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 SEPTEMBER 30, 1998
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.)
310 FIRST STREET, SE MOULTRIE, GA 31768
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(Address of principal executive offices)
(912) 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
--- ---
THERE WERE 7,244,865 SHARES OF COMMON STOCK OUTSTANDING AS OF
SEPTEMBER 30, 1998.
1
ABC BANCORP
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item Page
- ----- ----
1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income
& 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
PART II - OTHER INFORMATION
4. Submission of Matters to a Vote of
Securities Holders 16
6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
2
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
================================================================================
September 30 December 31
1998 1997
------------- -----------
Assets
Cash and due from banks $ 49,533 $ 36,261
Federal funds sold 970 890
Securities available for sale, at fair value 98,829 93,199
Securities held to maturity, at cost 19,584 30,020
Loans 498,428 490,244
Less allowance for loan losses 10,883 7,627
-------- --------
Loans, net 487,545 482,617
-------- --------
Premises and equipment, net 19,624 19,054
Other assets 23,869 29,845
-------- --------
$699,954 $691,886
======== ========
Liabilities and Stockholders' Equity
Deposits
Noninterest -bearing demand 82,001 $ 90,109
Interest-bearing demand 127,921 128,294
Savings 51,273 46,715
Time, $100,000 and over 85,515 85,937
Other time 262,544 249,656
-------- --------
Total deposits 609,254 600,711
Federal funds purchased & securities sold under
repurchase agreements 443 660
Other borrowings 13,971 15,400
Other liabilities 6,845 6,962
-------- --------
Total liabilities 630,513 623,733
-------- --------
Stockholders' equity
Common stock,par value $1; 15,000,000
shares authorized 7,524,718 shares issued 7,525 7,525
Surplus 29,677 29,677
Retained earnings 33,443 32,264
Accumulated other comprehensive income 445 242
-------- --------
71,090 69,708
Less cost of shares acquired for the treasury,
279,853 and 272,353 shares (1,649) (1,555)
-------- --------
Total stockholders' equity 69,441 68,153
-------- --------
$699,954 $691,886
======== ========
See Notes to Consolidated Financial Statements.
3
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Dollars in Thousands)
(Unaudited)
================================================================================================
1998 1997
---------- ----------
Interest income
Interest and fees on loans $ 13,247 $ 12,747
Interest on taxable securities 1,412 1,648
Interest on nontaxable securities 300 302
Interest on deposits in other banks 301 83
Interest on Federal funds sold 8 36
---------- ----------
15,268 14,816
---------- ----------
Interest expense
Interest on deposits 6,484 6,268
Interest on securities sold under repurchase
agreements and other borrowings 267 476
---------- ----------
6,751 6,744
---------- ----------
Net interest income 8,517 8,072
Provision for loan losses 819 610
---------- ----------
Net interest income after provision for loan losses 7,698 7,462
---------- ----------
Other income
Service charges on deposit accounts 1,397 1,382
Other service charges, commisions and fees 547 544
Other 24 8
---------- ----------
1,968 1,934
---------- ----------
Other expense
Salaries and employee benefits 3,996 3,800
Equipment expense 641 638
Occupancy expense 500 383
Amortization of intangible assets 257 239
Data processing fees 333 138
Directors fees 190 160
FDIC premiums 61 62
Other operating expenses 1,396 1,724
---------- ----------
7,374 7,144
---------- ----------
Income before income taxes 2,292 2,252
Applicable income taxes 790 724
---------- ----------
Net income $ 1,502 $ 1,528
---------- ----------
Other comprehensive income, net of tax:
Unrealized holding losses arising during period $ 228 $ 145
Comprehensive income $ 1,730 $ 1,673
========== ==========
Income per common share-Basic $ 0.21 $ 0.21
========== ==========
Income per common share-Diluted $ 0.21 $ 0.21
========== ==========
Average shares outstanding 7,252,365 7,252,365
========== ==========
See Notes to Consolidated Financial Statements.
4
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Dollars in Thousands)
(Unaudited)
====================================================================================================================
1998 1997
----------- ------------
Interest income
Interest and fees on loans $ 38,647 $ 37,159
Interest on taxable securities 4,677 5,158
Interest on nontaxable securities 903 899
Interest on deposits in other banks 604 144
Interest on Federal funds sold 39 173
---------- ----------
44,870 43,533
---------- ----------
Interest expense
Interest on deposits 19,120 17,973
Interest on securities sold under repurchase
agreements and other borrowings 828 1,365
---------- ----------
19,948 19,338
---------- ----------
Net interest income 24,922 24,195
Provision for loan losses 4,139 1,715
---------- ----------
Net interest income after provision for loan losses 20,783 22,480
---------- ----------
Other income
Service charges on deposit accounts 4,165 3,969
Other service charges, commisions and fees 1,603 1,439
Other 311 234
---------- ----------
6,079 5,642
---------- ----------
Other expense
Salaries and employee benefits 11,745 10,845
Equipment expense 1,810 1,692
Occupancy expense 1,387 1,212
Amortization of intangible assets 682 579
Data processing fees 504 360
Directors fees 519 464
FDIC premiums 178 194
Other operating expenses 4,877 4,674
---------- ----------
21,702 20,020
---------- ----------
Income before income taxes 5,160 8,102
Applicable income taxes 1,805 2,691
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Net income $ 3,355 $ 5,411
---------- ----------
Other comprehensive income, net of tax:
Unrealized holding gains arising during period $ 203 $ 188
Comprehensive income $ 3,558 $ 5,599
========== ==========
Income per common share-Basic $ 0.46 $ 0.75
========== ==========
Income per common share-Diluted $ 0.46 $ 0.75
========== ==========
Average shares outstanding 7,252,365 7,252,365
========== ==========
See Notes to Consolidated Financial Statements.
5
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
==================================================================================================================
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,355 $ 5,411
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation $ 1,513 $ 1,050
Provision for loan losses 4,139 1,715
Amortization of intangible assets 682 579
Other prepaids, deferrals and accruals, net 5,100 7,635
-------- --------
Total adjustments 11,434 10,979
-------- --------
Net cash provided by operating activities 14,789 16,390
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities 55,041 15,855
Purchase of investment securities (49,955) (16,238)
Proceeds from sales of securities available for sale 0 6,365
(Increase)decrease in Federal funds sold (80) 6,060
(Increase) decrease in loans (9,067) (27,603)
Purchase of premises and equipment (2,084) (3,080)
Net cash received from acquisition of deposits 0 16,398
-------- --------
Net cash used in investing activities (6,145) (2,243)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 8,543 (21,748)
Net increase (decrease) in repurchase agreements (217) 135
Increase (decrease) in other borrowings (1,429) (3,150)
Dividends paid (2,175) (1,942)
Proceeds from exercise of stock options 0 109
Purchase of fractional shares 0 (6)
Purchase treasury stock (94)
-------- --------
Net cash provided by (used in) financing activities 4,628 (26,602)
-------- --------
Net increase (decrease) in cash and due from banks $ 13,272 $(12,455)
Cash and due from banks at beginning of period 36,261 42,901
-------- --------
Cash and due from banks at end of period $ 49,533 $ 30,446
======== ========
See Notes to Consolidated Financial Statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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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, 1997. The results of operations for the nine
months ended September 30, 1998 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 September 30, 1998 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 September 30, 1998, the Company's
and the Banks' capital asset ratios were considered adequate based on guidelines
established by regulatory authorities. During the nine months ended September
30, 1998, total capital increased $1,288,000 to $69,441,000. This increase in
capital resulted from the retention of net earnings of $1,180,000 (after
deducting dividends to shareholders of $2,175,000), an increase of $202,000 in
unrealized gains on securities available for sale, net of taxes, less $94,000
for the purchase of 7,500 shares acquired for the treasury.
As of September 30, 1998, the Company had binding commitments for capital
expenditures totaling $300,000. The Company anticipates that approximately
$1,000,000 will be required for capital expenditures during the remainder of
1998. 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
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 Douglas branch is now
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 was 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.
On August 31, 1997, CSB acquired 100% of the equity of Irwin Bankcorp, Inc.,
Ocilla, Georgia. The acquisition was accounted for as a pooling of interests.
Irwin had total assets of approximately $38 million, loans of approximately $17
million, deposits of approximately $31 million and equity of approximately $6
million. Irwin's wholly-owned subsidiary, The Bank of Ocilla, also became a
branch of CSB.
YEAR 2000 STATUS
The Company is actively engaged in remediating potential Year 2000 technology
problems. All items were inventoried and vendors contacted regarding Year 2000
readiness of their products. The inventory included computer equipment and
software as well as other items which could contain embedded date chips.
Renovation plans for non-compliant items were developed. The Company is
currently in the process of testing. It is anticipated that all testing and
implementation of compliant technology items will be completed by June, 1999.
The Company's and subsidiaries' Boards of Directors are updated on a regular
basis on the status of the project. The Company estimates total Year 2000
project costs will approximate $500,000 of which $224,000 has been spent through
September 30, 1998. Year 2000 expenditures are not expected to have a material
impact on the company's earnings, financial position or cash flows.
Additionally, the status of major customers and vendors is being reviewed to
minimize the risks to the Company.
9
The impact of Year 2000 noncompliance by major customers and vendors cannot be
accurately projected at this time. ABC Bancorp is in the process of developing
contingency plans should there be system failures due to this problem. The
Company anticipates adoption of contingency plans by December 31, 1998.
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 5.33% and 5.30% during the nine months ended
September 30, 1998 and 1997, respectively, an increase of 3 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 $25.5 million as
compared to $24.7 million during the nine months ended September 30, 1998 and
1997, respectively, representing an increase of 3.2%.
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 $4,139,000 and $1,715,000 during the nine months ended September 30,
1998 and 1997, respectively. Adverse weather conditions during the previous
several months in most of the Company's market areas had an adverse impact on
some large loans in the Company's portfolio. Management is carefully monitoring
the economic conditions, the collateral associated with selected loans and the
ability of the customers to repay specific loans in accordance with the
negotiated loan agreements.
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 2.18% and 1.56% of total loans outstanding
at September 30, 1998 and December 31, 1997. Management considers the allowance
for loan losses as of September 30, 1998 adequate to cover potential losses in
the loan portfolio.
11
Following is a comparison of noninterest income for the three and nine months
ended September 30, 1998 and 1997 (dollars in thousands).
Three Months Ended
------------------
September 30, 1998 September 30, 1997
------------------ ------------------
Service charges on deposits $1,397 $1,382
Other service charges,
commissions & fees 547 544
Other income 24 8
------ ------
TOTAL NONINTEREST INCOME $1,968 $1,934
====== ======
Nine Months Ended
-----------------
September 30, 1998 September 30, 1997
------------------ ------------------
Service charges on deposits $4,165 $3,969
Other service charges,
commissions & fees 1,603 1,439
Other income 311 234
------ ------
TOTAL NONINTEREST INCOME $6,079 $5,642
====== ======
Total noninterest income for the nine months ended September 30, 1998 was
$437,000 higher than during the same period in 1997.
Following is an analysis of noninterest expense for the three and nine months
ended September 30, 1998 and 1997 (dollars in thousands).
Three Months Ended
------------------
September 30,1998 September 30, 1997
----------------- ------------------
Salaries and employee benefits $3,996 3,800
Occupancy and equipment expense 1,141 1,021
Deposit Insurance Premium 61 62
Data processing fees 333 138
Other expense 1,843 2,123
------ ------
TOTAL NONINTEREST EXPENSE $7,374 $7,144
====== ======
12
Nine Months Ended
-----------------
September 30, 1998 September 30, 1997
------------------ ------------------
Salaries and employee benefits $11,745 10,845
Occupancy and equipment expense 3,197 2,904
Deposit Insurance Premium 178 194
Data processing fees 504 360
Other expense 6,078 5,717
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TOTAL NONINTEREST EXPENSE $21,702 $20,020
======= =======
Total noninterest expense for the nine months ended September 30, 1998 was
$1,682,000 higher than during the same period in 1997.
Salaries and employee benefits for the nine months ended September 30, 1998,
were $900,000 higher than during the same period in 1997. The increase in
salaries and employee benefits resulted from normal increases in salaries and
bonuses and salaries and benefits for the employees of the Douglas branch of
Citizens Security Bank, which expenses are only included for approximately three
months in the operation for the nine months ended September 30, 1997.
Deposit insurance premiums for the nine months ended September 30, 1998 was
$16,000 lower than during the same period in 1997.
Data processing fees for the nine months ended September 30, 1998 was $144,000
higher than during the same period in 1997. Other operating expense for the
nine months ended September 30, 1998 increased $361,000 as compared to the same
period in 1997.
13
Following is a condensed summary of net income during the three and nine
months ended September 30, 1998 and 1997 (dollars in thousands).
Three Months Ended
------------------
September 30, 1998 September 30, 1997
------------------ ------------------
Net interest income $8,517 $8,072
Provision for loan losses 819 610
Other income 1,968 1,934
Other expense 7,374 7,144
------ ------
Income before income
taxes 2,292 2,252
Applicable income taxes 790 724
------ ------
NET INCOME $1,502 $1,528
====== ======
Nine Months Ended
-----------------
September 30, 1998 September 30, 1997
------------------ ------------------
Net interest income $24,922 $24,195
Provision for loan losses 4,139 1,715
Other income 6,079 5,642
Other expense 21,702 20,020
------- -------
Income before income
taxes 5,160 8,102
Applicable income taxes 1,805 2,691
------- -------
Net income $ 3,355 $ 5,411
======= =======
Net income decreased $2,056,000 or 38.0% to $3,355,000 for the nine months
ended September 30, 1998 as compared to $5,411,000 for the nine months ended
September 30, 1997. Net interest income of ABC and its subsidiaries increased
$727,000, offset by an increase in provision for loan losses of $2,424,000 and
an increase in all other noninterest expense of $1,682,000. Net income for the
nine months ended September 30, 1998 was severely impacted by the increases in
the provision for loan losses in the amount of $2,424,000 as compared with the
amount provided for the same period in 1997.
14
COMPARISON OF BALANCE SHEETS
Total assets increased by $8.1 million, or 1.17%, to $699.95 million at
September 30, 1998 from $691.9 million at December 31, 1997.
Total earning assets increased by $24.9 million or 4.04%, to $641.6 million at
September 30, 1998 from $616.6 million at December 31, 1997.
Total loans, net of the allowance for loan losses, increased by $4.9 million,
or 1.02%, to $487.5 million at September 30, 1998 from $482.6 million at
December 31, 1997.
Total deposits increased by $8.5 million, or 1.42%, to $609.3 million at
September 30, 1998 from $600.7 million at December 31, 1997. Approximately
13.46% and 15.00% of deposits were noninterest-bearing as of September 30, 1998
and December 31, 1997, respectively.
FORWARD-LOOKING STATEMENTS
This document contains statements that constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The words
"believe", "estimate", "expect", "intend", "anticipate" and similar expressions
and variations thereof identify certain of such forward-looking statements,
which speak only as of the dates which they were made. The Company undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events, or otherwise. Users are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those indicated in the forward-looking statements as a
result of various factors. Users are therefore cautioned not to place undue
reliance on these forward-looking statements.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, credit risk and liquidity risk. The company has little or no risk
related to trading accounts, commodities or foreign exchange. Interest rate risk
is the exposure of a banking organization's financial condition and earnings
ability to adverse movements in interest rates. The Company has analyzed the
assumed market value risk and earnings risk inherent in its interest rate
sensitive instruments related to interest-rate swings of 200 basis points, both
above and below current levels (rate shock analysis). The Company's overall
interest rate risk was less than 5.50% of net interest income subjected to
rising and falling rates of 200 basis points. Earnings and fair value estimates
are subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. There have been no
significant changes in the Company's market risk exposure since December 31,
1997.
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 September 30, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
There were no exhibits and reports filed on Form 8-K during the
quarter ended September 30, 1998.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
Undersigned thereunto duly authorized:
ABC BANCORP
November 9, 1998 /s/ W. Edwin Lane, Jr.
______________________ _____________________________________
DATE W. EDWIN LANE, JR.
EXECUTIVE VICE PRESIDENT &
CHIEF FINANCIAL OFFICER
(Duly authorized officer and principal
financial/accounting officer)
17