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, 1997 -------------- 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.) 310 FIRST STREET, 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 6,745,331 SHARES OF COMMON STOCK OUTSTANDING AS OF JUNE 30, 1997. 1 ABC BANCORP QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item Page - ---- ---- 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of 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 PART II - OTHER INFORMATION 3. Submission of Matters to a Vote of Securities Holders 16 6. Exhibits and Reports on Form 8-K 17 SIGNATURE 18 2 ABC BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) (UNAUDITED) ----------------------------------------------------------------------------------------------- Jun 30 Dec 31 1997 1996 ------------ ------------ Assets Cash and due from banks $ 27,371 $ 40,894 Federal funds sold 581 5,120 Securities available for sale, at fair value 81,368 86,148 Securities held to maturity, at cost 31,835 31,990 Loans 467,180 438,390 Less allowance for loan losses 6,915 6,873 Loans, net 460,265 431,517 -------- -------- Premises and equipment, net 17,153 15,640 Other assets 23,894 23,723 -------- -------- $642,467 $635,032 ======== ======== Liabilities and Stockholders' Equity Deposits Noninterest-bearing demand $ 73,029 $ 81,448 Interest-bearing demand 109,171 116,777 Savings 42,218 43,332 Time, $100,000 and over 83,086 78,998 Other time 233,201 225,183 -------- -------- Total deposits 540,705 545,738 Federal funds purchased & securities sold under repurchase agreements 4,116 997 Other borrowings 30,750 24,200 Other liabilities 6,758 6,428 -------- -------- Total liabilities 582,329 577,363 -------- -------- Stockholders' equity Common stock,par value $1; 15,000,000 shares authorized 7,017,684 shares issued, respectively 7,018 7,018 Surplus 28,062 28,062 Retained earnings 26,627 24,203 Unrealized gains (losses) on securities available for sale, net of taxes (14) (59) -------- -------- 61,693 59,224 Less cost of 272,353 shares acquired for the treasury (1,555) (1,555) -------- -------- Total stockholders' equity 60,138 57,669 -------- -------- $642,467 $635,032 ======== ======== See Notes to Consolidated Financial Statements. 3 ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (DOLLARS IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------------------------- 1997 1996 ------------ ------------ Interest income Interest and fees on loans $11,973 $ 9,184 Interest on taxable securities 1,540 1,192 Interest on nontaxable securities 274 221 Interest on deposits in other banks 14 0 Interest on Federal funds sold 15 254 ------- -------- 13,816 10,851 ------- -------- Interest expense Interest on deposits 5,637 4,420 Interest on securities sold under repurchase agreements and other borrowings 513 117 ------- -------- 6,150 4,537 ------- -------- Net interest income 7,666 6,314 Provision for loan losses 501 335 ------- -------- Net interest income after provision for loan losses 7,165 5,979 ------- -------- Other income Service charges on deposit accounts 1,275 859 Other service charges, commissions and fees 418 390 Other 154 69 ------- -------- 1,847 1,318 ------- -------- Other expense Salaries and employee benefits 3,320 2,419 Equipment expense 512 358 Occupancy expense 390 297 Amortization of intangible assets 172 90 Data processing fees 82 166 Directors fees 142 113 FDIC premiums 64 30 Other operating expenses 1,413 1,025 ------- -------- 6,095 4,498 ------- -------- Income before income taxes 2,917 2,799 Applicable income taxes 1,016 904 ------- -------- Net income $ 1,901 $ 1,895 ======= ======== Income per common share $ 0.28 $ 0.30 ======= ======== Average shares outstanding 6,745,331 6,297,749 ========= ========= See Notes to Consolidated Financial Statements. 4 ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (DOLLARS IN THOUSANDS) (UNAUDITED) ------------------------------------------------------------------------------------------------------ 1997 1996 ------------ ------------ Interest income Interest and fees on loans $23,596 $17,467 Interest on taxable securities 3,049 2,336 Interest on nontaxable securities 546 409 Interest on deposits in other banks 61 3 Interest on Federal funds sold 60 733 ------- ------- 27,312 20,948 ------- ------- Interest expense Interest on deposits 11,126 8,798 Interest on securities sold under repurchase agreements and other borrowings 889 213 ------- ------- 12,015 9,011 ------- ------- Net interest income 15,297 11,937 Provision for loan losses 1,085 583 ------- ------- Net interest income after provision for loan losses 14,212 11,354 ------- ------- Other income Service charges on deposit accounts 2,500 1,826 Other service charges, commisions and fees 895 706 Other 188 119 ------- ------- 3,583 2,651 ------- ------- Other expense Salaries and employee benefits 6,723 4,699 Equipment expense 1,043 679 Occupancy expense 777 602 Amortization of intangible assets 340 169 Data processing fees 174 314 Directors fees 287 203 FDIC premiums 126 58 Other operating expenses 2,797 1,972 ------- ------- 12,267 8,696 ------- ------- Income before income taxes 5,528 5,309 Applicable income taxes 1,895 1,739 ------- ------- Net income $ 3,633 $ 3,570 ======= ======= Income per common share $ 0.54 $ 0.57 ======= ======= Average shares outstanding 6,745,331 6,270,121 ========= ========= See Notes to Consolidated Financial Statements. 5 ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (DOLLARS IN THOUSANDS) (UNAUDITED) - --------------------------------------------------------------------------------------------------- 1997 1996 ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,633 $ 3,570 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 827 598 Provision for loan losses 1,085 583 Amortization of intangible assets 340 169 Other prepaids, deferrals and accruals, net (217) 959 -------- -------- Total adjustments 2,035 2,309 -------- -------- Net cash provided by operating activities 5,668 5,879 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities 867 14,907 Purchase of investment securities (1,200) (22,991) Proceeds from sales of securities available for sale 5,354 2,130 (Increase)decrease in Federal funds sold 4,539 42,325 (Increase) decrease in loans (29,833) (38,032) Purchase of premises and equipment (2,340) (724) Merger accounted for as a purchase -- (3,947) -------- -------- Net cash provided by (used in) investing activities (22,613) (6,332) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits (5,033) (12,611) Net increase (decrease) in repurchase agreements 3,119 (7,086) Increase (decrease) in short-term borrowings 6,550 17,395 Proceeds from sale of stock of pooled subsidiary -- -- Dividends paid (1,214) (676) -------- -------- Net cash provided by financing activities 3,422 (2,978) -------- -------- Net decrease in cash and due from banks $(13,523) $ (3,431) Cash and due from banks at beginning of period 40,894 29,841 -------- -------- Cash and due from banks at end of period $ 27,371 $ 26,410 ======== ======== See Notes to Consolidated Financial Statements. 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. All per share amounts have been adjusted to reflect the 5-for-4 stock split effected in the form of a 25% stock dividend on shares outstanding as of April 15, 1997. 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, 1996. The results of operations for the six months ended June 30, 1997 are not necessarily indicative of the results to be expected for the full year. 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 (Federal funds sold) 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 Banks' liquidity ratios at June 30, 1997 were considered satisfactory. At that date, the Banks' Federal funds sold 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. At June 30, 1997, the Company's and the Banks' capital asset ratios were considered adequate based on guidelines established by regulatory authorities. During the six months ended June 30, 1997, total capital increased $2.5 million to $60.2 million. This increase in capital resulted from the retention of net earnings of $2.5 million (after deducting dividends to shareholders of $1.2 million) and an increase of $.05 million in unrealized gains on securities available for sale, net of taxes. At June 30, 1997, ABC had binding commitments for capital expenditures of approximately $400,000. The Company anticipates that approximately $1,000,000 will be required for capital expenditures during the remainder of 1997. Additional expenditures may be required for other mergers and acquisitions. No additional mergers or acquisitions requiring cash are being negotiated at present. 8 MERGERS AND ACQUISITIONS The results of operations for the six months ended June 30, 1997 and 1996 include the operations of the five wholly-owned subsidiary banks held prior to 1996 and the operations of Central Bankshares, Inc., First National Financial Corporation, and M & F Financial Corporation, which were acquired in 1996 in transactions that were accounted for as poolings of interests. The results of operations for the six months ended June 30,1997 also include the operations of Southland Bancorporation ("Southland"), acquired June 21, 1996, which transaction was accounted for as a purchase. On July 17, 1997, the Company purchased the assets and assumed the liabilities of the Douglas, Georgia banking center of NationsBank. Total assets of $29.3 million were included in the transaction, with loans totaling $7.3 million. Total deposits of $29.3 million were assumed by ABC. The office will be operated as an extension of Citizens Security Bank (formerly The Citizens Bank of Tifton), the Company's wholly-owned subsidiary in Tifton, Georgia ("CSB"). The premium paid upon consummation of this transaction was $3.5 million, and will be recorded as an intangible asset on the books of CSB. The Company injected $4.2 million additional capital into CSB in connection with this transaction. ABC and Irwin Bankcorp, Inc., Ocilla, Georgia, have entered into a definitive merger agreement under which CSB will acquire 100% of the equity of Irwin. Irwin currently has total assets of approximately $38 million, loans of approximately $17 million, deposits of approximately $31 million and equity of approximately $5 million. Irwin's wholly-owned subsidiary, The Bank of Ocilla, will also become an extension of CSB. This transaction is expected to be completed during August, 1997. 9 NAME CHANGE On July 18, 1997, ABC's subsidiary in Tifton, Georgia, changed its name from The Citizens Bank of Tifton to Citizens Security Bank. 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 was 5.35% and 5.40% during the three months ended June 30, 1997 and 1996, respectively, a decrease of 5 basis points. The net interest margin was 5.43% and 5.31% during the six months ended June 30, 1997 and 1996, respectively, an increase of 12 basis points. These variances are primarily attributable to fluctuations in the average rates charged and fees earned on loans. Net interest income on a taxable-equivalent basis was $7.8 million as compared to $6.4 million during the three months ended June 30, 1997 and 1996, respectively, representing an increase of 21.9%. Net interest income on a taxable-equivalent basis was $15.6 million as compared to $12.1 million during the six months ended June 30, 1997 and 1996, respectively, representing an increase of 28.2%. The net interest income on a taxable-equivalent basis during the six months ended June 30, 1997, includes approximately $2.8 million attributable to Southland. 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 $501,000 and $335,000 during the three months ended June 30, 1997 and 1996 and $1,085,000 and $583,000 during the six months ended June 30, 1997 and 1996, respectively. The provision for loan losses during the six months ended June 30, 1997, includes approximately $175,000 attributable to Southland. Following is a comparison of noninterest income for the three and six months ended June 30, 1997 and 1996 (dollars in thousands). Three Months Ended -------------------- June 1997 June 1996 --------- --------- Service charges on deposits $1,275 $ 859 Other service charges, commissions & fees 418 390 Other income 154 69 ------ ------ TOTAL NONINTEREST INCOME $1,847 $1,318 ====== ====== 11 Six Months Ended -------------------- June 1997 June 1996 --------- --------- Service charges on deposits $2,500 $1,826 Other service charges, commissions & fees 895 706 Other income 188 119 ------ ------ TOTAL NONINTEREST INCOME $3,583 $2,651 ====== ====== Total noninterest income for the six months ended June 30, 1997 was $932,000 higher than during the same period in 1996. Total noninterest income for the six months ended June 30, 1997 includes approximately $658,000 attributable to Southland. Following is an analysis of noninterest expense for the three and six months ended June 30, 1997 and 1996 (dollars in thousands). Three Months Ended --------------------------- June 30,1997 June 30, 1996 ------------ ------------- Salaries and employee benefits $3,320 $2,419 Occupancy and equipment expense 902 655 Deposit insurance premium 64 30 Data processing fees 82 166 Other expense 1,727 1,228 ------ ------ TOTAL NONINTEREST EXPENSE $6,095 $4,498 ====== ====== Six Months Ended ---------------------------- June 30,1997 June 30, 1996 ------------ ------------- Salaries and employee benefits $ 6,723 $4,699 Occupancy and equipment expense 1,820 1,281 Deposit insurance premium 126 58 Data processing fees 174 314 Other expense 3,424 2,344 ------- ------ TOTAL NONINTEREST EXPENSE $12,267 $8,696 ======= ====== 12 Total noninterest expense for the six months ended June 30, 1997 was $ 3,571,000 higher than during the same period in 1996. Total noninterest expense for the six months ended June 30, 1997, includes approximately $2,019,000 attributable to Southland. Salaries and employee benefits for the six months ended June 30, 1997, was $2,024,000 higher than during the same period in 1996. The remaining increase in salaries and employee benefits resulted from normal increases in salaries and bonuses and the addition of several employees by the parent company, including three senior executives. Deposit insurance premiums for the six months ended June 30, 1997 was $68,000 higher than during the same period in 1996. Data processing fees for the six months ended June 30, 1997 were $140,000 lower than during the same period in 1996. Other operating expense for the six months ended June 30, 1997 increased $1,080,000 as compared to the same period in 1996. Following is a condensed summary of net income during the three and six months ended June 30, 1997 and 1996 (dollars in thousands). Three Months Ended ---------------------------- June 30,1997 June 30, 1996 ------------ ------------- Net interest income $7,666 $6,314 Provision for loan losses 501 335 Other income 1,847 1,318 Other expense 6,095 4,498 ------ ------ Income before income taxes 2,917 2,799 Applicable income taxes 1,016 904 ------ ------ NET INCOME $1,901 $1,895 ====== ====== 13 Six Months Ended ---------------------------- June 30,1997 June 30, 1996 ------------ ------------- Net interest income $15,297 $11,937 Provision for loan losses 1,085 583 Other income 3,583 2,651 Other expense 12,267 8,696 ------- ------- Income before income taxes $ 5,528 $ 5,309 Applicable income taxes 1,895 1,739 ------- ------- NET INCOME $ 3,633 $ 3,570 ======= ======= Net income increased $63,000 or 1.76% to $3,633,000 for the six months ended June 30, 1997 as compared to $3,570,000 for the six months ended June 30, 1996. Net interest income of ABC and its subsidiaries increased 3,360,000, offset by an increase in provision for loan losses of $502,000 and an increase in all other net noninterest expense of $3,571,000. 14 COMPARISON OF BALANCE SHEETS Total assets increased by $7.4 million, or 1.2%, to $642.5 million at June 30, 1997 from $635.0 million at December 31, 1996. Total earning assets increased by $18.3 million, or 3.25%, to $581.2 million at June 30, 1997 from $562.9 million at December 31, 1996. Total loans, net of the allowance for loan losses, increased by $28.7 million, or 6.7%, to $460.2 million at June 30, 1997 from $431.5 million at December 31, 1996. Total deposits decreased by $5.0 million, or 1.00%, to $540.7 million at June 30, 1997 from $545.7 million at December 31, 1996. Approximately 13.5% and 14.9% of deposits were noninterest-bearing as of June 30, 1997 and December 31, 1996, respectively. 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 1.5% and 1.6% of total loans outstanding at June 30, 1997 and December 31, 1996. Management considers the allowance for loan losses as of June 30, 1997 adequate to cover potential losses in the loan portfolio. 15 PART II. OTHER INFORMATION ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS The Annual Meeting of the Shareholders of the Company was held on April 15, 1997. At this meeting proxies were solicited under Regulation 14a of the Securities and Exchange Act of 1934. Total shares outstanding, net of 217,882 shares held for the treasury amounted to 5,396,561. A total of 3,133,490 shares were represented by shareholders in attendance or by proxy by a vote of 3,013,117 for, and 120,373 withholding authority, representing 96% in favor of the following directors elected to serve one year until the next annual meeting. Johnny W. Floyd J. Raymond Fulp Kenneth J. Hunnicutt Daniel B. Jeter Willard Lasseter Bobby B. Lindsey Hal L. Lynch John Mobley Eugene M. Vereen, Jr. Doyle Weltzbarker Sidney J. Wooten Henry C. Wortman Joe Parker retired as a director of the Company. By a vote of 2,793,001 for, 189,281 against, 30,835 abstaining, the shareholders approved an amendment to the Company by-laws to divide the Company's Board of Directors into three classes to serve staggered terms. By a vote of 2,977,050 for, 100,806 against, and 55,634 abstaining, the shareholders approved the adoption of the Company's 1997 incentive stock option plan for Kenneth J. Hunnicutt. By a vote of 2,958,499 for, 110,890 against, and 64,101 abstaining, the shareholders approved the adoption of the Company's Omnibus Stock Ownership and Long Term Incentive Plan for the officers and managerial employees. By a vote of 3,119,111 for, 3,293 against, and 11,086 abstaining, the shareholders approved the ratification of the appointment of Mauldin & Jenkins, LLC as the Company's independent accountants for the fiscal year ended December 31, 1996. 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits - None. B. ABC has filed a Report on Form 8-K, dated May 15, 1997, concerning the execution and delivery of an Agreement and Plan of Merger by ABC and Irwin Bankcorp, Inc., Ocilla, Georgia ("Irwin"). No financial information concerning ABC or Irwin was filed with such Form 8-K. 17 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 8/11/97 /s/ W. Edwin Lane, Jr. - ------------------- ----------------------------------- DATE W. EDWIN LANE, JR. EXECUTIVE VICE PRESIDENT & CHIEF FINANCIAL OFFICER (DULY AUTHORIZED OFFICER AND PRINCIPAL FINANCIAL/ACCOUNTING OFFICER) 18