Ameris Bancorp
Annual Report 2002

Plain-text annual report

ANNUAL REPORT 2002 PROUD MEMBERS OF THE ABC BANCORP TEAM American Banking Company www.americanbankingcompany.com Bank of Thomas County www.bankofthomascounty.com Cairo Banking Company www.cairobankingcompany.com Central Bank & Trust www.centralbankandtrust.com Citizens Security Bank www.citizenssecuritybank.com First National Bank of South Georgia www.first-nationalbank.com Heritage Community Bank www.heritage-communitybank.com Merchants & Farmers Bank www.merchants-farmersbank.com Southland Bank www.southland-bank.com The First Bank of Brunswick www.firstbankbrunswick.com Tri-County Bank www.tri-county-bank.com Working hard for you. COMPANY PROFILE ABC Bancorp’s primary business is managing our subsidiary banks. Through a focused strategy, the ABC Bancorp family of banks has grown to 11 separately chartered banks with $1.2 billion dollars in assets. These banks have a total of 35 banking locations that span southern Georgia, southeastern Alabama and northern Florida. Our business model capitalizes on the efficiencies of a billion dollar financial services company while providing the community with the banking service expected by our customers. We manage our banks through a balance of decentralized management responsibilities and efficient centralized operating systems, products and loan underwriting standards. Our Board of Directors establishes corporate policy, strategy and certain administrative policies. Within ABC Bancorp’s established guidelines and policies, each bank makes lending and community-specific decisions. This approach allows the banker closest to the customer to respond to the differing needs and demands of their unique market. Our corporate office is located at 24 Second Avenue, S.E., Moultrie, Georgia 31768. Our telephone number is (229) 890-1111. Our Internet address is www.abcbancorp.com. ABC Bancorp’s stock is publicly listed on the NASDAQ under the symbol “ABCB”. MISSION STATEMENT ❑ To be a major financial services provider by expanding our presence in Georgia, Alabama and north Florida through branching and acquisitions. ❑ To be an employer of choice by developing, energizing, retaining and rewarding our team of quality employees who pursue exceptional performance. ❑ To grow market share in our communities by offering superior products that benefit our customers’ financial needs through exceptional customer service. ❑ To deliver consistent annual earnings growth achieving and maintaining a level of profitability consistent with the top quartile of financial holding companies as measured by ROA (Return on Assets). ON THE FRONT COVER (From Left to Right) JENEANE HINSON, Retail Banking Officer, American Banking Company; DONNA GOWEN, SVP Commercial Lending, The First Bank of Brunswick; GENE VICKERS, AVP Branch Manager, Heritage Community Bank; LILIANA NUNEZ, Customer Service Representative, American Banking Company TABLE OF CONTENTS Management’s Report to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Selected Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Stock Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Senior Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Our Associates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Office Locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Board of Directors and Subsidiary Bank Presidents . . . . . . . . . . . . . . . . . . . . 16 Management’s Discussion and Analysis of Financial Conditions and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 17 Independent Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . 31 Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . 32 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . 36 Executive Officers, Directors and Senior Management . . . . . . . . . . . . . . . . . . 61 Presidents and Directors – Subsidiary Banks. . . . . . . . . . . . . . . . . . . . . . . . . 62 Common Stock and Dividend Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 ABC Bancorp and Subsidiaries 1 MANAGEMENT’S REPORT TO SHAREHOLDERS A CLEAR AND FOCUSED PLAN. A year of challenges was not without perseverance and dedication. We are pleased to report that 2002 offered ABC Bancorp an opportunity to showcase our strength and stability as a company that is built on the principles of honesty and sound fiscal management. It is in times such as these — when corporate earnings are often called into question — that true character emerges. While 2002 was not a banner year in terms of investment return, our net income was a respectable $10,355,000 or $1.05 per share. It is the strength of that performance in such a weak market that provides optimism for 2003. A major highlight of 2002 was our restructuring plan that divides the ABC Bancorp family into two geographic regions — each with a Bancorp executive assigned to support individual bank presidents and their staffs. These additional onsite resources support the banks’ efforts to enhance profitability and customer service. It has been a tremendous success. In 2003, we expect to see significant results from this new approach to leadership. Last year presented an opportunity to isolate problem areas and keep them from adversely affecting future performance. The downturn in the national economy influenced some of the loans in our portfolio. We faced it head-on. Because of our historically conservative business philosophy, loan quality and non-performing assets have been brought back into line. Our practice of timely and accurately grading our loan portfolio kept loan reserves well-funded. We dealt decisively with problem loans thus avoiding additional negative impact on future earnings. We remained committed to a sound fiscal philosophy that emphasized asset quality and expense control. We exercised caution in merger and acquisition activities. We would rather effectively manage our existing banking network than grow just for the sake of becoming larger. Honesty and integrity have been the hallmark of ABC Bancorp since its inception. Although 2002 was a challenge to all financial institutions, I am proud of our successes. I am particularly proud because our performance was achieved in a highly volatile business environment. While no one has a crystal ball to look into the coming year, we remain committed to the solid financial decisions made in 2002. I’m optimistic these tough decisions will continue to reward us in the future. 2 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 3 KENNETH J. HUNNICUTT, Chairman, President and CEO MANAGEMENT’S REPORT TO SHAREHOLDERS A CLEAR AND FOCUSED PLAN. A year of challenges was not without perseverance and dedication. We are pleased to report that 2002 offered ABC Bancorp an opportunity to showcase our strength and stability as a company that is built on the principles of honesty and sound fiscal management. It is in times such as these — when corporate earnings are often called into question — that true character emerges. While 2002 was not a banner year in terms of investment return, our net income was a respectable $10,355,000 or $1.05 per share. It is the strength of that performance in such a weak market that provides optimism for 2003. A major highlight of 2002 was our restructuring plan that divides the ABC Bancorp family into two geographic regions — each with a Bancorp executive assigned to support individual bank presidents and their staffs. These additional onsite resources support the banks’ efforts to enhance profitability and customer service. It has been a tremendous success. In 2003, we expect to see significant results from this new approach to leadership. Last year presented an opportunity to isolate problem areas and keep them from adversely affecting future performance. The downturn in the national economy influenced some of the loans in our portfolio. We faced it head-on. Because of our historically conservative business philosophy, loan quality and non-performing assets have been brought back into line. Our practice of timely and accurately grading our loan portfolio kept loan reserves well-funded. We dealt decisively with problem loans thus avoiding additional negative impact on future earnings. We remained committed to a sound fiscal philosophy that emphasized asset quality and expense control. We exercised caution in merger and acquisition activities. We would rather effectively manage our existing banking network than grow just for the sake of becoming larger. Honesty and integrity have been the hallmark of ABC Bancorp since its inception. Although 2002 was a challenge to all financial institutions, I am proud of our successes. I am particularly proud because our performance was achieved in a highly volatile business environment. While no one has a crystal ball to look into the coming year, we remain committed to the solid financial decisions made in 2002. I’m optimistic these tough decisions will continue to reward us in the future. 2 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 3 KENNETH J. HUNNICUTT, Chairman, President and CEO FINANCIAL HIGHLIGHTS A CLEAR AND FOCUSED RESULT. ABC Bancorp and Subsidiaries (Dollars in thousands except per share data) 2002 2001 2000 EARNINGS SUMMARY Net interest income Provision for loan losses Non-interest income Non-interest expense Income taxes Net income PER SHARE SUMMARY Common shares outstanding Weighted average shares Income per weighted average share - basic Dividends declared per share ASSET QUALITY Non-performing assets Net loan charge-offs (recoveries) Reserve for loan loss to loans Net loan charge-offs (recoveries) to average loans Non-performing assets to reserve for loan loss Non-performing assets to total assets OTHER KEY DATA Net interest rate spread (a) Net interest margin (a) Return on average assets Return on average equity Efficiency ratio Book value per share Tangible book value per share Stockholders’ equity to total assets $ 46,309 $ 41,186 $ 5,574 15,610 40,913 5,077 $ 10,355 $ 9,770,936 9,858,463 1.05 0.48 9,250 5,650 1.78 % 0.68 % 62.21 % 0.78 % 3.98 % 4.39 % 0.90 % 9.81 % 66.08 % 11.00 8.59 9.01 % $ $ $ $ $ $ $ $ $ $ $ $ 4,566 11,725 34,020 4,692 9,633 9,999,387 9,214,276 1.05 0.48 13,463 4,378 1.86 % 0.63 % 90.09 % 1.14 % $ $ $ $ $ 4.03 % 4.68 % 1.00 % 10.30 % 64.30 % 10.42 7.88 $ $ 8.85 % 38,171 1,712 8,215 30,233 4,343 10,098 8,347,008 8,460,230 1.19 0.46 5,606 1,775 1.67 % 0.31 % 57.02 % 0.68 % 4.43 % 5.20 % 1.27 % 13.19 % 65.18 % 9.66 8.84 9.76 % (a) Computed using fully taxable-equivalent net income. 4 ABC Bancorp and Subsidiaries FROM LEFT TO RIGHT MITCHELL SMITH, VP Corporate Loan Review Manager, ABC Bancorp JOHNNY DYKES, Retail Banking Officer, American Banking Company MARY DUNN, VP Loan Officer, Tri-County Bank ABC Bancorp and Subsidiaries 5 FINANCIAL HIGHLIGHTS A CLEAR AND FOCUSED RESULT. ABC Bancorp and Subsidiaries (Dollars in thousands except per share data) 2002 2001 2000 EARNINGS SUMMARY Net interest income Provision for loan losses Non-interest income Non-interest expense Income taxes Net income PER SHARE SUMMARY Common shares outstanding Weighted average shares Income per weighted average share - basic Dividends declared per share ASSET QUALITY Non-performing assets Net loan charge-offs (recoveries) Reserve for loan loss to loans Net loan charge-offs (recoveries) to average loans Non-performing assets to reserve for loan loss Non-performing assets to total assets OTHER KEY DATA Net interest rate spread (a) Net interest margin (a) Return on average assets Return on average equity Efficiency ratio Book value per share Tangible book value per share Stockholders’ equity to total assets $ 46,309 $ 41,186 $ 5,574 15,610 40,913 5,077 $ 10,355 $ 9,770,936 9,858,463 1.05 0.48 9,250 5,650 1.78 % 0.68 % 62.21 % 0.78 % 3.98 % 4.39 % 0.90 % 9.81 % 66.08 % 11.00 8.59 9.01 % $ $ $ $ $ $ $ $ $ $ $ $ 4,566 11,725 34,020 4,692 9,633 9,999,387 9,214,276 1.05 0.48 13,463 4,378 1.86 % 0.63 % 90.09 % 1.14 % $ $ $ $ $ 4.03 % 4.68 % 1.00 % 10.30 % 64.30 % 10.42 7.88 $ $ 8.85 % 38,171 1,712 8,215 30,233 4,343 10,098 8,347,008 8,460,230 1.19 0.46 5,606 1,775 1.67 % 0.31 % 57.02 % 0.68 % 4.43 % 5.20 % 1.27 % 13.19 % 65.18 % 9.66 8.84 9.76 % (a) Computed using fully taxable-equivalent net income. 4 ABC Bancorp and Subsidiaries FROM LEFT TO RIGHT MITCHELL SMITH, VP Corporate Loan Review Manager, ABC Bancorp JOHNNY DYKES, Retail Banking Officer, American Banking Company MARY DUNN, VP Loan Officer, Tri-County Bank ABC Bancorp and Subsidiaries 5 LEADERSHIP A CLEAR AND FOCUSED FUTURE. A new way to effectively manage our banking network. The regional executive approach represents the implementation of good fiscal management in its truest form. We are more responsive to meeting local needs. We are looking closer at specific performance. We are getting tremendous positive feedback from our associates who have daily contact with our customers. Although in-house improvements are important, the bottom line measurement of performance is profitability and enhanced customer service. We are proving that a large company can be nimble and respectful. Local business people need quick answers on loans that will help our communities remain vital and grow. Having regional executives gives ABC Bancorp a competitive edge. One of the strengths of ABC Bancorp is our ability to combine the personal service of hometown banks with the collective clout of a regional bank that spans three states. During the last half of 2002, we began taking full advantage of that power with the implementation of our regional executive program. The program divides the ABC Bancorp subsidiary banks into two geographic areas – each with a regional banking executive assigned to provide personal guidance and support to bank presidents and their staffs. Within the policies and controls set by the Bancorp, decisions are made in the offices of local loan officers and customer service representatives. While our regional executives are successfully supporting the efforts of the bank presidents, they allow the presidents the room necessary to capitalize on a community bank structure. The presidents remain in charge of their respective banks. Our regional executives make themselves available to promote good communication and morale. Both do a lot of listening. They search for ways to improve the banking experience of each customer. 6 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 7 FROM LEFT TO RIGHT EDWIN W. HORTMAN, JR., EVP, Northern Region Executive JON S. EDWARDS, EVP, Southern Region Executive LEADERSHIP A CLEAR AND FOCUSED FUTURE. A new way to effectively manage our banking network. The regional executive approach represents the implementation of good fiscal management in its truest form. We are more responsive to meeting local needs. We are looking closer at specific performance. We are getting tremendous positive feedback from our associates who have daily contact with our customers. Although in-house improvements are important, the bottom line measurement of performance is profitability and enhanced customer service. We are proving that a large company can be nimble and respectful. Local business people need quick answers on loans that will help our communities remain vital and grow. Having regional executives gives ABC Bancorp a competitive edge. One of the strengths of ABC Bancorp is our ability to combine the personal service of hometown banks with the collective clout of a regional bank that spans three states. During the last half of 2002, we began taking full advantage of that power with the implementation of our regional executive program. The program divides the ABC Bancorp subsidiary banks into two geographic areas – each with a regional banking executive assigned to provide personal guidance and support to bank presidents and their staffs. Within the policies and controls set by the Bancorp, decisions are made in the offices of local loan officers and customer service representatives. While our regional executives are successfully supporting the efforts of the bank presidents, they allow the presidents the room necessary to capitalize on a community bank structure. The presidents remain in charge of their respective banks. Our regional executives make themselves available to promote good communication and morale. Both do a lot of listening. They search for ways to improve the banking experience of each customer. 6 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 7 FROM LEFT TO RIGHT EDWIN W. HORTMAN, JR., EVP, Northern Region Executive JON S. EDWARDS, EVP, Southern Region Executive STOCK PERFORMANCE A CLEAR AND FOCUSED RETURN. ABCB delivered consistent financial results in a difficult economy. Brunswick operating systems and the hiring of key local investment advisors. These additions led to the rapid transformation of our most recent acquisition. The First Bank of Brunswick is in a position to contribute quickly to the holding company. In addition to the accomplishments of the past year, our company was included in the Russell 2000, a benchmark index for publicly traded companies in the United States. * This is not a sales offer. Past performance is no indication of future results. As for all investment decisions, it is advisable to seek the guidance of a competent and licensed investment professional. Upon written request, ABC Bancorp will provide, without charge, a copy of the Annual Report on Form 10-K, including the financial statements and the financial statement schedules required to be filed with the Securities and Exchange Commission for fiscal year 2002. In a year that demonstrated less- than-stellar stock performances for many sectors, ABC Bancorp proved that solid fundamentals can result in respectable returns. When comparing the 2002 stock performance of ABC Bancorp to certain market indices, the company’s performance, while modest, is quite remarkable. At the same time the Dow Jones Industrial Average retreated by more than 15 percent, the Russell 2000 lost about 20 percent and the NASDAQ declined by more than 30 percent, the value of ABC Bancorp stock rose.* Last year’s performance is a tribute to the sound banking principles on which the company was founded more than 30 years ago. There was no new strategy for last year’s volatile market conditions. We kept the same steady approach to banking that has served the company well in good times and in more challenging times. Accomplishments in 2002 that helped maintain a positive direction in the value of the company included the integration of The First Bank of 8 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 9 FROM LEFT TO RIGHT BETH LEE GARNER, VP Controller, ABC Bancorp; GREG WOOD, VP Mortgage Manager, ABC Bancorp; STEPHANIE TINSON, Customer Service Representative, First National Bank of South Georgia STOCK PERFORMANCE A CLEAR AND FOCUSED RETURN. ABCB delivered consistent financial results in a difficult economy. Brunswick operating systems and the hiring of key local investment advisors. These additions led to the rapid transformation of our most recent acquisition. The First Bank of Brunswick is in a position to contribute quickly to the holding company. In addition to the accomplishments of the past year, our company was included in the Russell 2000, a benchmark index for publicly traded companies in the United States. * This is not a sales offer. Past performance is no indication of future results. As for all investment decisions, it is advisable to seek the guidance of a competent and licensed investment professional. Upon written request, ABC Bancorp will provide, without charge, a copy of the Annual Report on Form 10-K, including the financial statements and the financial statement schedules required to be filed with the Securities and Exchange Commission for fiscal year 2002. In a year that demonstrated less- than-stellar stock performances for many sectors, ABC Bancorp proved that solid fundamentals can result in respectable returns. When comparing the 2002 stock performance of ABC Bancorp to certain market indices, the company’s performance, while modest, is quite remarkable. At the same time the Dow Jones Industrial Average retreated by more than 15 percent, the Russell 2000 lost about 20 percent and the NASDAQ declined by more than 30 percent, the value of ABC Bancorp stock rose.* Last year’s performance is a tribute to the sound banking principles on which the company was founded more than 30 years ago. There was no new strategy for last year’s volatile market conditions. We kept the same steady approach to banking that has served the company well in good times and in more challenging times. Accomplishments in 2002 that helped maintain a positive direction in the value of the company included the integration of The First Bank of 8 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 9 FROM LEFT TO RIGHT BETH LEE GARNER, VP Controller, ABC Bancorp; GREG WOOD, VP Mortgage Manager, ABC Bancorp; STEPHANIE TINSON, Customer Service Representative, First National Bank of South Georgia SENIOR MANAGEMENT A CLEAR AND FOCUSED DIFFERENCE. Diversifying the way we do business. The stability and long-term success of ABC Bancorp can be attributed to the vision and commitment of co-founder and CEO Jack Hunnicutt. Our senior management team of accomplished professionals make this vision a reality through a common sense approach to leadership. They work as a team. Both Bancorp and bank employees pull from their collective experiences to explore innovative and time-proven solutions. These results-driven managers combine the advantages of “best practices” with local banking experience. This approach enhances the opportunity for success for each bank in the ABC Bancorp network. ABC Bancorp is a regional bank holding company with community bank roots. This commitment separates us from other financial institutions. We offer superior products. We deliver these products in a personalized hometown manner. Our approach is designed to push decisions closest to the customer. We are not burdened by the bureaucracy of megabanks. We are not limited by issues faced by many community banks with limited resources. When a particular strategy is deemed effective in a single market, our senior management team is quick to employ the tactic in other locations throughout our banking network. 10 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 11 FROM LEFT TO RIGHT KENNETH J. HUNNICUTT, Chairman, President and CEO; MICHAEL F. MCDONALD, SVP, Director of Retail Banking; W. EDWIN LANE, JR., CPA, EVP, Chief Financial Officer; CINDI H. LEWIS, EVP, Director of Human Resources; CHARLES A. ROBINSON, SVP, Director of Internal Audit; MARC E. DEMOTT, SVP, Director of Automation & Operations; EDWIN W. HORTMAN, JR., EVP Northern Region Executive and President/CEO, Citizens Security Bank; JON S. EDWARDS, EVP Southern Region Executive and Director of Credit Administration SENIOR MANAGEMENT A CLEAR AND FOCUSED DIFFERENCE. Diversifying the way we do business. The stability and long-term success of ABC Bancorp can be attributed to the vision and commitment of co-founder and CEO Jack Hunnicutt. Our senior management team of accomplished professionals make this vision a reality through a common sense approach to leadership. They work as a team. Both Bancorp and bank employees pull from their collective experiences to explore innovative and time-proven solutions. These results-driven managers combine the advantages of “best practices” with local banking experience. This approach enhances the opportunity for success for each bank in the ABC Bancorp network. ABC Bancorp is a regional bank holding company with community bank roots. This commitment separates us from other financial institutions. We offer superior products. We deliver these products in a personalized hometown manner. Our approach is designed to push decisions closest to the customer. We are not burdened by the bureaucracy of megabanks. We are not limited by issues faced by many community banks with limited resources. When a particular strategy is deemed effective in a single market, our senior management team is quick to employ the tactic in other locations throughout our banking network. 10 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 11 FROM LEFT TO RIGHT KENNETH J. HUNNICUTT, Chairman, President and CEO; MICHAEL F. MCDONALD, SVP, Director of Retail Banking; W. EDWIN LANE, JR., CPA, EVP, Chief Financial Officer; CINDI H. LEWIS, EVP, Director of Human Resources; CHARLES A. ROBINSON, SVP, Director of Internal Audit; MARC E. DEMOTT, SVP, Director of Automation & Operations; EDWIN W. HORTMAN, JR., EVP Northern Region Executive and President/CEO, Citizens Security Bank; JON S. EDWARDS, EVP Southern Region Executive and Director of Credit Administration OUR ASSOCIATES A CLEAR AND FOCUSED CONTRIBUTION. We’re making banking fun. The bottom line at ABC Bancorp is results. For our customers, this means convenience, excellent service and responsible money management. For our company and its shareholders, it means conducting business in an honorable, innovative and enthusiastic manner that brings about maximum sustained profits. To achieve those goals, employees must be motivated to come to work ready to perform their jobs. They must be proactive in their approach to customer service and hold true to the vision and objectives of the company. It also helps if they can have some fun. To establish a fun and dynamic work environment, the management team at ABC Bancorp has introduced the FISH! philosophy to create an enjoyable workplace. FISH! has swept the nation with lessons of finding fun and meaning in the most mundane tasks while boosting morale and improving results. It teaches employees to do four things every day: choose your attitude (come to work with a positive mindset), play (find a way to make your daily tasks fun), make their day (create a positive memory for your customers), and be there (really listen and give each customer your full attention). The employees at ABC Bancorp have embraced this philosophy. They make conscious decisions each day to find a reason to smile or laugh. They truly enjoy the opportunity to impact customer lives in a positive and lasting way. We are confident the results will be felt by our customers and shareholders for many years to come. Permission granted by Charterhouse Learning FROM LEFT TO RIGHT ANN DUNN, AVP Operations Manager, Citizens Security Bank, LILIANA NUNEZ, Customer Service Representative, American Banking Company, GENE VICKERS, AVP Branch Manager, Heritage Community Bank; DONNA GOWEN, SVP Commercial Lender, The First Bank of Brunswick 12 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 13 OUR ASSOCIATES A CLEAR AND FOCUSED CONTRIBUTION. We’re making banking fun. The bottom line at ABC Bancorp is results. For our customers, this means convenience, excellent service and responsible money management. For our company and its shareholders, it means conducting business in an honorable, innovative and enthusiastic manner that brings about maximum sustained profits. To achieve those goals, employees must be motivated to come to work ready to perform their jobs. They must be proactive in their approach to customer service and hold true to the vision and objectives of the company. It also helps if they can have some fun. To establish a fun and dynamic work environment, the management team at ABC Bancorp has introduced the FISH! philosophy to create an enjoyable workplace. FISH! has swept the nation with lessons of finding fun and meaning in the most mundane tasks while boosting morale and improving results. It teaches employees to do four things every day: choose your attitude (come to work with a positive mindset), play (find a way to make your daily tasks fun), make their day (create a positive memory for your customers), and be there (really listen and give each customer your full attention). The employees at ABC Bancorp have embraced this philosophy. They make conscious decisions each day to find a reason to smile or laugh. They truly enjoy the opportunity to impact customer lives in a positive and lasting way. We are confident the results will be felt by our customers and shareholders for many years to come. Permission granted by Charterhouse Learning FROM LEFT TO RIGHT ANN DUNN, AVP Operations Manager, Citizens Security Bank, LILIANA NUNEZ, Customer Service Representative, American Banking Company, GENE VICKERS, AVP Branch Manager, Heritage Community Bank; DONNA GOWEN, SVP Commercial Lender, The First Bank of Brunswick 12 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 13 OFFICE LOCATIONS A CLEAR AND FOCUSED GROWTH Office Locations of Subsidiary Banks. GEORGIA American Banking Company Moultrie (229) 985-2222 Doerun (229) 985-2222 Quitman Hwy. (229) 985-1111 Sunset (229) 873-4444 www.americanbankingcompany.com Bank of Thomas County Thomasville (229) 226-5755 Coolidge (229) 346-3555 www.bankofthomascounty.com Cairo Banking Company Cairo (229) 377-1110 Meigs (229) 683-3411 www.cairobankingcompany.com Central Bank & Trust Cordele (229) 273-7700 www.centralbankandtrust.com Citizens Security Bank Tifton (229) 382-7311 Douglas (912) 384-2701 Ocilla (229) 468-9411 www.citizenssecuritybank.com First National Bank of South Georgia Albany (229) 888-5600 Leesburg (229) 434-4550 www.first-nationalbank.com Heritage Community Bank Quitman (229) 263-7525 Troupeville (229) 247-5376 Valdosta (229) 241-2851 www.heritage-communitybank.com Merchants & Farmers Bank Donalsonville (229) 524-2112 Lake Seminole (229) 861-2213 Colquitt (229) 758-3461 www.merchants-farmersbank.com The First Bank of Brunswick Brunswick (912) 267-9500 St. Simons Island (912) 634-1270 North Glynn (912) 264-9699 Jekyll Island (912) 635-9014 www.firstbankbrunswick.com ALABAMA Southland Bank Dothan (334) 671-4000 Headland (334) 693-5411 Abbeville (334) 585-2265 Clayton (334) 775-3211 Eufaula (334) 687-3260 www.southland-bank.com FLORIDA Tri-County Bank Trenton (352) 463-7171 Newberry (352) 472-2162 www.tri-county-bank.com FROM LEFT TO RIGHT SUSAN PARKER, VP, Branch Manager, Tri-County Bank; MARTY CANNINGTON, VP, Commercial Loan Officer, Cairo Banking Company; CHUCK OWENS, VP, Commercial Lending, First National Bank of South Georgia; KIM ATKINSON, Customer Service Specialist, Merchants & Farmers Bank 14 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 15 OFFICE LOCATIONS A CLEAR AND FOCUSED GROWTH Office Locations of Subsidiary Banks. GEORGIA American Banking Company Moultrie (229) 985-2222 Doerun (229) 985-2222 Quitman Hwy. (229) 985-1111 Sunset (229) 873-4444 www.americanbankingcompany.com Bank of Thomas County Thomasville (229) 226-5755 Coolidge (229) 346-3555 www.bankofthomascounty.com Cairo Banking Company Cairo (229) 377-1110 Meigs (229) 683-3411 www.cairobankingcompany.com Central Bank & Trust Cordele (229) 273-7700 www.centralbankandtrust.com Citizens Security Bank Tifton (229) 382-7311 Douglas (912) 384-2701 Ocilla (229) 468-9411 www.citizenssecuritybank.com First National Bank of South Georgia Albany (229) 888-5600 Leesburg (229) 434-4550 www.first-nationalbank.com Heritage Community Bank Quitman (229) 263-7525 Troupeville (229) 247-5376 Valdosta (229) 241-2851 www.heritage-communitybank.com Merchants & Farmers Bank Donalsonville (229) 524-2112 Lake Seminole (229) 861-2213 Colquitt (229) 758-3461 www.merchants-farmersbank.com The First Bank of Brunswick Brunswick (912) 267-9500 St. Simons Island (912) 634-1270 North Glynn (912) 264-9699 Jekyll Island (912) 635-9014 www.firstbankbrunswick.com ALABAMA Southland Bank Dothan (334) 671-4000 Headland (334) 693-5411 Abbeville (334) 585-2265 Clayton (334) 775-3211 Eufaula (334) 687-3260 www.southland-bank.com FLORIDA Tri-County Bank Trenton (352) 463-7171 Newberry (352) 472-2162 www.tri-county-bank.com FROM LEFT TO RIGHT SUSAN PARKER, VP, Branch Manager, Tri-County Bank; MARTY CANNINGTON, VP, Commercial Loan Officer, Cairo Banking Company; CHUCK OWENS, VP, Commercial Lending, First National Bank of South Georgia; KIM ATKINSON, Customer Service Specialist, Merchants & Farmers Bank 14 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 15 BOARD OF DIRECTORS / BANK PRESIDENTS & CITY PRESIDENTS A CLEAR AND FOCUSED LEADERSHIP. FROM LEFT TO RIGHT HENRY C. WORTMAN J. THOMAS WHELCHEL EUGENE M. VEREEN, JR. CHAIRMAN EMERITUS DANIEL B. JETER KENNETH J. HUNNICUTT CHAIRMAN ROBERT P. LYNCH DOYLE WELTZBARKER VICE-CHAIRMAN J. RAYMOND FULP JOHNNY W. FLOYD (NOT PICTURED) FROM LEFT TO RIGHT LAWTON E. BASSETT, III JOHN H. FERGUSON JOHN C. MOSELY C. LARRY YOUNG HARRIS O. PITTMAN TIM S. JONES MICHAEL D. HODGES EDWIN W. HORTMAN, JR. ERVIN E. BROCK ROBERT L. EVANS EDGAR B. SMITH, III RONNIE F. MARCHANT DAVID B. BATCHELOR DON MONK 16 ABC Bancorp and Subsidiaries MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT REGARDING only as of the date the statement was made. ABC FORWARD-LOOKING STATEMENTS undertakes no obligation to update or revise any ABC Bancorp’s (ABC) 2002 Annual Report contains forward-looking statements in addition to historical information. ABC cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements within the meaning forward-looking statements. Additional information with respect to factors that may cause results to differ materially from those contemplated by such forward-looking statements is included in the ABC’s current and subsequent filings with the Securities and Exchange Commission. of the Private Securities Litigation Reform Act of GENERAL 1995; accordingly, there can be no assurance that such indicated results will be realized. Our principal asset is the ownership of our Banks. Accordingly, our results of operations are The Private Securities Litigation Reform Act primarily dependent upon the results of operations of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, ABC is required to note the variety of factors that could cause ABC’s actual results and experience to differ materially from the anticipated results or other expectations expressed in ABC’s forward-looking statements. These factors include legislative and regulatory initiatives regarding deregulation and restructuring of the banking industry; the extent and timing of the entry of additional competition in ABC’s markets; potential business strategies, including acquisitions or dispositions of assets or internal restructuring, that may be pursued by ABC, state and federal banking regulations; changes in or application of environmental and other laws and regulations to which ABC is subject; political, legal and economic conditions and developments; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather, natural disasters and other catastrophic events; and other factors discussed in ABC’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K. The words “believe”, “expect”, “anticipate”, “project”, and similar expressions signify such forward-looking statements. of our Banks. Our Banks conduct a commercial banking business which consists of attracting deposits from the general public and applying those funds to the origination of commercial, consumer and real estate loans (including commercial loans collateralized by real estate). The Banks' profitability depends primarily on net interest income, which is the difference between interest income generated from interest-earning assets (i.e., loans and investments) less the interest expense incurred on interest-bearing liabilities (i.e., customer deposits and borrowed funds). Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities, and the interest rate paid and earned on these balances. Net interest income is dependent upon the Banks' interest rate spread, which is the difference between the average yield earned on its interest-earning assets and the average rate paid on its interest- bearing liabilities. When interest-earning assets approximates or exceeds interest-bearing liabilities, any positive interest rate spread will generate interest income. The interest rate spread is impacted by interest rates, deposit flows and loan demand. Additionally, and to a lesser extent, the profitability of the Banks is affected by such factors as the level of noninterest income and expenses, Readers are cautioned not to place undue the provision for loan losses and the effective tax reliance on any forward-looking statements made by rate. Noninterest income consists primarily of or on behalf of ABC. Any such statement speaks service charges on deposit accounts and other fees ABC Bancorp and Subsidiaries 17 MANAGEMENT'S DISCUSSION MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and income from the sale of loans and investment Reserve during 2002. During 2001 the Federal $112,895,000 or 14.46% to $893,759,000 in deposits of $126,872,000 or 19.40% to securities. Noninterest expenses consist of Reserve reduced the discount rate on 11 separate 2002 from $780,864,000 in 2001 and an increase $780,864,000 in 2001 from $653,992,000 in compensation and benefits, occupancy-related occasions resulting in a reduction in the prime in average other borrowings and trust preferred 2000 and an increase in average other borrowings of expenses and other operating expenses. interest rate a total of 475 basis points from 9.50% securities of $64,801,000 or 82.27% to $$17,662,000 or 28.91% to $78,760,000 in 2001 RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 on January 1, 2001 to 4.75% on December 31, 2001. The prime interest rate on December 31, 2001 was one-half of the effective rate on January Our results of operations are determined by 1, 2001. The Federal Reserve reduced the discount our ability to effectively manage interest income and by 50 basis points in November 2002 resulting in expense, to minimize loan and investment losses, to the reduction in the prime interest of 50 basis generate noninterest income and to control points to 4.25%. As a result of these rate noninterest expense. Since interest rates are reductions, ABC’s average yield on interest-earning determined by market forces and economic assets decreased 157 basis points to 7.04% in conditions beyond our control, the ability to generate 2002 from 8.61% in 2001. The average interest net interest income is dependent upon the ability of rate paid on interest-bearing liabilities decreased the Banks to obtain an adequate spread between 152 basis points to 3.06% in 2001 from 4.58% in the rate earned on interest-earning assets and the 2001. Average interest-earning assets increased rate paid on interest-bearing liabilities. Thus, the $169,193,000 or 19.03% to $1,058,221,000 in key performance measure for net interest income is 2002 from $889,028,000 in 2001. Average loans the interest margin or net yield, which is taxable- increased $129,647,000 or 18.57% to equivalent net interest income divided by average $827,939,000 in 2002 from $698,292,000 in earning assets. The primary component of consolidated earnings is net interest income, or the difference between interest income on interest-earning assets and interest paid on interest-bearing liabilities. The net interest margin is net interest income expressed as a percentage of average interest-earning assets. Interest-earning assets consist of loans, investment securities and federal funds sold. Interest-bearing liabilities consist of deposits, Federal Home Loan Bank borrowings and other short-term borrowings. A portion of interest income is earned on tax-exempt investments such as state and municipal bonds. In an effort to state this tax-exempt income and its resultant yields on a basis comparable to all other taxable investments, an adjustment is made to analyze this income on a taxable-equivalent basis. 2001. Average yield on loans decreased 148 basis points to 7.85% in 2002 as compared to 9.33% in 2001. Average investments increased $9,953,000 or 6.27% to $168,807,000 in 2002 from $158,854,000 in 2001. Average yield on investments decreased 147 basis points or 22.48% to 5.07% in 2002 as compared to 6.54% in 2001. The significant decrease in yield resulted from a significant decrease in nontaxable securities as a percentage of total securities in our investments portfolio in 2002 as compared to 2001. Average interest-bearing deposits in and federal funds sold to other banks increased $29,593,000 or 92.83% to $61,475,000 in 2002 from $31,882,000 in 2001. Although the average yield on deposits in and federal funds sold to other banks decreased 145 basis points, the reduction in yield did not significantly affect the average yield on earning The net interest margin decreased 29 assets due to the relatively small volume of basis points to 4.39% in 2002 as compared to investments represented by such funds. The 4.68% in 2001. This decrease resulted primarily increase in average interest-earning assets was from the monetary policy pursued by the Federal funded by an increase in average deposits of $143,561,000 in 2002 from $78,760,000 in from $61,098,000 in 2000. Average interest paid 2001. Average interest paid on total average on total average deposits decreased 28 basis points deposits decreased 185 basis points or 70.88% to or 5.92% to 4.45% in 2001 as compared to 4.73% 2.62% in 2002 as compared to 4.46% in 2001. in 2000. Approximately 13% of the total average Approximately 13% of the total average deposits deposits were noninterest-bearing deposits in 2001 were noninterest-bearing deposits in 2002 and as compared to approximately 14% in 2000. 2001. During 2001, we acquired two new The net interest margin decreased 52 basis subsidiary Banks and two branches of other banks points to 4.68% in 2001 as compared to 5.20% in which have now been merged with two of our Banks. 2000. This decrease in net interest margin resulted These new bank and branch acquisitions were primarily from the monetary policy pursued by the accounted for as purchases. Following is a summary Federal Reserve during 2001 as discussed in the of assets and liabilities related to the acquisitions of prior paragraph. Our average yield on interest- the two new subsidiary Banks and one branch. The earning decreased 74 basis points to 8.61% in acquisition of one branch was not consummated 2001 from 9.35% in 2000. The average rate paid until December 24, 2001; consequently, the on interest-bearing liabilities decreased 34 basis balances related to that branch have not been points to 4.58% in 2001 from 4.92% in 2000. included because the results would not be materially Average interest-earning assets increased $146,017 different had the balances been included. or 19.65% to $889,028,000 in 2001 from $743,011,000 in 2000. Average loans increased $127,766.000 or 22.39% to $698,292.000 in Interest-earning assets: 2001 from $570,526,000 in 2000. Average yield on loans decreased 89 basis points to 9.33% in 2001 as compared to 10.22% in 2000. Average investments decreased $314,000 or .20% to $158,854,000 in 2001 from $159,168,000 in 2000. Average yield on investments increased 13 basis points or 3.12% to 6.54% in 2001 as compared to 6.41% in 2000. Average interest- bearing deposits in and federal funds sold to other Loans .......................................... $ 71,233,000 Investment securities..................... 15,163,000 Deposit in and federal funds sold to banks................................ 1,772,000 Total interest-earning assets ...... $ 88,168,000 Interest-bearing liabilities: Deposits....................................... $ 83,528,000 Other borrowings........................... 4,263,000 banks increased $18,565,000 or 39.41% to Total interest-bearing liabilities ... $ 87,791,000 $31,882,000 in 2001 from $13,317,000 in 2000. Noninterest-bearing deposits.......... $ 10,326,000 Total deposits ............................... $ 93,854,000 Although the average yield on deposits in and federal funds sold to other banks decreased 394 basis points, the reduction in yield did not significantly affect the average yield on earning assets due to the relatively small volume of investments represented by such funds. The increase in average interest-earning assets was funded by an increase in average 18 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 19 MANAGEMENT'S DISCUSSION MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and income from the sale of loans and investment Reserve during 2002. During 2001 the Federal $112,895,000 or 14.46% to $893,759,000 in deposits of $126,872,000 or 19.40% to securities. Noninterest expenses consist of Reserve reduced the discount rate on 11 separate 2002 from $780,864,000 in 2001 and an increase $780,864,000 in 2001 from $653,992,000 in compensation and benefits, occupancy-related occasions resulting in a reduction in the prime in average other borrowings and trust preferred 2000 and an increase in average other borrowings of expenses and other operating expenses. interest rate a total of 475 basis points from 9.50% securities of $64,801,000 or 82.27% to $$17,662,000 or 28.91% to $78,760,000 in 2001 RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 on January 1, 2001 to 4.75% on December 31, 2001. The prime interest rate on December 31, 2001 was one-half of the effective rate on January Our results of operations are determined by 1, 2001. The Federal Reserve reduced the discount our ability to effectively manage interest income and by 50 basis points in November 2002 resulting in expense, to minimize loan and investment losses, to the reduction in the prime interest of 50 basis generate noninterest income and to control points to 4.25%. As a result of these rate noninterest expense. Since interest rates are reductions, ABC’s average yield on interest-earning determined by market forces and economic assets decreased 157 basis points to 7.04% in conditions beyond our control, the ability to generate 2002 from 8.61% in 2001. The average interest net interest income is dependent upon the ability of rate paid on interest-bearing liabilities decreased the Banks to obtain an adequate spread between 152 basis points to 3.06% in 2001 from 4.58% in the rate earned on interest-earning assets and the 2001. Average interest-earning assets increased rate paid on interest-bearing liabilities. Thus, the $169,193,000 or 19.03% to $1,058,221,000 in key performance measure for net interest income is 2002 from $889,028,000 in 2001. Average loans the interest margin or net yield, which is taxable- increased $129,647,000 or 18.57% to equivalent net interest income divided by average $827,939,000 in 2002 from $698,292,000 in earning assets. The primary component of consolidated earnings is net interest income, or the difference between interest income on interest-earning assets and interest paid on interest-bearing liabilities. The net interest margin is net interest income expressed as a percentage of average interest-earning assets. Interest-earning assets consist of loans, investment securities and federal funds sold. Interest-bearing liabilities consist of deposits, Federal Home Loan Bank borrowings and other short-term borrowings. A portion of interest income is earned on tax-exempt investments such as state and municipal bonds. In an effort to state this tax-exempt income and its resultant yields on a basis comparable to all other taxable investments, an adjustment is made to analyze this income on a taxable-equivalent basis. 2001. Average yield on loans decreased 148 basis points to 7.85% in 2002 as compared to 9.33% in 2001. Average investments increased $9,953,000 or 6.27% to $168,807,000 in 2002 from $158,854,000 in 2001. Average yield on investments decreased 147 basis points or 22.48% to 5.07% in 2002 as compared to 6.54% in 2001. The significant decrease in yield resulted from a significant decrease in nontaxable securities as a percentage of total securities in our investments portfolio in 2002 as compared to 2001. Average interest-bearing deposits in and federal funds sold to other banks increased $29,593,000 or 92.83% to $61,475,000 in 2002 from $31,882,000 in 2001. Although the average yield on deposits in and federal funds sold to other banks decreased 145 basis points, the reduction in yield did not significantly affect the average yield on earning The net interest margin decreased 29 assets due to the relatively small volume of basis points to 4.39% in 2002 as compared to investments represented by such funds. The 4.68% in 2001. This decrease resulted primarily increase in average interest-earning assets was from the monetary policy pursued by the Federal funded by an increase in average deposits of $143,561,000 in 2002 from $78,760,000 in from $61,098,000 in 2000. Average interest paid 2001. Average interest paid on total average on total average deposits decreased 28 basis points deposits decreased 185 basis points or 70.88% to or 5.92% to 4.45% in 2001 as compared to 4.73% 2.62% in 2002 as compared to 4.46% in 2001. in 2000. Approximately 13% of the total average Approximately 13% of the total average deposits deposits were noninterest-bearing deposits in 2001 were noninterest-bearing deposits in 2002 and as compared to approximately 14% in 2000. 2001. During 2001, we acquired two new The net interest margin decreased 52 basis subsidiary Banks and two branches of other banks points to 4.68% in 2001 as compared to 5.20% in which have now been merged with two of our Banks. 2000. This decrease in net interest margin resulted These new bank and branch acquisitions were primarily from the monetary policy pursued by the accounted for as purchases. Following is a summary Federal Reserve during 2001 as discussed in the of assets and liabilities related to the acquisitions of prior paragraph. Our average yield on interest- the two new subsidiary Banks and one branch. The earning decreased 74 basis points to 8.61% in acquisition of one branch was not consummated 2001 from 9.35% in 2000. The average rate paid until December 24, 2001; consequently, the on interest-bearing liabilities decreased 34 basis balances related to that branch have not been points to 4.58% in 2001 from 4.92% in 2000. included because the results would not be materially Average interest-earning assets increased $146,017 different had the balances been included. or 19.65% to $889,028,000 in 2001 from $743,011,000 in 2000. Average loans increased $127,766.000 or 22.39% to $698,292.000 in Interest-earning assets: 2001 from $570,526,000 in 2000. Average yield on loans decreased 89 basis points to 9.33% in 2001 as compared to 10.22% in 2000. Average investments decreased $314,000 or .20% to $158,854,000 in 2001 from $159,168,000 in 2000. Average yield on investments increased 13 basis points or 3.12% to 6.54% in 2001 as compared to 6.41% in 2000. Average interest- bearing deposits in and federal funds sold to other Loans .......................................... $ 71,233,000 Investment securities..................... 15,163,000 Deposit in and federal funds sold to banks................................ 1,772,000 Total interest-earning assets ...... $ 88,168,000 Interest-bearing liabilities: Deposits....................................... $ 83,528,000 Other borrowings........................... 4,263,000 banks increased $18,565,000 or 39.41% to Total interest-bearing liabilities ... $ 87,791,000 $31,882,000 in 2001 from $13,317,000 in 2000. Noninterest-bearing deposits.......... $ 10,326,000 Total deposits ............................... $ 93,854,000 Although the average yield on deposits in and federal funds sold to other banks decreased 394 basis points, the reduction in yield did not significantly affect the average yield on earning assets due to the relatively small volume of investments represented by such funds. The increase in average interest-earning assets was funded by an increase in average 18 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 19 MANAGEMENT'S DISCUSSION MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The allowance for loan losses represents a the loan balance to determine the adequate amount $4,924,000 or 96% of the increase represented accounting policies are defined as policies that are reserve for potential losses in the loan portfolio. The of reserve. Many of the larger loans require an loan reserves acquired in bank acquisitions in 2001. very important to the presentation of ABC’s financial adequacy of the allowance for loan losses is annual review by an independent loan officer. As a Net charge-offs represented 101.36% of the condition and results of operations, and that require evaluated periodically based on a review of all result of loan reviews certain loans may be assigned provision for loan losses in 2002 as compared to management's most difficult, subjective, or complex significant loans, with a particular emphasis on specific reserve allocations. Other loans that 95.88% in 2001. Net loan charge-offs for 2002 judgments. ABC’s financial results could differ nonaccruing, past due and other loans that surface as problem loans may also be assigned represented .68% of average loans outstanding significantly if different judgments or estimates are management believes require attention. We specific reserves. Past due loans are assigned risk during the year as compared to .63% for 2001 and applied in the application of these policies. segregate our loan portfolio by type of loan and ratings based on the number of days past due. utilize this segregation in evaluating exposure to risks within the portfolio. In addition, based on internal reviews and external reviews performed by independent auditors and regulatory authorities, we further segregates our loan portfolio by loan classifications within each type of loan based on an assessment of risk for a particular loan or group of loans. Certain reviewed loans require specific allowances. Allowances are provided for other types and classifications of loans based on anticipated loss rates. Allowances are also provided for loans that are reviewed by management and considered creditworthy and loans for which management determines no review is required. In establishing allowances, management considers historical loan loss experience with an emphasis on current loan quality trends, current economic conditions and other factors in the markets where the subsidiary banks operate. Factors considered include among others, unemployment rates, effect of weather on agriculture and significant local economic events, such as major plant closings. We have developed a methodology for determining the adequacy of the loan loss reserve which is followed by all our Banks and monitored by ABC’s senior credit officer and internal audit staff. Procedures provide for the assignment of a risk rating for every loan included in our total loan portfolio, with the exception of credit card The provision for loan losses is a charge to earnings in the current period to replenish the allowance and maintain it at a level management has determined to be adequate. The provision for loan losses charged to earnings amounted to $5,574,000 in 2002, $4,566,000 in 2001, and $1,712,000 in 2000. The increase in the provision for loan losses in 2002 was necessary to cover an increase in average loans of 18.57% over 2001 and increase of net loan charge-offs of 29.05% in 2002 as compared to 2001. Real estate loans and consumer loans accounted for the majority of loan charge-offs in 2002. These charge-offs resulted from depressed economic conditions during the year. The increase in the provision for loan losses of $2,854,000 in 2001 over the provision in 2000 was required to replenish the reserve for greater net charge-offs. Net charge-offs in 2001 increased $2,603,000 to $4,378,000 in 2001 as compared to $1,775,000 in 2000. The charge-off of $2,200,000 on one line of credit in 2001 accounted for 77% of the increase. The remaining portion of the increase in net charge-offs in 2001 was related to the increase in average loans during 2001. During 2002, average loans increased $129,647,000 or 18.57% over 2001 as compared to an increase in average loans of $127,766,000 or 22.39% in 2001 as compared to 2000. .31% for 2000. At December 31, 2002, the allowance for loan losses was 1.78% of total loans outstanding as compared to an allowance for loan losses of 1.86% of total loans outstanding at December 31, 2001 and 1.67% of total loans outstanding at December 31, 2000. The determination of the allowance rests upon management's judgment about factors affecting loan quality and assumptions about the local and national economy. Management considers the year- end allowance for loan losses adequate to cover potential losses in the consolidated loan portfolio. Average total assets increased $190,235,000 or 19.82% to $1,150,266,000 in 2002 as compared to $960,031,000 in 2001. The increase in average total assets was accompanied by an increase in average deposits of $112,895,000 or 14.46% to $893,759,000 in 2002 from $780,864,000 in 2001 and an increase of average borrowings of $64,801,000. Average total assets increased $161,810,000 or 20.27% to $960,031,000 in 2001 as compared to $798,221,000 in 2000. The increase in average total assets was accompanied by an increase in average total deposits of $126,872,000 or 19.40% to $780,864,000 in 2001 from $653,992,000 in 2000 and an increase in average borrowings of $17,662,000. CRITICAL ACCOUNTING POLICIES ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through provisions for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collection of principal is unlikely. Subsequent recoveries are added to the allowance. Management's evaluation of the adequacy of the allowance for loan losses is based on a formal analysis that assesses the risk within the loan portfolio. This analysis includes consideration of historical performance, current economic conditions, level of nonperforming loans, loan concentrations, and review of certain individual loans. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the subsidiary banks' allowances for loan losses. Such agencies may require the subsidiary banks to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Considering current information and events receivables and overdraft protection loans which are The allowance for loan losses amounted to The accounting and financial reporting regarding a borrower’s ability to repay its obligations, treated as pools for risk rating purposes. The risk $14,868,000 at December 31, 2002 and policies of ABC conform to accounting principles management considers a loan to be impaired when rating schedule provides seven ratings of which $14,944,000 at December 31, 2001. The generally accepted in the United States of America the ultimate collectibility of all amounts due, three ratings are classified as pass ratings and four allowance for loan losses increased $5,112,000 to and to general practices within the banking industry. according to the contractual terms of the loan ratings are classified as criticized ratings. Each risk $14,944,000 at December 31, 2001 from Following is a description of the accounting policies agreement, is in doubt. When a loan is considered rating is assigned a percent factor to be applied to $9,832,000 at December 31, 2000. Approximately applied by ABC that are deemed "critical". Critical to be impaired, the amount of impairment is 20 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 21 MANAGEMENT'S DISCUSSION MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The allowance for loan losses represents a the loan balance to determine the adequate amount $4,924,000 or 96% of the increase represented accounting policies are defined as policies that are reserve for potential losses in the loan portfolio. The of reserve. Many of the larger loans require an loan reserves acquired in bank acquisitions in 2001. very important to the presentation of ABC’s financial adequacy of the allowance for loan losses is annual review by an independent loan officer. As a Net charge-offs represented 101.36% of the condition and results of operations, and that require evaluated periodically based on a review of all result of loan reviews certain loans may be assigned provision for loan losses in 2002 as compared to management's most difficult, subjective, or complex significant loans, with a particular emphasis on specific reserve allocations. Other loans that 95.88% in 2001. Net loan charge-offs for 2002 judgments. ABC’s financial results could differ nonaccruing, past due and other loans that surface as problem loans may also be assigned represented .68% of average loans outstanding significantly if different judgments or estimates are management believes require attention. We specific reserves. Past due loans are assigned risk during the year as compared to .63% for 2001 and applied in the application of these policies. segregate our loan portfolio by type of loan and ratings based on the number of days past due. utilize this segregation in evaluating exposure to risks within the portfolio. In addition, based on internal reviews and external reviews performed by independent auditors and regulatory authorities, we further segregates our loan portfolio by loan classifications within each type of loan based on an assessment of risk for a particular loan or group of loans. Certain reviewed loans require specific allowances. Allowances are provided for other types and classifications of loans based on anticipated loss rates. Allowances are also provided for loans that are reviewed by management and considered creditworthy and loans for which management determines no review is required. In establishing allowances, management considers historical loan loss experience with an emphasis on current loan quality trends, current economic conditions and other factors in the markets where the subsidiary banks operate. Factors considered include among others, unemployment rates, effect of weather on agriculture and significant local economic events, such as major plant closings. We have developed a methodology for determining the adequacy of the loan loss reserve which is followed by all our Banks and monitored by ABC’s senior credit officer and internal audit staff. Procedures provide for the assignment of a risk rating for every loan included in our total loan portfolio, with the exception of credit card The provision for loan losses is a charge to earnings in the current period to replenish the allowance and maintain it at a level management has determined to be adequate. The provision for loan losses charged to earnings amounted to $5,574,000 in 2002, $4,566,000 in 2001, and $1,712,000 in 2000. The increase in the provision for loan losses in 2002 was necessary to cover an increase in average loans of 18.57% over 2001 and increase of net loan charge-offs of 29.05% in 2002 as compared to 2001. Real estate loans and consumer loans accounted for the majority of loan charge-offs in 2002. These charge-offs resulted from depressed economic conditions during the year. The increase in the provision for loan losses of $2,854,000 in 2001 over the provision in 2000 was required to replenish the reserve for greater net charge-offs. Net charge-offs in 2001 increased $2,603,000 to $4,378,000 in 2001 as compared to $1,775,000 in 2000. The charge-off of $2,200,000 on one line of credit in 2001 accounted for 77% of the increase. The remaining portion of the increase in net charge-offs in 2001 was related to the increase in average loans during 2001. During 2002, average loans increased $129,647,000 or 18.57% over 2001 as compared to an increase in average loans of $127,766,000 or 22.39% in 2001 as compared to 2000. .31% for 2000. At December 31, 2002, the allowance for loan losses was 1.78% of total loans outstanding as compared to an allowance for loan losses of 1.86% of total loans outstanding at December 31, 2001 and 1.67% of total loans outstanding at December 31, 2000. The determination of the allowance rests upon management's judgment about factors affecting loan quality and assumptions about the local and national economy. Management considers the year- end allowance for loan losses adequate to cover potential losses in the consolidated loan portfolio. Average total assets increased $190,235,000 or 19.82% to $1,150,266,000 in 2002 as compared to $960,031,000 in 2001. The increase in average total assets was accompanied by an increase in average deposits of $112,895,000 or 14.46% to $893,759,000 in 2002 from $780,864,000 in 2001 and an increase of average borrowings of $64,801,000. Average total assets increased $161,810,000 or 20.27% to $960,031,000 in 2001 as compared to $798,221,000 in 2000. The increase in average total assets was accompanied by an increase in average total deposits of $126,872,000 or 19.40% to $780,864,000 in 2001 from $653,992,000 in 2000 and an increase in average borrowings of $17,662,000. CRITICAL ACCOUNTING POLICIES ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through provisions for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collection of principal is unlikely. Subsequent recoveries are added to the allowance. Management's evaluation of the adequacy of the allowance for loan losses is based on a formal analysis that assesses the risk within the loan portfolio. This analysis includes consideration of historical performance, current economic conditions, level of nonperforming loans, loan concentrations, and review of certain individual loans. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the subsidiary banks' allowances for loan losses. Such agencies may require the subsidiary banks to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Considering current information and events receivables and overdraft protection loans which are The allowance for loan losses amounted to The accounting and financial reporting regarding a borrower’s ability to repay its obligations, treated as pools for risk rating purposes. The risk $14,868,000 at December 31, 2002 and policies of ABC conform to accounting principles management considers a loan to be impaired when rating schedule provides seven ratings of which $14,944,000 at December 31, 2001. The generally accepted in the United States of America the ultimate collectibility of all amounts due, three ratings are classified as pass ratings and four allowance for loan losses increased $5,112,000 to and to general practices within the banking industry. according to the contractual terms of the loan ratings are classified as criticized ratings. Each risk $14,944,000 at December 31, 2001 from Following is a description of the accounting policies agreement, is in doubt. When a loan is considered rating is assigned a percent factor to be applied to $9,832,000 at December 31, 2000. Approximately applied by ABC that are deemed "critical". Critical to be impaired, the amount of impairment is 20 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 21 MANAGEMENT'S DISCUSSION MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS measured based on the present value of expected Additionally, we are assuming that the effect of the INCOME TAXES Long-Lived Assets, Including Intangibles future cash flows discounted at the loan's effective recession will have had its greatest impact on interest rate. If the loan is collateral-dependent, the economic conditions, including unemployment, by fair value of the collateral is used to determine the the end of 2003. With respect to the interest rate amount of impairment. Impairment losses are included in the allowance for loan losses through a charge to the provision for losses on loans. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash environment, ABC anticipates that interest rates will be increasing slightly during 2003. In the event of a dramatic downturn in this recession in which there is a broad effect in all sectors of our economy and/or a significant rapid rise in interest rates to double-digit levels creating higher borrowing costs and tightening corporate profits, ABC’s credit costs could increase receipts on impaired loans for which the accrual of significantly. interest has been discontinued are applied first to principal and then to interest income. Another factor that we have considered in the determination of the allowance for loan losses is The accounting for impaired loans loan concentrations to individual borrowers or described above applies to all loans, except for large industries. At December 31, 2002, ABC had 11 pools of smaller-balance, homogeneous loans that individual credit relationships that exceeded $3.5 are collectively evaluated for impairment, loans that million with none exceeding $11 million. are measured at fair value or at the lower of cost or fair value, and debt securities. The allowance for loan losses for large pools of smaller-balance, homogeneous loans is established through consideration of such factors as changes in the A substantial portion of the loan portfolio is in the commercial real estate and residential real estate sectors Those loans are secured by real estate in ABC’s primary market area. A substantial nature and volume of the portfolio, overall portfolio of portion of other real estate owned is located in quality, adequacy of the underlying collateral, loan those same markets. Therefore, the ultimate concentrations, historical charge-off trends, and collectibility of a substantial portion of our loan economic conditions that may affect the borrowers' portfolio and the recovery of a substantial portion of ability to pay. Certain economic and interest rate factors could have a material impact on the determination of the allowance for loan losses. The depth, duration, and dispersion of any economic recession all have an impact on the credit risk profile of the loan portfolio. Additionally, a rapidly rising interest rate environment that may cause rates to reach double digits could as well have a material impact on certain borrowers' ability to pay. the carrying amount of other real estate owned are susceptible to changes to market conditions in ABC’s primary market area. ABC is closely monitoring certain portions of its loan portfolio that we believe have a higher credit risk profile under the current environment based solely upon their industry classification. Based on current information, we have not identified any problem credits included in these categories, which are not already classified as nonperforming or Our current assumptions are that an impaired loans. However, if the economic recovery SFAS No. 109, “Accounting for Income We evaluate long-lived assets, such as Taxes,” requires the asset and liability approach for property and equipment, specifically identifiable financial accounting and reporting for deferred intangibles and goodwill, when events or changes in income taxes. We use the asset and liability circumstances indicate that the carrying value of method of accounting for deferred income taxes and such assets might not be recoverable. Factors that provide deferred income taxes for all significant could trigger an impairment include significant income tax temporary differences. See Note 11 to underperformance relative to historical or projected the Notes to Consolidated Financial Statements for future operating results, significant changes in the additional details. manner of our use of the acquired assets and significant negative industry or economic trends. As part of the process of preparing our consolidated financial statements we are required to The determination of whether an estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation and the provision for loan losses, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities that are included in our consolidated balance sheet. We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. To the extent we establish a impairment has occurred is based on an estimate of undiscounted cash flows attributable to the assets as compared to the carrying value of the assets. If an impairment has occurred, the amount of the impairment loss recognized would be determined by estimating the fair value of the assets and recording a loss if the fair value was less than the book value. In determining the existence of impairment factors, our assessment is based on market conditions, operational performance and legal factors of our Company and its subsidiary banks. Our review of factors present and the resulting appropriate carrying value of our goodwill, intangibles, and other long-lived assets are subject to judgments and estimates that management is required to make. Future events could cause us to conclude that impairment indicators exist and that our goodwill, intangibles and other long-lived assets might be impaired. valuation allowance or adjust this allowance in a NONINTEREST INCOME period, we must include an expense within the tax provisions in the statement of income. Service charges on deposit accounts increased $2,829,000 or 36.64% to $10,550,000 We have recorded on our consolidated in 2002 as compared to $7,721,000 in 2001 on balance sheet net deferred tax assets of an increase in average deposits of $112,895,000 $3,632,000 which includes amounts relating to loss or 14.46% to $893,759,000 in 2002 from carryforwards. We believe there will be sufficient $780,864,000 in 2001. Service charges on economic recovery will occur during the second half takes longer than expected, the allowance for loan taxable income in the future allowing us to utilize deposit accounts increased $1,328,000 or 20.77% of 2003 and that the depth of the recession will losses could be impacted by adverse developments these loss carryforwards in the tax jurisdictions to $7,721,000 in 2001 as compared to have already peaked prior to the first half of 2004. in these credits. where they exist. $6,393,000 in 2000 on an increase in average 22 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 23 MANAGEMENT'S DISCUSSION MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS measured based on the present value of expected Additionally, we are assuming that the effect of the INCOME TAXES Long-Lived Assets, Including Intangibles future cash flows discounted at the loan's effective recession will have had its greatest impact on interest rate. If the loan is collateral-dependent, the economic conditions, including unemployment, by fair value of the collateral is used to determine the the end of 2003. With respect to the interest rate amount of impairment. Impairment losses are included in the allowance for loan losses through a charge to the provision for losses on loans. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash environment, ABC anticipates that interest rates will be increasing slightly during 2003. In the event of a dramatic downturn in this recession in which there is a broad effect in all sectors of our economy and/or a significant rapid rise in interest rates to double-digit levels creating higher borrowing costs and tightening corporate profits, ABC’s credit costs could increase receipts on impaired loans for which the accrual of significantly. interest has been discontinued are applied first to principal and then to interest income. Another factor that we have considered in the determination of the allowance for loan losses is The accounting for impaired loans loan concentrations to individual borrowers or described above applies to all loans, except for large industries. At December 31, 2002, ABC had 11 pools of smaller-balance, homogeneous loans that individual credit relationships that exceeded $3.5 are collectively evaluated for impairment, loans that million with none exceeding $11 million. are measured at fair value or at the lower of cost or fair value, and debt securities. The allowance for loan losses for large pools of smaller-balance, homogeneous loans is established through consideration of such factors as changes in the A substantial portion of the loan portfolio is in the commercial real estate and residential real estate sectors Those loans are secured by real estate in ABC’s primary market area. A substantial nature and volume of the portfolio, overall portfolio of portion of other real estate owned is located in quality, adequacy of the underlying collateral, loan those same markets. Therefore, the ultimate concentrations, historical charge-off trends, and collectibility of a substantial portion of our loan economic conditions that may affect the borrowers' portfolio and the recovery of a substantial portion of ability to pay. Certain economic and interest rate factors could have a material impact on the determination of the allowance for loan losses. The depth, duration, and dispersion of any economic recession all have an impact on the credit risk profile of the loan portfolio. Additionally, a rapidly rising interest rate environment that may cause rates to reach double digits could as well have a material impact on certain borrowers' ability to pay. the carrying amount of other real estate owned are susceptible to changes to market conditions in ABC’s primary market area. ABC is closely monitoring certain portions of its loan portfolio that we believe have a higher credit risk profile under the current environment based solely upon their industry classification. Based on current information, we have not identified any problem credits included in these categories, which are not already classified as nonperforming or Our current assumptions are that an impaired loans. However, if the economic recovery SFAS No. 109, “Accounting for Income We evaluate long-lived assets, such as Taxes,” requires the asset and liability approach for property and equipment, specifically identifiable financial accounting and reporting for deferred intangibles and goodwill, when events or changes in income taxes. We use the asset and liability circumstances indicate that the carrying value of method of accounting for deferred income taxes and such assets might not be recoverable. Factors that provide deferred income taxes for all significant could trigger an impairment include significant income tax temporary differences. See Note 11 to underperformance relative to historical or projected the Notes to Consolidated Financial Statements for future operating results, significant changes in the additional details. manner of our use of the acquired assets and significant negative industry or economic trends. As part of the process of preparing our consolidated financial statements we are required to The determination of whether an estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation and the provision for loan losses, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities that are included in our consolidated balance sheet. We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. To the extent we establish a impairment has occurred is based on an estimate of undiscounted cash flows attributable to the assets as compared to the carrying value of the assets. If an impairment has occurred, the amount of the impairment loss recognized would be determined by estimating the fair value of the assets and recording a loss if the fair value was less than the book value. In determining the existence of impairment factors, our assessment is based on market conditions, operational performance and legal factors of our Company and its subsidiary banks. Our review of factors present and the resulting appropriate carrying value of our goodwill, intangibles, and other long-lived assets are subject to judgments and estimates that management is required to make. Future events could cause us to conclude that impairment indicators exist and that our goodwill, intangibles and other long-lived assets might be impaired. valuation allowance or adjust this allowance in a NONINTEREST INCOME period, we must include an expense within the tax provisions in the statement of income. Service charges on deposit accounts increased $2,829,000 or 36.64% to $10,550,000 We have recorded on our consolidated in 2002 as compared to $7,721,000 in 2001 on balance sheet net deferred tax assets of an increase in average deposits of $112,895,000 $3,632,000 which includes amounts relating to loss or 14.46% to $893,759,000 in 2002 from carryforwards. We believe there will be sufficient $780,864,000 in 2001. Service charges on economic recovery will occur during the second half takes longer than expected, the allowance for loan taxable income in the future allowing us to utilize deposit accounts increased $1,328,000 or 20.77% of 2003 and that the depth of the recession will losses could be impacted by adverse developments these loss carryforwards in the tax jurisdictions to $7,721,000 in 2001 as compared to have already peaked prior to the first half of 2004. in these credits. where they exist. $6,393,000 in 2000 on an increase in average 22 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 23 MANAGEMENT'S DISCUSSION MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS deposits of $126,872,000 or 19.59% to $780,864,000 in 2001 from $653,992,000 in 2000. Bank acquisitions in 2001 accounted for $549,000 or 41.34% of the increase in service charges and $93,854,000 or 73.98% of the increase in average deposits. Other service charges, commissions and fees decreased $17,000 to $806,000 in 2002 from $823,000 in 2001. The decline was attributable to a decrease in the sale of annuities and other financial instruments. Other service charges, commissions and fees increased $201,000 or 32.32% to $823,000 in 2001 from $622,000 in 2000. Approximately $15,000 or 7.46% of the increase was attributable to the 2001 bank acquisitions. The remaining increase in other service charges, commissions and fees relate to increased activity in the sale of annuities and other financial instruments and increased emphasis on credit life insurance that generated additional fee income. Origination fees on mortgage loans increased $469,000 or 52.34% to $1,365,000 from 896,000 in 2001. Such fees increased $491,000 or 121.23% to $896,000 in 2001 from $405,000 in 2000. The significant increase in mortgage fee income resulted from the volume of mortgage refinancing generated by the decrease in mortgage rates and the inclusion of results of operations for the entire year in 2002 for banks acquired in 2001, whose results of operations were included only since the date of acquisition in accordance with purchase accounting. Approximately $134,000 or 27.29% of the increase in 2001 as attributable to First Bank of Brunswick NONINTEREST EXPENSE effect) from the amortization expense recorded in Salaries and employee benefits increased $2,989,000 or 16.45% to $21,155,000 in 2002 from $18,166,000 in 2001. Approximately $1,982,000 or 66.31% of the increase resulted from the inclusion of salaries and employee benefits for the entire year in expense for 2002 whereas salaries and benefits were included in expense in 2001 from the dates the banks were acquired in accordance with purchase accounting. Salaries increased $1,880,000; bonuses increased $611,000; retirement expense increased $222,000; and all other employee benefits, including stock options and 2001. Amortization expense for 2002 also included approximately $1,208,000 additional amortization related to the 2001 bank acquisitions. The additional expense related to acquisitions, net of the nonamortization provisions of the newly adopted accounting statement resulted in a net increase in amortization expense in 2002 of approximately $580,000. Amortization of intangible assets increased $381,000 to $1,185,000 in 2001 from $804,000 in 2000. The entire amount of the increase resulted from the amortization of intangible assets arising from the 2001 acquisitions. other grants, insurance and payroll taxes, increased Data processing fees increased $296,000 $276,000. Salaries and employee benefits increased to $1,546,000 in 2002 from $1,250,000 in 2001. $1,746,000 or 10.63% to $18,166,000 in 2001 The significant increase in fees is attributable to from $16,420,000 in 2000. Salaries increased increased volume of transactions processed following acquired in 2001. In 2002, we realized $1,643,000 in gain on sale of securities as compared to $1,253,000 $547,000; bonuses increased $468,000; retirement the recent bank acquisitions and the inclusion for the on sale of securities in 2001. There were no sales of securities in 2000. All other noninterest income increased $214,000 or 20.74 % in 2002 from 2001 and $237,000 or 29.81% in 2001 from 2000. Such increases were primarily attributable to the 2001 bank acquisitions. Following is a comparison of noninterest income for 2002, 2001 and 2000. Year Ended December 31, 2002 2001 (Dollars in Thousands) 2000 Service charges on deposit accounts $ 10,550 $ 7,721 $ 6,393 Mortgage origination fees Other service charges, commissions and fees Gain on sale of securities Other income 1,365 806 1,643 1,246 896 823 1,253 1,032 405 622 - 795 expense increased $242,000; and all other employee entire year in 2002 of the acquired banks that were benefits, including stock options and other grants, only included from the dates they were acquired in insurance and payroll taxes, increased $489,000. 2001. Bank transactions and all accounting data are The major portion of the increase in 2001 expense now processed online on equipment at the Banks, was attributable to the acquisition of three banks in parent company offices or central operations. Data 2001 accounted for as purchase transactions. processing fees increased $103,000 to $1,250,000 Equipment and occupancy expense increased $214,000 to $4,982,000 in 2002 from $4,768,000 in 2001. The 2002 bank acquisitions had the effect of increasing equipment and occupancy expense by $458,000 in 2002. This increase was offset by a reduction in leased in 2001 from $804,000 in 2000. Approximately $35,000, representing one-third of the increase related to the 2001 acquisitions. The remaining increase was attributable to increased volume of financial data processed in 2001 as compared with 2000. equipment expense of $192,000 in 2002 and other All other expense increased $2,814,000 to reductions totaling 52,000 attributable to decreased $11,465,000 in 2002 from $8,651,000 in 2001. depreciation in some of the Banks. Equipment and Approximately $946,000 or 33.62% of the increase $ 15,610 $ 11,725 $ 8,215 occupancy increased $430,000 or 9.91% to is attributable to the 2001 acquisitions. Included in 24 ABC Bancorp and Subsidiaries $4,768,000 in 2001 from $4,338,000 in 2000. the 2002 expense was $602,000 in other real estate Approximately $407,000 or 94.65% of the increase losses and sale or abandonment of fixed assets. In was attributable to the 2001 acquisitions. 2002 we incurred $680,000 more in conversion As of January 1, 2002, we were required to adopt the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” The adoption of this statement had the effect of reducing amortization expense by approximately $628,000 (before tax charges as compared with 2001, $400,000 in additional bank analysis charges and $304,000 in additional postage and stationery supplies. All other expense increased $1,127,000 in 2001 over 2000. Approximately $930,000 or 80% of this increase was attributable to the 2001 acquisitions. ABC Bancorp and Subsidiaries 25 MANAGEMENT'S DISCUSSION MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS deposits of $126,872,000 or 19.59% to $780,864,000 in 2001 from $653,992,000 in 2000. Bank acquisitions in 2001 accounted for $549,000 or 41.34% of the increase in service charges and $93,854,000 or 73.98% of the increase in average deposits. Other service charges, commissions and fees decreased $17,000 to $806,000 in 2002 from $823,000 in 2001. The decline was attributable to a decrease in the sale of annuities and other financial instruments. Other service charges, commissions and fees increased $201,000 or 32.32% to $823,000 in 2001 from $622,000 in 2000. Approximately $15,000 or 7.46% of the increase was attributable to the 2001 bank acquisitions. The remaining increase in other service charges, commissions and fees relate to increased activity in the sale of annuities and other financial instruments and increased emphasis on credit life insurance that generated additional fee income. Origination fees on mortgage loans increased $469,000 or 52.34% to $1,365,000 from 896,000 in 2001. Such fees increased $491,000 or 121.23% to $896,000 in 2001 from $405,000 in 2000. The significant increase in mortgage fee income resulted from the volume of mortgage refinancing generated by the decrease in mortgage rates and the inclusion of results of operations for the entire year in 2002 for banks acquired in 2001, whose results of operations were included only since the date of acquisition in accordance with purchase accounting. Approximately $134,000 or 27.29% of the increase in 2001 as attributable to First Bank of Brunswick NONINTEREST EXPENSE effect) from the amortization expense recorded in Salaries and employee benefits increased $2,989,000 or 16.45% to $21,155,000 in 2002 from $18,166,000 in 2001. Approximately $1,982,000 or 66.31% of the increase resulted from the inclusion of salaries and employee benefits for the entire year in expense for 2002 whereas salaries and benefits were included in expense in 2001 from the dates the banks were acquired in accordance with purchase accounting. Salaries increased $1,880,000; bonuses increased $611,000; retirement expense increased $222,000; and all other employee benefits, including stock options and 2001. Amortization expense for 2002 also included approximately $1,208,000 additional amortization related to the 2001 bank acquisitions. The additional expense related to acquisitions, net of the nonamortization provisions of the newly adopted accounting statement resulted in a net increase in amortization expense in 2002 of approximately $580,000. Amortization of intangible assets increased $381,000 to $1,185,000 in 2001 from $804,000 in 2000. The entire amount of the increase resulted from the amortization of intangible assets arising from the 2001 acquisitions. other grants, insurance and payroll taxes, increased Data processing fees increased $296,000 $276,000. Salaries and employee benefits increased to $1,546,000 in 2002 from $1,250,000 in 2001. $1,746,000 or 10.63% to $18,166,000 in 2001 The significant increase in fees is attributable to from $16,420,000 in 2000. Salaries increased increased volume of transactions processed following acquired in 2001. In 2002, we realized $1,643,000 in gain on sale of securities as compared to $1,253,000 $547,000; bonuses increased $468,000; retirement the recent bank acquisitions and the inclusion for the on sale of securities in 2001. There were no sales of securities in 2000. All other noninterest income increased $214,000 or 20.74 % in 2002 from 2001 and $237,000 or 29.81% in 2001 from 2000. Such increases were primarily attributable to the 2001 bank acquisitions. Following is a comparison of noninterest income for 2002, 2001 and 2000. Year Ended December 31, 2002 2001 (Dollars in Thousands) 2000 Service charges on deposit accounts $ 10,550 $ 7,721 $ 6,393 Mortgage origination fees Other service charges, commissions and fees Gain on sale of securities Other income 1,365 806 1,643 1,246 896 823 1,253 1,032 405 622 - 795 expense increased $242,000; and all other employee entire year in 2002 of the acquired banks that were benefits, including stock options and other grants, only included from the dates they were acquired in insurance and payroll taxes, increased $489,000. 2001. Bank transactions and all accounting data are The major portion of the increase in 2001 expense now processed online on equipment at the Banks, was attributable to the acquisition of three banks in parent company offices or central operations. Data 2001 accounted for as purchase transactions. processing fees increased $103,000 to $1,250,000 Equipment and occupancy expense increased $214,000 to $4,982,000 in 2002 from $4,768,000 in 2001. The 2002 bank acquisitions had the effect of increasing equipment and occupancy expense by $458,000 in 2002. This increase was offset by a reduction in leased in 2001 from $804,000 in 2000. Approximately $35,000, representing one-third of the increase related to the 2001 acquisitions. The remaining increase was attributable to increased volume of financial data processed in 2001 as compared with 2000. equipment expense of $192,000 in 2002 and other All other expense increased $2,814,000 to reductions totaling 52,000 attributable to decreased $11,465,000 in 2002 from $8,651,000 in 2001. depreciation in some of the Banks. Equipment and Approximately $946,000 or 33.62% of the increase $ 15,610 $ 11,725 $ 8,215 occupancy increased $430,000 or 9.91% to is attributable to the 2001 acquisitions. Included in 24 ABC Bancorp and Subsidiaries $4,768,000 in 2001 from $4,338,000 in 2000. the 2002 expense was $602,000 in other real estate Approximately $407,000 or 94.65% of the increase losses and sale or abandonment of fixed assets. In was attributable to the 2001 acquisitions. 2002 we incurred $680,000 more in conversion As of January 1, 2002, we were required to adopt the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” The adoption of this statement had the effect of reducing amortization expense by approximately $628,000 (before tax charges as compared with 2001, $400,000 in additional bank analysis charges and $304,000 in additional postage and stationery supplies. All other expense increased $1,127,000 in 2001 over 2000. Approximately $930,000 or 80% of this increase was attributable to the 2001 acquisitions. ABC Bancorp and Subsidiaries 25 MANAGEMENT'S DISCUSSION MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Following is a comparison of noninterest income for 2002, 2001 and 2000. Year Ended December 31, 2002 2001 (Dollars in Thousands) 2000 The Company's operating leases represent short-term obligations, normally with maturities of one year or less. Many of the operating leases have thirty-day cancellation provisions. The total contractual obligations for operating leases do not require a material amount of the Company's cash funds. Salaries and employee benefits $ 21,155 $ 18,166 $ 16,420 At December 31, 2002, we had no binding commitments for capital expenditures. Equipment and occupancy Amortization of intangible assets Data processing fees Other expense LIQUIDITY AND CAPITAL RESOURCES 4,982 1,765 1,546 11,465 4,768 1,185 1,250 8,651 4,338 804 1,147 7,524 In accordance with risk capital guidelines issued by the Federal Reserve Board, we are required to maintain a minimum standard of total capital to risk-weighted assets of 8%. Additionally, all member banks must maintain “core” or “Tier 1” capital of at least 4% of total assets (“leverage ratio”). Member banks operating at or near the 4% capital level are expected to have well-diversified risks, including no undue interest rate risk exposure, excellent control systems, good earnings, high asset quality, and well managed on- and off- $ 40,913 $ 34,020 $ 30,233 balance sheet activities; and, in general, be considered strong banking organizations with a composite 1 rating under the CAMEL rating system of banks. For all but the most highly rated banks meeting the above conditions, the minimum leverage ratio is to be 4% plus an additional 100 to 200 basis points. The following table summarizes the regulatory capital levels of our Company at December 31, 2002. Actual Required Excess Amount Percent Percent Amount (Dollars in Thousands) Amount Percent $ 109,733 9.49 % $ 46,252 4.00 % $ 63,481 5.49 % 109,733 127,577 12.79 14.87 34,325 68,649 4.00 8.00 75,408 58,928 8.79 6.87 Leverage capital Risk-based capital: Core capital Total capital Each Bank also met its individual regulatory capital requirements at December 31, 2002. Liquidity management involves the matching of the cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs, and the ability of ABC and our Banks to meet those needs. ABC and our Banks seek to meet liquidity requirements primarily through management of short-term investments (principally interest-bearing deposits in banks) and monthly amortizing loans. Another source of liquidity is the repayment of maturing single payment loans. In addition, our Banks maintain relationships with correspondent banks which could provide funds to them on short notice, if needed. The liquidity and capital resources of ABC and our Banks are monitored on a periodic basis by state and federal regulatory authorities. At December 31, 2002, the Banks’ short-term investments were adequate to cover any reasonable anticipated immediate need for funds. During 2002, we increased our capital by retaining net earnings of $5,626,000 after payment of dividends. After recording an increase in capital of $602,000 for unrealized gains on securities available for sale, net of taxes, an increase of $444,000 for restricted stock transactions, an increase of $133,000 for the exercise of stock options, total capital increased $3,336,000 during 2002. At December 31, 2002, total capital of ABC amounted to $107,484,000. We are aware of no events or trends likely to result in a material change in our liquidity. The following table sets forth certain information about contractual cash obligations as of December 31, 2002. Total Payments Due After December 31, 2002 1 -3 1 Year Years Or Less 4 -5 Years After 5 Years Long-term debt $ 8,144 $ 1,563 $ 2,925 $ 2,925 $ 731 Federal Home Loan Bank advances Total contractual cash obligations 109,146 3,086 16,044 22 89,994 $ 117,290 $ 4,649 $ 18,969 $ 2,947 $ 90,725 26 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 27 MANAGEMENT'S DISCUSSION MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Following is a comparison of noninterest income for 2002, 2001 and 2000. Year Ended December 31, 2002 2001 (Dollars in Thousands) 2000 The Company's operating leases represent short-term obligations, normally with maturities of one year or less. Many of the operating leases have thirty-day cancellation provisions. The total contractual obligations for operating leases do not require a material amount of the Company's cash funds. Salaries and employee benefits $ 21,155 $ 18,166 $ 16,420 At December 31, 2002, we had no binding commitments for capital expenditures. Equipment and occupancy Amortization of intangible assets Data processing fees Other expense LIQUIDITY AND CAPITAL RESOURCES 4,982 1,765 1,546 11,465 4,768 1,185 1,250 8,651 4,338 804 1,147 7,524 In accordance with risk capital guidelines issued by the Federal Reserve Board, we are required to maintain a minimum standard of total capital to risk-weighted assets of 8%. Additionally, all member banks must maintain “core” or “Tier 1” capital of at least 4% of total assets (“leverage ratio”). Member banks operating at or near the 4% capital level are expected to have well-diversified risks, including no undue interest rate risk exposure, excellent control systems, good earnings, high asset quality, and well managed on- and off- $ 40,913 $ 34,020 $ 30,233 balance sheet activities; and, in general, be considered strong banking organizations with a composite 1 rating under the CAMEL rating system of banks. For all but the most highly rated banks meeting the above conditions, the minimum leverage ratio is to be 4% plus an additional 100 to 200 basis points. The following table summarizes the regulatory capital levels of our Company at December 31, 2002. Actual Required Excess Amount Percent Percent Amount (Dollars in Thousands) Amount Percent $ 109,733 9.49 % $ 46,252 4.00 % $ 63,481 5.49 % 109,733 127,577 12.79 14.87 34,325 68,649 4.00 8.00 75,408 58,928 8.79 6.87 Leverage capital Risk-based capital: Core capital Total capital Each Bank also met its individual regulatory capital requirements at December 31, 2002. Liquidity management involves the matching of the cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs, and the ability of ABC and our Banks to meet those needs. ABC and our Banks seek to meet liquidity requirements primarily through management of short-term investments (principally interest-bearing deposits in banks) and monthly amortizing loans. Another source of liquidity is the repayment of maturing single payment loans. In addition, our Banks maintain relationships with correspondent banks which could provide funds to them on short notice, if needed. The liquidity and capital resources of ABC and our Banks are monitored on a periodic basis by state and federal regulatory authorities. At December 31, 2002, the Banks’ short-term investments were adequate to cover any reasonable anticipated immediate need for funds. During 2002, we increased our capital by retaining net earnings of $5,626,000 after payment of dividends. After recording an increase in capital of $602,000 for unrealized gains on securities available for sale, net of taxes, an increase of $444,000 for restricted stock transactions, an increase of $133,000 for the exercise of stock options, total capital increased $3,336,000 during 2002. At December 31, 2002, total capital of ABC amounted to $107,484,000. We are aware of no events or trends likely to result in a material change in our liquidity. The following table sets forth certain information about contractual cash obligations as of December 31, 2002. Total Payments Due After December 31, 2002 1 -3 1 Year Years Or Less 4 -5 Years After 5 Years Long-term debt $ 8,144 $ 1,563 $ 2,925 $ 2,925 $ 731 Federal Home Loan Bank advances Total contractual cash obligations 109,146 3,086 16,044 22 89,994 $ 117,290 $ 4,649 $ 18,969 $ 2,947 $ 90,725 26 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 27 INDEPENDENT AUDITOR’S REPORT CONSOLIDATED BALANCE SHEETS To the Board of Directors ABC Bancorp Moultrie, Georgia We have audited the accompanying consolidated balance sheets of ABC Bancorp and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ABC Bancorp and Subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Albany, Georgia January 28, 2003 December 31, 2002 and 2001 (Dollars in Thousands) Assets Cash and due from banks Interest-bearing deposits in banks Securities available for sale, at fair value Restricted stock Federal funds sold Loans Less allowance for loan losses Loans, net Premises and equipment, net Intangible assets Goodwill Other assets Liabilities and Stockholders' Equity Deposits Noninterest-bearing Interest-bearing Total deposits Federal funds purchased and securities sold under agreements to repurchase Other borrowings Other liabilities Trust preferred securities Total liabilities Commitments and contingencies Stockholders' equity Common stock, par value $1; 30,000,000 shares authorized; 10,824,257 and 10,790,369 shares issued Capital surplus Retained earnings Accumulated other comprehensive income Unearned compensation Less cost of 1,053,321 and 790,982 shares acquired for the treasury Total stockholders' equity See Notes to Consolidated Financial Statements. 2002 2001 $ 45,098 77,979 178,303 5,778 - 833,447 14,868 818,579 25,327 4,309 19,240 17,864 $ 1,192,477 $ 51,303 106,172 152,134 4,701 44 805,076 14,944 790,132 26,821 8,695 16,619 20,265 $ 1,176,886 $ 131,749 784,436 916,185 $ 125,522 805,634 931,156 8,204 117,290 8,814 34,500 1,084,993 3,792 95,293 7,997 34,500 1,072,738 10,824 45,946 59,210 1,636 (443) 117,173 10,790 45,616 53,584 1,034 (656) 110,368 (9,689) 107,484 $ 1,192,477 (6,220) 104,148 $ 1,176,886 28 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 29 INDEPENDENT AUDITOR’S REPORT CONSOLIDATED BALANCE SHEETS To the Board of Directors ABC Bancorp Moultrie, Georgia We have audited the accompanying consolidated balance sheets of ABC Bancorp and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ABC Bancorp and Subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Albany, Georgia January 28, 2003 December 31, 2002 and 2001 (Dollars in Thousands) Assets Cash and due from banks Interest-bearing deposits in banks Securities available for sale, at fair value Restricted stock Federal funds sold Loans Less allowance for loan losses Loans, net Premises and equipment, net Intangible assets Goodwill Other assets Liabilities and Stockholders' Equity Deposits Noninterest-bearing Interest-bearing Total deposits Federal funds purchased and securities sold under agreements to repurchase Other borrowings Other liabilities Trust preferred securities Total liabilities Commitments and contingencies Stockholders' equity Common stock, par value $1; 30,000,000 shares authorized; 10,824,257 and 10,790,369 shares issued Capital surplus Retained earnings Accumulated other comprehensive income Unearned compensation Less cost of 1,053,321 and 790,982 shares acquired for the treasury Total stockholders' equity See Notes to Consolidated Financial Statements. 2002 2001 $ 45,098 77,979 178,303 5,778 - 833,447 14,868 818,579 25,327 4,309 19,240 17,864 $ 1,192,477 $ 51,303 106,172 152,134 4,701 44 805,076 14,944 790,132 26,821 8,695 16,619 20,265 $ 1,176,886 $ 131,749 784,436 916,185 $ 125,522 805,634 931,156 8,204 117,290 8,814 34,500 1,084,993 3,792 95,293 7,997 34,500 1,072,738 10,824 45,946 59,210 1,636 (443) 117,173 10,790 45,616 53,584 1,034 (656) 110,368 (9,689) 107,484 $ 1,192,477 (6,220) 104,148 $ 1,176,886 28 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 29 CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, 2002, 2001 and 2000 Years Ended December 31, 2002, 2001 and 2000 (Dollars in Thousands) Interest income Interest and fees on loans Interest on taxable securities Interest on nontaxable securities Interest on deposits in other banks Interest on federal funds sold Interest expense Interest on deposits Interest on other borrowings Net interest income 2002 2001 2000 (Dollars in Thousands) 2002 2001 2000 $ $ 64,970 8,275 187 1,020 1 74,453 20,286 7,858 28,144 46,309 65,157 9,072 869 943 49 76,090 30,480 4,424 34,904 41,186 $ 58,328 8,750 959 939 - 68,976 26,753 4,052 30,805 38,171 Net income $ 10,355 $ 9,633 $ 10,098 Other comprehensive income: Net unrealized holding gains arising during period, net of tax of $869, $606 and $1,129 1,687 1,176 2,192 Reclassification adjustment for gains included in net income, net of tax of $558 and $426 Total other comprehensive income (1,085) 602 (827) 349 - 2,192 Comprehensive income $ 10,957 $ 9,982 $ 12,290 Provision for loan losses 5,574 4,566 1,712 Net interest income after provision for loan losses 40,735 36,620 36,459 See Notes to Consolidated Financial Statements. Other income Service charges on deposit accounts Other service charges, commissions and fees Mortgage origination fees Gain on sale of securities Other Other expenses Salaries and employee benefits Equipment expense Occupancy expense Amortization of intangible assets Data processing fees Other operating expenses Income before income taxes 10,550 806 1,365 1,643 1,246 15,610 21,155 2,394 2,588 1,765 1,546 11,465 40,913 15,432 7,721 823 896 1,253 1,032 11,725 18,166 2,817 1,951 1,185 1,250 8,651 34,020 14,325 6,393 622 405 - 795 8,215 16,420 2,484 1,854 804 1,147 7,524 30,233 14,441 Applicable income taxes 5,077 4,692 4,343 Net income Basic earnings per share Diluted earnings per share $ 10,355 $ $ 1.05 1.05 $ $ $ 9,633 1.05 1.04 $ $ $ 10,098 1.19 1.19 See Notes to Consolidated Financial Statements. 30 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 31 CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, 2002, 2001 and 2000 Years Ended December 31, 2002, 2001 and 2000 (Dollars in Thousands) Interest income Interest and fees on loans Interest on taxable securities Interest on nontaxable securities Interest on deposits in other banks Interest on federal funds sold Interest expense Interest on deposits Interest on other borrowings Net interest income 2002 2001 2000 (Dollars in Thousands) 2002 2001 2000 $ $ 64,970 8,275 187 1,020 1 74,453 20,286 7,858 28,144 46,309 65,157 9,072 869 943 49 76,090 30,480 4,424 34,904 41,186 $ 58,328 8,750 959 939 - 68,976 26,753 4,052 30,805 38,171 Net income $ 10,355 $ 9,633 $ 10,098 Other comprehensive income: Net unrealized holding gains arising during period, net of tax of $869, $606 and $1,129 1,687 1,176 2,192 Reclassification adjustment for gains included in net income, net of tax of $558 and $426 Total other comprehensive income (1,085) 602 (827) 349 - 2,192 Comprehensive income $ 10,957 $ 9,982 $ 12,290 Provision for loan losses 5,574 4,566 1,712 Net interest income after provision for loan losses 40,735 36,620 36,459 See Notes to Consolidated Financial Statements. Other income Service charges on deposit accounts Other service charges, commissions and fees Mortgage origination fees Gain on sale of securities Other Other expenses Salaries and employee benefits Equipment expense Occupancy expense Amortization of intangible assets Data processing fees Other operating expenses Income before income taxes 10,550 806 1,365 1,643 1,246 15,610 21,155 2,394 2,588 1,765 1,546 11,465 40,913 15,432 7,721 823 896 1,253 1,032 11,725 18,166 2,817 1,951 1,185 1,250 8,651 34,020 14,325 6,393 622 405 - 795 8,215 16,420 2,484 1,854 804 1,147 7,524 30,233 14,441 Applicable income taxes 5,077 4,692 4,343 Net income Basic earnings per share Diluted earnings per share $ 10,355 $ $ 1.05 1.05 $ $ $ 9,633 1.05 1.04 $ $ $ 10,098 1.19 1.19 See Notes to Consolidated Financial Statements. 30 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 31 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Years Ended December 31, 2002, 2001 and 2000 Years Ended December 31, 2002, 2001 and 2000 (Dollars in Thousands) Common Stock Shares Par Value Capital Surplus Retained Earnings (Dollars in Thousands) Accumulated O t h e r Comprehensive Income (Loss) Unearned Treasury Stock Compensation Shares C o s t T o t a l Balance, December 31, 1999 9,098,690 $ 9,099 $ 28,854 $ 42,188 $ (1,507) $ (560) 374,823 $ (2,058) $ 76,016 Net income Cash dividends declared, $.46 per share Issuance of restricted shares of common stock - - under employee incentive plan 39,300 Amortization of unearned compensation, net of forfeitures Repurchase of shares for treasury Other comprehensive income - - - - - 39 - - - - - 383 - - - Balance, December 31, 2000 9,137,990 9,138 29,237 Net income Cash dividends declared, $.48 per share Adjustments to record acquisition of - - - - - - purchased subsidiaries 1,588,347 1,588 15,768 Issuance of restricted shares of common stock under employee incentive plan 62,800 Amortization of unearned compensation, net of forfeitures Proceeds from exercise of stock options Other comprehensive income - 1,232 - 63 - 1 - 600 - 11 - Balance, December 31, 2001 10,790,369 10,790 45,616 Net income Cash dividends declared, $.48 per share Issuance of restricted shares of common stock - - under employee incentive plan 15,300 Amortization of unearned compensation, net of forfeitures - Proceeds from exercise of stock options 18,588 Repurchase of shares for treasury Other comprehensive income - - - - 16 18 - - - - 215 115 - - 10,098 (3,875) - - - - 48,411 9,633 (4,460) - - - - - 53,584 10,355 (4,729) - - - - Balance, December 31, 2002 10,824,257 $ 10,824 $ 45,946 $ 59,210 See Notes to Consolidated Financial Statements. - - - - - 2,192 685 - - - - - - 349 1,034 - - - - 602 1,636 $ - - (422) 387 - - (595) - - - (663) 602 - - (656) - - (231) 444 - - - - - - - - - - - 416,159 (4,162) - - 790,982 (6,220) - - - - - - - - - - - - - - 790,982 (6,220) - - - - - - - - - - 262,339 (3,469) - - 10,098 (3,875) - 387 (4,162) 2,192 80,656 9,633 (4,460) 17,356 - 602 12 349 104,148 10,355 (4,729) - 444 133 (3,469) 602 $ (443) 1,053,321 $ (9,689) $ 107,484 32 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 33 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Years Ended December 31, 2002, 2001 and 2000 Years Ended December 31, 2002, 2001 and 2000 (Dollars in Thousands) Common Stock Shares Par Value Capital Surplus Retained Earnings (Dollars in Thousands) Accumulated O t h e r Comprehensive Income (Loss) Unearned Treasury Stock Compensation Shares C o s t T o t a l Balance, December 31, 1999 9,098,690 $ 9,099 $ 28,854 $ 42,188 $ (1,507) $ (560) 374,823 $ (2,058) $ 76,016 Net income Cash dividends declared, $.46 per share Issuance of restricted shares of common stock - - under employee incentive plan 39,300 Amortization of unearned compensation, net of forfeitures Repurchase of shares for treasury Other comprehensive income - - - - - 39 - - - - - 383 - - - Balance, December 31, 2000 9,137,990 9,138 29,237 Net income Cash dividends declared, $.48 per share Adjustments to record acquisition of - - - - - - purchased subsidiaries 1,588,347 1,588 15,768 Issuance of restricted shares of common stock under employee incentive plan 62,800 Amortization of unearned compensation, net of forfeitures Proceeds from exercise of stock options Other comprehensive income - 1,232 - 63 - 1 - 600 - 11 - Balance, December 31, 2001 10,790,369 10,790 45,616 Net income Cash dividends declared, $.48 per share Issuance of restricted shares of common stock - - under employee incentive plan 15,300 Amortization of unearned compensation, net of forfeitures - Proceeds from exercise of stock options 18,588 Repurchase of shares for treasury Other comprehensive income - - - - 16 18 - - - - 215 115 - - 10,098 (3,875) - - - - 48,411 9,633 (4,460) - - - - - 53,584 10,355 (4,729) - - - - Balance, December 31, 2002 10,824,257 $ 10,824 $ 45,946 $ 59,210 See Notes to Consolidated Financial Statements. - - - - - 2,192 685 - - - - - - 349 1,034 - - - - 602 1,636 $ - - (422) 387 - - (595) - - - (663) 602 - - (656) - - (231) 444 - - - - - - - - - - - 416,159 (4,162) - - 790,982 (6,220) - - - - - - - - - - - - - - 790,982 (6,220) - - - - - - - - - - 262,339 (3,469) - - 10,098 (3,875) - 387 (4,162) 2,192 80,656 9,633 (4,460) 17,356 - 602 12 349 104,148 10,355 (4,729) - 444 133 (3,469) 602 $ (443) 1,053,321 $ (9,689) $ 107,484 32 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 33 CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2002, 2001 and 2000 Years Ended December 31, 2002, 2001 and 2000 (Dollars in Thousands) OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization of intangible assets Amortization of unearned compensation Net gains on sale of securities available for sale Net (gains) losses on sale or disposal of premises and equipment Provision for loan losses Provision for deferred taxes (Increase) decrease in interest receivable Increase (decrease) in interest payable Increase (decrease) in taxes payable Net other operating activities Total adjustments 2002 2001 2000 (Dollars in Thousands) 2002 2001 2000 $ 10,355 $ 9,633 $ 10,098 2,241 1,765 444 (1,643) 320 5,574 (65) 1,120 (1,216) 588 2,964 12,092 2,438 1,185 602 (1,253) (13) 4,566 (726) 2,233 (672) 167 (900) 7,627 2,189 804 387 - 7 1,712 (634) (1,970) 578 (1) 371 3,443 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 29,360 $ 35,576 $ 30,227 Income taxes $ 4,554 $ 5,251 $ 4,978 NONCASH TRANSACTIONS Principal balances of loans transferred to other real estate owned Common stock issued in connection with business acquisitions See Notes to Consolidated Financial Statements. $ 3,930 $ 2,216 $ 1,021 $ - $ 17,590 $ - Net cash provided by operating activities 22,447 17,260 13,541 INVESTING ACTIVITIES (Increase) decrease in interest-bearing deposits in banks Purchases of securities available for sale Proceeds from maturities of securities available for sale Proceeds from sale of securities available for sale Purchase of restricted equity securities Decrease in federal funds sold Increase in loans, net Purchase of premises and equipment Proceeds from sale of premises and equipment Net cash received from acquisitions 28,193 (140,148) 78,632 37,903 (1,077) 44 (34,021) (1,726) - - (97,267) (86,585) 82,511 42,996 (1,215) 13,942 (53,244) (1,896) 28 11,609 27,779 (26,927) 15,167 - (34) - (58,931) (2,359) - - Net cash used in investing activities (32,200) (89,121) (45,305) FINANCING ACTIVITIES Increase (decrease) in deposits Increase in federal funds purchased and securities sold under agreements to repurchase Proceeds from other borrowings Repayment of other borrowings Dividends paid Proceeds from exercise of stock options Proceeds from issuance of trust preferred securities Payment for debt issue costs Purchase of treasury shares (14,971) 24,591 39,227 4,412 25,100 (2,908) (4,749) 133 - - (3,469) 1,139 69,738 (39,515) (4,262) 12 34,500 (1,450) - 2,256 109,800 (120,600) (3,745) - - - (4,162) Net cash provided by financing activities 3,548 84,753 22,776 Net increase (decrease) in cash and due from banks (6,205) 12,892 (8,988) Cash and due from banks at beginning of year 51,303 38,411 47,399 Cash and due from banks at end of year $ 45,098 $ 51,303 $ 38,411 34 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 35 CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2002, 2001 and 2000 Years Ended December 31, 2002, 2001 and 2000 (Dollars in Thousands) OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization of intangible assets Amortization of unearned compensation Net gains on sale of securities available for sale Net (gains) losses on sale or disposal of premises and equipment Provision for loan losses Provision for deferred taxes (Increase) decrease in interest receivable Increase (decrease) in interest payable Increase (decrease) in taxes payable Net other operating activities Total adjustments 2002 2001 2000 (Dollars in Thousands) 2002 2001 2000 $ 10,355 $ 9,633 $ 10,098 2,241 1,765 444 (1,643) 320 5,574 (65) 1,120 (1,216) 588 2,964 12,092 2,438 1,185 602 (1,253) (13) 4,566 (726) 2,233 (672) 167 (900) 7,627 2,189 804 387 - 7 1,712 (634) (1,970) 578 (1) 371 3,443 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 29,360 $ 35,576 $ 30,227 Income taxes $ 4,554 $ 5,251 $ 4,978 NONCASH TRANSACTIONS Principal balances of loans transferred to other real estate owned Common stock issued in connection with business acquisitions See Notes to Consolidated Financial Statements. $ 3,930 $ 2,216 $ 1,021 $ - $ 17,590 $ - Net cash provided by operating activities 22,447 17,260 13,541 INVESTING ACTIVITIES (Increase) decrease in interest-bearing deposits in banks Purchases of securities available for sale Proceeds from maturities of securities available for sale Proceeds from sale of securities available for sale Purchase of restricted equity securities Decrease in federal funds sold Increase in loans, net Purchase of premises and equipment Proceeds from sale of premises and equipment Net cash received from acquisitions 28,193 (140,148) 78,632 37,903 (1,077) 44 (34,021) (1,726) - - (97,267) (86,585) 82,511 42,996 (1,215) 13,942 (53,244) (1,896) 28 11,609 27,779 (26,927) 15,167 - (34) - (58,931) (2,359) - - Net cash used in investing activities (32,200) (89,121) (45,305) FINANCING ACTIVITIES Increase (decrease) in deposits Increase in federal funds purchased and securities sold under agreements to repurchase Proceeds from other borrowings Repayment of other borrowings Dividends paid Proceeds from exercise of stock options Proceeds from issuance of trust preferred securities Payment for debt issue costs Purchase of treasury shares (14,971) 24,591 39,227 4,412 25,100 (2,908) (4,749) 133 - - (3,469) 1,139 69,738 (39,515) (4,262) 12 34,500 (1,450) - 2,256 109,800 (120,600) (3,745) - - - (4,162) Net cash provided by financing activities 3,548 84,753 22,776 Net increase (decrease) in cash and due from banks (6,205) 12,892 (8,988) Cash and due from banks at beginning of year 51,303 38,411 47,399 Cash and due from banks at end of year $ 45,098 $ 51,303 $ 38,411 34 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 35 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business ABC Bancorp, (the "Company") is a multi-bank holding company whose business is presently conducted by its subsidiary banks (the "Banks"). Through the Banks, the Company operates a full service banking business and offers a broad range of retail and commercial banking services to its customers located in a market area which includes South and Southeast Georgia, North Florida and Southeast Alabama. The Company and the Banks are subject to the regulations of certain federal and state agencies and are periodically examined by those regulatory agencies. Basis of Presentation and Accounting Estimates The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation. In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date 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 in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, impairment of intangible assets and deferred taxes. The Company's consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany trans- actions and balances have been eliminated in consolidation. 36 ABC Bancorp and Subsidiaries Cash, Due from Banks and Cash Flows For purposes of reporting cash flows, cash and due from banks includes cash on hand, cash items in process of collection and amounts due from banks. Cash flows from loans, federal funds sold, deposits, interest-bearing deposits in banks and federal funds purchased and securities sold under agreements to repurchase are reported net. The Banks are required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of those reserve balances was approximately $6,438,000 and $8,086,000 at December 31, 2002 and 2001, respectively. Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Management has not classified any of its debt securities as held-to-maturity. Securities not classified as held-to-maturity, including equity securities with readily determinable fair values, are classified as available-for-sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of the related deferred tax effect. Equity securities, including restricted stock, without a readily determinable fair value are classified as available-for-sale and recorded at cost. Purchase premiums and discounts are recognized in interest income using the interest method based on the terms of the securities. Gains and losses on the sale of securities are determined using the specific identification method. Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans Loans are reported at their outstanding principal balances less unearned income, net deferred fees, and the allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct loan origination costs, are deferred and recognized as an adjustment of the related loan yield over the life of the loan using a method which approximates a level yield. The accrual of interest on loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due, unless the loan is well-secured. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. Interest income on nonaccrual loans is subsequently recognized only to the extent cash payments are received until the loans are returned to accrual status. The allowance for loan losses is established through a provision for loan losses charged to expense. Loan losses are charged against the allowance when management believes the collectibility of the principal is unlikely. Subsequent recoveries are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb estimated losses in the loan portfolio. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations. A loan is considered impaired when it is probable the Banks will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses. Premises and Equipment Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation computed principally on the straight-line method over the estimated useful lives: Buildings . . . . . . . . . . . . . . . . . . . . . . . . 39 Furniture and equipment . . . . . . . . . . . . . 5-7 Years Intangible Assets and Goodwill Intangible assets, arising from excess of purchase price over the fair value of net assets acquired in purchase transactions, represent identified intangible assets and goodwill. Identifiable intangible assets are amortized over their estimated useful lives. Goodwill arising from purchase transactions con- summated prior to July 1, 2002 had been amortized over periods ranging from 15 to 25 years. ABC Bancorp and Subsidiaries 37 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business ABC Bancorp, (the "Company") is a multi-bank holding company whose business is presently conducted by its subsidiary banks (the "Banks"). Through the Banks, the Company operates a full service banking business and offers a broad range of retail and commercial banking services to its customers located in a market area which includes South and Southeast Georgia, North Florida and Southeast Alabama. The Company and the Banks are subject to the regulations of certain federal and state agencies and are periodically examined by those regulatory agencies. Basis of Presentation and Accounting Estimates The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation. In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date 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 in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, impairment of intangible assets and deferred taxes. The Company's consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany trans- actions and balances have been eliminated in consolidation. 36 ABC Bancorp and Subsidiaries Cash, Due from Banks and Cash Flows For purposes of reporting cash flows, cash and due from banks includes cash on hand, cash items in process of collection and amounts due from banks. Cash flows from loans, federal funds sold, deposits, interest-bearing deposits in banks and federal funds purchased and securities sold under agreements to repurchase are reported net. The Banks are required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of those reserve balances was approximately $6,438,000 and $8,086,000 at December 31, 2002 and 2001, respectively. Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Management has not classified any of its debt securities as held-to-maturity. Securities not classified as held-to-maturity, including equity securities with readily determinable fair values, are classified as available-for-sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of the related deferred tax effect. Equity securities, including restricted stock, without a readily determinable fair value are classified as available-for-sale and recorded at cost. Purchase premiums and discounts are recognized in interest income using the interest method based on the terms of the securities. Gains and losses on the sale of securities are determined using the specific identification method. Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans Loans are reported at their outstanding principal balances less unearned income, net deferred fees, and the allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct loan origination costs, are deferred and recognized as an adjustment of the related loan yield over the life of the loan using a method which approximates a level yield. The accrual of interest on loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due, unless the loan is well-secured. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. Interest income on nonaccrual loans is subsequently recognized only to the extent cash payments are received until the loans are returned to accrual status. The allowance for loan losses is established through a provision for loan losses charged to expense. Loan losses are charged against the allowance when management believes the collectibility of the principal is unlikely. Subsequent recoveries are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb estimated losses in the loan portfolio. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations. A loan is considered impaired when it is probable the Banks will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses. Premises and Equipment Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation computed principally on the straight-line method over the estimated useful lives: Buildings . . . . . . . . . . . . . . . . . . . . . . . . 39 Furniture and equipment . . . . . . . . . . . . . 5-7 Years Intangible Assets and Goodwill Intangible assets, arising from excess of purchase price over the fair value of net assets acquired in purchase transactions, represent identified intangible assets and goodwill. Identifiable intangible assets are amortized over their estimated useful lives. Goodwill arising from purchase transactions con- summated prior to July 1, 2002 had been amortized over periods ranging from 15 to 25 years. ABC Bancorp and Subsidiaries 37 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In 2001 and 2002, the Financial Accounting Standards Board (the FASB) issued four new accounting standards, which significantly affected the accounting for goodwill and other intangible assets arising from purchase transactions. See “Accounting Standards” included in this note for additional information on SFAS Statements No. 141, 142, 144 and 147. As a result of the application of these new standards, goodwill and intangible assets that management concludes have indefinite useful lives can no longer be amortized, but are subject to impairment tests performed at least annually. Other identifiable intangible assets will continue to be amortized over their estimated useful lives but will be subject to impairment tests. For the year ended December 31, 2002, no amortization of goodwill was included in the consolidated statement of income. For the years ended December 31, 2001 and 2000, charges in the amount of $668,000 and $627,000, respectively, were included in the consolidated statements of income for amortization of goodwill. Included in the consolidated statements of income for December 31, 2002, 2001 and 2000, were charges for amortization of identifiable intangible assets in the amounts of $1,765,000, $517,000 and $177,000, respectively. Other Real Estate Owned Other real estate owned represents properties acquired through foreclosure. Other real estate owned is held for sale and is carried at the lower of cost or fair value less estimated costs to sell. Any write-down to fair value at the time of transfer to other real estate owned is charged to the allowance for loan losses. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. The carrying amount of other real estate owned at December 31, 2002 and 2001 was $1,534,200 and $1,249,500, respectively. 38 ABC Bancorp and Subsidiaries Income Taxes Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Stock Compensation Plans At December 31, 2002, the Company has two stock-based employee compensation plans, which are described more fully in Note 13. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock- based employee compensation. Years Ended December 31, 2000 2001 2002 (Dollars in Thousands) $ 10,355 $ 9,633 $ 10,098 Net income, as reported Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (54) (39) (33) Pro forma net income $ 10,301 $ 9,594 $ 10,065 Earnings per share: Basic - as reported $ Basic - pro forma $ Diluted - as reported $ Diluted - pro forma $ 1.05 $ 1.04 $ 1.05 $ 1.04 $ 1.05 $ 1.04 $ 1.04 $ 1.04 $ 1.19 1.19 1.19 1.19 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Treasury Stock The Company’s repurchases of shares of its common stock are recorded at cost as “Treasury stock” and result in a reduction of “Stockholders’ equity.” When treasury shares are reissued, the Company uses a first-in, first-out method and any difference in repurchase cost and reissuance price is recorded as an increase or reduction in “Capital surplus.” Earnings Per share Basic earnings per common share are computed by dividing net income by the weighted-average number of shares of common stock outstanding. Diluted earnings per common share are computed by dividing net income by the effect of the issuance of potential common shares that are dilutive by the sum of the weighted-average number of shares of common stock outstanding and potential common shares. Potential common shares consist of only stock options for the years ended December 31, 2002, 2001 and 2000. The weighted-average number of shares outstanding for the years ended at December 31, 2002, 2001 and 2000 was 9,858,463; 9,214,276 and 8,460,230, respectively. The weighted-average number of shares outstanding and potential shares for the years ended December 31, 2002, 2001 and 2000 was 9,908,663, 9,250,040 and 8,465,669, respectively. Potential common shares not included due to the fact that they would be anti-dilutive at December 31, 2002, 2001 and 2000 were 89,944, 30,696 and 159,052, respectively. Comprehensive Income assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Accounting Standards In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142. “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations consummated after June 30, 2001 be accounted for by the purchase method unless the combination was initiated on or prior to that date and it meets the conditions to be accounted by the pooling-of- interests method in accordance with APB Opinion No. 16, “Business Combinations.” Under SFAS No. 142, goodwill and intangible assets that management concludes have indefinite useful lives will no longer be amortized, but will be subject to impairment tests performed at least annually. SFAS No. 142 also requires the Company to perform a transitional impairment test of all previously recognized goodwill and to assign all recognized assets and liabilities to reporting units. Other identifiable intangible assets will continue to be amortized over their useful lives. During 2002, the Company performed the first of the required annual impairment tests of goodwill and indefinite lived intangible assets. As a result of this test, no amount was charged to earnings for impairment in 2002. Application of the non- amortization provisions of SFAS No. 142 resulted in an increase of $730,000 ($.07 per share basic and diluted share) in net income for 2002. In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions.” SFAS No. 147 removed acquisitions of financial institutions from the scope of SFAS No. 72, Accounting principles generally require that “Accounting for Certain Acquisitions of Banking or recognized revenue, expenses, gains and losses be Thrift Institutions,” which permitted the recognition included in net income. Although certain changes in and subsequent amortization of any excess of the ABC Bancorp and Subsidiaries 39 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In 2001 and 2002, the Financial Accounting Standards Board (the FASB) issued four new accounting standards, which significantly affected the accounting for goodwill and other intangible assets arising from purchase transactions. See “Accounting Standards” included in this note for additional information on SFAS Statements No. 141, 142, 144 and 147. As a result of the application of these new standards, goodwill and intangible assets that management concludes have indefinite useful lives can no longer be amortized, but are subject to impairment tests performed at least annually. Other identifiable intangible assets will continue to be amortized over their estimated useful lives but will be subject to impairment tests. For the year ended December 31, 2002, no amortization of goodwill was included in the consolidated statement of income. For the years ended December 31, 2001 and 2000, charges in the amount of $668,000 and $627,000, respectively, were included in the consolidated statements of income for amortization of goodwill. Included in the consolidated statements of income for December 31, 2002, 2001 and 2000, were charges for amortization of identifiable intangible assets in the amounts of $1,765,000, $517,000 and $177,000, respectively. Other Real Estate Owned Other real estate owned represents properties acquired through foreclosure. Other real estate owned is held for sale and is carried at the lower of cost or fair value less estimated costs to sell. Any write-down to fair value at the time of transfer to other real estate owned is charged to the allowance for loan losses. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. The carrying amount of other real estate owned at December 31, 2002 and 2001 was $1,534,200 and $1,249,500, respectively. 38 ABC Bancorp and Subsidiaries Income Taxes Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Stock Compensation Plans At December 31, 2002, the Company has two stock-based employee compensation plans, which are described more fully in Note 13. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock- based employee compensation. Years Ended December 31, 2000 2001 2002 (Dollars in Thousands) $ 10,355 $ 9,633 $ 10,098 Net income, as reported Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (54) (39) (33) Pro forma net income $ 10,301 $ 9,594 $ 10,065 Earnings per share: Basic - as reported $ Basic - pro forma $ Diluted - as reported $ Diluted - pro forma $ 1.05 $ 1.04 $ 1.05 $ 1.04 $ 1.05 $ 1.04 $ 1.04 $ 1.04 $ 1.19 1.19 1.19 1.19 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Treasury Stock The Company’s repurchases of shares of its common stock are recorded at cost as “Treasury stock” and result in a reduction of “Stockholders’ equity.” When treasury shares are reissued, the Company uses a first-in, first-out method and any difference in repurchase cost and reissuance price is recorded as an increase or reduction in “Capital surplus.” Earnings Per share Basic earnings per common share are computed by dividing net income by the weighted-average number of shares of common stock outstanding. Diluted earnings per common share are computed by dividing net income by the effect of the issuance of potential common shares that are dilutive by the sum of the weighted-average number of shares of common stock outstanding and potential common shares. Potential common shares consist of only stock options for the years ended December 31, 2002, 2001 and 2000. The weighted-average number of shares outstanding for the years ended at December 31, 2002, 2001 and 2000 was 9,858,463; 9,214,276 and 8,460,230, respectively. The weighted-average number of shares outstanding and potential shares for the years ended December 31, 2002, 2001 and 2000 was 9,908,663, 9,250,040 and 8,465,669, respectively. Potential common shares not included due to the fact that they would be anti-dilutive at December 31, 2002, 2001 and 2000 were 89,944, 30,696 and 159,052, respectively. Comprehensive Income assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Accounting Standards In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142. “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations consummated after June 30, 2001 be accounted for by the purchase method unless the combination was initiated on or prior to that date and it meets the conditions to be accounted by the pooling-of- interests method in accordance with APB Opinion No. 16, “Business Combinations.” Under SFAS No. 142, goodwill and intangible assets that management concludes have indefinite useful lives will no longer be amortized, but will be subject to impairment tests performed at least annually. SFAS No. 142 also requires the Company to perform a transitional impairment test of all previously recognized goodwill and to assign all recognized assets and liabilities to reporting units. Other identifiable intangible assets will continue to be amortized over their useful lives. During 2002, the Company performed the first of the required annual impairment tests of goodwill and indefinite lived intangible assets. As a result of this test, no amount was charged to earnings for impairment in 2002. Application of the non- amortization provisions of SFAS No. 142 resulted in an increase of $730,000 ($.07 per share basic and diluted share) in net income for 2002. In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions.” SFAS No. 147 removed acquisitions of financial institutions from the scope of SFAS No. 72, Accounting principles generally require that “Accounting for Certain Acquisitions of Banking or recognized revenue, expenses, gains and losses be Thrift Institutions,” which permitted the recognition included in net income. Although certain changes in and subsequent amortization of any excess of the ABC Bancorp and Subsidiaries 39 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset. For a transaction that is a business combination, SFAS No. 147 requires that the unidentifiable intangible asset acquired be recognized as goodwill and accounted for under SFAS No. 142. SFAS No. 147 also amended SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” to include in its scope long-term borrower-relationship intangible assets of financial institutions such as depositor-and-borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock- based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. The Company has not elected to adopt the recognition provisions of this Statement for stock-based employee compensation and has elected to continue with accounting methodology in Opinion No. 25 as permitted by SFAS No. 123. Reclassification of Certain Items provisions that SFAS No. 144 requires of other long- Certain items in the consolidated financial lived assets that are held and used. As a result of statements as of and for the years ended December the application of SFAS No. 147 as of October 1, 31, 2001 and 2000 have been reclassified, with no 2002, approximately $2,621,000 of previously effect on total assets or net income, to be recognized unidentifiable intangible assets was consistent with the classifications adopted for the reclassified to goodwill in 2002. year ended December 31, 2002. NOTE 2. Investments in Securities The amortized cost and fair value of securities are summarized as follows: Amortized Cost Gross Gross Unrealized Unrealized Gains Losses (Dollars in Thousands) Fair Value Securities Available for Sale December 31, 2002: U. S. Government and agency securities $ 72,326 $ 1,488 $ State and municipal securities Corporate debt securities Mortgage-backed securities Equity securities 3,362 22,838 76,439 859 179 384 921 - (41) (12) (355) (46) (39) $ 73,773 3,529 22,867 77,314 820 $ 175,824 $ 2,972 $ (493) $ 178,303 Securities Available for Sale December 31, 2001: U. S. Government and agency securities $ 49,509 $ 1,034 $ State and municipal securities Corporate debt securities Mortgage-backed securities Equity securities 5,239 7,171 88,128 521 119 2 1,242 - (70) (19) (458) (259) (25) $ 50,473 5,339 6,715 89,111 496 $ 150,568 $ 2,397 $ (831) $ 152,134 The amortized cost and fair value of debt securities as of December 31, 2002 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without penalty. Therefore, these securities are not included in the maturity categories in the following maturity summary. Due in one year or less Due from one year to five years Due from five to ten years Due after ten years Mortgage-backed securities Equity securities Amortized Cost Fair Value (Dollars in Thousands) $ 27,493 $ 27,867 60,779 5,580 4,674 76,439 859 62,283 5,620 4,399 77,314 820 $ 175,824 $ 178,303 40 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 41 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset. For a transaction that is a business combination, SFAS No. 147 requires that the unidentifiable intangible asset acquired be recognized as goodwill and accounted for under SFAS No. 142. SFAS No. 147 also amended SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” to include in its scope long-term borrower-relationship intangible assets of financial institutions such as depositor-and-borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock- based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. The Company has not elected to adopt the recognition provisions of this Statement for stock-based employee compensation and has elected to continue with accounting methodology in Opinion No. 25 as permitted by SFAS No. 123. Reclassification of Certain Items provisions that SFAS No. 144 requires of other long- Certain items in the consolidated financial lived assets that are held and used. As a result of statements as of and for the years ended December the application of SFAS No. 147 as of October 1, 31, 2001 and 2000 have been reclassified, with no 2002, approximately $2,621,000 of previously effect on total assets or net income, to be recognized unidentifiable intangible assets was consistent with the classifications adopted for the reclassified to goodwill in 2002. year ended December 31, 2002. NOTE 2. Investments in Securities The amortized cost and fair value of securities are summarized as follows: Amortized Cost Gross Gross Unrealized Unrealized Gains Losses (Dollars in Thousands) Fair Value Securities Available for Sale December 31, 2002: U. S. Government and agency securities $ 72,326 $ 1,488 $ State and municipal securities Corporate debt securities Mortgage-backed securities Equity securities 3,362 22,838 76,439 859 179 384 921 - (41) (12) (355) (46) (39) $ 73,773 3,529 22,867 77,314 820 $ 175,824 $ 2,972 $ (493) $ 178,303 Securities Available for Sale December 31, 2001: U. S. Government and agency securities $ 49,509 $ 1,034 $ State and municipal securities Corporate debt securities Mortgage-backed securities Equity securities 5,239 7,171 88,128 521 119 2 1,242 - (70) (19) (458) (259) (25) $ 50,473 5,339 6,715 89,111 496 $ 150,568 $ 2,397 $ (831) $ 152,134 The amortized cost and fair value of debt securities as of December 31, 2002 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without penalty. Therefore, these securities are not included in the maturity categories in the following maturity summary. Due in one year or less Due from one year to five years Due from five to ten years Due after ten years Mortgage-backed securities Equity securities Amortized Cost Fair Value (Dollars in Thousands) $ 27,493 $ 27,867 60,779 5,580 4,674 76,439 859 62,283 5,620 4,399 77,314 820 $ 175,824 $ 178,303 40 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 41 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. Investments in Securities (Continued) Securities with a carrying value of $84,535,517 and $86,541,872 at December 31, 2002 and 2001, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Gains and losses on sales of securities available for sale consist of the following: December 31, 2002 2001 2000 (Dollars in Thousands) Gross gains on sales of securities Gross losses on sales of securities $ 1,643 $ 1,253 - - Net realized gains on sales of securities available for sale $ 1,643 $ 1,253 $ $ - - - NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of loans is summarized as follows: Commercial and financial Agricultural Real estate – construction Real estate - mortgage, farmland Real estate - mortgage, commercial Real estate - mortgage, residential Consumer installment loans Other Allowance for loan losses December 31, 2001 2002 (Dollars in Thousands) $ 172,429 $ 152,097 34,007 23,020 63,093 243,037 209,485 78,535 9,841 833,447 14,868 39,878 24,650 63,533 225,470 202,447 91,557 5,444 805,076 14,944 $ 818,579 $ 790,132 The following is a summary of information pertaining to impaired loans: Impaired loans without a valuation allowance Impaired loans with a valuation allowance Total impaired loans Valuation allowance related to impaired loans Average investment in impaired loans Interest income recognized on impaired loans Forgone interest income on impaired loans As of and For the Years Ended December 31, 2002 2001 2000 $ $ $ $ $ $ - 7,561 7,561 1,358 8,966 26 792 $ $ $ $ $ $ - 11,958 11,958 1,984 8,249 6 666 $ $ $ $ $ $ - 4,863 4,863 1,020 5,603 51 541 Loans on nonaccrual status amounted to approximately $7,561,000, $11,958,000 and $4,863,000 at December 31, 2002, 2001 and 2000, respectively. There were $171,000, $691,000 and $81,000 of loans past due ninety days or more and still accruing interest at December 31, 2002, 2001, and 2000, respectively. NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) Changes in the allowance for loan losses for the years ended December 31, 2002, 2001, and 2000 are as follows: Balance, beginning of year Provision for loan losses Loans charged off Recoveries of loans previously charged off Acquired loan loss reserve Balance, end of year December 31, 2002 2001 2000 (Dollars in Thousands) $ 14,944 $ 5,574 (7,159) 1,509 - 9,832 4,566 $ 9,895 1,712 (5,488) (2,594) 1,110 4,924 819 - $ 14,868 $ 14,944 $ 9,832 In the ordinary course of business, the Company has granted loans to certain directors, executive officers, and their affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan. Changes in related party loans for the years ended December 31, 2002 and 2001 are as follows: Balance, beginning of year Advances Repayments Transactions due to changes in related parties Balance, end of year NOTE 4. PREMISES AND EQUIPMENT, NET Premises and equipment are summarized as follows: Land Buildings Furniture and equipment Construction in progress, estimated cost to complete, $35,000 Accumulated depreciation December 31, 2001 2002 (Dollars in Thousands) $ 34,488 $ 36,321 33,424 (26,285) 1,180 9,890 (10,771) (952) $ 42,807 $ 34,488 December 31, 2001 2002 (Dollars in Thousands) $ 6,096 $ 6,200 22,618 17,889 472 47,075 (21,748) 22,260 19,643 1,697 49,800 (22,979) $ 25,327 $ 26,821 42 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 43 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. Investments in Securities (Continued) Securities with a carrying value of $84,535,517 and $86,541,872 at December 31, 2002 and 2001, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Gains and losses on sales of securities available for sale consist of the following: December 31, 2002 2001 2000 (Dollars in Thousands) Gross gains on sales of securities Gross losses on sales of securities $ 1,643 $ 1,253 - - Net realized gains on sales of securities available for sale $ 1,643 $ 1,253 $ $ - - - NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of loans is summarized as follows: Commercial and financial Agricultural Real estate – construction Real estate - mortgage, farmland Real estate - mortgage, commercial Real estate - mortgage, residential Consumer installment loans Other Allowance for loan losses December 31, 2001 2002 (Dollars in Thousands) $ 172,429 $ 152,097 34,007 23,020 63,093 243,037 209,485 78,535 9,841 833,447 14,868 39,878 24,650 63,533 225,470 202,447 91,557 5,444 805,076 14,944 $ 818,579 $ 790,132 The following is a summary of information pertaining to impaired loans: Impaired loans without a valuation allowance Impaired loans with a valuation allowance Total impaired loans Valuation allowance related to impaired loans Average investment in impaired loans Interest income recognized on impaired loans Forgone interest income on impaired loans As of and For the Years Ended December 31, 2002 2001 2000 $ $ $ $ $ $ - 7,561 7,561 1,358 8,966 26 792 $ $ $ $ $ $ - 11,958 11,958 1,984 8,249 6 666 $ $ $ $ $ $ - 4,863 4,863 1,020 5,603 51 541 Loans on nonaccrual status amounted to approximately $7,561,000, $11,958,000 and $4,863,000 at December 31, 2002, 2001 and 2000, respectively. There were $171,000, $691,000 and $81,000 of loans past due ninety days or more and still accruing interest at December 31, 2002, 2001, and 2000, respectively. NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) Changes in the allowance for loan losses for the years ended December 31, 2002, 2001, and 2000 are as follows: Balance, beginning of year Provision for loan losses Loans charged off Recoveries of loans previously charged off Acquired loan loss reserve Balance, end of year December 31, 2002 2001 2000 (Dollars in Thousands) $ 14,944 $ 5,574 (7,159) 1,509 - 9,832 4,566 $ 9,895 1,712 (5,488) (2,594) 1,110 4,924 819 - $ 14,868 $ 14,944 $ 9,832 In the ordinary course of business, the Company has granted loans to certain directors, executive officers, and their affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan. Changes in related party loans for the years ended December 31, 2002 and 2001 are as follows: Balance, beginning of year Advances Repayments Transactions due to changes in related parties Balance, end of year NOTE 4. PREMISES AND EQUIPMENT, NET Premises and equipment are summarized as follows: Land Buildings Furniture and equipment Construction in progress, estimated cost to complete, $35,000 Accumulated depreciation December 31, 2001 2002 (Dollars in Thousands) $ 34,488 $ 36,321 33,424 (26,285) 1,180 9,890 (10,771) (952) $ 42,807 $ 34,488 December 31, 2001 2002 (Dollars in Thousands) $ 6,096 $ 6,200 22,618 17,889 472 47,075 (21,748) 22,260 19,643 1,697 49,800 (22,979) $ 25,327 $ 26,821 42 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 43 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. INTANGIBLE ASSETS Following is a summary of information related to acquired intangible assets: December 31, 2002 December 31, 2001 Gross Carrying Accumulated Gross Carrying Amortization Amount Amount (Dollars in Thousands) Accumulated Amortization Amortized intangible assets Core deposit premiums Unamortized intangible assets Goodwill $ $ 8,896 $ 4,587 19,240 $ $ 11,517 $ 2,822 16,619 The aggregate amortization expense was $1,765,000, $1,185,000 and $804,000 for the years ended December 31, 2002, 2001, and 2000, respectively. The estimated amortization expense for each of the next five years is as follows: 2003 2004 2005 2006 2007 Later years NOTE 6. DEPOSITS The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2002 and 2001 was $155,048,000 and $156,562,000, respectively. The scheduled maturities of time deposits at December 31, 2002 are as follows: (Deposits in Thousands) $ 407,921 36,122 12,212 3,886 4,550 77 $ 464,768 2003 2004 2005 2006 2007 $ 1,023,000 790,000 642,000 549,000 490,000 There were no changes in the carrying amount of goodwill during the year ended December 31, 2002, except for the reclassification of approximately $2,621,000 of previously recognized unidentifiable intangible assets in accordance with SFAS No. 147. Following is a summary of net income and earnings per share that would have been reported exclusive of amortization expense recognized in those periods related to goodwill and intangible assets that are no longer being amortized. Reported net income Add back goodwill amortization Adjusted net income Basic earnings per share: Reported net income Goodwill amortization Adjusted net income Diluted earnings per share: Reported net income Goodwill amortization Adjusted net income For the Year Ended December 31, 2002 2001 2000 (Dollars in Thousands) $ 10,355 $ 9,633 $ 10,098 - 668 627 $ 10,355 $ 10,301 $ 10,725 $ $ $ $ 1.05 - 1.05 1.05 - 1.05 $ $ $ $ 1.05 .07 1.12 1.04 .07 1.11 $ $ $ $ 1.19 .07 1.26 1.19 .07 1.26 NOTE 7. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Securities sold under repurchase agreements, which are secured borrowings, generally mature within one to four days from the transaction date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transactions. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements at December 31, 2002 and 2001 were $8,204,000 and $3,792,000, respectively. NOTE 8. EMPLOYEE BENEFIT PLANS The Company has established a retirement plan for eligible employees. The ABC Bancorp 401(k) Profit Sharing Plan allows a participant to defer a portion of his compensation and provides that the Company will match a portion of the deferred compensation. The plan also provides for nonelective and discretionary contributions. All full-time and part-time employees are eligible to participate in the 401(k) Profit Sharing Plan provided they have met the eligibility requirements. Generally, a participant must have completed twelve months of employment with a minimum of 1,000 hours. In 2002, the Company terminated the ABC Bancorp Money Purchase Pension Plan. All fully funded employee benefits under the plan were transferred to the 401(k) profit sharing plan. Aggregate expense under the two plans charged to operations during 2002, 2001 and 2000 amounted to $877,000, $655,000 and $949,000, respectively. 44 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 45 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. INTANGIBLE ASSETS Following is a summary of information related to acquired intangible assets: December 31, 2002 December 31, 2001 Gross Carrying Accumulated Gross Carrying Amortization Amount Amount (Dollars in Thousands) Accumulated Amortization Amortized intangible assets Core deposit premiums Unamortized intangible assets Goodwill $ $ 8,896 $ 4,587 19,240 $ $ 11,517 $ 2,822 16,619 The aggregate amortization expense was $1,765,000, $1,185,000 and $804,000 for the years ended December 31, 2002, 2001, and 2000, respectively. The estimated amortization expense for each of the next five years is as follows: 2003 2004 2005 2006 2007 Later years NOTE 6. DEPOSITS The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2002 and 2001 was $155,048,000 and $156,562,000, respectively. The scheduled maturities of time deposits at December 31, 2002 are as follows: (Deposits in Thousands) $ 407,921 36,122 12,212 3,886 4,550 77 $ 464,768 2003 2004 2005 2006 2007 $ 1,023,000 790,000 642,000 549,000 490,000 There were no changes in the carrying amount of goodwill during the year ended December 31, 2002, except for the reclassification of approximately $2,621,000 of previously recognized unidentifiable intangible assets in accordance with SFAS No. 147. Following is a summary of net income and earnings per share that would have been reported exclusive of amortization expense recognized in those periods related to goodwill and intangible assets that are no longer being amortized. Reported net income Add back goodwill amortization Adjusted net income Basic earnings per share: Reported net income Goodwill amortization Adjusted net income Diluted earnings per share: Reported net income Goodwill amortization Adjusted net income For the Year Ended December 31, 2002 2001 2000 (Dollars in Thousands) $ 10,355 $ 9,633 $ 10,098 - 668 627 $ 10,355 $ 10,301 $ 10,725 $ $ $ $ 1.05 - 1.05 1.05 - 1.05 $ $ $ $ 1.05 .07 1.12 1.04 .07 1.11 $ $ $ $ 1.19 .07 1.26 1.19 .07 1.26 NOTE 7. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Securities sold under repurchase agreements, which are secured borrowings, generally mature within one to four days from the transaction date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transactions. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements at December 31, 2002 and 2001 were $8,204,000 and $3,792,000, respectively. NOTE 8. EMPLOYEE BENEFIT PLANS The Company has established a retirement plan for eligible employees. The ABC Bancorp 401(k) Profit Sharing Plan allows a participant to defer a portion of his compensation and provides that the Company will match a portion of the deferred compensation. The plan also provides for nonelective and discretionary contributions. All full-time and part-time employees are eligible to participate in the 401(k) Profit Sharing Plan provided they have met the eligibility requirements. Generally, a participant must have completed twelve months of employment with a minimum of 1,000 hours. In 2002, the Company terminated the ABC Bancorp Money Purchase Pension Plan. All fully funded employee benefits under the plan were transferred to the 401(k) profit sharing plan. Aggregate expense under the two plans charged to operations during 2002, 2001 and 2000 amounted to $877,000, $655,000 and $949,000, respectively. 44 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 45 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9. DEFERRED COMPENSATION PLANS The Company and two subsidiary banks have entered into separate deferred compensation arrangements with certain executive officers and directors. The plans call for certain amounts payable at retirement, death or disability. The estimated present value of the deferred compensation is being accrued over the remaining expected term of active employment. The Company and Banks have purchased life insurance policies which they intend to use to finance this liability. Cash surrender value of life insurance of $1,038,000 and $965,000 at December 31, 2002 and 2001 is included in other assets. Accrued deferred compensation of $1,012,000 and $919,000 at December 31, 2002 and 2001 is included in other liabilities. Aggregate compensation expense under the plans were $93,000, $74,000 and $43,000 for 2002, 2001 and 2000, respectively, and is included in other operating expenses. OTHER BORROWINGS (Continued) NOTE 10. Other borrowings at December 31, 2002 have maturities in future years as follows: 2003 2004 2005 2006 2007 Later years $ (Dollars in Thousands) 4,649 2,484 16,485 1,484 1,463 90,725 $ 117,290 NOTE 10. OTHER BORROWINGS Other borrowings consist of the following: December 31, 2002 2001 (Dollars in Thousands) NOTE 11. INCOME TAXES The income tax expense in the consolidated statements of income consists of the following: Advances under revolving credit agreement with $ 100 $ 100 SunTrust Bank with interest at LIBOR plus 1.15% (2.57% at December 31, 2002) due on May 31, 2003; secured by subsidiary bank stock. Advances from SunTrust Bank with 28 quarterly principal 8,044 9,507 payments of $366,000 at sixty-day LIBOR rate plus .9% (2.28% at December 31, 2002), maturing July 23, 2008. Advances from Federal Home Loan Bank with interest at adjustable 26,000 27,000 rates (ranging from 1.42% to 4.88% at December 31, 2002) due at various dates from April 2, 2003 to September 8, 2009. Advances from Federal Home Loan Bank with interest at a fixed rate 152 498 (ranging from 6.72% to 7.23%) due in annual installments at various dates from September 8, 2003 through November 1, 2006. Advances from Federal Home Loan Bank with interest at a fixed rate 82,994 58,188 (ranging from 3.66% to 6.41%) convertible to a variable rate at option of Federal Home Loan Bank, due at various dates from March 17, 2003 through August 6, 2012. $ 117,290 $ 95,293 The advances from Federal Home Loan Bank are collateralized by the pledging of first mortgage loans and other specific loans. Current Deferred Years Ended December 31, 2002 2001 2000 (Dollars in Thousands) $ 5,142 (65) $ 5,077 $ $ 5,418 (726) 4,692 $ $ 4,977 (634) 4,343 The Company's income tax expense differs from the amounts computed by applying the federal income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows: Tax at federal income tax rate Increase (decrease) resulting from: Tax-exempt interest Amortization of intangible assets Other Provision for income taxes Years Ended December 31, 2002 2001 2000 (Dollars in Thousands) $ 5,247 $ 4,871 $ 4,910 (224) 33 21 (476) 274 23 (497) 162 (232) $ 5,077 $ 4,692 $ 4,343 46 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 47 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9. DEFERRED COMPENSATION PLANS The Company and two subsidiary banks have entered into separate deferred compensation arrangements with certain executive officers and directors. The plans call for certain amounts payable at retirement, death or disability. The estimated present value of the deferred compensation is being accrued over the remaining expected term of active employment. The Company and Banks have purchased life insurance policies which they intend to use to finance this liability. Cash surrender value of life insurance of $1,038,000 and $965,000 at December 31, 2002 and 2001 is included in other assets. Accrued deferred compensation of $1,012,000 and $919,000 at December 31, 2002 and 2001 is included in other liabilities. Aggregate compensation expense under the plans were $93,000, $74,000 and $43,000 for 2002, 2001 and 2000, respectively, and is included in other operating expenses. OTHER BORROWINGS (Continued) NOTE 10. Other borrowings at December 31, 2002 have maturities in future years as follows: 2003 2004 2005 2006 2007 Later years $ (Dollars in Thousands) 4,649 2,484 16,485 1,484 1,463 90,725 $ 117,290 NOTE 10. OTHER BORROWINGS Other borrowings consist of the following: December 31, 2002 2001 (Dollars in Thousands) NOTE 11. INCOME TAXES The income tax expense in the consolidated statements of income consists of the following: Advances under revolving credit agreement with $ 100 $ 100 SunTrust Bank with interest at LIBOR plus 1.15% (2.57% at December 31, 2002) due on May 31, 2003; secured by subsidiary bank stock. Advances from SunTrust Bank with 28 quarterly principal 8,044 9,507 payments of $366,000 at sixty-day LIBOR rate plus .9% (2.28% at December 31, 2002), maturing July 23, 2008. Advances from Federal Home Loan Bank with interest at adjustable 26,000 27,000 rates (ranging from 1.42% to 4.88% at December 31, 2002) due at various dates from April 2, 2003 to September 8, 2009. Advances from Federal Home Loan Bank with interest at a fixed rate 152 498 (ranging from 6.72% to 7.23%) due in annual installments at various dates from September 8, 2003 through November 1, 2006. Advances from Federal Home Loan Bank with interest at a fixed rate 82,994 58,188 (ranging from 3.66% to 6.41%) convertible to a variable rate at option of Federal Home Loan Bank, due at various dates from March 17, 2003 through August 6, 2012. $ 117,290 $ 95,293 The advances from Federal Home Loan Bank are collateralized by the pledging of first mortgage loans and other specific loans. Current Deferred Years Ended December 31, 2002 2001 2000 (Dollars in Thousands) $ 5,142 (65) $ 5,077 $ $ 5,418 (726) 4,692 $ $ 4,977 (634) 4,343 The Company's income tax expense differs from the amounts computed by applying the federal income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows: Tax at federal income tax rate Increase (decrease) resulting from: Tax-exempt interest Amortization of intangible assets Other Provision for income taxes Years Ended December 31, 2002 2001 2000 (Dollars in Thousands) $ 5,247 $ 4,871 $ 4,910 (224) 33 21 (476) 274 23 (497) 162 (232) $ 5,077 $ 4,692 $ 4,343 46 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 47 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $ 4,942 $ 4,945 bank and financial holding companies. In calculating the amount of Tier l qualifying capital, the trust preferred NOTE 11. INCOME TAXES (Continued) Net deferred income tax assets of $3,632,000 and $3,877,000 at December 31, 2002 and 2001, respectively, are included in other assets. The components of deferred income taxes are as follows: December 31, 2002 2001 (Dollars in Thousands) Deferred tax assets: Loan loss reserves Deferred compensation Unearned compensation related to restricted stock Nonaccrual interest Net operating loss tax carryforward Other Deferred tax liabilities: Deprecation and amortization Unrealized gain on securities available for sale Intangible assets 344 295 235 115 121 313 401 429 140 75 6,052 6,303 242 843 1,335 2,420 233 533 1,660 2,426 Net deferred tax assets $ 3,632 $ 3,877 NOTE 12. TRUST PREFERRED SECURITIES In 2001, the Company formed a wholly-owned grantor trust to issue cumulative trust preferred securities to the public. The grantor trust has invested the proceeds of the trust preferred securities in junior subordinated debentures of the Company. The trust preferred securities can be redeemed prior to maturity at the option of the Company on or after September 30, 2006. The sole assets of the guarantor trust are the Junior Subordinated Deferrable Interest Debentures of the Company (the Debentures) held by the grantor trust. The Debentures have the same interest rate (9%) as the trust preferred securities. The Company has the right to defer interest payments on the Debentures at any time or from time to time for a period not exceeding 20 consecutive quarters provided that no extension period may extend beyond the stated maturity of the related Debentures. During any such extension period, distributions on the trust preferred certificates would also be deferred. The trust preferred securities are subject to mandatory redemption upon repayment of the related Debentures at their stated maturity date or their earlier redemption at a redemption price equal to their stated maturity date or their earlier redemption at a redemption price equal to their liquidation amount plus accrued distributions to the date fixed for the redemption upon concurrent repayment of the related Debentures. The trust preferred securities may be redeemed in whole or part at any time on or after September 30, 2006. Payment of periodic cash distributions and payment upon liquidation or redemption with respect to the trust preferred securities are guaranteed by the Company to the extent of funds held by the grantor trust TRUST PREFERRED SECURITIES (Continued) NOTE 12. (the Preferred Securities Guarantee). The Preferred Securities Guarantee, when taken together with the Company’s other obligations under the Debentures, constitute a full and unconditional guarantee, on a subordinated basis, by the Company of payments due on the trust preferred securities. The Company is required by the Federal Reserve Board to maintain certain levels of capital for bank regulatory purposes. The Federal Reserve Board has determined that certain cumulative preferred securities having the characteristics of trust preferred securities qualify as minority interest, which is included in Tier 1 capital for securities can only be included up to the amount constituting 25% of total Tier 1 capital elements (including trust preferred securities). Such Tier 1 capital treatment provides the Company with a more cost-effective means of obtaining capital for bank regulatory purposes than if the Company were to issue preferred stock. The trust preferred securities and the related Debentures were issued on November 8, 2001. Both financial instruments bear an identical annual rate of interest of 9%. Distributions on the trust preferred securities are paid quarterly on March 31, June 30, September 30 and December 31 of each year. Interest on the Debentures is paid on the corresponding dates. The aggregate principal amount of trust preferred certificates outstanding at December 31, 2002 and 2001 was $34,500,000. The aggregate principal amount of Debentures outstanding at December 31, 2002 and 2001 was $35,567,000. STOCK OPTION PLANS NOTE 13. The Company has two fixed stock option plans under which it has granted options to its Chief Executive Officer to purchase common stock at the fair market price on the date of grant. All of the options are intended to be incentive stock options qualifying under Section 422 of the Internal Revenue Code for favorable tax treatment. Under the 1992 Plan, options to purchase 10,000 shares were granted. All of these options were exercised during 2002. Under the 1997 Plan, options to purchase 67,500 shares were granted. Options under the 1997 Plan are fully vested and are exercisable over a period of ten years subject to certain limitations as to aggregate fair market value (determined as of the date of the grant) of all options exercisable for the first time by the optionee during any calendar year (the “$100,000 Per-Year Limitation”). Under the 1997 Plan, options to purchase 51,450 shares were exercisable as of December 31, 2002. At the annual meeting on April 15, 1997, the shareholders approved the ABC Bancorp Omnibus Stock Ownership and Long-Term Incentive Plan (the “Omnibus Plan”). Awards granted under the Omnibus Plan may be in the form of Qualified or Nonqualified Stock Options, Restricted Stock, Stock Appreciation Rights (“SARS”), Long-Term Incentive Compensation Units consisting of a combination of cash and Common Stock, or any combination thereof within the limitations set forth in the Omnibus Plan. The Omnibus Plan provides that the aggregate number of shares of the Company’s Common Stock which may be subject to award may not exceed 637,500 subject to adjustment in certain circumstances to prevent dilution. As of December 31, 2002, the Company has issued a total of 186,796 restricted shares under the Omnibus Plan as compensation for certain employees. These shares carry dividend and voting rights. Sale of these shares is restricted prior to the date of vesting, which is three years from the date of the grant. Shares issued under this plan were recorded at their fair market value on the date of their grant with a corresponding charge to equity. The unearned portion is being amortized as compensation expense on a straight-line basis over the related vesting period. Compensation expense related to these grants was $444,000, $602,000 and $387,000 for 2002, 2001 and 2000, respectively. In addition to the granting of restricted shares, options to purchase 246,488 shares of the Company’s common stock have been granted under the Omnibus Plan as of December 31, 2002. 48 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 49 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $ 4,942 $ 4,945 bank and financial holding companies. In calculating the amount of Tier l qualifying capital, the trust preferred NOTE 11. INCOME TAXES (Continued) Net deferred income tax assets of $3,632,000 and $3,877,000 at December 31, 2002 and 2001, respectively, are included in other assets. The components of deferred income taxes are as follows: December 31, 2002 2001 (Dollars in Thousands) Deferred tax assets: Loan loss reserves Deferred compensation Unearned compensation related to restricted stock Nonaccrual interest Net operating loss tax carryforward Other Deferred tax liabilities: Deprecation and amortization Unrealized gain on securities available for sale Intangible assets 344 295 235 115 121 313 401 429 140 75 6,052 6,303 242 843 1,335 2,420 233 533 1,660 2,426 Net deferred tax assets $ 3,632 $ 3,877 NOTE 12. TRUST PREFERRED SECURITIES In 2001, the Company formed a wholly-owned grantor trust to issue cumulative trust preferred securities to the public. The grantor trust has invested the proceeds of the trust preferred securities in junior subordinated debentures of the Company. The trust preferred securities can be redeemed prior to maturity at the option of the Company on or after September 30, 2006. The sole assets of the guarantor trust are the Junior Subordinated Deferrable Interest Debentures of the Company (the Debentures) held by the grantor trust. The Debentures have the same interest rate (9%) as the trust preferred securities. The Company has the right to defer interest payments on the Debentures at any time or from time to time for a period not exceeding 20 consecutive quarters provided that no extension period may extend beyond the stated maturity of the related Debentures. During any such extension period, distributions on the trust preferred certificates would also be deferred. The trust preferred securities are subject to mandatory redemption upon repayment of the related Debentures at their stated maturity date or their earlier redemption at a redemption price equal to their stated maturity date or their earlier redemption at a redemption price equal to their liquidation amount plus accrued distributions to the date fixed for the redemption upon concurrent repayment of the related Debentures. The trust preferred securities may be redeemed in whole or part at any time on or after September 30, 2006. Payment of periodic cash distributions and payment upon liquidation or redemption with respect to the trust preferred securities are guaranteed by the Company to the extent of funds held by the grantor trust TRUST PREFERRED SECURITIES (Continued) NOTE 12. (the Preferred Securities Guarantee). The Preferred Securities Guarantee, when taken together with the Company’s other obligations under the Debentures, constitute a full and unconditional guarantee, on a subordinated basis, by the Company of payments due on the trust preferred securities. The Company is required by the Federal Reserve Board to maintain certain levels of capital for bank regulatory purposes. The Federal Reserve Board has determined that certain cumulative preferred securities having the characteristics of trust preferred securities qualify as minority interest, which is included in Tier 1 capital for securities can only be included up to the amount constituting 25% of total Tier 1 capital elements (including trust preferred securities). Such Tier 1 capital treatment provides the Company with a more cost-effective means of obtaining capital for bank regulatory purposes than if the Company were to issue preferred stock. The trust preferred securities and the related Debentures were issued on November 8, 2001. Both financial instruments bear an identical annual rate of interest of 9%. Distributions on the trust preferred securities are paid quarterly on March 31, June 30, September 30 and December 31 of each year. Interest on the Debentures is paid on the corresponding dates. The aggregate principal amount of trust preferred certificates outstanding at December 31, 2002 and 2001 was $34,500,000. The aggregate principal amount of Debentures outstanding at December 31, 2002 and 2001 was $35,567,000. STOCK OPTION PLANS NOTE 13. The Company has two fixed stock option plans under which it has granted options to its Chief Executive Officer to purchase common stock at the fair market price on the date of grant. All of the options are intended to be incentive stock options qualifying under Section 422 of the Internal Revenue Code for favorable tax treatment. Under the 1992 Plan, options to purchase 10,000 shares were granted. All of these options were exercised during 2002. Under the 1997 Plan, options to purchase 67,500 shares were granted. Options under the 1997 Plan are fully vested and are exercisable over a period of ten years subject to certain limitations as to aggregate fair market value (determined as of the date of the grant) of all options exercisable for the first time by the optionee during any calendar year (the “$100,000 Per-Year Limitation”). Under the 1997 Plan, options to purchase 51,450 shares were exercisable as of December 31, 2002. At the annual meeting on April 15, 1997, the shareholders approved the ABC Bancorp Omnibus Stock Ownership and Long-Term Incentive Plan (the “Omnibus Plan”). Awards granted under the Omnibus Plan may be in the form of Qualified or Nonqualified Stock Options, Restricted Stock, Stock Appreciation Rights (“SARS”), Long-Term Incentive Compensation Units consisting of a combination of cash and Common Stock, or any combination thereof within the limitations set forth in the Omnibus Plan. The Omnibus Plan provides that the aggregate number of shares of the Company’s Common Stock which may be subject to award may not exceed 637,500 subject to adjustment in certain circumstances to prevent dilution. As of December 31, 2002, the Company has issued a total of 186,796 restricted shares under the Omnibus Plan as compensation for certain employees. These shares carry dividend and voting rights. Sale of these shares is restricted prior to the date of vesting, which is three years from the date of the grant. Shares issued under this plan were recorded at their fair market value on the date of their grant with a corresponding charge to equity. The unearned portion is being amortized as compensation expense on a straight-line basis over the related vesting period. Compensation expense related to these grants was $444,000, $602,000 and $387,000 for 2002, 2001 and 2000, respectively. In addition to the granting of restricted shares, options to purchase 246,488 shares of the Company’s common stock have been granted under the Omnibus Plan as of December 31, 2002. 48 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 49 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13. Other borrowings at December 31, 2002 have maturities in future years as follows: STOCK OPTION PLANS (Continued) 2002 Weighted- Average Exercise Price Number December 31, 2001 Weighted- Average Exercise Price Number 2000 Weighted- Average Exercise Price Number 285,943 $ 10.95 239,553 $ 81,950 (18,589) (35,316) 313,988 14.42 7.17 12.06 11.95 71,550 (1,232) (23,928) 285,943 11.00 10.60 10.09 10.47 10.95 159,151 $ 11.40 86,000 10.30 - (5,598) 239,553 - 11.79 11.00 Under option, beginning of the year Granted Exercised Forfeited Under option, end of year Exercisable at end of year 130,352 99,625 65,781 Weighted-average fair value per option of options granted during year NOTE 13. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing STOCK OPTION PLANS (Continued) model with the following weighted-average assumptions: Dividend yield Expected life Expected volatility Risk-free interest rate Years Ended December 31, 2002 3.60% 7 years 22.80% 4.60% 2001 3.60% 10 years 15.04% 5.05% 2000 4.57% 10 years 17.34% 5.76% NOTE 14. Presented below is a summary of the components used to calculate basic and diluted earnings per share: EARNINGS PER SHARE Years Ended December 31, 2002 2001 2000 $ 2.96 $ 1.84 $ 1.78 Net income $ 10,355 $ 9,633 $ 10,098 Information pertaining to options outstanding at December 31, 2002 is as follows: Range of Exercise Prices $ 11.33 15.94 14.17 10.39 9.90 10.11 10.83 10.38 9.94 10.50 11.20 13.25 14.55 Options Outstanding Options Exercisable Number Outstanding Weighted- Average Contractual Life in Years Weighted- Average Exercise Price Number Outstanding Weighted- Average Exercise Price 67,500 23,994 6,000 600 23,994 6,000 2,400 57,000 3,000 45,550 10,000 8,000 59,950 4.3 5.0 5.3 6.1 6.1 6.3 6.9 7.1 7.5 8.1 8.5 9.2 9.7 313,988 6.95 11.33 15.94 14.17 10.39 9.90 10.11 10.83 10.38 9.94 10.50 11.20 13.25 14.55 11.95 11.33 15.94 14.17 10.39 9.90 10.11 10.83 10.38 9.94 10.50 11.20 51,450 19,195 4,800 360 14,397 3,600 1,440 22,800 1,200 9,110 2,000 - - 130,352 11.67 50 ABC Bancorp and Subsidiaries Weighted average number of common shares outstanding Effect of dilutive options Weighted average number of common shares outstanding used to calculate dilutive earnings per share 9,859 50 9,214 36 8,460 5 9,909 9,250 8,465 NOTE 15. COMMITMENTS AND CONTINGENT LIABILITIES Loan Commitments The Company 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. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. A summary of the Company's commitments is as follows: Commitments to extend credit Credit card commitments Standby letters of credit December 31, 2002 2001 (Dollars in Thousands) $ 89,540 $114,631 - 5,315 13,775 3,405 $ 94,855 $131,811 ABC Bancorp and Subsidiaries 51 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13. Other borrowings at December 31, 2002 have maturities in future years as follows: STOCK OPTION PLANS (Continued) 2002 Weighted- Average Exercise Price Number December 31, 2001 Weighted- Average Exercise Price Number 2000 Weighted- Average Exercise Price Number 285,943 $ 10.95 239,553 $ 81,950 (18,589) (35,316) 313,988 14.42 7.17 12.06 11.95 71,550 (1,232) (23,928) 285,943 11.00 10.60 10.09 10.47 10.95 159,151 $ 11.40 86,000 10.30 - (5,598) 239,553 - 11.79 11.00 Under option, beginning of the year Granted Exercised Forfeited Under option, end of year Exercisable at end of year 130,352 99,625 65,781 Weighted-average fair value per option of options granted during year NOTE 13. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing STOCK OPTION PLANS (Continued) model with the following weighted-average assumptions: Dividend yield Expected life Expected volatility Risk-free interest rate Years Ended December 31, 2002 3.60% 7 years 22.80% 4.60% 2001 3.60% 10 years 15.04% 5.05% 2000 4.57% 10 years 17.34% 5.76% NOTE 14. Presented below is a summary of the components used to calculate basic and diluted earnings per share: EARNINGS PER SHARE Years Ended December 31, 2002 2001 2000 $ 2.96 $ 1.84 $ 1.78 Net income $ 10,355 $ 9,633 $ 10,098 Information pertaining to options outstanding at December 31, 2002 is as follows: Range of Exercise Prices $ 11.33 15.94 14.17 10.39 9.90 10.11 10.83 10.38 9.94 10.50 11.20 13.25 14.55 Options Outstanding Options Exercisable Number Outstanding Weighted- Average Contractual Life in Years Weighted- Average Exercise Price Number Outstanding Weighted- Average Exercise Price 67,500 23,994 6,000 600 23,994 6,000 2,400 57,000 3,000 45,550 10,000 8,000 59,950 4.3 5.0 5.3 6.1 6.1 6.3 6.9 7.1 7.5 8.1 8.5 9.2 9.7 313,988 6.95 11.33 15.94 14.17 10.39 9.90 10.11 10.83 10.38 9.94 10.50 11.20 13.25 14.55 11.95 11.33 15.94 14.17 10.39 9.90 10.11 10.83 10.38 9.94 10.50 11.20 51,450 19,195 4,800 360 14,397 3,600 1,440 22,800 1,200 9,110 2,000 - - 130,352 11.67 50 ABC Bancorp and Subsidiaries Weighted average number of common shares outstanding Effect of dilutive options Weighted average number of common shares outstanding used to calculate dilutive earnings per share 9,859 50 9,214 36 8,460 5 9,909 9,250 8,465 NOTE 15. COMMITMENTS AND CONTINGENT LIABILITIES Loan Commitments The Company 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. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. A summary of the Company's commitments is as follows: Commitments to extend credit Credit card commitments Standby letters of credit December 31, 2002 2001 (Dollars in Thousands) $ 89,540 $114,631 - 5,315 13,775 3,405 $ 94,855 $131,811 ABC Bancorp and Subsidiaries 51 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. COMMITMENTS AND CONTINGENT LIABILITIES (Continued) NOTE 17. REGULATORY MATTERS 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. 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 Banks are subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 2002, approximately $10,400,000 of retained earnings were available for dividend declaration without regulatory approval. There are no credit card commitments at December 31, 2002 because the Company sold its credit card portfolio during the year. The Company is obligated to repurchase credit card accounts that did meet certain criteria as of the preliminary closing date. As of December 31, 2002, the Company has accrued this potential liability based on the past average loss experience. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances which the Company deems necessary. Contingencies In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material effect on the Company's financial statements. NOTE 16. CONCENTRATIONS OF CREDIT The Banks make agricultural, agribusiness, commercial, residential and consumer loans to customers primarily in counties in South and Southeast Georgia, North Florida and Southeast Alabama. A substantial portion of the Company's customers' abilities to honor their contracts is dependent on the business economy in the geographical area served by the Banks. Although the Company's loan portfolio is diversified, there is a relationship in this region between the agricultural economy and the economic performance of loans made to nonagricultural customers. The Company's lending policies for agricultural and nonagricultural customers require loans to be well-collateralized and supported by cash flows. Collateral for agricultural loans include equipment, crops, livestock and land. Credit losses from loans related to the agricultural economy is taken into consideration by management in determining the allowance for loan losses. A substantial portion of the Company's loans are secured by real estate in the Company's primary market area. In addition, a substantial portion of the real estate owned is located in those same markets. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of a substantial portion of the carrying amount of real estate owned are susceptible to changes in market conditions in the Company's primary market area. The Company has a concentration of funds on deposit at its two primary correspondent banks at December 31, 2002 as follows: Noninterest-bearing accounts Interest-bearing accounts 52 ABC Bancorp and Subsidiaries $ 28,848 $ 76,337 The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, as defined and of Tier I capital to average assets, as defined. Management believes, as of December 31, 2002 and 2001, the Company and the Banks met all capital adequacy requirements to which they are subject. As of December 31, 2002, the most recent notification from the regulatory authorities categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Banks' category. The Banks' actual capital amounts and ratios are presented in the following table. As of December 31, 2002 Total Capital to Risk Weighted Assets: Actual Amount Ratio For Capital Adequacy Purposes Ratio Amount (Dollars in Thousands) To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio Amount Consolidated $ 127,577 14.87% $ 68,649 8.00% – N/A – American Banking Company Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia $ $ $ $ $ $ $ $ Merchants and Farmers Bank $ Tri-County Bank First Bank of Brunswick $ $ 17,374 13.63% $ 10,200 8.00% $ 12,750 8,210 4,813 14,937 7,236 19,782 5,721 6,772 8,266 6,589 14,342 12.30% $ 11.67% $ 5,342 3,299 8.00% $ 8.00% $ 6,678 4,124 11.95% $ 10,002 8.00% $ 12,502 13.85% $ 4,181 8.00% $ 5,226 14.13% $ 11,198 8.00% $ 13,998 13.04% $ 3,509 8.00% $ 4,386 11.21% $ 14.40% $ 16.20% $ 12.15% $ 4,833 4,591 3,254 9,443 8.00% $ 8.00% $ 8.00% $ 6,041 5,739 4,067 8.00% $ 11,804 – N/A – 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% ABC Bancorp and Subsidiaries 53 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. COMMITMENTS AND CONTINGENT LIABILITIES (Continued) NOTE 17. REGULATORY MATTERS 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. 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 Banks are subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 2002, approximately $10,400,000 of retained earnings were available for dividend declaration without regulatory approval. There are no credit card commitments at December 31, 2002 because the Company sold its credit card portfolio during the year. The Company is obligated to repurchase credit card accounts that did meet certain criteria as of the preliminary closing date. As of December 31, 2002, the Company has accrued this potential liability based on the past average loss experience. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances which the Company deems necessary. Contingencies In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material effect on the Company's financial statements. NOTE 16. CONCENTRATIONS OF CREDIT The Banks make agricultural, agribusiness, commercial, residential and consumer loans to customers primarily in counties in South and Southeast Georgia, North Florida and Southeast Alabama. A substantial portion of the Company's customers' abilities to honor their contracts is dependent on the business economy in the geographical area served by the Banks. Although the Company's loan portfolio is diversified, there is a relationship in this region between the agricultural economy and the economic performance of loans made to nonagricultural customers. The Company's lending policies for agricultural and nonagricultural customers require loans to be well-collateralized and supported by cash flows. Collateral for agricultural loans include equipment, crops, livestock and land. Credit losses from loans related to the agricultural economy is taken into consideration by management in determining the allowance for loan losses. A substantial portion of the Company's loans are secured by real estate in the Company's primary market area. In addition, a substantial portion of the real estate owned is located in those same markets. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of a substantial portion of the carrying amount of real estate owned are susceptible to changes in market conditions in the Company's primary market area. The Company has a concentration of funds on deposit at its two primary correspondent banks at December 31, 2002 as follows: Noninterest-bearing accounts Interest-bearing accounts 52 ABC Bancorp and Subsidiaries $ 28,848 $ 76,337 The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, as defined and of Tier I capital to average assets, as defined. Management believes, as of December 31, 2002 and 2001, the Company and the Banks met all capital adequacy requirements to which they are subject. As of December 31, 2002, the most recent notification from the regulatory authorities categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Banks' category. The Banks' actual capital amounts and ratios are presented in the following table. As of December 31, 2002 Total Capital to Risk Weighted Assets: Actual Amount Ratio For Capital Adequacy Purposes Ratio Amount (Dollars in Thousands) To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio Amount Consolidated $ 127,577 14.87% $ 68,649 8.00% – N/A – American Banking Company Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia $ $ $ $ $ $ $ $ Merchants and Farmers Bank $ Tri-County Bank First Bank of Brunswick $ $ 17,374 13.63% $ 10,200 8.00% $ 12,750 8,210 4,813 14,937 7,236 19,782 5,721 6,772 8,266 6,589 14,342 12.30% $ 11.67% $ 5,342 3,299 8.00% $ 8.00% $ 6,678 4,124 11.95% $ 10,002 8.00% $ 12,502 13.85% $ 4,181 8.00% $ 5,226 14.13% $ 11,198 8.00% $ 13,998 13.04% $ 3,509 8.00% $ 4,386 11.21% $ 14.40% $ 16.20% $ 12.15% $ 4,833 4,591 3,254 9,443 8.00% $ 8.00% $ 8.00% $ 6,041 5,739 4,067 8.00% $ 11,804 – N/A – 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% ABC Bancorp and Subsidiaries 53 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. REGULATORY MATTERS (Continued) NOTE 17. REGULATORY MATTERS (Continued) As of December 31, 2002 (Continued) Tier 1 to Capital to Risk Weighted Assets: Consolidated Actual Amount Ratio For Capital Adequacy Purposes Ratio Amount (Dollars in Thousands) To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio Amount $ 109,733 12.79% $ 34,325 4.00% – N/A – – N/A – American Banking Company $ 15,776 Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia Merchants and Farmers Bank $ Tri-County Bank $ First Bank of Brunswick $ 12,861 $ $ 7,375 4,296 $ 13,366 $ 6,577 $ 18,019 5,169 6,015 7,543 6,104 12.37% $ 11.04% $ 10.42% $ 10.69% $ 12.58% $ 12.87% $ 11.79% $ 9.96% $ 13.14% $ 15.01% $ 10.90% $ 5,100 2,671 1,649 5,001 2,090 5,599 1,754 2,416 2,295 1,627 4,722 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 7,650 4,007 2,474 7,501 3,136 8,399 2,631 3,625 3,443 2,440 7,083 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% Tier I Capital to Average Assets: Consolidated $ 109,733 9.49% $ 46,252 4.00% – N/A – – N/A – American Banking Company $ 15,776 $ $ 7,375 4,296 $ 13,366 $ 6,577 $ 18,019 9.02% $ 9.21% $ 8.37% $ 8.01% $ 8.09% $ 6,996 3,203 2,053 6,675 3,252 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 8,745 4,004 2,566 8,343 4,065 6.83% $ 10,553 4.00% $ 13,191 5,169 8.44% $ 2,450 4.00% $ 3,062 Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia Merchants and Farmers Bank $ Tri-County Bank $ First Bank of Brunswick $ 12,861 6,015 7,543 6,104 8.04% $ 8.11% $ 9.19% $ 9.29% $ 2,993 3,720 2,657 5,538 4.00% $ 4.00% $ 4.00% $ 4.00% $ 3,741 4,650 3,321 6,922 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% $ $ $ $ As of December 31, 2001 Total Capital to Risk Weighted Assets: Consolidated American Banking Company Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia Merchants and Farmers Bank Tri-County Bank First Bank of Brunswick Tier I Capital to Risk Weighted Assets: Consolidated American Banking Company Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia Merchants and Farmers Bank Tri-County Bank First Bank of Brunswick Tier I Capital to Average Assets: Consolidated American Banking Company Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia Merchants and Farmers Bank Tri-County Bank First Bank of Brunswick Actual Amount Ratio For Capital Adequacy Purposes Ratio Amount (Dollars in Thousands) To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio Amount $ 122,372 $ 14,311 6,496 $ $ 3,937 $ 13,269 $ 7,247 $ 19,199 5,806 $ 6,659 $ 6,782 $ $ 5,599 $ 12,307 $ 103,506 $ 12,710 5,834 $ $ 3,487 $ 11,876 $ 6,627 $ 17,393 5,200 $ 5,899 $ 6,017 $ $ 5,148 $ 11,010 $ 103,506 $ 12,710 5,834 $ $ 3,487 $ 11,876 6,627 $ $ 17,393 5,200 $ 5,899 $ 6,017 $ $ 5,148 $ 11,010 15.02% $ 11.19% $ 12.28% $ 10.99% $ 11.94% $ 14.80% $ 13.33% $ 12.02% $ 10.97% $ 11.32% $ 15.52% $ 12.01% $ 12.70% $ 9.94% $ 11.03% $ 9.74% $ 10.69% $ 13.53% $ 12.08% $ 10.76% $ 9.71% $ 10.04% $ 14.27% $ 10.75% $ 9.26% $ 7.18% $ 8.48% $ 7.53% $ 8.03% $ 8.44% $ 6.99% $ 8.66% $ 7.88% $ 11.09% $ 8.42% $ 7.56% $ 65,266 10,228 4,230 2,865 8,888 3,917 11,522 3,865 4,858 4,794 2,886 8,196 32,633 5,114 2,115 1,433 4,444 1,959 5,761 1,933 2,429 2,397 1,443 4,098 43,874 7,067 2,753 1,852 5,989 3,129 10,081 2,400 2,991 2,344 2,557 6,300 8.00% 8.00% $ 8.00% $ 8.00% $ 8.00% $ 8.00% $ 8.00% $ 8.00% $ 8.00% $ 8.00% $ 8.00% $ 8.00% $ 4.00% 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ – N/A – 12,785 5,288 3,582 11,110 4,897 14,403 4,831 6,072 5,992 3,607 10,245 – N/A – 7,671 3,173 2,149 6,666 2,938 8,642 2,899 3,643 3,595 2,164 6,147 – N/A – 8,834 3,442 2,314 7,486 3,912 12,602 2,999 3,738 2,931 3,196 7,875 – N/A – 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% – N/A – 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% – N/A – 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 54 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 55 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. REGULATORY MATTERS (Continued) NOTE 17. REGULATORY MATTERS (Continued) As of December 31, 2002 (Continued) Tier 1 to Capital to Risk Weighted Assets: Consolidated Actual Amount Ratio For Capital Adequacy Purposes Ratio Amount (Dollars in Thousands) To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio Amount $ 109,733 12.79% $ 34,325 4.00% – N/A – – N/A – American Banking Company $ 15,776 Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia Merchants and Farmers Bank $ Tri-County Bank $ First Bank of Brunswick $ 12,861 $ $ 7,375 4,296 $ 13,366 $ 6,577 $ 18,019 5,169 6,015 7,543 6,104 12.37% $ 11.04% $ 10.42% $ 10.69% $ 12.58% $ 12.87% $ 11.79% $ 9.96% $ 13.14% $ 15.01% $ 10.90% $ 5,100 2,671 1,649 5,001 2,090 5,599 1,754 2,416 2,295 1,627 4,722 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 7,650 4,007 2,474 7,501 3,136 8,399 2,631 3,625 3,443 2,440 7,083 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% Tier I Capital to Average Assets: Consolidated $ 109,733 9.49% $ 46,252 4.00% – N/A – – N/A – American Banking Company $ 15,776 $ $ 7,375 4,296 $ 13,366 $ 6,577 $ 18,019 9.02% $ 9.21% $ 8.37% $ 8.01% $ 8.09% $ 6,996 3,203 2,053 6,675 3,252 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 8,745 4,004 2,566 8,343 4,065 6.83% $ 10,553 4.00% $ 13,191 5,169 8.44% $ 2,450 4.00% $ 3,062 Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia Merchants and Farmers Bank $ Tri-County Bank $ First Bank of Brunswick $ 12,861 6,015 7,543 6,104 8.04% $ 8.11% $ 9.19% $ 9.29% $ 2,993 3,720 2,657 5,538 4.00% $ 4.00% $ 4.00% $ 4.00% $ 3,741 4,650 3,321 6,922 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% $ $ $ $ As of December 31, 2001 Total Capital to Risk Weighted Assets: Consolidated American Banking Company Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia Merchants and Farmers Bank Tri-County Bank First Bank of Brunswick Tier I Capital to Risk Weighted Assets: Consolidated American Banking Company Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia Merchants and Farmers Bank Tri-County Bank First Bank of Brunswick Tier I Capital to Average Assets: Consolidated American Banking Company Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia Merchants and Farmers Bank Tri-County Bank First Bank of Brunswick Actual Amount Ratio For Capital Adequacy Purposes Ratio Amount (Dollars in Thousands) To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio Amount $ 122,372 $ 14,311 6,496 $ $ 3,937 $ 13,269 $ 7,247 $ 19,199 5,806 $ 6,659 $ 6,782 $ $ 5,599 $ 12,307 $ 103,506 $ 12,710 5,834 $ $ 3,487 $ 11,876 $ 6,627 $ 17,393 5,200 $ 5,899 $ 6,017 $ $ 5,148 $ 11,010 $ 103,506 $ 12,710 5,834 $ $ 3,487 $ 11,876 6,627 $ $ 17,393 5,200 $ 5,899 $ 6,017 $ $ 5,148 $ 11,010 15.02% $ 11.19% $ 12.28% $ 10.99% $ 11.94% $ 14.80% $ 13.33% $ 12.02% $ 10.97% $ 11.32% $ 15.52% $ 12.01% $ 12.70% $ 9.94% $ 11.03% $ 9.74% $ 10.69% $ 13.53% $ 12.08% $ 10.76% $ 9.71% $ 10.04% $ 14.27% $ 10.75% $ 9.26% $ 7.18% $ 8.48% $ 7.53% $ 8.03% $ 8.44% $ 6.99% $ 8.66% $ 7.88% $ 11.09% $ 8.42% $ 7.56% $ 65,266 10,228 4,230 2,865 8,888 3,917 11,522 3,865 4,858 4,794 2,886 8,196 32,633 5,114 2,115 1,433 4,444 1,959 5,761 1,933 2,429 2,397 1,443 4,098 43,874 7,067 2,753 1,852 5,989 3,129 10,081 2,400 2,991 2,344 2,557 6,300 8.00% 8.00% $ 8.00% $ 8.00% $ 8.00% $ 8.00% $ 8.00% $ 8.00% $ 8.00% $ 8.00% $ 8.00% $ 8.00% $ 4.00% 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ – N/A – 12,785 5,288 3,582 11,110 4,897 14,403 4,831 6,072 5,992 3,607 10,245 – N/A – 7,671 3,173 2,149 6,666 2,938 8,642 2,899 3,643 3,595 2,164 6,147 – N/A – 8,834 3,442 2,314 7,486 3,912 12,602 2,999 3,738 2,931 3,196 7,875 – N/A – 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% – N/A – 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% – N/A – 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 54 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 55 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) The fair value of a financial instrument is the current amount that would be exchanged between willing parties, Accrued Interest: The carrying amounts of accrued interest approximate their fair values. other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases Off-Balance-Sheet Instruments: Fair values of the Company's off-balance-sheet financial instruments are based where quoted market prices are not available, fair values are based on estimates using present value or other on fees currently charged to enter into similar agreements. Since the majority of the Company’s off-balance- valuation techniques. Those techniques are significantly affected by the assumptions used, including the sheet instruments consist of nonfee producing, variable-rate commitments, the Company has determined they discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in do not have a distinguishable fair value. an immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts The carrying value and estimated fair value of the Company's financial instruments were as follows: presented may not necessarily represent the underlying fair value of the Company. The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments. Cash, Due From Banks, Interest-Bearing Deposits in Banks and Federal Funds Sold: The carrying amounts of cash, due from banks, interest-bearing deposits in banks and federal funds sold approximate fair values. Securities: Fair values for securities are based on available quoted market prices. The carrying values of equity securities and restricted stock with no readily determinable fair value approximate fair values. Loans: For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For other loans, the fair values are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Deposits: The carrying amounts of demand deposits, savings deposits, and variable-rate certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Federal Funds Purchased, Repurchase Agreements and Other Borrowings: The fair values of the Company's fixed rate other borrowings are estimated using discounted cash flow models based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts of all other variable rate borrowings, federal funds purchased, and securities sold under repurchase agreements approximate their fair values. Trust Preferred Securities: The fair value of the Company’s fixed rate trust preferred securities are based on available quoted market prices. December 31, 2002 Carrying Amount December 31, 2001 Carrying Fair Value Amount (Dollars in Thousands) Fair Value Financial assets: Cash and short-term investments Federal funds sold Investments in securities Restricted stock Loans Allowance for loan losses Loans, net Accrued interest receivable $ $ $ $ $ $ $ 123,077 - 178,303 5,778 833,447 14,868 818,579 9,647 $ $ $ $ $ $ $ 123,077 - 178,303 5,778 $ $ $ $ 157,475 44 152,134 4,701 $ $ $ $ 157,475 44 152,134 4,701 837,057 $ 805,076 $ 819,616 - 14,944 - 837,057 $ 790,132 $ 819,616 9,647 $ 10,767 $ 10,767 Financial liabilities: Deposits Federal funds purchased and securities sold under agreements to repurchase Other borrowings Accrued interest payable Trust preferred securities $ 916,185 $ 919,406 $ 931,156 $ 935,729 $ $ $ $ 8,204 117,290 2,395 34,500 $ $ $ $ 8,204 117,094 2,395 37,088 $ $ $ $ 3,792 95,293 3,611 34,500 $ $ $ $ 3,792 94,067 3,611 37,088 56 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 57 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) The fair value of a financial instrument is the current amount that would be exchanged between willing parties, Accrued Interest: The carrying amounts of accrued interest approximate their fair values. other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases Off-Balance-Sheet Instruments: Fair values of the Company's off-balance-sheet financial instruments are based where quoted market prices are not available, fair values are based on estimates using present value or other on fees currently charged to enter into similar agreements. Since the majority of the Company’s off-balance- valuation techniques. Those techniques are significantly affected by the assumptions used, including the sheet instruments consist of nonfee producing, variable-rate commitments, the Company has determined they discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in do not have a distinguishable fair value. an immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts The carrying value and estimated fair value of the Company's financial instruments were as follows: presented may not necessarily represent the underlying fair value of the Company. The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments. Cash, Due From Banks, Interest-Bearing Deposits in Banks and Federal Funds Sold: The carrying amounts of cash, due from banks, interest-bearing deposits in banks and federal funds sold approximate fair values. Securities: Fair values for securities are based on available quoted market prices. The carrying values of equity securities and restricted stock with no readily determinable fair value approximate fair values. Loans: For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For other loans, the fair values are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Deposits: The carrying amounts of demand deposits, savings deposits, and variable-rate certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Federal Funds Purchased, Repurchase Agreements and Other Borrowings: The fair values of the Company's fixed rate other borrowings are estimated using discounted cash flow models based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts of all other variable rate borrowings, federal funds purchased, and securities sold under repurchase agreements approximate their fair values. Trust Preferred Securities: The fair value of the Company’s fixed rate trust preferred securities are based on available quoted market prices. December 31, 2002 Carrying Amount December 31, 2001 Carrying Fair Value Amount (Dollars in Thousands) Fair Value Financial assets: Cash and short-term investments Federal funds sold Investments in securities Restricted stock Loans Allowance for loan losses Loans, net Accrued interest receivable $ $ $ $ $ $ $ 123,077 - 178,303 5,778 833,447 14,868 818,579 9,647 $ $ $ $ $ $ $ 123,077 - 178,303 5,778 $ $ $ $ 157,475 44 152,134 4,701 $ $ $ $ 157,475 44 152,134 4,701 837,057 $ 805,076 $ 819,616 - 14,944 - 837,057 $ 790,132 $ 819,616 9,647 $ 10,767 $ 10,767 Financial liabilities: Deposits Federal funds purchased and securities sold under agreements to repurchase Other borrowings Accrued interest payable Trust preferred securities $ 916,185 $ 919,406 $ 931,156 $ 935,729 $ $ $ $ 8,204 117,290 2,395 34,500 $ $ $ $ 8,204 117,094 2,395 37,088 $ $ $ $ 3,792 95,293 3,611 34,500 $ $ $ $ 3,792 94,067 3,611 37,088 56 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 57 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY) NOTE 19. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY) (Continued) CONDENSED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (Dollars in Thousands) CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Dollars in Thousands) Assets Cash Interest bearing deposits in banks Investment in subsidiaries Other assets 2002 2001 $ 3,535 $ 22,187 14,933 128,286 6,232 3,557 116,993 8,026 Total assets $ 152,986 $ 150,763 Liabilities Other borrowings Other liabilities Trust preferred securities $ 8,144 $ 9,607 2,858 34,500 2,508 34,500 Total liabilities 45,502 46,615 Income Dividends from subsidiaries Interest Fee income Other income Total income Expense Interest Amortization and depreciation Other expense Total expense 2002 2001 2000 $ 4,220 $ 7,386 $ 7,645 334 9,865 1,416 15,835 3,650 1,129 12,239 17,018 212 9,252 1,002 17,852 955 1,599 10,072 12,626 52 8,424 645 16,766 174 935 9,716 10,825 Income (loss) before income tax benefits and equity in undistributed earnings (1,183) 5,226 5,941 Stockholders' equity 107,484 104,148 Income tax benefits 1,860 590 621 Total liabilities and stockholders' equity $ 152,986 $ 150,763 Income before equity in undistributed earnings 677 5,816 6,562 Equity in undistributed earnings of subsidiaries 9,678 3,817 3,536 Net income $ 10,355 $ 9,633 $ 10,098 58 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 59 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY) NOTE 19. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY) (Continued) CONDENSED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (Dollars in Thousands) CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Dollars in Thousands) Assets Cash Interest bearing deposits in banks Investment in subsidiaries Other assets 2002 2001 $ 3,535 $ 22,187 14,933 128,286 6,232 3,557 116,993 8,026 Total assets $ 152,986 $ 150,763 Liabilities Other borrowings Other liabilities Trust preferred securities $ 8,144 $ 9,607 2,858 34,500 2,508 34,500 Total liabilities 45,502 46,615 Income Dividends from subsidiaries Interest Fee income Other income Total income Expense Interest Amortization and depreciation Other expense Total expense 2002 2001 2000 $ 4,220 $ 7,386 $ 7,645 334 9,865 1,416 15,835 3,650 1,129 12,239 17,018 212 9,252 1,002 17,852 955 1,599 10,072 12,626 52 8,424 645 16,766 174 935 9,716 10,825 Income (loss) before income tax benefits and equity in undistributed earnings (1,183) 5,226 5,941 Stockholders' equity 107,484 104,148 Income tax benefits 1,860 590 621 Total liabilities and stockholders' equity $ 152,986 $ 150,763 Income before equity in undistributed earnings 677 5,816 6,562 Equity in undistributed earnings of subsidiaries 9,678 3,817 3,536 Net income $ 10,355 $ 9,633 $ 10,098 58 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 59 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ABC BANCORP EXECUTIVE OFFICERS, DIRECTORS AND SENIOR MANAGEMENT NOTE 19. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY) (Continued) CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Dollars in Thousands) OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization of intangible assets Amortization of compensation expense Undistributed earnings of subsidiaries (Increase) decrease in interest receivable Increase (decrease) in interest payable Increase (decrease) in taxes payable Provision for deferred taxes (Increase) decrease in due from subsidiaries Other operating activities Total adjustments Net cash provided by operating activities INVESTING ACTIVITIES (Increase) decrease in interest-bearing deposits in banks Purchases of premises and equipment Contribution of capital to subsidiary bank Proceeds from sale of premises and equipment Net cash paid for purchased subsidiaries 2002 2001 2000 $ 10,355 $ 9,633 $ 10,098 685 - 444 (9,678) (9) (58) 4 (27) 301 624 (7,714) 2,641 (11,376) (369) - - - 698 299 602 (3,817) (2) 58 (552) (284) (61) (729) (3,788) 636 299 387 (3,536) 2 - 91 (203) (117) 302 (2,139) 5,845 7,959 (3,557) (111) (8,500) 422 (11,681) 1,200 (1,521) (400) 979 - Net cash provided by (used in) investing activities (11,745) (23,427) 258 FINANCING ACTIVITIES Repayment of other borrowings Purchase of treasury shares Dividends paid Proceeds from other borrowings Proceeds from issuance of trust preferred Proceeds from exercise of stock options (1,463) (3,469) (4,749) - - 133 (7,131) - (4,262) 14,738 34,500 12 (500) (4,162) (3,745) - - - Net cash provided by (used in) financing activities (9,548) 37,857 (8,407) Net increase (decrease) in cash (18,652) 20,275 (190) Cash at beginning of year Cash at end of year SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest 60 ABC Bancorp and Subsidiaries 22,187 1,912 2,102 $ 3,535 $ 22,187 $ 1,912 $ 3,388 $ 853 $ 174 Executive Officers Chairman of the Board, President Executive Vice President & Chief Executive Officer Kenneth J. Hunnicutt & Chief Financial Officer W. Edwin Lane, Jr., CPA Executive Vice President, Director of Human Resources & Corporate Secretary Cindi H. Lewis Executive Vice President Southern Region Executive Jon S. Edwards Executive Vice President Northern Region Executive Edwin W. Hortman, Jr. Directors Kenneth J. Hunnicutt, Chairman Occupation: Banker Main Employer: ABC Bancorp Doyle Weltzbarker, Vice Chairman Occupation: Farm Products Main Employer: West End Milling Johnny W. Floyd Occupation: Timber and Realty Main Employer: Floyd Timber Company & Cordele Realty, Inc. J. Raymond Fulp Occupation: Pharmacist Main Employer: CVS Pharmacy Daniel B. Jeter Occupation: Consumer Finance Main Employer: Standard Discount Robert P. Lynch Occupation: Automobile Dealer Main Employer: Motor Finance Co. Eugene M. Vereen, Jr. Chairman Emeritus Occupation: Real Estate & Investing Main Employer: M.I.A., Co. J. Thomas Whelchel Occupation: Attorney Main Employer: Whelchel, Brown, Readdick & Bumgartner Henry C. Wortman Occupation: Dairyman Main Employer: Jackson & Wortman ABC Bancorp Senior Management Chairman of the Board, President & Chief Executive Officer Kenneth J. Hunnicutt Executive Vice President & Chief Financial Officer W. Edwin Lane, Jr., CPA Executive Vice President, Director of Human Resources & Corporate Secretary Cindi H. Lewis Executive Vice President, Southern Region Bank Executive & Director of Credit Administration Jon S. Edwards Executive Vice President, Northern Region Bank Executive & President and CEO of Citizens Security Bank Edwin W. Hortman, Jr. Senior Vice President & Director of Automation & Operations Marc E. DeMott Senior Vice President & Director of Retail Banking Michael F. McDonald Senior Vice President & Director of Internal Audit Charles A. Robinson ABC Bancorp and Subsidiaries 61 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ABC BANCORP EXECUTIVE OFFICERS, DIRECTORS AND SENIOR MANAGEMENT NOTE 19. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY) (Continued) CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Dollars in Thousands) OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization of intangible assets Amortization of compensation expense Undistributed earnings of subsidiaries (Increase) decrease in interest receivable Increase (decrease) in interest payable Increase (decrease) in taxes payable Provision for deferred taxes (Increase) decrease in due from subsidiaries Other operating activities Total adjustments Net cash provided by operating activities INVESTING ACTIVITIES (Increase) decrease in interest-bearing deposits in banks Purchases of premises and equipment Contribution of capital to subsidiary bank Proceeds from sale of premises and equipment Net cash paid for purchased subsidiaries 2002 2001 2000 $ 10,355 $ 9,633 $ 10,098 685 - 444 (9,678) (9) (58) 4 (27) 301 624 (7,714) 2,641 (11,376) (369) - - - 698 299 602 (3,817) (2) 58 (552) (284) (61) (729) (3,788) 636 299 387 (3,536) 2 - 91 (203) (117) 302 (2,139) 5,845 7,959 (3,557) (111) (8,500) 422 (11,681) 1,200 (1,521) (400) 979 - Net cash provided by (used in) investing activities (11,745) (23,427) 258 FINANCING ACTIVITIES Repayment of other borrowings Purchase of treasury shares Dividends paid Proceeds from other borrowings Proceeds from issuance of trust preferred Proceeds from exercise of stock options (1,463) (3,469) (4,749) - - 133 (7,131) - (4,262) 14,738 34,500 12 (500) (4,162) (3,745) - - - Net cash provided by (used in) financing activities (9,548) 37,857 (8,407) Net increase (decrease) in cash (18,652) 20,275 (190) Cash at beginning of year Cash at end of year SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest 60 ABC Bancorp and Subsidiaries 22,187 1,912 2,102 $ 3,535 $ 22,187 $ 1,912 $ 3,388 $ 853 $ 174 Executive Officers Chairman of the Board, President Executive Vice President & Chief Executive Officer Kenneth J. Hunnicutt & Chief Financial Officer W. Edwin Lane, Jr., CPA Executive Vice President, Director of Human Resources & Corporate Secretary Cindi H. Lewis Executive Vice President Southern Region Executive Jon S. Edwards Executive Vice President Northern Region Executive Edwin W. Hortman, Jr. Directors Kenneth J. Hunnicutt, Chairman Occupation: Banker Main Employer: ABC Bancorp Doyle Weltzbarker, Vice Chairman Occupation: Farm Products Main Employer: West End Milling Johnny W. Floyd Occupation: Timber and Realty Main Employer: Floyd Timber Company & Cordele Realty, Inc. J. Raymond Fulp Occupation: Pharmacist Main Employer: CVS Pharmacy Daniel B. Jeter Occupation: Consumer Finance Main Employer: Standard Discount Robert P. Lynch Occupation: Automobile Dealer Main Employer: Motor Finance Co. Eugene M. Vereen, Jr. Chairman Emeritus Occupation: Real Estate & Investing Main Employer: M.I.A., Co. J. Thomas Whelchel Occupation: Attorney Main Employer: Whelchel, Brown, Readdick & Bumgartner Henry C. Wortman Occupation: Dairyman Main Employer: Jackson & Wortman ABC Bancorp Senior Management Chairman of the Board, President & Chief Executive Officer Kenneth J. Hunnicutt Executive Vice President & Chief Financial Officer W. Edwin Lane, Jr., CPA Executive Vice President, Director of Human Resources & Corporate Secretary Cindi H. Lewis Executive Vice President, Southern Region Bank Executive & Director of Credit Administration Jon S. Edwards Executive Vice President, Northern Region Bank Executive & President and CEO of Citizens Security Bank Edwin W. Hortman, Jr. Senior Vice President & Director of Automation & Operations Marc E. DeMott Senior Vice President & Director of Retail Banking Michael F. McDonald Senior Vice President & Director of Internal Audit Charles A. Robinson ABC Bancorp and Subsidiaries 61 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES PRESIDENTS AND DIRECTORS SUBSIDIARY BANKS PRESIDENTS AND DIRECTORS SUBSIDIARY BANKS AMERICAN BANKING COMPANY Moultrie, GA CAIRO BANKING COMPANY Cairo, GA CITIZENS SECURITY BANK Tifton, GA CITIZENS SECURITY BANK Ocilla, GA HERITAGE COMMUNITY BANK Quitman, GA SOUTHLAND BANK Dothan, AL President & Chief Executive Officer President & Chief Executive Officer President & Chief Executive Officer Ronnie F. Marchant Edgar B. Smith, III Directors Lynn L. Jones, Chairman Robert M. Brown, MD Jack C. Chastain C. Wayne Cooper Jon S. Edwards Thomas L. Estes, MD Robert A. Faircloth Plenn Hunnicutt Daniel B. Jeter Ronnie F. Marchant J. Mark Mobley, Jr. Thomas W. Rowell Brooks Sheldon President Emeritus Eugene M. Vereen, Jr. BANK OF THOMAS COUNTY Thomasville, GA Directors Jeffrey F. (Jet) Cox, Chairman Nancy C. Clark Jon S. Edwards Ronnie L. Gainous Cuy Harrell, III Winburn Knight William J. Morton, MD G. Ashley Register, MD Edgar B. Smith, III CENTRAL BANK & TRUST Cordele, GA President & Chief Executive Officer Robert L. Evans Directors Johnny W. Floyd, Chairman Robert E. Barr, MD Charles W. Clark President & Chief Executive Officer Robert L. Evans Ervin E. Brock Directors William T. Greene W.H. Griffin, III Edwin W. Hortman, Jr. L. Maurice Chastain, Chairman David N. Rainwater Director Emeritus Henry M. Turton, Jr. Dale E. Aldridge S. Mark Brewer, MD Ervin E. Brock Jon S. Edwards Gene Hickey Zeke Johnson Dr. Terrel M. Solana F. Keith Wortman Edwin W. Hortman, Jr. City President Lawton E. Bassett, III Directors J. Raymond Fulp, Chairman Lawton E. Bassett, III Austin L. Coarsey Robert R. Fender Stewart D. Gilbert, MD Edwin W. Hortman, Jr. John Alan Lindsey Loran A. Pate Clifford A. Walker, Sr., DMD CITIZENS SECURITY BANK Douglas, GA City President David B. Batchelor City Directors Robert R. Fender, Chairman David B. Batchelor Earl Brice J. Anthony Deal Sherman Dudley William (Bill) H. Elliott Fay Hennesy Edwin W. Hortman, Jr. E. Carlyle Ragans Donnie H. Smith Ronnie Spivey Oscar Street President & Chief Executive Officer President & Chief Executive Officer City President C. Larry Young City Directors Loran A. Pate, Chairman Edwin W. Hortman, Jr. Tim S. Jones Directors Doyle Weltzbarker, Chairman John A. Baker Howard C. McMahan, MD William P. Cooper, Jr. Daniel M. Paulk Gary H. Paulk C. Larry Young Director Emeritus Wycliffe Griffin Jon S. Edwards Tim S. Jones Sue D. Mink Charles E. Smith Henry C. Wortman Thomas Eddie York Harris O. Pittman, III Directors Robert Dale Ezzell, Chairman Robert Crowder Gerald B. Crowley Ronald E. Dean John D. DeLoach Edwin W. Hortman, Jr. Harris O. Pittman, III THE FIRST BANK OF BRUNSWICK Brunswick, GA FIRST NATIONAL BANK OF SOUTH GEORGIA Albany, GA MERCHANTS & FARMERS BANK Donalsonville, GA President & Chief Executive Officer Michael D. Hodges President & Chief Executive Officer Don Monk Directors Glen A. Kirbo, Chairman Willie Adams, Jr., MD Robert V. Barkley, Sr. Waddell M. Hagins, Jr. Edwin W. Hortman, Jr. Russell E. Martin Reid E. Mills W. Thomas Mitcham, MD Don Monk R. Douglas Oliver W. Paul Wallace, Jr. President & Chief Executive Officer John C. Mosely Directors J. Thomas Whelchel, Chairman Directors Jerry G. Mitchell, Chairman Lewis M. Carter, Jr. Joseph S. Hall Rufus G. Heard Edwin W. Hortman, Jr. Newton E. King, Jr. C. Willard Mims John C. Mosely Dan E. Ponder, Jr. Directors Emeritus Charles R. Burke, Sr. H. Wayne Carr John B. Clarke, Sr. Newton E. King, Sr. C. Ray Acosta Jon S. Edwards James M. Fiveash L. McRee (Mac) Harden Michael D. Hodges Jimmy D. Veal TRI-COUNTY BANK Trenton, FL President & Chief Executive Officer John H. Ferguson Directors Wilbur Bush, Chairman Jon S. Edwards John H. Ferguson Donna Graham Michael Hayes Norman Scoggins 62 62 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 63 ABC BANCORP AND SUBSIDIARIES ABC BANCORP AND SUBSIDIARIES PRESIDENTS AND DIRECTORS SUBSIDIARY BANKS PRESIDENTS AND DIRECTORS SUBSIDIARY BANKS AMERICAN BANKING COMPANY Moultrie, GA CAIRO BANKING COMPANY Cairo, GA CITIZENS SECURITY BANK Tifton, GA CITIZENS SECURITY BANK Ocilla, GA HERITAGE COMMUNITY BANK Quitman, GA SOUTHLAND BANK Dothan, AL President & Chief Executive Officer President & Chief Executive Officer President & Chief Executive Officer Ronnie F. Marchant Edgar B. Smith, III Directors Lynn L. Jones, Chairman Robert M. Brown, MD Jack C. Chastain C. Wayne Cooper Jon S. Edwards Thomas L. Estes, MD Robert A. Faircloth Plenn Hunnicutt Daniel B. Jeter Ronnie F. Marchant J. Mark Mobley, Jr. Thomas W. Rowell Brooks Sheldon President Emeritus Eugene M. Vereen, Jr. BANK OF THOMAS COUNTY Thomasville, GA Directors Jeffrey F. (Jet) Cox, Chairman Nancy C. Clark Jon S. Edwards Ronnie L. Gainous Cuy Harrell, III Winburn Knight William J. Morton, MD G. Ashley Register, MD Edgar B. Smith, III CENTRAL BANK & TRUST Cordele, GA President & Chief Executive Officer Robert L. Evans Directors Johnny W. Floyd, Chairman Robert E. Barr, MD Charles W. Clark President & Chief Executive Officer Robert L. Evans Ervin E. Brock Directors William T. Greene W.H. Griffin, III Edwin W. Hortman, Jr. L. Maurice Chastain, Chairman David N. Rainwater Director Emeritus Henry M. Turton, Jr. Dale E. Aldridge S. Mark Brewer, MD Ervin E. Brock Jon S. Edwards Gene Hickey Zeke Johnson Dr. Terrel M. Solana F. Keith Wortman Edwin W. Hortman, Jr. City President Lawton E. Bassett, III Directors J. Raymond Fulp, Chairman Lawton E. Bassett, III Austin L. Coarsey Robert R. Fender Stewart D. Gilbert, MD Edwin W. Hortman, Jr. John Alan Lindsey Loran A. Pate Clifford A. Walker, Sr., DMD CITIZENS SECURITY BANK Douglas, GA City President David B. Batchelor City Directors Robert R. Fender, Chairman David B. Batchelor Earl Brice J. Anthony Deal Sherman Dudley William (Bill) H. Elliott Fay Hennesy Edwin W. Hortman, Jr. E. Carlyle Ragans Donnie H. Smith Ronnie Spivey Oscar Street President & Chief Executive Officer President & Chief Executive Officer City President C. Larry Young City Directors Loran A. Pate, Chairman Edwin W. Hortman, Jr. Tim S. Jones Directors Doyle Weltzbarker, Chairman John A. Baker Howard C. McMahan, MD William P. Cooper, Jr. Daniel M. Paulk Gary H. Paulk C. Larry Young Director Emeritus Wycliffe Griffin Jon S. Edwards Tim S. Jones Sue D. Mink Charles E. Smith Henry C. Wortman Thomas Eddie York Harris O. Pittman, III Directors Robert Dale Ezzell, Chairman Robert Crowder Gerald B. Crowley Ronald E. Dean John D. DeLoach Edwin W. Hortman, Jr. Harris O. Pittman, III THE FIRST BANK OF BRUNSWICK Brunswick, GA FIRST NATIONAL BANK OF SOUTH GEORGIA Albany, GA MERCHANTS & FARMERS BANK Donalsonville, GA President & Chief Executive Officer Michael D. Hodges President & Chief Executive Officer Don Monk Directors Glen A. Kirbo, Chairman Willie Adams, Jr., MD Robert V. Barkley, Sr. Waddell M. Hagins, Jr. Edwin W. Hortman, Jr. Russell E. Martin Reid E. Mills W. Thomas Mitcham, MD Don Monk R. Douglas Oliver W. Paul Wallace, Jr. President & Chief Executive Officer John C. Mosely Directors J. Thomas Whelchel, Chairman Directors Jerry G. Mitchell, Chairman Lewis M. Carter, Jr. Joseph S. Hall Rufus G. Heard Edwin W. Hortman, Jr. Newton E. King, Jr. C. Willard Mims John C. Mosely Dan E. Ponder, Jr. Directors Emeritus Charles R. Burke, Sr. H. Wayne Carr John B. Clarke, Sr. Newton E. King, Sr. C. Ray Acosta Jon S. Edwards James M. Fiveash L. McRee (Mac) Harden Michael D. Hodges Jimmy D. Veal TRI-COUNTY BANK Trenton, FL President & Chief Executive Officer John H. Ferguson Directors Wilbur Bush, Chairman Jon S. Edwards John H. Ferguson Donna Graham Michael Hayes Norman Scoggins 62 62 ABC Bancorp and Subsidiaries ABC Bancorp and Subsidiaries 63 MARKET FOR THE COMPANY’S COMMON STOCK AND DIVIDEND INFORMATION ABC Bancorp Common Stock is quoted through the National Market System of the National Association of Securities Dealers (NASDAQ) under the symbol “ABCB”. The following table sets forth the low and high sales prices for the common stock as quoted on the NASDAQ during 2002. Calendar Period Sales Price 2002 First Quarter Low High $ 12.92 $ 14.70 Second Quarter $ 13.10 $ 16.50 Third Quarter Fourth Quarter $ 11.05 $ 15.24 $ 12.50 $ 14.14 Quarterly dividends of $0.12 per share were declared for the first, second, third and fourth quarters of 2002. AVAILABILTY OF INFORMATION Upon written request, ABC Bancorp will provide, without charge, a copy of the Annual Report on Form 10-K, including the financial statements and the financial statement schedules, required to be filed with the Securities and Exchange Commission for fiscal year 2002. Please direct requests to: ABC Bancorp, Attention: W. Edwin Lane, Jr., CPA, P.O. Box 3668, Moultrie, GA 31776-3668. ANNUAL MEETING OF SHAREHOLDERS The 2003 Annual Meeting of Shareholders of ABC Bancorp will be held at 4:15 p.m. EST, Tuesday, May 20, 2003 at the ABC Bancorp Corporate Office located at 24 Second Avenue S.E., Moultrie, Georgia. 24 Second Avenue S.E. • Moultrie, Georgia 31768 (229) 890-1111 • www.abcbancorp.com 64 ABC Bancorp and Subsidiaries ANNUAL REPORT 2002 PROUD MEMBERS OF THE ABC BANCORP TEAM American Banking Company www.americanbankingcompany.com Bank of Thomas County www.bankofthomascounty.com Cairo Banking Company www.cairobankingcompany.com Central Bank & Trust www.centralbankandtrust.com Citizens Security Bank www.citizenssecuritybank.com First National Bank of South Georgia www.first-nationalbank.com Heritage Community Bank www.heritage-communitybank.com Merchants & Farmers Bank www.merchants-farmersbank.com Southland Bank www.southland-bank.com The First Bank of Brunswick www.firstbankbrunswick.com Tri-County Bank www.tri-county-bank.com Working hard for you. 

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