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 September 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)
Check whether the issuer: (1) 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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Check whether the issuer 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 equity, as of the latest practicable date:
5,247,204 shares of common stock, $3.00 par value per share, outstanding as
of September 30, 2003.
GEORGIA BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page
Part I
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002 3
Consolidated Statements of Income for the Three and Nine
Months ended September 30, 2003 and 2002 4
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
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 *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K *
Signature 25
* No information submitted under this caption
1
PART I
FINANCIAL INFORMATION
2
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
ASSETS
September 30, December 31,
2003 2002
-------------------------------
Cash and due from banks $ 17,957,328 $ 12,942,512
Federal funds sold 15,901,000 3,691,000
Interest-bearing deposits in other banks 17,297 517,179
--------------- --------------
Cash and cash equivalents 33,875,625 17,150,691
Investment securities
Available-for-sale 137,777,980 133,971,802
Held-to-maturity, at cost (fair values of
$5,724,310 and $6,385,650, respectively) 5,437,331 6,138,889
Loans held for sale 23,644,293 24,296,598
Loans 394,563,015 372,402,679
Less allowance for loan losses (6,974,102) (6,534,417)
--------------- --------------
Loans, net 387,588,913 365,868,262
Premises and equipment, net 14,222,788 13,882,987
Accrued interest receivable 3,516,227 3,688,630
Intangible assets, net 139,883 139,883
Bank-owned life insurance 10,848,841 2,646,751
Other assets 3,096,455 2,047,917
--------------- --------------
$ 620,148,336 $ 569,832,410
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 68,342,213 $ 70,334,882
Interest-bearing:
NOW accounts 71,283,951 63,115,877
Savings 191,002,643 152,244,387
Money management accounts 23,534,928 28,687,166
Time deposits over $100,000 96,070,009 87,746,760
Other time deposits 30,294,914 37,427,629
--------------- --------------
480,528,658 439,556,701
Securities sold under repurchase agreements 47,676,603 42,987,681
Advances from Federal Home Loan Bank 35,000,000 35,000,000
Other borrowed funds 400,000 1,000,000
Accrued interest and other liabilities 4,918,996 4,539,968
--------------- --------------
Total liabilities 568,524,257 523,084,350
--------------- --------------
Stockholders' equity
Common stock, $3.00 par value; 10,000,000
shares authorized; 5,284,746 shares issued;
5,247,204 shares outstanding 7,927,119 7,927,119
Additional paid-in capital 42,264,703 29,871,959
Retained earnings 993,769 7,471,434
Treasury stock, at cost, 37,542 shares (507,360) (507,360)
Accumulated other comprehensive income 945,848 1,984,908
--------------- --------------
Total stockholders' equity 51,624,079 46,748,060
--------------- --------------
$ 620,148,336 $ 569,832,410
=============== ==============
See accompanying notes to consolidated financial statements.
3
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
2003 2002 2003 2002
----------- ---------- ------------ -----------
Interest income:
Loans, including fees $6,630,320 $6,313,600 $19,375,530 $18,136,196
Investment securities 1,487,377 1,679,996 4,669,042 5,050,156
Federal funds sold 10,345 43,138 70,215 109,278
Interest-bearing deposits in other banks (84) 4,016 3,496 13,473
----------- ---------- ------------ -----------
Total interest income 8,127,958 8,040,750 24,118,283 23,309,103
----------- ---------- ------------ -----------
Interest expense:
Deposits 1,715,861 2,150,354 5,635,878 6,518,898
Federal funds purchased and securities sold
under repurchase agreements 154,025 166,100 486,524 468,664
Other borrowings 447,923 494,432 1,338,929 1,474,615
----------- ---------- ------------ -----------
Total interest expense 2,317,809 2,810,886 7,461,331 8,462,177
----------- ---------- ------------ -----------
Net interest income 5,810,149 5,229,864 16,656,952 14,846,926
Provision for loan losses 218,833 789,096 1,125,388 1,873,914
----------- ---------- ------------ -----------
Net interest income after provision for loan losses 5,591,316 4,440,768 15,531,564 12,973,012
----------- ---------- ------------ -----------
Noninterest income:
Service charges and fees on deposits 1,149,044 1,112,141 3,371,463 3,267,795
Gain on sale of loans 2,862,538 1,667,854 7,181,770 4,042,738
Investment securities (losses) gains, net (73,460) 118,147 (44,688) 171,013
Retail investment income 47,954 49,242 221,343 188,672
Trust service fees 97,451 57,839 247,086 155,044
Increase in cash surrender value of
bank-owned life insurance 129,166 41,522 202,090 114,302
Miscellaneous income 94,061 107,402 285,365 301,793
----------- ---------- ------------ -----------
Total noninterest income 4,306,754 3,154,147 11,464,429 8,241,357
----------- ---------- ------------ -----------
Noninterest expense:
Salaries 3,838,190 2,538,556 9,830,618 7,303,010
Employee benefits 727,505 563,239 2,037,439 1,701,397
Occupancy expenses 619,152 577,230 1,797,155 1,718,863
Other operating expenses 1,556,800 1,412,959 4,300,359 3,878,120
----------- ---------- ------------ -----------
Total noninterest expense 6,741,647 5,091,984 17,965,571 14,601,390
----------- ---------- ------------ -----------
Income before income taxes 3,156,423 2,502,931 9,030,422 6,612,979
Income tax expense 1,059,793 842,000 3,104,631 2,234,000
----------- ---------- ------------ -----------
Net income $2,096,630 $1,660,931 $ 5,925,791 $ 4,378,979
=========== ========== ============ ===========
4
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic net income per share $ 0.40 $ 0.32 $ 1.13 $ 0.83
========== ========== ========== ==========
Diluted net income per share $ 0.39 $ 0.31 $ 1.11 $ 0.82
========== ========== ========== ==========
Weighted average common shares outstanding 5,247,204 5,247,204 5,247,204 5,247,204
========== ========== ========== ==========
Weighted average number of common and
common equivalent shares outstanding 5,362,008 5,330,944 5,358,078 5,326,744
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
5
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
2003 2002
----------------- ------------------
Cash flows from operating activities
Net income $ 5,925,791 $ 4,378,979
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 966,699 1,028,867
Provision for loan losses 1,125,388 1,873,914
Net investment securities losses (gains) 44,688 (171,013)
Net amortization of premium on investment securities 606,323 302,623
Increase in CSV of bank owned life insurance (202,090) (114,302)
Loss on disposal of premises and equipment 3,048 28,252
Gain on the sale of other real estate - (5,923)
Gain on sale of loans (7,181,770) (4,042,738)
Real estate loans originated for sale (306,272,107) (168,336,711)
Proceeds from sales of real estate loans 314,106,182 176,042,809
Decrease (increase) in accrued interest receivable 172,403 (177,392)
Increase in other assets (513,265) (134,354)
Increase in accrued interest and other liabilities 379,028 267,083
----------------- ------------------
Net cash provided by operating activities 9,160,318 10,940,094
----------------- ------------------
Cash flows from investing activities
Proceeds from sales of available-for-sale securities 33,318,794 12,750,167
Proceeds from maturities of available-for-sale securities 50,931,903 32,592,286
Proceeds from maturities of held-to-maturity securities 700,000 1,070,000
Purchase of available-for-sale securities (90,280,661) (66,811,244)
Net increase in loans (22,962,832) (47,700,610)
Purchase of Bank-owned life insurance (8,000,000) -
Purchases of premises and equipment (1,321,234) (1,061,140)
Proceeds from sale of other real estate 116,793 71,902
Proceeds from sale of premises and equipment 11,686 57,776
----------------- ------------------
Net cash used in investing activities (37,485,551) (69,030,863)
----------------- ------------------
Cash flows from financing activities
Net increase in deposits 40,971,957 57,401,996
Net increase in federal funds purchased and
securities sold under repurchase agreements 4,688,922 11,191,821
Payments of Federal Home Loan Bank advances - (5,000,000)
Principal payments on other borrowed funds (600,000) -
Cash paid for fractional shares (10,712) -
----------------- ------------------
Net cash provided by financing activities 45,050,167 63,593,817
----------------- ------------------
6
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
2003 2002
---------------- -----------------
Net increase in cash and cash equivalents 16,724,934 5,503,048
Cash and cash equivalents at beginning of period 17,150,691 15,509,900
---------------- -----------------
Cash and cash equivalents at end of period $ 33,875,625 $ 21,012,948
================ =================
Supplemental disclosures of cash paid during the period for:
Interest $ 7,926,597 $ 9,058,203
================ =================
Income taxes $ 3,133,000 $ 2,480,000
================ =================
Supplemental disclosures of 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
September 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 the consolidation.
The financial statements for the three and nine months ended September 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 nine months ended September 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 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 adoption of SFAS No. 149 did not have a significant effect on
the Company's 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
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 adoption of this
8
standard did not have a significant effect on the Company's consolidated
financial statements.
Note 3 - Comprehensive Income
Other comprehensive income for the Company consists of net unrealized gains and
losses on investment securities. Total comprehensive income for the three months
ended September 30, 2003 was $389,130 compared to $2,131,980 for the three
months ended September 30, 2002. Total comprehensive income for the nine months
ended September 30, 2003 was $4,886,731 compared to $5,191,838 for the nine
months ended September 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 Accounting Principles Board (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 nine months
ended September 30, 2003 and 2002 is indicated below.
9
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2003 2002 2003 2002
----------- ---------- ---------- ----------
Net income $ 2,096,629 $1,660,931 $5,925,791 $4,378,979
Deduct: Total stock-based
Compensation expense determined
Under fair value based method,
net of related tax effect 36,534 24,692 106,164 69024
----------- ---------- ---------- ----------
Pro Forma, net income $ 2,060,096 $1,636,239 $5,819,627 $4,309,955
=========== ========== ========== ==========
Basic net income per share:
As reported $ 0.40 $ 0.32 $ 1.13 $ 0.83
Pro forma $ 0.39 $ 0.31 $ 1.11 $ 0.82
Diluted net income per share:
As reported $ 0.39 $ 0.31 $ 1.11 $ 0.82
Pro forma $ 0.38 $ 0.31 $ 1.09 $ 0.81
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 was payable on
August 29, 2003. Stockholders' equity, including shares, at September 30, 2003
and December 31, 2002, reflect the stock dividend. All per share amounts and
weighted average shares outstanding have been restated to reflect the stock
dividend.
Note 6 - Stock Split
On October 15, 2003, the board of directors of the Company declared a 2:1 stock
split for shareholders of record on October 31, 2003 which is payable on
November 21, 2003. Stockholders' equity, including shares, at September 30,
2003 and December 31, 2003, has been retroactively restated to reflect the stock
split. All per share amounts and weighted average shares outstanding have been
restated to reflect the stock split.
10
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 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.
11
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 74.16% of its loan portfolio secured by real estate loans, this
percentage is not significantly higher than in previous years. Commercial real
estate comprises 29.57% 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 comprise 19.34% 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
12
by national and local economic conditions. The residential category represents
those loans that the Company 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 12.61% of the
Company's portfolio consists of consumer loans. Unsecured loans at September 30,
2003 were $9.4 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 third quarter of 2003 was $2,097,000 which was
an increase of $436,000 (26.2%) compared to net income of $1,661,000 for the
third quarter of 2002. Basic net income per share for the three months ended
September 30, 2003 was $0.40 compared to $0.32 for the three months ended
September 30, 2002. Earnings per share for both periods have been adjusted to
reflect the 2:1 stock split discussed in Item 1, Note 6. Net income for the
first nine months of 2003 was $5,926,000, an increase of $1,547,000 (35.3%) when
compared to net income of $4,379,000 for the first nine months of 2002. The
increase in net income for both the three and nine months ended September 30,
2003 compared to the same periods in 2002 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, a decrease in the provision for loan losses,
primarily due to a decrease in substandard loans, and an increase in net
interest income. Due to the lower interest rates, the Bank experienced decreases
in deposit interest expense while continuing to experience increases in loan
interest income for the three and nine months ended September 30, 2003 compared
to the three and nine months ended September 30, 2002. Interest income from
investment securities decreased due to lower average balances and lower interest
rates. The income growth discussed above for the three and nine months ended
September 30, 2003, was partially offset by increases in salaries and employee
benefits expenses due to higher commissions related to the secondary mortgage
market volume, increased personnel to support growth, 401(K) employer
contributions, and incentive compensation. The increase in other operating
expenses is primarily due to increases in marketing and loan costs, related to
the increased mortgage production.
The annualized return on average assets for the Company was 1.33% for the nine
months ended September 30, 2003, compared to 1.14% for the same period last
year. The annualized return on average stockholders' equity was 15.81% for the
nine months ended September 30, 2003 compared to 13.92% for the comparable
period in 2002.
13
Changes in Financial Condition
- ---------------------------------
Total assets of $620.1 million at September 30, 2003 reflects an increase of
$50.3 million (8.8%) from year-end 2002 and an increase of $69.4 million (12.6%)
over September 30, 2002. The growth in total assets has been largely due to
growth in the loan and investment portfolios, Federal funds sold, and bank owned
life insurance. Total loans at September 30, 2003 were $418.2 million
representing an increase of $21.5 million from December 31, 2002 and an increase
of $35.4 million from September 30, 2002. Investment securities increased $3.1
million (2.2%) from December 31, 2002 and $10.6 million (8.03%) from September
30, 2002. Federal funds sold increased $12.2 million (330.8%) from December 31,
2002 and $11.3 million (245.5%) from September 30, 2002. Bank owned life
insurance increased $8.0 million from December 31, 2002 and September 30, 2002.
Total deposits have grown $41.0 million (9.3%) since December 31, 2002 and $54.0
million (12.7%) since September 30, 2002. Total deposits include $30.0 million
of brokered CDs at September 30, 2003 compared to $15.0 million at December 31,
2002. Additionally, securities sold under repurchase agreements have increased
$4.7 million (10.9%) since December 31, 2002 and $4.0 million (9.2%) since
September 30, 2002. The Company has increased its advances from the Federal
Home Loan Bank by $5.0 million (16.7%) since September 30, 2002.
Net Interest Income
- ---------------------
Net interest income increased $580,000 (11.1%) in the third quarter of 2003
compared to the third quarter of 2002 and $1.8 million (12.2%) during the first
nine months of 2003 compared to the same period in 2002. Despite the lower
interest rates, interest income on loans increased $317,000 (5.0%) for the
three-month period and $1.2 million (6.8%) for the nine-month period due to the
additional volume. Interest income on investment securities decreased $193,000
(11.5%) and $381,000 (7.5%) for the three and nine-month periods ended September
30, 2003, respectively, compared to the same periods in 2002 due to lower rates.
Interest income on federal funds sold decreased primarily due to the lower
federal funds interest rate. Despite increases in deposit volumes, interest
expense on deposits decreased $434,000 (20.2%) and $883,000 (13.5%) during the
three and nine-month periods ended September 30, 2003, respectively, compared to
the same periods in 2002 due to lower interest rates during 2003. Decreases in
other borrowings interest expense in both the three-month and nine-month periods
ended September 30, 2003 of $47,000 (9.4%) and $136,000 (9.2%), respectively,
compared to the same periods in 2002 are due to a prepayment of a Federal Home
Loan Bank advance in September 2002 and a subsequent advance at lower rate.
The Company's net interest margin for the three months and nine months ended
September 30, 2003 was 3.93% and 3.89%, respectively, compared to 4.02% and
4.03% for the three and nine months ended September 30, 2002, respectively.
14
Noninterest Income
- -------------------
Noninterest income for the respective periods in 2003 increased $1.2 million
(36.5%) compared to the three-month period ended September 30, 2002 and $3.2
million (39.1%) compared to the nine-month period ended September 30, 2002. The
increase for both periods in noninterest income was primarily attributable to
increases in gain on sale of mortgage loans in the secondary market of $1.2
million (71.6%) over the third quarter 2002 and $3.1 million (77.6%) over the
nine months ended September 30, 2002. These increases are attributable to the
low interest rates resulting in higher levels of home purchases and
refinancings. Service charges and fees on deposits increased $37,000 (3.3%)
from the third quarter 2002 and increased $104,000 (3.2%) over the nine months
ended September 30, 2002, primarily due to increases in deposit account
balances, an increase in cash processing fees and a low earnings credit rate for
customers due to the low interest rates. Loss on sale of investment securities
increased 192,000 (162.2%) compared to the three-month period ended September
30, 2002 and $216,000 (126.1%) compared to the nine-month period ended September
30, 2002. Low yielding bonds were sold at a loss in the third quarter of 2003
and higher yielding bonds were purchased in the third and fourth quarters of
2003.
Noninterest Expense
- --------------------
Noninterest expense for the respective periods in 2003 increased $1.6 million
(32.4%) from the third quarter of 2002 and increased $3.4 million (23.0%) over
the first nine months of 2002. Salary expense increased $1.3 million (51.2%) in
the third quarter of 2003 compared to the third quarter of 2002 and increased
$2.5 million (34.6%) for the nine month period ended September 30, 2003 when
compared to the nine months ended September 30, 2002. The increases in salary
expense for both the quarter and nine-month period are primarily the result of
increased mortgage commissions directly related to the secondary mortgage market
volume, additional personnel to support Company growth and increases in
incentive compensation. Employee benefits expense increased $164,000 (29.2%)
over the third quarter of 2002 and $336,000 (19.8%) over the first nine months
of 2002, primarily due to additional 401(K) expense, FICA expense, and medical
and dental insurance expense. The increase in other operating expenses of
$144,000 (10.2%) over the three months ended September 30, 2002 and $422,000
(10.9%) over the nine months ended September 30, 2002 are primarily due to
increases in marketing expense due to an increased marketing budget and loan
costs, primarily due to costs associated with the additional mortgage
production.
Income Taxes
- -------------
Income tax expense in the third quarter of 2003 totaled $1,060,000, an increase
of $218,000 over the third quarter of 2002. Income tax expense of $3.1 million
for the first nine months of 2003 reflects an increase of $871,000 over the
comparable nine month period in 2002. The effective tax rate for the nine
months ended September 30, 2003 and 2002 was 34.4% and 33.8%, respectively. The
15
increase in the effective tax rate is primarily due to a decrease in tax-exempt
income. Income taxes are estimated on a quarterly basis.
Asset Quality
- --------------
Table 1 shows the current and prior period amounts of non-performing assets.
Non-performing assets were $2.6 million at September 30, 2003, compared to $1.9
million at December 31, 2002 and $2.8 million at September 30, 2002. The ratio
of non-performinassets to total loans and other real estate was 0.63% at
September 30, 2003, compared to 0.48% at December 31, 2002 and 0.74% at
September 30, 2002. The control and monitoring of non-performing assets
continues to be a priority of management.
There were no loans past due 90 days or more and still accruing at September 30,
2003 and 2002. There were $60,000 of loans past due and still accruing at
December 31, 2002.
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. For a
discussion of our methodology in determining the allowance, see "Critical
Accounting Policies" above.
The allowance for loan losses was $7.0 million at September 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 $219,000 was charged to expense for the quarter ended
September 30, 2003 compared to $789,000 for the quarter ended September 30,
2002, and $1.1 million for the nine months ended September 30, 2003 compared to
$1.9 million for the nine months ended September 30, 2002. The decrease in the
provision for loan losses for the third quarter and nine months ended September
2003 as compared with the third quarter and nine months ended September 2002 is
due to a decrease in substandard loans, as well as a decrease in net
charge-offs.
At September 30, 2003 the ratio of allowance for loan losses to total loans was
1.67% compared to 1.65% at December 31, 2002 and 1.61% at September 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.
16
Liquidity and Capital Resources
- ----------------------------------
The Company's liquidity remains adequate to meet operating and loan funding
requirements. The loan to deposit ratio at September 30, 2003 was 87.0%
compared to 90.3% at December 31, 2002 and 89.7% at September 30, 2002. Loans
increased $35.4 million from September 30, 2002 and $21.5 million during the
first nine months of 2003 while deposits increased $54.0 million from September
30, 2002 and increased $41.0 million during the first nine months of 2003. The
Company also uses Federal Home Loan Bank borrowings 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 specific commercial real estate loans. The Company prepaid a
$5.0 million Federal Home Loan advance in September 2002 and secured an
additional advance at a lower rate in December 2002. Securities sold under
repurchase agreements increased $4.0 million from September 30, 2002 and
increased $4.7 million from December 31, 2002. The Company has federal funds
purchased accommodations with The Bankers Bank, Atlanta, Georgia, for advances
up to $15.0 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, up to $10.0 million. At September 30, 2003,
securities sold under repurchase agreements included $11.0 million in 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.
Shareholders' equity to total assets was 8.3% at September 30, 2003 compared to
8.2% at September 30, 2002 and 8.2% at December 31, 2002. The capital of the
Company and the Bank exceeded all required regulatory guidelines at September
30, 2003. The Company's Tier 1 risk-based, total risk-based and leverage
capital ratios were 10.26%, 11.51%, and 8.21%, respectively, at September 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
17
before extending additional credit. The Bank follows the same credit policies
in making commitments and contractual obligations as it does for on-balance
sheet instruments.
Unfunded commitments to extend credit where contract amounts represent potential
credit risk totaled $105.8 million at September 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
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 $105,845,000 - - - -
Lease agreements 157,475 63,226 45,261 34,675 5,250
Deposits 218,464,599 89,591,239 69,882,264 30,178,585 29,774,246
Securities sold under
repurchase agreements 47,676,603 - - - -
FHLB advances 5,000,000
------------ ----------- ----------- ----------- -----------
Other borrowings 400,000 - - - -
------------ ----------- ----------- ----------- -----------
Total commitments and
contractual obligations $377,543,677 $89,654,465 $69,927,525 $30,213,260 $29,779,496
============ =========== =========== =========== ===========
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
18
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)
Nine Months Ended September 30,
-------------------------------------
PROFITABILITY 2003 2002
- ------------- ----------------- ------------------
Return on average assets * 1.33% 1.14%
Return on average equity * 15.81% 13.92%
ALLOWANCE FOR LOAN LOSSES
- -------------------------
Beginning balance, January 1 $ 6,534 $ 5,109
Provision charged to expense 1,125 1,874
Recoveries 462 380
Loans charged off 1,147 1,217
----------------- ------------------
Ending balance, September 30 $ 6,974 $ 6,146
================= ==================
NON-PERFORMING ASSETS September 30, 2003 December 31, 2002 September 30, 2002
- ---------------------
Non-accrual loans $ 2,631 $ 1,897 $ 2,840
Other real estate owned 0 0 0
------------------- ------------------ -------------------
Total non-performing assets $ 2,631 $ 1,897 $ 2,840
=================== ================== ===================
LOANS PAST DUE 90 DAYS OR
MORE AND STILL ACCRUING $ 0 $ 60 $ 0
=================== ================== ===================
* Annualized
20
TABLE 2
- -------
Georgia Bank Financial Corporation
and
Georgia Bank & Trust Company
Regulatory Capital Requirements
September 30, 2003
(Dollars in Thousands)
Actual Required Excess
Amount Percent Amount Percent Amount Percent
================= ================ ================
Georgia Bank Financial Corporation
Risk-based capital:
Tier 1 capital $50,539 10.26% 19,699 4.00% 30,840 6.26%
Total capital 56,705 11.51% 39,397 8.00% 17,308 3.51%
Tier 1 leverage ratio 50,539 8.21% 24,626 4.00% 25,913 4.21%
Georgia Bank & Trust Company
Risk-based capital:
Tier 1 capital $47,851 9.75% 19,634 4.00% 28,217 5.75%
Total capital 53,997 11.00% 39,268 8.00% 14,729 3.00%
Tier 1 leverage ratio 47,851 7.79% 24,557 4.00% 23,294 3.79%
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 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 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 Chief Executive Officer and Chief Operating
Officer (who serves as the Company's 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, the Company's Chief Executive Officer and Chief Operating Officer
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
and 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
None
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 Executive 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.
23
(b) Reports on Form 8-K
Form 8-K filed on July 23, 2003, reporting earnings for
the second 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: November 14, 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