Ameris Bancorp - 10-Q quarterly report FY

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2003

OR

Commission File Number:  0-16181

ABC BANCORP

(Exact name of registrant as specified in its charter)

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  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2) of the Exchange  Act). Yes   x    No  ¨

There were 9,783,854 shares of Common Stock outstanding as of September 30, 2003.

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ABC BANCORP

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2003

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ABC BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

(Unaudited)

See Notes to Consolidated Financial Statements.

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ABC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(Dollars in Thousands)

(Unaudited)

See Notes to Consolidated Financial Statements.

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ABC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(Dollars in Thousands)

(Unaudited)

See Notes to Consolidated Financial Statements.

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ABC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(Dollars in Thousands)

(Unaudited)

See Notes to Consolidated Financial statements.

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NOTE 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 accounting principles generally accepted in the United States of America 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 Annual Report on Form 10-K for the year ended December 31, 2002. The results of operations for the nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year.

Stock Compensation Plans

At September 30, 2003, the Company has two stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of 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. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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Accounting Standards

In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34”. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The disclosures required by FIN 45 improve the transparency of the financial statement information about the guarantor’s obligations and liquidity risks related to guarantees issued. This interpretation also incorporates, without change, the guidance in Financial Accounting Standards Board Interpretation No. 34 (“FIN 34”),“Disclosure of Indirect Guarantees of Indebtedness of Others”, which is being superceded. FIN 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company’s consolidated financial statements.

In May 2003, the Financial Accounting Standards Board issued Statement No. 150 (“Statement 150”), “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. Statement 150 requires certain financial instruments that have characteristics of both liabilities and equity to be classified as a liability on the balance sheet. Prior to the issuance of Statement 150, the Company classified trust preferred securities as a liability on the consolidated balance sheet and its related interest cost as interest expense on the consolidated statement of income, which is consistent with the requirements of Statement 150. Statement 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003. Statement 150 will be effected by reporting the cumulative effect of a change in accounting principle for contracts created before the issuance date and still existing at the beginning of that interim period. The adoption of Statement 150 did not have an impact on the Company’s consolidated financial statements.

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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 September 30, 2003 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 nine months ended September 30, 2003, total capital increased $3,850,000 to $111,334,000. Of this change, $4,718,000 resulted from the retention of earnings (net of $3,705,000 dividends declared to shareholders), plus $261,000 for the accrual for grants of restricted shares as incentive to certain employees, less a decrease of $959,000 in other comprehensive income, net of taxes and $170,000 for the purchase of treasury stock.

At September 30, 2003, ABC had no binding commitments for capital expenditures. The Company anticipates that approximately $500,000 will be required for capital expenditures during the remainder of 2003. 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.

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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 3.96% and 4.17% during the nine months ended September 30, 2003 and 2002, respectively, a decrease of 21 basis points. This decrease is mostly attributable to the current interest rate environment. The Federal Reserve Bank has systematically lowered the federal funds rate from 6.50% as of December 31, 2000 to 1.00% as of June 25, 2003. The prime interest rate, which is used by most banks as a guideline for pricing loans, tracks the federal funds rate and has, therefore, also decreased by 550 basis points over the last 30 months to 4.00% as of June 25, 2003 (a 44-year low). The resulting reduction in interest income because of the lower loan rates has outpaced the reduction in interest expense that is realized by lowering rates paid on maturing deposits and borrowings. Thus, the net interest margin has decreased.

Net interest income was $31.6 million as compared to $32.4 million during the nine months ended September 30, 2003 and 2002, respectively, representing a decrease of 2.47%

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 $3,043,000 and $3,957,000 during the nine months ended September 30, 2003 and 2002, respectively. Charge offs, net of recoveries, for the first nine months of 2003 amounted to $2,478,000 as compared to $4,093,000 for the nine months ended September 30, 2002.

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 ongoing reviews of all loans. A particular emphasis is placed on non-accruing, past due and other loans in which management has identified possible weaknesses, and that require special attention and/or action. Other factors used in determining the adequacy of the reserve are management’s judgment about factors affecting loan quality and assumptions about the local and national economy. All of these factors are considered and then grades are assigned to each loan. A calculation is then performed that adds a weighted percentage of the balance in each loan grade to additional specific reserves for certain loans based on management’s judgment. The result of this standard calculation determines the amount of reserve to be recorded. Management considers the amount of reserve determined by this process adequate to cover potential losses in the portfolio.

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The allowance for loan losses totaled $15.4 million and $14.9 million as of September 30, 2003 and December 31, 2002, respectively. The allowance for loan losses as a percentage of total loans was 1.81% and 1.78% as of September 30, 2003 and December 31, 2002, respectively.

Nonperforming assets were $9.2 million and $9.1 million as of September 30, 2003 and December 31, 2002, respectively. The ratio of nonperforming assets as a percentage of the loan loss reserve was 59.74% and 61.04% as of September 30, 2003 and December 31, 2002, respectively.

Following is a comparison of noninterest income for the nine months ended September 30, 2003 and 2002 (dollars in thousands).

Total noninterest income for the nine months ended September 30, 2003 was $991,000 lower than during the same period in 2002. This decrease is mainly reflected in the sale of securities, a decrease of $1,640,000 from the same period in 2002, offset by an increase of $443,000, which relates to a 5.9% increase in service charges on deposit accounts which is primarily attributable to a new program adopted by the Company that expanded the number of customers allowed to overdraw their deposit accounts and the number of overdrafts each customer could incur. The program also expanded the monitoring and control over overdrafts to ensure that the additional income generated would substantially exceed the anticipated increase in overdrafts charged off. The remaining $206,000 increase in noninterest income relates to normal changes from period to period.

Following is an analysis of noninterest expense for the nine months ended September 30, 2003 and 2002 (dollars in thousands).

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Total noninterest expense for the nine months ended September 30, 2003 was $1,935,000 lower than during the same period in 2002.

Salaries and employee benefits for the nine months ended September 30, 2003 were $252,000, or 1.74%, higher than during the same period in 2002. Amortization of intangible assets was $636,000 lower for the nine months ended September 30, 2003 as compared to September 30, 2002. This decrease resulted primarily from the adoption of SFAS 147 during the fourth quarter of 2002. Other expense for the nine months ended September 30, 2003 decreased $1,410,000 as compared to September 30, 2002. This decrease resulted from conversion expense associated with the data processing conversion of the First Bank of Brunswick in 2002 of $636,000 and the remaining $774,000 resulted mainly from controllable cost efficiencies initiated by the Company. Postage expense was reduced $70,000, supplies expense was reduced $99,000 and data processing expense decreased $69,000. Also affecting this variance was record retention expense which decreased $151,000 and the expense associated with disposing of foreclosed loan collateral decreased $200,000.

Following is a condensed summary of net income during the nine months ended September 30, 2003 and 2002 (dollars in thousands).

Net income increased $798,000, or 10.47%, to $8,423,000 for the nine months ended September 30, 2003 as compared to $7,625,000 for the nine months ended September 30, 2002. Net interest income of ABC and its subsidiaries decreased $740,000, the provision for loan losses decreased by $914,000 and all other noninterest expense decreased by $1,935,000.

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Comparison of Balance Sheets

Total assets decreased by $54 million, or 4.53%, to $1,138 million at September 30, 2003 from $1,192 million at December 31, 2002.

Total earning assets decreased by $51 million, or 4.65%, to $1,045 million at September 30, 2003 from $1,096 million at December 31, 2002.

Loans, net of the allowance for loan losses, increased by $18 million, or 2.20%, to $837 million at September 30, 2003 from $819 million at December 31, 2002.

Total deposits decreased by $50 million, or 5.46%, to $866 million at September 30, 2003 from $916 million at December 31, 2002. Approximately 14.20% and 14.41% of deposits were noninterest-bearing as of September 30, 2003 and December 31, 2002, respectively.

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 5.74% if rates rise gradually over the next year. On the other hand, the model projects net interest income to decrease 5.05% if rates decline over the next year.

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The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings under the Exchange Act.

Since the Evaluation Date, there have not been any significant changes in the Company’s internal controls or in other factors that could significantly affect such controls.

There were no matters submitted to a vote of securities holders during the quarter ended September 30, 2003.

  Exhibit 10.1 Executive Employment Agreement between ABC Bancorp and Jon S. Edwards dated as of July 1, 2003.

  Exhibit 31.1 Section 302 Certification

  Exhibit 31.2 Section 302 Certification

  Exhibit 32.1 Section 906 Certification

  Exhibit 32.2 Section 906 Certification

  None

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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:

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EXHIBIT INDEX

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