FORM 10-QSB

U. S. Securities and Exchange Commission

Washington, D.C. 20549

(Mark One)

[X]	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2002
[ ] 	TRANSITIONS REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1943.

For the transition period from ___________ to _________

Commission file number 0-16657
**FIRST GEORGIA HOLDING, INC.**

Georgia
58-1781773
(State or other jurisdiction or 

incorporation or organization)
(IRS Employer Identification No.)

 

1703 Gloucester Street

Brunswick, Georgia 31520

(Issuer's Address)

(912) 267-7283

(Issuer's telephone number)

Check whether the issuer (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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______ 

Number of shares of Common Stock outstanding as of June 30, 2002

 

7,751,712

 

**PART 1**FINANCIAL INFORMATION
 
The consolidated financial statements of First Georgia Holding, Inc. filed as part of this report are as follows:
 
Page
Consolidated Balance Sheets as of

June 30, 2002 and September 30, 2001
3
 
 
Consolidated Income Statements for the Three Months and Nine

Months Ended June 30, 2002 and 2001
4
 
 
Consolidated Cash Flow Statements for the Nine Months Ended 

June 30, 2002 and 2001
5
 
 
Notes to Consolidated Financial Statements
6
 
 
Management's Discussion and Analysis of Financial Condition 

and Results of Operation
8
 
 **PART II
Item 6. Exhibits and Reports on Form 8-K
16
 
 
 
 
 

 

**FIRST GEORGIA HOLDING, INC
CONSOLIDATED BALANCE SHEETS

(unaudited)
 **June 30,

2002**September 30,

2001**Assets:
 
 
Cash and cash equivalents:
 
 
Cash and due from banks
$ 11,127,619
$ 8,972,134
Federal funds sold
3,176,000
10,759,000
Interest bearing deposits in other banks
209,565
220,179
Cash and cash equivalents
14,513,184
19,951,313
 
 
 
Investment securities to be held to maturity, fair value

approximately $29,400,000 and $26,459,000 at

June 30, 2002 and September 30, 2001, respectively
29,201,772
25,950,677
Loans receivable, net of allowance for loan losses of 

approximately $2,390,00 and $2,414,000 at

June 30, 2002 and September 30, 2001, respectively
199,001,921
187,526,158
Real estate owned
921,465
928,739
Federal Home Loan Bank stock, at cost
1,025,900
992,300
Premises and equipment, net
5,329,855
5,616,054
Accrued interest receivable
1,124,595
1,328,007
Intangible assets, net
430,304
502,025
Other assets
1,852,704
2,672,763
 
 
 
Total Assets
$ 253,401,700
$ 245,468,036
 
 
 **Liabilities and Stockholders' Equity
 
 **Liabilities:
 
 
Deposits
$ 226,474,427
$ 218,982,788
Federal Home Loan Bank advances
3,500,000
3,500,000
Other borrowed funds
2,000,000
2,000,000
Accrued interest payable
384,623
644,192
Obligations under capital lease
156,155
172,959
Accrued expenses and other liabilities
430,748
498,937
 
232,945,453
225,798,876**Stockholders' Equity
 
 
Common stock, $1.00 par value; 10,000,000 shares 

authorized; 7,751,712 and 7,713,733 shares issued

and outstanding at June 30, 2002 and September 30,

2001, respectively
7,751,712
7,713,733
Additional paid-in capital
383,383
396,297
Retained earnings
12,320,652
11,559,130
Total Stockholders' Equity
20,455,747
19,669,160
 
 
 
Total Liabilities and Stockholders' Equity
$ 253,401,700
$ 245,468,036
 
 
See accompanying notes to consolidated financial statements.
 
 

**FIRST GEORGIA HOLDING, INC.
CONSOLIDATED INCOME STATEMENTS

(unaudited)
 
 
 
 
 
 **Three Months Ended

June 30,**Nine Months Ended

June 30,**2002**2001**2002**2001
Interest Income:
 
 
 
 
Loans
$ 3,529,803
$ 4,338,713
$ 10,694,748
$ 14,217,683
Federal funds sold
28,994
167,398
46,935
290,323
Investments
475,665
401,542
1,487,718
1,107,665
Other
990
703
3,222
13,995
Total Interest Income
4,035,452
4,908,356
12,232,623
15,629,666
 
 
 
 
 
Interest Expense:
 
 
 
 
Deposits
1,574,390
2,501,405
5,383,585
7,555,390
FHLB advances and other borrowings
98,598
77,164
263,108
285,298
Total interest expense
1,672,988
2,578,569
5,646,693
7,840,688
 
 
 
 
 
Net interest income
2,362,464
2,329,787
6,585,930
7,788,978
Provision for loan losses
30,000
15,000
90,000
435,000
Net interest income after provision for loan losses
2,332,464
2,314,787
6,495,930
7,353,978
 
 
 
 
 
Other income:
 
 
 
 
Loan fees
133,347
142,640
422,805
403,693
Deposit service charges
493,540
516,449
1,570,018
1,492,408
Gain on sale of real estate owned and foreclosed property
55,576
-
66,457
48,220
Other operating income
117,151
64,619
292,483
168,044
Total other income
799,614
723,708
2,351,763
2,112,365
 
 
 
 
 
Other Expenses:
 
 
 
 
Salaries and employee benefits
1,212,400
1,184,240
3,590,792
3,447,189
Net occupancy expense
413,322
436,558
1,269,337
1,353,099
Amortization of intangibles
23,907
23,907
71,721
71,721
Federal insurance premiums
9,040
16,926
44,728
53,503
Other operating expenses
734,037
640,694
2,059,655
1,879,135
Total other expenses
2,392,706
2,302,325
7,036,233
6,804,647
 
 
 
 
 
Income before income taxes
739,372
736,170
1,811,460
2,661,696
Income tax expense
273,909
292,890
662,350
1,063,500
 
 
 
 
 
Net Income
$ 465,463
$ 443,280
$ 1,149,110
$ 1,598,196
 
 
 
 
 
Income per share of common stock:
 
 
 
 
Basic
$ 0.06
$ 0.06
$ 0.15
$ 0.21
Diluted
$ 0.06
$ 0.06
$ 0.15
$ 0.21
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 

**FIRST GEORGIA HOLDING, INC.
CONOLIDATED STATEMENT OF CASH FLOWS

(unaudited)
 **Nine Months Ended

June 30,
 **2002**2001
OPERATING ACTIVITIES:
 
 
Net Income
$ 1,170,593
$ 1,598,196
Adjustments to reconcile net income to net cash provided by operations:
 
 
Provision for loan losses
90,000
435,000
Depreciation and amortization
525,518
584,881
 
(333,146)
(68,495)
Amortization of intangibles
71,721
71,721
Amortization of deferred loan fees
(124,454)
7,130
Gain on sale of premises and equipment
(4,700)
-
Gain on Sale of real estate owned and foreclosed property
(66,457)
(48,220)
Decrease in accrued interest receivable
203,412
108,501
Decrease in other assets
820,060
281,752
Decrease in accrued interest payable
(295,569)
(41,646)
Decrease in accrued expenses and other liabilities
(84,994)
(229,847)
 
 
 
Net cash provided by operating activities
1,986,501
2,698,973
 
 
 
INVESTING ACTIVITIES:
 
 
Principal payments received on mortgage-backed securities
1,329,398
1,534,313
Maturities of investment securities
928,000
1,076,718
Purchase of FHLB stock
(33,600)
(100,000)
Purchase of investment securities
(5,175,347)
(6,061,315)
Loan originations, net of principal repayments
(12,046,850)
658,800
Purchase of premises and equipment
(234,619)
(583,401)
Proceeds from the sale of real estate owned
679,273
1,041,423
 
 
 
Net cash used by investing activities
(14,553,745)
(2,433,462)
 
 
 
FINANCING ACTIVITIES:
 
 
Net increase in deposits
7,491,636
5,800,610
Proceeds from FHLB advances
-
5,000,000
Repayments of FHLB advances
-
(4,000,000)
Proceeds from exercise of stock options
25,065
-
Cash dividends paid ($0.05 and $0.04 per share, respectively)
(387,586)
(308,308)
 
 
 
Net cash provided by financing activities
7,129,115
6,492,402
 
 
 
Net (decrease) increase in cash and cash equivalents
(5,438,129)
6,757,913
Cash and cash equivalents at beginning of period
19,951,313
16,586,760
 
 
 
Cash and cash equivalents at end of period
$ 14,513,184
$ 23,344,673
 
 
 
Supplemental disclosure of cash paid during the period for:
 
 
Interest
$ 5,195,792
$ 4,497,619
Income taxes
418,000
835,000
 
 
 
Supplemental disclosure of non-cash activities:
 
 
Loans transferred to real estate owned
$ 1,848,000
$ 1,702,205
Sale of real estate owned financed by bank
975,327
192,900
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
FIRST GEORGIA HOLDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) 	BASIS OF PRESENTATION

In the opinion of Management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of First Georgia Holding, Inc. as of June 30, 2002 and September 30, 2001. Also included are the results of its operations and changes in financial position for the three and nine months ended June 30, 2002 and 2001. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Bank's Annual Report to Shareholders, incorporated by reference into the Company's Form 10-KSB for the year ended September 30, 2001.
- EARNINGS PER SHARE
Earnings per share were calculated using the weighted-average number of shares outstanding for the period. The diluted earnings per share takes into consideration the assumed increase in shares from the conversion of stock options as well.

 **Three Month Period Ended

June 30,
 **Nine Month Period Ended

June 30,
 **2002**2001
 **2002**2001
Weighted average number of common

shares outstanding - Basic
7,751,712
7,713,733
 
7,729,314
7,713,733
 
 
 
 
 
 
Incremental shares from the assumed

conversion of stock options
-
31,760
 
11,511
31,760
 
 
 
 
 
 
Total - Diluted
7,751,712
7,745,493
 
7,740,825
7,745,493
The incremental shares from the assumed conversion of stock options were determined using the treasury stock method under which the assumed proceeds were equal to the amount that the Company would receive upon the exercise of the options plus the amount of tax benefit that would be credited to additional paid-in-capital assuming exercise of options. The assumed proceeds are used to purchase outstanding shares at the average market price during the period.
ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses are summarized as follows:

 **Nine Months

Ended June 30,

2002**Nine Months

Ended June 30, 

2001
 
 
 
Beginning Balance
$ 2,414,477
$ 2,364,704
Provision charged to operations
90,000
435,000
Charge-offs
(520,667)
(633,091)
Recoveries
405,842
138,271
Balance, end of year
$ 2,389,652
$ 2,304,884
 

(4)	RECENT ACCOUNTING PRONOUNCEMENTS

	

In July of 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 establishes accounting and reporting standards for business combinations. This Statement eliminates the use of the pooling-of-interests method of accounting for business combinations, requiring future business combinations to be accounted for using the purchase method of accounting. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. This Statement also applies to all business combinations accounted for using the purchase method of accounting for which the date of acquisition is July 1, 2001 or later. It does not appear the Statement will have a material impact on the Company's consolidated financial position and consolidated results of operations. 	

	SFAS No. 142 establishes accounting and reporting standards for goodwill and other intangible assets. With the adoption of this Statement, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value based test. SFAS No. 142 is required to be adopted for fiscal years beginning after December 15, 2001. The Company does not expect adoption of the Statement to have a material impact on the Company's consolidated financial position and consolidated results of operations.

	In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and requires that the amount recorded as a liability be capitalized by increasing the carrying amount of the related long-lived assets. Subsequent to initial measurement, the liability is accreted to the ultimate amount anticipated to be paid, and is also adjusted for revisions to the timing or amount of estimated cash flows. The capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is required to be adopted for fiscal years beginning after June 15, 2002, with earlier application encouraged. It does not appear the Statement will have a material impact on the Company's consolidated financial position and consolidated results of operations.

	In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company has not yet determined the impact, if any, the adoption of SFAS No. 144 will have on the Company's consolidated financial position and results of operations.

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers". This Statement amends SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This Statement will be effective for the year ended December 31, 2003 and for transactions entered into after May 15, 2002. It does not appear that this statement will have a material effect on the financial position, operations or cash flows of the Company.

In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This Statement nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under Issue 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. It does not appear that this statement will have a material effect on the financial position, operations or cash flows of the Company.

FIRST GEORGIA HOLDING, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

	The following discussion should be read in conjunction with the financial statements and related notes appearing elsewhere in this Form 10-QSB.

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies for the Company and its subsidiary are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The more critical accounting and reporting policies include the Company's accounting for the allowance for loan losses, other real estate owned and income taxes. In particular, the accounting for these areas requires significant judgments to be made by management. Different assumptions in the application of these policies could result in material changes in the Company's consolidated financial position or consolidated results of operations. See "Allowance for Loan Losses" herein for a complete discussion. Please also refer to Note 1 in the "Notes to Consolidated Financial Statements" in the Company's Annual Report on Form 10-KSB on file with the Securities and Exchange Commission for details regarding all of the Company's critical and significant accounting policies.

LIQUIDITY

First Georgia Bank (the "Bank") has traditionally maintained levels of liquidity above levels required by regulatory authorities. As a member of the Federal Home Loan Bank System, the Bank is required to maintain a daily average balance of cash and eligible liquidity investments equal to a monthly average of 5% of withdrawable savings and short-term borrowings. The Bank's liquidity level was 6.73% and 9.51% at June 30, 2002 and September 30, 2001, respectively.

The Bank's operational needs, demand for loan disbursements, and savings withdrawals can be met by loan principal and interest payments received, new deposits, and excess liquid assets. Significant loan demand, deposit withdrawal, increased delinquencies, and increased real estate acquired in settlement of loans (REO) could alter this condition. Management does not foresee any liquidity problems for 2002.

Neither the Company nor its subsidiary have historically incurred off-balance sheet obligations through the use of or investment in off-balance sheet derivative financial instruments or structured finance or special purpose entities organized as corporations, partnerships or limited liability companies or trusts.

CAPITAL RESOURCES

The following is reconciliation at June 30, 2002 of the Bank's equity capital to regulatory capital, under generally accepted accounting principles:

First Georgia Bank
Stockholder's Equity
$ 22,360,000
 
 
Less:
 
Intangible assets
430,000
Tangible Capital
21,930,000
 
 
Plus:
 
Qualifying intangible assets
430,000
Core Capital
22,360,000
 
 
Plus:
 
Supplemental Capital
1,751,000
 
 
Less:
 
Deducted Capital
658,000
Risk-Based Capital
$ 23,453,000
Current regulations require institutions to keep minimum regulatory tangible capital equal to 1.5% of adjusted assets, minimum core capital to adjusted assets of 4% (the leverage ratio), and risk-based capital to risk-adjusted assets of 8%. The Office of Thrift Supervision (the OTS) may increase the minimum core capital, or leverage ratio, based on its assessment of the institution's risk management systems and the level of total risk in the individual institution. At June 30, 2002, the Bank met all three capital requirements.

The Bank's regulatory capital and the required minimum amounts at June 30, 2002 are summarized as follows:

 
 
 **Required Minimum
 
 
 **Bank Capital**Amount**Excess (Deficiency)
Tangible Capital
8.67%
$21,930,000
1.50%
$3,795,000
7.17%
$18,135,000
 
 
 
 
 
 
 
Core Capital
8.82%
22,360,000
4.00%
10,136,000
4.82%
12,224,000
 
 
 
 
 
 
 
Risk-Based Capital
10.73%
23,453,000
8.00%
17,482,000
2.73%
5,971,000
 
 
 
 
 
 
 
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) required the Federal banking agencies to take "prompt corrective action" in respect to institutions that do not meet minimum capital requirements. Along with the ratios described above, FDICIA also introduced an additional capital measurement, the Tier 1 risk-based capital ratio. The Tier 1 ratio is the ratio of Tier 1 or core capital to total risk-adjusted assets. FDICIA establishes five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." The regulators summarize their minimum requirements for the five capital tiers established by the FDICIA as follows:

 
Risk-Based

Capital Ratio
Tier I Risk-Based Capital Ratio
Tier I

Leverage Ratio
Well Capitalized
10% or above
6% or above
5% or above
Adequately Capitalized
8% or above
4% or above
4% or above
Undercapitalized
Less than 8%
Less than 4%
Less than 4%
Significantly Undercapitalized
Less than 6%
Less than 3%
Less than 3%
Critically Undercapitalized
--------------------------
----------------------
2% or less
An unsatisfactory examination rating may cause an institution's capitalization category to be lower than suggested by its actual capital position. 

At June 30, 2002, the Bank's Tier 1 risk-based capital ratio was 10.23%. If a depository institution should fail to meet its regulatory capital requirements, regulatory agencies can require submission and funding of a capital restoration plan by the institution, place limits on its activities, require the raising of additional capital, and ultimately require the appointments of a conservator or receiver for the institution.

Total capital as well as tangible capital, core capital, and risk-based capital continued to increase during the quarter ended June 30, 2002. The mix of risk-based assets and additional earnings are the primary factors for this increase.

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income on loans decreased $808,910, or 18.64%, for the three-month period ended June 30, 2002 and $3,522,935 or 24.78% for the nine-month period as compared to the same period in 2001. This decrease is directly related to the decrease in average loans outstanding and an overall decrease in interest rates as compared to the same period last year. Interest on Federal funds sold decreased $138,404 for the quarter or 82.68% and $243,388 or 83.83% for the nine-month period ended June 30, 2002 as compared to the same period in 2001. Increased loan demand and increased investment balances during the quarter caused the Bank to sell less overnight Federal funds during the quarter as compared to the previous year. Interest on investments increased $74,123 or 18.46% for the quarter and $380,053, or 34.31% for the nine-month period. This increase is related to an approximate $8 million increase in investment balances as compared to June 30, 2001. 

INTEREST EXPENSE

Interest on deposits decreased $927,015 or 37.06% for the quarter ended June 30, 2002 and $2,171,805, or 28.75% for the nine-month period ended June 30, 2002 as compared to the same period in 2001. This decrease is primarily attributable to decreased interest rates paid on interest bearing deposits coupled with an approximate $17 million decrease in the average balance of certificate of deposit accounts. Due to lower interest rates being paid on certificates of deposit, the Bank has experienced an increase in the average balance of money market accounts. Interest expense on Certificates of deposit decreased approximately $2 million during the nine-month period ended June 30, 2002 as compared to the same period in 2001. Money market accounts earn interest at 2.05% rate compared to certificate of deposit accounts that were earning interest at approximately 7.00%. Interest on FHLB advances and other borrowings increased $21,934 or 27.78% for the quarter ended June 30, 2002 and decreased $22,190 or 7.78% for the nine-month period as compared to same period in 2001. The increase during the quarter is related to an increase in average borrowings. The decrease in interest expense over the nine-month period is related to lower interest rates charged on FHLB advances as compared to the same period in the prior year. 

NET INTEREST INCOME

Net interest income for the quarter ended June 30, 2002 increased $32,677 or 1.40% and decreased $1,203,048 or 15.45% for the nine-month period ended June 30, 2002 when compared to the same period in 2001. The increase during the quarter is attributable to increased interest earned on investments. Average investment balances increased approximately $8 million as compared to June 30, 2001. During the quarter ended June 30, 2002, loan demand has increased with loans outstanding increasing approximately $11 million since September 30, 2001. However, interest rates are significantly lower when compared to the same period last year. Prime interest rates have dropped from 8.50% at June 30, 2001 to 4.75% at June 30, 2002 resulting in a decrease in net interest income for the nine-month period as compared to the same period in the prior year.

PROVISION FOR LOAN LOSSES

The provision for loan losses for the nine-month period ended June 30, 2002 totaled $90,000. The loan loss provision increased $15,000 or 100.00% for the quarter and decreased $345,000 or 79.31% for the nine-month period ended June 30, 2002 as compared to the same period in 2001. The increase in the provision for the quarter results from an increase in the loan portfolio. However, for the nine-month period ended June 30, 2002 the provision has continued to decrease to levels experienced prior to fiscal year 2000 as a result of the resolution of loans originated by a particular loan officer. The Bank experienced substantial charge-offs in 2000 primarily as a result of under collateralized loans made by a particular loan officer. During a six-month period, the loan officer made loans totaling approximately $3.3 million that were under collateralized. The loan officer provided falsified collateral information to the loan committee and granted a large number of small dollar loans that were under the scope of a loan review. Once it was determined that the loan officer was making under collateralized loans, he was immediately terminated and a suspicious activities report was filed with the Office of Thrift Supervision. Of the total loan charged-off in 2000, 84.70% or $1.4 million was related to the particular loan officer. Management felt it necessary to increase the allowance for loan losses in fiscal year 2000 as a result of the increased charge-offs and to allocate a portion of the reserve to loans remaining in the portfolio that were originated by the particular loan officer and thought to have a high risk of loss based upon the characteristics of the loan. Of the total provision at September 30, 2000 approximately 72.94% or $1.9 million related to loans remaining in the portfolio related to the particular loan officer. 

The Bank has made significant progress in resolving loan problems related to fiscal year 2000. Of the total allowance at June 30, 2002, approximately 26.74% or $639,000 relates to loans originated by the particular loan officer. The Bank has recovered approximately $116,000 of the $1.4 million charged-off in fiscal year 2000.

Management has taken additional precautions since that time to ensure that all loans are properly collateralized. The Company engaged an outside firm to conduct quarterly loan reviews of the loan portfolio in order to assist in identifying all loans originated by the particular loan officer and as a preventative measure to ensure timely recognition of under collateralized loans. The quarterly review process includes all loans, regardless of principal amount. The Company also hired a credit analyst to review and provide recommendations on larger loan applications.

See "Allowance for Loan Losses" herein for a discussion of all factors considered in determining the provision for loan losses. 

Net interest income after the provision for loan losses for the quarter ended June 30, 2002 increased $17,677 or 0.76% and decreased $858,048, or 11.67% for the nine-month period ended June 30, 2002 when compared with the same period in the prior year. The increase during the quarter is attributable to a $74,123 increase in interest income on investments as compared to the same period in the prior year resulting from an approximate $ 7.8 million increase in investment balances. The decrease for the nine-month period is directly related to the decrease in loan interest income resulting from a decrease in interest rates. 

OTHER INCOME

Other income for the quarter increased $75,906 or 10.49% from the same quarter in the previous year and increased $239,398 or 11.33% for the nine-month period ended June 30, 2002 over the same nine-months last year. Loan fees decreased $9,293, or 6.52% during the quarter and increased $19,112 or 4.73% during the nine-month period ended June 30, 2002 as compared to the same period in 2001. The decrease during the quarter is attributable to a decrease in brokered mortgage loan closings during the three-month period as compared to the same period last year offset by an increase in loan fees. The number of brokered mortgage loans decreased approximately 10.20% for the quarter but remained consistent for the nine-month period with a decrease of only 2.05%. The increase in loan fees over the nine-month period is attributable to higher fees earned on brokered mortgage loans. Deposit service charges decreased $22,909 or 4.44% for the quarter ended June 30, 2002 and increased $77,610 or 5.20% for the nine-month period. The decrease during the quarter is attributable to decreased insufficient funds fees earned on deposit accounts as compared to the same period last year. The increase over the nine-month period is related to increased fee income, such as service charges and insufficient funds fees. Other operating income increased $52,532 or 81.29% for the three-months ended June 30, 2002 and $124,439 or 74.05% for the nine-month period as compared to the same periods in the prior year. The increase is a result of increased ATM fees.

OTHER EXPENSES

Other expenses for the quarter ended June 30, 2002 increased $90,381, or 3.93%, over the quarter ended June 30, 2001 and increased $231,586 or 3.40% for the nine-months ended June 30, 2002 as compared to the same period last year. Salaries and employee benefits increased $28,160 or 2.38% for the three-month period ending June 30, 2002 over the same period in the prior year and increased $143,603 or 4.17% for the nine-month period ended June 30, 2002. The increase in salary and employee benefits is attributable to annual salary increases and additional employees hired. Net occupancy expense decreased $23,236 or 5.32% in the quarter ended June 30, 2002 and decreased $83,762 or 6.19% during the nine-month period ended June 30, 2002 over the same period last year. The decrease during the quarter is primarily attributable to an approximate $15,000 decrease in building cleaning and maintenance related to a change in the provider of paper products and an approximate $8,000 decrease in property tax expense. The decrease for the nine-month period is related to an approximate $54,000 decrease in repairs and maintenance and approximate $31,000 decrease in building cleaning and maintenance related to a decrease in the cost of services provided by the maintenance company. Other operating expenses increased $93,343 or 14.57% for the three-month period ended June 30, 2002 as compared to the same period in 2001 and increased $180,520 or 9.61% during the nine-month period ended June 30, 2002 as compared to the same period in 2001. This increase during the quarter results from an approximate $90,000 increase in bad check losses related to a single loss incurred from fraudulent activity by a customer. The increase in other operating expense during nine-month period ended June 30, 2002 is primarily attributable to the same $90,000 increase in bad check losses, an approximate $45,000 increase in data processing expenses related to increased fees charged by the processor of the Bank's ACH transactions, an approximate $20,000 increase in postage expense resulting from increased volume and increased postage rates, and an approximate $15,000 in charitable contributions as compared to the same period in the previous year.

The provision for income taxes decreased $18,981 or 6.48% for the quarter and $401,150 or 37.72% for the nine-month period ended June 30, 2002 as compared to the same periods in 2001. The effective tax rate decreased to 36.00% from 40.00% for the nine-month period in 2001. This decrease results primarily from an increase in tax-exempt municipal interest income and an increase in state tax credits.

FINANCIAL CONDITION

ASSETS

Cash and cash equivalents decreased $5,438,129 or 27.26%, over the nine-month period ended June 30, 2002. Included in cash equivalents is a decrease of $7,583,000 in Federal funds sold during the nine-month period. Because loan volume has increased, the Bank has had less cash available to sell on a nightly basis. Investment balances increased $3,251,095 or 12.53%, for the nine-months ended June 30, 2002. The Bank is investing more of its cash into interest earning assets. Premises and equipment decreased $286,199 or 5.10%. The decrease results primarily from approximately $525,000 depreciation expense during the nine-month period offset by approximately $290,000 in purchases. Other assets decreased $820,060 or 30.68% during the nine-month period ended June 30, 2002. The decrease is primarily related to a an approximate $645,000 decrease in other accounts receivable related to receipt of proceeds from the sale of REO property during the prior year; a $119,454 decrease in prepaid expenses resulting from decreased prepaid balances; and a $124,200 decrease in the federal income tax receivable account. Real estate owned balances decreased $7,274 or 0.78% over the nine-month period. This decrease is related to the sale of approximately $1.5 million in other real estate previously held by the Bank offset by approximately $1.4 million in additional real estate being added. Accrued interest receivable decreased $203,412 or 15.32% as a result of decreasing interest rates.

Loans receivable increased $11,475,763 or 6.12% during the nine months ended June 30, 2002 over September 30, 2001. The allowance for loan losses decreased from $2,414,477 at September 30, 2001 to $2,389,651 at June 30, 2002. This decrease is a result of the net charge-offs during the period partially offset by an additional provision of approximately $90,000 related to the increase in the loan portfolio during the nine-month period ended June 30, 2002. The Bank's loan portfolio at June 30, 2002 and September 30, 2001 are summarized as follows:

 

**LOANS RECEIVABLE
 
 
 
 **June 30,

2002**September 30,

2001
Real estate mortgage loans
$ 131,451,665
$ 123,603,340
Real estate construction loans
36,166,798
34,202,379
Consumer loans
16,907,420
17,454,671
Commercial and other loans
19,999,509
14,823,605
 
201,525,392
190,083,995
Less:
 
 
Deferred loan fees
(124,454)
(119,042)
Unearned interest income
(9,365)
(24,318)
Allowance for loan losses
(2,389,652)
(2,414,477)
 
$ 199,001,921
$ 187,526,158
 

ALLOWANCE FOR LOAN LOSSES

Management conducts an extensive review of the provision for loan losses on a monthly basis. Additions to the allowance for loan losses are charged to operations based upon management's evaluation of the probable losses in its loan portfolio. This evaluation considers the estimated value of the underlying collateral and such other factors as, in management's judgment, deserve recognition under existing economic conditions. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowances for losses on loans and real estate owned. Such agencies may require the Bank to recognize additions to the allowances based on their judgments of information available to them at the time of their examination.

Management determines the allowance for loan losses by establishing a general allowance by loan type determined for groups of smaller, homogenous loans possessing similar characteristics and non-homogeneous loans that are not impaired. All classified loans are reviewed on an individual basis. The Bank currently engages an outside firm to conduct a quarterly review of the loan portfolio to assist in determining specific allowances as well as identify trends in the loan portfolio.
*General Allowance*
The Company determines the general allowance by applying historical loss percentages to all loans not impaired. Historical loss percentages are calculated and applied to each category of loans by risk grade. Loans are grouped into categories based upon the specific characteristics of the loan such as type of collateral. The Company generally calculates the historical loss percentages using a six-year moving average. However, for the past year, the Company has moved to a two-year moving average. As a result of changes in the loan portfolio, a decline in the economy and a significant increase in charge-offs, management feels that the losses experienced in the past two years provides a more accurate estimate of losses occurring in the present. 

The Company may adjust the allowance determined by the method described above for qualitative factors that are probable to impact future loan losses. Management has reviewed various factors to determine the impact on the current loan portfolio. These adjustments reflect management's best estimate of the level of loan losses resulting from these factors. The following current qualitative factors were considered in this analysis:
Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices. 

Changes in the nature and volume of the portfolio. 

Changes in the experience, ability, and depth of lending management and staff. 

Changes in the volume and severity of past dues and classified loans; and the volume of non-accruals, troubled debt restructurings and other loan modifications

The existence and effect of any concentrations of credit, and changes in the level of such conditions. 

The effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the Bank's portfolio. 

The effect of changes in national and local economic business. 

Bank regulatory exam results

*Specific Allowances*
Management feels that given the small number of impaired loans, type of historical loan losses, and the nature of the underlying collateral, creating specific allowances for classified assets results in the most accurate and objective allowance. Should the number of these types of assets grow substantially, other methods may have to be considered. 

The method used in setting the specific allowance uses current appraisals as a starting point, based on the Bank's possible liquidation of the collateral. On assets other than real estate, which tend to depreciate rapidly, another current valuation is used. For instance, in the case of commercial loans collateralized by automobiles, the current NADA wholesale value is used. On collateral such as over-the-road equipment, trucks or heavy equipment, valuations are sought from firms or persons knowledgeable in the area, and adjusted for the probable condition of the collateral. Other collateral such as furniture, fixtures and equipment, accounts receivable, and inventory, are considered separately with more emphasis given to the borrower's financial condition and trends rather than the collateral support. The value of the collateral is then discounted for estimated selling cost.In addition, the allowance incorporates the results of measuring impaired loans as provided by Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. *Summary*
The various methodologies included in this analysis take into consideration the historic loan losses and specific allowances. The analysis of the allowance indicated a historical allocation, adjusted for qualitative factors, of approximately $1.7 million and a specific allowance of $639,000 at June 30, 2002. The historical allocation increased approximately $25,000 from fiscal year-end, primarily as a result of growth in the loan portfolio, offset by a decrease in charge-offs from fiscal year-end. Net charge-offs to average loans outstanding decreased to 0.06% at June 30, 2002 compared to .20% at September 30, 2001 and 0.07% at June 30, 2001. Net charge-offs have decreased primarily as a result of an increase in recoveries offset by a decrease in charge-offs. The bank has been successful in recovering loans that were charged-off related to events that occurred in fiscal year 2000 involving a particular loan officer. (See "Provision for Loan Losses" herein). Additionally, in determining the general allowance, management considered improvements in Georgia economic indicators such as unemployment rates and economic growth rates. Additionally, management considered the increase in non-accruing loans of $889,352 from the end of fiscal year 2001. Non-accrual loans are examined on an individual basis to determine the appropriate action. Specific allowances decreased $72,000 from fiscal year-end as result of a decrease in impaired loans. The Company's allowance for loan losses as of June 30, 2002, is $ 2.4 million or 1.19% of total loans compared to $2.4 million or 1.27% of total loans at September 30, 2001. 
The following tables illustrate the Bank's allowance for loan losses and its problem loans. 

 

**ANALYSIS OF NON-ACCRUING AND PAST DUE LOANS
 
 
 
 **June 30,

2002**September 30,

2001**Non-accruing Loans
 
 
Construction
$ 340,725
$ 52,925
First Mortgage
2,792,615
2,670,843
Commercial and Other
397,980
161,288
Consumer
1,455,430
655,854
Total non-accruing loans
4,634,956
3,540,910
 
 
 **Past Due Loans
 
 
Real Estate
-
-
Construction
-
-
Mortgage
-
-
Consumer
-
-
Total past due loans
-
-
 
 
 **Total non-accruing and past due loans
$ 4,634,956
$ 3,540,910
 
 
 
Percentage of total loans
2.30%
1.86%
 
 
 
Real estate acquired through foreclosure
$ 921,465
$ 928,739
 
 
 **Total non-accruing, past due loans, and

non-performing assets
$ 5,565,421
$ 4,469,649
(1) Non-Accruing loans are loans for which unpaid interest is not recognized into income.

(2) Past due loans are 90 days or more delinquent for which interest is still accruing.

 

 

**ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
 
 
 
 **Nine Months Ended

June 30,

2002**Nine Months Ended

June 30,

2001
Beginning balance
$2,414,477
$2,364,704
Loans charged-off:
 
 
Real estate construction
-
7,639
Real estate mortgage
229,062
354,925
Consumer and other
291,605
270,527
Total charge-offs
520,667
633,091
 
 
 
Recoveries:
 
 
Real estate construction
-
-
Real estate mortgage
315,923
43,445
Consumer and other
89,919
94,826
Total recoveries
405,842
138,271
 
 
 
Net charge-offs
114,825
494,820
 
 
 
Provision charged to operations
90,000
435,000
 
 
 
Balance at end of period
$2,389,652
$2,304,884
 
 
 
Ratio of net charge-offs to 

average loans outstanding
0.06%
0.26%
 

LIABILITIES

Deposits have increased $7,491,639, or 3.42%, for the nine-month period ended June 30, 2002. This increase is primarily the result of an approximate $1,360,000 increase in interest-bearing accounts, an approximate $19,000,000 increase in money market accounts offset by a $13,800,000 decrease in certificate of deposit accounts. First Georgia has continued to be successful in its efforts to obtain new deposit business. However, due to a declining economy and falling interest rates the Bank has lowered the interest rates paid on CD's and offered special rates for money market accounts. Accrued expenses and other liabilities decreased $68,189 or 13.67% for the nine months ended June 30, 2002. This decrease is attributable to an approximate $127,000 decrease in the accrued expense account offset by an approximate $117,000 increase in federal income tax payable. The decrease in accrued expenses is primarily attributable to the payment of annual bonuses to employees during the quarter ended December 31, 2001.

 

PART II

ITEM 6. EXHIBITS AND REPORTS ON FORM 8K

A.
Exhibits. 
 
Exhibit 1 Certification Pursuant to 18 U.S.C. Section 1350
B.
Reports on Form 8-K
 
The Bank filed no reports on Form 8-K for the quarter ended June 30, 2002.
 

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 Date: August 12, 2002

By: /s/ G. Fred Coolidge III

Secretary and Treasurer 

 

Exhibit 1
**CERTIFICATION PURSUANT TO**********************************************************************************************