-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VBnEDafbMyfXSFyZ78fqlaE/g++gz4ooQBXQ52yLjR7bwAMqBl7wJ3ukKM6QNR03 z9RyJCfkY9NZQMtOEBLR5g== 0000944122-98-000004.txt : 19980331 0000944122-98-000004.hdr.sgml : 19980331 ACCESSION NUMBER: 0000944122-98-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTH BANKING CO CENTRAL INDEX KEY: 0000351566 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 581418696 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 002-71249 FILM NUMBER: 98579054 BUSINESS ADDRESS: STREET 1: 104 N DIXON ST CITY: ALMA STATE: GA ZIP: 31510 BUSINESS PHONE: 9126328631 MAIL ADDRESS: STREET 1: 104 N DIXON ST CITY: ALMA STATE: GA ZIP: 31510 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 Commission file number 2-71249 SOUTH BANKING COMPANY (Exact name of registrant as specified in its charter) Georgia 58-1418696 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 104 North Dixon Street, Alma, Georgia 31510 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (912) 632-8631 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation 5-K is not contained herein and will not be contained to the best of registrant's knowledge in definitive proxy on information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) State the aggregate market value of the voting stock held by nonaffiliates of the registrant: There is no established market for the outstanding common stock of the registrant. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the most recent practicable date. Class Outstanding at February 28, 1998 Common stock $1.00 par value per 399,500 share DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the part of the Form 10-K into which the documents are incorporated: (1) any annual reports to security holders; (2) any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. None PART 1. Item 1. Business South Banking Company (the "Registrant") is a business corporation organized at the direction of Alma Exchange Bank & Trust ("Alma Bank") and Citizens State Bank ("Citizens Bank") (collectively, the "Banks") in 1980 under the Georgia Business Corporation Code. It was formed to obtain all the issued and outstanding shares of Common Stock of the Banks. Pursuant to the terms and provisions of a Plan of Reorganization and Agreement of Merger, dated as of January 13, 1981 and approved by the shareholders of the Banks on June 24, 1981, the Banks were reorganized into a holding company structure by merging the Banks with wholly-owned subsidiaries of the Registrant, which transaction was consummated on July 28, 1981. In connection with those mergers, the outstanding shares of Common Stock of the Banks were converted into shares of the Registrant at specified ratios and the Banks became wholly-owned subsidiaries of the Registrant. Pursuant to the terms and provision of an agreement of merger dated June 12, 1989 between South Banking and Georgia Peoples Bankshares, Inc. and approved by shareholders of Georgia Peoples on February 26, 1990, Georgia Peoples Bankshares and its subsidiary, Peoples State Bank, were merged into South Banking Company. In connection with the merger, the outstanding shares of Georgia Peoples Bankshares were converted into shares of the Registrant at specified ratios. During 1993, South Banking Company formed Banker's Data Services, Inc. ("Banker's Data") for the purpose of handling all the computer functions of the banks. Operations began in April, 1994. South Banking entered into an agreement in October of 1995 to acquire all the stock of Pineland State Bank ("Pineland Bank") in Metter, Georgia. On January 11, 1996, the transaction was completed. The Banks The Banks operate full service banking business in Bacon, Appling, Candler and Camden Counties, Georgia, providing such customary banking services as checking and savings accounts, various other types of time deposits, safe deposit facilities and money transfers. The Banks also finance commercial and agricultural transactions, make secured and unsecured loans, and provide other financial services to its customers. The Banks do not conduct trust activities. On December 31, 1996, 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 253rd and 276nd largest banks among 344 banks in Georgia, Citizens Bank, one of five banking operations in Camden County, ranked the 333rd largest bank among 344 banks in Georgia and Pineland Bank, one of three banking operations in Metter, Georgia ranked the 316th largest bank among 344 banks in Georgia, Sheshunoff's Banks of Georgia (1996 edition). The Banks make and service both secured and unsecured loans to individuals, firms and corporations. Commercial lending operations include various types of credit for the Banks' customers. The Banks' installment loan departments make direct loans to individuals and, to a limited extent, purchase installment obligations from retailers both with and without recourse. The Banks make a variety of residential, industrial, commercial and agricultural loans secured by real estate, including interim construction financing. Each bank has established desired mixes of real estate, commercial, agricultural and consumer lending depending upon activities within the local area. The ratios are established in accordance with risk diversification goals. All banks are located in small rural areas with low to moderate income levels. The banks primarily look to real estate lending as a major portion of portfolio. Real estate values have remained fairly stable over the past few years to give stability to lending activities. Loan to value ratios are maintained in the 60% to 80% level for various real estate lending. Loan to value ratio of non real estate loans vary from 50% for the inventory or receivables to 90% for vehicles and other consumer lending. The economy of the area remains fairly constant without great fluctuation. The national economy will effect the area primarily in the timber and other agricultural products; however, the movement is not as wide locally as national movement indicates. Citizens Bank, Pineland Bank and Peoples Bank act as agents for another bank in offering "Master Card" and "VISA" credit cards to its customers and does not assume the credit risk on these transactions. Alma Bank offers "Master Card" credit cards to its customers. At December 31, 1997, the Banks had correspondent relationships with 17 other commercial banks. These correspondent banks provide certain services to the banks such as processing checks and other items, buying and selling federal funds, handling money transfers and exchanges, shipping coins and currency, providing security and safekeeping of funds or other valuable items and furnishing limited management information and advice. As compensation for the services, the Banks maintain certain balances with its correspondents in noninterest bearing accounts. Employees On December 31, 1997, the Registrant and its subsidiaries had 81 full-time and 17 part-time employees. The Registrant is not a party to any collective bargaining agreement and employee relations are deemed to be good. Competition The Banking business is highly competitive. The Banks compete primarily with other commercial banks operating in Bacon, Camden, Appling and Candler Counties. In addition, the Banks compete with other financial institutions, including savings and loan associations, credit unions and finance companies and, to a lesser extent, insurance companies and certain governmental agencies. The banking industry is also experiencing increased competition for deposits from less traditional sources such as money-market mutual funds. Monetary Policies The results of operations of the Banks, and therefore of the Registrant, are affected by credit policies of monetary authorities, particularly the Board of Governors of the Federal Reserve System (the "Board of Governors"), even though the Banks are not members of the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market operations in U. S. Government securities and changes in the discount rate on member bank borrowing changes in reserve requirements against member bank deposits. In view of changing conditions in the national economy and in the money markets, as well as the effect of action by monetary and fiscal authorities, including the Federal Reserve System, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Banks. Supervision and Regulations The Registrant is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "Act"), and is required to register as such with the Board of Governors. The Registrant is required to file with the Board of Governors an annual report and such other information as may be required to keep the Board of Governors informed with respect to the Registrant's compliance with the provisions of the Act. The Board of Governors may also make examinations of the Registrant and its subsidiaries from time to time. The Act requires every bank holding company to obtain the prior approval of the Board of Governors before it may acquire substantially all the assets of any bank or ownership or control of any voting shares of any bank, if, after such acquisition, it would own or control, directly or indirectly, more than five percent of the voting shares of such bank. In no case, however, may the Board of Governors approve the acquisition by the Registrant of the voting shares of any bank located outside Georgia, unless such acquisition is specifically authorized by the laws of the state in which the bank to be acquired is located. In addition, a bank holding company is generally prohibited from engaging in or acquiring direct or indirect control of voting shares of any company engaged in nonbanking activities. One of the principal exceptions to this prohibition is for activities found by the Board of Governors, by order or regulation, to be so closely related to banking, managing or controlling banks as to be a proper incident thereto. Some of the activities that the Board of Governors has determined by regulation to be closely related to banking are: making or servicing loans and certain types of leases; performing certain data processing services; acting as fiduciary, investment or financial advisor; making investments in corporations or projects designed primarily to promote community welfare. In January, 1989, the Board of Governors issued final regulations which implement risk-based rules for assessing bank and bank holding company capital adequacy. The regulations revise the definition of capital and establish minimum capital standards in relation to assets and off-balance sheet exposures, as adjusted for credit risk. Payment of Dividends and Other Restrictions South is a legal entity separate and distinct from its subsidiaries. There are various legal and regulatory limitations under Federal and state law on the extent to which South's subsidiaries can pay dividends or otherwise supply funds to South. The principal source of South's cash revenues is dividends from its subsidiaries and there are certain limitations under Federal and state laws on the payment of dividends by such subsidiaries. The prior approval of the FRB or the Georgia Department of Bankers, as the case may be, is required if the total of all dividends declared by any state member bank of the Federal Reserve System in any calendar year exceeds the Bank's net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years, less any required transfers to surplus or a fund for the retirement of any preferred stock. The relevant Federal and state regulatory agencies also have authority to prohibit a state member bank or bank holding company, which would include South and the Subsidiary Banks from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or unsound practice in conducting its business. The payment of dividends could, depending upon the financial condition of the subsidiary, be deemed to constitute such an unsafe or unsound practice. Under Georgia law, the prior approval of the DBF is required before any cash dividends may be paid by a state bank if: (i) total classified assets at the most recent examination of such bank exceed 80% of the equity capital (as defined, which includes the reserve for loan losses) of such bank; (ii) the aggregate amount of dividends declared or anticipated to be declared in the calendar year exceeds 50% of the net profits (as defined) for the previous calendar year; or (iii) the ratio of equity capital to adjusted total assets is less than 6%. In addition, the Banks are subject to limitations under Section 23A of the Federal Reserve Act with respect to extensions of credit to, investments in, and certain other transactions with, South. Furthermore, loans and extensions of credit are also subject to various collateral requirements. Capital Adequacy The FRB has adopted risk-based capital guidelines for bank holding companies. The minimum ratio of total capital ("Total Capital") to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8%. At least half of the Total Capital is to be composed of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock and a limited amount of perpetual preferred stock, less goodwill ("Tier I Capital"). The remainder may consist of subordinated debt, other preferred stock and a limited amount of loan loss reserves. In addition, the FRB has established minimum leverage ratio guidelines for bank holding companies. These guidelines for a minimum ratio of Tier I Capital to total assets, less goodwill (the "Leverage Ratio") of 3% for bank holding companies that meet certain specified criteria, including those having the highest regulatory rating. All other bank holding companies generally are required to maintain a Leverage Ratio of at least 3% plus an additional cushion of 100 to 200 basis points. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the FRB has indicated that it will consider a "tangible Tier I capital leverage ratio" (deducting all intangibles) and other indications of capital strength in evaluating proposals for expansion or new activities. Effective December 19, 1992, a new Section 38 to the Federal Deposit Insurance Act implemented the prompt corrective action provisions that Congress enacted as a part of the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "1991 Act"). The "prompt corrective action" provisions set forth five regulatory zones in which all banks are placed largely based on their capital positions. Regulators are permitted to take increasingly harsh action as a Bank's financial condition declines. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank's capital leverage ratio reaches two percent. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with less amounts of capital. The FDIC has adopted regulations implementing the prompt corrective action provisions of the 1991 Act, which place financial institutions in the following five categories based upon capitalization ratios: (i) a "well capitalized" institution has a total risk-based capital ratio of at least 10%, a Tier I risk-based ratio of at least 6% and a leverage ratio of at least 5%; (ii) an "adequately capitalized" institution has a total risk-based capital ratio of at least 8%, a Tier I risk-based ratio of at least 4% and a leverage ratio of at least 4%, (iii) an "undercapitalized" institution has a total risk-based capital ratio of under 8%, a Tier I risk-based ratio of under 4% or a leverage ratio of under 4%; (iv) a "significantly undercapitalized" institution has a total risk-based capital ratio of under 6%, a Tier I risk-based ratio of under 3% or a leverage ratio of under 3%; and (v) a "critically undercapitalized" institution has a leverage ratio of 2% or less. Institutions in any of the three undercapitalized categories would be prohibited from declaring dividends or making capital distributions. The FDIC regulations also establish procedures for "downgrading" an institution to a lower capital category based on supervisory factors other than capital. The downgrading of an institution's category is automatic in two situations: (i) whenever an otherwise well-capitalized institution is subject to any written capital order or directive; and (ii) where an undercapitalized institution fails to submit or implement a capital restoration plan or has its plan disapproved. The Federal banking agencies may treat institutions in the well-capitalized, adequately capitalized and undercapitalized categories as if they were in the next lower level based on safety and soundness considerations relating to factors other than capital levels. All insured institutions regardless of their level of capitalization are prohibited by the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC Act") from paying any dividend or making any other kind of capital distribution or paying any management fee to any controlling person if following the payment or distribution the institution would be undercapitalized. While the prompt corrective action provisions of the FDIC Act contain no requirements or restrictions aimed specifically at adequately capitalized institutions, other provisions of the FDIC Act and the agencies' regulations relating to deposit insurance assessments, brokered deposits and interbank liabilities treat adequately capitalized institutions less favorably than those that are well-capitalized. Under the FDIC's regulations, all of the Subsidiary Banks are "well capitalized" institutions. The written policies of the Georgia Department of Banking and Finance (the "DBF") require that state banks in Georgia generally maintain a minimum ratio of primary capital to total assets of 6.0%. At December 31, 1997, 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. Current legislation has passed that would allow banks to branch statewide subject to certain restriction. This law became effective July 1, 1996. Georgia banking laws permit bank holding companies to own more than one bank, subject to the prior approval of the Georgia Department of Banking and Finance; thereby, in effect, permitting statewide banking organizations. Such banks may be acquired as subsidiaries of the Registrant or merged into its existing bank subsidiaries. Support of Subsidiary Bank Under the FRB policy, South is expected to act as a source of financial strength to, and to commit resources to support, each of the Subsidiary Banks. This support may be required at times when, absent such FRB policy, South may not be inclined to provide it. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a Federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. As a result of the enactment of Section 206 of the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") on August 9, 1989, a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulator assistance. FDIC Insurance Assessments The Subsidiary Banks are subject to FDIC deposit insurance assessments for the Bank Insurance Fund (the "BIF"). Since 1989, the annual FDIC deposit insurance assessments increased from $.083 per $100 of deposits to a minimum level of $.23 per $100, an increase of 177 percent. The FDIC implemented a risk-based assessment system whereby banks are assessed on a sliding scale depending on their placement in nine separate supervisory categories, from $.23 per $100 of deposits for the healthiest banks (those with the highest capital, best management and best overall condition) to as much as $.31 per $100 of deposits for the less-healthy institutions, for an average of $.259 per $100 of deposits. On August 8, 1995, the FDIC lowered the BIF premium for "healthy" banks 83% from $.23 per $100 in deposits to $.04 per $100 in deposits, while retaining the $.31 level for the riskiest banks. The average assessment rate was therefore reduced from $.232 to $.044 per $100 of deposits. The new rate took effect on September 29, 1995. On November 14, 1995, the FDIC again lowered the BIF premium for "healthy" banks from $.04 per $100 of deposits to zero for the highest rated institutions (92% of the industry). All of the Subsidiary Banks are insured under the BIF fund and it is expected that they will be required to pay only the legally required annual minimum payments during 1998. Recent Legislative and Regulatory Action On April 19, 1995, the four Federal bank regulatory agencies adopted revisions to the regulations promulgated pursuant to the Community Reinvestment Act (the "CRA"), which are intended to set distinct assessment standards for financial institutions. The revised regulations contains three evaluation tests: (i) a lending test which will compare the institution's market share of loans in low- and moderate-income areas to its market share of loans in its entire service area and the percentage of a bank's outstanding loans to low- and moderate-income areas or individuals; (ii) a services test which will evaluate the provisions of services that promote the availability of credit to low- and moderate-income areas; and (iii) an investment test, which will evaluate an institution's record of investments in organizations designed to foster community development, small- and minority-owned businesses and affordable housing lending, including state and local government housing or revenue bonds. The regulation is designed to reduce some paperwork requirements of the current regulations and provide regulators, institutions and community groups with a more objective and predictable manner with which to evaluate the CRA performance of financial institutions. The rule became effective on January 1, 1996, at which time evaluation under streamlined procedures were scheduled to begin for institutions with assets of less than $250 million. It is unclear what effect, if any, these regulations will have on South and the Subsidiary Banks. Congress and various Federal agencies (including Housing and Urban Development, the Federal Trade Commission and the Department of Justice) (collectively, the "Federal Agencies") responsible for implementing the nation's fair lending laws have been increasingly concerned that prospective home buyers and other borrowers are experiencing discrimination in their efforts to obtain loans. In recent years, the Department of Justice has filed suit against financial institutions, which it determined had discriminated, seeking fines and restitution for borrowers who allegedly suffered from discriminatory practices. Most, if not all, of these suits have been settled (some for substantial sums) without a full adjudication on the merits. On March 8, 1994, the Federal Agencies, in an effort to clarify what constitutes lending discrimination and specify the factors the agencies will consider in determining if lending discrimination exists, announced a joint policy statement detailing specific discriminatory practices prohibited under the Equal Opportunity Act and the Fair Housing Act. In the policy statement, three methods of proving lending discrimination were identified: (i) over evidence of discrimination, when a lender blatantly discriminates on a prohibited basis; (ii) evidence of disparate treatment, when a lender treats applicants differently based on a prohibited factor even where there is no showing that the treatment was motivated by prejudice or a conscious intention to discriminate against a person; and (iii) evidence of disparate impact, when a lender applies a practice uniformly to all applicants, but the practice has a discriminatory effect, even where such practices are neutral on their face and are applied equally, unless the practice can be justified on the basis of business necessity. On September 23, 1994, President Clinton signed the Reigle Community Development and Regulatory Improvement Act of 1994 (the "Regulatory Improvement Act"). The Regulatory Improvement Act contains funding for community development projects through banks and community development financial institutions and also numerous regulatory relief provisions designed to eliminate certain duplicative regulations and paperwork requirements. On September 29, 1994, President Clinton signed the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Federal Interstate Bill") which amended Federal law to permit bank holding companies to acquire existing banks in any state effective September 29, 1995, and to permit any interstate bank holding company to merge its various bank subsidiaries into a single bank with interstate branches after May 31, 1997. States have the authority to authorize interstate branching prior to June 1, 1997, or, alternatively, to opt out of interstate branching prior to that date. The Georgia Financial Institutions Code was amended in 1994 to permit the acquisition of a Georgia bank or bank holding company by out-of-state bank holding companies beginning July 1, 1995. On september 29, 1995, the interstate banking provisions of the Georgia Financial Institutions Code were superseded by the Federal Interstate Bill. In February 1996, the Georgia legislature adopted the "Georgia Interstate Branching Act," which permitted Georgia-based banks and bank holding companies owning or acquiring banks outside of Georgia and all non-Georgia banks and bank holding companies owning or acquiring banks in Georgia the right to merge any lawfully acquired bank into an interstate branch network. The Georgia Interstate Branching Act also allows banks to establish de novo branch banks on a limited basis beginning July 1, 1996. Beginning July 1, 1998, the number of de novo bank branches which may be established will no longer be limited. Monetary Policy The earnings of South are affected by domestic and foreign economic conditions, particularly by the monetary and fiscal policies of the United States government and its agencies. The FRB has had, and will continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to mitigate recessionary and inflationary pressures by regulating the national money supply. The techniques used by the Federal Reserve Bank include setting the reserve requirements of member banks and establishing the discount rate on member bank borrowings. The FRB also conducts open market transactions in United States government securities. 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. 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. 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, 1997 1996 1995 (In Thousands) ASSETS Cash and due from banks $ 8,723 $ 5,421 $ 4,348 Cash in bank - interest bearing 1,412 2,138 827 Taxable investment securities 12,026 14,598 8,518 Nontaxable investment securities 1,833 1,947 1,055 Others 833 556 273 Federal funds sold and securities purchased under agreements to resell 7,202 9,593 8,023 Loans - net 96,657 84,023 60,641 Other assets 7,944 7,523 5,968 Total Assets $ 136,630 $ 125,799 $ 89,653 Year Ended Year Ended Year Ended December 31, December 31, December 31, 1997 1996 1995 (In Thousands) LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand - non-interest bearing $ 18,052 $ 17,379 $ 13,446 Demand - interest bearing 21,118 20,380 15,211 Savings 8,327 7,903 6,675 Time 72,070 64,401 42,838 Total Deposits $ 119,567 $ 110,063 $ 78,170 Federal funds purchased 507 343 7 Other borrowed funds 3,614 3,741 1,545 Other liabilities 1,102 888 408 Total Liabilities $ 124,790 $ 115,035 $ 80,130 Shareholders' equity 11,840 10,764 9,523 Total Liabilities and Shareholders' Equity $ 136,630 $ 125,799 $ 89,653 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, 1997 Average Yield/ Balance Interest Rate ASSETS (In Thousands) Cash in banks - interest bearing $ 1,412 $ 92 6.50% Loans 96,657 10,770 11.14 Taxable investments 12,026 941 7.82 Non-taxable investments 1,833 90 4.91 Other 833 42 5.04 Federal funds sold and securities purchased under agreements to resell 7,202 393 5.54 Total Interest-bearing assets $ 119,963 $ 12,328 10.28% LIABILITIES Demand - interest bearing $ 21,118 $ 720 3.41% Savings deposits 8,327 258 3.10 Other time deposits 72,070 4,074 5.65 Other borrowing 3,614 305 8.44 Federal funds purchased 507 30 5.91 Total Interest-Bearing Liabilities $ 105,636 $ 5,387 5.10% Net interest earnings $ 6,941 Net yield on interest earning assets 5.18% Year Ended December 31, 1996 Average Yield/ Balance Interest Rate ASSETS (In Thousands) Cash in banks - interest bearing $ 2,138 $ 119 5.57% Loans 84,023 9,479 11.28 Taxable investments 14,598 879 6.02 Non-taxable investments 1,947 95 4.88 Other 556 28 5.04 Federal funds sold and securities purchased under agreements to resell 9,593 506 5.27 Total Interest-bearing assets $ 112,855 $ 11,106 9.84% LIABILITIES Demand - interest bearing $ 20,380 $ 579 2.84% Savings deposits 7,903 231 2.92 Other time deposits 64,401 3,703 5.75 Other short term borrowing 3,741 292 7.81 Federal funds purchased 343 18 5.25 Total Interest-Bearing Liabilities $ 96,768 $ 4,823 4.98% Net interest earnings $ 6,283 Net yield on interest earning assets 4.86% Year Ended December 31, 1995 Average Yield/ Balance Interest Rate ASSETS (In Thousands) 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% 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% (1) Note: Loan fees are included for rate calculation purposes. Loan fees included in interest amounted to approximately $732,852 in 1997, $723,885 in 1996 and $464,456 in 1995. 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. 1997 compared to 1996 Increase (Decrease) Due to (1) Volume Rate Change Interest earned on: (In Thousands) Cash in banks - interest bearing $( 40) $ 13 $( 27) Loans 1,426 ( 135) 1,291 Taxable investments ( 155) 217 62 Nontaxable investments ( 6) 1 ( 5) Other 14 - 14 Federal funds sold and securities purchased under agreement to resell ( 126) 13 ( 113) Total Interest-Earning Assets $ 1,113 $ 109 $ 1,222 Interest paid on: NOW deposits $ 22 $ 119 $ 141 Savings deposits 12 15 27 Other time deposits 443 ( 72) 371 Other borrowing ( 10) 23 13 Federal funds purchased 9 3 12 Total Interest-bearing Liabilities $ 476 $ 88 $ 564 Net Interest Earnings $ 637 $ 21 $ 658 (1) The change in interest due to volume has been determined by applying the rate from the earlier year to the change in average balances outstanding from one year to the next. The change in interest due to rate has been determined by applying the change in rate from one year to the next to average balances outstanding in the later year. 1996 compared to 1995 Increase (Decrease) Due to (1) Volume Rate Change Interest earned on: (In Thousands) Cash in banks - interest bearing $ 65 $ 13 $ 78 Loans 2,698 ( 215) 2,483 Taxable investments 366 - 366 Nontaxable investments 50 ( 14)) 36 1996 compared to 1995 (con't) Increase (Decrease) Due to (1) Volume Rate Change (In Thousands) Other $ 10 $ 8 $ 18 Federal funds sold and securities purchased under agreement to resell 92 ( 58) 34 Total Interest-Earning Assets $ 3,281 $( 266) $ 3,015 Interest paid on: NOW deposits $ 139 $ 33 $ 172 Savings deposits 34 15 49 Other time deposits 1,298 ( 175) 1,123 Other borrowing 205 ( 57) 148 Federal funds purchased 17 - 17 Total Interest-bearing Liabilities $ 1,693 $( 184) $ 1,509 Net Interest Earnings $ 1,588 $( 82) $ 1,506 (1) The change in interest due to volume has been determined by applying the rate from the earlier year to the change in average balances outstanding from one year to the next. The change in interest due to rate has been determined by applying the change in rate from one year to the next to average balances outstanding in the later year. 1995 compared to 1994 Increase (Decrease) Due to (1) Volume Rate Change Interest earned on: (In Thousands) 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 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. 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, 1997 1996 1995 (In Thousands) U. S. Treasury and other U. S. government agencies and corporations $ 13,892 $ 12,381 $ 7,634 State and political subdivisions (domestic) 1,976 1,888 1,921 Mortgage backed securities 1,080 1,544 1,897 Totals $ 16,948 $ 15,813 $ 11,452 B. Maturities The amounts of investment securities in each category as of December 31, 1997 are shown in the following table according to maturity classifications (1) one year or less, (2) after one year through five years, (3) after five years through ten years, (4) after ten years. U. S. Treasury and Other U. S. Government State Agencies and and Political Mortgage Backed Corporations Subdivisions Securities Average Average Yield Yield Average Amount (1) Amount (1)(2) Amount Yield Maturity: One year or less $ 1,797 5.27% $ 35 10.64% $ 43 8.37 After one year through five years 10,991 6.16 896 6.48 707 6.10 After five years through ten years 1,091 6.76 400 7.62 - - After ten years - - 599 7.43 320 7.03 Totals $13,879 6.09% $ 1,930 7.09% $ 1,070 6.46% (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, 1997 1996 1995 (In Thousands) Commercial, financial and agricultural $ 29,728 $ 19,565 $ 14,592 Real estate - mortgage 52,544 53,813 36,426 Real estate - construction 6,968 3,798 1,767 Installments 17,285 11,870 8,932 $ 106,525 $ 89,046 $ 61,717 Less - unearned income 149 150 82 Reserve for possible losses 1,822 1,781 994 Total Loans $ 104,554 $ 87,115 $ 60,641 B. Maturities and Sensitivity to Changes in Interest Rates The amount of total loans by category outstanding as of December 31, 1997 which, based on remaining repayments of principal, are due in (1) one year or less, (2) more than one year but less than five and (3) more than five years are shown in the following table. The amounts due after one year are classified according to the sensitivity to changes in interest rates. Maturity Classification Over One One Year Through Over or Less Five Years Five Years Total (In Thousands) Types of Loans Commercial, financial and agricultural $ 18,857 $ 10,871 $ - $ 29,728 Real estate mortgage 38,005 6,872 7,667 52,544 Real estate construction 6,968 - - 6,968 Installment 6,164 11,121 - 17,285 Total loans due after one year with: Predetermined interest rate 27,545 Floating interest rate Not available 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, 1997 1996 1995 (In Thousands) Loans accounted for on a non-accrual basis $ 311 $ 553 $ 46 Loans contractually past due ninety days or more as to interest or principal payments 760 226 276 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 36 35 - 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, 1997 +------Interest Sensitive-----+ 0 - 91 - 181 - 90 Days 180 Days 365 Days (Thousands of Dollars) Earning Assets: Loans $ 56,590 $ 5,068 $ 8,361 Investment securities 1,485 42 410 Interest bearing deposits 785 99 297 Federal funds sold and securities purchased under agreement to resell 9,890 - - Total Earning Assets $ 68,750 $ 5,209 $ 9,068 Supporting Sources of Fund Savings $ 8,669 $ - $ - Money market and NOW 21,997 - - Other time deposits 20,858 10,428 26,594 CD's - $100,000 or more 3,698 5,315 7,008 Other borrowings 3,347 - - Total Interest Bearing Deposits $ 58,569 $ 15,743 $ 33,602 Demand deposits and other funds supporting earning assets - non interest earning $ - $ - $ - Total Supporting Sources of funds $ 58,569 $ 15,743 $ 33,602 Interest Sensitive - interest earning assets less interest bearing liabilities $ 10,181 $( 10,534) $( 24,534) Cumulative interest rate sensitivity gap $ 10,181 $( 353) $( 24,887) Interest rate sensitivity gap ratio 1.17 .33 .27 Cumulative interest rate sensitivity gap ratio 1.17 .99 .77 5 Years Total $ 28,864 $ 106,525 12,878 16,947 99 1,280 - 9,890 $ 41,841 $ 134,642 $ - $ 8,669 - 21,997 2,005 62,685 1,000 17,021 - 3,347 $ 3,005 $ 113,719 $ - $ 22,230 $ 3,005 $ 135,949 $ 38,836 $( 1,307) $ 13,949 $( 1,307) 1392.3 .99 1.12 .99 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, 1997 1996 1995 (In Thousands) A. Average amount of loans outstanding $ 96,657 $ 84,023 $ 60,641 B. Balance of reserve for possible loan losses at beginning of period $ 1,781 $ 994 $ 975 C. Loans charged off: Commercial, financial and agricultural $ 44 $ 57 $ 45 Real estate - mortgage 123 30 - Installments 97 172 144 $ 264 $ 259 $ 189 D. Recoveries of loans previously charged off: Commercial, financial and agricultural $ 34 $ 161 $ 7 Real estate 8 68 46 Installment 83 45 93 $ 125 $ 274 $ 146 E. Net loans charged off during period $ 139 $( 15) $ 43 Additions to reserve charged to operating expense during period (1) $ 180 $ 201 $ 62 Addition from bank acquisition - 571 - $ 180 $ 772 $ 62 F. Balance of reserve for possible loan losses at end of period $ 1,822 $ 1,781 $ 994 G. Ratio of net loans charged off during the period to average loans outstanding .014 ( .002) .070 (1) Although the provisions exceeded the minimum provision required by regulatory authorities, the Board of Directors believe that the provision has not been in excess of the amount required to maintain the reserve at a sufficient level to cover potential losses. The amount charged to operations and the related balance in the reserve for loan losses is based upon periodic evaluations by management of the loan portfolio. These evaluations consider several factors including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience and management's estimation of future potential losses. (2) Management's review of the loan portfolio did not allocate reserves by category due to the portfolio's small size. The reserves were allocated on the basis of a review of the entire portfolio. The 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, 1997 1996 1995 (In Thousands) Demand deposits $ 18,052 $ 17,379 $ 13,446 NOW deposits 21,118 20,380 15,211 Savings deposits 8,327 7,903 6,675 Time certificates of deposits 72,070 64,401 42,838 Total Deposits $ 119,567 $ 110,063 $ 78,170 B. The amounts of time certificates of deposit issued in amounts of $100,000 or more as of December 31, 1997 are shown below by category, which is based on time remaining until maturity of (1) three months or less, (2) over three through six months, (3) over six through twelve months and (4) over twelve months. Three months or less $ 3,968 Over three through six months 5,045 Over six through twelve months 7,008 Over twelve months 1,000 Total $ 17,021 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, 1997 1996 1995 Return on assets (1) 1.13% 1.14% 1.28% Return on equity (2) 13.06 13.29 12.08 Dividend payout ratio (3) 15.54 15.54 19.37 Equity to assets ratio (4) 8.67 8.56 10.62 (1) Net income divided by average total assets. (2) Net income divided by average equity. (3) Dividends declared per share divided by net income per share. (4) Average equity divided by average total assets. Item 2. Properties Alma Bank's main banking office and the Registrant's principal executive offices are located at 104 North Dixon Street, Alma, Georgia 31510. The building, containing approximately 13,040 square feet of usable office and banking space, and the land, approximately 1.2 acres, are owned by Alma Bank. Alma Bank also has a separate drive-in banking facility located at 505 South Pierce Street, Alma, Georgia. The building, containing 510 square feet, in which the branch is located and the land, approximately .4 acres, on which it is located are owned by Alma Bank. Citizens Bank's main banking office is located at 205 East King Street, Kingsland, Georgia 31548. The building, containing approximately 6,600 square feet of usable office and banking space, and the land, approximately 2 acres, are owned by Citizens Bank. Peoples Bank's main banking office is located at Comas and E. Parker Streets, Baxley, Georgia 31513. The building, containing approximately 7,800 square feet of usable office and banking space, and the land, approximately 2.5 acres, are owned by the Peoples Bank. The Bank does not have branches. Pineland Bank's main banking office is located at 257 North Broad Street, Metter, Georgia 30439. The building, containing approximately 10,000 square feet of usable office and banking space, and the land, approximately 1 acre, are owned by the Pineland Bank. The Bank does not have branches currently but is in the process of constructing a bank on leased property. Item 3. Legal Proceedings Neither the Registrant or its subsidiaries are parties to, nor is any of their property the subject of, any material pending legal proceedings, other than ordinary routine proceedings incidental to the business of the Banks, nor to the knowledge of the management of the Registrant are any such proceedings contemplated or threatened against it or its subsidiaries. Item 4. Submission of Matters to a vote of Security Holders Note applicable. Part II. 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, 1998, there were approximately 480 holders of record of the Registrant's common stock. (c) The Registrant paid an annual dividend on its common stock of $.60 per share for a total of $239,681 for fiscal 1997. Item 6. Selected Financial Data Years Ended December 31, 1997 1996 1995 1994 1993 (In Thousands) Total Assets $ 149,895 $ 132,291 $ 97,175 $ 84,477 $ 78,911 Operations: Interest income $ 12,328 $ 11,107 $ 8,090 $ 6,568 $ 5,982 Interest expense 5,387 4,823 3,314 2,269 2,135 Net Interest Income $ 6,941 $ 6,284 $ 4,776 $ 4,299 $ 3,847 Provision for loan losses 179 202 62 53 118 Net interest income after provision for loan losses $ 6,762 $ 6,082 $ 4,714 $ 4,246 $ 3,729 Other income $ 1,569 $ 1,596 $ 1,371 $ 1,264 $ 1,251 Other expenses $ 6,017 $ 5,586 $ 4,345 $ 4,116 $ 3,765 Income before income taxes $ 2,314 $ 2,092 $ 1,740 $ 1,394 $ 1,215 Federal Income taxes $ 768 $ 662 $ 590 $ 405 $ 287 Net income before extraordinary items $ 1,546 $ 1,430 $ 1,150 $ 989 $ 928 Extraordinary items $ - $ - $ - $ - $ - Net income $ 1,546 $ 1,430 $ 1,150 $ 989 $ 928 Per Share Data: Income after extraordinary items $ 3.86 $ 3.54 $ 2.84 $ 2.44 $ 2.27 Net income $ 3.86 $ 3.54 $ 2.84 $ 2.44 $ 2.27 Dividends Declared $ .60 $ .55 $ .55 $ .55 $ .55 Book value $ 31.28 $ 27.72 $ 24.79 $ 22.20 $ 20.50 Profitability Ratios Net income to average total assets 1.13% 1.14% 1.28% 1.19% 1.16% Net income to average stockholders' equity $ 13.06 $ 13.29 $ 12.08 $ 11.22 $ 11.66 Net interest margin $ 5.18 $ 4.86 $ 5.20 $ 5.21 $ 4.99 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 $149,894,560 at year end 1997 from $132,290,583 at year end 1996. This growth represents a 13.30% increase in 1997 compared to 5.67% increase in 1996. The increase is attributable to normal growth within the banking area with limited entry into competitive situations for large deposits. South was able to maintain rates at a level which minimizes net interest margin decline. South continues to be aggressive in the markets it operates for good core deposits. Loan demand continues to be strong with loans increasing $17,478,696 in 1997. Loan demand continues to be strong as evidenced by the 19.6% internal growth in loans. The banks continue to look for good quality loans as loans represent the highest yielding asset on the bank's books. The rural economy of the bank's market area has been stable for the past three years allowing the bank to place good quality loans on the books. Classified loans for regulatory purposes remain at low levels and do not represent any trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity on capital resources or represents material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan payment terms. South's investment portfolio, including certificate of deposits in other banks, increased to $18,227,557 from $17,699,032. The small increase of $528,525 from operation is an indication of the loan demand of the banks and the desire of the banks to utilize the assets of South in the highest yielding manner available to the banks without creating liquidity problems. South has maintained adequate federal funds sold and investments available for sale to sufficiently maintain adequate liquidity. South's securities are primarily short term of three years or less in maturity enabling South to better monitor the rate sensitivity of these assets. Unrealized gain and losses on this portfolio is not material to the statement as South maintains a slight unrealized gain of $43,781. As the primary source of funds, aggregate deposits increased by $15,908,509 in 1997 compared to $32,148,126 in 1996. The 1996 increase includes $25,055,325 acquired in the Pineland State Bank acquisition and an operational increase of $7,092,801. This represents a 13.63% increase for the year compared to a 6.47% increase in 1996. This illustrates the efforts of the banks to maintain good core deposit growth and reach the higher paying time certificates. Rates have not fluctuated much during the year as most of the bank's market has helped the bank remain competitive without drastically reducing the net interest margin. One of the markets will experience new competition in 1998 which could have some impact on time certificate rates; however, management does not anticipate any major shifting of 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 $1,875,596 and federal funds sold with daily maturities amounted to $10,040,000 at year end 1997, a decrease from prior years as the loan demand continues. Maturing loans and certificates of deposits in other banks are other sources of liquidity. The overall liquidity of South has been enhanced by a significant aggregate amount of core deposits. These core deposits have remained constant during this period. South has utilized less stable short-term funding sources to enhance liquidity such as large denomination time deposits and money market certificates within its current customer base, but has not attempted to acquire these type of accounts from non-core deposit customers. South has utilized its core deposit base to help insure it maintains adequate liquidity. Historically, the trend in cash flows as represented in the statement of cash flows shows a steady increase in cash generated by operations from the last three years. This is a result of increasing net income for each year. While income is not predictable, it is anticipated that liquidity will continue to be enhanced by the operations of the bank. Operations activity, however, generate only a small portion of the cash flow activities of the bank. Primary cash flow comes from investing activities such as sales and/or maturity of investment securities and in the financing activity through an increase in deposits. The primary use of cash flow includes the purchase of securities and making new loans as investing activities. The history of the bank's cash flow indicates a nonrepeating source such as proceeds from borrowing utilized as sources of cash for the purpose of acquisition or expansion. South's overall cash flows indicate the relative stability and manageable growth of the bank's assets. South utilized deposit growth as its primary source of funds to handle growth. South's liquidity is maintained at levels determined by management to be sufficient to handle the cash needs that might arise at any given date. Outside sources are maintained, but South looks to these sources only on a very short term basis. South's long term liquidity plans include utilizing internally generated deposits as its primary source of cash flows and utilizing the shifting of the make up of assets to handle short term demands on cash. 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 different time intervals as of December 31, 1997. 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 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 1997 Compared to 1996 Net interest income remains an effective measurement of how well management has balanced the South's interest rate sensitive assets and liabilities. Net interest income increased by $657,643. The increase of 10.46% compared to a 7.8% increase in 1996. The primary determinants of the increase were loans and time deposits. As loan demand increased, funds were channeled into higher yielding loans. Management continues its policy of not soliciting high interest deposits and was able to maintain stable cost of funds. The shifting of assets and liabilities was necessary to maintain level of net interest income as net interest yield increased to 5.20% from 4.96%. With the low interest rate currently in the market and South's current interest rate gap, South will continue its efforts to channel funds into higher yielding assets. Due to the rate sensitivity gap, South will attempt to improve its current position with a controlled attempt to lengthen its maturity of interest rate sensitive liabilities although this is difficult without rate adjustments upward. The provision for loan loss was $1,821,680 in 1997 compared to $1,781,013 in 1996. The provision for loan losses has been sufficient to increase the allowance for loan losses each year. During the year 1997, loan loss were held to low levels as management continues to work its loan portfolio to minimize charge-offs and place maximum efforts to collect previously charged off. Other income, decreased slightly from the prior year. Service charges increased in 1997 compared to 1996. Additionally, a small loss on securities occurred in 1997 on early calls. A loss on sale of equipment from the computer center during a conversion accounts for the decline in other income in 1997. Operating cost grew at a rate of 7.72%. The increases are primarily personnel related as bank works hard at controlling cost. Decrease in FDIC fees and increased data processing efficiency help maintain cost levels. Income tax expense was $767,811 in 1997 or 33.1% of net income compared to $662,078 in 1996 or 31.6% of net income. The nondeductible cost attributable to the 1996 acquisition of Pineland Bank accounts for the higher tax rate. Results of operations can be measured by various ratio analysis. Two widely recognized performance indicators are the return on average equity and the returns on average assets. South's return on equity increased from 11.66% to 13.06%. The return on assets decreased from 1.16% to 1.13%. These levels are within peer group ranges of some other bank holding companies, management believes that 1998 can obtain comparable ratios despite increased competition. 1996 Compared to 1995 Net interest income is an effective measurement of how well management has balanced the South's interest rate sensitive assets and liabilities. Net interest income increased by $1,507,250 of which $1,134,158 was a result of Pineland State Bank acquisition. The increase, excluding bank acquisition was $373,092 or 7.8% compared to a 11.1% increase in 1995. The primary determinants of the increase were loans and time deposits. As loan demand increased, funds were channeled into higher yielding loans. Management did not solicit high interest deposits and was able to maintain stable cost of funds. The shifting of assets and liabilities was necessary to maintain level of net interest income as net interest yield decreased to 4.96% from 4.99%. With the low interest rate currently in the market and South's current interest rate gap, South will continue its efforts to channel funds into higher yielding assets. Due to the rate sensitivity gap, South will attempt to improve its current position with a controlled attempt to lengthen its maturity of interest rate sensitive liabilities. The provision for loan loss was $1,781,013 in 1996 of which $603,299 came from the Pineland State Bank acquisition compared to $994,027 in 1995. The provision for loan losses has been sufficient to increase the allowance for loan losses each year. During the year 1996, loan loss recoveries exceeded the loan charged off as management continues to work its loan portfolio to minimize charge-offs and place maximum efforts to collect previously charged off. Other income, excluding bank acquired, increased slightly from the prior year. Service charges increased in 1996 compared to 1995. Additionally, a small loss on securities occurred in 1996 as early calls and a small number of sales resulted in a small loss. Operating cost, excluding bank acquired, grew at a rate of 1.68%. The increases are primarily personnel related as bank works hard at controlling cost. Decrease in FDIC fees and increased data processing efficiency help maintain cost levels. Income tax expense was $662,078 in 1996 or 31.6% of net income compared to $589,746 in 1995 or 33.9% of net income. During the year 1993, FASB 109 was adopted by South with no material effect on its financial statements; however, some adjustments were required. Results of operations can be measured by various ratio analysis. Two widely recognized performance indicators are the return on average equity and the returns on average assets. South's return on equity increased from 11.19% to 11.66%. The return on assets increased from 1.03% to 1.16%. 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's current interest rate gap, South will continue its efforts to channel funds into higher yielding assets. Due to the rate sensitivity gap, South will 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 becoming 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%. 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 1997 1996 1995 (In Thousands) Non accrual loans $ 311 $ 553 $ 66 Past due 90 days still accruing 760 226 276 Other real estate (ORE) 122 346 283 $ 1,193 $ 1,125 $ 625 Nonperforming loans to year end loans 1.00% .87% .54% Nonperforming assets to year end loan and ORE 1.11% 1.26% 1.00% The ratio of nonperforming assets has increased since 1994. A slight increase occurred as ORE sales declined and a subsequent foreclosure has increased the ORE in 1994 and 1996. This increase is attributed to management's early review system to grasp problems before they become unmanageable. Management continues to work on nonperforming assets to further reduce this ratio. Regulatory Matters During the year 1997, 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 Recently Issued Accounting Standards In June 1996, the FASB issued Statement of Financial Accounting Standard No 125 relating to transfers and servicing of financial assets as well as for extinguishment of liabilities. This standard is based on the consistent application of the financial components approach which focuses on control. Under such an approval after a transfer of financial assets an entity: Recognized the financial and servicing assets it controls and the liabilities it has occurred. Derecognizes financial assets when control is surrendered. Derecognizes liabilities when extinguished. This FASB is effective for statement issued on or after December 31, 1996 except for selected provision. This FASB does not affect South Banking Company materially in any fashion as South, with minimum exceptions, does not transfer assets to others or retain any service rights. In October 1995, the FASB issued Statement of Financial Accounting Standard No. 124 relating to accounting standards for stock based employer compensation plans. This FASB is effective for the 1996 year; however, South does not have any stock based compensation plans and does not have any plans to enact such a plan in the future. Item 8. Financial Statements and Supplementary Data The following consolidated financial statements of the Registrant and its subsidiaries are included on pages F-1 through F-37 of this Annual report on Form 10-K. Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Income - Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995 Consolidated Statement of Cash Flow - Year ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Item 9. Disagreement on Accounting and Financial Disclosures Not applicable. Part III. Item 10. Directors and Executive Officers of the Registrant The Directors and Executive Officers of the Registrant and their respective ages, positions with the Registrant, principal occupation and Common Stock of the Registrant beneficially owned as of March 1, 1998 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 (42) President, 1978(1)(2) 18,543 Treasurer and (3) ( 4.64%) Director; Vice (4) Chairman and Director, Citizens Bank; Vice Chairman and Director, Peoples State Bank & Trust, Baxley, Georgia; President Peoples Bank, Lyons, Georgia; Director, Banker's Data Services; Director, Alma Exchange Bank and Trust 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) Olivia Bennett (78) Executive Vice 1969(1)(2) 186,493 President, Secretary (3) ( 46.68%) and Director; Chairman and Director, Alma Bank; Director, Banker's Data Services; Chairman of Board, President, Citizens Bank; Director, Peoples Bank Lawrence Bennett (50) President and 1987(1)(2) 11,897 Director, Alma (4) ( 2.98%) Bank; Director, Banker's Data Services; Director, Peoples Bank, Baxley; Director Peoples Bank, Lyons Charles Stuckey (50) Director; Executive 1990(3) 358 Vice President, ( .1%) Peoples Bank; Director, Banker's Data Services James W. Whiddon (53) Director; Executive 1989(2) 66 Vice President and ( -%) Director, Citizens Bank; Director, Banker's Data Services Kenneth F. Wade (55) Director; Executive 1980(1) 4,779 Vice President, Director ( 1.19%) and Cashier, Alma Bank; Director, Banker's Data Services John Rogers (50) Director, Executive 1996(4) - Vice President, Pineland State Bank; Director; Banker's Data Service (1) Director of Alma Bank (2) Director of Citizens Bank (3) Director of Peoples Bank (4) Director of Pineland State Bank Included in shares owned by Olivia Bennett are 175,501 shares owned by Estate of Valene Bennett of which she is the Executrix. None of the directors are a director of a publicly-held corporation which is required to file reports with the Securities and Exchange Commission. Each of the Directors and Executive Officers have been engaged in his or her present principal occupation for at least five years. Olivia Bennett is the mother of Paul T. Bennett and Lawrence Bennett. There are no other family relationships between any other Director or Executive Officer. Directors serve until the next annual meeting of shareholders or until their successors are elected and qualified. Officers serve at the pleasure of the Board of Directors. Item 11. Management Renumeration and Transactions The following information is given as to the cash and cash equivalent forms of renumeration received by South's CEO. Long-Term Compensation Annual Compensation Awards 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 (2) Award SARS # Payouts sation Valene Bennett CEO 1997 $ - $ - $ - $ - $ - $ - $ - 1996 - - - - - - - 1995 72,486 - 8,985 - - - - 1994 83,582 - 11,795 - - - - 1993 80,346 - 11,900 - - - - Paul T. Bennett CEO 1997 $125,138 $ - $ 20,235 $ - $ - $ - $ - 1996 109,480 - 22,940 - - - - 1995 87,566 - 15,310 - - - - 1994 79,472 - 15,115 - - - - 1993 76,504 - 13,685 - - - - Olivia Bennett Secretary 1997 $182,936 $ - $ 15,135 $ - $ - $ - $ - 1996 168,748 - 15,295 - - - - 1995 100,857 - 12,200 - - - - 1994 84,223 - 12,200 - - - - 1993 79,414 - 10,975 - - - - (1) Does not include fees and dues for clubs and fraternal and civic organizations paid by the Banks to certain officers for business related purposes. Also, does not include any amounts for use of an automobile. (2) Other compensation consists of director fees from registrant and subsidiary banks. Transactions with Management Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of March 1, 1998, 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 43.93% Olivia Bennett Route 4 Alma, Georgia 31510 10,992 2.75% All Executive Officers and Directors as a group (7 persons) 222,136 55.6% Item 13. Certain Relationships and Related Transactions The Banks have had, and expect to have in the future, banking transactions in the ordinary course of business with Directors and Officers of the Banks and their associates, including corporations, partnerships and other organizations in which such Directors and Officers have an interest, on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with unrelated parties. Such transactions have not involved more than the normal risk of collectibility or presented other unfavorable features. Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K Item 14(a) 1. and 3. and Item 14(d) (a) The following documents are filed as part of this report: 1. Financial Statements (a) South Banking Company and Subsidiaries: (i ) Consolidated Balance sheet - December 31, 1997 and 1996 (ii ) Consolidated Statement of Income - Year ended December 31, 1997, 1996 and 1995 (iii) Consolidated Statement of Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995 (iv ) Consolidated Statement of Cash Flow - Year ended December 31, 1997, 1996 and 1995 Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K (con't) (b) South Banking Company (Parent Corporation Only): (i ) Balance sheet - December 31, 1997 and 1996 (ii ) Statement of Income - period ended December 31, 1997, 1996 and 1995 (iii) Statement of Stockholders' Equity - Period ended December 31, 1997, 1996 and 1995 (iv ) Statement of Cash Flow - Year ended December 31, 1997, 1996 and 1995 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) 1997 Annual Report to Shareholders of South Banking Company (not deemed filed except to the extent that sections thereof are specifically incorporated into this report on Form 10-K by reference). (22) List of the Registrant's subsidiaries: (1) Alma Exchange Bank & Trust (2) Citizens State Bank (3) Peoples State Bank & Trust (4) Bankers' Data Services, Inc. (5) Pineland State Bank All of the Registrant's subsidiaries were incorporated under the laws of the State of Georgia and are doing business in Georgia under the above names. (b) The registrant has not filed a Form 8-K during the last quarter of the period. (c) The response to this Item 14(c) is included in item 14(a). (d) Financial Statements Schedules - None. POWER OF ATTORNEY Know all men by these present, that each person whose signature appears below constitutes and appoints Paul T. Bennett, his attorney-in- fact, to sign any amendments to this Report, and to file the same, with exhibits thereto, and other documents in connection therewith. The Securities and Exchange Commission hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 26, 1998 Paul T. Bennett Paul T. Bennett Principal Executive, Financial and Accounting Officer and Director Date: March 26, 1998 Olivia Bennett Olivia Bennett Executive Vice President and Director Date: March 26, 1998 Charles Stuckey Charles Stuckey Director Date: March 26, 1998 James W. Whiddon James W. Whiddon Director Date: March 26, 1998 Kenneth F. Wade Kenneth F. Wade Director Date: March 26, 1998 Lawrence Bennett Lawrence Bennett Director Date: March 26, 1998 John Rogers John Rogers Director SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOUTH BANKING COMPANY Date: March 26, 1998 By: Paul T. Bennett 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) 1997 annual report to shareholders. (2) Proxy statement for 1998 annual meeting of shareholders. The foregoing materials will be furnished to the Commission when they are sent to the shareholders since the Registrant does not have securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. The foregoing materials shall not be deemed to be "filed" with the Commission or otherwise subject to the liabilities of Section 18 of that Act. SOUTH BANKING COMPANY ALMA, GEORGIA FINANCIAL STATEMENTS DECEMBER 31, 1997 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, 1997 and 1996 and the related consolidated statements of income, cash flows and shareholders' equity for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We 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, 1997 and 1996 and the consolidated results of its operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Respectfully submitted, H. H. BURNET & COMPANY, P. C. Waycross, Georgia February 11, 1998 SOUTH BANKING COMPANY ALMA, GEORGIA CONSOLIDATED BALANCE SHEETS December 31, December 31, 1997 1996 ASSETS Cash and due from banks $ 8,128,444 $ 6,863,559 Deposits in other banks - interest bearing $ 1,280,000 $ 1,886,000 Investment securities Available for sale $ 15,341,990 $ 13,449,288 Held to maturity - market value of $1,614,474 in 1997 and $2,365,832 in 1996 $ 1,605,567 $ 2,363,744 Georgia Bankers stock $ 547,283 $ 547,283 Federal Home Loan Bank stock $ 344,500 $ 247,600 Federal funds sold $ 10,040,000 $ 11,983,000 Loans $106,525,222 $ 89,046,526 Less: Unearned discount ( 149,418) ( 150,457) Reserve for loan losses ( 1,821,680) ( 1,781,013)))) $104,554,124 $ 87,115,056 Bank premises and equipment $ 4,078,502 $ 3,995,385 Goodwill $ 315,514 $ 364,983 Other assets $ 3,658,636 $ 3,474,685 Total Assets $149,894,560 $132,290,583 The accompanying notes are an integral part of these financial statements. SOUTH BANKING COMPANY ALMA, GEORGIA CONSOLIDATED BALANCE SHEETS (con't) December 31, December 31, 1997 1996 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits: Demand - non-interest bearing $ 22,230,080 $ 21,451,527 Demand - interest bearing 21,996,765 20,440,276 Savings 8,668,639 7,917,814 Time 79,706,608 66,883,966 $132,602,092 $116,693,583 Borrowing 3,347,322 3,507,279 Accrued expenses and other liabilities 1,299,188 905,472 Federal funds purchased 150,000 - Total Liabilities $137,398,602 $121,106,334 Stockholder's Equity Common stock $1 par value; shares authorized - 1,000,000, shares issued and outstanding - 1997 and 1996 - 399,500 and 403,500, respectively $ 399,500 $ 403,500 Surplus 3,070,831 3,116,581 Undivided profits 8,981,846 7,675,216 Unrealized gain (loss) on securities 43,781 ( 11,048) Total Stockholders' Equity $ 12,495,958 $ 11,184,249 Total Liabilities and Stockholders' Equity $149,894,560 $132,290,583 The accompanying notes are an integral part of these financial statements. SOUTH BANKING COMPANY ALMA, GEORGIA CONSOLIDATED STATEMENTS OF INCOME Year Ended Year Ended Year Ended December 31, December 31, December 31, 1997 1996 1995 Interest Income Interest and other fees on loans $ 10,769,564 $ 9,479,255 $ 6,995,954 Interest on deposits - interest bearing 92,506 119,366 40,904 Interest on federal funds sold 393,317 506,525 472,289 Interest on investment securities: U. S. Treasury 202,516 186,697 99,131 U. S. Government agencies 655,440 541,881 273,579 Mortgage backed securities 83,951 150,011 140,159 State and municipal subdivisions 89,615 95,350 58,584 Other securities 41,412 27,623 9,893 Total Interest Income $ 12,328,321 $ 11,106,708 $ 8,090,493 Interest Expense Interest on deposits $ 5,052,525 $ 4,512,373 $ 3,167,719 Interest - other borrowing 334,531 310,713 146,402 Total Interest Expense $ 5,387,056 $ 4,823,086 $ 3,314,121 Net interest income $ 6,941,265 $ 6,283,622 $ 4,776,372 Provision for loan losses 179,500 201,589 62,200 Net interest income after provision for loan losses $ 6,761,765 $ 6,082,033 $ 4,714,172 Other Operating Income Service charge on deposits $ 1,191,927 $ 1,163,935 $ 955,791 Commission on insurance 108,277 84,843 63,154 Other income 264,480 231,602 161,926 Securities gains (losses) 246 ( 15,708) 21,591 Data processing fees 153,811 146,598 167,267 Loss on sale of fixed assets ( 149,206) ( 14,957) 1,657 Total Other Operating Income $ 1,569,535 $ 1,596,313 $ 1,371,386 The accompanying notes are an integral part of these financial statements. SOUTH BANKING COMPANY ALMA, GEORGIA CONSOLIDATED STATEMENTS OF INCOME (Con't) Year Ended Year Ended Year Ended December 31, December 31, December 31, 1997 1996 1995 Other Operating Expenses Salaries $ 2,416,589 $ 2,148,626 $ 1,558,381 Profit sharing and other personnel expenses 648,124 518,962 355,822 Occupancy expense of bank premises 383,268 368,854 269,909 Furniture and equipment expense 661,994 559,194 422,129 Stationery and supplies 182,727 165,697 136,568 Data processing 178,838 393,791 428,979 Director fees 137,586 143,040 103,436 Other real estate expenses 15,781 31,751 30,856 Other expenses 1,392,271 1,256,029 1,039,355 Total Other Operating Expenses $ 6,017,178 $ 5,585,944 $ 4,345,435 Income before income taxes $ 2,314,122 $ 2,092,402 $ 1,740,123 Applicable income taxes 767,811 662,078 589,746 Net Income $ 1,546,311 $ 1,430,324 $ 1,150,377 Per share earnings based on weighted average outstanding shares: Weighted average outstanding shares 400,501 403,811 405,283 Net income before extraordinary items $ 3.86 $ 3.54 $ 2.84 Net Income Per Share $ 3.86 $ 3.54 $ 2.84 The accompanying notes are an integral part of these financial statements. SOUTH BANKING COMPANY ALMA, GEORGIA STATEMENT OF STOCKHOLDERS' EQUITY Unrealized Gain (Loss) on Securities Total Common Undivided Available Stockholders ' Stock Surplus Profits for Sale Equity Balance, December 31, 1994 $ 405,283 $ 3,136,238 $ 5,537,253$( 80,997) $ 8,997,777 Net income - - 1,150,377-1,150,377 Cash dividends - - ( 222,889)-( 222,889 ) Unrealized gain (loss) on securities available for sale - - - 123,588 123,588 Balance, December 31, 1995 $ 405,283 $ 3,136,238 $ 6,464,741$ 42,591 $10,048,853 Net income - - 1,430,324-1,430,324 Cash dividends - - ( 219,849)-( 219,849 ) Unrealized gain (loss) on securities available for sale - - -( 53,639) ( 53,639 ) Redemption of shares ( 1,783) ( 19,657) - - - ( 21,440 ) Balance, December 31, 1996 $ 403,500 $ 3,116,581 $ 7,675,216$( 11,048) $11,184,249 Net income - - 1,546,311-1,546,311 Cash dividends - - ( 239,681-)( 239,681) Unrealized gain (loss) on securities available for sale - - -54,829 54,829 Redemption of shares ( 4,000) ( 45,750) - - - ( 49,750) Balance, December 31, 1997 $ 399,500 $ 3,070,831 $ 8,981,846$ 43,781 $12,495,958 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, 1997 1996 1995 Cash Flows From Operating Activities: Net income $ 1,546,311 $ 1,430,324 $ 1,150,377 Add expenses not requiring cash: Provision for depreciation and amortization 599,366 462,180 420,747 Provision for loan losses 179,500 201,589 62,200 Provision for loss on ORE 7,000 41,044 28,110 Bond portfolio losses (gains) ( 265) 15,734 ( 21,827) (Gain ) loss on sale of premises & equipment 153,151 14,957 ( 1,657) Gain on sale of other real estate owned ( 19,071) ( 5,342) ( 17,718) Increase (decrease) in taxes payable ( 125,505) ( 16,610) ( 123,457) Increase (decrease) in interest payable 139,213 57,433 287,865 Increase (decrease) in other liabilities 1,156 49,749 36,870 (Increase) decrease in interest receivable ( 192,363) ( 272,411) ( 73,925) Decrease (increase) in prepaid expenses ( 22,924) 48,322 53,186 (Increase) decrease in other assets 134,274 ( 119,537) ( 224,305) Recognition of unearned loan income ( 1,039) 29,180 21,887 Net Cash Provided From Operating Activities $ 2,398,804 $ 1,936,612 $ 1,598,353 Cash Flows From Investing Activities: Proceeds from sales of investment securities - available for sale $ - $ 4,506,015 $ 979,156 Proceeds from maturities of securities held to maturity 1,056,813 1,635,361 2,533,844 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, 1997 1996 1995 Cash Flows From Investing Activities: (con't) Purchase of securities held to maturity $( 398,399) $( 498,738) $( 1,596,546) Proceeds from maturity of securities available for sale 5,209,008 3,302,652 786,703 Net loans to customers (17,755,789) (13,911,298) ( 4,694,955) Purchase of securities available for sale ( 6,892,671) ( 9,479,898) ( 4,849,104) Purchase of premises and equipment ( 814,681) ( 423,377) ( 273,546) Proceeds from sale of premises and equipment 19,986 18,850 4,911 Proceeds from sale of other real estate owned 379,997 258,140 385,215 Purchase of Pineland Bank stock - ( 1,839,937) ( 975,141) Purchase of FHLB stock ( 96,900) ( 147,700) ( 99,900) Cash and cash equivalents received in bank acquisition - 8,773,744 - Net Cash Provided from Investing Activities $(19,292,636) $( 7,806,186) $( 7,799,363) Cash Flows From Financing Activities: Net increase (decrease) in demand deposits, NOW and money markets $ 2,335,042 $ 2,858,872 $ 1,141,372 Net increase in savings and time deposits 13,574,063 4,334,112 9,620,328 Proceeds from borrowing 320,043 2,000,000 825,000 Payments on borrowing ( 480,000) ( 469,126) ( 140,833) Dividends paid ( 239,681) ( 219,849) ( 222,889) Payments to retire stock ( 49,750) ( 21,440) - Increase in federal funds purchased 150,000 - - Net Cash Provided From Financing Activities $ 15,609,717 $ 8,482,569 $ 11,222,978 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, 1997 1996 1995 Net increase (decrease) in cash and cash equivalents $( 1,284,115) $ 2,612,995 $ 5,021,968 Cash and Cash Equivalents at Beginning of Year 20,732,559 18,119,564 13,097,596 Cash and Cash Equivalents at End of Year $ 19,448,444 $ 20,732,559 $ 18,119,564 The accompanying notes are an integral part of these financial statements. SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 1. Significant Accounting Policies The accounting and reporting policies of South Banking Company, Inc. and its subsidiaries conform with generally accepted accounting principles and with practices within the banking industry. (a) Basis of Presentation During 1996, Pineland State Bank was acquired by South Banking Company. The transaction was accounted for using the purchase method. (b) Principles of Consolidation The consolidated financial statements include the accounts of South Banking Company, Alma, Georgia (The Bank) and its wholly owned bank subsidiaries, Alma Exchange Bank, Alma, Georgia; Peoples State Bank, Baxley, Georgia; Citizens State Bank, Kingsland, Georgia and Pineland State Bank, Metter, Georgia; and its wholly owned computer center, Bankers' Data Services, Inc., Alma, Georgia. All significant intercompany transactions and balances have been eliminated in consolidation. (c) Nature of Operations: The Banks provide a variety of banking services to individuals and businesses through its offices in Alma, Georgia; Kingsland, Georgia; Baxley, Georgia; and Metter, Georgia. Its primary source of revenue is loans to customers who are primarily low to middle income individuals and small to mid size businesses. (d) Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of foreclosed real estate. In connection with the determination of the estimated losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 1. Significant Accounting Policies (con't) (d) Use of Estimates (con't) While management uses available information to recognize losses on loans and foreclosed real estate, further reductions in the carrying amounts of loans and foreclosed assets may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans and foreclosed real estate may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated. (e) Securities: The Bank adopted FASB 115 effective January 1, 1994. The Bank's investments in securities are classified in two categories and accounted for as follows. Securities to be Held to Maturity. Bonds, notes and debentures for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using the interest method over the period to maturity. Securities Available for Sale. Securities available for sale consist of bonds, notes, debentures and certain equity securities not classified as trading securities or as securities to be held to maturity. Declines in fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary have resulted in write-downs of the individual securities to their fair value. The related write-downs have been included in earnings as realized losses. Unrealized holding gains and losses, net of tax, on securities available for sale are reported as a net amount in a separate component of shareholders' equity until realized. Gains and losses on the sale of securities available-for- sale are determined using the specific-identification method. SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 1. Significant Accounting Policies (con't) f. Loans Receivable: Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. (g) Allowances for Loan Losses: The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. (h) Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is computed generally by the straight-line method. (i) Other Real Estate (ORE) Real estate acquired in satisfaction of a loan and in- substance foreclosures are reported in other assets. In- substance foreclosures are properties in which a borrower with little or no equity in the collateral, effectively abandons control of the property or has no economic interest to continue involvement in the property. The borrower's ability to rebuild equity based on current financial conditions also is considered doubtful. Properties acquired by foreclosure or deed in lieu SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 1. Significant Accounting Policies (con't) (i) Other Real Estate (ORE) (con't) of foreclosure and properties classified as in-substance foreclosures are transferred to ORE and recorded at the lower of cost or fair market value based on appraised value at the date actually or constructively received. Loan losses arising from the acquisition of such property are charged against the allowance for loan losses. Losses on ORE due to subsequent valuation adjustments are recorded on a specific property basis. (j) Income Taxes Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The FASB recently issued pronouncement on accounting for income taxes which require a change to the liabilities method for accounting for deferred taxes. The statement includes several other provisions that may affect the bank's accounting for income taxes and allows restatement of as many years as deemed appropriate. The bank adopted the new statement which required a cumulative effect adjustment of $97,693 in 1993. The bank files a consolidated federal income tax return with its subsidiaries. Each subsidiary provides for income taxes on a separate return basis and remits to the parent company amounts determined to be currently payable. (k) Intangibles The intangibles (Goodwill) recorded by the Company in the acquisition of Pineland State Bank are being amortized on a straight line basis over a eight year period. (l) Earnings Per Share Earnings per share are based on the weighted average number of shares outstanding. SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 1. Significant Accounting Policies (con't) (m) 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, 1997, 1996 and 1995 for interest was $5,526,269, $4,765,653 and $3,026,256, respectively. Total income tax payments during 1997, 1996 and 1995 were $893,316, $727,000 and $666,401, respectively. Note 2. Investment Securities The amortized cost and estimated market values of investments in debt securities are as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Securities available for sale - December 31, 1997: U.S. Government and agency securities $12,480,161 $ 46,263 $ 27,628 $12,498,796 State and municipal securities 1,748,433 39,839 3 1,788,269 Mortgage backed securities 1,044,885 13,181 3,141 1,054,925 Totals $15,273,479 $ 99,283 $ 30,772 $15,341,990 December 31, 1996: U.S. Government and agency securities $10,411,873 $ 27,035 $ 57,721 $10,381,187 State and municipal securities 1,575,173 16,883 734 1,591,322 Mortgage backed securities 1,478,983 3,945 6,149 1,476,779 Totals $13,466,029 $ 47,863 $ 64,604 $13,449,288 SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 2. Investment Securities (con't) Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Securities to be held to maturity - December 31, 1997: U.S. Government and agency securities $1,398,742 $ 3,132 $ 1,156 $1,400,718 State and municipal securities 181,692 6,555 - 188,247 Mortgage backed securities 25,133 326 - 25,459 Totals $1,605,567 $ 10,013 $ 1,156 $1,614,424 December 31, 1996: U.S. Government and agency securities $ 2,000,103 $ 2,081 $ 5,726 $ 1,996,458 State and municipal securities 296,420 5,104 - 301,524 Mortgage backed securities 67,221 680 51 67,850 Totals $ 2,363,744 $ 7,865 $ 5,777 $ 2,365,832 Gross realized gains on sales and losses of available-for- sale securities were $-0- and $-0- in 1997, respectively and $9,941 and $25,677, respectively for 1996 and $21,483 and $344, respectively in 1995. Assets, principally securities carried at approximately $10,425,725 at December 31, 1997 and $6,833,268 at December 31, 1996, were pledged to secure public deposits and for other purposes required or permitted by law. The scheduled contractual maturities of securities to be held to maturity and securities available for sale at December 31, 1997 were as follows: SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 2. Investment Securities (con't) Securities to be Securities Held to Maturity Available for Sale Amortized Amortized Cost Fair Value Cost Fair Value Due in one year or less $1,159,718 $1,160,145 $ 715,618 $ 715,878 Due from one year to five years 399,152 403,652 12,444,904 12,479,282 Due from five years to ten years - - 1,241,330 1,241,770 Due after ten years 46,697 50,627 871,627 905,060 $1,605,567 $1,614,424 $15,273,479 $15,341,990 The market value of State and Other Political Subdivision Obligations is established with the assistance of an outside bond department and is based on available market data which often reflects transactions of relatively small size and is not necessarily indicative of prices at which large amounts of particular issues could readily be sold or purchased. Expected maturities will differ from contractual maturities because issuers may have the right to call on prepay obligations with or without call on prepayment penalties. Note 3. Loans The composition of the bank's portfolio was as follows: 1997 1996 Commercial, financial and agricultural $ 29,727,607 $ 19,565,455 Real estate - mortgage 52,544,224 53,813,217 Real estate - construction 6,967,737 3,798,037 Installment and consumer 17,285,654 11,869,817 Total Loans $106,525,222 $ 89,046,526 Less: Unearned discount ( 149,418) ( 150,457)) Reserve for loan losses ( 1,821,680) ( 1,781,013)) Loans, net $104,554,121 $ 87,115,056 SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 3. Loans (con't) The Company and its subsidiaries have granted loans to the officers and directors of the Company, its subsidiaries and to their associates. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The aggregate dollar amount of these loans was $586,758 and $789,805 at December 31, 1997 and 1996. During 1997, $402,886 of new loans were made, and repayments totaled $605,933. Note 4. Reserve for Loan Losses Transactions in the reserve for loan losses are summarized as follows: Year Ended Year Ended Year Ended December 31, December 31, December 31, 1997 1996 1995 Balance at beginning of period $ 1,781,013 $ 994,027 $ 974,866 Additions: Provision charged to operating expenses $ 179,500 $ 201,589 $ 62,200 Balance from bank acquisition - 570,707 - $ 179,500 $ 772,296 $ 62,200 Deductions: Loans charged off $ 263,945 $ 259,264 $ 189,371 Less: recoveries 125,112 273,954 146,332 $ 138,833 $( 14,690) $ 43,039 Balance at end of period $ 1,821,680 $ 1,781,013 $ 994,027 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. SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 4. Reserve for Loan Losses (con't) Loans having carrying values of $138,261 and $185,865 were transferred to foreclosed real estate in 1997 and 1996, respectively. The bank is not committed to lend additional funds to debtors whose loans have been modified. Note 5. Deposits The aggregate amount of short-term jumbo CDs, each with a minimum denomination of $100,000, was approximately $16,735,532 in 1997 and $13,545,611 in 1996. At December 31, 1997, the scheduled maturities of CDs are as follows: 1998 $72,670,608 1999 and 2000 5,501,100 2001 and 2002 1,534,900 2003 and thereafter - $80,706,608 Note 6. Premises and Equipment A summary of the account: Year Ended Year Ended December 31, December 31, 1997 1996 Land $ 448,149 $ 448,149 Buildings 3,199,752 2,914,115 Furniture and equipment 3,776,721 3,581,514 $ 7,424,622 $ 6,943,778 Less: Accumulated depreciation 3,346,120 2,948,393 $ 4,078,502 $ 3,995,385 Depreciation expense was $547,940 in 1997, $516,629 in 1996 and $418,618 in 1995. SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 7. Borrowings Data relating to borrowing is as follows: Year Ended Year ended December 31, December 31, 1997 1996 Parent company - Note payable in 10 annual payments of $350,000. Interest is payable quarterly and accrues at prime rate and is secured by subsidiary bank stock. $ 2,800,000 $ 3,150,000 Subsidiary - Bankers Data Services, Inc. Note payable in 60 monthly principal amount of $10,833.33 plus interest. Interest accrues at prime rate basis. Computer equipment is pledged as collateral for loan. - 357,279 Note payable in 72 monthly principal payments of $8,205. Interest accrues at prime rate minus one half and is payable monthly. Computer equipment is pledged as collateral. 547,322 - Following are maturities of long term debt for each of the next five years. 1998 $ 448,460 1999 448,460 2000 448,460 2001 448,460 2002 448,460 Note 8. Income Taxes Income tax expense (benefit) was $767,811 for 1997, (an effective rate of 33.2%), $662,078 for 1996 (an effective rate of 31.6%) and $509,746 for 1995 (an effective rate of 33.9%). The actual expense for 1997, 1996 and 1995 differs from the "expected" tax expense for those years (computed by applying the federal corporate rate of 34% as follows: SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 8. Income Taxes (con't) 1997 1996 1995 Computed "expected" tax expenses $ 786,801 $ 711,417 $ 591,642 Alternative minimum tax - - - Decrease resulting from: Surtax exemption - - - Tax exempt interest on securities and loans ( 65,118) ( 63,613) ( 39,927) Other, net 46,128 14,274 38,031 $ 767,811 $ 662,078 $ 589,746 The current and deferred amounts of these tax provisions were as follows: 1997 1996 1995 Current $ 793,779 $ 764,797 $ 481,329 Deferred ( 25,968) ( 102,719) 108,417 $ 767,811 $ 662,078 $ 589,746 The tax effects of each type of income and expense item that gave rise to deferred taxes are: December 31 December 31,, 1997 1996 Net unrealized appreciation on securities available for sale $( 22,553) $ 5,691 Depreciation ( 227,204) ( 256,484) Deferred loan fees 50,801 51,203 Allowance for credit losses 334,555 321,666 Other 7,125 15,926 Purchase accounting treatment ( 59,297) ( 59,297) Net deferred tax asset (liability) $ 83,427 $ 78,705 Note 9. Employee Benefit Plans The Company maintains a 401K deferred compensation plan for all subsidiaries effective January 1, 1993. The Company elected to match 75% of employee contributions for 1997 and 50% of employee contributions for 1996 and 1995. The expense to the Company for 1997, 1996 and 1995 was $89,746, $37,009, and $32,256, respectively. SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 10. Leases The Pineland State Bank leases 5.35 acres of land in Candler County under an operating lease expiring December 31, 2054 with an option to lease the land for an additional 75 years. Minimum future rental payments under non-cancelable operating lease having remaining term in excess of 1 year as of December 31, 1997 for each of the next 5 years and in the aggregate is: Year Ended 1998 $ 4,000 1999 4,000 2000 4,000 2001 4,000 2002 4,000 Subsequent to 2002 208,000 Total minimum future rental payments $ 228,000 In June, 1997, the parties amended the lease to allow Pineland State Bank to sublet part of the property and in consideration, the landlord will receive 50% of gross rental under the sublease in addition to the minimum amount above. Note 11. Liabilities Standby Letters of Credit. These transactions are used by the Company's customers as a means of improving their credit standing in their dealings with others. Under these agreements, the Company agrees to honor certain financial commitments in the event that its customers are unable to do so. As of December 31, 1997 the Company had $722,000 in outstanding standby letters of credit. Loan Commitments. As of December 31, 1997, the Company had commitments outstanding to extend credit totaling $14,736,785. 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, 1997 Note 12. Financial Instruments The Bank is a party to financial instruments with off- balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contract or notional amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and financial guarantees written is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments to Extend Credit and Financial Guarantees. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case- by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable; inventory, property, plant and equipment; and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements, including commercial paper and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds various assets as collateral supporting those commitments for which collateral is deemed necessary. SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 12. Financial Instruments (con't) The Bank has not been required to perform on any financial guarantees during the past two years. The Bank has not incurred any losses on its commitments in 1997, 1996 or 1995. Note 13. Restrictions on Subsidiary Dividends, Loans or Advances Dividends are paid by the Company from its assets which are mainly provided by dividends from the Banks. However, certain restrictions exist regarding the ability of the Banks to transfer funds to the Company in the form of cash dividends, loans or advances. The approval of the Georgia Department of Banking is required to pay dividends in excess of 50% of the Bank's net profits for the prior year. Under Federal Reserve regulation, the Bank also is limited as to the amount it may loan to its affiliates, including the Company, unless such loans are collateralized by specified obligations. At December 31, 1997, the maximum amount available for transfer from the Bank to the Company in the form of loans approximated 20% of consolidated net equity. Note 14. Restrictions on Cash and Due from Banks The bank is required to maintain reserve balances with the Federal Reserve Bank. The average amount of those reserve balances for the year ended December 31, 1997 was approximately $-0-. Note 15. Related Party Transactions The Company has entered into a split dollar life insurance arrangement with a director and substantial shareholder. The Company and director's trust each contribute toward the payment of premium for life insurance policy. The Company records its contribution at the present value of anticipated future return or total cash surrender value of policy whichever is higher; however, the carrying amount cannot exceed the amount of premiums paid by the Company. The Company will receive all reimbursement from anticipated withdrawal of cash surrender value or from the proceeds of policy in the event of the death of the director. All cash surrender value of the policy accrues to the benefit of the Company until such time as the cash surrender value exceeds advances made by the Company. As of December 31, 1997, $1,130,596 is carried in other assets related to this arrangement. SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 16. Fair Value of Financial Instruments The following table shows the estimated fair value and the related carrying values of South Banking Company's financial instruments at December 31, 1997 and 1996. Items which are not financial instruments are not included. 1997 Carrying Estimated Amount Fair Value Cash and due from financial institutions $ 8,128,444 $ 8,128,444 Interest earning balances with financial institutions 1,280,000 1,280,000 Federal funds 10,040,000 10,040,000 Securities available for sale 15,341,990 15,341,990 Securities held to maturity 1,605,567 1,614,474 Federal Home Loan Bank stock 344,500 344,500 Georgia Bankers Bank - stock 547,283 716,480 Loans - net of allowances 104,554,124 105,099,123 Demand and savings deposits 52,895,484 52,895,484 Time deposits 79,706,608 80,635,252 1996 Carrying Estimated Amount Fair Value Cash and due from financial institutions $ 6,863,559 $ 6,863,559 Interest earning balances with financial institutions 1,886,000 1,886,000 Federal funds 11,983,000 11,983,000 Securities available for sale 13,449,288 13,449,288 Securities held to maturity 2,363,744 2,365,832 Federal Home Loan Bank stock 247,600 - Georgia Bankers Bank - stock 547,283 - Loans - net of allowances 87,115,056 86,967,948 Demand and savings deposits 42,683,587 42,683,587 Time deposits 66,883,966 67,045,456 For purposes of the above disclosures of estimated fair value, the following assumptions were used as of December 31, 1997 and 1996. 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 SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 16. Fair Value of Financial Instruments (con't) 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, 1997 and 1996, 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, 1997 and 1996, applied for the time period until estimated repayment. The estimated fair value for individual retirement account deposits and time deposits is based on estimates of the rate the Company would pay on such deposits or borrowings at December 31, 1997 and 1996, 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, 1997 and 1996. 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, 1997 and 1996, 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, 1997 and 1996 should not necessarily be considered to apply at subsequent dates. In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the above disclosures, such as property and equipment. Also, non-financial instruments typically not recognized in the financial statements nevertheless may have value but are not included in the above disclosures. These include among other items, the estimated earnings power of core deposit accounts, the earnings potential of loan servicing rights, the trained work force, customer goodwill and similar items. Note 17. Regulatory Matters The Company and its subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off- SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 17. Regulatory Matters (con't) 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, 1997, that the Company and its subsidiaries meet all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Company and its subsidiaries' actual capital amounts and ratios are also presented in the table. To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions: Amount Ratio Amount Ratio Amount Ratio As of December 31, 1997: Total Capital (to Risk Weighted Assets) Consolidated $ 13,580 12.0% $ 9,052 8.0% $ N/A N/A% Subsidiary - Alma 5,720 13.9 3,336 8.0 4,170 10.0 Subsidiary - Baxley 5,036 15.1 2,669 8.0 3,337 10.0 Subsidiary - Kingsland 1,989 14.7 1,080 8.0 1,350 10.0 Subsidiary - Metter 2,845 11.0 2,069 8.0 2,586 10.0 SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 17. Regulatory Matters (con't) To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions: Amount Ratio Amount Ratio Amount Ratio As of December 31, 1997 (con't): Tier I Capital (to Risk Weighted Assets) Consolidated $ 12,137 10.7% $ 4,526 4.0% $ N/A N/A% Subsidiary - Alma 5,208 12.6 1,668 4.0 2,502 6.0 Subsidiary - Baxley 4,603 13.8 1,335 4.0 2,002 6.0 Subsidiary - Kingsland 1,817 13.5 540 4.0 810 6.0 Subsidiary - Metter 2,519 9.7 1,199 4.0 1,552 6.0 Tier I Capital (to Average Assets) Consolidated $ 12,137 8.4% $ 5,743 4.0% $ N/A N/A% Subsidiary - Alma 5,208 9.5 2,188 4.0 2,736 5.0 Subsidiary - Baxley 4,603 10.9 1,694 4.0 2,118 5.0 Subsidiary - Kingsland 1,817 11.0 660 4.0 825 5.0 Subsidiary - Metter 2,519 8.4 1,199 4.0 1,499 5.0 As of December 31, 1996: Total Capital (to Risk Weighted Assets) Consolidated $ 11,955 12.4% $ 7,714 8.0% $ N/A N/A% Subsidiary - Alma 5,262 15.7 2,685 8.0 3,357 10.0 Subsidiary - Baxley 4,542 14.1 2,574 8.0 3,217 10.0 Subsidiary - Kingsland 1,873 16.3 918 8.0 1,147 10.0 Subsidiary - Metter 2,626 14.2 1,483 8.0 1,854 10.0 SOUTH BANKING COMPANY ALMA, GEORGIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note 17. Regulatory Matters (con't) To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions: Amount Ratio Amount Ratio Amount Ratio As of December 31, 1996(con't): Tier I Capital (to Risk Weighted Assets) Consolidated $ 10,763 11.2% $ 3,857 4.0% $ N/A N/A% Subsidiary - Alma 4,841 14.4 1,342 4.0 2,014 6.0 Subsidiary - Baxley 4,138 12.9 1,287 4.0 1,930 6.0 Subsidiary - Kingsland 1,742 15.2 459 4.0 688 6.0 Subsidiary - Metter 2,390 12.9 741 4.0 1,113 6.0 Tier I Capital (to Average Assets) Consolidated $ 10,763 8.3% $ 4,305 4.0% $ N/A N/A% Subsidiary - Alma 4,841 10.0 1,929 4.0 2,411 5.0 Subsidiary - Baxley 4,138 10.6 1,557 4.0 1,946 5.0 Subsidiary - Kingsland 1,742 12.2 569 4.0 711 5.0 Subsidiary - Metter 2,390 8.8 1,082 4.0 1,352 5.0 Note 18. Acquisitions On January 11, 1996, South Banking Company consummated an agreement to acquire the stock of Pineland State Bank for cash. The total acquisition cost was $2,745,716. Funding for the acquisition was through a loan from Georgia Bankers Bank. SOUTH BANKING COMPANY (PARENT CORPORATION ONLY) ALMA, GEORGIA FINANCIAL STATEMENTS DECEMBER 31, 1997 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors South Banking Company Alma, Georgia 31510 Under date of February 2, 1998, we reported on the consolidated balance sheets of South Banking Company, as of December 31, 1997 and 1996, and the related statements of income, cash flows and stockholders' equity for the three years in the period ended December 31, 1997. 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, 1997 and 1996 and the related statements of income, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of South Banking Company (Parent Corporation Only) as of December 31, 1997 and 1996, and the results of its operations, stockholders' equity and its cash flows for the three years then ended in conformity with generally accepted accounting principles. Respectfully submitted, H. H. BURNET & COMPANY, P. C. February 2, 1998 SOUTH BANKING COMPANY (PARENT CORPORATION ONLY) ALMA, GEORGIA BALANCE SHEETS December 31, December 31, 1997 1996 ASSETS Cash and due from banks Interest bearing $ 414,399 $ 418,716 Non-interest bearing 16,789 12,761 Investment in bank's subsidiaries 14,506,089 13,536,590 Investment in nonbank subsidiaries 181,759 226,431 Investment - Pineland State Bank - at cost - - Other assets 60,428 98,449 Costs in excess of book value - 1,896 Prepaid income taxes 180,411 54,905 Total Assets $15,359,875 $14,349,748 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 186 $ 186 Other liabilities - - Accrued income taxes - - Notes payable 2,800,000 3,150,000 Due to subsidiaries 63,731 15,313 Total Liabilities $ 2,863,917 $ 3,165,499 Stockholders' Equity Common stock of $1 par value; authorized 1,000,000 shares; issued and outstanding, 1997 and 1996 $399,500 and 403,500, respectively $ 399,500 $ 403,500 Surplus 3,070,831 3,116,581 Undivided profits 8,981,846 7,675,216 Unrealized gain (loss) on securities available for sale (net) 43,781 ( 11,048) Total Stockholders' Equity $12,495,958 $11,184,249 Total Liabilities and Stockholders' Equity $15,359,875 $14,349,748 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,, 1997 1996 1995 Income Dividends from bank subsidiaries $ 893,272 $ 854,987 $ 773,430 Miscellaneous income 500 845 - Interest income 19,276 32,841 11,692 Management fees 101,500 101,000 79,400 Total Income $ 1,014,548 $ 989,673 $ 864,522 Expenses Salaries $ 73,157 $ 65,000 $ 73,163 Amortization 15,421 24,346 6,726 Interest 260,532 256,725 87,051 Professional fees 15,358 15,150 46,079 Other 84,542 67,014 49,527 Total Expenses $ 449,010 $ 428,235 $ 262,546 Income before income taxes and equity in undistributed income (loss) of subsidiaries $ 565,538 $ 561,438 $ 601,976 Provision (credit) for income taxes ( 110,776) ( 99,798) ( 57,665)) Income before equity in undistributed income in subsidiaries $ 676,314 $ 661,236 $ 659,641 Equity in undistributed income of bank subsidiaries $ 914,669 $ 720,064 $ 440,715 Equity in undistributed income (loss) of nonbank subsidiaries ( 44,672) 49,024 50,021 $ 869,997 $ 769,088 $ 490,736 Net Income $ 1,546,311 $ 1,430,324 $ 1,150,377 The accompanying note is an integral part of these financial statements. SOUTH BANKING COMPANY ALMA, GEORGIA STATEMENT OF STOCKHOLDERS' EQUITY Common Undivided Stock Surplus Profits 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 Net income - - 1,430,324 Cash dividends - - ( 219,849) Unrealized gain (loss) on securities available for sale - - - Redemption of shares ( 1,783) ( 19,657) - Balance, December 31, 1996 $ 403,500 $ 3,116,581 $ 7,675,216 Net income - - 1,546,311 Cash dividends - - ( 239,681) Unrealized gain (loss) on securities available for sale - - - Redemption of shares ( 4,000) ( 45,750) - Balance, December 31, 1997 $ 399,500 $ 3,070,831 $ 8,981,846 Unrealized Gain (Loss) on Securities Total Available Stockholders for Sale Equity $( 80,997) $ 8,997,777 - 1,150,377 - ( 222,889) 123,588 123,588 $ 42,591 $10,048,853 - 1,430,324 - ( 219,849) ( 53,639) ( 53,639) - ( 21,440) $( 11,048) $11,184,249 - 1,546,311 - ( 239,681) 54,829 54,829 - ( 49,750) $ 43,781 $12,495,958 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, 1997 1996 1995 Cash Flow From Financing Activities: Payments on note payable bank $( 350,000) $( 350,000) $ - Proceeds from notes payable to banks - 2,000,000 825,000 Dividends paid ( 239,681) ( 219,849) ( 222,889) Increase (decrease) in due to subsidiaries - - Redemption of common stock ( 49,750) ( 21,440) - Net Cash Provided (Used) from Financing Activities $( 639,431) $ 1,408,711 $ 602,111 Net increase (decrease) in cash and cash equivalents $( 289) $( 160,745) $ 314,108 Cash and cash equivalents at beginning of year 431,477 592,222 278,114 Cash and Cash Equivalents at End of Year $ 431,188 $ 431,477 $ 592,222 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. EX-9 2 [ARTICLE] 9 [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-END] DEC-31-1997 [CASH] 8,128,444 [INT-BEARING-DEPOSITS] 1,280,000 [FED-FUNDS-SOLD] 10,040,000 [TRADING-ASSETS] 0 [INVESTMENTS-HELD-FOR-SALE] 15,341,990 [INVESTMENTS-CARRYING] 1,605,567 [INVESTMENTS-MARKET] 0 [LOANS] 106,525,222 [ALLOWANCE] 1,821,680 [TOTAL-ASSETS] 149,894,560 [DEPOSITS] 132,602,092 [SHORT-TERM] 150,000 [LIABILITIES-OTHER] 1,299,188 [LONG-TERM] 3,347,322 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 399,500 [OTHER-SE] 12,096,458 [TOTAL-LIABILITIES-AND-EQUITY] 149,894,560 [INTEREST-LOAN] 10,769,564 [INTEREST-INVEST] 1,558,757 [INTEREST-OTHER] 0 [INTEREST-TOTAL] 12,328,321 [INTEREST-DEPOSIT] 5,052,525 [INTEREST-EXPENSE] 5,387,056 [INTEREST-INCOME-NET] 6,941,265 [LOAN-LOSSES] 179,500 [SECURITIES-GAINS] 246 [EXPENSE-OTHER] 6,017,178 [INCOME-PRETAX] 2,314,122 [INCOME-PRE-EXTRAORDINARY] 2,314,122 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 1,546,311 [EPS-PRIMARY] 3.86 [EPS-DILUTED] 3.86 [YIELD-ACTUAL] 0 [LOANS-NON] 311,000 [LOANS-PAST] 760,000 [LOANS-TROUBLED] 36,000 [LOANS-PROBLEM] 0 [ALLOWANCE-OPEN] 1,781,013 [CHARGE-OFFS] 263,945 [RECOVERIES] 125,112 [ALLOWANCE-CLOSE] 1,821,680 [ALLOWANCE-DOMESTIC] 0 [ALLOWANCE-FOREIGN] 0 [ALLOWANCE-UNALLOCATED] 1,821,680
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