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 September 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
-----------------------------------------
(Address of principal executive offices)
(706) 738-6990
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(Issuer's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
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, issued and
outstanding as of September 30, 2002.
GEORGIA BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX
PAGE
PART I
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2001 3
Consolidated Statements of Income for the Three and Nine
Months ended September 30, 2002 and September 30, 2001 4
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2002 and September 30,
2001 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 21
Item 4. Controls and Procedures 21
PART II Other Information
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K *
Signature 23
* No information submitted under this caption
1
PART I
FINANCIAL INFORMATION
2
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
ASSETS
September 30, December 31,
2002 2001
--------------- --------------
Cash and due from banks $ 15,892,830 $ 13,844,022
Federal funds sold 4,603,000 1,149,000
Interest-bearing deposits in other banks 517,118 516,878
--------------- --------------
Cash and cash equivalents 21,012,948 15,509,900
Investment securities
Available-for-sale 126,199,997 103,599,535
Held-to-maturity, at cost (fair value of
$6,667,837 and $7,569,719, respectively) 6,375,930 7,453,215
Loans held for sale 5,521,699 9,185,059
Loans 377,281,921 330,484,798
Less allowance for loan losses (6,145,853) (5,109,447)
--------------- --------------
Loans, net 376,657,767 334,560,410
Premises and equipment, net 12,444,342 12,418,033
Accrued interest receivable 3,507,803 3,330,411
Intangible assets, net 166,571 246,635
Other assets 4,231,250 4,425,732
--------------- --------------
$ 550,596,608 $ 481,543,871
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing $ 67,065,111 $ 56,802,063
Interest bearing:
NOW accounts 59,675,973 48,819,392
Savings 149,863,261 127,052,190
Money management accounts 27,028,373 23,819,452
Time deposits over $100,000 83,303,577 61,635,262
Other time deposits 39,614,298 51,020,238
--------------- --------------
426,550,593 369,148,597
Federal funds purchased and securities sold
under repurchase agreements 43,648,204 32,456,383
Advances from Federal Home Loan Bank 30,000,000 35,000,000
Other borrowed funds 1,000,000 1,000,000
Accrued interest and other liabilities 4,207,380 3,940,297
--------------- --------------
Total liabilities 505,406,177 441,545,277
--------------- --------------
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 5,840,287 1,461,309
Treasury Stock, at cost, 18,771 shares (507,360) (507,360)
Accumulated other comprehensive income 2,058,426 1,245,567
--------------- --------------
Total stockholders' equity 45,190,431 39,998,594
--------------- --------------
$ 550,596,608 $ 481,543,871
=============== ==============
See accompanying notes to consolidated financial statements.
3
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
Interest Income:
Loans, including fees $6,313,600 $6,715,133 $18,136,196 $20,110,741
Investment securities 1,679,996 1,492,678 5,050,156 4,169,423
Federal funds sold 43,138 148,626 109,278 393,802
Interest bearing deposits in other banks 4,016 6,720 13,473 21,897
---------- ---------- ----------- -----------
Total interest income 8,040,750 8,363,157 23,309,103 24,695,863
---------- ---------- ----------- -----------
Interest Expense:
Deposits 2,150,354 3,162,567 6,518,898 10,062,338
Federal funds purchased and securities sold
under repurchase agreements 166,100 145,647 468,664 599,844
Other borrowings 494,432 477,418 1,474,615 1,286,042
---------- ---------- ----------- -----------
Total interest expense 2,810,886 3,785,632 8,462,177 11,948,224
---------- ---------- ----------- -----------
Net Interest Income 5,229,864 4,577,525 14,846,926 12,747,639
Provision for loan losses 789,096 405,000 1,873,914 1,200,000
---------- ---------- ----------- -----------
Net interest income after provision for loan losses 4,440,768 4,172,525 12,973,012 11,547,639
---------- ---------- ----------- -----------
Noninterest Income:
Service charges and fees on deposits 1,112,141 633,354 3,267,795 1,968,833
Gain on sale of loans 1,667,854 1,093,858 4,042,738 2,553,258
Investment securities gain, net 118,147 3,718 171,013 18,702
Retail investment income 49,242 37,639 188,672 140,717
Trust service fees 57,839 33,651 155,044 93,648
Miscellaneous income 107,402 125,045 301,793 361,521
---------- ---------- ----------- -----------
Total noninterest income 3,112,625 1,927,265 8,127,055 5,136,679
---------- ---------- ----------- -----------
Noninterest Expense:
Salaries 2,344,056 2,087,036 6,623,229 5,743,985
Employee benefits 716,217 561,846 2,266,876 1,628,778
Occupancy expenses 577,230 556,888 1,718,863 1,532,516
Other operating expenses 1,412,959 1,025,286 3,878,120 2,947,145
---------- ---------- ----------- -----------
Total noninterest expense 5,050,462 4,231,056 14,487,088 11,852,424
---------- ---------- ----------- -----------
Income before income taxes 2,502,931 1,868,734 6,612,979 4,831,894
Income tax expense 842,000 631,000 2,234,000 1,592,724
---------- ---------- ----------- -----------
Net ncome $1,660,931 $1,237,734 $ 4,378,979 $ 3,239,170
========== ========== =========== ===========
4
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Basic net income per share $ 0.70 $ 0.52 $ 1.84 $ 1.36
========== ========== ========== ==========
Diluted net income per share $ 0.69 $ 0.52 $ 1.83 $ 1.35
========== ========== ========== ==========
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 2,400,563 2,391,477 2,396,322 2,391,218
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
5
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
2002 2001
-------------- --------------
Cash flows from operating activities
Net income $ 4,378,979 $ 3,239,170
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 1,028,867 913,072
Provision for loan losses 1,873,914 1,200,000
Net investment securities gains (171,013) (18,702)
Net amortization (accretion) of premium / discount on investment securities 302,623 (41,501)
Loss on disposal of premises and equipment 28,252 49,470
Gain on the sale of other real estate (5,923) (132)
Gain on sale of loans (4,042,738) (2,553,258)
Real estate loans originated for sale (168,336,711) (134,000,120)
Proceeds from sales of real estate loans 176,042,809 130,868,648
Net (increase) decrease in accrued interest receivable (177,392) 35,021
Net increase in other assets (248,656) (890,474)
Net increase in accrued interest and other liabilities 267,083 594,369
-------------- --------------
Net cash provided by (used in) operating activities 10,940,094 (604,437)
-------------- --------------
Cash flows from investing activities
Proceeds from sales of available-for-sale securities 12,750,167 7,057,721
Proceeds from maturities of available-for-sale securities 32,592,286 25,356,674
Proceeds from maturities of held-to-maturity securities 1,070,000 1,150,808
Purchase of available-for-sale securities (66,811,244) (50,678,772)
Purchase of Federal Home Loan Bank stock - (550,000)
Net increase in loans (47,700,610) (36,774,598)
Net purchase of premises and equipment (1,061,140) (2,598,570)
Proceeds from the sale of other real estate 71,902 96,390
Proceeds from the sale of premises and equipment 57,776 33,981
-------------- --------------
Net cash used in investing activities (69,030,863) (56,906,366)
-------------- --------------
Cash flows from financing activities
Net increase in deposits 57,401,996 52,116,255
Net increase (decrease) in federal funds purchased and
securities sold under repurchase agreements 11,191,821 (3,440,772)
Advances from Federal Home Loan Bank - 11,000,000
Payments of Federal Home Loan Bank advances (5,000,000) -
Payments for fractional shares from stock dividend - (8,519)
-------------- --------------
Net cash provided by financing activities 63,593,817 59,666,964
-------------- --------------
6
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
2002 2001
----------- -----------
Net increase in cash and cash equivalents 5,503,048 2,156,161
Cash and cash equivalents at beginning of period 15,509,900 25,994,253
----------- -----------
Cash and cash equivalents at end of period $21,012,948 $28,150,414
=========== ===========
Supplemental disclosures of cash paid during the period for:
Interest $ 9,058,203 $12,099,752
=========== ===========
Income taxes $ 2,480,000 $ 1,096,406
=========== ===========
Supplemental disclosures of noncash investing activities:
Loan foreclosures transferred to other real estate $ 65,979 $ 146,236
=========== ===========
See accompanying notes to consolidated financial statements.
7
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 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 nine months ended September 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 nine months ended September 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
8
beginning after December 15, 2001 and applied to all goodwill and other
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 June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 applies to all entities. SFAS
No. 143 applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long lived asset, except for certain lease
obligations. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. Management does not expect the
adoption of SFAS No. 143 to have a material effect on its financial condition or
results of operations.
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.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS
No. 145 updates, clarifies, and simplifies existing accounting pronouncements.
SFAS No. 145 requires that in certain circumstances previous items classified as
extraordinary that do not meet the criteria in Opinion 30 must be reclassified.
The Statement is effective for fiscal years beginning after May 15, 2002.
Management does not expect the adoption of SFAS No. 145 to have a material
effect on the Company's financial condition or results of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities. SFAS No. 146
requires recognition of a liability for a cost associated with an exit or
disposal activity when the liability is incurred, as opposed to when the entity
commits to an exit plan under EITF Issue No. 94-3. SFAS No. 146 is effective
prospectively for exit or disposal activities initiated after December 31, 2002.
Management does not anticipate that SFAS No. 146 will have a material impact on
the Company's financial condition or results of operations.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions. SFAS No. 147 removes financial acquisitions of financial
institutions from the scope of both SFAS No. 72, "Accounting for Certain
9
Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9,
"Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a
Similar Institution is Acquired in a Business Combination Accounted for by the
Purchase Method" and requires that those transactions be accounted for in
accordance with FASB Statements No. 141, "Business Combinations, and No. 142,
"Goodwill and Other Intangible Assets". In addition, SFAS No. 147 amends SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", to
include in its scope long-term customer-relationship intangible assets of
financial institutions such as depositor- and borrower-relationship intangible
assets and credit cardholder intangible assets. SFAS No. 147's transition
provisions require affected institutions to reclassify their SFAS No. 72
goodwill as SFAS No. 142 goodwill as of the date the Company initially applied
SFAS No. 142 in its entirety. The adoption of SFAS No. 147 will not have a
material impact on the Company's financial condition or results of operations.
Note 3 - Comprehensive Income
Other comprehensive income for the Company consists of net unrealized gains and
losses on investment securities. Total comprehensive income for the three months
ended September 30, 2002 was $2,131,480 compared to $2,267,868 for the three
months ended September 30, 2001. Total comprehensive income for the nine months
ended September 30, 2002 was $5,191,838 compared to $5,005,938 for the nine
months ended September 30, 2001.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
- ---------------------------
Georgia Bank Financial Corporation (the "Company") may, from time-to-time, make
written or oral forward-looking statements, including statements contained in
the Company's filings with the Securities and Exchange Commission (the
"Commission") and its reports to shareholders. Statements made in such
documents, other than those concerning historical information, should be
considered forward-looking and subject to various risks and uncertainties. Such
forward-looking statements are made based upon management's belief as well as
assumptions made by, and information currently available to, management pursuant
to "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. The Company's actual results may differ materially from the results
anticipated in forward-looking statements due to a variety of factors, including
governmental monetary and fiscal policies, deposit levels, loan demand, loan
collateral values, securities portfolio values, and interest rate risk
management; the effects of competition in the banking business from other
commercial banks, savings and loan associations, mortgage banking firms,
consumer finance companies, credit unions, securities brokerage firms, insurance
companies, money market mutual funds and other financial institutions operating
in the Company's market area and elsewhere, including institutions operating
through the Internet; changes in governmental regulation relating to the banking
industry, including regulations relating to branching and acquisitions; failure
of assumptions underlying the establishment of reserves for loan losses,
including the value of collateral underlying delinquent loans, and other
factors. The Company cautions that such factors are not exclusive. The Company
does not undertake to update any forward-looking statement that may be made from
time to time by, or on behalf of, the Company.
Critical Accounting Policies
- ------------------------------
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 allowance, a specific allowance and an
unallocated allowance. The general allowance 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 allowance 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
11
determined based upon historical loss experience and regulatory requirements.
For loans considered impaired, specific allowances are provided in the event
that the individual collateral analysis on each impaired 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 allowances, the Company has established an unallocated allowance of
$10,000 at September 30, 2002. Additions to the allowance for loan losses are
made periodically to maintain the allowance at an appropriate level based upon
management's analysis of potential risk in the loan portfolio.
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.
Performance Overview -- Net Income
- --------------------------------------
The Company's net income for the third quarter of 2002 was $1,661,000 which was
an increase of $423,000 (34.2%) compared to net income of $1,238,000 for the
third quarter of 2001. Basic net income per share for the three months ended
September 30, 2002 was $0.70 compared to $0.52 for the three months ended
September 30, 2001. Net income for the first nine months of 2002 was
$4,379,000, an increase of $1,140,000 (35.2%) when compared to net income of
$3,239,000 for the first nine months of 2001. Basic net income per share for
the nine months ended September 30, 2002 was $1.84 compared to $1.36 for the
nine months ended September 30, 2001. The increase in net income for both the
three and nine months ended September 30, 2002 compared to the same periods in
2001 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 loan interest
income and deposit interest expense for the three and nine months ended
September 30, 2002 compared to the three and nine months ended September 30,
2001. However, the decrease in interest expense on deposits was greater than
the decrease in loan interest income. Interest income from investment securities
increased due to higher volume. The income growth discussed above for the three
and nine months ended September 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, 401K
employer contributions, incentive compensation, and deferred compensation
expense. For the three and nine months ended September 30, 2002 compared to the
three and nine months ended September 30, 2001, there was an increase in the
provision for loan losses due to the Company's increased loan volume and
12
classified loans. Increase in other operating expenses is due to increases in
various areas resulting from growth, with the largest increases noted in
processing, marketing, business development, professional fees, loan costs,
contributions, and operational losses due to a prepayment penalty of $94,000
resulting from the early pay off of a fixed rate FHLB advance.
The annualized return on average assets for the Company was 1.14% for the nine
months ended September 30, 2002, compared to .99% for the same period last year.
The annualized return on average stockholders' equity was 13.92% for the nine
months ended September 30, 2002 compared to 11.86% for the comparable period in
2001.
Total assets of $550.6 million at September 30, 2002 reflects an increase of
$69.1 million (14.34%) from year-end 2001 and an increase of $79.6 million
(16.9%) over September 30, 2001. The growth in total assets has been largely
due to growth in the loan and investment portfolios. Total loans at September
30, 2002 were $382.8 million representing an increase of $43.1 million (12.7%)
from December 31, 2001 and an increase of $57.6 million (17.7%) from September
30, 2001. Investment securities increased $21.5 million (19.4%) from December
31, 2001 and $29.9 million (29.1%) from September 30, 2001.
Total deposits have grown $57.4 million (15.6%) since December 31, 2001 and
$63.5 million (17.5%) since September 30, 2001. Additionally, securities sold
under repurchase agreements have increased $11.2 million (34.5%) since December
31, 2001 and $15.0 million (52.3%) since September 30, 2001. The Company has
decreased its advances from the Federal Home Loan Bank by $5.0 million (14.3%)
since December 31, 2001 and September 30, 2001.
Net Interest Income
- ---------------------
Net interest income increased $652,000 (14.3%) in the third quarter of 2002
compared to the third quarter of 2001 and $2.1 million (16.5%) during the first
nine months of 2002 compared to the same period in 2001. Despite increases in
loan volume, interest income on loans decreased $402,000 (6.0%) for the
three-month period and $2.0 million (9.8%) for the nine-month period due to
lower interest rates in 2002. Interest income on investment securities
increased $187,000 (12.5%) and $881,000 (21.1%) for the three and nine-months
periods ended September 30, 2002, respectively, compared to the same periods in
2001 due to higher volume. Interest income on federal funds sold decreased
primarily due to the lower federal funds interest rate. Despite increases in
deposit volumes, interest expense on deposits decreased $1.0 million (32.0%) and
$3.5 million (35.2%) during the three and nine-month periods ended September 30,
2002, respectively, compared to the same periods in 2001 due to lower interest
rates during 2002. Interest expense for securities sold under repurchase
agreements increased for the third quarter of 2002 as compared with the third
quarter of 2001, due to the higher average volume during the third quarter of
2002. For the first nine months of 2002 as compared to the first nine months of
2001, interest expense on securities sold under repurchase agreements decreased
$131,000 (21.9%) due to the lower interest rates, despite the higher volume.
13
Increases in other borrowings interest expense in both the three-month and
nine-month periods ended September 30, 2002 of $17,000 (3.6%) and $189,000
(14.7%), respectively, compared to the same periods in 2001 are due to
additional advances obtained from the Federal Home Loan Bank in May 2001.
The Company's net interest margin for the three months and nine months ended
September 30, 2002 was 4.02% and 4.03%, respectively, compared to 4.15% and
4.14% for the three and nine months ended September 30, 2001, respectively.
Noninterest Income
- -------------------
Noninterest income for the respective periods in 2002 increased $1.2 million
(61.5%) compared to the three-month period ended September 30, 2001 and $3.0
million (58.2%) compared to the nine-month period ended September 30, 2001. The
increase for both periods in noninterest income was primarily attributable to
increases in gain on sale of mortgage loans in the secondary market of $574,000
(52.5%) over the third quarter 2001 and $1.5 million (58.3%) over the nine
months ended September 30, 2001. These increases are attributable to the low
interest rates resulting in higher levels of home purchases and refinancings.
Service charges and fees on deposits increased $479,000 (75.6%) from the third
quarter 2001 and increased $1.3 million (66.0%) over the nine months ended
September 30, 2001, due primarily to the Bounce overdraft protection program,
introduced in October 2001, as well as increases in deposit account balances.
Gain on sale of investment securities increased $114,000 (3077.6%) compared to
the three-month period ended September 30, 2001 and $152,310 (814.4%) compared
to the nine-month period ended September 30, 2001.
Noninterest Expense
- --------------------
Noninterest expense for the respective periods in 2002 increased $819,000
(19.4%) from the third quarter of 2001 and increased $2.6 million (22.2%) over
the first nine months of 2001. Salary expense increased $257,000 (12.3%) in the
third quarter of 2002 compared to the third quarter of 2001 and increased
$879,000 (15.3%) for the nine month period ended September 30, 2002 when
compared to the nine months ended September 30, 2001. The increases in salary
expense for both the quarter and nine-month period are primarily the result of
increased mortgage commissions directly related to the secondary mortgage market
volume, the additional personnel for the Furys Ferry branch opened in June 2001,
and overall Company growth. Employee benefits expense increased $154,000 (27.5%)
over the third quarter of 2001 and $638,000 (39.2%) over the first nine months
of 2001, primarily due to additional 401K expense, incentive compensation, and
deferred compensation expense. Increases in premises and fixed assets expense
of $20,000 (3.7%) over the third quarter of 2001 and $186,000 (12.2%) over the
comparable nine months of 2001 primarily resulted from depreciation expense
associated with the Furys Ferry branch, the core software system installed in
May 2001, as well as, the network upgrade and new personal computers
installations in May 2002. The increase in other operating expenses of $388,000
(37.8%) over the three months ended September 30, 2001 and $931,000 (31.6%) over
the nine months ended September 30, 2001 are primarily due to increases in
processing expense, primarily due to the Bounce overdraft protection program,
14
increases in business development expenses primarily due to the Company's
celebration of reaching $500 million in total assets, professional fees
primarily related to FDICIA internal control expense and advisory and consulting
fees, and operational losses related to a Federal Home Loan Bank advance
prepayment fee.
Income Taxes
- -------------
Income tax expense in the third quarter of 2002 totaled $842,000, an increase of
$211,000 over the third quarter of 2001. Income tax expense of $2,234,000 for
the first nine months of 2002 reflects an increase of $641,000 over the
comparable nine month period in 2001. The effective tax rate for the nine
months ended September 30, 2002 and 2001 was 33.8% and 33.0%, respectively. The
increase in the effective tax rate is primarily due to a decrease in tax-exempt
income. Income taxes are estimated on a quarterly basis.
Asset Quality
- --------------
Table 1 shows the current and prior period amounts of non-performing assets.
Non-performing assets were $2.8 million at September 30, 2002, compared to $2.0
million at December 31, 2001 and $1.7 million at September 30, 2001. The ratio
of non-performing assets to total loans and other real estate was 0.74% at
September 30, 2002, compared to 0.58% at December 31, 2001 and 0.53% at
September 30, 2001. The control and monitoring of non-performing assets
continues to be a priority of management.
Loans past due 90 days or more and still accruing were $60,000 at September 30,
2002 compared to $0 at December 31, 2001 and $5,000 at September 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 September 30, 2002, the loan portfolio is comprised
of 70.0% real estate loans, of which 20.6% constitutes construction and
acquisition and development loans. Commercial, financial and agricultural loans
comprise 17.3%, and consumer loans comprise 12.7% of the portfolio. Loan
concentration 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
15
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 $789,000 was charged to expense for the
quarter ended September 30, 2002 compared to $405,000 for the quarter ended
September 30, 2001. The increase in the provision for loan losses for the third
quarter of 2002 as compared with the third quarter of 2001 is due to increased
loan volume and an increase in classified loans. The Bounce overdraft
protection provision was $71,000 for the three months ended September 30, 2002
compared to $0 for the three months ended September 30, 2001, due to the
introduction of the Bounce overdraft protection program in late October of 2001.
At September 30, 2002 the ratio of allowance for loan losses to total loans was
1.61% compared to 1.50% at December 31, 2001 and 1.46% at September 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 September 30, 2002 was 89.7%
compared to 92.0% at December 31, 2001 and 89.6% at September 30, 2001. Loans
increased $57.6 million from September 30, 2001 and $46.8 million during the
first nine months of 2002 while deposits increased $63.5 million from September
30, 2001 and increased $57.4 million during the first nine 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. There was a Federal Home Loan
Bank advance $5.0 million prepayment since September 2001 and December 2001.
Securities sold under repurchase agreements increased $15.0 million from
September 30, 2001 and increased $11.2 million from December 31, 2001. The
Company has federal funds purchased accommodations with The Bankers Bank,
Atlanta, Georgia, for advances up to $12,800,000 and with SunTrust Bank,
Atlanta, Georgia, for advances up to $10,000,000. The Company maintains
repurchase lines of credit with SunTrust Robinson Humphrey, Atlanta, Georgia,
for advances up to $10,000,000 and with The Bankers Bank, Atlanta, Georgia, up
to $10,000,000. 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.
Shareholders' equity to total assets was 8.2% at September 30, 2002 compared to
8.4% at September 30, 2001 and 8.3% at December 31, 2001. This decrease in the
ratio is reflective of the growth experienced by the Company. The capital of
the Company and the Bank exceeded all required regulatory guidelines at
September 30, 2002. The Company's Tier 1 risk-based, total risk-based and
16
leverage capital ratios were 10.07%, 11.32%, and 7.97%, respectively, at
September 30, 2002. 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 $71,623,000 at September 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 $ 71,623,000 - - - -
Lease agreements 130,051 128,268 33,969 21,560 12,575
Deposits 203,351,839 74,262,676 62,430,821 24,996,648 25,675,424
Securities sold under
repurchase agreements 43,648,204 - - - -
Other borrowings 1,000,000 - - - -
------------ ----------- ----------- ----------- -----------
Total commitments and
contractual obligations $319,753,094 $74,390,944 $62,464,790 $25,018,208 $25,687,999
============ =========== =========== =========== ===========
17
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.
18
TABLE 1
- --------
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30,
-----------------------------------
PROFITABILITY 2002 2001
- ------------- ------- -------
Return on average assets * 1.14% .99%
Return on average equity * 13.92% 11.86%
ALLOWANCE FOR LOAN LOSSES
- -------------------------
Beginning balance, January 1 $5,109 $4,143
Provision charged to expense 1,874 1,200
Recoveries 380 125
Loans charged off 1,217 712
------- -------
Ending balance, September 30 $6,146 $4,756
======= =======
NON-PERFORMING ASSETS September 30, 2002 December 31, 2001 September 30, 2001
- ---------------------
Non-accrual loans $ 2,840 $ 1,955 $ 1,587
Other real estate owned 0 0 130
------------------- ------------------ -------------------
Total non-performing assets $ 2,840 $ 1,955 $ 1,717
=================== ================== ===================
LOANS PAST DUE 90 DAYS OR
MORE AND STILL ACCRUING $ 60 $ 0 $ 5
=================== ================== ===================
<FN>
* Annualized
19
TABLE 2
- --------
Georgia Bank Financial Corporation
and
Georgia Bank & Trust Company
Regulatory Capital Requirements
September 30, 2002
(Dollars In Thousands)
Actual Required Excess
Amount Percent Amount Percent Amount Percent
----------------- ---------------- ---------------
Georgia Bank Financial Corporation
Risk-based capital:
Tier 1 capital $42,966 10.07% 17,073 4.00% 25,893 6.07%
Total capital 48,311 11.32% 34,146 8.00% 14,165 3.32%
Tier 1 leverage ratio 42,966 7.97% 21,559 4.00% 21,407 3.97%
Georgia Bank & Trust Company
Risk-based capital:
Tier 1 capital $41,245 9.70% 17,007 4.00% 24,238 5.70%
Total capital 46,570 10.95% 34,014 8.00% 12,556 2.95%
Tier 1 leverage ratio 41,245 7.68% 21,493 4.00% 19,752 3.68%
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 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 2000 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Operating
Officer (who serves as the Company's principal financial officer), of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Operating Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) that is required to be included in the Company's
periodic filings with the Securities and Exchange Commission. There have been
no significant changes in the Company's internal controls or, to the Company's
knowledge, in other factors that could significantly affect those internal
controls subsequent to the date the Company carried out its evaluation, and
there have been no corrective actions with respect to significant deficiencies
and material weaknesses.
21
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company
or any of its subsidiaries is a party or of which any of their
property is subject.
Item 2. Changes In Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports On Form 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company (incorporated by
reference from the Company's registration statement on Form SB-2
filed August 20, 1997 (Registration No. 333-34037)).
3.2 Bylaws of the Company (Incorporated by reference to the
Company's Form 10-KSB, dated April 29, 1994).
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: November 8, 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 8th day of November, 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
Certification
I, R. Daniel Blanton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Georgia Bank
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
24
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002
/s/ R. Daniel Blanton
-----------------------------------
President & Chief Executive Officer
25
Certification
I, Ronald L. Thigpen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Georgia Bank
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
26
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002
/s/ Ronald L. Thigpen
-----------------------------
Executive Vice President &
Chief Operating Officer
(Principal Financial Officer)
27