Ameris Bancorp 10-Q 2005
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended June 30, 2005
Commission File Number: 001-13901
(Exact name of registrant as specified in its charter)
24 SECOND AVE., SE MOULTRIE, GA 31768
(Address of principal executive offices)
(Registrants 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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2) of the Exchange Act). Yes x No ¨
There were 11,866,295 shares of Common Stock outstanding as of August 5, 2005.
TABLE OF CONTENTS
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
See notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
(Dollars in Thousands)
See notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(Dollars in Thousands)
See notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(Dollars in Thousands)
See notes to unaudited consolidated financial statements.
June 30, 2005
Note 1 - Basis of Presentation & Accounting Policies
ABC Bancorp, (together with its subsidiaries, the Company or ABC) is a financial holding company headquartered in Moultrie, Georgia. ABC owns and operates 12 separately subsidiary chartered banks, having a total of thirty-seven branches in Georgia, Florida and Alabama. Our business model capitalizes on the efficiencies of a billion dollar financial services company while still providing the community with the personalized banking service expected by our customers. We manage our banks through a balance of decentralized management responsibilities and efficient centralized operating systems, products and loan underwriting standards. ABCs board of directors and senior managers establish corporate policy, strategy and certain administrative policies. Within ABCs established guidelines and policies, each subsidiary Banks board and senior managers make lending and community-specific decisions. This approach allows the banker closest to the customer to respond to the differing needs and demands of their unique market.
The accompanying unaudited consolidated financial statements for ABC have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation. 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 significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the six months ended June 30, 2005 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto and the report of registered independent public accounting firm included in the Companys Annual Report on Form 10-K for the year ended December 31, 2004.
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted within the United States of America and conform to general practices within the banking industry. Accounting and reporting policies for allowance for loan losses are deemed critical since they involve the use of estimates and require significant management judgments. Losses on loans result from a broad range of causes from borrower specific problems, to industry issues and to the impact of the economic environment. The identification of these factors that lead to default or non-performance under a borrower loan agreement and the estimation of loss in these situations are very subjective. In addition, a dramatic change in the performance of one or a small number of borrowers can have a significant impact on the estimate of losses. Management has implemented a process that has been applied consistently to systematically consider the many variables that impact the estimation of the allowance for loan losses.
Note 2 - Acquisitions
On July 1, 2005, ABC Bancorp announced the signing of a definitive agreement to acquire First National Banc, Inc. (First National) is headquartered in St. Marys, Georgia and has banking operations in St. Marys, Georgia and Orange Park, Florida. First National had assets totaling approximately $255 million at May 31, 2005. Under the terms of the agreement, First National shareholders may elect to receive cash or ABC common stock as consideration with the stock portion limited to 65% of the total consideration. ABC expects the transaction will close during the fourth quarter of 2005 and will be accretive to its 2006 earnings.
The acquisition has been approved by the Board of Directors of each company and is subject to the approval of First National shareholders, receipt of regulatory approval and other customary closing conditions. ABC expects that, at the time of the closing of the transaction, it will merge First Nationals St. Marys and Orange Park banks into one of its existing subsidiary banks.
Note 3 - Stock Split
On February 17, 2005, ABC announced that its Board of Directors approved a six for five stock split on outstanding ABC common stock shares at the Boards February meeting. The additional shares were payable March 31, 2005 to shareholders of record at the close of business on March 15, 2005.
All information concerning earnings per share, dividends per share and number of shares outstanding has been adjusted to give effect to this split.
Note 4 - Investment Securities
ABCs investment policy blends the needs of the Companys liquidity and interest rate risk with its desire to improve income and provide funds for expected growth in loans. Under this policy, the Company generally invests in obligations of the United States Treasury or other governmental or quasi-governmental agencies. ABCs portfolio and investing philosophy concentrate activities in obligations where the credit risk is limited. For a small portion of ABCs portfolio where there has been determined to be present credit risk, the Company has reviewed the investments and financial performance of the obligors and believes the credit risks to be acceptable.
The amortized cost and estimated fair value of investment securities available for sale at June 30, 2005 and December 31, 2004 are presented below:
Note 5 - Loans
The Company engages in a full complement of lending activities, including real estate-related loans, agriculture-related loans, commercial and financial loans and consumer installment loans. As of June 30, 2005, ABCs loan portfolio consisted of 76.45% real estate-related loans, 4.00% agriculture-related, 12.18% commercial and financial loans, and 6.02% consumer installment loans. ABC concentrates the majority of its lending activities on real estate loans where the historical loss percentages have been low. While risk of loss in the Companys portfolio is primarily tied to the credit quality of the various borrowers, risk of loss may also increase due to factors beyond ABCs control, such as local, regional and/or national economic downturns. General conditions in the real estate market may also impact the relative risk in the real estate portfolio. Of the target areas of lending activities, commercial and financial loans are generally considered to have a greater risk of loss than real estate loans or consumer installment loans.
ABC evaluates loans for impairment when a loan is risk rated as substandard or doubtful. The Company measures impairment based upon the present value of the loans expected future cash flows discounted at the loans effective interest rate, except where foreclosure or liquidation is probable or when the primary source of repayment is provided by real estate collateral. In these circumstances, impairment is measured based upon the estimated fair value of the collateral. In addition, in certain circumstances, impairment may be based on the loans observable estimated fair value. Impairment with regard to substantially all of ABCs impaired loans has been measured based on the estimated fair value of the underlying collateral. The Companys policy for recognizing interest income on impaired loans is consistent with its nonaccrual policy. At the time the contractual payments on a loan are deemed to be uncollectible, ABCs policy is to record a charge-off against the allowance for loan losses.
Nonperforming assets include loans classified as nonaccrual or renegotiated and foreclosed assets. It is the general policy of the Company to stop accruing interest income and place the recognition of interest on a cash basis when any commercial, industrial or commercial real estate loan is 90 days or more past due as to principal or interest and/or the ultimate collection of either is in doubt, unless collection of both principal and interest is assured by way of collateralization, guarantees or other security. When a loan is placed on nonaccrual status, any interest previously accrued but not collected is reversed against current income unless the collateral for the loan is sufficient to cover the accrued interest or a guarantor assures payment of interest.
Loans are stated at unpaid balances, net of unearned income and deferred loan fees. Balances within the major loans receivable categories are represented in the following table:
Note 6 - Allowance for Loan Losses
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 periodically based on a review of all significant loans, with a particular emphasis on nonaccruing, past due and other loans that management believes require attention. ABC segregates its loan portfolio by type of loan and utilizes this segregation in evaluating exposure to risks within the portfolio. In addition, based on internal reviews and external reviews performed by independent auditors and regulatory authorities, ABC further segregates its loan portfolio by loan classifications within each type of loan based on an assessment of risk for a particular loan or group of loans. Certain reviewed loans require specific allowances. Allowances are provided for other types and classifications of loans based on anticipated loss rates. Allowances are also provided for loans that are reviewed by management and considered creditworthy and loans for which management determines no review is required. In establishing allowances, management considers historical loan loss experience with an emphasis on current loan quality trends, current economic conditions and other factors in the markets where the subsidiary banks operate. Factors considered include, among others, unemployment rates, the effects of weather on agriculture and significant local economic events, such as major plant closings.
ABC has developed a methodology for determining the adequacy of the loan loss reserve which is followed by all of its subsidiary banks and monitored by ABCs senior credit officer and internal audit staff. Procedures provide for the assignment of a risk rating for every loan included in ABCs total loan portfolio. The risk rating schedule provides eight ratings, of which three ratings are classified as pass ratings and five ratings are classified as criticized ratings. Each risk rating is assigned a percent factor to be applied to the loan balance to determine the adequate amount of reserve. Many of the larger loans require an annual review by an independent loan officer. As a result of loan reviews, certain loans may be assigned specific reserve allocations. Other loans that surface as problem loans may also be assigned specific reserves. Past due loans are assigned risk ratings based on the number of days past due. In managements opinion, the reserve for loan losses at June 30, 2005 was adequate to absorb potential losses in the portfolio.
The provision for loan losses is a charge or credit to earnings in the current period to maintain a level of reserve management determines to be adequate. The provision for loan losses charged to earnings amounted to $905,000 in the second quarter of 2005 compared to $938,000 in the second quarter of 2004. Factors affecting the level of the provision in the current quarter are discussed further in the Managements Discussion and Analysis portion of this report.
Activity in the allowance for loan losses for the six months ended June 30, 2005 and June 30, 2004 is as follows:
The following table sets forth, for the periods indicated, certain ratios related to the Companys charge-offs, allowance for loan losses and outstanding loans:
Note 7 - Earnings per Share and Common Stock
Following is a summary of the information used in the computation of earnings per share:
Note 8 - Stock-Based Compensation
The Company applies the Accounting Practices Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock options. Accordingly, no stock-based employee compensation cost is reflected in net income (except for compensation cost associated with restricted shares), as all options granted under this plan had an exercise price equal to the market value of the underlying stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation:
On March 10, 2005, the Board of Directors approved the 2005 Omnibus Stock Ownership and Long-Term Incentive Plan, (the Plan) which was also approved by the shareholders at their annual meeting held on May 17, 2005. The Plan allows the Company to continue to provide equity compensation to employees in order to enable the Company to attract and retain qualified persons to serve as employees, to enhance their equity interest in the Company, and thereby to solidify their common interest with shareholders in enhancing the value and growth of the Company.
Note 9 - Capital Adequacy
Federal banking regulators have established certain capital adequacy standards required to be maintained by banks and bank holding companies. The minimum requirements established in the regulations are set forth in the table below, along with the actual ratios at June 30, 2005 and December 31, 2004.
Management believes, as of June 30, 2005, that the Company met all capital requirements to which they are subject.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report of ABC contains forward-looking statements in addition to historical information. ABC cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995; accordingly, there can be no assurance that such indicated results will be realized.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, ABC is required to note the variety of factors that could cause ABCs actual results and experience to differ materially from the anticipated results or other expectations expressed in ABCs forward-looking statements. These factors include legislative and regulatory initiatives regarding deregulation and restructuring of the banking industry; the extent and timing of the entry of additional competition in ABCs markets; potential business strategies, including acquisitions or dispositions of assets or internal restructuring, that may be pursued by ABC; state and federal banking regulations; changes in or application of environmental and other laws and regulations to which ABC is subject; political, legal and economic conditions and developments; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather, natural disasters and other catastrophic events; and other factors discussed in ABCs filings with the Securities and Exchange Commission. The words believe, expect, anticipate, project, and similar expressions signify such forward-looking statements.
Readers are cautioned not to place undue reliance on any forward-looking statements made by or on behalf of ABC. Any such statement speaks only as of the date the statement was made. ABC undertakes no obligation to update or revise any forward-looking statements. Additional information with respect to factors that may cause results to differ materially from those contemplated by such forward-looking statements is included in ABCs current and subsequent filings with the Securities and Exchange Commission.
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 to manage those requirements. 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 at any given time will adequately cover any reasonably anticipated immediate need for funds. Additionally, the subsidiary banks of the Company (the Banks) maintain relationships with correspondent banks, which could provide funds to them on short notice, if needed. The Bank has invested in Federal Home Loan Bank stock for the purpose of establishing credit lines with the Federal Home Loan Bank. The credit availability to the Banks is equal to 20 percent of the Banks total assets as reported on the most recent quarterly financial information submitted to the regulators subject to the pledging of sufficient collateral. At June 30, 2005, there were $95.0 million in advances outstanding with the Federal Home Loan Bank. In July 2004, new agreements were executed with the FHLB and a blanket floating lien pledge of the Banks residential 1-4 family mortgage real estate secured loans was done to bring the collateral availability up to approximately $178.8 million.
The Banks also have an unsecured overnight federal funds purchased accommodation up to a maximum of $41.5 million from two correspondent banks. Additionally, ABC has a line of credit with its principal correspondent bank in the amount of $5 million.
The following liquidity ratios compare certain assets and liabilities to total deposits or total assets:
The liquidity resources of the Company are monitored continuously by the Companys 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 Companys and the Banks liquidity ratios at June 30, 2005 were considered satisfactory. The Company is aware of no events or trends likely to result in a material change in liquidity.
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
At June 30, 2005, ABC had no material binding commitments for capital expenditures. The Company anticipates normal capital expenditures will be required during the remainder of 2005, but does not believe these amounts will be significant.
Results of Operations
The Companys results of operations are determined by its ability to effectively manage interest income and expense, minimize loan and investment losses, generate noninterest income and 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 net interest margin or net yield, which is taxable-equivalent net interest income divided by average earning assets.
Net income increased $458,000, or 15.1%, for the second quarter of 2005 compared to the second quarter of 2004. Net income increased $872,000, or 14.0%, for the first half of 2005 compared to the first half of 2004. Following is selected information for quarterly and year-to-date comparison:
Net Interest Income
Net interest income is the primary component of consolidated earnings. Interest-earning assets consist of loans, investment securities, interest bearing deposits in other banks and federal funds sold. Interest-bearing liabilities consist of deposits and borrowings, such as federal funds purchased, securities sold under repurchase agreements, Federal Home Loan Bank advances and subordinated deferrable interest debentures. 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.
Net interest income for the three months ended June 30, 2005 increased $1.8 million, or 16.5% as compared to the same time period last year, and was $2.9 million, or 13.5% higher for the six months ended June 30, 2005. ABCs net interest margin was 4.29% for the three months ended June 30, 2005, 22 basis points wider than the same time period a year ago and 15 basis points more than the six months ended June 30, 2004. Compared to the three months ended June 30, 2005, average earning assets increased $110.4 million, which was one of the factors contributing to the $1.8 million increase in net interest income. The prime rate as published in the Wall Street Journal increased 25 basis points during the three months ended June 30, 2004 while the prime rate increased 50 basis points during the same time period for this year. Many of the Banks loans are indexed to this floating rate; therefore, the higher level of prime rate in the second quarter of 2005 compared to the comparative period in 2004 did result in a higher average yield in the loan portfolio. This led to the increase in yield on average earning assets from 5.79% for the three months ended June 30, 2004 to 6.31% for the three months ended June 30, 2005, which is a 52 basis points increase. Cost of funds during the same time period increased from 2.07% to 2.42%, which is a 35 basis point increase. ABCs average interest bearing liabilities increased $97.0 million from June 30, 2004 to June 30, 2005. Because the yield on average earning assets increased 52 basis points while the cost of funds was held to an increase of only 35 basis points, the net interest margin increased from 4.07% for the three months ended June 30, 2004 to 4.29% for the same time period in 2005.
Net interest income increased $2.9 million, or 13.5%, for the six months ended June 30, 2005 over the same time period a year ago. The prime rate as published in the Wall Street Journal began 2004 at 4.00% and remained at that rate until June 2004 when it increased 25 basis points. During the same time
period in 2005, the prime rate has increased a total of 100 basis points from January to June. Many of the Banks loans are indexed to this floating rate; therefore, the higher level of prime rate in the second quarter of 2005 compared to the comparative period in 2004 resulted in a higher average yield in the loan portfolio. The higher interest rates will increase our net interest margin. A higher prime rate directly affects yields on the loans that are tied to the prime rate index and new loans not indexed to prime are priced reflective of overall higher asset yields. The average yield on interest-earning assets for the first six months of 2005 was 6.19%, which was an increase of 37 basis points compared to the 5.82% yield earned during the first six months of 2004. The average cost of interest-bearing liabilities increased 35 basis points from 2.07% during the first six months of 2004 to 2.42% for the comparable period in 2005. ABCs net interest margin increased to 4.25% in the first six months of 2005 compared to 4.10% in the first six months of 2004. Compared to the six months ended June 30, 2005, average earning assets increased $99.7 million, which contributed to the $2.9 million increase in net interest income.
The loan to deposit ratio was maintained at 97.8% and 92.9% for the six months ended June 30, 2004 and 2005, respectively. In addition, loans comprised as of June 30, 2004 and 2005 approximately 80% of the earning asset base.
Provision for Loan Losses
The provision for loan losses is a charge to income necessary to adjust the allowance for loan losses to an amount that represents managements assessment of the estimated probable credit losses inherent in the loan portfolio.
The provision for loan losses increased $126,000, or 20% for the three months ended June 30, 2005 compared to the same time period last year. The provision for loan losses decreased $33,000 for the six months ended June 30, 2005 compared to the same time period last year. The lower provision for loan losses in 2005 is primarily attributable to the decrease in net loan charge-offs (recoveries) which was $854,000 less for the six months ended June 30, 2005 compared to the same time period from last year. Some of the decrease was offset by growth in the loan portfolio, which was 10% for the six months ended June 30, 2005. Total loans outstanding grew $85.3 million, or 9.7%, during the six months ended June 30, 2005, as compared to only $19.1 million, or 2.3%, during the same time period in 2004.
Management will continue to monitor the credit quality of the loan portfolio and will recognize additional provisions in the future as necessary, in the opinion of management, to maintain the allowance for loan losses at an appropriate level.
Following is a comparison of non-interest income for the three months and six months ended June 30, 2005 and 2004:
Non-interest income for the three months ended June 30, 2005 was $3,552,000. This represents a $257,000, or 7.8%, increase over the prior year quarter which totaled $3,295,000. The increase in non-interest income is primarily attributable to the $242,000 increase in other service charges, commissions and fees. The increase in other service charges, commissions and fees is primarily due to an increase in brokerage income of $162,000 and an increase in mortgage income of $57,000. Both increases in the brokerage income and mortgage income are primarily a result of volume increases in these areas.
Non-interest income for the first six months of 2005 was up $527,000, or 7.9%, compared to the same time period a year ago. The primary factors impacting the higher levels of non-interest income as compared to the same time period a year ago are an increase of $335,000 in other service charges, commissions and fees and an increase of $155,000 in other income. The difference in other service charges, commissions and fees include an increase in brokerage income of $207,000 and an increase of $84,000 in mortgage income, which are both due to volume increase in these areas. Driving the higher levels of other income from the prior year were increases in the Companys rebate received from our check supplier.
Following is an analysis of non-interest expense for the three months and six months ended June 30, 2005 and 2004:
Operating expenses for the three months ended June 30, 2005 were $1,211.000, or 13.6% higher compared to the same period a year ago. The increase in non-interest expense is attributable to salaries and employee benefits increasing $707,000, net occupancy and equipment increasing $61,000 and other expenses increasing $443,000. The increase in salaries and employee benefits is related to normal increases in salaries and employee benefits during the course of business and additional employees added due to the Citizens Bank~Wakulla acquisition which closed in the fourth quarter of 2004. Salary and wages expense per employee increased from $10,160 for the three months ended June 30, 2004 to $10,628 for the same time period this year, which represents a 4.6% increase.
Other expense increased $443,000 during the three months ended June 30, 2005 when compared to the same time period for 2005. This difference is due to an increase of $129,000 in public relations and marketing expense, an increase of $201,000 in proof and credit related expenses, an increase of $126,000 in general and administrative expenses and a decrease of $15,000 in bank operating expense. In this category of other expense, the acquisition of Citizens Bank~Wakulla accounted for $259,000 of the increase due to expenses that are attributable to normal bank expenses as well as an increase in amortization expense and conversion costs related to this transaction. The remainder of the increase was primarily attributable to an increase of business development and marketing expense in which this increase in expense was planned and budgeted for in the three months ended June 30, 2005.
Non-interest expense for the first six months of 2005 was $20,290,000. This represents a $2,131,000 increase over the prior year period which totaled $18,159,000. The increase in non-interest expense is attributable to salaries and employee benefits increasing $1,422,000, net occupancy and equipment increasing $136,000, amortization expense increasing $14,000 and other expense increasing $559,000.
At June 30, 2005, ABC had 533 full-time equivalent employees compared to 488 full-time equivalent employees at June 30, 2004. The increase in staff was required to manage the growth of our organization as well as due to the 2004 Citizens Bank~Wakulla acquisition. When comparing assets/the number of full-time employees (FTE), ABC increased from $2,371 assets/per FTE in the six months ended 2004 to $2,449 assets/per FTE for the six months ended 2005, which represents an increase of 3.3%.
Salaries and employee benefits for the six months ended June 30, 2005 were $1.42 million higher than during the same period in 2004. Of this increase, $406,000 is related to the acquisition of Citizens Bank~Wakulla. The other $1,016,000 increase was attributable to a 16.9% increase in health and life insurance premiums, a 6.15% increase in salaries and employee benefits (excluding Citizens Bank~Wakulla), and an increase in ABCs incentive programs which were created to promote production and to retain and hire qualified employees in our organization.
Amortization of intangible assets was $14,000 higher for the six months ended June 30, 2005 as compared to the quarter ended June 30, 2004, which is due to additional expense related to the purchase of Citizens Bank~Wakulla. Occupancy and equipment expense increased $136,000 to $2.48 million for the second quarter of 2005 as compared to the second quarter of 2004. The Citizens Bank~Wakulla acquisition accounted for $133,000 of that increase.
Other expenses for the six months ended June 30, 2005 increased $559,000 when compared to the same time period for 2005. This difference is due to an increase of $192,000 in public relations and marketing expense, an increase of $239,000 in proof and credit related expenses, an increase of $224,000 in general and administrative expenses and an increase of $38,000 in bank operating expense. In this category of other expense, the acquisition of Citizens Bank~Wakulla accounted for $435,000 of the increase due to expenses that are attributable to normal bank expenses as well as an increase in amortization expense and conversion costs related to this transaction. A portion of the increase was attributable to an increase in business development and marketing expense, which was planned and budgeted for in the six months ended June 30, 2005.
The Companys efficiency ratio (expressed as operating expenses as a percent of total revenue) decreased to 63.71% for the six months ended June 30, 2005 from 63.99% for the six months ended June 30, 2004.
The effective federal income tax rate of ABC continues to be less than the statutory rate of 35%, due primarily to tax-exempt interest income. For the six months ended June 30, 2004 and 2005, the effective federal income tax rate was approximately 33%.
Comparison of Balance Sheets
Total assets were $1.305 billion at June 30, 2005, an increase from $1.268 billion at December 31, 2004. Earning assets totaled $1.206 billion, or 92.41% of total assets, at June 30, 2005, compared to $1.168 billion, or 92.11% of total assets, at December 31, 2004.
Total loans outstanding were $962.4 million at June 30, 2005, compared to $877.1 million at December 31, 2004. Loans comprised 79.77% and 75.09% of earning assets at June 30, 2005 and December 31, 2004, 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 monthly based on ongoing reviews of all loans. A particular emphasis is placed on non-accruing, past due and other loans in which management has identified possible weaknesses and that require special attention or action. Other factors used in determining the adequacy of the reserve are managements judgment about factors affecting loan quality and assumptions about the local and national economy. All of these factors are considered and then grades are assigned to each loan. A calculation is then performed that adds a weighted percentage of the balance in each loan grade to additional specific reserves for certain loans based on managements judgment. The result of this standard calculation determines the amount of reserve to be recorded. Management considers the amount of reserve determined by this process adequate to cover potential losses in the portfolio.
The allowance for loan losses totaled $16.56 million and $15.49 million as of June 30, 2005 and December 31, 2004, respectively. The allowance for loan losses as a percentage of total loans was 1.72% and 1.77% as of June 30, 2005 and December 31, 2004, respectively.
Total deposits increased by $50 million, or 5.03%, to $1.036 billion at June 30, 2005 from $986.2 million at December 31, 2004. Approximately 14.58% and 15.21% of deposits were non-interest-bearing as of June 30, 2005 and December 31, 2004, respectively.
Non-performing assets include nonaccrual loans, accruing loans contractually past due 90 days or more, repossessed personal property, and other real estate. Loans are placed on nonaccrual status when management has concerns relating to the ability to collect the principal and interest and generally when such loans are 90 days or more past due. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract.
Non-performing assets were as follows:
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 Companys 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 8.96% if rates rise gradually over the next year. On the other hand, the model projects net interest income to decrease 10.54% if rates decline over the next year.
The Companys Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, such officers have concluded that, as of such date, the Companys disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Companys periodic filings under the Exchange Act.
Since the end of the period covered by this report, there have not been any significant changes in the Companys internal controls or in other factors that could significantly affect such controls.
PART II - OTHER INFORMATION
On June 28, 2005, ABC issued to Edwin W. Hortman, Jr., pursuant to the Companys 2005 Omnibus Stock Ownership and Long-Term Incentive Plan, (i) a qualified stock option to purchase 18,500 shares of the Companys common stock at an exercise price of $18.00 per share (each, an Option and, collectively, the Options) and (ii) 20,000 restricted shares of the Companys common stock (each, a Restricted Share and, collectively, the Restricted Shares). Each Restricted Share and each Option vests with respect to one-fifth of the Restricted Shares or the underlying shares of ABCs common stock, as applicable, on each of January 31, 2006, January 31, 2007, January 31, 2008, January 31, 2009 and January 31, 2010. Vested Options first become exercisable on January 31, 2010, unless otherwise accelerated in connection with a termination of employment or a change of control of ABC. Vesting of the Restricted Shares and the Options is subject to the Companys satisfaction of certain performance targets to be established each year by the Board of Directors of the Company.
The Options and Restricted Shares were issued without registration under the Securities Act of 1933, as amended (the Securities Act), in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act. The Company based such reliance upon factual representations made by Mr. Hortman regarding his investment intent and sophistication, among other things.
The Annual Meeting of the Shareholders of the Company was held on May 17, 2005. At this meeting, proxies were solicited pursuant to Regulation 14A under the Exchange Act. Total shares outstanding, net of 1,314,430 shares held in treasury, amounted to 11,855,622. A total of 7,792,738 shares (65.73% of total shares outstanding) were represented by shareholders in attendance at the meeting or by proxy.
The following director nominees were elected by a plurality vote (listed as follows) to serve as Class II directors until the annual meeting to be held in 2008:
J. Raymond Fulp, 7,455,514 for, 337,224, withholding authority, 95.67% in favor
Robert P. Lynch, 7,473,412 for, 319,326, withholding authority, 95.90% in favor
Henry C. Wortman, 7,468,514 for, 324,224 withholding authority, 95.84% in favor
Brooks Sheldon, 7,442,526 for, 350,212 withholding authority, 95.51% in favor
The following director nominee was elected by a plurality vote (listed as follows) to serve as a Class III director until the annual meeting to be held in 2006:
Glenn A. Kirbo, 7,471,129 for, 321,609 withholding authority, 95.87% in favor.
Ratification of the appointment of Mauldin & Jenkins, Certified Public Accountants and Consultants, LLC, as the Companys independent accountants for the fiscal year ended December 31, 2004 by a vote of 7,724,866 for, 51,988 against, and 15,884 abstaining, representing 99.13% in favor.
Approval of the 2005 Omnibus Stock Ownership and Long-Term Incentive Plan by a vote of 4,364,334 for, 1,363,461 against, 52,921 abstaining, and 2,012,022 broker non-votes, representing 56.01% in favor.
Approval to transact any other business to come before the Annual Meeting by a vote of 6,541,946 for, 1,148,066 against, 102,726 abstaining, representing 83.95% in favor.
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.