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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
Commission file number 2-71249
SOUTH BANKING COMPANY
(Exact name of registrant as specified in its charter
Georgia 58-1418696
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
104 North Dixon Street, Alma, Georgia 31510
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (912) 632-8631
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation 5-K is not contained herein and will not be
contained to the best of registrant's knowledge in definitive proxy on
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (X)
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant: There is no established market for the
outstanding common stock of the registrant.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the most recent practicable
date.
Class Outstanding at February 29,
2000
Common stock $1.00 par value per 399,500
Share
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference
and the part of the Form 10-K into which the documents are incorporated:
(1) any annual reports to security holders; (2) any prospectus filed
pursuant to Rule 424(b) or (c) under the Securities Act of 1933. None
PART 1.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING INFORMATION
Statements and financial discussion and analysis contained in this
Annual Report on Form 10-K that are not historical facts are forward-
looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking
statements describe the Company's future plans, strategies and
expectations, are based on assumptions and involve a number of risks and
uncertainties, many of which are beyond the Company's control. The
important factors that could cause actual results to differ materially
from the forward-looking statements include, without limitation:
changes in interest rates and market prices, which could reduce the
Company's net interest margins, asset valuations and expense
expectations;
changes in the levels of loan prepayments and the resulting effects
on the value of the Company's loan portfolio;
changes in local economic and business conditions which adversely
affect the Company's customers and their ability to transact profitable
business with the Company, including the ability of its borrowers to
repay their loans according to their terms or a change in the value of
the related collateral;
increased competition for deposits and loans adversely affecting
rates and terms;
the timing, impact and other uncertainties of the Company's
potential future acquisitions, including the Company's ability to
identify suitable future acquisition candidates, the success or failure
in the integration of their operations, and the Company's ability to
enter new markets successfully and capitalize on growth opportunities;
increased credit risk in the Company's assets and increased
operating risk caused by a material change in commercial, consumer
and/or real estate loans as a percentage of the total loan portfolio;
the failure of assumptions underlying the establishment of and
provisions made to the allowance for loan losses;
changes in the availability of funds resulting in increased costs
or reduced liquidity;
changes in the Company's ability to pay dividends on its Common
Stock;
increased asset levels and changes in the composition of assets and
the resulting impact on the Company's capital levels and regulatory
capital ratios;
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the Company's ability to acquire, operate and maintain cost
effective and efficient systems without incurring unexpectedly difficult
or expensive but necessary technological changes;
the loss of senior management or operating personnel and the
potential inability to hire qualified personnel at reasonable
compensation levels;
changes in statutes and government regulations or their
interpretations applicable to bank holding companies and the Company's
present and future banking and other subsidiaries, including changes in
tax requirements and tax rates;
all written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by these cautionary
statements.
Item 1. Business
South Banking Company (the "Registrant") is a business corporation
organized at the direction of Alma Exchange Bank & Trust ("Alma Bank")
and Citizens State Bank ("Citizens Bank") (collectively, the "Banks") in
1980 under the Georgia Business Corporation Code. It was formed to
obtain all the issued and outstanding shares of Common Stock of the
Banks. Pursuant to the terms and provisions of a Plan of Reorganization
and Agreement of Merger, dated as of January 13, 1981 and approved by
the shareholders of the Banks on June 24, 1981, the Banks were
reorganized into a holding company structure by merging the Banks with
wholly-owned subsidiaries of the Registrant, which transaction was
consummated on July
28, 1981. In connection with those mergers, the outstanding shares of
Common Stock of the Banks were converted into shares of the Registrant
at specified ratios and the Banks became wholly-owned subsidiaries of
the Registrant. Pursuant to the terms and provision of an agreement of
merger dated June 12, 1989 between South Banking and Georgia Peoples
Bankshares, Inc. and approved by shareholders of Georgia Peoples on
February 26, 1990, Georgia Peoples Bankshares and its subsidiary,
Peoples State Bank, were merged into South Banking Company. In
connection with the merger, the outstanding shares of Georgia Peoples
Bankshares were converted into shares of the Registrant at specified
ratios. During 1993, South Banking Company formed Banker's Data
Services, Inc. ("Banker's Data") for the purpose of handling all the
computer functions of the banks. Operations began in April, 1994.
South Banking entered into an agreement in October of 1995 to acquire
all the stock of Pineland State Bank ("Pineland Bank") in Metter,
Georgia. On January 11, 1996, the transaction was completed.
During 1998, Alma Bank formed South Financial Products, Inc. (SFP)
as a vehicle to enter the financial services market and provide service
to its customers. South Financial Products, Inc. offers a complete
array of investments options including stocks, bonds, mutual funds,
financial and retirement planning, tax advantaged investments and asset
allocations. SFP offers securities through Unvest, a North Carolina
based independent clearing firm. SFP is licensed and regulated through
the National Association of Securities Dealers, the Securities and
Exchange Commission and various state and federal banking authorities.
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The maturing of the baby boomer generation is creating a market for
asset management services. The Company expects growth in this department
and anticipates that resulting fees will provide a stable stream of
income.
The Banks
The Banks operate full service banking business in Bacon, Appling,
Candler and Camden Counties, Georgia, providing such customary banking
services as checking and savings accounts, various other types of time
deposits, safe deposit facilities and money transfers. The Banks also
finance commercial and agricultural transactions, make secured and
unsecured loans, and provide other financial services to its
customers. The Banks do not conduct trust activities. On December 31,
1998, Alma Bank and Peoples Bank ranked, on the basis of total deposits,
as the smaller of the two banks in Bacon and Appling Counties and the
224th and 267nd largest banks among 349 banks in Georgia. Citizens
Bank, one of five banking operations in Camden County, ranked the 324th
largest bank among 349 banks in Georgia; and Pineland Bank, one of three
banking operations in Metter, Georgia, ranked the 300th largest bank
among 349 banks in Georgia, Sheshunoff's Banks of Georgia (1999
edition).
The Banks make and service both secured and unsecured loans to
individuals, firms, and corporations. Commercial lending operations
include various types of credit for the Banks' customers. The Banks'
installment loan departments make direct loans to individuals and, to a
limited extent, purchase installment obligations from retailers both
with and without recourse. The Banks make a variety of residential,
industrial, commercial, and agricultural loans secured by real estate,
including interim construction financing. Each bank has established
desired mixes of real estate, commercial, agricultural, and consumer
lending depending upon activities within the local area. The ratios are
established in accordance with risk diversification goals. All banks
are located in small rural areas with low to moderate income levels.
The banks primarily look to real estate lending as a major portion of
portfolio. Real estate values have remained fairly stable over the past
few years to give stability to lending activities. Loan to value ratios
are maintained in the 60% to 80% level for various real estate lending.
Loan to value ratio of non real estate loans vary from 50% for the
inventory or receivables to 90% for vehicles and other consumer lending.
The economy of the area remains fairly constant without great
fluctuation. The national economy will effect the area primarily in the
timber and other agricultural products; however, the movement is not as
wide locally as national movement indicates. Citizens Bank, Pineland
Bank and Peoples Bank act as agents for another bank in offering "Master
Card" and "VISA" credit cards to its customers and does not assume the
credit risk on these transactions. Alma Bank offers "Master Card"
credit cards to its customers.
At December 31, 1999, the Banks had correspondent relationships
with 15 other commercial banks. These correspondent banks provide
certain services to the banks such as processing checks and other items,
buying and selling federal funds, handling money transfers and
exchanges, shipping coins and currency, providing security and
safekeeping of funds or other valuable items and furnishing limited
management information and advice. As compensation for the services,
the Banks maintain certain balances with its correspondents in
noninterest bearing accounts.
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Employees
On December 31, 1999, the Registrant and its subsidiaries had 91
full-time and 11 part-time employees. The Registrant is not a party to
any collective bargaining agreement and employee relations are deemed to
be good.
Competition
The Banking business is highly competitive. The Banks compete
primarily with other commercial banks operating in Bacon, Camden,
Appling, and Candler Counties. In addition, the Banks compete with
other financial institutions, including savings and loan associations,
credit unions and finance companies and, to a lesser extent, insurance
companies and certain governmental agencies. The banking industry is
also experiencing increased competition for deposits from less
traditional sources such as money-market mutual funds.
Customers
The majority of the Banks' customers are individuals and small to
medium-sized businesses headquartered within its service area. The
Banks
are not dependent upon a single or a very few customers, the loss of
which would have a material adverse effect on the Banks. No customer
accounts for more than 5% of the Banks' total deposits at any time.
Management does not believe that the Banks' loan portfolio is dependent
on a single customer or group of customers concentrated in a particular
industry whose loss or insolvency would have a material adverse effect
on the Banks.
Systems
During 1999, the Company completely tested all of its core application
systems for Year 2000 readiness. For further information, please see
the "General" heading in Managements' Discussion and Analysis.
Monetary Policies
The results of operations of the Banks, and therefore of the
Registrant, are affected by credit policies of monetary authorities,
particularly the Board of Governors of the Federal Reserve System (the
"Board of Governors"), even though the Banks are not members of the
Federal Reserve.
The instruments of monetary policy employed by the Federal Reserve
include open market operations in U. S. Government securities and
changes in the discount rate on member bank borrowing changes in reserve
requirements against member bank deposits. In view of changing
conditions in the national economy and in the money markets, as well as
the effect of action by monetary and fiscal authorities, including the
Federal Reserve System, no prediction can be made as to possible future
changes in interest rates, deposit levels, loan demand or the business
and earnings of the Banks.
Supervision and Regulations
The Registrant is a bank holding company within the meaning of the
Bank Holding Company Act of 1956, as amended (the "Act"), and is
required
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to register as such with the Board of Governors. The Registrant is
required to file with the Board of Governors an annual report and such
other information as may be required to keep the Board of Governors
informed with respect to the Registrant's compliance with the provisions
of the Act. The Board of Governors may also make examinations of the
Registrant and its subsidiaries from time to time.
The Act requires every bank holding company to obtain the prior
approval of the Board of Governors before it may acquire substantially
all the assets of any bank or ownership or control of any voting shares
of any bank, if, after such acquisition, it would own or control,
directly or indirectly, more than five percent of the voting shares of
such bank. In no case, however, may the Board of Governors approve the
acquisition by the Registrant of the voting shares of any bank located
outside Georgia, unless such acquisition is specifically authorized by
the laws of the state in which the bank to be acquired is located.
In addition, a bank holding company is generally prohibited from
engaging in or acquiring direct or indirect control of voting shares of
any company engaged in nonbanking activities. One of the principal
exceptions to this prohibition is for activities found by the Board of
Governors, by order or regulation, to be so closely related to banking,
managing or controlling banks as to be a proper incident thereto. Some
of the activities that the Board of Governors has determined by
regulation to be closely related to banking are: making or servicing
loans and certain types of leases; performing certain data processing
services; acting as fiduciary, investment or financial advisor; making
investments in corporations or projects designed primarily to promote
community welfare.
In January, 1989, the Board of Governors issued final regulations
which implement risk-based rules for assessing bank and bank holding
company capital adequacy. The regulations revise the definition of
capital and establish minimum capital standards in relation to assets
and off-balance sheet exposures, as adjusted for credit risk.
Payment of Dividends and Other Restrictions
South is a legal entity separate and distinct from its
subsidiaries. There are various legal and regulatory limitations under
federal and state law on the extent to which South's subsidiaries can
pay dividends or otherwise supply funds to South.
The principal source of South's cash revenues is dividends from its
subsidiaries. The prior approval of the FRB or the Georgia Department
of Bankers, as the case may be, is required if the total of all
dividends declared by any state member bank of the Federal Reserve
System in any calendar year exceeds the Bank's net profits (as defined)
for that year combined with its retained net profits for the preceding
two calendar years, less any required transfers to surplus or a fund for
the retirement of any preferred stock. The relevant federal and state
regulatory agencies also have authority to prohibit a state member bank
or bank holding company, which would include South and the Subsidiary
Banks from engaging in what, in the opinion of such regulatory body,
constitutes an unsafe or unsound practice in conducting its business.
The payment of dividends could, depending upon the financial condition
of the subsidiary, be deemed to constitute such an unsafe or unsound
practice.
5
Under Georgia law, the prior approval of the DBF is required before
any cash dividends may be paid by a state bank if: (i) total classified
assets at the most recent examination of such bank exceed 80% of the
equity capital (as defined, which includes the reserve for loan losses)
of such bank; (ii) the aggregate amount of dividends declared or
anticipated to be declared in the calendar year exceeds 50% of the net
profits (as defined) for the previous calendar year; or (iii) the ratio
of equity capital to adjusted total assets is less than 6%.
In addition, the Banks are subject to limitations under Section 23A
of the Federal Reserve Act with respect to extensions of credit to,
investments in, and certain other transactions with South. Furthermore,
loans and extensions of credit are also subject to various collateral
requirements.
Capital Adequacy
The FRB has adopted risk-based capital guidelines for bank holding
companies. The minimum ratio of total capital ("Total Capital") to risk-
weighted assets (including certain off-balance sheet items, such as
standby letters of credit) is 8%. At least half of the Total Capital is
to be composed of common stock, minority interests in the equity
accounts of consolidated subsidiaries, noncumulative perpetual preferred
stock and a limited amount of perpetual preferred stock, less goodwill
("Tier I Capital"). The remainder may consist of subordinated debt,
other preferred stock and a limited amount of loan loss reserves.
In addition, the FRB has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a
minimum ratio of Tier I Capital to total assets, less goodwill (the
"Leverage Ratio") of 3% for bank holding companies that meet certain
specified criteria, including those having the highest regulatory
rating. All other bank holding companies generally are required to
maintain a Leverage Ratio of at least 3% plus an additional cushion of
100 to 200 basis points. The guidelines also provide that bank holding
companies experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the
minimum supervisory levels without significant reliance on intangible
assets. Furthermore, the FRB has indicated that it will consider a
"tangible Tier I capital leverage ratio" (deducting all intangibles) and
other indications of capital strength in evaluating proposals for
expansion or new activities.
Effective December 19, 1992, a new Section 38 to the Federal
Deposit Insurance Act implemented the prompt corrective action
provisions that Congress enacted as a part of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (the "1991 Act"). The
"prompt corrective action" provisions set forth five regulatory zones in
which all banks are placed largely based on their capital positions.
Regulators are permitted to take increasingly harsh action as a Bank's
financial condition declines.
Regulators are also empowered to place in receivership or require the
sale of a bank to another depository institution when a bank's capital
leverage ratio reaches two percent. Better capitalized institutions are
generally subject to less onerous regulation and supervision than banks
with less amounts of capital.
The FDIC has adopted regulations implementing the prompt corrective
action provisions of the 1991 Act, which place financial institutions in
6
the following five categories based upon capitalization ratios: (i) a
"well capitalized" institution has a total risk-based capital ratio of
at least 10%, a Tier I risk-based ratio of at least 6% and a leverage
ratio of at least 5%; (ii) an "adequately capitalized" institution has a
total risk-based capital ratio of at least 8%, a Tier I risk-based ratio
of at least 4% and a leverage ratio of at least 4%, (iii) an
"undercapitalized" institution has a total risk-based capital ratio of
under 8%, a Tier I risk-based ratio of under 4% or a leverage ratio of
under 4%; (iv) a "significantly undercapitalized" institution has a
total risk-based capital ratio of under 6%, a Tier I risk-based ratio of
under 3% or a leverage ratio of under 3%; and (v) a "critically
undercapitalized" institution has a leverage ratio of 2% or less.
Institutions in any of the three undercapitalized categories would be
prohibited from declaring dividends or making capital distributions.
The FDIC regulations also establish procedures for "downgrading" an
institution to a lower capital category based on supervisory factors
other than capital.
The downgrading of an institution's category is automatic in two
situations: (i) whenever an otherwise well-capitalized institution is
subject to any written capital order or directive; and (ii) where an
undercapitalized institution fails to submit or implement a capital
restoration plan or has its plan disapproved. The Federal banking
agencies may treat institutions in the well-capitalized, adequately
capitalized and undercapitalized categories as if they were in the next
lower level based on safety and soundness considerations relating to
factors other than capital levels.
All insured institutions regardless of their level of
capitalization are prohibited by the Federal Deposit Insurance
Corporation Improvement Act of 1991 (the "FDIC Act") from paying any
dividend or making any other kind of capital distribution or paying any
management fee to any controlling person if following the payment or
distribution the institution would be undercapitalized. While the
prompt corrective action provisions of the FDIC Act contain no
requirements or restrictions aimed specifically at adequately
capitalized institutions, other provisions of the FDIC Act and the
agencies' regulations relating to deposit insurance assessments,
brokered deposits and interbank liabilities treat adequately capitalized
institutions less favorably than those that are well-capitalized.
Under the FDIC's regulations, all of the Subsidiary Banks are "well
capitalized" institutions.
The written policies of the Georgia Department of Banking and
Finance (the "DBF") require that state banks in Georgia generally
maintain a minimum ratio of primary capital to total assets of 6.0%. At
December 31, 1999, the Banks were in compliance with these requirements.
In addition, the DBF is likely to compute capital obligations in
accordance with the risk-based capital rules while continuing to require
a minimum absolute level of capital.
It is not anticipated that such minimum capital requirements will
affect the business operations of the Banks. However, the Board, in
connection with granting approval for bank holding companies to acquire
other banks and bank holding companies or to engage in non-banking
activities, requires bank holding companies to maintain tangible capital
ratios at approximate peer group levels. This requirement can result in
7
a bank holding company maintaining more capital than it would otherwise
maintain. At the present time, South Banking Company's tangible primary
capital ratios are equal or above their peer group level.
The laws of Georgia require annual registration with the DBF by all
Georgia bank holding companies. Such registration includes information
with respect to the financial condition, operations and management of
intercompany relationships of the bank holding company and its
subsidiaries and related matters. The DBF may also require such other
information as is necessary to keep informed as to whether the
provisions of Georgia law and the regulations and orders issued
thereunder by the DBF have been in compliance with and the DBF may make
examinations of the bank holding company and each bank subsidiary
thereof.
The banks are also subject to examination by the DBF and the FDIC.
The DBF regulates and monitors all areas of the operations of the banks,
including reserves, loans, mortgages, issuances of securities, payment
of dividends, interest rates, and establishment of branches. Interest
and certain other charges collected or contracted for by the Banks are
also subject to state usury laws and certain federal laws concerning
interest rates. The Banks' deposits are insured by the FDIC up to the
maximum permitted by law.
Legislation has passed that would allow banks to branch statewide
subject to certain restrictions. This law became effective July 1,
1996.
Georgia banking laws permit bank holding companies to own more than
one bank, subject to the prior approval of the Georgia Department of
Banking and Finance; thereby, in effect, permitting statewide banking
organizations. Such banks may be acquired as subsidiaries of the
Registrant or merged into its existing bank subsidiaries.
Support of Subsidiary Banks
Under the FRB policy, South is expected to act as a source of
financial strength to, and to commit resources to support, each of the
Subsidiary Banks. This support may be required at times when, absent
such FRB policy, South may not be inclined to provide it. In the event
of a bank holding company's bankruptcy, any commitment by the bank
holding company to a Federal bank regulatory agency to maintain the
capital of a subsidiary bank will be assumed by the bankruptcy trustee
and entitled to a priority of payment.
As a result of the enactment of Section 206 of the Financial
Institutions Reform, Recovery and Enforcement Act ("FIRREA") on August
9, 1989, a depository institution insured by the FDIC can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the
FDIC after August 9, 1989 in connection with (i) the default of a
commonly controlled FDIC-insured depository institution or (ii) any
assistance provided by the FDIC to any commonly controlled FDIC-insured
depository institution "in danger of default" is defined generally as
the existence of certain conditions indicating that a default is likely
to occur in the absence of regulator assistance.
FDIC Insurance Assessments
The Subsidiary Banks are subject to FDIC deposit insurance
assessments for the Bank Insurance Fund (the "BIF"). Since 1989, the
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annual FDIC deposit insurance assessments increased from $.083 per $100
of deposits to a minimum level of $.23 per $100, an increase of 177
percent. The FDIC implemented a risk-based assessment system whereby
banks are assessed on a sliding scale depending on their placement in
nine separate supervisory categories, from $.23 per $100 of deposits for
the healthiest banks (those with the highest capital, best management
and best overall condition) to as much as $.31 per $100 of deposits for
the less-healthy institutions, for an average of $.259 per $100 of
deposits.
On August 8, 1995, the FDIC lowered the BIF premium for "healthy"
banks 83% from $.23 per $100 in deposits to $.04 per $100 in deposits,
while retaining the $.31 level for the riskiest banks. The average
assessment rate was therefore reduced from $.232 to $.044 per $100 of
deposits. The new rate took effect on September 29, 1995. On November
14, 1995, the FDIC again lowered the BIF premium for "healthy" banks
from $.04 per $100 of deposits to zero for the highest rated
institutions (92% of the industry). All of the Subsidiary Banks are
insured under the BIF fund and it is expected that they will be required
to pay only the legally required annual minimum payments during 1998.
Recent Legislative and Regulatory Action
On April 19, 1995, the four Federal bank regulatory agencies
adopted revisions to the regulations promulgated pursuant to the
Community Reinvestment Act (the "CRA"), which are intended to set
distinct assessment standards for financial institutions. The revised
regulations contain three evaluation tests: (i) a lending test which
will compare the
institution's market share of loans in low- and moderate-income areas to
its market share of loans in its entire service area and the percentage
of a bank's outstanding loans to low- and moderate-income areas or
individuals; (ii) a services test which will evaluate the provisions of
services that promote the availability of credit to low- and moderate-
income areas; and (iii) an investment test, which will evaluate an
institution's record of investments in organizations designed to foster
community development, small- and minority-owned businesses, and
affordable housing lending, including state and local government housing
or revenue bonds. The regulation is designed to reduce some paperwork
requirements of the current regulations and provide regulators,
institutions, and community groups with a more objective and predictable
manner with which to evaluate the CRA performance of financial
institutions. The rule became effective on January 1, 1996, at which
time evaluation under streamlined procedures were scheduled to begin for
institutions with assets of less than $250 million.
These regulations have had little or no effect on South and the
Subsidiary Banks. Congress and various Federal agencies (including
Housing and Urban Development, the Federal Trade Commission and the
Department of Justice) (collectively, the "Federal Agencies")
responsible for implementing the nation's fair lending laws have been
increasingly concerned that prospective home buyers and other borrowers
are experiencing discrimination in their efforts to obtain loans. In
recent years, the Department of Justice has filed suit against financial
institutions, which it determined had discriminated, seeking fines and
restitution for borrowers who allegedly suffered from discriminatory
practices. Most, if not all, of these suits have been settled (some for
substantial sums) without a full adjudication on the merits.
9
On March 8, 1994, the Federal Agencies, in an effort to clarify
what
constitutes lending discrimination and specify the factors the agencies
will consider in determining if lending discrimination exists, announced
a joint policy statement detailing specific discriminatory practices
prohibited under the Equal Opportunity Act and the Fair Housing Act. In
the policy statement, three methods of proving lending discrimination
were identified: (i) over evidence of discrimination, when a lender
blatantly discriminates on a prohibited basis; (ii) evidence of
disparate treatment, when a lender treats applicants differently based
on a prohibited factor even where there is no showing that the treatment
was motivated by prejudice or a conscious intention to discriminate
against a person; and (iii) evidence of disparate impact, when a lender
applies a practice uniformly to all applicants, but the practice has a
discriminatory effect, even where such practices are neutral on their
face and are applied equally, unless the practice can be justified on
the basis of business necessity.
On September 23, 1994, President Clinton signed the Reigle
Community Development and Regulatory Improvement Act of 1994 (the
"Regulatory Improvement Act"). The Regulatory Improvement Act contains
funding for community development projects through banks and community
development financial institutions and also numerous regulatory relief
provisions designed to eliminate certain duplicative regulations and
paperwork requirements. On September 29, 1994, President Clinton signed
the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Federal Interstate Bill") which amended Federal law to permit bank
holding companies to acquire existing banks in any state effective
September 29, 1995, and to permit any interstate bank holding company to
merge its various bank subsidiaries into a single bank with interstate
branches after May 31, 1997. States have the authority to authorize
interstate branching prior to June 1, 1997, or, alternatively, to opt
out of interstate branching prior to that date. The Georgia Financial
Institutions Code was amended in 1994 to permit the acquisition of a
Georgia bank or bank holding company by out-of-state bank holding
companies beginning July 1, 1995. On September 29, 1995, the interstate
banking provisions of the Georgia Financial Institutions Code were
superseded by the Federal Interstate Bill.
In February 1996, the Georgia legislature adopted the "Georgia
Interstate Branching Act," which permitted Georgia-based banks and bank
holding companies owning or acquiring banks outside of Georgia and all
non-Georgia banks and bank holding companies owning or acquiring banks
in Georgia the right to merge any lawfully acquired bank into an
interstate branch network. The Georgia Interstate Branching Act also
allows banks to establish de novo branch banks on a limited basis
beginning July 1, 1996. Beginning July 1, 1998, the number of de novo
bank branches which may be established will no longer be limited.
Effective March 11, 2000, pursuant to authority granted under the
Gramm-Leach-Bliley Act, a bank holding company may elect to become a
financial holding company and thereby to engage in a broader range of
financial and other activities than are permissible for traditional bank
holding companies. In order to quality for the election, all of the
depository institution subsidiaries of the bank holding company must be
well capitalized and well managed, as defined by regulation, and all of
its insured depository institution subsidiaries must have achieved a
rating of "satisfactory" or better with respect to meeting community
credit needs. Pursuant to the Gramm-Leach-Bliley Act, financial
holding
10
companies will be permitted to engage in activities that are "financial
in nature" or incidental or complementary hereto, as determined by the
Federal Reserve Board. The Gramm-Leach-Bliley Act identifies several
activities as "financial in nature" including, among others, insurance
underwriting and agency, investment advisory services, merchant banking
and underwriting, dealing or making a market in securities. The
Registrant has not, at this time, made any decision with respect to
whether it will elect to become a financial holding company under the
Gramm-Leach-Bliley Act.
The Gramm-Leach-Bliley Act does not significantly alter the
regulatory regimes under which the Registrant and the Bank currently
operate. While certain business combinations not currently permissible
will be possible after March 11, 2000, we cannot predict at this time
resulting changes in the competitive environment or the financial
condition of the Registrant or the Bank's. Using the financial holding
company structure, insurance companies and securities firms may acquire
the bank holding companies, such as the registrant, and may compete more
directly with banks or bank holding companies.
Various legislation, including proposals to substantially change
the financial institution regulatory system and to expand or contract
the powers of banking institutions and bank holding companies, is from
time to time introduced in Congress. This legislation may change
banking statutes and the operating environment of the combined company
and its subsidiaries in substantial and unpredictable ways. If enacted,
such legislation could increase or decrease the cost of doing business,
limit or expand permissible activities or affect the competitive balance
among banks, savings associations, credit unions, and other financial
institutions. The Registrant cannot accurately predict whether any of
this potential legislation will ultimately be enacted, and, if enacted,
the ultimate effect that it, or implementing regulations, would have
upon the financial condition or results of operations of itself or any
of its subsidiaries.
Omnibus Budget Reconciliation Act of 1993
The Omnibus Budget Reconciliation Act of 1993 (the "Tax Act")
continues the recent legislation affecting banks and financial
institutions. The Tax Act was designed as a deficit reduction with
similarities to the 1990 Act which was also designed to slice $500
billion from the deficit.
Generally the Tax Act affects all corporations as to a new 35% tax
rate for income in excess of $10 million and the maximum corporate
capital gains rate was increased to 35%. The Registrant currently will
not be affected by the change due to the income level of the Registrant.
Various other provisions would restrict certain deductions and/or change
the treatment of certain transactions.
Provisions that especially affect financial institutions included
market to market Accounting for Securities. The Tax Act requires that
securities that are inventory in the hands of a dealer be inventoried at
fair market value (market to market). For the purposes of these rules,
"securities" and a "dealer" are defined more broadly than under prior
law. A "dealer" is any person who either regularly purchases securities
from or sells securities to customers in the ordinary course of business
or regularly offers to enter into, assume, offset, assign or otherwise
11
terminate positions in securities with customers in the ordinary course
of a trade or business. Banks have been determined to qualify as a
dealer under the new definitions. Unless securities are properly
identified as held for investment, all inventory will be required to be
market to market.
A second item affecting financial institutions is the treatment of
tax-free FSLIC Assistance that was credited on or after March 4, 1991 in
connection with the disposition of "covered" assets. Financial
institutions are required to treat that assistance as compensation for
any losses claimed on dispositions or charge-offs of these assets,
effectively denying them any tax loss for those assets. This provision
should not have any effect on the Registrant.
The third item affecting financial institutions is the amortization
of intangible assets effective for purchase after the enactment (August
10, 1993). Taxpayers are required to amortize most intangibles
(including goodwill, core deposits, going concern value and covenant not
to compete) used in a trade or business over a 15 year period.
Exception to this rule includes mortgage service rights. The provision
will have significant impact on any future purchases the holding company
may decide to undertake.
Some of the other provisions such as eliminating deductions for
lobbying expense and club dues will impact the taxes payable by the
Registrant.
Recent and Proposed Changes in Accounting Rules
In June, 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income. The statement is effective for annual and
quarterly financial statements for fiscal years beginning after December
15, 1997, with earlier application permitted. For the Company, the
statement became effective in the first quarter of 1998 and required
reclassification of earlier financial statements for comparative
purposes. SFAS No. 130 requires that changes in the amounts of
comprehensive income items be shown in a primary financial statement.
Comprehensive income is defined by the statement as "the change in
equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources.
It includes all changes in equity during a period except those resulting
from investments by owners and distributions to owners." While the
adoption of this statement changed the look of the Company's financial
statements, it did not have a material effect on the Company.
Also, in June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The statement is
effective for financial statements for fiscal years beginning after
December 15, 1997, with earlier application permitted. SFAS No. 131
changes the way public companies report information about segments of
their business in their annual financial statements and requires them to
report selected segment information in their quarterly reports issued to
shareholders. A company is required to report on operating segments
based on the management approach. An operating segment is defined as
any component of an enterprise that engages in business activities from
which
12
it may earn revenues and incur expenses. The management approach is
based on the way that management organizes the segments within the
enterprise for making operating decisions and assessing performance.
The adoption of this standard did not have a material effect on the
Company.
In February 1998, the FASB issued SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits. The
statement is effective for fiscal years beginning after December 15,
1997. SFAS No. 132 provides additional information to facilitate
financial analysis and eliminates certain disclosures which are no
longer useful. To the extent practical, the statement also standardizes
disclosures for retiree benefits. The adoption of this standard did not
have a material effect on the Company.
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value
of a derivative depends on the intended use of the derivative and the
resulting designation.
In June of 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." This statement deferred the
effective date of SFAS No. 133 to fiscal years beginning after June 15,
2000, with early application encouraged. South is in the process of
determining the impact, if any, the implementation of SFAS No. 133 and
SFAS No. 137 will have on its results of operations.
In October 1998, the FASB issued SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by Mortgage Banking Enterprise, an amendment to SFAS
No. 65. This statement is effective for the first fiscal quarter
beginning after December 15, 1998, (or January 1, 1999 for the Company).
The statement requires that after the securitization of mortgage loans
held for sale, any retained mortgage-backed securities be classified in
accordance with SFAS No. 115, based on the entity's ability and intent
to sell or hold those investments. Prior to this statement, mortgage
banking entities were required to classify these securities as trading
only. The adoption of this standard did not have a material effect on
the Company.
Industry Developments
Certain recently-enacted and proposed legislation could have an
effect on both the costs of doing business and the competitive factors
facing the financial institution's industry. Because of the uncertainty
of the final terms and likelihood of passage of the proposed
legislation, the Company is unable to assess the impact of any proposed
legislation of its financial condition or operations at this time.
13
Selected Statistical Information
The tables and schedules on the following pages set forth certain
significant statistical data with respect to: (i) the distribution of
assets, liabilities and shareholders' equity and the interest rates and
interest differentials experienced by, the Registrant and its
subsidiaries; (ii) the investment portfolio of the Registrant and its
subsidiaries; (iii) the loan portfolio of the Registrant and its
subsidiaries, including types of loans, maturities and sensitivity to
changes in interest rates and information on nonperforming loans; (iv)
summary of the loan loss experience and reserves for loan losses of the
Registrant and its subsidiaries; (v) types of deposits of the Registrant
and its subsidiaries; and (vi) the return on assets and equity for the
Registrant and its subsidiaries.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIALS
A. The condensed average balance sheets for the periods indicated are
presented below.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
ASSETS (In Thousands)
Cash and due from banks $ 7,836 $ 5,736 $ 8,723
Cash in bank - interest bearing 1,355 1,411 1,412
Taxable investment securities 15,905 15,285 12,026
Nontaxable investment securities 1,825 1,945 1,833
Others 1,435 932 833
Federal funds sold and securities
purchased under agreements to
resell 8,757 11,354 7,202
Loans - net 121,166 111,239 96,657
Other assets 8,031 8,625 7,944
Total Assets $ 166,310 $ 156,527 $ 136,630
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits: Demand - non-interest
bearing $ 20,341 $ 20,209 $ 18,052
Demand - interest bearing 23,777 22,732 21,118
Savings 10,674 9,048 8,327
Time 92,406 86,113 72,070
Total Deposits $ 147,198 $ 138,102 $ 119,567
Federal funds purchased 55 - 507
Other borrowed funds 3,087 3,380 3,614
Other liabilities 962 1,694 1,102
Total Liabilities $ 151,302 $ 143,176 $ 124,790
Shareholders' equity 15,008 13,351 11,840
Total Liabilities and
Shareholders' Equity $ 166,310 $ 156,527 $ 136,630
B. Interest Rates. The tables below show for the periods indicated
the average amount outstanding for major categories of interest
14
earning assets and interest bearing liabilities; the average
interest rates earned or paid; the interest income and expense
earned or paid thereon; net interest earnings and the net yield
on interest-earning assets.
Year Ended December 31, 1999
Average Yield/
Balance Interest Rate
ASSETS (In Thousands)
Cash in banks - interest bearing$ 1,355 $ 78 5.75%
Loans 121,166 12,859 10.61
Taxable investments 15,905 936 5.88
Non-taxable investments 1,825 87 4.77
Other 1,435 96 6.68
Federal funds sold and
securities Purchased under
agreements to resell 8,757 462 5.28
Total Interest-Bearing
Assets $ 150,443 $ 14,518 9.65%
LIABILITIES
Demand - interest bearing $ 23,777 $ 633 2.66%
Savings deposits 10,674 352 3.30
Other time deposits 92,406 5,037 5.45
Other borrowing 3,087 236 7.65
Federal funds purchased 55 3 5.54
Total Interest-Bearing
Liabilities $ 129,999 $ 6,261 4.82%
Net interest earnings $ 8,257
Net yield on interest earning assets 4.83%
Year Ended December 31, 1998
Average Yield/
Balance Interest Rate
ASSETS (In Thousands)
Cash in banks - interest
bearing $ 1,411 $ 82 5.81 %
Loans 111,239 12,152 10.92
Taxable investments 15,285 936 6.12
Non-taxable investments 1,945 92 4.73
Other 932 57 6.11
Federal funds sold and
securities purchased
under agreements to resell 11,354 601 5.29
Total Interest-Bearing
Assets $ 142,166 $ 13,920 9.79%
LIABILITIES
Demand - interest bearing $ 22,732 $ 678 2.98
%
Savings deposits 9,048 288 3.18
Other time deposits 86,113 5,164 5.99
Other borrowing 3,380 262 7.75
Federal funds purchased - - -
Total Interest-Bearing
Liabilities $ 121,273 $ 6,392 5.27%
Net interest earnings $ 7,528
Net yield on interest earning assets 4.52%
15
Year Ended December 31, 1997
Average Yield/
Balance Interest Rate
ASSETS (In Thousands)
Cash in banks - interest
bearing $ 1,412 $ 92 6.50%
Loans 96,657 10,770 11.14
Taxable investments 12,026 941 7.82
Non-taxable investments 1,833 90 4.91
Other 833 42 5.04
Federal funds sold and
securities purchased
under agreements to resell 7,202 393 5.45
Total Interest-Bearing
Assets $ 119,963 $ 12,328 10.28%
LIABILITIES
Demand - interest bearing $ 21,118 $ 720 3.41%
Savings deposits 8,327 258 3.10
Other time deposits 72,070 4,074 5.65
Other borrowing 3,614 305 8.44
Federal funds purchased 507 30 5.91
Total Interest-Bearing
Liabilities $ 105,636 $ 5,387 5.10%
Net interest earnings $ 6,941
Net yield on interest earning assets 5.18%
(1) Note: Loan fees are included for rate calculation purposes. Loan
fees included in interest amounted to approximately $892,522 in 1999,
$810,462 in 1998 and $732,852 in 1997. Non accrual loans have been
included in the average balances.
C. Interest Differentials. The following tables set forth for the
periods indicated a summary of the changes in interest earned and
interest paid resulting from changes in volume and changes in rates.
1999 compared to 1998
Increase (Decrease) Due to (1)
Volume Rate Change
Interest earned on: (In Thousands)
Cash in banks - interest
bearing $( 3) $( 1) $( 4)
Loans 1,084 ( 377) 707
Taxable investments ( 38) 38 -
Nontaxable investments ( 7 ) 2
( 5 )
Other 24 14 38
Federal funds sold and
securities purchased under
agreement to resell ( 137) ( 2) ( 139)
Total Interest-Earning Assets $ 923 $( 326 )$
597
16
1999 compared to 1998 (Con't)
Increase (Decrease) Due to (1)
Volume Rate Change
(In Thousands)
Interest paid on:
NOW deposits $ 31 $( 76 )$(
45 )
Savings deposits 52 12 64
Other time deposits 372 ( 499) ( 127)
Other borrowing ( 23) ( 3) ( 26)
Federal funds purchased 3 -
3
Total Interest-Bearing
Liabilities $ 435 $( 566 )$(
131 )
Net Interest Earnings $ 488 $ 240 $ 728
(1) The change in interest due to volume has been determined by
applying the rate from the earlier year to the change in average
balances outstanding from one year to the next. The change in interest
due to rate has been determined by applying the change in rate from one
year to the next to average balances outstanding in the later year.
1998 compared to 1997
Increase (Decrease) Due to (1)
Volume Rate Change
Interest earned on: (In Thousands)
Cash in banks - interest
bearing $ - $( 10) $( 10
)
Loans 1,624 ( 242) 1,382
Taxable investments 255 ( 260) ( 5)
Nontaxable investments 5 ( 3) 2
Other 5 10 15
Federal funds sold and
securities purchased under
agreement to resell 230 ( 22) 208
Total Interest-Earning Assets $ 2,119 $( 527) $ 1,592
Interest paid on:
NOW deposits $ 55 $( 97) $( 42)
Savings deposits 22 8
30
Other time deposits 793 297
1,090
Other borrowing ( 20) ( 23) ( 43)
Federal funds purchased ( 30) - ( 30)
Total Interest-Bearing
Liabilities $ 820 $ 185 $ 1,005
Net Interest Earnings $ 1,299 $( 712) $ 587
(1) The change in interest due to volume has been determined by
applying the rate from the earlier year to the change in average
balances outstanding from one year to the next. The change in interest
due to rate has been determined by applying the change in rate from one
year to the next to average balances outstanding in the later year.
17
1997 compared to 1996
Increase (Decrease) Due to (1)
Volume Rate Change
Interest earned on: (In Thousands)
Cash in banks - interest
bearing $( 40) $ 13 $( 27)
Loans 1,426 ( 135) 1,291
Taxable investments ( 155 ) 217
62
Nontaxable investments ( 6 ) 1 ( 5)
Other 14 - 14
Federal funds sold and
securities purchased under
agreement to resell ( 126) 13 ( 113)
Total Interest-Earning Assets $ 1,113 $ 109 $ 1,222
1997 compared to 1996
Increase (Decrease) Due to (1)
Volume Rate Change
Interest paid on:
NOW deposits $ 22 $ 119 $ 141
Savings deposits 12 15 27
Other time deposits 443 ( 72 )
371
Other borrowing ( 10) 23 13
Federal funds purchased 9 3
12
Total Interest-Bearing
Liabilities $ 476 $ 88 $ 564
Net Interest Earnings $ 637 $ 21$
658
(1) The change in interest due to volume has been determined by
applying the rate from the earlier year to the change in average
balances outstanding from one year to the next. The change in interest
due to rate has been determined by applying the change in rate from one
year to the next to average balances outstanding in the later year.
II. INVESTMENT PORTFOLIO
A. Types of Investments The carrying amounts of investment securities
at the dates indicated are summarized as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
(In Thousands)
U. S. Treasury and other
U. S. government agencies
and corporations $ 16,292 $ 14,750 $ 13,892
State and political
subdivisions (domestic) 1,714 1,959 1,976
Mortgage backed securities 502 732 1,080
Equities 545 300 -
Totals $ 19,053 $ 17,741 $ 16,948
18
B. Maturities The amounts of investment securities in each category as
of December 31, 1999 are shown in the following table according to
maturity classifications (1) one year or less, (2) after one year
through five years, (3) after five years through ten years, (4) after
ten years.
U. S. Treasury
and Other U. S.
Government State
Agencies and and Political Mortgage Backed
Corporations Subdivisions Securities
Average Average
Yield Yield Average
Amount (1) Amount (1)(2) Amount Yield
(In Thousands)
Maturity:
One year or less $ 2,297 5.99% $ 200 6.17% $ - -
After one year
through five years 13,508 5.83 905 7.06 213 6.02
%
After five years
through ten years - - - - -
After ten years 487 5.50 610 8.58 289 7.41
Totals $ 16,292 5.84% $ 1,715 7.50% $ 502 6.82
%
(1) Yields were computed using coupon interest, adding discount
accretion or subtracting premium amortization, as appropriate, on a
ratable basis over the life of each security. The weighted average
yield for each maturity range was computed using the acquisition price
of each security in that range.
(2) Yields on securities of state and political subdivisions are stated
on a tax equivalent basis, using a tax rate of 34%.
III. Loan Portfolio
A. Types of Loans The amount of loans outstanding at the indicated
dates are shown in the following table according to type of loan.
Year Ended Year Ended Year Ended
December 31, December 31, December 31
,
1999 1998 1997
(In Thousands)
Commercial, financial and
agricultural $ 34,607 $ 29,889 $ 29,728
Real estate - mortgage 62,829 58,005 52,544
Real estate - construction 13,413 7,909 6,968
Installments 21,433 19,157 17,285
$ 132,282 $ 114,960 $ 106,525
Less - Unearned income 216 154 149
Reserve for possible
losses 2,169 1,971 1,822
Total Loans $ 129,897 $ 112,835 $ 104,554
19
C. Maturities and Sensitivity to Changes in Interest Rates The amount
of total loans by category outstanding as of December 31, 1999 which,
based on remaining repayments of principal, are due in (1) one year or
less, (2) more than one year but less than five and (3) more than five
years are shown in the following table. The amounts due after one year
are classified according to the sensitivity to changes in interest
rates.
Maturity Classification
Over One
One Year Through Over
or Less Five Years Five Years Total
Types of Loans (In Thousands)
Commercial,
financial and
agricultural $ 28,375 $ 4,955 $ 1,191 $ 34,521
Real estate
mortgage 42,131 12,223 8,058 62,412
Real estate
construction 11,568 662 1,182 13,412
Installment 9,118 9,130 2,739 2,987
Total loans due
after one year
with:
Predetermined
interest rate 36,693
Floating interest
rate 3,447
C. Nonperforming Loans The following table presents, at the dates
indicated, the aggregate amounts of nonperforming loans for the
categories indicated.
Year Ended Year Ended Year Ended
December 31, December 31, December 31 ,
1999 1998 1997
(In Thousands)
Loans accounted for on a
non-accrual basis $ 422 $ 557 $ 311
Loans contractually past
due ninety days or more
as to interest or principal
payments 419 492 760
Loans, the terms of which
have been renegotiated to
provide a reduction or
deferral of interest or
principal because of a
deterioration in the financial
position of the borrower 29 37 36
20
C. Nonperforming Loans - (con't)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
(In Thousands)
Loans now current about which
there are serious doubts as
to the ability of the borrower
to comply with present loan
repayment terms - - -
Loans are placed on non-accrual basis when loans are past due
ninety days or more. Management can elect not to place loans on non-
accrual status if net realizable value of collateral is sufficient to
cover the balance and accrued interest.
D. Commitments and Lines of Credit The banks provide commitments and
lines of credits to their most credit worthy customers only.
Commitments are for short terms, usually not exceeding 30 days, and are
provided for a fee of 1% of the amount committed. Lines of credit are
for periods extending up to one year. No fee is usually charged with
respect to the unused portion of a line of credit. Interest rates on
loans made pursuant to commitments or under lines of credit are
determined at the time that the commitment is made or line is
established.
21
E. Rate Sensitivity Analysis
SOUTH BANKING COMPANY
DECEMBER 31, 1999
+------Interest Sensitive-------+
0 - 91 - 1
to 3
90 Day 365 Days Years
(Thousands of Dollars)
Earning Assets:
Loans $ 72,332 $ 19,575 $ 16,839
Investment securities 289 2,497 9,576
Interest bearing deposits 491 279 -
Federal funds sold and
securities purchased under
agreement to resell 3,180 - -
Total Earning Assets $ 76,292 $ 22,351 $ 26,415
Supporting Sources of Funds
Savings $ 10,520 $ - $ -
Money market and NOW 23,089 - -
Other time deposits 18,741 49,210 5,039
CD's - $100,000 or more 4,808 17,370 2,214
Other borrowings 33 720 867
Federal funds purchased 1,140 - -
Total Interest Bearing Deposits $ 58,331 $ 67,300 $ 8,120
Demand deposits and other funds
supporting earning assets -
non interest earning $ - $ - $ -
Total Supporting Sources of Funds $ 58,331 $ 67,300 $ 8,120
Interest Sensitive - interest
earning assets less interest
bearing liabilities $ 17,961 $(44,949) $ 18,295
Cumulative interest rate sensitivity
gap $ 17,961 $(26,988) $( 8,693)
Interest rate sensitivity gap ratio 1.31 .33 .33
Cumulative interest rate sensitivity
gap ratio 1.31 .79 .94
3 to 5 5 Years +
Years Over Total
Earning Assets:
Loans $ 10,319 $ 13,217 $ 132,282
Investment securities 5,050 1,097 18,509
Interest bearing deposits 99 - 869
Federal funds sold and
securities purchased under
agreement to resell - - 3,180
Total Earning Assets $ 15,468 $ 14,314 $ 154,840
Supporting Sources of Funds
Savings $ - $ - $ 10,520
Money market and NOW - - 23,089
Other time deposits 346 - 73,336
CD's - $100,000 or more - - 24,392
Other borrowings 700 350 2,670
Federal funds purchased - - 1,140
Total Interest Bearing Deposits $ 1,046 $ 350 $ 135,147
Demand deposits and other funds
supporting earning assets -
non interest earning $ - $ - $ 21,463
Total Supporting Sources of Funds $ 1,046 $ 350 $ 156,610
Interest Sensitive - interest
earning assets less interest
bearing liabilities $ 14,422 $ 13,964 $ 1,770
Cumulative interest rate sensitivity
gap $ 5,729 $ 19,693 $ 1,770
Interest rate sensitivity gap ratio 14.78 - -
Cumulative interest rate sensitivity
gap ratio 1.04 1.15 98.9
22
The rate sensitivity analysis table is designed to demonstrate South's
sensitivity to changes in interest rates by setting forth in comparative
form the repricing maturities of South's assets and liabilities for the
period shown. A ratio of greater than 1.0 times interest earnings assets to
interest bearing liabilities indicates that an increase in interest rates
will generally result in an increase in net income for South and a decrease
in interest rates will result in a decrease in net income. A ratio of less
than 1.0 times earnings assets to interest-bearing liabilities indicates
that a decrease in interest rates will generally result in a increase in
net income for South and an increase in interest rates will result in an
decrease in net income.
22
IV. Summary of Loan Loss Experience
The following table summarizes loan balances at the end of each
period and average balances during the year for each category; changes
in the reverse for possible loan losses arising from loans charged off
and recoveries on loans previously charged off; additions to the reserve
which have been charged to operating expense; and the ratio of net
charge-offs during the period to average loans.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
(In Thousands)
A. Average amount of loans
outstanding $ 121,166 $ 111,239 $ 96,657
B. Balance of reserve for
possible loan losses at
beginning of period $ 1,971 $ 1,822 $ 1,781
C. Loans charged off:
Commercial, financial
and agricultural $ 149 $ 10 $ 44
Real estate - mortgage 67 75 123
Installments 217 172 97
$ 433 $ 257 $ 264
D. Recoveries of loans
previously charged off:
Commercial, financial
and agricultural $ 2 $ 20 $ 34
Real estate 31 2 8
Installment 95 98 83
$ 128 $ 120 $ 125
E. Net loans charged off
during period $ 305 $ 137 $ 139
Additions to reserve
charged to operating
expense during period (1)$ 503 $ 286 $ 180
Addition from bank
acquisition - - -
$ 503 $ 286 $ 180
F. Balance of reserve for
possible loan losses at
end of period $ 2,169 $ 1,971 $ 1,822
G. Ratio of net loans charged
off during the period to
average loans outstanding .25 .12 .14
23
(1) Although the provisions exceeded the minimum provision required
by regulatory authorities, the Board of Directors believe that the
provision has not been in excess of the amount required to maintain the
reserve at a sufficient level to cover potential losses. The amount
charged to operations and the related balance in the reserve for loan
losses is based upon periodic evaluations by management of the loan
portfolio. These evaluations consider several factors including, but not
limited to, general economic conditions, loan portfolio composition,
prior loan loss experience and management's estimation of future
potential losses.
(2) Management's review of the loan portfolio did not allocate
reserves by category due to the portfolio's small size. The
reserves were allocated on the basis of a review of the entire
portfolio. The portfolio does not contain excessive concentrations
in any industry or loan category that might expose South to
significant risk.
V. Deposits
A. Average deposits, classified as demand deposits, savings deposits
and time certificates of deposit for the periods indicated are presented
below:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
(In Thousands)
Demand deposits $ 20,341 $ 20,209 $ 18,052
NOW deposits 23,777 22,732 21,118
Savings deposits 10,674 9,048 8,327
Time certificates of
deposits 92,406 86,113 72,070
Total Deposits $ 147,198 $ 138,102 $ 119,567
B. 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 six months, (3) over
six through twelve months and (4) over twelve months.
Three months or less $ 4,808
Over three through twelve months 17,370
Over twelve months 2,214
Total $ 24,392
24
VI. Return on Assets and Shareholders' Equity
The following rate of return information for the periods
indicated is presented below:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
Return on assets (1) 1.28% 1.23 % 1.13
%
Return on equity (2) 14.18 14.45 13.06
Dividend payout ratio (3) 12.20 13.46 15.54
Equity to assets ratio (4) 9.02 8.53 8.67
(1) Net income divided by average total assets.
(2) Net income divided by average equity.
(3) Dividends declared per share divided by net income per share.
(4) Average equity divided by average total assets.
Item 2. Properties
Alma Bank's main banking office and the Registrant's principal
executive offices are located at 104 North Dixon Street, Alma, Georgia
31510. The building, containing approximately 13,040 square feet of
usable office and banking space, and the land, approximately 1.2
acres, are owned by Alma Bank. Alma Bank also has a separate drive-in
banking facility located at 505 South Pierce Street, Alma, Georgia.
The building, containing 510 square feet, in which the branch is
located and the land, approximately .4 acres, on which it is located
are owned by Alma Bank.
Citizens Bank's main banking office is located at 205 East King
Street, Kingsland, Georgia 31548. The building, containing
approximately 6,600 square feet of usable office and banking space,
and the land, approximately 2 acres, are owned by Citizens Bank.
Peoples Bank's main banking office is located at Comas and E.
Parker Streets, Baxley, Georgia 31513. The building, containing
approximately 7,800 square feet of usable office and banking space,
and the land, approximately 2.5 acres, are owned by the Peoples Bank.
The Bank does not have branches.
Pineland Bank's main banking office is located at 257 North Broad
Street, Metter, Georgia 30439. The building, containing approximately
10,000 square feet of usable office and banking space, and the land,
approximately 1 acre, are owned by the Pineland Bank. The Bank opened
a branch in 1998 on land under a long term lease.
Item 3. Legal Proceedings
Neither the Registrant or its subsidiaries are parties to, nor
is any of their property the subject of, any material pending legal
proceedings, other than ordinary routine proceedings incidental to
the business of the Banks, nor to the knowledge of the management of
the Registrant are any such proceedings contemplated or threatened
against it or its subsidiaries.
25
Item 4. Submission of Matters to a vote of Security Holders
None applicable.
Part II.
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
There is no public market for the common stock of South or the
Banks. The last known selling price of South's common stock, based
on information available to South's management, was $12.00 per share
on October 7, 1999. As of March 1, 2000, the Company had 464
shareholders with 399,500 shares outstanding.
For the years ended December 31, 1999, 1998 and 1997, South paid
cash dividends of $259,675 or $.65 per share, $259,654 or $.65 per
share, and $239,681 or $.65 per share, respectively. These dollars
equate to dividend payout ratios (dividends declared divided by net
income) of 12.20%, 13.46% and 15.54% in 1999, 1998 and 1997,
respectively. Certain other information concerning dividends and
historical trading prices is set forth below:
QUARTERLY COMMON STOCK DATA
Set forth below is information concerning high and low sales
prices by quarter for each of the last two fiscal years and dividend
information for the last two fiscal years. The Company's common
stock is not traded on any established pubic trading market. The
Company acts as its own transfer agent, and the information
concerning sales prices set forth below is derived from the Company's
stock transfer records. As of December 31, 1999, there were 464
shareholders of record.
SALES PRICES BY QUARTER
High Low
Fiscal Year 1999
First Quarter $12.00 $12.00
Second Quarter 12.00 12.00
Third Quarter 12.00 12.00
Fourth Quarter 12.00 12.00
SALES PRICES BY QUARTER
High Low
Fiscal Year 1998
First Quarter $12.00 $12.00
Second Quarter - -
Third Quarter - -
Fourth Quarter 12.00 12.00
DIVIDENDS PAID PER SHARE
Fiscal Year
Fiscal Year 1999 1999 1998
March 31 $ .00 .00
June 30 .00 .00
September 30 .00 .00
December 31 .65 .65
26
Item 6. Selected Financial Data
Years Ended December 31,
1999 1998 1997 1996 1995
(In Thousands)
Total Assets $ 173,807 $ 164,890 $ 149,895 $ 132,291 $ 97,175
Operations:
Interest income $ 14,518 $ 13,920 $ 12,328 $ 11,107$ 8,090
Interest expense 6,261 6,392 5,387 4,823 3,314
Net Interest
Income $ 8,257 $ 7,528 $ 6,941 $ 6,284$ 4,776
Provision for
loan losses 503 286 179 202 62
Net interest
income after
provision for
loan losses $ 7,754 $ 7,242 $ 6,762 $ 6,082$ 4,714
Other income $ 2,298 $ 1,905 $ 1,569 $ 1,596$ 1,371
Other expenses $ 6,906 $ 6,387 $ 6,017 $ 5,586$ 4,345
Income before
income taxes $ 3,146 $ 2,760 $ 2,314 $ 2,092$ 1,740
Federal Income
Taxes $ 1,017 $ 831 $ 768 $ 662$ 590
Net income before
extraordinary
items $ 2,129 $ 1,929 $ 1,546 $ 1,430$ 1,150
Extraordinary
items $ - $ - $ - $ -$ -
Net income $ 2,129 $ 1,929 $ 1,546 $ 1,430$ 1,150
Per Share Data:
Income after
extraordinary
items $ 5.33 $ 4.83 $ 3.86 $ 3.54 $ 2.84
Net income $ 5.33 $ 4.83 $ 3.86 $ 3.54 $ 2.84
Dividends
Declared $ .65 $ .65 $ .60 $ .55 $ .55
Book value $ 39.57 $ 35.56 $ 31.28 $ 27.72 $ 24.79
Profitability Ratios
Net income to
average total
assets 1.28 % 1.23 % 1.13 %
1.14 % 1.28%
Net income to average
stockholders'
equity 14.18 % $ 14.45 $ 13.06 $ 13.29
$ 12.08
Net interest
margin 4.83 % $ 4.52 $ 5.18 $ 4.86
$ 5.20
27
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The purpose of this discussion is to focus on information about
South Banking Company's financial condition and results of operations
which is not otherwise apparent from the consolidated financial
statement included in this report. Reference should be made to those
statements, selected statistical information and the selected financial
data presented elsewhere in this report for an understanding of the
following discussion and analysis.
Year 2000 Compliance
GENERAL. The Year 2000 risk involved computer programs and computer
software that are not able to perform without interruption into and
during the Year 2000. If computer systems did not correctly recognize
the date change from December 31, 1999, to January 1, 2000, computer
applications that rely on the date field could fail or create erroneous
results. Such erroneous results could have affected interest, payments
or due dates, or caused the temporary inability to process transactions,
send invoices or engage in similar normal business activities. If the
Company, its suppliers and its borrowers, failed to address these issues
there be a material adverse impact on the Company's financial condition
or results of operations.
STATE OF READINESS. The Company formally initiated its Year 2000
project and plan in 1997 to insure that its operational and financial
systems would not be adversely affected by Year 2000 problems. The
Company formed a Year 2000 project team, and the Board of Directors and
management supported all compliance efforts and allocated the necessary
resources to ensure completion. An inventory of all systems and products
(including both information technology ("IT") and non-informational
technology ("non-IT") systems) that could have been affected by the Year
2000 date change was developed, verified and categorized as to their
importance to the Company and an assessment of all mission critical IT
and mission critical non-IT systems was completed. This assessment
involved inputting test data which simulated the Year 2000 date change
into such IT systems and reviewing the system output for accuracy. The
Company's assessment of mission critical non-IT systems involved
reviewing such systems to determine whether they were date dependent.
Based on such assessment, the Company believed that none of its critical
systems were date dependent. The software for the Company's systems is
provided through software vendors. The Company contacted all of its
third party vendors and software providers and required them to
demonstrate and represent that the products provided were Year 2000
compliant and a program of testing compliance was planned. The
Company's item processing software provider, which performs
substantially all of the Company's data processing functions, stated
that its software is Year 2000 compliant and pursuant to applicable
regulatory guidelines the Company tested scenarios to verify this
assertion. In addition, the FDIC reviewed the Company's compliance with
Year 2000 issues on several occasions.
28
RISKS RELATED TO THIRD PARTIES. The impact of Year 2000 noncom-
pliance by third parties with which the Company transacts business could
not be accurately gauged. The Company identified its largest dollar
depositors and loan customers and, based on information available to the
Company, conducted evaluations to determine which of those customers
were likely to be affected by Year 2000 issues. To the extent a problem
was identified with respect to a customer, the Company monitored the
customer's progress in resolving such problem. The Company is not aware
of any material problem by any of its customers that would affect their
repayment of any loans. With respect to depositors, the Company had
additional cash on hand to handle any excessive withdrawals. With
respect to its borrowers, the Company includes in its loan documents a
Year 2000 disclosure form and an addendum to the loan agreement in which
the borrower represents and warrants its Year 2000 compliance to the
Company.
TRANSITION INTO THE YEAR 2000. The Company suffered no failures in
any system or product upon the date change from December 31, 1999 to
January 1, 2000. In addition, management is not aware of any vendor or
provider used by the Company for data processing or related services
which experienced a material failure of its product or service due to a
Year 2000 related problem. The Company is also subject to risks
associated with Year 2000 noncompliance by its customers. Management is
not aware of any customer which suffered losses related to a Year 2000
problem which would adversely affect that customer's financial condition
or its ability to repay any outstanding loan is has with the Company.
ONGOING PLANS. Although many of the critical dates related to
potential Year 2000 related problems have passed, experts predict that
Year 2000 related failures could occur throughout the year, such as on
February 29, 2000 and December 31, 2000. Accordingly, the Company's
Year 2000 project team will continue to monitor the Company's IT and non-
IT systems and attempt to identify any potential problems during the
course of the year. In addition, the Company will continue to monitor
the Year 2000 compliance of the third parties with which the Company
transacts business.
Financial Condition and Liquidity
Financial Condition
South functions as a financial institution and as such its
financial condition should be examined in terms of trends in its sources
and uses of funds. A comparison of daily average balances indicate how
South has managed its sources and uses of funds. Included in the
selected statistical information, the comparison of daily average
balance in the business portion of the filing indicated how South has
managed its sources and uses of funds. South used its funds primarily
to support its lending activities.
South's total assets increased to $173,807,421 at year end 1999
from $164,890,742 at year end 1998. This growth represents a 5.4%
increase in 1999 compared to 10.00% increase in 1998. This increase is
attributable
29
to normal growth within the banking area with limited entry into
competitive situations for large deposits. Due to the increased
competition in certain markets, the net interest margins have declined.
The net interest margin is not anticipated to change much in 2000 as the
effect of the new competition has leveled off. However, continued
increases in the prime rate could impact the margins. The interest rate
sensitivity analysis, which is a part of this report, gives some
indication of the repricing opportunities of South. The gap ratios for
the first twelve months are outside the limits established by the Bank
as ideal, however, the current interest rates are not favorable to
customers purchasing certificates in excess of twelve months. Loan
demand continues to be strong with loans increasing $17,322,771 in 1999.
The banks
continue to look for good quality loans as loans represent the highest
yielding asset on the Bank's books. The rural economy of the Banks'
market area has been stable prior to 1998. The Banks have noticed some
decline in 1999 in the overall economy, and especially in the agri-
cultural and timber industries. While the Banks are not heavy into
these industries, the decline in these areas have impacted the overall
economy. Classified loans for regulatory purposes remain at low levels
and, despite the problem in the local economies, do not represent any
trend or uncertainties which management reasonably expects will
materially impact future operating results, liquidity of capital
resources, or represents material credits about which management is
aware that causes management to have serious doubts as to the ability of
such borrowers to comply with the loan payment terms.
South's investment portfolio, including certificates of deposits in
other banks, increased to $19,922,578 from $19,280,633. The small
increase of $641,945 from operations is an indication of the loan demand
of the banks and the desire of the banks to utilize the assets of South
in the highest yielding manner available to the banks without creating
liquidity problems. South has maintained adequate federal funds sold and
investments available for sale to sufficiently maintain adequate
liquidity. South's securities are primarily short term of three years
or less in maturity, enabling South to better monitor the rate
sensitivity of these assets. Unrealized gain and losses on this
portfolio is not material to the statement as South maintains a slight
unrealized loss of $286,251.
As the primary source of funds, aggregate deposits increased by
$6,810,030 in 1999 compared to $13,387,853 in 1998. This represents a
4.66% increase for the year compared to a 10.09% increase in 1998. This
illustrates the efforts of the banks to maintain good core deposit
growth and not reach for the higher paying time certificates. One of the
markets experienced new competition in 1998 which continues to have some
impact on time certificate rates.
Liquidity
The primary function of asset/liability management is to assure
adequate liquidity and maintain an appropriate balance between interest
sensitive earning assets and interest bearing liabilities. Liquidity
management involves the ability to meet the cash flow requirements of
customers who may be either depositors desiring to withdraw funds
or
30
borrowers requiring assurance that sufficient funds will be available to
meet their credit needs. Interest rate sensitivity management seeks to
avoid fluctuating net interest margins and to enhance consistent growth
of net interest income through periods of changing interest rates.
Interest rate sensitivity varies with different types of interest-
earning assets and interest bearing liabilities. Overnight federal
funds on which rates change daily and loans which are tied to prime
differ considerably from long-term investment and fixed rate loans.
Similarly, time deposits over $100,000 and money market accounts are
much more interest sensitive than passbook savings and long-term capital
notes. The shorter-term interest rate sensitivities are key to measuring
the interest sensitivity gap, or excess interest-sensitive earning
assets over interest-bearing liabilities. An interest rate sensitivity
table is included elsewhere in this document, and it shows the interest
sensitivity gaps for different time intervals as of December 31, 1999.
The first 30 days there is an excess of interest-bearing assets over
interest-bearing liabilities. South becomes more sensitive to interest
rate fluctuations on a short time period. While the cumulative gap
declines with each time interval, South remains within a manageable
position.
Marketable investment securities, particularly those of shorter
maturities, and federal funds sold are the principal sources of asset
liquidity. Securities maturing in one year or less amounted to
$2,497,226 and federal funds sold net of federal funds purchased with
daily maturities amounted to $2,040,000 at year end 1999, a decrease
from prior years as loan demand exceeded deposit growth demand.
Maturing loans and certificates of deposits in other banks are other
sources of liquidity.
The overall liquidity of South has been enhanced by a significant
aggregate amount of core deposits. These core deposits have remained
constant during this period. South has utilized less stable short-term
funding sources to enhance liquidity such as large denomination time
deposits and money market certificates within its current customer base,
but has not attempted to acquire these type of accounts from non-core
deposit customers. South has utilized its core deposit base to help
insure it maintains adequate liquidity.
Historically, the trend in cash flows as represented in the
statement of cash flows shows a steady increase in cash generated by
operations from the last three years. This is a result of increasing
net income for each year. While income is not predictable, it is
anticipated that liquidity will continue to be enhanced by the
operations of the bank. Operations activity, however, generate only a
small portion of the cash flow activities of the bank. Primary cash
flow comes from investing activities such as sales and/or maturity of
investment securities and in the financing activity through an increase
in deposits. The primary use of cash flow includes the purchase of
securities and making new loans as investing activities. The history of
the bank's cash flow indicates a nonrepeating source such as proceeds
from borrowings utilized as sources of cash for the purpose of
acquisition or expansion. South's overall
31
cash flows indicate the relative stability and manageable growth of the
bank's assets. South utilized deposit growth as its primary source of
funds to handle growth. South's liquidity is maintained at levels
determined by management to be sufficient to handle the cash needs that
might arise at any given date. Outside sources are maintained, but
South looks to these sources only on a very short term basis. South's
long term liquidity plans include utilizing internally generated
deposits as its primary source of cash flows and utilizing the shifting
of the make up of assets to handle short term demands on cash.
Capital Resources
In January 1989, the Federal Reserve Board released new standards
for measuring capital adequacy for U. S. banking organizations. These
standards are based on the original risk-based capital requirements
first proposed in early 1986 by U. S. bank regulators and then developed
jointly by authorities from the twelve leading industrial countries.
As a result, the standards are designed to not only provide more risk-
responsive capital guidelines for financial institutions in the U. S.,
but also incorporate a consistent framework for use by financial
institutions operating in the major international financial markets.
In general, the standards require banks and bank holding companies
to maintain capital based on "risk-adjusted" assets so that categories
of assets with potentially higher credit risk will require more capital
backing than assets with lower risk. In addition, banks and bank
holding companies are required to maintain capital to support, on a risk-
adjusted basis, certain off-balance sheet activities such as loan
commitments and interest rate swaps.
The Federal Reserve Board standards classify capital into two
tiers, referred to as Tier 1 and Tier 2. Tier 1 capital consists of
common shareholders' equity, noncumulative and cumulative (BHCs only)
perpetual preferred stock and minority interest less goodwill. Tier 2
capital consists of allowance for loan and lease losses, perpetual
preferred stock (not included in Tier 1), hybrid capital instruments,
term subordinated debt and intermediate-term preferred stock. By
December 31, 1992, all banks were required to meet a minimum ratio of 8%
of qualifying total capital to risk-adjusted total assets with at least
4% Tier 1 capital. Capital that qualifies as Tier 2 capital is limited
to 100% of Tier 1 capital.
Loans and Asset Quality
Management of the Company believes that the loan portfolio is
adequately diversified. Commercial loans are spread through numerous
types of businesses with no particular industry concentrations. Loans
to individuals are made primarily to finance consumer goods purchased.
At December 31, 1999, total loans, net of unearned discounts, were 76%
of total earning assets. Loans secured by real estate accounted for 57%
of total loans as of December 31, 1999. Most of the loans classified as
real estate-mortgage are commercial loans where real estate provides
additional collateral. The Banks do not participate in the secondary
loan market.
32
Nonperforming assets include nonaccrual loans, accruing loans past
due 90 days or more and other real estate, which includes foreclosures,
deeds in lieu of foreclosure and in-substance foreclosures.
A loan is generally classified as nonaccrual when full
collectibility of principal or interest is doubtful or a loan becomes 90
days past due as to principal or interest, unless management determines
that the estimated net realizable value of the collateral is sufficient
to cover the principal balance and accrued interest. When interest
accruals are discontinued, unpaid interest credited to income in the
current year is reversed and unpaid interest accrued in prior years is
charged to the allowance for loan losses. Nonperforming loans are
returned to performing status when the loan is brought current and has
performed in accordance with contract terms for a period of time. A
summary of South's loan loss experience is included elsewhere in this
report.
Distribution of Nonperforming Assets
1999 1998 1997
(In Thousands)
Nonaccrual loans $ 442 $ 557 $ 311
Past due 90 days still accruing 419 492 760
Other real estate (ORE) 168 163 122
$ 1,029 $ 1,212 $ 1,193
Nonperforming loans to year
end loans .65 % .91
% 1.00 %
Nonperforming assets to year
end loan and ORE .78 % 1.05
% 1.11 %
The ratio of nonperforming assets has increased each year from 1994
to 1997. However in 1998 and 1999, a slight decrease occurred as 90
days past dues declined. This decrease is attributed to management's
early review system to grasp problems before they become unmanageable.
Management continues to work on nonperforming assets to further reduce
this ratio.
Asset-Liability Management and Market Risk Sensitivity
Market risk is the risk of loss from adverse changes in market
prices and rates. The Company's market risk arises principally from
interest rate risk inherent in its lending, deposit and borrowing
activities. Management actively monitors and manages its inherent rate
risk exposure. Although the Company manages other risks, as in credit
quality and liquidity risk, in the normal course of business, management
considers interest rate risk to be its most significant market risk and
could potentially have the largest material effect on the Company's
financial condition and results of operations. Other types of market
risks, such as foreign currency exchange rate risk and commodity price
risk, do not arise in the normal course of the Company's business
activities.
33
The Company's profitability is affected by fluctuations in interest
rates. Management's goal is to maintain a reasonable balance between
exposure to interest rate fluctuations and earnings. A sudden and
substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates on interest-
earning assets and interest-bearing liabilities do not change at the
same speed, to the same extent or on the same basis. The Company
monitors the impact of changes in interest rates on its net interest
income using several tools.
The Banks' goal is to minimize interest rate risk between interest
bearing assets and liabilities at various maturities through its Asset-
Liability Management (ALM). ALM involves managing the mix and pricing
of assets and liabilities in the face of uncertain interest rates and an
uncertain economic outlook. It seeks to achieve steady growth of net
interest income with an acceptable amount of interest rate risk and
sufficient liquidity. The process provides a framework for determining,
in conjunction with the profit planning process, which elements of the
Company's profitability factors can be controlled by management.
Understanding the current position and implications of past decisions is
necessary in providing direction for the future financial management of
the Company. The Company uses an asset-liability model to determine the
appropriate strategy for current conditions.
Interest sensitivity management is part of the asset-liability
management process. Interest sensitivity gap (GAP) is the difference
between total rate sensitive assets and rate sensitive liabilities in a
given time period. The Company's rate sensitive assets are those
repricing within one year and those maturing within one year. Rate
sensitive liabilities include insured money market accounts, savings
accounts, interest-bearing transaction accounts, time deposits and
borrowings. The profitability of the Company is influenced
significantly by management's ability to manage the relationship between
rate sensitive assets and liabilities. At December 31, 1999,
approximately 64% of the Company's earnings assets could be repriced
within one year compared to approximately 93% of its interest-bearing
liabilities. This compares to 65% and 96% in 1998.
The Company's current GAP analysis reflects that in periods of
increasing interest rates, rate sensitive assets will reprice slower
than rate sensitive liabilities. The Company's GAP analysis also shows
that at the interest repricing of one year, the Company's net interest
margin would be adversely impacted. This analysis, however, does not
take into account the dynamics of the marketplace. GAP is a static
measurement that assumes if the prime rate increases by 100 basis
points, all assets and liabilities that are due to reprice will increase
by 100 basis points at the next opportunity. However, the Company is
actually able to experience a benefit from rising rates in the short
term because deposit rates do not follow the national money market.
They are controlled by the local market. Loans do follow the money
market; so when rates increase they reprice immediately, but the Company
is able to manage the deposit side. The Company generally does not
raise deposit rates as fast or as much. The Company also has the
ability to manage its funding costs by choosing alternative sources of
funds.
34
The Company's current GAP position would also be interpreted to
mean that in periods of declining interest rates, the Company's net
interest margin would benefit. However, competitive pressures in the
local market may not allow the Company to lower rates on deposits, but
force the Company to lower rates on loans.
Computation of prospective effects of hypothetical interest rate
changes are based on numerous assumptions including relative levels of
market interest rates, loan prepayments and deposit decay rates, and
should not be relied upon as indicative of actual results. Further, the
computations do not contemplate any actions the Company could undertake
in response to changes in interest rates.
The rate sensitivity analysis as presented in the selected
statistical information shows the Company's financial instruments that
are sensitive to changes in interest rates, categorized by expected
maturity. Market risk sensitive instruments are generally defined as on
and off balance sheet derivatives and other financial instruments.
Notes to Market Risk Sensitivity Table:
Expected maturities are contractual maturities adjusted for
prepayments of principal when possible. The Company uses certain
assumptions to estimate expected maturities.
For loans, the Company has used contractual maturities due to the
fact that the Company has no historical information on prepayment
speeds. Since most of these loans are consumer and commercial
loans, and since the Company's customer base is community-based,
the Company feels its prepayment rates are insignificant.
For mortgage-backed securities, expected maturities are based upon
contractual maturity, projected repayments and prepayment of
principal. The prepayment experience herein is based on industry
averages as provided by the Company's investment trustee.
Loans receivable includes non-performing loans.
Interest-bearing liabilities are included in the period in which
the balances are expected to be withdrawn as a result of
contractual maturities. For accounts with no stated maturities,
the balances are included in the 0 to 90 day category.
The interest rate sensitivity gap represents the difference between
total interest-earning assets and total interest-bearing
liabilities.
An important aspect of achieving satisfactory net interest income
is the composition and maturities of rate sensitive assets and
liabilities. The table generally reflects that in periods of rising
interest rates, rate sensitive liabilities will reprice faster than rate
sensitive assets, thus having a negative effect on net interest income.
It must be
understood, however, that such an analysis is only a snapshot picture
and
35
does not reflect the dynamics of the market place. Therefore,
management reviews simulated earnings statements on a monthly basis to
more accurately anticipate its sensitivity to changes in interest rates.
Results of Operations
1999 Compared to 1998
Net interest income remains an effective measurement of how well
management has balanced South's interest rate sensitive assets and
liabilities. Net interest income increased by $728,607. The increase
of 9.68% compared to a 8.45% increase in 1998. The primary determinants
of the increase were loans and time deposits. As loan demand increased,
funds were channeled into higher yielding loans. Management continues
its policy of not soliciting high interest deposits and was able to
maintain stable cost of funds. The growth of assets and liabilities was
only part of the reason for the increase as net interest yield increased
to 4.83% from 4.52%. With the low interest rate currently in the market
and South's current rate gap, South will continue its efforts to channel
funds into higher yielding assets. Due to the rate sensitivity gap,
South will attempt to improve its current position with a controlled
attempt to lengthen its maturity of interest rate sensitive liabilities
although this remains difficult without rate adjustments upward.
Interest and fees on loans increased $706,985 or 5.82% from 1998 to
1999 due to loan growth of 15.1% in 1999. Interest on investment
securities increased $29,504 or 2.5% from 1998 to 1999 due to a slight
increase in the yield in investments as rates have increased slightly.
Interest income on federal funds sold decreased $113,905 or 18.9% due to
lower average balances invested.
Total interest expense decreased 20% or $131,134 from 1998 to 1999.
The largest component of total interest expense is interest expense on
deposits, which decreased $117,482 or 1.9% from 1998 to 1999 due to a
rate decrease that offset growth in deposits. The average rate paid on
deposits was 4.82%, 5.27% and 5.10% in 1999, 1998 and 1997,
respectively.
The allowance for possible loan losses is established through
charges to expense in the form of a provision for loan losses. The
provision for loan losses was $503,000 and $286,000, respectively, for
the years ended December 31, 1999 and 1998. The provision in 1999
reflects replenishing the allowance for loan losses to cover net charge-
offs of $432,472, plus providing for the 15.10% increase in total loans
outstanding. The allowance for loan losses to total loans outstanding
is 1.64% at December 31, 1999. Net charge-offs to average loans are
.25% for 1999 as compared to 0.12% for 1998.
The allowance for loan losses is based on an in-depth analysis of
the loan portfolio. Specifically included in that analysis are the
following types of loans: loans determined to be of a material amount,
loans commented on by regulatory authorities, loans commented on by
internal and external auditors, loans past due more than 60 days, and
36
loans on a nonaccrual status. The allowance for loan losses is not
allocated to specific credit risk, but rather to the overall loan
portfolio as the individual banks are relatively small and can be looked
at as a whole. The overall loan portfolio remains of good quality,
however, some deterioration has been noted in the economy which reflects
on the loan portfolio. The Banks have made provisions where necessary
to reflect the overall quality of loans.
Non-Interest Income
Non-interest income for 1999 increased by $392,788 or 20.6% over
1998, as compared to an increase in 1998 of $335,546 or 21.4% over 1997.
These increases generally resulted from increased activity in data
processing, financial services and service charges on deposits. A
significant contributor to non-interest income is service charges on
deposit accounts which increased 24.2%. Management views deposit fee
income as critical influence on profitability. Periodic monitoring of
competitive fee schedules and examination of alternative opportunities
ensure that the Company realizes the maximum contribution to profits
from this area.
Non-Interest Expense
Non-interest expenses totaled $6,905,856 in 1999 as compared to
$6,386,678 in 1998. This represented an 8% increase from 1998 to 1999,
and a 6% increase from 1997 to 1998. The overall increases during the
year were to growth in all geographic markets, which is evidenced by the
growth in deposits of $4.7% from 1998 to 1999 and 11% from 1997 to 1998.
Salaries and other personnel expenses, which comprised 54% of total non-
interest expenses for 1999, were up $410,409 or 12.5% over 1998 due to
normal salary increases, benefit cost increases, and increased personnel
due to one new branch. During 1998 and 1997, salaries and other
personnel expenses accounted for 51% and 50% of total other operating
expenses, respectively.
Combined net occupancy and furniture and equipment expenses
increased $26,489, or 2.3% from 1998 to 1999, as compared to an increase
of $102,423, or 9.8% in 1998.
Income Taxes
Income tax expense totaled $1,017,056 in 1999 as compared to
$830,744 in 1998. The changes in net income tax expense for the years
were due to changes in taxable income for each respective year. Taxable
income is affected by net income, income on tax exempt investment
securities and loans, and the provision for loan los