UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 --------------- OR [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-16181 ------- ABC BANCORP - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) GEORGIA 58-1456434 - ------------------------------- ------------------- (State of incorporation) (IRS Employer ID No.) 24 SECOND AVE, SE MOULTRIE, GA 31768 --------------------------------------- (Address of principal executive offices) (912) 890-1111 ------------------------------- (Registrant's telephone number) 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_____ - There were 8,409,208 shares of Common Stock outstanding as of March 31, 2001. 1
ABC BANCORP QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION <TABLE> <CAPTION> Item Page ---- <S> <C> 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Income & Comprehensive Income 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 3. Quantitative and Qualitative Disclosures about Market Risk 15 PART II - OTHER INFORMATION 4. Submission of Matters to a Vote of Securities Holders 16 6. Exhibits and Reports on Form 8-K 16 Signature 17 </TABLE> 2
ABC BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------- Mar 31 Dec 31 2001 2000 ------------- ------------- <S> <C> <C> Assets - ------ Cash and due from banks $ 40,891 $ 43,363 Securities available for sale, at fair value 149,824 162,105 Loans 606,286 587,381 Less allowance for loan losses 10,288 9,832 ------------- ------------- Loans, net 595,998 577,549 ------------- ------------- Premises and equipment, net 19,461 19,703 Other assets 22,396 23,477 ------------- ------------- $ 828,570 $ 826,197 ============= ============= Liabilities and Stockholders' Equity - ------------------------------------ Deposits Noninterest-bearing demand $ 87,183 94,917 Interest-bearing demand 159,679 157,086 Savings 45,982 44,169 Time, $100,000 and over 129,513 120,670 Other time 266,125 263,043 ------------- ------------- Total deposits 688,482 679,885 Federal funds purchased & securities sold under repurchase agreements 3,937 2,653 Other borrowings 45,464 55,350 Other liabilities 7,213 7,653 ------------- ------------- Total liabilities 745,096 745,541 ------------- ------------- Stockholders' equity - -------------------- Common stock, par value $1; 15,000,000 shares authorized 9,200,190 and 9,137,990 shares issued 9,200 9,138 Surplus 29,828 29,237 Retained earnings 49,699 48,411 Accumulated other comprehensive income 2,110 685 Unearned Comp-Grants (1,143) (595) ------------- ------------- 89,694 86,876 Less cost of shares acquired for the treasury, 790,982 (6,220) (6,220) ------------- ------------- Total stockholders' equity 83,474 80,656 ------------- ------------- $ 828,570 $ 826,197 ============= ============= </TABLE> See Notes to Consolidated Financial Statements. 3
ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (Dollars in Thousands) (Unaudited) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------ 2001 2000 ---------- --------- <S> <C> <C> Interest income Interest and fees on loans $ 15,184 $ 13,650 Interest on taxable securities 2,226 2,029 Interest on nontaxable securities 231 241 Interest on deposits in other banks 155 243 ---------- ---------- 17,796 16,163 ---------- ---------- Interest expense Interest on deposits 7,341 5,892 Interest on fed funds purchased and securities sold under agreements to repurchase 54 - Interest on other borrowings 850 683 ---------- ---------- 8,245 6,575 ---------- ---------- Net interest income 9,551 9,588 Provision for loan losses 493 378 ---------- ---------- Net interest income after provision for loan losses 9,058 9,210 ---------- ---------- Other income Service charges on deposit accounts 1,577 1,446 Other service charges, commissions and fees 569 522 Other 30 48 Loss on sale of securities (1) - ---------- ---------- 2,175 2,016 ---------- ---------- Other expense Salaries and employee benefits 4,423 4,183 Equipment and occupancy expense 1,120 1,025 Other operating expenses 2,301 2,476 ---------- ---------- 7,844 7,684 ---------- ---------- Income before income taxes 3,389 3,542 Applicable income taxes 1,091 1,137 ---------- ---------- Net income $ 2,298 $ 2,405 ---------- ---------- Other comprehensive income, net of tax: Unrealized holding gains (losses) arising during period, net of tax $ 1,425 (388) ---------- ---------- Comprehensive income $ 3,723 $ 2,017 ========== ========== Income per common share-Basic $ 0.27 $ 0.28 ========== ========== Income per common share-Diluted $ 0.27 $ 0.28 ========== ========== Average shares outstanding 8,398,150 8,552,854 ========== ========== </TABLE> See Notes to Consolidated Financial Statements. 4
ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (Dollars in Thousands) (Unaudited) <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------- 2001 2000 ---------- ---------- <S> <C> <C> OPERATING ACTIVITIES Net Income $ 2,298 $ 2,405 ---------- ---------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 597 509 Provision for loan losses 493 378 Amortization of intangible assets 201 210 Other prepaids, deferrals and accruals, net (190) 4,284 ---------- ---------- Total adjustments 1,101 5,381 ---------- ---------- Net cash provided by operating activities 3,399 7,786 ---------- ---------- INVESTING ACTIVITIES Proceeds from maturities of investment securities 26,157 1,288 Purchase of investment securities (11,757) (7,127) Proceeds from sales of securities available for sale 40 - Increase in loans (18,942) (23,069) Purchase of premises and equipment (355) (788) ---------- ---------- Net cash used in investing activities (4,857) (29,696) ---------- ---------- FINANCING ACTIVITIES Net increase in deposits 8,597 12,220 Net increase in repurchase agreements 1,284 90 Increase in long-term borrowings - 15,000 Decrease in other borrowings (9,886) (44,233) Dividends paid (1,009) (861) Purchase treasury stock - (1,752) ---------- ---------- Net cash used in financing activities (1,014) (19,536) ---------- ---------- Net decrease in cash and due from banks $ (2,472) $(41,446) Cash and due from banks at beginning of period 43,363 80,130 ---------- ---------- Cash and due from banks at end of period $ 40,891 $ 38,684 ========== ========== </TABLE> See Notes to Consolidated Financial statements. 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - -------------------------------------------------------------------- NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of ABC Bancorp and subsidiaries ("the Company") conform to generally accepted accounting principles and to general practices within the banking industry. The interim consolidated financial statements included herein are unaudited, but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods presented. All adjustments reflected in the interim financial statements are of a normal, recurring nature. Such financial statements should be read in conjunction with the financial statements and notes thereto and the report of independent auditors included in the Company's Form 10-K Annual Report for the year ended December 31, 2000. The results of operations for the three months ended March 31, 2001 are not necessarily indicative of the results to be expected for the full year. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Liquidity management involves the matching of the cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs, and the ability of ABC Bancorp and its subsidiaries (the "Company") to meet those needs. The Company strives to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance it has in short-term investments at any given time will adequately cover any reasonably anticipated immediate need for funds. Additionally, the subsidiary banks (the "Banks") maintain relationships with correspondent banks which could provide funds to them on short notice, if needed. The liquidity and capital resources of the Company is monitored on a periodic basis by state and Federal regulatory authorities. As determined under guidelines established by these regulatory authorities, the Company's and the Banks' liquidity ratios at March 31, 2001 were considered satisfactory. At that date, the Banks' short term investments were adequate to cover any reasonably anticipated immediate need for funds. The Company is aware of no events or trends likely to result in a material change in liquidity. During the three months ended March 31, 2001, total capital increased $2,818,000 to $83,474,000. This increase in capital resulted from the retention of net earnings of $1,289,000 (after deducting dividends to shareholders of $1,009,000), plus $104,000 accrual for award grants, and an increase of approximately $1,425,000 in unrealized gains on securities available for sale, net of taxes. At March 31, 2001, ABC had binding commitments for capital expenditures totaling $800,000. The Company anticipates that approximately $1,500,000 will be required for capital expenditures during the remainder of 2001. Additional expenditures may be required for other mergers and acquisitions. 7
Mergers and Acquisitions On April 13, 2001, ABC Bancorp acquired 100% of the equity of Tri-County Bank, Trenton, Florida in a merger that will be accounted for as a "purchase". The acquisition marks ABC Bancorp's initial entry into Florida. Under the terms of the merger: . The total merger price is $7.2 million, which is approximately 1.5 times Tri-County's total equity. . Each holder of a certificate representing 700 or more shares of Tri-County's Common Stock will receive 60% of the holder's pro-rata share of the merger price in shares of ABC's Common Stock. The number of shares thus issued will be based on $11.39, which is the average market price of ABC's Common Stock for a certain trading period as specified in the merger agreement. Cash will be issued for fractional shares. Such holders will also receive cash for the balance of the holder's pro-rata share of the merger price. . Each holder of a certificate representing less than 700 shares of Tri-County's Common Stock will receive cash in an amount equal to the holder's pro-rata share of the merger price. At the time of the merger, Tri-County had total assets of approximately $49 million and total equity of approximately $4.8 million. ABC currently has total assets of approximately $829 million. On April 13, 2001, ABC Bancorp entered into a Purchase and Assumption Agreement whereby Tri-County Bank will purchase the Newberry, Florida branch of Republic Security Bank. The transaction will include all consumer and business deposit accounts (approximately $20 million currently) and associated lines of credit, along with real property and certain fixed assets. The sale is expected to be completed in July, subject to approval by regulatory authorities. 8
On February 21, 2001, ABC Bancorp and Golden Isles Financial Holdings, St. Simons Island, Georgia entered into a definitive merger agreement whereby ABC will acquire 100% of the equity of Golden Isles in a merger that will be accounted for as a "purchase" transaction. Under the terms of the agreement: . The total merger price will be between $20.1 million and $25.2 million, depending upon the average price of ABC's Common Stock during a defined period immediately preceding the merger. For example, at the closing price of ABC's Common Stock on February 16, of $11.50 per share, the merger price would consist of $10,237,960 in cash and 1,241,204 shares of ABC's Common Stock, representing a total merger price of $24,511,806. . Each Golden Isles shareholder will receive approximately 41% of the shareholder's pro-rata portion of the total merger price in cash, and approximately 59% in ABC's Common Stock. At the February 16 closing price for ABC's Common Stock of $11.50, each Golden Isles shareholder would receive $4.13 in cash and one-half share of ABC's Common Stock for each share of Golden Isles Common Stock, or a combined price of $9.88 per share. . If the closing price of ABC's Common Stock exceeds $12.00 over a defined period immediately preceding the merger, then the total merger price is capped at $25,132,408, or $10.13 per share of Golden Isles' Common Stock. . Golden Isles may terminate the agreement if the closing price of ABC's Common Stock over a defined period immediately preceding the merger is less than $8.00 per share or more than $14.00 per share. The First Bank of Brunswick, the principal wholly-owned subsidiary of Golden Isles, will retain its charter and, upon consummation of the merger, will become a wholly-owned subsidiary of ABC Bancorp. The First Bank of Brunswick's name will not change, and Michael D. Hodges will continue as its President and Chief Executive Officer. It is expected that all current Directors of the bank will remain on its Board. Golden Isles currently has total assets of approximately $147 million and total equity of approximately $14 million. ABC currently has total assets of approximately $829 million. 9
Results of Operations The Company's results of operations are determined by its ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense. Since interest rates are determined by market forces and economic conditions beyond the control of the Company, the ability to generate net interest income is dependent upon the Banks' ability to obtain an adequate spread between the rate earned on interest-earning assets and the rate paid on interest-bearing liabilities. Thus, the key performance measure for net interest income is the interest margin or net yield, which is taxable-equivalent net interest income divided by average earning assets. The primary component of consolidated earnings is net interest income, or the difference between interest income on interest-earning assets and interest paid on interest-bearing liabilities. The net interest margin is net interest income expressed as a percentage of average interest-earning assets. Interest-earning assets consist of loans, investment securities and Federal funds sold. Interest-bearing liabilities consist of deposits and borrowings such as Federal funds purchased, securities sold under repurchase agreements and Federal Home Loan Bank advances. A portion of interest income is earned on tax-exempt investments, such as state and municipal bonds. In an effort to state this tax-exempt income and its resultant yields on a basis comparable to all other taxable investments, an adjustment is made to analyze this income on a taxable-equivalent basis. 10
Comparison of Statements of Income The net interest margin on a taxable-equivalent basis was 5.10% and 5.55% during the three months ended March 31, 2001 and 2000, respectively, a decrease of 45 basis points. These variances are primarily attributable to fluctuations in the average rates charged and fees earned on loans and the average rates paid on deposit accounts. Net interest income on a taxable-equivalent basis was $9.76 million as compared to $9.78 million during the three months ended March 31, 2001 and 2000, respectively, representing a decrease of 2 basis points or 0.20%. The provision for loan losses is a charge to earnings in the current period to replenish the allowance for loan losses and maintain it at the level management determines is adequate. The provision for loan losses charged to earnings amounted to $493,000 and $378,000 during the three months ended March 31, 2001 and 2000, respectively, an increase of $115,000, or 30.42%. The allowance for loan losses represents a reserve for potential losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated quarterly based on a review of all significant loans, with a particular emphasis on non-accruing, past due and other loans that management believes require attention. Another factor used in determining the adequacy of the reserve is management's judgment about factors affecting loan quality and assumptions about the local and national economy. The allowance for loan losses was 1.70% and 1.67% of total loans outstanding at March 31, 2001 and December 31, 2000. As of March 31, 2001, nonperforming assets were $6,594,000 compared to $6,106,000 in nonperforming assets as of December 31, 2000. Management considers the allowance for loan losses as of March 31, 2001 adequate to cover potential losses in the loan portfolio. 11
Following is a comparison of noninterest income for the three months ended March 31, 2001 and 2000 (dollars in thousands). Three Months Ended ------------------ March 31,2001 March 31,2000 ------------- ------------- Service charges on deposits $1,577 $1,446 Other service charges, commissions & fees 569 522 Other income 30 0 Loss on sale of securities (1) 48 ------ ------ Total noninterest income $2,175 $2,016 ====== ====== Total noninterest income for the three months ended March 31, 2001 was $159,000 higher than during the same period in 2000. Following is an analysis of noninterest expense for the three months ended March 31, 2001 and 2000 (dollars in thousands). Three Months Ended ------------------ March 31, 2001 March 31, 2000 -------------- -------------- Salaries and employee benefits $4,423 $4,183 Occupancy and equipment expense 1,120 1,025 Other expense 2,301 2,476 ------ ------ Total noninterest expense $7,844 $7,684 ====== ====== Total noninterest expense for the three months ended March 31, 2001 was $160,000 higher than during the same period in 2000. Salaries and employee benefits for the three months ended March 31, 2001 were $240,000 or 5.73% higher than during the same period in 2000. This increase is due to normal increases in salaries and employee benefits. 12
Following is a condensed summary of net income during the three months ended March 31, 2001 and 2000 (dollars in thousands). Three Months Ended ------------------ March 31, 2001 March 31, 2000 -------------- -------------- Net interest income $9,551 $9,588 Provision for loan losses 493 378 Other income 2,175 2,016 Other expense 7,844 7,684 Income before income taxes 3,389 3,542 Applicable income taxes 1,091 1,137 ------ ------ Net income $2,298 $2,405 ====== ====== Net income decreased $107,000 or 4.45% to $2,298,000 for the three months ended March 31, 2001 as compared to $2,405,000 for the three months ended March 31, 2000. Net interest income of ABC and its subsidiaries decreased $37,000, the provision for loan losses increased by $115,000 and all other noninterest expense increased by $160,000. 13
Comparison of Balance Sheets Total assets increased by $2.8 million, or .34% to $829 million at March 31, 2001 from $826.2 million at December 31, 2000. Total earning assets increased by $13.1 million, or 1.74%, to $767.8 million at March 31, 2001 from $754.7 million at December 31, 2000. Total loans, net of the allowance for loan losses, increased by $18 million, or 3.11% to $596 million at March 31, 2001 from $578 million at December 31, 2000. Total deposits increased by $8.6 million, or 1.26%, to $688.5 million at March 31, 2001 from $679.9 million at December 31, 2000. Approximately 12.66% and 13.96% of deposits were noninterest-bearing as of March 31, 2001 and December 31, 2000, respectively. 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed only to U. S. Dollar interest rate changes and, accordingly, the Company manages exposure by considering the possible changes in the net interest margin. The Company does not have any trading instruments nor does it classify any portion of the investment portfolio as held for trading. The Company does not engage in any hedging activities or enter into any derivative instruments with a higher degree of risk than mortgage backed securities which are commonly pass through securities. Finally, the Company has no exposure to foreign currency exchange rate risk, commodity price risk, and other market risks. Interest rates play a major part in the net interest income of a financial institution. The sensitivity to rate changes is known as "interest rate risk." The repricing of interest earning assets and interest-bearing liabilities can influence the changes in net interest income. As part of the Company's asset/liability management program, the timing of repriced assets and liabilities is referred to as Gap management. It is the policy of the Company to maintain a Gap ratio in the one-year time horizon of .80 to 1.20 The Company uses simulation analysis to monitor changes in net interest income due to changes in market interest rates. The simulation of rising, declining and flat interest rate scenarios allows management to monitor and adjust interest rate sensitivity to minimize the impact of market interest rate swings. The analysis of the impact on net interest income over a twelve month period is subjected to a gradual 200 basis point increase or decrease in market rates on net interest income and is monitored on a quarterly basis. The most recent simulation model projects net interest income would increase 3.02% if rates rise gradually over the next year. On the other hand, the model projects net interest income to decrease 5.30% if rates decline over the next year. 15
Part II. Other Information Item 4. Submission of Matters to a Vote of Securities Holders There were no matters submitted to a vote of securities holders during the quarter ended March 31, 2001. Item 6. Exhibits and Reports on Form 8-K ABC has filed a Current Report on Form 8-K, dated February 20, 2001, concerning the execution and delivery of an Agreement and Plan of Merger by ABC and Golden Isles Financial Holdings, Inc., Brunswick, Georgia ("Golden Isles"). The Current Report on Form 8-K was filed under Item 5 of Form 8-K, and no financial information concerning ABC or Golden Isles was filed therewith. 16
SIGNATURE Pursuant to the requirements 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: ABC BANCORP 5/8/01 /s/ W. Edwin Lane, Jr. - ---------------------- ------------------------------------- DATE W. EDWIN LANE, JR. EXECUTIVE VICE PRESIDENT & CHIEF FINANCIAL OFFICER (Duly authorized officer and principal financial/accounting officer) 17