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, 1999
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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.)
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 ___
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THERE WERE 7,247,965 SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 31, 1999.
1
ABC BANCORP
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
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 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
3. Quantitative and Qualitative Disclosures about
Market Risk 14
PART II - OTHER INFORMATION
4. Submission of Matters to a Vote of
Securities Holders 15
6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
2
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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MARCH 31 DEC 31
1999 1998
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ASSETS
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Cash and due from banks $ 40,038 $ 56,475
Securities available for sale, at fair value 133,115 135,933
Securities held to maturity, at cost 16,731 18,613
Loans 485,827 477,194
Less allowance for loan losses 10,098 10,192
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Loans, net 475,729 467,002
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Premises and equipment, net 19,180 19,088
Other assets 21,425 27,835
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$ 706,218 $ 724,946
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits
Noninterest-bearing demand 90,481 99,957
Interest-bearing demand 137,529 132,527
Savings 57,647 59,719
Time, $100,000 and over 91,193 93,381
Other time 236,578 247,741
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Total deposits 613,428 633,325
Federal funds purchased & securities sold under
repurchase agreements 286 883
Other borrowings 13,970 11,850
Other liabilities 5,548 7,054
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Total liabilities 633,232 653,112
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STOCKHOLDERS' EQUITY
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Common stock, par value $1; 15,000,000 shares authorized
7,560,318 and 7,524,718 shares issued 7,560 7,525
Surplus 30,085 29,677
Retained earnings 37,689 36,280
Accumulated other comprehensive income 117 322
Unearned Comp-Grants (407) 0
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75,044 73,804
Less cost of shares acquired for the treasury, 312,353
and 305,153 shares (2,058) (1,970)
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Total stockholders' equity 72,986 71,834
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$ 706,218 $ 724,946
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
1999 1998
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INTEREST INCOME
Interest and fees on loans $ 12,095 $ 12,638
Interest on taxable securities 1,974 1,648
Interest on nontaxable securities 271 302
Interest on deposits in other banks 191 114
Interest on Federal funds sold - 20
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14,531 14,722
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INTEREST EXPENSE
Interest on deposits 5,700 6,253
Interest on securities sold under repurchase
agreements and other borrowings 211 318
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5,911 6,571
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Net interest income 8,620 8,151
PROVISION FOR LOAN LOSSES 532 2,628
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Net interest income after provision for loans losses 8,088 5,523
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OTHER INCOME
Service charges on deposit accounts 1,281 1,335
Other service charges, commissions and fees 654 585
Other 56 51
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1,991 1,971
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OTHER EXPENSE
Salaries and employee benefits 3,790 3,978
Equipment expense 657 579
Occupancy expense 452 426
Amortization of intangible assets 213 229
Data processing fees 135 89
Directors fees 163 161
FDIC premiums 62 62
Other operating expenses 1,407 1,616
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6,879 7,140
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Income before income taxes 3,200 354
Applicable income taxes 1,066 120
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NET INCOME $ 2,134 $ 234
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OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized holding gains (losses) arising during period
(205) (4)
COMPREHENSIVE INCOME $ 1,929 $ 230
========== ==========
Income per common share-Basic $ 0.29 $ 0.03
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Income per common share-Diluted $ 0.29 $ 0.03
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Average shares outstanding 7,238,974 7,252,365
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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, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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1999 1998
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OPERATING ACTIVITIES
Net Income $ 2,134 $ 234
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Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 556 483
Provision for loan losses 532 2,628
Amortization of intangible assets 213 229
Other prepaids, deferrals and accruals, net 4,833 5,638
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Total adjustments 6,134 8,978
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Net cash provided by operating activities 8,268 9,212
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INVESTING ACTIVITIES
Proceeds from maturities of investment securities 40,139 18,196
Purchase of investment securities (35,750) (25,750)
Proceeds from sales of securities available for sale - -
(Increase) decrease in Federal funds sold - (1,575)
(Increase) decrease in loans (9,259) (7,840)
Purchase of premises and equipment (648) (633)
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Net cash used in investing activities (5,518) (17,602)
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FINANCING ACTIVITIES
Net increase (decrease) in deposits (19,897) 6,087
Net increase (decrease) in repurchase agreements (597) (317)
Repay long-term borrowings (2,000) -
Increase (decrease) in other borrowings 4,120 5,622
Dividends paid (725) (725)
Purchase treasury stock (88) -
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Net cash provided by (used in) financing activities (19,187) 10,667
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Net increase (decrease) in cash and due from banks $ (16,437) $ 2,277
Cash and due from banks at beginning of period 56,475 36,261
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Cash and due from banks at end of period $ 40,038 $ 38,538
========== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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, 1998. The results of operations for the three months
ended March 31, 1999 are not necessarily indicative of the results to be
expected for the full year.
6
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 March 31, 1999 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. At March 31, 1999, the Company's and
the Banks' capital asset ratios were considered adequate based on guidelines
established by regulatory authorities. During the three months ended March 31,
1999, total capital increased $1,152,000 to $72,986,000. This increase in
capital resulted from the retention of net earnings of $1,409,000 (after
deducting dividends to shareholders of $725,000), less $88,000 for the purchase
of 7,200 shares acquired for the treasury, plus $36,000 accrual for award
grants, and an increase of approximately $205,000 in unrealized losses on
securities available for sale, net of taxes.
At March 31, 1999, ABC had no binding commitments for capital expenditures.
The Company anticipates that approximately $2,000,000 will be required for
capital expenditures during the remainder of 1999. Additional expenditures may
be required for other mergers and acquisitions. No additional mergers or
acquisitions requiring cash are being negotiated at present.
7
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. Expenses associated with The Company's
Year 2000 compliance efforts for fiscal year 1998 were approximately $300,000.
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.
The impact of Year 2000 noncompliance by major customers and vendors cannot
be accurately projected at this time. The Company has contracted with a third
party to provide consulting services relative to the development and testing of
a Year 2000 contingency plan as well as disaster recovery and business
continuity plans. It is anticipated that the Year 2000 contingency plan will be
completed and tested prior to June 30, 1999.
8
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.
9
COMPARISON OF STATEMENTS OF INCOME
The net interest margin was 5.39% and 5.27% during the three months ended
March 31, 1999 and 1998, 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 $8.8 million as
compared to $8.3 million during the three months ended March 31, 1999 and 1998,
respectively, representing an increase of 6.02%.
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 $532,000 and $2,628,000 during the three months ended March
31, 1999 and 1998, respectively. The decrease in the provision for loan losses
of $2,096,000, or 79.76%, is attributable to an unusually large provision being
recorded in the first quarter of 1998 in response to the deteriorating financial
condition of several large borrowers.
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 2.08% and 2.14% of total loans
outstanding at March 31, 1999 and December 31, 1998. As of March 31, 1999,
nonperforming assets were $8,858,000 compared to $9,382,000 in nonperforming
assets as of December 31, 1998. Management considers the allowance for loan
losses as of March 31, 1999 adequate to cover potential losses in the loan
portfolio.
10
Following is a comparison of noninterest income for the three months ended
March 31, 1999 and 1998 (dollars in thousands).
Three Months Ended
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March 31, 1999 March 31,1998
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Service charges on deposits $ 1,281 $ 1,335
Other service charges,
commissions & fees 654 585
Other income 56 51
TOTAL NONINTEREST INCOME $ 1,991 $ 1,971
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Total noninterest income for the three months ended March 31, 1999 was
$20,000 higher than during the same period in 1998.
Following is an analysis of noninterest expense for the three months ended
March, 1999 and 1998 (dollars in thousands).
Three Months Ended
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March 31,1999 March 31,1998
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Salaries and employee benefits $ 3,790 $ 3,978
Occupancy and equipment expense 1,109 1,005
Deposit Insurance Premium 62 62
Data processing fees 135 89
Other expense 1,783 2,006
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TOTAL NONINTEREST EXPENSE $ 6,879 $ 7,140
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Total noninterest expense for the three months ended March 31, 1999 was
$261,000 lower than during the same period in 1998.
Salaries and employee benefits for the three months ended March 31, 1999,
were $188,000 lower than during the same period in 1998.
Deposit insurance premiums for the three months ended March 31, 1999 was
the same during the same period in 1998.
11
Data processing fees for the three months ended March 31, 1999 were $46,000
higher than during the same period in 1998. Other operating expense for the
three months ended March 31, 1999 decreased $223,000 as compared to the same
period in 1998.
Following is a condensed summary of net income during the three months
ended March 31, 1999 and 1998 (dollars in thousands).
Three Months Ended
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March 31, 1999 March 31, 1998
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Net interest income $ 8,620 $ 8,151
Provision for loan losses 532 2,628
Other income 1,991 1,971
Other expense 6,879 7,140
Income before income taxes 3,200 354
Applicable income taxes 1,066 120
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NET INCOME $ 2,134 $ 234
======== ========
Net income increased $1,900,000 or 812% to $2,134,000 for the three months
ended March 31, 1999 as compared to $234,000 for the three months ended March
31, 1998. Net interest income of ABC and its subsidiaries increased $469,000,
the provision for loan losses decreased by $2,096,000 and all other noninterest
expense decreased by $261,000.
12
COMPARISON OF BALANCE SHEETS
Total assets decreased by $18.7 million, or 2.58%, to $706.22 million at
March 31, 1999 from $724.95 million at December 31, 1998.
Total earning assets increased by $3.92 million, or .6%, to $654.43 million
at March 31, 1999 from $650.51 million at December 31, 1998.
Total loans, net of the allowance for loan losses, increased by $8.73
million, or 1.87%, to $475.73 million at March 31, 1999 from $467 million at
December 31, 1998.
Total deposits decreased by $19.9 million, or 3.14%, to $613.43 million at
March 31, 1999 from $633.33 million at December 31, 1998. Approximately 14.75%
and 15.78% of deposits were noninterest-bearing as of March 31, 1999 and
December 31, 1998, respectively.
13
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 decrease .50% if rates rise
gradually over the next year. On the other hand, the model projects net interest
income to increase .52% if rates decline over the next year.
14
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, 1999.
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, 1999.
15
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
_______________________ ________________________________________
DATE W. EDWIN LANE, JR.
EXECUTIVE VICE PRESIDENT &
CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED OFFICER AND PRINCIPAL
FINANCIAL/ACCOUNTING OFFICER)
16