SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
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of 1934
For the quarterly period ended March 31, 2003.
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or
Transition Report under Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the transition period from _______________ to ________________
Commission File No. 0-23980
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Georgia Bank Financial Corporation
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(Exact name of registrant as specified in its charter)
Georgia 58-2005097
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(State of Incorporation) (I.R.S. Employer Identification No.)
3530 Wheeler Road, Augusta, Georgia 30909
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(Address of principal executive offices)
(706) 738-6990
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(Issuer's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
2,385,280 shares of common stock, $3.00 par value per share, issued and
outstanding as of March 31, 2003.
GEORGIA BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page
Part I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002 3
Consolidated Statements of Income for the three months
ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 2003 and 2002 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 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 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
March 31, December 31,
2003 2002
------------- -------------
Cash and due from banks $ 19,017,681 $ 12,942,512
Federal funds sold 5,357,000 3,691,000
Interest-bearing deposits in other banks 517,230 517,179
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Cash and cash equivalents 24,891,911 17,150,691
Investment securities
Available-for-sale 140,397386 133,971,802
Held-to-maturity, at cost (fair values of
$6,515,555 and $6,385,650, respectively) 6,137,504 6,138,889
Loans held for sale 18,957,401 24,296,598
Loans 389,316,232 372,402,679
Less allowance for loan losses (6,831,353) (6,534,417)
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Loans, net 382,484,879 365,868,262
Premises and equipment, net 13,818,212 13,882,987
Accrued interest receivable 3,606,060 3,688,630
Goodwill 139,883 139,883
Other assets 4,447,873 4,694,668
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$594,881,109 $569,832,410
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 71,882,277 $ 70,334,882
Interest-bearing
NOW accounts 61,685,103 63,115,877
Savings 175,655,772 152,244,387
Money management accounts 26,209,991 28,687,166
Time deposits over $100,000 92,578,529 87,746,760
Other time deposits 35,011,240 37,427,629
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463,022,912 439,556,701
Securities sold under repurchase agreements 42,884,103 42,987,681
Advances from Federal Home Loan Bank 35,000,000 35,000,000
Other borrowed funds 400,000 1,000,000
Accrued interest and other liabilities 4,556,033 4,539,968
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Total liabilities 545,863,048 523,084,350
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Stockholders' equity
Common stock, $3.00 par value; 10,000,000
shares authorized; 2,404,051 shares issued;
2,385,280 shares outstanding 7,212,153 7,212,153
Additional paid-in capital 30,586,925 30,586,925
Retained earnings 9,323,621 7,471,434
Treasury stock, at cost, 18,771 shares (507,360) (507,360)
Accumulated other comprehensive income 2,402,722 1,984,908
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Total stockholders' equity 49,018,061 46,748,060
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$594,881,109 $569,832,410
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See accompanying notes to consolidated financial statements.
3
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31,
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2003 2002
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Interest income:
Loans, including fees $6,257,448 $5,872,538
Investment securities 1,621,372 1,623,477
Federal funds sold 33,106 35,318
Interest-bearing deposits in other banks 1,276 5,667
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Total interest income 7,913,202 7,537,000
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Interest expense:
Deposits 1,980,159 2,238,495
Federal funds purchased and securities sold
under repurchase agreements 167,572 142,967
Other borrowings 443,086 487,775
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Total interest expense 2,590,817 2,869,237
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Net interest income 5,322,385 4,667,763
Provision for loan losses 474,750 669,990
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Net interest income after provision
for loan losses 4,847,635 3,997,773
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Noninterest income:
Service charges and fees on deposits 1,082,649 1,030,175
Gain on sale of loans 1,787,730 1,135,719
Investment securities gains, net 46,192 50,039
Retail investment income 90,937 56,580
Trust services fees 69,859 42,648
Miscellaneous income 97,312 98,075
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Total noninterest income 3,174,679 2,413,236
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Noninterest expense:
Salaries 2,549,632 2,102,590
Employee benefits 799,644 729,367
Occupancy expenses 581,346 566,741
Other operating expenses 1,271,463 1,145,591
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Total noninterest expense 5,202,085 4,544,289
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Income before income taxes 2,820,229 1,866,720
Income tax expense 968,042 606,000
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Net income $1,852,187 $1,260,720
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4
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31,
2003 2002
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Basic net income per share $ 0.78 $ 0.53
Diluted net income per share $ 0.77 $ 0.53
Weighted average common shares outstanding 2,385,280 2,385,280
============= =============
Weighted average number of common and
common equivalent shares outstanding 2,404,185 2,392,693
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5
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
2003 2002
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Cash flows from operating activities
Net income $ 1,852,187 $ 1,260,720
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 320,347 330,675
Provision for loan losses 474,750 669,990
Net investment securities gains (46,192) (50,039)
Net amortization of premium on investment securities 226,924 59,848
Loss (gain) on disposal of premises and equipment 651 (243)
Gain on the sale of other real estate - (1,314)
Gain on sale of loans (1,787,730) (1,135,719)
Real estate loans originated for sale (75,044,326) (47,700,462)
Proceeds from sales of real estate loans 82,171,253 51,924,613
Decrease in accrued interest receivable 82,570 26,558
Decrease (increase) in other assets 31,558 (67,316)
Increase (decrease) in accrued interest and other liabilities 16,065 (33,155)
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Net cash provided by operating activities 8,298,057 5,284,156
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Cash flows from investing activities
Proceeds from sales of available for sale securities 15,340,549 2,632,775
Proceeds from maturities of available for sale securities 12,851,269 10,824,176
Purchase of available for sale securities (34,163,698) (24,368,191)
Net increase in loans (17,091,367) (11,989,002)
Purchase of premises and equipment (265,810) (489,416)
Proceeds from the sale of other real estate - 1,314
Proceeds from the sale of premises and equipment 9,587 4,200
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Net cash used in investing activities (23,319,470) (23,384,144)
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Cash flows from financing activities
Net increase in deposits 23,466,211 22,360,649
Net (decrease) increase in federal funds purchased and
securities sold under repurchase agreements (103,578) 4,482,269
Principal payments on other borrowed funds (600,000) -
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Net cash provided by financing activities 22,762,633 26,842,918
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6
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
2003 2002
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Net increase in cash and cash equivalents 7,741,220 8,742,930
Cash and cash equivalents at beginning of period 17,150,691 15,509,900
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Cash and cash equivalents at end of period $ 24,891,911 $ 24,252,830
============= =============
Supplemental disclosures of cash paid during the period for:
Interest $ 2,890,377 $ 3,158,581
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Income taxes $ 53,000 $ 315,000
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Supplemental information on noncash investing activities:
Loans transferred to other real estate $ - $ 50,632
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See accompanying notes to consolidated financial statements.
7
GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2003
Note 1 - Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Georgia Bank Financial Corporation and its wholly-owned subsidiary, Georgia Bank
& Trust Company (the "Company" or the "Bank"). Significant intercompany
transactions and accounts are eliminated in the consolidation.
The consolidated financial statements for the three months ended March 31, 2003
and 2002 are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
These consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and footnotes included in the
Company's annual report on Form 10-K for the year ended December 31, 2002.
In the opinion of management, all adjustments necessary to present fairly the
financial position and the results of operations and cash flows for the interim
periods have been made. All such adjustments are of a normal recurring nature.
The results of operations for the three months ended March 31, 2003 are not
necessarily indicative of the results of operations which the Company may
achieve for the entire year.
Note 2 - Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 145, Rescission of FASB Statements
No. 4, 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 Accounting
Principals Board (APB) Opinion 30 must be reclassified. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. The adoption of SFAS
No. 145 did not 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. SFAS No. 146 is effective prospectively for exit or
disposal activities initiated after December 31, 2002. The adoption of SFAS No.
8
146 did not 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 acquisitions of financial institutions from
the scope of both SFAS No. 72, Accounting for Certain 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 SFAS No. 141, Business
Combinations, and SFAS 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 did not have any impact on the Company's financial
condition or results of operations.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires that the guarantor recognize,
at the inception of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing such guarantee. FIN 45 also requires additional
disclosure about the guarantor's obligations under certain guarantees that it
has issued. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002 and the disclosure requirements are effective
after December 15, 2002. The adoption of FIN 45 did not have a material impact
on the Company's financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities and Interpretation of ARB No. 51 (FIN 46). FIN 46
establishes the criteria for consolidating variable interest entities. FIN 46 is
effective for fiscal years or interim periods beginning after June 15, 2003, to
variable entities that were acquired before February 1, 2003. Management does
not anticipate that FIN 46 will 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 March 31, 2003 was $2,270,001 compared to $687,751 for the three months
ended March 31, 2002.
9
Note 4 - Stock-based Compensation
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of SFAS No. 123 to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, SFAS No. 148 also amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosure about those effects in the interim
financial information. The Company adopted the provisions of SFAS No. 148
effective December 31, 2002.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plans.
Accordingly compensation cost is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of grant over the amount an
employee must pay to acquire the stock. Had compensation cost been determined
based upon the fair value of the options at the grant dates consistent with the
method recommended by SFAS No. 123, on a pro forma basis, the Company's net
income and income per share for the three months ended March 31, 2003 and 2002
is indicated below.
Three Months Ended
March 31,
2002 2001
----------- -----------
Net income $1,852,187 $1,260,720
Deduct: Total stock-based
Compensation expense determined
under fair value based method,
net of related tax effect (33,096) (19,640)
----------- -----------
Pro Forma $1,819,091 $1,241,080
=========== ===========
Basic net income per share:
As reported $ 0.78 $ 0.53
Pro forma $ 0.76 $ 0.52
Diluted net income per share:
As reported $ 0.77 $ 0.53
Pro forma $ 0.76 $ 0.52
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
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Georgia Bank Financial Corporation (the "Company") may, from time-to-time, make
written or oral forward-looking statements, including statements contained in
the Company's filings with the Securities and Exchange Commission (the
"Commission") and its reports to shareholders. Statements made in such
documents, other than those concerning historical information, should be
considered forward-looking and subject to various risks and uncertainties. Such
forward-looking statements are made based upon management's belief as well as
assumptions made by, and information currently available to, management pursuant
to "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. The Company's actual results may differ materially from the results
anticipated in forward-looking statements due to a variety of factors, including
governmental monetary and fiscal policies, deposit levels, loan demand, loan
collateral values, securities portfolio values, and interest rate risk
management; the effects of competition in the banking business from other
commercial banks, savings and loan associations, mortgage banking firms,
consumer finance companies, credit unions, securities brokerage firms, insurance
companies, money market mutual funds and other financial institutions operating
in the Company's market area and elsewhere, including institutions operating
through the Internet; changes in governmental regulation relating to the banking
industry, including regulations relating to branching and acquisitions; failure
of assumptions underlying the establishment of reserves for loan losses,
including the value of collateral underlying delinquent loans, and other
factors. The Company cautions that such factors are not exclusive. The Company
does not undertake to update any forward-looking statement that may be made from
time to time by, or on behalf of, the Company.
Critical Accounting Policies
- ------------------------------
The accounting and financial reporting policies of Georgia Bank Financial
Corporation and subsidiary conform to accounting principles generally accepted
in the United States of America accounting principles and to general practices
within the banking industry. Of these policies, management has identified the
allowance for loan losses as a critical accounting policy that requires
difficult subjective judgment and is important to the presentation of the
financial condition and results of operations of the Company.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely.
Subsequent recoveries are added to the allowance. The allowance is an amount
that management believes will be adequate to absorb losses on existing loans
that become uncollectible, based on evaluations of the collectibility of loans.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, historical loss rates, overall portfolio
quality, review of specific problem loans, and current economic conditions and
trends that may affect a borrower's ability to repay.
11
The Company segments its allowance for loan losses into the following five major
categories: 1) identified losses for impaired loans; 2) general reserves for
Classified/Watch loans; 3) general reserves for loans with satisfactory ratings;
4) general reserves based on economic and market risk qualitative factors, and
5) an unallocated amount. Risk ratings are initially assigned in accordance
with the Bank's loan and collection policy. An organizationally independent
department reviews grade assignments on an ongoing basis. Management reviews
current information and events regarding a borrowers' financial condition and
strengths, cash flows available for debt repayment, the related collateral
supporting the loan and the effects of known and expected economic conditions.
When the evaluation reflects a greater than normal risk associated with the
individual loan, management classifies the loan accordingly. If the loan is
determined to be impaired, management allocates a portion of the allowance for
loan losses for that loan based upon the present value of future cash flows
discounted at the loan's effective interest rate or the fair value of the
collateral as the measure for the amount of the impairment. Impairment losses
are included in the allowance for loan losses through a charge to the provision
for losses on loans. Subsequent recoveries are added to the allowance for loan
losses. Cash receipts for accruing loans are applied to principal and interest
under the contractual terms of the loan agreement. Cash receipts on impaired
loans for which the accrual of interest has been discontinued are applied first
to principal and then to interest income. Impaired and Classified/Watch loans
are aggressively monitored. The reserves for loans rated satisfactory are
further subdivided into various types of loans as defined by call report codes.
The Company developed specific qualitative factors to apply to each individual
component of the reserve. These qualitative factors are based upon economic,
market and industry conditions that are specific to the Company's local two
county markets. These qualitative factors include, but are not limited to,
national and local economic conditions, bankruptcy trends, unemployment trends,
loan concentrations, dependency upon government installations and facilities,
and competitive factors in the local market. These allocations for the
qualitative factors are included in the various individual components of the
allowance for loan losses. The qualitative factors are subjective in nature and
require considerable judgment on the part of the Bank's management. However, it
is the Bank's opinion that these factors do represent uncertainties in the
Bank's business environment that must be factored into the Bank's analysis of
the allowance for loan losses. The Bank is committed to developing more
historical data in the future to reduce the dependence on these qualitative
factors. The unallocated component of the allowance is established for losses
that specifically exist in the remainder of the portfolio, but have yet to be
identified.
Management believes that the allowance for loan losses is adequate. While the
Company has 71.67% of its loan portfolio secured by real estate loans, this
percentage is not significantly higher than in previous years. Commercial real
estate comprises 27.68 % of the loan portfolio and is primarily owner occupied
properties where the operations of the commercial entity provide the necessary
cash flow to service the debt. For this portion of real estate loans, repayment
is not dependent upon liquidation of the real estate. Construction and
development (18.67%) has been an increasingly important portion of the real
estate loan portfolio. The Company carefully monitors the loans in this
12
category since the repayment of these loans is generally dependent upon the
liquidation of the real estate and is impacted by national and local economic
conditions. The residential category represents those loans that the Company
chooses to maintain in its portfolio rather than selling into the secondary
market for marketing and competitive reasons. The residential held for sale
category comprises loans that are in the process of being sold into the
secondary market. The credit has been approved by the investor and the interest
rate locked so the Company takes no credit or interest rate risk with respect to
these loans. The Company has no large loan concentrations to individual
borrowers or industries. Only 12.69% of the Company's portfolio consists of
consumer loans. Unsecured loans at March 31, 2003 were $8.9 million. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
Performance Overview -- Net Income
- ----------------------------------
The Company's net income for the first quarter of 2003 was $1,852,000, which was
an increase of $591,000 (46.9%) compared to net income of $1,261,000 for the
first quarter of 2002. Basic net income per share for the three months ended
March 31, 2003 was $0.78 compared to $0.53 for the three months ended March 31,
2002. The increase in 2003 compared to 2002 was primarily a result of an
increase in the gain on sale of loans in the secondary market due to increased
home purchases and refinancing activity in the first three months of 2003
compared to the comparable quarter of 2002, a decrease in the provision for loan
losses, and an increase in net interest income. Due to the lower interest rates
in 2003, the Bank experienced a decrease in interest expense. However, despite
the lower interest rates, interest income increased due to the loan portfolio
growth. The income growth discussed above was offset by increases in salaries
and employee benefits expenses due to higher commissions related to the increase
in loan originations of loans sold in the secondary mortgage market as well as
increased personnel to support growth. Other operating expenses increased
$126,000, primarily due to increases in professional fees, staff development,
and loan costs.
The annualized return on average assets for the Company was 1.30% for the three
months ended March 31, 2003, compared to 1.04% for the same period last year.
The increase is primarily attributable to the increase in net income. The
annualized return on average stockholders' equity was 15.67% for the three
months ended March 31, 2003 compared to 12.57% for the comparable period in
2002.
Total assets of $594.9 million at March 31, 2003 reflects an increase of $25.0
million (4.4%) from year-end 2002. This increase is primarily attributable to
higher loan, investment and cash and due from banks balances since December
2002. Total loans at March 31, 2003 were $408.3 million which represented an
increase of $11.6 million (2.9%) from December 31, 2002. Investment securities
increased $6.4 million (4.6%) from December 31, 2002 and cash and due from banks
13
increased $6.1 million (46.9%) from December 31, 2002.
Total deposits have grown $23.5 million (5.3%) since December 31, 2002. The
balance of securities sold under repurchase agreements has decreased $104,000
(0.2%) from December 31, 2002. Securities sold under repurchase agreements
includes $11.0 million of repurchase agreements from SunTrust Robinson Humphrey.
Advances from the Federal Home Loan Bank have remained constant since December
31, 2002.
Net Interest Income
- ---------------------
Net interest income increased $655,000 (14.0%) in the first quarter of 2003
compared to the first quarter of 2002. Despite lower interest rates, interest
income increased $376,000 (5.0%) during 2003 compared to 2002, due to increased
loan volume. Interest-earning assets at March 31, 2003 increased $82.1 million
(17.2%) over March 31, 2002. Despite increased deposit volume, interest expense
on deposits decreased $258,000 (11.5%) for the three-month period ended March
31, 2003 compared to the three-month period ended March 31, 2002 due to lower
interest rates. A $10.6 million increase in the average quarterly balance of
securities sold under repurchase agreements for the three-month period ended
March 31, 2003 resulted in increased interest expense of $25,000. Other
borrowings expense decreased $45,000 in 2003 compared to 2002 due to the
prepayment of a $5.0 million Federal Home Loan Bank advance with a 4.95% rate in
September 2002 and borrowed a $5.0 million advance with a 1.41% rate in December
2002.
The Company's net interest margin was 3.88% for the three months ended March 31,
2003 compared to 4.07% for the three months ended March 31, 2002.
Noninterest Income
- -------------------
Noninterest income increased $761,000 (31.6%) for the three-month period ended
March 31, 2003 compared to the three-month period ended March 31, 2002. The
increase in noninterest income was primarily attributable to the increase in
gain on sale of mortgage loans in the secondary market, which increased $652,000
(57.4%) for the three months ended March 31, 2003 compared to the three months
ended March 31, 2002. This gain is attributable to increased mortgage volume
from home purchases and refinancing activity due to the low interest rate
environment. Service charges and fees on deposits increased $52,000 (5.1%)
during the three months ended March 31, 2003 as compared to the three months
ended March 31, 2002. This is primarily attributable to increases in NSF fees
and service charges due to increased deposit volume and increases in debit card
income due to increased usage and deposit accounts. Retail investment income
increased $34,000 (60.7%) and trust income increased $27,000 (63.8%) in 2003
compared to 2002, both attributable to increases in volume.
14
Noninterest Expense
- --------------------
Noninterest expense increased $658,000 (14.5%) during the first quarter of 2003
compared to the first quarter of 2002. Salary and benefits expense accounted for
$517,000 of this increase. Increases in salary and benefits expense are due to
higher commissions related to the increase in loan originations of loans sold in
the secondary mortgage market volume as well as the continued expansion in the
Company's local market that is reflected in additions to staff. The increase in
other operating expenses of $126,000 (11.0%) for the three months ended March
31, 2003 is primarily a result of increased professional expenses due to
increased audit expenses related to FDICIA requirements and efficiency reviews,
increased advisory and consulting fees and directors fees, increased staff
development due to seminars and staff training, and increased loan costs due to
increased mortgage origination volume.
Income Taxes
- -------------
Income taxes in the first quarter of 2003 totaled $968,000, an increase of
$362,000 (59.7%) over the first quarter of 2002. The effective tax rate for the
three months ended March 31, 2003 was 34.3% compared to 32.5% for the three
months ended March 31, 2002. The increase in the effective tax rate for the
first quarter of 2003 is due primarily to a decrease in tax-exempt income.
Asset Quality
- --------------
Table 1 shows the current and prior period amounts of non-performing assets.
Non-performing assets were $2.7 million at March 31, 2003 compared to $1.9
million at December 31, 2002 and $2.1 million at March 31, 2002. The ratio of
non-performing assets to total loans and other real estate was 0.65% at March
31, 2003, compared to 0.48% at December 31, 2002 and 0.61% at March 31, 2002.
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 $0 at March 31, 2003
compared to $0 at December 31, 2002 and $5,000 at March 31, 2002.
Allowance for Loan Losses
- ----------------------------
The allowance for loan losses represents a reserve for probable loan losses in
the loan portfolio. The adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant loans, with particular
emphasis on impaired, non-accruing, past due, and other loans that management
believes require special attention. The determination of the allowance for loan
losses is considered a critical accounting policy of the Company.
When reviewing the allowance for loan losses, it is important to understand to
whom the Company lends. At March 31, 2003, the loan portfolio is comprised of
71.67% real estate loans, of which 18.67% constitutes construction and
15
acquisition and development loans. Commercial, financial and agricultural loans
comprise 15.64%, and consumer loans comprise 12.69% of the portfolio.
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
the individual collateral analysis on each problem loan indicates that the
probable loss upon liquidation of collateral would be in excess of the fair
value of the collateral if the loan is collateral dependent or if the present
value of expected future cash flows is less than the loan balance. In addition
to these allocated reserves, the Company has established an unallocated reserve
of $67,000 at March 31, 2003.
Additions to the allowance for loan losses are made periodically to maintain the
allowance at an appropriate level based upon management's analysis of potential
risk in the loan portfolio. A provision for losses in the amount of $475,000
was charged to expense for the quarter ended March 31, 2003 compared to $670,000
for the quarter ended March 31, 2002.
At March 31, 2003 the ratio of allowance for loan losses to total loans was
1.67% compared to 1.65% at December 31, 2002 and 1.54% at March 31, 2002.
Management considers the current allowance for loan losses appropriate based
upon its analysis of the potential risk in the portfolio, although there can be
no assurance that the assumptions underlying such analysis will continue to be
correct.
Liquidity and Capital Resources
- ----------------------------------
The Company's liquidity remains adequate to meet operating and loan funding
requirements. The loan to deposit ratio at March 31, 2003 was 88.2% compared to
90.3% at December 31, 2002 and 88.9% at March 31, 2002. The decrease in the
loan to deposit ratio from December 31, 2002 reflects the significant increase
in deposits in the first quarter of 2002. Deposits at March 31, 2003 include
$20.0 million of brokered certificates of deposit, a $5.0 million increase from
December 31, 2002. The Company has also utilized borrowings from the Federal
Home Loan Bank, reverse repurchase agreements and securities sold under
repurchase agreements to fund additional growth. The Company maintains a line
of credit with the Federal Home Loan Bank approximating 10% of the Bank's total
assets. Federal Home Loan Bank advances are collateralized by eligible first
mortgage loans, and specific commercial loans. The Company has a federal funds
purchased accommodation with The Bankers Bank, Atlanta, Georgia, for advances up
16
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 $11,000,000 and with The
Bankers Bank, Atlanta, Georgia, for advances up to $10,000,000. At March 31,
2003, securities sold under repurchase agreements included $11.0 million in
repurchase agreements with SunTrust Robinson Humphrey, Atlanta, Georgia.
Additionally, liquidity needs can be satisfied by the structuring of the
maturities of investment securities and the pricing and maturities on loans and
deposits offered to customers.
Stockholders' equity to total assets was 8.2% at March 31, 2003 and December 31,
2002. The capital of the Company and the Bank exceeded all required regulatory
guidelines at March 31, 2003. The Company's Tier 1 risk-based, total risk-based
and the leverage capital ratios were 10.07%, 11.33%, and 8.05%, respectively, at
March 31, 2003. Table 2 reflects the current regulatory capital levels in more
detail, including comparisons to the regulatory minimums.
Management is not aware of any events or uncertainties that are reasonably
likely to have a material affect on the Company's liquidity, capital resources
or operations.
Commitments and Contractual Obligations
- ---------------------------------------
The Bank is a party to lines of credit with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers. Lines of
credit are unfunded 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 $80,543,000 at March 31, 2003. These commitments are
primarily at variable interest rates.
The Company's commitments are funded through internal funding sources of
scheduled repayments of loans and sales and maturities of investment securities
available for sale or external funding sources through acceptance of deposits
from customers or borrowings from other financial institutions.
The following table is a summary of the Company's commitments to extend credit,
commitments under contractual leases as well as the Company' contractual
obligations, consisting of deposits, FHLB advances, which are subject to early
termination options, and borrowed funds by contractual maturity date for the
next five years.
17
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 $ 80,543,000 - - - -
Lease agreements 154,000 108,000 56,000 37,000 21,000
Deposits 220,393,000 75,519,000 69,859,000 29,099,000 27,864,000
Securities sold under
repurchase agreements 42,884,000 - - - -
FHLB advances 5,000,000 - - - -
Other borrowings 400,000 - - - -
- ----------------------------- ------------ ----------- ----------- ----------- -----------
Total commitments and
contractual obligations $349,374,000 $75,627,000 $69,915,000 $29,136,000 $27,885,000
============================= ============ =========== =========== =========== ===========
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)
Three Months Ended March 31,
----------------------------
PROFITABILITY 2003 2002
- ----------------------------- ------- -------
Return on average assets * 1.30% 1.04%
Return on average equity * 15.67% 12.57%
ALLOWANCE FOR LOAN LOSSES
- -------------------------
Beginning balance, January 1, $6,534 $5,109
Provision charged to expense 475 670
Recoveries 166 106
Loans charged off 344 511
------- -------
Ending balance, March 31, $6,831 $5,374
NON-PERFORMING ASSETS March 31, 2003 December 31, 2002 March 31, 2002
- ---------------------
Non-accrual loans $2,651 $1,897 $2,076
Other real estate owned 0 0 51
------ ------ ------
Total non-performing assets $2,651 $1,897 $2,127
====== ====== ======
LOANS PAST DUE 90 DAYS OR
MORE AND STILL ACCRUING $0 $0 $5
====== ====== ======
<FN>
* Annualized
19
Table 2
- -------
Georgia Bank Financial Corporation
And
Georgia Bank & Trust Company
Regulatory Capital Requirements
March 31, 2003
(Dollars in Thousands)
Actual Required Excess
Amount Percent Amount Percent Amount Percent
------- -------- ------ -------- ------ --------
Georgia Bank Financial
Corporation
Risk-based capital:
Tier 1 capital $46,475 10.07% 18,456 4.00% 28,019 6.07%
Total capital 52,256 11.33% 36,913 8.00% 15,343 3.33%
Tier 1 leverage ratio 46,475 8.05% 23,105 4.00% 23,370 4.05%
Georgia Bank & Trust
Company
Risk-based capital:
Tier 1 capital $44,752 9.73% 18,391 4.00% 26,361 5.73%
Total capital 50,513 10.99% 36,782 8.00% 13,731 2.99%
Tier 1 leverage ratio 44,752 7.77% 23,040 4.00% 21,712 3.77%
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of March 31, 2003, there were no substantial changes from the interest rate
sensitivity analysis or the market risk analysis for various changes in interest
rate calculated as of December 31, 2002. The foregoing disclosures related to
the market risk of the Company should be read in conjunction with the Company's
audited consolidated financial statements, related notes and management's
discussion and analysis of financial condition and results of operations for the
year ended December 31, 2002 included in the Company's 2002 annual report on
Form 10-K, Item 7A.
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 President and Chief Executive Officer
(principal executive officer) and its Executive Vice President and Chief
Operating Officer (principal financial officer), of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, such officers
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) that is required to be included in the Company's
periodic filings with the Securities and Exchange Commission. There have been
no significant changes in the Company's internal controls or, to the Company's
knowledge, in other factors that could significantly affect those internal
controls subsequent to the date the Company carried out its evaluation, and
there have been no corrective actions with respect to significant deficiencies
or material weaknesses.
21
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company
or Bank is a party or of which any of their property is subject.
Item 2. Changes in Securities
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: May 13, 2003 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 13th day of May, 2003.
/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: May 13, 2003
/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: May 13, 2003
/s/ Ronald L. Thigpen
--------------------------
Executive Vice President &
Chief Operating Officer
(Principal Financial Officer)
27