Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Check whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Check if disclosure of delinquent filers pursuant to Item405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 126-2).

As of the last business day of the registrant’s most recently completed second fiscal quarter, registrant had outstanding 9,854,279 shares of common stock, $1 par value per share, which is registrant’s only class of common stock.   The aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $136,041,000 million.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Annual Report is incorporated by reference from the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report.

Table of Contents

PART I

          ABC Bancorp (“ABC”) was organized as a bank holding company under the Federal Bank Holding Company Act of 1956, as amended in 1981 (the “BHCA”), and the bank holding company laws of Georgia.

          ABC provides, through its commercial bank subsidiaries described below (sometimes hereinafter referred to as “Banks”), banking services to individuals and businesses in Southern Georgia, Southeastern Alabama and Northern Florida.  ABC’s executive office is located at 24 2nd Avenue, S.E., Moultrie, Georgia 31768, its telephone number is (229) 890-1111 and its Internet address is http://www.abcbancorp.com.  As a registered bank holding company, ABC is subject to the applicable provisions of the Federal Bank Holding Company Act and the Georgia Bank Holding Company Act, as well as to supervision by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the State of Georgia Department of Banking and Finance.  ABC makes available, free of charge through its Internet website, copies of its annual reports and quarterly reports as soon as reasonably practicable after it electronically files such materials with the SEC.  ABC will make available free of charge paper copies of its current reports on Form 8-K upon request.

          Our primary business as a bank holding company is to manage the business and affairs of our Banks. The Banks provide a broad range of retail and commercial banking services to its customers, including checking, savings, NOW and money market accounts and time deposits of various types; loans for business, agriculture, real estate, personal uses, home improvement and automobiles, credit cards; debit cards; overdraft protection services; Internet banking; letters of credit; trust services through Reliance Trust Company; brokerage services through either PFIC Securities Corporation or Raymond James Financial Services, Inc.; fixed rate annuities through PFIC Corporation; IRAs; safe deposit box rentals; bank money orders; and electronic funds transfer services, including wire transfers and automated teller machines.  We maintain a diversified loan portfolio and make no foreign or energy-related loans.

          While we have decentralized certain of our management responsibilities, we maintain efficient centralized operating systems.  As a result, corporate policy, strategy and certain administrative policies are established by our board of directors, while lending and community-specific marketing decisions are made primarily by each bank to allow it to respond to differing needs and demands of its own market. Data processing functions are centralized in ABC’s data processing division located in Moultrie, Georgia.  Within this framework, the Banks focus on providing personalized services and quality products to their customers to meet the needs of the communities they serve.  Our objective is to establish ABC as a major financial institution in Southern Georgia, Southeastern Alabama and Northern Florida.  Management has pursued this objective through an acquisition-oriented growth strategy and a prudent operating strategy.

          As a bank holding company, we perform central data processing functions, purchasing and other common functions and provides certain management services for our Banks.  Traditional banking services are conducted by the Banks.

1

Table of Contents

Our Subsidiaries

          Following is a list of our Banks, the market areas served by the Banks and the estimated relative size of the Banks as compared with their major competitors.

          All of the Banks offer traditional loan and deposit services discussed elsewhere in this Annual Report on Form 10-K.  Only American Banking Company provides trust services directly to its customers and to the customers of the other subsidiary banks.  All of the Banks maintain correspondent relationships with other commercial banks and the Federal Home Loan Bank of Atlanta.  As compensation for services provided by the correspondent banks, the Banks maintain certain balances in noninterest-bearing accounts with those banks.  The principal correspondent bank for all of the Banks is SunTrust Bank in Atlanta, Georgia.

          On August 30, 2001, ABC formed ABC Bancorp Capital Trust I, a Delaware statutory trust and a wholly-owned subsidiary of ABC (the “Trust”), for the purpose of (i) issuing and selling its common securities to ABC and its trust preferred securities to the public, and (ii) using the proceeds from the sale of the trust preferred securities to purchase 9.00% Subordinated Debentures (the “Subordinated Debentures”) from ABC.  In the quarter ended December 31, 2001, the Trust sold its securities and used the proceeds to purchase the Subordinated Debentures, which are the sole asset of the Trust.  ABC pays interest on the Subordinated Debentures to the Trust at the end of each quarter at an annual rate of 9.00%, which is equal to the dividend rate payable by the Trust to the holders of its preferred securities.  The cost of the issuance of the Trust’s preferred securities is treated as a deferred asset and will be amortized over the life of the securities.  Following the offer and sale of the Trust’s securities, ABC owned and currently holds all of the outstanding common securities of the Trust, its only voting securities, and as a result the Trust is a subsidiary of the Company.  See the Notes to ABC’s Consolidated Financial Statements included in this annual report for a further discussion regarding the issuance of Trust’s preferred securities.

2

Table of Contents

Our Market Areas and Competition

          Our market area is located in Southern Georgia, Southeastern Alabama and Northern Florida. The Banks’ main offices and larger branches are located in the southern Georgia cities of Albany, Brunswick, Cairo, Colquitt, Cordele, Donalsonville, Douglas, Jekyll Island, Moultrie, Ocilla, Quitman, St. Simons Island, Thomasville, Tifton and Valdosta, the southern Alabama cities of Abbeville, Clayton, Dothan, Eufaula and Headland and the northern Florida cities of Trenton and Newberry.  The Banks have a total of 35 offices located in either the cities or counties in which the main offices are located or in nearby cities.

          We have subsidiary banks in several high-growth market areas that offer favorable growth and profitability potential, including banks in the cities of Valdosta, Tifton and Cordele, which are located along the I-75 corridor of Georgia, a major north-south transportation artery.  We also have banks in Albany, Georgia and Dothan, Alabama, both of which are developing commercial and industrial “hubs” where residents of the numerous smaller, surrounding cities find jobs, entertainment, consumer products and services and medical services.

          The banking industry in Georgia, Alabama and Florida is highly competitive. In recent years, intense market demands, economic pressures, fluctuating interest rates and increased customer awareness of product and service differences among financial institutions have forced banks to diversify their services and become more cost effective. Each of the Banks faces strong competition in attracting deposits and making loans. Their most direct competition for deposits comes from other commercial banks, thrift institutions, credit unions and issuers of securities such as brokerage firms. Interest rates, convenience of office locations and marketing are all significant factors in the Banks’ competition for deposits.

          Competition for loans comes from other commercial banks, thrift institutions, savings banks, insurance companies, consumer finance companies, credit unions and other institutional lenders.  Our Banks compete for loan originations through the interest rates and loan fees they charge and the efficiency and quality of services they provide.  Competition is affected by the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors that are not readily predictable.

          Management expects that competition will become more intense in the future due to changes in state and federal laws and regulations and the entry of additional bank and nonbank competitors. See “Supervision and Regulation”.

Lending Policy

          We have sought to maintain a comprehensive lending policy that meets the credit needs of each of the communities served by the Banks, including low- and moderate-income customers, and to employ lending procedures and policies consistent with this approach.  All loans are subject to our written loan policy, which is reviewed annually, updated as needed, and provides that lending officers have sole authority to approve loans of various maximum amounts commensurate with their seniority and experience.  Each bank’s president has sole discretion to approve loans in varying principal amounts up to specified limits established for each president.  Each bank’s board of directors reviews and approves loans that exceed management’s lending authority and, in certain instances, other types of loans.  New credit extensions are reviewed daily by each bank’s senior management and at least monthly by its board of directors.

3

Table of Contents

          The lending officers at each bank have authority to make loans only in the county in which the Bank is located and its contiguous counties.  Occasionally, the loan committee of the Company will approve a loan for purposes outside of the market area of our Banks, provided the Bank has established a relationship with the borrower by making loans for purposes within the Banks’ market area.  Our lending policy requires analysis of the borrower’s projected cash flow and ability to service the debt.  For agricultural loans, the lending officer visits the borrower regularly during the growing season and re-evaluates the loan in light of the borrower’s updated cash flow projections.  Each subsidiary bank is assigned an approval limit by the holding company, which serves as the maximum limit of new extensions of credit each Bank can approve.  That approval limit is reviewed annually by the Holding Company and adjusted as needed.  All extensions of credit in excess of the Banks’ internal approval limits are reviewed by ABC’s Senior Credit Officer.  Further approval by a Holding Company loan committee may also be needed.  Under our ongoing loan review program, all loans are subject to sampling and objective review by an assigned loan reviewer who is independent of the originating loan officer.

          We actively market our services to qualified lending customers in both the commercial and consumer sectors.  Our commercial lending officers actively solicit the business of new companies entering the market as well as longstanding members of that market’s business community.  Through personalized professional service and competitive pricing, we have been successful in attracting new commercial lending customers.  At the same time, we actively advertise our consumer loan products and continually seek to make our lending officers more accessible.

          Each bank continually monitors its loan portfolio to identify areas of concern and to enable management to take corrective action when necessary.  Each bank’s lending officers and board of directors meet periodically to review all past due loans, the status of large loans and certain other matters. Individual lending officers are responsible for reviewing collection of past due amounts and monitoring any changes in the financial status of the borrowers.

Lending Activities

          General.  We provide a broad range of commercial and retail lending services to corporations, partnerships and individuals, including agricultural, commercial business loans, commercial and residential real estate construction and mortgage loans, loan participations, consumer loans, revolving lines of credit and letters of credit.  The loan department of each bank makes loans to consumers and originates and services residential mortgages.

          Real Estate Loans.  Our real estate loans are for a term of years, although rarely more than ten, over which period the principal thereof is amortized, and are generally secured by residential real estate, farmland or commercial real estate.  Real estate related loans represent a significant portion of the loan portfolio.

          Agricultural Loans.  Our agricultural loans are made to finance crop production expenses and to finance the purchase of farm-related equipment or farmland. Agricultural loans typically involve seasonal fluctuations in amounts.  Although we typically look to an agricultural borrower’s cash flow as the principal source of repayment, agricultural loans are also generally secured by a security interest in the crops or the farm-related equipment and, in some cases, an assignment of crop insurance or a mortgage on real estate.  In addition, a portion of our agricultural loans are guaranteed by the FmHA Guaranteed Loan Program.

          Commercial and Industrial Loans. General commercial and industrial loans consist of loans made primarily to manufacturers, wholesalers and retailers of goods, service companies and other industries. Management believes that a significant portion of these loans are, to varying degrees, agricultural-related.  The Banks have also generated loans which are guaranteed by the U. S. Small Business Administration. Management believes that making such loans helps the local community and also provides ABC with a source of income and solid future lending relationships as such businesses grow and prosper. The primary repayment risk for commercial loans is the failure of the business due to economic or financial factors.  Although we typically look to a commercial borrower’s cash flow as the principal source of repayment for such loans, some commercial loans are secured by inventory, equipment, accounts receivable and other assets.

          Consumer Lending.  Our consumer loans include motor vehicle, home improvement, home equity, student and signature loans and small personal credit lines.  Many of our Banks also offer credit cards to their customers via a marketing agreement with MBNA.

          Compliance with Community Reinvestment Act.  Each of our Banks has a Community Reinvestment Act Officer who develops and oversees that Bank’s Community Reinvestment Act program and makes quarterly reports to that Bank’s board of directors. The Banks regularly sponsor or participate in community programs designed to ascertain and meet the credit needs of each of the communities they serve, including low and moderate income neighborhoods. Some of these activities include participating in community meetings to explain the availability of Small Business Administration, Farmers’ Home Loan Administration and Regional Development Center loans, and sponsoring educational seminars for area farmers. In addition, each of our Georgia Banks participate in the Georgia Residential Finance Authority program which makes low interest rate loans to rehabilitate low income rental housing.

4

Table of Contents

Trust Services

          We provide personal trust and employee benefit services to our customers through a contractual arrangement with Reliance Trust Company.

Deposits

          Checking, savings, NOW and money market accounts and other time accounts are the primary sources of the Banks’ funds for loans and investments.  Our Banks obtain most of their deposits from individuals and from businesses in their respective market areas.

          Our Banks have not had to attract new or retain old deposits by paying depositors rates of interest on certificates of deposit, money market and other interest-bearing accounts significantly above rates paid by other banks in our respective market areas. In the future, increasing competition among banks in our market areas may cause our Banks’ interest margins to shrink.  The Banks have never accepted deposits for which a broker’s commission was paid.

Investment Activities

          Our investment policy is designed to maximize income from funds not needed to meet loan demand in a manner consistent with appropriate liquidity and risk objectives. Under this policy, our Banks may invest in federal, state and municipal obligations, corporate obligations, public housing authority bonds, industrial development revenue bonds and Government National Mortgage Association (“GNMA”) securities and satisfactorily rated trust preferred obligations.  Our Banks’ investments must satisfy certain investment quality criteria.  Our Bank’s investments must be rated at least “BAA” by either Moody’s or Standard and Poor’s.  Securities rated below “A” are periodically reviewed for creditworthiness.  Our Banks may purchase non-rated municipal bonds only if the issuer of such bonds is located in a Bank’s general market area and such bonds are determined by the purchasing Bank to have a credit risk no greater than the minimum ratings referred to above. Industrial development authority bonds, which normally are not rated, are purchased only if the issuer is located in the purchasing Bank’s market area and if the bonds are considered to possess a high degree of credit soundness.  Our Banks typically have not purchased a significant amount of GNMA securities, which normally have higher yields than our Banks’ other investments.

          While our investment policy permits the Banks to trade securities to improve the quality of yields or marketability or to realign the composition of the portfolio, the Banks historically have not done so to any significant extent.

          Our investment committee implements the investment policy and portfolio strategies, monitors the portfolio and reports to each Bank’s board and ALCO committees.  Reports on all purchases, sales, net profits or losses and market appreciation or depreciation of the bond portfolio are reviewed by our boards of directors each month. Once a year, the written investment policy is reviewed by our board of directors.

                    The Banks’ securities are kept in safekeeping accounts at correspondent banks.

Asset/Liability Management

          Our objective is to manage our assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established cash, loan, investment, borrowing and capital policies.  The overall philosophy of our management is to support asset growth primarily through growth of core deposits, which include deposits of all categories made by individuals, partnerships, corporations and other entities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

5

Table of Contents

Properties

          The table below sets forth the location, size and other information with respect to ABC’s real properties.  Except for the leased Jekyll Island property and two locations in Dothan, Alabama, all properties are owned by ABC or the Banks and are unencumbered. 

6

Table of Contents

Employees

          At December 31, 2002, ABC and our Banks employed approximately 500 employees.  We consider our relationship with our employees to be satisfactory.

          We have adopted one retirement plan for our employees, the ABC Bancorp 401(k) Profit Sharing Plan.  This plan provides deferral of compensation by our employees and contributions by ABC.  ABC and our Banks made contributions for all eligible employees in 2002.  We also maintain a comprehensive employee benefits program providing, among other benefits, hospitalization and major medical insurance and life insurance.  Management considers these benefits to be competitive with those offered by other financial institutions in our market areas.  Our employees are not represented by any collective bargaining group.

SUPERVISION AND REGULATION

General

          As a bank holding company, we are subject to the regulation, supervision and reporting requirements of the Federal Reserve Board, the Georgia Department of Banking and Finance, the Alabama State Banking Department and the Florida Department of Banking and Finance.  Our Banks are Georgia, Alabama, Florida and federally chartered banks.  The FDIC to the full extent permitted by law insures each of our Banks.  As a result, our Banks are subject to the supervision, examination and reporting requirements of the Georgia Department of Banking and Finance, the Alabama State Banking Department, the Florida Department of Banking and Finance, the FDIC and the OCC.

          The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

          The Bank Holding Company Act further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or that would substantially lessen competition in the banking business, unless the public interest in meeting the needs of the communities to be served outweighs the anti-competitive effects.  The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved and the convenience and needs of the communities to be served.  Consideration of financial resources generally focuses on capital adequacy, and consideration of convenience and needs issues focuses, in part, on the performance under The Community Reinvestment Act of 1997, both of which are discussed in more detail.

          The Bank Holding Company Act generally prohibits a bank holding company from engaging in activities other than:

7

Table of Contents

General (Continued)

          The activities in which holding companies and their affiliates are permitted to engage were substantially expanded by The Gramm-Leach-Bliley Act, which was signed on November 12, 1999.  The Gramm-Leach-Bliley Act repeals the anti-affiliation provisions of The Glass-Steagall Act to permit the common ownership of commercial banks, investment banks and insurance companies.  The Gramm-Leach-Bliley Act also amends The Bank Holding Company Act to permit a financial holding company to, among other things, engage in any activity that the Federal Reserve determines to be (i) financial in nature or incidental to such financial activity or (ii) complementary to a financial activity and not a substantial risk to the safety and soundness of depository institutions or the financial system generally.  The Federal Reserve must consult with the Secretary of the Treasury in determining whether an activity is financial in nature or incidental to a financial activity.  Holding companies may continue to own companies conducting activities which had been approved by federal order or regulation on the day before The Gramm-Leach-Bliley Act was enacted.  Effective August 24, 2000, pursuant to a previously-filed election with the Federal Reserve, ABC became a financial holding company.

          In determining whether a particular activity is permissible, the Federal Reserve considers whether performing the activity can be expected to produce benefits to the public that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.  The Federal Reserve has the power to order a bank holding company or its subsidiaries to terminate any activity or control of any subsidiary when the continuation of the activity or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company.

          Our Banks are also subject to numerous state and federal statues and regulations that affect their business, activities and operations, and each is supervised and examined by one or more state or federal bank regulatory agencies.  The FDIC, the OCC, the Georgia Department of Banking and Finance, the Alabama State Banking Department and the Florida Department of Banking and Finance regularly examine the operations of our Banks and are given the authority to approve or disapprove mergers, consolidations, the establishment of branches and similar corporate actions.  The FDIC, the OCC, the Georgia Department of Banking and Finance, the Alabama State Banking Department and the Florida Department of Banking and Finance also have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.

Payment of Dividends and Other Restrictions

          ABC is a legal entity separate and distinct from its subsidiaries. There are various legal and regulatory limitations under federal and state law on the extent to which our subsidiaries can pay dividends or otherwise supply funds to ABC. 

          The principal source of ABC’s cash revenues is dividends from its subsidiaries, and there are certain limitations under federal and state laws on the payment of dividends by our subsidiaries.  The prior approval of applicable regulatory authorities, as the case may be, is required if the total dividends declared by any subsidiary Bank in any calendar year exceeds the Bank’s net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years, less any required transfers to surplus or a fund for the retirement of any preferred stock or 50% of the Bank’s net profits for the previous year in the case of Georgia banks.  The relevant federal and state regulatory agencies also have authority to prohibit a state member bank or bank holding company, which would include ABC and its Banks, from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or unsound practice in conducting its business. The payment of dividends could, depending upon the financial condition of the subsidiary, be deemed to constitute such an unsafe or unsound practice.

          Under Georgia law (which would apply to any payment of dividends by the Georgia Banks to ABC), the prior approval of the Georgia Department of Banking and Finance is required before any cash dividends may be paid by a state bank if: (i) total classified assets at the most recent examination of such bank exceed 80% of the equity capital (as defined, which includes the reserve for loan losses) of such bank; (ii) the aggregate amount of dividends declared or anticipated to be declared in the calendar year exceeds 50% of the net profits (as defined) for the previous calendar year; or (iii) the ratio of equity capital to adjusted total assets is less than 6%.

          Retained earnings of our Banks available for payment of cash dividends under all applicable regulations without obtaining governmental approval were approximately $10.4 million as of December 31, 2002.

8

Table of Contents

Payment of Dividends and Other Restrictions (Continued)

          In addition, our Banks are subject to limitations under Section 23A of the Federal Reserve Act with respect to extensions of credit to, investments in, and certain other transactions with, ABC. Furthermore, loans and extensions of credit are also subject to various collateral requirements.

          The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition.  The Federal Reserve also indicated that it would be inappropriate for a holding company experiencing serious financial problems to borrow funds to pay dividends.  Furthermore, under the prompt corrective action regulations adopted by the Federal Reserve, the Federal Reserve may prohibit a bank holding company from paying any dividends if one or more of the holding company’s bank subsidiaries are classified as undercapitalized.

          Bank holding companies are required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth.  The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order, or any condition imposed by, or written agreement with, the Federal Reserve.  This notification requirement does not apply to any company that meets the well-capitalized standard for commercial banks, has a safety and soundness examination rating of at least a “2” and is not subject to any unresolved supervisory issues.  As of December 31, 2002, ABC meets these requirements.

Capital Adequacy

          ABC must comply with the Federal Reserve’s established capital adequacy standards, and our Banks are required to comply with the capital adequacy standards established by the FDIC and the OCC.  The Federal Reserve has promulgated two basic measures of capital adequacy for bank holding companies: a risk-based measure and a leverage measure.  A bank holding company must satisfy all applicable capital standards to be considered in compliance.

          The risk-based capital standards are designed to:

          Assets and off-balance-sheet items are assigned to broad risk categories, each with appropriate weights.  The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.

          The minimum guideline for the ratio of total capital to risk-weighted assets is 8%.  At least half of total capital must be comprised of Tier 1 Capital, which is common stock, undivided profits, minority interests in the equity accounts of consolidated subsidiaries and noncumulative perpetual preferred stock, less goodwill and certain other intangible assets.  The remainder may consist of Tier 2 Capital, which is subordinated debt, other preferred stock and a limited amount of loan loss reserves.  During 2001, we increased our consolidated ratios by issuing trust preferred securities in the amount of $34,500,00. At December 31, 2002, $27,434,000 (25% of total Tier 1 Capital) was included in Tier 1 Capital and the balance included in Tier 2 Capital.  At December 31, 2002, ABC’s total risk-based capital ratio and its Tier 1 risk-based capital ratio were 14.87% and 12.79%, respectively.

9

Table of Contents

Capital Adequacy (Continued)

          In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies.  These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and certain other intangible assets, of 3% for bank holding companies that meet specified criteria.  All other bank holding companies generally are required to maintain a minimum leverage ratio of 4%. ABC’s ratio at December 31, 2002 was 9.49%.  The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets.  Furthermore, the Federal Reserve has indicated that it will consider a “tangible Tier 1 Capital leverage ratio” and other indicia of capital strength in evaluating proposals for expansion or new activities.  The Federal Reserve has not advised ABC of any specific minimum leverage ratio or tangible Tier 1 Capital leverage ratio applicable to it.

          Our Banks are subject to risk-based and leverage capital requirements adopted by the FDIC and the OCC that are substantially similar to those adopted by the Federal Reserve for bank holding companies.  All of our Banks were in compliance with applicable minimum capital requirements as of December 31, 2002.

          Neither ABC nor any of our Banks has been advised by any federal banking agency of any specific minimum capital ratio requirement applicable to it.

          In January 2001, the Basel Committee on Banking Supervision issued a second consultative paper entitled “Proposal for a New Basel Capital Accord”.  This proposal, which will apply to all banks and holding companies that are parents of banking groups, is expected to be finalized by the end of 2003.  Implementation of this new framework, to the extent it is adopted and promulgated by the Federal Reserve, is expected to begin at the end of 2006.  The Company is monitoring the status and progress of this proposal. 

          Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on taking brokered deposits, and certain other restrictions on its business.  As described below, the FDIC can impose substantial additional restrictions upon FDIC-insured depository institutions that fail to meet applicable capital requirements. 

Prompt Corrective Action

          The Federal Deposit Insurance Act (or “FDI Act”), among other things, requires the federal regulatory agencies to take “prompt corrective action” if a depository institution does not meet minimum capital requirements.  The FDI Act establishes five capital tiers: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized” and “critically undercapitalized”.  A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation.

          The federal bank regulatory agencies have adopted regulations establishing relevant capital measurers and relevant capital levels applicable to FDIC-insured banks.  The relevant capital measures are the Total Capital ratio, Tier 1 Capital ratio and the leverage ratio.  Under the regulations, a FDIC-insured bank will be:

          An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.  As of December 31, 2002, all of ABC’s Banks had capital levels that qualify as “well capitalized” under such regulations.

10

Table of Contents

Prompt Corrective Action (Continued)

          The FDI Act generally prohibits an FDIC-insured bank from making a capital distribution (including payment of a dividend) or paying any management fee to its holding company if the bank would thereafter be “undercapitalized”.  “Undercapitalized” banks are subject to growth limitations and are required to submit a capital restoration plan.  The federal regulators may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the bank’s capital.  In addition, for a capital restoration plan to be acceptable, the bank’s parent holding company must guarantee that the institution will comply with such capital restoration plan.  The aggregate liability of the parent holding company is limited to the lesser of: (i) an amount equal to 5% of the bank’s total assets at the time it became “undercapitalized”; and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan.  If a bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized”.

          “Significantly undercapitalized” insured banks may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized”, requirements to reduce total assets and the cessation of receipt of deposits from correspondent banks.  “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.  A bank that is not “well capitalized” is also subject to certain limitations relating to so-called “brokered” deposits.

Community Reinvestment Act

          The Community Reinvestment Act requires federal bank regulatory agencies to encourage financial institutions to meet the credit needs of low- and moderate-income borrowers in their local communities.  An institution’s size and business strategy determines the type of examination that it will receive.  Large, retail-oriented institutions are examined using a performance-based lending, investment and service test.  Small institutions are examined using a streamlined approach.  All institutions may opt to be evaluated under a strategic plan formulated with community input and pre-approved by the bank regulatory agency.

          The Community Reinvestment Act regulations provide for certain disclosure obligations.  Each institution must post a notice advising the public of its right to comment to the institution and its regulator on the institution’s Community Reinvestment Act performance and to review the institution’s Community Reinvestment Act public file.  Each lending institution must maintain for public inspection a file that includes a listing of branch locations and services, a summary of lending activity, a map of its communities and any written comments from the public on its performance in meeting community credit needs.  The Community Reinvestment Act requires public disclosure of a financial institution’s written Community Reinvestment Act evaluations.  This promotes enforcement of Community Reinvestment Act requirements by providing the public with the status of a particular institution’s community reinvestment record.

          The Gramm-Leach-Bliley Act made various changes to The Community Reinvestment Act.  Among other changes, Community Reinvestment Act agreements with private parties must be disclosed and annual Community Reinvestment Act reports must be made to a bank’s primary federal regulator.  A bank holding company will not be permitted to become a financial holding company and no new activities authorized under The Gramm-Leach-Bliley Act may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a “satisfactory” Community Reinvestment Act rating in its latest Community Reinvestment Act examination.

Privacy

          Financial institutions are required to disclose their policies for collecting and protecting confidential information.  Customers generally may prevent financial institutions from sharing personal financial information with nonaffiliated third parties except for third parties which market the institutions’ own products and services.  Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing through electronic mail to consumers.

          The Gramm-Leach-Bliley Act also includes provisions to protect consumer privacy by prohibiting banks from disclosing non-public, personal, financial information to unaffiliated parties without the consent of the customer, and by requiring annual disclosure of the Banks’ privacy policies.  Each Bank’s primary regulator is responsible for promulgating rules to implement these provisions.

11

Table of Contents

Legislative and Regulatory Changes

          The Gramm-Leach-Bliley Act allows bank holding companies that are “well managed” and “well capitalized” and whose depositor subsidiaries have “satisfactory” or better Community Reinvestment Act ratings to become financial holding companies that may engage in a substantially broader range of nonbanking activities than are currently permissible, including insurance underwriting and securities activities.  Effective August 24, 2000, ABC became a financial holding company.

Fiscal and Monetary Policy

          Banking is a business which depends on interest rate differentials.  In general, the difference between the interest paid by a bank on its deposits and its other borrowings, an the interest received by an bank on its loans and securities holdings, constitutes the major portion of a bank’s earnings.  Thus, the earnings and growth of ABC will be subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve.  The Federal Reserve regulates the supply of money through various means, including open market dealings in United States government securities, the discount rate at which banks may borrow from the Federal Reserve and the reserve requirements on deposits.  The nature and timing of any changes in such policies and their effect on ABC cannot be predicted.

          Current and future legislation and the policies established by federal and state regulatory authorities will affect ABC’s future operations.  Banking legislation and regulations may limit our growth and the return to our investors by restricting certain of our activities.

          In addition, capital requirements could be changed and have the effect of restricting our activities or requiring additional capital to be maintained.  We cannot predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on ABC’s business.

Federal Home Loan Bank System

          All of our Banks have correspondent relationships with the Federal Home Loan Bank of Atlanta (“FHLB Atlanta”), which is one of 12 regional Federal Home Loan Banks (or “FHLBs”) that administer the home financing credit function of savings companies.  Each FHLB serves as a reserve or central bank for its members within its assigned region.  FHLBs are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System and make loans to members (i.e., advances) in accordance with policies and procedures, established by the Board of Directors of the FHLB which are subject to the oversight of the Federal Housing Finance Board.  All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB.  In addition, all long-term advances are required to provide funds for residential home financing.

          FHLB Atlanta provides certain services to certain of our Banks such as processing checks and other items, buying and selling Federal funds, handling money transfers and exchanges, shipping coin and currency, providing security and safekeeping of funds or other valuable items, and furnishing limited management information and advice.  As compensation for these services, the Banks maintain certain balances with FHLB Atlanta in noninterest-bearing accounts.

          Under federal law, the FHLBs are required to provide funds for the resolution of troubled savings companies and to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects.

          Title 6 of the GLB Act, entitled the Federal Home Loan Bank System Modernization Act of 1999 (called the “FHLB Modernization Act”), has amended the Federal Home Loan Bank Act by allowing for voluntary membership and modernizing the capital structure and governance of the FHLBs.  The new capital structure established under the FHLB Modernization Act sets forth new leverage and risk-based capital requirements based on permanence of capital.  It also requires some minimum investment in the stock of the FHLBs of all member entities.  Capital will include retained earnings and two forms of stock: Class A stock redeemable within six months, written notice and Class B stock redeemable within five years written notice.  The FHLB Modernization Act provides a transition period to the new capital regime, which will not be effective until the FHLBs enact implementing regulations.  The FHLB Modernization Act also reduces the period of time in which a member exiting the FHLB system must stay out of the system.

12

Table of Contents

ITEM 2.                   PROPERTIES

                                 The principal properties of ABC consist of the properties of the Banks. For a description of the properties of the Banks, see “Item 1 - Business of ABC and the Banks - Properties” included elsewhere in this Annual Report.  

ITEM 3.                   LEGAL PROCEEDINGS

                                 Neither ABC nor any of the Banks is a party to, nor is any of their property the subject of, any material pending legal proceedings, other than ordinary routine proceedings incidental to the business of the Banks, nor to the knowledge of the management of ABC are any such proceedings contemplated or threatened against it or the Banks.

ITEM 4.                   SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

                                 No matters were submitted to a vote of ABC’s shareholders during the fourth quarter of 2002.

ITEM 4.5                 EXECUTIVE OFFICERS

                                 The following table sets forth certain information with respect to the executive officers of ABC.

                                 Officers serve at the discretion of the Board of Directors.

13

Table of Contents

PART II

14

Table of Contents

SELECTED CONSOLIDATED FINANCIAL INFORMATION

          The following table presents selected consolidated financial information for ABC. The data set forth below are derived from the audited consolidated financial statements of ABC. The selected financial data should be read in conjunction with, and are qualified in their entirety by, the Consolidated Financial Statements and the Notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.

15

Table of Contents

SELECTED CONSOLIDATED FINANCIAL INFORMATION (Continued)

16

Table of Contents

SELECTED CONSOLIDATED FINANCIAL INFORMATION (Continued)

SELECTED QUARTERLY FINANCIAL DATA:

17

Table of Contents

Cautionary Statement Regarding Forward-Looking Statements

          ABC’s 2002 Annual Report contains forward-looking statements in addition to historical information.  ABC cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995; accordingly, there can be no assurance that such indicated results will be realized.

          The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements.  In order to comply with the terms of the safe harbor, ABC is required to note the variety of factors that could cause ABC’s actual results and experience to differ materially from the anticipated results or other expectations expressed in ABC’s forward-looking statements.  These factors include legislative and regulatory initiatives regarding deregulation and restructuring of the banking industry; the extent and timing of the entry of additional competition in ABC’s markets; potential business strategies, including acquisitions or dispositions of assets or internal restructuring, that may be pursued by ABC, state and federal banking regulations; changes in or application of environmental and other laws and regulations to which ABC is subject; political, legal and economic conditions and developments; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather, natural disasters and other catastrophic events; and other factors discussed in ABC’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K.  The words “believe”, “expect”, “anticipate”, “project”, and similar expressions signify such forward-looking statements.

          Readers are cautioned not to place undue reliance on any forward-looking statements made by or on behalf of ABC.  Any such statement speaks only as of the date the statement was made.  ABC undertakes no obligation to update or revise any 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.

General

          Our principal asset is the ownership of our Banks.  Accordingly, our results of operations are primarily dependent upon the results of operations of our Banks.  Our Banks conduct a commercial banking business which consists of attracting deposits from the general public and applying those funds to the origination of commercial, consumer and real estate loans (including commercial loans collateralized by real estate).  The Banks’ profitablity depends primarily on net interest income, which is the difference between interest income generated from interest-earning assets (i.e., loans and investments) less the interest expense incurred on interest-bearing liabilities (i.e., customer deposits and borrowed funds).  Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities, and the interest rate paid and earned on these balances.  Net interest income is dependent upon the Banks’ interest rate spread, which is the difference between the average yield earned on its interest-earning assets and the average rate paid on its interest-bearing liabilities.  When interest-earning assets approximates or exceeds interest-bearing liabilities, any positive interest rate spread will generate interest income.   The interest rate spread is impacted by interest rates, deposit flows and loan demand.  Additionally, and to a lesser extent, the profitability of the Banks is affected by such factors as the level of noninterest income and expenses, 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 loans and investment securities.  Noninterest expenses consist of compensation and benefits, occupancy-related expenses and other operating expenses.

18

Table of Contents

Results of Operations for Years Ended December 31, 2002, 2001 and 2000

          Our results of operations are determined by our ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense.  Since interest rates are determined by market forces and economic conditions beyond our control, the ability to generate net interest income is dependent upon the ability of the  Banks to obtain an adequate spread between the rate earned on interest-earning assets and the rate paid on interest-bearing liabilities.  Thus, the key performance measure for net interest income is the interest margin or net yield, which is taxable-equivalent net interest income divided by average earning assets.

          The primary component of consolidated earnings is net interest income, or the difference between interest income on interest-earning assets and interest paid on interest-bearing liabilities.  The net interest margin is net interest income expressed as a percentage of average interest-earning assets.  Interest-earning assets consist of loans, investment securities and federal funds sold.  Interest-bearing liabilities consist of deposits, Federal Home Loan Bank borrowings and other short-term borrowings.  A portion of interest income is earned on tax-exempt investments such as state and municipal bonds.  In an effort to state this tax-exempt income and its resultant yields on a basis comparable to all other taxable investments, an adjustment is made to analyze this income on a taxable-equivalent basis.

          The net interest margin decreased 29 basis points to 4.39% in 2002 as compared to 4.68% in 2001.  This decrease resulted primarily from the monetary policy pursued by the Federal Reserve during 2002.  During 2001 the Federal Reserve  reduced the discount rate on 11 separate occasions resulting in a reduction in the prime interest rate a total of 475 basis points from 9.50% on January 1, 2001 to 4.75% on December 31, 2001.  The prime interest rate on December 31, 2001 was one-half of the effective rate on January 1, 2001.  The Federal Reserve reduced the discount by 50 basis points in November 2002 resulting in the reduction in the prime interest of 50 basis points to 4.25%.  As a result of these rate reductions, ABC’s average yield on interest-earning assets decreased 157 basis points to 7.04% in 2002 from 8.61% in 2001.  The average interest rate paid on interest-bearing liabilities decreased 152 basis points to 3.06% in 2001 from 4.58% in 2001.  Average interest-earning assets increased $169,193,000 or 19.03% to $1,058,221,000 in 2002 from $889,028,000 in 2001.  Average loans increased $129,647,000 or 18.57% to $827,939,000 in 2002 from $698,292,000 in 2001.  Average yield on loans decreased 148 basis points to 7.85% in 2002 as compared to 9.33% in 2001.  Average investments increased $9,953,000 or 6.27% to $168,807,000 in 2002 from $158,854,000 in 2001.  Average yield on investments decreased 147 basis points or 22.48% to 5.07% in 2002 as compared to 6.54% in 2001.  The significant decrease in yield resulted from a significant decrease in nontaxable securities as a percentage of total securities in our investments portfolio in 2002 as compared to 2001.  Average interest-bearing deposits in and federal funds sold to other banks increased $29,593,000 or 92.83% to $61,475,000 in 2002 from $31,882,000 in 2001.  Although the average yield on deposits in and federal funds sold to other banks decreased 145 basis points, the reduction in yield did not significantly affect the average yield on earning assets due to the relatively small volume of investments represented by such funds.  The increase in average interest-earning assets was funded by an increase in average deposits of  $112,895,000 or 14.46% to $893,759,000 in 2002 from $780,864,000 in 2001 and an increase in average other borrowings and trust preferred securities of $64,801,000 or 82.27% to $143,561,000 in 2002 from $78,760,000 in 2001.  Average interest paid on total average deposits decreased 185 basis points or 70.88% to 2.62% in 2002 as compared to 4.46% in 2001.  Approximately 13% of the total average deposits were noninterest-bearing deposits in 2002 and 2001.

          The net interest margin decreased 52 basis points to 4.68% in 2001 as compared to 5.20% in 2000.  This decrease in net interest margin resulted primarily from the monetary policy pursued by the Federal Reserve during 2001 as discussed in the prior paragraph.  Our average yield on interest-earning decreased 74 basis points to 8.61% in 2001 from 9.35% in 2000.  The average rate paid on interest-bearing liabilities decreased 34 basis points to 4.58% in 2001 from 4.92% in 2000.  Average interest-earning assets increased $146,017 or 19.65% to $889,028,000 in 2001 from $743,011,000 in 2000.  Average loans increased $127,766.000 or 22.39% to $698,292.000 in 2001 from $570,526,000 in 2000.  Average yield on loans decreased 89 basis points to 9.33% in 2001 as compared to 10.22% in 2000.  Average investments decreased $314,000 or .20% to $158,854,000 in 2001 from $159,168,000 in 2000.  Average yield on investments increased 13 basis points or 3.12% to 6.54% in 2001 as compared to 6.41% in 2000.  Average interest-bearing deposits in and federal funds sold to other banks increased  $18,565,000 or 39.41% to $31,882,000 in 2001 from $13,317,000 in 2000. Although the average yield on deposits in and federal funds sold to other banks decreased 394 basis points, the reduction in yield did not significantly affect the average yield on earning assets due to the relatively small volume of investments represented by such funds.  The increase in average interest-earning assets was funded by an increase in average deposits of  $126,872,000 or 19.40% to $780,864,000 in 2001 from $653,992,000 in 2000 and an increase in average other borrowings of $$17,662,000 or 28.91% to $78,760,000 in 2001 from $61,098,000 in 2000.  Average interest paid on total average deposits decreased 28 basis points or 5.92% to 4.45% in 2001 as compared to 4.73% in 2000.  Approximately 13% of the total average deposits were noninterest-bearing deposits in 2001 as compared to approximately 14% in 2000.

19

Table of Contents

          During 2001, we acquired two new subsidiary Banks and two branches of other banks which have now been merged with two of our Banks.   These new bank and branch acquisitions were accounted for as purchases.  Following is a summary of assets and liabilities related to the acquisitions of the two new subsidiary Banks and one branch.  The acquisition of one branch was not consummated until December 24, 2001; consequently, the balances related to that branch have not been included because the results would not be materially different had the balances been included.

          The allowance for loan losses represents a reserve for potential losses in the loan portfolio.  The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, with a particular emphasis on nonaccruing, past due and other loans that management believes require attention.  We segregate our loan portfolio by type of loan and utilize this segregation in evaluating exposure to risks within the portfolio.  In addition, based on internal reviews and external reviews performed by independent auditors and regulatory authorities, we further segregates our loan portfolio by loan classifications within each type of loan based on an assessment of risk for a particular loan or group of loans.  Certain reviewed loans require specific allowances.  Allowances are provided for other types and classifications of loans based on anticipated loss rates.  Allowances are also provided for loans that are reviewed by management and considered creditworthy and loans for which management determines no review is required.  In establishing allowances, management considers historical loan loss experience with an emphasis on current loan quality trends, current economic conditions and other factors in the markets where the subsidiary banks operate.  Factors considered include among others, unemployment rates, effect of weather on agriculture and significant local economic events, such as major plant closings.

          We have developed a methodology for determining the adequacy of the loan loss reserve which is followed by all our Banks and monitored by ABC’s senior credit officer and internal audit staff.  Procedures provide for the assignment of a risk rating for every loan included in our total loan portfolio, with the exception of credit card receivables and overdraft protection loans which are treated as pools for risk rating purposes.  The risk rating schedule provides seven ratings of which three ratings are classified as pass ratings and four ratings are classified as criticized ratings.  Each risk rating is assigned a percent factor to be applied to the loan balance to determine the adequate amount of reserve.  Many of the larger loans require an annual review by an independent loan officer.  As a result of loan reviews certain loans may be assigned specific reserve allocations.  Other loans that surface as problem loans may also be assigned specific reserves.  Past due loans are assigned risk ratings based on the number of days past due.            

          The provision for loan losses is a charge to earnings in the current period to replenish the allowance and maintain it at a level management has determined to be adequate.  The provision for loan losses charged to earnings amounted to $5,574,000 in 2002, $4,566,000 in 2001, and $1,712,000 in 2000.  The increase in the provision for loan losses in 2002 was necessary to cover an increase in average loans of 18.57% over 2001 and increase of net loan charge-offs of 29.05% in 2002 as compared to 2001.  Real estate loans and consumer loans accounted for the majority of loan charge-offs in 2002.  These charge-offs resulted from depressed economic conditions during the year.  The increase in the provision for loan losses of  $2,854,000 in 2001 over the provision in 2000 was required to replenish the reserve for greater net charge-offs.  Net charge-offs in 2001 increased $2,603,000 to $4,378,000 in 2001 as compared to $1,775,000 in 2000.  The charge-off of $2,200,000 on one line of credit in 2001 accounted for 77% of the increase.  The remaining portion of the increase in net charge-offs in 2001 was related to the increase in average loans during 2001.   During 2002, average loans increased $129,647,000 or 18.57% over 2001 as compared to an increase in average loans of $127,766,000 or 22.39% in 2001 as compared to 2000.

20

Table of Contents

          The allowance for loan losses amounted to $14,868,000 at December 31, 2002 and $14,944,000 at December 31, 2001.   The allowance for loan losses increased $5,112,000 to $14,944,000 at December 31, 2001 from $9,832,000 at December 31, 2000.  Approximately $4,924,000 or 96% of the increase represented loan reserves acquired in bank acquisitions in 2001.  Net charge-offs represented 101.36% of the provision for loan losses in 2002 as compared to 95.88% in 2001.  Net loan charge-offs for 2002 represented .68% of average loans outstanding during the year as compared to  .63% for 2001 and .31% for 2000.   At December 31, 2002, the allowance for loan losses was 1.78% of total loans outstanding as compared to an allowance for loan losses of 1.86% of total loans outstanding at December 31, 2001 and 1.67% of total loans outstanding at December 31, 2000.  The determination of the allowance rests upon management’s judgment about factors affecting loan quality and assumptions about the local and national economy.  Management considers the year-end allowance for loan losses adequate to cover potential losses in the consolidated loan portfolio.

          Average total assets increased $190,235,000 or 19.82% to $1,150,266,000 in 2002 as compared to $960,031,000 in 2001.  The increase in average total assets was accompanied by an increase in average deposits of $112,895,000 or 14.46% to $893,759,000 in 2002 from $780,864,000 in 2001 and an increase of average borrowings of $64,801,000.  Average total assets increased $161,810,000 or 20.27% to $960,031,000 in 2001 as compared to $798,221,000 in 2000.  The increase in average total assets was accompanied by an increase in average total deposits of $126,872,000 or 19.40% to $780,864,000 in 2001 from $653,992,000 in 2000 and an increase in average borrowings of $17,662,000.     

CRITICAL ACCOUNTING POLICIES

          The accounting and financial reporting policies of ABC conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry.  Following is a description of the accounting policies applied by ABC that are deemed “critical”. Critical accounting policies are defined as policies that are very important to the presentation of ABC’s financial condition and results of operations, and that require management’s most difficult, subjective, or complex judgments. ABC’s financial results could differ significantly if different judgments or estimates are applied in the application of these policies.

          Allowance for Loan Losses

          The allowance for loan losses is established through provisions for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collection of principal is unlikely. Subsequent recoveries are added to the allowance. Management’s evaluation of the adequacy of the allowance for loan losses is based on a formal analysis that assesses the risk within the loan portfolio. This analysis includes consideration of historical performance, current economic conditions, level of nonperforming loans, loan concentrations, and review of certain individual loans.

          Management believes that the allowance for loan losses is adequate.  While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the subsidiary banks’ allowances for loan losses. Such agencies may require the subsidiary banks to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

          Considering current information and events 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 under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal and then to interest income.

21

Table of Contents

          The accounting for impaired loans described above applies to all loans, except for large pools of smaller-balance, homogeneous loans that are collectively evaluated for impairment, loans that are measured at fair value or at the lower of cost or fair value, and debt securities. The allowance for loan losses for large pools of smaller-balance, homogeneous loans is established through consideration of such factors as changes in the nature and volume of the portfolio, overall portfolio quality, adequacy of the underlying collateral, loan concentrations, historical charge-off trends, and economic conditions that may affect the borrowers’ ability to pay.

          Certain economic and interest rate factors could have a material impact on the determination of the allowance for loan losses. The depth, duration, and dispersion of any economic recession all have an impact on the credit risk profile of the loan portfolio. Additionally, a rapidly rising interest rate environment that may cause rates to reach double digits could as well have a material impact on certain borrowers’ ability to pay.

          Our current assumptions are that an economic recovery will occur during the second half of 2003 and that the depth of the recession will have already peaked prior to the first half of 2004. Additionally, we are assuming that the effect of the recession will have had its greatest impact on economic conditions, including unemployment, by the end of 2003.  With respect to the interest rate environment, ABC anticipates that interest rates will be increasing slightly during 2003.  In the event of a dramatic downturn in this recession in which there is a broad effect in all sectors of our economy and/or a significant rapid rise in interest rates to double-digit levels creating higher borrowing costs and tightening corporate profits, ABC’s credit costs could increase significantly.

          Another factor that we have considered in the determination of the allowance for loan losses is loan concentrations to individual borrowers or industries. At December 31, 2002, ABC had 11 individual credit relationships that exceeded $3.5 million with none exceeding $11 million.

          A substantial portion of the loan portfolio is in the commercial real estate and residential real estate sectors Those loans are secured by real estate in ABC’s primary market area.  A substantial 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.

          ABC is closely monitoring certain portions of its loan portfolio that we believe have a higher credit risk profile under the current environment based solely upon their industry classification 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 temporary differences.  See Note 11 to the Notes to Consolidated Financial Statements for additional details.

          As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate.  This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation and the provision for loan losses, for tax and financial reporting purposes.  These differences result in deferred tax assets and liabilities that are included in our consolidated balance sheet.

          We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance.  Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.  To the extent we establish a 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 $3,632,000 which includes amounts relating to loss carryforwards.  We believe there will be sufficient taxable income in the future allowing is to utilize these loss carryforwards in the tax jurisdictions where they exist.

22

Table of Contents

          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 results, significant changes in the manner of our use of the acquired assets and significant negative industry or economic trends.

          The determination of whether an impairment has occurred is based on an estimate of undiscounted cash flows attributable to the assets as compared to the carrying value of the assets.  If an impairment has occurred, the amount of the impairment loss recognized would be determined by estimating the fair value of the assets and recording a loss if the fair value was less than the book value. 

          In determining the existence of impairment factors, our assessment is based on market conditions, operational performance and legal factors of our Company and its subsidiary banks.  Our review of factors present and the resulting appropriate carrying value of our goodwill, intangibles, and other long-lived assets are subject to judgments and estimates that management is required to make.  Future events could cause us to conclude that impairment indicators exist and that our goodwill, intangibles and other long-lived assets might be impaired.

          ABC is exposed only to U. S. Dollar interest rate changes and, accordingly, we manage exposure by considering the possible changes in the net interest margin.  We do not have any trading instruments nor do we classify any portion of the investment portfolio as held for trading.  We  do not engage in any hedging activities or enter into any derivative instruments with a higher degree of risk than mortgage-backed securities, which are commonly, pass through securities.  Finally, we have no exposure to foreign currency exchange rate risk, commodity price risk, and other market risks.

          Interest rates play a major part in the net interest income of a financial institution.  The sensitivity to rate changes is known as “interest rate risk.”  The repricing of interest earning assets and interest-bearing liabilities can influence the changes in net interest income.  As part of our asset/liability management program, the timing of repriced assets and liabilities is referred to as Gap management.  Our policy is to maintain a Gap ratio in the one-year time horizon of .80 to 1.20.  As indicated by the Gap analysis included in this annual report, the Company is somewhat asset sensitive in relation to changes in market interest rates.  Being asset sensitive would result in net interest income increasing in a rising rate environment and decreasing in a declining rate environment.  See “Asset/Liability Management” included in this annual report.              

          ABC uses simulation analysis to monitor changes in net interest income due to changes in market interest rates.  The simulation of rising, declining and flat interest rate scenarios allow management to monitor and adjust interest rate sensitivity to minimize the impact of market interest rate swings.  The analysis of the impact on net interest income over a twelve-month period is subjected to a gradual 200 basis point increase or decrease in market rates on net interest income and is monitored on a quarterly basis.  The most recent simulation model projects net interest income would increase 8.82% if rates rise gradually over the next year.  On the other hand, the model projects net interest income to decrease 10.43% if rates decline over the next year.

23

Table of Contents

SELECTED STATISTICAL INFORMATION OF ABC BANCORP

          The following statistical information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and the financial statements and related notes included elsewhere in this Annual Report and in the documents incorporated herein by reference.

Average Balances and Net Income Analysis

          The following tables set forth the amount of the ABC’s interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for total interest-earning assets and total interest-bearing liabilities, net interest spread and net yield on average interest-earning assets.  Federally tax-exempt income is presented on a taxable-equivalent basis assuming a 34% federal tax rate.