Properties

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

6

Table of Contents

Employees

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

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

SUPERVISION AND REGULATION

General

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

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

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

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

7

Table of Contents

General (Continued)

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

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

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

Payment of Dividends and Other Restrictions

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

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

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

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

8

Table of Contents

Payment of Dividends and Other Restrictions (Continued)

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

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

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

Capital Adequacy

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

          The risk-based capital standards are designed to:

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

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

9

Table of Contents

Capital Adequacy (Continued)

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

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

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

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

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

Prompt Corrective Action

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

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

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

10

Table of Contents

Prompt Corrective Action (Continued)

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

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

Community Reinvestment Act

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

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

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

Privacy

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

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

11

Table of Contents

Legislative and Regulatory Changes

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

Fiscal and Monetary Policy

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

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

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

Federal Home Loan Bank System

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

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

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

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

12

Table of Contents

ITEM 2.                   PROPERTIES

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

ITEM 3.                   LEGAL PROCEEDINGS

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

ITEM 4.                   SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

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

ITEM 4.5                 EXECUTIVE OFFICERS

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

                                 Officers serve at the discretion of the Board of Directors.

13

Table of Contents