ANNUAL REPORT 2003 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). 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 in … 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 Working hard for you. TABLE OF CONTENTS Chairman and Chief Executive Officer’s Letter to Shareholders . . . . . . . . . . . . . . . 3 Letter from the President and Chief Operating Officer . . . . . . . . . . . . . . . . . . . . . 5 Financial Highlights – A Rewarding and Profitable Year . . . . . . . . . . . . . . . . . . . . . 6 Bank & City Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Our People – A Story of Teamwork . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Our People – The Strength of our Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Senior Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . 65 Presidents and Directors – Subsidiary Banks . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Common Stock and Dividend Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 ABC Bancorp and Subsidiaries 1 CHAIRMAN AND CHIEF EXECUTIVE OFFICER'S LETTER TO SHAREHOLDERS Dear fellow shareholders, In 1971, together with the founding investors in our Company, we set out to build a bank based on the core principles of value, service and character. ABC Bancorp is a direct result of the faithful execution of this strategy. These core principles drive our Company at the most basic levels. Today, these founding core principles are shared by the exceptional individuals who comprise ABC Bancorp. We believe companies which create value for their shareholders are those which create real value for their customers. Our Company experienced record earnings of approximately $12,000,000, an increase of 16% versus the prior year. Net income per basic share also reached a record high of $1.23. Our commitment to creating customer value remains the driving force behind our success. I am proud of our employees. They achieved exceptional results. We improved asset quality and service levels while reducing expenses. Non- performing assets were reduced by nearly 14%. The ratio of loans charged-off (net of recoveries) was 22 basis points better than the prior year. Our unique approach to community banking provided an environment in which our family of separately chartered banks prospered. The external expansion program remains a key growth strategy. Our Company is strong, well capitalized, skillfully managed and prepared for external growth. Our ability to continually improve the productivity of our seasoned staff will insure our future success as we exercise this growth strategy. It is critical the next leader of our Company inspires our employees. I am excited Ed Hortman has accepted the role of President and Chief Operating Officer. As North Regional Executive and President & CEO of Citizens Security Bank, he has proven that he is guided by the same core principles on which our Company was founded. Ed is an experienced banker. His new ideas will continue to energize our Company and grow shareholder value. During my banking career, optimism has been my source of energy. For the past 33 years, positive leadership has driven ABC Bancorp's growth and profitability. I have been told to be an effective leader you must surround yourself with great people. Having done that, I am honored to be a part of ABC Bancorp. I am confident greater results can and will be achieved. Sincerely, Kenneth J. Hunnicutt Chairman and Chief Executive Officer ABC Bancorp and Subsidiaries 3 LETTER FROM THE PRESIDENT AND CHIEF OPERATING OFFICER A renewed commitment to the basics As your President and Chief Operating Officer, I am proud of our 2003 results and look forward to continued improvements in performance and increased shareholder value. My banking career during the past 28 years has afforded me an appreciation of community based banking. This approach has also served ABC Bancorp's shareholders, customers and employees well. With pride in our heritage, it will continue to be our trademark of the future. It is my desire that our Company has a focused strategic plan to achieve success in these areas: • Shareholder Value – capitalizing on profitable and growth oriented opportunities. • Quality Customer Service – resulting from a sincere effort to meet customer needs in the communities we serve. • Asset Quality – continuing to enhance profitability and shareholder value. • Operational Efficiencies – working smarter in concert with our dedicated work ethic. • Great Execution – engaging our team of talented employees with an intense business focus that creates exceptional performance. In summary, a return to the “basics”, for these are the foundations that give strength to our actions and add value to our franchise. These actions are the habits that become our character. We remain committed to delivering a solid performance and are appreciative of your support. Respectfully, Edwin W. Hortman, Jr. President & Chief Operating Officer ABC Bancorp and Subsidiaries 5 FINANCIAL HIGHLIGHTS — A REWARDING AND PROFITABLE YEAR 5 Year Comparative Charts (Dollars in thousands) 6 ABC Bancorp and Subsidiaries FINANCIAL HIGHLIGHTS — A REWARDING AND PROFITABLE YEAR Selected Financial Highlights (Dollars in thousands except per share data) 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 (a) Computed using fully taxable-equivalent net income. 2003 2002 2001 $ $ $ $ $ $ $ $ 42,434 3,945 14,622 35,147 5,954 12,010 9,783,854 9,772,166 1.23 0.52 7,977 3,850 1.78 % 0.47 % 53.31 % 0.68 % 3.63 % 3.98 % 1.04 % 10.85 % 61.60 % 11.61 9.31 9.73 % $ $ $ $ $ $ $ $ 43,203 5,574 15,610 37,807 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 % 3.69 % 4.09 % 0.90 % 9.81 % 64.28 % 11.00 8.59 9.01 % $ $ $ $ $ $ $ $ 38,009 4,566 11,725 30,843 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 % 3.67 % 4.33 % 1.00 % 10.30 % 62.02 % 10.42 7.88 8.85 % ABC Bancorp and Subsidiaries 7 BANK & CITY PRESIDENTS FROM LEFT TO RIGHT EDGAR B. SMITH, III Cairo Banking Company SAMMIE D. DIXON, JR. Bank of Thomas County ROBERT L. EVANS Central Bank & Trust DON MONK First National Bank of South Georgia TERESA YOUMANS Merchants & Farmers Bank - Colquitt RONNIE F. MARCHANT American Banking Company TIM S. JONES Heritage Community Bank JOHN C. MOSELY Merchants & Farmers Bank 8 ABC Bancorp and Subsidiaries BANK & CITY PRESIDENTS FROM LEFT TO RIGHT DAVID B. BATCHELOR Citizens Security Bank - Douglas C. LARRY YOUNG Citizens Security Bank - Ocilla MICHAEL D. HODGES The First Bank of Brunswick LAWTON E. BASSETT, III Citizens Security Bank HARRIS O. PITTMAN, III Southland Bank JOHN H. FERGUSON Tri-County Bank ABC Bancorp and Subsidiaries 9 OUR PEOPLE — A STORY OF TEAMWORK Teamwork strengthens our Company TEAMWORK – "In the right formation, the lifting power of many wings can achieve twice the distance of any bird flying alone. Teamwork is the ability to direct individual accomplishment toward achieving organizational objectives. It is the fuel that allows common people to attain uncommon results." - ABC Bancorp Corporate Value Statement As our leadership crafted the corporate value statement, they were compelled to place teamwork among the nine values most critical to our success. It is the stroke that sets our core principles into motion. Teamwork can not be fully described using a few words. But one thing is for sure…you know teamwork when you see it. An example to help gain insight into our unique definition of teamwork is found at Tri-County Bank. In 2001, our Company jumped into the Florida market with the acquisition of Tri- County Bank in Trenton. With Tri-County Bank we found not only a strong bank but a seasoned team built on the core principles we value most. For the past 17 years, the team of Karol Lindsey, Sandi Hilliard and Mary Dunn has successfully led their customers through a lot of change. According to John Ferguson, Bank President and CEO of Tri-County Bank, "Our bankers are strong. But our bank's strength is our teamwork. Our customers don't bank with one person. They bank with all of us. The way Karol, Sandi and Mary cooperate illustrates our team's sixth sense when working with each other and our customers." Financially, ABC Bancorp's results are primarily the sum of the eleven separately charted banks. When our banks are in the right formation, the outcome exceeds what could be achieved if each bank stood alone. It takes time to develop a team, but the payoff is tremendous. This year's results are another way one can see where teamwork sets ABC Bancorp apart. 10 ABC Bancorp and Subsidiaries Karol Lindsey, Sandi Hilliard and Mary Dunn have successfully led their customers through a lot of thing has change, but one remained constant – teamwork. ABC Bancorp and Subsidiaries 11 OUR PEOPLE — THE STRENGTH OF OUR COMPANY Service is what drives our success. direct result of the service Sandi, Barbara and Sandy provide. Customer response to this team has been phenomenal. In addition to growing the bank's assets and profitability by over 65% in three years, we have created an exciting work environment that continues to attract quality bankers that help the bank continue to grow." The experience at Heritage Community Bank typifies ABC Bancorp's commitment to attracting, retaining and empowering talented bankers. Banking is all about service. Banking is all about the service we provide our customers who entrust us with their money. We thank them for their patronage. Banking is all about the service we provide our shareholders. We remain committed to providing a competitive return. ABC Bancorp is all about the service that our 520 employees give each other. We thank our team members for their unyielding effort. The phrase, “banking is all about service” is often overused. Nevertheless, it is true. Excellent service is never an accident. It is always the result of effort, intelligence, and the vision to see obstacles as opportunities. ABC Bancorp's ability to grow is in direct proportion to the service we provide. Our customer service is not a department. It is our attitude. As a result of many bank consolidations, the trio of Sandi Skoropat, Sandy Rentz and Barbara Tomlinson found themselves working for banks who valued profit over customer service. The bureaucracy of these mega banks did not allow them to care for their customer. Moreover, their jobs were not fun. They sought a company which placed the highest premium on providing personal service, delivering state-of-the-art products and creating a fun workplace. Established in 1888, Heritage Community Bank has stood the test of time. We knew that a community bank offering quality customer service would flourish in the rapidly growing market of Valdosta, Georgia. But, we needed talented people to carry our customer service strategy in a new market. At the same time, this trio of talented bankers needed a company that shared their values. Our shared belief brought us together. In August of 2000, a perfect fit was made as Heritage Community Bank opened its first branch in Valdosta. According to Bank President and CEO, Tim Jones, "Our successful branching is a 12 ABC Bancorp and Subsidiaries Our shared beliefs bring people of common values together. Sandi Skoropat, Sandy Rentz and Barbara Tomlinson helped each other find their ideal work environment within ABC Bancorp. ABC Bancorp and Subsidiaries 13 BOARD OF DIRECTORS FROM LEFT TO RIGHT HENRY C. WORTMAN DANIEL B. JETER EUGENE M. VEREEN, JR. Chairman Emeritus ROBERT P. LYNCH KENNETH J. HUNNICUTT Chairman 14 ABC Bancorp and Subsidiaries 15 ABC Bancorp and Subsidiaries EDWIN W. HORTMAN, JR. J. THOMAS WHELCHEL DOYLE WELTZBARKER Vice Chairman J. RAYMOND FULP JOHNNY W. FLOYD (NOT PICTURED) ABC Bancorp and Subsidiaries 15 ABC Bancorp and Subsidiaries 16 SENIOR MANAGEMENT FROM LEFT TO RIGHT KENNETH J. HUNNICUTT Chairman of the Board & Chief Executive Officer O. MITCHELL SMITH Senior Vice President & Director of Credit Administration W. EDWIN LANE, JR. Executive Vice President & Chief Financial Officer JON S. EDWARDS Executive Vice President & South Regional Executive MICHAEL F. MCDONALD Senior Vice President & Director of Retail Banking CHARLES A. ROBINSON Senior Vice President & Director of Internal Audit CINDI H. LEWIS Executive Vice President Director of Human Resources & Corporate Secretary EDWIN W. HORTMAN, JR. President, Chief Operating Officer & North Regional Executive MARC E. DEMOTT Senior Vice President & Director of Automation & Operations 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’s 2003 Annual Report contains forward- looking statements in addition to historical information. ABC cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward- looking statements within the meaning of the Private 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. Securities Litigation Reform Act of 1995; Critical Accounting Policies accordingly, there can be no assurance that such indicated results will be realized. ABC has established certain accounting and financial reporting policies to govern the application The Private Securities Litigation Reform Act of of accounting principles generally accepted in the 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 United States of America in the preparation of our financial statements. Our significant accounting policies are described in the Notes to the Consolidated Financial Statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities; management considers these accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from the judgments and estimates adopted by management which could have a material impact on the carrying values of assets and liabilities and the results of ABC’s operations. We believe the following accounting policies applied by ABC represent critical accounting policies. with the Securities and Exchange Commission, Allowance for Loan Losses including its Annual Report on Form 10-K. The words “believe”, “expect”, “anticipate”, “project”, and similar expressions signify such forward-looking statements. We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of our consolidated financial statements. Readers are cautioned not to place undue The allowance for loan losses represents reliance on any forward-looking statements made by management’s estimate of probable loan losses or on behalf of ABC. Any such statement speaks inherent in the loan portfolio. Calculation of the ABC Bancorp and Subsidiaries 17 MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS allowance for loan losses represents a critical The accounting for impaired loans described accounting estimate due to the significant judgment, above applies to all loans, except for large pools of assumptions and estimates related to the amount smaller-balance, homogeneous loans that are and timing of estimated losses, consideration of collectively evaluated for impairment, loans that are current and historical trends and the amount and timing of cash flows related to impaired loans. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, 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 nature and volume of the portfolio, overall portfolio future additions to the allowance for loan losses quality, adequacy of the underlying collateral, loan may be necessary based on changes in economic concentrations, historical charge-off trends, and conditions. In addition, various regulatory agencies, economic conditions that may affect the borrowers' as an integral part of their examination process, ability to pay. 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 regarding a borrower’s ability to repay its obligations, management considers a loan to be impaired when the ultimate collectibility of all amounts due, according to the contractual terms of the loan agreement, is in doubt. When a loan is considered to be impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. If the loan is collateral-dependent, the fair value of the collateral is used to determine the 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 Certain economic and interest rate factors could have a material impact on the determination of the allowance for loan losses. The national economy showed signs of rebounding during the fourth quarter of 2003. If the economy’s momentum continues, certain factors could evolve which would positively impact our net interest margin. An increase in interest rates by the Federal Reserve Bank would favorably impact our net interest margin. An improving economy could result in the expansion of businesses and creation of jobs which would positively affect ABC’s loan growth and improve our gross revenue stream. Conversely, certain factors could result from an expanding economy which could increase our credit costs and adversely impact our net earnings. A significant rapid rise in interest rates could create higher borrowing costs and shrinking corporate profits which could have a material impact on borrowers’ ability to pay. We will continue to concentrate on maintaining a high quality loan portfolio through strict administration of our loan policy. Another factor that we have considered in the determination of the allowance for loan losses is under the contractual terms of the loan agreement. loan concentrations to individual borrowers or Cash receipts on impaired loans for which the industries. At December 31, 2003, we had 12 accrual of interest has been discontinued are individual credit relationships that exceeded $5.0 applied first to principal and then to interest income. million with none exceeding $12.0 million. 18 ABC Bancorp and Subsidiaries MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A substantial portion of our loan portfolio is in the and financial reporting purposes. These differences commercial real estate and residential real estate result in deferred tax assets and liabilities that are sectors. Those loans are secured by real estate in included in our consolidated balance sheet. ABC’s primary market area. A substantial of portion of other real estate owned is located in those same markets. Therefore, the ultimate collectibility of a substantial portion of our loan portfolio and the recovery of a substantial portion of the carrying amount of other real estate owned are susceptible to changes to market conditions in ABC’s primary market area. 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 We are closely monitoring certain portions of our deferred tax assets. To the extent we establish a loan portfolio that we believe have a higher credit risk profile under the current environment based solely upon their industry classification which includes agricultural and agribusiness loans. Based on current information, we have not identified any problem credits included in these categories, which are not already classified as nonperforming or impaired loans. However, if the economic recovery takes longer than expected, the allowance for loan losses could be impacted by adverse developments in these credits. Income Taxes SFAS No. 109, “Accounting for Income Taxes,” requires the asset and liability approach for financial accounting and reporting for deferred income taxes. We use the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant income tax valuation allowance or adjust this allowance in a period, we must include an expense within the tax provisions in the statement of income. We have recorded on our consolidated balance sheet net deferred tax assets of $4,363,000 which includes amounts relating to loss carryforwards. We believe there will be sufficient taxable income in the future allowing us to utilize these loss carryforwards in the tax jurisdictions where they exist. Long-Lived Assets, Including Intangibles We evaluate long-lived assets, such as property and equipment, specifically identifiable intangibles and goodwill, when events or changes in circumstances indicate that the carrying value of such assets might not be recoverable. Factors that could trigger an impairment include significant underperformance relative to historical or projected future operating temporary differences. See Note 11 to the Notes results, significant changes in the manner of our use to Consolidated Financial Statements for of the acquired assets and significant negative additional details. industry or economic trends. As part of the process of preparing our The determination of whether an impairment has consolidated financial statements we are required to occurred is based on an estimate of undiscounted estimate our income taxes in each of the cash flows attributable to the assets as compared to jurisdictions in which we operate. This process the carrying value of the assets. If an impairment involves estimating our actual current tax exposure has occurred, the amount of the impairment loss together with assessing temporary differences recognized would be determined by estimating the resulting from differing treatment of items, such as fair value of the assets and recording a loss if the depreciation and the provision for loan losses, for tax fair value was less than the book value. ABC Bancorp and Subsidiaries 19 MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In determining the existence of impairment Due to the record low interest rate environment factors, our assessment is based on market during 2003, our net interest margin decreased $.8 conditions, operational performance and legal million or 1.85% to $42.4 million in 2003 factors of our Company and its subsidiary banks. compared to $43.2 million in 2002. To lessen the 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. Performance Overview adverse impact on net interest margins, we avoided paying excessive interest rates on non-core deposits and relied on lower cost alternative funding. Although this strategy lessened the adverse impact on interest margins, it resulted in a shrinkage of $4.1 million or .5% in average deposits during 2003 compared to 2002. As a result of our focus on controlling noninterest expenses, we reduced noninterest expenses $2.7 million or 7.04% to $35.1 million in 2003 We reported net income of $12.0 million, or compared to $37.8 million in 2002. $1.22 per diluted common share in 2003, compared to $10.4 million, or $1.05 per diluted common share in 2002 and $9.6 million, or $1.04 RESULTS OF OPERATIONS per diluted common share in 2001. The return on average assets was 1.04% in 2003 compared to .90% in 2002 and 1.00% in 2001. The return on General Our principal asset is the ownership of our Banks. average common shareholders’ equity was 10.85% Accordingly, our results of operations are primarily in 2003 compared to 9.81% in 2002 and 10.30% dependent upon the results of operations of our in 2001. As a result of a new accounting rule Banks. Our Banks conduct a commercial banking issued by the Financial Accounting Standards Board business which consists of attracting deposits from (FASB), no amount of goodwill was expensed in the general public and applying those funds to the 2003 or 2002, except for the impairment charge of origination of commercial, consumer and real estate $9,000 in 2003. During 2001, we expensed loans (including commercial loans collateralized by $668,000 or $.07 per diluted common share associated with goodwill. During 2003, we focused on three priorities: preserving asset quality, minimizing shrinkage of our net interest margin and controlling noninterest expenses. As a result of our focus on asset quality, nonperforming assets decreased 13% during the year, our charge-off ratio was 22 basis points lower than the previous year, and the ratio of our 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 allowance for loan losses to nonperforming assets is dependent upon the Banks' interest rate spread, increased 26 basis points during the year. Due to which is the difference between the average yield the improvement of asset quality, we reduced our earned on its interest-earning assets and the provision for loan losses $1.7 million to $3.9 million average rate paid on its interest-bearing liabilities. in 2003 compared to $5.6 million in 2002. When interest-earning assets approximate or exceed 20 ABC Bancorp and Subsidiaries MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS interest-bearing liabilities, any positive interest rate 2003 from 4.09% in 2002. The net interest margin spread will generate interest income. The interest decreased 24 basis points to 4.09% in 2002 from rate spread is impacted by interest rates, deposit 4.33% in 2001. Over the past three years, the net flows and loan demand. Additionally, and to a interest margin has been impacted by changes in lesser extent, the profitability of the Banks is balance sheet mix and fair market value purchase affected by such factors as the level of noninterest income and expenses, the provision for loan losses and the effective tax rate. Noninterest income consists primarily of service charges on deposit accounts and other fees and income from the sale of investment securities and origination of mortgage loans. Noninterest expenses consist of compensation and benefits, occupancy-related expenses and other operating expenses. Earnings Summary accounting adjustments related to recent purchase acquisitions which have affected the yields earned and rates paid on the underlying assets and liabilities. These factors, coupled with the decrease in general interest rates as a result of action undertaken by the Federal Reserve, have resulted in net interest margin compression over the past three years. Our provision for loan losses totaled $3.9 million in 2003, $5.6 million in 2002 and $4.6 in 2001. We reported earnings of $12.0 million for 2003 The allowance for loan losses represented 1.78% of representing an increase of $1.6 million or 15% total loans outstanding at both December 31, 2003 compared to earnings of $10.4 million for 2002. and December 31, 2002. The allowance for loan Diluted earnings per common share were $1.22 in losses represented 1.85% of total loans outstanding 2003 compared to $1.05 per common share in at December 31, 2001. The allowance for loan 2002 and $1.04 per common share in 2001. losses is discussed in more detail under “Summary As a result of accounting changes required by of Loan Loss Experience.” FASB, we discontinued the amortization of goodwill Noninterest income decreased 6.41% to $14.6 in 2002. As required by FASB, we will periodically million in 2003 compared to $15.6 million in 2002. test goodwill to determine whether the carrying Noninterest income increased 33.3% in 2002 from value of our goodwill is impaired. We continue to $11.7 million in 2001. The decrease in noninterest amortize core deposit premiums and other identifiable intangibles as a noncash charge that increases our operating expenses. Intangible asset amortization included as an operating expense amounted to $1.0 million, $1.8 million and $1.2 million in 2003, 2002 and 2001, respectively. Net interest income, on a taxable-equivalent basis, decreased 1.85% in 2003 to $42.5 million from $43.3 million in 2002. Net interest income increased 12.47% in 2002 to $43.3 million from income in 2003 is attributable to securities transactions. In 2002, we recorded gains on sales of securities in the amount of $1.6 million; whereas in 2003, we recorded losses on sales of securities in the amount of $5,000. We recorded an increase of $.2 million in mortgage origination fees in 2003 from the amount recorded in 2002. We also recorded in 2003 approximately $.6 million representing gains on the sale of bank property and the reversal of contingent liabilities recorded in $38.5 million in 2001. The significant increase in connection with the sale of our credit card portfolio net interest income in 2002 is attributable to bank in 2002. The increase in noninterest income in acquisitions consummated in 2001 and accounted 2002 compared to 2001 represented increases in for as purchase transactions. The net interest service charges on deposit accounts and mortgage margin decreased 11 basis points to 3.98% in origination fees. ABC Bancorp and Subsidiaries 21 MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Noninterest expense decreased $2.7 million to The yield on loans decreased 62 basis points in $35.1 million in 2003 from $37.8 million in 2002. 2003, 141 basis points in 2002 and 89 basis Salaries and employee benefits increased $1.4 points in 2001 as a significant portion of our loan million; equipment and occupancy expense portfolio repriced as interest rates fell through 2003, decreased $.3 million; and all other expenses 2002 and 2001. The cost of interest-bearing decreased a net of $3.8 million. These reductions liabilities decreased 64 basis points in 2003, 152 resulted from our focus on controlling expenses. basis points in 2002 and 34 basis points in 2001 Noninterest expense increased $7.0 million in 2002 as deposits repriced when interest rates declined. compared to 2001. The majority of the increase Average borrowings increased $4.3 million in 2003 resulted from the purchase acquisitions consummated in 2001. Net Interest Income and $35.4 million in 2002 as an alternative funding source when loan growth exceeded deposit growth. The average rate paid on borrowings in 2003 decreased 13 basis points to 3.93%. The effects of A portion of interest income is earned on tax- changes in rates and average volumes are set forth exempt investments such as state and municipal in the table titled “Rate/Volume Analysis.” 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 assuming a 34% federal income tax rate. Average earning assets increased $9.2 million, or .87%, to $1,067.4 million in 2003 compared to $1,058.2 in 2002. In 2002, average earning assets increased $169.2 million, or 19.03%, from $889.0 million in 2001. Average loans increased Net interest income totaled $42.4 million in 2003 $14.0 million, or 1.69%, to $841.9 million in 2003 representing a decrease of $.8 million compared to net interest income of $43.2 million in 2002. Net interest income increased 13.68% in 2002 over 2001. The decrease in net interest income in 2003 was attributable to a decrease in general interest rates as a result of action undertaken by the Federal Reserve. In 2003, the net interest spread declined 6 basis points resulting in a net interest margin decline of 11 basis points. In 2002, the net interest spread increased 2 basis points, but the net interest margin declined 24 basis points. Net interest income in 2003 reflected a decrease in the average yield on earning assets of 70 basis points, while the average cost of interest-bearing liabilities declined only 64 basis points. In 2002, net interest income reflected a decrease in the average yield on earning assets of 150 points, while the average cost of interest-bearing liabilities declined 152 basis points. Over the past three years, the net interest compared to $827.9 in 2002. Average loans increased $129.6 million, or 18.56%, in 2002 compared to average loans of $698.3 million in 2001. Opportunity for loan growth has remained strong in our market. The growth in average loans in 2002 also reflected the impact of acquisitions consummated in 2001 and accounted for as purchase transactions. The average balance of our securities portfolio increased $14.3 million, or 8.44% during 2003 and $10.0 million, or 6.30% during 2002. Average investment securities represented 15.83% of total average assets in 2003 and 14.68% of total average assets in 2002. All of our investment securities are classified as available for sale. Average earning assets as a percentage of total average assets was 92.28% in 2003 compared to 92.00% in 2002 and 92.60% in 2001. margin has been impacted by changes in earning Average interest-bearing liabilities decreased $8.3 assets mix and the decrease in general interest million, or .90%, in 2003 compared to an increase rates precipitated by actions of the Federal Reserve. of $159.2 million, or 20.91% in 2002 and an 22 ABC Bancorp and Subsidiaries MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS increase of $134.9 million, or 21.53% in 2001. of branch real estate and the reversal of contingent Average interest-bearing deposits decreased $13.0 liabilities recorded in connection with the sale of our million, or 1.62%, in 2003 compared to an increase credit card portfolio in 2002. of $94.4 million, or 13.83%, in 2002 and an increase of $117.3 million, or 20.74% in 2001. The decrease in average interest-bearing deposits in 2003 resulted from management’s decision to avoid paying the relatively high interest rates on non-core deposits. The increase in average interest-bearing deposits in 2002 was attributable to the purchase acquisitions consummated in 2001. Approximately 14% of total average deposits were noninterest- bearing in 2003 compared to 13% for both 2002 and 2001. Noninterest income increased $3.9 million in 2002 compared to 2001. Service charges on deposit accounts increased $2.8 million, or 36.64%, to $10.6 million in 2002 compared to $7.7 million in 2001 on an increase in average deposits of $112.9 million, or 14.46% to $893.8 million in 2002 from $780.9 million in 2001. The increase in service charges on deposit accounts and the increase in average deposits was directly related to the purchase acquisitions consummated in 2001. Origination fees on mortgage loans increased $.5 Average short-term borrowings do not represent a million or 52.34% to $1.4 million from $.9 million in material source of funds and the average amounts 2001. The significant increase in mortgage fee outstanding during the last three years have income resulted from the volume of mortgage remained fairly constant. Other borrowings refinancing generated by the decrease in mortgage represent primarily advances by the Federal Home rates and the inclusion of results of operations for Loan Bank. Average other borrowings increased the entire year in 2002 for banks acquired in 2001, $3.1 million, or 2.99%, to $106.8 million in 2003 whose results of operations were included only since compared to $103.7 in 2002. Average other the date of acquisition in accordance with purchase borrowings increased $34.5 million, or 49.86%, in accounting. In 2002, we realized $1. 6 million in 2002 compared to average borrowings of $69.2 gain on sale of securities as compared to $1.2 million in 2001. The increase in average other million in gain on sale of securities in 2001. All borrowings in 2002 was attributable to greater other noninterest income increased $214,000 or utilization of Federal Home Loan advances to fund 20.74 % in 2002 from 2001 and $237,000 or loan growth. In late 2001, we issued trust preferred 29.81% in 2001 from 2000. Such increases were securities in the amount of $34.5 million which primarily attributable to the 2001 bank acquisitions. have been included in interest-bearing liabilities and have remained unchanged since issue. Noninterest Income Noninterest income totaled $14.6 million in 2003 compared to $15.6 million in 2002 and $11.7 million in 2001. The decrease of $1.0 million in 2003 resulted from a decrease of $1.6 million in gains on sale of investments securities offset by an increase of $.4 million in service charges on deposit accounts, mortgage origination fees, and other service charges and fees. Other net noninterest income increased $.2 million in 2003 attributable primarily to nonrecurring transactions related to sale ABC Bancorp and Subsidiaries 23 MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Following is a comparison of noninterest income for 2003, 2002 and 2001. Service charges on deposit accounts $ 10,638 $ 10,550 $ 7,721 Years Ended December 31, 2003 2002 (Dollars in Thousands) 2001 Mortgage origination fees Other service charges, commissions and fees Gain (loss) on sale of securities Other income Noninterest Expense 1,637 917 (5) 1,435 1,365 806 1,643 1,246 896 823 1,253 1,032 $ 14,622 $ 15,610 $ 11,725 In compliance with the requirements of FASB Statement No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases”, we allocated $3.4 million of salaries to loan costs in 2003, $3.1 million in 2002 and $3.2 million in 2001. After adjusting salaries and benefits for amounts allocated to loan costs, total salaries and benefits increased $1.7 million, or 7.98%, to $23.0 million in 2003 compared to $21.3 million in 2002. The total full-time equivalent employees remained at approximately 500 employees for both 2003 and 2002. Salaries and employee benefits increased $3.0 million, or 16.39% to $21.3 in 2002 from $18.3 million in 2001. Approximately $2.0 million, or 66.66% 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 banks were acquired in accordance with purchase accounting. Salaries increased $1.9 million; bonuses increased $.6 million; retirement expense increased $.2 million; and all other employee benefits, including stock options and other grants, insurance and payroll taxes, increased $.3 million. Equipment and occupancy expense decreased $.3 million to $4.7 million in 2003 compared to $5.0 million in 2002. Equipment and occupancy expense increased $.2 million to $5.0 million in 2002 from $4.8 million in 2001. The 2002 bank acquisitions had the effect of increasing equipment and occupancy expense $.5 million in 2002. This increase was offset by a reduction in leased equipment expense of $.2 million in 2002 and other reductions totaling $.1 million attributable to decreased depreciation . The decrease of $.8 million in amortization of intangible assets in 2003 compared to 2002 resulted from a reduction in amortization of core deposit premiums paid on prior acquisitions. Amortization of intangible assets charged to expense increased $.6 million in 2002 compared to 2001. 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 $.6 million for amortization of goodwill charged to expense in 2001. Amortization expense for 2002 also included approximately $1.2 million additional amortization related to the 2001 bank acquisitions. The additional expense related to acquisitions, 24 ABC Bancorp and Subsidiaries MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS net of the nonamortization provisions of the newly adopted accounting statement resulted in a net increase in amortization expense in 2002 of $.6 million. Data processing fees remained constant in 2003 compared to 2002. Data processing fees increased $.3 million to $1.5 million in 2002 from $1.2 million in 2001. The significant increase in fees was attributable to increased volume of transactions processed resulting from bank acquisitions and the inclusion of the acquired banks’ results of operations for the entire year in 2002 as opposed to inclusion of operations of the acquired banks from the dates of acquisition in 2001. Bank transactions and all accounting data are now processed online on equipment at the Banks, parent company offices or central operations. All other noninterest expense decreased $3.1 million to $8.2 million in 2003 from $11.3 million in 2002. The decrease was attributed to management’s focus on controlling operating expenses in 2003. Significant reductions include decreases in conversion fees of $.7 million, accounting and auditing fees of $.3 million, OREO losses and other losses of $.2 million and postage, stationary and supplies of $.3 million. All other expense increased $2.8 million to $11.5 million in 2002 from $8.7 million in 2001. Approximately $.9 million, or 33.62% of the increase, was attributable to the 2001 acquisitions. Included in the 2002 expense was $.6 million resulting from other real estate losses and sale or abandonment of fixed assets. In 2002, we incurred $.7 million more in conversion charges compared to 2001, $.4 million in additional bank analysis charges and $.3 million in additional postage and stationery supplies. All other expense increased $1.1 million in 2002 over 2001. Following is a comparison of noninterest income for 2003, 2002 and 2001. Salaries and employee benefits $ 19,599 $ 18,192 $ 15,100 Years Ended December 31, 2003 2002 (Dollars in Thousands) 2001 Equipment and occupancy Amortization of intangible assets Data processing fees Other expense Income Taxes 4,725 1,032 1,587 8,204 5,039 1,765 1,546 11,265 4,784 1,185 1,250 8,524 $ 35,147 $ 37,807 $ 30,843 Income taxes totaled $6.0 million in 2003, $5.1 million in 2002 and $4.7 million in 2001. The effective tax rate was 33% for each of the years ended December 31, 2003, 2002 and 2001. Liquidity and Capital Resources Liquidity management involves the matching of the cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs, and the ability of ABC and our Banks to meet those needs. We seek to meet liquidity requirements primarily through management of short-term investments (principally interest-bearing deposits in ABC Bancorp and Subsidiaries 25 MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2003, the Banks’ short-term investments were adequate to cover any reasonable anticipated immediate need for funds. During 2003, we increased our capital by retaining net earnings of $6,935,000 after payment of dividends. After recording a decrease in capital of $1,114,000 for unrealized losses on securities available for sale, net of taxes, an increase of $469,000 for restricted stock transactions, an increase of $9,000 for the exercise of stock options, a decrease of $170,000 for the repurchase of treasury shares, total capital increased $6,129,000 during 2003. At December 31, 2003, total capital of ABC amounted to $113,613,000. We are aware of no events or trends likely to result in a material change in our liquidity. The following table summarizes the regulatory capital levels of our Company at December 31, 2003. Years Ended December 31, 2003 2002 2001 Average Balance Average Rate Average Balance Average Rate Average Balance Average Rate Federal funds purchased and securities sold under agreement to repurchase Total maximum short-term borrowings outstanding at any month-end during the year $ 6,547 1.04 % $ 5,363 2.20 % $ 4,523 4.40 % Total Balance Total Balance Total Balance $ 13,978 $ 15,978 $ 16,941 The following table sets forth certain information about contractual cash obligations as of December 31, 2003. Payments Due After December 31, 2003 Total 1 Year Or Less 1-3 Years 4-5 Years After 5 Years Short-term borrowings $ 8,211 $ 8,211 $ - $ - $ Time certificates of deposit 407,176 355,473 39,969 11,580 Long-term debt 1,681 1,462 219 Federal Home Loan Bank advances 95,864 22 16,044 Subordinated deferrable interest debentures 34,500 - 34,500 - - - - 154 - 79,798 - Total contractual cash obligations $ 547,432 $ 365,168 $ 90,732 $ 11,580 $ 79,952 26 ABC Bancorp and Subsidiaries MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our 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 our cash funds. At December 31, 2003, we had $1,478,000 in binding commitments for capital expenditures. 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-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, 2003. Actual Required Excess Amount Percent Percent Amount (Dollars in Thousands) Amount Percent Leverage capital $ 120,765 10.77 % $ 44,852 4.00 % $ 75,913 6.77 % Risk-based capital: Core capital Total capital 120,765 13.85 136,022 15.60 34,874 69,748 4.00 8.00 85,891 66,274 9.85 7.60 Each Bank also met its individual regulatory capital requirements at December 31, 2003. ABC Bancorp and Subsidiaries 27 INDEPENDENT AUDITOR’S REPORT To the Board of Directors ABC Bancorp Moultrie, Georgia We have audited the accompanying consolidated balance sheets of ABC Bancorp and Subsidiaries as of December 31, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Albany, Georgia January 26, 2004 28 ABC Bancorp and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, 2003 and 2002 (Dollars in Thousands) Assets Cash and due from banks Interest-bearing deposits in banks Securities available for sale, at fair value Restricted stock Loans, net of unearned income 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 Subordinated deferrable interest debentures Total liabilities Commitments and contingencies Stockholders' equity Common stock, par value $1; 30,000,000 shares authorized; 10,849,922 and 10,824,257 shares issued Capital surplus Retained earnings Accumulated other comprehensive income Unearned compensation Less cost of 1,066,068 and 1,053,321 shares acquired for the treasury Total stockholders' equity See Notes to Consolidated Financial Statements. 2003 2002 $ 44,854 35,626 190,595 5,694 840,539 14,963 825,576 25,537 3,286 19,231 17,645 $ 1,168,044 $ 45,098 77,979 178,303 5,778 833,447 14,868 818,579 25,327 4,309 19,240 17,726 $ 1,192,339 $ 141,715 764,809 906,524 $ 131,611 784,436 916,047 8,211 97,545 7,651 34,500 1,054,431 8,204 117,290 8,814 34,500 1,084,855 10,850 46,446 66,145 522 (491) 123,472 10,824 45,946 59,210 1,636 (443) 117,173 (9,859) 113,613 $ 1,168,044 (9,689) 107,484 $ 1,192,339 ABC Bancorp and Subsidiaries 29 CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2003, 2002 and 2001 (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 Provision for loan losses Net interest income after provision for loan losses Other income Service charges on deposit accounts Other service charges, commissions and fees Mortgage origination fees Gain (loss) 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 2003 2002 2001 $ $ 57,707 6,079 156 537 - 64,479 14,183 7,862 22,045 42,434 3,945 61,864 8,275 187 1,020 1 71,347 20,286 7,858 28,144 43,203 5,574 $ 61,980 9,072 869 943 49 72,913 30,480 4,424 34,904 38,009 4,566 38,489 37,629 33,443 10,638 917 1,637 (5) 1,435 14,622 19,599 2,112 2,613 1,032 1,587 8,204 35,147 17,964 10,550 806 1,365 1,643 1,246 15,610 18,192 2,451 2,588 1,765 1,546 11,265 37,807 15,432 7,721 823 896 1,253 1,032 11,725 15,100 2,833 1,951 1,185 1,250 8,524 30,843 14,325 4,692 9,633 1.05 1.04 Applicable income taxes 5,954 5,077 Net income Basic earnings per share Diluted earnings per share $ 12,010 $ $ 1.23 1.22 $ $ $ 10,355 1.05 1.05 $ $ $ See Notes to Consolidated Financial Statements. 30 ABC Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, 2003, 2002 and 2001 (Dollars in Thousands) 2003 2002 2001 Net income $ 12,010 $ 10,355 $ 9,633 Other comprehensive income (loss): Net unrealized holding gains (losses) arising during period, net of tax (benefits) of $(575), $869 and $606 (1,117) 1,687 1,176 Reclassification adjustment for (gains) losses included in net income, net of (tax) benefits of $2, $(558) and $(426) Total other comprehensive income (loss) 3 (1,114) (1,085) 602 (827) 349 Comprehensive income $ 10,896 $ 10,957 $ 9,982 See Notes to Consolidated Financial Statements. ABC Bancorp and Subsidiaries 31 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Years Ended December 31, 2003, 2002 and 2001 (Dollars in Thousands) Common Stock Shares Par Value Capital Surplus Retained Earnings Balance, December 31, 2000 9,137,990 $ 9,138 $ 29,237 $ 48,411 Net income Cash dividends declared, $.48 per share Adjustments to record acquisition of - - - - - - 9,633 (4,460) 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 - - Balance, December 31, 2002 10,824,257 10,824 45,946 Net income Cash dividends declared, $.52 per share Issuance of restricted shares of common stock - - under employee incentive plan 24,800 Amortization of unearned compensation, net of forfeitures Proceeds from exercise of stock options Reduction in income taxes payable resulting from vesting of restricted shares Repurchase of shares for treasury Other comprehensive income - 865 - - - - - 25 - 1 - - - - - 386 - 8 106 - - - - - - - 53,584 10,355 (4,729) - - - - - 59,210 12,010 (5,075) - - - - - - Balance, December 31, 2003 10,849,922 $ 10,850 $ 46,446 $ 66,145 See Notes to Consolidated Financial Statements. 32 ABC Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Years Ended December 31, 2003, 2002 and 2001 (Dollars in Thousands) Accumulated O t h e r Comprehensive Unearned Treasury Stock Income Compensation Shares C o s t T o t a l $ 685 $ (595) 790,982 $ (6,220) $ 80,656 - - - - - - - 349 1,034 - - - - - - 602 1,636 - - - - - - - (1,114) 522 $ - - - (663) - 602 - - (656) - - (231) 444 - - - - - - - - - - - - - - - - - - - 790,982 (6,220) - - - - - - - - - - 262,339 (3,469) - - (443) 1,053,321 (9,689) - - (411) 363 - - - - - - - - - - - - - - - - 12,747 - (170) - 9,633 (4,460) 17,356 - - 602 12 349 104,148 10,355 (4,729) - 444 133 (3,469) 602 107,484 12,010 (5,075) - 363 9 106 (170) (1,114) $ (491) 1,066,068 $ (9,859) $ 113,613 ABC Bancorp and Subsidiaries 33 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2003, 2002 and 2001 (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 (losses) 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 Decrease in interest receivable Decrease in interest payable Increase (decrease) in taxes payable Net other operating activities Total adjustments 2003 2002 2001 $ 12,010 $ 10,355 $ 9,633 1,858 1,032 363 5 3 3,945 (157) 944 (667) (284) (533) 6,509 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 Net cash provided by operating activities 18,519 22,447 17,260 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 (Increase) decrease in restricted stock, net 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 42,353 (129,998) 89,533 26,479 84 - (10,942) (2,071) - - 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 Net cash provided by (used in) investing activities 15,438 (32,200) (89,121) 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 Reduction in income taxes payabe resulting from vesting of restricted shares Payment for debt issue costs Purchase of treasury shares (9,523) (14,971) 24,591 7 15,000 (34,745) (4,885) 9 - 106 - (170) 4,412 25,100 (2,908) (4,749) 133 - - - (3,469) 1,139 69,738 (39,515) (4,262) 12 34,500 - (1,450) - Net cash provided by (used in) financing activities (34,201) 3,548 84,753 Net increase (decrease) in cash and due from banks (244) (6,205) 12,892 Cash and due from banks at beginning of year 45,098 51,303 38,411 Cash and due from banks at end of year $ 44,854 $ 45,098 $ 51,303 34 ABC Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2003, 2002 and 2001 (Dollars in Thousands) 2003 2002 2001 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 22,712 $ 29,360 $ 35,576 Income taxes $ 6,395 $ 4,554 $ 5,251 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. $ 2,096 $ 3,390 $ 2,216 $ - $ - $ 17,590 ABC Bancorp and Subsidiaries 35 ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES losses on loans and the valuation of foreclosed real estate, management obtains independent appraisals for significant collateral. Management also tests intangible assets and goodwill for impairment on an Nature of Business annual basis. ABC Bancorp (the "Company") is a multi-bank holding company whose business is presently Cash, Due from Banks and Cash Flows 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 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 The consolidated financial statements include the $7,845,000 and $6,438,000 at December 31, accounts of the Company and its subsidiaries. 2003 and 2002, respectively. Significant intercompany transactions and balances have been eliminated in consolidation. Securities In preparing the consolidated financial statements in accordance 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 relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, contingent assets and liabilities, impairment of intangible assets and goodwill. The determination of the adequacy of the allowance for loan losses is based on estimates that are susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated 36 ABC Bancorp and Subsidiaries 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 accumulated 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. The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the life of the securities. Realized gains and losses, determined on the basis of the cost of specific securities sold, are included in earnings on the settlement date. Declines in the fair value of ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS securities available for sale below their cost that are Allowance for Loan Losses deemed to be other than temporary are reflected in earnings as realized losses. Loans Loans are reported at their outstanding principal 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 balances less unearned income, net deferred fees credited to the allowance. and the allowance for loan losses. Interest income is accrued on the outstanding 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, unless management believes that the accrued interest is recoverable through the liquidation of collateral. Interest income on nonaccrual loans is subsequently recognized only to the extent cash payments are received until the loans are returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts are brought current and future payments are reasonably assured. A loan is considered impaired when it is probable, based on current information and events, the Company 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 The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, concentrations and current economic conditions that may affect the borrower's ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. 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 Banks’ allowance for loan losses and may require the Banks to make additions to the allowance based on their judgment about information available to them at the time of their examinations. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such price or the fair value of the collateral if the loan is loans that are also classified as impaired, an collateral dependent. The amount of impairment, if allowance is established when the discounted cash any, and any subsequent changes are included in the flows (or collateral value or observable market price) allowance for loan losses. Interest on accruing of the impaired loan is lower than the carrying value impaired loans is recognized as long as such loans of that loan. The general component covers non- do not meet the criteria for nonaccrual status. classified loans and is based on historical loss ABC Bancorp and Subsidiaries 37 ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS experience adjusted for qualitative factors. An For the years ended December 31, 2003 and unallocated component is maintained to cover December 31, 2002, no amortization of goodwill uncertainties that could affect management’s was included in the consolidated statements of estimate of probable losses. The unallocated income, except for the impairment charge of $9,000 component of the allowance reflects the margin of in 2003. For the year ended December 31, 2001, imprecision inherent in the underlying assumptions charges in the amount of $668,000 were included used in the methodologies for estimating specific in the consolidated statements of income for and general losses in the portfolio. amortization of goodwill. Included in the consolidated statements of income for December 31, 2003, 2002 and 2001 were charges for Premises and Equipment amortization of identifiable intangible assets in the 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: amounts of $1,023,000, $1,765,000 and $517,000, respectively. Other Real Estate Owned Other real estate owned represents properties Years acquired through or in lieu of loan foreclosure and is Buildings . . . . . . . . . . . . . . . . . . . . . . . . . 39 initially recorded at the lower of cost or fair value Furniture and equipment . . . . . . . . . . . . . 5-7 less estimated costs to sell. Any write-down to fair Goodwill and Intangible Assets Goodwill represents the excess of cost over the fair value of the net assets purchased in business combinations. Goodwill is required to be tested annually for impairment or whenever events occur that may indicate that the recoverability of the carrying amount is not probable. In the event of an impairment, the amount by which the carrying amount exceeds the fair value is charged to earnings. The Company performed its annual test of impairment in the fourth quarter and determined that there was impairment of approximately $9,000 in the carrying value of goodwill allocated to a subsidiary bank as of October 1, 2003. Intangible assets consist of core deposit premiums acquired in connection with the business combinations. The core deposit premium is initially recognized based on a valuation performed as of the consummation date. The core deposit premium is value at the time of transfer to other real estate owned is charged to the allowance for loan losses. Costs of improvements are capitalized, whereas costs relating to holding other real estate owned and subsequent adjustments to the value are expensed. The carrying amount of other real estate owned at December 31, 2003 and 2002 was $1,503,139 and $1,534,200, respectively. 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-Based Compensation amortized over the average remaining life of the The Company has two stock-based employee acquired customer deposits, or five to eight years. compensation plans, which are described more fully Amortization periods are reviewed annually in in Note 13. The Company accounts for those plans connection with the annual impairment testing under the recognition and measurement principles of of goodwill. APB Opinion No. 25, Accounting for Stock Issued to 38 ABC Bancorp and Subsidiaries ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2001 2002 2003 (Dollars in Thousands) $ 12,010 $ 10,355 $ 9,633 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 (70) (54) (39) Pro forma net income $ 11,940 $ 10,301 $ 9,594 Earnings per share: Basic - as reported $ Basic - pro forma $ Diluted - as reported $ Diluted - pro forma $ 1.23 $ 1.22 $ 1.22 $ 1.21 $ 1.05 $ 1.04 $ 1.05 $ 1.04 $ 1.05 1.04 1.04 1.04 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 stock options for the years ended December 31, 2003, 2002 and 2001. The weighted-average number of shares outstanding for the years ended December 31, 2003, 2002 and 2001 was 9,772,166, 9,858,463 and 9,214,276, respectively. The weighted-average number of shares outstanding and potential shares for the years ended December 31, 2003, 2002 and 2001 was 9,838,590, 9,908,663 and 9,250,040, respectively. Potential common shares not included due to the fact that they would be anti-dilutive at December 31, 2003, 2002 and 2001 were 62,577, 89,944 and 30,696, respectively. Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale, 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 November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34". The interpretation discusses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. It also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing a guarantee. The initial recognition and initial measurement provisions of the interpretation are applicable to guarantees issued or modified after December 31, 2002. The disclosure requirements in the interpretation are ABC Bancorp and Subsidiaries 39 ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of the interpretation did not have a material effect on the Company’s financial condition or results of operations. In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123". The Statement amends Statement No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect on reported results of operations. The disclosure requirements of the statement are required for fiscal years ending after December 15, 2002 and interim periods beginning after December 15, 2002. The Company has not adopted Statement No. 123 for accounting for stock-based compensation as of December 31, 2003; however, all required disclosures of Statement No. 148 are included above under the heading “Stock-Based Compensation”. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51" and, on December 24, 2003, the FASB issued FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities” which replaced FIN 46. The interpretation addresses consolidation by business enterprises of variable interest entities. A variable interest entity is defined as an entity subject to consolidation according to the provisions of the interpretation. The revised interpretation provided for special effective dates for entities that had fully or partially applied the original interpretation as of December 24, 2003. Otherwise, application of the interpretation is required in financial statements of public entities that have interests in special-purpose entities, or SPEs, for periods ending after December 15, 2003. Application by public entities, other than 40 ABC Bancorp and Subsidiaries small business issuers, for all other types of variable interest entities (i.e., non-SPEs) is required in financial statements for periods ending after March 15, 2004. Application by small business issuers to variable interest entities other than SPEs and by nonpublic entities to all types of variable interest entities is required at various dates in 2004 and 2005. The Company has determined that the provisions of FIN 46 may require deconsolidation of subsidiary trusts which issued subordinated debentures. The Company plans to adopt the provisions under the revised interpretation in the first quarter of 2004. The adoption of FIN 46 and related revisions is not expected to have a material impact on the Company’s consolidated financial statements. In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". The statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement requires that an issuer classify a financial instrument that is within its scope as a liability. Many of those instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. Mandatorily redeemable financial instruments of nonpublic entities are subject to the provisions of the statement for the first fiscal period beginning after December 15, 2003. The adoption of the statement did not have a material effect on the Company’s financial condition or results of operations. Reclassification of Certain Items Certain items in the consolidated financial statements as of and for the years ended December 31, 2002 and 2001 have been reclassified, with no effect on total assets or net income, to be consistent with the classifications adopted for the year ended December 31, 2003. ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. 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 December 31, 2003: U. S. Government and agency securities $ 78,826 $ State and municipal securities Corporate debt securities Mortgage-backed securities Equity securities 3,584 23,057 83,550 788 727 149 418 131 - $ (8) - (7) (573) (47) $ 79,545 3,733 23,468 83,108 741 $ 189,805 $ 1,425 $ (635) $ 190,595 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 $ (439) $ 178,303 The amortized cost and fair value of securities available for sale as of December 31, 2003 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) $ 37,330 $ 37,793 57,171 6,340 4,626 83,550 788 57,893 6,375 4,685 83,108 741 $ 189,805 $ 190,595 ABC Bancorp and Subsidiaries 41 ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. Securities (Continued) Securities with a carrying value of $125,547,653 and $84,535,517 at December 31, 2003 and 2002, 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: Gross gains on sales of securities Gross losses on sales of securities Net realized gains (losses) on sales of securities available for sale $ $ December 31, 2003 2002 2001 (Dollars in Thousands) 87 (92) $ 1,643 $ 1,253 - - (5) $ 1,643 $ 1,253 The following table shows the gross unrealized losses and fair value of securities aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2003. Less than 12 months 12 months or More Total Fair Value Unrealized Losses Fair Unrealized Value Losses Dollars in Thousands Fair Value Unrealized Losses Description of Securities U.S. Government and agency securities $ 1,912 $ 1,012 59,838 62,762 - 8 7 572 587 - $ - $ - 982 982 221 - - 1 1 47 $ 1,912 $ 1,012 60,820 63,744 221 8 7 573 588 47 Corporate debt securities Mortgage-backed securities Subtotal, debt services Equity securities Total temporarily impaired securities $ 62,762 $ 587 $ 1,203 $ 48 $ 63,965 $ 635 The majority of debt securities containing unrealized losses at December 31, 2003 represent mortgage-backed securities. Nine (9) securities contained unrealized losses greater than two percent (2%) of their costs. None of the securities contained an unrealized loss greater than 2.50% of its cost. One equity security representing an investment in a mutual fund reflected an unrealized loss of 17% of its cost. The unrealized loss in this security represented 7.4% of the total unrealized losses in the Company’s investment portfolio. The unrealized losses are considered temporary because each security carries an acceptable investment grade and the repayment sources of principal and interest are government backed. 42 ABC Bancorp and Subsidiaries ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2002 2003 (Dollars in Thousands) $ 157,594 $ 172,429 22,051 60,978 65,433 250,247 209,172 68,230 6,834 840,539 14,963 34,007 23,020 63,093 243,037 209,485 78,535 9,841 833,447 14,868 $ 825,576 $ 818,579 The following is a summary of information pertaining to impaired loans: As of and For the Years Ended December 31, 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 2003 - 6,472 6,472 1,105 8,619 27 842 $ $ $ $ $ $ 2002 (Dollars in Thousands) $ - $ 7,561 7,561 1,358 8,966 26 792 $ $ $ $ $ $ $ $ $ $ 2001 - 11,958 11,958 1,984 8,249 6 666 Loans on nonaccrual status amounted to approximately $6,472,000, $7,561,000 and $11,958,000 at December 31, 2003, 2002 and 2001, respectively. There were $25,000, $171,000 and $691,000 of loans past due ninety days or more and still accruing interest at December 31, 2003, 2002, and 2001, respectively. ABC Bancorp and Subsidiaries 43 ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) Changes in the allowance for loan losses for the years ended December 31, 2003, 2002, and 2001 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, 2003 2002 2001 (Dollars in Thousands) $ 14,868 $ 14,944 $ 3,945 (5,226) 1,376 - 5,574 (7,159) 1,509 - 9,832 4,566 (5,488) 1,110 4,924 $ 14,963 $ 14,868 $ 14,944 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 are summarized as follows: Balance, beginning of year Advances Repayments Transactions due to changes in related parties Balance, end of year NOTE 4. PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: Land Buildings Furniture and equipment Construction in progress, estimated cost to complete, $1,478,000 Accumulated depreciation 44 ABC Bancorp and Subsidiaries December 31, 2002 2003 (Dollars in Thousands) $ 42,807 $ 34,488 19,467 (29,966) 2,934 33,424 (26,285) 1,180 $ 35,242 $ 42,807 December 31, 2002 2003 (Dollars in Thousands) $ 6,694 $ 6,096 23,030 17,275 1,026 48,025 (22,488) 22,618 17,889 472 47,075 (21,748) $ 25,537 $ 25,327 ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. INTANGIBLE ASSETS Following is a summary of information related to acquired intangible assets: As of December 31, 2003 As of December 31, 2002 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount (Dollars in Thousands) Accumulated Amortization Amortized intangible assets Core deposit premiums $ 8,896 $ 5,610 $ 8,896 $ 4,587 The aggregate amortization expense for intangible assets was $1,023,000, $1,765,000 and $1,185,000 for the years ended December 31, 2003, 2002, and 2001, respectively. The estimated amortization expense for each of the next five years is as follows: 2004 2005 2006 2007 2008 Changes in the carrying amount of goodwill are as follows: Beginning balance Goodwill written off at a subsidiary Bank Ending balance $ 790,000 642,000 549,000 490,000 287,000 For the Years Ended December 31, 2002 2003 (Dollars in Thousands) $ $ 19,240 (9) 19,231 $ $ 19,240 - 19,240 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. For the Years Ended December 31, 2003 2002 2001 Reported net income Add back goodwill amortization Adjusted net income (Dollars in Thousands) $ 12,010 - $ 12,010 $ $ 10,355 $ 9,633 - 668 10,355 $ 10,301 ABC Bancorp and Subsidiaries 45 ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. INTANGIBLE ASSETS (Continued) For the Years Ended December 31, 2003 2002 2001 Basic earnings per share: Reported net income Goodwill amortization Adjusted net income Diluted earnings per share: Reported net income Goodwill amortization Adjusted net income (Dollars in Thousands) $ $ $ $ 1.23 - 1.23 1.22 - 1.22 $ $ $ $ 1.05 - 1.05 1.05 - 1.05 $ $ $ $ 1.05 .07 1.12 1.04 .07 1.11 NOTE 6. DEPOSITS The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2003 and 2002 was $149,991,000 and $155,048,000, respectively. The scheduled maturities of time deposits at December 31, 2003 are as follows: 2004 2005 2006 2007 2008 Later years (Deposits in Thousands) $ 355,470 30,634 9,338 6,855 4,725 154 $ 407,176 At December 31, 2003 and 2002, overdraft demand deposits reclassified to loans totaled $1,402,000 and $1,226,000, respectively. 46 ABC Bancorp and Subsidiaries ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2003 and 2002 were $8,211,000 and $8,204,000, 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 2003, 2002 and 2001 amounted to $1,149,000, $877,000 and $655,000, respectively. 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 service period. 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 $1,231,000 and $1,038,000 at December 31, 2003 and 2002, respectively, is included in other assets. Accrued deferred compensation of $1,105,000 and $1,012,000 at December 31, 2003 and 2002, respectively, is included in other liabilities. Aggregate compensation expense under the plans were $94,000, $93,000 and $74,000 for 2003, 2002 and 2001, respectively, and is included in other operating expenses. ABC Bancorp and Subsidiaries 47 ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. OTHER BORROWINGS Other borrowings consist of the following: Advances under revolving credit agreement with SunTrust Bank with interest at LIBOR plus 1.15% (2.02% at December 31, 2003) due on May 31, 2004, secured by subsidiary bank stock. Advances from SunTrust Bank with 5 quarterly principal payments of $366,000 at sixty-day LIBOR rate plus .9% (2.07% at December 31, 2003), maturing July 23, 2005. December 31, 2003 2002 (Dollars in Thousands) $ - $ 100 1,681 8,044 Advances from Federal Home Loan Bank with interest at adjustable 15,000 26,000 rate (4.08% at December 31, 2003), due February 10, 2005. Advances from Federal Home Loan Bank with interest at a fixed rate 65 152 of 6.72%, due in annual installments due November 1, 2006. Advances from Federal Home Loan Bank with interest at a fixed rate 80,799 82,994 (ranging from 3.66% to 6.12%) convertible to a variable rate at option of Federal Home Loan Bank, due at various dates from September 28, 2004 through August 6, 2012. $ 97,545 $117,290 The advances from Federal Home Loan Bank are collateralized by the pledging of a blanket lien on all first mortgage loans and other specific loans, as well as FLHB stock. Other borrowings at December 31, 2003 have maturities in future years as follows: 2004 2005 2006 2007 2008 Later years (Dollars in Thousands) 1,484 16,241 22 - - 79,798 97,545 $ $ The Company and subsidiaries have available unused lines of credit with various financial institutions totaling approximately $80,100,000 at December 31, 2003. There were no other advances outstanding at December 31, 2003 or 2002. 48 ABC Bancorp and Subsidiaries ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. INCOME TAXES The income tax expense in the consolidated statements of income consists of the following: Current Deferred Years Ended December 31, 2003 2002 2001 (Dollars in Thousands) $ 6,111 (157) $ 5,954 $ $ 5,142 (65) 5,077 $ $ 5,418 (726) 4,692 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, 2003 2002 2001 (Dollars in Thousands) $ 6,108 $ 5,247 $ 4,871 (201) 13 34 (224) 33 21 (476) 274 23 $ 5,954 $ 5,077 $ 4,692 Net deferred income tax assets of $4,363,000 and $3,632,000 at December 31, 2003 and 2002, respectively, are included in other assets. The components of deferred income taxes are as follows: 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: Depreciation and amortization Unrealized gain on securities available for sale Intangible assets December 31, 2003 2002 (Dollars in Thousands) $ 5,022 $ 4,942 376 287 134 91 232 344 295 235 115 121 6,142 6,052 419 269 1,091 1,779 242 843 1,335 2,420 Net deferred tax assets $ 4,363 $ 3,632 ABC Bancorp and Subsidiaries 49 ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12. SUBORDINATED DEFERRABLE INTEREST DEBENTURES In 2001, the Company formed a wholly-owned grantor trust to issue cumulative trust preferred securities to the public. The grantor trust 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 (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 bank and financial holding companies. In calculating the amount of Tier l qualifying capital, the trust preferred 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, 2003 and 2002 was $34,500,000. The aggregate principal amount of Debentures outstanding at those dates was $35,567,000. The Company will be required to adopt the provisions of FIN 46 in the first quarter of 2004 and may be required to deconsolidate the trust subsidiary. The adoption of FIN 46 is not expected to have a material effect on the Company’s consolidated financial statements. 50 ABC Bancorp and Subsidiaries ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 60,150 shares were exercisable as of December 31, 2003. 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, 2003, the Company has issued a total of 211,596 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 $363,000, $444,000 and $602,000 for 2003, 2002 and 2001, respectively. In addition to the granting of restricted shares, options to purchase 276,039 shares of the Company’s common stock have been granted under the Omnibus Plan as of December 31, 2003. Other pertinent information related to the options is as follows: 2003 Weighted- Average Exercise Price Number December 31, 2002 Weighted- Average Exercise Price Number 2001 Weighted- Average Exercise Price Number Under option, beginning of the year Granted Exercised Forfeited 313,988 $ 40,250 (865) (9,834) Under option, end of year 343,539 11.95 16.50 9.90 13.16 12.46 285,943 $ 81,950 (18,589) (35,316) 313,988 10.95 14.42 7.17 12.06 11.95 239,553 $ 71,550 (1,232) (23,928) 285,943 11.00 10.60 10.09 10.47 10.95 Exercisable at end of year 182,757 $ 11.75 130,352 $ 11.67 99,625 $ 11.09 Weighted-average fair value per option of options granted during year $ 3.13 $ 2.96 $ 1.84 ABC Bancorp and Subsidiaries 51 ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13. STOCK OPTION PLANS (Continued) Information pertaining to options outstanding at December 31, 2003 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 16.50 Options Outstanding Options Exercisable Number Outstanding Weighted- Average Contractual Life in Years Weighted- Average Exercise Price Number Outstanding Weighted- Average Exercise Price 67,500 22,327 6,000 600 21,462 6,000 2,400 56,000 3,000 44,550 10,000 8,000 55,450 40,250 $ 3.3 4.0 4.3 5.1 5.1 5.3 5.9 6.1 6.5 7.1 7.5 8.2 8.7 9.3 343,539 6.32 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 16.50 12.46 60,150 $ 11.33 22,327 6,000 480 17,170 4,800 1,920 33,600 1,800 17,820 4,000 1,600 11,090 - 15.94 14.17 10.39 9.90 10.11 10.83 10.38 9.94 10.50 11.20 13.25 14.55 - 182,757 11.75 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: Dividend yield Expected life Expected volatility Risk-free interest rate Years Ended December 31, 2003 3.60% 7 years 22.30% 4.03% 2002 3.60% 7 years 22.80% 4.60% 2001 3.60% 10 years 15.04% 5.05% 52 ABC Bancorp and Subsidiaries ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2003 2002 2001 Dollars in Thousands Net income $ 12,010 $ 10,355 $ 9,633 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 9,772 66 9,859 50 9,214 36 9,838 9,909 9,250 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. They 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 Financial standby letters of credit December 31, 2003 2002 (Dollars in Thousands) $ 104,573 $ 89,540 2,536 5,315 $ 107,109 $ 94,855 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances which the Company deems necessary. ABC Bancorp and Subsidiaries 53 ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2003 and 2002, the carrying amount of liabilities related to the Company’s obligation to perform under financial standby letters of credit was insignificant. The Company has not been required to perform on any financial standby letters of credit and the Company has not incurred any losses on financial standby letters of credit for the years ended December 31, 2003 and 2002. 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 adverse effect on the Company's financial statements. NOTE 16. CONCENTRATIONS OF CREDIT The Banks make commercial, residential, construction, agricultural, agribusiness 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. 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 other 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 other real estate owned are susceptible to changes in market conditions in the Company's primary market area. 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. The Company has a concentration of funds on deposit at its two primary correspondent banks at December 31, 2003 as follows: Noninterest-bearing accounts Interest-bearing accounts $ 28,412 $ 33,847 54 ABC Bancorp and Subsidiaries ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. REGULATORY MATTERS The Banks are subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 2003, approximately $7,664,000 of retained earnings were available for dividend declaration without regulatory approval. 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 consolidated 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 Company’s and Banks’ 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. 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, 2003 and 2002, the Company and the Banks met all capital adequacy requirements to which they are subject. As of December 31, 2003, 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 following table. There are no conditions or events since that notification that management believes have changed the Banks' category. Prompt corrective action provisions are not applicable to bank holding companies. The Company and Banks' actual capital amounts and ratios are presented in the following table. As of December 31, 2003 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 $ 136,022 15.60% $ 69,748 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 $ $ 16,812 13.06% $ 10,295 8.00% $ 12,869 7,865 4,521 15,697 6,885 18,285 5,012 7,077 8,402 7,093 15,963 11.11% $ 13.22% $ 5,663 2,737 8.00% $ 8.00% $ 7,078 3,421 12.02% $ 10,445 8.00% $ 13,056 13.50% $ 4,080 8.00% $ 5,100 12.58% $ 11,627 8.00% $ 14,534 11.33% $ 3,538 8.00% $ 4,423 11.08% $ 14.00% $ 16.93% $ 13.36% $ 5,111 4,802 3,351 9,560 8.00% $ 8.00% $ 8.00% $ 6,389 6,002 4,189 8.00% $ 11,950 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 55 ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. REGULATORY MATTERS (Continued) As of December 31, 2003 (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 $ 120,765 13.85% $ 34,874 4.00% — N/A — American Banking Company $ 15,200 11.81% $ 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 $ 14,464 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 $ $ $ 6,979 4,085 $ 14,059 $ 6,244 $ 16,460 4,456 6,275 7,648 6,568 $ $ 6,979 4,085 $ 14,059 $ 6,244 $ 16,460 4,456 6,275 7,648 6,568 $ $ $ $ 9.86% $ 11.94% $ 10.77% $ 12.24% $ 11.33% $ 10.08% $ 9.82% $ 12.74% $ 15.68% $ 12.10% $ 8.47% $ 8.04% $ 8.65% $ 8.79% $ 7.45% $ 7.09% $ 7.92% $ 7.92% $ 8.60% $ 9.61% $ 5,148 2,831 1,368 5,222 2,040 5,814 1,769 2,556 2,401 1,675 4,780 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 7,722 4,247 2,052 7,833 3,060 8,720 2,654 3,834 3,601 2,513 7,170 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 7,178 3,472 1,889 6,398 3,352 9,286 2,251 3,169 3,557 2,734 5,623 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 8,973 4,340 2,361 7,997 4,191 4.00% $ 11,608 4.00% $ 2,813 4.00% $ 4.00% $ 4.00% $ 4.00% $ 3,961 4,447 3,417 7,028 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Tier I Capital to Average Assets: Consolidated $ 120,765 10.77% $ 44,852 4.00% — N/A — American Banking Company $ 15,200 First Bank of Brunswick $ 14,464 10.29% $ 56 ABC Bancorp and Subsidiaries ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. REGULATORY MATTERS (Continued) As of December 31, 2002 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 Actual Amount Ratio For Capital Adequacy Purposes Ratio Amount (Dollars in Thousands) To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio Amount $ 127,577 $ 17,374 8,210 $ $ 4,813 $ 14,937 $ 7,236 $ 19,782 5,721 $ 6,772 $ 8,266 $ $ 6,589 $ 14,342 $ 109,733 $ 15,776 7,375 $ $ 4,296 $ 13,366 6,577 $ $ 18,019 5,169 $ 6,015 $ 7,543 $ $ 6,104 $ 12,861 14.87% $ 13.63% $ 12.30% $ 11.67% $ 11.95% $ 13.85% $ 14.13% $ 13.04% $ 11.21% $ 14.40% $ 16.20% $ 12.15% $ 12.79% $ 12.37% $ 11.04% $ 10.42% $ 10.69% $ 12.58% $ 12.87% $ 11.79% $ 9.96% $ 13.14% $ 15.01% $ 10.90% $ 68,649 10,200 5,342 3,299 10,002 4,181 11,198 3,509 4,833 4,591 3,254 9,443 34,325 5,100 2,671 1,649 5,001 2,090 5,599 1,754 2,416 2,295 1,627 4,722 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% $ - — N/A — 12,750 6,678 4,124 12,502 5,226 13,998 4,386 6,041 5,739 4,067 11,804 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% - — N/A — 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% ABC Bancorp and Subsidiaries 57 ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. REGULATORY MATTERS (Continued) As of December 31, 2002 Tier 1 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) $ 109,733 $ 15,776 7,375 $ $ 4,296 $ 13,366 $ 6,577 $ 18,019 5,169 $ 6,015 $ 7,543 $ $ 6,104 $ 12,861 9.49% $ 9.02% $ 9.21% $ 8.37% $ 8.01% $ 8.09% $ 6.83% $ 8.44% $ 8.04% $ 8.11% $ 9.19% $ 9.29% $ 46,252 6,996 3,203 2,053 6,675 3,252 10,553 2,450 2,993 3,720 2,657 5,538 4.00% 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ 4.00% $ To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio Amount — N/A — 8,745 4,004 2,566 8,343 4,065 13,191 3,062 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% 58 ABC Bancorp and Subsidiaries ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the current amount that would be exchanged between willing parties, 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 where quoted market prices are not available, fair value is based on discounted cash flows or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS 107, Disclosures about Fair Value of Financial Instruments, excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments. Cash, Due From Banks, Interest-Bearing Deposits in Banks: The carrying amount of cash, due from banks and interest-bearing deposits in banks approximates fair value. Securities: Fair value of securities is based on available quoted market prices. The carrying amount of equity securities with no readily determinable fair value approximates fair value. Loans: The carrying amount of variable-rate loans that reprice frequently and have no significant change in credit risk approximates fair value. The fair value of fixed-rate loans is estimated based on discounted contractual cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of impaired loans is estimated based on discounted contractual cash flows or underlying collateral values, where applicable. Deposits: The carrying amount of demand deposits, savings deposits and variable-rate certificates of deposit approximates fair value. The fair value of fixed-rate certificates of deposit is estimated based on discounted contractual cash flows using interest rates currently being offered for certificates of similar maturities. Federal Funds Purchased, Repurchase Agreements and Other Borrowings: The carrying amount of variable rate borrowings, federal funds purchased and securities sold under repurchase agreements approximate fair value. The fair value of fixed rate other borrowings are estimated based on discounted contractual cash flows using the current incremental borrowing rates for similar type borrowing arrangements. Subordinated Deferrable Interest Debentures: The fair value of the Company’s fixed rate trust preferred securities are based on available quoted market prices. 59 ABC Bancorp and Subsidiaries ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Accrued Interest: The carrying amount of accrued interest approximates their fair value. Off-Balance-Sheet Instruments: The carrying amount of commitments to extend credit and standby letters of credit approximates fair value. The carrying amount of the off-balance-sheet financial instruments is based on fees charged to enter into such agreements. The carrying amount and estimated fair value of the Company's financial instruments were as follows: December 31, 2003 Carrying Amount December 31, 2002 Carrying Fair Value Amount (Dollars in Thousands) Fair Value Financial assets: Cash, due from banks and interest-bearing deposits in banks Securities available for sale Restricted stock Loans Allowance for loan losses Loans, net Accrued interest receivable $ $ $ $ $ $ 80,480 $ 80,480 190,595 $ 190,595 5,694 $ 5,694 $ $ $ 123,077 178,303 5,778 $ $ $ 123,077 178,303 5,778 840,539 $ 843,095 $ 833,447 $ 837,057 14,963 - 14,868 - 825,576 $ 843,095 $ 818,579 $ 837,057 8,702 $ 8,702 $ 9,647 $ 9,647 December 31, 2003 Carrying Amount December 31, 2002 Carrying Fair Value Amount (Dollars in Thousands) Fair Value Financial liabilities: Deposits Federal funds purchased and securities sold under agreements to repurchase Other borrowings Accrued interest payable Trust preferred securities 60 ABC Bancorp and Subsidiaries $ 906,524 $ 908,079 $ 916,185 $ 919,406 $ $ $ $ 8,211 97,545 1,728 34,500 $ $ $ $ 8,211 $ 8,204 $ 8,204 97,515 $ 117,290 $ 117,094 1,728 38,019 $ $ 2,395 34,500 $ $ 2,395 37,088 ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS DECEMBER 31, 2003 AND 2002 (Dollars in Thousands) Assets Cash Interest bearing deposits in banks Investment in subsidiaries Other assets 2003 2002 $ 1,547 17,575 125,477 8,252 $ 3,535 14,933 128,286 6,232 Total assets $ 152,851 $ 152,986 Liabilities Other borrowings Other liabilities Trust preferred securities Total liabilities Stockholders' equity $ 1,681 3,057 34,500 $ 8,144 2,858 34,500 39,238 45,502 113,613 107,484 Total liabilities and stockholders' equity $ 152,851 $ 152,986 ABC Bancorp and Subsidiaries 61 ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY) (Continued) CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (Dollars in Thousands) Income Dividends from subsidiaries Interest Fee income Other income Total income Expense Interest Amortization and depreciation Other expense Total expense 2003 2002 2001 $ 17,464 $ 4,220 $ 7,386 165 10,440 2,049 30,118 3,536 839 12,221 16,596 334 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 Income (loss) before income tax benefits and equity in undistributed earnings of subsidiaries (distributions in excess of earnings) 13,522 (1,183) 5,226 Income tax benefits 1,232 1,860 590 Income before equity in undistributed earnings of subsidiaries (distributions in excess of earnings) 14,754 677 5,816 Equity in undistributed earnings of subsidiaries (distributions in excess of earnings) (2,744) 9,678 3,817 Net income $ 12,010 $ 10,355 $ 9,633 62 ABC Bancorp and Subsidiaries ABC BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19. CONDENSED FINANCIAL INFORMATION OF ABC BANCORP (PARENT COMPANY ONLY) (Continued) CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (Dollars in Thousands) 2003 2002 2001 $ 12,010 $ 10,355 $ 9,633 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 (Undistributed earnings of subsidiaries) distributions in excess of earnings (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 476 - 363 2,744 5 - (564) 80 (178) (709) 2,217 Net cash provided by operating activities 14,227 INVESTING ACTIVITIES Increase 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 Net cash used in investing activities FINANCING ACTIVITIES Repayment of other borrowings Purchase of treasury shares Dividends paid Proceeds from other borrowings Proceeds from issuance of trust preferred Reduction in income taxes payable resulting from vesting of restricted shares Proceeds from exercise of stock options Net cash provided by (used in) financing activities Net increase (decrease) in cash Cash at beginning of year Cash at end of year SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest (2,642) (1,121) (1,050) - - (4,813) (6,462) (170) (4,885) - - 106 9 (11,402) (1,988) 3,535 $ 1,547 $ 3,239 685 - 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) 5,845 (3,557) (111) (8,500) 422 (11,681) (11,745) (23,427) (1,463) (3,469) (4,749) - - - 133 (9,548) (18,652) 22,187 (7,131) - (4,262) 14,738 34,500 - 12 37,857 20,275 1,912 $ $ 3,535 $ 22,187 3,388 $ 853 ABC Bancorp and Subsidiaries 63 This page intentionally left blank. 64 ABC Bancorp and Subsidiaries ABC BANCORP AND SUBSIDIARIES ABC BANCORP EXECUTIVE OFFICERS, DIRECTORS AND SENIOR MANAGEMENT Executive Officers Chairman of the Board & Chief Executive Officer Kenneth J. Hunnicutt President & Chief Operating Officer, North Regional Executive Edwin W. Hortman, Jr. Executive Vice President & Chief Financial Officer W. Edwin Lane, Jr., CPA Executive Vice President & South Regional Executive Jon S. Edwards Executive Vice President, Director of Human Resources & Corporate Secretary Cindi H. Lewis Directors Kenneth J. Hunnicutt, Chairman Occupation: Banker Main Employer: ABC Bancorp J. Raymond Fulp Occupation: Pharmacist Main Employer: CVS Pharmacy Doyle Weltzbarker, Vice Chairman Occupation: Farm Products Main Employer: West End Milling Edwin W. Hortman, Jr. Occupation: Banker Main Employer: ABC Bancorp Johnny W. Floyd Occupation: Timber and Realty Main Employer: Floyd Timber Company & Cordele Realty, Inc. Daniel B. Jeter Occupation: Consumer Finance Main Employer: Standard Discount Robert P. Lynch Occupation: Automobile Dealer Main Employer: Motor Finance Co. ABC Bancorp Senior Management Eugene M. Vereen, Jr. Chairman Emeritus Occupation: Investments 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 Chairman of the Board & Chief Executive Officer Kenneth J. Hunnicutt President & Chief Operating Officer, North Regional Executive Edwin W. Hortman, Jr. Executive Vice President & Chief Financial Officer W. Edwin Lane, Jr., CPA Executive Vice President & South Regional Executive Jon S. Edwards Executive Vice President, Director of Human Resources & Corporate Secretary Cindi H. Lewis 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 Senior Vice President & Director of Credit Administration O. Mitchell Smith ABC Bancorp and Subsidiaries 65 ABC BANCORP AND SUBSIDIARIES PRESIDENTS AND DIRECTORS SUBSIDIARY BANKS AMERICAN BANKING COMPANY Moultrie, GA CAIRO BANKING COMPANY Cairo, GA CITIZENS SECURITY BANK Tifton, GA President & Chief Executive Officer President & Chief Executive Officer President & Chief Executive Officer Ronnie F. Marchant Edgar B. Smith, III Lawton E. Bassett, III Directors Lynn L. Jones, Chairman Robert M. Brown, MD 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. Directors Directors Jeffrey F. (Jet) Cox, Chairman J. Raymond Fulp, Chairman Nancy C. Clark Jon S. Edwards Cuy Harrell, III Winburn Knight G. Ashley Register, MD Edgar B. Smith, III CENTRAL BANK & TRUST Cordele, GA Lawton E. Bassett, III John R. Brownlee 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 President & Chief Executive Officer Robert L. Evans CITIZENS SECURITY BANK Douglas, GA Directors Johnny W. Floyd, Chairman City President David B. Batchelor City Directors Robert R. Fender, Chairman Lawton E. Bassett, III David B. Batchelor Earl Brice J. Anthony Deal William (Bill) H. Elliott Faye Hennesy Edwin W. Hortman, Jr. Donnie H. Smith Ronnie Spivey Oscar Street BANK OF THOMAS COUNTY Thomasville, GA Robert E. Barr, MD Charles W. Clark Robert L. Evans President & Chief Executive Officer William T. Greene W.H. Griffin, III Edwin W. Hortman, Jr. David N. Rainwater Director Emeritus Henry M. Turton, Jr. Sammie D. Dixon, Jr. Directors L. Maurice Chastain, Chairman Dale E. Aldridge S. Mark Brewer, MD Sammie D. Dixon, Jr. Jon S. Edwards Gene Hickey Zeke Johnson Dr. Terrel M. Solana F. Keith Wortman 66 66 ABC Bancorp and Subsidiaries ABC BANCORP AND SUBSIDIARIES PRESIDENTS AND DIRECTORS SUBSIDIARY BANKS CITIZENS SECURITY BANK Ocilla, GA HERITAGE COMMUNITY BANK Quitman, GA SOUTHLAND BANK Dothan, AL City President C. Larry Young President & Chief Executive Officer President & Chief Executive Officer Tim S. Jones Harris O. Pittman, III City Directors Directors Loran A. Pate, Chairman Doyle Weltzbarker, Chairman Directors Robert Dale Ezzell, Chairman Lawton E. Bassett, III Edwin W. Hortman, Jr. Howard C. McMahan, MD Daniel M. Paulk Gary H. Paulk C. Larry Young Director Emeritus Wycliffe Griffin John A. Baker William P. Cooper, Jr. Jon S. Edwards Tim S. Jones Sue D. Mink Charles E. Smith Henry C. Wortman Thomas Eddie York 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 President & Chief Executive Officer MERCHANTS & FARMERS BANK Donalsonville, GA President & Chief Executive Officer Michael D. Hodges President & Chief Executive Officer John C. Mosely Directors J. Thomas Whelchel, Chairman Don Monk Directors Glenn 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. Directors Lewis M. Carter, Jr., Chairman Joseph S. Hall David Glenn 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. R.G. Heard Jerry G. Mitchell C. Ray Acosta Jon S. Edwards Michael D. Hodges Jimmy D. Veal Director Emeritus James M. Fiveash 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 ABC Bancorp and Subsidiaries 67 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 2003. Calendar Period Sales Price 2003 First Quarter Low High $ 12.97 $ 14.58 Second Quarter $ 13.55 $ 14.98 Third Quarter Fourth Quarter $ 14.35 $ 17.65 $ 15.25 $ 17.65 Quarterly dividends of $0.12 per share were declared for the first and second quarters and $0.14 per share for the third and fourth quarters of 2003. 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 2003. 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 2004 Annual Meeting of Shareholders of ABC Bancorp will be held at 4:15 p.m. EST, Tuesday, May 18, 2004 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 68 ABC Bancorp and Subsidiaries