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 June 30, 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) (229) 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 8,757,312 shares of Common Stock outstanding as of June 30, 2001. 1
ABC BANCORP QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item Page - ------ ---- 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Income and Comprehensive Income 4 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 3. Quantitative and Qualitative Disclosures about Market Risk 12 PART II - OTHER INFORMATION 4. Submission of Matters to a Vote of Securities Holders 12 6. Exhibits and Reports on Form 8-K 13 Signature 14 2
<TABLE> <CAPTION> ABC BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) - ----------------------------------------------------------------------------------------------------------------- Jun 30 Dec 31 2001 2000 ----------- ------------ Assets - ------ <S> <C> <C> Cash and due from banks $ 50,974 $ 43,363 Securities available for sale, at fair value 155,910 162,105 Loans 661,467 587,381 Less allowance for loan losses 11,228 9,832 -------- -------- Loans, net 650,239 577,549 -------- -------- Premises and equipment, net 19,718 19,703 Other assets 26,199 23,477 -------- -------- $903,040 $826,197 ======== ======== Liabilities and Stockholders' Equity - ------------------------------------ Deposits Noninterest-bearing demand $ 94,638 94,917 Interest-bearing demand 159,461 157,086 Savings 50,515 44,169 Time, $100,000 and over 135,976 120,670 Other time 303,159 263,043 -------- -------- Total deposits 743,749 679,885 Federal funds purchased & securities sold under repurchase agreements 4,922 2,653 Other borrowings 57,614 55,350 Other liabilities 7,776 7,653 -------- -------- Total liabilities 814,061 745,541 -------- -------- Stockholders' equity - -------------------- Common stock, par value $1; 30,000,000 shares authorized 9,548,294 and 9,137,990 shares issued 9,548 9,138 Surplus 33,448 29,237 Retained earnings 50,839 48,411 Accumulated other comprehensive income 2,350 685 Unearned Comp-Grants (986) (595) -------- -------- 95,199 86,876 Less cost of shares acquired for the treasury, 790,982 (6,220) (6,220) -------- -------- Total stockholders' equity 88,979 80,656 -------- -------- $903,040 $826,197 ======== ======== See Notes to Consolidated Financial Statements. </TABLE> 3
<TABLE> <CAPTION> ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME THREE MONTHS ENDED JUNE 30, 2001 AND 2000 (Dollars in Thousands) (Unaudited) - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> 2001 2000 ---------- ---------- Interest income Interest and fees on loans $ 15,566 $ 14,249 Interest on taxable securities 2,180 2,118 Interest on nontaxable securities 229 240 Interest on deposits in other banks 197 149 Interest on fed funds sold 28 - ---------- ---------- 18,200 16,756 ---------- ---------- Interest expense Interest on deposits 7,564 6,416 Interest on fed funds purchased and securities sold under agreements to repurchase 34 62 Interest on other borrowings 726 823 ---------- ---------- 8,324 7,301 ---------- ---------- Net interest income 9,876 9,455 Provision for loan losses 723 271 ---------- ---------- Net interest income after provision for loan losses 9,153 9,184 ---------- ---------- Other income Service charges on deposit accounts 1,670 1,536 Other service charges, commissions and fees 570 493 Other 116 72 Loss on sale of securities - - ---------- ---------- 2,356 2,101 ---------- ---------- Other expense Salaries and employee benefits 4,542 4,265 Equipment and occupancy expense 1,147 1,058 Other operating expenses 2,590 2,339 ---------- ---------- 8,279 7,662 ---------- ---------- Income before income taxes 3,230 3,623 Applicable income taxes 1,040 1,185 Net income $ 2,190 $ 2,438 ---------- ---------- Other comprehensive income, net of tax: Unrealized holding gains (losses) arising during period, net of tax 240 60 Reclassification adjustment for losses included in net income, net of tax $ - - ---------- ---------- Comprehensive income $ 2,430 $ 2,498 ========== ========== Income per common share-Basic $0.25 $0.29 ========== ========== Income per common share-Diluted $0.25 $0.29 ========== ========== Average shares outstanding 8,707,075 8,484,423 ========== ========== See Notes to Consolidated Financial Statements. </TABLE> 4
<TABLE> <CAPTION> ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (Dollars in Thousands) (Unaudited) - ---------------------------------------------------------------------------------------------------------- 2001 2000 ---------- ---------- <S> <C> <C> Interest income Interest and fees on loans $ 30,750 $ 27,899 Interest on taxable securities 4,406 4,147 Interest on nontaxable securities 460 481 Interest on deposits in other banks 352 392 Interest on fed funds sold 28 - ---------- ---------- 35,996 32,919 ---------- ---------- Interest expense Interest on deposits 14,905 12,308 Interest on fed funds purchased and securities sold under agreements to repurchase 88 62 Interest on other borrowings 1,576 1,506 ---------- ---------- 16,569 13,876 ---------- ---------- Net interest income 19,427 19,043 Provision for loan losses 1,216 649 ---------- ---------- Net interest income after provision for loan losses 18,211 18,394 ---------- ---------- Other income Service charges on deposit accounts 3,247 2,982 Other service charges, commissions and fees 1,139 1,015 Other 146 120 Loss on sale of securities (1) - ---------- ---------- 4,531 4,117 ---------- ---------- Other expense Salaries and employees benefits 8,965 8,448 Equipment and occupancy expense 2,267 2,083 Other operating expenses 4,891 4,815 ---------- ---------- 16,123 15,346 ---------- ---------- Income before income taxes 6,619 7,165 Applicable income taxes 2,131 2,322 ---------- ---------- Net income $ 4,488 $ 4,843 ---------- ---------- Other comprehensive income, net of tax: Unrealized holding gains (losses) arising during period, net of tax $ 1,665 $ (328) Reclassification adjustment for losses include in net income, net of tax $ - $ - ---------- ---------- Comprehensive income $ 6,153 $ 4,515 ========== ========== Income per common share-Basic $0.52 $0.57 ========== ========== Income per common share-Diluted $0.52 $0.56 ========== ========== Average shares outstanding 8,553,466 8,565,870 ========== ========== See Notes to Consolidated Financial Statements. </TABLE> 5
<TABLE> <CAPTION> ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (Dollars in Thousands) (Unaudited) --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> 2001 2000 ------- ------- OPERATING ACTIVITIES Net Income $ 4,488 $ 4,843 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 929 1,019 Provision for loan losses 1,216 649 Amortization of intangible assets 469 402 Other prepaids, deferrals and accruals, net 710 2,221 -------- -------- Total adjustments 3,324 4,291 -------- -------- Net cash provided by operating activities 7,812 9,134 -------- -------- INVESTING ACTIVITIES Proceeds from maturities of investment securities 46,394 4,150 Purchase of investment securities (22,757) (22,450) Proceeds from sales of securities available for sale 40 - Increase in loans (46,085) (46,815) Net cash received from acquisitions 17,911 - Purchase of premises and equipment (317) (1,711) -------- -------- Net cash used in investing activities (4,814) (66,826) -------- -------- FINANCING ACTIVITIES Net increase (decrease) in deposits 2,140 16,106 Net increase in repurchase agreements 2,269 4,249 Increase (decrease) in long-term borrowings 24,950 11,950 Increase (decrease) in other borrowings (22,686) (18,321) Dividends paid (2,060) (1,870) Purchase treasury stock - (3,430) -------- -------- Net cash provided by (used in) financing activities 4,613 8,684 -------- -------- Net increase (decrease) in cash and due from banks $ 7,611 $(49,008) Cash and due from banks at beginning of period 43,363 80,130 -------- -------- Cash and due from banks at end of period $ 50,974 $ 31,122 ======== ======== See Notes to Consolidated Financial statements. </TABLE> 6
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 six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year. NOTE 2. MERGERS AND ACQUISTIONS On April 13, 2001, ABC Bancorp issued 347,504 common shares and $3,229 million in cash to acquire Tri-County Bank. Tri-County Bank had approximately $49 million in assets at the date of acquisition and is headquartered in Trenton, Florida. The acquisition has been accounted for as a purchase and results of operations of Tri-County Bank since the date of acquisition are included in the consolidated financial statements. On June 29, 2001, Tri-County Bank purchased the Newberry, Florida branch of Republic Security Bank. The transaction included all consumer and business deposit accounts (approximately $20 million currently) and associated lines of credit, along with real property and certain fixed assets. On February 21, 2001, ABC Bancorp and Golden Isles Financial Holdings, St. Simons Island, Georgia entered into a definitive merger agreement whereby ABC would acquire 100% of the equity of Golden Isles in a merger that would be accounted for as a "purchase" transaction. On July 23, 2001, ABC Bancorp acquired Golden Isles Financial Holdings, Inc. and its wholly-owned Subsidiary, The First Bank of Brunswick by issuing 1,241,204 common shares and $10.2 million in cash. 7
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 are monitored continuously by the Company's Board-authorized Asset and Liability Management Committee, and 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 June 30, 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 six months ended June 30, 2001, total capital increased $8,323,000 to $88,979,000. Of this increase, $3,958,000 resulted from the purchase of Tri- County Bank, $2,428,000 from the retention of earnings (net of $2,060,000 dividends paid to shareholders), $272,000 for the accrual for grants of restricted shares as incentive to certain employees, and $1,665,000 in other comprehensive income, net of taxes. At June 30, 2001, ABC had binding commitments for capital expenditures of approximately $800,000. The Company anticipates that approximately $500,000 will be required for capital expenditures during the remainder of 2001. Additional expenditures may be required for other mergers and acquisitions. 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. 8
Results of Operations (Continued) 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, and on loans to states and municipalities. This tax-exempt income and its resultant yields are stated on a taxable-equivalent basis in order to be comparable to taxable investments and loans. Comparison of Statements of Income The net interest margin on a taxable-equivalent basis was 5.02% and 5.43% during the six months ended June 30, 2001 and 2000, respectively, a decrease of 41 basis points. These variances are attributable to fluctuations in the average rates charged and fees earned on loans and the average rates paid on deposit accounts. Several decreases in key interest rates by the Federal Reserve Bank during the six-month period also attributed to the decrease in net interest margin, because the rate of yield on certain variable-rate assets decreased immediately, whereas most interest-bearing liabilities are fixed-rate, and thus rates could not be decreased until maturity. Net interest income on a taxable-equivalent basis was $19.84 million as compared to $19.43 million during the six months ended June 30, 2001 and 2000, respectively, representing an increase of 2.12%. Of this increase, 1.85% related to the acquisition of Tri-County Bank. 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 $1,216,000 and $649,000 during the six months ended June 30, 2001 and 2000, respectively, an increase of $567,000, or 87.37%. 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 June 30, 2001 and December 31, 2000. As of June 30, 2001, non- performing assets were $6,116,000 compared to $6,106,000 in non-performing assets as of December 31, 2000. Management considers the allowance for loan losses as of June 30, 2001 adequate to cover potential losses in the loan portfolio. 9
Comparison of Statements of Income (Continued) Following is a comparison of noninterest income for the six months ended June 30, 2001 and 2000 (dollars in thousands). <TABLE> <CAPTION> Six Months Ended June 30, ---------------------------- 2001 2000 ---------- ---------- <S> <C> <C> Service charges on deposits $ 3,247 $ 2,982 Other service charges, commissions and fees 1,139 1,015 Other income 146 120 Loss on sale of securities (1) - ---------- ---------- Total noninterest income $ 4,531 $ 4,117 ========== ========== </TABLE> Total noninterest income for the six months ended June 30, 2001 was $414,000 higher than during the same period in 2000. Service charges on deposit accounts accounted for the majority of the increase at $265,000 of which $44,000 related to the acquisition of Tri-County Bank. Following is an analysis of noninterest expense for the six months ended June 30, 2001 and 2000 (dollars in thousands). <TABLE> <CAPTION> Six Months Ended June 30, -------------------------------- 2001 2000 ------------ ------------- <S> <C> <C> Salaries and employee benefits $ 8,965 $ 8,448 Occupancy and equipment expense 2,267 2,083 Other expense 4,891 4,815 ------- ------- Total noninterest expense $16,123 $15,346 ======= ======= </TABLE> Total noninterest expense for the six months ended June 30, 2001 was $777,000 higher than during the same period in 2000. Salaries and employee benefits for the six months ended June 30, 2001 were $517,000 or 6.12% higher than during the same period in 2000. The acquisition of Tri-County Bank accounted for $120,000 of the increase and the remaining $397,000 related to normal increases in salaries and employee benefits. 10
Comparison of Statements of Income (Continued) Following is a condensed summary of net income during the six months ended June 30, 2001 and 2000 (dollars in thousands). <TABLE> <CAPTION> Six Months Ended June 30, ---------------------------------- 2001 2000 -------------- --------------- <S> <C> <C> Net interest income $ 19,427 $ 19,043 Provision for loan losses 1,216 649 Other income 4,531 4,117 Other expense 16,123 15,346 ------------- -------------- Income before income taxes 6,619 7,165 Applicable income taxes 2,131 2,322 ------------- -------------- Net income $ 4,488 $ 4,843 ============= ============== </TABLE> Net income decreased $355,000 or 7.33% to $4,488,000 for the six months ended June 30, 2001 as compared to $4,843,000 for the six months ended June 30, 2000. Net interest income of ABC and its subsidiaries increased $384,000, the provision for loan losses increased by $567,000 and all other noninterest expense increased by $777,000. Comparison of Balance Sheets Total assets increased by $76.8 million, or 9.3% to $903 million at June 30, 2001 from $826.2 million at December 31, 2000. Approximately $66 million of this increase related to the acquisition of the Tri-County Bank and the Newberry branch. Total earning assets increased by $85.1 million, or 11.28%, to $839.8 million at June 30, 2001 from $754.7 million at December 31, 2000. Approximately $60 million of this increase related to the acquisition of the Tri-County Bank and the Newberry branch. Total loans, net of the allowance for loan losses, increased by $72 million, or 12.5% to $650 million at June 30, 2001 from $578 million at December 31, 2000. Approximately $28 million of this increase related to the acquisition of the Tri-County Bank and the Newberry branch. Total deposits increased by $63.9 million, or 9.39%, to $743.7 million at June 30, 2001 from $679.9 million at December 31, 2000. Approximately 12.72% and 13.96% of deposits were noninterest-bearing as of June 30, 2001 and December 31, 2000, respectively. Approximately $62 million of this increase related to the acquisition of the Tri-County Bank and the Newberry branch. 11
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. Part II. Other Information Item 4. Submission of Matters to a Vote of Securities Holders The Annual Meeting of the Shareholders of the Company was held on May 15, 2001. At this meeting proxies were solicited under Regulation 14a of the Securities and Exchange Act of 1934. Total shares outstanding, net of 790,982 shares held for the treasury amounted to 8,409,208. A total of 6,524,794 shares were represented by shareholders in attendance or by proxy. Director nominees were elected by a vote of 6,163,562 shares for, and 361,232 withholding authority, representing 73% in favor of the following directors elected to serve as Class I directors, until the annual meeting to be held in 2004. Johnny W. Floyd Daniel B. Jeter Mark D. Thomas 12
Item 4. Submission of Matters to a Vote of Securities Holders (Continued) Amend and restate Article V of the Company's Articles of Incorporation to increase the number of authorized shares of common stock thereunder to 30,000,000 was approved by a vote of 5,885,747 shares for, 623,231 against, and 15,617 abstaining, representing 70% in favor. Ratification of the appointment of Mauldin & Jenkins, Certified Public Accountants and Consultants, LLC, as the Company's independent accountants for the fiscal year ended December 31, 2000, by a vote of 6,497,255 for, 16,022 against, and 11,514 abstaining, representing 77% in favor. Item 6. Exhibits and Reports on Form 8-K There were no exhibits and reports filed on Form 8-K during the quarter ended June 30, 2001. 13
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 August 10, 2001 /s/ W. Edwin Lane, Jr. - ------------------------------------ -------------------------------------- Date W. EDWIN LANE, JR. EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (Duly authorized officer and principal financial/accounting officer) 14