UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Mark One

 

 

Commission File Number:  000-24203

 

GB&T Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

 

Indicate by check mark whether the registrant (1) 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    ý    No    o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).      Yes    o    No    ý

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of November 10, 2003:    6,792,326 shares; no par value

 

 

GB&T BANCSHARES, INC.

 

TABLE OF CONTENTS

 

PART I.	FINANCIAL INFORMATION
	Item 1.  FINANCIAL STATEMENTS
		Consolidated Balance Sheets – September 30, 2003 (Unaudited) and December 31, 2002
		Consolidated Statements of Income (Unaudited)- Three and nine months ended September 30, 2003 and 2002
		Consolidated Statements of Comprehensive Income (Unaudited)- Three and nine months ended September 30, 2003 and 2002
		Consolidated Statements of Stockholders’ Equity (Unaudited) Nine months ended September 30, 2003
		Consolidated Statements of Cash Flows (Unaudited) - Nine months ended September 30, 2003 and 2002
		Notes to Consolidated Financial Statements (Unaudited)
	Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.  Quantitative and Qualitative Disclosures About Market Risk
	Item 4.  Controls and Procedures
PART II.	OTHER INFORMATION
	Item 6.  Exhibits and Reports on Form 8-K
	Signatures

 

2

 

PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS

 

GB&T BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)

 

		September 30, 2003			December 31, 2002
		(amounts in thousands, except share data)
Assets
Cash and due from banks		$	24,960		$	18,113
Interest-bearing deposits in banks		542			8,205
Federal funds sold		—			25,170
Securities available for sale, at fair value		136,429			106,843
Restricted equity securities		4,582			3,784
Loans, net of unearned income		685,098			542,834
Less allowance for loan losses		9,079			7,538
Loans, net		676,019			535,296
Premises and equipment		26,117			20,774
Goodwill and intangible assets		30,851			9,522
Other assets		19,728			14,265
Total assets		$	919,228		$	741,972
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing demand deposits		$	96,406		$	56,795
Interest-bearing deposits		615,883			523,453
Total deposits		712,289			580,248
Federal funds purchased and securities sold Under repurchase agreements		14,455			11,538
Federal Home Loan Bank advances		75,825			63,654
Other borrowings		233			820
Other liabilities		6,254			9.935
Company guaranteed trust preferred securities		15,000			15,000
Total liabilities		824,056			681,195
Stockholders’ Equity: Capital Stock-no par value. Authorized 20,000,000 Shares.  6,792,326 shares issued and outstanding at September 30, 2003; 5,356,946 shares issued and outstanding at December 31, 2002		67,888			35,658
Retained earnings		26,626			23,130
Accumulated other comprehensive income, net of tax		658			1,989
Total stockholders’ equity		95,172			60,777
Total liabilities and stockholders’ equity		$	919,228		$	741,972

 

See accompanying notes to consolidated financial statements.

 

3

 

GB&T BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)

 

		Three months ended September 30,						Nine months ended September 30,
		2003			2002			2003			2002
		(amounts in thousands, except per share data)
Interest income:
Loans, including fees		$	10,480		$	8,604		$	30,185		$	25,220
Investment securities:
Taxable		882			948			2,817			2,938
Nontaxable		169			173			495			526
Federal funds sold		11			30			117			69
Interest-bearing deposits in banks		9			7			26			25
Total interest income		11,551			9,762			33,640			28,778
Interest expense:
Deposits		2,723			2,738			8,599			8,627
Federal funds purchased and securities sold under repurchase agreements		45			57			128			190
Federal Home Loan Bank advances		703			743			2,068			2,193
Other borrowings		215			38			642			92
Total interest expense		3,686			3,576			11,437			11,102
Net interest income		7,865			6,186			22,203			17,676
Provision for loan losses		861			202			1,251			589
Net interest income after Provision for loan losses		7,004			5,984			20,952			17,087
Other income:
Service charges on deposit accounts		1,266			852			3,540			2,610
Mortgage origination fees		698			429			1,981			964
Insurance commissions		138			152			431			447
Gain on sale of securities		78			33			155			170
Other operating income		344			444			1,161			1,208
Total other income		2,524			1,910			7,268			5,399
Other expense:
Salaries and employee benefits		4,391			3,178			12,686			9,102
Net occupancy and equipment expense		1,103			843			3,137			2,414
Other operating expenses		1,825			1,595			5,588			4,304
Total other expense		7,319			5,616			21,411			15,820
Income before income taxes		2,209			2,278			6,809			6,666
Income tax expense		731			744			1,887			2,156
Net income		$	1,478		$	1,534		$	4,922		$	4,510
Earnings per share:
Basic		$	0.25		$	0.32		$	0.89		$	0.95
Diluted		$	0.24		$	0.31		$	0.86		$	0.92
Weighted average shares
Basic		5,848			4,767			5,532			4,762
Diluted		6,054			4,918			5,717			4,903
Cash dividends per common share		$	0.090		$	0.085		$	0.265		$	0.250

 

See accompanying notes to consolidated financial statements.

 

4

 

GB&T BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income

 

		Three months ended September 30,						Nine months ended September 30,
		2003			2002			2003			2002
		(Dollars in thousands) (unaudited)
Net Income		$	1,478		$	1,534		$	4,922		$	4,510
Unrealized gains (losses) on securities Available-for-sale arising during period, net of tax		(1,008		)	622			(1,235		)	1,104
Reclassification adjustment for gains realized on Securities available-for-sale in net income, net of tax		(48		)	(20		)	(96		)	(105		)
Other comprehensive income (loss)		(1,056		)	602			(1,331		)	999
Comprehensive income		$	422		$	2,136		$	3,591		$	5,509

 

See accompanying notes to consolidated financial statements.

 

Consolidated Statements of Stockholders’ Equity
Nine Months Ended September 30, 2003

 

		(Dollars in thousands)
		Shares		Capital Stock			Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
Balance, December 31, 2002		5,357		$	35,658		$	23,130		$	1,989		$	60,777
Net income		—		—			4,922			—			4,922
Options excercised		39		370			—			—			370
Dividends declared $0.265 per share		—		—			(1,426		)	—			(1,426		)
Purchase of First National Bank of the South		1,397		31,869									31,869
Payment for fractional shares in connection with business combinations		(1	)	(9		)	—			—			(9		)
Other comprehensive loss		—		—			—			(1,331		)	(1,331		)
Balance, September 30, 2003		6,792		$	67,888		$	26,626		$	658		$	95,172

 

See accompanying notes to consolidated financial statements.

 

5

 

GB&T BANCSHARES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 

		Nine months ended September 30,
		2003			2002
		(amounts in thousands)
Operating Activities
Net income		$	4,922		$	4,510
Adjustments to reconcile net income to net cash Provided by operating activities:
Depreciation		1,378			1,078
Provision for loan losses		1,251			387
Amortization and (accretion), net		654			126
Securities (gains) losses, net		(155		)	(170		)
Net (increase) decrease in other assets		1,017			(2,207		)
Net decrease in other liabilities		(4,297		)	(1,412		)
Net cash provided by operating activities		4,770			2,312
Investing Activities
Purchase of investment securities available for sale		(85,363		)	(26,802		)
Proceeds from sales of investment securities available for sale		7,641			17,345
Principal collections and maturities of investment securities available for sale		61,767			14,303
Net (increase) decrease in Federal Home Loan Bank stock		(146		)	(1,766		)
Net (increase) decrease in interest-bearing deposits in other banks		7,713			(1,440		)
Net (increase) decrease in federal funds sold		28,149			(18,319		)
Net increase in loans		(54,686		)	(32,835		)
Net cash acquired in business combination		5,452			—
Proceeds from sales of real estate acquired through foreclosure		779			383
Purchases of premises and equipment		(3,998		)	(2,313		)
Sales of premises and equipment		1,497			—
Net cash used in investing activities		(31,195		)	(51,444		)
Financing Activities
Net increase in deposits		28,565			42,658
Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements		2,917			(5,318		)
Proceeds from issuance of long-term debt, other borrowings and Federal Home Loan Bank advances		15,502			19,689
Payments on long-term debt, other borrowings and Federal Home Loan Bank advances		(12,656		)	(8,303		)
Dividends paid to stockholders		(1,426		)	(1,190		)
Proceeds from issuance of common stock		370			217
Net cash provided by financing activities		33,272			47,753
Net increase (decrease) in cash and due from banks		6,847			(1,379		)
Cash and due from banks at beginning of period		18,113			18,097
Cash and due from banks at end of period		$	24,960		$	16,718
Supplemental disclosure of cash paid during the period for:
Interest		$	11,859		$	12,867
Income taxes		$	2,134		$	2,771
Acquisition of Subsidiary
Capital stock issued		$	31,869		$	—

 

6

 

Assets acquired (liabilities assumed)
Cash and due from banks		$	5,452
Securities available for sale		16,891
Federal funds sold		2,979
Interest-bearing deposits in banks		50
Loans, net		88,467
Premises and equipment		5,662
Goodwill		19,043
Core deposit intangible		2,354
Other assets		6,280
Deposits		(104,092		)
Other borrowings		(9,522		)
Other liabilites		(1,695		)
		$	31,869

 

See accompanying notes to consolidated financial statements.

 

7

 

GB&T BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 1.        BASIS OF PRESENTATION

 

The unaudited consolidated financial statements include the accounts of GB&T Bancshares, Inc. and its wholly-owned banking subsidiaries, Gainesville Bank & Trust, United Bank & Trust, Community Trust Bank, HomeTown Bank of Villa Rica and First National Bank of the South, and its consumer finance company, Community Loan Company (collectively “the Company”).  Significant intercompany transactions and balances have been eliminated in consolidation.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, for interim financial information and with instructions for Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and nine-month periods ended September 30, 2003 is not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

 

NOTE 2.        STOCK COMPENSATION PLANS

 

The Company has a stock option plan for granting of options to directors, officers and employees.  The options may be exercised over a period of ten years in accordance with vesting schedules determined by the Board of Directors.  The Company accounts for the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying stock on the date of grant.  The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

 

 

8

 

NOTE 3.        EARNINGS PER COMMON SHARE (in thousands, except per share data)

 

Presented below is a summary of the components used to calculate basic and diluted earnings per share for the three and nine month periods ended September 30, 2003 and 2002.

 

		Quarters ended September 30,
		2003			2002
Basic Earnings Per Share:
Weighted average common shares outstanding		5,848			4,767
Net income		$	1,478		$	1,534
Basic earnings per share		$	0.25		$	0.32
Diluted Earnings Per Share:
Weighted average common shares outstanding		5,848			4,767
Net effect of the assumed exercise of stock Options based on the treasury stock method Using average market prices for the period		206			151
Total weighted average common shares and Common stock equivalents outstanding		6,054			4,918
Net income		$	1,478		$	1,534
Diluted earnings per share		$	0.24		$	0.31

 

		Nine Months ended September 30,
		2003			2002
Basic Earnings Per Share:
Weighted average common shares outstanding		5,532			4,762
Net income		$	4,922		$	4,510
Basic earnings per share		$	0.89		$	0.95
Diluted Earnings Per Share:
Weighted average common shares outstanding		5,532			4,762
Net effect of the assumed exercise of stock Options based on the treasury stock method using average market prices for the period		185			141
Total weighted average common shares and Common stock equivalents outstanding		5,717			4,903
Net income		$	4,922		$	4,510
Diluted earnings per share		$	0.86		$	0.92

 

9

 

NOTE 4.        MERGER AGREEMENT WITH BALDWIN BANCSHARES, INC.

 

On August 29, 2003, the Company completed the merger of Baldwin Bancshares, Inc., the parent company of First National Bank of the South, (“FNB”) in Milledgeville, Georgia.  The Company issued 1,397,584 shares of its capital stock in exchange for all of the issued and outstanding common shares of Baldwin Bancshares, Inc.  The acquisition has been accounted for as a purchase resulting in goodwill of approximately $19,043,000.  First National Bank of the South’s results of operations from September 1, 2003 to September 30, 2003 are included in the consolidated results of operations for the quarter and year ended September 30, 2003.

 

The following unaudited pro forma information for revenues and net income presents results as if the combination had occurred at the beginning of each period.

 

 

NOTE 5.        RECENT ACCOUNTING DEVELOPMENTS

 

In November 2002, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”.  The interpretation addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees.  The interpretation also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee, for the fair value of the obligation undertaken in issuing the guarantee.  The initial recognition and initial measurement provisions of the interpretation are to be applied to guarantees issued or modified after December 31, 2002.  As of September 30, 2003, the interpretation has not had a material effect on the financial condition or results of operations, and there are no guarantees required to disclose.

 

NOTE 6.        RECENT DEVELOPMENTS

 

On August 29, 2003, GB&T Bancshares, Inc. entered into a letter of intent to acquire Southern Heritage Bancorp, a Georgia corporation (“Southern Heritage”), and its wholly owned subsidiary, Southern Heritage Bank.  Negotiations with respect to the proposed acquisition are ongoing.  The proposed acquisition is subject to the execution of a definitive agreement and appropriate corporate shareholder and regulatory approvals.  There can be no assurances that this proposed acquisition will be consummated.

 

10

 

Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results including our wholly-owned subsidiaries, Gainesville Bank & Trust, United Bank & Trust, Community Trust Bank, HomeTown Bank of Villa Rica (“HTB”), First National Bank of the South (“FNB”) and Community Loan Company during the periods included in the accompanying consolidated financial statements.  This discussion should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.

 

Cautionary Notice Regarding Forward-Looking Statements

 

Some of the statements in this Report, including, without limitation, matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” of GB&T Bancshares, Inc. (the “Company”) are “forward-looking statements” within the meaning of the federal securities laws.  Forward-looking statements include statements about the competitiveness of the banking industry, potential regulatory obligations, our entrance and expansion into other markets, integration of recently acquired banks, our other business strategies, our expectations with respect to our allowance for loan losses and impaired loans, and other statements that are not historical facts.  When we use words like “anticipate”, “believe”, “intend”, “expect”, “estimate”, “could”, “should”, “will”, and similar expressions, you should consider them as identifying forward-looking statements, although we may use other phrasing.  These forward-looking statements involve risks and uncertainties and are based on our beliefs and assumptions, and on the information available to us at the time that these disclosures were prepared.  Factors that may cause actual results to differ materially from those expressed or implied by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins; (3) general economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduction in demand for credit; (4) legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which we are engaged; (5) costs or difficulties related to the integration of our businesses, may be greater than expected; (6) deposit attrition, customer loss or revenue loss following acquisitions may be greater than expected; (7) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than us; and (8) adverse changes may occur in the equity markets.

 

Many of such factors are beyond our ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements.  We disclaim any obligation to update or revise any forward-looking statements contained in this Report, whether as a result of new information, future events or otherwise.

 

Balance Sheets

 

Our total assets increased $177.3 million or 23.89% for the period ended September 30, 2003 compared to December 31, 2002.  The acquisition of FNB accounted for approximately $149.9 million of this increase.  The increase, exclusive of FNB, consists of an increase in loans of $51.4 million and an increase in securities of $14.1 million.  This increase is partially offset by decreases in federal funds sold of $25.2 million and interest-earning deposits of $7.7 million.

 

Total deposits have increased $132.0 million, or 22.76% during the period ended September 30, 2003 compared to December 31, 2002.  The acquisition of FNB accounted for approximately $105.3 of this increase.  Noninterest-bearing deposits increased $18.6 million and interest-bearing deposits increased $8.1 million during the period, both exclusive of FNB.   Loan growth was ahead of deposit growth resulting in a loan to deposit ratio of 96.18% at September 30, 2003 compared to 93.55% at December 31, 2002.

 

11

 

Liquidity and Capital Resources

 

Liquidity management involves the matching of the cash flow requirements of customers who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs and our ability to meet those needs.  We seek to meet liquidity requirements primarily through management of short-term investments, monthly amortizing loans, maturing single payment loans, and maturities of securities and prepayments.  Also we maintain relationships with correspondent banks which could provide funds on short notice.  As of September 30, 2003, we had borrowed under Federal funds purchase lines and securities sold under agreement to repurchase, $14.5 million compared to $11.5 million at December 31, 2002.

 

Our liquidity and capital resources are monitored on a periodic basis by management, State and Federal regulatory authorities.  Management reviews liquidity on a periodic basis to monitor and adjust liquidity as necessary.  Management has the ability to adjust liquidity by selling securities available for sale, selling participations in loans we generate and accessing available funds through various borrowing arrangements.  Our short-term investments and available borrowing arrangements are adequate to cover any reasonably anticipated immediate need for funds.

 

Our liquidity ratio was 16.72% at September 30, 2003, above our policy minimum ratio of 15%.  Liquidity is measured by the ratio of net cash, Federal funds sold and securities to net deposits and short-term liabilities. In the event the banks need to generate additional liquidity, funding plans would be implemented as outlined in the liquidity policy of the banks. The subsidiary banks have lines of credit available to meet any unforeseen liquidity needs.  Also, the Banks have relationships with the Federal Home Loan Bank of Atlanta, which provide funding for loan growth on an as needed basis.

 

We purchased a piece of property in May 2003 in Gainesville, Georgia for the purpose of locating an operations center for the Company’s operations and data processing. The approximate cost of the property was $1,168,000. We anticipate the construction of the operations center to be completed in 2004 with an approximate cost of $2.7 million.

 

12

 

As of September 30, 2003, the Company and the Banks were considered to be well-capitalized as defined in the Federal Deposit Insurance Corporation Improvement Act and based on regulatory minimum capital requirements.  The Company and its bank subsidiaries’ actual capital ratios are presented in the following table.

 

		ACTUAL		FOR CAPITAL ADEQUACY PURPOSES		TO BE WELL CAPITALIZED
As of September 30, 2003
Total Capital to Risk Weighted Assets:
Consolidated		12.34	%	8	%	N\A
Gainesville Bank & Trust		10.07	%	8	%	10	%
United Bank & Trust		12.58	%	8	%	10	%
Community Trust Bank		12.23	%	8	%	10	%
HomeTown Bank of Villa Rica		10.62	%	8	%	10	%
First National Bank of the South		11.25	%	8	%	10	%
Tier I Capital to Risk Weighted Assets:
Consolidated		11.08	%	4	%	N\A
Gainesville Bank & Trust		8.95	%	4	%	6	%
United Bank & Trust		11.36	%	4	%	6	%
Community Trust Bank		10.98	%	4	%	6	%
HomeTown Bank of Villa Rica		9.36	%	4	%	6	%
First National Bank of the South		10.41	%	4	%	6	%
Tier I Capital to Average Assets:
Consolidated		9.69	%	4	%	N\A
Gainesville Bank & Trust		7.10	%	4	%	5	%
United Bank & Trust		8.41	%	4	%	5	%
Community Trust Bank		8.80	%	4	%	5	%
HomeTown Bank of Villa Rica		7.19	%	4	%	5	%
First National Bank of the South		8.08	%	4	%	5	%

 

Results of Operations

 

Our profitability is determined by our ability to effectively manage interest income and expense, to minimize loan and security losses, to generate noninterest income, and to control operating expenses.  Since interest rates are determined by market forces and economic conditions beyond our control, our ability to generate net interest income is dependent upon our ability to obtain an adequate net interest spread between the rate paid on interest-bearing liabilities and the rate earned on interest-earning assets.  The net interest margin was 4.17% for the nine months ended September 30, 2003, compared to 4.44% for the same period in 2002, a decrease of 27 basis points.  This decrease resulted from a 91 basis point decrease in the yield on earning assets and a 67 basis point decrease in the effective cost of funds.  The decreased yield on earning assets was primarily due to lower yields on loans.  This was largely due to a 50 basis point decrease in the average Prime rate as compared to the prior year to date.  The decreased effective cost of funds was due to lower average rates paid on interest-bearing funding.

 

The results of operations for the three and nine months ended September 30, 2003, includes First National Bank of the South, which became part of the Company effective August 29, 2003.  The merger was accounted for as a purchase; therefore, results for FNB have been included since September 1, 2003.

 

13

 

Net Interest Income.  Net interest income increased $1,679,000 or 27.14% for the three months ended September 30, 2003 compared to the same period in 2002.  The net increase consists of an increase in interest income of $1,789,000 or 18.33% less an increase in interest expense of $110,000 or 3.08% for the three month period.  This increase consists of a volume variance of $2,255,541 and a rate variance of ($576,541).  Net interest income increased $4,527,000 or 25.61% for the nine months ended September 30, 2003 compared to the same period in 2002.  The net increase consists of an increase in interest income of $4,862,000 or 16.89% less an increase in interest expense of $335,000 or 3.02% for the nine-month period.   This increase consists of a volume variance of $5,930,520 and a rate variance of ($1,403,520).

 

Provision for Loan Losses.  Our provision for loan losses increased by $659,000 or 326.24% during the three months ended September 30, 2003 as compared to the same period in 2002.  Our provision for loan losses increased by $662,000 or 112.39% during the nine months ended September 30, 2003 as compared to the same period in 2002.  These increases directly relate to a provision taken in September at HTB attributable to one loan relationship commented on by its regulators.  The loan is currently performing and is secured by real estate.  The Company believes that there is sufficient collateral to cover this loan.  The analysis below indicates an increase of $236,000 in net charge-offs for the nine months ended September 30, 2003 as compared to the same period in 2002 which is directly attributable to the acquisitions of HTB and FNB.  HTB had net charge-offs of $291,000 and FNB had net recoveries of $19,000 for the nine months ended September 30, 2003.  Other changes compared to 2002 include a decrease in recoveries at one affiliate bank and a decrease in net charge-offs at Community Loan Company, our consumer finance company.  The allowance for loan losses at September 30, 2003 was $9,079,000 or 1.33% of total loans compared to 1.28% at September 30, 2002.  Based on its evaluation, management believes the allowance is adequate to absorb any potential loan losses at September 30, 2003.  The allowance for loan losses is evaluated monthly and adjusted to reflect the risk in the portfolio.

 

The following table summarizes the allowance for loan losses for the nine-month period ended September 30, 2003 and 2002.

 

		2003			2002
		(Dollars in Thousands)
Average amount of loans outstanding		$	577,171		$	435,408
Allowance for loan losses balance, beginning of period		$	7,538		$	5,522
Less charge-offs
Commercial loans		(83		)	—
Real estate loans		(284		)	(2		)
Consumer  loans		(478		)	(680		)
Total Charge-offs		(845		)	(682		)
Plus recoveries
Commercial loans		22			1
Real estate loans		19			174
Consumer loans		246			185
Total recoveries		287			360
Net charge-offs		(558		)	(322		)
Plus provision for loan losses		1,251			589
Plus allowance related to acquired loans		848			—
Allowance for loan losses balance, end of period		$	9,079		$	5,789
Net charge-offs to average loans (annualized)		0.13		%	0.10		%

 

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The following table is a summary of nonaccrual, past due and restructured debt. The numbers indicate an increase of $3,468,000 in nonaccrual loans which was partially due to the acquisitions of HTB and FNB, which represented $1,191,000 and $67,000, respectively, of the increase.  The remaining increase represents two loans at the lead bank for $1,408,000 and  $812,000, both of which are secured by real estate.  The Company believes there is sufficient collateral to cover these loans, therefore any loss on these loans is expected to be minimal.  Approximately 59%, or $428,000 of the nonaccrual consumer loan balance at September 30, 2003, is related to Community Loan Company.  The table presents a decrease of $141,000 in past due loans over 90 days.  This decrease consists of net decreases at two of the affiliate banks of $587,000 offset by an increase of $162,000 at Community Loan Company and an increase of $297,000 due to the acquisition of FNB.  Community Loan Company accounts for approximately 59%, or $440,000 of the past due loan balance at September 30, 2003.  Due to the nature of the consumer finance business, we believe that the level of nonaccrual loans and past due loans over 90 days for Community Loan Company is normal and will consistently remain higher than those seen in the banking industry.  Community Loan Company’s reserve for loan loss is also higher to cover these higher levels of nonaccrual and past due loans.   There is minimal or no loss anticipated on the remaining real estate loans in nonaccrual and past due loans due to the value of the underlying collateral.

 

		September 30, 2003
		Nonaccrual Loans			Past Due 90 Days Still Accruing			Restructured Debt
		(Dollars in Thousands)
Real estate loans		$	3,802		$	—		$	—
Commercial loans		322			—			—
Consumer loans		725			750			—
Total		$	4,849		$	750		$	—

 

		September 30, 2002
		Nonaccrual Loans			Past Due 90 Days Still Accruing			Restructured Debt
		(Dollars in Thousands)
Real estate loans		$	643		$	466		$	—
Commercial loans		172			5			—
Consumer loans		566			420			—
Total		$	1,381		$	891		$	—

 

Our banking subsidiary policy is to discontinue the accrual of interest income when, in the opinion of management, collection of such interest becomes doubtful.  This status is determined when; (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected; and (2) the principal or interest is more than 90 days past due, unless the loan is both well-secured and in the process of collection.  Our consumer finance company accrues interest until management determines that full repayment of principal and interest is not probable, which in some cases exceeds 90 days past due.  Accrual of interest on such loans is resumed when, in management’s judgment, the collection of interest and principal becomes probable.

 

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Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been included in the table above do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources.  These classified loans do not represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with their loan repayment terms, except as noted above.

 

Other Income.  Other income for the three months ended September 30, 2003, increased by $614,000 or 32.15% compared to the same period in 2002.  Service charges increased by $414,000 and mortgage origination fees increased by $269,000. The increase in service charges is directly related to the increase in deposit accounts and the inclusion of HTB for the three and nine month periods ended September 30, 2003 and FNB for September 2003.  Other income for the nine months ended September 30, 2003, increased $1,869,000 or 34.62% compared to the same period in 2002.  Mortgage origination fees increased by $1,017,000 and service charges increased by $930,000.  Mortgage origination fees increased as a result of refinancing activity spurred by the decline in mortgage rates.

 

Other Expense.  Other expenses increased by approximately $1,703,000 or 30.32% for the three months ended September 30, 2003 compared to the same period in 2002.  The increase is due primarily to an increase in salaries and employee benefits of $1,213,000.  Net occupancy and equipment expenses increased $260,000 and other operating expenses increased $230,000.  Other expenses increased by approximately $5,591,000 or 35.34% for the nine months ended September 30, 2003 compared to the same period in 2002.  The increase is due primarily to an increase in salaries and employee benefits of $3,584,000, an increase in net occupancy and equipment expense of $723,000, an increase in marketing and public relations of $223,000, and an increase of $308,000 in supplies, postage and telephone.  Also, a loss of $315,000 recorded on the sale of a building in Hiram, Georgia resulted in an increase to other operating expenses.  The increase in salaries and employee benefits is partially due to HTB and FNB, which accounted for $1,519,000 and $209,000, respectively, of the increase and also an increase of 11 employees, exclusive of HTB and FNB, as of September 30, 2003, compared to the same period in 2002.

 

Income Tax Expense.  Income tax expense decreased by $269,000 for the nine-month period ended September 30, 2003, compared to the same period last year. The effective tax rate for the period ended September 30, 2003 was 27.71%, compared to 32.34% for the same period in 2002.  The decrease in the effective tax rate is primarily due to the tax effect of the net operating loss carry forward at HTB.

 

Net Income.  Net income decreased by $56,000 or 3.65%, for the three months ended September 30, 2003 compared to the same period in 2002.  Net income increased by $412,000 or 9.14% for the nine months ended September 30, 2003 compared to the same period in 2002.

 

We are not aware of any other known trends, events or uncertainties, other than the effect of events as described above, that will have or that are reasonably likely to have a material effect on its liquidity, capital resources or operations.  We are not aware of any current recommendations by the regulatory authorities, which, if they were implemented, would have such an effect, except as noted above.

 

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Critical Accounting Policies

 

The preparation of financial statements and related documents in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.  Actual results could differ from those estimates.  We believe that our determination of the allowance for loan losses affect our most significant judgments and estimates used in the preparation of our consolidated financial statements.  Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.

 

The allowance for loan losses is an amount that management believes will be adequate to absorb estimated losses in the loan portfolio.  The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

 

Off Balance Sheet Arrangements

 

Our financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of business.  These off-balance sheet financial instruments include commitments to extend credit, standby letters of credit and credit card commitments.  Such financial instruments are included in the financial statements when funds are distributed or the instruments become payable.  Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and credit card commitments is represented by the contractual amount of those instruments.  We use the same credit policies in making commitments as we do for on-balance sheet instruments.  Although these amounts do not necessarily represent future cash requirements, a summary of our commitments as of September 30, 2003 and December 31, 2002 are as follows:

 

		September 30, 2003			December 31, 2002
		(Dollars in thousands)
Commitments to extend credit		$	123,089		$	99,362
Standby letters of credit		5,005			4,388
Credit card commitments		5,449			4,975
Total		$	133,543		$	108,725

 

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our net interest income and the fair value of our financial instruments (interest earning assets and interest bearing liabilities) are influenced by changes in market interest rates. We actively manage our exposure to interest rate fluctuations through policies established by the Asset/Liability Management Committee (the “ALCO”). The ALCO meets regularly and is responsible for approving asset/liability management policies, developing and implementing strategies to improve balance sheet positioning and net interest income and assessing the interest rate sensitivity of the Banks.  Management believes that the market risk of the Company’s financial instruments has not changed materially since December 31, 2002.  See “Item 7A” of the Company’s Annual Report on Form 10-K for a more complete discussion.

 

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Item 4.    CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and the Chief Financial Officer, of the design and operation of our disclosure controls and procedures.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information that we are required to disclose in the reports we file under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms.  Our Chief Executive Officer and Chief Financial Officer also concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our company required to be included in our periodic SEC filings.  In connection with the rules, we continually review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that our systems evolve with our business.

 

There have been no changes in our internal control over financial reporting identified in connection with this evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

 

Item 6.    EXHIBITS AND REPORTS ON FORM 8-K

 

(a)          Exhibits

31.1         Rule 13a-14(a) Certification of Principal Executive Officer

31.2         Rule 13a-14(a) Certification of Principal Financial Officer

32.1         Section 1350 Certification of Principal Executive Officer

32.2         Section 1350 Certification of Principal Financial Officer

 

(b)         Reports on Form 8-K

 

We furnished a report on Form 8-K on July 17, 2003 to report earnings for the quarter ending June 30, 2003.  We filed a report on Form8-K on September 10, 2003 to report the completion of the acquisition of Baldwin Bancshares, Inc. and to report the signing of a letter of intent to acquire Southern Heritage Bancorp, both effective August 29, 2003.

 

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SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

GB&T BANCSHARES, INC.
DATE:	11/14/2003		BY:	/s/ Richard A. Hunt
				Richard A. Hunt President and Chief Executive Officer
DATE:	11/14/2003		BY:	/s/ Gregory L. Hamby
				Gregory L. Hamby Executive Vice President & Chief Financial Officer

 

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