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 in Metter, Georgia. On January 11, 1996, the transaction was completed. Prior to year end and before final agreement to acquire Pineland Bank was reached, South Banking had acquired rights to approximately 39% of Pineland Bank.
The Banks
The Banks operate full service banking business in Bacon, Appling 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, 1994, 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 279th and 305th largest Banks among 386 banks in Georgia and Citizens Bank, one of five banking operations in Camden County, ranked the 366th largest bank among 386 banks in Georgia, Sheshunoff's Banks of Georgia (1995 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. Citizens 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, 1995, 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.
The Banks are members through its correspondent bank of the AVAIL network. AVAIL is an organization that has established a network of automated teller machines inside the state of Georgia.
Employees
On December 31, 1995, the Registrant and its subsidiaries had 62 full-time and 10 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 and Appling 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.
Monetary Policies
The results of operations of the Banks, and therefore of the Registrant, are affected by credit policies of monetary authorities, particularly the Board of Governors of the Federal Reserve System (the "Board of Governors"), even though the Banks are not members of the Federal Reserve.
The instruments of monetary policy employed by the Federal Reserve include open market operations in U. S. Government securities and changes in the discount rate on member bank borrowing changes in reserve requirements against member bank deposits. In view of changing conditions in the national economy and in the money markets, as well as the effect of action by monetary and fiscal authorities, including the Federal Reserve System, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Banks.
Supervision and Regulations
The Registrant is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "Act"), and is required to register as such with the Board of Governors. The Registrant is required to file with the Board of Governors an annual report and such other information as may be required to keep the Board of Governors informed with respect to the Registrant's compliance with the provisions of the Act. The Board of Governors may also make examinations of the Registrant and its subsidiaries from time to time.
The Act requires every bank holding company to obtain the prior approval of the Board of Governors before it may acquire substantially all the assets of any bank or ownership or control of any voting shares of any bank, if, after such acquisition, it would own or control, directly or indirectly, more than five percent of the voting shares of such bank. In no case, however, may the Board of Governors approve the acquisition by the Registrant of the voting shares of any bank located outside Georgia, unless such acquisition is specifically authorized by the laws of the state in which the bank to be acquired is located.
In addition, a bank holding company is generally prohibited from engaging in or acquiring direct or indirect control of voting shares of any company engaged in nonbanking activities. One of the principal exceptions to this prohibition is for activities found by the Board of Governors, by order or regulation, to be so closely related to banking, managing or controlling banks as to be a proper incident thereto. Some of the activities that the Board of Governors has determined by regulation to be closely related to banking are: making or servicing loans and certain types of leases; performing certain data processing services; acting as fiduciary, investment or financial advisor; making investments in corporations or projects designed primarily to promote community welfare.
In January, 1989, the Board of Governors issued final regulations which implement risk-based rules for assessing bank and bank holding company capital adequacy. The regulations revise the definition of capital and establish minimum capital standards in relation to assets and off-balance sheet exposures, as adjusted for credit risk.
Risk based capital regulations were adopted by banking regulations in 1989. These new capital adequacy standards were phased in and became fully effective on December 31, 1992. Risk based capital standards generally measure the amount of a bank's required capital in relation to the degree of risk perceived in its assets and its off-balance sheet exposure. The concepts of primary and secondary capital were replaced by Tier 1 and Tier 2 capital and a new leverage ratio requirement was added. The amount of risk-based capital required is calculated by multiplying the recorded amount of each asset category and each off- balance sheet exposure item by the appropriate risk-weighting percentage. Risk adjusted total assets is the total of these risk- weighted categories. Total required capital is the product of the risk- adjusted total assets multiplied by the specific capital percentage (i.e. 8% at December 31, 1995).
Capital for purposes of the risk-based capital calculation is divided into two categories:
(1) Tier 1 capital includes common shareholder equity, noncumulative perpetual preferred stock and minority interest; goodwill is subtracted.
(2) Tier 2 capital includes the allowance for loan and lease losses, qualifying perpetual preferred stock, hybrid capital instruments, term-subordinated debt and intermediate term preferred stock. The allowance and loan losses may only be included up to an amount equal to 1.25% of risk adjusted total assets. Term subordinated debt and intermediate term preferred stock may be included to a maximum of 50% of Tier 1 capital. Finally Tier 2 capital may not exceed Tier 1 capital.
Total qualifying capital, for purposes of risk-based capital calculation, is the total of Tier 1 capital and Tier 2 capital, less reciprocal holdings of bank capital instruments and less investments in unconsolidated subsidiaries.
In June 1992, the Federal Reserve Board released a proposal to add a measure of interest rate risk to the determination of supervisory capital adequacy. Under the proposal, items reported on a banks balance sheet and off-balance sheet would be reported according to maturity. A bank's reported position would be multiplied by duration based risk factions and weighted according to rate sensitivity. The objective of this computer proposal is to determine the sensitivity of a bank to a 1% change in interest rates.
In addition to risk-based capital, a leverage ratio test must be met. The leverage ratio is the ratio of Tier 1 capital to assets (not risk adjusted). The minimum leverage ratio is 3%.
As of December 31, 1995 the banks were in compliance with these regulations.
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, 1995, the Banks were in compliance with these requirements. In addition, the DBF is likely to compute capital obligations in accordance with the risk-based capital rules while continuing to require a minimum absolute level of capital.
It is not anticipated that such minimum capital requirements will affect the business operations of the Banks. However, the Board, in connection with granting approval for bank holding companies to acquire other banks and bank holding companies or to engage in non-banking activities, requires bank holding companies to maintain tangible capital ratios at approximate peer group levels. This requirement can result in a bank holding company maintaining more capital than it would otherwise maintain. At the present time, South Banking Company's tangible primary capital ratios are equal or above their peer group level.
The laws of Georgia require annual registration with the DBF by all Georgia bank holding companies. Such registration includes information with respect to the financial condition, operations and management of intercompany relationships of the bank holding company and its subsidiaries and related matters. The DBF may also require such other information as is necessary to keep informed as to whether the provisions of Georgia law and the regulations and orders issued thereunder by the DBF have been in compliance with; and the DBF may make examinations of the bank holding company and each bank subsidiary thereof.
The banks are also subject to examination by the DBF and the FDIC. The DBF regulates and monitors all areas of the operations of the banks, including reserves, loans, mortgages, issuances of securities, payment of dividends, interest rates and establishment of branches. Interest and certain other charges collected or contracted for by the Banks are also subject to state usury laws and certain federal laws concerning interest rates. The Banks' deposits are insured by the FDIC up to the maximum permitted by law.
Under present Georgia law, Alma Bank may operate and establish branches only in Bacon County, Georgia, Citizen Bank may operate and establish branches only in Camden County, Georgia and Peoples Bank may operate and establish branches only in Appling County, Georgia. Current legislation has passed that would allow banks to branch statewide subject to certain restriction. This law will become 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.
Recent Legislation
Bills are presently pending before the United States Congress and certain state legislatures and additional bills may be introduced in the future in the Congress and the state legislatures to alter the structure, regulation and competitive relationships of the nation's financial institutions. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which the business of the Banks may be affected thereby.
More recently, the attention of the United States Congress has been focused primarily on the need for resolution of the insolvency of the Federal Savings and Loan Insurance Corporation ("FSLIC"), which insured deposits maintained in most savings and loan associations and savings banks and the need to provide appropriate structural reform to the thrift industry. On August 9, 1989, President Bush signed the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), which is designed to resolve these problems and which, among other matters, fundamentally restructures the supervision and regulation of the thrift industry and creates a special corporation to liquidate insolvent institutions and issue $30 billion in bonds to assist in
financing the cost of resolving failed thrift institutions. Under the legislation, the FSLIC was merged administratively with the FDIC, and the FDIC now regulates the two deposit insurance funds for commercial banks and thrifts. Although the two insurance funds will not be co- mingled, the fees that commercial banks and thrifts would pay to their respective insurance funds will be increased. Within certain limits, assessments may be raised as high as .325% to prevent the insurance funds from declining. The FDIC will have the authority to revise the premium for institutions in either fund in certain circumstances. In addition to the insurance premium increase provisions, FIRREA also provides for these additional changes with a direct effect on commercial banks and bank holding companies: limits on the use of brokered deposits by capital deficient banks; the acquisition of savings and loan associations by bank holding companies; disclosures of the bank supervisors' assessment of community Reinvestment Act ratings for banks; and an increase in penalties for various bank related crimes both in the forms of fines and sentences. It is difficult to predict the effect of FIRREA on the operations and prospects of banks; however, the increase in deposit insurance premiums paid by the Banks will increase the Banks cost of funds and there can be no assurance that such cost can be passed on to the Banks' customers.
In the 1989 session, the Georgia legislature enacted a bill to authorize the DBF to promulgate regulations providing for increased securities and real estate powers for banks. The legislation does not detail these new powers, leaving the specifics to the DBF's discretion. It is not expected that the DBF will immediately grant significant new powers or that such powers will have a great impact on the Banks.
Effective on July 1, 1985, the Georgia General Assembly adopted legislation that allows bank holding companies located in Georgia to own or control banks in certain other southeastern states and allows bank holding companies in other southeastern states to own or control banks located in Georgia on a reciprocal basis. Effective March 13, 1987, the Georgia State Legislature expanded this reciprocal regional interstate banking area to include the State of Maryland and the District of Columbia. The legislatures of Alabama, the District of Columbia, Florida, Louisiana, Kentucky, Maryland, North Carolina, South Carolina, Tennessee and Virginia have passed regional interstate banking laws which are in effect. The state of Mississippi has approved regional interstate banking effective January 1, 1990 with respect to holding company entry on a reciprocal basis by holding companies located in Georgia. During 1994, the state of Georgia approved a measure to allow nation wide interstate banking. Management of the Banks do not anticipate this new law will have any impact on their operations. Georgia passed state wide branching law in February, 1996 with an efective date of July 1, 1996. This will allow banks to cross county lines and establish branches. It is anticipated that increased competition will occur as a result.
Federal Deposit Insurance Corporation Improvement Act of 1991
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA") became law. While the FDICIA primarily addressed additional sources of funding for the Bank Insurance Fund, which insures the deposits of commercial banks and savings banks, it also imposed a number of new mandatory supervisory measures on savings associations and banks.
Standards for Safety and Soundness FDICIA requires the federal bank regulatory agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating to: (i) internal controls, information systems and audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi) compensation, fees and benefits. The compensation standards would prohibit employment contracts, compensation or benefit arrangements, stock option plans, fee arrangements or other compensatory arrangements that would provide excessive compensation, fees or benefits or could lead to material financial loss. In addition, the federal banking regulatory agencies would be required to prescribe by regulation standards specifying: (i) maximum classified assets-to-capital ratios; (ii) minimum earnings sufficient to absorb losses without impairing capital; and (iii) to the extent feasible, a minimum ratio of market value to book value for publicly traded shares of depository institutions and depository institution holding companies. Final regulations implementing these standards must be promulgated by July 1, 1993 and effective by January 1, 1994. The federal banking agencies recently adopted an advance notice of proposed rulemaking regarding implementation of these standards. A recently enacted law amends certain FDICIA provisions regarding compensation standards and several pending legislative bills would amend certain other requirements of this section of FDICIA. Thus, it is uncertain whether such provisions will ever be implemented or, if implemented by the banking agencies, it is uncertain as to how the standards will be applied.
Financial Management Requirements FDICIA also imposes new financial reporting requirements on all depository institutions with assets of more than $150 million, their management and their independent auditors and establishes new rules for the composition, duties and authority of such institutions' audit committees and boards of directors, effective in fiscal years beginning after December 31, 1992. Among other things, all such depository institutions will be required to prepare and make available to the public annual reports on their financial condition and management, including statements of managements' responsibility for the financial statements, internal controls and compliance with certain federal banking laws and regulations relating to safety and soundness and an assessment of the institutions' compliance with such internal controls, laws and regulations. The institution's independent public accountants are required to attest to these management assessments. Each institution also is required to have an audit committee composed of independent directors. Audit committees of large institutions (to be defined by the FDIC) would have the ability to engage their own, independent legal counsel.
Prompt Corrective Regulatory Action FDICIA establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, which became effective December 19, 1992, the banking regulators are required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of
capitalization. Generally, subject to a narrow exception, the FDICIA requires the banking regulator to appoint a receiver or conservator for an institution that is critically undercapitalized. The FDICIA authorizes the banking regulators to specify the ratio of tangible capital to assets at which an institution becomes critically undercapitalized and requires that ratio be no less than 2% of assets.
Other Deposit Insurance Reforms FDICIA amended the Federal Deposit Insurance Act ("FDI Act") to prohibit insured depository institutions that are not well-capitalized from accepting brokered deposits unless a waiver has been obtained from the FDIC. Deposit brokers will be required to register with the FDIC.
FDICIA also directs the FDIC to establish a risk-based assessment system for deposit insurance to become effective no later than January 1, 1994. FDICIA provides that, under the risk-based system established by the FDIC, deposit insurance assessments paid by a financial institution are to be based on the probability that the deposit insurance funds (i.e. BIF or SAIF) will incur a loss with respect to the insured depository institution. The FDIC recently established a transitional risk-based insurance assessment system which was effective for the semi-annual assessment period beginning January 1, 1993 and has proposed a risk-based system to replace the transitional system. Furthermore, FDICIA authorizes the FDIC to privately reinsure up to 10% of its risk of loss with respect to an institution and base its assessment on the cost of such reinsurance.
The Tax Reform Act of 1986
The Tax Reform Act of 1986 (the "TRA") contains several provisions affecting banks and financial institutions, including new provisions governing tax rates, depreciation, investment tax credits, bad debt reserves, interest expense allocable to tax-exempt obligations, net operating losses and a new alternative minimum tax ("AMT"). The TRA reduced the maximum corporate income tax rate from 46% to 34% in 1988 when the provision was fully effective. A surcharge of 5% will also apply to income in excess of $100,000, up to a maximum surcharge of $11,750.
For tax years beginning after 1986, the TRA imposes an AMT on corporations. The tax is computed by applying a 20% tax rate to the sum of (1) taxable income, (2) certain preference items and (3) 50% of the excess of book income before taxes over the sum of (1) and (2). For a financial institution, the principal preference items result from bad debt deductions, accelerated depreciation and interest on certain private purpose tax exempt bonds. The taxpayer is then required to pay the greater of its regular tax or the AMT. South does not expect to incur an alternative minimum tax liability based on its current profitability and investment portfolio. If the AMT is incurred as a result of deferral preferences, a credit is generated which may be used against regular tax in subsequent years.
The TRA provides for disallowances of 100% of any otherwise allowable interest expense deduction that is deemed allocable to tax- exempt obligations acquired after August 7, 1986, except for certain small municipal issuers. As a result, the Banks expect to primarily invest in taxable investment securities.
Financial institutions with assets in excess of $500 million are no longer permitted to use the reserve method for accounting for loan losses for tax purposes. South does not exceed this asset size and, accordingly, can continue to use the reserve method.
The TRA also eliminated investment tax credits after December 31, 1985. As investment in premises and equipment is not significant to the assets of South, the elimination of investment tax credits is not perceived to materially affect the tax provision expense of South.
The foregoing is only a summary of certain Federal income tax changes caused by the TRA and is qualified in its entirety by reference to the TRA. It does not include all aspects of the TRA as it relates to financial institutions or state, local or other tax laws.
Omnibus Budget Reconciliation Act of 1993
The Omnibus Budget Reconciliation Act of 1993 (the "Tax Act") continues the recent legislation affecting banks and financial institution. The Tax Act was designed as a deficit reduction with similarities to the 1990 Act which was also designed to slice $500 billion from the deficit.
Generally the Tax Act affects all corporations as to a new 35% tax rate for income in excess of 10 million and the maximum corporate capital gains rate was increased to 35%. The Registrant currently will not be affected by the change due to the income level of the Registrant. Various other provisions would restrict certain deductions and/or change the treatment of certain transactions.
Provisions that especially affect financial institutions included market to market Accounting for Securities. The Tax Act requires that securities that are inventory in the hands of a dealer be inventoried at fair market value (market to market). For the purposes of these rules, "securities" and a "dealer" are defined more broadly than under prior law. A "dealer" is any person who either regularly purchases securities from or sells securities to, customers in the ordinary course of business or regularly offers to enter into, assume, offset, assign or otherwise terminate positions in securities with customers in the ordinary course of a trade or business. Banks have been determined to qualify as a dealer under the new definitions. Unless securities are properly identified as held for investment all inventory will be required to be market to market.
A second item affecting financial institutions is the treatment of tax-free FSLIC Assistance that was credited on or after March 4, 1991 in connection with the disposition of "covered" assets. Financial institutions are required to treat that assistance as compensation for any losses claimed on dispositions or charge-offs of these assets, effectively denying them any tax loss for those assets. This provision should not have any effect on the Registrant.
The third item affecting financial institutions is the amortization of intangible assets effective for purchase after the enactment (August 10, 1993). Taxpayers are required to amortize most intangibles (including goodwill, core deposits, going concern value and covenant not to compete) used in a trade or business over a 15 year period. Exception to this rule includes mortgage service rights. The provision will have significant impact on any future purchases the holding company may decide to undertake.
Some of the other provisions such as eliminating deductions for lobbying expense and club dues will impact the taxes payable by the Registrant.
Reigle Community Development and Regulatory Improvement Act of 1994
The Reigle Community Development and Regulatory Improvement Act of 1994 (CDRIA) was enacted in September, 1994. CDRIA is divided into five titles:
Title I. Community Development and Consumer Protection Title II. Small Business Capital Formation Title III. Paperwork Reduction and Regulatory Improvements Title IV. Money Laundering Title V. National Flood Insurance Refund
Some of the more prominent provisions of this legislation included, consideration of regulatory burden in the rule making process, streamlining of regulatory requirements, call report simplification and repeal of publication requirements, regulatory appeals reform, truth in savings act exemption for business accounts, guidelines for examiners, expedited procedures for forming a bank holding company and holding commpany audit requirements. Management has determined that this act will have minimal effect on South Banking Company.
Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994
The Reigle-Neal Interstate Bank and Branching Efficiency Act of 1994 expands the rights of bank and bank holding companies to own out- of-state banks and branches. After September 29, 1995, bank holding companies will be allowed to acquire banks in any state without regard to state law. States will be allowed to prevent holding companies from acquiring newly opened banks. (e.g., those in existance for less than 5 years).
Banks will also be able to merge with out-of-state banks and establish out-of-state branches effective June 1, 1997. States, however, have the authority to prohibit out-of-state banks from opening branches.
Recent and Proposed Changes in Accounting Rules
The Financial Accounting Standards Board ("FASB") recently adopted or issued proposals and guidelines which may have a significant impact on the accounting practices of commercial enterprises in general and financial institutions in particular.
Effective for years beginning after December 15, 1993 the Registrant was required to implement FASB 115 "Accounting for Certain Investments in Debt and Equity Securities". This FASB requires securities to be classified in one of three categories:
(1) Held to maturity (2) Trading securities (3) Securities available for sale
The Banks were required to classify all securities into one of the three categories. The Banks currently do not have trading accounts and do not anticipate classifying any securities into this category. Once the securities are classified FASB 115 restricts the transfer between classification except under rare circumstances. The affect on the banks will primarily be in securities classified available for sale. FASB 115 requires these securities to be market to market with unrealized gains and losses reported as a separate amount in stockholders equity section and excluded from earnings until realized. Deferred taxes will be provided in accordance with FASB 109 on the unrealized gains and losses.
FASB 114 became effective for years beginning after December 15, 1994. FASB 114 "Accounting by Creditors for Impairment of a Loan" specifies how allowance for credit losses related to certain loans should be determined. When the FASB became effective, the Banks were required to modify the treatment of impaired loans to discount expected cash flows and record a valuation allowance. The Banks did not have any material change as a result of this FASB.
In February 1992, the FASB issued Statement of Financial Accounting Standards SFAS No. 109 relating to the method of accounting for deferred income taxes. Implementation of SFAS 109 is required for fiscal years beginning after December 15, 1992. SFAS No. 109 requires companies to take into account changes in tax rates when valuing the deferred income tax amounts recorded on the balance sheet. The statement also requires that deferred taxes be provided for all temporary differences between financial statement and tax income in addition to the timing differences in the recognition of income for financial statement and tax purposes which were covered by prior accounting rules.
In December 1990, FASB issued SFAS No. 106, "Employer's Accounting for Post-Retirement Benefits Other Than Pensions". SFAS No. 106 focuses principally on post-retirement health care benefits and will significantly change the prevalent current practice of accounting for post-retirement benefits on a cash basis to requiring accrual, during the years that the employee renders the necessary service, of the expected cost of providing those benefits to an employee and the employee's beneficiaries and covered dependents. SFAS No. 106 is effective for fiscal years beginning after December 15, 1992, and adoption is required on a prospective basis. Management believes that the provisions of SFAS No. 106 will not have a significant effect on future results of operations.
In December 1991, the FASB issued SFAS No. 107, "Disclosures About Fair Value of Financial Investments". SFAS No. 107 requires all entities to disclose, in financial statements or the notes thereto, the
fair value of financial instruments, both assets and liabilities, recognized and not recognized, in the statement of financial condition, for which it is practicable to estimate fair value. SFAS No. 107 is effective for financial statements issued for years ending after December 15, 1992, except for entities with less than $150 million in total assets, for which it is effective in 1996. Substantially all of the Bank's assets and liabilities are financial instruments and, as a result, SFAS No. 107 requires the fair value of such assets and liabilities to be disclosed. Because such assets and liabilities are monetary in nature, their fair values may fluctuate significantly over time. The provisions of SFAS No. 107 will require certain disclosures on the part of management, but will not have a significant effect on future results of operations.
In April 1992, the Accounting Standards Division of the American Institute of Certified Public Accountants issued Statement of Position 92-3 ("SOP 92-3") "Accounting for Foreclosed Assets". SOP 92-3 requires all entities to value foreclosed assets held for sale at the lower of (i) fair value minus estimated costs to sell or (ii) cost. The bank is in compliance with this statement of position.
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, 1995 1994 1993 (In Thousands) ASSETS Cash and due from banks $ 4,348 $ 3,749 $ 4,788 Cash in bank - interest bearing 827 1,538 2,377 Taxable investment securities 8,518 8,222 10,610 Nontaxable investment securities 1,055 1,619 2,011 Others 273 - -
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1995 1994 1993 (In Thousands) ASSETS (con't) Federal funds sold and securities purchased under agreements to resell $ 8,023 $ 7,883 $ 5,655 Loans - net 60,641 54,042 48,898 Other assets 5,968 5,700 5,560
Total Assets $ 89,653 $ 82,753 $ 79,899
LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand - non-interest bearing $ 13,446 $ 12,965 $ 11,701 Demand - interest bearing 15,211 17,378 17,923 Savings 6,675 7,132 6,423 Time 42,838 34,647 34,005 Total Deposits $ 78,170 $ 72,122 $ 70,052 Federal funds purchased 7 167 - Other borrowed funds 1,545 1,186 762 Other liabilities 408 468 1,128
Total Liabilities $ 80,130 $ 73,943 $ 71,942
Shareholders' equity $ 9,523 $ 8,810 $ 7,957
Total Liabilities and Shareholders' Equity $ 89,653 $ 82,753 $ 79,899
B. Interest Rates. The tables below show for the periods indicated the average amount outstanding for major categories of interest earning assets and interest bearing liabilities; the average interest rates earned or paid; the interest income and expense earned or paid thereon; net interest earnings and the net yield on interest-earning assets. (1)
Year Ended December 31, 1995 Average Yield/ Balance Interest Rate (In Thousands) ASSETS Cash in banks - interest bearing $ 827 $ 41 4.96% Loans 60,641 6,996 11.54 Taxable investments 8,518 513 6.02 Non-taxable investments 1,055 59 5.59 Other 273 10 3.66 Federal funds sold and securities purchased under agreements to resell 8,023 472 5.88
Total Interest-bearing assets $ 79,337 $ 8,091 10.20%
Year Ended December 31, 1995 Average Yield/ Balance Interest Rate (In Thousands) LIABILITIES Demand - interest bearing $ 15,211 $ 407 2.68% Savings deposits 6,675 182 2.73 Other time deposits 42,838 2,580 6.02 Other short term borrowing 1,545 144 9.32 Federal funds purchased 7 1 N/A
Total Interest-Bearing Liabilities $ 66,276 $ 3,314 5.00%
Net interest earnings $ 4,777
Net yield on interest earning assets 5.20%
Year Ended December 31, 1994 Average Yield/ Balance Interest Rate (In Thousands) ASSETS Cash in banks - interest bearing $ 1,538 $ 65 4.22% Loans 54,042 5,666 10.48 Taxable investments 8,222 437 5.32 Non-taxable investments 1,619 94 5.81 Federal funds sold and securities purchased under agreements to resell 7,883 306 3.88
Total Interest-bearing assets $ 73,304 $ 6,568 8.96%
LIABILITIES Demand - interest bearing $ 17,378 $ 492 2.83% Savings deposits 7,132 197 2.76 Other time deposits 34,647 1,475 4.26 Other short term borrowing 1,186 101 8.52 Federal funds purchased 167 4 2.40
Total Interest-Bearing Liabilities $ 60,510 $ 2,269 3.75%
Net interest earnings $ 4,299
Net yield on interest earning assets 5.21%
Year Ended December 31, 1993 Average Yield/ Balance Interest Rate (In Thousands) ASSETS Cash in banks - interest bearing $ 2,377 $ 96 4.04% Loans 48,898 4,973 10.17 Taxable investments 10,610 616 5.81 Non-taxable investments 2,011 133 6.61 Federal funds sold and securities purchased under agreements to resell 5,655 164 2.90
Total Interest-bearing assets $ 69,551 $ 5,982 8.60%
LIABILITIES Demand - interest bearing $ 17,923 $ 485 2.70% Savings deposits 6,423 178 2.77 Other time deposits 34,005 1,423 4.18 Other short term borrowing 762 49 6.43 Federal funds purchased - - -
Total Interest-Bearing Liabilities $ 59,113 $ 2,135 3.61%
Net interest earnings $ 3,847
Net yield on interest earning assets 4.99%
(1) Note: Loan fees are included for rate calculation purposes. Loan fees included in interest amounted to approximately $464,456 in 1995, $521,000 in 1994 and $345,000 in 1993. 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.
1995 compared to 1994 Increase (Decrease) Due to (1) Volume Rate Change (In Thousands) Interest earned on: Cash in banks - interest bearing $( 30) $ 6 $( 24) Loans 690 640 1,330 Taxable investments 16 60 76 Nontaxable investments ( 33) ( 2) ( 35) Other 10 - 10 Federal funds sold and securities purchased under agreement to resell 6 160 166
Total Interest-Earning Assets $ 659 $ 864 $ 1,523
1995 compared to 1994 (con't) Increase (Decrease) Due to (1) Volume Rate Change (In Thousands) Interest paid on: NOW deposits $( 61) $( 24) $( 85) Savings deposits ( 13) ( 2) ( 15) Other time deposits 349 756 1,105 Other borrowing 30 13 43 Federal funds purchased ( 3) - ( 3)
Total Interest-bearing Liabilities $ 302 $ 743 $ 1,045
Net Interest Earnings $ 357 $ 121 $ 478
(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.
1994 compared to 1993 Increase (Decrease) Due to (1) Volume Rate Change (In Thousands) Interest earned on: Cash in banks - interest bearing $( 33) $ 2 $( 31) Loans 523 170 693 Taxable investments ( 138) ( 40) ( 178) Nontaxable investments ( 23) ( 16) ( 39) Federal funds sold and securities purchased under agreement to resell 65 76 141
Total Interest-Earning Assets $ 394 $ 192 $ 586
Interest paid on: NOW deposits $( 15) $ 22 $ 7 Savings deposits 19 - 19 Other time deposits 26 26 52 Other borrowing 27 25 52 Federal funds purchased 4 - 4
Total Interest-bearing Liabilities $ 61 $ 73 $ 134
Net Interest Earnings $ 333 $ 119 $ 452
(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.
1993 compared to 1992 Increase (Decrease) Due to (1) Volume Rate Change (In Thousands) Interest earned on: Cash in banks - interest bearing $ 12 $( 22) $( 10) Loans 46 ( 415) ( 369) Taxable investments 56 ( 99) ( 43) Nontaxable investments ( 11) ( 8) ( 19) Federal funds sold and securities purchased under agreement to resell ( 17) ( 28) ( 45)
Total Interest-Earning Assets $ 86 $( 572) $( 486)
Interest paid on: NOW deposits $ 145 $( 135) $ 10 Savings deposits 32 ( 26) 6 Other time deposits ( 344) ( 437) ( 781) Other short-term borrowing ( 6) ( 9) ( 15) Federal funds purchased - - -
Total Interest-bearing Liabilities $( 173) $( 607) $( 780)
Net Interest Earnings $ 259 $ 35 $ 294
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, 1995 1994 1993 (In Thousands) U. S. Treasury and other U. S. government agencies and corporations $ 7,634 $ 5,942 $ 6,750 State and political subdivisions (domestic) 1,921 1,126 1,871 Mortgage backed securities 1,897 2,065 1,897
Totals $ 11,452 $ 9,133 $ 10,518
B. Maturities The amounts of investment securities in each category as of December 31, 1995 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 Yields Maturity: One year or less $ 2,248 5.63% $ - -% $ - - After one year through five years 4,680 5.92 626 7.00 1,158 6.86 After five years through ten years 706 7.66 758 7.03 - - After ten years - - 537 8.65 739 7.38
Totals $ 7,634 6.00% $ 1,921 7.47% $ 1,897 7.06%
(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, 1995 1994 1993 (In Thousands) Commercial, financial and agricultural $ 14,592 $ 13,229 $ 7,904 Real estate - mortgage 36,426 32,792 26,883 Real estate - construction 1,767 2,347 1,039 Installments 8,932 8,834 14,967 $ 61,717 $ 57,202 $ 50,793 Less - unearned income 82 59 73 Reserve for possible losses 994 975 912
Total Loans $ 60,641 $ 56,168 $ 49,808
B. Maturities and Sensitivity to Changes in Interest Rates The amount of total loans by category (excluding real estate mortgage and installment loans) outstanding as of December 31, 1995 which, based on remaining repayments of principal, are due in (1) 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 5 Over or Less Years 5 years Total (In Thousands) Types of Loans Commercial, financial and agricultural $ N/A $ N/A $ N/A $ N/A Real estate construction $ 1,767 N/A N/A N/A
Total loans due after one year with: Predetermined interest rate N/A Floating interest rate N/A
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, 1995 1994 1993 (In Thousands) Loans accounted for on a non-accrual basis $ 46 $ 56 $ 100
Loans contractually past due ninety days or more as to interest or principal payments 276 33 58
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 - - -
Loans now current about which there are serious doubts as to the ability of the borrower to comply with present loan repayment terms - - -
Loans are placed on non-accrual basis when loans are past due ninety days or more. Management can elect not to place loans on non- accrual status if net realizable value of collateral is sufficient to cover the balance and accrued interest.
D. Commitments and Lines of Credit The banks provide commitments and lines of credits to their most credit worthy customers only. Commitments are for short terms, usually not exceeding 30 days, and are provided for a fee of 1% of the amount committed. Lines of credit are for periods extending up to one year. No fee is usually charged with respect to the unused portion of a line of credit. Interest rates on loans made pursuant to commitments or under lines of credit are deter- mined at the time that the commitment is made or line is established.
E. Rate Sensitivity Analysis SOUTH BANKING COMPANY DECEMBER 31, 1995
+-----Interest Sensitive
0 - 0 - 0 - 90 Days 180 Days 365 Days (Thousands of Earning Assets: Loans $ 25,984 $ 30,168 $ 37,948 Investment securities 2,017 2,498 4,680 Interest bearing deposits 398 398 795 Federal funds sold and securities purchased under agreement to resell 13,335 13,335 13,335
Total Earning Assets $ 41,734 $ 46,399 $ 56,758
Supporting Sources of Fund Savings $ 6,403 $ 6,403 $ 6,403 Money market and NOW 17,098 17,098 17,098 Other time deposits 11,297 19,704 31,276 CD's - $100,000 or more 2,243 4,183 7,322
Total Interest Bearing Deposits $ 37,041 $ 47,388 $ 62,099
Demand deposits and other funds supporting earning assets - non interest earning $ - $ - $ -
Total Supporting Sources of funds $ 37,041 $ 47,388 $ 62,099
Interest Sensitive - interest earning assets less interest bearing liabilities $ 4,693 $( 989) $( 5,341
Ratio of interest earning assets to interest bearing liabilities 1.13% .98% .91
--------+ 0 - 5 yrs 0 - 24 2 years Months Total Dollars)
$ 44,953 $ 55,336 $ 61,717 6,082 9,347 11,452 795 795 795
13,335 13,335 13,335
$ 65,165 $ 78,813 $ 87,299
$ 6,403 $ 6,403 $ 6,403 17,098 17,098 17,098 35,824 37,526 37,526 8,656 9,372 9,372
$ 67,981 $ 70,399 $ 70,399
$ - $ - $ 14,145
$ 67,981 $ 70,399 $ 84,544
$( 2,816) $ 8,414 $ 2,755
.96% 1.12% 1.03%
The rate sensitivity analysis table is designed to demonstrate South's sensitivity to changes in interest rates by setting forth in comparative form the repricing maturities of South's assets and liabilities for the period shown. A ratio of greater than 1.0 times interest earnings assets to interest bearing liabilities indicates that an increase in interest rates will generally result in an increase in net income for South and a decrease in interest rates will result in a decrease in net income. A ratio of less than 1.0 times earnings assets to interest-bearing liabilities indicates that a decrease in interest rates will generally result in a increase in net income for South and an increase in interest rates will result in an decrease in net income.
IV. Summary of Loan Loss Experience
The following table summarizes loan balances at the end of each period and average balances during the year for each category; changes in the reverse for possible loan losses arising from loans charged off and recoveries on loans previously charged off; additions to the reserve which have been charged to operating expense; and the ratio of net charge-offs during the period to average loans.
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1995 1994 1993 (In Thousands) A. Average amount of loans outstanding $ 60,641 $ 54,042 $ 48,898
B. Balance of reserve for possible loan losses at beginning of period $ 975 $ 912 $ 738
C. Loans charged off: Commercial, financial and agricultural $ 45 $ 53 $ 26 Real estate - mortgage - 16 9 Installments 144 24 48
$ 189 $ 93 $ 83 D. Recoveries of loans previously charged off: Commercial, financial and agricultural $ 7 $ 39 $ 36 Real estate 46 6 63 Installment 93 57 40
$ 146 $ 102 $ 139 E. Net loans charged off during period $ 43 $( 9) $( 56) Additions to reserve charged to operating expense during period (1) $ 62 $ 54 $ 118
F. Balance of reserve for possible loan losses at end of period $ 994 $ 975 $ 912
G. Ratio of net loans charged off during the period to average loans outstanding .070 ( .002) ( .01)
(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 bases of a review of the entire portfolio. The anticipated loan losses for the coming year are expected to be less than prior years. 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, 1995 1994 1993 (In Thousands) Demand deposits $ 13,446 $ 12,965 $ 11,701 NOW deposits 15,211 17,378 17,923 Savings deposits 6,675 7,132 6,423 Time certificates of deposits 42,838 34,647 34,005
Total Deposits $ 78,170 $ 72,122 $ 70,052
B. The amounts of time certificates of deposit issued in amounts of $100,000 or more as of December 31, 1995 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 of less $ 2,243 Over three through six months 1,940 Over six through twelve months 3,139 Over twelve months 2,050
Total $ 9,372
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, 1995 1994 1993 Return on assets (1) 1.28% 1.19% 1.16% Return on equity (2) 12.08 11.22 11.66 Dividend payout ratio (3) 19.37 22.54 24.23 Equity to assets ratio (4) 10.62 10.65 9.96
VI. Return on Assets and Shareholders' Equity (con't)
(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.

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 Bank. The Bank does not have branches.
Item 3.

Item 3. Legal Proceedings
Neither the Registrant or its subsidiaries are parties to, nor is any of their property the subject of, any material pending legal proceedings, other than ordinary routine proceedings incidental to the business of the Banks, nor to the knowledge of the management of the Registrant are any such proceedings contemplated or threatened against it or its subsidiaries.
Item 4.

Item 4. Submission of Matters to a vote of Security Holders
Note applicable.
Part II.
Item 5.

Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters
(a) There currently is no public market for the common stock of the Registrant.
(b) As of March 1, 1996 there were approximately 481 holders of record of the Registrant's common stock.
(c) The Registrant paid an annual dividend on its common stock of $.55 per share for a total of $222,906 for fiscal 1995.
Item 6.

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 and the selected financial data presented elsewhere in this report for an understanding of the following discussion and analysis.
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 $97,174,748 at year end 1995 from $84,476,527 at year end 1994. The increase totaled $12,698,221 or approximately 15.03% which compared to a increase rate of 7.05% for 1994. The increase in growth was attributable to improvement in the local economies and South maintaining competitive rates for deposits as interest rates began to rise. South loan demand was very strong allowing South to become more active in the higher paying certificates of deposits.
Loan demand increased during the current year as the continuing improvement in the economy maintained the confidence level of customers to a point where business activity has increased. Net loans increased to $60,641,359 in 1995 for an increase of $4,472,899 or 7.96% compared to an increase in 1994 of $6,360,363. The Banks have made an effort to retain quality loans since loans are the highest yielding assets of the Bank.
South's investment portfolio, including certificate of deposits in other banks, increased to $12,246,850 from $10,401,190, an increase of $1,845,660 compared to a decrease of $2,407,361 during 1994. Federal funds purchased increased from $8,655,000 in 1994 to $13,335,000 in 1995. The change in the investment portfolio and federal funds sold is attributable to South's desire to maintain sufficient liquidity to fund higher yielding loans and to South's decision to keep investments at short-terms when rates were low to better position ourselves to take advantage of rising rates. The portfolio of South is primarily short- term securities as South has purchased these securities over the past few years when loan demand declined. As demand increased South was in position to capitalize on the upturn of the economy. Unrealized gain and losses on this portfolio is not material to the statement as South maintains a slight net unrealized gain on the portfolio.
As the primary source of funds, aggregate deposits, increased by $10,761,700 in 1995 and increased by $4,160,468 in 1994 or approximately 14.6% and 5.3%, respectively. However, the change is not consistent with all categories. Non-interest bearing deposits decreased $606,663. The average balance for the year on non-interest bearing deposits increased to $13,446,000 in 1995 compared to $12,965,000 in 1994. This is indicative of the stable core deposits and the improving economy. Interest bearing demand deposits increased substantially to $17,098,343 from $15,350,308 for an increase of $1,748,035. Time deposits accounted for majority of the increase in deposits. Time deposits increased by $10,389,430 or 28.4%. The shifting of deposits within the Banks was predictable due to changing rates and the need for many depositors to seek higher yield for their deposits. The returns are illustrated by the average interest rates on demand deposits which during 1995 decreased from 2.83% to 2.68% on demand accounts and 4.26% to 6.02% on time deposits.
Liquidity
The primary function of asset/liability management is to assure adequate liquidity and maintain an appropriate balance between interest sensitive earning assets and interest bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors desiring to withdraw funds or borrowers requiring assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates.
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 $2,466,182 and federal funds sold with daily maturities amounted to $13,335,000 at year end 1995, an increase from prior years as the deposit growth continues. Maturing loans and certificates of deposits in other banks are other sources of liquidity.
Historically, 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.
South does not have current commitments, demands or uncertainties that would affect its liquidity in a material way. South had a net loan to deposit ratio of 71.7 percent for year end 1995 down from 77.5 percent at year end 1994. The increased liquidity that South managed over the prior three years helped South to be able to fund the loan demand without any liquidity problems.
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 document and it shows the interest sensitivity gaps for five different time intervals as of December 31, 1995. 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 with a manageable position.
Capital Resources
South does not presently have commitments for significant capital expenditures. However, there are regulatory constraints placed on the South's capital.
In January 1989, the Federal Reserve Board released new standards for measuring capital adequacy for U. S. banking organizations. These standards are based on the original risk-based capital requirements first proposed in early 1986 by U. S. bank regulators and then developed jointly by authorities from the twelve leading industrial countries. As a result, the standards are designed to not only provide more risk- responsive capital guidelines for financial institutions in the U. S., but also incorporate a consistent framework for use by financial institutions operating in the major international financial markets.
In general, the standards require banks and bank holding companies to maintain capital based on "risk-adjusted" assets so that categories of assets with potentially higher credit risk will require more capital backing than assets with lower risk. In addition, banks and bank holding companies are required to maintain capital to support, on a risk-adjusted basis, certain off-balance sheet activities such as loan commitments and interest rate swaps.
The Federal Reserve Board standards classify capital into two tiers, referred to as Tier 1 and Tier 2. Tier 1 capital consists of common shareholders' equity, noncumulative and cumulative (BHCs only) perpetual preferred stock and minority interest less goodwill. Tier 2 capital consists of allowance for loan and lease losses, perpetual preferred stock (not included in Tier 1), hybrid capital instruments, term subordinated debt and intermediate-term preferred stock. By December 31, 1992, all banks were required to meet a minimum ratio of 8% of qualifying total capital to risk-adjusted total assets with at least 4% Tier 1 capital. Capital that qualifies as Tier 2 capital is limited to 100% of Tier 1 capital.
Results of Operations 1995 Compared to 1994
Net interest income is an effective measurement of how well management has balanced the South's interest rate sensitive assets and liabilities. Net interest income increased by $477,147 or 11.1% in 1995 and $452,609 or 11.7% in 1994. The primary determinants of the increase were loans and time deposits. As loan demand increased, funds were channeled into higher yielding loans. The increase in loan demand continue to be sufficient to offset the higher paying deposit growth. The shifting of asset and liabilities was necessary to maintain level of net interest income as net interest yield remain constant at 5.20%. With the interest rate currently in the market and South current interest rate gap, South will continue its efforts to channel funds into higher yielding assets. Due to the rate sensitivity gap, South will continue to attempt to improve its current position with a controlled attempt to lengthen its maturity of interest rate sensitive liabilities.
The provision for loan loss was $994,027 in 1995 compared to $974,866 in 1994. The provision for loan losses has been sufficient to increase the allowance for loan losses each year. Management continues to work its loan portfolio to minimize charge-offs and place maximum efforts to collect previously charged off.
Other income increased slightly from the prior year. Service charges decreased slightly in 1995 compared to 1994. This is an indication of the higher balance being maintained by customers as the economy has started to improve. Additionally, a small gain on securities occurred in 1994 as a small number of sales resulted in a small gain. Operations from data center increased as 1995 was the first full operational year. Sales are for one bank not owned by South.
Operating cost grew at a rate of 5.84%. The increases are primarily personnel and equipment related. Increased demands by regulatory agencies have required some additional personnel time and other cost continue to increase. The start up of the data processing center in 1995 contributed to the increased operating cost. 1995 was the first full year of data processing center operation and costs are becomming more manageable than in the prior year of inception. Management expects the center to become more efficient as its operation matures.
Income tax expense was $589,746 in 1995 or 33.89% of net income compared to $405,023 in 1994 or 29.04% of net income. The reduction in tax free municipal bond interest in 1995, as bonds matured or were called, also raised the effective tax rate of South. During the year 1993, FASB 109 was adopted by South with no material effect on its financial statements; however, some adjustments were required.
Results of operations can be measured by various ratio analysis. Two widely recognized performance indicators are the return on average equity and the returns on average assets. South's return on equity increased from 11.22% to 12.08%. The return on assets increased from 1.19% to 1.28%.
Results of Operations 1994 Compared to 1993
Net interest income is an effective measurement of how well management has balanced the South's interest rate sensitive assets and liabilities. Net interest income increased by $452,609 or 11.7% in 1994 and $399,302 or 11.2% in 1993. The primary determinants of the increase were loans and time deposits. As loan demand increased, funds were channeled into higher yielding loans. The increase in loan demand was sufficient to offset the higher paying deposit growth. The shifting of asset and liabilities was necessary to maintain level of net interest income as net interest yield increased to 5.21% from 4.99%. With the interest rate currently in the market and South current interest rate gap, South will continue its efforts to channel funds into higher yielding assets. Due to the rate sensitivity gap, South will attempt to improve its current position with a controlled attempt to lengthen its maturity of interest rate sensitive liabilities.
The provision for loan loss was $974,866 in 1994 compared to $911,931 in 1993. The provision for loan losses has been sufficient to increase the allowance for loan losses each year. During the year 1994, loan loss recoveries exceeded the loan charged off as management continues to work its loan portfolio to minimize charge-offs and place maximum efforts to collect previously charged off.
Other income increased slightly from the prior year. Service charges remained level in 1994 compared to 1993. This is an indication of the higher balance being maintained by customers as the economy has started to improve. Additionally, a small loss on securities occurred in 1993 as early calls and a small number of sales resulted in a small loss.
Operating cost grew at a rate of 9.31%. The increases are primarily personnel, data processing and regulatory in nature. Increased demands by regulatory agencies have required some additional personnel time and FDIC fees and other cost continue to increase. The start up of the data processing center in 1994 contributed to the increased operating cost. Management expects the center to become more efficient as its operation matures.
Income tax expense was $405,023 in 1994 or 29.04% of net income compared to $286,472 in 1993 or 23.6% of net income. In 1993, South recovered previous alternative minimum tax paid in 1991 to reduce the overall tax bite. The reduction in tax free municipal bond interest in 1994, as bonds matured or were called, also raised the effective tax rate of South. During the year 1993, FASB 109 was adopted by South with no material effect on its financial statements; however, some adjustments were required.
Results of operations can be measured by various ratio analysis. Two widely recognized performance indicators are the return on average equity and the returns on average assets. South's return on equity decreased from 11.66% to 11.22%. The return on assets increased from 1.16% to 1.19%. Although these levels are within peer group ranges of some other bank holding companies, management believes that improvement for 1995 is realistic.
Results of Operations 1993 Compared to 1992
Net interest income is an effective measurement of how well management has balanced the South's interest rate sensitive assets and liabilities. Net interest income increased by $399,302 or 11.2% in 1993 and $36,908 or 1.05% in 1992. The primary determinants of the increase were loans and time deposits. As loan demand increased, funds were channeled into higher yielding loans. Management did not solicit high interest deposits and was able to maintain stable cost of funds. The shifting of assets and liabilities was necessary to maintain level of net interest income as net interest yield decreased to 4.99% from 5.17%. With the low interest rate currently in the market and South current interest rate gap, South will continue its efforts to channel funds into higher yielding assets. Due to the rate sensitivity gap, South will attempt to improve its current position with a controlled attempt to lengthen its maturity of interest rate sensitive liabilities.
The provision for loan loss was $911,931 in 1993 compared to $738,578 in 1992. The provision for loan losses has been sufficient to increase the allowance for loan losses each year. During the year 1993, loan loss recoveries exceeded the loan charged off as management continues to work its loan portfolio to minimize charge-offs and place maximum efforts to collect previously charged off.
Other income decreased from the prior year. Service charges were down in 1993 compared to 1992. This is an indication of the higher balance being maintained by customers as economy has started to improve. Additionally, a small loss on securities occurred in 1993 as early calls and a small number of sales resulted in a small loss.
Operating cost grew at a rate of 5.59%. The increases are primarily personnel and regulatory in nature. Increased demands by regulatory agencies have required some additional personnel time and FDIC fees and other cost continue to increase.
Income tax expense was $286,472 in 1993 or 23.6% of net income compared to $281,236 in 1992 or 25.6% of net income. South continued to recover previous alternative minimum tax paid in 1991 to reduce the overall tax bite. During the year 1993, FASB 109 was adopted by South with no material effect on its financial statements; however, some adjustments were required.
Results of operations can be measured by various ratio analysis. Two widely recognized performance indicators are the return on average equity and the returns on average assets. South's return on equity increased from 11.19% to 11.66%. The return on assets increased from 1.03% to 1.16%. Although these levels are within peer group ranges of some other bank holding companies, management believes that improvement for 1994 is realistic.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, accruing loans past due 90 days or more and other real estate, which include 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.
Distribution of Nonperforming Assets 1995 1994 1993 (In Thousands) Non accrual loans $ 66 $ 56 $ 100 Past due 90 days still accruing 276 33 58 Other real estate (ORE) 283 661 500
$ 625 $ 750 $ 658 Nonperforming loans to year end loans .54% .16% 31% Nonperforming assets to year end loan and ORE 1.00% 1.31% 1.28%
The ratio of nonperforming assets has decreased steadily since 1992 until 1995. A slight increase occurred as ORE sales declined and a subsequent foreclosure has increased the ORE in 1994. This decrease is attributed to the sale of ORE and the general improvement of the loan portfolio. Management continues to work on nonperforming assets to further reduce this ratio.
Regulatory Matters
During the year 1995, federal and state regulatory agencies completed asset quality examinations at the South's subsidiary banks. The South's level and classification of identified potential problem loans was not revised significantly as a result of this regulatory examination process.
Examination procedures require individual judgments about a borrower's ability to repay loans, sufficiency of collateral values and the effects of changing economic circumstances. These procedures are similar to those employed by South in determining the adequacy of the allowance for loan losses and in classifying loans. Judgments made by regulatory examiners may differ from those made by management.
Management and the boards of directors of South and affiliates evaluate existing practices and procedures on an ongoing basis. In addition, regulators often make recommendations during the course of their examinations that relate to the operations of South and its affiliates. As a matter of practice, management and the boards of directors of South and its subsidiaries consider such recommendations promptly.
Impact of Inflation and Changing Prices
The majority of assets and liability of a financial institution are monetary in nature; therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity-to-assets ratio. An important effect of this has been the reduction of asset growth to maintain appropriate levels. Another significant effect of inflation is on other expenses, which tend to rise during periods of general inflation.
Management believes the most significant impact on financial results is South's ability to react to changes in interest rates. As discussed previously, management is attempting to maintain an essentially balanced position between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations.
Impact of Accounting Change for Income Taxes and Tax Reform
In February 1992, the FASB issued Statement of Financial Accounting Standards SFAS No. 109 relating to the method of accounting for deferred income taxes. Implementation of SFAS 109 is required for fiscal years beginning after December 15, 1992. SFAS No. 109 requires companies to take into account changes in tax rates when valuing the deferred income tax amounts recorded on the balance sheet. The statement also requires that deferred taxes be provided for all temporary differences between financial statement and tax income in addition to the timing differences in the recognition of income for financial statement and tax purposes which were covered by prior accounting rules.
Item 8.

Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the Registrant and its subsidiaries are included on pages through of this Annual report on Form 10-K.
Consolidated Balance Sheets - December 31, 1995 and 1994
Consolidated Statements of Income - Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 1995, 1994 and 1993
Consolidated Statement of Cash Flow - Year ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Item 9.

Item 9. Disagreement on Accounting and Financial Disclosures
Not applicable.
Part III.
Item 10.

Item 10. Directors and Executive Officers of the Registrant
The Directors and Executive Officers of the Registrant and their respective ages, positions with the Registrant, principal occupation and Common Stock of the Registrant beneficially owned as of March 1, 1995 are as follows: Director (Officer) of # of shares Position with Registrator Owned Registrant of one of Beneficiary & Principal the Banks (Percent of Name (Age) Occupation Since Class)
Paul T. Bennett (40) President, 1978(1)(2) 10,334 Treasurer and (3) ( 2.55%) Director; Vice Chairman and Director, Citizens Bank; Vice Chairman and Director, Peoples State Bank & Trust, Baxley, Georgia; President Peoples Bank, Lyons, Georgia; Director, Banker's Data Services; Director, Alma Exchange Bank and Trust
Olivia Bennett (76) Executive Vice 1969(1)(2) 200,587 President, Secretary (3) ( 49.49%) and Director; Chairman and Director, Alma Bank; Director, Banker's Data Services Chairman of Board, President, Citizens Bank; Director Peoples Bank
Lawrence Bennett (48) President and 1987(1)(2) 3,654 Director, Alma ( .9%) Bank; Director, Banker's Data Services; Director, Peoples Bank, Baxley; Director Peoples Bank, Lyons
Charles Stuckey (48) Director; Executive 1990(3) 200 Vice President, ( .1%) Peoples Bank; Director, Banker's Data Services
Item 10. Directors and Executive Officers of the Registrant (con't)
Director (Officer) of # of shares Position with Registrator Owned Registrant of one of Beneficiary & Principal the Banks (Percent of Name (Age) Occupation Since Class)
James W. Whiddon (51) Director; Executive Vice President and 1989(2) 30 Director, Citizens ( -%) Bank; Director, Banker's Data Services
Kenneth F. Wade (53) Director; Executive 1980(1) 4,779 Vice President, Director ( 1.18%) and Cashier, Alma Bank; Director, Banker's Data Services
(1) Director of Alma Bank (2) Director of Citizens Bank (3) Director of Peoples Bank
Included in shares owned by Olivia Bennett are 175,501 shares owned by Estate of Valene Bennett of which she is the Executrix.
None of the directors are a director of a publicly-held corporation which is required to file reports with the Securities and Exchange Commission.
Each of the Directors and Executive Officers have been engaged in his or her present principal occupation for at least five years. Olivia Bennett is the mother of Paul T. Bennett and Lawrence Bennett. There are no other family relationships between any other Director or Executive Officer. Directors serve until the next annual meeting of shareholders or until their successors are elected and qualified. Officers serve at the pleasure of the Board of Directors.
Item 11.

Item 11. Management Renumeration and Transactions
The following information is given as to the cash and cash equivalent forms of renumeration received by South's CEO.
Item 11. Management Renumeration and Transactions (con't)
Long-Term Compensation Annual Compensation Awards Payouts (A) (B) (C) (D) (E) (F) (G) (H) (I) Other All Name and Annual Restricted Other Principal Compen- Stock Options/ LTIP Compen- Position Year Salary Bonus sation Award SARS # Payouts sation Valene Bennett CEO 1995 $ 72,486 $ - $ 8,985 $ - $ - $ - $ - 1994 83,582 - 11,795 - - - - 1993 80,346 - 11,900 - - - - 1992 75,746 - 11,470 - - - - 1991 72,996 - 9,725 - - - -
Paul T. Bennett CEO 1995 $ 87,566 $ - $ 15,310 $ - $ - $ - $ -
Olivia Bennett Secretary 1995 $100,857 $ - $ 12,200 $ - $ - $ - $ -
(1) Does not include fees and dues for clubs and fraternal and civic organizations paid by the Banks to certain officers for business related purposes. Also does not include any amounts for use of an automobile.
Transactions with Management
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 1, 1995, the beneficial ownership of Common Stock of Registrant by the Only "person" (as that term is defined by the Securities and Exchange Commission), who owns of record or is known by the Registrant to own beneficially 5% or more of the outstanding shares of Common Stock of the Registrant and by all Executive Officers and Directors of the Registrant as a group.
Number of Percent of Shares Owned Outstanding Name Beneficially Shares Estate of Valene Bennett Route 4 Alma, Georgia 31510 175,501 43.27%
Olivia Bennett Route 4 Alma, Georgia 31510 25,086 6.19%
All Executive Officers and Directors as a group (7 persons) 219,384 54.1%
Item 13.

Item 13. Certain Relationships and Related Transactions
The Banks have had, and expect to have in the future, banking transactions in the ordinary course of business with Directors and Officers of the Banks and their associates, including corporations, partnerships and other organizations in which such Directors and Officers have an interest, on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with unrelated parties. Such transactions have not involved more than the normal risk of collectibility or presented other unfavorable features.
Item 14.

Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K Item 14(a) 1. and 3. and Item 14(d)
(a) The following documents are filed as part of this report:
1. Financial Statements
(a) South Banking Company and Subsidiaries: (i ) Consolidated Balance sheet - December 31, 1995 and 1994 (ii ) Consolidated Statement of Income - Year ended December 31, 1995, 1994 and 1993 (iii) Consolidated Statement of Stockholders' Equity - Years ended December 31, 1995, 1994 and 1993 (iv ) Consolidated Statement of Cash Flow - Year ended December 31, 1995, 1994 and 1993
(b) South Banking Company (Parent Corporation Only): (i ) Balance sheet - December 31, 1995 and 1994 (ii ) Statement of Income - period ended December 31, 1995, 1994 and 1993 (iii) Statement of Stockholders' Equity - Period ended December 31, 1995, 1994 and 1993 (iv ) Statement of Cash Flow - Year ended December 31, 1995, 1994 and 1993
3. Exhibits required by Item 7 of regulation S-K:
(3) Articles of Incorporation and By-Laws (included as Exhibits 3(a) and (b), respectively, to Appendix II to Registrant's Registration Statement on Form S-14, File No. 2- 71249, previously filed with the Commission and incorporated herein by reference).
(13) 1995 Annual Report to Shareholders of South Banking Company (note deemed filed except to the extent that sections thereof are specifically incorporated into this report on Form 10-K by reference).
(22) List of the Registrant's subsidiaries:
(1) Alma Exchange Bank & Trust (2) Citizens State Bank (3) Peoples State Bank & Trust (4) Bankers' Data Services, Inc.
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K (con't)
All of the Registrant's subsidiaries were incorporated under the laws of the State of Georgia and are doing business in Georgia under the above names.
(b) The registrant has not filed a Form 8-K during the last quarter of the period.
(c) The response to this Item 14(c) is included in item 14(a).
(d) Financial Statements Schedules - None.
POWER OF ATTORNEY
Know all men by these present, that each person whose signature appears below constitutes and appoints Valene Bennett, his attorney-in- fact, to sign any amendments to this Report, and to file the same, with exhibits thereto, and other documents in connection therewith. The Securities and Exchange Commission hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: March 26, 1996 Paul T. Bennett Principal Executive, Financial and Accounting Officer and Director
Date: March 26, 1996 Olivia Bennett Executive Vice President and Director
Date: March 26, 1996 Charles Stuckey Director
Date: March 26, 1996 James W. Whiddon Director
Date: March 26, 1996 Kenneth F. Wade Director
Date: March 26, 1996 Lawrence Bennett Director
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SOUTH BANKING COMPANY
Date: March 26, 1996 By: Paul T. Bennett President, Treasurer and Director
SUPPLEMENTAL INFORMATION
The following supplemental information has not been sent to the Registrant's shareholders, but will be sent subsequent to the filing of this Annual Report on Form 10-K:
(1) 1995 annual report to shareholders.
(2) Proxy statement for 1995 annual meeting of shareholders.
The foregoing materials will be furnished to the Commission when they are sent to the shareholders since the Registrant does not have securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. The foregoing materials shall not be deemed to be "filed" with the Commission or otherwise subject to the liabilities of Section 18 or that Act.
SOUTH BANKING COMPANY
ALMA, GEORGIA
FINANCIAL STATEMENTS
DECEMBER 31, 1995
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors South Banking Company Alma, Georgia 31510
We have audited the accompanying consolidated balance sheets of South Banking Company as of December 31, 1995 and 1994 and the related consolidated statements of income, cash flows and shareholders' equity for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of South Banking Company at December 31, 1995 and 1994 and the consolidated results of its operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
Respectfully submitted,
H. H. BURNET & COMPANY February 14, 1996 SOUTH BANKING COMPANY ALMA, GEORGIA CONSOLIDATED BALANCE SHEET
December 31, December 31, 1995 1994 ASSETS Cash and due from banks $ 3,989,564 $ 3,447,596
Deposits in other banks - interest bearing $ 795,000 $ 995,000
Investment securities Available for sale $ 8,146,274 $ 4,063,412 Held to maturity - market value of $3,311,955 in 1995 and $4,964,722 in 1994 $ 3,305,576 $ 5,069,898
Pineland State Bank stock - at cost $ 975,141 $ -
Georgia Bankers stock $ 272,880 $ 272,880
Federal Home Loan Bank stock $ 99,900 $ -
Federal funds sold $13,335,000 $ 8,655,000
Loans $61,717,437 $57,201,948 Less: Unearned discount ( 82,051) ( 58,622) Reserve for loan losses ( 994,027) ( 974,866))))
$60,641,359 $56,168,460
Bank premises and equipment $ 3,104,655 $ 3,252,981
Other assets $ 2,509,399 $ 2,551,300
Total Assets $97,174,748 $84,476,527
LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits: Demand - non-interest bearing $14,145,230 $14,751,893 Demand - interest bearing 17,098,343 15,350,308 Savings 6,403,438 7,172,540 Time 46,898,446 36,509,016 $84,545,457 $73,783,757 Borrowing 1,976,405 1,292,238 Accrued expenses and other liabilities 604,033 402,755
Total Liabilities $87,125,895 $75,478,750
The accompanying notes are an integral part of these financial statements.
SOUTH BANKING COMPANY ALMA, GEORGIA CONSOLIDATED BALANCE SHEET (con't)
December 31, December 31, 1995 1994 Stockholder's Equity Common stock $1 par value; shares authorized - 1,000,000, shares issued and outstanding - 1995 and 1994 - 405,283 and 405,283, respectively $ 405,283 $ 405,283 Surplus 3,136,238 3,136,238 Undivided profits 6,464,741 5,537,253 Unrealized gain (loss) on securities 42,591 ( 80,997)
Total Stockholders' Equity $10,048,853 $ 8,997,777
Total Liabilities and Stockholders' Equity $97,174,748 $84,476,527
The accompanying notes are an integral part of these financial statements.
SOUTH BANKING COMPANY ALMA, GEORGIA CONSOLIDATED STATEMENT OF INCOME
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1995 1994 1993 Interest Income Interest and other fees on loans $ 6,995,954 $ 5,666,373 $ 4,972,996 Interest on deposits - interest bearing 40,904 65,241 96,289 Interest on federal funds sold 472,289 305,906 164,160 Interest on investment securities: U. S. Treasury 99,131 113,783 185,308 U. S. Government agencies 273,579 218,222 285,732 Mortgage backed securities 140,159 104,969 135,560 State and municipal subdivisions 58,584 94,106 133,104 Other securities 9,893 - 8,864
Total Interest Income $ 8,090,493 $ 6,568,600 $ 5,982,013
Interest Expense Interest on deposits $ 3,167,719 $ 2,164,062 $ 2,086,070 Interest - other borrowing 146,402 105,313 49,327
Total Interest Expense $ 3,314,121 $ 2,269,375 $ 2,135,397
Net interest income $ 4,776,372 $ 4,299,225 $ 3,846,616 Provision for loan losses 62,200 53,500 118,000
Net interest income after provision for loan losses $ 4,714,172 $ 4,245,725 $ 3,728,616
Other Operating Income Service charge on deposits $ 955,791 $ 987,131 $ 982,813 Commission on insurance 63,154 57,169 72,111 Other income 163,583 213,965 215,109 Securities gains (losses) 21,591 6,000 ( 19,133) Data processing fees 167,267 - -
Total Other Operating Income $ 1,371,386 $ 1,264,265 $ 1,250,900
The accompanying notes are an integral part of these financial statements.
SOUTH BANKING COMPANY ALMA, GEORGIA CONSOLIDATED STATEMENT OF INCOME (Con't)
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1995 1994 1993
Other Operating Expenses Salaries $ 1,558,381 $ 1,474,463 $ 1,353,968 Profit sharing and other personnel expenses 355,822 228,776 209,242 Occupancy expense of bank premises 269,909 300,586 230,270 Furniture and equipment expense 422,129 242,214 215,573 Stationery and supplies 136,568 124,885 83,721 Data processing 428,979 449,325 277,813 Director fees 103,436 101,405 103,385 Other real estate expenses 30,856 - 115,959 Other expenses 1,039,355 1,193,946 1,175,016
Total Other Operating Expenses $ 4,345,435 $ 4,115,600 $ 3,764,947
Income before income taxes $ 1,740,123 $ 1,394,390 $ 1,214,569 Applicable income taxes 589,746 405,523 286,472
Net Income $ 1,150,377 $ 988,867 $ 928,097
Per share earnings based on weighted average outstanding shares:
Weighted average outstanding shares 405,283 405,351 408,036
Net income before extraordinary items $ 2.84 $ 2.44 $ 2.27
Net Income Per Share $ 2.84 $ 2.44 $ 2.27
The accompanying notes are an integral part of these financial statements.
SOUTH BANKING COMPANY ALMA, GEORGIA STATEMENT OF STOCKHOLDERS' EQUITY
Common Undivided Stock Surplus Profits Balance, December 31, 1992 $ 408,070 $ 3,181,517 $ 4,009,125 Net income - - 928,097 Cash dividends - - ( 224,438) Redemption of shares ( 2,487) ( 42,279) - Prior year effect of FASB 109 - - 58,508
Balance, December 31, 1993 $ 405,583 $ 3,139,238 $ 4,771,292 Net income - - 988,867 Cash dividends - - ( 222,906) Redemption of shares ( 300) ( 3,000) - Unrealized gain (loss) on securities available for sale - - -
Balance, December 31, 1994 $ 405,283 $ 3,136,238 $ 5,537,253 Net income - - 1,150,377 Cash dividends - - ( 222,889) Unrealized gain (loss) on securities available for sale - - -
Balance, December 31, 1995 $ 405,283 $ 3,136,238 $ 6,464,741
Unrealized Gain (Loss) on Securities Total Available Stockholders' for Sale Equity
$ - $ 7,598,712 - 928,097 -) ( 224,438) - ( 44,766)
- 58,508
$ - $ 8,316,113 - 988,867 -) ( 222,906) - ( 3,300)
( 80,997) ( 80,997)
$( 80,997) $ 8,997,777 - 1,150,377 ) - ( 222,889)
123,588 123,588
$ 42,591 $10,048,853
The accompanying note is an integral part of these financial statements.
SOUTH BANKING COMPANY ALMA, GEORGIA CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1995 1994 1993
Cash Flows From Operating Activities: Net income $ 1,150,377 $ 988,867 $ 893,898 Add expenses not requiring cash: Provision for depreciation and amortization 420,747 370,378 293,085 Provision for loan losses 62,200 53,500 118,000 Provision for loss on ORE 28,110 20,184 18,900 Bond portfolio losses (gains) ( 21,827) ( 4,000) 19,133 (Gain ) loss on sale of premises & equipment ( 1,657) - ( 2,888) Gain on sale of other real estate owned ( 17,718) ( 8,696) 57,524 Increase (decrease) in taxes payable ( 123,457) 128,798 ( 113,368) Increase (decrease) in interest payable 287,865 60,772 ( 58,114) Increase (decrease) in other liabilities 36,870 ( 17,769) ( 354,644) (Increase) decrease in interest receivable ( 73,925) ( 32,245) 87,043 Decrease (increase) in prepaid expenses 53,186 16,910 ( 17,806)) (Increase) decrease in other assets ( 224,305) ( 143,099) ( 76,356) Recognition of unearned loan income 21,887 ( 7,688) 1,811
Net Cash Provided From Operating Activities $ 1,598,353 $ 1,425,912 $ 866,218
Cash Flows From Investing Activities: Proceeds from sales of investment securities $ 979,156 $ - $ 138,441 Proceeds from maturities of securities held to maturity 2,533,844 1,459,013 5,493,387 Purchase of securities held to maturity (1,596,546) (2,036,708) (3,074,287))
The accompanying notes are an integral part of these financial statements.
SOUTH BANKING COMPANY ALMA, GEORGIA CONSOLIDATED STATEMENT OF CASH FLOWS (con't)
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1995 1994 1993 Cash Flows From Investing Activities: (con't) Net loans to customers $(4,694,955) $(6,841,156) $(4,816,495) Proceeds from maturity of securities available for sale 786,703 2,844,514 - Purchase of securities available for sale (4,849,104) (1,016,502) - Purchase of premises and equipment ( 273,546) (1,011,428) ( 538,725)) Proceed from sale of premises and equipment 4,911 - 5,300 Proceeds from sale of other real estate owned 385,215 248,439 565,473 Purchase of Pineland Bank stock ( 975,141) - - Purchase of FHLB stock ( 99,900) - -
Net Cash Provided from Investing Activities $(7,799,363) $(6,353,828) $(2,226,906)
Cash Flows From Financing Activities: Net increase (decrease) in demand deposits, NOW and money markets $ 1,141,372 $ 414,207 $ 3,213,608 Net increase in savings and time deposits 9,620,328 3,743,262 (4,339,880) Proceeds from borrowing 825,000 650,000 - Payments on borrowing ( 140,833) ( 107,762) ( 25,000) Dividends paid ( 222,889) ( 222,906) ( 224,438) Payments to retire stock - ( 3,300) ( 44,766)
Net Cash Provided From Financing Activities $11,222,978 $ 4,473,501 $(1,420,476)
Net increase (decrease) in cash and cash equivalents $ 5,021,968 $( 454,415) $(2,781,164)
Cash and Cash Equivalents at Beginning of Year 13,097,596 13,552,011 16,333,175
Cash and Cash Equivalents at End of Year $18,119,564 $13,097,596 $13,552,011
The accompanying notes are an integral part of these financial statements.
SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
Note 1. Significant Accounting Policies
The accounting and reporting policies of South Banking Company, Inc. and its subsidiaries conform with generally accepted accounting principles and with practices within the banking industry.
(a) Basis of Presentation
During 1990, Georgia Peoples Bankshares, Inc. was merged with South Banking Company. The transaction was accounted for using the purchase method.
(b) Securities:
The Bank adopted FASB 115 effective January 1, 1994. The Bank's investments in securities are classified in two categories and accounted for as follows.
Securities to be Held to Maturity. Bonds, notes and debentures for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using the interest method over the period to maturity.
Securities Available for Sale. Securities available for sale consist of bonds, notes, debentures and certain equity securities not classified as trading securities or as securities to be held to maturity.
Declines in fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary have resulted in write-downs of the individual securities to their fair value. The related write-downs have been included in earnings as realized losses.
Unrealized holding gains and losses, net of tax, on securities available for sale are reported as a net amount in a separate component of shareholders' equity until realized.
Gains and losses on the sale of securities available-for- sale are determined using the specific-identification method.
(c) Revenue Recognition:
Interest on loans is accrued and credited to operations based upon the principal amount outstanding. Amortization of premiums on loans has been deducted from and accretion of
SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
Note 1. Significant Accounting Policies (con't)
(c) Revenue Recognition (con't):
discounts on loans has been added to the related interest income. Nonrefundable loan fees are deferred and recognized as income over the life of the loan as an adjustment of the yield. The accrual of interest income generally is discontinued when a loan becomes 90 days past due as to principal or interest. When interest accruals are discontinued, unpaid interest credited to income in the current year is reversed, and interest accrued in prior years is charged to the allowance for loan losses. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest.
(d) Allowances for Loan Losses:
The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current domestic and international economic conditions, volume, growth and composition of the loan portfolio and other relevant factors. The allowance is increased by provisions for loan losses charged against income.
(e) Premises and Equipment:
Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is computed generally by the straight-line method.
(f) Other Real Estate (ORE)
Real estate acquired in satisfaction of a loan and in- substance foreclosures are reported in other assets. In- substance foreclosures are properties in which a borrower with little or no equity in the collateral, effectively abandons control of the property or has no economic interest to continue involvement in the property. The borrower's ability to rebuild equity based on current financial conditions also is considered doubtful. Properties acquired by foreclosure or deed in lieu of foreclosure and properties classified as in-substance foreclosures are transferred to ORE and recorded at the lower of cost or fair market value based on appraised value at the
SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
Note 1. Significant Accounting Policies (con't)
(f) Other Real Estate (ORE) (con't)
date actually or constructively received. Loan losses arising from the acquisition of such property are charged against the allowance for loan losses. Losses on ORE due to subsequent valuation adjustments are recorded on a specific property basis.
(g) Income Taxes
For income tax purposes, the bank provides for the maximum deduction for depreciation, loan loss reserves and other timing differences which may differ from the amounts shown on the financial statements. Deferred income taxes have been provided on these timing differences. The FASB recently issued pronouncement on accounting for income taxes which require a change to the liabilities method for accounting for deferred taxes. The statement includes several other provisions that may affect the bank's accounting for income taxes and allows restatement of as many years as deemed appropriate. The bank adopted the new statement which required a cumulative effect adjustment of $97,693 in 1993.
The bank files a consolidated federal income tax return with its subsidiaries. Each subsidiary provides for income taxes on a separate return basis and remits to the parent company amounts determined to be currently payable.
(h) Earnings Per Share
Earnings per share are based on the weighted average number of shares outstanding.
(i) Cash Flow Information
For purposes of the statements of cash flows, the Company considers cash, federal funds sold and due from banks as cash and cash equivalents. Cash paid during the years ended December 31, 1995, 1994 and 1993 for interest was $3,026,256, $2,187,432 and $2,222,440, respectively. Total income tax payments during 1995, 1994 and 1993 were $666,401, $287,000 and $416,320, respectively.
Note 2. Investment Securities
The amortized cost and estimated market values of investments in debt securities are as follows:
SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
Note 2. Investment Securities (con't)
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Securities available for sale -
December 31, 1995:
U.S. Government and agency securities $5,150,304 $ 36,239 $ 6,588 $5,179,955 State and municipal securities 1,521,554 13,605 - 1,535,159 Mortgage backed securities 1,409,879 21,281 - 1,431,160
Totals $8,081,737 $ 71,125 $ 6,588 $8,146,274
December 31, 1994:
U.S. Government and agency securities $3,050,739 $ 1,601 $ 94,996 $2,957,344 State and municipal securities - - - - Mortgage backed securities 1,135,395 - 29,327 1,106,068
Totals $4,186,134 $ 1,601 $ 124,323 $4,063,412
Securities to be held to maturity -
December 31, 1995:
U.S. Government and agency securities $2,453,740 $ 10,798 $ 11,039 $2,453,499 State and municipal securities 386,148 6,875 - 393,023 Mortgage backed securities 465,688 1,167 1,422 465,433
Totals $3,305,576 $ 18,840 $ 12,461 $3,311,955
SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
Note 2. Investment Securities (con't)
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value
Securities to be held to maturity - (con't)
December 31, 1994:
U.S. Government and agency securities $2,992,366 $ - $ 90,759 $2,901,607 State and municipal securities 1,118,173 7,860 31 1,126,002 Mortgage backed securities 959,359 869 23,115 937,113
Totals $5,069,898 $ 8,729 $ 113,905 $4,964,722
Gross realized gains on sales of available-for-sale securities were $21,591 in 1995.
Assets, principally securities carried at approximately $3,972,330 at December 31, 1995 and $4,117,665 at December 31, 1994, were pledged to secure public deposits and for other purposes required or permitted by law.
The scheduled maturities of securities to be held to maturity and securities available for sale at December 31, 1995 were as follows:
Securities to be Securities Held to Maturity Available for Sale Amortized Amortized Cost Fair Value Cost Fair Value Due in one year or less $ 464,153 $ 464,557 $1,997,524 $2,002,029 Due from one year to five years 2,402,812 2,405,396 3,725,090 3,739,506 Due from five years to ten years 302,334 303,641 1,241,204 1,261,815 Due after ten years 136,277 138,361 1,117,917 1,142,924
$3,305,576 $3,311,955 $8,081,735 $8,146,274
SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
Note 2. Investment Securities (con't)
The market value of State and Other Political Subdivision Obligations is established with the assistance of an outside bond department and is based on available market data which often reflects transactions of relatively small size and is not necessarily indicative of prices at which large amounts of particular issues could readily be sold or purchased.
Note 3. Loans
The composition of the bank's portfolio was as follows:
1995 1994 Commercial, financial and agricultural $14,591,725 $13,228,952 Real estate - mortgage 36,426,397 32,792,117 Real estate - construction 1,767,423 2,347,157 Installment and consumer 8,931,892 8,833,722 Total Loans $61,717,437 $57,201,948 Less: Unearned discount ( 82,051) ( 58,622)) Reserve for loan losses ( 994,027) ( 974,866))
Loans, net $60,641,359 $56,168,460
The Company and its subsidiaries have granted loans to the officers and directors of the Company, its subsidiaries and to their associates. Related party loans are made on substan- tially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The aggregate dollar amount of these loans was $525,535 and $590,102 at December 31, 1995 and 1994. During 1995, $149,545 of new loans were made, and repayments totaled $188,399.
Note 4. Reserve for Loan Losses
Transactions in the reserve for loan losses are summarized as follows: SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
Note 4. Reserve for Loan Losses (con't)
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1995 1994 1993
Balance at beginning of period $ 974,866 $ 911,931 $ 738,578 Additions: Provision charged to operating expenses $ 62,200 $ 53,500 $ 118,000
Deductions: Loans charged off $ 189,371 $ 92,986 $ 82,979 Less: recoveries 146,332 102,421 138,332
$ 43,039 $( 9,435) $( 55,353)
Balance at end of period $ 994,027 $ 974,866 $ 911,931
Additions to the reserve for loan losses are based on management's evaluation of the loan portfolio under current economic conditions, past loan loss experience and such other factors which, in management's judgment, deserve recognition in estimating loan losses. Loans are charged off when, in the opinion of management, such loans are deemed to be uncollectible. Recognized losses are charged to the reserve and subsequent recoveries added.
Note 5. Deposits
The aggregate amount of short-term jumbo CDs, each with a minimum denomination of $100,000, was approximately $9,268,553 in 1995. At December 31, 1995, the scheduled maturities of CDs are as follows:
1996 $ 38,310,333 1997 5,871,753 1998 2,248,485 1999 467,875 2000 and thereafter -
$ 46,898,446
SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
Note 6. Premises and Equipment
A summary of the account: Year Ended Year Ended December 31, December 31, 1995 1994 Land $ 393,148 $ 393,148 Buildings 2,345,562 2,348,036 Furniture and equipment 3,306,840 3,100,892 $ 6,045,550 $ 5,842,076 Less: Accumulated depreciation 2,940,895 2,589,095
$ 3,104,655 $ 3,252,981
Depreciation expense was $418,618 in 1995, $315,743 in 1994, and $248,616 in 1993.
Note 7. Borrowings
Data relating to borrowing is as follows:
Year Ended Year ended December 31, December 31, 1995 1994 Parent company -
Line of credit loan in the amount of $3,675,000 for the purpose of refinancing existing loan and the acquisition of Pineland Bank stock. Interest only due until 1-31-97 at which time annual payment of 10% of original loan will be payable over ten years. Interest accrues at the prime rate basis and is paid quarterly. Additional draws on note in 1996 will increase outstanding balance to $3,100,000. $ 1,500,000 $ -
Payable in nine equal annual principal payments beginning December 31, 1995. Interest accrues at prime rate basis and is paid quarterly - 675,000
SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
Note 7. Borrowings (con't) Year Ended Year ended December 31, December 31, 1995 1994 Subsidiary - Bankers Data Services, Inc.
Note payable in 60 monthly principal amount of $10,833.33 plus interest. Interest accrues at prime rate basis $ 476,405 $ 542,238
Note 8. Income Taxes
Income tax expense (benefit) was $589,746 for 1995, (an effective rate of 33.9%), $405,523 for 1994 (an effective rate of 29.1%) and $286,472 for 1993 (an effective rate of 23.6%). The actual expense for 1995, 1994 and 1993 differs from the "expected" tax expense for those years (computed by applying the federal corporate rate of 34% as follows:
1995 1994 1993 Computed "expected" tax expenses $ 591,642 $ 474,093 $ 412,953 Alternative minimum tax - - ( 34,199) Decrease resulting from: Surtax exemption - - - Tax exempt interest on securities and loans ( 39,927) ( 42,804) ( 74,976) Other, net 38,031 ( 25,766) ( 17,306)
$ 589,746 $ 405,523 $ 286,472
The current and deferred amounts of these tax provisions were as follows:
1995 1994 1993
Current $ 481,329 $ 425,551 $ 306,906 Deferred 108,417 ( 20,028) ( 20,434)
$ 589,746 $ 405,523 $ 286,472
SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
Note 8. Income Taxes (con't)
The tax effects of each type of income and expense item that gave rise to deferred taxes are: December 31 December 31,, 1995 1994 Net unrealized appreciation on securities available for sale $( 21,942) $ 41,725 Depreciation ( 160,633) ( 122,875) Deferred loan fees 25,417 18,608 Allowance for credit losses 140,801 158,803 Other 6,768 2,567
Net deferred tax asset (liability) $( 9,589) $ 98,828
Note 9. Employee Benefit Plans
The Company maintains a 401K deferred compensation plan for all subsidiaries effective January 1, 1993. The Company elected to match 50% of employee contributions for 1995, 1994 and 1993. The expense to the Company for 1995, 1994 and 1993 was $32,256, $29,457 and $27,380, respectively.
Note 10. Commitments and Contingent Liabilities
In the normal course of business, the Company offers a variety of financial products to its customers to aid them in meeting their requirements for liquidity, credit enhancement and interest rate protection. Generally accepted accounting principles recognize these transactions as contingent liabilities and, accordingly, they are not reflected in the accompanying financial statements. Following is a discussion of these transactions.
Standby Letters of Credit. These transactions are used by the Company's customers as a means of improving their credit standing in their dealings with others. Under these agreements, the Company agrees to honor certain financial commitments in the event that its customers are unable to do so. As of December 31, 1995 the Company had $392,000 in outstanding standby letters of credit.
Loan Commitments. As of December 31, 1995, the Company had commitments outstanding to extend credit totaling $4,921,085. These commitments generally require the customers to maintain certain credit standards. Management does not anticipate any material losses as a result of these commitments.
SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
Note 11. Restrictions on Subsidiary Dividends, Loans or Advances
Dividends are paid by the Company from its assets which are mainly provided by dividends from the Banks. However, certain restrictions exist regarding the ability of the Banks to transfer funds to the Company in the form of cash dividends, loans or advances. The approval of the Georgia Department of Banking is required to pay dividends in excess of 50% of the Bank's net profits for the prior year.
Under Federal Reserve regulation, the Bank also is limited as to the amount it may loan to its affiliates, including the Company, unless such loans are collateralized by specified obligations. At December 31, 1995, the maximum amount available for transfer from the Bank to the Company in the form of loans approximated 20% of consolidated net equity.
Note 12. Restrictions on Cash and Due from Banks
The bank is required to maintain reserve balances with the Federal Reserve Bank. The average amount of those reserve balances for the year ended December 31, 1995 was approximately $-0-.
Note 13. Related Party Transactions
The Company has entered into a split dollar life insurance arrangement with a director and substantial shareholder. The Company and director's trust each contribute toward the payment of premium for life insurance policy. The Company records its contribution at the present value of anticipated future return or total cash surrender value of policy whichever is higher; however, the carrying amount cannot exceed the amount of premiums paid by the Company. The Company will receive all reimbursement from anticipated withdrawal of cash surrender value or from the proceeds of policy in the event of the death of the director. All cash surrender value of the policy accrues to the benefit of the Company until such time as the cash surrender value exceeds advances made by the Company. As of December 31, 1995, $985,175 is carried in other assets related to this arrangement.
SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
Note 14. Fair Value of Financial Instruments
The following table shows the estimated fair value and the related carrying values of South Banking Company's financial instruments at December 31, 1995. Items which are not financial instruments are not included. Carrying Estimated Amount Fair Value Cash and due from financial institutions $ 3,989,564 $ 3,989,564 Interest earning balances with financial institutions 795,000 795,000 Federal funds 13,335,000 13,335,000 Securities available for sale 8,146,274 8,146,274 Securities held to maturity 3,305,576 3,311,955 Federal Home Loan Bank stock 99,900 99,900 Georgia Bankers Bank - stock 272,880 307,500 Loans - net of allowances 60,641,359 59,901,705 Demand and savings deposits 37,647,011 37,647,011 Individual retirement account deposits 6,573,568 6,669,710 Time deposits 40,324,878 40,720,301
For purposes of the above disclosures of estimated fair value, the following assumptions were used as of December 31, 1995. The estimated fair value for cash and due from financial institutions and federal funds sold are considered to approximate cost. The estimated fair value for interest-earning balances with financial institutions, securities available-for- sale, securities held-to-maturity and Georgia Bankers Bank stock are based on quoted market values for the individual securities or for equivalent securities. The estimated fair value for commercial loans is based on estimates of the difference in interest rates the Company would charge the borrowers for similar such loans with similar maturities made at December 31, 1995, applied for an estimated time period until the loan is assumed to reprice or be paid. The estimated fair value for other loans is based on estimates of the rate the Company would charge for similar such loans at December 31, 1995, applied for the tie period until estimated repayment. The estimated fair value for individual retirement account deposits and time deposits is based on estimates of the rate the Company would pay on such deposits or borrowings at December 31, 1995, applied for the time period until maturity. The estimated fair value for other financial instruments and off-balance-sheet loan commitments are considered to approximate cost at December 31, 1995.
SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
Note 14. Fair Value of Financial Instruments (con't)
While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that were the Company to have disposed of such items at December 31, 1995, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 1995 should not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the above disclosures, such as property and equipment. Also, non-financial instruments typically not recognized in the financial statements nevertheless may have value but are not included in the above disclosures. These include among other items, the estimated earnings power of core deposit accounts, the earnings potential of loan servicing rights, the trained work force, customer goodwill and similar items.
Note 15. Regulatory Matters
The Company and its subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off- balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1995, that the Company and its subsidiaries meet all capital adequacy requirements to which it is subject.
SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
Note 15. Regulatory Matters (con't)
Subsequent Events
On January 11, 1996, South Banking Company consummated an agreement to acquire the stock of Pineland State Bank for cash. The total acquisition cost was $2,745,716. Funding for the acquisition was through a loan from Georgia Bankers Bank.
SOUTH BANKING COMPANY (PARENT CORPORATION ONLY)
ALMA, GEORGIA
FINANCIAL STATEMENTS
DECEMBER 31, 1995
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors South Banking Company Alma, Georgia 31510
Under date of January 21, 1996, we reported on the consolidated balance sheets of South Banking Company, as of December 31, 1995 and 1994, and the related statements of income, cash flows and stockholders' equity for the three years in the period ended December 31, 1995.
In connection with our examination of the aforementioned consolidated financial statements, we also audited the accompanying balance sheets (Parent Corporation Only) as of December 31, 1995 and 1994 and the related statements of income, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on the financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of South Banking Company (Parent Corporation Only) as of December 31, 1995 and 1994, and the results of its operations, stockholders' equity and their cash flows for the three years then ended in conformity with generally accepted accounting principles.
Respectfully submitted,
H. H. BURNET & COMPANY, P. C. February 14, 1996 SOUTH BANKING COMPANY (PARENT CORPORATION ONLY) ALMA, GEORGIA BALANCE SHEET
December 31, December 31, 1995 1994
ASSETS Cash and due from banks Interest bearing $ 290,640 $ 265,846 Non-interest bearing 301,582 12,268 Investment in bank's subsidiaries 9,724,449 9,160,147 Investment in nonbank subsidiaries 177,408 127,386 Investment - Pineland State Bank - at cost 975,141 - Other assets 17,314 19,935 Costs in excess of book value 8,620 15,345 Due from subsidiaries - income taxes 10,150 151,931 Prepaid income taxes 45,793 -
Total Assets $11,551,097 $ 9,752,858
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 2,244 $ 2,416 Other liabilities - - Accrued income taxes - 77,665 Notes payable 1,500,000 675,000 Due to subsidiaries - -
Total Liabilities $ 1,502,244 $ 755,081
Stockholders' Equity Common stock of $1 par value; authorized 1,000,000 shares; issued and outstanding, 1995 and 1994 $405,283 and 405,283, respectively $ 405,283 $ 405,283 Surplus 3,136,238 3,136,238 Undivided profits 6,464,741 5,537,253 Unrealized gain (loss) on securities available for sale (net) 42,591 ( 80,997)
Total Stockholders' Equity $10,048,853 $ 8,997,777
Total Liabilities and Stockholders' Equity $11,551,097 $ 9,752,858
The accompanying note is an integral part of these financial statements.
SOUTH BANKING COMPANY (PARENT CORPORATION ONLY) ALMA, GEORGIA STATEMENT OF INCOME
Year Ended Year Ended Year Ended December 31 December 31, December 31,, 1995 1994 1993 Income Dividends from bank subsidiaries $ 773,430 $ 543,805 $ 445,249 Other dividends - - - Interest income 11,692 6,690 3,018 Management fees 79,400 79,200 79,200 Loss on sale of stock - - ( 19,710)
Total Income $ 864,522 $ 629,695 $ 507,757
Expenses Salaries $ 73,163 $ 56,746 $ 54,996 Amortization 6,726 6,726 6,726 Interest 87,051 56,954 49,327 Professional fees 46,079 16,084 21,400 Other 49,527 40,560 47,251
Total Expenses $ 262,546 $ 177,070 $ 179,700
Income before income taxes and equity in undistributed income (loss) of subsidiaries $ 601,976 $ 452,625 $ 328,057
Provision (credit) for income taxes ( 57,665) ( 27,700) ( 37,559)
Income before equity in undistributed income in subsidiaries $ 659,641 $ 480,325 $ 365,616
Equity in undistributed income of bank subsidiaries $ 440,715 $ 597,787 $ 570,850 Equity in undistributed income (loss) of nonbank subsidiaries 50,021 ( 89,245) ( 8,369)
$ 490,736 $ 508,542 $ 562,481
Net Income $ 1,150,377 $ 988,867 $ 928,097
The accompanying note is an integral part of these financial statements.
SOUTH BANKING COMPANY (PARENT CORPORATION ONLY) ALMA, GEORGIA STATEMENT OF STOCKHOLDERS' EQUITY
Common Undivided Stock Surplus Profits Balance, December 31, 1992 $ 408,070 $ 3,181,517 $ 4,009,125 Net income - - 928,097 Cash dividends - - ( 224,438) Redemption of shares ( 2,487) ( 42,279) - Prior year effect of FASB 109 - - 58,508
Balance, December 31, 1993 $ 405,583 $ 3,139,238 $ 4,771,292 Net income - - 988,867 Cash dividends - - ( 222,906) Redemption of shares ( 300) ( 3,000) - Unrealized gain (loss) on securities available for sale - - -
Balance, December 31, 1994 $ 405,283 $ 3,136,238 $ 5,537,253 Net income - - 1,150,377 Cash dividends - - ( 222,889) Unrealized gain (loss) on securities available for sale - - -
Balance, December 31, 1995 $ 405,283 $ 3,136,238 $ 6,464,741
Unrealized Gain (Loss) on Securities Total Available Stockholders' for Sale Equity
$ - $ 7,598,712 - 928,097 -) ( 224,438) - ( 44,766)
- 58,508
$ - $ 8,316,113 - 988,867 -) ( 222,906) - ( 3,300)
( 80,997) ( 80,997)
$( 80,997) $ 8,997,777 - 1,150,377 ) - ( 222,889)
123,588 123,588
$ 42,591 $10,048,853
The accompanying note is an integral part of these financial statements.
SOUTH BANKING COMPANY (PARENT CORPORATION ONLY) ALMA, GEORGIA STATEMENT OF CASH FLOWS
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1995 1994 1993
Cash Flows From Operating Activities: Net income $ 1,150,377 $ 988,867 $ 928,097 Add expenses not requiring cash Depreciation and amortization 13,501 12,938 13,949 Undistributed earnings of subsidiaries ( 490,736) ( 508,542) ( 562,481) Increase (decrease) in accounts payable ( 172) 172 208 Increase (decrease) in other liabilities - ( 427) 171 Increase (decrease) in accrued income taxes ( 77,665) ( 9,068) - Increase (decrease) in other assets ( 4,155) ( 473) 134,507 Increase (decrease) in prepaid income taxes ( 45,793) - - Increase (decrease) in due from subsidiary - taxes 141,781 - -
Net Cash Used in Operating Activities $ 687,138 $ 483,467 $ 514,451
Cash Flows From Investing Activities: Basis in investments sold $ - $ - $ 64,476 Contribution to equity in nonbank subsidiary - ( 125,000) ( 100,000) Purchase of equipment - - ( 931) Purchase of Pineland State Bank ( 975,141) - -
Net Cash Used in Investing Activities $( 975,141) $( 125,000) $( 36,455)
The accompanying note is an integral part of these financial statements.
SOUTH BANKING COMPANY (PARENT CORPORATION ONLY) ALMA, GEORGIA STATEMENT OF CASH FLOWS
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1995 1994 1993 Cash Flow From Financing Activities: Payments on note payable bank $ - $( 75,000) $(1,220,000) Proceeds from notes payable to banks 825,000 - 1,195,000 Dividends paid ( 222,889) ( 222,906) ( 224,438) Increase (decrease) in due to subsidiaries - - - Redemption of common stock - ( 3,300) ( 44,766)
Net Cash Provided (Used) from Financing Activities $ 602,111 $( 301,206) $( 294,204)
Net increase (decrease) in cash and cash equivalents $ 314,108 $ 57,261 $ 183,792 Cash and cash equivalents at beginning of year 278,114 220,853 37,061
Cash and Cash Equivalents at End of Year $ 592,222 $ 278,114 $ 220,853
The accompanying note is an integral part of these financial statements.
SOUTH BANKING COMPANY (PARENT CORPORATION ONLY) ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS
(A) Summary of Significant Accounting Policies
General - The following notes to the financial statements of South Banking Corporation, formed on July 28, 1981, (parent corporation only) (the corporation) includes only that information which is in addition to information presented in the consolidated financial statements and notes to consolidated financial statements.
Investment in subsidiaries - The corporation reports its investment in the common stock of its subsidiaries at its equity in the net assets of the subsidiaries.
Organization costs - Organization costs have been deferred and are being amortized on a straight-line basis over a period of five years.