respectively in 1996.
Assets, principally securities carried at approximately
$10,490,274 at December 31, 1998 and $10,425,725 at December
31, 1997, were pledged to secure public deposits and for other
purposes required or permitted by law.
The scheduled contractual maturities of securities to be
held to maturity and securities available for sale at December
31, 1998 were as follows:
Securities to be Securities
Held to Maturity Available for Sale
Amortized Amortized
Cost Fair Value Cost Fair Value
Due in one year
or less $ - $ - $ 2,468,691 $ 2,480,921
Due from one year
to five years 700,809 713,322 12,309,544 12,390,646
Due from five
years to ten
years - - 949,775 941,969
Due after ten
years 46,907 51,738 837,605 880,382
$ 747,716 $ 765,060 $16,565,615 $16,693,918
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 2. Investment Securities (con't)
The market value of State and Other Political Subdivision
Obligations is established with the assistance of an outside bond
department and is based on available market data which often
reflects transactions of relatively small size and is not
necessarily indicative of prices at which large amounts of
particular issues could readily be sold or purchased.
Expected maturities will differ from contractual maturities
because issuers may have the right to call on prepay obligations
with or without call on prepayment penalties.
Note 3. Loans
The composition of the bank's portfolio was as follows:
1998 1997
(In Thousands)
Commercial, financial and
agricultural $ 29,889 $ 29,728
Real estate - mortgage 58,005 52,544
Real estate - construction 7,909 6,968
Installment and consumer 19,157 17,285
Total Loans $ 114,960 $ 106,525
Less: Unearned discount ( 154) ( 149)
Reserve for loan losses ( 1,971) ( 1,822)
Loans, net $ 112,835 $ 104,554
The Company and its subsidiaries have granted loans to the
officers and directors of the Company, its subsidiaries and to
their associates. Related party loans are made on
substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more
than normal risk of collectibility. The aggregate dollar
amount of these loans was $500,391 and $491,558 at December 31,
1998 and 1997. During 1998, $180,186 of new loans were made,
and repayments totaled $171,353.
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 4. Reserve for Loan Losses
Transactions in the reserve for loan losses are summarized
as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
Balance at beginning
of period $ 1,821,680 $ 1,781,013 $ 994,027
Additions: Provision
charged to operating
expenses $ 286,000 $ 179,500 $ 201,589
Balance from bank
acquisition - - 570,707
$ 286,000 $ 179,500 $ 772,296
Deductions: Loans
charged off $ 257,163 $ 263,945 $ 259,264
Less: recoveries 120,103 125,112 273,954
$ 137,060 $ 138,833 $( 14,690)
Balance at end of
period $ 1,970,620 $ 1,821,680 $ 1,781,013
Additions to the reserve for loan losses are based on
management's evaluation of the loan portfolio under current
economic conditions, past loan loss experience and such other
factors which, in management's judgment, deserve recognition in
estimating loan losses. Loans are charged off when, in the
opinion of management, such loans are deemed to be
uncollectible. Recognized losses are charged to the reserve
and subsequent recoveries added.
Loans having carrying values of $236,049 and $138,261 were
transferred to foreclosed real estate in 1998 and 1997,
respectively.
The bank is not committed to lend additional funds to
debtors whose loans have been modified.
Note 5. Deposits
The aggregate amount of short-term jumbo CDs, each with a
minimum denomination of $100,000, was approximately $21,155,947
in 1998 and $16,735,532 in 1997.
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 5. Deposits (Con't)
At December 31, 1998, the scheduled maturities of CDs are
as follows:
(In Thousands)
1999 $ 83,311
2000 and 2001 5,696
2002 and thereafter 12
$ 89,019
Note 6. Premises and Equipment
A summary of the account:
Year Ended Year Ended
December 31, December 31,
1998 1997
Land $ 448,148 $ 448,149
Buildings 3,469,813 3,199,752
Furniture and equipment 3,683,407 3,776,721
$ 7,601,368 $ 7,424,622
Less: Accumulated depreciation 3,580,633 3,346,120
$ 4,020,735 $ 4,078,502
Depreciation expense was $605,161 in 1998, $547,940 in
1997 and $516,629 in 1996.
Note 7. Borrowings
Data relating to borrowing is as follows:
Year Ended Year ended
December 31, December 31,
Parent Company - 1998 1997
Note payable in 10 annual payments
of $350,000. Interest is payable
quarterly and accrues at prime rate
and is secured by subsidiary bank
stock. $ 2,450,000 $ 2,800,000
Note payable due June 30, 1999.
Interest payable quarterly and
accrues at 8% and is secured
by bank stock 300,000 -
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 7. Borrowings (Con't)
Year Ended Year ended
December 31, December 31,
1998 1997
Subsidiary - Bankers Data Services,
Inc.
Note payable in 60 monthly principal
amount of $10,833.33 plus interest.
Interest accrues at prime rate basis.
Computer equipment is pledged as
collateral for loan. 406,096 547,322
Following are maturities of long term debt for each of the
next five years.
1999 $ 780,000
2000 480,000
2001 480,000
2002 366,096
2003 350,000
Note 8. Income Taxes
Income tax expense (benefit) was $830,744 for 1998, (an
effective rate of 30.1%), $767,811 for 1997 (an effective rate of
33.2%) and $662,078 for 1996 (an effective rate of 31.6%). The
actual expense for 1998, 1997 and 1996 differs from the "expected"
tax expense for those years (computed by applying the federal
corporate rate of 34%) as follows:
1998 1997 1996
Computed "expected"
tax expenses $ 938,516 $ 786,801 $ 711,417
Alternative minimum tax - - -
Decrease resulting from:
Surtax exemption - - -
Tax exempt interest
on securities and loans 116,135 65,118 63,613
Other, net ( 8,363) ( 46,128) ( 14,274)
$ 830,744 $ 767,811 $ 662,078
The current and deferred amounts of these tax provisions were
as follows:
1998 1997 1996
Current $ 912,639 $ 793,779 $ 764,797
Deferred ( 81,895) ( 25,968)) ( 102,719)
$ 830,744 $ 767,811 $ 662,078
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 8. Income Taxes (Con't)
The tax effects of each type of income and expense item
that gave rise to deferred taxes are:
December 31 December 31,,
1998 1997
Net unrealized appreciation on
securities available for sale $( 43,621) $( 22,553)
Depreciation ( 204,985) ( 227,204)
Deferred loan fees 52,545 50,801
Allowance for credit losses 395,222 334,555
Other 5,788 7,125
Purchase accounting treatment ( 59,297) ( 59,297)
Net deferred tax asset (liability) $ 145,652 $ 83,427
Note 9. Employee Benefit Plans
The Company maintains a 401K deferred compensation plan
for all subsidiaries effective January 1, 1993. The Company
elected to match 75% of employee contributions for 1998 and
1997 and 50% of employee contributions for 1996. The expense
to the Company for 1998, 1997 and 1996 was $87,658, $89,746,
and $37,009, respectively.
Note 10. Leases
The Pineland State Bank leases 5.35 acres of land in
Candler County under an operating lease expiring December 31,
2054 with an option to lease the land for an additional 75
years.
Minimum future rental payments under non-cancelable
operating lease having remaining term in excess of 1 year as of
December 31, 1998 for each of the next 5 years and in the
aggregate is:
Year Ended
1999 $ 4,000
2000 4,000
2001 4,000
2002 4,000
2003 4,000
Subsequent to 2003 204,000
Total minimum future
rental payments $ 224,000
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 10. Leases (Con't)
In June, 1997, the parties amended the lease to allow
Pineland State Bank to sublet part of the property and in
consideration, the landlord will receive 50% of gross rental
under the sublease in addition to the minimum amount above.
Note 11. Liabilities
Standby Letters of Credit. These transactions are used by the
Company's customers as a means of improving their credit
standing in their dealings with others. Under these
agreements, the Company agrees to honor certain financial
commitments in the event that its customers are unable to do
so. As of December 31, 1998, the Company had $931,000 in
outstanding standby letters of credit.
Loan Commitments. As of December 31, 1998, the Company had
commitments outstanding to extend credit totaling $10,596,552.
These commitments generally require the customers to maintain
certain credit standards. Management does not anticipate any
material losses as a result of these commitments.
Note 12. Financial Instruments
The Bank is a party to financial instruments with off-
balance-sheet risk in the normal course of business to meet the
financing needs of its customers and to reduce its own exposure
to fluctuations in interest rates. These financial instruments
include commitments to extend credit and standby letters of
credit and financial guarantees. Those instruments involve, to
varying degrees, elements of credit and interest-rate risk in
excess of the amount recognized in the consolidated statements
of financial condition. The contract or notional amounts of
those instruments reflect the extent of the Bank's involvement
in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument
for commitments to extend credit, standby letters of credit,
and financial guarantees written is represented by the
contractual notional amount of those instruments. The Bank
uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet
instruments.
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 12. Financial Instruments (Con't)
Commitments to Extend Credit and Financial Guarantees.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer's credit worthiness on a case-
by-case basis. The amount of collateral obtained, if it is
deemed necessary by the Bank upon extension of credit, is based
on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable;
inventory, property, plant and equipment; and income-producing
commercial properties.
Standby letters of credit and financial guarantees written
are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Those guarantees
are primarily issued to support private borrowing arrangements,
including commercial paper and similar transactions. The
credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan
facilities to customers. The Bank holds various assets as
collateral supporting those commitments for which collateral is
deemed necessary.
The Bank has not been required to perform on any financial
guarantees during the past two years. The Bank has not
incurred any losses on its commitments in 1998, 1997 or 1996.
Note 13. Restrictions on Subsidiary Dividends, Loans or Advances
Dividends are paid by the Company from its assets which
are mainly provided by dividends from the Banks. However,
certain restrictions exist regarding the ability of the Banks
to transfer funds to the Company in the form of cash dividends,
loans or advances. The approval of the Georgia Department of
Banking is required to pay dividends in excess of 50% of the
Bank's net profits for the prior year.
Under Federal Reserve regulation, the Bank also is limited
as to the amount it may loan to its affiliates, including the
Company, unless such loans are collateralized by specified
obligations. At December 31, 1998, the maximum amount
available for transfer from the Bank to the Company in the form
of loans approximated 20% of consolidated net equity.
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 14. Restrictions on Cash and Due from Banks
The bank is required to maintain reserve balances with the
Federal Reserve Bank. The average amount of those reserve
balances for the year ended December 31, 1998 was approximately
$-0-.
Note 15. Related Party Transactions
The Company has entered into a split dollar life insurance
arrangement with a director and substantial shareholder. The
Company and director's trust each contribute toward the payment
of premium for life insurance policy. The Company records its
contribution at the present value of anticipated future return
or total cash surrender value of policy whichever is higher;
however, the carrying amount cannot exceed the amount of
premiums paid by the Company. The Company will receive all
reimbursement from anticipated withdrawal of cash surrender
value or from the proceeds of policy in the event of the death
of the director. All cash surrender value of the policy
accrues to the benefit of the Company until such time as the
cash surrender value exceeds advances made by the Company. As
of December 31, 1998, $1,088,596 is carried in other assets
related to this arrangement.
Note 16. Fair Value of Financial Instruments
The following table shows the estimated fair value and the
related carrying values of South Banking Company's financial
instruments at December 31, 1998 and 1997. Items which are not
financial instruments are not included.
1998
Carrying Estimated
Amount Fair Value
Cash and due from financial
institutions $ 6,122,085 $ 6,122,085
Interest earning balances with
financial institutions 1,539,000 1,539,000
Federal funds 17,648,000 17,648,000
Securities available for sale 16,993,917 16,993,917
Securities held to maturity 747,716 765,060
Federal Home Loan Bank stock 396,200 396,200
Georgia Bankers Bank - stock 547,283 787,320
Loans - net of allowances 112,834,679 113,319,807
Demand and savings deposits 56,970,216 56,970,216
Time deposits 89,019,729 88,647,457
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 16. Fair Value of Financial Instruments (Con't)
1997
Carrying Estimated
Amount Fair Value
Cash and due from financial
institutions $ 8,128,444 $ 8,128,444
Interest earning balances with
financial institutions 1,280,000 1,280,000
Federal funds 10,040,000 10,040,000
Securities available for sale 15,341,990 15,341,990
Securities held to maturity 1,605,567 1,614,474
Federal Home Loan Bank stock 344,500 344,500
Georgia Bankers Bank - stock 547,283 716,480
Loans - net of allowances 104,554,124 105,099,123
Demand and savings deposits 52,895,484 52,895,484
Time deposits 79,706,608 80,635,252
For purposes of the above disclosures of estimated fair
value, the following assumptions were used as of December 31,
1998 and 1997. The estimated fair value for cash and due from
financial institutions and federal funds sold are considered to
approximate cost. The estimated fair value for interest-earning
balances with financial institutions, securities available-for-
sale, securities held-to-maturity and Georgia Bankers Bank stock
are based on quoted market values for the individual securities
or for equivalent securities. The estimated fair value for
commercial loans is based on estimates of the difference in
interest rates the Company would charge the borrowers for
similar such loans with similar maturities made at December 31,
1998 and 1997, applied for an estimated time period until the
loan is assumed to reprice or be paid. The estimated fair value
for other loans is based on estimates of the rate the Company
would charge for similar such loans at December 31, 1998 and
1997, applied for the time period until estimated repayment.
The estimated fair value for individual retirement account
deposits and time deposits is based on estimates of the rate the
Company would pay on such deposits or borrowings at December 31,
1998 and 1997, applied for the time period until maturity. The
estimated fair value for other financial instruments and off-
balance-sheet loan commitments are considered to approximate
cost at December 31, 1998 and 1997.
While these estimates of fair value are based on
management's judgment of the most appropriate factors, there is
no assurance that were the Company to have disposed of such
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 16. Fair Value of Financial Instruments (con't)
items at December 31, 1998 and 1997, the estimated fair values
would necessarily have been achieved at that date, since market
values may differ depending on various circumstances. The
estimated fair values at December 31, 1998 and 1997 should not
necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of the Company
that are not defined as financial instruments are not included
in the above disclosures, such as property and equipment. Also,
non-financial instruments typically not recognized in the
financial statements nevertheless may have value but are not
included in the above disclosures. These include among other
items, the estimated earnings power of core deposit accounts,
the earnings potential of loan servicing rights, the trained
work force, customer goodwill and similar items.
Note 17. Regulatory Matters
The Company and its subsidiaries are subject to various
regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company
must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities and certain off-
balance-sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company to maintain minimum amounts
and ratios of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1998, that the Company and its
subsidiaries meet all capital adequacy requirements to which it
is subject.
As of December 31, 1998, the most recent notification from
the FDIC categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 17. Regulatory Matters (con't)
total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events
since that notification that management believes have changed
the institution's category.
The Company and its subsidiaries' actual capital amounts
and ratios are also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998:
Total Capital
(to Risk
Weighted
Assets)
Consolidated $ 15,626 12.5% $ 10,029 8.0% $ N/A N/A%
Subsidiary -
Alma 6,174 13.3 3,712 8.0 4,640 10.0
Subsidiary -
Baxley 5,424 15.1 2,881 8.0 3,601 10.0
Subsidiary -
Kingsland 2,192 14.0 1,250 8.0 1,562 10.0
Subsidiary -
Metter 3,114 11.9 2,091 8.0 2,614 10.0
Tier I Capital
(to Risk Weighted
Assets)
Consolidated $ 13,860 11.1% $ 5,015 4.0% $ N/A N/A%
Subsidiary -
Alma 5,385 11.6 1,856 4.0 2,784 6.0
Subsidiary -
Baxley 4,972 13.8 1,440 4.0 2,160 6.0
Subsidiary -
Kingsland 1,996 12.8 625 4.0 937 6.0
Subsidiary -
Metter 2,785 10.6 1,045 4.0 1,568 6.0
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 17. Regulatory Matters (con't)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998 (con't):
Tier I
Capital (to
Average Assets)
Consolidated $ 13,860 8.6% $ 6,410 4.0% $ N/A N/A%
Subsidiary -
Alma 5,385 8.9 2,478 4.0 3,098 5.0
Subsidiary -
Baxley 4,972 11.2 1,779 4.0 2,224 5.0
Subsidiary -
Kingsland 1,996 9.3 855 4.0 1,069 5.0
Subsidiary -
Metter 2,785 8.4 1,329 4.0 1,661 5.0
As of December 31, 1997:
Total Capital
(to Risk Weighted
Assets)
Consolidated $ 13,580 12.0% $ 9,052 8.0% $ N/A N/A%
Subsidiary -
Alma 5,720 13.9 3,336 8.0 4,170 10.0
Subsidiary -
Baxley 5,036 15.1 2,669 8.0 3,337 10.0
Subsidiary -
Kingsland 1,989 14.7 1,080 8.0 1,350 10.0
Subsidiary -
Metter 2,845 11.0 2,069 8.0 2,586 10.0
Tier I Capital
(to Risk
Weighted
Assets)
Consolidated $ 12,137 10.7% $ 4,526 4.0% $ N/A N/A%
Subsidiary -
Alma 5,208 12.6 1,668 4.0 2,502 6.0
Subsidiary -
Baxley 4,603 13.8 1,335 4.0 2,002 6.0
Subsidiary -
Kingsland 1,817 13.5 540 4.0 810 6.0
Subsidiary -
Metter 2,519 9.7 1,199 4.0 1,552 6.0
SOUTH BANKING COMPANY
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 17. Regulatory Matters (con't)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997(con't):
Tier I
Capital (to
Average Assets)
Consolidated $ 12,137 8.4% $ 5,743 4.0% $ N/A N/A%
Subsidiary -
Alma 5,208 9.5 2,188 4.0 2,736 5.0
Subsidiary -
Baxley 4,603 10.9 1,694 4.0 2,118 5.0
Subsidiary -
Kingsland 1,817 11.0 660 4.0 825 5.0
Subsidiary -
Metter 2,519 8.4 1,199 4.0 1,499 5.0
Note 18. Acquisitions
On January 11, 1996, South Banking Company consummated an
agreement to acquire the stock of Pineland State Bank for
cash. The total acquisition cost was $2,745,716. Funding for
the acquisition was through a loan from Georgia Bankers Bank.
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
FINANCIAL STATEMENTS
DECEMBER 31, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
South Banking Company
Alma, Georgia 31510
Under date of February 6, 1999, we reported on the consolidated
balance sheets of South Banking Company, as of December 31, 1998 and
1997, and the related statements of income, cash flows and stockholders'
equity for the three years in the period ended December 31, 1998.
In connection with our examination of the aforementioned
consolidated financial statements, we also audited the accompanying
balance sheets (Parent Corporation Only) as of December 31, 1998 and
1997 and the related statements of income, cash flows and stockholders'
equity for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on
the financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of South
Banking Company (Parent Corporation Only) as of December 31, 1998 and
1997, and the results of its operations, stockholders' equity and its
cash flows for the three years then ended in conformity with generally
accepted accounting principles.
Respectfully submitted,
H. H. BURNET & COMPANY, P.C.
February 6, 1999
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
BALANCE SHEETS
December 31, December 31,
1998 1997
ASSETS
Cash and due from banks
Interest bearing $ 547,372 $ 414,399
Non-interest bearing 23,830 16,789
Investment in bank's subsidiaries 15,682,810 14,506,089
Investment in nonbank subsidiaries 240,925 181,759
Investment-C B Financial-available for sale 300,000 -
Other assets 40,165 60,428
Prepaid income taxes 145,937 180,411
Total Assets $16,981,039 $15,359,875
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 186 $ 186
Other liabilities - -
Accrued income taxes - -
Notes payable 2,750,000 2,800,000
Due to subsidiaries 24,166 63,731
Total Liabilities $ 2,774,352 $ 2,863,917
Stockholders' Equity
Common stock of $1 par value;
authorized 1,000,000 shares;
issued and outstanding, 1998 and 1997
399,500 and 399,500, respectively $ 399,500 $ 399,500
Surplus 3,070,831 3,070,831
Undivided profits 10,651,788 8,981,846
Unrealized gain (loss) on securities
available for sale (net) 84,568 43,781
Total Stockholders' Equity $14,206,687 $12,495,958
Total Liabilities and Stockholders' Equity $16,981,039 $15,359,875
The accompanying note is an integral part of these financial statements.
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
STATEMENT OF INCOME
Year Ended Year Ended Year Ended
December 31, December 31, December 31,,
1998 1997 1996
Income
Dividends from bank
subsidiaries $ 926,568 $ 893,272 $ 854,987
Miscellaneous income 1,484 500 845
Interest income 21,158 19,276 32,841
Management fees 102,000 101,500 101,000
Total Income $ 1,051,210 $ 1,014,548 $ 989,673
Expenses
Salaries $ 75,467 $ 73,157 $ 65,000
Amortization 13,526 15,421 24,346
Interest 235,182 260,532 256,725
Professional fees 22,621 15,358 15,150
Other 75,277 84,542 67,014
Total Expenses $ 422,073 $ 449,010 $ 428,235
Income before income taxes
and equity in undistributed
income (loss) of subsidiaries $ 629,137 $ 565,538 $ 561,438
Provision (credit) for
income taxes ( 105,360) ( 110,776) ( 99,798)
Income before equity in
undistributed income in
subsidiaries $ 734,497 $ 676,314 $ 661,236
Equity in undistributed
income of bank subsidiaries $ 1,135,934 $ 914,669 $ 720,064
Equity in undistributed
income (loss) of nonbank
subsidiaries 59,165 ( 44,672) 49,024
$ 1,195,099 $ 869,997 $ 769,088
Net Income $ 1,929,596 $ 1,546,311 $ 1,430,324
The accompanying note is an integral part of these financial statements.
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
STATEMENT OF STOCKHOLDERS' EQUITY
Common Undivided
Stock Surplus Profits
Balance,
December 31, 1995 $ 405,283 $ 3,136,238 $ 6,464,741
Net income - - 1,430,324
Cash dividends - - ( 219,849)
Unrealized gain
(loss) on securities
available for sale - - -
Redemption of shares ( 1,783) ( 19,657) -
Balance,
December 31, 1996 $ 403,500 $ 3,116,581 $ 7,675,216
Net income 1,546,311
Cash dividends - - ( 239,681)
Unrealized gain
(loss) on securities
available for sale - - -
Redemption of shares ( 4,000) ( 45,750) -
Balance,
December 31, 1997 $ 399,500 $ 3,070,831 $ 8,981,846
Net income - - 1,929,596
Cash dividends - - ( 259,654)
Unrealized gain
(loss) on securities
available for sale - - -
Redemption of share - -
Balance,
December 31, 1998 $ 399,500 $ 3,070,831 $110,651,788
Unrealized
Gain
(Loss) on
Securities Total
Available Stockholders'
for Sale Equity
$ 42,591 $ 10,048,853
- 1,430,324
- ( 219,849)
( 53,639) ( 53,639)
- ( 21,440)
$( 11,048) $ 11,184,249
1,546,311
( 239,681)
54,829 54,829
- ( 49,750)
$ 43,781 $ 12,495,958
- 1,929,596
- ( 259,654)
40,787 40,787
- -
$ 84,568 $ 14,206,687
The accompanying note is an integral part of these financial statements.
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
STATEMENT OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
Cash Flows From Operating
Activities:
Net income $ 1,929,596 $ 1,546,311 $ 1,430,324
Add expenses not requiring
cash
Depreciation and
amortization 20,697 27,358 36,088
Undistributed earnings of
subsidiaries (1,195,099) ( 869,997) ( 769,088)
Increase (decrease) in
accounts payable - - ( 2,058)
Increase (decrease) in
other liabilities - - -
Increase (decrease) in
accrued income taxes - - -
(Increase) decrease in
other assets ( 435) 14,865 17,802
(Increase) decrease in
prepaid income taxes 34,474 ( 125,506) 9,112
Increase (decrease) in
due from subsidiary-taxes ( 39,565) 48,418 ( 25,463)
Net Cash Used in Operating
Activities $ 749,668 $ 641,449 $ 696,717
Cash Flows From Investing
Activities:
Contribution to equity in
bank subsidiary $ - $ - $( 400,000)
Purchase of equipment - ( 2,307) ( 26,236)
Purchase of Pineland
State Bank - - (1,839,937)
Purchase of C B Financial
Stock ( 300,000) - -
Net Cash Used in Investing
Activities $( 300,000) $( 2,307) $(2,266,173))
The accompanying note is an integral part of these financial statements.
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
STATEMENT OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
Cash Flows From Financing
Activities:
Payments on note payable
bank $( 350,000) $( 350,000) $( 350,000)
Proceeds from notes payable
to banks 300,000 - 2,000,000
Dividends paid ( 259,654) ( 239,681) ( 219,849)
Increase (decrease) in due
to subsidiaries - - -
Redemption of common stock - ( 49,750) ( 21,440)
Net Cash Provided (Used)
from Financing Activities $( 309,654) $( 639,431) $ 1,408,711
Net increase (decrease) in
cash and cash equivalents $ 140,014 $( 289) $( 160,745)
Cash and cash equivalents at
beginning of year 431,188 431,477 592,222
Cash and Cash Equivalents
at End of Year $ 571,202 $ 431,188 $ 431,477
The accompanying note is an integral part of these financial statements.
SOUTH BANKING COMPANY
(PARENT CORPORATION ONLY)
ALMA, GEORGIA
NOTES TO FINANCIAL STATEMENTS
(A) Summary of Significant Accounting Policies
General - The following notes to the financial statements of South
Banking Corporation, formed on July 28, 1981, (parent
corporation only) (the corporation) includes only that
information which is in addition to information presented
in the consolidated financial statements and notes to
consolidated financial statements.
Investment in subsidiaries - The corporation reports its investment
in the common stock of its subsidiaries at its equity in
the net assets of the subsidiaries.
Organization costs - Organization costs have been deferred and are
being amortized on a straight-line basis over a period of
five years.
[ARTICLE] 9
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] DEC-31-1998
[CASH] 6,122,085
[INT-BEARING-DEPOSITS] 1,539,000
[FED-FUNDS-SOLD] 17,648,000
[TRADING-ASSETS] -
[INVESTMENTS-HELD-FOR-SALE] 16,993,917
[INVESTMENTS-CARRYING] 747,716
[INVESTMENTS-MARKET] 17,758,977
[LOANS] 114,959,844
[ALLOWANCE] 1,970,620
[TOTAL-ASSETS] 164,890,742
[DEPOSITS] 145,989,945
[SHORT-TERM] -
[LIABILITIES-OTHER] 1,391,347
[LONG-TERM] 3,302,763
[PREFERRED-MANDATORY] -
[PREFERRED] -
[COMMON] 399,500
[OTHER-SE] 13,807,187
[TOTAL-LIABILITIES-AND-EQUITY] 164,890,742
[INTEREST-LOAN] 12,151,982
[INTEREST-INVEST] 1,710,874
[INTEREST-OTHER] 57,435
[INTEREST-TOTAL] 13,920,291
[INTEREST-DEPOSIT] 6,129,599
[INTEREST-EXPENSE] 6,392,354
[INTEREST-INCOME-NET] 7,527,937
[LOAN-LOSSES] 286,000
[SECURITIES-GAINS] 2,288
[EXPENSE-OTHER] 6,386,678
[INCOME-PRETAX] 2,760,340
[INCOME-PRE-EXTRAORDINARY] 2,760,340
[EXTRAORDINARY] -
[CHANGES] -
[NET-INCOME] 1,929,596
[EPS-PRIMARY] 4.83
[EPS-DILUTED] 4.83
[YIELD-ACTUAL] -
[LOANS-NON] 557,000
[LOANS-PAST] 492,000
[LOANS-TROUBLED] 37,000
[LOANS-PROBLEM] -
[ALLOWANCE-OPEN] 1,821,680
[CHARGE-OFFS] 257,163
[RECOVERIES] 120,103
[ALLOWANCE-CLOSE] 1,970,620
[ALLOWANCE-DOMESTIC] 1,970,620
[ALLOWANCE-FOREIGN] -
[ALLOWANCE-UNALLOCATED] -
</TABLE>
