SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange
----- Act of 1934
For the quarterly period ended March 31, 2004.
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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
---------------
(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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
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 March 31, 2004.
GEORGIA BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page
Part I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2004 and
December 31, 2003 3
Consolidated Statements of Income for the three months
ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 2004 and 2003 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
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, Uses of Proceeds and Issuer Purchases of
Equity Securities 23
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 23
Signature 25
* No information submitted under this caption
1
PART I
FINANCIAL INFORMATION
2
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
ASSETS
March 31,
2004 December 31,
(Unaudited) 2003
------------- --------------
Cash and due from banks $ 15,791,853 $ 15,704,566
Interest-bearing deposits in other banks 17,273 17,318
------------- --------------
Cash and cash equivalents 15,809,126 15,721,884
Investment securities
Available-for-sale 149,686,130 151,394,463
Held-to-maturity, at cost (fair values of
$5,478,826 and $5,750,099, respectively) 5,072,670 5,437,519
Loans held for sale 12,734,114 14,047,080
Loans 445,508,159 418,632,111
Less allowance for loan losses (7,402,292) (7,277,589)
------------- --------------
Loans, net 438,105,867 411,354,522
Premises and equipment, net 14,488,364 14,250,543
Accrued interest receivable 3,435,121 3,784,888
Intangible assets, net 139,883 139,883
Bank-owned life insurance 11,096,896 10,971,633
Other assets 3,247,764 3,530,542
------------- --------------
$653,815,935 $ 630,632,957
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 75,745,996 $ 68,033,102
Interest-bearing
NOW accounts 80,301,767 72,386,405
Savings 204,716,144 194,366,425
Money management accounts 23,394,362 22,137,192
Time deposits over $100,000 103,986,574 97,631,749
Other time deposits 28,173,283 29,396,929
------------- --------------
516,318,126 483,951,802
Federal funds purchased and securities sold
under repurchase agreements 41,433,893 56,968,754
Advances from Federal Home Loan Bank 35,000,000 30,000,000
Other borrowed funds 500,000 800,000
Accrued interest and other liabilities 4,831,504 5,223,354
------------- --------------
Total liabilities 598,083,523 576,943,910
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Stockholders' equity
Common stock, $3.00 par value; 10,000,000
shares authorized; 5,284,746 shares issued;
5,247,204 shares outstanding 15,854,238 15,854,238
Additional paid-in capital 34,337,584 34,337,584
Retained earnings 4,325,033 3,001,079
Treasury stock, at cost, 37,542 shares (507,360) (507,360)
Accumulated other comprehensive income 1,722,917 1,003,506
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Total stockholders' equity 55,732,412 53,689,047
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$653,815,935 $ 630,632,957
============= ==============
See accompanying notes to consolidated financial statements.
3
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31,
---------------------------------
2004 2003
---------------- ---------------
Interest income:
Loans, including fees $ 6,640,344 $ 6,257,448
Investment securities 1,706,843 1,621,372
Federal funds sold 8,224 33,106
Interest-bearing deposits in other banks 29 1,276
---------------- ---------------
Total interest income 8,355,440 7,913,202
---------------- ---------------
Interest expense:
Deposits 1,639,538 1,980,159
Federal funds purchased and securities sold
under repurchase agreements 177,388 167,572
Other borrowings 432,107 443,086
---------------- ---------------
Total interest expense 2,249,033 2,590,817
---------------- ---------------
Net interest income 6,106,407 5,322,385
Provision for loan losses 388,723 474,750
---------------- ---------------
Net interest income after provision
for loan losses 5,717,684 4,847,635
---------------- ---------------
Noninterest income:
Service charges and fees on deposits 1,058,907 1,082,649
Gain on sale of loans 1,276,680 1,787,730
Investment securities gains, net 80,751 46,192
Retail investment income 95,555 90,937
Trust service fees 122,239 69,859
Increase in cash surrender value of
bank-owned life insurance 125,263 34,912
Miscellaneous income 99,332 97,312
---------------- ---------------
Total noninterest income 2,858,727 3,209,591
---------------- ---------------
Noninterest expense:
Salaries 2,513,124 2,755,773
Employee benefits 766,855 628,415
Occupancy expenses 619,164 581,346
Other operating expenses 1,699,930 1,271,463
---------------- ---------------
Total noninterest expense 5,599,073 5,236,997
---------------- ---------------
Income before income taxes 2,977,338 2,820,229
Income tax expense 971,248 968,042
---------------- ---------------
Net income $ 2,006,090 $ 1,852,187
================ ===============
(Continued)
4
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31,
----------------------------
2004 2003
-------------- ------------
Basic net income per share $ 0.38 $ 0.35
Diluted net income per share $ 0.38 $ 0.35
Weighted average common shares outstanding 5,247,204 5,247,204
============== ============
Weighted average number of common and
common equivalent shares outstanding 5,324,089 5,353,697
============== ============
See accompanying notes to consolidated financial statements.
5
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
2004 2003
----------------- ---------------
Cash flows from operating activities
Net income $ 2,006,090 $ 1,852,187
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 313,172 320,347
Provision for loan losses 388,723 474,750
Net investment securities gains (80,751) (46,192)
Net amortization of premium on investment securities 72,332 226,924
Increase in CSV of bank-owned life insurance (125,263) (34,912)
(Gain) loss on disposal of premises and equipment (5,682) 651
Gain on sale of loans (1,276,680) (1,787,730)
Real estate loans originated for sale (57,843,342) (75,044,326)
Proceeds from sales of real estate loans 60,432,988 82,171,253
Decrease in accrued interest receivable 349,767 82,570
(Decrease) increase in other assets (87,828) 66,470
(Decrease) increase in accrued interest and other liabilities (391,850) 16,065
----------------- ---------------
Net cash provided by operating activities 3,751,676 8,298,057
----------------- ---------------
Cash flows from investing activities
Proceeds from sales of available for sale securities 8,019,697 15,340,549
Proceeds from maturities of available for sale securities 18,450,920 12,851,269
Proceeds from maturities of held to maturity securities 365,000 _
Purchase of available for sale securities (23,663,999) (34,163,698)
Net increase in loans (27,140,068) (17,091,367)
Purchase of premises and equipment (579,564) (265,810)
Proceeds from sale of premises and equipment 34,253 9,587
----------------- ---------------
Net cash used in investing activities (24,513,761) (23,319,470)
----------------- ---------------
Cash flows from financing activities
Net increase in deposits 32,366,324 23,466,211
Net decrease in federal funds purchased and
securities sold under repurchase agreements (15,534,861) (103,578)
Advances from Federal Home Loan Bank 5,000,000 -
Principal payments on other borrowed funds (300,000) (600,000)
Cash dividends paid (682,136) -
----------------- ---------------
Net cash provided by financing activities 20,849,327 22,762,633
----------------- ---------------
6
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
2004 2003
---------------- --------------
Net increase in cash and cash equivalents 87,242 7,741,220
Cash and cash equivalents at beginning of period 15,721,884 17,150,691
---------------- --------------
Cash and cash equivalents at end of period $ 15,809,126 $ 24,891,911
================ ==============
Supplemental disclosures of cash paid during the period for:
Interest $ 2,601,926 $ 2,890,377
================ ==============
Income taxes $ 150,000 $ 53,000
================ ==============
See accompanying notes to consolidated financial statements.
7
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2004
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 consolidated financial statements for the three months ended March 31, 2004
and 2003 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, 2003.
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 months ended March 31, 2004 are not
necessarily indicative of the results of operations which the Company may
achieve for the entire year.
Note 2 - 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 March 31, 2004 was $2,725,501 compared to $2,270,001 for the three months
ended March 31, 2003.
Note 3 - Stock-based Compensation
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 months ended March 31, 2004 and 2003
is indicated below.
8
Three Month Ended
March 31,
2004 2003
----------- -----------
Net income $2,006,090 $1,852,187
Deduct: Total stock-based
compensation expense determined
under fair value based method,
net of related tax effect (51,969) (33,096)
----------- -----------
Pro forma $1,954,121 $1,819,091
=========== ===========
Basic net income per share:
As reported $ 0.38 $ 0.35
Pro forma $ 0.37 $ 0.33
Diluted net income per share:
As reported $ 0.38 $ 0.35
Pro forma $ 0.37 $ 0.33
Note 4 - Cash Dividends Declared
On January 23, 2004, the Board of Directors approved the commencement of
quarterly cash dividends and declared its first quarterly cash dividend of $0.13
per share on outstanding shares. The dividend was paid on February 20, 2004 to
shareholders of record as of February 2, 2004.
On April 15, 2004, the Company declared the payment of a quarterly cash dividend
of $0.13 per share on outstanding shares. The dividend is payable on May 21,
2004 to shareholders of record as of May 3, 2004.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
- --------
The Bank was organized by a group of local citizens and commenced business on
August 28, 1989. It began operations with one branch. Today, the Bank operates
six full service branches and one drive through branch in Richmond and Columbia
counties in Augusta, Martinez, and Evans, Georgia. The Bank operates three
mortgage origination offices in Augusta, Georgia, Savannah, Georgia, and
Nashville, Tennessee. The Savannah, Georgia office also offers construction
lending services. Bank and mortgage operations are located in Augusta, Georgia
in two operations campuses located in close proximity to the main office in
Augusta, Georgia. Trust and retail investment services are located in the main
office. The Bank is Augusta's largest community banking company.
Richmond and Columbia counties have a diversified economy based primarily on
government, transportation, public utilities, health care, manufacturing, and
wholesale and retail trade. Augusta is one of the leading medical centers in the
Southeast. The 2002 population of the Augusta-Richmond County, GA-SC
metropolitan area was 337,032, the second largest in Georgia.
The Bank's services include lending, residential and commercial real estate
loans, construction and development loans, and commercial and consumer loans.
The Bank also offers a variety of deposit programs, including
noninterest-bearing demand, interest checking, money management, savings, and
time deposits. In both Richmond and Columbia counties, the Bank had 15.2% of
all deposits and was the second largest depository institution at June 30, 2003,
as cited from the Federal Deposit Insurance Corporation's website. Securities
sold under repurchase agreements are also offered. Additional services include
trust, retail investment, and mortgage. As a matter of practice, most mortgage
loans are sold in the secondary market; however, some mortgage loans are placed
in the portfolio based on marketing and balance sheet considerations. The Bank
continues to concentrate on increasing its market share through various new
deposit and loan products and other financial services and by focusing on the
customer relationship management philosophy. The Bank is committed to building
life-long relationships with its customers, employees, shareholders, and the
communities it serves.
The Bank's primary source of income is from its lending activities. In 2003,
the Bank's second largest source of income was from gain on sale of loans in the
secondary market. As mortgage interest rates began to rise during the first
quarter of 2004, this source of income has decreased, while loan income
increased due to higher loan volume. The Bank also generates income from its
investment activities and service charges and fees on deposits. The Bank
continues to concentrate on increasing trust service fees. Other significant
contributors to income include retail investment income and increase in cash
surrender value of bank-owned life insurance.
The Bank has experienced steady growth. Over the past five years, assets grew
from $342.1 million at December 31, 1999 to $630.6 at December 31, 2003. At
March 31,
10
2004, assets were $653.8 million. From year end 1999 to year end 2003, loans
increased $193.6 million, and deposits increased $200.8 million. From December
31, 2003 to March 31, 2004, loans increased $25.4 million and deposits increased
$32.4 million. Also, from 1999 to 2003, return on average equity increased from
13.48% to 15.62% and return on average assets increased from 1.21% to 1.31%. At
March 31, 2004, return on average assets was 1.26% and return on average equity
was 14.76%. Net income for the year ended 1999 was $4.0 million compared to net
income of $7.9 million at year end 2003. Net income for the quarter ended March
31, 2004 was $2.0 million. The Company has reached a level of maturity evidenced
by long-term financial performance and stability that resulted in the January
23, 2004 declaration of its first quarterly cash dividend of $0.13 per share. On
April 15, 2004, the Company declared its second quarterly cash dividend of $0.13
per share.
The Bank meets its liquidity needs by managing cash and due from banks, federal
funds purchased and sold, maturity of investment securities, paydowns from
mortgage backed securities, and draws on lines of credit. Additionally,
liquidity can be managed through structuring deposit and loan maturities. The
Bank funds loan and investment growth with core deposits, securities sold under
repurchase agreements and wholesale borrowings. During inflationary periods,
interest rates generally increase. When interest rates rise, variable rate
loans and investments produce higher earnings, however, deposit and other
borrowings interest expense and operating expenses also rise. The Bank monitors
its interest rate risk in a ramp up and down annually 200 basis points (2%)
scenario and a shock up and down 200 (2%) basis points scenario. The Bank
monitors operating expenses through responsibility center budgeting.
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
11
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 the Company 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.
The Company segments its allowance for loan losses into the following four 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. 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 allocates a
portion of 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
reserves for loans rated satisfactory are further subdivided into various types
of loans as defined by call report codes. The Company developed specific
qualitative factors to apply to each individual component of the reserve. These
qualitative factors are based upon economic, market and industry conditions that
are specific to the Company's local two county markets.
12
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 the Company's management. However, it is
the Company's opinion that these factors do represent uncertainties in the
Bank's business environment that must be factored into the Company's analysis of
the allowance for loan losses. The Company is committed to developing more
historical data in the future to reduce the dependence on these qualitative
factors.
Management believes that the allowance for loan losses is adequate. While the
Company has 76.99% of its loan portfolio secured by real estate loans, this
percentage is not significantly higher than in previous years. Commercial real
estate comprises 29.45 % of the loan portfolio and is primarily 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 (22.30%) 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
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 10.53% of the Company's portfolio consists of
consumer loans. Unsecured loans at March 31, 2004 were $10.0 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 first quarter of 2004 was $2,006,000, which was
an increase of $154,000 (8.3%) compared to net income of $1,852,000 for the
first quarter of 2003. Basic net income per share for the three months ended
March 31, 2004 was $0.38 compared to $0.35 for the three months ended March 31,
2003. The increase in net income in 2004 compared to 2003 was primarily a
result of an increase in net interest income and a decrease in salaries,
somewhat offset by a decrease in the gain on sale of mortgage loans in the
secondary market and an increase in other operating expenses. Despite a lower
interest rate environment in 2004, loan interest income increased due to
13
loan volume. However, the lower rates, coupled with a decrease in the prime
savings account rate, resulted in lower interest expense on deposits. Gain on
sale of mortgage loans in the secondary market decreased due to higher mortgage
rates in 2004 as compared to the first quarter of 2003 which resulted in a
decrease in refinancing activity in 2004. This also resulted in lower mortgage
commissions. Other operating expenses increased $428,000, primarily due to a
$150,000 loss recorded on a fraudulent mortgage loan sold in the secondary
market, increases in processing fees due to new retail checking accounts, and
increases in professional fees to assist the Company in compliance with FDICIA.
The annualized return on average assets for the Company was 1.26% for the three
months ended March 31, 2004, compared to 1.30% for the same period last year.
While total assets have increased $58.9 million since first quarter 2003, net
income has only increased $154,000 due to the lower interest rates and the
decrease in gain on sale of mortgage loans, resulting in a lower return on
assets. The annualized return on average stockholders' equity was 14.76% for
the three months ended March 31, 2004 compared to 15.67% for the comparable
period in 2003. The decrease is primarily attributable to the continued
increase in stockholders' equity.
Total assets of $653.8 million at March 31, 2004 reflects an increase of $23.2
million (3.7%) from year-end 2003. This increase is primarily attributable to
higher loan balances since December 2003. Total loans at March 31, 2004 were
$458.2 million which represented an increase of $25.6 million (5.9%) from
December 31, 2003. Investment securities decreased $2.1 million (1.3%) from
December 31, 2003.
Loans were funded by increases in total deposits of $32.4 million (6.7%),
increases in Federal Home Loan Bank advances of $5.0 million, decreases in
investments of $1.7 million and current quarter earnings of $2.0 million less
decreases in Federal Funds Purchased of $10.4 million and securities sold under
repurchase agreements of $5.2 million since December 31, 2003. Securities sold
under repurchase agreements included $7.0 million of repurchase agreements from
SunTrust Robinson Humphrey at March 31, 2004, which decreased $4.0 million from
December 31, 2003 due to alternative funding sources.
Net Interest Income
- ---------------------
Net interest income increased $784,000 (14.7%) in the first quarter of 2004
compared to the first quarter of 2003. Despite lower interest rates, interest
income increased $442,000 (5.6%) during the first quarter of 2004 as compared to
2003. Increases in loan volume, offset by lower rates, accounted for $383,000 of
this increase. Investment income increased $85,000 over first quarter 2003,
also due to an increase in volume. Interest-earning assets at March 31, 2004
increased $52.3 million (9.3%) over March 31, 2003. Despite increased deposit
volume, interest expense on deposits decreased $341,000 (17.2%) for the
three-month period ended March 31, 2004 compared to the three-month period ended
March 31, 2003 due to lower interest rates.
14
The Company's net interest margin was 4.07% for the three months ended March 31,
2004 compared to 3.88% for the three months ended March 31, 2003.
Noninterest Income
- -------------------
Noninterest income decreased $350,000 (10.9%) for the three-month period ended
March 31, 2004 compared to the three-month period ended March 31, 2003. The
decrease in noninterest income was primarily attributable to the decrease in
gain on sale of mortgage loans in the secondary market, which decreased $511,000
(28.6%) for the three months ended March 31, 2004 compared to the three months
ended March 31, 2003. This decline is attributable to decreased mortgage volume
from home purchases and refinancing activity due to the increase in the mortgage
interest rate environment. Increase in cash surrender value of bank-owned life
insurance increased $91,000 (260.3%) during the three months ended March 31,
2004 as compared to the three months ended March 31, 2003 due to additional
policy purchases in 2003. Trust services fees increased $52,000 (75.0%) over
first quarter 2003 due to increased volume.
Noninterest Expense
- --------------------
Noninterest expense increased $363,000 (6.9%) during the first quarter of 2004
compared to the first quarter of 2003. A $150,000 loss was recorded in first
quarter 2004 for a mortgage loan which was sold in the secondary market. The
customer defaulted on the loan which had a fraudulent appraisal and the loss was
absorbed by the Company. Processing expense increased $107,000 over first
quarter 2003, primarily due to expenses associated with the new retail checking
accounts offered in 2004, coupled with overlapping expenses from the previous
checking account program. Professional fees increased $56,000, primarily due to
additional expenses to comply with FDICIA. Salary and benefits expense
decreased $243,000, due to decreased mortgage commissions associated with
decreased mortgage volume, somewhat offset by increases in salaries due to
company growth. Employee benefits expense increased $139,000, primarily due to
increases in salary continuation expense due to new plans which commenced in
late 2003, increased state unemployment insurance taxes due to a Georgia tax
increase, increased FICA expense due to retirement plan payouts, and 401K
contributions due to company growth.
Income Taxes
- -------------
Income taxes in the first quarter of 2004 totaled $971,000, an increase of
$3,000 (0.3%) over the first quarter of 2003. The effective tax rate for the
three months ended March 31, 2004 was 33.6% compared to 34.3% for the three
months ended March 31, 2003. The decrease in the effective tax rate for the
first quarter of 2004 is due primarily to the increase in cash surrender value
of bank-owned life insurance and an increase in state business license and
training tax credits.
15
Asset Quality
- --------------
Table 1 shows the current and prior period amounts of non-performing assets.
Non-performing assets were $3.2 million at March 31, 2004 compared to $3.0
million at December 31, 2003 and $2.7 million at March 31, 2003. The ratio of
non-performing assets to total loans and other real estate was 0.71% at March
31, 2004, compared to 0.70% at December 31, 2003 and 0.65% at March 31, 2003.
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 March 31,
2004, December 31, 2003 and March 31, 2003.
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."
When reviewing the allowance for loan losses, it is important to understand to
whom the Company lends. At March 31, 2004, the loan portfolio is comprised of
76.99% real estate loans, of which 22.3% constitutes construction and
acquisition and development loans. Commercial, financial and agricultural loans
comprise 12.48%, and consumer loans comprise 10.53% of the portfolio.
The allowance for loan losses is based on a loan classification system and
consists of three components: the general reserve and the specific reserve. The
general reserve is calculated based on estimates of inherent losses which
probably exist as of the evaluation date. The loss percentages used for this
portion of the portfolio, which has not been identified as problem loans, are
generally based on historical factors adjusted when necessary for qualitative
factors. The general reserve for losses on problem loans is based on a review
and evaluation of these loans, taking into consideration financial condition and
strengths of the borrower, related collateral, cash flows available for debt
repayment, and known and expected trends and conditions. General loss
percentages for problem loans are determined based upon historical loss
experience and regulatory requirements. For loans considered impaired, specific
reserves are provided in the event that the individual collateral analysis on
each problem loan indicates that the probable loss upon liquidation of
collateral would be in excess of the fair value of the collateral if the loan is
collateral dependent or if the present value of expected future cash flows is
less than the loan balance.
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 $389,000
was charged to
16
expense for the quarter ended March 31, 2004 compared to $475,000 for the
quarter ended March 31, 2003. The decrease is attributable to a decrease in
classified/watch loans.
At March 31, 2004 the ratio of allowance for loan losses to total loans was
1.62% compared to 1.69% at December 31, 2003 and 1.67% at March 31, 2003.
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 March 31, 2004 was 88.8% compared to
89.4% at December 31, 2003 and 88.2% at March 31, 2003. The decrease in the loan
to deposit ratio from December 31, 2003 reflects the significant increase in
deposits in the first quarter of 2004. Deposits at March 31, 2004 and December
31, 2003 include $35.0 million of brokered certificates of deposit. The Company
has also utilized borrowings from the Federal Home Loan Bank, reverse repurchase
agreements and securities sold under repurchase agreements to fund additional
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
loans. The Company had Federal Home Loan Bank advances totaling $35.0 million at
March 31, 2004 and $30.0 million at December 31, 2003. The Company has a federal
funds purchased accommodation for advances up to $26.3 million with various
financial institutions. In addition the Company maintains repurchase lines of
credit with the same financial institutions for advances up to $30.0 million. At
March 31, 2004, securities sold under repurchase agreements included $7.0
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.
Stockholders' equity to total assets was 8.5% at March 31, 2004 and December 31,
2003. The capital of the Company and the Bank exceeded all required regulatory
guidelines at March 31, 2004. The Company's Tier 1 risk-based, total risk-based
and the leverage capital ratios were 10.39%, 11.65%, and 8.41%, respectively, at
March 31, 2004. Table 2 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 affect 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
17
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 $108.3 million at March 31, 2004. 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
Contractual Obligations Due in Due in Due in Due in Due in
(Dollars in thousands) 1 Year 2 Years 3 Years 4 Years 5 Years
Lines of credit $108,330 - - - -
Lease agreements 128 95 77 427 -
Deposits 223,458 109,206 74,275 31,620 30,735
Federal funds purchased and
securities sold under
repurchase agreements 41,434 - - - -
Other borrowings 500 - - - -
Total commitments and
contractual obligations $373,850 $109,301 $ 74,352 $ 32,047 $ 30,735
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
18
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)
Three Months Ended March 31,
----------------------------------
PROFITABILITY 2004 2003
- ------------- ---------------- ----------------
Return on average assets * 1.26% 1.30%
Return on average equity * 14.76% 15.67%
ALLOWANCE FOR LOAN LOSSES
- --------------------------
Beginning balance, January 1, $ 7,278 $ 6,534
Provision charged to expense 388 475
Recoveries 185 166
Loans charged off (449) (344)
---------------- ----------------
Ending balance, March 31, $ 7,402 $ 6,831
================ ================
NON-PERFORMING ASSETS March 31, 2004 December 31, 2003 March 31, 2003
- ---------------------
Non-accrual loans $ 3,230 $ 3,045 $ 2,651
Other real estate owned 5 0 0
--------------- ------------------ ---------------
Total non-performing assets $ 3,235 $ 3,045 $ 2,651
=============== ================== ===============
* Annualized
20
Table 2
- --------
Georgia Bank Financial Corporation
And
Georgia Bank & Trust Company
Regulatory Capital Requirements
March 31, 2004
(Dollars in Thousands)
Actual Required Excess
Amount Percent Amount Percent Amount Percent
----------------- ---------------- ----------------
Georgia Bank Financial
Corporation
Risk-based capital:
Tier 1 capital $53,870 10.39% 20,733 4.00% 33,137 6.39%
Total capital 60,360 11.65% 41,466 8.00% 18,894 3.65%
Tier 1 leverage ratio 53,870 8.41% 25,626 4.00% 28,244 4.41%
Georgia Bank & Trust
Company
Risk-based capital:
Tier 1 capital $50,364 9.75% 20,669 4.00% 26,695 5.75%
Total capital 56,835 11.00% 41,339 8.00% 15,496 3.00%
Tier 1 leverage ratio 50,364 7.88% 25,564 4.00% 24,800 3.88%
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of March 31, 2004, there were no substantial changes from the interest rate
sensitivity analysis or the market risk analysis for various changes in interest
rate calculated as of December 31, 2003. 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, 2003 included in the Company's 2003 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 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 Bank is a party or of which any of their property is
subject.
Item 2. Changes in Securities, Uses of Proceeds and Issuer Purchases of
Equity Securities
On April 15, 2004, the Company announced the commencement of a
stock repurchase program, pursuant to which it will, from time to
time, repurchase up to 100,000 shares of its outstanding stock.
There were no shares repurchased under an existing stock
repurchase plan or otherwise during the first quarter of 2004.
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
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.
23
(b) Reports on Form 8-K
Form 8-K filed on January 29, 2004 reporting earnings for
the fourth quarter of 2004 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: May 7, 2004 By: /s/ Ronald L. Thigpen
----------------- --------------------------------------
Ronald L. Thigpen
Executive Vice President, Chief
Operating Officer (Duly Authorized
Officer of Registrant and Principal
Financial Officer)
25