SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
- --- of 1934
For the quarterly period ended June 30, 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)
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
--- ---
Indicate by check 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 stock, as of the latest practicable date:
5,247,204 shares of common stock, $3.00 par value per share, outstanding as
of June 30, 2004.
GEORGIA BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2004 and
December 31, 2003 3
Consolidated Statements of Income for the three and six months
ended June 30, 2004 and June 30, 2003 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 2004 and June 30, 2003 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
Part II Other Information
Item 1. Legal Proceedings *
Item 2. Changes in Securities, Uses of Proceeds and Issuer Purchases of *
Equity Securities
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security-Holders 24
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
* No information submitted under this caption
1
PART I
FINANCIAL INFORMATION
2
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
ASSETS June 30,
2004 December 31,
(Unaudited) 2003
------------- --------------
Cash and due from banks $ 15,097,115 $ 15,704,566
Federal funds sold 11,743,000 -
Interest-bearing deposits in other banks 17,380 17,318
------------- --------------
Cash and cash equivalents 26,857,495 15,721,884
Investment securities
Available-for-sale 155,846,245 151,394,463
Held-to-maturity, at cost (fair values of
$4,965,735 and $5,750,099, respectively) 4,772,749 5,437,519
Loans held for sale 20,431,195 14,047,080
Loans 441,348,938 418,632,111
Less allowance for loan losses (7,302,393) (7,277,589)
------------- --------------
Loans, net 434,046,545 411,354,522
Premises and equipment, net 16,859,252 14,250,543
Accrued interest receivable 3,555,963 3,784,888
Intangible assets, net 139,883 139,883
Bank-owned life insurance 11,223,719 10,971,633
Other assets 4,889,156 3,530,542
------------- --------------
$678,622,202 $ 630,632,957
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 81,723,440 $ 68,033,102
Interest-bearing
NOW accounts 74,848,327 72,386,405
Savings 219,197,189 194,366,425
Money management accounts 26,529,133 22,137,192
Time deposits over $100,000 105,498,003 97,631,749
Other time deposits 30,909,172 29,396,929
------------- --------------
538,705,264 483,951,802
Federal funds purchased and securities sold
under repurchase agreements 40,766,879 56,968,754
Advances from Federal Home Loan Bank 40,000,000 30,000,000
Other borrowed funds 900,000 800,000
Accrued interest and other liabilities 4,388,740 5,223,354
------------- --------------
Total liabilities 624,760,883 576,943,910
------------- --------------
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 5,799,619 3,001,079
Treasury stock, at cost 37,542 shares (507,360) (507,360)
Accumulated other comprehensive (loss) income (1,622,762) 1,003,506
------------- --------------
Total stockholders' equity 53,861,319 53,689,047
------------- --------------
$678,622,202 $ 630,632,957
============= ==============
3
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
2004 2003 2004 2003
----------- ----------- ------------ -----------
Interest income:
Loans, including fees $6,791,048 $6,487,762 $13,431,392 $12,745,210
Investment securities 1,712,465 1,560,293 3,419,308 3,181,665
Federal funds sold 9,006 26,764 17,230 59,870
Interest-bearing deposits in other banks 14 2,304 43 3,580
----------- ----------- ------------ -----------
Total interest income 8,512,533 8,077,123 16,867,973 15,990,325
----------- ----------- ------------ -----------
Interest expense:
Deposits 1,674,482 1,939,858 3,314,020 3,920,017
Federal funds purchased and securities sold
under repurchase agreements 134,421 164,927 311,809 332,499
Other borrowings 445,930 447,920 878,037 891,006
----------- ----------- ------------ -----------
Total interest expense 2,254,833 2,552,705 4,503,866 5,143,522
----------- ----------- ------------ -----------
Net interest income 6,257,700 5,524,418 12,364,107 10,846,803
Provision for loan losses 131,197 431,805 519,920 906,555
----------- ----------- ------------ -----------
Net interest income after provision
for loan losses 6,126,503 5,092,613 11,844,187 9,940,248
------------------------ -------------------------
Noninterest income:
Service charges and fees on deposits 1,227,462 1,139,770 2,286,369 2,222,419
Gain on sale of loans 1,628,426 2,531,502 2,905,106 4,319,232
Investment securities (losses) gains, net (85,293) (17,420) (4,542) 28,772
Retail investment income 108,983 82,452 204,538 173,389
Trust service fees 135,831 79,776 258,070 149,635
Increase in cash surrender value of
bank-owned life insurance 126,823 38,012 252,086 72,924
Miscellaneous income 112,612 93,992 211,944 191,304
----------- ----------- ------------ -----------
Total noninterest income 3,254,844 3,948,084 6,113,571 7,157,675
----------- ----------- ------------ -----------
Noninterest expense:
Salaries 3,120,656 3,236,655 5,633,780 5,992,428
Employee benefits 730,100 681,519 1,496,955 1,309,934
Occupancy expenses 642,195 596,657 1,261,359 1,178,003
Other operating expenses 1,654,695 1,472,096 3,354,625 2,743,559
----------- ----------- ------------ -----------
Total noninterest expense 6,147,646 5,986,927 11,746,719 11,223,924
----------- ----------- ------------ -----------
Income before income taxes 3,233,701 3,053,770 6,211,039 5,873,999
Income tax expense 1,076,978 1,076,796 2,048,226 2,044,838
----------- ----------- ------------ -----------
Net income $2,156,723 $1,976,974 $ 4,162,813 $ 3,829,161
=========== =========== ============ ===========
(Continued)
4
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Basic net income per share $ 0.41 $ 0.38 $ 0.79 $ 0.73
========== ========== ========== ==========
Diluted net income per share $ 0.41 $ 0.37 $ 0.78 $ 0.72
========== ========== ========== ==========
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 5,323,482 5,356,982 5,323,786 5,355,340
========== ========== ========== ==========
5
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
-------------------------------
2004 2003
-------------- ---------------
Cash flows from operating activities:
Net income $ 4,162,813 $ 3,829,161
Adjustments to reconcile net income to net cash
used in operating activities
Depreciation and amortization 646,054 647,613
Provision for loan losses 519,920 906,555
Net investment securities losses (gains) 4,542 (28,772)
Net amortization of premium on investment
securities 186,162 403,743
Increase in CSV of bank owned life insurance (252,086) (72,924)
(Gain) loss on disposal of premises and equipment (1,867) 768
Loss on the sale of other real estate 22,233 -
Gain on sale of loans (2,905,106) (4,319,232)
Real estate loans originated for sale (148,063,638) (192,127,990)
Proceeds from sales of real estate loans 144,584,629 190,059,190
Decrease (increase) in accrued interest receivable 228,925 (15,372)
(Increase) decrease in other assets (5,688) 145,826
(Decrease) increase in accrued interest and other liabilities (834,614) 87,346
-------------- ---------------
Net cash used in operating activities (1,707,721) (484,088)
-------------- ---------------
Cash flows from investing activities:
Proceeds from sales of available for sale securities 15,930,455 23,937,827
Proceeds from maturities of available for sale securities 25,926,243 36,996,656
Proceeds from maturities of held to maturity securities 668,000 500,000
Purchase of available for sale securities (50,231,608) (54,470,813)
Purchase of Federal Home Loan Bank stock (250,000) -
Net increase in loans (23,461,164) (18,495,011)
Purchase of Bank-owned life insurance - (3,000,000)
Purchases of premises and equipment (3,303,103) (413,022)
Proceeds from sale of other real estate 226,988 -
Proceeds from sale of premises and equipment 50,207 9,987
-------------- ---------------
Net cash used in investing activities (34,443,982) (14,934,376)
-------------- ---------------
Cash flows from financing activities:
Net increase in deposits 54,753,462 36,580,103
Net decrease in federal funds purchased and
securities sold under repurchase agreements (16,201,875) (3,999,079)
Advances from Federal Home Loan Bank 10,000,000 -
Proceeds from other borrowed funds 100,000 -
Payment of cash dividends (1,364,273) -
-------------- ---------------
Net cash provided by financing activities 47,287,314 32,581,024
-------------- ---------------
(Continued)
6
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
-----------------------------
2004 2003
------------- --------------
Net increase in cash and cash equivalents 11,135,611 17,162,560
Cash and cash equivalents at beginning of period 15,721,884 17,150,691
------------- --------------
Cash and cash equivalents at end of period $ 26,857,495 $ 34,313,251
============= ==============
Supplemental disclosures of cash paid during the period for:
Interest $ 4,764,509 $ 5,139,755
============= ==============
Income taxes $ 2,200,000 $ 2,128,000
============= ==============
Supplemental information on noncash investing activities:
Loans transferred to other real estate $ 249,221 $ 116,793
============= ==============
See accompanying notes to consolidated financial statements.
7
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 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 consolidation.
The financial statements for the three and six months ended June 30, 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 and six months ended June 30, 2004 are
not necessarily indicative of the results of operations which the Company may
achieve for the entire year.
Note 2 - Recent Accounting Pronouncements
The Emerging Issues Task Force on November 13, 2003 issued EITF Issue No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its Application of Certain
Investments. This new guidance is to be applied in other-than-temporary
impairment evaluations performed in reporting periods beginning after June 15,
2004. Disclosures are effective in annual financial statements for fiscal years
ending after December 15, 2003, for investments accounted for under FASB
Statements No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and No. 124, Accounting for Certain Investments Held by
Not-for-Profit Organizations. The disclosure requirements for all other
investments are effective in annual financial statements for fiscal years ending
after June 15, 2004. The Company does not expect the adoption of EITF 03-1 to
have a significant impact on its consolidated financial statements.
On March 31, 2004, the FASB issued an Exposure Draft titled Share-Based
Payments, an amendment of FASB Statements No. 123 and 95, that addresses
accounting for equity based compensation arrangements. The proposed statement
would eliminate the ability to account for share-based compensation transactions
using APB No. 25, Accounting for Stock Issued to
8
Employees and replace some of the existing requirements under FASB Statement No.
123, Accounting for Stock-Based Compensation". The proposed statement would
require that such arrangements are accounted for using the fair-value-based
method of accounting and the related cost expensed over the corresponding
service period. It is anticipated that the final statement will be issued in
the fourth quarter of 2004 and may be effective for the first quarter of 2005.
The Company provides proforma disclosures related to stock-based compensation in
Note 4.
Note 3 - Comprehensive Income
Other comprehensive income for the Company consists of net unrealized gains and
losses on investment securities available for sale. Total comprehensive income
(loss) for the three months ended June 30, 2004 was $(1,189,000) compared to
$2,228,000 for the three months ended June 30, 2003. Total comprehensive income
for the six months ended June 30, 2004 was $1,537,000 compared to $4,498,000 for
the six months ended June 30, 2003.
Note 4 - 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, the Company's net income and income per
share, on a pro forma basis, for the three and six months ended June 30, 2004
and 2003 is indicated below.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income $2,156,723 $1,976,974 $4,162,813 $3,829,161
Deduct: Total stock-based
Compensation expense determined
under fair value based method,
net of related tax effect (51,969) (36,534) (103,938) (69,729)
----------- ----------- ----------- -----------
Pro Forma $2,104,754 $1,940,440 $4,058,875 $3,759,432
=========== =========== =========== ===========
Basic net income per share:
As reported $ 0.41 $ 0.38 $ .79 $ .73
Pro forma $ 0.40 $ 0.37 $ .77 $ .72
Diluted net income per share:
As reported $ 0.41 $ 0.37 $ .78 $ .72
Pro forma $ 0.40 $ 0.36 $ .76 $ .70
Note 4 - Cash Dividend Declared
On April 15, 2004, the Company declared a quarterly cash dividend of $0.13 per
share on outstanding shares. The dividend was paid on May 21, 2004 to
shareholders of record as of May 3, 2004.
9
On July 21, 2004, the Company declared a quarterly cash dividend of $0.13 per
share on outstanding shares. The dividend is payable on August 11, 2004 to
shareholders of record as of July 28, 2004.
10
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. Combined 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 increases 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 million at December 31, 2003.
At June 30, 2004, assets
11
were $678.6 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 June 30, 2004, loans increased $29.1 million and deposits increased $57.8
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
June 30, 2004, return on average assets was 1.28% and return on average equity
was 15.10%. 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 six months ended
June 30, 2004 was $4.2 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. Subsequently, on April 15, 2004 and July 21, 2004, the Company declared
its second and third quarterly cash dividends 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 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.
12
Critical Accounting Estimates
- -----------------------------
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, which affects the Company's earnings directly. 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
borrower's 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. Cash receipts for accruing loans are applied to principal and
interest under the contractual terms of the loan agreement, where cash receipts
on impaired and nonaccrual 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. 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 the Company's management. However,
it is the Company's opinion that these factors 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
13
committed to developing more historical data in the future to reduce the
dependence on these qualitative factors.
Performance Overview - Net Income
- ---------------------------------
The Company's net income for the second quarter of 2004 was $2,157,000, which
was an increase of $180,000 (9.1%) compared to net income of $1,977,000 for the
second quarter of 2003. Diluted net income per share was $0.41 for the second
quarter of 2004 compared to $0.37 for the second quarter of 2003. Net income
for the first six months of 2004 was $4,163,000, an increase of $334,000 (8.7%)
compared with net income of $3,829,000 for the first six months of 2003. The
increase in net income for the three and six months ended June 30, 2004 as
compared with the three and six months ended June 30, 2003, was primarily a
result of increases in net interest income and a decrease in the loan loss
provision, somewhat offset by a decrease in gain on sales of loans in the
secondary market and an increase in noninterest expense. Despite a lower
interest rate environment in 2004, loan interest income increased due to loan
volume. Additionally, the lower rates, coupled with a decrease in the prime
savings account rate, resulted in lower interest expense on deposits, despite
the increase in deposit volume. The decrease in the loan loss provision is due
to improvement in the levels of Classified Watch rated debt. 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.
The increase in employee benefit expense is primarily due to increases in
deferred compensation expense, 401K contributions, and state unemployment taxes.
Other operating expenses increased primarily due to loan costs, where we
recorded a $150,000 loss on a fraudulent mortgage loan sold in the secondary
market. Other increases include processing fees due to new retail checking
accounts, somewhat offset by a decrease in overdraft protection expense, and
increases in professional fees to assist the Company in compliance with FDICIA
as well as increased trust advisory fees and state tax training credit fees.
Total assets of $678.6 million at June 30, 2004 reflects an increase of $48.0
million (7.6%) from year-end 2003. This increase is primarily attributable to
higher loan balances since December 2003. Total loans at June 30, 2004 were
$461.8 million which represented an increase of $29.1 million (6.7%) from
December 31, 2003. Since December 31, 2003, investment securities increased
$3.8 million (2.4%), Federal Funds Sold increased $11.7 million (100.0%),
premises and equipment increased $2.6 million (18.3%), and other assets
increased $1.4 million (38.5%). These increases were funded by increases in
total deposits of $54.8 million (11.3%), increases in Federal Home Loan Bank
advances of $10.0 million (33.3%), decreases in securities sold under repurchase
agreements of $16.2 million (28.4%). Accumulated comprehensive income decreased
$2.6 million (261.7%) since December 31, 2003.
The annualized return on average assets for the Company was 1.28% for the six
months ended June 30, 2004, compared to 1.31% for the same period last year.
While total assets have increased $71.6 million since second quarter 2003, net
income has only increased $334,000 due to the lower interest rates, the decrease
in gain on sale of mortgage loans, and the increase in other operating expenses
resulting in a lower return on assets. The annualized return on average
14
stockholders' equity was 15.10% for the six months ended June 30, 2004 compared
to 15.76% for the comparable period in 2003. The decrease is primarily
attributable to the continued increase in stockholders' equity.
Net Interest Income
- -------------------
Net interest income increased $733,000 (13.3%) over the second quarter of 2003
and $1.5 million (14.0%) during the first six months of 2004 over the comparable
period in 2003. Interest income on loans increased $303,000 (4.7%) for the
second quarter 2004 over the second quarter 2003, and $686,000 (5.4%) primarily
due for the six months ended June 30, 2004 over the comparable six-month period
in 2003 primarily due to increased loan volume. Investment interest income
increased $152,000 (9.8%) for the second quarter 2004 over the second quarter
2003, and $238,000 (7.5%) for the six months ended June 30, 2004 over the
comparable six-month period in 2003. Interest income on investment securities
also increased due to volume, despite the lower interest rates.
Interest-earning assets were $634.2 million at June 30, 2004, an increase of
$64.9 million (11.4%) over June 30, 2003 and $44.6 million (7.6%) over December
31, 2003. Despite increases in deposit volumes, interest expense on deposits
decreased $265,000 (13.7%) for the second quarter of 2004 over the second
quarter of 2003 and $606,000 (15.5%) for the six months ended June 30, 2004 over
the comparable six-month period in 2003, due to lower interest rates during
2004.
The Company's net interest margin for the three and six months ended June 30,
2004 was 3.97% and 4.01%, respectively, compared to 3.85% and 3.86% for the
three and six months ended June 30, 2003, respectively.
Noninterest Income
- ------------------
Noninterest income decreased $694,000 (17.6%) during the three-month period
ended June 30, 2004 compared to the three-month period ended June 30, 2003 and
$1,044,000 (14.6%) during the six-month period ended June 30, 2004 compared to
the six-month period ended June 30, 2003. This decrease was primarily due to
the decrease in gains from the origination and sale of mortgages in the
secondary market which decreased $903,000 (35.7%) during the three-month period
ended June 30, 2004 compared to the three-month period ended June 30, 2003 and
$1,414,000 (32.7%) during the six-month period ended June 30, 2004 compared to
the six-month period ended June 30, 2003. The decrease in gains is the result of
lower volumes of loans sold which are influenced by the higher interest rate
environment during 2004. This decrease was somewhat offset by increases in cash
surrender value of bank owned life insurance due to additional purchases in June
and July of 2003, trust service fees due to increased volume, and service
charges and fees on deposits, primarily due to an increase in NSF fees somewhat
offset by a reduction in service charges due primarily to lower commercial cash
processing fees.
Noninterest Expense
- -------------------
Noninterest expense totaled $6,147,000 for the second quarter of 2004, an
increase of $160,000 (2.7%) over the second quarter of 2003 and totaled
$11,747,000 for the six months ended June
15
30, 2004, an increase of $523,000 (4.7%) over the comparable period in 2003.
Salary expense of $3,121,000 and $5,634,000 for the three and six months ended
June 30, 2004, respectively, decreased $116,000 (3.6%) over the second quarter
of 2003 and $359,000 (6.0%) over the six months ended June 30, 2003. The
decrease is primarily attributable to the decrease in mortgage commissions and
salaries directly related to the secondary mortgage market volume, somewhat
offset by increases in overall company growth and increases in incentive
compensation. Employee benefits increased $48,000 (7.1%) for the three months
ended June 30, 2004 compared to the three months ended June 30, 2003, and
$187,000 (14.3%) for the six months ended June 30, 2004 as compared to the six
months ended June 30, 2003. This increase is primarily attributable to
increases in long-term compensation expense, 401K contributions, and state
unemployment taxes due to a statewide increase in the tax rate. Other operating
expenses increased $183,000 (12.4%) over the second quarter of 2003 and $611,000
(22.3%) during the first six months of 2004 over the comparable period in 2003.
The increase is primarily attributable to loan costs due to a loss recorded on a
fraudulent mortgage loan sold in the secondary market, increases in processing
fees due to new retail checking accounts, somewhat offset by a decrease in
overdraft protection expense, and increases in professional fees to assist the
Company in compliance with FDICIA as well as increased trust advisory fees and
state tax training credit fees.
Income Taxes
- ------------
Income tax expense for the second quarter of 2004 totaled $1,077,000, which was
virtually the same as from the second quarter of 2003. Income tax expense for
the six months ended June 30, 2004 totaled $2,048,000 for an effective tax rate
of 32.98% compared to 34.81% for the six months ended June 30, 2003. The
decrease in the effective tax rate for the six months ended June 30, 2004 is
primarily due to the increase in cash surrender value of bank-owned life
insurance and an increase in state business license expense and training tax
credits which resulted in a reduction of income tax expense for 2004.
Asset Quality
- -------------
Table 1 which follows shows the current and prior period amounts of
non-performing assets. Non-performing assets were $3.2 million at June 30, 2004,
compared to $3.0 million at December 31, 2003 and $3.0 million at June 30, 2003.
The ratio of non-performing assets to total loans and other real estate was
0.56% at June 30, 2004, compared to 0.70% at December 31, 2003 and 0.69% at June
30, 2003. The control and monitoring of non-performing assets continues to be
management's priority.
At June 30, 2004, December 31, 2003 and June 30, 2003, the Company had no loans
90 days past due and still accruing.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses represents a reserve for probable loan losses in
the loan portfolio. The adequacy of the allowance for loan losses is evaluated
periodically based on a review of all
16
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 June 30, 2004, the loan portfolio is comprised of
77.56% real estate loans, of which 23.02% constitutes construction and
acquisition and development loans. Commercial, financial and agricultural loans
comprise 12.52%, and consumer loans comprise 9.92% of the portfolio.
While the Company has 77.56% of its loan portfolio secured by real estate loans,
this percentage is not significantly higher than in previous years. Commercial
real estate comprises 30.61% 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 (23.02%) 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, 19.50% of the portfolio, 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, 4.42% of the portfolio, 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. Unsecured loans at June 30, 2004 were $9.2 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.
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
borrower's 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
17
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.
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. Loans determined to be uncollectible are charged to
the allowance for loan losses and subsequent recoveries are added to the
allowance. A provision for losses in the amount of $131,000 was charged to
expense for the quarter ended June 30, 2004 compared to $432,000 for the quarter
ended June 30, 2003, and $520,000 for the six months ended June 30, 2004
compared to $907,000 for the six months ended June 30, 2003. This lower
provision for the three and six months ended June 30, 2004 as compared to the
three and six months ended June 30, 2003 is due to improvement in the levels of
Classified Watch rated debt.
At June 30, 2004 the ratio of allowance for loan losses to total loans was 1.58%
compared to 1.69% at December 31, 2003 and 1.68% at June 30, 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 June 30, 2004 was 85.7% compared to
89.4% at December 31, 2003 and 88.3% at June 30, 2003. The decrease in the loan
to deposit ratio from December 31, 2003 and June 30, 2003 reflects the
significant increase in deposits during the first six months of 2004. Deposits
at June 30, 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. The Company maintains a line of credit with the Federal
Home Loan Bank approximating 10% of the Bank's total assets. Federal Home Loan
Bank advances are collateralized by eligible first mortgage loans, and
commercial real estate loans. These borrowings totaled $40.0 million at June
30, 2004. The Company maintains repurchase lines of credit with SunTrust
Robinson Humphrey, Atlanta, Georgia, for advances up to $20.0 million and with
The Bankers Bank, Atlanta, Georgia, for advances up to $10.0 million. At June
30, 2004, there were no repurchase agreements with SunTrust Robinson Humphrey,
Atlanta, Georgia or the Bankers Bank, Atlanta, Georgia. The Company has a
federal funds purchased accommodation with The Bankers Bank, Atlanta, Georgia,
for advances up to $16.3 million and with SunTrust Bank, Atlanta, Georgia for
advances up to $10.0 million. 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. The Company also uses
securities sold under repurchase agreements to fund growth. Securities sold
under repurchase agreements were $40.8 million at June 30, 2004.
Shareholders' equity to total assets was 7.9% at June 30, 2004 compared to 8.4%
at June 30, 2003 and 8.5% at December 31, 2003. The capital of the Company and
the Bank exceeded all required regulatory guidelines at June 30, 2004. The
Company's Tier 1 risk-based, total risk-based and leverage capital ratios were
10.38%, 11.63%, and 8.28%, respectively, at June 30,
18
2004. Table 2 which follows reflects the current regulatory capital levels in
more detail, including comparisons to the regulatory minimums.
Management is not aware of any events or uncertainties that are reasonably
likely to have a material effect on the Company's liquidity, capital resources
or operations.
Commitments and Contractual Obligations
- ---------------------------------------
The Bank is a party to lines of credit with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers. Lines of
credit are unfunded commitments to extend credit. These instruments involve, in
varying degrees, exposure to credit and interest rate risk in excess of the
amounts recognized in the financial statements. The Bank's exposure to credit
loss in the event of nonperformance by the other party to the financial
instrument for unfunded commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Bank evaluates
construction and acquisition and development loans for the percentage completed
before extending additional credit. The Bank follows the same credit policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments.
Unfunded commitments to extend credit where contract amounts represent potential
credit risk totaled $114.6 million at June 30, 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 Due in Due in Due in Due in Due in
Contractual Obligations 1 Year 2 Years 3 Years 4 Years 5 Years
(Dollars in thousands)
- ------------------------------ -------- ------- ------- ------- -------
Lines of credit $114,643 - - - -
Lease agreements 114 90 77 23 -
Deposits 229,358 114,490 79,141 33,816 32,175
Securities sold under
repurchase agreements 40,767 - - - -
FHLB advances - 5,000 5,000 - -
Other borrowings 900 - - - -
-------- ------- ------- ------- -------
Total commitments and
contractual obligations 385,782 119,580 84,218 33,839 32,175
======== ======= ======= ======= =======
19
Although management regularly monitors the balance of outstanding commitments to
fund loans to ensure funding availability should the need arise, management
believes that the risk of all customers fully drawing on all these lines of
credit at the same time is remote.
Effects of Inflation and Changing Prices
- ----------------------------------------
Inflation generally increases the cost of funds and operating overhead and to
the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction and to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation can increase
a financial institution's cost of goods and services purchased, the cost of
salaries and benefits, occupancy expense and similar items. Inflation and
related increases in interest rates generally decrease the market value of
investments and loans held and may adversely affect liquidity, earnings, and
stockholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase, and can reduce the Company's earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.
20
TABLE 1
- -------
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30,
---------------------------------
PROFITABILITY 2004 2003
- ------------- ---------- ----------
Return on average assets * 1.28% 1.31%
Return on average equity * 15.10% 15.76%
ALLOWANCE FOR LOAN LOSSES
- -------------------------
Beginning balance, January 1, $ 7,278 $ 6,534
Provision charged to expense 520 907
Recoveries 335 310
Loans charged off (831) (676)
---------- ----------
Ending balance, June 30, $ 7,302 $ 7,075
========== ==========
NON-PERFORMING ASSETS June 30, 2004 December 31, 2003 June 30, 2003
- --------------------- ------------- ----------------- -------------
Non-accrual loans $ 3,230 $ 3,045 $ 2,917
Other real estate owned 5 0 117
--------- --------- ---------
Total non-performing assets $ 3,235 $ 3,045 $ 3,034
========= ========= =========
* Annualized
21
TABLE 2
- -------
Georgia Bank Financial Corporation
and
Georgia Bank & Trust Company
Regulatory Capital Requirements
June 30, 2004
(Dollars in Thousands)
Actual Required Excess
Amount Percent Amount Percent Amount Percent
----------------- ----------------- -----------------
Georgia Bank Financial
Corporation
Risk-based capital:
Tier 1 capital $55,344 10.38% $21,320 4.00% $34,024 6.38%
Total capital 62,014 11.63% 42,641 8.00% 19,373 3.63%
Tier 1 leverage ratio 55,344 8.28% 26,749 4.00% 28,595 4.28%
Georgia Bank & Trust
Company
Risk-based capital:
Tier 1 capital $52,038 9.79% $21,257 4.00% $30,781 5.79%
Total capital 58,689 11.04% 42,514 8.00% 16,175 3.04%
Tier 1 leverage ratio 52,038 7.80% 26,685 4.00% 25,353 3.80%
22
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of June 30, 2004, 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, 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 President and Chief Executive Officer
(principal executive officer) and its Executive Vice President and Chief
Operating Officer (principal financial officer), of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, such officers
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) that is required to be included in the Company's
periodic filings with the Securities and Exchange Commission. There have been
no significant changes in the Company's internal controls or, to the Company's
knowledge, in other factors that could significantly affect those internal
controls subsequent to the date the Company carried out its evaluation, and
there have been no corrective actions with respect to significant deficiencies
or material weaknesses.
23
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
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 this existing stock repurchase plan or
otherwise, and no stock repurchase programs were terminated, during
the second quarter of 2004.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The Annual Meeting of Shareholders was held on April 14, 2004 at
the Company's office located at 3530 Wheeler Road, Augusta,
Georgia.
(b) The following directors were elected for a term of one year and
until a successor is duly qualified and elected:
William J. Badger
R. Daniel Blanton
Warren Daniel
Edward G. Meybohm
Robert W. Pollard, Jr.
Randolph R. Smith
Ronald L. Thigpen
John W. Trulock, Jr.
(c) The following matters were voted on at the meeting as was
previously identified in the Proxy materials forwarded to each
shareholder:
24
1. Proposal to elect the nine individuals nominated by management as
Directors.
Votes were cast as follows:
Director For Withhold
----------------------- --------- --------
William J. Badger 4,450,674 12
R. Daniel Blanton 4,415,580 35,106
Warren Daniel 4,450,362 324
Edward G. Meybohm 4,450,674 35,106
Robert W. Pollard, Jr. 4,450,686 0
Randolph R. Smith, M.D. 4,450,686 0
Ronald L. Thigpen 4,415,580 35,106
John W. Trulock, Jr. 4,450,686 0
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.
(b) Reports on Form 8-K
Form 8-K filed on April 21, 2004, reporting the April 15, 2004
declaration of a quarterly cash dividend of $.13 per share to
shareholders of record as of May 3, 2004 and is payable on May 21,
2004.
Form 8-K furnished under Item 9 on April 27, 2004 reporting earnings
for the first quarter of 2004.
25
GEORGIA BANK FINANCIAL CORPORATION
Form 10-Q Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GEORGIA BANK FINANCIAL CORPORATION
Date: August 6, 2004 By: /s/ Ronald L. Thigpen
---------------------- ----------------------------------------
Ronald L. Thigpen
Executive Vice President, Chief Operating
Officer (Duly Authorized Officer of
Registrant and Principal Financial Officer)
26