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, 2002.
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or
Transition Report under Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the transition period from _______________ to _______________.
Commission File No. 0-23980
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Georgia Bank Financial Corporation
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(Exact name of registrant as specified in its charter)
Georgia 58-2005097
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(State of Incorporation) (I.R.S. Employer Identification No.)
3530 Wheeler Road, Augusta, Georgia 30909
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(Address of principal executive offices)
(706) 738-6990
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(Issuer's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
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:
2,385,280 shares of common stock, $3.00 par value per share, outstanding as
of June 30, 2002.
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, 2002 and
December 31, 2001 3
Consolidated Statements of Income for the three and six months
ended June 30, 2002 and June 30, 2001 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 2002 and June 30, 2001 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 20
PART II Other Information
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security-Holders 21
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 23
<FN>
* No information submitted under this caption
1
PART I
FINANCIAL INFORMATION
2
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
ASSETS
June 30, December 31,
2002 2001
------------- --------------
Cash and due from banks $ 16,021,529 $ 13,844,022
Federal funds sold 19,567,000 1,149,000
Interest bearing deposits in other banks 517,049 516,878
------------- --------------
Cash and cash equivalents 36,105,578 15,509,900
Investment Securities
Available-for-sale 120,114,867 103,599,535
Held-to-maturity, at cost (fair values of
$6,814,555 and $7,569,719, respectively) 6,597,756 7,453,215
Loans held for sale 2,669,896 9,185,059
Loans 351,136,460 330,484,798
Less allowance for loan losses (5,590,184) (5,109,447)
------------- --------------
Loans, net 348,216,172 334,560,410
Premises and equipment, net 12,606,644 12,418,033
Accrued interest receivable 3,508,016 3,330,411
Intangible assets, net 193,260 246,635
Other assets 4,219,973 4,425,732
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$531,562,266 $481,543,871
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing $ 61,793,252 $ 56,802,063
Interest bearing
NOW accounts 60,369,929 48,819,392
Savings 140,508,568 127,052,190
Money management accounts 23,495,682 23,819,452
Time deposits over $100,000 72,218,845 61,635,262
Other time deposits 42,243,274 51,020,238
------------- --------------
400,629,550 369,148,597
Federal funds purchased and securities sold
under repurchase agreements 48,079,709 32,456,383
Advances from Federal Home Loan Bank 35,000,000 35,000,000
Other borrowed funds 1,000,000 1,000,000
Accrued interest and other liabilities 3,794,055 3,940,297
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Total liabilities 488,503,314 441,545,277
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Stockholders' equity
Common Stock, $3.00 par value; authorized 10,000,000
shares; issued 2,404,051 in 2002 and 2001;
outstanding 2,385,280 in 2002 and 2001 7,212,153 7,212,153
Additional paid-in capital 30,586,925 30,586,925
Retained earnings 4,179,357 1,461,309
Accumulated other comprehensive income 1,587,877 1,245,567
Treasury Stock, at cost, 18,771 shares (507,360) (507,360)
------------- --------------
Total stockholders' equity 43,058,952 39,998,594
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$531,562,266 $ 481,543,871
============= ==============
<FN>
See accompany notes to consolidated financial statements.
3
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
Interest Income:
Loans, including fees $5,950,058 $6,823,476 $11,822,596 $13,395,608
Investment securities 1,746,683 1,389,808 3,370,160 2,676,745
Federal funds sold 30,822 81,505 66,140 245,176
Interest bearing deposits in other banks 3,790 7,478 9,457 15,177
---------- ---------- ----------- -----------
Total interest income 7,731,353 8,302,267 15,268,353 16,332,706
---------- ---------- ----------- -----------
Interest Expense:
Deposits 2,130,049 3,455,852 4,368,544 6,899,771
Federal funds purchased and securities sold
under repurchase agreements 159,597 169,554 302,564 454,197
Other borrowings 492,408 443,920 980,183 808,624
---------- ---------- ----------- -----------
Total interest expense 2,782,054 4,069,326 5,651,291 8,162,592
---------- ---------- ----------- -----------
Net Interest Income 4,949,299 4,232,941 9,617,062 8,170,114
Provision for loan losses 414,828 405,000 1,084,818 795,000
---------- ---------- ----------- -----------
Net interest income after provision for loan losses 4,534,471 3,827,941 8,532,244 7,375,114
---------- ---------- ----------- -----------
Noninterest Income:
Service charges and fees on deposits 1,125,479 677,406 2,155,654 1,335,479
Gain on sale of loans 1,239,165 902,487 2,374,884 1,459,400
Investment securities gains, net 2,827 10,265 52,866 14,984
Retail investment income 82,850 59,724 139,430 103,078
Trust service fees 54,557 30,323 97,205 59,997
Miscellaneous income 96,316 111,958 194,391 236,476
---------- ---------- ----------- -----------
Total noninterest income 2,601,194 1,792,163 5,014,430 3,209,414
---------- ---------- ----------- -----------
Noninterest Expense:
Salaries 2,176,583 1,995,216 4,279,173 3,656,949
Employee benefits 821,292 574,383 1,550,659 1,066,932
Occupancy expenses 574,892 516,378 1,141,633 975,628
Other operating expenses 1,319,570 997,027 2,465,161 1,921,859
Total noninterest expense 4,892,337 4,083,004 9,436,626 7,621,368
Income before income taxes 2,243,328 1,537,100 4,110,048 2,963,160
Income tax expense 786,000 521,000 1,392,000 961,724
---------- ---------- ----------- -----------
Net Income $1,457,328 $1,016,100 $ 2,718,048 $ 2,001,436
========== ========== =========== ===========
4
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Basic net income per share $ 0.61 $ 0.43 $ 1.14 $ 0.84
========== ========== ========== ==========
Diluted net income per share $ 0.61 $ 0.42 $ 1.14 $ 0.84
========== ========== ========== ==========
Weighted average common shares outstanding 2,385,280 2,385,280 2,385,280 2,385,280
========== ========== ========== ==========
Weighted average number of common and
common equivalent shares outstanding 2,395,710 2,392,159 2,394,201 2,391,089
========== ========== ========== ==========
<FN>
See accompanying notes to consolidated financial statements.
5
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
----------------------------
2002 2001
------------- -------------
Cash flows from operating activities:
Net income $ 2,718,048 $ 2,001,436
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 677,576 581,102
Provision for loan losses 1,084,818 795,000
Net investment securities gains (52,866) (14,984)
Net amortization/(accretion) of premium/discount
on investment securities 161,884 (24,584)
Loss on disposal of premises and equipment 23,319 47,569
Gain on the sale of other real estate (5,923) (132)
Gain on sale of loans (2,374,884) (1,459,400)
Real estate loans originated for sale (99,597,175) (80,571,524)
Proceeds from sales of real estate loans 108,487,222 77,191,585
Net increase in accrued interest receivable (177,605) (25,375)
Net decrease (increase) in other assets 5,025 (808,564)
Net (decrease) increase in accrued interest and other liabilities (146,242) 508,107
------------- -------------
Net cash provided by (used in) operating activities 10,803,197 (1,779,764)
------------- -------------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities 9,428,761 5,288,420
Proceeds from maturities of available-for-sale securities 17,525,829 18,680,555
Proceeds from maturities of held-to-maturity securities 850,000 540,808
Purchase of available-for-sale securities (43,030,437) (32,540,725)
Purchase of FHLB stock - (550,000)
Net increase in loans (21,321,722) (26,633,453)
Net purchase of premises and equipment (866,646) (2,341,267)
Proceeds from the sale of other real estate 71,902 96,390
Proceeds from the sale of premises and equipment 30,515 33,981
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Net cash used in investing activities (37,311,798) (37,425,291)
------------- -------------
Cash flows from financing activities:
Net increase in deposits 31,480,953 46,451,278
Net (decrease) increase in federal funds purchased and
securities sold under repurchase agreements 15,623,326 (7,713,850)
Proceeds from notes and bonds payable - 50,000
Advances from Federal Home Loan Bank - 11,000,000
------------- -------------
Net cash provided by financing activities 47,104,279 49,787,428
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6
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
------------------------
2002 2001
----------- -----------
Net increase in cash and cash equivalents 20,595,678 10,582,373
Cash and cash equivalents at beginning of period 15,509,900 25,994,253
----------- -----------
Cash and cash equivalents at end of period $36,105,578 $36,576,626
=========== ===========
Supplemental disclosures of cash paid during the period for:
Interest $ 5,917,986 $ 7,524,221
=========== ===========
Income taxes $ 1,980,000 $ 997,000
=========== ===========
Supplemental disclosures of noncash investing activities -
Loan foreclosures transferred to other real estate $ 65,979 $ 146,236
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
7
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002
Note 1 - Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Georgia Bank Financial Corporation and its wholly-owned subsidiary, Georgia Bank
& Trust Company (the "Company" or the "Bank"). Significant intercompany
transactions and accounts are eliminated in the consolidation.
The financial statements for the three and six months ended June 30, 2002 and
2001 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, 2001.
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, 2002 are
not necessarily indicative of the results of operations which the Company may
achieve for the entire year.
Note 2 - Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, Business Combinations which is
effective for all business combinations initiated after June 30, 2001. SFAS No.
141 requires companies to account for all business combinations using the
purchase method of accounting, recognize intangible assets if certain criteria
are met, as well as provide additional disclosures regarding business
combinations and allocation of purchase price. Because the Bank has not
initiated any business combinations since the effective date of SFAS No. 141,
this pronouncement has not impacted the Bank's consolidated financial
statements.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which eliminates amortization of goodwill and intangible assets that
have indefinite useful lives and requires annual tests of impairments of those
assets. SFAS No. 142 also provides specific guidance about how to determine and
measure goodwill and intangible asset impairments, and requires additional
disclosures of information about goodwill and other intangible assets. The
provisions of SFAS No. 142 are required to be applied starting with fiscal years
beginning after December 15, 2001 and applied to all goodwill and other
8
intangible assets recognized in financial statements at the date of adoption.
Due to the insignificance of the Bank's intangible assets at December 31, 2001,
the adoption of SFAS No. 142 by the Bank did not have a material effect on the
Bank's consolidated results of operations, financial position, or cash flows.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company adopted the provisions of SFAS No. 144 on January 1, 2002. The adoption
of SFAS No. 144 did not have a material impact on the Company's consolidated
financial statements.
Note 3 - Comprehensive Income
Other comprehensive income for the Company consists of net unrealized gains and
losses on investment securities. Total comprehensive income for the three months
ended June 30, 2002 was $2,372,607 compared to $1,164,735 for the three months
ended June 30, 2001. Total comprehensive income for the six months ended June
30, 2002 was $3,060,358 compared to $2,738,070 for the six months ended June 30,
2001.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
- ---------------------------
Georgia Bank Financial Corporation (the "Company") may, from time-to-time, make
written or oral forward-looking statements, including statements contained in
the Company's filings with the Securities and Exchange Commission (the
"Commission") and its reports to shareholders. Statements made in such
documents, other than those concerning historical information, should be
considered forward-looking and subject to various risks and uncertainties. Such
forward-looking statements are made based upon management's belief as well as
assumptions made by, and information currently available to, management pursuant
to "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. The Company's actual results may differ materially from the results
anticipated in forward-looking statements due to a variety of factors, including
governmental monetary and fiscal policies, deposit levels, loan demand, loan
collateral values, securities portfolio values, and interest rate risk
management; the effects of competition in the banking business from other
commercial banks, savings and loan associations, mortgage banking firms,
consumer finance companies, credit unions, securities brokerage firms, insurance
companies, money market mutual funds and other financial institutions operating
in the Company's market area and elsewhere, including institutions operating
through the Internet; changes in governmental regulation relating to the banking
industry, including regulations relating to branching and acquisitions; failure
of assumptions underlying the establishment of reserves for loan losses,
including the value of collateral underlying delinquent loans, and other
factors. The Company cautions that such factors are not exclusive. The Company
does not undertake to update any forward-looking statement that may be made from
time to time by, or on behalf of, the Company.
Critical Accounting Policies
- ------------------------------
In reviewing and understanding financial information provided by the Company,
you are encouraged to read and understand the significant accounting policies
which are used in preparing the consolidated financial statements of the
Company. These policies are described in Note 1 to the consolidated financial
statements which are presented in the Company's 2001 annual report on Form 10-K.
Of these policies, management believes that the accounting for the allowance for
loan losses is among the most critical.
The allowance for loan losses is based on a loan classification system and
consists of three components: the general reserve, specific reserve and an
unallocated 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
10
the individual collateral analysis on each problem loan indicates that there
would be loss upon liquidation of collateral based on 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. In addition to these
allocated reserves, the Company has established an unallocated reserve of
$1,077,000 at June 30, 2002. The basis for the unallocated reserve is due to
loan concentrations, the general economic environment including anticipated
layoffs and closings in the area, increases in bankruptcies and new community
bank competition. 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.
Losses on loans result from a broad range of causes, from borrower-specific
problems to industry issues to the impact of the economic environment. The
identification of the factors that lead to default or non-performance under a
loan agreement and the estimation of loss in these situations is very
subjective. In addition, a dramatic change in the performance of one or a small
number of borrowers can have a significant impact in the estimate of losses. As
described further below, management has implemented a process that has been
applied consistently to systematically consider the many variables that impact
the estimation of the allowance for loan losses.
11
Performance Overview - Net Income
- -------------------------------------
The Company's net income for the second quarter of 2002 was $1,457,000, which
was an increase of $441,000 (43.4%) compared to net income of $1,016,000 for the
second quarter of 2001. Basic net income per share was $0.61 for the second
quarter of 2002 compared to $0.43 for the second quarter of 2001. Net income
for the first six months of 2002 was $2,718,000, an increase of $717,000 (35.8%)
compared with net income of $2,001,000 for the first six months of 2001. The
increase in net income for both the three and six months ended June 30, 2002 was
primarily a result of an increase in gain on sales of loans in the secondary
market due to increased home purchases and refinancing activity, an increase in
income from the Bounce overdraft protection program, a product introduced in
late 2001, and an increase in net interest income. Due to the lower interest
rates, the Bank experienced decreases in both interest income and interest
expense for the three and six months ended June 30, 2002. However, the decrease
in interest expense on deposits and other borrowings was greater than the
decrease in interest income. The income growth discussed above for the three and
six months ended June 30, 2002, was partially offset by increases in salaries
and employee benefits expenses due to higher commissions related to the
secondary mortgage market volume, increased personnel to support growth,
increased incentive compensation, and increased deferred compensation expense.
For the six months ended June 30, 2002, there was in increase in the provision
for loan losses due to the Company's increased loan volume. Increase in other
operating expenses is due to increases in various areas due to growth, with the
largest increases noted in processing, marketing, business development, and loan
costs.
Total assets increased $50.0 million (10.4%) from December 31, 2001 and $72.7
million (15.9%) from June 30, 2001. For the six months ended June 30, 2002, the
$50.0 million of growth was attributable to growth in loans of $14.1 million,
investments of $15.7 million, and federal funds sold of $18.4 million. Deposits
increased $31.5 million and securities sold under repurchase agreements
increased $15.6 million during the six months ended June 30, 2002. For the
twelve months ended June 30, 2002, loans increased $39.3 million and investments
increased $34.7 million. During the past twelve months, deposits increased
$43.2 million, and securities sold under repurchase agreements increased $23.7
million.
The return on average assets for the Company was 1.09% for the six months ended
June 30, 2002, compared to .95% for the same period last year. The return on
average stockholders' equity was 13.34% for the six months ended June 30, 2002,
versus 11.27% for the comparable period in 2001.
Net Interest Income
- ---------------------
Net interest income increased $716,000 (16.9%) over the second quarter of 2001
and $1,447,000 (17.7%) during the first six months of 2002 over the comparable
period in 2001. Despite increases in loan volume, interest income on loans
decreased due to lower interest rates in 2002. Interest income on investment
securities increased due to increased volume. Federal funds sold income
decreased primarily due to the lower federal funds interest rate.
Interest-earning assets were $500.6 million at June 30, 2002, an increase of
$73.3 million over June 30, 2001 and $48.2 million over December 31, 2001.
12
Despite increases in deposit volumes, interest expense on deposits decreased
$1.3 million (31.6%) for the second quarter of 2002 over the second quarter of
2001 and $2.5 million (36.7%) for the six months ended June 30, 2002 over the
comparable six-month period ended June 30, 2001, due to lower interest rates
during 2002. Increases in other borrowings interest expense in both the
three-month and six-month periods ended June 30, 2002 compared to the same
periods in 2001 are due to additional advances obtained from the Federal Home
Loan Bank in May 2001. Interest expense for securities sold under repurchase
agreements decreased in both the three-month and six-month periods ended June
20, 2002 compared to the same periods in 2001 due to lower interest rates,
despite the higher volumes.
The Company's net interest margin for the three months and six months ended June
30, 2002 was 4.05% and 4.06%, respectively, compared to 4.27% and 4.14% for the
three and six months ended June 30, 2001, respectively.
Noninterest Income
- -------------------
Noninterest income increased $809,000 (45.1%) during the three-month period
ended June 30, 2002 compared to the three-month period ended June 30, 2001 and
$1.8 million (56.2%) during the six-month period ended June 30, 2002 compared to
the six-month period ended June 30, 2001. Fee income from the origination and
sale of mortgages in the secondary market increased $337,000 (37.3%) during the
three-month period June 30, 2002 compared to the three-month period ended June
30, 2001 and $915,000 (62.7%) during the six-month period ended June 30, 2002
compared to the six-month period ended June 30, 2001. These increases are the
result of higher volumes influenced by the low interest rate environment during
2002. Service charges and fees on deposits increased $448,000 (66.1%) and
$820,000 (61.40%) during the three and six months ended June 30, 2002,
respectively, compared to the three and six months ended June 30, 2001, due
primarily to the Bounce overdraft protection program, introduced in October
2001, as well as increases in deposit account balances.
Noninterest Expense
- --------------------
Noninterest expense totaled $4.9 million for the second quarter of 2002, an
increase of $809,000 (19.8%) over the second quarter of 2001 and totaled $9.4
million for the six months ended June 30, 2002 an increase of $1.8 million
(23.8%), over the comparable period in 2001. Salary expense of $2.2 million and
$4.3 million for the three and six months ended June 30, 2002, respectively,
increased $181,000 (9.1%) over the second quarter of 2001 and $622,000 (17.0%)
over the six months ended June 30, 2001. Increases in mortgage commissions
directly related to the secondary mortgage market volume, and overall company
growth accounted for these increases. Employee benefits increased $247,000
(43.0%) for the three months ended June 30, 2002 compared to the three months
ended June 30, 2001, and $484,000 (45.3%) for the six months ended June 30, 2002
as compared to the six months ended June 30, 2001. These increases are due to
increases in incentive compensation, deferred compensation expense and overall
Company growth. Occupancy expense increased $59,000 (11.3%) during the three
months ended June 30, 2002 when compared to the second quarter of 2001 and
$166,000 (17.0%) during the six months ended June 30, 2002 when compared to the
13
six-month period in 2001. These increases are due primarily from increases in
depreciation expense due to the new computer system and branch, with a smaller
impact from increases for maintenance agreements on the new computer system,
rent expense due to the addition of the Nashville, Tennessee mortgage office,
property taxes on the computer system and new branch, and decreases in rental
income due to utilization of Company property previously rented. Other
operating expenses increased $322,000 (32.4%) over the second quarter of 2001
and $543,000 (28.3%) during the first six months of 2002 over the comparable
period in 2001. The increase is primarily attributable to increases in
processing expense due to the Bounce overdraft protection program, marketing and
business development due to increased mortgage production, loan costs due to
increased mortgage origination volume and foreclosure expense, insurance and
taxes due to additional business license expense, and staff development due to
additional staff training.
Income Taxes
- -------------
Income tax expense for the second quarter of 2002 totaled $786,000, an increase
of $265,000 from the second quarter of 2001. Income tax expense for the six
months ended June 30, 2002 totaled $1,392,000 for an effective tax rate of
33.87% compared to 32.46% for the six months ended June 30, 2001. The increase
in the effective tax rate for the six months ended June 30, 2002 is due to a
decrease in tax-exempt income. Income taxes are estimated on a quarterly basis.
Asset Quality
- --------------
Table 1 which follows shows the current and prior period amounts of
non-performing assets. Non-performing assets were $1.5 million at June 30,
2002, compared to $2.0 million at December 31, 2001 and $1.6 million at June 30,
2001. The ratio of non-performing assets to total loans and other real estate
was 0.43% at June 30, 2002, compared to 0.58% at December 31, 2001 and 0.50% at
June 30, 2001. The control and monitoring of non-performing assets continues to
be management's priority.
Loans past due 90 days or more and still accruing were $0 at June 30, 2002
compared to $0 at December 31, 2001 and $182,000 at June 30, 2001.
Allowance for Loan Losses
- ----------------------------
The allowance for loan losses represents a reserve for probable loan losses in
the loan portfolio. The adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant loans, with particular
emphasis on impaired, non-accruing, past due, and other loans that management
believes require special attention. The determination of the allowance for loan
losses is considered a critical accounting policy of the Company. For a
discussion of our methodology in determining the allowance, see "Critical
Accounting Policies" above.
When reviewing the allowance for loan losses, it is important to understand to
whom the Company lends. At June 30, 2002, the loan portfolio is comprised of
72.1% real estate loans, of which 21.5% constitutes construction and acquisition
and development loans. Commercial, financial and agricultural loans comprise
14.5%, and consumer loans comprise 13.3% of the portfolio. Loan concentration
14
in the construction and acquisition and development portfolio are inherently an
above average lending risk. Additionally, the large increase in local and
national rates for personal and business bankruptcies in 2001 and the
probability that they will continue to increase in 2002 due to the lag time of a
recession's impact on community banks, coupled with the higher unemployment in
the Augusta-Aiken MSA compared to others in the state has been evaluated in
determining the Company's economic and market risk factor reserves.
A provision for losses in the amount of $415,000 was charged to expense for the
quarter ended June 30, 2002 compared to $405,000 for the quarter ended June 30,
2001. The Bounce overdraft protection provision was $47,000 for the three months
ended June 30, 2002 compared to $0 for the three months ended June 30, 2001.
At June 30, 2002 the ratio of allowance for loan losses to total loans was 1.58%
compared to 1.50% at December 31, 2001 and 1.44% at June 30, 2001. 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, 2002 was 88.3% compared to
92.0% at December 31, 2001 and 88.0% at June 30, 2001. Loans increased $39.3
million from June 30, 2001 and $14.1 million during the first six months of 2002
while deposits increased $43.2 million from June 30, 2001 and increased $31.5
million during the first six months of 2002. The Company also uses Federal
Home Loan Bank borrowings and securities sold under repurchase agreements to
fund loan growth. The Company maintains a line of credit with the Federal Home
Loan Bank approximating 10% of the Bank's total assets. Federal Home Loan Bank
advances are collateralized by eligible first mortgage loans, and specific
commercial loans. The Company has a federal funds purchased accommodation with
The Bankers Bank, Atlanta, Georgia, for advances up to $12,800,000.
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. There were no increases in FHLB borrowings from
June 30, 2001 and from December 31, 2001. Securities sold under repurchase
agreements increased $23.7 million from June 30, 2001 and increased $15.6
million from December 31, 2001.
Shareholders' equity to total assets was 8.1% at June 30, 2002 compared to 8.1%
at June 30, 2001 and 8.3% at December 31, 2001. This decrease in the ratio from
December 31, 2001 is reflective of the growth experienced by the Company. The
capital of the Company and the Bank exceeded all required regulatory guidelines
at June 30, 2002. The Company's Tier 1 risk-based, total risk-based and
leverage capital ratios were 9.78%, 11.45%, and 7.73%, respectively, at June 30,
2002. Table 2 which follows reflects the current regulatory capital levels in
more detail, including comparisons to the regulatory minimums.
15
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 $73,090,000 at June 30, 2002. These commitments are
primarily at variable interest rates.
The Company's commitments are funded through internal funding sources of
scheduled repayments of loans and sales and maturities of investment securities
available for sale or external funding sources through acceptance of deposits
from customers or borrowings from other financial institutions.
The following table is a summary of the Company's commitments to extend credit,
commitments under contractual leases as well as the Company' contractual
obligations, consisting of deposits, FHLB advances, which are subject to early
termination options, and borrowed funds by contractual maturity date for the
next five years.
COMMITMENTS AND DUE IN DUE IN DUE IN DUE IN DUE IN
CONTRACTUAL OBLIGATIONS 1 YEAR 2 YEARS 3 YEARS 4 YEARS 5 YEARS
- ----------------------------- ------------ ----------- ----------- ----------- -----------
Lines of credit $ 73,090,000 - - - -
Lease agreements 121,015 112,885 42,840 11,759 -
Deposits 189,989,104 75,077,837 54,254,337 23,352,279 24,414,166
Securities sold under
repurchase agreements 48,079,709 - - - -
FHLB advances 5,000,000 - - - -
Other borrowings 1,000,000 - - - -
------------ ----------- ----------- ----------- -----------
Total commitments and
contractual obligations $317,279,828 $75,190,722 $54,297,177 $23,364,038 $24,414,166
============ =========== =========== =========== ===========
16
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.
17
TABLE 1
- --------
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
PROFITABILITY 2002 2001
- ------------- ----------- ------------
Return on average assets * 1.09% .95%
Return on average equity * 13.34% 11.27%
ALLOWANCE FOR LOAN LOSSES
- -------------------------
Beginning balance, January 1, $ 5,109 $ 4,143
Provision charged to expense 1,085 795
Recoveries 254 72
Loans charged off 858 471
----------- ------------
Ending balance, June 30, $ 5,590 $ 4,539
----------- ------------
NON-PERFORMING ASSETS June 30, 2002 December 31, 2001 June 30, 2001
- ---------------------
Non-accrual loans $ 1,526 $ 1,955 $ 1,429
Other real estate owned 0 0 131
-------------- ----------------- -------------
Total non-performing assets $ 1,526 $ 1,955 $ 1,560
============== ================= =============
LOANS PAST DUE 90 DAYS OR
MORE AND STILL ACCRUING $ 0 $ 0 $ 182
============== ================= =============
* Annualized
18
TABLE 2
- -------
GEORGIA BANK FINANCIAL CORPORATION
AND
GEORGIA BANK & TRUST COMPANY
REGULATORY CAPITAL REQUIREMENTS
JUNE 30, 2002
(Dollars in Thousands)
Actual Required Excess
Amount Percent Amount Percent Amount Percent
------------------ ------------------ ------------------
GEORGIA BANK FINANCIAL CORPORATION
Risk-based capital:
Tier 1 capital $39,564 9.78% 16,188 4.00% 23,376 5.78%
Total capital 46,343 11.45% 32,375 8.00% 13,968 3.45%
Tier 1 leverage ratio 39,564 7.73% 20,481 4.00% 19,083 3.73%
GEORGIA BANK & TRUST COMPANY
Risk-based capital:
Tier 1 capital $41,278 10.24% 16,121 4.00% 25,157 6.24%
Total capital 44,609 11.07% 32,242 8.00% 12,367 3.07%
Tier 1 leverage ratio 41,278 8.09% 20,416 4.00% 20,862 4.09%
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2002, 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, 2001. 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, 2001 included in the
Company's 2001 Annual Report on Form 10-K.
20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
or any of its subsidiaries is a party or of which any of their
property is subject.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
(a) The Annual Meeting of Shareholders was held on April 24, 2002 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
Travers W. Paine III
Robert W. Pollard, Jr.
Randolph R. Smith
Ronald L. Thigpen
John W. Trulock, Jr.
21
(c) The following matters were voted on at the meeting as was previously
identified in the Proxy materials forwarded to each shareholder:
1. Proposal to elect the nine individuals nominated by management as
Directors.
Votes were cast as follows:
Director For Withhold Abstain
-------- --- -------- -------
William J. Badger 1,966,911 0 59
R. Daniel Blanton 1,964,928 1,983 59
Warren Daniel 1,966,911 0 59
Edward G. Meybohm 1,966,911 0 59
Travers W. Paine, III 1,966,911 0 59
Robert W. Pollard, Jr. 1,966,911 0 59
Randolph R. Smith, M.D. 1,966,911 0 59
Ronald L. Thigpen 1,964,928 1,983 59
John W. Trulock, Jr. 1,966,911 0 59
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Articles of Incorporation of the Company (Incorporated by
reference from the Company's registration statement on Form SB-2 filed
August 20, 1997 (Registration No. 333-34037)).
3.2 Bylaws of the Company (Incorporated by reference to the Company's
Form 10-KSB, dated April 29, 1994).
(b) Reports on Form 8-K
None
22
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, 2002 By: /s/ Ronald L. Thigpen
------------- ------------------------------------
..
Ronald L. Thigpen
Executive Vice President, Chief Operating
Officer (Duly Authorized Officer of
Registrant and Principal Financial Officer)
Each of the undersigned hereby certifies that this Quarterly Report on Form 10-Q
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, and the information contained in such report
fairly represents, in all material respects, the financial condition and results
of operations of the Company.
This 6th day of August, 2002.
/s/ R. Daniel Blanton
- ------------------------
R. Daniel Blanton
President &
Chief Executive Officer
(Principal executive officer)
/s/ Ronald L. Thigpen
- -------------------------
Ronald L. Thigpen
Executive Vice President &
Chief Operating Officer
(Principal financial officer)
23