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, 2002
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-16181
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ABC BANCORP
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(Exact name of registrant as specified in its charter)
GEORGIA 58-1456434
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(State of incorporation) (IRS Employer ID No.)
24 SECOND AVE., SE MOULTRIE, GA 31768
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(Address of principal executive offices)
(229) 890-1111
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(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
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There were 9,878,679 shares of Common Stock outstanding as of March 31, 2002.
ABC BANCORP
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2002
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 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II - OTHER INFORMATION
4. Submission of Matters to a Vote of Securities Holders 11
6. Exhibits and Reports on Form 8-K 11
Signature 12
2
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
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Mar 31 Dec 31
2002 2001
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Assets
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Cash and due from banks $ 103,190 $ 157,475
Securities available for sale, at fair value 167,643 156,835
Federal funds sold 36 44
Loans 807,179 805,076
Less allowance for loan losses 14,468 14,944
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Loans, net 792,711 790,132
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Premises and equipment, net 27,111 26,821
Intangible assets 5,665 6,074
Goodwill 19,240 19,240
Other assets 22,778 20,265
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$1,138,374 $1,176,886
========== ==========
Liabilities and Stockholders' Equity
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Deposits
Noninterest-bearing demand 120,362 125,522
Interest-bearing demand 240,608 254,301
Savings 63,181 62,536
Time, $100,000 and over 150,746 156,562
Other time 318,798 332,235
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Total deposits 893,695 931,156
Federal funds purchased & securities sold under
agreements to repurchase 4,921 3,792
Other borrowings 93,989 95,293
Other liabilities 8,539 7,997
Trust preferred securities 34,500 34,500
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Total liabilities 1,035,644 1,072,738
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Stockholders' equity
- --------------------
Common stock, par value $1; 30,000,000 shares authorized;
10,790,369 shares issued 10,790 10,790
Capital surplus 45,616 45,616
Retained earnings 54,570 53,584
Accumulated other comprehensive income 115 1,034
Unearned compensation (540) (656)
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110,551 110,368
Less cost of shares acquired for the treasury, 911,690
and 790,982 shares (7,821) (6,220)
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Total stockholders' equity 102,730 104,148
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$1,138,374 $1,176,886
========== ==========
See Notes to Consolidated Financial Statements.
3
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Dollars in Thousands)
(Unaudited)
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2002 2001
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Interest income
Interest and fees on loans $ 16,464 $ 15,184
Interest on taxable securities 2,161 2,226
Interest on nontaxable securities 53 231
Interest on deposits in other banks 345 155
Interest on fed funds sold 12
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19,035 17,796
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Interest expense
Interest on deposits 5,877 7,341
Interest on fed funds purchased and securities
sold under agreements to repurchase 44 54
Interest on other borrowings 1,706 850
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7,627 8,245
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Net interest income 11,408 9,551
Provision for loan losses 959 493
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Net interest income after provision for loan losses 10,449 9,058
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Other income
Service charges on deposit accounts 2,241 1,577
Other service charges, commissions and fees 872 569
Other 107 30
Gain (Loss) on sale of securities 26 (1)
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3,246 2,175
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Other expense
Salaries and employee benefits 5,831 4,423
Equipment and occupancy expense 1,205 1,120
Other operating expenses 3,430 2,301
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10,466 7,844
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Income before income taxes 3,229 3,389
Applicable income taxes 1,057 1,091
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Net income $ 2,172 $ 2,298
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Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period, net of tax $ (919) $ 1,425
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Comprehensive income $ 1,253 $ 3,723
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Income per common share-Basic $ 0.22 $ 0.27
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Income per common share-Diluted $ 0.22 $ 0.27
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Average shares outstanding 9,814,710 8,398,150
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See Notes to Consolidated Financial Statements.
4
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Dollars in Thousands)
(Unaudited)
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2002 2001
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OPERATING ACTIVITIES
Net Income $ 2,172 $ 2,298
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Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 596 597
Provision for loan losses 959 493
Amortization of intangible assets 409 201
Other prepaids, deferrals and accruals, net (1,450) (190)
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Total adjustments 514 1,101
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Net cash provided by operating activities 2,686 3,399
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INVESTING ACTIVITIES
Proceeds from maturities of investment securities 26,320 26,157
Purchase of investment securities (39,468) (11,757)
Proceeds from sales of securities available for sale 1,015 40
Decrease in Federal funds sold 8 -
Increase in loans (3,538) (18,942)
Purchase of premises and equipment (886) (355)
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Net cash used in investing activities (16,549) (4,857)
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FINANCING ACTIVITIES
Net increase (decrease) in deposits (37,461) 8,597
Net increase in federal funds purchased and
securities sold under agreements to repurchase 1,129 1,284
Decrease in other borrowings (1,304) (9,886)
Dividends paid (1,185) (1,009)
Purchase treasury stock (1,601) -
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Net cash used in financing activities (40,422) (1,014)
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Net decrease in cash and due from banks $(54,285) $ (2,472)
Cash and due from banks at beginning of period 157,475 43,363
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Cash and due from banks at end of period $103,190 $ 40,891
======== ========
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 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, 2001. The results of
operations for the three months ended March 31, 2002 are not necessarily
indicative of the results to be expected for the full year.
NOTE 2. RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued two new
accounting standards: Statement of Financial Standards ("SFAS") No 141,
"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets."
SFAS No 141, which was effective immediately, requires that all business
combinations consummated after June 30, 2001 be accounted for by the purchase
method unless the combination was initiated on or prior to that date and it
meets the conditions to be accounted for by the pooling-of-interests method in
accordance with AFB Opinion No. 16, "Business Combinations." Under SFAS No. 142,
goodwill and intangible assets that management concludes has indefinite useful
lives will no longer be amortized, but will be subject to impairment tests
performed at least annually. The Company was required to adopt SFAS No. 142 on
January 1, 2002. Before June 30, 2002, the Company will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets.
Pending completion of this test the Company has not yet determined what effect
those tests will have on earnings and financial position of the Company.
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
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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 March 31, 2002 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, 2002, total capital decreased $1,418,000
to $102,730,000. Of this change, $986,000 resulted from the retention of
earnings (net of $1,185,000 dividends paid to shareholders), plus $116,000 for
the accrual for grants of restricted shares as incentive to certain employees,
less $919,000 in other comprehensive income, net of taxes, less $1,601,000 for
the purchase of Treasury Stock.
At March 31, 2002, ABC had binding commitments for capital expenditures
of approximately $250,000. The Company anticipates that approximately
$1,500,0000 will be required for capital expenditures during the remainder of
2002. 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.
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.
7
Comparison of Statements of Income
The net interest margin on a taxable-equivalent basis was 4.38% and
5.10% during the three months ended March 31, 2002 and 2001, respectively, a
decrease of 72 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 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 was $11.4 million as compared to $9.6 million
during the three months ended March 31, 2002 and 2001, respectively,
representing an increase of 18.75%. This increase of $1.8 million was
attributable to the acquisition of Tri-County Bank and Golden Isles which
contributed $1.8 million of net interest income for the period ended March 31,
2002.
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 $959,000 and $493,000 during the three months ended March
31, 2002 and 2001. Of the $466,000 increase in 2002, $165,000 is attributable to
replenishing the reserve for a loan charged off during the first quarter. Most
of the remaining increase is attributable to substantial loan growth on four
subsidiary banks.
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 totaled $14.5 million and $14.9 million
as of March 31, 2002 and December 31, 2001, respectively. The allowance for loan
losses as a percentage of total loans was 1.80% and 1.85% as of March 31, 2002
and December 31, 2001, respectively.
Non-performing assets were $12.6 million and $13.2 as of March 31, 2002
and December 31, 2001, respectively. The ratio of non-performing assets as a
percentage of the loan loss reserve was 86.9% and 88.6% as of March 31, 2002
and December 31, 2001, respectively.
Management considers the allowance for loan losses as of March 31, 2002
adequate to cover potential losses in the loan portfolio.
Following is a comparison of noninterest income for the three months
ended March 31, 2002 and 2001 (dollars in thousands).
8
Three Months Ended
March
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2002 2001
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Service charges on deposits $2,241 $1,577
Other service charges, commissions and fees 872 569
Other income 107 30
Gain (Loss) on sale of securities 26 -1
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Total noninterest income $3,246 $2,175
====== ======
Total noninterest income for the three months ended March 31, 2002 was
$1,071,000 higher than during the same period in 2001. Service charges on
deposit accounts accounted for the majority of the increase at $664,000 of which
$134,000 related to the acquisition of Tri-County Bank, and $161,000 related to
the acquisition of Golden Isles. Service charges on deposits increased $664,000.
Banks acquired after the first quarter of 2001 accounted for $295,000 of this
increase. Additionally insufficient fund charges on checking deposit accounts in
all other subsidiary banks increased $338,000 during the first quarter of 2002
compared to the same quarter last year. This increase is mostly attributable to
an increase in the per item charge for overdrafts. Other service charges,
commissions and fees increased because of enhanced income from the Company's
retail division, particularly mortgage financing. Of the $303,000 increase, 70%
or $212,000 was attributable to mortgage financing.
Following is an analysis of noninterest expense for the three months
ended March 31, 2002 and 2001 (dollars in thousands).
Three Months Ended
March
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2002 2001
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Salaries and employee benefits $ 5,831 $4,423
Occupancy and equipment expense 1,205 1,120
Other expense 3,430 2,301
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Total noninterest expense $10,466 $7,844
======= ======
Total noninterest expense for the three months ended March 31, 2002 was
$2,622,000 higher than during the same period in 2001.
Salaries and employee benefits for the three months ended March 31,
2002 were $1,408,000 or 31.83% higher than during the same period in 2001. The
acquisition of Tri-County Bank accounted for $216,000, the acquisition of Golden
Isles accounted for $658,000 of the increase and the remaining $534,000 related
to normal increases in salaries and employee benefits. Of the $1.1 million
increase in other expense $298,000 is attributable to an increase in
amortization expense as a result of acquisitions
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made during the last three quarters of 2001, $331,000 is attributable to other
expenses of the acquired banks, and $102,000 is attributable to systems
conversion expenses of the acquired banks.
Following is a condensed summary of net income during the three months
ended March 31, 2002 and 2001 (dollars in thousands).
Three Months Ended
March 31,
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2002 2001
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Net interest income $11,408 $9,551
Provision for loan losses 959 493
Other income 3,246 2,175
Other expense 10,466 7,844
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Income before income taxes 3,229 3,389
Applicable income taxes 1,057 1,091
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Net income $ 2,172 $2,298
======= ======
Net income decreased $126,000 or 5.48% to $2,172,000 for the three
months ended March 31, 2002 as compared to $2,298,000 for the three months ended
March 31, 2001. Net interest income of ABC and its subsidiaries increased
$1,857,000, the provision for loan losses increased by $466,000 and all other
noninterest expense increased by $2,622,000.
Comparison of Balance Sheets
Total assets decreased by $39 million, or 3.31% to $1,138 million at
March 31, 2002 from $1,177 million at December 31, 2001.
Total earning assets decreased by $23 million, or 2.15%, to $1,045
million at March 31, 2002 from $1,068 million at December 31, 2001.
Loans, net of the allowance for loan losses, increased by $3 million,
or .38% to $793 million at March 31, 2002 from $790 million at December 31,
2001.
Total deposits decreased by $37 million, or 3.97% to $894 million at
March 31, 2002 from $931 million at December 31, 2001. Approximately 13.42% and
13.53% of deposits were noninterest-bearing as of March 31, 2002 and December
31, 2001, respectively.
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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 9.15% if
rates rise gradually over the next year. On the other hand, the model projects
net interest income to decrease 10.90% if rates decline over the next year.
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, 2002.
Item 6. Exhibits and Reports on Form 8-K
There were no exhibits and reports filed on Form 8-K during the quarter
ended March 31, 2002.
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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:
ABC BANCORP
May 9, 2002 /s/ W. Edwin Lane, Jr.
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Date W. EDWIN LANE, JR.
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Duly authorized officer and principal
financial/accounting officer)
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