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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001 - Commission File Number 1-11823
_____________
PAB BANKSHARES, INC.
(A Georgia Corporation)
IRS Employer Identification Number: 58-1473302
3250 NORTH VALDOSTA ROAD, VALDOSTA, GEORGIA 31602
TELEPHONE NUMBER: (229) 241-2775
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, no par value American Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 2002 was $73,926,376 based on a closing trading price
of $10.35 per share.
The number of shares outstanding of the registrant's common stock at March 1,
2002 was 9,421,913 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2002 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days of the registrant's fiscal year end is incorporated by reference
in answer to Part III of this Form 10-K.
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TABLE OF CONTENTS
Page
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PART I
1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Supervision and Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . . . . . 11
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Statistical Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . 21
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . . . . . . 27
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly Financial Summary for 2001 and 2000 . . . . . . . . . . . . . . . . . . 28
Management's Responsibility For Financial Reporting . . . . . . . . . . . . . . . 29
Report of Independent Public Accountants. . . . . . . . . . . . . . . . . . . . . 30
Consolidated Balance Sheets at December 31, 2001 and 2000 . . . . . . . . . . . . 32
Consolidated Statements of Income for the Three Years Ended December 31, 2001 . . 33
Consolidated Statements of Comprehensive Income (Loss) for the Three Years Ended
December 31, 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Stockholders' Equity for the Three Years Ended
December 31, 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2001 36
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . 38
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . 64
11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . 64
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . 64
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K . . . . . . . . . 65
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Report, including, without limitation, matters
discussed under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operation," as well as oral statements made by PAB
Bankshares, Inc. ("PAB", and also referred to in this Report as "we", "us", or
"our") or the officers, directors, or employees of PAB may constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"). Forward-looking statements
include statements about the competitiveness of the banking industry, potential
regulatory obligations, our charter consolidation plan, our entrance and
expansion into higher growth markets, our other business strategies and other
statements that are not historical facts. When we use words like "anticipate,"
"believe," "intend," "expect," "estimate," "could," "should," "will" and similar
expressions, you should consider them as identifying forward-looking statements.
These forward-looking statements involve risks and uncertainties and are based
on our beliefs and assumptions, and on the information available to us at the
time that these disclosures were prepared. Factors that may cause actual
results to differ materially from those expressed or implied by such
forward-looking statements include, among others, the following possibilities:
(1) competitive pressures among depository and other financial institutions may
increase significantly; (2) changes in the interest rate environment may reduce
margins; (3) general economic conditions may be less favorable than expected,
resulting in, among other things, a deterioration in credit quality and/or a
reduction in demand for credit; (4) legislative or regulatory changes, including
changes in accounting standards, may adversely affect the businesses in which we
are engaged; (5) costs or difficulties related to the integration of our
businesses and our merger partners may be greater than expected; (6) expected
cost savings associated with mergers may not be fully realized or realized
within the expected time frame; (7) deposit attrition, customer loss or revenue
loss following mergers may be greater than expected; (8) competitors may have
greater financial resources and develop products that enable such competitors to
compete more successfully than us; and (9) adverse changes may occur in the bond
and equity markets. Many of such factors are beyond our ability to control or
predict, and readers are cautioned not to put undue reliance on such
forward-looking statements. We disclaim any obligation to update or revise any
forward-looking statements contained in this Report, whether as a result of new
information, future events or otherwise.
ITEM 1. BUSINESS
GENERAL
PAB is a bank holding company headquartered in Valdosta, Georgia. PAB was
organized and incorporated in 1982 under the laws of the State of Georgia as a
holding company for The Park Avenue Bank ("Park Avenue"). Park Avenue became a
state-chartered commercial bank in 1971. In 2001, Park Avenue became a state
member bank of the Federal Reserve System. Since our incorporation in 1982, we
acquired five other Georgia financial institutions and one Florida financial
institution. In addition, we formed PAB Financial Services, LLC ("PAB
Financial"), an investment advisory services firm, in 1999. PAB Financial has
offices in Valdosta, Georgia and Ocala, Florida.
Through our banking offices, we provide a broad array of products and services
to commercial and consumer customers in the communities we serve. Our product
line includes loans to small- and medium-sized businesses, residential mortgage
loans, home equity loans, construction and development loans, commercial real
estate loans, consumer loans, and a variety of commercial and consumer deposit
products. We also offer Internet banking, cash management, electronic bill
payment services, safe deposit box rentals, telephone banking, credit and debit
card services, and the availability of a network of ATMs to our customers.
Through PAB Financial, we are able to offer a complete line of financial and
investment products and services to our customers.
Our focus is on community banking. Over the past two years, we have upgraded
and invested heavily in systems and support to provide a product line that is
comparable to the larger regional banks and gives us a competitive edge over
many of the smaller financial institutions in our local markets. When it comes
to competing with the larger financial institutions in our markets, we believe
that our people make the difference. Our experience and strong community
relationships in our local markets allow us to deliver a higher level of
customer service to the small- to mid-sized commercial and individual consumer
accounts.
3
The table below provides basic information on our wholly-owned subsidiary banks
as of December 31, 2001. See "Markets and Competition" for additional
demographic information on each of our markets.
BANK SUBSIDIARY AND YEAR PROXIMITY TO TOTAL TOTAL
LOCATION OF MAIN OFFICE CHARTERED VALDOSTA, GA LOANS(1) DEPOSITS(1)
- ----------------------- --------- ------------------- -------- -----------
The Park Avenue Bank 1971 -- $351,049 $ 406,184
Valdosta, Georgia
First Community Bank of 1934 90 miles west 116,123 135,253
Southwest Georgia
Bainbridge, Georgia
Eagle Bank and Trust(2) 1991 155 miles northeast 78,355 82,517
Statesboro, Georgia
Baxley Federal Bank(3) 1934 90 miles northeast 92,299 96,443
Baxley, Georgia
(1) Dollars in thousands as of December 31, 2001.
(2) Eagle Bank & Trust was subsequently merged into Park Avenue on January
11, 2002. See "Charter Consolidation Plan".
(3) Baxley Federal Bank was subsequently merged into Park Avenue on March
8, 2002. See "Charter Consolidation Plan".
On November 30, 2001, we sold our 50% equity interest in Empire Financial
Services, LLC of Milledgeville, Georgia ("Empire") to a third party for $1.8
million. Empire is a commercial mortgage origination and servicing organization
that serves numerous financial institutions throughout the Southeastern United
States, including our subsidiary banks.
Charter Consolidation Plan
In September 2001, we announced a plan to consolidate the bank charters of each
of our separate subsidiary banks into our lead bank, Park Avenue, through a
series of mergers. We have received regulatory approval to proceed with our
plan. Under the plan, the merged banks will continue to operate under their
previous trade names and to be managed by their community presidents and local
advisory boards. The consolidation process should increase economies of scale
in our back office loan and deposit operations, systems, and support teams, and
improve efficiencies in our delivery of products and services to our customers.
As a consolidated bank, we will also be able to offer a more competitive product
line, while still maintaining the level of service that only community banks can
deliver. Because of the nature of the mergers and the requisite change in
computer and banking practices that mergers entail, we believe that such mergers
need to occur one at a time and with sufficient time in between, so that the
high quality of customer service and sound banking practices of the banks may be
preserved.
The charter consolidation process began with the merger of Friendship Community
Bank of Ocala, Marion County, Florida into Park Avenue on June 22, 2001. We had
previously acquired Friendship in a purchase transaction on December 29, 2000.
On December 7, 2001, we merged Farmers & Merchants Bank of Adel, Cook County,
Georgia into Park Avenue. On January 11, 2002, we merged Eagle Bank and Trust
of Statesboro, Bulloch County, Georgia into Park Avenue. On March 8, 2002, we
merged Baxley Federal Bank of Baxley, Appling County, Georgia into Park Avenue.
We plan to merge First Community Bank of Southwest Georgia of Bainbridge,
Decatur County, Georgia, into Park Avenue during the second quarter of this
year.
4
Markets and Competition
The financial services industry is highly competitive. In our markets, we
primarily face competitive pressures from both larger regional banks and smaller
community banks in attracting and retaining commercial and consumer accounts.
The principal factors in competing for such accounts include interest rates, fee
structures, the range of products and services offered, convenience of office
and ATM locations, and flexible office hours. Other competition for such
accounts comes from credit unions, retail brokerage firms, mortgage companies,
and consumer finance offices. Other investment alternatives such as stocks and
mutual funds made readily accessible by the Internet have also had an effect on
our ability to grow deposits in our markets.
With the opening of our de novo branch in McDonough, Henry County, Georgia in
the fourth quarter of 2000, we implemented a strategic plan to enter into higher
growth markets that would complement our stable position in existing markets.
Since expanding into Henry County, we have also entered into markets in Ocala,
Marion County, Florida, and Gainesville, Hall County, Georgia. Once
established, these offices should serve as the anchor points in any future
branch expansion plans. With the right people and the right timing, we plan to
continue this strategy to pursue opportunities for growth in other markets as
well. The potential for double-digit growth in our core markets in South
Georgia has been maximized over the past several years. However, opportunities
to grow quality market share and improve profitability still exist in these core
markets, which will continue to build shareholder value.
The table below provides summary demographic data on each of our market
locations.
MARKET MKT SHARE(1)
- ----------------- ---------------- # OF PCT
COUNTY STATE BANK OR TRADE NAME PCT RANK OFFICES POPULATION(2) CHANGE(3)
- ---------- ----- ------------------------ ---- ---------- ------- ------------ --------
Lowndes GA The Park Avenue Bank 22.6 1st of 11 4 92,115 21.2
Henry GA The Park Avenue Bank 1.9 13th of 15 1 119,341 103.2
Marion FL The Park Avenue Bank 2.2 12th of 20 2 258,916 32.9
Hall GA The Park Avenue Bank(4) - - 1 139,277 45.9
Cook GA Farmers & Merchants Bank 29.8 2nd of 4 1 15,771 17.2
Bulloch GA Eagle Bank & Trust 15.0 4th of 7 2 55,983 29.8
Bryan GA The Richmond Hill Bank(5) 1.7 3rd of 4 1 23,417 51.7
Decatur GA First Community Bank of 47.9 1st of 5 3 28,240 10.7
Southwest Georgia
Grady GA Bank of Grady County 6.2 5th of 5 1 23,659 16.7
Appling GA Baxley Federal Bank 27.7 2nd of 4 1 17,419 10.6
Jeff Davis GA Baxley Federal Bank 30.6 2nd of 4 1 12,684 5.4
(1) Based on FDIC/OTS Summary of Deposits data as of June 30, 2001. Market
share data only includes FDIC insured depository institutions. Credit
unions, retail brokerage firms, mortgage companies, and consumer
finance offices are not included.
(2) County populations are based on 2000 U.S. Census Bureau data.
(3) Percentage change in county populations from 1990 to 2000 is based on
U.S. Census Bureau data.
(4) Park Avenue has operated a loan production office in this market since
October 2001. During the first quarter of 2002, we applied for and
received approval from our federal and state regulators to open a full
service branch office in Oakwood, Hall County, Georgia, about 50 miles
northeast of downtown Atlanta, Fulton County, Georgia along the
I-85/I-985 corridor. We expect to open the Oakwood branch office
during the second quarter of 2002 and simultaneously close the loan
production office.
(5) Park Avenue subsequently sold this branch location along with
approximately $10.4 million in loans and $4.3 million in deposits to
another Georgia financial institution on January 31, 2002.
5
Nonbanking Services and Operations
Through PAB Financial, we provide agency transactional services for customer
investments as permitted under the regulations of the Federal Reserve. PAB
Financial provides its customers with securities brokerage services, including
securities execution services on national securities exchanges. PAB Financial's
brokerage activities are restricted to buying and selling securities solely as
an agent for the account of its customers, and do not include underwriting or
dealing in securities. In addition, PAB Financial is permitted to act as an
agent for the private placement of securities in accordance with federal
securities laws. PAB Financial also provides investment advisory services to
its customers, such as furnishing general economic information and investment
advice, and providing instructional materials for customers on individual
financial management matters.
Although we provide products and services under two distinct regulatory-defined
operations (i.e. banking and nonbanking), our nonbanking operations do not meet
the minimum materiality requirements for separate segment reporting under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 131.
Employees
As of March 1, 2002, we had a total of 284 full-time and 35 part-time employees
on our payroll.
SUPERVISION AND REGULATION
The banking industry is heavily regulated at both the federal and state levels.
Legislation and regulations authorized by legislation influence, among other
things:
- How, when and where we may expand geographically;
- Into what product or service market we may enter;
- How we must manage our assets; and
- Under what circumstances money may or must flow between and among the
parent bank holding company and the subsidiary banks.
Set forth below is an explanation of the major pieces of legislation affecting
our industry and how that legislation affects our actions.
General
PAB is a bank holding company registered with the Board of Governors of the
Federal Reserve System (the "Federal Reserve") and the Georgia Department of
Banking and Finance (the "Georgia Department") under the Bank Holding Company
Act of 1956, as amended (the "BHC Act") and the Financial Institutions Code of
Georgia (the "FICG"), respectively. PAB has also qualified as a financial
holding company under the provisions of the Gramm-Leach-Bliley Act (the "GLB
Act"). As such, we are subject to the supervision, examination and reporting
requirements of the BHC Act and the regulations of the Federal Reserve, and the
FICG and the regulations of the Georgia Department.
Our subsidiary banks are members of the Federal Deposit Insurance Corporation
("FDIC"), and as such, our deposits are insured by the FDIC to the maximum
extent provided by law. We are also subject to numerous state and federal
statutes and regulations that affect our business, activities, and operations,
and we are supervised and examined by one or more state or federal bank
regulatory agencies on a periodic basis.
Park Avenue is a state member bank of the Federal Reserve and it is subject to
regulation, supervision, and examination by the Federal Reserve and the Georgia
Department. The other subsidiary banks have been approved by the Federal
Reserve and the Georgia Department to be merged into Park Avenue during 2002.
These regulatory agencies regularly examine our operations and are given
authority to approve or disapprove mergers, consolidations, the establishment of
branches, and similar corporate actions. The agencies also have the power to
prevent the continuance or development of unsafe or unsound banking practices or
other violations of law.
Acquisitions
The BHC Act requires every bank holding company to obtain the prior approval of
the Federal Reserve before: (i) it may acquire direct or indirect ownership or
control of any voting shares of any bank if, after such acquisition, the bank
holding company will directly or indirectly own or control more than 5% of the
voting shares of the bank; (ii) it or any of its subsidiaries, other than a
bank, may acquire all or substantially all of the assets of any bank; or (iii)
it may merge or consolidate with any other bank holding company.
6
The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the country, or that in any other manner would be in restraint of
trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the communities to be served. 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
generally focuses on the parties' performance under the Community Reinvestment
Act of 1977.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act, the
restrictions on interstate acquisitions of banks by bank holding companies were
repealed. As a result, PAB, and any other bank holding company located in
Georgia is able to acquire a bank located in any other state, and a bank holding
company located outside of Georgia can acquire any Georgia-based bank, in either
case subject to certain deposit percentage and other restrictions. The
legislation provides that unless an individual state has elected to prohibit
out-of-state banks from operating interstate branches within its territory,
adequately capitalized and managed bank holding companies are able to
consolidate their multistate banking operations into a single bank subsidiary
and to branch interstate through acquisitions. De novo branching by an
out-of-state bank is permitted only if it is expressly permitted by the laws of
the host state. Georgia does not permit de novo branching by an out-of-state
bank. Therefore, the only method by which an out-of-state bank or bank holding
company may enter Georgia is through an acquisition. Georgia has adopted an
interstate banking statute that removes the existing restrictions on the ability
of banks to branch interstate through mergers, consolidations and acquisitions.
However, Georgia law prohibits a bank holding company from acquiring control of
a financial institution until the target financial institution has been
incorporated five years.
Activities
The BHC Act has generally prohibited a bank holding company from engaging in
activities other than banking or managing or controlling banks or other
permissible subsidiaries and from acquiring or retaining direct or indirect
control of any company engaged in any activities other than those determined by
the Federal Reserve to be closely related to banking or managing or controlling
banks as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley
Act, discussed below, have expanded the permissible activities of a bank holding
company, such as PAB, that qualifies as a financial holding company. In
determining whether a particular activity is permissible, the Federal Reserve
must consider whether the performance of such an activity can be reasonably
expected to produce benefits to the public, such as a greater convenience,
increased competition, or gains in efficiency, that outweigh possible adverse
effects such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices.
Gramm-Leach-Bliley Act
The GLB Act implemented major changes to the statutory framework for providing
banking and other financial services in the United States. The GLB Act, among
other things, eliminated many of the restrictions on affiliations among banks
and securities firms, insurance firms, and other financial service providers. A
bank holding company that qualifies as a financial holding company will be
permitted to engage in activities that are financial in nature or incidental or
complimentary to a financial activity. The GLB Act specifies certain activities
that are deemed to be financial in nature, including underwriting and selling
insurance, providing financial and investment advisory services, underwriting,
dealing in, or making a market in securities, limited merchant banking
activities, and any activity currently permitted for bank holding companies
under Section 4(c)(8) of the BHC Act.
To become eligible for these expanded activities, a bank holding company must
qualify as a financial holding company. To qualify as a financial holding
company, each insured depository institution controlled by the bank holding
company must be well-capitalized, well-managed, and have at least a satisfactory
rating under the Community Reinvestment Act. In addition, the bank holding
company must file declaration with the Federal Reserve of its intention to
become a financial holding company. In November 2001, we filed a declaration to
qualify as a financial holding company.
The GLB Act designates the Federal Reserve as the overall umbrella supervisor of
the new financial services holding companies. The GLB Act adopts a system of
functional regulation where the primary regulator is determined by the nature of
activity rather than the type of institution. Under this principle, securities
activities are regulated by the SEC and other securities regulators, insurance
activities by the state insurance authorities, and banking activities by the
appropriate banking regulator. As a result, to the extent that we engage in
non-banking activities permitted under the GLB Act, we will be subject to the
regulatory authority of the SEC or state insurance authority, as applicable.
7
Payment of Dividends
PAB is a legal entity separate and distinct from our subsidiaries. Our
principal source of cash flow is dividends from our subsidiary banks. There are
statutory and regulatory limitations on the payment of dividends by these
subsidiary banks to us, as well as by us to our stockholders.
If, in the opinion of the federal banking regulators, a depository institution
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the financial condition of the depository
institution, could include the payment of dividends), such authority may
require, after notice and hearing, that such institution cease and desist from
such practice. The federal banking agencies have indicated that paying
dividends that deplete a depository institution's capital base to an inadequate
level would be an unsafe and unsound banking practice. Under the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a depository
institution may not pay any dividend if payment would cause it to become
undercapitalized or if it already is undercapitalized. See "Prompt Corrective
Action". Moreover, the federal agencies have issued policy statements that
provide that bank holding companies and insured banks should generally only pay
dividends out of current operating earnings.
At December 31, 2001, pursuant to dividend restrictions imposed under federal
and state laws, our subsidiary banks, without obtaining governmental approvals,
could declare aggregate dividends to us of approximately $2.7 million. The
decline in available dividends is due to a net loss at our lead bank, Park
Avenue, in 2001. As a result, our Board of Directors is considering various
options, including a reduction or suspension of the dividends paid to our
stockholders until the profitability of our subsidiary banks is re-established.
Capital Adequacy
We are required to comply with the capital adequacy standards established by the
federal banking agencies. There are two basic measures of capital adequacy for
bank holding companies that have been promulgated by the Federal Reserve: a
risk-based measure and a leverage measure. All applicable capital standards
must be satisfied for a bank holding company to be considered in compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. 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
(including certain off-balance-sheet items, such as standby letters of credit)
is 8.0%. Total Capital consists of Tier 1 Capital, which is comprised of 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, and Tier 2 Capital, which consists
of subordinated debt, other preferred stock, and a limited amount of loan loss
reserves. At December 31, 2001, our consolidated Total Capital Ratio and our
Tier 1 Capital Ratio were 12.0% and 10.8%, respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio (the "Leverage Ratio") of Tier 1 Capital to average assets, less goodwill
and certain other intangible assets, of 3.0% for bank holding companies that
meet certain specified criteria, including those having the highest regulatory
rating. All other bank holding companies generally are required to maintain a
Leverage Ratio of at least 3.0%, plus an additional cushion of 100 to 200 basis
points. Our Leverage Ratio at December 31, 2001 was 8.0%. 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" (deducting all intangibles) and other
indicators of capital strength in evaluating proposals for expansion or new
activities.
Our subsidiary banks are subject to risk-based and leverage capital requirements
adopted by their respective federal banking regulators, which are substantially
similar to those adopted by the Federal Reserve for bank holding companies.
Each of our subsidiary banks was in compliance with all applicable minimum
capital requirements as of December 31, 2001. Neither PAB nor any of its
subsidiary banks have been advised by any federal banking agency of any specific
minimum capital ratio requirement applicable to it.
8
Failure to meet capital guidelines could subject a bank or bank holding company
to a variety of enforcement remedies, including issuance of a capital directive,
the termination of deposit insurance by the FDIC, a prohibition on the taking of
brokered deposits, and certain other restrictions on its business. As described
below, substantial additional restrictions can be imposed upon FDIC-insured
depository institutions that fail to meet applicable capital requirements. See
"Prompt Corrective Action".
The federal bank regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels.
In this regard, the Federal Reserve and the FDIC have, pursuant to FDICIA,
recently adopted final regulations requiring regulators to consider interest
rate risk (when the interest rate sensitivity of an institution's assets does
not match the sensitivity of its liabilities or its off-balance-sheet position)
in the evaluation of a bank's capital adequacy. The bank regulatory agencies
have concurrently proposed a methodology for evaluating interest rate risk that
would require banks with excessive interest rate risk exposure to hold
additional amounts of capital against such exposures.
Support of Subsidiary Institutions
Under Federal Reserve policy, we are expected to act as a source of financial
strength for, and to commit resources to support, each of our subsidiary banks.
This support may be required at times when, absent such Federal Reserve policy,
we may not be inclined to provide such support. In addition, any capital loans
by a bank holding company to any of its banking subsidiaries are subordinate in
right of payment to deposits and to certain other indebtedness of such
subsidiary banks. In the event of a bank holding company's bankruptcy, any
commitment by a bank holding company to a federal bank regulatory agency to
maintain the capital of a banking subsidiary will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
Under the Federal Deposit Insurance Act ("FDIA"), a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC, in connection with (i) the default of a
commonly controlled FDIC-insured depository institution or (ii) any assistance
provided by the FDIC to any commonly controlled FDIC-insured depository
institution in danger of default. The FDIC's claim for damages is superior to
claims of shareholders of the insured depository institution or its holding
company, but is subordinate to claims of depositors, secured creditors, and
holders of subordinated debt (other than affiliates) of the commonly controlled
insured depository institution. Our subsidiary banks are subject to these
cross-guarantee provisions. As a result, any loss suffered by the FDIC in
respect of any of our banks would likely result in assertion of the
cross-guarantee provisions, the assessment of such estimated losses against the
depository institution's banking affiliates, and a potential loss of our
investment in such other subsidiary banks.
Prompt Corrective Action
FDICIA established a system of prompt corrective action to resolve the problems
of undercapitalized institutions. Under this system, the federal banking
regulators have established five capital categories (well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized), and are required to take certain mandatory
supervisory actions, and are authorized to take other discretionary actions,
with respect to institutions in the three undercapitalized categories. The
severity of the action will depend upon the capital category in which the
institution is placed. Generally, subject to a narrow exception, the banking
regulator must appoint a receiver or conservator for an institution that is
critically undercapitalized. The federal banking agencies have specified by
regulation the relevant capital level for each category.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
A bank holding company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to certain limitations. The
controlling holding company's obligation to fund a capital restoration plan is
limited to the lesser of 5.0% of an undercapitalized subsidiary's assets or the
amount required to meet regulatory capital requirements. An undercapitalized
institution is also generally prohibited from increasing its average total
assets, making acquisitions, establishing any branches or engaging in any new
line of business, except under an accepted capital restoration plan or with FDIC
approval. In addition, the appropriate federal banking agency may test an
undercapitalized institution in the same manner as it treats a significantly
undercapitalized institution if it determines that those actions are necessary.
At December 31, 2001, Park Avenue had the requisite capital level to qualify as
"adequately capitalized" under the regulatory framework for prompt corrective
action. Each of our other subsidiary banks had the capital to qualify as "well
capitalized". Through the merger of charters (see "Charter Consolidation Plan"
in Item 1 of this Report), Park Avenue will have sufficient capital to again
qualify as "well capitalized" by the end of the first quarter of 2002.
9
FDIC Insurance Assessments
The FDIC has adopted a risk-based assessment system for insured depository
institutions that takes into account the risks attributable to different
categories and concentrations of assets and liabilities. The system assigns an
institution to one of three capital categories: (i) well capitalized; (ii)
adequately capitalized; and (iii) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. The FDIC also assigns
an institution to one of three supervisory subgroups within each capital group.
The supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation that the institution's primary federal regulator provides
to the FDIC and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. The FDIC then determines an institution's insurance assessment rate
based on the institution's capital category and supervisory category. Under the
risk-based assessment system, there are nine combinations of capital groups and
supervisory subgroups to which different assessment rates are applied.
Assessments range from 0 to 27 cents per $100 of deposits, depending on the
institution's capital group and supervisory subgroup.
The FDIC may terminate its insurance of deposits if it finds that the
institution has engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC.
Safety and Soundness Standards
The FDIA, as amended by the FDICIA and the Riegle Community Development and
Regulatory Improvement Act of 1994, requires the federal bank regulatory
agencies to prescribe standards, by regulations or guidelines, relating to
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
asset quality, earnings, stock valuation and compensation, fees and benefits,
and such other operational and managerial standards as the agencies deem
appropriate. The federal bank regulatory agencies have adopted a set of
guidelines prescribing safety and soundness standards pursuant to FDICIA, as
amended. The guidelines establish general standards relating to internal
controls and information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation and
fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director, or principal shareholder. In
addition, the agencies adopted regulations that authorize, but do not require,
an agency to order an institution that has been given notice by an agency that
it is not satisfying any of such safety and soundness standards to submit a
compliance plan. If, after being so notified, an institution fails to submit an
acceptable compliance plan or fails in any material respect to implement an
acceptable compliance plan, the agency must issue an order directing action to
correct the deficiency and may issue an order directing other actions of the
types to which an undercapitalized institution is subject under the "prompt
corrective action" provisions of FDICIA. See "Prompt Corrective Action". If an
institution fails to comply with such an order, the agency may seek to enforce
such order in judicial proceedings and to impose civil money penalties. The
federal regulatory agencies also proposed guidelines for asset quality and
earnings standards.
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA") our subsidiary banks, as FDIC
insured institutions, have a continuing and affirmative obligation to help meet
the credit needs of their entire community, including low- and moderate-income
neighborhoods, consistent with safe and sound banking practices. The CRA
requires the appropriate federal regulator, in connection with its examination
of an insured institution, to assess the institution's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications, such as applications for a merger or the
establishment of a branch. An unsatisfactory rating may be used as the basis
for the denial of an application by the federal banking regulator. Each of our
subsidiary banks received a satisfactory or better rating in their last CRA
examination.
Privacy
The GLB Act also modified laws related to financial privacy. The new financial
privacy provisions generally prohibit a financial institution from disclosing
nonpublic personal financial information about consumers to third parties unless
consumers have the opportunity to "opt out" of the disclosure. A financial
institution is also required to provide its privacy policy annually to its
customers. Compliance with the implementing regulations was mandatory effective
July 1, 2001. Each of our subsidiary banks implemented the required financial
privacy provisions by July 1, 2001.
10
Monetary Policy
The earnings of our subsidiary banks are affected by domestic and foreign
conditions, particularly by the monetary and fiscal policies of the United
States government and its agencies. The Federal Reserve has had, and will
continue to have, an important impact on the operating results of commercial
banks through its power to implement monetary policy in order, among other
things, to mitigate recessionary and inflationary pressures by regulating the
national money supply. The techniques used by the Federal Reserve include
setting the reserve requirements of member banks and establishing the discount
rate on member bank borrowings. The Federal Reserve also conducts open market
transactions in United States government securities.
ITEM 2. PROPERTIES
We operate 14 banking offices in Georgia and 2 in Florida. With the exception
of one of our offices in Ocala, Florida, we own all of the real property and/or
buildings in which our offices are located. The Ocala office is under a
five-year operating lease that expires in May 2003. In addition, we own an
administrative building in Valdosta, Georgia for use as our corporate office.
All of the properties are in a good state of repair and are appropriately
designed for the purposes for which they are used.
Other than normal real estate and commercial lending activities of our
subsidiary banks, we generally does not invest in real estate, interests in real
estate, real estate mortgages, or securities of persons primarily engaged in
real estate activities.
ITEM 3. LEGAL PROCEEDINGS
The nature of the business of PAB and the subsidiary banks ordinarily results in
a certain amount of litigation. Accordingly, we are party to a limited number
of lawsuits incidental to our respective businesses. In our opinion, the
ultimate disposition of these matters will not have a material adverse impact on
our consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the fourth
quarter of 2001.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock has been listed for quotation on the American Stock Exchange
("AMEX") under the symbol "PAB" since July 9, 1996. As of March 1, 2002, there
were 2,300 holders of record of our common stock.
Our ability to pay dividends is primarily dependent on earnings from operations,
the adequacy of capital and the availability of liquid assets for distribution.
Our ability to generate liquid assets for distribution is primarily dependent on
the ability of our subsidiary banks to pay dividends to us. The payment of
dividends is an integral part of our goal to retain sufficient capital to
support future growth and to meet regulatory requirements while providing a
competitive return on investment to our stockholders. For more information on
dividend restrictions see the "Payment of Dividends" section in Item 1 of this
Report.
The following table sets forth, for the indicated periods, the high and low
closing sales prices for our common stock as reported by AMEX, the cash
dividends declared, and the diluted earnings per share.
Sales Price
-------------
Calendar Period High Low Dividends Earnings
--------------- ----- ------ --------- ---------
2000
First Quarter $15.00 $ 8.63 $ 0.1050 $ 0.22
Second Quarter 12.13 9.50 0.1075 0.21
Third Quarter 12.19 9.75 0.1100 0.23
Fourth Quarter 10.81 8.69 0.1100 -0.06
2001
First Quarter 13.00 9.38 0.1100 0.18
Second Quarter 12.35 10.50 0.1100 0.19
Third Quarter 11.99 10.28 0.1100 0.14
Fourth Quarter 10.89 9.90 0.1100 -0.49
12
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data for PAB. This
selected financial data is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements and the Notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
(In thousands, except per share and other data) 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Summary of Operations:
Interest income $ 62,715 $ 57,526 $ 49,495 $ 48,385 $ 44,381
Interest expense 35,600 28,674 22,906 23,439 21,225
--------------------------------------------------------------------------------------------------------------------
Net interest income 27,115 28,852 26,589 24,946 23,156
Provision for loan losses 12,220 4,099 985 903 793
Other income 11,923 5,756 6,060 5,266 4,442
Other expense 26,921 21,874 18,966 17,224 15,275
--------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense (103) 8,635 12,698 12,085 11,530
Income tax expense (251) 2,909 4,005 4,098 4,022
--------------------------------------------------------------------------------------------------------------------
Net income $ 148 $ 5,726 $ 8,693 $ 7,987 $ 7,508
====================================================================================================================
Net interest income (taxable-equivalent) $ 27,216 $ 28,968 $ 26,718 $ 25,108 $ 22,988
Selected Average Balances:
Total assets $ 847,100 $ 694,674 $ 629,634 $ 597,461 $ 554,964
Earning assets 780,120 640,889 576,729 554,127 501,734
Loans 616,156 534,340 467,149 425,210 390,496
Deposits 694,219 548,276 500,582 488,322 462,302
Stockholders' equity 72,268 70,706 68,161 62,913 58,271
Selected Year End Balances:
Total assets $ 859,143 $ 794,907 $ 664,969 $ 620,111 $ 572,172
Earning assets 790,546 722,490 606,464 569,291 525,897
Loans 637,825 580,737 494,417 440,515 409,905
Allowance for loan losses 15,765 8,185 5,037 5,172 4,996
Deposits 720,398 637,180 516,204 504,087 472,556
Stockholders' equity 65,372 70,780 69,611 66,063 59,763
Common Share Data:
Outstanding at year end 9,409,913 9,501,947 9,617,406 9,604,027 9,594,319
Weighted average outstanding 9,482,709 9,528,387 9,612,634 9,602,946 9,544,959
Diluted weighted average outstanding 9,550,080 9,598,790 9,749,162 9,813,825 9,627,669
Per Share Ratios:
Net income - basic $ 0.02 $ 0.60 $ 0.90 $ 0.83 $ 0.79
Net income - diluted 0.02 0.60 0.89 0.81 0.78
Dividends declared 0.44 0.43 0.39 0.28 0.18
Book value 6.95 7.45 7.24 6.88 6.23
Profitability Ratios:
Return on average assets (ROA) 0.02% 0.82% 1.38% 1.34% 1.35%
Return on average equity (ROE) 0.20% 8.10% 12.75% 12.70% 12.88%
Net interest margin 3.49% 4.52% 4.63% 4.53% 4.37%
Efficiency ratio (excluding merger and
conversion costs) 74.02% 60.39% 57.12% 55.06% 55.28%
Liquidity Ratios:
Total loans to total deposits 88.54% 91.14% 95.78% 87.39% 86.74%
Average loans to average earning assets 78.98% 83.37% 81.00% 76.74% 77.83%
Noninterest-bearing deposits to total deposits 11.31% 11.09% 12.58% 14.30% 15.02%
Capital Adequacy Ratios:
Average equity to average assets 8.53% 10.18% 10.83% 10.53% 10.50%
Dividend payout ratio 2855.42% 72.08% 43.54% 33.95% 22.44%
Asset Quality Ratios:
Net charge-offs to average loans 0.75% 0.26% 0.24% 0.17% 0.09%
Nonperforming loans to total loans 1.91% 1.27% 0.54% 0.40% 0.24%
Nonperforming assets to total assets 1.57% 0.99% 0.52% 0.37% 0.26%
Allowance for loan losses to total loans 2.47% 1.41% 1.02% 1.17% 1.22%
Allowance for loan losses to nonperforming loans 129.44% 111.03% 188.79% 292.87% 498.11%
- ----------------------------------------------------------------------------------------------------------------------
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
GENERAL
The following discussion and analysis of the consolidated financial condition
and results of operations of PAB should be read in conjunction with the
Consolidated Financial Statements and related Notes, and is qualified in its
entirety by the foregoing and other more detailed financial information
appearing elsewhere. Historical results of operations and the percentage
relationships among any amounts included, and any trends which may appear to be
inferred, should not be taken as being necessarily indicative of trends in
operations or results of operations for any future periods.
We have made, and will continue to make, various forward-looking statements with
respect to financial and business matters. Comments regarding our business
which are not historical facts are considered forward-looking statements that
involve inherent risks and uncertainties. Actual results may differ materially
from those contained in these forward-looking statements. For additional
information regarding our cautionary disclosures, see the "Cautionary Notice
Regarding Forward-Looking Statements" at the beginning of this Report.
STATISTICAL DISCLOSURES
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
At December 31, 2001, our total assets were $859.1 million, a $64.2 million, or
8.1%, increase over total assets of $794.9 million at December 31, 2000. The
majority of the increase in assets was in new loan growth. Total loans
increased $57.1 million, or 9.8%, in 2001. This loan growth was funded with
bank deposits. Total deposits increased $83.2 million, or 13.1%, from $637.2
million at December 31, 2000 to $720.4 million one year later. Most of the
funds raised through deposit growth not used to fund new loans were used to pay
off advances from the Federal Home Loan Bank of Atlanta (the "FHLB"). We paid
off $21.2 million in higher-rate FHLB advances as they came due during 2001.
Total stockholders' equity decreased $5.4 million, from $70.8 million at
December 31, 2000 to $65.4 million at year end. With our net income for 2001
only contributing $147,000, the decrease in equity resulted primarily from the
payment of $4.2 million in dividends to our stockholders and the planned
buy-back of $1.3 million of our common stock.
During 2001, we saw the federal funds interest rate cut to its lowest level in
forty years. In an effort to stimulate a slowing economy, the Federal Reserve
lowered this benchmark short-term interest rate eleven times during 2001 from
6.50% at the end of 2000 to 1.75% by the end of 2001. These actions had a
profound negative impact on our net interest income for 2001. An unbalanced
combination of shorter-term and adjustable rate earning assets with longer-term
and fixed-rate interest-bearing liabilities recorded on the books of our six
different subsidiary banks prevented us from being able to adjust our balance
sheet fast enough to compensate for the rapid reduction in short-term interest
rates during the year. We have taken several actions to help manage our
interest rate risk and prepare for such interest rate volatility in the future.
These actions, designed around our charter consolidation plan, include the
installation of a new asset-liability management software package, the
designation of an officer responsible for the measurement and reporting of our
asset-liability position, the adoption of a comprehensive and updated risk
management policy, and the formation of a risk management committee charged with
managing interest rate risk and other risk elements.
The next two tables illustrate the effects of the decline in rates, despite an
increase in volume, on our net interest income during 2001.
14
Average Balances, Interest and Yields
The following table details the average balance of interest-earning assets and
interest-bearing liabilities, the amount of interest earned and paid, and the
average yields and rates realized for each of the last three fiscal years ended
December 31. Federally tax-exempt income is presented on a taxable-equivalent
basis assuming a 34% Federal tax rate. Loan average balances include loans on
nonaccrual status.
For the Years Ended
December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
ASSETS
Interest-earning assets:
Loans $616,156 $ 54,163 8.79% $ 534,340 $ 51,045 9.55% $467,149 $ 43,166 9.24%
Investment securities:
Taxable 93,377 5,468 5.86% 68,702 4,028 5.86% 81,341 4,849 5.96%
Nontaxable 4,607 299 6.49% 5,009 344 6.86% 6,677 378 5.66%
Other short-term
investments 65,980 2,886 4.37% 32,838 2,225 6.78% 21,562 1,231 5.71%
--------- ---------- --------- -------- -------- --------
Total interest-
earning assets 780,120 62,816 8.05% 640,889 57,642 8.99% 576,729 49,624 8.60%
Noninterest-earning assets:
Cash 23,329 25,170 26,292
Allowance for loan
losses (8,429) (5,650) (5,189)
Unrealized gain (loss)
on securities
available for sale 2,340 (240) 909
Other assets 49,740 34,505 30,893
--------- --------- --------
Total assets $847,100 $ 694,674 $629,634
========= ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits $141,314 $ 3,624 2.56% $ 116,661 $ 3,357 2.88% $111,642 $ 2,978 2.67%
Savings deposits 34,535 732 2.12% 28,723 725 2.52% 30,267 805 2.66%
Time deposits 443,486 27,012 6.09% 335,935 20,128 5.99% 294,673 16,131 5.47%
FHLB advances 51,248 3,213 6.27% 56,674 3,796 6.70% 44,376 2,507 5.65%
Notes payable 7,930 468 5.90% - - - -
Other short-term
borrowings 13,958 551 3.95% 13,717 668 4.87% 11,421 485 4.25%
--------- ---------- --------- -------- -------- --------
Total interest-
bearing liabilities 692,471 35,600 5.14% 551,710 28,674 5.20% 492,379 22,906 4.65%
Noninterest-bearing liabilities
and stockholders' equity:
Demand deposits 74,884 66,957 64,000
Other liabilities 7,477 5,301 5,094
Stockholders' equity 72,268 70,706 68,161
--------- --------- --------
Total liabilities and
stockholders'
equity $847,100 $ 694,674 $629,634
========= ========= ========
Interest rate spread 2.91% 3.79% 3.95%
========= ======== =======
Net interest income $ 27,216 $ 28,968 $ 26,718
========== ======== ========
Net interest margin 3.49% 4.52% 4.63%
========= ======== =======
15
Rate / Volume Analysis
The following table shows a summary of the changes in interest income and
interest expense on a fully taxable equivalent basis resulting from changes in
volume and changes in rates for each category of interest-earning assets and
interest-bearing liabilities. The change in interest attributable to rate has
been determined by applying the change in rate between years to average balances
outstanding in the later year. The change in interest due to volume has been
determined by applying the rate from the earlier year to the change in average
balances outstanding between years. Thus, changes that are not solely due to
volume have been consistently attributed to rate.
For the Years Ended December 31, 2001 vs. 2000 2000 vs. 1999
- ----------------------------------------------------------------------------------------------------
Changes Due To Changes Due To
Increase ------------------ Increase ----------------
(Decrease) Rate Volume (Decrease) Rate Volume
- ----------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Increase (decrease) in:
Income from earning assets:
Loans $ 3,118 $(4,698) $ 7,816 $ 7,879 $1,670 $ 6,209
Taxable securities 1,440 (7) 1,447 (821) (68) (753)
Nontaxable securities (45) (17) (28) (34) 60 (94)
Other short-term investments 661 (1,585) 2,246 994 350 644
- ----------------------------------------------------------------------------------------------------
Total interest income 5,174 (6,307) 11,481 8,018 2,012 6,006
- ----------------------------------------------------------------------------------------------------
Expense from interest-bearing
liabilities:
Demand deposits 267 (442) 709 379 245 134
Savings deposits 7 (140) 147 (80) (39) (41)
Time deposits 6,884 440 6,444 3,997 1,738 2,259
FHLB advances (583) (220) (363) 1,289 594 695
Notes payable 468 - 468 - - -
Other short-term borrowings (117) (129) 12 183 85 98
- ----------------------------------------------------------------------------------------------------
Total interest expense 6,926 (491) 7,417 5,768 2,623 3,145
- ----------------------------------------------------------------------------------------------------
Net interest income $ (1,752) $(5,816) $ 4,064 $ 2,250 $ (611) $ 2,861
====================================================================================================
INVESTMENT PORTFOLIO
The carrying values of investment securities at the indicated dates are
presented below. Changes in the mix of our investment portfolio will vary over
time given changes in market conditions and liquidity needs of our subsidiary
banks.
As of December 31, 2001 2000 1999
- ---------------------------------------------------------------------
(Dollars in Thousands)
U. S. Government and agency securities $ 56,504 $51,031 $45,158
State and municipal securities 4,999 4,967 5,486
Mortgage-backed securities 32,199 21,127 21,117
Corporate debt securities 8,389 - -
Marketable equity securities 4,827 2,817 2,499
Restricted and other equity securities 6,536 4,983 4,666
- ---------------------------------------------------------------------
Total $113,454 $84,925 $78,926
=====================================================================
The following table shows the contractual maturities of non-equity investment
securities at December 31, 2001 and the weighted-average yields (for all
obligations on a fully taxable basis assuming a 34% tax rate) on such
securities. Actual maturities usually differ from contractual maturities
because certain security issuers have the right to call or prepay obligations
with or without call or prepayment penalties.
U.S. Government State, County, Corporate Mortgage-
and Agency and Municipal Debt backed
Securities Securities Securities Securities
As of December 31, 2001 Amount Yield Amount Yield Amount Yield Amount Yield
- -------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Due in one year or less $ 9,386 5.52% $ 1,691 6.52% $ 8,389 2.55% $ 564 6.20%
Due after one year through five years 19,947 5.65% 1,419 6.84% - - 1,469 6.24%
Due after five years through ten years 27,171 5.82% 104 6.27% - - 4,963 5.38%
Due after ten years - - 1,785 6.68% - - 25,203 5.62%
- -------------------------------------------------------------------------------------------------------------
Total $56,504 5.71% $ 4,999 6.66% $ 8,389 2.55% $32,199 5.62%
- -------------------------------------------------------------------------------------------------------------
16
The estimated fair market value of our investment portfolio at December 31,
2001, was approximately $878,000 above amortized cost; however, market values
vary significantly as interest rates change. Of the investments maturing after
one year, approximately $27.3 million are potentially callable at par value or
more within one year.
Our investment portfolio policy stresses quality and liquidity. Approximately
95% of the investment portfolio is rated "A" or better by Standard and Poor's or
Moody's Investors Service, Inc. Non-rated securities are principally issued by
various political subdivisions within the states of Georgia and Florida. The
portfolio is monitored to assure there is no unreasonable concentration of
securities in the obligations of a single debtor.
LOAN PORTFOLIO
Early in 2001, we engaged an outside consulting firm to perform an assessment of
our subsidiary banks' credit risk management practices and credit process. As a
result of this engagement, we developed and adopted a new comprehensive loan
policy during the fourth quarter of 2001. A well-drafted loan policy will help
us maintain soundness and profitability while obtaining planned growth. We
recognize that a policy is only one segment in pursuit of loan portfolio
soundness. Equally important is the employment of capable, skilled and
experienced personnel to market and administer selected financial and fiduciary
services to our target customer base in our defined market areas. The new
policy is more structured and conservative, and it will take some time to orient
our lending personnel to the new lending philosophy.
We make both secured and unsecured loans to individuals, corporations, and other
entities with the goals of safety, soundness, profitability and responsiveness
to community needs. The loan portfolio contains no foreign or energy-related
loans or significant concentrations in any one industry or loan type, with the
exception of loans secured by residential and commercial real estate in our
market areas.
Types of Loans
The amount of loans outstanding at the indicated dates is presented in the
following table according to type of loan.
As of December 31, 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Commercial and financial $ 80,493 $ 72,942 $ 59,328 $ 56,531 $ 71,355
Agricultural 26,428 23,064 8,197 6,759 7,340
Real estate - construction 63,486 40,130 31,858 22,567 19,519
Real estate - mortgage 402,988 376,000 332,008 298,211 262,041
Installment loans to individuals and other 64,806 68,880 63,424 56,825 50,143
- ----------------------------------------------------------------------------------------------------
638,201 581,016 494,815 440,893 410,398
Unearned income, net (376) (279) (398) (378) (493)
- ----------------------------------------------------------------------------------------------------
637,825 580,737 494,417 440,515 409,905
Allowance for loan losses (15,765) (8,185) (5,037) (5,172) (4,996)
- ----------------------------------------------------------------------------------------------------
Loans, net $622,060 $572,552 $489,380 $435,343 $404,909
====================================================================================================
The percentage of loans outstanding at the indicated dates is presented in the
following table according to type of loan.
As of December 31, 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Commercial and financial 12.62% 12.56% 12.00% 12.83% 17.41%
Agricultural 4.15% 3.97% 1.66% 1.54% 1.79%
Real estate - construction 9.95% 6.91% 6.44% 5.12% 4.76%
Real estate - mortgage 63.18% 64.75% 67.15% 67.70% 63.93%
Installment loans to individuals and other 10.16% 11.86% 12.83% 12.90% 12.23%
- ----------------------------------------------------------------------------------------------------
100.06% 100.05% 100.08% 100.09% 100.12%
Unearned income, net -0.06% -0.05% -0.08% -0.09% -0.12%
- ----------------------------------------------------------------------------------------------------
100.00% 100.00% 100.00% 100.00% 100.00%
Allowance for loan losses -2.47% -1.41% -1.02% -1.17% -1.22%
- ----------------------------------------------------------------------------------------------------
Loans, net 97.53% 98.59% 98.98% 98.83% 98.78%
====================================================================================================
17
Maturities and Sensitivities of Loans to Changes in Interest Rates
A schedule of loans maturing, based on contractual terms, is presented in the
following table for selected loan types.
Commercial Real Estate -
As of December 31, 2001 & Financial Agricultural Construction
- -------------------------------------------------------------------------------------------
(Dollars in Thousands)
Due in one year or less $ 43,361 $ 15,525 $ 41,287
Due after one year through five years 29,287 9,931 12,274
Due after five years 7,845 972 9,925
- -------------------------------------------------------------------------------------------
Total $ 80,493 $ 26,428 $ 63,486
===========================================================================================
Of the above loans maturing after one year,
those with predetermined fixed rates $ 18,692 $ 6,567 $ 12,261
those with floating or adjustable rates 18,440 4,336 9,938
- -------------------------------------------------------------------------------------------
Total maturing after one year $ 37,132 $ 10,903 $ 22,199
===========================================================================================
Nonperforming Loans
The amount of nonperforming loans outstanding at the indicated dates is
presented in the following table by category.
As of December 31, 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------
(Dollars in Thousands)
Loans accounted for on a nonaccrual basis $10,581 $2,430 $2,395 $1,567 $ 825
Accruing loans which are contractually past due
90 days or more as to principal or interest
payments 1,598 509 273 199 178
Loans not included above which are "troubled
debt restructurings" as defined in SFAS No. 15 - - - - -
Other impaired loans - 4,433 - - -
- -------------------------------------------------- ------- ------ ------ ------ ------
Total nonperforming loans $12,179 $7,372 $2,668 $1,766 $1,003
================================================== ======= ====== ====== ====== ======
Total nonperforming loans increased $4.8 million, or 65.2%, since 2000. More
than half of this increase is on a commercial real estate development line with
a remaining balance of $2.7 million. This line was placed on nonaccrual status
in September due to its delinquent status. In the fourth quarter of 2001, we
took a $2 million write-down on the line due to a potential collateral
deficiency. The liquidation of the underlying collateral is our primary source
of repayment at this juncture.
Included in the schedule of nonperforming loans at December 31, 2000, were loans
to one borrower categorized as "other impaired loans" with a net principal
balance outstanding of approximately $4.4 million. These loans are
conditionally guaranteed by the U. S. Department of Agriculture. However, these
loans are considered by us to be impaired loans as defined in SFAS No. 114.
During the fourth quarter of 2000, we charged-off the unguaranteed balances and
established a reserve for interest accrued but uncollected through year end.
Unable to come to resolution with the USDA during 2001, we foreclosed on the
property, wrote the property down to fair value, placed the balance of the loans
on nonaccrual status, and charged-off an additional $1 million leaving a
remaining principal balance of $3.0 million at December 31, 2001. We have
directed legal counsel to evaluate our position and submit a formal claim
seeking final resolution with the USDA in 2002.
For the year ended December 31, 2001, the gross interest income that would have
been recorded in the period had the above nonperforming loans been current in
accordance with their original terms and had been outstanding throughout the
year was approximately $1,109,000. The amount of interest income on the above
nonperforming loans that was included in net income for the year ended December
31, 2001 was approximately $59,500.
The accrual of interest on loans is discontinued when, in our judgment, 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 status or charged off is reversed against interest income.
Interest income on nonaccrual loans is subsequently recognized only to the
extent cash payments are received unless and until the loan is returned to
accrual status.
A potential problem loan is any loan which is not disclosed above as
nonperforming, but where known information about possible credit problems of the
borrower causes management to have serious doubts as to the ability of such
borrower to comply with the present loan repayment terms. As of December 31,
2001, there were approximately $1.7 million in loans not classified as
nonperforming that management considered as potential problem loans.
18
SUMMARY OF LOAN LOSS EXPERIENCE
Analysis of the Allowance for Loan Losses
The following table summarizes the activity in the allowance for loan losses,
the average balance of loans outstanding, and the ratio of net losses
experienced for each of the last five years.
For the Years Ended December 31, 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Balance at beginning of year $ 8,185 $ 5,037 $ 5,172 $ 4,996 $ 4,570
Charge-offs:
Commercial, financial and agricultural 1,619 680 444 207 97
Real estate - construction 2,001 110 13 - -
Real estate - mortgage (commercial and residential) 538 393 191 45 36
Installment loans to individuals and other loans 675 401 568 571 314
- -------------------------------------------------------------------------------------------------------------
4,833 1,584 1,216 823 447
- -------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial and agricultural 55 59 10 16 14
Real estate - construction - - - - -
Real estate - mortgage (commercial and residential) 72 72 - 22 16
Installment loans to individuals and other loans 66 51 86 58 50
- -------------------------------------------------------------------------------------------------------------
193 182 96 96 80
- -------------------------------------------------------------------------------------------------------------
Net charge-offs 4,640 1,402 1,120 727 367
- -------------------------------------------------------------------------------------------------------------
Additions provided to the allowance
charged to operations 12,220 4,099 985 903 793
Allowance for loan losses of acquired bank - 451 - - -
- -------------------------------------------------------------------------------------------------------------
Balance at end of year $ 15,765 $ 8,185 $ 5,037 $ 5,172 $ 4,996
=============================================================================================================
Average balance of loans outstanding $616,156 $534,340 $467,149 $425,210 $390,496
=============================================================================================================
Ratio of net charge-offs during the year to average
loans outstanding during the year 0.75% 0.26% 0.24% 0.17% 0.09%
=============================================================================================================
Upon adoption of the new loan policy mentioned above, we began an intensive
review of our loan portfolio to identify problem credits and potential problem
credits not previously detected. To assist us in this process, we engaged an
experienced, independent loan review team. At the same time, we had our annual
examinations by our external auditors and the Federal Reserve, our primary
federal regulatory agency. In the end, varying degrees of weakness in a
significant amount of loans in our portfolio were discovered, and we recorded
approximately $10.2 million in additional provisions in the fourth quarter to
bring our allowance for loan losses to an adequate level. Approximately $7.2
million of that additional fourth quarter provision was required by the Federal
Reserve.
The allowance for loan losses as a percentage of nonperforming loans was 129.44%
at December 31, 2001, compared to 111.03% at December 31, 2000. We consider the
current level of the allowance for loan losses adequate to absorb losses from
loans in the portfolio. With the new loan policy, we have begun a more
comprehensive methodology in determining the adequacy of our allowance for loan
losses. This new methodology is in line with SEC Staff Accounting Bulletin No.
102 and generally accepted accounting principles. This methodology includes an
assessment for specific valuations on larger loan lines and nonperforming loans,
and an assessment based more on environmental factors applied to other smaller
homogenous groups of otherwise performing loans. The environmental factors
considered in developing our loss measurements include:
- levels of and trends in delinquencies and impaired loans;
- levels of and trends in charge-offs and recoveries;
- trends in volume and terms of loans;
- effects of any changes in risk selection and underwriting standards
and other changes in lending policies, procedures, and practices;
- experience, ability, and depth of lending management and other
relevant staff;
- national and local economic trends and conditions;
- industry conditions; and
- effects of changes in credit concentrations.
Changes in the factors we use to determine the adequacy of the allowance, or the
availability of new information, could cause the allowance for loan losses to be
increased or decreased in future periods.
19
Allocation of the Allowance for Loan Losses
We have allocated the allowance for credit losses according to the amount deemed
to be reasonably necessary at each year end to provide for the possibility of
losses being incurred within the categories of loans set forth in the table
below. The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
The components of the allowance for credit losses for each of the past five
years are presented below.
As of December 31, 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- -----------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Commercial, financial
and agricultural $ 2,823 16.7% $ 1,203 16.5% $ 687 13.7% $ 742 14.3% $ 958 19.2%
Real estate -
construction 1,572 9.9% 973 6.9% 324 6.4% 265 5.1% 237 4.7%
Real estate -
mortgage 9,244 63.2% 4,779 64.7% 3,380 67.1% 3,498 67.7% 3,190 63.9%
Installment loans to
Individuals 2,126 10.2% 1,230 11.9% 646 12.8% 667 12.9% 611 12.2%
Unallocated - - - - -
- -----------------------------------------------------------------------------------------------------------
Total $15,765 100.0% $ 8,185 100.0% $ 5,037 100.0% $ 5,172 100.0% $ 4,996 100.0%
===========================================================================================================
DEPOSITS
The following table summarizes average deposits and related weighted average
rates of interest paid for each of the three years presented.
For the Year Ended December 31, 2001 2000 1999
- -----------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------
(Dollars In Thousands)
Noninterest-bearing demand $ 74,884 - $ 66,957 - $ 64,000 -
Interest-bearing demand 141,314 2.56% 116,661 2.88% 111,642 2.67%
Savings 34,535 2.12% 28,723 2.52% 30,267 2.66%
Time 443,486 6.09% 335,935 5.99% 294,673 5.47%
- ---------------------------------- -------- ------- -------- ------- -------- -----
Total $694,219 4.52% $548,276 4.44% $500,582 3.98%
- ---------------------------------- -------- ------- -------- ------- -------- -----
The maturities of time deposits of $100,000 or more as of December 31, 2001 are
summarized below.
Amount (in thousands)
------------------------------------------------------
Three months or less $ 45,612
Over three through six months 32,793
Over six through twelve months 51,200
Over twelve months 27,795
------------------------------------------------------
Total $ 157,400
======================================================
20
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is an important factor in our financial condition and affects our
ability to meet borrowing needs and deposit withdrawal requirements of our
customers. Assets, consisting principally of loans and investment securities,
are funded by customer deposits, borrowed funds, and retained earnings.
Maturities in the investment and loan portfolios also provide a steady flow of
funds for reinvestment. In addition, our liquidity continues to be enhanced by
a relatively stable core deposit base and the availability of additional funding
sources.
At December 31, 2001, our liquidity ratio was 17.3% and our dependency ratio was
12.1%, compared to 20.1% and 12.9%, respectively, at December 31, 2000. The
decrease in our liquidity ratio from year to year is the result of our
intentions during the second half of 2001 to reduce excess liquidity as interest
rates declined. We are aware of no trends or events likely to result in a
material change in our liquidity from year end.
Monitoring our loan-to-deposit ratio is another tool we use to assess our
liquidity levels. For 2001 our average loan-to-deposit ratio was 88.8% compared
to 97.5% in 2000. The decrease in this ratio is attributed to a 26.6% increase
in average deposits compared to only a 15.3% increase in average loans.
Borrowings
We will often utilize external funding sources to fund growth and operations.
We utilize deposits, federal funds lines of credit with our correspondent banks,
and customer repurchase agreements to provide liquidity and short-term funding,
while long-term funding needs are met through advances from the FHLB and other
borrowing arrangements. Our FHLB advances outstanding averaged $51.2 million
during 2001. The advances outstanding at December 31, 2001 totaled $38.2
million with a weighted-average stated interest rate of 5.56%. Using our excess
liquidity, we retired $21.1 million in FHLB advances as they came due during
2001.
On November 28, 2001, PAB Bankshares Capital Trust I ("PAB Trust") issued $10
million of Floating Rate Capital Securities, also referred to as "trust
preferred securities". We formed PAB Trust, a statutory business trust created
under the laws of the State of Delaware, for the sole purpose of issuing the
Capital Securities and investing the proceeds in Floating Rate Junior
Subordinated Debentures issued by us. The interest rates on both the Capital
Securities and the Debentures are reset semi-annually at LIBOR plus 3.75%
(currently 6.007%) with a rate cap of 11.0% through December 8, 2006. We
entered into agreements which, taken collectively, fully, irrevocably and
unconditionally guarantee, on a subordinated basis, all of PAB Trust's
obligations under the Capital Securities. PAB Trust's sole asset is the
Debentures issued by us. The Debentures will mature on December 8, 2031, but
are callable at par at our option in whole or in part anytime after December 8,
2006. The proceeds from the issuance of these trust preferred securities
qualify as Tier 1 Capital under the risk-based capital guidelines established by
the Federal Reserve.
We used the proceeds of the trust preferred securities to retire $7.7 million on
a line of credit with The Bankers Bank of Atlanta, Georgia. Another $345,000
paid issuance costs, and the remaining $1.9 million of the proceeds was
contributed in the form of capital to Park Avenue.
Investment Portfolio
The investment portfolio is another primary source of liquidity. Maturities of
securities provide a constant flow of funds that are available for cash needs.
Contractual investment securities that mature within one year total $20.0
million. However, mortgage-backed securities and securities with call
provisions create cash flows earlier than the contractual maturities. Estimates
of prepayments on mortgage-backed securities and call provisions on Federal
agency and state and municipals increase the forecasted cash flow from the
investment portfolio.
Our liquidity from investments is somewhat limited since we pledge certain
investments to secure public deposits, certain borrowing arrangements, and for
other purposes. At December 31, 2001, approximately 50.4% of our $113.5 million
investment portfolio was pledged as collateral to others.
21
Commitments of Capital
Our financial statements do not reflect various commitments and contingent
liabilities that arise in the normal course of business. These off-balance
sheet financial instruments include commitments to extend credit and standby
letters of credit. These financial instruments are included in the financial
statements when funds are distributed or the instruments become payable. We use
the same credit policies in making commitments as we do for on-balance sheet
instruments. Our exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and credit card commitments is represented by the
contractual amount of those instruments. At December 31, 2001, we had
outstanding commitments to extend credit through open lines of credit of
approximately $61.7 million and outstanding standby letters of credit of
approximately $4.2 million.
At December 31, 2001, we had an outstanding commitment to complete the
construction of a $1.4 million operations center in Valdosta, Georgia. In
addition, we intend to build a branch office in Hall County, Georgia during
2001. The estimated cost for this facility is approximately $1.5 million. Our
plan is to fund both of these projects with cash provided from operations in
2002. Our cash flow from operations for the past three years has ranged between
$9.5 and $11.3 million per year. In addition to cash flows from operations, we
will have approximately $8 million in cash proceeds from the sale of our
Richmond Hill office in January 2002 that could be used to fund these projects.
There are no other binding commitments for material cash expenditures
outstanding.
Stockholders' Equity
We strive to maintain a ratio of stockholders' equity to total assets that is
adequate relative to industry standards. Our ratio of stockholders' equity to
total assets was 7.6% at December 31, 2001, compared to 8.9% at December 31,
2000. The decrease in capital is the combined result of asset growth, a
reduction in earnings, the payment of dividends, and a stock buyback plan. We
are required to comply with capital adequacy standards established by our
regulatory agencies. See the section titled "Capital Adequacy" under
Supervision and Regulation in Item 1 of this document for more information on
the regulatory capital adequacy standards.
The following table summarizes our regulatory capital ratios at December 31,
2001, 2000, and 1999.
Minimum
Regulatory
2001 2000 1999 Requirement
- ------------------------------------------------------------------------------------
Total Capital to Risk Weighted Assets 12.0% 12.5% 15.0% 8.0%
Tier 1 Capital to Risk Weighted Assets 10.8% 11.1% 14.0% 4.0%
Tier 1 Capital to Average Assets (Leverage Ratio) 8.0% 8.7% 11.8% 4.0%
- ------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
NET INTEREST INCOME
The primary component of a financial institution's profitability is net interest
income, or the difference between the interest income earned on assets,
primarily loans and investments, and interest paid on liabilities, primarily
deposits and other borrowed funds. Our net interest income for 2001, on a tax
equivalent basis, decreased $1.7 million, or 6.0%, from 2000. Total interest
income for 2001, on a tax equivalent basis, increased $5.2 million, or 8.9%,
from 2000. The increase in interest income is the net result of a $139.2
million, or 21.7%, increase in the volume of average earning assets held during
2001, offset by a 94 basis point drop in average yield earned on those assets.
Total interest expense for 2001 increased $6.9 million, or 24.2%, from 2000.
The increase in interest expense is the net result of a $140.8 million, or
25.5%, increase in the volume of average interest-bearing liabilities
outstanding during 2001, offset slightly by a 6 basis point drop in the average
rate paid on those liabilities. The increase in volume is primarily from the
purchase acquisition of the Ocala offices and growth from loan demand and
deposit generation in our markets. The decline in rates is the effect of eleven
separate interest rate cuts totaling 475 basis points perpetuated by the Federal
Reserve during 2001 in setting their monetary policy.
The net interest margin is net interest income expressed as a percentage of
average earning assets. Our net interest margin decreased from 4.52% in 2000
to 3.49% in 2001, a 103 basis point difference. For the year, our yield on
average earning assets fell from 8.99% in 2000 to 8.05% in 2001, a 94 basis
point drop. With most of our loan pricing based on the Prime Rate, the decrease
in the yield on earning assets can be attributed to the Prime Rate falling in
step with the short-term rates set by the Federal Reserve from 9.50% at December
31, 2000 to 4.75% at December 31, 2001. The impact of the interest rate cuts is
22
most notable when comparing yields earned during the fourth quarters of 2001 and
2000. Our yield on earning assets for the fourth quarter fell from 9.12% in
2000 to 7.20% in 2001. Another factor affecting our net interest margin was our
inability to reprice our fixed rate deposits and other borrowings as often as
our earning assets repriced during much of 2001. This kept our cost of funds up
during the falling rate environment. The average rate paid on interest-bearing
liabilities only decreased by 6 basis points during 2001. Fortunately, if
interest rates stabilize, approximately $127.5 million, or 29.6%, of our time
deposits will either reprice at the lower market rates or roll off during the
first quarter of 2002.
Net interest income for 2000, on a tax equivalent basis increased $2.3 million,
or 8.4%, from 1999. This increase can be attributed to the $67.2 million, or
14.4%, increase in average loans outstanding. The average balance sheet for
2000 grew $65.0 million due to strong loan demand. We funded this loan growth
by liquidating investments, offering promotional rate time deposits, and
borrowing short-term advances from the FHLB. During 2000, our cost of funds
increased by 55 basis points.
Net interest income for 1999, on a tax equivalent basis increased $1.6 million,
or 6.4% from 1998. This increase can be attributed to the $22.6 million, or
4.1%, increase in average interest earning assets. The average balance sheet
for 1999 grew $32.2 million, or 5.4%, due to loan demand. The net interest
margin increased as our cost of funds decreased.
The table below illustrates the changes in the net interest margin over the past
three fiscal years.
For the Year Ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Interest Percent of Interest Percent of Interest Percent of
Income/ Earning Income/ Earning Income/ Earning
Expense Assets Expense Assets Expense Assets
- ---------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Interest income $ 62,715 8.04% $ 57,526 8.98% $ 49,495 8.58%
Tax-equivalent adjustment 101 0.01% 116 0.01% 129 0.02%
- ---------------------------------------------------------------------------------------------------------------
Interest income, taxable equivalent 62,816 8.05% 57,642 8.99% 49,624 8.60%
Interest expense 35,600 4.56% 28,674 4.47% 22,906 3.97%
- ---------------------------------------------------------------------------------------------------------------
Net interest income,
taxable equivalent $ 27,216 3.49% $ 28,968 4.52% $ 26,718 4.63%
===============================================================================================================
Average Earning Assets $ 780,120 $ 640,889 $ 576,729
===============================================================================================================
PROVISION FOR LOAN LOSSES
The provision for loan losses is the charge to operating earnings necessary to
maintain an adequate allowance for loan losses. Through the provision, we
maintain an allowance for loan losses that we believe is adequate to absorb
losses inherent in our loan portfolio. However, future additions to the
allowance may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
procedures, periodically review our allowance for loan losses. Based on their
judgments about information available to them at the time of their examination,
such agencies may require us to recognize additions to the allowance for loan
losses.
On a quarterly basis, we analyze the allowance for loan losses, nonperforming
loans, and net charge-offs to assess the adequacy of the allowance. At December
31, 2001, the allowance as a percent of total loans was 2.47%, compared to 1.41%
at December 31, 2000. The ratio of nonperforming loans to total loans was 1.91%
and 1.27% at December 31, 2001 and 2000, respectively. Net charge-offs as a
percent of average loans were at 0.75% and 0.26% for the years ended December
31, 2001 and 2000, respectively.
The provision for loan losses increased $8.1 million, or 198%, in 2001, from
$4.1 million to $12.2 million. Of the increase, $3.0 million was provided to
replenish the allowance after write-downs were taken on some impaired loans in
the fourth quarter. An additional $7.2 million was required to be recorded in
2001 by the examiners for the Federal Reserve after its initial examination of
Park Avenue. Park Avenue became a member of the Federal Reserve System during
the third quarter of 2001. The increased provisions were necessary to cover the
rise in nonperforming loans, to keep pace with an increase in charge-offs, and
to reserve for other weaknesses identified in the loan portfolio.
23
NONINTEREST INCOME
The following table summarizes noninterest income during the last three fiscal
years.
For the Year Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------
Percent Percent
Change Change
Amount 2001 vs. 2000 Amount 2000 vs. 1999 Amount
- ------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Service charges on deposit accounts $ 5,575 43.6% $ 3,881 6.9% $ 3,630
Mortgage origination fees 702 59.9% 439 -22.8% 569
Insurance commissions and fees 161 -46.7% 302 37.3% 220
Brokerage commissions and fees 306 144.8% 125 - -
Other commissions and fees 355 49.2% 238 88.9% 126
Securities transactions, net 1,741 7,354.2% (24) 29.4% (34)
Equity in earnings of Empire 590 4.8% 563 -17.3% 681
Gain (loss) on disposal of assets (24) 84.4% (154) -1500.0% 11
Earnings on bank-owned life insurance 532 280.0% 140 -74.1% 541
Gain (loss) on sale of Empire 1,462 - - -
Other 523 112.6% 246 -22.2% 316
- ------------------------------------------------------------------------------------------------------
Total Noninterest Income $11,923 107.1% $ 5,756 -5.0% $ 6,060
======================================================================================================
Noninterest income increased 107% in 2001, from $5.8 million to $11.9 million.
As a percentage of average assets, noninterest income, excluding securities
transactions and other non-recurring gains and losses, has been approximately
1.03%, 0.85%, and 0.97% for each of the last three fiscal years, respectively.
Approximately $371,000, or 6%, of the overall increase is due to income
generated in new markets during 2001. We consider our operations in McDonough,
Richmond Hill, and Gainesville, Georgia and Ocala, Florida as new markets for
2001.
Service charges on deposit accounts increased 44% due primarily to fee income
generated from an overdraft privilege product ("ODP") introduced in March 2001.
ODP fees generated approximately $1.4 million additional income in 2001. This
income is net of ODP losses of approximately $1.1 million. We do not anticipate
generating as much ODP fee income or incurring as many losses in 2002 due to the
implementation of more conservative limitations on the use of the product.
Service charges on deposit accounts in the new markets amounted to $312,000 in
2001.
Mortgage origination fees increased nearly 60% in 2001 due to a rise in
refinancing activity as interest rates fell during the year. If the demand for
refinancing slows during 2002, we expect our mortgage origination fee income to
decline as well.
Brokerage commissions increased nearly 145% in 2001 to $306,000. This is gross
fee income generated through PAB Financial. PAB Financial began operations in
late 1999, and although this operation is not independently profitable at this
point, we do expect PAB Financial to generate more fee income going forward.
The increase in income in 2001 from securities transactions is primarily due to
a gain of $1.7 million on the sale of stock in the Federal Home Loan Mortgage
Corporation ("FHLMC") held by one of our subsidiary banks.
Our equity in the earnings of Empire increased approximately 5% in 2001.
However, due to the sale of our 50% equity interest in Empire on November 30,
2001, there will be no further income contributed from this unconsolidated
subsidiary. We recorded a gain of nearly $1.5 million on the sale.
Earnings on bank-owned life insurance increased 280% in 2001, from $140,000 to
$532,000. The increase is due to the additional purchase of $6.3 million in
bank-owned life insurance policies in December 2000.
24
NONINTEREST EXPENSE
The following table summarizes noninterest expenses during the last three fiscal
years.
For the Year Ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------
Percent Percent
Change Change
Amount 2001 vs. 2000 Amount 2000 vs. 1999 Amount
- ---------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Salaries and wages $12,648 36.6% $ 9,259 11.8% $ 8,278
Employee benefits 2,716 20.4% 2,256 1.7% 2,219
Net occupancy expense of premises 1,580 35.6% 1,165 18.5% 983
Furniture and equipment expense 2,553 47.4% 1,732 20.2% 1,441
Amortization of intangible assets 409 13.6% 360 0.8% 357
Advertising and business development 601 14.3% 526 37.1% 384
Supplies and printing 953 51.0% 631 23.2% 512
Postage and courier 613 33.6% 459 -1.7% 467
Legal and accounting fees 437 -7.0% 470 9.9% 427
Outside consulting fees 346 -20.8% 437 90.8% 229
Director and committee fees 423 -25.5% 568 18.2% 481
Merger and acquisition costs 7 -85.7% 49 -90.8% 535
Conversion costs 313 -62.4% 833 - -
Other 3,723 18.9% 3,129 17.9% 2,653
- --------------------------------------------------------------------------------------------------
Total Noninterest Expense $27,322 24.9% $21,874 15.3% $18,966
==================================================================================================
Noninterest expense increased 25% in 2001, from $21.9 million to $27.3 million.
As a percentage of average assets, noninterest expense, excluding merger and
acquisition costs, conversion costs, and other non-recurring charges discussed
below, has been approximately 2.91%, 3.02%, and 2.93% for each of the last three
fiscal years, respectively. Approximately $2.8 million, or 52%, of the overall
increase is due to costs incurred in new markets during 2001. We consider our
operations in McDonough, Richmond Hill, and Gainesville, Georgia and Ocala,
Florida as new markets for 2001.
Salaries and employee benefits increased 33% in 2001, from $11.5 million to
$15.4 million. Approximately $1.4 million of the increase is directly
attributable to personnel costs in the new markets. Additional one-time charges
amounting to $2.2 million related to the cancellation of two executives'
employment agreements are also included in 2001. Other increases are the result
of annual raises, promotions, health insurance premium increases, etc.
Occupancy and equipment expense increased nearly 43% in 2001, from $2.9 million
to $4.1 million. Approximately $412,000 of the increase is directly
attributable to the costs of maintaining premises and equipment in the new
markets. Depreciation expense increased $601,000 in 2001 as a result of the
$10.8 million in premises and equipment acquired in 2000 and 2001.
INCOME TAXES
Our pre-tax operating loss for 2001 of $103,000 resulted in a net tax benefit of
$251,000. The net tax benefit is comprised of current taxes of $3.1 million
offset by a $3.3 million deferred tax benefit. The deferred tax benefit results
primarily from the timing difference between periods when the provision for loan
losses is recorded on the books and when the actual loss is recorded and the tax
deduction is allowed. No valuation allowance was recorded against these
deferred tax assets as we expect to use their benefits within a reasonable
period of time.
FOURTH QUARTER RESULTS
We had a net loss of $4.7 million, or $0.49 per share, for the fourth quarter of
2001, compared to a $0.06 loss per share in the fourth quarter of 2000. An
$11.2 million provision for loan losses and one-time charges totaling $2.2
million in canceling two executive officers' employment contracts were the
primary contributors to our operating loss during the quarter. These charges
were offset by gains of $1.5 million on the sale of Empire and $1.7 million on
the sale of FHLMC stock.
The net interest margin was 3.32% compared to 4.22% in 2000. The average yield
on earning assets fell from 9.12% in 2000 to 7.20% in 2001. However, the
average rate on interest-bearing liabilities improved from 5.60% in 2000 to
4.41% in 2001 as we continued to reprice or retire higher rate time deposits and
FHLB advances.
25
IMPACT OF INFLATION
Inflation impacts the growth in total assets in the banking industry and causes
a need to increase equity capital at higher than normal rates to meet capital
adequacy requirements. We cope with the effects of inflation through managing
our interest rate sensitivity gap position, by periodically reviewing and
adjusting our pricing of services to consider current costs, and through
managing our dividend payout policy relative to our level of income.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, effective for
fiscal years beginning after June 15, 2000. This Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measure them at fair value. If certain
conditions are met, an entity may elect to designate a derivative as follows:
(a) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of an unrecognized firm commitment, an available-for-sale
security, a foreign currency denominated forecasted transaction, or a net
investment in a foreign operation. The Statement generally provides for
matching the timing of the recognition of the gain or loss on derivatives
designated as hedging instruments with the recognition of the changes in the
fair value of the item being hedged. Depending on the type of hedge, such
recognition will be in either net income or other comprehensive income. For a
derivative not designated as a hedging instrument, changes in fair value will be
recognized in net income in the period of change. We adopted SFAS No. 133 on
January 1, 2001, with no material impact on our financial condition or results
of operations.
DELAYED ADOPTION OF FASB STATEMENT
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all
business combinations consummated after June 30, 2001 be accounted for by the
purchase method unless the combination was initiated on or prior to that date
and it meets the conditions to be accounted for by the pooling-of-interests
method in accordance with AFB Opinion No. 16, Business Combinations. SFAS No.
142 is required to be applied in years beginning after December 15, 2001. Under
SFAS No. 142, goodwill and intangible assets that management concludes has
indefinite useful lives will no longer be amortized, but will be subject to
impairment tests performed at least annually. Also, upon initial application,
we are required to perform a transitional impairment test of all previously
recognized goodwill and to assign all recognized assets and liabilities to
reporting units. Other intangible assets will continue to be amortized over
their useful lives as determined at the date of initial application.
We will adopt SFAS No. 142 beginning in the first quarter of 2002. Application
of the nonamortization provisions of SFAS No. 142 is expected to result in an
increase in net income of $409,000 ($.04 per basic and diluted share) per year.
During 2002, we will perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets, but we have not yet determined
what effect those test will have on our financial condition or results of
operations.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to exposure to U.S. dollar interest rate changes and accordingly,
we manage our exposure by considering the possible changes in the net interest
margin. We do not engage in trading activity 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 held pass through
securities. Finally, we have no material direct 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. It is our policy to maintain a gap ratio in the one-year
time horizon between 0.80 and 1.20. The table below has two measures of gap;
regulatory and management-adjusted. The regulatory gap considers only
contractual maturities or repricings. The management-adjusted gap includes
assumptions regarding prepayment speeds on certain rate sensitive assets, the
repricing frequency of interest-bearing demand and savings accounts, and the
stability of core deposit levels, all of which are adjusted periodically as
market conditions change. The management-adjusted gap indicates that we are
highly asset sensitive in relation to changes in market interest rates in the
short-term. Being asset sensitive would result in net interest income
increasing in a rising rate environment and decreasing in a declining rate
environment. At December 31, 2001, our one-year management-adjusted gap ratio
of 1.47 was outside of our policy guidelines, however, this exception to policy
was mitigated by our strategy to position our balance sheet to benefit from an
increase in interest rates. Also, our assumptions on prepayments speeds, based
in part on the Mortgage Bankers Association's Refinancing Index that reached
record high levels during the fourth quarter of 2001, may not be sustainable
throughout the next twelve months.
We use 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 allows us 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
an immediate 200 basis point increase or decrease in market rates on net
interest income and is monitored on a quarterly basis. As of year end, the
simulation model projected net interest income would increase 19.3% over the
next twelve months if market rates immediately rose by 200 basis points. On the
other hand, the model projected net interest income to decrease 14.4% over the
next twelve months if market rates immediately fell by 200 basis points. The
high volatility in our results is due primarily to our asset-sensitive balance
sheet mix. Our policy states that net interest income cannot be reduced by more
than 10% using this analysis, and technically, we were outside of policy
guidelines at year end. However, this exception was mitigated because a further
200 basis point drop was not realistic given that the federal funds rate stood
at 1.75%. If market rates fell by only 100 basis points, a more plausible
scenario, our model projected net interest income to decrease 9.3% over the next
twelve months.
CUMULATIVE GAP ANALYSIS
3-Month 6-Month 1-Year
- --------------------------------------------------------------------
(Dollars in Thousands)
Regulatory Defined
Rate Sensitive Assets (RSA) $341,470 $382,333 $ 435,167
Rate Sensitive Liabilities (RSL) 345,652 432,855 568,891
- --------------------------------------------------------------------
RSA minus RSL (Gap) $ (4,182) $(50,522) $(133,724)
Gap Ratio (RSA/RSL) 0.99 0.88 0.76
Management-Adjusted
Rate Sensitive Assets (RSA) $633,842 $703,298 $ 720,330
Rate Sensitive Liabilities (RSL) 158,458 261,261 490,893
- --------------------------------------------------------------------
RSA minus RSL (Gap) $475,384 $442,037 $ 229,437
Gap Ratio (RSA/RSL) 4.00 2.69 1.47
27
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
QUARTERLY FINANCIAL SUMMARY FOR 2001 AND 2000
Quarterly Period Ended
March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Year Ended December 31, 2001:
Interest income $ 16,359 $ 16,410 $ 15,453 $ 14,492
Interest expense 9,412 9,479 8,876 7,833
- ----------------------------------------------------------------------------------------
Net interest income 6,947 6,931 6,577 6,659
Provision for loan losses 280 301 488 11,151
- ----------------------------------------------------------------------------------------
Net interest income (loss)
after provision for
loan losses 6,667 6,630 6,089 (4,492)
Other income 1,912 2,445 2,199 5,367
Other expenses 6,178 6,382 6,451 7,909
- ----------------------------------------------------------------------------------------
Income (loss) before
income taxes 2,401 2,693 1,837 (7,034)
Income tax (benefit) 721 854 526 (2,352)
- ----------------------------------------------------------------------------------------
Net income (loss) $ 1,680 $ 1,839 $ 1,311 $ (4,682)
========================================================================================
Basic earnings (loss) per share $ 0.18 $ 0.19 $ 0.14 $ (0.49)
Diluted earnings (loss) per share $ 0.18 $ 0.19 $ 0.14 $ (0.49)
Year Ended December 31, 2000:
Interest income $ 13,473 $ 13,882 $ 14,673 $ 15,498
Interest expense 6,223 6,569 7,544 8,338
- ----------------------------------------------------------------------------------------
Net interest income 7,250 7,313 7,129 7,160
Provision for loan losses 391 337 367 3,004
- ----------------------------------------------------------------------------------------
Net interest income
after provision for
loan losses 6,859 6,976 6,762 4,156
Other income 1,340 1,328 1,576 1,512
Other expenses 5,036 5,261 4,991 6,586
- ----------------------------------------------------------------------------------------
Income (loss) before
income taxes 3,163 3,043 3,347 (918)
Income tax (benefit) 1,038 1,034 1,172 (335)
- ----------------------------------------------------------------------------------------
Net income (loss) $ 2,125 $ 2,009 $ 2,175 $ (583)
========================================================================================
Basic earnings (loss) per share $ 0.22 $ 0.21 $ 0.23 $ (0.06)
Diluted earnings (loss) per share $ 0.22 $ 0.21 $ 0.23 $ (0.06)
28
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
We are responsible for the preparation of the financial statements, related
financial data and other information in this Annual Report on Form 10-K. The
financial statements are prepared in accordance with generally accepted
accounting principles and include amounts based on management's estimates and
judgment where appropriate. Financial information appearing throughout this
Report is consistent with the financial statements.
Our accounting system, which records, summarizes and reports financial
transactions, is supported by an internal control structure which provides
reasonable assurance that assets are safeguarded and that transactions are
recorded in accordance with our policies and established accounting procedures.
As an integral part of the internal control structure, we maintain a
professional staff of internal auditors who monitor compliance with and assess
the effectiveness of the internal control structure.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets regularly with management, internal auditors and independent
public accountants to review matters relating to financial reporting, internal
control structure and the nature, extent and results of the audit effort. The
independent public accountants and the internal auditors have access to the
Audit Committee with or without management present.
The financial statements have been audited by Mauldin & Jenkins, LLC,
independent public accountants, who rendered an independent opinion on our
financial statements. Their appointment was recommended by the Audit Committee
and approved by the Board of Directors. Their examination provides an objective
assessment of the degree to which we meet our responsibility for financial
reporting. Their opinion on the financial statements is based on auditing
procedures, which include reviewing the internal control structure to determine
the timing and scope of audit procedures and performing selected tests of
transactions and records as they deem appropriated. These auditing procedures
are designed to provide a reasonable level of assurance that the financial
statements are fairly presented in all material respects.
Michael E. Ricketson Donald J. Torbert, Jr. Laura A. Hancock
President and Senior Vice President and Vice President and
Chief Executive Officer Chief Financial Officer Controller
29
INDEPENDENT AUDITOR'S REPORT
================================================================================
To the Board of Directors
PAB Bankshares, Inc.
Valdosta, Georgia
We have audited the accompanying consolidated balance sheet of PAB
Bankshares, Inc. and Subsidiaries as of December 31, 2001, and the related
statements of income, comprehensive income (loss), stockholders' equity and cash
flows for the year then ended. 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 audit. The financial
statements of PAB Bankshares, Inc. and Subsidiaries for each of the two years in
the period ended December 31, 2000 were audited by other auditors, whose report
dated January 26, 2001 expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2001 financial statements referred to above
present fairly, in all material respects, the financial position of PAB
Bankshares, Inc. and Subsidiaries, as of December 31, 2001, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ MAULDIN & JENKINS, LLC
Albany, Georgia
April 3, 2002
30
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
PAB Bankshares, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of condition of PAB
Bankshares, Inc. and its Subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the statement of condition as
of December 31, 2000 of Friendship Community Bank, a wholly-owned subsidiary
which statement reflects total assets constituting 6.2% as of December 31, 2000,
of the related consolidated total assets. That statement was audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Friendship Community Bank, is based solely
on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. As audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of PAB Bankshares, Inc. and its
Subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
We previously audited and reported on the consolidated statements of income,
comprehensive income, stockholders' equity and cash flows of PAB Bankshares,
Inc. and its Subsidiaries for the year ended December 31, 1998, prior to their
restatement for the 1999 pooling of interests. The contribution of PAB
Bankshares, Inc. and Subsidiaries to revenues and net income for the year ended
December 31, 1998 represented 84% and 83% of the respective restated totals.
Separate financial statements of the other companies included in the 1998
restated consolidated statements of income, comprehensive income, stockholders'
equity, and cash flows were audited and reported on separately by other
auditors. We also audited the combination of the accompanying consolidated
statements of income, retained earnings, and cash flows for the year ended
December 31, 1998, after restatement for the 1999 pooling of interests. In our
opinion, such consolidated statements have been properly combined on the basis
described in Note 1 of the notes to the consolidated financial statements.
/s/ Stewart, Fowler & Stalvey, P.C.
- -----------------------------------
Valdosta, Georgia
January 26, 2001
31
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
- -----------------------------------------------------------------------------------------------
2001 2000
------------- -------------
ASSETS
Cash and due from banks $ 28,188,779 $ 29,697,335
Interest-bearing deposits in other banks 15,940,115 13,414,020
Federal funds sold 24,205,000 43,415,000
Investment securities, at fair value 113,454,135 84,924,830
Loans 637,825,571 580,736,533
Allowance for loan losses (15,765,373) (8,184,641)
------------- -------------
Net loans 622,060,198 572,551,892
------------- -------------
Premises and equipment 23,508,083 22,380,725
Goodwill and other intangible assets 5,984,604 6,450,742
Investment in unconsolidated subsidiary - 57,639
Cash value of bank-owned life insurance policies 9,471,936 9,041,355
Foreclosed assets 1,311,933 566,518
Other assets 15,018,471 12,406,513
------------- -------------
Total assets $859,143,254 $794,906,569
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 81,493,517 $ 70,679,023
Interest-bearing 638,904,142 566,500,715
------------- -------------
Total deposits 720,397,659 637,179,738
------------- -------------
Federal funds purchased and securities sold under
agreements to repurchase 15,708,621 12,165,591
Advances from the Federal Home Loan Bank 38,228,478 58,701,282
Guaranteed preferred beneficial interests in debentures (trust
preferred securities) 10,000,000 -
Other borrowings - 7,667,280
Other liabilities 9,436,613 8,412,198
------------- -------------
Total liabilities 793,771,371 724,126,089
------------- -------------
Stockholders' equity:
Preferred stock, no par value, 1,500,000 shares authorized,
no shares issued - -
Common stock, no par value, 98,500,000 shares authorized,
9,409,913 and 9,501,947 shares issued 1,217,065 1,217,065
Additional paid-in capital 28,657,351 29,754,284
Retained earnings 34,917,898 38,939,722
Accumulated other comprehensive income 579,569 869,409
------------- -------------
Total stockholders' equity 65,371,883 70,780,480
------------- -------------
Total liabilities and stockholders' equity $859,143,254 $794,906,569
============= =============
See accompanying notes to consolidated financial statements.
32
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- ----------------------------------------------------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
INTEREST INCOME
Interest and fees on loans $54,162,805 $51,045,640 $43,165,734
Interest and dividends on investment securities:
Taxable 5,468,147 4,028,030 4,849,344
Nontaxable 197,206 226,732 249,259
Other interest income 2,886,541 2,225,325 1,230,786
------------ ------------ ------------
Total interest income 62,714,699 57,525,727 49,495,123
------------ ------------ ------------
INTEREST EXPENSE
Interest on deposits 31,368,578 24,209,959 19,914,138
Interest on federal funds purchased and securities sold
under agreements to repurchase 550,840 668,246 484,993
Interest on Federal Home Loan Bank advances 3,212,932 3,796,126 2,507,423
Other interest expense 468,029 - -
------------ ------------ ------------
Total interest expense 35,600,379 28,674,331 22,906,554
------------ ------------ ------------
Net interest income 27,114,320 28,851,396 26,588,569
Provision for loan losses 12,220,250 4,098,663 985,188
------------ ------------ ------------
Net interest income after provision for loan losses 14,894,070 24,752,733 25,603,381
------------ ------------ ------------
OTHER INCOME
Service charges on deposit accounts 5,574,871 3,880,560 3,629,687
Other fee income 1,524,909 1,105,167 914,987
Securities transactions, net 1,740,720 (23,630) (33,629)
Equity in earnings of unconsolidated subsidiary 590,370 562,979 680,578
Other noninterest income 2,492,190 231,290 868,477
------------ ------------ ------------
Total other income 11,923,060 5,756,366 6,060,100
------------ ------------ ------------
OTHER EXPENSES
Salaries and employee benefits 15,364,051 11,515,415 10,496,961
Occupancy expense of premises 1,579,803 1,164,663 982,977
Furniture and equipment expense 2,552,914 1,731,930 1,440,998
Amortization of goodwill and other intangibles 408,635 359,520 356,664
Other noninterest expense 7,015,193 7,102,166 5,687,951
------------ ------------ ------------
Total other expenses 26,920,596 21,873,694 18,965,551
------------ ------------ ------------
Income (loss) before income tax expense (benefit) (103,466) 8,635,405 12,697,930
Income tax expense (benefit) (250,626) 2,908,808 4,005,054
------------ ------------ ------------
Net income $ 147,160 $ 5,726,597 $ 8,692,876
============ ============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.02 $ 0.60 $ 0.90
============ ============ ============
Diluted $ 0.02 $ 0.60 $ 0.89
============ ============ ============
See accompanying notes to consolidated financial statements.
33
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- -------------------------------------------------------------------------------------------
2001 2000 1999
------------ ---------- ------------
Net income $ 147,160 $5,726,597 $ 8,692,876
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during
the period, net of tax (benefit) of $442,595;
$531,975; and ($979,902) 859,035 1,032,658 (1,616,553)
Reclassification adjustment for (gains) losses
included in net income, net of (tax) benefit of
($591,845); $8,034; and $12,692 (1,148,875) 15,596 20,937
------------ ---------- ------------
(289,840) 1,048,254 (1,595,616)
------------ ---------- ------------
Comprehensive income (loss) $ (142,680) $6,774,851 $ 7,097,260
============ ========== ============
See accompanying notes to consolidated financial statements.
34
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- ---------------------------------------------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES PAR VALUE CAPITAL EARNINGS INCOME (LOSS) TOTAL
---------- ---------- ------------ ------------ -------------- ------------
BALANCE, DECEMBER 31, 1998 9,604,027 $1,217,065 $31,095,359 $32,334,269 $ 1,416,771 $66,063,464
Net income - - - 8,692,876 - 8,692,876
Other comprehensive loss - - - - (1,595,616) (1,595,616)
Cash dividends declared, $.3875
per share - - - (3,339,028) - (3,339,028)
Cash dividends declared by
pooled companies - - - (341,918) - (341,918)
Dividends on preferred stock of
subsidiaries - - - (10,080) - (10,080)
Stock issued to directors in lieu
of fees 9,503 - 114,630 - - 114,630
Stock options exercised 3,876 - 26,932 - - 26,932
---------- ---------- ------------ ------------ -------------- ------------
BALANCE, DECEMBER 31, 1999 9,617,406 1,217,065 31,236,921 37,336,119 (178,845) 69,611,260
Net income - - - 5,726,597 - 5,726,597
Other comprehensive income - - - - 1,048,254 1,048,254
Cash dividends declared, $.4325
per share - - - (4,122,994) - (4,122,994)
Stock acquired and cancelled
under stock repurchase plan (119,616) - (1,512,152) - - (1,512,152)
Stock options exercised 4,157 - 29,515 - - 29,515
---------- ---------- ------------ ------------ -------------- ------------
BALANCE, DECEMBER 31, 2000 9,501,947 1,217,065 29,754,284 38,939,722 869,409 70,780,480
Net income - - - 147,160 - 147,160
Other comprehensive loss - - - - (289,840) (289,840)
Cash dividends declared, $.4400
per share - - - (4,168,984) - (4,168,984)
Stock acquired and cancelled
under stock repurchase plan (123,534) - (1,293,808) - - (1,293,808)
Stock options exercised 31,500 - 196,875 - - 196,875
---------- ---------- ------------ ------------ -------------- ------------
BALANCE, DECEMBER 31, 2001 9,409,913 $1,217,065 $28,657,351 $34,917,898 $ 579,569 $65,371,883
========== ========== ============ ============ ============== ============
See accompanying notes to consolidated financial statements.
35
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- ----------------------------------------------------------------------------------------------------------
2001 2000 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 147,160 $ 5,726,597 $ 8,692,876
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion, net 2,674,847 2,019,426 1,842,249
Provision for loan losses 12,220,250 4,098,663 985,188
Provision for deferred taxes (3,343,255) (968,127) (184,024)
Net realized (gain) loss on securities transactions (1,740,720) 23,630 33,629
Net (gain) loss on disposal of assets 839 153,817 (10,889)
Gain on sale of interest in unconsolidated subsidiary (1,461,739) - -
Equity in earnings of unconsolidated subsidiary (590,370) (562,979) (680,578)
Dividends received from unconsolidated subsidiary 350,000 500,000 675,000
Increase in cash value of bank-owned life insurance (491,579) (139,958) (540,695)
Increase in deferred compensation accrual 1,156,175 176,877 381,764
Increase in retirement and severance accruals 1,436,388 - -
(Increase) decrease in interest receivable 443,054 (969,909) (604,525)
Increase in interest payable 80,769 774,898 251,976
(Increase) decrease in taxes receivable 144,270 (892,703) 207,543
Increase (decrease) in taxes payable - (340,497) 340,497
Net change in other assets and other liabilities (1,574,011) 1,679,617 (645,976)
------------- ------------- -------------
Net cash provided by operating activities 9,452,078 11,279,352 10,744,035
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in interest-bearing deposits
in other banks (2,526,095) (1,477,548) 197,536
(Increase) decrease in federal funds sold 19,210,000 (11,935,000) (5,000,000)
Activities on securities available for sale:
Purchases (72,833,848) (4,003,944) (16,350,094)
Proceeds from sales and calls 16,468,305 103,933 12,842,700
Proceeds from maturities and paydowns 30,620,307 11,707,704 22,714,619
Purchase of restricted and other equity securities (1,637,600) (163,500) (345,800)
Proceeds from redemption of restricted and
other equity securities 85,000 456,200 -
Net increase in loans (63,674,464) (65,053,345) (55,344,190)
Purchase of premises and equipment (3,332,730) (7,437,686) (2,343,484)
Proceeds from disposal of assets 1,799,167 924,785 16,318
Proceeds from sale of interest in unconsolidated subsidiary 1,800,000 - -
Purchase of bank-owned life insurance polices - (6,265,261) -
Proceeds from redemption of life insurance policies 60,998 511,031 -
Net cash received in purchase acquisition of Friendship - 1,526,565 -
------------- ------------- -------------
Net cash used in investing activities (73,960,960) (81,106,066) (43,612,395)
------------- ------------- -------------
36
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- ------------------------------------------------------------------------------------------------------------
2001 2000 1999
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 83,217,921 $ 76,610,058 $ 12,116,855
Net increase (decrease) in federal funds purchased
and securities sold under repurchase agreements 3,543,030 (1,662,503) 7,664,829
Advances from the Federal Home Loan Bank 700,000 27,770,000 33,027,000
Payments on Federal Home Loan Bank advances (21,172,804) (29,180,958) (11,972,483)
Cash paid to former stockholders on acquisition of Friendship (7,667,280) - -
Proceeds on issuance of guaranteed preferred beneficial
interests in debentures 10,000,000 - -
Dividends paid (4,179,108) (4,054,117) (3,367,049)
Dividends paid by pooled companies - - (452,214)
Proceeds from the exercise of stock options 196,875 29,515 26,932
Acquisition of stock under stock repurchase plans (1,293,808) (1,512,152) -
Proceeds from the issuance of preferred stock in
REIT subsidiaries - - 126,000
Costs capitalized on issuance of guaranteed preferred
beneficial interest in debentures (344,500) - -
------------- ------------- -------------
Net cash provided by financing activities 63,000,326 67,999,843 37,169,870
------------- ------------- -------------
Net increase (decrease) in cash and due from banks (1,508,556) (1,826,871) 4,301,510
Cash and due from banks at beginning of period 29,697,335 31,524,206 27,222,696
------------- ------------- -------------
Cash and due from banks at end of period $ 28,188,779 $ 29,697,335 $ 31,524,206
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $ 35,519,610 $ 27,899,433 $ 22,654,578
============= ============= =============
Taxes $ 2,948,358 $ 4,626,725 $ 4,262,579
============= ============= =============
NONCASH INVESTING AND FINANCING TRANSACTIONS
Increase (decrease) in unrealized gains on securities
available for sale $ (438,972) $ 1,597,178 $ (2,514,112)
============= ============= =============
Purchase price and debt incurred on acquisition of Friendship $ - $ 7,667,280 $ -
============= ============= =============
Stock issued to directors in lieu of fees $ - $ - $ 114,630
============= ============= =============
See accompanying notes to consolidated financial statements.
37
PAB BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
PAB Bankshares, Inc, (the Company) is a financial holding company
whose business is primarily conducted by its wholly-owned commercial
bank subsidiaries (the Banks) listed below. Through the Banks, the
Company offers a broad range of commercial and consumer banking
products and services to customers located in the local market areas
served by the Banks. The Company and the Banks are subject to the
regulations of certain federal and state agencies and are periodically
examined by those regulatory agencies. Certain bank subsidiaries have
been consolidated into the lead subsidiary, The Park Avenue Bank, in
2001 through a charter consolidation plan. The Company also plans to
consolidate the remaining charters into The Park Avenue Bank in 2002.
BANK SUBSIDIARY BANKING LOCATIONS(# OF OFFICES)
--------------- -------------------------------
The Park Avenue Bank Valdosta, Lowndes County, Georgia (3)
Lake Park, Lowndes County, Georgia (1)
McDonough, Henry County, Georgia (1)
Ocala, Marion County, Florida (2)
Richmond Hill, Bryan County, Georgia (1)
Adel, Cook County, Georgia (1)
Gainesville, Hall County, Georgia (1 - a loan
production office)
First Community Bank of Bainbridge, Decatur County,
Southwest Georgia Georgia (3)
Cairo, Grady County, Georgia (1)
Eagle Bank and Trust Statesboro, Bulloch County, Georgia (2)
Baxley Federal Bank Baxley, Appling County, Georgia (1)
Hazlehurst, Jeff Davis County, Georgia (1)
In addition to the Banks, the Company owns an investment advisory
services subsidiary, PAB Financial Services, LLC (PAB Financial). PAB
Financial offers brokerage, insurance, annuity, and investment
planning services to its customers from its offices in Valdosta,
Georgia and Ocala, Florida.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Significant intercompany transactions
and balances are eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities as of the balance sheet date and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate
to the determination of the allowance for loan losses, the valuation
of foreclosed real estate, and deferred taxes.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION (CONTINUED)
Certain items in the consolidated financial statements as of and for
the years ended December 31, 2000 and 1999 have been reclassified,
with no net effect on total assets, total stockholders' equity, or net
income, in order to be consistent with the classifications adopted
with the current year presentation.
The principles that significantly affect the determination of
financial position, results of operations and cash flows are
summarized below.
CASH AND DUE FROM BANKS
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, federal funds
purchased and securities sold under repurchase agreements, and
deposits are reported net.
The Company maintains amounts due from banks which, at times, may
exceed federally insured limits. The Company has not experienced any
losses in such accounts.
INVESTMENT SECURITIES
Securities are classified based on management's intention on the date
of purchase. Securities which management has the intent and ability to
hold to maturity are classified as held to maturity and reported at
amortized cost. All other debt and equity securities with readily
determinable fair values are classified as available for sale and
carried at fair value with unrealized gains and losses excluded from
earnings and reported in other comprehensive income, net of tax.
Restricted and other equity securities without a readily determinable
fair value are carried at cost and periodically evaluated for
impairment. Included in restricted equity securities are the Banks'
investments in Federal Reserve Bank stock and Federal Home Loan Bank
stock.
Interest and dividends, including amortization of premiums and
accretion of discounts, are recognized in interest income. Gains and
losses on the sale or call of securities are determined using the
specific identification method. Declines in the fair value of
securities below their cost that are deemed to be other than temporary
are reflected in earnings as realized losses.
LOANS
Loans are reported at their outstanding principal balances less
unearned income, including deferred fees and costs on originated
loans, and the allowance for loan losses. Interest income is accrued
on the unpaid 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.
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 status or charged
off is reversed against interest income. Interest income on nonaccrual
loans is subsequently recognized only to the extent cash payments are
received until the loan is returned to accrual status.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONTINUED)
The allowance for loan losses is established through a provision for
loan losses charged to expense. Loan losses are charged against the
allowance when management believes the collectibility of the principal
is unlikely. Subsequent recoveries are credited to the allowance.
The allowance is an amount that management believes will be adequate
to absorb estimated losses in the loan portfolio. The allowance for
loan losses is evaluated on a regular basis by management and is based
upon management's periodic review of the collectibility of the loans
in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability
to repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision as
more information becomes available. In addition, regulatory agencies,
as an integral part of their examination process, periodically review
the Company's allowance for loan losses, and may require the Company
to make additions to the allowance based on their judgment about
information available to them at the time of their examinations.
A loan is considered impaired when it is probable the 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 price, or the fair value of the collateral if the
loan is collateral dependent. The amount of impairment, if any, and
any subsequent changes are included in the allowance for loan losses.
PREMISES AND EQUIPMENT
Land is carried at cost. Buildings and equipment are carried at cost,
less accumulated depreciation computed on the straight-line method
over the estimated useful lives.
YEARS
-----
Buildings and improvements 10-39
Furniture, fixtures and equipment 3-7
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
First Community Bank of Southwest Georgia owned a 50% equity interest
in Empire Financial Services, Inc. of Milledgeville, Georgia (Empire),
a commercial mortgage origination and servicing organization that
serves various financial institutions throughout the southeastern
United States, including the Banks. This investment was accounted for
under the equity method. On November 30, 2001, the Company sold its
entire interest in Empire to a third party for $1.8 million.
FORECLOSED ASSETS
Foreclosed assets represent other real estate owned and other
repossessions acquired through, or in lieu of, loan foreclosure or
other proceedings. Foreclosed assets are held for sale and are carried
at the lower of cost or fair value less estimated disposal costs. Any
write-down to fair value at the time of transfer to foreclosed assets
is charged to the allowance for loan losses. Revenue and expenses from
operations and changes in the valuation allowance are included in net
expenses from foreclosed assets.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
REAL ESTATE INVESTMENT TRUSTS
In 1999, the Company formed two real estate investment trusts (REIT's)
and two intermediate REIT holding companies as subsidiaries of The
Park Avenue Bank and First Community Bank of Southwest Georgia. The
REIT's were established to realize state income tax benefits and to
provide the two banks with ready access to capital markets if
additional capital were needed. The REIT holding companies were
established to provide assistance in managing the Company's investment
in the REIT's. To comply with Federal tax law, a minority interest in
the non-voting, cumulative preferred stock of the REIT's was issued to
certain directors, officers and employees of the Company. The $500 par
value preferred stock pays an 8% annual dividend. The total minority
interest of the REIT's included in other liabilities was $126,000 as
of December 31, 2001 and 2000.
STOCK COMPENSATION PLANS
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation, encourages all entities to adopt a fair
value based method of accounting for employee stock compensation
plans, whereby compensation cost is measured at the grant date based
on the value of the award and is recognized over the service period,
which is usually the vesting period. However, it also allows an entity
to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, whereby compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date over the amount an
employee must pay to acquire the stock. Stock options issued under the
Company's stock option plan have no intrinsic value at the grant date,
and under Opinion No. 25 no compensation cost is recognized for them.
The Company has elected to continue with the accounting methodology in
Opinion No. 25 and, as a result, has provided pro forma disclosures of
net income and earnings per share and other disclosures, as if the
fair value based method of accounting had been applied.
INCOME AND EXPENSE RECOGNITION
Items of income and expense (including advertising costs) are
recognized using the accrual basis of accounting, except for some
immaterial amounts that are recognized when received or paid.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the
weighted-average number of shares of common stock outstanding. Diluted
earnings per share are computed by dividing net income 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.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME (LOSS)
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 available-for-sale securities, are reported as a separate component
of the equity section of the balance sheet, such items, along with net
income, are components of comprehensive income.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, effective for fiscal years beginning after June 15, 2000.
This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain
derivative instruments embedded in other contracts, and requires that
an entity recognize all derivatives as assets or liabilities in the
balance sheet and measure them at fair value. If certain conditions
are met, an entity may elect to designate a derivative as follows: (a)
a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of an unrecognized firm
commitment, an available-for-sale security, a foreign currency
denominated forecasted transaction, or a net investment in a foreign
operation. The Statement generally provides for matching the timing of
the recognition of the gain or loss on derivatives designated as
hedging instruments with the recognition of the changes in the fair
value of the item being hedged. Depending on the type of hedge, such
recognition will be in either net income or other comprehensive
income. For a derivative not designated as a hedging instrument,
changes in fair value will be recognized in net income in the period
of change. Management adopted SFAS No. 133 on January 1, 2001, with no
material impact on the Company's financial condition or results of
operations.
DELAYED ADOPTION OF FASB STATEMENT
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
requires that all business combinations consummated after June 30,
2001 be accounted for by the purchase method unless the combination
was initiated on or prior to that date and it meets the conditions to
be accounted for by the pooling-of-interests method in accordance with
APB Opinion No. 16, Business Combinations. SFAS No. 142 is required to
be applied in years beginning after December 15, 2001. Under SFAS No.
142, goodwill and intangible assets that management concludes has
indefinite useful lives will no longer be amortized, but will be
subject to impairment tests performed at least annually. Also, upon
initial application, the Company is required to perform a transitional
impairment test of all previously recognized goodwill and to assign
all recognized assets and liabilities to reporting units. Other
intangible assets will continue to be amortized over their useful
lives as determined at the date of initial application.
The Company will adopt SFAS No., 142 beginning in the first quarter of
2002. Application of the nonamortization provisions of SFAS No. 142 is
expected to result in an increase in net income of $408,635 ($.04 per
basic and diluted share) per year. During 2002, the Company will
perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets, but has not yet determined what
effect those test will have on the earnings and financial position of
the Company.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. BUSINESS COMBINATIONS
At the close of business on December 29, 2000, the Company consummated
its merger with Friendship Community Bank (Friendship). This
transaction was accounted for under the purchase method of accounting
for business combinations. In an all cash transaction, the Company
acquired 100% of Friendship's outstanding common stock for $7,667,280.
The excess cost over the net assets acquired of Friendship amounted to
$4,407,434.
Following is a summary of the assets acquired and liabilities assumed
in connection with the Friendship business combination.
Cash and due from banks $ 1,526,565
Interest-bearing deposits with other banks 220,844
Federal funds sold 10,075,000
Investment securities 12,596,913
Loans, net 22,020,968
Other assets 2,223,554
Deposits 44,365,697
Other liabilities 1,038,301
Since this transaction became effective after the last business day of
the year, none of the results of operations for Friendship are
included in the Company's consolidated statements of income for the
years ended December 31, 2000 and 1999. The following unaudited
summary information presents the consolidated results of operations of
the Company on a pro forma basis, as if Friendship had been acquired
on January 1, 2000. The pro forma summary information does not
necessarily reflect the results of operations that would have
occurred, if the acquisitions had occurred at the beginning of the
period presented, or of the results which may occur in the future.
Interest income $60,672,394
Interest expense 30,060,828
-----------
Net interest income 30,611,566
Provision for loan losses 4,134,663
Noninterest income 6,030,674
Noninterest expense 23,545,687
-----------
Income before income taxes 8,961,890
Income tax expense 3,034,476
-----------
Net income $ 5,927,414
===========
Net income per share $ 0.62
===========
Net income per share, diluted $ 0.62
===========
In 2001, Friendship's Florida bank charter was surrendered and
Friendship became a Florida branch of The Park Avenue Bank.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENT SECURITIES
The amortized cost and approximate fair values of the investment
portfolio are summarized as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
December 31, 2001:
U. S. Government and
agency securities $ 55,463,937 $1,062,488 $ (22,541) $ 56,503,884
State and municipal securities 4,994,307 61,087 (55,659) 4,999,735
Mortgage-backed securities 32,270,575 222,102 (293,656) 32,199,021
Corporate debt securities 8,398,990 2,399 (12,593) 8,388,796
Marketable equity securities 4,912,193 121,763 (207,036) 4,826,920
Restricted and other equity
securities 6,535,779 - - 6,535,779
------------ ---------- ---------- ------------
$112,575,781 $1,469,839 $(591,485) $113,454,135
============ ========== ========== ============
December 31, 2000:
U. S. Government and
agency securities $ 51,246,474 $ 44,522 $(260,411) $ 51,030,585
State and municipal securities 4,964,322 21,610 (18,410) 4,967,522
Mortgage-backed securities 21,274,968 72,954 (220,961) 21,126,961
Marketable equity securities 1,138,561 1,881,268 (203,246) 2,816,583
Restricted and other equity
securities 4,983,179 - - 4,983,179
------------ ---------- ---------- ------------
$ 83,607,504 $2,020,354 $(703,028) $ 84,924,830
============ ========== ========== ============
Included in restricted and other equity securities at December 31,
2001 and 2000, are the Banks' holdings of stock in the Federal Reserve
Bank of Atlanta and the Federal Home Loan Bank of Atlanta of
$4,374,800 and $3,822,200, respectively.
The amortized cost and fair value of debt securities as of December
31, 2001 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 any penalties. Equity securities have a perpetual life
and no stated maturity. Therefore these securities are not included in
the maturity categories in the following maturity summary.
AMORTIZED FAIR
COST VALUE
------------ ------------
Due in one year or less $ 19,325,299 $ 19,466,691
Due from one year to five years 20,827,427 21,365,868
Due from five to ten years 26,865,135 27,274,715
Due after ten years 1,839,373 1,785,141
Mortgage-backed securities 32,270,575 32,199,021
Marketable equity securities 4,912,193 4,826,920
Restricted and other equity securities 6,535,779 6,535,779
------------ ------------
$112,575,781 $113,454,135
============ ============
Securities with a carrying value of approximately $57,160,000 and $51,976,000 at
December 31, 2001 and 2000, respectively, were pledged to secure public
deposits, certain borrowing arrangements, and for other purposes.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENT SECURITIES (CONTINUED)
Gains and losses on sales and calls of securities available for sale
for the years ended December 31, 2001, 2000, and 1999 consist of the
following:
2001 2000 1999
----------- --------- ---------
Gross gains on securities transactions $1,740,846 $ 2,886 $ 7,827
Gross losses on securities transactions (126) (26,516) (41,456)
----------- --------- ---------
Net realized gain (loss) on
securities transactions $1,740,720 $(23,630) $(33,629)
=========== ========= =========
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio as of December 31, 2001 and 2000
is summarized as follows:
2001 2000
------------- -------------
Commercial and financial $ 80,492,791 $ 72,942,398
Agricultural 26,428,296 23,063,510
Real estate - construction 63,486,438 40,129,922
Real estate - mortgage (commercial and residential) 402,988,101 376,000,100
Installment loans to individuals and other loans 64,212,067 68,544,419
Overdrafts 593,604 335,019
------------- -------------
638,201,297 581,015,368
Unearned income, net (375,726) (278,835)
------------- -------------
637,825,571 580,736,533
Allowance for loan losses (15,765,373) (8,184,641)
------------- -------------
$622,060,198 $572,551,892
============= =============
Changes in the allowance for loan losses for the years ended December
31, 2001, 2000 and 1999 are as follows:
2001 2000 1999
------------ ------------ ------------
Balance, beginning of year $ 8,184,641 $ 5,037,074 $ 5,171,905
Provision charged to operations 12,220,250 4,098,663 985,188
Loans charged-off (4,832,799) (1,583,833) (1,216,662)
Recoveries 193,281 182,292 96,643
Purchase acquisition of Friendship - 450,445 -
------------ ------------ ------------
Balance, end of year $15,765,373 $ 8,184,641 $ 5,037,074
============ ============ ============
At December 31, 2001 and 2000, the total recorded investment in
impaired loans amounted to approximately $10,581,000 and $6,451,000,
respectively. These loans had a related allowance for loan losses of
approximately $4,819,000 and $1,303,000 at December 31, 2001 and 2000,
respectively. The average recorded investment in impaired loans during
2001, 2000 and 1999 was approximately $8,839,000, $2,486,000, and
$1,981,000, respectively. Interest income recognized on impaired loans
for cash payments received in 2001, 2000, and 1999 was approximately
$59,500, $115,000, and $117,000, respectively.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
In the ordinary course of business, the Company has granted loans to
certain related parties, including executive officers, directors and
their affiliates. The interest rates on these loans were substantially
the same as rates prevailing at the time of the transaction and
repayment terms are customary for the type of loan. Changes in related
party loans for the year ended December 31, 2001 are as follows:
Balance, beginning of year $ 19,108,106
Advances 6,199,184
Repayments (1,247,224)
Transactions due to changes in related parties (11,137,272)
-------------
Balance, end of year $ 12,922,794
=============
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 2001 and 2000 are summarized
as follows:
2001 2000
------------ ------------
Land $ 4,572,447 $ 4,610,555
Buildings and improvements 16,636,114 14,407,290
Furniture, fixtures and equipment 11,106,285 9,648,889
Construction in progress 158,862 486,236
------------ ------------
32,473,708 29,152,970
Less accumulated depreciation (8,965,625) (6,772,245)
------------ ------------
$23,508,083 $22,380,725
============ ============
Depreciation expense amounted to $2,190,192, $1,588,796, and
$1,412,249, for the years ended December 31, 2001, 2000, and 1999,
respectively.
With the exception of the main banking office in Ocala, Florida, the
Company owns and operates all of its banking offices. The leased Ocala
office is under a five-year agreement for a base amount plus an annual
indexed adjustment. During 2002, the Company will pay $86,820 to lease
the property. The agreement will expire at the end of May 2003.
At December 31, 2001, the Company had an operations building under
construction in Valdosta, Georgia. The Company is committed to
complete this project during 2002 for a total cost of approximately
$1,355,000.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. DEPOSITS
Interest-bearing deposits as of December 31, 2001 and 2000 are
summarized as follows:
2001 2000
------------ ------------
Interest-bearing demand $171,769,563 $125,714,275
Savings 36,284,941 32,859,370
Time, $100,000 and over 157,400,594 136,786,504
Other time 273,449,044 271,140,566
------------ ------------
$638,904,142 $566,500,715
============ ============
Interest expense on deposits for the years ended December 31, 2001,
2000 and 1999 are summarized as follows:
2001 2000 1999
----------- ----------- -----------
Interest-bearing demand $ 3,623,765 $ 3,357,422 $ 2,977,692
Savings 732,517 724,968 805,384
Time, $100,000 and over 8,875,059 6,872,195 4,707,018
Other time 18,137,237 13,255,374 11,424,044
----------- ----------- -----------
$31,368,578 $24,209,959 $19,914,138
=========== =========== ===========
The scheduled maturities of time deposits at December 31, 2001 are as
follows:
YEAR AMOUNT
- ---- ------------
2002 $350,419,590
2003 50,505,195
2004 10,418,195
2005 15,461,688
2006 3,322,053
Thereafter 722,917
------------
430,849,638
============
47
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 day to a week 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, 2001 and 2000 were $15,708,621 and $12,165,591, respectively.
NOTE 8. ADVANCES FROM THE FEDERAL HOME LOAN BANK
Listed below is a summary of the advances from the Federal Home Loan
Bank of Atlanta (FHLB) as of December 31, 2001 and 2000.
2001 2000
----------- -----------
Advances with interest at adjustable rates,
ranging from 1.91% to 2.17% at December 31, 2001,
due at various dates from May 2003 to
September 2009. $ 5,541,580 $ 5,541,580
Amortizing advances with interest at fixed rates,
ranging from 5.20% to 7.24% at December 31, 2001,
due in varying amounts and at various intervals through
August 2010. 3,536,898 5,239,702
Advances with interest at fixed rates, ranging from 5.74%
to 6.51% at December 31, 2001, due at various dates
from February 2002 to February 2006. 2,050,000 20,820,000
Advances with interest at fixed rates, ranging from 5.46%
to 6.77% at December 31, 2001, convertible to
variable rates at the option of the FHLB, due at
various dates from March 2003 to March 2010. 27,100,000 27,100,000
----------- -----------
$38,228,478 $58,701,282
=========== ===========
The Banks have pledged qualifying residential real estate mortgage
loans as collateral on the advances from the FHLB.
Contractual maturities of the advances from the FHLB at December 31,
2001 are as follows:
YEAR AMOUNT
- ---- -----------
2002 $ 2,283,071
2003 12,756,503
2004 505,059
2005 3,030,288
2006 1,038,771
Thereafter 18,614,786
-----------
38,228,478
===========
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN DEBENTURES
On November 28, 2001, PAB Bankshares Capital Trust I (PAB Trust)
issued $10 million of Floating Rate Capital Securities, also referred
to as "trust preferred securities". The Company formed PAB Trust, a
statutory business trust created under the laws of the State of
Delaware, for the sole purpose of issuing the Capital Securities and
investing the proceeds in Floating Rate Junior Subordinated Debentures
issued by the Company. The interest rate on both the Capital
Securities and the Debentures is reset semi-annually at LIBOR plus
3.75% (currently 6.007%) with a rate cap of 11.0% through December 8,
2006. The Company entered into agreements which, taken collectively,
fully, irrevocably and unconditionally guarantee, on a subordinated
basis, all of PAB Trust's obligations under the Capital Securities.
PAB Trust's sole asset is the Debentures issued by the Company. The
Debentures will mature on December 8, 2031, but are callable at par by
the Company in whole or in part anytime after December 8, 2006. The
proceeds from the issuance of these Capital Securities qualify as Tier
1 capital under the risk-based capital guidelines established by the
Federal Reserve.
NOTE 10. OTHER BORROWINGS
At December 31, 2000, the Company owed $7,667,280 to the former
stockholders of Friendship (see Note 2). During 2001, the Company used
the line of credit described below to finance 100% of this
acquisition.
On August 31, 2000, the Company obtained a 3-year, $15 million line of
credit with The Bankers Bank of Atlanta, Georgia, for the purpose of
providing operating capital and to finance potential purchase
acquisitions. The Company had not drawn on the line of credit prior to
the acquisition of Friendship. On November 28, 2001, the Company paid
off and closed this line of credit with the proceeds from the
Debentures described in Note 9.
NOTE 11. INCOME TAXES
The components of income tax expense for the years ended December 31,
2001, 2000 and 1999 are as follows:
2001 2000 1999
------------ ----------- -----------
Current $ 3,092,629 $3,876,935 $4,189,078
Deferred (3,343,255) (968,127) (184,024)
------------ ----------- -----------
$ (250,626) $2,908,808 $4,005,054
============ =========== ===========
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. INCOME TAXES (CONTINUED)
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 for the years ended
December 31, 2001, 2000 and 1999 follows.
2001 2000 1999
---------- ----------- -----------
Tax at statutory rate $ (35,178) $2,936,038 $4,317,296
Increase (decrease) resulting from:
State income tax, net of
Federal tax benefit - - 172,459
Tax exempt interest and dividend
exclusion (229,875) (270,909) (358,884)
Amortization of goodwill 118,681 43,755 43,746
Increase in cash value of bank-
owned life insurance policies (162,369) (46,177) (196,283)
Deferred tax adjustment (36,847) 159,422 -
Prior year accrual differences 61,459 123,174 -
Other items, net 33,503 (36,495) 26,720
---------- ----------- -----------
Income tax expense (benefit) $(250,626) $2,908,808 $4,005,054
========== =========== ===========
The components of deferred income taxes at December 31, 2001 and 2000
are as follows:
2001 2000
---------- ----------
Deferred tax assets:
Allowance for loan losses $5,257,913 $2,524,297
Purchase accounting adjustments 390,779 525,954
Deferred compensation 620,439 218,788
Accrued severance payable 505,372 -
Reserve for uncollectible interest 225,375 109,820
---------- ----------
6,999,878 3,378,859
---------- ----------
Deferred tax liabilities:
Premises and equipment 740,118 577,652
Deferred loan origination cost 322,229 187,965
Unrealized gain on securities available for sale 298,639 447,889
Core deposit intangible - 6,520
Other - 12,446
---------- ----------
1,360,986 1,232,472
---------- ----------
Net deferred tax assets $5,638,892 $2,146,387
========== ==========
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. EMPLOYEE BENEFIT PLANS
The Company provides an employee 401(k) profit sharing plan for
qualified employees. The 401(k) 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 profit sharing contributions to be made
at the sole discretion of the Board of Directors. Approximately 3.5%
of the participants' eligible compensation was accrued as the
discretionary profit sharing contributions for 2001, 2000, and 1999.
All full-time and part-time employees are eligible to participate in
the 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. Aggregate expense under the
plan charged to operations during 2001, 2000, and 1999 amounted to
approximately $553,000, $595,000, and $433,000, respectively.
NOTE 13. DEFERRED COMPENSATION AND RETIREMENT PLANS
In years past, the Company and the Banks entered into separate
deferred compensation arrangements with certain officers. The plans
called for the deferred compensation to be payable over a fifteen-year
period beginning at the earlier of age 65, death, or disability of
each officer. The estimated present value of the deferred compensation
has been accrued over each officer's remaining expected term of active
employment. The Banks purchased life insurance policies that they
intend to use to finance this liability. The accrued liability related
to deferred compensation plans was $1,824,000 and $644,000 at December
31, 2001 and 2000, respectively. In 2001, the Board of Directors
elected to terminate these plans. At that time, the Company incurred a
one-time cost of approximately $898,000 to fully fund the remaining
liability covering two executive officers that retired at the end of
the year. Aggregate expense under the deferred compensation plans
charged to salaries and employee benefits expense were approximately
$1,156,000 (including the $898,000 expense for the two retiring
executive officers), $177,000 and $382,000 during 2001, 2000 and 1999,
respectively.
In 2001, the Company entered into separate retirement agreements with
two executive officers that effectively terminated their existing
employment agreements and committed to pay each officer a 3-year
severance package beginning in January 2002. The Company accrued
approximately $1,291,000 representing the net present value of these
future obligations with the expense included in salaries and employee
benefits for the year ended December 31, 2001.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. OTHER INCOME AND EXPENSES
Other fee income for the years ended December 31, 2001, 2000 and 1999
are summarized as follows:
2001 2000 1999
---------- ---------- --------
Mortgage origination fees $ 702,329 $ 439,327 $569,121
Insurance commissions and fees 161,015 302,277 219,893
Brokerage commissions and fees 306,322 125,241 -
Other fee income 355,243 238,322 125,973
---------- ---------- --------
Total other fee income $1,524,909 $1,105,167 $914,987
========== ========== ========
Other noninterest income for the years ended December 31, 2001, 2000
and 1999 are summarized as follows:
2001 2000 1999
----------- ---------- --------
Earnings on bank-owned life insurance $ 525,181 $ 139,958 $540,695
Gain (loss) on disposal of assets (839) (153,817) 10,889
Gain on sale of interest in unconsolidated
subsidiary (Empire) 1,461,739 - -
Other noninterest income 506,109 245,149 316,893
----------- ---------- --------
Total other noninterest income $2,492,190 $ 231,290 $868,477
=========== ========== ========
Other noninterest expense for the years ended December 31, 2001, 2000
and 1999 are summarized as follows:
2001 2000 1999
---------- ---------- ----------
Advertising and business development $ 601,045 $ 526,016 $ 383,687
Supplies and printing 953,385 630,892 512,247
Postage and courier 613,213 459,059 467,113
Legal and accounting fees 436,915 469,549 427,428
Outside consulting fees 346,324 436,647 228,875
Director and committee fees 422,560 568,296 480,640
Merger and acquisition costs 7,494 49,292 534,523
Conversion and consolidation costs 312,933 833,139 -
Other noninterest expenses 3,321,324 3,129,276 2,653,438
---------- ---------- ----------
Total other noninterest expense $7,015,193 $7,102,166 $5,687,951
========== ========== ==========
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. EARNINGS PER COMMON SHARE
The components used to calculate basic and diluted earnings per share
for the years ended December 31, 2001, 2000 and 1999 are summarized as
follows:
2001 2000 1999
---------- ---------- ----------
Basic earnings per share:
Net income $ 147,160 $5,726,597 $8,692,876
---------- ---------- ----------
Weighted average common shares
outstanding 9,482,709 9,528,387 9,612,634
---------- ---------- ----------
Earnings per common share $ 0.02 $ 0.60 $ 0.90
========== ========== ==========
Diluted earnings per share:
Net income $ 147,160 $5,726,597 $8,692,876
---------- ---------- ----------
Weighted average common shares
outstanding 9,482,709 9,528,387 9,612,634
Effect of dilutive stock options 67,371 70,403 136,528
---------- ---------- ----------
Weighted average diluted common
shares outstanding 9,550,080 9,598,790 9,749,162
---------- ---------- ----------
Earnings per common share $ 0.02 $ 0.60 $ 0.89
========== ========== ==========
NOTE 16. DIRECTORS DEFERRED STOCK PURCHASE PLAN
In 1994, the Company's stockholders approved the Directors Deferred
Stock Purchase Plan (the Director Plan), which provides that a
director of the Company or any subsidiary may elect to receive shares
of common stock of the Company in lieu of the cash compensation
otherwise payable as director's fees for services rendered as a member
of the Board of Directors or any committee thereof. The Director Plan
expired in January 1999.
NOTE 17. DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLAN
In 1993, the Board of Directors approved a dividend reinvestment and
common stock purchase plan. The plan is designed to provide
stockholders with a simple and convenient means to reinvest cash
dividends and make additional cash purchases of the Company's common
stock. The Company acquires shares in the open market as needed to
fill orders for dividend reinvestment and stock purchases in the plan
rather than issuing additional shares of common stock.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18. STOCK OPTION PLANS
The Company has two fixed stock option plans under which it has
granted options to its employees and directors to purchase common
stock at the fair market price on the date of grant. Both plans
provide for "incentive stock options" and "non-qualified stock
options". The incentive stock options are intended to qualify under
Section 422 of the Internal Revenue Code for favorable tax treatment.
Under the 1994 Employee Stock Option Plan, the Company's stockholders
authorized the Board of Directors to grant up to 399,750 stock options
to employees of the Company as part of an incentive plan to attract
and retain key personnel in the Company. Under the 1999 Stock Option
Plan, the Company's stockholders authorized the Board of Directors to
grant up to 600,000 stock options to directors, employees, consultants
and advisors of the Company.
A summary of the status of the two fixed plans at December 31, 2001,
2000, and 1999 and changes during the years ended on those dates is as
follows:
2001 2000 1999
--------------------- --------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
--------- ---------- --------- ---------- -------- ----------
Under option, beginning
of year 523,650 $ 11.58 440,157 $ 11.19 347,103 $ 8.76
Granted 288,750 10.19 88,950 13.40 121,750 16.84
Exercised (31,500) 6.25 (4,157) 7.10 (3,876) 6.95
Forfeited (49,265) 12.25 (1,300) 16.09 (24,820) 9.21
--------- ---------- --------- ---------- -------- ----------
Under option, end of year 731,635 $ 11.22 523,650 $ 11.58 440,157 $ 11.19
========= ========== ========= ========== ======== ==========
Exercisable at end of year 355,290 $ 11.13 305,929 $ 10.68 246,959 $ 10.62
========= ========== ========= ========== ======== ==========
Weighted-average fair value
per option of options
granted during year $ 2.69 $ 4.53 $ 6.59
========== ========== ==========
A further summary of the options outstanding at December 31, 2001 is
as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES NUMBER LIFE IN YEARS PRICE NUMBER PRICE
- ---------------- -------------------------------- -------------------
$ 6.25 - 9.38 184,700 6.47 $ 7.74 98,500 $ 6.31
9.63 - 10.20 129,200 5.16 10.06 112,674 10.06
10.60 - 10.60 155,305 9.74 10.60 - -
10.71 - 15.88 146,680 7.23 12.80 51,976 12.78
16.25 - 23.13 115,750 7.52 16.93 92,140 16.66
------- -------
731,635 7.25 11.22 355,290 11.13
======= =======
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18. STOCK OPTION PLANS (CONTINUED)
The Company applies Opinion 25 and related Interpretations in
accounting for the stock option plan. Accordingly, no compensation
cost has been recognized. Had compensation cost for the stock option
plan been determined based on the fair value at the grant dates for
awards under the plan consistent with the method prescribed by SFAS
No. 123, net income and earnings per share would have been adjusted to
the pro forma amounts indicated below for the years ended December
31, 2001, 2000 and 1999.
2001 2000 1999
------------------------- ------------------------ ------------------------
BASIC BASIC BASIC
NET EARNINGS NET EARNINGS NET EARNINGS
INCOME PER SHARE INCOME PER SHARE INCOME PER SHARE
------------ ----------- ----------- ----------- ----------- -----------
As reported $ 147,160 $ 0.02 $5,726,597 $ 0.60 $8,692,876 $ 0.90
Stock based
compensation, net of
related tax effect (324,816) (0.04) (287,254) (0.03) (741,218) (0.07)
------------ ----------- ----------- ----------- ----------- -----------
As adjusted $ (177,656) $ (0.02) $5,439,343 $ 0.57 $7,951,658 $ 0.83
============ =========== =========== =========== =========== ===========
2001 2000 1999
------------------------- ------------------------ ------------------------
DILUTED DILUTED DILUTED
NET EARNINGS NET EARNINGS NET EARNINGS
INCOME PER SHARE INCOME PER SHARE INCOME PER SHARE
------------ ----------- ----------- ----------- ----------- -----------
As reported $ 147,160 $ 0.02 $5,726,597 $ 0.60 $8,692,876 $ 0.89
Stock based
compensation, net of
related tax effect (324,816) (0.04) (287,254) (0.03) (741,218) (0.07)
------------ ----------- ----------- ----------- ----------- -----------
As adjusted $ (177,656) $ (0.02) $5,439,343 $ 0.57 $7,951,658 $ 0.82
============ =========== =========== =========== =========== ===========
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
2001 2000 1999
--------- --------- ---------
Risk-free interest rate 5.01% 5.24% 5.39%
Expected life of the options 10 years 10 years 10 years
Expected dividends (as a percent
of the fair value of the stock) 4.40% 4.69% 2.50%
Expected volatility 32.56% 45.62% 34.20%
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 19. STOCK REPURCHASE PLAN
In June 1999, the Board of Directors approved a stock repurchase plan
whereby management was authorized to buy back and cancel up to 75,000
shares of the Company's common stock from the open market. In March
2000, the Board approved to buy back and cancel an additional 50,000
shares of the Company's common stock. In January 2001, the Board
approved to buy back and cancel another additional 125,000 shares of
the Company's common stock. During 2000, the Company acquired and
canceled 119,616 shares of common stock for a total cost of
$1,512,152. During 2001, the Company acquired and canceled 123,534
shares of common stock for a total cost of $1,293,808. A balance of
6,850 shares remained available from the plans for repurchase at
December 31, 2001.
NOTE 20. COMMITMENTS AND CONTINGENT LIABILITIES
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, standby letters of credit and credit card commitments.
Such commitments involve, to varying degrees, elements of credit risk
and interest rate risk in excess of the amount recognized in the
balance sheets.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit, standby letters of credit and credit card commitments
is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments as it does
for on-balance sheet instruments. A summary of the Company's
commitments as of December 31, 2001 and 2000 are as follows:
2001 2000
----------- -----------
Commitments to extend credit $61,674,000 $58,371,000
Standby letters of credit $ 4,189,000 $ 1,083,000
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained,
if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those letters of credit are primarily issued to support public and
private borrowing arrangements. The credit risk involved in issuing
letters of credit is essentially the same as that involved in
extending loans to customers. Collateral is required in instances
which the Company deems necessary.
In the normal course of business, the Company is involved in various
legal proceedings. In the opinion of management, any liability
resulting from such proceedings would not have a material effect on
the Company's financial statements.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 21. CONCENTRATIONS OF CREDIT
The Company originates commercial, agricultural, residential, and
consumer loans to customers primarily in southern Georgia, south-metro
Atlanta, and central Florida. The ability of the majority of the
Company's customers to honor their contractual obligations is
dependent on the local economies in the geographical areas served by
the Company.
As of December 31, 2001, approximately 73% of the Company's loan
portfolio is concentrated in loans secured by real estate. A
substantial portion of these loans are in the Company's primary market
areas. In addition, a substantial portion of the other real estate
owned is located in those same markets. Accordingly, the ultimate
collectibility of the Company's loan portfolio and the recovery of the
carrying amount of other real estate owned are susceptible to changes
in market conditions in the Company's market areas. The other
significant concentrations of credit by type of loan are set forth in
Note 4.
NOTE 22. 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, 2001, approximately $2,736,000 of the Banks' 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 financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Banks must
meet specific capital guidelines that involve quantitative measures of
the assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's and
the Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors. Prompt corrective action provisions are
not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Banks to maintain minimum amounts
and ratios of total and Tier I capital to risk-weighted assets and of
Tier I capital to average assets as set forth in the table below.
Management believes, as of December 31, 2001, the Company and the
Banks meet all capital adequacy requirements to which they are
subject.
As of March 31, 2002, the most recent notification from the regulatory
authorities categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Banks must maintain minimum Total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the
following table. There are no conditions or events since that
notification that management believes have changed the Banks'
category.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 22. REGULATORY MATTERS (CONTINUED)
The actual capital amounts and ratios for the Company and its lead
bank, The Park Avenue Bank, are presented in the following table. All
amounts have been rounded to the nearest thousand.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ------ ----------- ------ ----------- ------
As of December 31, 2001:
Total Capital
to Risk Weighted Assets:
Consolidated $76,954,000 12.0% $51,265,000 8.0% - N/A -
The Park Avenue Bank $34,247,000 9.2% $29,853,000 8.0% $37,316,000 10.0%
Tier 1 Capital
to Risk Weighted Assets:
Consolidated $68,848,000 10.7% $25,632,000 4.0% - N/A -
The Park Avenue Bank $29,493,000 7.9% $14,927,000 4.0% $22,390,000 6.0%
Tier 1 Capital
to Average Assets:
Consolidated $68,848,000 8.0% $34,453,000 4.0% - N/A -
The Park Avenue Bank $29,493,000 6.2% $18,877,000 4.0% $23,596,000 5.0%
As of December 31, 2000:
Total Capital
to Risk Weighted Assets:
Consolidated $71,496,000 12.5% $45,753,000 8.0% - N/A -
The Park Avenue Bank $22,965,000 10.4% $17,661,000 8.0% $22,076,000 10.0%
Tier 1 Capital
to Risk Weighted Assets:
Consolidated $63,592,000 11.1% $22,877,000 4.0% - N/A -
The Park Avenue Bank $20,425,000 9.3% $ 8,830,000 4.0% $13,246,000 6.0%
Tier 1 Capital
to Average Assets:
Consolidated $63,592,000 8.7% $29,250,000 4.0% - N/A -
The Park Avenue Bank $20,425,000 7.2% $11,294,000 4.0% $14,118,000 5.0%
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 23. 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 values are based on estimates
using present value or other valuation techniques. Those 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 No. 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 its fair value disclosures for financial instruments.
CASH, DUE FROM BANKS, INTEREST BEARING DEPOSITS, AND FEDERAL FUNDS
SOLD
The carrying amounts of cash, due from banks, interest-bearing
deposits in other banks, and federal funds sold approximate their
fair value.
INVESTMENT SECURITIES
Fair values for securities are based on available quoted market
prices. The carrying values of equity securities with no readily
determinable fair value approximate fair values.
LOANS
For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. For other loans, the fair values are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. Fair values for impaired loans are estimated using
discounted cash flow analyses or underlying collateral values, where
applicable.
DEPOSITS
The carrying amounts of demand deposits and savings deposits
approximate their fair values. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities
on time deposits.
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
The carrying amounts of federal funds purchased and securities sold
under agreements to repurchase approximate their fair value.
ADVANCES FROM THE FHLB, OTHER BORROWINGS, AND DEBENTURES
For variable-rate borrowings that reprice frequently, fair values
are based on carrying values. For fixed-rate borrowings, the fair
values are estimated using discounted cash flow models, using
interest rates currently being offered for borrowings with similar
terms.
OFF-BALANCE SHEET INSTRUMENTS
Fair values of the Company's off-balance sheet financial instruments
are based on fees currently charged to enter into similar
agreements. Since the majority of the Company's off-balance sheet
instruments consist of nonfee-producing, variable-rate commitments,
the Company has determined they do not have a distinguishable fair
value.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 23. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and estimated fair value of the Company's
financial instruments as of December 31, 2001 and 2000 are summarized
below. All amounts have been rounded to the nearest thousand.
2001 2000
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
Cash and due from banks, interest-
bearing deposits with other banks,
and federal funds sold $ 68,334,000 $ 68,334,000 $ 86,526,000 $ 86,526,000
Investment securities 113,454,000 113,454,000 84,925,000 84,925,000
Loans, net 622,060,000 638,321,000 572,552,000 566,383,000
Deposits 720,398,000 727,185,000 637,180,000 638,990,000
Federal funds purchased and
securities sold under agreements
to repurchase 15,709,000 15,709,000 12,166,000 12,166,000
Advances from the FHLB 38,228,000 38,879,000 58,701,000 58,127,000
Other borrowings - - 7,667,000 7,667,000
Beneficial interest in debentures 10,000,000 10,000,000 - -
NOTE 24. CONDENSED FINANCIAL INFORMATION OF PAB BANKSHARES, INC.
(PARENT COMPANY ONLY)
The following information presents the condensed financial statements
for PAB Bankshares, Inc.
PAB BANKSHARES, INC.
CONDENDSED STATEMENTS OF CONDITION
DECEMBER 31, 2001 AND 2000
2001 2000
----------- -----------
Assets:
Cash on deposit with subsidiary banks $ 2,826,599 $ 6,503,960
Investment securities 1,349,945 349,945
Investment in subsidiaries 70,218,251 66,470,737
Premises and equipment 4,399,715 4,309,587
Other assets 1,632,549 2,607,148
----------- -----------
Total assets $80,427,059 $80,241,377
=========== ===========
Liabilities and stockholders' equity:
Other borrowings $ - $ 7,667,280
Guaranteed preferred beneficial
interests in debentures (trust preferred securities) 10,000,000 -
Dividends payable 1,035,090 1,045,214
Other liabilities 4,020,086 748,403
----------- -----------
Total liabilities 15,055,176 9,460,897
----------- -----------
Stockholders' equity 65,371,883 70,780,480
----------- -----------
Total liabilities and stockholders' equity $80,427,059 $80,241,377
=========== ===========
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 24. CONDENSED FINANCIAL INFORMATION OF PAB BANKSHARES, INC.
(PARENT COMPANY ONLY) (CONTINUED)
PAB BANKSHARES, INC.
CONDENDSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999
------------ ---------- ------------
Income:
Dividends from subsidiaries $ 3,914,630 $4,930,706 $13,844,725
Interest income 60,747 103,820 14,132
Management and service fees 1,866,933 1,279,967 1,256,033
Other income 179,389 92,504 36,032
------------ ---------- ------------
Total income 6,021,699 6,406,997 15,150,922
------------ ---------- ------------
Expenses 8,591,404 4,800,038 3,131,068
------------ ---------- ------------
Income (loss) before income tax benefit
and equity in undistributed earnings
(distributions in excess of earnings)
of subsidiaries (2,569,705) 1,606,959 12,019,854
Income tax benefit 2,196,385 1,258,615 680,336
------------ ---------- ------------
Income (loss) before equity in
undistributed earnings (distributions in
excess of earnings) of subsidiaries (373,320) 2,865,574 12,700,190
Equity in undistributed earnings
(distributions in excess of earnings)
of subsidiaries 520,480 2,861,023 (4,007,314)
------------ ---------- ------------
Net income $ 147,160 $5,726,597 $ 8,692,876
============ ========== ============
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 24. CONDENSED FINANCIAL INFORMATION OF PAB BANKSHARES, INC.
(PARENT COMPANY ONLY) (CONTINUED)
PAB BANKSHARES, INC.
CONDENDSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 147,160 $ 5,726,597 $ 8,692,876
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 874,739 422,579 267,321
Deferred tax provision 788,607 78,065 (9,150)
Gain on disposal of assets (10,590) (3,634) -
Distributions in excess of earnings
(undistributed earnings) of subsidiaries (520,480) (2,861,023) 4,007,314
Increase in cash value of life insurance (6,859) (66,159) (7,988)
Increase in deferred compensation accrual 1,113,578 133,703 -
Increase in retirement accrual 1,291,388 - -
Net change in other assets and liabilities 748,918 (898,101) 125,442
------------ ------------ ------------
Net cash provided by operating activities 4,426,461 2,532,027 13,075,815
------------ ------------ ------------
Cash flows from investing activities:
Purchase of securities available for sale (1,000,000) - (349,945)
Purchase of premises and equipment (969,592) (3,501,165) (924,171)
Proceeds from disposal of assets 609,467 9,494 -
Redemption of life insurance policies 60,998 - -
Investment in subsidiary (3,516,874) (50,000) (50,000)
------------ ------------ ------------
Net cash used in investing activities (4,816,001) (3,541,671) (1,324,116)
------------ ------------ ------------
Cash flows from financing activities:
Cash paid to former stockholders on
acquisition of Friendship (7,667,280) - -
Proceeds on issuance of guaranteed preferred
beneficial interests in debentures 10,000,000 - -
Dividends paid (4,179,108) (4,054,117) (3,025,131)
Proceeds from the exercise of stock options 196,875 29,515 26,932
Acquisition of stock under the stock repurchase
plans (1,293,808) (1,512,152) -
Costs capitalized on issuance of guaranteed
preferred beneficial interests in debentures (344,500) - -
------------ ------------ ------------
Net cash used in financing activities (3,287,821) (5,536,754) (2,998,199)
------------ ------------ ------------
Net increase (decrease) in cash (3,677,361) (6,546,398) 8,753,500
Cash at beginning of year 6,503,960 13,050,358 4,296,858
------------ ------------ ------------
Cash at end of year $ 2,826,599 $ 6,503,960 $13,050,358
============ ============ ============
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 25. FOURTH QUARTER RESULTS OF OPERATIONS
The Company's unaudited results of operations for the fourth quarter
ended 2001 discloses a net loss of $4.7 million. The net loss for the
fourth quarter included provision for loan losses of $11.2 million
before income tax benefits, of which $7.2 million before income tax
benefits resulted from an examination adjustment by the Federal
Reserve. Also included in the unaudited results of operations were
non-recurring gains before income taxes on the sale of Empire of $1.5
million and sale of Federal Home Loan Mortgage Corporation stock of
$1.7 million.
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On May 29, 2001, our board of directors voted to engage Mauldin & Jenkins, LLC
as PAB's independent auditors for the year ending December 31, 2001. On May 30,
2001, we notified Stewart, Fowler & Stalvey, P.C., our previous independent
auditors, that they would not be engaged for the audit of fiscal year 2001. The
determination to engage Mauldin & Jenkins, LLC was the result of a competitive
bid process.
As required by securities laws, we filed a Current Report on Form 8-K, dated May
29, 2001 and filed with the Securities and Exchange Commission on May 31, 2001,
announcing our change in accountants. In that Form 8-K, we disclosed that the
report of Stewart, Fowler & Stalvey, P.C.'s on PAB's consolidated financial
statements for the fiscal years ended December 31, 1999 and 2000 contained no
adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles. We also disclosed that
during the years ended December 31, 1999 and 2000 and for the interim period
from December 31, 2000 to May 29, 2001, there were no disagreements between us
and Stewart, Fowler & Stalvey, P.C. as to accounting principles or practices,
financial statement disclosure or audit scope or procedure. A letter from
Stewart, Fowler & Stalvey, P.C., dated May 30, 2001, stating that they agreed
with the disclosures we made in our Form 8-K regarding the changes of auditors
was filed as Exhibit 16 to that Form 8-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the headings "Proposal One: Election of
Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the definitive Proxy Statement (the "2002 Proxy
Statement") relating to the annual meeting of shareholders of PAB, is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the heading "Executive Compensation" in the 2002
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information appearing under the heading "Principal Shareholders" in the 2002
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the headings "Executive Compensation -
Compensation Committee Interlocks and Insider Participation" and "Certain
Relationships and Related Transactions" in the 2002 Proxy Statement is
incorporated herein by reference.
64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS.
The consolidated financial statements, notes thereto and auditor's report
thereon, filed as part hereof, are listed in the Index to Item 8 of this
Report.
2. FINANCIAL STATEMENT SCHEDULES.
All schedules are omitted as the required information is inapplicable or the
information is presented in the financial statements or related notes.
3. EXHIBITS.
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, dated as of June 3, 1999, by and
between Baxley Federal Savings Bank and the Registrant, and
joined into as of November 2, 1999 by PAB Interim Association No.
1 (incorporated by reference to Exhibit 2(a) to the Registrant's
Registration Statement No. 333-83907 on Form S-4 (No. 333-83907)
filed with the Commission on July 28, 1999).
2.2 Agreement and Plan of Merger, dated as of September 15, 2000, by
and between Friendship Community Bank and the Registrant, and
joined into by FCB Interim Bank (incorporated by reference to
Exhibit 2.2 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000).
2.3 Agreement and Plan of Merger, dated March 23, 2001, by and
between the Registrant, The Park Avenue Bank and Friendship
Community Bank.
2.4 Agreement and Plan of Merger, dated August 15, 2001, by and
between the Registrant, The Park Avenue Bank and Farmers &
Merchants Bank.
2.5 Agreement and Plan of Merger, dated September 26, 2001, by and
between the Registrant, The Park Avenue Bank and Eagle Bank and
Trust.
2.6 Agreement and Plan of Merger, dated September 26, 2001, by and
between the Registrant, The Park Avenue Bank and Baxley Federal
Bank.
2.7 Agreement and Plan of Merger, dated September 26, 2001, by and
between the Registrant, The Park Avenue Bank and First Community
Bank of Southwest Georgia.
3.1 Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3(a) to the Registrant's Registration
Statement on Form S-4 (No. 333-83907) filed with the Commission
on October 14, 1999).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit
4.2 to the Registrant's Registration Statement on Form S-8 (No.
333-74819) filed with the Commission on March 22, 1999).
4.1 Indenture Agreement, dated November 28, 2001, by and between the
Registrant and Wilmington Trust Company for the issuance of
Floating Rate Junior Subordinated Debt Securities due 2031.
10.1 Form of Employment Agreement with Schedule of Parties and Terms
(incorporated by reference to Exhibit 10.1 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999).
65
10.2.1 PAB Bankshares, Inc. First Amendment to First Restated and
Amended Dividend Reinvestment and Common Stock Purchase Plan
(incorporated by reference to Exhibit 28.2 to the Registrant's
Registration Statement on Form S-3 (No. 33-74080) filed with the
Commission on April 8, 1997).
10.2.2 PAB Bankshares, Inc. Third Amended and Restated Dividend
Reinvestment and Common Stock Purchase Plan (incorporated by
reference to Exhibit 28.1 to the Registrant's Registration
Statement on Form S-3 (No. 33-74080) filed with the Commission on
September 1, 1998).
10.3 PAB Bankshares, Inc. 1994 Employee Stock Option Plan, as amended
(incorporated by reference to Exhibit 10.3 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1998).
10.4 PAB Bankshares, Inc. 1994 Directors Deferred Stock Purchase Plan
(incorporated by reference to Exhibit 10.4 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1998).
10.5 Form of Executive Salary Continuation Agreement, with attached
Schedule of Terms (incorporated by reference to Exhibit 10.5 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998).
10.6 PAB Bankshares, Inc. 1999 Stock Option Plan (incorporated by
reference to Exhibit 99 to the Registrant's Registration
Statement on Form S-8 (No. 333-89527) filed with the Commission
on March 22, 1999).
10.7 Employee Contract Termination Agreement, dated September 1, 2001,
by and between C. Larry Wilkinson and the Registrant.
10.8 Employment Agreement, dated October 24, 2001, by and between Jay
Torbert, the Registrant, and The Park Avenue Bank.
10.9 Employment Agreement, dated August 30, 2000, by and between M.
Burke Welsh, Jr. and the Registrant.
10.10 Rescission Agreement, dated December 31, 2001, by and between R.
Bradford Burnette and the Registrant.
16 Letter re: change in certifying accountant (incorporated by
reference to Exhibit 16 to the Registrant's Current Report on
Form 8-K dated May 29, 2001).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Stewart, Fowler & Stalvey, P.C.
23.3 Consent of Mauldin & Jenkins, LLC.
(b) REPORTS ON FORM 8-K.
None.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PAB BANKSHARES, INC.
Date: April 15, 2002
By: /s/ Michael E. Ricketson
-------------------------
Michael E. Ricketson,
President and Chief Executive Officer
Signature Title Date
- --------- ----- ----
/s/ R. Bradford Burnette Director, Chairman April 15, 2002
- ---------------------------
R. Bradford Burnette
/s/ Walter W. Carroll, II Director April 15, 2002
- ---------------------------
Walter W. Carroll, II
Director Emeritus
- ---------------------------
James L. Dewar, Sr.
/s/ James L. Dewar, Jr. Director April 15, 2002
- ---------------------------
James L. Dewar, Jr.
Director
- ---------------------------
Bill J. Jones
/s/ Thompson Kurrie, Jr. Director April 15, 2002
- ---------------------------
Thompson Kurrie, Jr.
/s/ James B. Lanier, Jr. Director April 15, 2002
- ---------------------------
James B. Lanier, Jr.
/s/ Kennith D. McLeod Director April 15, 2002
- ---------------------------
Kennith D. McLeod
/s/ Paul E. Parker Director April 15, 2002
- ---------------------------
Paul E. Parker
/s/ Michael E. Ricketson Director, President and April 15, 2002
- --------------------------- Chief Executive Officer
Michael E. Ricketson
/s/ F. Ferrell Scruggs, Sr. Director April 15, 2002
- ---------------------------
F. Ferrell Scruggs, Sr.
/s/ John M. Simmons Director April 15, 2002
- ---------------------------
John M. Simmons
/s/ Joe P. Singletary, Jr. Director April 15, 2002
- ---------------------------
Joe P. Singletary, Jr.
/s/ Donald J. Torbert, Jr. Senior Vice President and April 15, 2002
- --------------------------- Chief Financial Officer
Donald J. Torbert, Jr
67
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
2.3 Agreement and Plan of Merger, dated March 23, 2001, by and
between the Registrant, The Park Avenue Bank and Friendship
Community Bank.
2.4 Agreement and Plan of Merger, dated August 15, 2001, by and
between the Registrant, The Park Avenue Bank and Farmers &
Merchants Bank.
2.5 Agreement and Plan of Merger, dated September 26, 2001, by and
between the Registrant, The Park Avenue Bank and Eagle Bank and
Trust.
2.6 Agreement and Plan of Merger, dated September 26, 2001, by and
between the Registrant, The Park Avenue Bank and Baxley Federal
Bank.
2.7 Agreement and Plan of Merger, dated September 26, 2001, by and
between the Registrant, The Park Avenue Bank and First Community
Bank of Southwest Georgia.
4.1 Indenture Agreement, dated November 28, 2001, by and between the
Registrant and Wilmington Trust Company for the issuance of
Floating Rate Junior Subordinated Debt Securities due 2031.
10.1 Form of Employment Agreement with Schedule of Parties and Terms
10.7 Employee Contract Termination Agreement, dated September 1, 2001,
by and between C. Larry Wilkinson and the Registrant.
10.8 Employment Agreement, dated October 24, 2001, by and between Jay
Torbert, the Registrant, and The Park Avenue Bank.
10.9 Employment Agreement, dated August 30, 2000, by and between M.
Burke Welsh, Jr. and the Registrant.
10.10 Rescission Agreement, dated December 31, 2001, by and between R.
Bradford Burnette and the Registrant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Stewart, Fowler & Stalvey, P.C.
23.3 Consent of Mauldin & Jenkins, LLC.
68