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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, 2002
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-16181
ABC BANCORP
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(Exact name of registrant as specified in its charter)
GEORGIA 58-1456434
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(State of incorporation) (IRS Employer ID No.)
24 SECOND AVE., SE MOULTRIE, GA 31768
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(Address of principal executive offices)
(229) 890-1111
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(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
There were 9,854,279 shares of Common Stock outstanding as of June 30, 2002.
ABC BANCORP
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item Page
- ---- ----
1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income and Comprehensive Income 4
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II - OTHER INFORMATION
4. Submission of Matters to a Vote of Securities Holders 13
6. Exhibits and Reports on Form 8-K 13
Signature 14
2
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
- -------------------------------------------------------------------------------------------------------------
June 30 Dec. 31
2002 2001
---------- ----------
Assets
- ------
Cash and due from banks $ 65,468 $ 157,475
Securities available for sale, at fair value 176,494 156,835
Federal funds sold 136 44
Loans 828,511 805,076
Less allowance for loan losses 14,061 14,944
---------- ----------
Loans, net 814,450 790,132
---------- ----------
Premises and equipment, net 27,030 26,821
Intangible assets 5,256 6,074
Goodwill 19,240 19,240
Other assets 18,971 20,265
---------- ----------
$1,127,045 $1,176,886
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits
Noninterest-bearing demand 112,487 125,522
Interest-bearing demand 240,336 254,301
Savings 64,072 62,536
Time, $100,000 and over 151,786 156,562
Other time 312,969 332,235
---------- ----------
Total deposits 881,650 931,156
Federal funds purchased & securities sold under
agreements to repurchase 3,250 3,792
Other borrowings 93,272 95,293
Other liabilities 8,409 7,997
Trust preferred securities 34,500 34,500
---------- ----------
Total liabilities 1,021,081 1,072,738
---------- ----------
Stockholders' equity
- --------------------
Common stock, par value $1; 30,000,000 shares authorized;
10,790,969 and 10,790,369 shares issued, respectively 10,791 10,790
Capital surplus 45,616 45,616
Retained earnings 56,276 53,584
Accumulated other comprehensive income 1,889 1,034
Unearned compensation (422) (656)
---------- ----------
114,150 110,368
Less cost of shares acquired for the treasury, 936,690
and 790,982 shares (8,186) (6,220)
---------- ----------
Total stockholders' equity 105,964 104,148
---------- ----------
$1,127,045 $1,176,886
========== ==========
See Notes to Consolidated Financial Statements.
3
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(Dollars in Thousands)
(Unaudited)
- ----------------------------------------------------------------------------------------------------------
2002 2001
---------- ----------
Interest income
Interest and fees on loans $ 16,460 $ 15,566
Interest on taxable securities 2,225 2,180
Interest on nontaxable securities 44 229
Interest on deposits in other banks 193 197
Interest on federal funds sold 12 28
---------- ----------
18,934 18,200
---------- ----------
Interest expense
Interest on deposits 5,021 7,564
Interest on federal funds purchased and securities
sold under agreements to repurchase 30 34
Interest on other borrowings 1,842 726
---------- ----------
6,893 8,324
---------- ----------
Net interest income 12,041 9,876
Provision for loan losses 774 723
---------- ----------
Net interest income after provision for loan losses 11,267 9,153
---------- ----------
Other income
Service charges on deposit accounts 2,566 1,670
Other service charges, commissions and fees 723 570
Other 102 116
Loss on sale of securities (4) -
---------- ----------
3,387 2,356
---------- ----------
Other expense
Salaries and employee benefits 5,758 4,542
Equipment and occupancy expense 1,219 1,147
Other operating expenses 3,363 2,590
---------- ----------
10,340 8,279
---------- ----------
Income before income taxes 4,314 3,230
Applicable income taxes 1,431 1,040
---------- ----------
Net income $ 2,883 $ 2,190
---------- ----------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period, net of tax $ 1,774 $ 240
---------- ----------
Comprehensive income $ 4,657 $ 2,430
========== ==========
Income per common share-Basic $ 0.29 $ 0.25
========== ==========
Income per common share-Diluted $ 0.29 $ 0.25
========== ==========
Average shares outstanding 9,874,639 8,707,075
========== ==========
See Notes to Consolidated Financial Statements.
4
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Dollars in Thousands)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------
2002 2001
---------- ----------
Interest income
Interest and fees on loans $ 32,924 $ 30,750
Interest on taxable securities 4,386 4,406
Interest on nontaxable securities 97 460
Interest on deposits in other banks 538 352
Interest on federal funds sold 24 28
---------- ----------
37,969 35,996
---------- ----------
Interest expense
Interest on deposits 10,898 14,905
Interest on federal funds purchased and securities
sold under agreements to repurchase 74 88
Interest on other borrowings 3,548 1,576
---------- ----------
14,520 16,569
---------- ----------
Net interest income 23,449 19,427
Provision for loan losses 1,733 1,216
---------- ----------
Net interest income after provision for loan losses 21,716 18,211
---------- ----------
Other income
Service charges on deposit accounts 4,807 3,247
Other service charges, commissions and fees 1,595 1,139
Other 209 146
Gain (Loss) on sale of securities 22 (1)
---------- ----------
6,633 4,531
---------- ----------
Other expense
Salaries and employee benefits 11,589 8,965
Equipment and occupancy expense 2,424 2,267
Other operating expenses 6,793 4,891
---------- ----------
20,806 16,123
---------- ----------
Income before income taxes 7,543 6,619
Applicable income taxes 2,488 2,131
---------- ----------
Net income $ 5,055 $ 4,488
---------- ----------
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net of tax $ 855 $ 1,665
---------- ----------
Comprehensive income $ 5,910 $ 6,153
========== ==========
Income per common share-Basic $ 0.51 $ 0.52
========== ==========
Income per common share-Diluted $ 0.51 $ 0.52
========== ==========
Average shares outstanding 9,899,474 8,553,466
========== ==========
See Notes to Consolidated Financial Statements.
5
ABC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Dollars in Thousands)
(Unaudited)
- --------------------------------------------------------------------------------------------------------------
2002 2001
-------- --------
OPERATING ACTIVITIES
Net Income $ 5,055 $ 4,488
-------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 1,151 929
Provision for loan losses 1,733 1,216
Amortization of intangible assets 818 469
Other prepaids, deferrals and accruals, net 1,521 710
-------- --------
Total adjustments 5,223 3,324
-------- --------
Net cash provided by operating activities 10,278 7,812
-------- --------
INVESTING ACTIVITIES
Proceeds from maturities of investment securities 39,256 46,394
Purchase of investment securities (58,655) (22,757)
Proceeds from sales of securities available for sale 1,015 40
Decrease in federal funds sold (92)
Increase in loans (26,051) (46,085)
Net cash received from acquisitions - 17,911
Purchase of premises and equipment (1,360) (317)
-------- --------
Net cash used in investing activities (45,887) (4,814)
-------- --------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (49,506) 2,140
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase (542) 2,269
Increase (decrease) in other borrowings (130) 2,264
Dividends paid (2,367) (2,060)
Purchase of treasury stock (1,962) -
-------- --------
Net cash used in financing activities (54,507) 4,613
-------- --------
Net increase (decrease) in cash and due from banks $(92,007) $ 7,611
Cash and due from banks at beginning of period 157,475 43,363
-------- --------
Cash and due from banks at end of period $ 65,468 $ 50,974
======== ========
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 accounting principles generally accepted in the
United States of America and to general practices within the banking industry.
The interim consolidated financial statements included herein are unaudited, but
reflect all adjustments which, in the opinion of management, are necessary for a
fair presentation of the consolidated financial position and results of
operations for the interim periods presented. All adjustments reflected in the
interim financial statements are of a normal, recurring nature. Such financial
statements should be read in conjunction with the financial statements and notes
thereto and the report of independent auditors included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001. The results of
operations for the six months ended June 30, 2002 are not necessarily indicative
of the results to be expected for the full year.
NOTE 2. RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued two new
accounting standards: Statement of Financial Standards ("SFAS") No 141,
"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets."
SFAS No 141, which was effective immediately, requires that all business
combinations consummated after June 30, 2001 be accounted for by the purchase
method unless the combination was initiated on or prior to that date and it
meets the conditions to be accounted for by the pooling-of-interests method in
accordance with AFB Opinion No. 16, "Business Combinations." Under SFAS No. 142,
goodwill and intangible assets that management concludes have indefinite useful
lives will no longer be amortized, but will be subject to impairment tests
performed at least annually. The Company was required to adopt SFAS No. 142 on
January 1, 2002. During the quarter ended June 30, 2002, the Company performed
the first of the required impairment tests of goodwill and indefinite-lived
intangible assets. The test results indicated that there was no impairment of
goodwill and indefinite-lived intangible assets.
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
7
managing the balances and maturities of interest-earning assets and
interest-bearing liabilities so that the balance it has in short-term
investments at any given time will adequately cover any reasonably anticipated
immediate need for funds. Additionally, the subsidiary Banks (the "Banks")
maintain relationships with correspondent banks which could provide funds to
them on short notice, if needed.
The liquidity and capital resources of the Company are monitored
continuously by the Company's Board-authorized Asset and Liability Management
Committee, and on a periodic basis by state and federal regulatory authorities.
As determined under guidelines established by these regulatory authorities, the
Company's and the Banks' liquidity ratios at June 30, 2002 were considered
satisfactory. At that date, the Banks' short-term investments were adequate to
cover any reasonably anticipated immediate need for funds. The Company is aware
of no events or trends likely to result in a material change in liquidity.
During the six months ended June 30, 2002, total capital increased $1,816,000 to
$105,964,000. Of this change, $2,692,000 resulted from the retention of earnings
(net of $2,367,000 dividends paid to shareholders), plus $235,000 for the
accrual for grants of restricted shares as incentive to certain employees, plus
$855,000 in other comprehensive income, net of taxes, less $1,966,000 for the
purchase of Treasury Stock.
At June 30, 2002, ABC had binding commitments for capital expenditures
of approximately $200,000. The Company anticipates that approximately $500,000
will be required for capital expenditures during the remainder of 2002.
Additional expenditures may be required for other mergers and acquisitions.
Results of Operations
The Company's results of operations are determined by its ability to
effectively manage interest income and expense, to minimize loan and investment
losses, to generate noninterest income and to control noninterest expense. Since
interest rates are determined by market forces and economic conditions beyond
the control of the Company, the ability to generate net interest income is
dependent upon the Banks' ability to obtain an adequate spread between the rate
earned on interest-earning assets and the rate paid on interest-bearing
liabilities. Thus, the key performance measure for net interest income is the
interest margin or net yield, which is taxable-equivalent net interest income
divided by average earning assets.
The primary component of consolidated earnings is net interest income,
or the difference between interest income on interest-earning assets and
interest paid on interest-bearing liabilities. The net interest margin is net
interest income expressed as a percentage of average interest-earning assets.
Interest-earning assets consist of loans, investment securities and Federal
funds sold. Interest-bearing liabilities consist of deposits and borrowings,
such as Federal funds purchased, securities sold under repurchase agreements and
Federal Home Loan Bank advances. A portion of interest income is earned on
tax-exempt investments, such as state and municipal bonds, and on loans to
states and municipalities. This tax-exempt income and its resultant yields are
stated on a taxable-equivalent basis in order to be comparable to taxable
investments and loans.
8
Comparison of Statements of Income
The net interest margin on a taxable-equivalent basis was 4.53% and
5.02% during the six months ended June 30, 2002 and 2001, respectively, a
decrease of 49 basis points. These variances are attributable to fluctuations in
the average rates charged and fees earned on loans and the average rates paid on
deposit accounts. Several decreases in key interest rates by the Federal Reserve
Bank during the last half of 2001 also attributed to the decrease in net
interest margin, because the rate of yield on certain variable-rate assets
decreased immediately, whereas most interest-bearing liabilities are fixed-rate,
and thus rates could not be decreased until maturity.
Net interest income was $23.4 million as compared to $19.4 million
during the six months ended June 30, 2002 and 2001, respectively, representing
an increase of 20.62%. This increase of $4 million was largely attributable to
the new acquisitions which contributed $3.6 million of this increase.
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 $1,733,000 and $1,216,000 during the six months ended June
30, 2002 and 2001. This $517,000 increase in 2002 over 2001 was primarily
attributable to replenishing the reserve for loan losses to an adequate level
due to $2.6 million in charge offs, net of recoveries, for the first six months
and also for the 3.08% growth in the loan portfolio. Charge offs, net of
recoveries, for the first six months of 2001 amounted to a net recovery of
$179,000. The comparatively high net charge offs for the first six months of
2002 resulted in part from anticipated charge offs against reserves established
in connection with two acquisitions made during 2001, and in part from an
aggressive effort during the first two quarters of 2002 to resolve a number of
small non-performing loans on the books of the subsidiary banks.
The allowance for loan losses represents a reserve for potential losses
in the loan portfolio. The adequacy of the allowance for loan losses is
evaluated quarterly based on a review of all significant loans, with a
particular emphasis on non-accruing, past due and other loans that management
believes require attention. Another factor used in determining the adequacy of
the reserve is management's judgment about factors affecting loan quality and
assumptions about the local and national economy.
The allowance for loan losses totaled $14.06 million and $14.94 million
as of June 30, 2002 and December 31, 2001, respectively. The allowance for loan
losses as a percentage of total loans was 1.70% and 1.86% as of June 30, 2002
and December 31, 2001, respectively.
Non-performing assets were $10.2 million and $13.2 as of June 30, 2002
and December 31, 2001, respectively. The ratio of non-performing assets as a
percentage of the loan loss reserve was 72.6% and 88.4% as of June 30, 2002 and
December 31, 2001, respectively.
Management considers the allowance for loan losses as of June 30, 2002
adequate to cover potential losses in the loan portfolio.
9
Following is a comparison of noninterest income for the six months
ended June 30, 2002 and 2001 (dollars in thousands).
Six months Ended
June
------------------
2002 2001
------ ------
Service charges on deposits $4,807 $3,247
Other service charges, commissions and fees 1,595 1,139
Other income 209 146
Gain (Loss) on sale of securities 22 (1)
------ ------
Total noninterest income $6,633 $4,531
====== ======
Total noninterest income for the six months ended June 30, 2002 was
$2,102,000 higher than during the same period in 2001. Three recent acquisitions
are reflected in 2002's results, but not 2001. Approximately $688,000 of the
increase is attributable to these acquisitions. Approximately 90% of the
remaining increase is attributable to three retail-related initiatives: (1) an
increase in mortgage loan fees; (2) an increase in credit life insurance
premiums; and (3) a new program to increase overdraft fees on deposit accounts.
Additionally insufficient fund charges on checking deposit accounts in
all other subsidiary banks increased $1,253,000 during the six months ended June
30, 2002 as compared to the same period last year. This increase is mostly
attributable to an increase in the per item charge for overdrafts. Other service
charges, commissions and fees increased because of enhanced income from the
Company's retail division, particularly mortgage financing. Of the $456,000
increase, 70% or $317,000 was attributable to mortgage financing.
Following is an analysis of noninterest expense for the six months
ended June 30, 2002 and 2001 (dollars in thousands).
Six months Ended
June
--------------------
2002 2001
------- -------
Salaries and employee benefits $11,589 $ 8,965
Occupancy and equipment expense 2,424 2,267
Other expense 6,793 4,891
------- -------
Total noninterest expense $20,806 $16,123
======= =======
Total noninterest expense for the six months ended June 30, 2002 was
$4,683,000 higher than during the same period in 2001.
10
Salaries and employee benefits for the six months ended June 30, 2002
were $2,624,000 or 29.27% higher than during the same period in 2001. The new
acquisitions accounted for approximately $1,567,000 of the increase and the
remaining $1,057,000 related to normal increases in salaries and employee
benefits, and an increase in the number of employees throughout the company. Of
the $1,902,000 million increase in other expense $496,000 is attributable to an
increase in amortization expense as a result of acquisitions made during the
last three quarters of 2001, $836,000 is attributable to other expenses of the
acquired banks, and $102,000 is attributable to systems conversion expenses of
the acquired banks.
Following is a condensed summary of net income during the six months
ended June 30, 2002 and 2001 (dollars in thousands).
Six months Ended
June 30,
--------------------
2002 2001
------- -------
Net interest income $23,449 $19,427
Provision for loan losses 1,733 1,216
Other income 6,633 4,531
Other expense 20,806 16,123
------- -------
Income before income taxes 7,543 6.619
Applicable income taxes 2,488 2,131
------- -------
Net income $ 5,055 $ 4,488
======= =======
Net income increased $567,000 or 12.63% to $5,055,000 for the six
months ended June 30, 2002 as compared to $4,488,000 for the six months ended
June 30, 2001. Net interest income of ABC and its subsidiaries increased
$4,022,000, the provision for loan losses increased by $517,000 and all other
noninterest expense increased by $4,683,000.
Comparison of Balance Sheets
Total assets decreased by $50 million, or 4.25% to $1,127 million at
June 30, 2002 from $1,177 million at December 31, 2001.
Total earning assets decreased by $33 million, or 3.09%, to $1,035
million at June 30, 2002 from $1,068 million at December 31, 2001.
Loans, net of the allowance for loan losses, increased by $24 million,
or 3.08% to $814 million at June 30, 2002 from $790 million at December 31,
2001.
11
Total deposits decreased by $49 million, or 5.26% to $882 million at
June 30, 2002 from $931 million at December 31, 2001. Approximately 12.75% and
13.53% of deposits were noninterest-bearing as of June 30, 2002 and December 31,
2001, respectively.
The decrease in total assets and deposits was due to an intentional
reduction in non-core deposits. Retaining maturing deposits would have required
paying higher rates than were desired because of current market pressures. Given
the Company's current loan funding projections and alternative funding sources
available, a significant amount of maturing deposits were not renewed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed only to U. S. dollar interest rate changes and,
accordingly, the Company manages exposure by considering the possible changes in
the net interest margin. The Company does not have any trading instruments nor
does it classify any portion of the investment portfolio as held for trading.
The Company does not engage in any hedging activities or enter into any
derivative instruments with a higher degree of risk than mortgage backed
securities which are commonly pass through securities. Finally, the Company has
no exposure to foreign currency exchange rate risk, commodity price risk, and
other market risks.
Interest rates play a major part in the net interest income of a
financial institution. The sensitivity to rate changes is known as "interest
rate risk." The repricing of interest earning assets and interest-bearing
liabilities can influence the changes in net interest income. As part of the
Company's asset/liability management program, the timing of repriced assets and
liabilities is referred to as Gap management. It is the policy of the Company to
maintain a Gap ratio in the one-year time horizon of .80 to 1.20.
The Company uses simulation analysis to monitor changes in net interest
income due to changes in market interest rates. The simulation of rising,
declining and flat interest rate scenarios allows management to monitor and
adjust interest rate sensitivity to minimize the impact of market interest rate
swings. The analysis of the impact on net interest income over a twelve month
period is subjected to a gradual 200 basis point increase or decrease in market
rates on net interest income and is monitored on a quarterly basis. The most
recent simulation model projects net interest income would increase 5.30% if
rates rise gradually over the next year. On the other hand, the model projects
net interest income to decrease 7.34% if rates decline over the next year.
12
Part II. Other Information
Item 4. Submission of Matters to a Vote of Securities Holders
The Annual Meeting of the Shareholders of the Company was held on May
14, 2002. At this meeting proxies were solicited under Regulation 14a of the
Securities and Exchange Act of 1934. Total shares outstanding, net of 911,690
shares held for the treasury amounted to 9,878,679. A total of 6,886,395 shares
were represented by shareholders in attendance or by proxy. Director nominees
were elected by a vote of 6,773,135 shares for, and 113,260 withholding
authority, representing 69% in favor of the following directors elected to serve
as Class II directors, until the annual meeting to be held in 2005.
J. Raymond Fulp
Robert P. Lynch
J. Thomas Whelchel
Henry C. Wortman
Ratification of the appointment of Mauldin & Jenkins, Certified Public
Accountants and Consultants, LLC, as the Company's independent accountants for
the fiscal year ended December 31, 2001, by a vote of 6,853,362 for, 18,520
against, and 14,513 abstaining, representing 69% in favor.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 99.1 Section 906 Certification
Exhibit 99.2 Section 906 Certification
13
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
8/13/02 /s/ W. EDWIN LANE, JR.
- ----------------- --------------------------------------
Date W. EDWIN LANE, JR.
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Duly authorized officer and principal
financial/accounting officer)
14