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, 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 7,252,365 shares of Common Stock outstanding as of September 30, 1997. 1 ABC BANCORP QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 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 16 Signature 17 2 ABC BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) ================================================================================ Sept 30 Dec 31 1997 1996 -------- -------- Assets - ------ Cash and due from banks $ 30,446 $ 42,901 Federal funds sold 2,560 8,620 Securities available for sale, at fair value 97,396 103,276 Securities held to maturity, at cost 32,206 31,990 Loans 486,081 452,844 Less allowance for loan losses 7,395 7,273 -------- -------- Loans, net 478,686 445,571 -------- -------- Premises and equipment, net 18,569 16,198 Other assets 25,548 24,618 -------- -------- $685,411 $673,174 -------- -------- Liabilities and Stockholders' Equity - ------------------------------------ Deposits Noninterest-bearing demand 78,277 $ 87,006 Interest-bearing demand 120,542 125,255 Savings 48,757 45,269 Time, $100,000 and over 85,910 82,535 Other time 249,443 237,840 -------- -------- Total deposits 582,929 577,905 Federal funds purchased & securities sold under repurchase agreements 1,132 997 Other borrowings 20,850 24,200 Other liabilities 13,770 7,102 -------- -------- Total liabilities 618,681 610,204 -------- -------- Stockholders' equity Common stock, par value $1; 15,000,000 shares authorized 7,524,718 shares issued, respectively 7,525 7,525 Surplus 29,677 29,574 Retained earnings 30,952 27,483 Unrealized gains (losses) on securities available for sale, net of taxes 131 (57) -------- -------- 68,285 64,525 Less cost of 272,353 shares acquired for the treasury (1,555) (1,555) -------- -------- Total stockholders' equity 66,730 62,970 -------- -------- $685,411 $673,174 ======== ======== See Notes to Consolidated Financial Statements. ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (Dollars in Thousands) (Unaudited) ============================================================================================== 1997 1996 ---------- ---------- Interest income Interest and fees on loans $ 12,747 $ 11,875 Interest on taxable securities 1,648 1,717 Interest on nontaxable securities 302 268 Interest on deposits in other banks 83 0 Interest on Federal funds sold 36 136 ---------- ---------- 14,816 13,996 ---------- ---------- Interest expense Interest on deposits 6,268 5,688 Interest on securities sold under repurchase agreements and other borrowings 476 618 ---------- ---------- 6,744 6,306 ---------- ---------- Net interest income 8,072 7,690 Provision for loan losses 610 459 ---------- ---------- Net interest income after provision for loan losses 7,462 7,231 ---------- ---------- Other income Service charges on deposit accounts 1,382 1,535 Other service charges, commissions and fees 544 220 Other 8 187 ---------- ---------- 1,934 1,942 ---------- ---------- Other expense Salaries and employee benefits 3,800 3,313 Equipment expense 638 574 Occupancy expense 383 375 Amortization of intangible assets 239 150 Data processing fees 138 777 Directors fees 160 143 FDIC premiums 62 36 Other operating expenses 1,724 1,031 ---------- ---------- 7,144 6,399 ---------- ---------- Income before income taxes 2,252 2,774 Applicable income taxes 724 923 ---------- ---------- Net income $ 1,528 $ 1,851 ========== ========== Income per common share $ 0.21 $ 0.26 ========== ========== Average shares outstanding 7,252,365 7,252,365 ========== ========== See Notes to Consolidated Financial Statements. 4 ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (Dollars in Thousands) (Unaudited) ============================================================================================= 1997 1996 ---------- ---------- Interest income Interest and fees on loans $ 37,159 $ 30,155 Interest on taxable securities 5,158 4,512 Interest on nontaxable securities 899 731 Interest on deposits in other banks 144 0 Interest on Federal funds sold 173 966 ---------- ---------- 43,533 36,364 ---------- ---------- Interest expense Interest on deposits 17,973 15,088 Interest on securities sold under repurchase agreements and other borrowings 1,365 831 ---------- ---------- 19,338 15,919 ---------- ---------- Net interest income 24,195 20,445 Provision for loan losses 1,715 1,072 ---------- ---------- Net interest income after provision for loan losses 22,480 19,373 ---------- ---------- Other income Service charges on deposit accounts 3,969 3,444 Other service charges, commissions and fees 1,439 926 Other 234 358 ---------- ---------- 5,642 4,728 ---------- ---------- Other expense Salaries and employee benefits 10,845 8,336 Equipment expense 1,692 1,265 Occupancy expense 1,212 1,032 Amortization of intangible assets 579 319 Data processing fees 360 1,134 Directors fees 464 363 FDIC premiums 194 93 Other operating expenses 4,674 3,118 ---------- ---------- 20,020 15,660 ---------- ---------- Income before income taxes 8,102 8,441 Applicable income taxes 2,691 2,733 ---------- ---------- Net income $ 5,411 $ 5,708 ========== ========== Income per common share $ 0.75 $ 0.82 ========== ========== Average shares outstanding 7,252,365 6,934,879 ========== ========== See Notes to Consolidated Financial Statements. 5 ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (Dollars in Thousands) (Unaudited) ==================================================================================== 1997 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,411 $ 5,708 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation $ 1,050 $ 986 Provision for loan losses 1,715 1,072 Amortization of intangible assets 551 319 Other prepaids, deferrals and accruals, net 7,654 (3,580) -------- -------- Total adjustments 10,970 (1,203) -------- -------- Net cash provided by operating activities 16,381 4,505 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities 15,855 31,806 Purchase of investment securities (16,238) (35,569) Proceeds from sales of securities available for sale 6,365 2,101 (Increase)decrease in Federal funds sold 6,060 44,785 (Increase) decrease in loans (34,830) (51,156) Purchase of premises and equipment (3,421) (2,363) Merger accounted for as a purchase (2,796) (3,947) -------- -------- Net cash provided by (used in) investing activities (29,005) (14,343) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 5,023 (20,276) Net increase (decrease) in repurchase agreements 135 Increase (decrease) in short-term borrowings (3,150) 30,794 Proceeds from sale of stock of pooled subsidiary Dividends paid (1,942) (1,179) Proceeds from exercise of stock options 109 Purchase of fractional shares (6) (6) -------- -------- Net cash provided by financing activities 169 9,333 -------- -------- Net decrease in cash and due from banks ($12,455) ($ 505) Cash and due from banks at beginning of period 42,901 32,236 -------- -------- Cash and due from banks at end of period $ 30,446 $ 31,731 ======== ======== 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 nine months ended September 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 September 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 September 30, 1997, 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, 1997, total capital increased $3.7 million to $66.7 million. This increase in capital resulted from the retention of net earnings of $3.5 million (after deducting dividends to shareholders of $1.9 million)and an increase of approximately $190,000 in unrealized gains on securities available for sale, net of taxes. At September 30, 1997, ABC had binding commitments for capital expenditures of approximately $360,000. The Company anticipates that approximately $900,000 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 nine months ended September 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 nine months ended September 30,1997 and 1996, 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. 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 an extension of CSB. 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 5.16% and 5.19% during the three months ended September 30, 1997 and 1996, respectively, a decrease of 3 basis points. The net interest margin was 5.30% and 5.23% during the nine months ended September 30, 1997 and 1996, respectively, an increase of 7 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 $8.2 million as compared to $7.8 million during the three months ended September 30, 1997 and 1996, respectively, representing an increase of 5.13%. Net interest income on a taxable-equivalent basis was $24.7 million as compared to $20.8 million during the nine months ended September 30, 1997 and 1996, respectively, representing an increase of 18.8%. The net interest income on a taxable-equivalent basis during the nine months ended September 30, 1997 and 1996, includes approximately $4.2 million and $1.4 million, respectively, 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 $610,000 and $459,000 during the three months ended September 30, 1997 and 1996 and $1,715,000 and $1,072,000 during the nine months ended September 30, 1997 and 1996, respectively. The provision for loan losses during the nine months ended September 30, 1997 and 1996, includes approximately $280,000 and $77,000, respectively, attributable to Southland. Following is a comparison of noninterest income for the three and nine months ended September 30, 1997 and 1996 (dollars in thousands). Three Months Ended ------------------ September 1997 September 1996 -------------- -------------- Service charges on deposits $1,382 $1,535 Other service charges, commissions & fees 544 220 Other income 8 187 ------- ------ Total noninterest income $1,934 $1,942 ====== ====== 11 Nine Months Ended ----------------- September 1997 September 1996 -------------- -------------- Service charges on deposits $3,969 $3,444 Other service charges, commissions & fees 1,439 926 Other income 234 358 ------ ------ Total noninterest income $5,642 $4,728 ====== ====== Total noninterest income for the nine months ended September 30, 1997 was $914,000 higher than during the same period in 1996. Total noninterest income for the nine months ended September 30, 1997 and 1996, includes approximately $954,000 and $443,000, respectively, attributable to Southland. Following is an analysis of noninterest expense for the three and nine months ended September 30, 1997 and 1996 (dollars in thousands). Three Months Ended ------------------ September 30, 1997 September 30, 1996 ----------------- ------------------ Salaries and employee benefits $ 3,800 $3,313 Occupancy and equipment expense 1,021 949 Deposit Insurance Premium 62 36 Data processing fees 138 777 Other expense 2,123 1,324 ------- ------ Total noninterest expense $ 7,144 $6,399 ======= ====== Nine Months Ended --------------------- September 30, 1997 September 30, 1996 ----------------- ------------------ Salaries and employee benefits $10,845 $8,336 Occupancy and equipment expense 2,904 2,297 Deposit insurance premium 194 93 Data processing fees 360 1,134 Other expense 5,717 3,800 ------- ------- Total noninterest expense $20,020 $15,660 ======= ======= 12 Total noninterest expense for the nine months ended September 30, 1997 was $4,360,000 higher than during the same period in 1996. Total noninterest expense for the nine months ended September 30, 1997 and 1996, includes approximately $3,320,000 and $1,160,000, respectively, attributable to Southland. Salaries and employee benefits for the nine months ended September 30, 1997, was $2,509,000 higher than during the same period in 1996. The 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 nine months ended September 30, 1997 was $101,000 higher than during the same period in 1996. Data processing fees for the nine months ended September 30, 1997 were $774,000 lower than during the same period in 1996. Other operating expense for the nine months ended September 30, 1997 increased $1,917,000 as compared to the same period in 1996. Following is a condensed summary of net income during the three and nine months ended September 30, 1997 and 1996 (dollars in thousands). Three Months Ended ------------------ September 30, 1997 September 30, 1996 ------------------ ------------------ Net interest income $8,072 7,690 Provision for loan losses 610 459 Other income 1,934 1,942 Other expense 7,144 6,399 ----- ----- Income before income taxes 2,252 2,774 Applicable income taxes 724 923 ----- ----- Net income $1,528 $1,851 13 Nine Months Ended ----------------- September 30, 1997 September 30, 1996 ------------------- ------------------ Net interest income $24,195 $20,445 Provision for loan losses 1,715 1,072 Other income 5,642 4,728 Other expense 20,020 15,660 ------ ------ Income before income taxes 8,102 8,441 Applicable income taxes 2,691 2,733 Net income $5,411 $ 5,708 ====== ======= Net income decreased $297,000 or 5.2% to $5,411,000 for the nine months ended September 30, 1997 as compared to $5,708,000 for the nine months ended September 30, 1996. Net interest income of ABC and its subsidiaries increased 3,750,000, offset by an increase in provision for loan losses of $643,000 and an increase in all other noninterest expense of $4,360,000. 14 Comparison of Balance Sheets Total assets increased by $12.6 million, or 1.87%, to $685.4 million at September 30, 1997 from $672.8 million at December 31, 1996. Total earning assets increased by $21.5 million, or 3.61%, to $618.2 million at September 30, 1997 from $596.7 million at December 31, 1996. Total loans, net of the allowance for loan losses, increased by $33.1 million, or 7.43%, to $478.7 million at September 30, 1997 from $445.6 million at December 31, 1996. Total deposits increased by $5.0 million, or .87%, to $582.9 million at September 30, 1997 from $577.9 million at December 31, 1996. Approximately 13.43% and 15.06% of deposits were noninterest-bearing as of September 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 1.52% and 1.65% of total loans outstanding at September 30, 1997 and December 31, 1996. Management considers the allowance for loan losses as of September 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 There were no matters submitted to a vote of securities holders during the quarter ended September 30, 1997. Item 6. Exhibits and Reports on Form 8-K A. Exhibits Exhibits 27.1 Financial Data Schedule B. During the quarterly period ended September 30, 1997, ABC filed a Current Report on Form 8-K dated July 30, 1997. Such Current Report, which was filed under Item 5 of Form 8-K, reported the resignation of the Company's Executive Vice President, Chief Operating Officer and Director effective September 15, 1997. 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 - ------------------- ------------------------------------ DATE W. EDWIN LANE, JR. EXECUTIVE VICE PRESIDENT & CHIEF FINANCIAL OFFICER (Duly authorized officer and principal financial/accounting officer) 17