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
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of 1934
For the quarterly period ended June 30, 2003.
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or
Transition Report under Section 13 or 15(d) of the Securities Exchange
- ---
Act of 1934
For the transition period from _______________ to ________________.
Commission File No. 0-23980
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Georgia Bank Financial Corporation
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(Exact name of registrant as specified in its charter)
Georgia 58-2005097
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(State of Incorporation) (I.R.S. Employer Identification No.)
3530 Wheeler Road, Augusta, Georgia 30909
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(Address of principal executive offices)
(706) 738-6990
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(Issuer's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
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Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
2,385,280 shares of common stock, $3.00 par value per share, outstanding as
of June 30, 2003.
GEORGIA BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2003 and
December 31, 2002 3
Consolidated Statements of Income for the three and six months
ended June 30, 2003 and June 30, 2002 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 2003 and June 30, 2002 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
Part II Other Information
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security-Holders 23
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
* No information submitted under this caption
1
PART I
FINANCIAL INFORMATION
2
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
ASSETS June 30,
2003 December 31,
(Unaudited) 2002
------------- -------------
Cash and due from banks $ 19,905,985 $ 12,942,512
Federal funds sold 13,890,000 3,691,000
Interest bearing deposits in other banks 517,266 517,179
------------- -------------
Cash and cash equivalents 34,313,251 17,150,691
Investment securities
Available-for-sale 128,147,695 133,971,802
Held-to-maturity, at cost (fair values of
$6,100,156 and $6,385,650, respectively) 5,637,143 6,138,889
Loans held for sale 30,684,630 24,296,598
Loans 390,415,229 372,402,679
Less allowance for loan losses (7,075,304) (6,534,417)
------------- -------------
Loans, net 383,339,925 365,868,262
Premises and equipment, net 13,637,641 13,882,987
Accrued interest receivable 3,704,002 3,688,630
Intangible assets, net 139,883 139,883
Other assets 7,394,211 4,694,668
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$606,998,381 $569,832,410
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 78,905,716 $ 70,334,882
Interest-bearing
NOW accounts 61,007,512 63,115,877
Savings 181,370,483 152,244,387
Money management accounts 24,901,136 28,687,166
Time deposits over $100,000 93,817,256 87,746,760
Other time deposits 36,134,701 37,427,629
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476,136,804 439,556,701
Securities sold under repurchase agreements 38,988,602 42,987,681
Advances from Federal Home Loan Bank 35,000,000 35,000,000
Other borrowed funds 1,000,000 1,000,000
Accrued interest and other liabilities 4,627,314 4,539,968
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Total liabilities 555,752,720 523,084,350
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Stockholders' equity
Common Stock, $3.00 par value; 10,000,000
shares authorized; 2,642,579 shares issued;
2,623,808 shares outstanding 7,927,737 7,927,737
Additional paid-in capital 42,274,797 29,871,341
Retained earnings 11,300,595 7,471,434
Stock dividend declared (12,403,456) -
Treasury stock, at cost 18,771 shares (507,360) (507,360)
Accumulated other comprehensive income 2,653,348 1,984,908
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Total stockholders' equity 51,245,661 46,748,060
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$606,998,381 $569,832,410
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3
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Interest income:
Loans, including fees $6,487,762 $ 5,950,058 $12,745,210 $11,822,596
Investment securities 1,560,293 1,746,683 3,181,665 3,370,160
Federal funds sold 26,764 30,822 59,870 66,140
Interest-bearing deposits in other banks 2,304 3,790 3,580 9,457
----------- ----------- ----------- -----------
Total interest income 8,077,123 7,731,353 15,990,325 15,268,353
----------- ----------- ----------- -----------
Interest expense:
Deposits 1,939,858 2,130,049 3,920,017 4,368,544
Federal funds purchased and securities sold
under repurchase agreements 164,927 159,597 332,499 302,564
Other borrowings 447,920 492,408 891,006 980,183
----------- ----------- ----------- -----------
Total interest expense 2,552,705 2,782,054 5,143,522 5,651,291
----------- ----------- ----------- -----------
Net interest income 5,524,418 4,949,299 10,846,803 9,617,062
Provision for loan losses 431,805 414,828 906,555 1,084,818
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 5,092,613 4,534,471 9,940,248 8,532,244
----------- ----------- ----------- -----------
Noninterest income:
Service charges and fees on deposits 1,139,770 1,125,479 2,222,419 2,155,654
Gain on sale of loans 2,531,502 1,239,165 4,319,232 2,374,884
Investment securities (losses) gains, net (17,420) 2,827 28,772 52,566
Retail investment income 82,452 82,850 173,389 139,430
Trust service fees 79,776 54,557 149,635 97,205
Miscellaneous income 93,992 96,316 191,304 194,391
----------- ----------- ----------- -----------
Total noninterest income 3,910,072 2,601,194 7,084,751 5,014,430
----------- ----------- ----------- -----------
Noninterest expense:
Salaries 3,236,655 2,441,083 5,992,428 4,764,454
Employee benefits 643,507 556,792 1,237,010 1,065,378
Occupancy expenses 596,657 574,892 1,178,003 1,141,633
Other operating expenses 1,472,096 1,319,570 2,743,559 2,465,161
----------- ----------- ----------- -----------
Total noninterest expense 5,948,915 4,892,337 11,151,000 9,436,626
----------- ----------- ----------- -----------
Income before income taxes 3,053,770 2,243,328 5,873,999 4,110,048
Income tax expense 1,076,796 786,000 2,044,838 1,392,000
----------- ----------- ----------- -----------
Net income $1,976,974 $ 1,457,328 $ 3,829,161 $ 2,718,048
=========== =========== =========== ===========
4
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic net income per share $ 0.75 $ 0.56 $ 1.46 $ 1.04
========== ========== ========== ==========
Diluted net income per share $ 0.74 $ 0.55 $ 1.44 $ 1.03
========== ========== ========== ==========
Weighted average common shares outstanding 2,623,808 2,623,808 2,623,808 2,623,808
========== ========== ========== ==========
Weighted average number of common and
common equivalent shares outstanding 2,653,816 2,640,371 2,652,094 2,638,878
========== ========== ========== ==========
5
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
-------------------------------
2003 2002
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Cash flows from operating activities:
Net income $ 3,829,161 $ 2,718,048
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Depreciation and amortization 647,613 677,576
Provision for loan losses 906,555 1,084,818
Net investment securities gains (28,772) (52,866)
Net amortization of premium on investment
securities 403,743 161,884
Loss on disposal of premises and equipment 768 23,319
Gain on the sale of other real estate - (5,923)
Gain on sale of loans (4,319,232) (2,374,884)
Real estate loans originated for sale (192,127,990) (99,597,175)
Proceeds from sales of real estate loans 190,059,190 108,487,222
Increase in accrued interest receivable (15,372) (177,605)
Decrease in other assets 72,902 5,025
Increase (decrease) in accrued interest and other liabilities 87,346 (146,242)
-------------- ---------------
Net cash (used in) provided by operating activities (484,088) 10,803,197
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Cash flows from investing activities:
Proceeds from sales of available for sale securities 23,937,827 9,428,761
Proceeds from maturities of available for sale securities 36,996,656 17,525,829
Proceeds from maturities of held to maturity securities 500,000 850,000
Purchase of available for sale securities (54,470,813) (43,030,437)
Net increase in loans (18,495,011) (21,321,722)
Purchase of Company-owned life insurance (3,000,000) -
Purchases of premises and equipment (413,022) (866,646)
Proceeds from sale of other real estate - 71,902
Proceeds from sale of premises and equipment 9,987 30,515
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Net cash used in investing activities (14,934,376) (37,311,798)
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Cash flows from financing activities:
Net increase in deposits 36,580,103 31,480,953
Net (decrease) increase in federal funds purchased and
securities sold under repurchase agreements (3,999,079) 15,623,326
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Net cash provided by financing activities 32,581,024 47,104,279
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6
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
------------------------------
2003 2002
-------------- --------------
Net increase in cash and cash equivalents 17,162,560 20,595,678
Cash and cash equivalents at beginning of period 17,150,691 15,509,900
-------------- --------------
Cash and cash equivalents at end of period $ 34,313,251 $ 36,105,578
============== =============
Supplemental disclosures of cash paid during the period for:
Interest $ 5,139,755 $ 5,917,986
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Income taxes $ 2,128,000 $ 1,980,000
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Supplemental disclosures on noncash investing activities:
Loans transferred to other real estate $ 116,793 $ 65,979
============== =============
See accompanying notes to consolidated financial statements.
7
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2003
Note 1 - Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Georgia Bank Financial Corporation and its wholly-owned subsidiary, Georgia Bank
& Trust Company (the "Company" or the "Bank"). Significant intercompany
transactions and accounts are eliminated in consolidation.
The financial statements for the three and six months ended June 30, 2003 and
2002 are unaudited and have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and footnotes included in the Company's annual
report on Form 10-K for the year ended December 31, 2002.
In the opinion of management, all adjustments necessary to present fairly the
financial position and the results of operations and cash flows for the interim
periods have been made. All such adjustments are of a normal recurring nature.
The results of operations for the three and six months ended June 30, 2003 are
not necessarily indicative of the results of operations which the Company may
achieve for the entire year.
Note 2 - Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 updates, clarifies, and simplifies existing accounting
pronouncements. SFAS No. 145 requires that in certain circumstances previous
items classified as extraordinary that do not meet the criteria in Accounting
Principals Board (APB) Opinion 30 must be reclassified. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. The adoption of SFAS
No. 145 did not have a material effect on the Company's financial condition or
results of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities. SFAS No. 146
requires recognition of a liability for a cost associated with an exit or
disposal activity when the liability is incurred, as opposed to when the entity
commits to an exit plan. SFAS No. 146 is effective prospectively for exit or
8
disposal activities initiated after December 31, 2002. The adoption of SFAS No.
146 did not have a material impact on the Company's financial condition or
results of operations.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions. SFAS No. 147 removes acquisitions of financial institutions from
the scope of both SFAS No. 72, Accounting for Certain Acquisitions of Banking or
Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16
and 17, When a Savings and Loan Association or a Similar Institution is Acquired
in a Business Combination Accounted for by the Purchase Method and requires that
those transactions be accounted for in accordance with SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. In
addition, SFAS No. 147 amends SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. SFAS No. 147's transition provisions require affected
institutions to reclassify their SFAS No. 72 goodwill as SFAS No. 142 goodwill
as of the date the Company initially applied SFAS No. 142 in its entirety. The
adoption of SFAS No. 147 did not have any impact on the Company's financial
condition or results of operations.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires that the guarantor recognize,
at the inception of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing such guarantee. FIN 45 also requires additional
disclosure about the guarantor's obligations under certain guarantees that it
has issued. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002 and the disclosure requirements are effective
after December 15, 2002. The adoption of FIN 45 did not have a material impact
on the Company's financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities and Interpretation of ARB No. 51 (FIN 46). FIN 46
establishes the criteria for consolidating variable interest entities. FIN 46 is
effective for fiscal years or interim periods beginning after June 15, 2003, to
variable entities that were acquired before February 1, 2003. The adoption of
FIN 46 did not have a material impact on the Company's financial condition or
results of operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003. The Company does not expect that SFAS No. 149 will have a
significant effect on its consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
9
financial instruments with characteristics of both liabilities and equity, and
imposes certain additional disclosure requirements. The provisions of SFAS No.
150 are generally effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company does not expect
that this standard will have a significant effect on its consolidated financial
statements.
Note 3 - Comprehensive Income
Other comprehensive income for the Company consists of net unrealized gains and
losses on investment securities available for sale. Total comprehensive income
for the three months ended June 30, 2003 was $2,227,600 compared to $2,372,607
for the three months ended June 30, 2002. Total comprehensive income for the
six months ended June 30, 2003 was $4,497,601 compared to $3,060,358 for the six
months ended June 30, 2002.
Note 4 - Stock-based Compensation
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of SFAS No. 123 to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, SFAS No. 148 also amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosure about those effects in the interim
financial information. The Company adopted the provisions of SFAS No. 148
effective December 31, 2002.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plans.
Accordingly compensation cost is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of grant over the amount an
employee must pay to acquire the stock. Had compensation cost been determined
based upon the fair value of the options at the grant dates consistent with the
method recommended by SFAS No. 123, on a pro forma basis, the Company's net
income and income per share for the three and six months ended June 30, 2003 and
2002 is indicated below.
10
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income $1,976,974 $1,457,328 $3,829,161 $2,718,048
Deduct: Total stock-based
Compensation expense determined
under fair value based method,
net of related tax effect 36,534 24,692 69,729 44,332
---------- ---------- ---------- ----------
Pro Forma $1,940,440 $1,432,636 $3,759,432 $2,673,716
========== ========== ========== ==========
Basic net income per share:
As reported $ 0.75 $ 0.56 $ 1.46 $ 1.04
Pro forma $ 0.74 $ 0.55 $ 1.43 $ 1.02
Diluted net income per share:
As reported $ 0.74 $ 0.55 $ 1.44 $ 1.03
Pro forma $ 0.73 $ 0.54 $ 1.42 $ 1.01
Note 5 - Stock Dividend Declared
On July 16, 2003, the board of directors of the Company declared a 10% stock
dividend for shareholders of record on August 8, 2003 which is payable on August
29, 2003. Stockholders' equity, including shares, at June 30, 2003 and December
31, 2002, has been retroactively restated to reflect the stock dividend. All per
share amounts and weighted average shares outstanding have been restated to
reflect the stock dividend.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
- ---------------------------
Georgia Bank Financial Corporation (the "Company") may, from time-to-time, make
written or oral forward-looking statements, including statements contained in
the Company's filings with the Securities and Exchange Commission (the
"Commission") and its reports to shareholders. Statements made in such
documents, other than those concerning historical information, should be
considered forward-looking and subject to various risks and uncertainties. Such
forward-looking statements are made based upon management's belief as well as
assumptions made by, and information currently available to, management pursuant
to "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. The Company's actual results may differ materially from the results
anticipated in forward-looking statements due to a variety of factors, including
governmental monetary and fiscal policies, deposit levels, loan demand, loan
collateral values, securities portfolio values, and interest rate risk
management; the effects of competition in the banking business from other
commercial banks, savings and loan associations, mortgage banking firms,
consumer finance companies, credit unions, securities brokerage firms, insurance
companies, money market mutual funds and other financial institutions operating
in the Company's market area and elsewhere, including institutions operating
through the Internet; changes in governmental regulation relating to the banking
industry, including regulations relating to branching and acquisitions; failure
of assumptions underlying the establishment of reserves for loan losses,
including the value of collateral underlying delinquent loans, and other
factors. The Company cautions that such factors are not exclusive. The Company
does not undertake to update any forward-looking statement that may be made from
time to time by, or on behalf of, the Company.
Critical Accounting Policies
- ------------------------------
The accounting and financial reporting policies of Georgia Bank Financial
Corporation and subsidiary conform to accounting principles generally accepted
in the United States of America accounting principles and to general practices
within the banking industry. Of these policies, management has identified the
allowance for loan losses as a critical accounting policy that requires
difficult subjective judgment and is important to the presentation of the
financial condition and results of operations of the Company.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely.
Subsequent recoveries are added to the allowance. The allowance is an amount
that management believes will be adequate to absorb losses on existing loans
that become uncollectible, based on evaluations of the collectibility of loans.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, historical loss rates, overall portfolio
quality, review of specific problem loans, and current economic conditions and
trends that may affect a borrower's ability to repay.
12
The Company segments its allowance for loan losses into the following five major
categories: 1) identified losses for impaired loans; 2) general reserves for
Classified/Watch loans; 3) general reserves for loans with satisfactory ratings;
4) general reserves based on economic and market risk qualitative factors, and
5) an unallocated amount. Risk ratings are initially assigned in accordance
with the Bank's loan and collection policy. An organizationally independent
department reviews grade assignments on an ongoing basis. Management reviews
current information and events regarding a borrowers' financial condition and
strengths, cash flows available for debt repayment, the related collateral
supporting the loan and the effects of known and expected economic conditions.
When the evaluation reflects a greater than normal risk associated with the
individual loan, management classifies the loan accordingly. If the loan is
determined to be impaired, management determines the allowance for loan losses
for that loan based upon the present value of future cash flows discounted at
the loan's effective interest rate or the fair value of the collateral as the
measure for the amount of the impairment. Impairment losses are included in the
allowance for loan losses through a charge to the provision for losses on loans.
Subsequent recoveries are added to the allowance for loan losses. Cash receipts
for accruing loans are applied to principal and interest under the contractual
terms of the loan agreement. Cash receipts on impaired loans for which the
accrual of interest has been discontinued are applied first to principal and
then to interest income. Impaired and Classified/Watch loans are aggressively
monitored. The allowance for loans rated satisfactory is further subdivided
into various types of loans as defined by call report codes. The Company has
developed specific qualitative factors to apply to each individual component of
the allowance. These qualitative factors are based upon economic, market and
industry conditions that are specific to the Company's local two county markets.
These qualitative factors include, but are not limited to, national and local
economic conditions, bankruptcy trends, unemployment trends, loan
concentrations, dependency upon government installations and facilities, and
competitive factors in the local market. These allocations for the qualitative
factors are included in the various individual components of the allowance for
loan losses. The qualitative factors are subjective in nature and require
considerable judgment on the part of management. However, it is management's
opinion that these factors represent uncertainties in the Bank's business
environment that must be factored into management's analysis of the allowance
for loan losses. Management is committed to developing more historical data in
the future to reduce the dependence on these qualitative factors. The
unallocated component of the allowance is established for losses that
specifically exist in the remainder of the portfolio, but have yet to be
identified.
Management believes that the allowance for loan losses is adequate. While the
Company has 74.25% of its loan portfolio secured by real estate loans, this
percentage is not significantly higher than in previous years. Commercial real
estate comprises 29.36 % of the loan portfolio and consists primarily of owner
occupied properties where the operations of the commercial entity provide the
necessary cash flow to service the debt. For this portion of real estate loans,
repayment is not dependent upon liquidation of the real estate. Construction
and development (18.46%) has been an increasingly important portion of the real
estate loan portfolio. The Company carefully monitors the loans in this
category since the repayment of these loans is generally dependent upon the
liquidation of the real estate and is impacted by national and local economic
conditions. The residential category represents those loans that the Company
13
chooses to maintain in its portfolio rather than selling into the secondary
market for marketing and competitive reasons. The residential held for sale
category comprises loans that are in the process of being sold into the
secondary market. The credit has been approved by the investor and the interest
rate locked so the Company takes no credit or interest rate risk with respect to
these loans. The Company has no large loan concentrations to individual
borrowers or industries. Only 12.57% of the Company's portfolio consists of
consumer loans. Unsecured loans at June 30, 2003 were $8.8 million.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
Performance Overview - Net Income
- -------------------------------------
The Company's net income for the second quarter of 2003 was $1,977,000, which
was an increase of $520,000 (35.66%) compared to net income of $1,457,000 for
the second quarter of 2002. Basic net income per share was $0.75 for the second
quarter of 2003 compared to $0.56 for the second quarter of 2002. Earnings per
share for both periods have been adjusted to reflect the 10% stock dividend
declared which is discussed in Item 1, Note 5 above. Net income for the first
six months of 2003 was $3,829,000, an increase of $1,111,000 (40.9%) compared
with net income of $2,718,000 for the first six months of 2002. The increase in
net income for both the three and six months ended June 30, 2003 was primarily a
result of an increase in gain on sales of loans in the secondary market due to
increased home purchases and refinancing activity, as well as an increase in net
interest income. The Bank experienced an increase in interest income due to
increased loan volume which was somewhat offset by a decrease in investment
interest income, due to lower interest rates. Interest expense decreased due to
the lower deposit interest rates for the three and six months ended June 30,
2003. The income growth discussed above for the three and six months ended June
30, 2003, was partially offset by increases in salaries and employee benefits
expenses due to higher commissions related to the secondary mortgage market
volume, and increased personnel to support growth. For the six months ended June
30, 2003 as compared with the six months ended June 30, 2002, there was a
$178,000 decrease in the provision for loan losses. In March 2003, the Company
began segmenting its loan losses into five major categories. See Critical
Accounting Policies above. This resulted in an increase in the general
allowance based on economic and market risk qualitative factors and was
partially offset by a decrease in the unallocated portion of the allowance.
Increases in other operating expenses is due to increases in various areas due
to growth, with the largest increases noted in marketing and loan costs,
primarily related to the sale of mortgage loans in the secondary market.
Total assets increased $37.2 million (6.5%) from December 31, 2002 and $75.4
million (14.2%) from June 30, 2002. For the six months ended June 30, 2003, the
$37.2 million of growth was primarily attributable to growth in loans of $24.4
million, cash and due from banks of $7.0 million, federal funds sold of $10.2
million, and other assets of $2.7 million, which was somewhat offset by a
14
decrease in investments of $6.3 million. Deposits increased $36.6 million and
securities sold under repurchase agreements decreased $4.0 million during the
six months ended June 30, 2003. For the twelve months ended June 30, 2003,
loans increased $67.3 million, investments increased $7.1 million, cash and due
from banks increased $3.9 million and other assets increased $3.2 million,
somewhat offset by a decrease in federal funds sold of $5.7 million. During the
past twelve months, deposits increased $75.5 million, and securities sold under
repurchase agreements decreased $9.1 million.
The return on average assets for the Company was 1.31% for the six months ended
June 30, 2003, compared to 1.09% for the same period last year. The return on
average stockholders' equity was 15.76% for the six months ended June 30, 2003,
versus 13.34% for the comparable period in 2002.
Net Interest Income
- ---------------------
Net interest income increased $575,000 (11.6%) over the second quarter of 2002
and $1,230,000 (12.8%) during the first six months of 2003 over the comparable
period in 2002. Interest income on loans increased $538,000 (9.0%) for the
second quarter 2003 over the second quarter 2002, and $923,000 (7.8%) for the
six months ended June 30, 2003 over the comparable six-month period in 2002.
Despite lower interest rates, these increases are due to increased loan volume.
Investment interest income decreased $186,000 (10.7%) for the second quarter
2003 over the second quarter 2002, and $188,000 (5.6%) for the six months ended
June 30, 2003 over the comparable six-month period in 2002. Interest income on
investment securities decreased due to the lower interest rates, in spite of the
increased average balance. Interest-earning assets were $569.3 million at June
30, 2003, an increase of $68.7 million (13.7%) over June 30, 2002 and $28.3
million (5.2%) over December 31, 2002. Despite increases in deposit volumes,
interest expense on deposits decreased $190,000 (8.9%) for the second quarter of
2003 over the second quarter of 2002 and $449,000 (10.3%) for the six months
ended June 30, 2003 over the comparable six-month period in 2002, due to lower
interest rates during 2003. The decrease in other borrowings interest expense
in both the three-month and six-month periods ended June 30, 2003 compared to
the same periods in 2002 is due to a $5.0 million Federal Home Loan Bank advance
prepayment in September 2002. A $5.0 million Federal Home Loan Bank advance was
secured December 30, 2002 at a lower interest rate. Despite higher average
balances, interest expense on securities sold under repurchase agreements only
had a minimal increase in interest expense due to the lower interest rates.
The Company's net interest margin for the three and six months ended June 30,
2003 was 3.85% and 3.86%, respectively, compared to 4.05% and 4.06% for the
three and six months ended June 30, 2002, respectively.
Noninterest Income
- -------------------
Noninterest income increased $1,309,000 (50.3%) during the three-month period
ended June 30, 2003 compared to the three-month period ended June 30, 2002 and
$2,070,000 (41.3%) during the six-month period ended June 30, 2003 compared to
the six-month period ended June 30, 2002. These increases were primarily from
fee income from the origination and sale of mortgages in the secondary market
which increased $1,292,000 (104.3%) during the three-month period ended June 30,
2003 compared to the three-month period ended June 30, 2002 and $1,944,000
(81.9%) during the six-month period ended June 30, 2003 compared to the
six-month period ended June 30, 2002. These increases are the result of higher
volumes of loans sold which are influenced by the low interest rate environment
during 2003.
Noninterest Expense
- --------------------
Noninterest expense totaled $5,949,000 for the second quarter of 2003, an
increase of $1,057,000 (21.6%) over the second quarter of 2002 and totaled
$11,151,000 for the six months ended June 30, 2003, an increase of $1,714,000
(18.2%) over the comparable period in 2002. Salary expense of $3,237,000 and
$5,992,000 for the three and six months ended June 30, 2003, respectively,
15
increased $796,000 (32,6%) over the second quarter of 2002 and $1,228,000
(25.8%) over the six months ended June 30, 2002. Increases in mortgage
commissions and salaries directly related to the secondary mortgage market
volume accounted for $550,000 of the increase for the three months period and
$856,000 for the six-month period. Overall company growth accounted for the
remainder of the increase. Employee benefits increased $87,000 (15.6%) for the
three months ended June 30, 2003 compared to the three months ended June 30,
2002, and $172,000 (16.1%) for the six months ended June 30, 2003 as compared to
the six months ended June 30, 2002. Increased mortgage production accounts for
$36,000 of the increase for the three month period and $73,000 for the six month
period, while increases in medical and dental insurance and 401K expense were
somewhat offset by a decrease in long-term compensation expense. Other
operating expenses increased $153,000 (11.6%) over the second quarter of 2002
and $278,000 (11.3%) during the first six months of 2003 over the comparable
period in 2002. The increase is primarily attributable to expanded marketing
and loan costs associated with the increased mortgage volume.
Income Taxes
- -------------
Income tax expense for the second quarter of 2003 totaled $1,177,000, an
increase of $291,000 (37.0%) from the second quarter of 2002. Income tax
expense for the six months ended June 30, 2003 totaled $2,045,000 for an
effective tax rate of 34.81% compared to 33.87% for the six months ended June
30, 2002. The increase in the effective tax rate for the six months ended June
30, 2003 is primarily due to an increase in Sec. 291 interest disallowance.
Income taxes are estimated on a quarterly basis.
Asset Quality
- --------------
Table 1 which follows shows the current and prior period amounts of
non-performing assets. Non-performing assets were $3.0 million at June 30,
2003, compared to $1.9 million at December 31, 2002 and $1.5 million at June 30,
2002. The impact of a slower economy is reflected in detoriation of a number of
smaller commercial real estate loans. Additionally, it reflects a higher number
of consumer bankruptcies, which have been placed on nonaccrual pending
disposition of bankruptcy proceedings. The ratio of non-performing assets to
total loans and other real estate was 0.69% at June 30, 2003, compared to 0.48%
at December 31, 2002 and 0.43% at June 30, 2002. The control and monitoring of
non-performing assets continues to be management's priority.
16
At June 30, 2003, December 31, 2002 and June 30, 2002, the Company had no loans
90 days past due and still accruing.
Allowance for Loan Losses
- ----------------------------
The allowance for loan losses represents a reserve for probable loan 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 particular
emphasis on impaired, non-accruing, past due, and other loans that management
believes require special attention. The determination of the allowance for loan
losses is considered a critical accounting policy of the Company. See "Critical
Accounting Policies" above for a discussion of the determination of the
allowance.
The allowance for loan losses was $7.1 million at June 30, 2003 and $6.5 million
at December 31, 2002. Additions to the allowance for loan losses are made
periodically to maintain the allowance at an appropriate level based upon
management's analysis of potential risk in the loan portfolio. A provision for
losses in the amount of $432,000 was charged to expense for the quarter ended
June 30, 2003 compared to $415,000 for the quarter ended June 30, 2002, and
$907,000 for the six months ended June 30, 2003 compared to $1,085,000 for the
six months ended June 30, 2002.
At June 30, 2003 the ratio of allowance for loan losses to total loans was 1.68%
compared to 1.65% at December 31, 2002 and 1.58% at June 30, 2002. Management
considers the current allowance for loan losses appropriate based upon its
analysis of the potential risk in the portfolio, although there can be no
assurance that the assumptions underlying such analysis will continue to be
correct.
Liquidity and Capital Resources
- ----------------------------------
The Company's liquidity remains adequate to meet operating and loan funding
requirements. The loan to deposit ratio at June 30, 2003 was 88.3% compared to
90.3% at December 31, 2002 and 88.3% at June 30, 2002. Loans increased $67.3
million from June 30, 2002 and $24.4 million during the first six months of 2003
while deposits increased $75.5 million from June 30, 2002 and increased $36.6
million during the first six months of 2002. Deposits at June 30, 2003 include
$25.0 million of brokered certificates of deposit, a $10.0 million increase
since December 31, 2002. The Company also uses Federal Home Loan Bank
borrowings, reverse repurchase agreements and securities sold under repurchase
agreements to fund loan growth. The Company maintains a line of credit with the
Federal Home Loan Bank approximating 10% of the Bank's total assets. Federal
Home Loan Bank advances are collateralized by eligible first mortgage loans, and
commercial real estate loans. The Company has a federal funds purchased
accommodation with The Bankers Bank, Atlanta, Georgia, for advances up to $12.8
million and with SunTrust Bank, Atlanta, Georgia for advances up to $10.0
million. The Company maintains repurchase lines of credit with SunTrust
Robinson Humphrey, Atlanta, Georgia, for advances up to $11.0 million and with
The Bankers Bank, Atlanta, Georgia, for advances up to $10.0 million. At June
30, 2003, securities sold under repurchase agreements included $6.0 million in
17
repurchase agreements with SunTrust Robinson Humphrey, Atlanta, Georgia.
Additionally, liquidity needs can be satisfied by the structuring of the
maturities of investment securities and the pricing and maturities on loans and
deposits offered to customers. While there were no increases in FHLB borrowings
from June 30, 2002 and from December 31, 2002, an advance was prepaid in
September 2002 and another advance secured at a lower rate in December 2002.
Securities sold under repurchase agreements decreased $9.1 million from June 30,
2002 and $4.0 million from December 31, 2002.
Shareholders' equity to total assets was 8.4% at June 30, 2003 compared to 8.1%
at June 30, 2002 and 8.2% at December 31, 2002. The capital of the Company and
the Bank exceeded all required regulatory guidelines at June 30, 2003. The
Company's Tier 1 risk-based, total risk-based and leverage capital ratios were
10.21%, 11.46%, and 8.09%, respectively, at June 30, 2003. Table 2 which follows
reflects the current regulatory capital levels in more detail, including
comparisons to the regulatory minimums.
Management is not aware of any events or uncertainties that are reasonably
likely to have a material effect on the Company's liquidity, capital resources
or operations.
Commitments and Contractual Obligations
- ------------------------------------------
The Bank is a party to lines of credit with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers. Lines of
credit are unfunded commitments to extend credit. These instruments involve, in
varying degrees, exposure to credit and interest rate risk in excess of the
amounts recognized in the financial statements. The Bank's exposure to credit
loss in the event of nonperformance by the other party to the financial
instrument for unfunded commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Bank evaluates
construction and acquisition and development loans for the percentage completed
before extending additional credit. The Bank follows the same credit policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments.
Unfunded commitments to extend credit where contract amounts represent potential
credit risk totaled $90,320,000 at June 30, 2003. These commitments are
primarily at variable interest rates.
The Company's commitments are funded through internal funding sources of
scheduled repayments of loans and sales and maturities of investment securities
available for sale or external funding sources through acceptance of deposits
from customers or borrowings from other financial institutions.
The following table is a summary of the Company's commitments to extend credit,
commitments under contractual leases as well as the Company' contractual
18
obligations, consisting of deposits, FHLB advances, which are subject to early
termination options, and borrowed funds by contractual maturity date for the
next five years.
Commitments and Due in Due in Due in Due in Due in
Contractual Obligations 1 Year 2 Years 3 Years 4 Years 5 Years
- ----------------------------- ------------ ----------- ----------- ----------- -----------
Lines of credit $ 90,320,000 - - - -
Lease agreements 154,534 84,489 50,934 36,350 12,700
Deposits 223,548,274 79,793,089 72,696,755 29,768,451 29,209,125
Securities sold under
repurchase agreements 38,988,602 - - - -
FHLB advances 5,000,000 - - - -
Other borrowings 1,000,000 - - - -
------------ ----------- ----------- ----------- -----------
Total commitments and
contractual obligations $359,011,410 $79,877,578 $72,747,689 $29,804,801 $29,221,825
============ =========== =========== =========== ===========
Although management regularly monitors the balance of outstanding commitments to
fund loans to ensure funding availability should the need arise, management
believes that the risk of all customers fully drawing on all these lines of
credit at the same time is remote.
Effects of Inflation and Changing Prices
- ---------------------------------------------
Inflation generally increases the cost of funds and operating overhead and to
the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction and to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation can increase
a financial institution's cost of goods and services purchased, the cost of
salaries and benefits, occupancy expense and similar items. Inflation and
related increases in interest rates generally decrease the market value of
investments and loans held and may adversely affect liquidity, earnings, and
stockholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase, and can reduce the Company's earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.
19
TABLE 1
- --------
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30,
------------------------------
PROFITABILITY 2003 2002
- ------------- ------------ ----------------
Return on average assets * 1.31% 1.09%
Return on average equity * 15.76% 13.34%
ALLOWANCE FOR LOAN LOSSES
- -------------------------
Beginning balance, January 1, $ 6,534 $ 5,109
Provision charged to expense 907 1,085
Recoveries 310 254
Loans charged off 676 858
------------ ----------------
Ending balance, June 30, $ 7,075 $ 5,590
============ ================
NON-PERFORMING ASSETS June 30, 2003 December 31, 2002 June 30, 2002
- --------------------------- -------------- ------------------ --------------
Non-accrual loans $ 2,917 $ 1,897 $ 1,526
Other real estate owned 117 0 0
-------------- ------------------ --------------
Total non-performing assets $ 3,034 $ 1,897 $ 1,526
============== ================== ==============
* Annualized
20
TABLE 2
- --------
Georgia Bank Financial Corporation
and
Georgia Bank & Trust Company
Regulatory Capital Requirements
June 30, 2003
(Dollars in Thousands)
Actual Required Excess
Amount Percent Amount Percent Amount Percent
----------------- ---------------- ----------------
Georgia Bank Financial
Corporation
Risk-based capital:
Tier 1 capital $48,453 10.21% 18,980 4.00% 29,473 6.21%
Total capital 54,398 11.46% 37,959 8.00% 16,439 3.46%
Tier 1 leverage ratio 48,453 8.09% 23,946 4.00% 24,507 4.09%
Georgia Bank & Trust
Company
Risk-based capital:
Tier 1 capital $45,752 9.68% 18,915 4.00% 26,837 5.68%
Total capital 51,677 10.93% 37,829 8.00% 13,848 2.93%
Tier 1 leverage ratio 45,752 7.66% 23,882 4.00% 21,870 3.66%
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of June 30, 2003, there were no substantial changes in the interest rate
sensitivity analysis or the sensitivity of market value of portfolio equity for
various changes in interest rates calculated as of December 31, 2002. The
foregoing disclosures related to the market risk of the Company should be read
in conjunction with the Company's audited consolidated financial statements,
related notes and management's discussion and analysis of financial condition
and results of operations for the year ended December 31, 2002 included in the
Company's 2002 Annual Report on Form 10-K, Item 7A.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer
(principal executive officer) and its Executive Vice President and Chief
Operating Officer (principal financial officer), of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, such officers
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) that is required to be included in the Company's
periodic filings with the Securities and Exchange Commission. There have been
no significant changes in the Company's internal controls or, to the Company's
knowledge, in other factors that could significantly affect those internal
controls subsequent to the date the Company carried out its evaluation, and
there have been no corrective actions with respect to significant deficiencies
or material weaknesses.
22
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company
or any of its subsidiaries is a party or of which any of their
property is subject.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The Annual Meeting of Shareholders was held on April 16, 2003 at the
Company's office located at 3530 Wheeler Road, Augusta, Georgia.
(b) The following directors were elected for a term of one year and until
a successor is duly qualified and elected:
William J. Badger
R. Daniel Blanton
Warren Daniel
Edward G. Meybohm
Robert W. Pollard, Jr.
Randolph R. Smith
Ronald L. Thigpen
John W. Trulock, Jr.
(c) The following matters were voted on at the meeting as was previously
identified in the Proxy materials forwarded to each shareholder:
23
1. Proposal to elect the nine individuals nominated by management as
Directors.
Votes were cast as follows:
Director For Withhold Abstain
-------- --- -------- -------
William J. Badger 2,199,524 0 55
R. Daniel Blanton 2,199,524 0 55
Warren Daniel 2,199,524 0 55
Edward G. Meybohm 2,199,524 0 55
Robert W. Pollard, Jr. 2,199,524 0 55
Randolph R. Smith, M.D. 2,199,524 0 55
Ronald L. Thigpen 2,199,524 0 55
John W. Trulock, Jr. 2,199,524 0 55
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Articles of Incorporation of the Company (Incorporated by
reference from the Company's registration statement on Form SB-2 filed
August 20, 1997 (Registration No. 333-34037)).
3.2 Bylaws of the Company (Incorporated by reference to the Company's
Form 10-KSB, dated April 29, 1994).
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes - Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes - Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
(b) Reports on Form 8-K
Form 8-K filed on April 29, 2003, reporting earnings for the first
quarter of 2003 under Item 9 Pursuant to instructions contained in
Item 12 and SEC Release No. 33-8176 and 34-47226.
24
GEORGIA BANK FINANCIAL CORPORATION
Form 10-Q Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GEORGIA BANK FINANCIAL CORPORATION
Date: August 13, 2003 By: /s/ Ronald L. Thigpen
---------------- -------------------------------
Ronald L. Thigpen
Executive Vice President, Chief Operating
Officer (Duly Authorized Officer of
Registrant and Principal Financial Officer)
25