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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, 2002 - 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.
As of February 28, 2003, the registrant had 9,430,413 shares of common stock
outstanding. The aggregate market value of common stock held by non-affiliates
on February 28, 2003 was approximately $65.05 million.
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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.)
Yes [ ] No [X]
As of June 30, 2002, the registrant had 9,430,413 shares of common stock
outstanding. The aggregate market value of common stock held by non-affiliates
on June 30, 2002 was approximately $60.68 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2003 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
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Page
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PART I
Cautionary Notice Regarding Forward-Looking Statements. . . . . . . . . . 3
1. BUSINESS
General. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Supervision and Regulation . . . . . . . . . . . . . . . . 5
2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . 10
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . 10
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . 11
6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . 12
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Statistical Disclosures. . . . . . . . . . . . . . . . . . 13
Liquidity and Capital Resources. . . . . . . . . . . . . . 20
Results of Operations. . . . . . . . . . . . . . . . . . . 21
7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . 25
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly Financial Summary for 2002 and 2001. . . . . . . 27
Management's Responsibility For Financial Reporting. . . . 28
Reports of Independent Public Accountants. . . . . . . . . 29
Consolidated Balance Sheets at December 31, 2002 and 2001. 31
Consolidated Statements of Income for the Three Years
Ended December 31, 2002. . . . . . . . . . . . . . . . . 32
Consolidated Statements of Comprehensive Income (Loss)
for the Three Years Ended December 31, 2002. . . . . . . 33
Consolidated Statements of Stockholders' Equity for
the Three Years Ended December 31, 2002. . . . . . . . . 34
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 2002. . . . . . . . . . . . . . . . . 35
Notes to Consolidated Financial Statements . . . . . . . . 37
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES. . . . . . . . . . . . . . . . . 59
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . 59
11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . 59
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 59
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . 59
14. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . 59
PART IV
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . . . 60
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
CERTIFICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
2
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 either "the
Company", "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", "plan", "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, including our charter
consolidations, may be greater than expected; (6) expected cost savings
associated with our charter consolidations may not be fully realized or realized
within the expected time frame; (7) deposit attrition, customer loss or revenue
loss following our charter consolidations 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; (9) adverse
changes may occur in the bond and equity markets; (10) war or terrorist
activities may cause further deterioration in the economy or cause instability
in credit markets; and (11) restrictions or conditions imposed by our regulators
on our operations may make it more difficult for us to achieve our goals. 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 Bankshares, Inc. 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 the holding company for The Park Avenue Bank (the "Bank"). The
Bank was founded in Valdosta, Georgia in 1956, and became a state-chartered
commercial bank in 1971. In 2001, the Bank became a state member bank of the
Federal Reserve System. Since our incorporation in 1982, we have acquired five
other Georgia financial institutions and one Florida financial institution and
merged those institutions into the Bank. Currently, the Bank operates 18
offices in Georgia and Florida. Based on the FDIC/OTS Summary of Deposits
report as of June 30, 2002, the Bank is the 10th largest financial institution
headquartered in Georgia in terms of total in-state deposits. Further
information on each of our markets is provided below under "Markets and
Competition".
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, among other things, loans to small- and medium-sized businesses,
residential and commercial construction and development loans, commercial real
estate loans, farmland and agricultural production loans, residential mortgage
loans, home equity loans, consumer loans, and a variety of commercial and
consumer demand, savings and time deposit products. We also offer Internet
banking, on-line 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. In addition, with two
licensed financial advisors on staff, we are able to offer a complete line of
financial and investment products and services to our customers.
More information on the Company is available on our Internet website at
www.pabbankshares.com and on the Bank at www.parkavebank.com. We are not
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incorporating by reference into this Report the information contained on our
websites and, therefore, the content of our websites is not a part of this
Report.
3
Markets and Competition
The financial services industry is highly competitive. In our markets, we face
competitive pressures from both larger regional banks and smaller community
banks and thrifts in attracting and retaining commercial and consumer accounts.
The competitive environment is amplified in some of our smaller markets as there
are more financial service providers competing for fewer customers. 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.
Our investment in "human capital" is one of our greatest assets. 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. In addition, over the past three 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.
During the fourth quarter of 2000, we adopted a strategy to enter into higher
growth metropolitan markets that would complement our stable position in our
existing South Georgia markets. This expansion began with the opening of an
office in McDonough, Henry County, Georgia in October 2000. At the end of 2000,
we acquired a bank with two offices in Ocala, Marion County, Florida. In
October 2001, we opened an office in Oakwood, Hall County, Georgia. Both the
Henry County and Hall County offices initially began as loan production offices
and were subsequently developed into full service branches. In October 2002, we
opened a loan production office in Duluth, Gwinnett County, Georgia. We do not
have any plans to convert the Gwinnett County office to a full service branch at
this time. Our offices in Henry, Hall, and Gwinnett counties are also referred
to collectively as our "Metro Atlanta" offices in this Report.
The table below provides summary demographic data on each of our markets.
MARKET MARKET SHARE(1)
------ TOTAL DEPOSITS ------------------ # OF PCT(%)
COUNTIES STATE IN MARKET(1) PCT(%) RANK OFFICES POPULATION (2) CHANGE (3)
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Lowndes/Cook GA $ 1,317,267 21.4 1st of 15 5 108,105 0.2
Decatur/Grady GA 491,153 24.9 1st of 9 4 51,889 *
Bulloch GA 573,143 12.0 4th of 7 2 56,918 1.7
Appling/Jeff Davis GA 334,864 26.0 1st of 7 2 30,234 0.4
Henry GA 1,082,577 2.5 11th of 16 1 132,581 11.1
Marion FL 2,928,964 1.6 14th of 20 2 267,889 3.5
Hall (4) GA 1,897,725 - - 1 145,664 4.6
Gwinnett (5) GA 6,364,200 - - 1 621,528 5.6
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1 Dollars in thousands. Based on FDIC/OTS Summary of Deposits data as of
June 30, 2002. 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 2001 estimates provided by the U.S.
Census Bureau.
3 Percentage change in county populations from 2000 to 2001 is based on
U.S. Census Bureau data. * = percentage change was less than 0.1%.
4 We did not open our branch and begin accepting deposits from this
location until July 2002. Prior to that date, our presence was limited
to a loan production office in this market.
5 We opened a loan production office in this market in October 2002.
4
Nonbanking Services and Operations
The Bank provides agency transactional services for customer investments as
permitted under the regulations of the Federal Reserve. We are able to provide
our customers with securities brokerage services, including securities execution
services on national securities exchanges. Our brokerage activities are
restricted to buying and selling securities solely as an agent for the account
of our customers, and do not include underwriting or dealing in securities. In
addition, we are permitted to act as an agent for the private placement of
securities in accordance with federal securities laws. We also provide
investment advisory services to our 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 February 28, 2003, we had a total of 298 full-time and 27 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 bank.
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.
The Bank is a member of the Federal Deposit Insurance Corporation ("FDIC"), and
as such, our deposits are insured by the FDIC to the maximum extent provided by
law. The Bank is also 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. 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.
On May 20, 2002, the Company's Board of Directors adopted a Resolution requested
by the Federal Reserve, which, among other things, restricts us from redeeming
our capital stock, paying dividends, modifying existing debt agreements, or
incurring additional debt without the prior approval of our banking regulators.
The Resolution is the result of an examination that found the Bank to be in less
than satisfactory condition due primarily to serious weaknesses identified in
the asset quality of the Bank's loan portfolio. This Resolution will remain in
effect until removed by the regulators.
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.
5
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 three 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 (the "GLB Act"), discussed below, have expanded the permissible activities
of a bank holding company 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 a declaration with the Federal Reserve of its intention to
become 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 Securities and Exchange Commission (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.
6
Payment of Dividends
PAB is a legal entity separate and distinct from its subsidiaries. Its
principal source of cash flow is dividends from its subsidiary bank. There are
statutory and regulatory limitations on the payment of dividends by the
subsidiary bank to PAB, as well as by PAB to its stockholders.
If, in the opinion of the federal banking agencies, 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 pay
dividends only out of current operating earnings.
Pursuant to a Resolution entered into with our federal and state regulatory
agencies on May 20, 2002, neither the Bank nor PAB can declare a dividend
without obtaining prior governmental approvals. This Resolution will remain in
effect until removed by the regulators. In March 2003, we requested and
received approval from the Federal Reserve for the payment of a First Quarter
2003 dividend in the amount of $.03 per share to stockholders of record on March
31, 2003.
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, 2002, our consolidated Total Capital Ratio and our
Tier 1 Capital Ratio were 14.0% and 12.7%, 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, 2002 was 10.0%. 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.
The Bank is subject to risk-based and leverage capital requirements adopted by
its federal banking regulators, which are substantially similar to those adopted
by the Federal Reserve for bank holding companies. Pursuant to an agreement
entered into with our federal and state regulatory agencies on May 20, 2002, the
Bank is required to maintain a minimum Tier 1 Capital Leverage Ratio of 7.5% at
all times. The Bank was in compliance with all applicable minimum capital
requirements as of December 31, 2002.
7
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 agencies 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, the Bank. 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.
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, 2002, the Bank had the requisite capital level to qualify as
"well capitalized" under the regulatory framework for prompt corrective action.
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.
8
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") the Bank, as an FDIC insured
institution, has a continuing and affirmative obligation to help meet the credit
needs of the 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. The Bank has received
satisfactory ratings in its CRA examinations.
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. The Bank implemented the required financial privacy provisions by
July 1, 2001.
Monetary Policy
The earnings of the Bank 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.
USA Patriot Act of 2001
In October 2001, the USA Patriot Act of 2001 (the "Patriot Act") was enacted in
response to the terrorist attacks in New York, Pennsylvania, and Washington,
D.C. that occurred on September 11, 2001. The Patriot Act impacts financial
institutions in particular through its anti-money laundering and financial
transparency laws. The Patriot Act establishes regulations which, among others,
set standards for identifying customers who open an account and promoting
cooperation with law enforcement agencies and regulators in order to effectively
identify parties that may be associated with, or involved in, terrorist
activities or money laundering.
9
Georgia Fair Lending Act
The Georgia Fair Lending Act (the "GFLA") became initially effective on October
1, 2002 and establishes a number of prohibitions for loans that are "covered" by
the statute. Generally, a loan is "covered" by the GFLA if it has an annual
interest rate that exceeds the prime rate or comparable yield on treasury
securities by an amount specified by the statute or if its points and fees
exceed a specified percentage of the total loan amount. The GFLA has a broad
definition of points and fees. Any creditor who violates the GFLA may be liable
to the borrower for actual damages; statutory damages equal to two times the
interest paid under the loan; forfeiture of interest; punitive damages; costs;
and/or reasonable attorney's fees. For any violation for which statutory
damages may be awarded, the GFLA provides the borrower with a right of
rescission.
The GFLA is a controversial law because of provisions such as those creating
potential liability for assignees and holders of "covered" loans. As a result,
the GFLA was amended, effective March 7, 2003, by the Georgia legislature in an
effort to address a number of those provisions. In addition, there are issues
concerning federal preemption of the GFLA pending. The Office of the
Comptroller of the Currency (the "OCC") has begun the process of issuing a
determination or order regarding the preemption of GFLA. If the OCC determines
that federal law preempts the GFLA, then banks operating under a national
charter will not be subject to the GFLA while banks operating under a state
charter will be required to comply with the GFLA. Depending upon (i) the OCC's
determination regarding preemption, and (ii) the amendments to the GFLA passed
by the Georgia legislature, state-chartered banks could be at a competitive
disadvantage to banks operating pursuant to national charters in certain
segments of the lending market. We are monitoring developments in this area
and, even though the Bank is a state-chartered bank, we do not believe that we
will be exposed to any significant competitive disadvantage as a result of GFLA.
Availability of Filings on Company Website
The Company's website address is www.pabbankshares.com. Under the link entitled
---------------------
"Investor Relations", any person may access the Company's filings for the past
five years with the SEC by selecting "Documents". We are not incorporating by
reference into this Report the information contained on our websites and,
therefore, the content of our websites is not a part of this Report.
ITEM 2. PROPERTIES
We operate 16 banking offices in Georgia and 2 in Florida. With the exception
of one of our offices in Ocala, Florida, and our loan production office in
Duluth, Georgia, 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. The Duluth office is under a three-year operating lease
that expires in September 2005. In addition, we own a three-story
administrative building, which houses our corporate offices, and an operations
center in Valdosta, Georgia. 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 the normal real estate and commercial lending activities of the Bank,
we generally do 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 Bank 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 2002.
10
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 February 28, 2003,
there were 2,430 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 the Bank to pay dividends up to the parent holding company. 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. However,
pursuant to the Resolution adopted on May 20, 2002, the Company must seek prior
approval from its banking regulators before paying a dividend. Accordingly, in
March 2003, we requested and received approval from the Federal Reserve for the
payment of a First Quarter 2003 dividend in the amount of $.03 per share to
stockholders of record on March 31, 2003. For more information on dividend
restrictions see the "Supervision and Regulation" 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
-------------------- ------ ------ ---------- ---------
2001
First Quarter $13.00 $ 9.38 $ 0.11 $ 0.18
Second Quarter 12.35 10.50 0.11 0.19
Third Quarter 11.99 10.28 0.11 0.14
Fourth Quarter 10.89 9.90 0.11 -0.49
2002
First Quarter $11.30 $ 9.21 $ 0.11 $ 0.18
Second Quarter 10.01 8.15 - 0.18
Third Quarter 8.83 7.70 - 0.18
Fourth Quarter 9.00 8.00 - 0.13
Equity Compensation Plan Information
The following table summarizes the Company's equity compensation plans as of
December 31, 2002.
Number of Securities Number of Securities
To be Issued Upon Weighted-Average Remaining Available
Exercise of Exercise Price of for Future Issuance
Outstanding Outstanding Under Equity
Options, Warrants Options, Warrants Compensation
Plan Category and Rights and Rights Plans *
--------------------- -------------------- --------------------- -------------------
Equity Compensation 366,546 $ 11.41 573,171
Plans Approved by
Security Holders
Equity Compensation n/a n/a n/a
Plans Not Approved by
Security Holders
- -------------------------------
* excluding securities reflected in the second column
In addition to the equity compensation plans approved by our stockholders, we
have the Employee and Director Stock Purchase Program (the "SPP"). The Bank,
serving as the SPP custodian, uses funds contributed from employees and
directors up to an amount specified in the SPP, matched by the Company a rate of
50%, to purchase shares of our common stock. A participant may request a
distribution of his or her entire account at any time. A participant's
participation in the SPP terminates immediately upon termination of employment
or director status. The SPP is administered by a committee appointed by the
Board of Directors. We may amend or terminate the SPP or suspend the employer
matching contributions at any time. For more information about the SPP, see Note
15 in the accompanying Notes to Consolidated Financial Statements. Also, a full
text of the SPP is attached to this Report as Exhibit 10.9.
11
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 in Item 8
and Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 of this Report.
(In thousands, except per share and other data) 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Summary of Operations:
Interest income $ 48,079 $ 62,715 $ 57,526 $ 49,495 $ 48,385
Interest expense 19,989 35,600 28,674 22,906 23,439
------------------------------------------------------------------------------------------------------------------
Net interest income 28,090 27,115 28,852 26,589 24,946
Provision for loan losses 2,575 12,220 4,099 985 903
Other income 8,013 11,923 5,756 6,060 5,266
Other expense 24,368 26,921 21,874 18,966 17,224
------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense 9,160 (103) 8,635 12,698 12,085
Income tax expense 2,813 (251) 2,909 4,005 4,098
------------------------------------------------------------------------------------------------------------------
Net income $ 6,347 $ 148 $ 5,726 $ 8,693 $ 7,987
==================================================================================================================
Net interest income (taxable-equivalent) $ 28,225 $ 27,216 $ 28,968 $ 26,718 $ 25,108
Selected Average Balances:
Total assets $ 779,958 $ 847,100 $ 694,674 $ 629,634 $ 597,461
Earning assets 719,352 780,120 640,889 576,729 554,127
Loans 586,712 616,156 534,340 467,149 425,210
Deposits 641,449 694,219 548,276 500,582 488,322
Stockholders' equity 67,975 72,268 70,706 68,161 62,913
Selected Year End Balances:
Total assets $ 747,911 $ 859,143 $ 794,907 $ 664,969 $ 620,111
Earning assets 683,456 790,546 722,490 606,464 569,291
Loans 555,238 637,825 580,737 494,417 440,515
Allowance for loan losses 12,097 15,765 8,185 5,037 5,172
Deposits 606,730 720,398 637,180 516,204 504,087
Stockholders' equity 71,265 65,372 70,780 69,611 66,063
Common Share Data:
Outstanding at year end 9,430,413 9,409,913 9,501,947 9,617,406 9,604,027
Weighted average outstanding 9,426,761 9,482,709 9,528,387 9,612,634 9,602,946
Diluted weighted average outstanding 9,459,768 9,550,080 9,598,790 9,749,162 9,813,825
Per Share Ratios:
Net income - basic $ 0.67 $ 0.02 $ 0.60 $ 0.90 $ 0.83
Net income - diluted 0.67 0.02 0.60 0.89 0.81
Dividends declared 0.11 0.44 0.43 0.39 0.28
Book value 7.56 6.95 7.45 7.24 6.88
Profitability Ratios:
Return on average assets (ROA) 0.81% 0.02% 0.82% 1.38% 1.34%
Return on average equity (ROE) 9.34% 0.20% 8.10% 12.75% 12.70%
Net interest margin 3.92% 3.49% 4.52% 4.63% 4.53%
Efficiency ratio (excluding merger and
conversion costs) 67.04% 74.02% 60.39% 57.12% 55.06%
Liquidity Ratios:
Total loans to total deposits 91.51% 88.54% 91.14% 95.78% 87.39%
Average loans to average earning assets 81.56% 78.98% 83,37% 81.00% 76.74%
Noninterest-bearing deposits to total deposits 14.45% 11.31% 11.09% 12.58% 14.30%
Capital Adequacy Ratios:
Average equity to average assets 8.72% 8.53% 10.18% 10.83% 10.53%
Dividend payout ratio 16.39% 2855.42% 72.08% 43.54% 33.95%
Asset Quality Ratios:
Net charge-offs to average loans 1.06% 0.75% 0.26% 0.24% 0.17%
Nonperforming loans to total loans 1.87% 1.91% 1.27% 0.54% 0.40%
Nonperforming assets to total assets 1.56% 1.57% 0.99% 0.52% 0.37%
Allowance for loan losses to total loans 2.18% 2.47% 1.41% 1.02% 1.17%
Allowance for loan losses to nonperforming loans 116.56% 129.44% 111.03% 188.79% 292.87%
- --------------------------------------------------------------------------------------------------------------------
12
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
On May 20, 2002, the Board of Directors adopted a Resolution requested by our
primary federal regulator, the Federal Reserve Bank of Atlanta, which, among
other things, restricts us from redeeming our capital stock, paying dividends,
modifying existing debt agreements, or incurring additional debt without the
prior approval of our banking regulators. The Resolution is the result of a
recent examination that found the Bank to be in less than satisfactory condition
due primarily to serious weaknesses identified in the asset quality of the
Bank's loan portfolio. This Resolution had a profound impact on our financial
condition and results of operations in 2002, and it shall remain in effect until
removed by the regulators.
The Company's balance sheet has been in a period of contraction since the end of
2001. At December 31, 2002, our total assets were $747.9 million, a $111.2
million, or 13%, decrease from total assets of $859.1 million at December 31,
2001. The majority of the decrease in assets was in the loan portfolio. Total
loans decreased $82.6 million, or 13%, in 2002. Total deposits decreased $113.7
million, or 16%, in 2002. Of those decreases, $10.4 million in loans and $4.3
million in deposits were sold with our Richmond Hill branch office in January
2002. Overall, our residential mortgage loan portfolio is down $43.1 million,
or 21%, since the beginning of 2002 due primarily to the high level of mortgage
refinancing activity. Our consumer loans are down $15.7 million, or 30%, for
the year. Loans for commercial purposes (including commercial real estate and
construction and development loans) are down $21.6 million, or 6%. The decline
in consumer and commercial loans during 2002 is primarily the result of the
following factors: (1) some of our markets have been in an economic recession
and there has been a corresponding slow down in loan demand; (2) new loan growth
in our South Georgia markets has been hampered by our internal focus on
improving asset quality, high turnover in senior lenders, and the adoption of a
more conservative underwriting philosophy; (3) payoffs of some large
out-of-market participation loans were not replaced; (4) general portfolio decay
resulting from customer reaction to the consolidation of our banking charters,
and (5) net charge-offs of $6.1 million in those categories for the year. Loan
growth has been positive in our new markets in Metro Atlanta, but not at a pace
to replenish the contraction in some of our South Georgia markets.
Without any net new loans driving asset growth in 2002, we have reduced the
liability side of our balance sheet by allowing time deposits to either roll off
the balance sheet or into other deposit accounts at maturity. Time deposits
have declined by a net $125.8 million, or 29%, since the beginning of 2002. At
the same time, we have continued to focus on building customer relationships and
seeking core deposits. Balances in demand and savings accounts increased $12.1
million, or 4%, during 2002. In addition, we reduced our advances from the
Federal Home Loan Bank of Atlanta by a net $2.1 million, or 5%, during 2002.
Total stockholders' equity increased $5.9 million, or 9%, during 2002. Equity
was increased primarily from the contribution of $6.3 million from 2002 earnings
net of $1.0 million in dividends paid prior to the adoption of the Resolution
previously mentioned. As a percentage of total assets, equity represented 9.5%
at end of 2002, compared to 7.6% at the beginning of 2002, with the increase
resulting from an increase in equity and a decline in assets during the year.
13
Interest rates remained at near-historic lows throughout most of 2002. While
the lower rate environment resulted in downward repricing of our earning assets,
we were also able to reduce the cost of funding those earning assets during the
year. The next two tables illustrate the effects of the decline in interest
rates and a decrease in the volume of loans and other earning assets on our
interest income during 2002. The impact of interest rates and volume on our
earnings are more fully discussed under "Results of Operations" below.
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 years. 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, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
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 $ 586,712 $ 42,645 7.27% $616,156 $ 54,163 8.79% $534,340 $ 51,045 9.55%
Investment securities:
Taxable 92,942 4,638 4.99% 93,377 5,468 5.86% 68,702 4,028 5.86%
Nontaxable 6,157 398 6.46% 4,607 299 6.49% 5,009 344 6.86%
Other short-term
investments 33,541 533 1.59% 65,980 2,886 4.37% 32,838 2,225 6.78%
---------- --------- --------- --------- --------- --------
Total interest-
earning assets 719,352 48,214 6.70% 780,120 62,816 8.05% 640,889 57,642 8.99%
Noninterest-earning assets:
Cash 22,541 23,329 25,170
Allowance for loan losses (14,903) (8,429) (5,650)
Unrealized gain (loss)
on securities
available for sale 1,095 2,340 (240)
Other assets 51,873 49,740 34,505
---------- --------- ---------
Total assets $ 779,958 $847,100 $694,674
========== ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits $ 167,986 $ 2,330 1.39% $141,314 $ 3,624 2.56% $116,661 $ 3,357 2.88%
Savings deposits 38,289 430 1.12% 34,535 732 2.12% 28,723 725 2.52%
Time deposits 350,697 14,309 4.08% 443,486 27,012 6.09% 335,935 20,128 5.99%
FHLB advances 36,863 2,014 5.46% 51,248 3,213 6.27% 56,674 3,796 6.70%
Notes payable 10,000 608 6.08% 7,930 468 5.90% - -
Other short-term
borrowings 16,870 298 1.77% 13,958 551 3.95% 13,717 668 4.87%
---------- --------- --------- --------- --------- --------
Total interest-
bearing liabilities 620,705 19,989 3.22% 692,471 35,600 5.14% 551,710 28,674 5.20%
Noninterest-bearing liabilities
and stockholders' equity:
Demand deposits 84,476 74,884 66,957
Other liabilities 6,802 7,477 5,301
Stockholders' equity 67,975 72,268 70,706
---------- --------- ---------
Total liabilities and
stockholders'
equity $ 779,958 $847,100 $694,674
========== ========= =========
Interest rate spread 3.48% 2.91% 3.79%
========== ======== =======
Net interest income $ 28,225 $ 27,216 $28,968
========= ========= ========
Net interest margin 3.92% 3.49% 4.52%
========== ======== =======
14
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, 2002 vs. 2001 2001 vs. 2000
----------------------------------------------------------------------------------------------------
Changes Due To Changes Due To
Increase ------------------- Increase ------------------
(Decrease) Rate Volume (Decrease) Rate Volume
----------- --------- -------- ----------- -------- --------
(Dollars In Thousands)
Increase (decrease) in:
Income from:
Loans $ (11,518) $ (8,930) $(2,588) $ 3,118 $(4,698) $ 7,816
Taxable securities (830) (805) (25) 1,440 (7) 1,447
Nontaxable securities 99 (2) 101 (45) (17) (28)
Other short-term investments (2,353) (934) (1,419) 661 (1,585) 2,246
----------------------------------------------------------------------------------------------------
Total interest income (14,602) (10,671) (3,931) 5,174 (6,307) 11,481
----------------------------------------------------------------------------------------------------
Expense from:
Demand deposits (1,294) (1,978) 684 267 (442) 709
Savings deposits (302) (382) 80 7 (140) 147
Time deposits (12,703) (7,052) (5,651) 6,884 440 6,444
FHLB advances (1,199) (297) (902) (583) (220) (363)
Notes payable 140 18 122 468 - 468
Other short-term borrowings (253) (368) 115 (117) (129) 12
----------------------------------------------------------------------------------------------------
Total interest expense (15,611) (10,059) (5,552) 6,926 (491) 7,417
----------------------------------------------------------------------------------------------------
Net interest income $ 1,009 $ (612) $ 1,621 $ (1,752) $(5,816) $ 4,064
====================================================================================================
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 the Bank.
As of December 31, 2002 2001 2000
-------------------------------------------------------------------
(Dollars in Thousands)
U. S. Government and agency securities $25,622 $ 56,504 $51,031
State and municipal securities 8,614 4,999 4,967
Corporate debt securities 12,397 8,389 -
Mortgage-backed securities 32,066 32,199 21,127
Marketable equity securities 13,500 4,827 2,817
Restricted and other equity securities 5,827 6,356 4,983
-------------------------------------------------------------------
Total $98,026 $113,454 $84,925
===================================================================
The following table shows the maturities of non-equity investment securities at
December 31, 2002 and the weighted-average yields (on a fully taxable basis
assuming a 34% tax rate) on such securities. The maturities presented for
mortgage-backed securities are based on the average lives of those bonds at the
then projected prepayment speeds. 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, 2002 Amount Yield Amount Yield Amount Yield Amount Yield
-----------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Due in one year or less $ 1,068 6.09% $ 1,195 2.80% $ 4,057 3.43% $ 130 0.00%
Due after one year through five years 18,985 4.42% 2,305 5.74% 7,340 5.30% 16,695 4.49%
Due after five years through ten years 5,569 6.10% 1,758 6.24% 1,000 6.75% 12,332 5.41%
Due after ten years - - 3,357 6.70% - - 2,909 5.94%
-----------------------------------------------------------------------------------------------------------
Total $25,622 4.85% $ 8,614 5.81% $12,397 4.79% $32,066 4.91%
-----------------------------------------------------------------------------------------------------------
15
The estimated fair market value of our investment portfolio at December 31,
2002, was approximately $1.6 million, or 1.6%, above amortized cost; however,
market values vary significantly as interest rates change. Of the investments
in U.S. Government and agency securities maturing after one year, approximately
$16.4 million, or 67%, are potentially callable at par value within one year.
Our investment portfolio policy stresses quality and liquidity. With the
exception of three bonds with a total carrying value of $1.6 million, or 1.7% of
our total portfolio, the bonds which are selected as investments carry an "A"
rating or better by either Standard and Poor's or Moody's Investors Service,
Inc. The three non-rated investments are small, private placements for two
Georgia municipalities and one Georgia bank holding company. These investments
were reviewed for credit and market risk and deemed appropriate for the Bank's
portfolio by management. The portfolio is monitored to assure there is no
unreasonable concentration of securities in the obligations of a single debtor.
LOAN PORTFOLIO
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, 2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Commercial and financial $ 55,840 $ 80,493 $ 72,942 $ 59,328 $ 56,531
Agricultural 22,178 26,428 23,064 8,197 6,759
Real estate - construction 75,076 63,486 40,130 31,858 22,567
Real estate - mortgage (commercial and residential) 354,628 402,988 376,000 332,008 298,211
Installment loans to individuals and other 47,739 64,806 68,880 63,424 56,825
----------------------------------------------------------------------------------------------------------
555,461 638,201 581,016 494,815 440,893
Unearned income, net (223) (376) (279) (398) (378)
----------------------------------------------------------------------------------------------------------
555,238 637,825 580,737 494,417 440,515
Allowance for loan losses (12,097) (15,765) (8,185) (5,037) (5,172)
----------------------------------------------------------------------------------------------------------
Loans, net $543,141 $622,060 $572,552 $489,380 $435,343
==========================================================================================================
The percentage of loans outstanding at the indicated dates is presented in the
following table according to type of loan.
As of December 31, 2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Commercial and financial 10.06% 12.62% 12.56% 12.00% 12.83%
Agricultural 3.99% 4.15% 3.97% 1.66% 1.54%
Real estate - construction 13.52% 9.95% 6.91% 6.44% 5.12%
Real estate - mortgage (commercial and residential) 63.87% 63.18% 64.75% 67.15% 67.70%
Installment loans to individuals and other 8.60% 10.16% 11.86% 12.83% 12.90%
------------------------------------------------------------------------------------------------
100.04% 100.06% 100.05% 100.08% 100.09%
Unearned income, net -0.04% -0.06% -0.05% -0.08% -0.09%
------------------------------------------------------------------------------------------------
100.00% 100.00% 100.00% 100.00% 100.00%
Allowance for loan losses -2.18% -2.47% -1.41% -1.02% -1.17%
------------------------------------------------------------------------------------------------
Loans, net 97.82% 97.53% 98.59% 98.98% 98.83%
================================================================================================
There was a definite change in both the volume and mix of the Bank's loan
portfolio during 2002. Overall, the portfolio decreased $82.6 million, or
12.9%, from $637.8 million at the beginning of the year to $555.2 million at
year end. As a percentage of the portfolio, construction and development loans
expanded from 9.95% at the end of 2001 to 13.52% at the end of 2002 due to
growth in our Metro Atlanta offices. The largest category in our portfolio,
commercial and residential real estate loans, held at approximately 63% of the
portfolio over the past year.
16
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 - Real Estate - All Other
As of December 31, 2002 & Financial Agricultural Construction Mortgage Loans
----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Due in one year or less $ 33,135 $ 10,824 $ 58,362 $ 89,348 $ 22,551
Due after one year through five years 18,408 10,873 10,231 190,370 19,431
Due after five years 4,297 481 6,483 74,910 5,757
----------------------------------------------------------------------------------------------------------------------
Total $ 55,840 $ 22,178 $ 75,076 $ 354,628 $ 47,739
======================================================================================================================
Of the above loans maturing after one year,
those with predetermined fixed rates $ 10,763 $ 3,907 $ 5,103 $ 116,059 $ 25,188
those with floating or adjustable rates 11,942 7,447 11,611 149,221 -
----------------------------------------------------------------------------------------------------------------------
Total maturing after one year $ 22,705 $ 11,354 $ 16,714 $ 265,280 $ 25,188
======================================================================================================================
Nonperforming Loans
The amount of nonperforming loans outstanding at the indicated dates is
presented in the following table by category.
As of December 31, 2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Loans accounted for on a nonaccrual basis $10,378 $10,581 $2,430 $2,395 $1,567
Accruing loans which are contractually past due
90 days or more as to principal or interest payments - 1,598 509 273 199
Other impaired loans - - 4,433 - -
----------------------------------------------------------------------------------------------------
Total nonperforming loans $10,378 $12,179 $7,372 $2,668 $1,766
====================================================================================================
Total nonperforming loans decreased $1.8 million, or 14.8%, from 2001. Included
in the group of nonperforming loans at December 31, 2002, are loans totaling
$4.2 million, or 40.5% of the total, that are due from four borrowers. Three
of the four borrowers, whose debts with the Bank total $1.5 million, are farmers
whose loans are secured by farmland and agricultural equipment. The other
borrower owes the Bank $2.7 million on a real estate and golf course
development. In December 2001, we took a $2 million write-down on this line due
to a potential collateral deficiency.
Included in nonperforming loans at the beginning of 2002, were loans totaling
$3.3 million due from one commercial borrower. These loans were partially
guaranteed by the U. S. Department of Agriculture (the "USDA"). We wrote-off
the unguaranteed portions of these loans in December 2000 when it became
apparent the borrower could no longer adequately service the debt. In September
2002, after an unsuccessful effort to collect the loans from the borrower, the
remaining balance of these loans were charged-off and a formal claim was filed
with the USDA for a recovery of the guaranteed portion plus uncollected interest
and legal and collection fees. Our claim is currently under review at the USDA,
and at this time, we can provide no assurances as to the timing or amount of a
recovery, if any.
Although we have made some progress in addressing our nonperforming loans, we
still have a challenge ahead of us as we work to bring our level of
nonperforming loans to a more acceptable level. Our ratio of nonperforming
loans to total loans was 1.87% at year end, compared to an average ratio of
0.77% for our national peer group (all commercial banks having assets between
$500 million and $1 billion). Unfortunately, with a slowing economy we would
expect to see additional problems develop in both consumer and commercial loans
in 2003.
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 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.
For the year ended December 31, 2002, the gross interest income that would have
been recorded if our nonperforming loans had been current in accordance with
their original terms was approximately $1.1 million. The amount of interest
income on the above nonperforming loans that was included in net income for the
year ended December 31, 2002 was approximately $199,000.
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,
2002, there were approximately $894,000 in loans not classified as nonperforming
that management considered potential problem loans.
17
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, 2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Balance at beginning of year $ 15,765 $ 8,185 $ 5,037 $ 5,172 $ 4,996
Charge-offs:
Commercial, financial and agricultural 3,771 1,619 680 444 207
Real estate - construction - 2,001 110 13 -
Real estate - mortgage (commercial and residential) 1,752 538 393 191 45
Installment loans to individuals and other loans 1,079 675 401 568 571
------------------------------------------------------------------------------------------------------------
6,602 4,833 1,584 1,216 823
------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial and agricultural 89 55 59 10 16
Real estate - construction - - - - -
Real estate - mortgage (commercial and residential) 119 72 72 - 22
Installment loans to individuals and other loans 151 66 51 86 58
------------------------------------------------------------------------------------------------------------
359 193 182 96 96
------------------------------------------------------------------------------------------------------------
Net charge-offs 6,243 4,640 1,402 1,120 727
------------------------------------------------------------------------------------------------------------
Additions provided to the allowance
charged to operations 2,575 12,220 4,099 985 903
Allowance for loan losses of acquired bank - - 451 - -
------------------------------------------------------------------------------------------------------------
Balance at end of year $ 12,097 $ 15,765 $ 8,185 $ 5,037 $ 5,172
============================================================================================================
Average balance of loans outstanding $586,712 $616,156 $534,340 $467,149 $425,210
============================================================================================================
Ratio of net charge-offs during the year to average
loans outstanding during the year 1.06% 0.75% 0.26% 0.24% 0.17%
============================================================================================================
The allowance for loan losses as a percentage of nonperforming loans was 116.6%
at December 31, 2002, compared to 129.4% at December 31, 2001. The allowance
for loan losses related to our nonperforming loans amounted to $2.4 million and
$4.8 million at December 31, 2002 and 2001, respectively. Our level of
charge-offs has increased substantially in 2002 and 2001 compared to the
previous years due primarily to $6.7 million in write-downs taken on two larger
credits.
At December 31, 2002, the allowance as a percent of total loans was 2.18%,
compared to 2.47% at December 31, 2001. We consider the current level of the
allowance for loan losses adequate to absorb losses from loans in the portfolio.
We have a comprehensive methodology for determining the adequacy of our
allowance for loan losses. This methodology includes an assessment for specific
valuations on larger loan lines and nonperforming loans, and an assessment based
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.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
While we use the best information available to make the evaluation, future
adjustments to the allowance may be necessary if there are significant changes
in economic conditions or other environmental factors. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses, and may require the Bank to make additions
to the allowance based on their judgment about information available to them at
the time of their examinations.
18
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, 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
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 $ 2,422 14.0% $ 2,823 16.7% $ 1,203 16.5% $ 687 13.7% $ 742 14.3%
Real estate -
construction 1,293 13.5% 1,572 9.9% 973 6.9% 324 6.4% 265 5.1%
Real estate -
mortgage 7,660 63.9% 9,244 63.2% 4,779 64.7% 3,380 67.1% 3,498 67.7%
Installment loans to
Individuals 722 8.6% 2,126 10.2% 1,230 11.9% 646 12.8% 667 12.9%
Unallocated - - - - -
- -----------------------------------------------------------------------------------------------------------
Total $12,097 100.0% $15,765 100.0% $ 8,185 100.0% $ 5,037 100.0% $ 5,172 100.0%
===========================================================================================================
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, 2002 2001 2000
------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
------------------------------------------------------------------------------------
(Dollars In Thousands)
Noninterest-bearing demand $ 84,476 - $ 74,884 - $ 66,957 -
Interest-bearing demand 167,986 1.39% 141,314 2.56% 116,661 2.88%
Savings 38,289 1.12% 34,535 2.12% 28,723 2.52%
Time 350,697 4.08% 443,486 6.09% 335,935 5.99%
------------------------------------------------------------------------------------
Total $641,449 2.66% $694,219 4.52% $548,276 4.44%
------------------------------------------------------------------------------------
The maturities of time deposits of $100,000 or more as of December 31, 2002 are
summarized below.
Amount (in thousands)
--------------------------------------------------------
Three months or less $ 25,577
Over three through six months 22,527
Over six months through one year 23,260
Over one year 27,413
--------------------------------------------------------
Total $ 98,777
========================================================
With a decline in loan volume during 2002, we elected to not compete
aggressively for time deposits of $100,000 or more. Within our portfolio of
time deposits, those with balances of $100,000 or more decreased by $58.6
million, or 37%, during the year. Other time deposits also declined as we
lowered our offering rates during the year and depositors moved into
interest-bearing demand and savings accounts. Along with the decrease in
volume, the average rate paid on time deposits dropped 201 basis points from
6.09% in 2001 to 4.08% in 2002. The decrease in both volume and rate on these
deposits allowed us to improve our net interest margin and keep our net interest
income from falling to a less profitable level.
19
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is an important factor in our financial condition and affects our
ability to meet the borrowing needs and deposit withdrawal requirements of our
customers. Assets, consisting primarily 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, 2002, our liquidity ratio was 22.5% and our net noncore funding
dependency ratio was 16.3%. Our liquidity and funding policy provides that we
should maintain a liquidity position of greater than or equal to 15% and a net
noncore funding dependency ratio of less than or equal to 25%. Although we
intend to tighten our liquidity levels in early 2003, since year end we are
aware of no trends or events likely to result in a material change in our
ability to meet the borrowing needs and deposit withdrawal requirements of our
customers.
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 often met through advances from the Federal
Home Loan Bank of Atlanta (the "FHLB") and other borrowing arrangements. Our
FHLB advances outstanding averaged $36.9 million during 2002. The advances
outstanding at December 31, 2002 totaled $36.1 million with a weighted-average
stated interest rate of 5.35%.
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
trust preferred securities and investing the proceeds in Floating Rate Junior
Subordinated Debentures issued by us. The interest rates on both the trust
preferred securities and the debentures are reset semi-annually at LIBOR plus
3.75% (currently 5.17%) 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 trust preferred 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 the trust preferred securities qualify
as Tier 1 Capital under the risk-based capital guidelines established by the
Federal Reserve.
Investment Portfolio
The Bank's 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
$6.3 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 flows 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, 2002, approximately 49.7% of our $98 million
investment portfolio was pledged as collateral to others.
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,
2002, we had outstanding commitments to extend credit through open lines of
credit of approximately $70.3 million and outstanding standby letters of credit
of approximately $1.4 million.
20
At December 31, 2002, we had an outstanding commitment to complete the
construction of a branch office in Hall County, Georgia. Our plan is to fund
the remaining $350,000 estimated for final construction costs and to furnish and
equip this office during the first quarter of 2003 with cash provided from
operations. Our cash flow from operations for the past three years has ranged
between $9.5 and $14.5 million per year. There are no other binding commitments
for material cash expenditures outstanding.
Stockholders' Equity
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 consolidated regulatory capital ratios at
December 31, 2002, 2001 and 2000.
Minimum
Regulatory
2002 2001 2000 Requirement
------------------------------------------------------------------------------------------
Total Capital to Risk Weighted Assets 14.0% 12.0% 12.5% 8.0%
Tier 1 Capital to Risk Weighted Assets 12.7% 10.7% 11.1% 4.0%
Tier 1 Capital to Average Assets (Leverage Ratio) 10.0% 8.0% 8.7% 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 2002, on a tax
equivalent basis, increased by $1 million, or 3.7%, over 2001. Interest income
decreased $14.6 million, or 23.2%, while interest expense decreased by $15.6
million, or 43.8%, during 2002. The decrease in interest income is primarily
the result of a $60.8 million, or 7.8%, decrease in the volume of average
earning assets held in 2002 compared to 2001. In addition, due to the low
interest rate environment, the average yield on those earning assets fell 135
basis points from 8.05% in 2001 to 6.70% in 2002. The decrease in interest
expense is also the result of a decline in volume and rates. Average
interest-bearing liabilities decreased by $71.8 million, or 10.4%, during 2002,
and the average rates paid on those funds decreased 192 basis points from 5.14%
in 2001 to 3.22% in 2002.
Net interest income for 2001 decreased by $1.8 million, or 6%, from 2000. The
decrease in 2001 from 2000 was the net result of a rapid decrease in interest
rates during 2001 offset somewhat by an increase in volume over 2000. The
repricing of our fixed-rate time deposits and other borrowings lagged nine to
twelve months on average behind the almost instantaneous repricing of the bulk
of our loans during 2001.
The net interest margin is net interest income expressed as a percentage of
average earning assets. Our net interest margin increased from 3.49% in 2001
to 3.92% in 2002, a 43 basis point improvement. Although our net interest
margin steadily improved each quarter during 2002, from 3.32% during the fourth
quarter of 2001 to 4.18% during the fourth quarter of 2002, our ability to
continue to improve our net interest margin going forward will be a challenge as
long as interest rates hold at or slide even lower than the current levels.
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 and other
internal and external environmental factors. 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.
21
The provision for loan losses was $2.6 million in 2002. This is a decline of
$9.6 million from 2001. The decline is due to a shrinking loan portfolio and
some stabilization in the level of nonperforming loans.
The provision for loan losses increased to $12.2 million in 2001 from $4.1
million in 2000 due primarily to a $7.2 million provision required by the
examiners for the Federal Reserve. The increased provisions in 2001 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.
NONINTEREST INCOME
The following table summarizes noninterest income during the last three years.
For the Year Ended December 31, 2002 2001 2000
----------------------------------------------------------------------------------------------------------
Percent Percent
Change Change
Amount 2002 vs. 2001 Amount 2001 vs. 2000 Amount
----------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Service charges on deposit accounts $ 5,295 -5.0% $ 5,575 43.6% $ 3,881
Mortgage origination fees 838 19.4% 702 59.9% 439
Brokerage commissions and fees 485 58.5% 306 144.8% 125
ATM/debit card fee income 329 149.2% 132 -2.9% 136
Insurance commissions and fees 6 -96.3% 161 -23.2% 210
Other commissions and fees 227 1.3% 224 14.9% 195
Securities transactions, net 261 -85.0% 1,741 7,354.2% (24)
Earnings of unconsolidated subsidiary - - 590 4.8% 563
Earnings on bank-owned life insurance 478 -2.8% 492 251.4% 140
Write-down due to impairment in value
of branch office * (372) - - - -
Gain (loss) on disposal of assets * - - (1) 99.4% (154)
Gain on sale of branch office * 100 - - - -
Gain on sale of unconsolidated subsidiary * - - 1,462 - -
Other noninterest income 366 -32.1% 539 120.0% 245
----------------------------------------------------------------------------------------------------------
Total Noninterest Income $ 8,013 -32.8% $11,923 107.1% $ 5,756
==========================================================================================================
* Non-recurring items for discussion purposes
Noninterest income decreased 32.8% in 2002, from $11.9 million in 2001 to $8
million in 2002. However, as a percentage of average assets, noninterest
income, excluding securities transactions and other non-recurring items, has
been approximately 1.03%, 1.03%, and 0.85% for each of the last three years
ending December 31, 2002, 2001 and 2000, respectively.
Service charges on deposit accounts dropped slightly from 2001 to 2002 as we
continued to promote a free checking product and the average balance per
transaction account increased over 2001, thus reducing the monthly service fees.
The fee income generated from an overdraft privilege product that was launched
in March 2001 and resulted in an increase in revenues that year also tapered off
in 2002.
Mortgage origination fees increased 19.4% in 2002 due to a rise in refinancing
activity as interest rates remained low during the year. If the demand for
refinancing slows during 2003, we expect our mortgage origination fee income to
decline as well.
Brokerage income increased 58.5% in 2002 to $485,000 during the third year of
that operation. We do not expect to be able to generate as much income in 2003
as retail investing activity has slowed.
Fee income from ATM and debit cards increased 149.2% in 2002 as the volume of
point-of-sale transactions has increased and, to a lesser degree, we increased
the fees we charge non-bank customers for the use of our ATM's during the year.
Fee income for sales of consumer credit insurance decreased by 96.3% in 2002 as
we moved away from paying our lenders commissions for the product.
22
Gains on securities transactions decreased nearly $1.5 million in 2002. There
was a $1.7 million gain on the sale of stock in the Federal Home Loan Mortgage
Corporation in 2001.
We did not record any earnings from our equity investment in an unconsolidated
subsidiary in 2002 because we sold our 50% equity interest in December 2001 for
a gain of approximately $1.5 million.
We recorded a $100,000 gain on the sale of our branch office in Richmond Hill,
Georgia in January 2002. In December 2002, we recognized a $372,000 write-down
on the impairment of a branch office in Ocala, Florida after an updated
appraisal of the property failed to support the carrying value recorded when the
branch was acquired in December 2000.
NONINTEREST EXPENSE
The following table summarizes noninterest expenses during the last three years.
For the Year Ended December 31, 2002 2001 2000
------------------------------------------------------------------------------------------------
Percent Percent
Change Change
Amount 2002 vs. 2001 Amount 2001 vs. 2000 Amount
------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Salaries and wages $10,921 -13.7% $12,648 36.6% $ 9,259
Employee benefits 2,958 8.9% 2,716 20.4% 2,256
Net occupancy expense of premises 1,716 8.6% 1,580 35.6% 1,165
Furniture and equipment expense 2,396 -6.1% 2,553 47.4% 1,732
Amortization of intangible assets - - 409 13.6% 360
Advertising and business development 512 -14.8% 601 14.3% 526
Supplies and printing 638 -33.1% 953 51.0% 631
Telephone and internet charges 638 15.0% 555 48.8% 373
Postage and courier 644 5.1% 613 33.6% 459
Legal and accounting fees 883 97.5% 447 -13.9% 519
Conversion and consolidation costs - - 313 -62.4% 833
Other noninterest expense 3,062 -13.3% 3,533 -6.1% 3,761
------------------------------------------------------------------------------------------------
Total Noninterest Expense $24,368 -9.5% $26,921 23.1% $21,874
================================================================================================
Noninterest expense decreased 9.5% in 2002. As a percentage of average assets,
noninterest expense has been approximately 3.12%, 3.18%, and 3.15% for each of
the last three years ending December 31, 2002, 2001 and 2000, respectively.
Salaries and employee benefits decreased 9.7% in 2002, from $15.4 million to
$13.9 million. In 2001, we incurred a charge amounting to $2.2 million related
to the cancellation of two executives' employment agreements. When this amount
is excluded, salaries and employee benefits for 2002 increased 5.3% from 2001 to
2002. This increase is the result of annual raises, promotions, health
insurance premium increases, etc. as the number of full-time equivalent
employees in the organization actually fell from 318 at the end of 2001 to 314
at the end of 2002.
Occupancy expense increased 8.6% in 2002 due to the addition of new facilities
and an increase in property taxes, insurance, and utilities. Furniture and
equipment expense decreased 6.1% in 2002 due primarily to a decrease in
depreciation expense.
With the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, on
January 1, 2002, the prior straight-line amortization of our goodwill ceased.
This resulted in a decrease in goodwill amortization cost of $352,000 from 2001.
Legal and accounting fees increased by 97.5% in 2002. The majority of this
increase can be attributed to an increase in legal fees for the collection and
recovery of problem loans. Both legal and accounting fees also increased due to
regulatory matters.
Telephone, postage and courier costs all increased as we have geographically
expanded our offices further away from our headquarters in Valdosta over the
past two years. Most other operating expenses were down in 2002 as a result of
a tighter budgeting process, the consolidation of our banking charters, and
other cost savings measures.
23
INCOME TAXES
The provision for income tax expense as a percentage of pre-tax income was 30.7%
for 2002. The difference between the effective rate and the statutory federal
rate of 34% is due primarily to income earned on our investments in and loans to
tax-exempt municipalities and earnings on the cash value of our bank-owned life
insurance.
FOURTH QUARTER RESULTS
For the fourth quarter of 2002, our net income was $1.3 million, or $0.13 per
share, compared to a loss of $4.7 million in the fourth quarter of 2001. The
loss in 2001 was due primarily to an additional $7.2 million provision for loan
losses recorded during the quarter. Our net interest margin for the fourth
quarter of 2002 was 4.18% compared to 3.32% in 2001. The average yield on
earning assets fell 63 basis points to 6.57% in 2002 from 7.20% in 2001.
However, the average rate paid on interest-bearing liabilities improved 160
basis points to 2.81% in 2002 from 4.41% in 2001.
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.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and the related disclosures in
conformity with accounting principles generally accepted in the United States
requires that management make estimates and assumptions which effect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. We believe that our determination of the allowance
for loan losses and the fair value of assets, including the impairment of
goodwill, affect our most significant judgments and estimates used in the
preparation of our consolidated financial statements. The Company's accounting
policies are described in detail in Note 1 of our Consolidated
Financial Statements provided in Item 8 of this Report. The following is
a brief description of the Company's critical accounting policies involving
significant management valuation judgment.
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of losses
inherent in the existing loan portfolio. The allowance for loan losses is
increased by the provision for loan losses charged to expense and reduced by
loans charged off, net of recoveries. The allowance for loan losses is
determined based on management's assessment of several factors including, but
not limited to, reviews and evaluations of specific loans, changes in the nature
and volume of the loan portfolio, current economic conditions and the related
impact on segments of the loan portfolio, historical loan loss experiences and
the level of classified and nonperforming loans.
Loans are considered impaired if, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is based on either the fair value
of the underlying collateral, the present value of the future cash flows
discounted at the historical effective interest rate stipulated in the loan
agreement, or the estimated market value of the loan. In measuring the fair
value of the collateral, management uses assumptions (e.g., discount rate) and
methodologies (e.g., comparison to the recent selling price of similar assets)
consistent with those that would be utilized by unrelated third parties.
Management's assessment is inherently subjective as it requires estimates that
are susceptible to significant revision as more information becomes available.
Changes in the financial condition of individual borrowers, economic conditions,
historical loss experience, or the condition of the various markets in which
collateral may be sold may affect the required level of the allowance for loan
losses and the associated provision for loan losses. Should cash flow
assumptions or market conditions change, a different amount may be reported for
the allowance for loan losses and the associated provision for loan losses.
24
Estimates of Fair Value
The estimation of fair value is significant to a number of the Company's assets,
including, but not limited to, investment securities, other real estate owned,
and other repossessed assets. These are all recorded at either fair value or at
the lower of cost or fair value. Fair values are volatile and may be influenced
by a number of factors. Circumstances that could cause estimates of the fair
value of certain assets and liabilities to change include a change in prepayment
speeds, discount rates, or market interest rates. Our estimates and assumptions
are reviewed periodically and the effects of revisions are reflected in the
consolidated financial statements in the period they are determined to be
necessary.
Fair values for most investment securities are based on quoted market prices.
If quoted market prices are not available, fair values are based on the quoted
prices of similar instruments. The fair values of other real estate owned are
typically determined based on appraisals by third parties, less estimated costs
to sell.
Estimates of fair value are also required in performing an impairment analysis
of goodwill. The Company reviews goodwill for impairment on at least an annual
basis and whenever events or circumstances indicate the carrying value may not
be recoverable. An impairment would be indicated if the carrying value exceeds
the fair value of a reporting unit.
RECENT ACCOUNTING PRONOUNCEMENTS
In management's opinion, there are no recent accounting pronouncements that have
had a material impact on PAB's earnings or financial position as of or for the
year ended December 31, 2002.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to exposure from 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. However, with interest rates at historic
lows and the shape of the interest rate curve, the Company has exceeded policy
limits by adjusting the balance sheet to a more asset-sensitive position. At
December 31, 2002, our one-year management-adjusted gap ratio of 1.41 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 2002, may or may not be sustainable throughout the
next year.
25
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 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.
CUMULATIVE REPRICING GAP ANALYSIS
3-Month 6-Month 1-Year
--------------------------------------------------------------
(Dollars in thousands)
Regulatory Defined
Rate Sensitive Assets (RSA) $398,585 $424,976 $461,525
Rate Sensitive Liabilities (RSL) 324,114 392,723 478,107
--------------------------------------------------------------
RSA minus RSL (Gap) $ 74,471 $ 32,253 $(16,582)
Gap Ratio (RSA/RSL) 1.23 1.08 0.97
Management-Adjusted
Rate Sensitive Assets (RSA) $417,803 $463,412 $537,758
Rate Sensitive Liabilities (RSL) 131,445 200,054 381,773
--------------------------------------------------------------
RSA minus RSL (Gap) $286,358 $263,358 $155,985
Gap Ratio (RSA/RSL) 3.18 2.32 1.41
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
increases or decreases 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 12.7% over the next year if market rates
immediately rose by 200 basis points. On the other hand, the model projected
net interest income to decrease 27.5% over the next year 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 and our behavioral
assumptions for repricing and prepayment speeds. 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 1.25%. If market rates immediately
fell by 100 basis points, a more plausible but still unlikely scenario, our
model projected net interest income to decrease 13.0% over the next year.
The following table shows the results of these projections for net interest
income expressed as a percentage change over net interest income in a flat rate
scenario for both a gradual change in market interest rates over a twelve-month
period and an immediate change, or "shock", in market interest rates.
Effect on Net Interest Income
Market -----------------------------
Rate Change Gradual Immediate
----------- -------- ----------
+300 bps 12.3% 15.8%
+200 bps 11.1% 12.7%
+100 bps 7.9% 8.5%
-100 bps -11.4% -13.0%
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
Quarterly Financial Summary for 2002 and 2001. . . . . . . . . . . . . . . . 27
Management's Responsibility For Financial Reporting. . . . . . . . . . . . . 28
Reports of Independent Public Accountants. . . . . . . . . . . . . . . . . . 29
Consolidated Balance Sheets at December 31, 2002 and 2001. . . . . . . . . . 31
Consolidated Statements of Income for the Three Years Ended December 31,
2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Consolidated Statements of Comprehensive Income (Loss) for the Three Years
Ended December 31, 2002. . . . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Statements of Stockholders' Equity for the Three Years Ended
December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Cash Flows for the Three Years Ended December 31,
2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 37
QUARTERLY FINANCIAL SUMMARY FOR 2002 AND 2001
(The sum of the quarterly results presented may not agree with the results for
the full year due to rounding.)
Quarterly Period Ended
March 31 June 30 September 30 December 31
---------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Year Ended December 31, 2002:
Interest income $ 12,990 $ 12,116 $ 11,619 $ 11,354
Interest expense 6,069 5,150 4,627 4,142
---------------------------------------------------------------------------------------
Net interest income 6,921 6,966 6,992 7,212
Provision for loan losses 456 519 513 1,088
---------------------------------------------------------------------------------------
Net interest income
after provision for
loan losses 6,465 6,447 6,479 6,124
Other income 2,186 1,973 2,012 1,842
Other expenses 6,113 5,951 6,107 6,197
---------------------------------------------------------------------------------------
Income before
income taxes 2,538 2,469 2,384 1,769
Income tax 800 769 734 511
---------------------------------------------------------------------------------------
Net income $ 1,738 $ 1,700 $ 1,650 $ 1,258
=======================================================================================
Basic earnings per share $ 0.18 $ 0.18 $ 0.18 $ 0.13
Diluted earnings per share $ 0.18 $ 0.18 $ 0.18 $ 0.13
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
after provision for
loan losses 6,667 6,630 6,090 (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)
27
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. The financial
statements are prepared in accordance with accounting principles generally
accepted in the United States 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.
/s/ Michael E. Ricketson
- ------------------------------------
Michael E. Ricketson
President and
Chief Executive Officer
/s/ Donald J. Torbert, Jr.
- ------------------------------------
Donald J. Torbert, Jr., CPA
Senior Vice President and
Chief Financial Officer
/s/ Laura A. Hancock
- ------------------------------------
Laura A. Hancock, CPA
Vice President and
Controller
28
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
PAB Bankshares, Inc.
Valdosta, Georgia
We have audited the accompanying consolidated balance sheets of PAB
BANKSHARES, INC. AND SUBSIDIARIES as of December 31, 2002 and 2001, and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The financial statements of PAB Bankshares, Inc.
and subsidiaries for the year 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 audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of PAB
Bankshares, Inc. and subsidiaries, as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/ MAULDIN & JENKINS, LLC
Albany, Georgia
January 24, 2003
29
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
30
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
- ----------------------------------------------------------------------------------------
2002 2001
------------- -------------
ASSETS
Cash and due from banks $ 25,199,278 $ 28,188,779
Interest-bearing deposits in other banks 974,848 15,940,115
Federal funds sold 30,784,000 24,205,000
Investment securities, at fair value 98,025,604 113,454,135
Loans 555,238,242 637,825,571
Allowance for loan losses (12,096,988) (15,765,373)
------------- -------------
Net loans 543,141,254 622,060,198
------------- -------------
Premises and equipment 22,555,234 23,508,083
Goodwill 5,984,604 5,984,604
Cash value of bank-owned life insurance policies 9,950,135 9,471,936
Foreclosed assets 1,284,487 1,311,933
Other assets 10,011,854 15,018,471
------------- -------------
Total assets $747,911,298 $859,143,254
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 87,667,055 $ 81,493,517
Interest-bearing 519,063,178 638,904,142
------------- -------------
Total deposits 606,730,233 720,397,659
------------- -------------
Federal funds purchased and securities sold under
agreements to repurchase 17,520,242 15,708,621
Advances from the Federal Home Loan Bank 36,144,910 38,228,478
Guaranteed preferred beneficial interests in debentures
(trust preferred securities) 10,000,000 10,000,000
Other liabilities 6,251,175 9,436,613
------------- -------------
Total liabilities 676,646,560 793,771,371
------------- -------------
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; 9,430,413 and 9,409,913 shares issued 1,217,065 1,217,065
Additional paid-in capital 28,785,476 28,657,351
Retained earnings 40,228,327 34,917,898
Accumulated other comprehensive income 1,033,870 579,569
------------- -------------
Total stockholders' equity 71,264,738 65,371,883
------------- -------------
Total liabilities and stockholders' equity $747,911,298 $859,143,254
============= =============
See accompanying notes to consolidated financial statements.
31
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ---------------------------------------------------------------------------------------------------
2002 2001 2000
----------- ------------ ------------
INTEREST INCOME
Interest and fees on loans $42,645,210 $54,162,805 $51,045,640
Interest and dividends on investment securities:
Taxable 4,637,821 5,468,147 4,028,030
Nontaxable 262,446 197,206 226,732
Other interest income 533,048 2,886,541 2,225,325
----------- ------------ ------------
Total interest income 48,078,525 62,714,699 57,525,727
----------- ------------ ------------
INTEREST EXPENSE
Interest on deposits 17,068,902 31,368,578 24,209,959
Interest on federal funds purchased and securities sold
under agreements to repurchase 298,310 550,840 668,246
Interest on Federal Home Loan Bank advances 2,013,671 3,212,932 3,796,126
Other interest expense 607,778 468,029 -
----------- ------------ ------------
Total interest expense 19,988,661 35,600,379 28,674,331
----------- ------------ ------------
Net interest income 28,089,864 27,114,320 28,851,396
Provision for loan losses 2,575,000 12,220,250 4,098,663
----------- ------------ ------------
Net interest income after provision for loan losses 25,514,864 14,894,070 24,752,733
----------- ------------ ------------
OTHER INCOME
Service charges on deposit accounts 5,294,753 5,574,871 3,880,560
Other fee income 1,884,885 1,524,909 1,105,167
Securities transactions, net 261,178 1,740,720 (23,630)
Equity in earnings of unconsolidated subsidiary - 590,370 562,979
Other noninterest income 572,341 2,492,190 231,290
----------- ------------ ------------
Total other income 8,013,157 11,923,060 5,756,366
----------- ------------ ------------
OTHER EXPENSES
Salaries and employee benefits 13,879,438 15,364,051 11,515,415
Occupancy expense of premises 1,716,338 1,579,803 1,164,663
Furniture and equipment expense 2,396,318 2,552,914 1,731,930
Amortization of goodwill and other intangibles - 408,635 359,520
Other noninterest expense 6,376,134 7,105,193 7,102,166
----------- ------------ ------------
Total other expenses 24,368,228 26,920,596 21,873,694
----------- ------------ ------------
Income (loss) before income tax expense (benefit) 9,159,793 (103,466) 8,635,405
Income tax expense (benefit) 2,812,954 (250,626) 2,908,808
----------- ------------ ------------
Net income $ 6,346,839 $ 147,160 $ 5,726,597
=========== ============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.67 $ 0.02 $ 0.60
=========== ============ ============
Diluted $ 0.67 $ 0.02 $ 0.60
=========== ============ ============
See accompanying notes to consolidated financial statements.
32
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- -------------------------------------------------------------------------------------------
2002 2001 2000
----------- ------------ ----------
Net income $6,346,839 $ 147,160 $5,726,597
Other comprehensive income (loss):
Unrealized holding gains arising during
the period, net of tax of $322,761; $442,595;
and $531,975 626,678 859,035 1,032,658
Reclassification adjustment for (gains) losses
included in net income, net of (tax) benefit of
($88,801); ($591,845); and $8,034 (172,377) (1,148,875) 15,596
----------- ------------ ----------
454,301 (289,840) 1,048,254
----------- ------------ ----------
Comprehensive income (loss) $6,801,140 $ (142,680) $6,774,851
=========== ============ ==========
See accompanying notes to consolidated financial statements.
33
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- -----------------------------------------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES PAR VALUE CAPITAL EARNINGS INCOME (LOSS) TOTAL
---------- ---------- ------------ ------------ -------------- ------------
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,
$.44 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
Net income - - - 6,346,839 - 6,346,839
Other comprehensive income - - - - 454,301 454,301
Cash dividends declared,
$.11 per share - - - (1,036,410) - (1,036,410)
Stock options exercised 20,500 - 128,125 - - 128,125
---------- ---------- ------------ ------------ -------------- ------------
BALANCE, DECEMBER 31, 2002 9,430,413 $1,217,065 $28,785,476 $40,228,327 $ 1,033,870 $71,264,738
========== ========== ============ ============ ============== ============
See accompanying notes to consolidated financial statements.
34
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ----------------------------------------------------------------------------------------------------------
2002 2001 2000
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,346,839 $ 147,160 $ 5,726,597
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion, net 3,112,790 2,674,847 2,019,426
Provision for loan losses 2,575,000 12,220,250 4,098,663
Provision for deferred taxes 1,180,948 (3,343,255) (968,127)
Net realized (gain) loss on securities transactions (261,178) (1,740,720) 23,630
Net (gain) loss on disposal of assets (404) 839 153,817
Gain on sale of interest in unconsolidated subsidiary - (1,461,739) -
Gain on sale of branch office (100,000) - -
Equity in earnings of unconsolidated subsidiary - (590,370) (562,979)
Dividends received from unconsolidated subsidiary - 350,000 500,000
Write down due to impairment in value of branch office 372,313 - -
Increase in cash value of bank-owned life insurance (478,199) (491,579) (139,958)
Increase in deferred compensation accrual 88,063 1,156,175 176,877
Increase (decrease) in retirement and severance accruals (402,362) 1,436,388 -
(Increase) decrease in interest receivable 2,870,401 443,054 (969,909)
Increase (decrease) in interest payable (1,981,829) 80,769 774,898
(Increase) decrease in taxes receivable 628,882 144,270 (892,703)
Decrease in taxes payable - - (340,497)
Net change in other assets and other liabilities 513,982 (1,574,011) 1,679,617
------------- ------------- -------------
Net cash provided by operating activities 14,465,246 9,452,078 11,279,352
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in interest-bearing deposits
in other banks 14,965,267 (2,526,095) (1,477,548)
(Increase) decrease in federal funds sold (6,579,000) 19,210,000 (11,935,000)
Activities on securities available for sale:
Purchases (76,717,640) (72,833,848) (4,003,944)
Proceeds from sales and calls 64,734,595 16,468,305 103,933
Proceeds from maturities and paydowns 27,114,382 30,620,307 11,707,704
Purchase of restricted and other equity securities (980,150) (1,637,600) (163,500)
Proceeds from redemption of restricted and
other equity securities 1,688,500 85,000 456,200
Net (increase) decrease in loans 63,295,276 (63,674,464) (65,053,345)
Purchase of premises and equipment (3,203,850) (3,332,730) (7,437,686)
Proceeds from disposal of assets 2,218,559 1,799,167 924,785
Proceeds from sale of interest in unconsolidated subsidiary - 1,800,000 -
Net proceeds from sale of branch office 7,748,200 - -
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 - - 1,526,565
------------- ------------- -------------
Net cash (used in) provided by investing activities 94,284,139 (73,960,960) (81,106,066)
------------- ------------- -------------
35
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ------------------------------------------------------------------------------------------------------------
2002 2001 2000
-------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $(109,503,044) $ 83,217,921 $ 76,610,058
Net increase (decrease) in federal funds purchased
and securities sold under repurchase agreements 1,811,621 3,543,030 (1,662,503)
Advances from the Federal Home Loan Bank 331,000 700,000 27,770,000
Payments on Federal Home Loan Bank advances (2,414,568) (21,172,804) (29,180,958)
Cash paid to former stockholders on acquisition - (7,667,280) -
Proceeds on issuance of guaranteed preferred beneficial
interests in debentures - 10,000,000 -
Dividends paid (2,073,020) (4,179,108) (4,054,117)
Proceeds from the exercise of stock options 128,125 196,875 29,515
Repurchase of preferred stock in REIT subsidiaries (19,000) - -
Acquisition of stock under stock repurchase plans - (1,293,808) (1,512,152)
Costs capitalized on issuance of guaranteed preferred
beneficial interest in debentures - (344,500) -
-------------- ------------- -------------
Net cash (used in) provided by financing activities (111,738,886) 63,000,326 67,999,843
-------------- ------------- -------------
Net decrease in cash and due from banks (2,989,501) (1,508,556) (1,826,871)
Cash and due from banks at beginning of period 28,188,779 29,697,335 31,524,206
-------------- ------------- -------------
Cash and due from banks at end of period $ 25,199,278 $ 28,188,779 $ 29,697,335
============== ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $ 21,970,490 $ 35,519,610 $ 27,899,433
============== ============= =============
Taxes $ 1,384,810 $ 2,948,358 $ 4,626,725
============== ============= =============
NONCASH INVESTING AND FINANCING TRANSACTIONS
Increase (decrease) in unrealized gains on securities
available for sale $ 688,114 $ (438,972) $ 1,597,178
============== ============= =============
Purchase price and debt incurred on acquisition $ - $ - $ 7,667,280
============== ============= =============
See accompanying notes to consolidated financial statements.
36
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 bank holding company whose
business is primarily conducted by its wholly-owned commercial bank
subsidiary, The Park Avenue Bank (the Bank). The Bank is a
state-chartered, member bank of the Federal Reserve System that was
originally founded in 1956 in Valdosta, Lowndes County, Georgia.
Through the Bank, the Company offers a broad range of commercial and
consumer banking products and services to customers located in the
local market areas listed below. The Company and the Bank are subject
to the regulations of certain federal and state agencies and are
periodically examined by those regulatory agencies.
BANKING LOCATION # OF OFFICES
-------------------------------------- -----------------------------
Valdosta, Lowndes County, Georgia 3 (including the main office)
Lake Park, Lowndes County, Georgia 1
Adel, Cook County, Georgia 1
Bainbridge, Decatur County, Georgia 3
Cairo, Grady County, Georgia 1
Statesboro, Bulloch County, Georgia 2
Baxley, Appling County, Georgia 1
Hazlehurst, Jeff Davis County, Georgia 1
McDonough, Henry County, Georgia 1
Ocala, Marion County, Florida 2
Oakwood, Hall County, Georgia 1
Duluth, Gwinnett County, Georgia 1 (loan production office)
In addition to the banking products and services, the Bank offers
brokerage, insurance, annuity, and investment planning services to
its customers from its office in Valdosta, Georgia.
The Company also owns PAB Bankshares Capital Trust I, a Delaware
statutory business trust. This non-operating subsidiary was created
in 2001 for the sole purpose of issuing trust preferred securities
and investing the proceeds in subordinated debt issued by the
Company, all of which is described more fully in Note 10.
BASIS OF PRESENTATION AND ACCOUNTING ESTIMATES
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Significant intercompany transactions
and balances are eliminated in consolidation.
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the balance sheet date and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan
losses, the valuation of goodwill, the valuation of foreclosed
assets, and deferred taxes.
CASH, DUE FROM BANKS AND CASH FLOWS
For purposes of reporting cash flows, cash and due from banks
includes cash on hand, cash items in process of collection and
amounts due from banks. Cash flows from loans, federal funds sold,
federal funds purchased and securities sold under repurchase
agreements, and deposits are reported net.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST BEARING DEPOSITS IN OTHER BANKS
Interest-bearing deposits in other banks are primarily overnight
funds or funds which mature within one year and are carried at cost.
INVESTMENT SECURITIES
Debt securities that management has the positive intent and ability
to hold to maturity are classified as held to maturity and recorded
at amortized cost. All debt securities are classified as available
for sale and recorded at fair value with unrealized gains and losses
excluded from earnings and reported in other comprehensive income,
net of the related deferred tax effect. Restricted and other equity
securities without a readily determinable fair value are recorded at
cost and periodically evaluated for impairment. Included in
restricted equity securities are the Bank's required investments in
the Federal Reserve Bank of Atlanta and the Federal Home Loan Bank of
Atlanta.
Purchase premiums and discounts are recognized in interest income
using the interest method based on the terms of the securities. Gains
and losses on the sale of securities are determined using the
specific identification method. Declines in the fair value of
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, net deferred fees, and the allowance for loan
losses. Interest income is accrued on the unpaid principal balance.
Loan origination fees, net of certain direct loan origination costs,
are deferred and recognized as an adjustment of the related loan
yield over the life of the loan using a method which approximates a
level yield.
The accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due, unless the loan is well-secured. All interest
accrued but not collected for loans that are placed on nonaccrual
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.
The allowance for loan losses is established through a provision for
loan losses charged to expense. Loan losses are charged against the
allowance when management believes the collectibility of the
principal is unlikely. Subsequent recoveries are credited to the
allowance.
The allowance is an amount that management believes will be adequate
to absorb estimated losses in the loan portfolio. The allowance for
loan losses is evaluated on a regular basis by management and is
based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral and
prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. While
management uses the best information available to make the
evaluation, future adjustments to the allowance may be necessary if
there are significant changes in economic conditions. In addition,
regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses,
and may require the Company to make additions to the allowance based
on their judgment about information available to them at the time of
their examinations.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONTINUED)
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 stated at cost
less accumulated depreciation computed principally by the
straight-line method over the estimated useful lives of the assets.
GOODWILL
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 142 requires that all business
combinations consummated after June 30, 200l be accounted for by the
purchase method unless the combination was initiated on or prior to
that date and it meets the conditions to be accounted by the
pooling-of-interests method in accordance with APB Opinion No. 16,
Business Combinations. Under SFAS No. 141, goodwill and intangible
assets that management concludes have indefinite useful lives will no
longer be amortized, but will be subject to impairment tests
performed at least annually. SFAS No. 142 also required the Company
to perform a transitional impairment test of all previously
recognized goodwill and to assign all recognized assets and
liabilities to reporting units. Other identifiable intangible assets
will continue to be amortized over their useful lives.
During 2002, the Company performed the initial and the required
annual impairment tests of goodwill. As a result of these tests, no
amount was charged to earnings for impairment in 2002.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of
Certain Financial Institutions. SFAS No. 147 removed acquisitions of
financial institutions from the scope of SFAS No. 72, Accounting for
Certain Acquisitions of Banking or Thrift Institutions, which
permitted the recognition and subsequent amortization of any excess
of the fair value of liabilities assumed over the fair value of
tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset. For a transaction that is a business
combination, SFAS No. 147 requires that the unidentifiable intangible
asset acquired be recognized as goodwill and accounted for under SFAS
No. 142. SFAS No. 147 also amended SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, to include in its scope
long-term borrower-relationship intangible assets of financial
institutions such as depositor-and-borrower-relationship intangible
assets and credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow
recoverability test and impairment loss recognition and measurement
provisions that SFAS No. 144 requires of other long-lived assets that
are held and used. The application of SFAS No. 147 as of October 1,
2002 had no effect on the Company's consolidated financial
statements.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 Bank. The REIT's were established to realize state income tax
benefits and to provide the Bank 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 $107,000 and $126,000 as of December 31, 2002 and
2001, respectively.
STOCK COMPENSATION PLANS
At December 31, 2002, the Company had two stock-based employee
compensation plans, which are described in more detail in Note 18.
The Company accounts for those plans under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had
an exercise price equal to the market value of the underlying stock
on the date of grant. In addition, the FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure
in December 2002. SFAS No. 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of SFAS No. 123 to require
prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based
employee compensation. The Company has not elected to adopt the
recognition provisions of this Statement for stock-based employee
compensation and has elected to continue with accounting methodology
in Opinion No. 25 as permitted by SFAS No. 123.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION PLANS
The following table illustrates the effect on net income and earnings
per share for the years ended December 31, 2002, 2001 and 2000 if the
Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.
2002 2001 2000
----------- ---------- -----------
Net income, as reported $6,346,839 $ 147,160 $5,726,597
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (347,587) (324,816) (287,254)
----------- ---------- -----------
Pro forma net income (loss) $5,999,252 $(177,656) $5,439,343
=========== ========== ===========
Earnings (loss) per share:
Basic - as reported $ 0.67 $ 0.02 $ 0.60
=========== ========== ===========
Basic - pro forma $ 0.64 $ (0.02) $ 0.57
=========== ========== ===========
Diluted - as reported $ 0.67 $ 0.02 $ 0.60
=========== ========== ===========
Diluted - pro forma $ 0.63 $ (0.02) $ 0.57
=========== ========== ===========
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.
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.
NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances in cash or on
deposit with the Federal Reserve Bank, based on a percentage of
deposits. The total of those reserve balances was approximately
$6,341,000 and $6,812,000 at December 31, 2002 and 2001,
respectively.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENT SECURITIES
The amortized cost and approximate fair value of the investment
portfolio follows.
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ------------ ------------
December 31, 2002:
U. S. Government and
agency securities $ 25,162,657 $ 458,854 $ - $ 25,621,511
State and municipal securities 8,462,575 165,692 (13,791) 8,614,476
Mortgage-backed securities 31,316,547 750,493 (1,411) 32,065,629
Corporate debt securities 12,189,928 209,350 (2,719) 12,396,559
Marketable equity securities 13,500,000 - - 13,500,000
Restricted and other equity
securities 5,827,429 - - 5,827,429
------------ ----------- ------------ ------------
$ 96,459,136 $ 1,584,389 $ (17,921) $ 98,025,604
============ =========== ============ ============
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
============ =========== ============ ============
Included in restricted and other equity securities are the Banks'
combined holdings of stock in the Federal Reserve Bank and the
Federal Home Loan Bank of $3,666,450 and $4,374,800, at December 31,
2002 and 2001, respectively.
The amortized cost and fair value of debt securities as of December
31, 2002 by contractual maturity are shown below. Maturities may
differ from contractual maturities in mortgage-backed securities
because the mortgages underlying the securities may be called or
repaid without 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 $ 6,303,841 $ 6,319,698
Due from one year to five years 27,982,918 28,628,706
Due from five to ten years 8,223,854 8,327,103
Due after ten years 3,304,547 3,357,039
Mortgage-backed securities 31,316,547 32,065,629
Marketable equity securities 13,500,000 13,500,000
Restricted and other equity securities 5,827,429 5,827,429
----------- -----------
$96,459,136 $98,025,604
=========== ===========
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENT SECURITIES (CONTINUED)
Securities with a carrying value of approximately $48,721,000 and
$57,160,000 at December 31, 2002 and 2001, respectively, were pledged
to secure public deposits, certain borrowing arrangements, and for
other purposes.
Gains and losses on sales and calls of securities available for sale
for the years ended December 31, 2002, 2001 and 2000 consist of the
following:
2002 2001 2000
---------- ----------- ---------
Gross gains on securities transactions $ 533,742 $1,740,846 $ 2,886
Gross losses on securities transactions (272,564) (126) (26,516)
---------- ----------- ---------
Net realized gain (loss) on
securities transactions $ 261,178 $1,740,720 $(23,630)
========== =========== =========
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio as of December 31, 2002 and
2001 follows.
2002 2001
------------- -------------
Commercial and financial $ 55,839,684 $ 80,492,791
Agricultural 22,177,617 26,428,296
Real estate - construction 75,075,858 63,486,438
Real estate - mortgage (commercial and residential) 354,628,081 402,988,101
Installment loans to individuals and other loans 47,489,134 64,212,067
Overdrafts 250,764 593,604
------------- -------------
555,461,138 638,201,297
Unearned income, net (222,896) (375,726)
------------- -------------
555,238,242 637,825,571
Allowance for loan losses (12,096,988) (15,765,373)
------------- -------------
$543,141,254 $622,060,198
============= =============
Changes in the allowance for loan losses for the years ended December
31, 2002, 2001 and 2000 follows.
2002 2001 2000
------------ ------------ ------------
Balance, beginning of year $15,765,373 $ 8,184,641 $ 5,037,074
Provision charged to operations 2,575,000 12,220,250 4,098,663
Loans charged-off (6,602,334) (4,832,799) (1,583,833)
Recoveries 358,949 192,281 182,292
Purchase acquisition - - 450,445
------------ ------------ ------------
Balance, end of year $12,096,988 $15,765,373 $ 8,184,641
============ ============ ============
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
At December 31, 2002 and 2001, the total recorded investment in
impaired loans amounted to approximately $10,378,000 and $10,581,000,
respectively. These loans had a related allowance for loan losses of
approximately $2,396,000 and $4,819,000 at December 31, 2002 and
2001, respectively. The average recorded investment in impaired loans
during 2002, 2001 and 2000 was approximately $13,207,000, $8,839,000
and $2,486,000, respectively. Interest income recognized on impaired
loans for cash payments received in 2002, 2001 and 2000 was
approximately $199,000, $59,500 and $115,000, respectively.
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, 2002
follows.
Balance, beginning of year $ 12,922,794
Advances 10,302,641
Repayments (9,454,832)
Transactions due to changes in related parties (4,564,661)
-----------------
Balance, end of year $ 9,205,942
=================
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 2002 and 2001 follows.
2002 2001
------------- ------------
Land $ 4,995,677 $ 4,572,447
Buildings and improvements 16,483,250 16,636,114
Furniture, fixtures and equipment 10,677,759 11,106,285
Construction in progress 576,944 158,862
------------- ------------
32,733,630 32,473,708
Less accumulated depreciation (10,178,396) (8,965,625)
------------- ------------
$ 22,555,234 $23,508,083
============= ============
Depreciation expense amounted to $2,110,353, $2,190,192 and
$1,588,796, for the years ended December 31, 2002, 2001 and 2000,
respectively. During 2002, the Company took a $372,000 write down for
impairment in value of the Ocala, Florida location.
With the exception of two offices: one in Ocala, Florida, and another
in Duluth, Georgia, the Company owns and operates all of its banking
offices. The leased Ocala, Florida office is under a five-year
agreement for a base amount plus an annual indexed adjustment. During
2003, the Company will pay $41,686 to lease the property through May.
The agreement will expire at the end of May 2003. The leased Duluth
office is under a three-year agreement. The lease expires at the end
of September 2005. The Company will pay $21,232, $22,634 and $17,437
to lease the property during 2003, 2004 and 2005, respectively.
At December 31, 2002, the Company had a branch building under
construction in Oakwood, Georgia. The Company is committed to
complete this during 2003 for a total cost of approximately $925,000.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. GOODWILL
There were no changes in the carrying amount of goodwill during the
year ended December 31, 2002.
A summary of net income and earnings per share that would have been
reported exclusive of amortization expense recognized related to
goodwill for the years ended December 31, 2002, 2001 and 2000
follows.
2002 2001 2000
---------- -------- ----------
Net income, as reported $6,346,839 $147,160 $5,726,597
Add back:
Goodwill amortization - 351,635 131,520
---------- -------- ----------
Pro forma net income $6,346,839 $498,795 $5,858,117
========== ======== ==========
Earnings per share:
Basic - as reported $ 0.67 $ 0.02 $ 0.60
========== ======== ==========
Basic - pro forma $ 0.67 $ 0.05 $ 0.61
========== ======== ==========
Diluted - as reported $ 0.67 $ 0.02 $ 0.60
========== ======== ==========
Diluted - pro forma $ 0.67 $ 0.05 $ 0.61
========== ======== ==========
NOTE 7. DEPOSITS
A summary of interest-bearing deposits as of December 31, 2002 and
2001 follows.
2002 2001
------------ ------------
Interest-bearing demand $176,781,620 $171,769,563
Savings 37,200,175 36,284,941
Time, $100,000 and over 98,776,734 157,400,594
Other time 206,304,649 273,449,044
------------ ------------
$519,063,178 $638,904,142
============ ============
Interest expense on deposits for the years ended December 31, 2002,
2001 and 2000 follows.
2002 2001 2000
----------- ----------- -----------
Interest-bearing demand $ 2,223,595 $ 3,623,765 $ 3,357,422
Savings 536,610 732,517 724,968
Time, $100,000 and over 4,730,549 8,875,059 6,872,195
Other time 9,578,148 18,137,237 13,255,374
----------- ----------- -----------
$17,068,902 $31,368,578 $24,209,959
=========== =========== ===========
The scheduled maturities of time deposits at December 31, 2002
follow.
YEAR AMOUNT
---- ------------
2003 $222,432,135
2004 42,829,872
2005 24,877,262
2006 7,771,830
2007 6,416,250
Thereafter 754,034
------------
$305,081,383
============
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. 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
weekly basis. Securities sold under repurchase agreements at December
31, 2002 and 2001 were $17,520,242 and $15,708,621, respectively.
NOTE 9. 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, 2002 and 2001.
2002 2001
----------- -----------
Advances with interest at adjustable rates,
ranging from 1.40% to 1.62% at December 31, 2002,
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 5.01% to 7.24% at December 31, 2002,
due in varying amounts and at various intervals through
November 2012. 2,503,330 3,536,898
Advances with interest at fixed rates, ranging from 5.74%
to 5.92% at December 31, 2002, due at various dates
from March 2003 to February 2006. 1,000,000 2,050,000
Advances with interest at fixed rates, ranging from 5.46%
to 6.77% at December 31, 2002, 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
----------- -----------
$36,144,910 $38,228,478
=========== ===========
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,
2002 follow.
YEAR AMOUNT
---- -----------
2003 $12,655,934
2004 404,998
2005 2,930,761
2006 939,805
2007 150,830
Thereafter 19,062,582
-----------
$36,144,910
===========
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. 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 (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 trust preferred securities and
investing the proceeds in Floating Rate Junior Subordinated
Debentures (the Debentures) issued by the Company. The interest rate
on both the trust preferred securities and the Debentures is reset
semi-annually at LIBOR plus 3.75% (currently 5.17%) 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 trust preferred 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 trust preferred securities
qualify as Tier 1 capital under the risk-based capital guidelines
established by the Federal Reserve.
NOTE 11. INCOME TAXES
The components of income tax expense (benefit) for the years ended
December 31, 2002, 2001 and 2000 follow.
2002 2001 2000
---------- ------------ -----------
Current $1,632,006 $ 3,092,629 $3,876,935
Deferred 1,180,948 (3,343,255) (968,127)
---------- ------------ -----------
$2,812,954 $ (250,626) $2,908,808
========== ============ ===========
The Company's income tax expense (benefit) 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, 2002, 2001 and 2000 follows.
2002 2001 2000
----------- ---------- -----------
Tax (benefit) at statutory rate $3,114,330 $ (35,178) $2,936,038
Increase (decrease) resulting from:
State income tax, net of
Federal tax benefit 37,894 - -
Tax exempt interest and dividend
exclusion (163,775) (229,875) (270,909)
Amortization of goodwill - 118,681 43,755
Increase in cash value of bank-
owned life insurance policies (162,053) (162,369) (46,177)
Deferred tax adjustment (20,897) (36,847) 159,422
Prior year accrual differences (13,723) 61,459 123,174
Other items, net 21,178 33,503 (36,495)
----------- ---------- -----------
Income tax expense (benefit) $2,812,954 $(250,626) $2,908,808
=========== ========== ===========
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. INCOME TAXES (CONTINUED)
The components of deferred income taxes at December 31, 2002 and 2001
follow.
2002 2001
---------- ----------
Deferred tax assets:
Allowance for loan losses $4,112,975 $5,257,913
Deferred compensation 650,381 620,439
Accrued severance payable 302,269 505,372
Other 575,432 293,925
---------- ----------
5,641,057 6,677,649
---------- ----------
Deferred tax liabilities:
Premises and equipment 884,474 740,118
Unrealized gain on securities available for sale 532,600 298,639
---------- ----------
1,417,074 1,038,757
---------- ----------
Net deferred tax assets $4,223,983 $5,638,892
========== ==========
NOTE 12. EMPLOYEE BENEFIT PLANS
The Company provides an employee 401(k) 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 2002, 2001 and 2000. The employer
contributions are on a five-year vesting schedule. 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 one month employment to become eligible, with
employer contributions beginning after six months of employment.
Aggregate expense under the plan charged to operations during 2002,
2001 and 2000 amounted to approximately $676,000, $553,000 and
$595,000, respectively.
NOTE 13. DEFERRED COMPENSATION AND RETIREMENT PLANS
In years past, the Company entered into separate deferred
compensation arrangements with certain officers. The agreements
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. Annual accruals were made based on
actuarial assumptions for the present value of the future
obligations. In 2001, the Board of Directors elected to terminate
these plans. At that time, the Company incurred an expense of
approximately $898,000 for the accrual for the net present value of
the liability covering two executive officers that were retiring at
the end of 2001. The total accrued liability for these deferred
compensation plans was $1,913,000 and $1,824,000 at December 31, 2002
and 2001, respectively. Aggregate expense under the deferred
compensation plans charged to salaries and employee benefits expense
were approximately $165,000, $1,156,000 (including the $898,000
expense for the two retiring executive officers) and $177,000 during
2002, 2001 and 2000, respectively.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. DEFERRED COMPENSATION AND RETIREMENT PLANS (CONTINUED)
In 2001, the Company entered into separate severance agreements with
two retiring executive officers that effectively terminated their
then 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 the severance payments with the expense included in salaries and
employee benefits for the year ended December 31, 2001. The remaining
liability in the severance plans payable as of December 31, 2002 was
$889,000.
NOTE 14. OTHER INCOME AND EXPENSES
Other fee income for the years ended December 31, 2002, 2001 and 2000
follows.
2002 2001 2000
---------- ---------- ----------
Mortgage origination fees $ 838,044 $ 702,329 $ 439,327
Brokerage commissions and fees 485,401 306,322 125,241
ATM and debit card fee income 329,100 131,544 135,463
Insurance premiums 5,822 161,015 209,742
Other fee income 226,518 223,699 195,394
---------- ---------- ----------
Total other fee income $1,884,885 $1,524,909 $1,105,167
========== ========== ==========
Other noninterest income for the years ended December 31, 2002, 2001
and 2000 follows.
2002 2001 2000
----------- ----------- -----------
Earnings on bank-owned life insurance $ 478,199 $ 491,579 $ 139,958
Gain (loss) on disposal of assets 404 (839) (153,817)
Gain on sale of branch office 100,000 - -
Write-down due to impairment in value of
branch office (372,313) - -
Gain on sale of interest in unconsolidated
subsidiary - 1,461,739 -
Other noninterest income 366,051 539,711 245,149
----------- ----------- -----------
Total other noninterest income $ 572,341 $2,492,190 $ 231,290
=========== =========== ===========
Other noninterest expense for the years ended December 31, 2002, 2001
and 2000 follows.
2002 2001 2000
----------- ----------- -----------
Advertising and business development $ 511,902 $ 601,045 $ 526,017
Supplies and printing 638,240 953,385 630,892
Telephone and internet charges 638,209 554,915 372,960
Postage and courier 644,332 613,213 459,059
Legal and accounting fees 882,765 447,038 518,841
Conversion and consolidation costs - 312,933 833,139
Other noninterest expenses 3,060,686 3,532,664 3,761,258
----------- ----------- -----------
Total other noninterest expense $6,376,134 $7,015,193 $7,102,166
=========== =========== ===========
49
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, 2002, 2001 and 2000 follows.
2002 2001 2000
---------- ---------- ----------
Basic earnings per share:
Net income $6,346,839 $ 147,160 $5,726,597
---------- ---------- ----------
Weighted average common shares
outstanding 9,426,761 9,482,709 9,528,387
---------- ---------- ----------
Earnings per common share $ 0.67 $ 0.02 $ 0.60
========== ========== ==========
Diluted earnings per share:
Net income $6,346,839 $ 147,160 $5,726,597
---------- ---------- ----------
Weighted average common shares
outstanding 9,426,761 9,482,709 9,528,387
Effect of dilutive stock options 33,007 67,371 70,403
---------- ---------- ----------
Weighted average diluted common
shares outstanding 9,459,768 9,550,080 9,598,790
---------- ---------- ----------
Earnings per common share $ 0.67 $ 0.02 $ 0.60
========== ========== ==========
NOTE 16. EMPLOYEE AND DIRECTOR STOCK PURCHASE PROGRAM
On July 1, 2002, the Board of Directors established an Employee and
Director Stock Purchase Program to enable the Company and its
participating subsidiaries to provide to their respective employees
and directors a convenient means of purchasing for long term
investment, and not for short term speculative gain, common stock of
the Company and thereby promote interest in the Company's continuing
success, growth and development. The program allows for an employee
or director to purchase up to a maximum of $2,000 a year of the
Company's stock with the Company matching 50% of the purchase. In
order to be eligible, an employee must be full-time and have worked a
full month. During the year ended December 31, 2002, the Company
recorded $51,700 of expense associated with this program.
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.
50
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 339,717 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, 2002,
2001 and 2000 and changes during the years ended on those dates
follows.
2002 2001 2000
----------------------- ------------------ --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
----------- ---------- --------- ------- -------- ----------
Under option, beginning
of year 731,635 $ 11.22 523,650 $ 11.58 440,157 $ 11.19
Granted 168,700 8.08 288,750 10.19 88,950 13.40
Exercised (20,500) 6.25 (31,500) 6.25 (4,157) 7.10
Forfeited (123,429) 11.41 (49,265) 12.25 (1,300) 16.09
----------- ---------- --------- ------- -------- ----------
Under option, end of year 756,406 $ 10.63 731,635 $ 11.22 523,650 $ 11.58
=========== ========== ========= ======= ======== ==========
Exercisable at end of year 366,546 $ 11.41 355,290 $ 11.13 305,929 $ 10.68
=========== ========== ========= ======= ======== ==========
Weighted-average fair value
per option of options
granted during year $ 3.84 $ 2.69 $ 4.53
========== ======= ==========
A further summary of the options outstanding at December 31, 2002
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 - 7.70 195,000 7.08 $ 7.13 76,000 $ 6.25
8.00 - 10.06 206,100 6.50 9.67 106,880 9.96
10.16 - 10.80 143,506 8.72 10.60 30,357 10.60
10.94 - 14.88 106,750 6.48 12.85 59,599 12.77
15.88 - 21.63 105,050 6.58 16.76 93,710 16.64
----------- ---------
756,406 7.08 10.63 366,546 11.41
=========== =========
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18. STOCK OPTION PLANS (CONTINUED)
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:
2002 2001 2000
--------- --------- ---------
Risk-free interest rate 3.81% 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) - 4.69% 2.50%
Expected volatility 28.79% 45.62% 34.20%
NOTE 19. STOCK REPURCHASE PLAN
In June 1999, the Board of Directors approved a stock repurchase plan
whereby management was authorized to purchase and cancel up to 75,000
shares of the Company's common stock from the open market. In March
2000, the Board approved the purchase and cancellation of 50,000
shares of the Company's common stock. In January 2001, the Board
approved the purchase and cancellation of 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. Those remaining 6,850 shares at December 31, 2001
were not repurchased and the plan expired January 31, 2002.
NOTE 20. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. 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 Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit, standby letters of credit and credit card commitments is
represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments as it does for
on-balance-sheet instruments. A summary of the Bank's commitments as
of December 31, 2002 and 2001 follows.
2002 2001
----------- -----------
Commitments to extend credit $70,351,000 $61,674,000
Standby letters of credit $ 1,445,000 $ 4,189,000
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 Bank upon extension of credit, is based on
management's credit evaluation of the customer.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 20. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Standby letters of credit are conditional commitments issued by the
Bank 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 Bank deems necessary.
In the normal course of business, the Bank 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 Bank's financial statements.
NOTE 21. CONCENTRATIONS OF CREDIT
The Bank originates commercial, agricultural, residential, and
consumer loans to customers primarily in markets served by the Bank.
The ability of the majority of the Bank's customers to honor their
contractual obligations is dependent on the local economies in the
geographical areas served by the Bank.
As of December 31, 2002, approximately 77% of the Bank's loan
portfolio is concentrated in loans secured by real estate. A
substantial portion of these loans are in the Bank'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 Bank's loan portfolio and the recovery of the
carrying amount of other real estate owned are susceptible to changes
in market conditions in the Bank's market areas. The other
significant concentrations of credit by type of loan are set forth in
Note 4.
NOTE 22. REGULATORY MATTERS
On May 20, 2002, the Company's Board of Directors adopted a
Resolution requested by the Federal Reserve Bank of Atlanta, which,
among other things, restricts the Company from redeeming its capital
stock, paying dividends, modifying existing debt agreements, or
incurring additional debt without the prior approval of its banking
regulators. The Resolution was the result of an examination that
found the Bank to be in less than satisfactory condition due
primarily to serious weaknesses identified in the asset quality of
the Bank's loan portfolio. This Resolution shall remain in effect
until removed by the regulators.
The Bank is subject to certain restrictions on the amount of
dividends that may be declared without prior regulatory approval. The
Company and the Bank 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 Bank must
meet specific capital guidelines that involve quantitative measures
of the assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Prompt corrective action provisions are not applicable to bank
holding companies.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 22. REGULATORY MATTERS (CONTINUED)
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios of total and Tier I capital to risk-weighted assets, as
defined, and of Tier I capital to average assets, as defined.
Management believes, as of December 31, 2002 and 2001, the Company
and the Bank met all capital adequacy requirements to which they are
subject.
As of December 31, 2002, the most recent notification from the
regulatory authorities categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum Total
risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the following table. There are no conditions or events since
that notification that management believes have changed the Bank's
category.
The Company and the Bank's actual capital amounts and ratios are
presented in the following table. All dollar 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, 2002:
Total Capital to Risk Weighted Assets:
Consolidated $81,738,000 14.0% $46,888,000 8.0% - N/A -
Bank $76,814,000 13.2% $46,710,000 8.0% $58,388,000 10.0%
Tier 1 Capital to Risk Weighted Assets:
Consolidated $74,353,000 12.7% $23,444,000 4.0% - N/A -
Bank $69,456,000 11.9% $23,355,000 4.0% $35,033,000 6.0%
Tier 1 Capital to Average Assets:
Consolidated $74,353,000 10.0% $29,729,000 4.0% - N/A -
Bank $69,456,000 9.4% $29,684,000 4.0% $37,105,000 5.0%
As of December 31, 2001:
Total Capital to Risk Weighted Assets:
Consolidated $76,954,000 12.0% $51,265,000 8.0% - N/A -
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 -
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 -
Bank $29,493,000 6.2% $18,877,000 4.0% $23,596,000 5.0%
54
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.
55
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, 2002 and 2001 are summarized
below. All dollar amounts have been rounded to the nearest thousand.
2002 2001
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
Cash and due from banks, interest-
bearing deposits with other banks,
and federal funds sold $ 56,958,000 $ 56,958,000 $ 68,334,000 $ 68,334,000
Investment securities 98,026,000 98,026,000 113,454,000 113,454,000
Loans, net 543,141,000 549,290,000 622,060,000 638,321,000
Deposits 606,730,000 609,484,000 720,398,000 727,185,000
Federal funds purchased and
securities sold under agreements
to repurchase 17,520,000 17,520,000 15,709,000 15,709,000
Advances from the FHLB 36,145,000 38,780,362 38,228,000 38,879,000
Beneficial interest in debentures 10,000,000 10,000,000 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, 2002 AND 2001
2002 2001
----------- -----------
Assets:
Cash on deposit with subsidiary banks $ 5,521,741 $ 2,826,599
Investment securities 1,349,945 1,349,945
Investment in subsidiaries 76,331,003 70,218,251
Premises and equipment - 4,399,715
Other assets 1,271,218 1,632,549
----------- -----------
Total assets $84,473,907 $80,427,059
=========== ===========
Liabilities and stockholders' equity:
Guaranteed preferred beneficial
interests in debentures (trust preferred securities) $10,000,000 $10,000,000
Dividends payable - 1,035,090
Other liabilities 3,209,169 4,020,086
----------- -----------
Total liabilities 13,209,169 15,055,176
----------- -----------
Stockholders' equity 71,264,738 65,371,883
----------- -----------
Total liabilities and stockholders' equity $84,473,907 $80,427,059
=========== ===========
56
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, 2002, 2001 AND 2000
2002 2001 2000
----------- ------------ ----------
Income:
Dividends from subsidiaries $1,677,950 $ 3,914,630 $4,930,706
Interest income 90,000 60,747 103,820
Management and service fees 1,171,316 1,866,933 1,279,967
Other income 122 179,389 92,504
----------- ------------ ----------
Total income 2,939,388 6,021,699 6,406,997
----------- ------------ ----------
Expenses 2,988,293 8,591,404 4,800,038
----------- ------------ ----------
Income (loss) before income tax benefit
and equity in undistributed earnings
of subsidiaries (48,905) (2,569,705) 1,606,959
Income tax benefit 745,316 2,196,385 1,258,615
----------- ------------ ----------
Income (loss) before equity in
undistributed earnings of subsidiaries 696,411 (373,320) 2,865,574
Equity in undistributed earnings
of subsidiaries 5,650,428 520,480 2,861,023
----------- ------------ ----------
Net income $6,346,839 $ 147,160 $5,726,597
=========== ============ ==========
57
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, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 6,346,839 $ 147,160 $ 5,726,597
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 376,322 874,739 422,579
Deferred tax provision (242,454) 788,607 78,065
Gain on disposal of assets - (10,590) (3,634)
Undistributed earnings of subsidiaries (5,650,428) (520,480) (2,861,023)
Increase in cash value of life insurance - (6,859) (66,159)
Increase in deferred compensation accrual 141,009 1,113,578 133,703
Increase (decrease) in retirement accrual (402,362) 1,291,388 -
Net change in other assets and liabilities 162,271 748,918 (898,101)
------------ ------------ ------------
Net cash provided by operating activities 731,197 4,426,461 2,532,027
------------ ------------ ------------
Cash flows from investing activities:
Purchase of securities available for sale - (1,000,000) -
Purchase of premises and equipment (118,106) (969,592) (3,501,165)
Proceeds from disposal of assets 4,025,426 609,467 9,494
Redemption of life insurance policies - 60,998 -
Investment in subsidiary - (3,516,874) (50,000)
------------ ------------ ------------
Net cash used in investing activities 3,907,320 (4,816,001) (3,541,671)
------------ ------------ ------------
Cash flows from financing activities:
Cash paid to former stockholders on
acquisition - (7,667,280) -
Proceeds on issuance of guaranteed preferred
beneficial interests in debentures - 10,000,000 -
Dividends paid (2,071,500) (4,179,018) (4,054,117)
Proceeds from the exercise of stock options 128,125 196,875 29,515
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 (1,943,375) (3,287,821) (5,536,754)
------------ ------------ ------------
Net increase (decrease) in cash 2,695,142 (3,677,361) (6,546,398)
Cash at beginning of year 2,826,599 6,503,960 13,050,358
------------ ------------ ------------
Cash at end of year $ 5,521,741 $ 2,826,599 $ 6,503,960
============ ============ ============
58
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 Fowler, Holley, Rambo, Haynes & Stalvey, PC (formerly Stewart,
Fowler & Stalvey, PC), our previous independent auditors (the "Fowler firm"),
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 the Fowler firm on the Company'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 the Fowler firm
as to accounting principles or practices, financial statement disclosure, or
audit scope or procedure. A letter from the Fowler firm, 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 "2003 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 2003
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 2003
Proxy Statement is incorporated herein by reference. Also see "Equity
Compensation Plan Information" in Part II, Item 5 of this filing.
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 2003 Proxy Statement is
incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Based on an evaluation completed within 90 days of the filing of this Annual
Report on Form 10-K, our principal executive and financial officers have
concluded that our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) are effective to ensure that information required
to be disclosed in our filings under the Securities Exchange Act of 1934 is
processed, recorded, summarized and reported within the time periods specified
in the forms and rules promulgated by the SEC. There have been no significant
changes in our internal controls, or other factors that could significantly
affect these internal controls, subsequent to the date of their evaluation.
59
PART IV
ITEM 15. 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 Purchase and Assumption Agreement, dated as of October 15, 2001,
by and between Southeastern Bank and the Bank regarding the sale
of the Bank's Richmond Hill branch office on January 31, 2002.
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
(incorporated by reference to Exhibit 4.1 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
2001).
10.1.1 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).
10.1.2 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).
10.2 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).
10.3 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).
10.4 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).
10.5 Employee Contract Termination Agreement, dated September 1, 2001,
by and between C. Larry Wilkinson and the Registrant
(incorporated by reference to Exhibit 10.7 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
2001).
60
10.6 Employment Agreement, dated October 24, 2001, by and between Jay
Torbert, the Registrant, and The Park Avenue Bank (incorporated
by reference to Exhibit 10.8 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001).
10.7 Employment Agreement, dated August 30, 2000, by and between M.
Burke Welsh, Jr. and the Registrant (incorporated by reference to
Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2001).
10.8 Rescission Agreement, dated December 31, 2001, by and between R.
Bradford Burnette and the Registrant (incorporated by reference
to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2001).
10.9 PAB Bankshares, Inc. Employee and Director Stock Purchase
Program, dated July 1, 2002 and amended March 25, 2003.
10.10 Employment Agreement, dated January 1, 2003, by and between
Michael E. Ricketson, the Registrant, and the Bank.
10.11 Employment Agreement, dated January 1, 2003, by and between
Milton Burke Welsh and the Bank.
10.12 Employment Agreement, dated January 1, 2003, by and between R.
Wesley Fuller and the Bank.
10.13 Employment Agreement, dated January 1, 2003, by and between
Donald J. Torbert, Jr. and the Bank.
16.1 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 Mauldin & Jenkins, LLC.
23.2 Consent of Fowler, Holley, Rambo, Haynes & Stalvey, PC (formerly
Stewart, Fowler & Stalvey, PC).
(b) REPORTS ON FORM 8-K.
None.
61
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: March 25, 2003
--------------
By: /s/ Michael E. Ricketson
---------------------------------------
Michael E. Ricketson,
President and Chief Executive Officer
Signature Title Date
- --------- ----- ----
/s/ R. Bradford Burnette Director, Chairman March 25, 2003
- -------------------------------- --------------
R. Bradford Burnette
/s/ Walter W. Carroll II Director March 25, 2003
- -------------------------------- --------------
Walter W. Carroll II
/s/ James L. Dewar, Jr. Director March 25, 2003
- -------------------------------- --------------
James L. Dewar, Jr.
/s/ Michael H. Godwin Director March 25, 2003
- -------------------------------- --------------
Michael H. Godwin
/s/ Bill J. Jones Director March 25, 2003
- -------------------------------- --------------
Bill J. Jones
/s/ James B. Lanier, Jr. Director March 25, 2003
- -------------------------------- --------------
James B. Lanier, Jr.
/s/ Kennith D. McLeod Director March 25, 2003
- -------------------------------- --------------
Kennith D. McLeod, CPA
/s/ Paul E. Parker Director March 25, 2003
- -------------------------------- --------------
Paul E. Parker
/s/ Michael E. Ricketson Director, President and March 25, 2003
- -------------------------------- Chief Executive Officer --------------
Michael E. Ricketson
/s/ F. Ferrell Scruggs, Sr. Director March 25, 2003
- -------------------------------- --------------
F. Ferrell Scruggs, Sr.
/s/ John M. Simmons Director March 25, 2003
- -------------------------------- --------------
John M. Simmons
/s/ Joe P. Singletary, Jr. Director March 25, 2003
- -------------------------------- --------------
Joe P. Singletary, Jr.
/s/ Donald J. Torbert, Jr. Senior Vice President and March 25, 2003
- -------------------------------- Chief Financial Officer --------------
Donald J. Torbert, Jr., CPA (Principal Accounting Officer)
62
CERTIFICATION
I, Michael E. Ricketson, certify that:
1. I have reviewed this annual report on Form 10-K of PAB Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report; and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 25, 2003 /s/ Michael E. Ricketson
--------------- -------------------------------------
Michael E. Ricketson
President and Chief Executive Officer
(Principal Executive Officer)
63
CERTIFICATION
I, Donald J. Torbert, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of PAB Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report; and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 25, 2003 /s/ Donald J. Torbert, Jr.
--------------- --------------------------------------------
Donald J. Torbert, Jr., CPA
Chief Financial Officer
(Principal Financial and Accounting Officer)
64
EXHIBIT INDEX
- -------------
Exhibit No. Description Page
- ----------- ----------- ----
2.1 Purchase and Assumption Agreement, dated as of October 15, 2001,
by and between Southeastern Bank and the Bank regarding the sale of
the Bank's Richmond Hill branch office on January 31, 2002. . . . . . . 66
10.9 PAB Bankshares, Inc. Employee and Director Stock Purchase Program,
dated July 1, 2002 and amended March 25, 2003 . . . . . . . . . . . . . 84
10.10 Employment Agreement, dated January 1, 2003, by and between
Michael E. Ricketson, the Registrant, and the Bank . . . . . . . . . . .92
10.11 Employment Agreement, dated January 1, 2003, by and between
Milton Burke Welsh and the Bank . . . . . . . . . . . . . . . . . . . .102
10.12 Employment Agreement, dated January 1, 2003, by and between
R. Wesley Fuller and the Bank . . . . . . . . . . . . . . . . . . . . .111
10.13 Employment Agreement, dated January 1, 2003, by and between
Donald J. Torbert, Jr. and the Bank . . . . . . . . . . . . . . . . . .120
21.1 Subsidiaries of the Registrant. . . . . . . . . . . . . . . . . . . . .129
23.1 Consent of Mauldin & Jenkins, LLC . . . . . . . . . . . . . . . . . . .130
23.2 Consent of Fowler, Holley, Rambo, Haynes & Stalvey, PC
(formerly Stewart, Fowler & Stalvey, PC). . . . . . . . . . . . . . . .131
65