ITEM 1. BUSINESS OF THE COMPANY AND THE SUBSIDIARY BANKS
ABC Bancorp ("ABC") was organized as a bank holding company under the Federal Bank Holding Company Act of 1956, as amended in 1981 (the"BHCA"), and the bank holding company laws of Georgia.
ABC provides, through its commercial bank subsidiaries described below (sometimes hereinafter referred to as the "Banks"), banking services to individuals and businesses in southwestern and southcentral Georgia and southeastern Alabama. ABC's executive office is located at 310 First Street, S.E., Moultrie, Georgia 31768, and its telephone number is (912) 890-1111. As a registered bank holding company, ABC is subject to the applicable provisions of the Federal Bank Holding Company Act and the Georgia Bank Holding Company Act, as well as to supervision by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the State of Georgia Department of Banking and Finance.
ABC's primary business as a bank holding company is to manage the business and affairs of the Banks. The Banks provide a broad range of retail and commercial banking services to its customers, including checking, savings, NOW and money market accounts and time deposits of various types; loans for business, agriculture, real estate, personal uses, home improvement and automobiles, credit cards; letters of credit; trust services; discount brokerage services through a correspondent bank; IRA's; safe deposit box rentals; bank money orders; and electronic funds transfer services, including wire transfers and automated teller machines. ABC maintains a diversified loan portfolio and makes no foreign or energy-related loans.
While ABC has decentralized certain of its management responsibilities, it maintains efficient centralized operating systems. As a result, corporate policy, strategy and certain administrative policies are established by ABC's board of directors, while lending and community-specific marketing decisions are made primarily by each bank to allow it to respond to differing needs and demands of its own market. Data processing functions are centralized in the ABC's data processing division located in Moultrie, Georgia. Within this framework, the Banks focus on providing personalized services and quality products to their customers to meet the needs of the communities they serve. ABC's objective is to establish itself as a major financial institution in south Georgia and southeast Alabama. Management has pursued this objective through an acquisition-oriented growth strategy and a prudent operating strategy.
As a bank holding company, ABC performs central data processing functions, purchasing functions and other common functions and provides certain management services for its subsidiaries. Normal banking services are conducted by the Banks.
SUBSIDIARY BANKS
Following is a list of the Banks, the market areas served by the Banks and the estimated relative size of the Banks as compared with their major competitors.
All of the Banks offer traditional loan and deposit services discussed elsewhere in this Annual Report on Form 10-K. Only American Banking Company provides trust services directly to its customers and to the customers of the other subsidiary banks. All of the Banks maintain correspondent relationships with other commercial banks and the Federal Home Loan Bank of Atlanta. As compensation for services provided by the correspondent banks, the Banks maintain certain balances in noninterest-bearing accounts with those banks. The principal correspondent bank for all of the Banks is SunTrust Bank in Atlanta, Georgia.
MARKET AREA AND COMPETITION
ABC's market area is located in South Georgia and Southeastern Alabama. The Banks' main offices and larger branches are located in the southern Georgia cities of Albany, Cairo, Cordele, Douglas, Donalsonville, Moultrie, Ocilla, Quitman, Thomasville and Tifton, and the southern Alabama cities of Abbeville, Clayton, Dothan, Eufaula and Headland. The Banks have a total of 27 offices located in either the cities or counties in which the main offices are located or in nearby cities.
ABC's banking facilities are located in communities whose economies are based primarily on agriculture, manufacturing and light industry. Textiles, meat processing and aluminum processing are among the leading manufacturing industries in ABC's market area.
The banking industry in Georgia and Alabama is highly competitive. In recent years, intense market demands, economic pressures, fluctuating interest rates and increased customer awareness of product and service differences among financial institutions have forced banks to diversify their services and become more cost effective. Each of the Banks faces strong competition in attracting deposits and making loans. Their most direct competition for deposits comes from other commercial banks, thrift institutions, credit unions and issuers of securities such as brokerage firms. Interest rates, convenience of office locations and marketing are all significant factors in the Banks' competition for deposits.
Competition for loans comes from other commercial banks, thrift institutions, savings banks, insurance companies, consumer finance companies, credit unions and other institutional lenders. The Banks compete for loan originations through the interest rates and loan fees they charge and the efficiency and quality of services they provide. Competition is affected by the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors that are not readily predictable.
Management expects that competition will become more intense in the future due to changes in state and Federal laws and regulations and the entry of additional bank and nonbank competitors. See "Supervision and Regulation".
LENDING POLICY
ABC has sought to maintain a comprehensive lending policy that meets the credit needs of each of the communities served by the Banks, including low- and moderate-income customers, and to employ lending procedures and policies consistent with this approach. All loans are subject to ABC's written loan policy, which is updated annually and which provides that lending officers have sole authority to approve loans of various maximum amounts depending upon their seniority and experience. Each bank's president has sole discretion to approve loans in varying principal amounts up to specified limits for each president. Each bank's board of directors reviews and approves loans that exceed management's lending authority and, in certain instances, other types of loans. New credit extensions are reviewed daily by each bank's senior management and at least monthly by its board of directors.
The lending officers at each bank have authority to make loans only in the county in which the Bank is located and its contiguous counties. ABC's lending policy requires analysis of the borrower's projected cash flow and ability to service the debt. For agricultural loans, which constitute a significant portion of ABC's consolidated loan portfolio, the lending officer visits the borrower regularly during the growing season and re-evaluates the loan in light of the borrower's updated cash flow projections. Under ABC's ongoing loan review program, all loans are subject to sampling and objective review by an assigned loan reviewer who is independent of the originating loan officer.
LENDING POLICY (CONTINUED)
ABC actively markets its services to qualified lending customers in both the commercial and consumer sectors. ABC's commercial lending officers actively solicit the business of new companies entering the market as well as longstanding members of that market's business community. Through personalized professional service and competitive pricing, ABC has been successful in attracting new commercial lending customers. At the same time, ABC actively advertises its consumer loan products and continually seeks to make its lending officers more accessible.
Each bank continually monitors its loan portfolio to identify areas of concern and to enable management to take corrective action when necessary. Each bank's lending officers and board of directors meet periodically to review all past due loans, the status of large loans and certain other matters. Individual lending officers are responsible for reviewing collection of past due amounts and monitoring any changes in the financial status of the borrowers.
LENDING ACTIVITIES
GENERAL. ABC provides a broad range of commercial and retail lending services to corporations, partnerships and individuals, including agricultural, commercial business loans, commercial and residential real estate construction and mortgage loans, loan participations, consumer loans, revolving lines of credit and letters of credit. The loan department of each bank makes direct and indirect loans to consumers and originates and services residential mortgages. In addition, each bank has loan officers who specialize in originating and servicing agricultrual-related loans.
REAL ESTATE LOANS. ABC's real estate loans are for a term of years, although rarely more than ten, over which period the principal thereof is amortized, and are generally secured by residential real estate, farmland or commercial real estate.
AGRICULTURAL LOANS. ABC's agricultural loans are made for crop production expenses or to finance the purchase of farm-related equipment. Agricultural loans typically involve seasonal fluctuations in amounts. Although ABC typically looks to an agricultural borrower's cash flow as the principal source of repayment, agricultural loans are also generally secured by a security interest in the crops or the farm-related equipment and, in some cases, an assignment of crop insurance or a mortgage on real estate. In addition, a portion of ABC's agricultural loans are guaranteed by the FmHA Guaranteed Loan Program.
LENDING ACTIVITIES (CONTINUED)
COMMERCIAL AND INDUSTRIAL LOANS. General commercial and industrial loans consist of loans made primarily to manufacturers, wholesalers and retailers of goods, service companies and other industries. Management believes that a significant portion of these loans are, to varying degrees, agricultural-related. See "--Agricultural-Related Loans." The Banks have also generated loans which are guaranteed by the U. S. Small Business Administration. Management believes that making such loans helps the local community and also provides ABC with a source of income and solid future lending relationships as such businesses grow and prosper. The primary repayment risk for commercial loans is the failure of the business due to economic or financial factors. Although ABC typically looks to a commercial borrower's cash flow as the principal source of repayment for such loans, many commercial loans are secured by inventory, equipment, accounts receivable and other assets.
CONSUMER LENDING. ABC's consumer loans include motor vehicle, home improvement, home equity, student and signature loans and small personal credit lines. Many of the Banks also offer credit cards to their customers.
COMPLIANCE WITH COMMUNITY REINVESTMENT ACT. Each of the Banks has a Community Reinvestment Act Officer who develops and oversees that Bank's Community Reinvestment Act program and makes monthly reports to that Bank's board of directors. The Banks regularly sponsor or participate in community programs designed to ascertain and meet the credit needs of each of the communities they serve, including low and moderate income neighborhoods. Some of these activities include sponsoring minority festivals during Black History Month, participating in community meetings to explain the availability of Small Business Administration, Farmers' Home Loan Administration and Regional Development Center loans, and sponsoring educational seminars for area farmers. In addition, each of the Banks participate in the Georgia Residential Finance Authority program which makes low interest rate loans to rehabilitate low income rental housing.
TRUST SERVICES
ABC provides personal trust services to its customers through American Bank.
DEPOSITS
Checking, savings and money market accounts and other time accounts are the primary sources of the Banks' funds for loans and investments. The Banks obtain most of their deposits from individuals and from businesses in their respective market areas.
The Banks have not had to attract new or retain old deposits by paying depositors rates of interest on certificates of deposit, money market and other interest-bearing accounts significantly above rates paid by other banks in the Banks' respective market areas. In the future, increasing competition among banks in the Banks' market areas may cause the Banks' interest margins to shrink. The Banks have never accepted deposits for which a broker's commission was paid.
INVESTMENT ACTIVITIES
ABC's investment policy is designed to maximize income from funds not needed to meet loan demand in a manner consistent with appropriate liquidity and risk objectives. Under this policy, the Banks may invest in federal, state and municipal obligations, public housing authority bonds, industrial development revenue bonds and Government National Mortgage Association ("GNMA") securities. The Banks' investments must satisfy certain investment quality criteria. The Bank's investments must be rated at least "BAA" by either Moody's or Standard and Poor's. Securities rated below "A" are periodically reviewed for creditworthiness. The Banks may purchase non-rated municipal bonds only if the issuer of such bonds is located in a Bank's general market area and such bonds are determined by the purchasing Bank to have a credit risk no greater than the minimum ratings referred to above. Industrial development authority bonds, which normally are not rated, are purchased only if the issuer is located in the purchasing Bank's market area and if the bonds are considered to possess a high degree of credit soundness. The Banks typically have not purchased a significant amount of GNMA securities, which normally have higher yields than the Banks' other investments.
While ABC's investment policy permits the Banks to trade securities to improve the quality of yields or marketability or to realign the composition of the portfolio, the Banks historically have not done so to any significant extent.
ABC's investment officers implement the investment policy, monitor the portfolio and, reporting to each Bank's investment committee, recommend portfolio strategies. Reports on all purchases, sales, net profits or losses and market appreciation or depreciation of the bond portfolio are reviewed by ABC's board of directors each month. Once a year, the written investment policy is reviewed by ABC's board of directors.
The Banks' securities are kept in safekeeping accounts at correspondent banks.
ASSET/LIABILITY MANAGEMENT
It is the objective of ABC to manage its assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established cash, loan, investment, borrowing and capital policies. It is the overall philosophy of ABC's management to support asset growth primarily through growth of core deposits, which include deposits of all categories made by individuals, partnerships, corporations and other entities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
PROPERTIES
The table below sets forth the location, size and other information with respect to ABC's real properties. All properties are owned by ABC or the Banks and are unencumbered.
EMPLOYEES
At December 31, 1999, ABC and its subsidiaries employed 376 full-time employees and 42 part-time employees. ABC considers its relationship with its employees to be excellent.
ABC has adopted two retirement plans for its employees, the ABC Bancorp 401(k) Profit Sharing Plan and the ABC Bancorp Money Purchase Pension Plan. These plans provide both deferral of compensation by the employees and matching contributions by the Company. ABC and the banks made contributions for all eligible employees in 1999. ABC also maintains a comprehensive employee benefits program providing, among other benefits, hospitalization and major medical insurance and life insurance. Management considers these benefits to be competitive with those offered by other financial institutions in south Georgia and southeast Alabama. ABC's employees are not represented by any collective bargaining group.
SUPERVISION AND REGULATION
GENERAL
As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board (the "FRB") and the Georgia Department of Banking and Finance (the "DBF"). The Banks are subject to supervision and examination by applicable state and Federal banking agencies, including the FRB, the Office of the Comptroller of the Currency (the "OCC"), the Federal Deposit Insurance Corporation (the "FDIC"), the DBF and the State of Alabama Department of Banking. The Banks are also subject to various requirements and restrictions under Federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Banks. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the FRB as it attempts to control the money supply and credit availability in order to influence the economy.
The Federal Bank Holding Company Act requires every bank holding company to obtain the prior approval of the FRB before (i) it may acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that it does not already control; (ii) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of a bank; and (iii) it may merge or consolidate with any other bank holding company. In addition, until recently, a bank holding company has generally been prohibited from engaging in, or acquiring, direct or indirect control of the voting shares of any company engaged in non-banking activities.
In addition, the DBF requires information with respect to the financial condition, operations, management and intercompany relationships of ABC and the Banks and related matters. The DBF may also require such other information as is necessary to keep itself informed as to whether the provisions of Georgia law and the regulations and orders issued thereunder by the DBF have been complied with, and the DBF may examine ABC. ABC is an "affiliate" of the Banks under the Federal Reserve Act, which imposes certain restrictions on (i) loans by the Banks to ABC; (ii) investments in the stock or securities of ABC by the Banks; (iii) the Bank's taking the stock or securities of an "affiliate" as collateral for loans by the Banks to a borrower; and (iv) the purchase of assets from ABC by the Banks. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.
THE GLB ACT
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (the "GLB Act"), which significantly changed the regulatory structure and oversight of ABC and its subsidiaries. The GLB Act revises the Bank Holding Company Act and repeals the affiliation provisions of the Glass-Steagall Act of 1933, permitting a qualifying holding company, called a "financial holding company", to engage in a full range of financial activities, including banking, insurance and securities activities, as well as merchant banking and additional activities that are "financial in nature" or "incidental" to such financial activities. The GLB Act thus provides expanded financial affiliation opportunities for existing bank holding companies by allowing bank holding companies to engage in activities such as securities underwriting and the underwriting and brokering of insurance products. The GLB Act also expands passive investments by financial holding companies in any type of company, financial or nonfinancial, through merchant banking and insurance company investments. In order for a bank holding company to qualify as a financial holding company, its subsidiary depository institutions must be "well-capitalized" and "well-managed" and have at least a "satisfactory" rating under the CRA. See "--Community Reinvestment Act."
The GLB Act also reforms the regulatory framework of the financial services industry. Under the GLB Act, financial holding companies are subject to primary supervision by the FRB, while current federal and state regulators of financial holding company regulated subsidiaries such as insurers, broker-dealers, investment companies and banks generally retain their jurisdiction and authority. In order to implement its underlying purposes, the GLB Act preempts state laws that restrict the establishment of financial affiliations authorized or permitted under the GLB Act, subject to specified exceptions for state insurance regulators. The GLB Act also removes the current blanket exemption for banks from the broker-dealer registration requirements under the Securities Exchange Act of 1934, as amended, amends the Investment Company Act of 1940, as amended, with respect to bank common trust fund and mutual fund activities, and amends the Investment Advisers Act of 1940, as amended, to require registration of banks that act as investment advisers to mutual funds.
The provisions of the GLB Act relating to financial holding companies will become effective 120 days after its enactment, or about March 15, 2000, excluding the federal preemption provisions, which became effective on the date of enactment. In January 2000, the FRB and the OCC each issued interim and proposed rules governing the application process for becoming a financial holding company or subsidiary of a financial holding company. Additional regulations are expected from the FRB and the OCC during the year 2000 for the implementation of the GLB Act.
PAYMENT OF DIVIDENDS AND OTHER RESTRICTIONS
ABC is a legal entity separate and distinct from its subsidiaries. There are various legal and regulatory limitations under federal and state law on the extent to which ABC's subsidiaries can pay dividends or otherwise supply funds to ABC.
The principal source of ABC's cash revenues is dividends from its subsidiaries and there are certain limitations under federal and state laws on the payment of dividends by such subsidiaries. The prior approval of the FRB or the applicable state commissioner, as the case may be, is required if the total of all dividends declared by any state member bank of the Federal Reserve System in any calendar year exceeds the Bank's net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years, less any required transfers to surplus or a fund for the retirement of any preferred stock. The relevant federal and state regulatory agencies also have authority to prohibit a state member bank or bank holding company, which would include ABC and the Banks, from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or unsound practice in conducting its business. The payment of dividends could, depending upon the financial condition of the subsidiary, be deemed to constitute such an unsafe or unsound practice.
Under Georgia law (which would apply to any payment of dividends by the Georgia Banks to ABC), the prior approval of the DBF is required before any cash dividends may be paid by a state bank if: (i) total classified assets at the most recent examination of such bank exceed 80% of the equity capital (as defined, which includes the reserve for loan losses) of such bank; (ii) the aggregate amount of dividends declared or anticipated to be declared in the calendar year exceeds 50% of the net profits (as defined) for the previous calendar year; or (iii) the ratio of equity capital to adjusted total assets is less than 6%.
Retained earnings of the Banks available for payment of cash dividends under all applicable regulations without obtaining governmental approval were approximately $7 million as of December 31, 1999.
In addition, the Banks are subject to limitations under Section 23A of the Federal Reserve Act with respect to extensions of credit to, investments in, and certain other transactions with, ABC. Furthermore, loans and extensions of credit are also subject to various collateral requirements.
The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRB's view that a bank holding company should pay cash dividends only to the extent that the holding company's net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the holding company's capital needs, asset quality and overall financial condition. The FRB also indicated that it would be inappropriate for a holding company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the FRB, the FRB may prohibit a bank holding company from paying any dividends if one or more of the holding company's bank subsidiaries are classified as undercapitalized.
Bank holding companies are required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would continue an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by, or written agreement with, the FRB. This notification requirement does not apply to any company that meets the well-capitalized standard for commercial banks, has a safety and soundness examination rating of at least a "2" and is not subject to any unresolved supervisory issues.
CAPITAL ADEQUACY
The FRB has adopted risk-based capital guidelines for bank holding companies. The minimum ratio of total capital 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.
Section 38 to the Federal Deposit Insurance Act, as revised in December 1992, implements the prompt corrective action provisions that Congress enacted as a part of the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC Act"). The "prompt corrective action" provisions set forth five regulatory zones in which all banks are placed largely based on their capital positions. Regulators are permitted to take increasingly harsh action as a bank's financial condition declines. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank's capital leverage ratio reaches two percent. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with less amounts of capital.
Under the regulations of the FDIC implementing the prompt corrective action provisions of the FDIC Act, financial institutions are placed in the following five categories based upon capitalization ratios: (i) a "well capitalized" institution has a total risk-based capital ratio of at least 10%, a Tier I risk-based ratio of at least 6% and a leverage ratio of at least 5%; (ii) an "adequately capitalized" institution has a total risk-based capital ratio of at least 8%, a Tier I risk-based ratio of at least 4% and a leverage ratio of at least 4%; (iii) an "undercapitalized" institution has a total risk-based capital ratio of under 8%, a Tier I risk-based ratio of under 4% or a leverage ratio of under 4%; (iv) a "significantly undercapitalized" institution has a total risk-based capital ratio of under 6%, a Tier I risk-based ratio of under 3% or a leverage ratio of under 3%; and (v) a "critically undercapitalized" institution has a leverage ratio of 2% or less. Institutions in any of the three undercapitalized categories would be prohibited from declaring dividends or making capital distributions. The FDIC regulations also establish procedures for "downgrading" an institution to a lower capital category based on supervisory factors other than capital.
The downgrading of an institution's category is automatic in two situations: (i) whenever an otherwise well-capitalized institution is subject to any written capital order or directive; and (ii) where an undercapitalized institution fails to submit or implement a capital restoration plan or has its plan disapproved. The Federal banking agencies may treat institutions in the well-capitalized, adequately capitalized and undercapitalized categories as if they were in the next lower level based on safety and soundness considerations relating to factors other than capital levels.
All insured institutions regardless of their level of capitalization are prohibited by the FDIC Act from paying any dividend or making any other kind of capital distribution or paying any management fee to any controlling person if following the payment or distribution the institution would be undercapitalized. While the prompt corrective action provisions of the FDIC Act contain no requirements or restrictions aimed specifically at adequately capitalized institutions, other provisions of the FDIC Act and the agencies' regulations relating to deposit insurance assessments, brokered deposits and interbank liabilities treat adequately capitalized institutions less favorably than those that are well-capitalized.
Under the FDIC's regulations, all of the Banks are "well capitalized" institutions.
The OCC's regulations establish two capital standards for national banks: a leverage requirement and a risk-based capital requirement. In addition, the OCC may, on a case-by-case basis, establish individual minimum capital requirements for a national bank that vary from the requirements which would otherwise apply under OCC regulations. A national bank that fails to satisfy the capital requirements established under the OCC's regulations will be subject to such administrative action or sanctions as the OCC deems appropriate.
The leverage ratio adopted by the OCC requires a minimum leverage ratio of 3% for national banks rated composite 1 under the CAMEL rating system for banks. National banks not rated composite 1 under the CAMEL rating system for banks are required to maintain a minimum leverage ratio of 4% to 5%, depending upon the level and nature of risks of their operations. For purposes of the OCC's leverage requirement, Tier I capital generally consists of common stockholders' equity and retained income and certain non-cumulative perpetual preferred stock and related income, except that no intangibles and certain purchased mortgage servicing rights and purchased credit card relationships may be included in capital.
The risk-based capital requirements established by the OCC's regulations require national banks to maintain total capital equal to at least 8% of total risk-weighted assets. For purposes of the risk-based capital requirement, total capital means Tier 1 capital plus Tier 2 capital, provided that the amount of Tier 2 capital may not exceed the amount of Tier 1 capital, less certain assets. The components of Tier 2 capital include certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
The OCC has revised its risk-based capital requirements to permit the OCC to require higher levels of capital for an institution in light of its interest rate risk. In addition, the OCC has proposed that a bank's interest rate risk exposure would be qualified using either the measurement system set forth in the proposal or the institution's internal model for measuring such exposure, if such model is determined to be adequate by the institution's examiner. Small institutions that are highly capitalized and have minimum interest rate risk would be exempt from the rule unless otherwise determined by the OCC. ABC has not determined what effect, if any, the OCC's proposed interest rate risk component would have on ABC's national bank subsidiary's capital if adopted as proposed.
SUPPORT OF SUBSIDIARY BANKS
Under the FRB policy, ABC is expected to act as a source of financial strength to, and to commit resources to support, each of the Banks. This support may be required at times when, absent such FRB policy, ABC may not be inclined to provide it. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Under the Financial Institutions Reform, Recovery and Enforcement Act, a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution in danger of default. "Default" is defined generally as the appointment of a conservator or receiver, and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulator assistance. The FDIC's claim for damages is superior to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution.
FDIC INSURANCE ASSESSMENTS
The Banks are subject to FDIC deposit insurance assessments for the Bank Insurance Fund (the "BIF"), which as of December 31, 1999, ranged from 0 to 27 basis points per $100 of insured deposits, based on the risk a particular institution poses to its deposit insurance fund. The risk classification is based on an institution's capital group and supervisory subgroup assignment.
On September 30, 1996, the President signed the Deposit Insurance Fund Act of 1996 ("DIFA") which was part of the omnibus spending bill enacted by Congress at the end of its 1996 session. DIFA provides that the FDIC may not set semi-annual assessments with respect to the BIF in excess of the amount needed to maintain the 1.25% designated reserve ratio or, if the reserve ratio is less than the designated reserve ratio, to increase the reserve ratio to the designated reserve ratio. In addition, DIFA mandates the merger of BIF and the Savings Association Insurance Fund (the "SAIF"), effective January 1, 1999, only if no insured depository institution is a savings association on that date. The combined deposit insurance fund would be called the "deposit insurance fund" or "DIF".
DIFA also imposes assessments against both SAIF and BIF deposits to avoid predicted default on the bonds issued by the Financing Corporation ("FICO") as deposits in savings institutions continue to decline. DIFA amends the Federal Home Loan Bank Act to impose the FICO assessment against both SAIF and BIF deposits beginning after December 31, 1996. The assessment imposed on insured depository institutions with respect to any BIF-assessable deposit will be assessed at a range equal to one-fifth of the rate (approximately 1.3 basis points) of the assessments imposed on insured depository institutions with respect to any SAIF-asssessable deposit (approximately 6.7 basis points). The FICO assessment for 1996 was paid entirely by SAIF-insured institutions, but BIF-insured banks will pay the same FICO assessment as SAIF-insured institutions beginning as of the earlier of December 31, 1999, or the date as of which the last savings association ceases to exist.
COMMUNITY REINVESTMENT ACT
The Banks are subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the Federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the Federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities.
A bank's compliance with its CRA obligations is based on a performance-based evaluation system which bases CRA ratings on an institution's lending service and investment performance. When a bank holding company applies for approval to acquire a bank or other bank holding company, the FRB will review the assessment of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. In connection with its assessment of CRA performance, the appropriate bank regulatory agency assigns a rating of "outstanding", "satisfactory", "needs to improve" or "substantial noncompliance". As of December 31, 1999, all of the Banks had a CRA rating of satisfactory or better.
COMMUNITY REINVESTMENT ACT (CONTINUED)
On April 19, 1995, the four Federal bank regulatory agencies adopted revisions to the regulations promulgated pursuant to the CRA, which are intended to set distinct assessment standards for financial institutions. The revised regulations contains three evaluation tests: (i) a lending test, which will compare the institution's market share of loans in low- and moderate-income areas to its market share of loans in its entire service area and the percentage of a bank's outstanding loans to low- and moderate-income areas or individuals; (ii) a services test, which will evaluate the provisions of services that promote the availability of credit to low- and moderate-income areas; and (iii) an investment test, which will evaluate an institution's record of investments in organizations designed to foster community development, small- and minority-owned businesses and affordable housing lending, including state and local government housing or revenue bonds. The regulation is designed to reduce some paperwork requirements of the current regulations and provide regulators, institutions and community groups with a more objective and predictable manner with which to evaluate the CRA performance of financial institutions. The rule became effective on January 1, 1996, at which time evaluation under streamlined procedures were scheduled to begin for institutions with assets of less than $250 million that are owned by a holding company with total assets of less than $1 billion. Congress and various Federal agencies (including, in addition to the bank regulatory agencies, the Department of Housing and Urban Development, the Federal Trade Commission and the Department of Justice) (collectively, the "Federal Agencies") responsible for implementing the nation's fair lending laws have been increasingly concerned that prospective home buyers and other borrowers are experiencing discrimination in their efforts to obtain loans. In recent years, the Department of Justice has filed suit against financial institutions, which it determined had discriminated, seeking fines and restitution for borrowers who allegedly suffered from discriminatory practices. Nearly all of these suits have been settled (some for substantial sums) without a full adjudication on the merits.
On March 8, 1994, the Federal Agencies, in an effort to clarify what constitutes lending discrimination and specify the factors the agencies will consider in determining if lending discrimination exists, announced a joint policy statement detailing specific discriminatory practices prohibited under the Equal Opportunity Act and the Fair Housing Act. In the policy statement, three methods of proving lending discrimination were identified: (i) over evidence of discrimination, when a lender blatantly discriminates on a prohibited basis; (ii) evidence of disparate treatment, when a lender treats applicants differently based on a prohibited factor even where there is no showing that the treatment was motivated by prejudice or a conscious intention to discriminate against a person; and (iii) evidence of disparate impact, when a lender applies a practice uniformly to all applicants, but the practice has a discriminatory effect, even where such practices are neutral on their face and are applied equally, unless the practice can be justified on the basis of business necessity.
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.
OTHER REGULATORY ACTION
On September 29, 1994, President Clinton signed the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Federal Interstate Act"), which amended Federal law to permit bank holding companies to acquire existing banks in any state effective September 29, 1995, and to permit any interstate bank holding company to merge its various bank subsidiaries into a single bank with interstate branches after May 31, 1997. States have the authority to authorize interstate branching prior to June 1, 1997, or, alternatively, to opt out of interstate branching prior to that date. The Georgia Financial Institutions Code was amended in 1994 to permit the acquisition of a Georgia bank or bank holding company by out-of-state bank holding companies beginning July 1, 1995. On September 29, 1995, the interstate banking provisions of the Georgia Financial Institutions Code were superseded by the Federal Interstate Act.
The Federal Interstate Act authorizes the OCC and FDIC to approve interstate branching de novo by national and state banks, respectively, only in states which specifically allow for such branching. The Federal Interstate Act also requires the appropriate Federal banking agencies to prescribe regulations by June 1, 1997 which prohibit any out-of-state bank from using the interstate branching authority primarily for the purpose of deposit production. These regulations must include guidelines to ensure that interstate branches operated by an out-of-state bank in a host state are reasonably helping to meet the credit needs of the communities which they serve.
In February 1996, Georgia adopted the "Georgia Interstate Branching Act," which permits Georgia-based banks and bank holding companies owning or acquiring banks outside of Georgia and all non-Georgia banks and bank holding companies owning or acquiring banks in Georgia the right to merge any lawfully acquired bank into an interstate branch network. The Georgia Interstate Branching Act also allows banks to establish de novo branch banks.
MONETARY POLICY
The earnings of ABC are affected by domestic and foreign economic conditions, particularly by the monetary and fiscal policies of the United States government and its agencies.
The FRB has had, and will continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to mitigate recessionary and inflationary pressures by regulating the national money supply. The techniques used by the FRB include setting the reserve requirements of member banks and establishing the discount rate on member bank borrowings. The FRB also conducts open market transactions in United States government securities.
FEDERAL HOME LOAN BANK SYSTEM
All of the Banks have correspondent relationships with the Federal Home Loan Bank of Atlanta ("FHLB Atlanta"), which is one of 12 regional Federal Home Loan Banks ("FHLBs") that administer the home financing credit function of savings companies. Each FHLB serves as a reserve or central bank for its members within its assigned region. FHLBs are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System and make loans to members (i.e., advances) in accordance with policies and procedures, established by the Board of Directors of the FHLB which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing.
FHLB Atlanta provides certain services to certain of the Banks such as processing checks and other items, buying and selling Federal funds, handling money transfers and exchanges, shipping coin and currency, providing security and safekeeping of funds or other valuable items, and furnishing limited management information and advice. As compensation for these services, the Banks maintain certain balances with FHLB Atlanta in noninterest-bearing accounts.
Under Federal law, the FHLBs are required to provide funds for the resolution of troubled savings companies and to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects.
FUTURE REQUIREMENTS
Statutes and regulations are regularly introduced which contain wide-ranging proposals for altering the structure, regulations and competitive relationships of the nation's financial institutions. It cannot be predicted whether or in what form any proposed statute or regulation will be adopted or the extent to which the business of ABC or any of the Banks may be affected by such statute or regulation.
ITEM 2.
ITEM 2. PROPERTIES
The principal properties of ABC consist of the properties of the Banks. For a description of the properties of the Banks, see "Item 1 - Business of ABC and the Banks - Properties" included elsewhere in this Annual Report.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Neither ABC nor any of the Banks is a party to, nor is any of their property the subject of, any material pending legal proceedings, other than ordinary routine proceedings incidental to the business of the Banks, nor to the knowledge of the management of ABC are any such proceedings contemplated or threatened against it or the Banks.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matters were submitted to a vote of ABC's shareholders during the fourth quarter of 1999.
ITEM 4.5 EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the executive officers of ABC.
Officers serve at the discretion of the Board of Directors.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
(a) The following table sets forth: (a) the high and low bid prices for the common stock as quoted on Nasdaq-NMS during 1999 and 1998; and (b) the amount of quarterly dividends declared on the common stock during the periods indicated.
CALENDAR PERIOD BID PRICES CASH ----------------------- --------------------- DIVIDENDS 1999 HIGH LOW DECLARED ----------------------- --------- --------- --------- FIRST QUARTER $ 10.828 $ 9.797 $ .083 SECOND QUARTER 12.500 10.109 .083 THIRD QUARTER 11.766 10.672 .083 FOURTH QUARTER 12.125 10.250 .10
CALENDAR PERIOD BID PRICES CASH ----------------------- --------------------- DIVIDENDS 1998 HIGH LOW DECLARED ----------------------- --------- --------- --------- First quarter $ 16.978 $13.750 $ .083 Second quarter 15.104 13.125 .083 Third quarter 13.645 9.583 .083 Fourth quarter 11.041 10.000 .083
(b) As of March 1, 2000, there were approximately 1,525 holders of record of the Common Stock, excluding individuals in security position listings.
(c) ABC paid an annual dividend on its common stock of $.35 and $.33 per share for fiscal years 1999 and 1998, respectively.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected consolidated financial information for ABC. The data set forth below are derived from the audited consolidated financial statements of ABC. The selected financial data should be read in conjunction with, and are qualified in their entirety by, the Consolidated Financial Statements and the Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.
SELECTED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
SELECTED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
SELECTED QUARTERLY FINANCIAL DATA:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
ABC's 1999 Annual Report contains forward-looking statements in addition to historical information. ABC cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995; accordingly, there can be no assurance that such indicated result will be realized.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, ABC is required to note the variety of factors that could cause ABC's actual results and experience to differ materially from the anticipated results or other expectations expressed in ABC's forward-looking statements. These factors include legislative and regulatory initiatives regarding deregulation and restructuring of the banking industry; the extent and timing of the entry of additional competition in ABC's markets; potential business strategies, including acquisitions or dispositions of assets or internal restructuring, that may be pursued by ABC, state and federal banking regulations; changes in or application of environmental and other laws and regulations to which ABC is subject; political, legal and economic conditions and developments; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather, natural disasters and other catastrophic events; and other factors discussed in ABC's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K. The words "believe", "expect", "anticipate", "project", and similar expressions signify such forward-looking statements.
Readers are cautioned not to place undue reliance on any forward-looking statements made by or on behalf of ABC. Any such statement speaks only as of the date the statement was made. ABC undertakes no obligation to update or revise any forward-looking statements. Additional information with respect to factors that may cause results to differ materially from those contemplated by such forward-looking statements is included in the ABC's current and subsequent filings with the Securities and Exchange Commission.
GENERAL
ABC's principal asset is its ownership of the Banks. Accordingly, its results of operations are primarily dependent upon the results of operations of the Banks. The Banks conduct a commercial banking business which consists of attracting deposits from the general public and applying those funds to the origination of commercial, consumer and real estate loans (including commercial loans collateralized by real estate). The Banks' profitablity depends primarily on net interest income, which is the difference between interest income generated from interest-earning assets (i.e., loans and investments) less the interest expense incurred on interest-bearing liabilities (i.e., customer deposits and borrowed funds). Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities, and the interest rate paid and earned on these balances. Net interest income is dependent upon the Banks' interest rate spread, which is the difference between the average yield earned on its interest-earning assets and the average rate paid on its interest-bearing liabilities. When interest-earning assets approximates or exceeds interest-bearing liabilities, any positive interest rate spread will generate interest income. The interest rate spread is impacted by interest rates, deposit flows and loan demand. Additionally, and to a lesser extent, the profitability of the Banks is affected by such factors as the level of noninterest income and expenses, the provision for loan losses and the effective tax rate. Noninterest income consists primarily of service charges on deposit accounts and other fees and income from the sale of loans and investment securities. Noninterest expenses consist of compensation and benefits, occupancy-related expenses, deposit insurance premiums paid to the FDIC and other operating expenses.
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ABC's results of operations are determined by its ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense. Since interest rates are determined by market forces and economic conditions beyond the control of ABC, the ability to generate net interest income is dependent upon the ability of the Banks to obtain an adequate spread between the rate earned on interest-earning assets and the rate paid on interest-bearing liabilities. Thus, the key performance measure for net interest income is the interest margin or net yield, which is taxable-equivalent net interest income divided by average earning assets.
The primary component of consolidated earnings is net interest income, or the difference between interest income on interest-earning assets and interest paid on interest-bearing liabilities. The net interest margin is net interest income expressed as a percentage of average interest-earning assets. Interest-earning assets consist of loans, investment securities and federal funds sold. Interest-bearing liabilities consist of deposits, Federal Home Loan Bank borrowings and other short-term borrowings. A portion of interest income is earned on tax-exempt investments such as state and municipal bonds. In an effort to state this tax-exempt income and its resultant yields on a basis comparable to all other taxable investments, an adjustment is made to analyze this income on a taxable-equivalent basis.
The net interest margin increased five basis points to 5.39% in 1999 as compared to 5.34% in 1998. This increase in net interest margin resulted from a decrease of 43 basis points in average yield earned on interest-earning assets accompanied by a decrease of 54 basis points in average rate paid on interest-bearing liabilities. Because declining interest rates had a greater impact on interest paid on interest-bearing liabilities than they had on yield on interest-earning assets, ABC actually increased its interest rate spread by eleven basis points to 4.71% in 1999 as compared to 4.60% in 1998. Net interest income on a taxable-equivalent basis was $35,940,000 in 1999 as compared to $34,063,000 in 1998, representing an increase of $1,877,000 or 5.51%. Net interest income on a taxable-equivalent basis was $34,063,000 in 1998 as compared to $33,320,000 in 1997, representing an increase of $743,000 or 2.23%. Net interest margin decreased 13 basis points or 2.38% to 5.34% in 1998 from 5.47% in 1997 on an increase of 4.59% in average interest-earning assets and an increase of 2.90% in average interest-bearing liabilities. Interest earned on average interest-earning assets decreased 23 basis points to 9.49% in 1998 as compared to 9.72% in 1997, while interest paid on interest-bearing liabilities decreased six basis points to 4.89% in 1998 as compared to 4.94% in 1997.
Average interest-earning assets increased $28,876,000 or 4.53% to $666,377,000 in 1999 from $637,501,000 in 1998. Average loans increased $10,520,000; average investments, including interest-bearing deposits in banks, increased $19,361,000; and average federal funds sold decreased $1,005,000. The increase in average interest-earning assets was funded by an increase in average deposits of $6,288,000 or 1.04% to $613,327,000 in 1999 from $607,039,000 in 1998. By comparison, average interest-earning assets increased $28,001,000 or 4.59% to $637,501,000 in 1998 from $609,500,000 in 1997. The increase in average interest-earning assets in 1998 was funded by an increase in average deposits of $31,060,000, or 5.39%. In 1999 and 1998, approximately 15% and 14%, respectively, of the average deposits were noninterest-bearing deposits.
The allowance for loan losses represents a reserve for potential losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, with a particular emphasis on nonaccruing, past due and other loans that management believes require attention. ABC segregates its loan portfolio by type of loan and utilizes this segregation in evaluating exposure to risks within the portfolio. In addition, based on internal reviews and external reviews performed by independent auditors and regulatory authorities, ABC further segregates its loan portfolio by loan classifications within each type of loan based on an assessment of risk for a particular loan or group of loans. Certain reviewed loans require specific allowances. Allowances are provided for other types and classifications of loans based on anticipated loss rates. Allowances are also provided for loans that are reviewed by management and considered creditworthy and loans for which management determines no review is required. In establishing allowances, management considers historical loan loss experience with an emphasis on current loan quality trends, current economic conditions and other factors in the markets where the subsidiary banks operate. Factors considered include among others, unemployment rates, effect of weather on agriculture and significant local economic events, such as major plant closings.
The provision for loan losses is a charge to earnings in the current period to replenish the allowance and maintain it at a level management has determined to be adequate. The provision for loan losses charged to earnings amounted to $2,154,000 in 1999, $5,505,000 in 1998 and $2,731,000 in 1997. The increase in the provision for loan losses of $2,774,000, or 101.57%, in 1998 as compared to 1997 was required to replenish the allowance for loan losses for approximately $3,000,000 of net charge-offs in 1998 and to cover potential losses in the loan portfolio resulting from the deterioration in the financial condition of certain borrowers. Due to adverse economic conditions in early 1998, it became apparent that several agriculturally related loans and commercial business loans were not performing according to the loan agreements. Management intensified its efforts to identify those nonperforming loans, to charge off loans which were considered in the loss category and to adequately reserve for other loans determined to be at risk. During 1999 net loan charge-offs decreased $489,000, or 16.63%, to $2,451,000 as compared to $2,940,000 in 1998. Due to the improvement in the quality of the loan portfolio, which resulted from management's efforts at resolving problem loan situations, management determined that the provision for loan losses in 1999 could be significantly reduced from the provision recorded in 1998. During 1999, average loans increased $10,520,000, or 2.12%, over 1998 as compared to an increase in average loans of $20,374,000, or 4.29%, in 1998 as compared to 1997. The allowance for loan losses decreased $297,000, or 2.91%, to $9,895,000 at December 31, 1999 from $10,192,000 at December 31, 1998. Net charge-offs represented 113.79% of the provision for loan losses in 1999 as compared to 53.41% in 1998. Net loan charge-offs for 1999 represented .48% of average loans outstanding during the year as compared to .59% for 1998 and .50% for 1997. At December 31, 1999, the allowance for loan losses was 1.87% of total loans outstanding as compared to an allowance for loan losses of 2.14% of total loans outstanding at December 31, 1998 and 1.56% of total loans outstanding at December 31, 1997. The determination of the allowance rests upon management's judgment about factors affecting loan quality and assumptions about the local and national economy. Management considers the year-end allowance for loan losses adequate to cover potential losses in the consolidated loan portfolio.
Average total assets increased $29,869,000 or 4.27% to $729,963,000 in 1999 as compared to $700,094,000 in 1998. The increase in average total assets was accompanied by an increase in average deposits of $6,288,000 or 1.04% and an increase of average borrowings of $19,678,000. Average total assets increased $23,513,000 or 3.48% to $700,094,000 in 1998 as compared to $676,581,000 in 1997. The increase in average total assets was accompanied by an increase in average total deposits of $31,060,000 or 5.39% to $607,039,000 in 1998 from $575,979,000 in 1997.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed only to U. S. Dollar interest rate changes and, accordingly, the Company manages exposure by considering the possible changes in the net interest margin. The Company does not have any trading instruments nor does it classify any portion of the investment portfolio as held for trading. The Company does not engage in any hedging activities or enter into any derivative instruments with a higher degree of risk than mortgage backed securities which are commonly pass through securities. Finally, the Company has no exposure to foreign currency exchange rate risk, commodity price risk, and other market risks.
Interest rates play a major part in the net interest income of a financial institution. The sensitivity to rate changes is known as "interest rate risk." The repricing of interest earning assets and interest-bearing liabilities can influence the changes in net interest income. As part of the Company's asset/liability management program, the timing of repriced assets and liabilities is referred to as Gap management. It is the policy of the Company to maintain a Gap ratio in the one-year time horizon of .80 to 1.20. As indicated by the Gap analysis included in this annual report, the Company is somewhat liability sensitive in relation to changes in market interest rates. Being liability sensitive would result in net interest income decreasing in a rising rate environment and increasing in a declining rate environment. See "Asset/Liability Management" included in SELECTED STATISTICAL INFORMATION OF ABC BANCORP.
The Company uses simulation analysis to monitor changes in net interest income due to changes in market interest rates. The simulation of rising, declining and flat interest rate scenarios allow management to monitor and adjust interest rate sensitivity to minimize the impact of market interest rate swings. The analysis of the impact on net interest income over a twelve month period is subjected to a gradual 200 basis point increase or decrease in market rates on net interest income and is monitored on a quarterly basis. The most recent simulation model projects net interest income would decrease 1.93% if rates rise gradually over the next year. On the other hand, the model projects net interest income to increase .58% if rates decline over the next year.
SELECTED STATISTICAL INFORMATION OF ABC BANCORP
The following statistical information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and the financial statements and related notes included elsewhere in this Annual Report and in the documents incorporated herein by reference.
AVERAGE BALANCES AND NET INCOME ANALYSIS
The following tables set forth the amount of the ABC's interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for total interest-earning assets and total interest-bearing liabilities, net interest spread and net yield on average interest-earning assets. Federally tax-exempt income is presented on a taxable-equivalent basis assuming a 34% Federal tax rate.
AVERAGE BALANCES AND NET INCOME ANALYSIS (CONTINUED)
RATE AND VOLUME ANALYSIS
The following table reflects the changes in net interest income resulting from changes in interest rates and from asset and liability volume. Federally tax-exempt interest is presented on a taxable-equivalent basis assuming a 34% Federal tax rate. The change in interest attributable to rate has been determined by applying the change in rate between years to average balances outstanding in the later year. The change in interest due to volume has been determined by applying the rate from the earlier year to the change in average balances outstanding between years. Thus, changes that are not solely due to volume have been consistently attributed to rate.
NONINTEREST INCOME
Service charges on deposit accounts decreased $24,000 or .42% to $5,696,000 in 1999 as compared to $5,720,000 in 1998 on an increase in average deposits of $6,288,000 or 1.04% to $613,327,000 in 1999 from $607,039,000 in 1998. The decrease in service charges on deposit accounts is attributable to the introduction of new products to meet increased competition in the Company's market areas. Certain of these products reduced service charge income. For example, overdraft protection extended to customers reduces the amount of income generated from insufficient check charges or overdraft charges. A portion of this decrease in other income is offset by increase in interest and fees on loans. Service charges on deposit accounts increased $211,000 or 3.83% to $5,720,000 in 1998 as compared to $5,509,000 in 1997 on an increase in average deposits of $31,060,000 or 5.39% to $607,039,000 in 1998 as compared to $575,979,000 in 1997. Origination fees on mortgage loans decreased $95,000 or 10.76% to $788,000 in 1999 as compared to $883,000 in 1998. This decrease is attributable to the decrease in mortgage lending activities resulting from an increase in interest rates on mortgage loans during 1999. In comparison, origination fees on mortgage loans increased significantly in 1998 over 1997 due to the increase in mortgage lending activities. During 1998, origination fees on mortgages loans increased $438,000 or 98.43% to $883,000 as compared to $445,000 in 1997. In 1998, ABC recognized nontaxable income of $1,200,000 in life insurance benefits upon the death of a former officer and director of a subsidiary bank. This nonrecurring transaction represented 12.37% of total noninterest income in 1998 and 17.36% of consolidated net income for 1998. All other noninterest income decreased $418,000 to $1,478,000 in 1999 as compared to $1,896,000 in 1998. The principal items contributing to the decrease in other income were: decrease of $112,000 in dividend income from the Federal Home Loan Bank, decrease of $143,000 in net gains and losses on sale of fixed assets and other real estate, and decrease of $68,000 in gain on sale of loans. Following is a comparison of noninterest income for 1999, 1998 and 1997.
NONINTEREST EXPENSE
Salaries and employee benefits increased $861,000, or 6.14%, to $14,886,000 in 1999 from $14,025,000 in 1998. This increase was attributable to an increase of 14 full-time employees and five part-time employees during 1999 and to normal increases in salaries and employee benefits. Salaries and employee benefits increased $283,000, or 2.06, to $14,025,000 in 1998 from $13,742,000 in 1997. Although individual salaries and employee benefits increased during 1998, the moderate increase in total salaries and employee benefits was achieved by a reduction of total personnel employed during the year of approximately 3%.
Equipment and occupancy expense decreased $129,000, or 2.99%, to $4,191,000 in 1999 as compared to $4,320,000 in 1998. This decrease in expense was attributable primarily to a decrease of $155,000 in depreciation expense. Equipment and occupancy expense increased $362,000, or 9.15%, in 1998 as compared to 1997. Approximately 40% of that increase was attributable to an increase of $143,000 in depreciation expense in 1998 as compared to 1997. The remainder of the increase was attributable to increased rentals of office space and equipment, and general increases in utilities, property taxes and maintenance expense.
Amortization of intangible assets decreased $47,000 in 1999 as compared to 1998 as a result of the completion of amortization of core deposits acquired in an earlier bank acquisition. Amortization of intangible assets increased $107,000 in 1998 over 1997. This increase represented the additional amount of cost amortized in 1998 over 1997 for the purchase of the Douglas branch of Security Bank.
Following is an analysis of noninterest expense for 1999, 1998 and 1997.
ASSET/LIABILITY MANAGEMENT
A principal objective of ABC's asset/liability management strategy is to minimize its exposure to changes in interest rates by matching the maturity and repricing horizons of interest-earning assets and interest-bearing liabilities. This strategy is overseen in part through the direction of ABC's Asset and Liability Committee (the "ALCO Committee") which establishes policies and monitors results to control interest rate sensitivity.
As part of ABC's interest rate risk management policy, the ALCO Committee examines the extent to which its assets and liabilities are "interest rate-sensitive" and monitors its interest rate-sensitivity "gap". An asset or liability is considered to be interest rate sensitive if it will reprice or mature within the time period analyzed, usually one year or less. The interest rate-sensitivity gap is the difference between the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within such time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the interest rate-sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If ABC's assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.
A simple interest rate "gap" analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates. Accordingly, the ALCO Committee also evaluates how the repayment of particular assets and liabilities is impacted by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may not react identically to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market interest rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as "interest rate caps") which limit changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the interest-rate gap. The ability of many borrowers to service their debts also may decrease in the event of an interest-rate increase.
The following table sets forth the distribution of the repricing of ABC's earning assets and interest-bearing liabilities as of December 31, 1999, the interest rate sensitivity gap (i.e., interest rate sensitive assets divided by interest rate sensitivity liabilities), the cumulative interest rate sensitivity gap ratio (i.e., interest rate sensitive assets divided by interest rate sensitive liabilities) and the cumulative sensitivity gap ratio. The table also sets forth the time periods in which earning assets and liabilities will mature or may reprice in accordance with their contractual terms. However, the table does not necessarily indicate the impact of general interest rate movements on the net interest margin since the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of ABC's customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times within such period and at different rates.
(1) The Company has found that NOW and money-market checking deposits and savings deposits reprice between three months and one year or between one to three years depending on the competition in the market areas where the deposits are located. Therefore, it has placed portions of these deposits in the three months to one year horizon and the one to three years horizon based on estimated amounts repricing in each horizon.
INVESTMENT PORTFOLIO
The Company manages the mix of asset and liability maturities in an effort to control the effects of changes in the general level of interest rates on net interest income. See "--Asset/Liability Management." Except for its effect on the general level of interest rates, inflation does not have a material impact on the Company due to the rate variability and short-term maturities of its earning assets. In particular, approximately 55% of the loan portfolio is comprised of loans which mature or reprice within one year or less. Mortgage loans, primarily with five to fifteen year maturities, are also made on a variable rate basis with rates being adjusted every one to five years. Additionally, 17% of the investment portfolio matures or reprices within one year or less.
TYPES OF INVESTMENTS
SECURITIES
Following is a summary of the carrying value of investments as of the end of each reported period:
MATURITIES The amounts of investments in securities in each category as of December 31, 1999 are shown in the following table according to contractual maturity classifications (1) one year or less, (2) after one year through five years, (3) after five years through ten years, and (4) after ten years.
(1) Yields were computed using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis over the life of each security. The weighted average yield for each maturity range was computed using the acquisition price of each security in that range.
(2) Yields on securities of state and political subdivisions are stated on a taxable-equivalent basis, using a tax rate of 34%.
LOAN PORTFOLIO
TYPES OF LOANS
Management believes that the Company's loan portfolio is adequately diversified. The loan portfolio contains no foreign or energy-related loans or significant concentrations in any one industry, with the exception of residential and commercial real estate mortgages, which constituted approximately 50% of the Company's loan portfolio as of December 31, 1999. The amount of loans outstanding at the indicated dates is shown in the following table according to type of loans.
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
Total loans as of December 31, 1999 are shown in the following table according to maturity or repricing opportunities (1) one year or less, (2) after one year through three years, and (3) after three years.
(DOLLARS IN THOUSANDS) --------------- MATURITY OR REPRICING WITHIN: One year or less $ 289,136 After one year through three years 135,213 After three years 105,876 --------------- $ 530,225 ===============
The following table summarizes loans at December 31, 1999 with the due dates after one year which (1) have predetermined interest rates and (2) have floating or adjustable interest rates.
(DOLLARS IN THOUSANDS) ---------------
Predetermined interest rates $ 239,364 Floating or adjustable interest rates 1,725 --------------- $ 241,089 ===============
Records were not available to present the above information in each category listed in the first paragraph above and could not be reconstructed without undue burden.
NONPERFORMING LOANS
A loan is placed on nonaccrual status when, in management's judgment, the collection of the interest income appears doubtful. Interest receivable that has been accrued in prior years and is subsequently determined to have doubtful collectibility is charged to the allowance for possible loan losses. Interest on loans that are classified as nonaccrual is recognized when received. Past due loans are loans whose principal or interest is past due 90 days or more. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the original contractual terms.
In the opinion of management, any loans classified by regulatory authorities as doubtful, substandard or special mention that have not been disclosed above do not (i) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. Any loans classified by regulatory authorities as loss have been charged off.
SUMMARY OF LOAN LOSS EXPERIENCE
The provision for possible loan losses is created by direct charges to operations. Losses on loans are charged against the allowance in the period in which such loans, in management's opinion, become uncollectible. Recoveries during the period are credited to this allowance. The factors that influence management's judgment in determining the amount charged to operating expense are past loan experience, composition of the loan portfolio, evaluation of possible future losses, current economic conditions and other relevant factors. The Company's allowance for loan losses was approximately $9,895,000 at December 31, 1999, representing 1.87% of year end total loans outstanding, compared with $10,192,000 at December 31, 1998, which represented 2.14% of year end total loans outstanding. The allowance for loan losses is reviewed quarterly based on management's evaluation of current risk characteristics of the loan portfolio, as well as the impact of prevailing and expected economic business conditions. Management considers the allowance for loan losses adequate to cover possible loan losses on the loans outstanding.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The following table sets forth the breakdown of the allowance for loan losses by loan category for the periods indicated. Management believes the allowance can be allocated only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any other category.
The following table presents an analysis of the Company's loan loss experience for the periods indicated:
DEPOSITS
Average amount of deposits and average rate paid thereon, classified as to noninterest-bearing demand deposits, interest-bearing demand and savings deposits and time deposits, for the periods indicated are presented below.
ABC has a large, stable base of time deposits with little or no dependence on volatile deposits of $100,000 or more. The time deposits are principally certificates of deposit and individual retirement accounts obtained for individual customers.
The amounts of time certificates of deposit issued in amounts of $100,000 or more as of December 31, 1999, are shown below by category, which is based on time remaining until maturity of (1) three months or less, (2) over three through twelve months and (3) over twelve months.
(DOLLARS IN THOUSANDS) ---------------
Three months or less $ 30,458 Over three through twelve months 52,195 Over twelve months 12,629 --------------- Total $ 95,282 ===============
RETURN ON ASSETS AND SHAREHOLDERS' EQUITY
The following rate of return information for the periods indicated is presented below.
(1) Net income divided by average total assets. (2) Net income divided by average equity. (3) Dividends declared per share divided by net income per share. (4) Average equity divided by average total assets.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management involves the matching of the cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs, and the ability of ABC and the Subsidiary Banks to meet those needs. ABC and the Subsidiary Banks seek to meet liquidity requirements primarily through management of short-term investments (principally interest-bearing deposits in banks) and monthly amortizing loans. Another source of liquidity is the repayment of maturing single payment loans. In addition, the Subsidiary Banks maintain relationships with correspondent banks which could provide funds to them on short notice, if needed.
The liquidity and capital resources of ABC and the Subsidiary Banks are monitored on a periodic basis by state and Federal regulatory authorities. At December 31, 1999, the Subsidiary Banks' short-term investments were adequate to cover any reasonable anticipated immediate need for funds. During 1999, ABC increased its capital by retaining net earnings of $5,908,000 after payment of dividends. After recording a decrease in capital of $1,829,000 for unrealized losses on securities available for sale, net of taxes, an increase of $191,000 for restricted stock transactions, and a decrease in capital of $88,000 for repurchase of treasury shares, total capital increased $4,182,000 during 1999. At December 31, 1999, total capital of ABC amounted to $76,016,000. ABC and the Subsidiary Banks are aware of no events or trends likely to result in a material change in their liquidity.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
At December 31, 1999, ABC had binding commitments for capital expenditures of approximately $238,000. In addition, management estimates that approximately $1,250,000 will be required for completion of banking facilities in 1999.
In accordance with risk capital guidelines issued by the Federal Reserve Board, ABC is required to maintain a minimum standard of total capital to risk-weighted assets of 8%. Additionally, all member banks must maintain "core" or "Tier 1" capital of at least 4% of total assets ("leverage ratio"). Member banks operating at or near the 4% capital level are expected to have well-diversified risks, including no undue interest rate risk exposure, excellent control systems, good earnings, high asset quality, and well managed on- and off-balance sheet activities; and, in general, be considered strong banking organizations with a composite 1 rating under the CAMEL rating system of banks. For all but the most highly rated banks meeting the above conditions, the minimum leverage ratio is to be 4% plus an additional 100 to 200 basis points.
The following table summarizes the regulatory capital levels of the Company at December 31, 1999.
Each Bank also met its individual regulatory capital requirements at December 31, 1999.
COMMITMENTS AND LINES OF CREDIT
In the ordinary course of business, the Banks have granted commitments to extend credit to approved customers. Generally, these commitments to extend credit have been granted on a temporary basis for seasonal or inventory requirements and have been approved by the Banks' Board of Directors. The Banks have also granted commitments to approved customers for standby letters of credit. These commitments are recorded in the financial statements when funds are disbursed or the financial instruments become payable. The Banks use the same credit policies for these off balance sheet commitments as they do for financial instruments that are recorded in the consolidated financial statements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitment amounts expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Following is a summary of the commitments outstanding at December 31, 1999 and 1998.
1999 1998 --------------- --------------- (DOLLARS IN THOUSANDS) ---------------------------------
Commitments to extend credit $ 84,150 $ 80,861 Credit card commitments 9,162 7,866 Standby letters of credit 3,415 2,761 --------------- --------------- $ 96,727 $ 91,488 =============== ===============
IMPACT OF INFLATION
The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with generally accepted accounting principles and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and its subsidiaries are included on pages through of this Annual Report on Form 10-K:
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Income - Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Comprehensive Income - Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity - Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements.
ITEM 9.
ITEM 9. DISAGREEMENT ON ACCOUNTING AND FINANCIAL DISCLOSURE
During 1999 and 1998, the Company did not change its accountants and there was no disagreement on any matter of accounting principles or practices for financial statement disclosure that would have required the filing of a current report on Form 8-K.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this Item is incorporated by reference to the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report ("ABC's Proxy Statement").
Information concerning the Company's executive officers is included in Item 4.5 of Part I of this Annual Report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to ABC's Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to ABC's Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to ABC's Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Item 13(a) 1., 2. and 3.
(a) The following documents are filed as part of this report:
1. Financial statements:
(a) ABC Bancorp and Subsidiaries:
(i) Consolidated Balance Sheets - December 31, 1999 and 1998
(ii) Consolidated Statements of Income - Years ended December 31, 1999, 1998 and 1997
(iii) Consolidated Statements of Comprehensive Income - Years ended December 31, 1999, 1998 and 1997
(iv) Consolidated Statements of Stockholders' Equity - Years ended December 31, 1999, 1998 and 1997
(v) Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997
(vi) Notes to Consolidated Financial Statements
(b) ABC Bancorp (Parent Company Only):
Parent Company only financial information has been included in Note 16 of Notes to Consolidated financial statements.
2. Financial statement schedules:
All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
3. Exhibits required by Item 601 of Regulation S-K:
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation of ABC, as amended (incorporated by reference to Exhibit 2.1 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630) filed August 14, 1987).
3.2 Amendment to Amended Articles of Incorporation dated May 26, 1995 (incorporated by reference to Exhibit 3.1.1 to ABC's Form 10-K filed March 28, 1996).
3.3 Amendment to Amended Articles of Incorporation (filed as Exhibit 4.3 to ABC's Registration on Form S-4 (Registration No. 333-08301), filed with the Commission on July 17, 1996 and incorporated herein by reference).
3.4 Bylaws of ABC, as amended (incorporated by reference to Exhibit 2.2 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630) filed August 14, 1987.
3.5 Form of Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.5 to ABC's Annual Report on Form 10-K (File No. 001-13901), filed with the Commission on March 25, 1998).
3.6 Form of Amendment to Bylaws (incorporated by reference to Exhibit 3.6 to ABC's Annual Report on Form 10-K (File No. 001-13901), filed with the Commission on March 25, 1998).
3.7 Form of Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.7 to ABC'S Annual Report on Form 10-K (File No. 001-13901), filed with the Commission on March 26, 1999).
3.8 Form of Amendment to Bylaws (incorporated by reference to Exhibit 3.8 to ABC'S Annual Report on Form 10-K (File No. 001-13901), filed with the Commission on March 26, 1999).
10.1 1985 Incentive Stock Option Plan (filed as Exhibit 5.1 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630), filed with the Commission on August 14, 1987 and incorporated herein by reference).
10.2 Incentive Stock Option Agreement with Kenneth J. Hunnicutt dated October 17, 1985 (filed as Exhibit 5.2 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630), filed with the Commission on August 14, 1987 and incorporated herein by reference).
10.3 Deferred Compensation Agreement for Kenneth J. Hunnicutt dated December 16, 1986 (filed as Exhibit 5.3 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630), filed with the Commission on August 14, 1987 and incorporated herein by reference).
EXHIBIT NO. DESCRIPTION
10.4 Security Deed in favor of M.I.A., Co. dated December 31, 1984 (filed as Exhibit 5.4 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630), filed with the Commission on August 14, 1987 and incorporated herein by reference).
10.5 Loan Agreement and Master Term Note dated December 30, 1986 (filed as Exhibit 5.5 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630), filed with the Commission on August 14, 1987 and incorporated herein by reference).
10.6 Executive Salary Continuation Agreement dated February 14, 1984 (filed as Exhibit 10.6 to ABC's Annual Report on Form 10-KSB (File Number 2-71257), filed herewith with the Commission on March 27, 1989 and incorporated herein by reference.
10.7 1992 Incentive Stock Option Plan and Option Agreement for K. J. Hunnicutt (filed as Exhibit 10.7 to ABC's Annual Report on Form 10-KSB (File Number 0-16181), filed with the Commission on March 30, 1993 and incorporated herein by reference).
10.8 Executive Employment Agreement with Kenneth J. Hunnicutt dated September 20, 1994 (filed as Exhibit 10.8 to ABC's Annual Report on Form 10-KSB (File Number 0-016181), filed with the Commission on March 30, 1995 and incorporated herein by reference).
10.9 Executive Consulting Agreement with Eugene M. Vereen dated September 20, 1994 (filed as Exhibit 10.9 to ABC's Annual Report on Form 10-KSB (File Number 0-016181), filed with the Commission on March 30, 1995 and incorporated herein by reference).
10.10 Agreement and Plan of Merger by and between ABC and Southland Bancorporation dated as of December 18, 1995 (filed as Exhibit 10.10 to ABC's Annual Report on Form 10-K (File No. 0-16181), filed with the Commission on March 28, 1996 and incorporated herein by reference), and Amendment No. 1 thereto dated as of April 16,1996 (filed as part of Appendix A to Amendment No. 1 to ABC's Registration on Form S-4 (Registration No. 333-2387), filed with the Commission on May 21, 1996 and incorporated herein by reference).
10.11 Agreement and Plan of Merger by and between ABC and Central Bankshares, Inc., dated as of December 29, 1995 (filed as Exhibit 10.11 to ABC's Annual Report on Form 10-K (File No. 0-16181), filed with the Commission on March 28, 1996 and incorporated herein by reference), and Amendment No. 1 thereto dated as April 26, 1996 (filed as part of Appendix A to ABC's Registration on Form S-4 (Registration No. 333-05861), filed with the Commission on June 12, 1996 and incorporated herein by reference).
EXHIBIT NO. DESCRIPTION
10.12 Agreement and Plan of Merger by and between ABC and First National Financial Corporation dated as of April 15, 1996 (filed as Exhibit 10.12 to Amendment No. 1 to ABC's Registration on Form S-4 (Registration No. 333-2387), filed with the Commission on May 21, 1996 and incorporated herein by reference).
10.13 Agreement and Plan of Merger by and between ABC and M & F Financial Corporation dated as of September 12, 1996 (filed as Appendix A to ABC's Registration on Form S-4 (Registration No. 333-14649), filed with the Commission on October 23, 1996 and incorporated herein by reference).
10.15 Form of Purchase and Assumption Agreement by and between NationsBank, N.A. (South) and ABC Bancorp dated as of February 26, 1997 (incorporated by reference to Exhibit 10.15 to ABC's Annual Report on Form 10-K (File No. 001-13981), filed with the Commission on March 25, 1998).
10.16 Form of Agreement and Plan of Merger by and between ABC Bancorp and Irwin Bankcorp, Inc. dated as of May 15, 1997 (incorporated by reference to Exhibit 10.16 to ABC's Annual Report on Form 10-K (File No. 001-13901) filed with the Commission on March 25, 1998).
10.17 Form of Omnibus Stock Ownership and Long-Term Incentive Plan (incorporated by reference to Exhibit 10.17 to ABC's Annual Report on Form 10-K (File No. 001-13901), filed with the Commission on March 25, 1998).
10.18 Form of Rights Agreement between ABC Bancorp and SunTrust Bank dated as of February 17, 1998 (incorporated by reference to Exhibit 10.18 to ABC's Annual Report on Form 10-K (File No. 001-13901), filed with the Commission on March 25, 1998).
10.19 ABC Bancorp 2000 Officer/Director Stock Bonus Plan.
21.1 Schedule of subsidiaries of ABC Bancorp.
24.1 Power of Attorney relating to this Form 10-K is set forth on the signature pages of this Form 10-K.
27 Financial Data Schedule.
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.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kenneth J. Hunnicutt as his attorney-in-fact, acting with full power of substitution for him in his name, place and stead, in any and all capacities, to sign any amendments to this Form 10-K and to file the same, with exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission and hereby ratifies and confirms all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Exchange Act, this Form 10-K has been signed by the following persons in the capacities and on the dates indicated.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation of ABC, as amended (incorporated by reference to Exhibit 2.1 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630) filed August 14, 1987).
3.2 Amendment to Amended Articles of Incorporation dated May 26, 1995 (incorporated by reference to Exhibit 3.1.1 to ABC's Form 10-K filed March 28, 1996).
3.3 Amendment to Amended Articles of Incorporation (filed as Exhibit 4.3 to ABC's Registration on Form S-4 (Registration No. 333-08301), filed with the Commission on July 17, 1996 and incorporated herein by reference).
3.4 Bylaws of ABC, as amended (incorporated by reference to Exhibit 2.2 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630) filed August 14, 1987.
3.5 Form of Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.5 to ABC's Annual Report on Form 10-K (File No. 001-13901), filed with the Commission on March 25, 1998).
3.6 Form of Amendment to Bylaws (incorporated by reference to Exhibit 3.6 to ABC's Annual Report on Form 10-K (File No. 001-13901), filed with the Commission on March 25, 1998).
3.7 Form of Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.7 to ABC'S Annual Report on Form 10-K (File No. 001-13901), filed with the Commission on March 26, 1999).
3.8 Form of Amendment to Bylaws (incorporated by reference to Exhibit 3.8 to ABC'S Annual Report on Form 10-K (File No. 001-13901), filed with the Commission on March 26, 1999).
10.1 1985 Incentive Stock Option Plan (filed as Exhibit 5.1 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630), filed with the Commission on August 14, 1987 and incorporated herein by reference).
10.2 Incentive Stock Option Agreement with Kenneth J. Hunnicutt dated October 17, 1985 (filed as Exhibit 5.2 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630), filed with the Commission on August 14, 1987 and incorporated herein by reference).
10.3 Deferred Compensation Agreement for Kenneth J. Hunnicutt dated December 16, 1986 (filed as Exhibit 5.3 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630), filed with the Commission on August 14, 1987 and incorporated herein by reference).
EXHIBIT NO. DESCRIPTION
10.4 Security Deed in favor of M.I.A., Co. dated December 31, 1984 (filed as Exhibit 5.4 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630), filed with the Commission on August 14, 1987 and incorporated herein by reference).
10.5 Loan Agreement and Master Term Note dated December 30, 1986 (filed as Exhibit 5.5 to ABC's Regulation A Offering Statement on Form 1-A (File No. 24A-2630), filed with the Commission on August 14, 1987 and incorporated herein by reference).
10.6 Executive Salary Continuation Agreement dated February 14, 1984 (filed as Exhibit 10.6 to ABC's Annual Report on Form 10-KSB (File Number 2-71257), filed herewith with the Commission on March 27, 1989 and incorporated herein by reference.
10.7 1992 Incentive Stock Option Plan and Option Agreement for K. J. Hunnicutt (filed as Exhibit 10.7 to ABC's Annual Report on Form 10-KSB (File Number 0-16181), filed with the Commission on March 30, 1993 and incorporated herein by reference).
10.8 Executive Employment Agreement with Kenneth J. Hunnicutt dated September 20, 1994 (filed as Exhibit 10.8 to ABC's Annual Report on Form 10-KSB (File Number 0-016181), filed with the Commission on March 30, 1995 and incorporated herein by reference).
10.9 Executive Consulting Agreement with Eugene M. Vereen dated September 20, 1994 (filed as Exhibit 10.9 to ABC's Annual Report on Form 10-KSB (File Number 0-016181), filed with the Commission on March 30, 1995 and incorporated herein by reference).
10.10 Agreement and Plan of Merger by and between ABC and Southland Bancorporation dated as of December 18, 1995 (filed as Exhibit 10.10 to ABC's Annual Report on Form 10-K (File No. 0-16181), filed with the Commission on March 28, 1996 and incorporated herein by reference), and Amendment No. 1 thereto dated as of April 16,1996 (filed as part of Appendix A to Amendment No. 1 to ABC's Registration on Form S-4 (Registration No. 333-2387), filed with the Commission on May 21, 1996 and incorporated herein by reference).
10.11 Agreement and Plan of Merger by and between ABC and Central Bankshares, Inc., dated as of December 29, 1995 (filed as Exhibit 10.11 to ABC's Annual Report on Form 10-K (File No. 0-16181), filed with the Commission on March 28, 1996 and incorporated herein by reference), and Amendment No. 1 thereto dated as April 26, 1996 (filed as part of Appendix A to ABC's Registration on Form S-4 (Registration No. 333-05861), filed with the Commission on June 12, 1996 and incorporated herein by reference).
EXHIBIT NO. DESCRIPTION
10.12 Agreement and Plan of Merger by and between ABC and First National Financial Corporation dated as of April 15, 1996 (filed as Exhibit 10.12 to Amendment No. 1 to ABC's Registration on Form S-4 (Registration No. 333-2387), filed with the Commission on May 21, 1996 and incorporated herein by reference).
10.13 Agreement and Plan of Merger by and between ABC and M & F Financial Corporation dated as of September 12, 1996 (filed as Appendix A to ABC's Registration on Form S-4 (Registration No. 333-14649), filed with the Commission on October 23, 1996 and incorporated herein by reference).
10.15 Form of Purchase and Assumption Agreement by and between NationsBank, N.A. (South) and ABC Bancorp dated as of February 26, 1997 (incorporated by reference to Exhibit 10.15 to ABC's Annual Report on Form 10-K (File No. 001-13981), filed with the Commission on March 25, 1998).
10.16 Form of Agreement and Plan of Merger by and between ABC Bancorp and Irwin Bankcorp, Inc. dated as of May 15, 1997 (incorporated by reference to Exhibit 10.16 to ABC's Annual Report on Form 10-K (File No. 001-13901) filed with the Commission on March 25, 1998).
10.17 Form of Omnibus Stock Ownership and Long-Term Incentive Plan (incorporated by reference to Exhibit 10.17 to ABC's Annual Report on Form 10-K (File No. 001-13901), filed with the Commission on March 25, 1998).
10.18 Form of Rights Agreement between ABC Bancorp and SunTrust Bank dated as of February 17, 1998 (incorporated by reference to Exhibit 10.18 to ABC's Annual Report on Form 10-K (File No. 001-13901), filed with the Commission on March 25, 1998).
10.19 ABC Bancorp Officer/Director Stock Bonus Plan.
21.1 Schedule of subsidiaries of ABC Bancorp.
24.1 Power of Attorney relating to this Form 10-K is set forth on the signature pages of this Form 10-K.
27 Financial Data Schedule.
ABC BANCORP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Consolidated financial statements:
Independent Auditor's Report
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Income - Years ended December 31, 1999, 1998 and
Consolidated Statements of Comprehensive Income - Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity - Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
INDEPENDENT AUDITOR'S REPORT - --------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS ABC BANCORP MOULTRIE, GEORGIA
We have audited the accompanying consolidated balance sheets of ABC BANCORP AND SUBSIDIARIES as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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 audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ABC Bancorp and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles.
/s/ Mauldin & Jenkins, LLC
Albany, Georgia January 21, 2000
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (Dollars in Thousands)
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Dollars in Thousands)
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Dollars in Thousands)
See Notes to Consolidated Financial Statements.
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Dollars in Thousands)
See Notes to Consolidated Financial Statements.
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Dollars in Thousands)
- --------------------------------------------------------------------------------
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Dollars in Thousands)
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
ABC Bancorp, (the "Company") is a multi-bank holding company whose business is presently conducted by its subsidiary banks (the "Banks"). Through the Banks, the Company operates a full service banking business and offers a broad range of retail and commercial banking services to its customers located in a market area which includes South Georgia and Southeast Alabama. The Company and the Banks are subject to the regulations of certain Federal and state agencies and are periodically examined by those regulatory agencies.
BASIS OF PRESENTATION
The accounting and reporting policies of the Company conform to generally accepted accounting principles and general practices within the financial services industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate and deferred tax assets.
The Company's consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.
The principles which significantly affect the determination of financial position, results of operations and cash flows are summarized below.
CASH AND DUE FROM BANKS
For purposes of reporting cash flows, cash and due from banks includes cash on hand and amounts due from banks (including cash items in process of clearing). Cash flows from loans originated by the Banks, deposits, interest-bearing deposits and Federal funds purchased and sold are reported net.
The Company maintains amounts due from banks which, at times, may exceed Federally insured limits. The Company has not experienced any losses in such accounts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES
Securities are classified based on management's intention on the date of purchase. Securities which management has the intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. All other debt securities are classified as available for sale and carried at fair value with net unrealized gains and losses included in stockholders' equity, net of tax. Marketable equity securities are carried at fair value with net unrealized gains and losses included in stockholders' equity. Other equity securities without a readily determinable fair value are carried at cost.
As of December 31, 1999, the Company transferred all debt securities classified as securities held to maturity to securities available for sale.
Interest and dividends on securities, including amortization of premiums and accretion of discounts, are included in interest income. Realized gains and losses from the sales of securities are determined using the specific identification method.
A decline in the fair value below cost of any security that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security.
LOANS HELD FOR SALE
Loans held for sale include mortgage and other loans and are carried at the lower of aggregate cost or fair value.
LOANS
Loans are reported at their outstanding principal balances less unearned income and the allowance for loan losses. Interest income is accrued based on the principal balance outstanding.
Loan origination fees and certain direct costs of most loans are recognized at the time the loan is recorded. Loan origination fees and costs incurred for other loans are deferred and recognized as income over the life of the loan. Because net origination loan fees and costs are not material, the results of operations are not materially different than the results which would be obtained by accounting for loan fees and costs in accordance with generally accepted accounting principles.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONTINUED)
The accrual of interest on loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. Interest income is subsequently recognized only to the extent cash payments are received.
The allowance for loan losses is maintained at a level that management believes to be adequate to absorb potential losses in the loan portfolio. Loan losses are charged against the allowance when management believes the uncollectibility of a loan is confirmed. Subsequent recoveries are credited to the allowance. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, growth, composition of the loan portfolio, and other risks inherent in the portfolio. This evaluation is inherently subjective as it requires material estimates that are susceptible to significant change including the amounts and timing of future cash flows expected to be received on impaired loans. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses, and may require the Bank to record additions to the allowance based on their judgment about information available to them at the time of their examinations.
A loan is considered impaired when it is probable the Bank will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Individually identified impaired loans are measured based on the present value of expected payments using the contractual loan rate as the discount rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation computed principally on the straight-line method over the estimated useful lives of the assets.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) represents properties acquired through foreclosure or other proceedings. OREO is held for sale and is recorded at the lower of the recorded amount of the loan or fair value of the properties less estimated costs of disposal. Any write-down to fair value at the time of transfer to OREO is charged to the allowance for loan losses. Property is evaluated regularly to ensure the recorded amount is supported by its current fair value and valuation allowances to reduce the carrying amount to fair value less estimated costs to dispose are recorded as necessary. Subsequent decreases in fair value and increases in fair value, up to the value established at foreclosure, are recognized as charges or credits to noninterest expense. OREO is reported net of allowance for losses in the Company's financial statements. The carrying amount of other real estate owned at December 31, 1999 and 1998 was $461,000 and $615,000, respectively.
INTANGIBLE ASSETS
Intangible assets, arising from excess of purchase price over net assets acquired of purchased banks, are being amortized on the straight-line method over various periods not exceeding 25 years for banks acquired prior to 1996. Excess acquisition cost of Southland Bank acquired in 1996 and the Douglas branch of Citizens Security Bank acquired in 1997 are being amortized on the straight-line method over 15 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income tax expense consists of current and deferred taxes. Current income tax provisions approximate taxes to be paid or refunded for the applicable year. Deferred tax assets and liabilities are recognized on the temporary differences between the bases of assets and liabilities as measured by tax laws and their bases as reported in the financial statements. Deferred tax expense or benefit is then recognized for the change in deferred tax assets or liabilities between periods.
Recognition of deferred tax balance sheet amounts is based on management's belief that it is more likely than not that the tax benefit associated with certain temporary differences, tax operating loss carryforwards, and tax credits will be realized. A valuation allowance is recorded for those deferred tax items for which it is more likely than not that realization will not occur.
The Company and its subsidiaries file a consolidated income tax return. Each subsidiary provides for income taxes based on its contribution to income taxes (benefits) of the consolidated group.
EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income by the weighted-average number of shares of common stock outstanding. Diluted earnings per common share are computed by dividing net income minus the income effect of potential common shares that are dilutive by the sum of the weighted-average number of shares of common stock outstanding and potential common shares. All per share data for prior years have been adjusted to reflect the six-for-five split effected in the form of a 20% stock dividend to shareholders of record as of December 15, 1999.
COMPREHENSIVE INCOME
Statement of Financial Standards ("SFAS") 130 describes comprehensive income as the total of all components of comprehensive income including net income. Other comprehensive income refers to revenues, expenses, gains and losses that, under generally accepted accounting principles, are included in comprehensive income but excluded from net income. Currently, the Company's other comprehensive income consists of unrealized gains and losses on available for sale securities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No., 133"), "Accounting for Derivative Instruments and Hedging Activities". This statement is required to be adopted for fiscal years beginning after June 2000. However, the statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Company expects to adopt this statement effective January 1, 2001. SFAS 133 requires the Company to recognize all derivatives as either assets or liabilities in the balance sheet at fair value. For derivatives that are not designated as hedges, the gain or loss must be recognized in earnings in the period of change. For derivatives that are designated as hedges, changes in the fair value of the hedged assets, liabilities, or firm commitments must be recognized in earnings or recognized in other comprehensive income until the hedged item is recognized in earnings, depending on the nature of the hedge. The ineffective portion of a derivative's change in fair value must be recognized in earnings immediately. Management has not yet determined what effect the adoption of SFAS 133 will have on the Company's earnings or financial position.
There are no other recent accounting pronouncements that have had, or are expected to have, a material effect on the Company's financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2. INVESTMENTS IN SECURITIES
As permitted by Financial Accounting Standards Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities", the Company elected on December 31, 1999, to transfer all debt securities classified as securities held to maturity to securities available for sale. Upon election, the Company transferred debt securities with a market value of $15,420,000 to securities available for sale. These securities were marked to fair value resulting in a net unrealized gain of $90,000 which was included in stockholders' equity at $59,000, net of related taxes of $31,000.
The amortized cost and approximate fair values of investments in securities at December 31, 1999 and 1998 were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2. INVESTMENTS IN SECURITIES (CONTINUED)
The amortized cost and fair value of debt securities as of December 31, 1999 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary.
SECURITIES AVAILABLE FOR SALE ------------------------------- AMORTIZED FAIR COST VALUE -------------- -------------- (DOLLARS IN THOUSANDS) -------------------------------
Due in one year or less $ 2,267 $ 2,271 Due from one year to five years 42,914 42,405 Due from five to ten years 26,004 25,589 Due after ten years 3,064 3,024 Mortgage-backed securities 70,700 69,477 Marketable equity securities 872 772 -------------- -------------- $ 145,821 $ 143,538 ============== ==============
Securities with a carrying value of $ 78,388,000 and $59,332,000 at December 31, 1999 and 1998, respectively, were pledged to secure public deposits and for other purposes.
Gains and losses on sales of securities available for sale consist of the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The Company has granted loans to certain directors, executive officers, and related entities of the Company and the Banks. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan involved. Changes in related party loans for the years ended December 31, 1999 and 1998 are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 4. PREMISES AND EQUIPMENT, NET
Major classifications of these assets are summarized as follows: DECEMBER 31, ----------------------------- 1999 1998 ------------ ------------ (DOLLARS IN THOUSANDS) -----------------------------
Land $ 4,903 $ 4,454 Buildings 14,776 14,644 Equipment 15,977 15,182 Construction in progress 1,502 910 ------------ ------------ 37,158 35,190 Accumulated depreciation 17,618 16,102 ------------ ------------ $ 19,540 $ 19,088 ============ ============
NOTE 5. EMPLOYEE BENEFIT PLANS
Prior to 1998, the Company and its subsidiaries maintained simplified employee pension plans for substantially all employees. These plans were SEP-IRA defined contribution plans. Contributions to these plans charged to expense during 1997 amounted to $1,093,000.
Effective January 1, 1998, the Company established two retirement plans to replace the simplified employee pension plans. The ABC Bancorp 401(k) Profit Sharing Plan allows a participant to defer a portion of his compensation and provides that the Company will match a portion of the deferred compensation. The plan also provides for nonelective and discretionary contributions to be made at the sole discretion of the Company. The ABC Bancorp Money Purchase Pension Plan was established to supplement a participant's income upon retirement. The Plan is fully funded by the Company. The Plan provides for a fixed rate of contribution, currently 5%, of the participant's eligible compensation. The rate of contribution is established by the Compensation Committee of ABC Bancorp's Board of Directors. The Plan must be amended to change the fixed rate of 5% established by the Compensation Committee in December 1997. All full-time and part-time employees are eligible to participate in both plans provided they have met the eligibility requirements. Generally, a participant must have completed twelve months of employment with a minimum of 1,000 hours. Aggregate expense under the two plans charged to operations during 1999 and 1998 amounted to $707,000 and $644,000, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 6. DEFERRED COMPENSATION PLANS
The Company and two subsidiary banks have entered into separate deferred compensation arrangements with certain executive officers and directors. The plans call for certain amounts payable at retirement, death or disability. The estimated present value of the deferred compensation is being accrued over the remaining expected term of active employment. The Company and Banks have purchased life insurance policies which they intend to use to finance this liability. Aggregate compensation expense under the plans were $70,000, $78,000 and $70,000 for 1999, 1998 and 1997, respectively, and is included in other operating expenses.
NOTE 7. STOCK OPTION PLANS
the Company has two fixed stock option plans under which it has granted options to its Chief Executive Officer to purchase common stock at the fair market price on the date of grant. All of the options are intended to be incentive stock options qualifying under Section 422 of the Internal Revenue Code for favorable tax treatment. Under the 1992 Plan, options to purchase 10,001 shares were granted. None of these options have been exercised, however, all of the options were exercisable as of December 31, 1999. Options under the 1992 Plan expire in 2002. Under the 1997 Plan, options to purchase 67,500 shares were granted. Options under the 1997 Plan are fully vested and are exercisable over a period of ten years subject to certain limitations as to aggregate fair market value (determined as of the date of the grant) of all options exercisable for the first time by the optionee during any calendar year (the "$100,000 Per-Year Limitation"). Under the 1997 Plan, options to purchase 25,350 shares were exercisable as of December 31, 1999.
At the annual meeting on April 15, 1997, the shareholders approved the ABC Bancorp Omnibus Stock Ownership and Long-Term Incentive Plan (the "Omnibus Plan"). Awards granted under the Omnibus Plan may be in the form of Qualified or Nonqualified Stock Options, Restricted Stock, Stock Appreciation Rights ("SARS"), Long-Term Incentive Compensation Units consisting of a combination of cash and Common Stock, or any combination thereof within the limitations set forth in the Omnibus Plan. The Omnibus Plan provides that the aggregate number of shares of the Company's Common Stock which may be subject to award may not exceed 637,500 subject to adjustment in certain circumstances to prevent dilution. As of December 31, 1999, the Company has issued 69,396
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 7. STOCK OPTION PLANS (CONTINUED)
restricted shares under the Omnibus Plan as compensation for certain key salaried employees. These shares carry dividend and voting rights. Sale of these shares is restricted prior to the date of vesting, which is three years from the date of the grant. Shares issued under this plan were recorded at their fair market value on the date of their grant with a corresponding charge to equity. The unearned portion is being amortized as compensation expense on a straight-line basis over the related vesting period. Compensation expense related to this grant was $191,000 in 1999. In addition to the granting of restricted shares, options to purchase 81,650 shares of the Company's common stock have been granted under the Omnibus Plan as of December 31,1999.
A summary of the status of the three fixed plans at December 31, 1999, 1998 and 1997 and changes during the years ended on those dates is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 7. STOCK OPTION PLANS (CONTINUED)
A further summary about options outstanding at December 31, 1999 is as follows:
As permitted by Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), the Company recognizes compensation cost for stock-based employee compensation awards in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees". The Company recognized no compensation cost under the fixed stock option plan for the years ended December 31, 1999, 1998 and 1997. If the Company had recognized compensation cost in accordance with SFAS No. 123, net income and net income per share would have been reduced as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 7. STOCK OPTION PLANS (CONTINUED)
NOTE 8. DEPOSITS
At December 31, 1999, the scheduled maturities of time deposits are as follows:
(DOLLARS IN THOUSANDS) ------------
2000 $ 288,013 2001 30,035 2002 9,173 2003 6,957 2004 2,915 Later years 66 ------------ $ 337,159 ============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 9. OTHER BORROWINGS
Other borrowings consist of the following:
The advances from the Federal Home Loan Bank are collateralized by the pledging of first mortgage loans and other specific loans. One subsidiary bank had pledged mortgage-backed securities having an aggregate market value of approximately $1,513,000, at December 31, 1998. There were no securities pledged in 1999 for advances from the Federal Home Loan Bank.
Other borrowings at December 31, 1999 have maturities in future years as follows:
(DOLLARS IN THOUSANDS) -------------
2000 $ 41,900 2001 50 2002 1,050 2003 3,050 2004 50 Later years 20,050 ------------- $ 66,150 =============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 10. INCOME TAXES
The income tax expense in the consolidated statements of income consists of the following:
YEARS ENDED DECEMBER 31, ------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) -------------------------------------------
Current $ 4,378 $ 3,905 $ 3,568 Deferred (87) (1,170) (449) ----------- ----------- ----------- $ 4,291 $ 2,735 $ 3,119 =========== =========== ===========
The Company's income tax expense differs from the amounts computed by applying the Federal income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 10. INCOME TAXES (CONTINUED)
Net deferred income tax assets of $3,981,000 and $2,952,000 at December 31, 1999 and 1998, respectively, are included in other assets. The components of deferred income taxes are as follows:
NOTE 11. EARNINGS PER COMMON SHARE
The following is a reconciliation of net income (the numerator) and the weighted average shares outstanding (the denominator) used in determining basic and diluted earnings per share. All amounts are presented in thousands, except per share amounts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 11. EARNINGS PER COMMON SHARE (CONTINUED)
NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company has entered into off-balance-sheet financial instruments which are not reflected in the financial statements. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are included in the financial statements when funds are disbursed or the instruments become payable. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit and collateral policies for these off-balance-sheet financial instruments as it does for on-balance-sheet financial instruments. A summary of the Company's commitments is as follows: DECEMBER 31, ------------------------------ 1999 1998 ------------- ------------- (DOLLARS IN THOUSANDS) ------------------------------
Commitments to extend credit $ 84,150 $ 80,861 Credit card commitments 9,162 7,866 Standby letters of credit 3,415 2,761 ------------- ------------- $ 96,727 $ 91,488 ============= =============
Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The credit risk involved in issuing these financial instruments is essentially the same as that involved in extending loans to customers. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include real estate and improvements, marketable securities, accounts receivable, crops, livestock, inventory, equipment and personal property.
Credit card commitments are unsecured.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary.
In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management for the Company, any liability resulting from such proceedings would not have a material adverse effect on the Company's financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 13. CONCENTRATIONS OF CREDIT
The Banks make agricultural, agribusiness, commercial, residential and consumer loans to customers primarily in counties in south Georgia and southeast Alabama. A substantial portion of the Company's customers' abilities to honor their contracts is dependent on the business economy in the geographical area served by the Banks.
Although the Company's loan portfolio is diversified, there is a relationship in this region between the agricultural economy and the economic performance of loans made to nonagricultural customers. The Company's lending policies for agricultural and nonagricultural customers require loans to be well-collateralized and supported by cash flows. Collateral for agricultural loans include equipment, crops, livestock and land. Credit losses from loans related to the agricultural economy is taken into consideration by management in determining the allowance for loan losses.
A substantial portion of the Company's loans are secured by real estate in the Company's primary market area. In addition, a substantial portion of the real estate owned is located in those same markets. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of a substantial portion of the carrying amount of real estate owned are susceptible to changes in market conditions in the Company's primary market area.
The Company has a concentration of funds on deposit at its primary correspondent banks at December 31, 1999, as follows:
Noninterest-bearing accounts $ 26,443,000 Interest-bearing accounts 29,702,000 ------------------- $ 56,145,000 ===================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 14. REGULATORY MATTERS
The Banks are subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 1999, approximately $6,880,000 of retained earnings were available for dividend declaration without regulatory approval.
The Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Banks to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. Management believes, as of December 31, 1999, the Banks meet all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the regulatory authorities categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Banks' category.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 14. REGULATORY MATTERS (CONTINUED)
The Banks' actual capital amounts and ratios are presented in the following table.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 14. REGULATORY MATTERS (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 14. REGULATORY MATTERS (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 14. REGULATORY MATTERS (CONTINUED)
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow models. Those models are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different methodologies may have a material effect on the estimated fair value amounts. Also, the fair value estimates presented herein are based on pertinent information available to management as of December 31, 1999 and 1998. Such amounts have not been revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:
CASH, DUE FROM BANKS, INTEREST BEARING DEPOSITS, AND FEDERAL FUNDS SOLD:
The carrying amounts of cash, due from banks, interest bearing deposits, and Federal funds sold approximate their fair value.
AVAILABLE FOR SALE AND HELD TO MATURITY SECURITIES:
Fair values for securities are based on quoted market prices. The carrying values of equity securities with no readily determinable fair value approximate fair values.
LOANS:
For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For other loans, the fair values are estimated using discounted cash flow methods, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow models or underlying collateral values.
DEPOSITS:
The carrying amounts of demand deposits, savings deposits, and variable-rate certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using discounted cash flow models, using interest rates currently being offered on certificates.
OTHER BORROWINGS:
For variable-rate borrowings that reprice frequently, fair values are based on carrying values. For fixed-rate borrowings, the fair values are estimated using discounted cash flow models, using interest rates currently being offered for borrowings with similar terms.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OFF-BALANCE SHEET INSTRUMENTS:
Fair values of the Company's off-balance sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit and standby letters of credit do not represent a significant value to the Company until such commitments are funded. The Company has determined that these instruments do not have a distinguishable fair value and no fair value has been assigned.
The carrying value and estimated fair value of the Company's financial instruments were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 16. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (DOLLARS IN THOUSANDS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 16. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 16. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 16. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS)