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)

 

 

500 Jesse Jewell Parkway, S.E.

Gainesville, Georgia  30501

(Address of principal executive offices)

 

(770) 532-1212

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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 ý  No o

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of April 30, 2004:    6,843,898 shares; no par value

 

 

GB&T BANCSHARES, INC.

 

TABLE OF CONTENTS

 

PART I.	FINANCIAL INFORMATION
	Item 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets – March 31, 2004 (Unaudited) and December 31, 2003
	Consolidated Statements of Income (Unaudited)- Three months ended March 31, 2004 and 2003
	Consolidated Statements of Comprehensive Income (Unaudited)- Three months ended March 31, 2004 and 2003
	Consolidated Statements of Stockholders’ Equity (Unaudited) Three months ended March 31, 2004
	Consolidated Statements of Cash Flows (Unaudited) - Three months ended March 31, 2004 and 2003
	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)

 

		March 31, 2004			December 31, 2003
		(Dollars in thousands)
Assets
Cash and due from banks		$	18,237		$	17,584
Interest-bearing deposits in banks		546			535
Federal funds sold		16,306			6,534
Securities available for sale		137,249			132,945
Restricted equity securities, at cost		4,763			4,582
Loans, net of unearned income		724,282			709,958
Less allowance for loan losses		9,004			8,726
Loans, net		715,278			701,232
Premises and equipment, net		25,950			25,813
Goodwill and intangible assets		32,909			33,043
Other assets		22,975			22,010
Total assets		$	974,213		$	944,278
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing		$	86,797		$	90,914
Interest-bearing		671,381			637,715
Total deposits		758,178			728,629
Federal funds purchased and securities sold under repurchase agreements		11,973			17,314
Federal Home Loan Bank advances		77,580			75,703
Other borrowings		1,330			300
Other liabilities		10,361			10,025
Subordinated debt		15,464			15,464
Total liabilities		874,886			847,435
Stockholders’ Equity:
Capital stock, no par value; 20,000,000 shares authorized, 6,822,098 and 6,794,148 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively		68,280			67,983
Retained earnings		30,012			28,393
Accumulated other comprehensive income		1,035			467
Total stockholders’ equity		99,327			96,843
Total liabilities and stockholders’ equity		$	974,213		$	944,278

 

See accompanying notes to consolidated financial statements.

 

3

 

GB&T BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

 

		Three months ended March 31,
		2004			2003
		(Dollars in thousands, except per share amounts)
Interest income:
Loans, including fees		$	11,645		$	9,738
Taxable securities		985			985
Nontaxable securities		184			168
Federal funds sold		27			54
Interest-bearing deposits in banks		1			11
Total interest income		12,842			10,956
Interest expense:
Deposits		2,903			2,977
Federal funds purchased, securities sold under  repurchase agreements, other borrowings and subordinated debt		1,053			982
Total interest expense		3,956			3,959
Net interest income		8,886			6,997
Provision for loan losses		284			214
Net interest income after provision for loan losses		8,602			6,783
Other income:
Service charges on deposit accounts		1,394			1,092
Mortgage origination fees		460			557
Insurance commissions		144			144
Gain on sale of securities		263			28
Other operating income		638			531
Total other income		2,899			2,352
Other expenses:
Salaries and employee benefits		4,933			4,124
Occupancy and equipment expenses, net		1,222			1,004
Other operating expenses		2,193			1,673
Total other expenses		8,348			6,801
Income before income taxes		3,153			2,334
Income tax expense		923			623
Net income		$	2,230		$	1,711
Earnings per share:
Basic		$	0.33		$	0.32
Diluted		$	0.32		$	0.31
Weighted average shares:
Basic		6,809			5,361
Diluted		6,943			5,523
Cash dividends per common share		$	0.090		$	0.085

 

See accompanying notes to consolidated financial statements.

 

4

 

GB&T BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(unaudited)

 

		Three months ended March 31,
		2004			2003
		(Dollars in thousands)
Net Income		$	2,230		$	1,711
Unrealized holding gains (losses) on securities available-  for-sale arising during period, net of tax (benefit)		731			(370		)
Reclassification adjustment for gains realized on  securities available-for-sale in net income, net of  taxes		(163		)	(17		)
Other comprehensive income (loss)		568			(387		)
Comprehensive income		$	2,798		$	1,324

 

Consolidated Statements of Stockholders’ Equity

Three Months Ended March 31, 2004

(Dollars in thousands)

 

		Shares		Capital Stock			Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
Balance, December 31, 2003		6,794		$	67,983		$	28,393		$	467		$	96,843
Net income		—		—			2,230			—			2,230
Options excercised		28		297			—			—			297
Dividends declared $0.09 per share		—		—			(611		)	—			(611		)
Other comprehensive income				—			—			568			568
Balance, March 31, 2004		6,822		$	68,280		$	30,012		$	1,035		$	99,327

 

See accompanying notes to consolidated financial statements.

 

5

 

GB&T BANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Three months ended March 31,
		2004			2003
		(Dollars in thousands)
Operating Activities
Net income		$	2,230		$	1,711
Adjustments to reconcile net income to net cash Provided by (used in) operating activities:
Depreciation		533			458
Provision for loan losses		284			214
Amortization and (accretion), net		293			157
Gain on sale of securities		(263		)	(28		)
Net (increase) decrease in other assets		(1,083		)	971
Net increase (decrease) in other liabilities		336			(4,825		)
Net cash provided by (used in) operating activities		2,330			(1,342		)
Investing Activities
Purchases of securities available for sale		(16,178		)	(23,479		)
Proceeds from sales of securities available for sale		2,271			1,116
Proceeds from maturities of securities available for sale		10,615			23,613
Increase in Federal Home Loan Bank stock		(324		)	—
(Increase) decrease in interest-bearing deposits in banks		(11		)	5,873
Net increase in federal funds sold		(9,772		)	(4,420		)
Net increase in loans		(14,768		)	(21,110		)
Proceeds from sale of other real estate owned		359			544
Purchase of premises and equipment		(670		)	(439		)
Proceeds from disposals of premises and equipment		—			21
Net cash used in investing activities		(28,478		)	(18,281		)
Financing Activities
Net increase in deposits		29,549			19,956
Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements		(5,341		)	2,813
Proceeds from other borrowings and Federal Home Loan Bank advances		6,608			107
Payments on other borrowings and Federal Home Loan Bank advances		(3,701		)	(2,731		)
Dividends paid		(611		)	(455		)
Proceeds from issuance of capital stock		297			37
Net cash provided by financing activities		26,801			19,727
Net increase in cash and due from banks		653			104
Cash and due from banks at beginning of period		17,584			18,113
Cash and due from banks at end of period		$	18,237		$	18,217
Supplemental disclosure of cash paid during the period for:
Interest		$	4,214		$	4,136
Income taxes		$	524		$	142

 

See accompanying notes to consolidated financial statements.

 

6

 

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 month period ended March 31, 2004 is not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

 

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.

 

 

7

 

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 month periods ended March 31, 2004 and 2003.

 

		Three months ended March 31,
		2004			2003
Basic Earnings Per Share:
Weighted average common shares outstanding		6,809			5,361
Net income		$	2,230		$	1,711
Basic earnings per share		$	0.33		$	0.32
Diluted Earnings Per Share:
Weighted average common shares outstanding		6,809			5,361
Net effect of the assumed exercise of stock Options based on the treasury stock method Using average market prices for the period		134			162
Total weighted average common shares and Common stock equivalents outstanding		6,943			5,523
Net income		$	2,230		$	1,711
Diluted earnings per share		$	0.32		$	0.31

 

NOTE 4.                RECENT DEVELOPMENTS

 

On January 26, 2004, the Company signed a definitive agreement for the merger of Southern Heritage Bancorp, Inc. into GB&T Bancshares, Inc.  The terms of the agreement call for the exchange of 1.063 shares of GB&T Bancshares, Inc. stock for each of the outstanding shares of Southern Heritage Bancorp, Inc. or within limits, that a portion of the acquisition price be paid in cash, at the option of Southern Heritage Bancorp, Inc. shareholders.  The merger is subject to approval of the shareholders of Southern Heritage Bancorp, Inc. and regulators.

 

On February 11, 2004, the Company signed a definitive agreement to acquire Lumpkin County Bank.  The terms of the agreement call for the exchange of .82 shares of GB&T Bancshares, Inc. stock for each of the outstanding shares of Lumpkin County Bank.  The merger is subject to approval of the shareholders of Lumpkin County Bank and regulators.

 

Both transactions are expected to close in the third quarter of 2004.

 

8

 

GB&T BANCSHARES, INC. AND SUBSIDIARIES

 

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. 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, pending or proposed acquisitions, our other business strategies, our expectations with respect to our allowance for loan losses and impaired loans, anticipated capital expenditures for our operations center, 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.

 

Critical Accounting Estimates

 

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.

 

9

 

The allowance for loan losses is an amount that management believes will be adequate to absorb estimated losses in the loan portfolio. The Company uses an 8 point rating system for its loans. Ratings of 1 to 4 are considered “pass ratings”, 5 is special mention, 6 is substandard, 7 is doubtful, and 8 is loss. The originating officer rates all loans on this system. This rating is adjusted from time to time by the officer to accurately reflect the loan’s current status. These ratings are reviewed regularly by the Loan Committee, an outside independent loan review firm, our accountants, and by the applicable regulator for accuracy.

 

Pass loans are separated into homogeneous pools. Currently, these pools consist of real estate, commercial, consumer and credit card. Management assigns loss percentages to these categories of homogeneous pools of loans based on historic loss data in each category. In addition to the homogeneous pools management has specified certain industry risks and applied loss percentages to the specified industry risk categories. Management is developing moving average net losses for the historic loss percentage in each category. These loss percentages will be reviewed and adjusted periodically, by pool, in light of current trends in past dues, changes in lending policies, underwriting standards, economic conditions, and other factors that may affect this number. Recently, because of low losses in most categories, management has assigned minimum percentages to each category.

 

For loans rated 5, an industry standard loss percentage of 5% is used.

 

All significant loans rated 6 and 7 are individually analyzed and a specific reserve is assigned based on exposure or industry standards whichever is greater. These accounts, their reserves, and action plans to resolve their criticisms are reviewed by the Loan Committee. All other loans rated 6 and 7 are assigned loss percentages of 15% and 50% respectively.

 

All loans rated 8 are assigned specific reserve of 100%

 

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.

 

Summary

 

Net income for the three months ended March 31, 2004 was $2.2 million, up 30.3% from the same period a year ago.  Diluted net income per share was $0.32 for the three months ended March 31, 2004, up 3.2% from the same period a year ago.  Return on average assets was 0.93% and return on average equity was 9.14% for the three months ended March 31, 2004.  This compares to a return on average assets of 0.94% and a return on average equity of 11.28% for the same period a year ago.

 

Balance Sheets

 

Our total assets increased $29.9 million or 3.17% for the period ended March 31, 2004 compared to December 31, 2003.  The increase consists of an increase in loans of $14.3 million or 2.0%, an increase in federal funds sold of $9.8 million, and an increase in securities of $4.5 million.

 

Total deposits have increased $29.5 million, or 4.06% during the period ended March 31, 2004 compared to December 31, 2003.  Noninterest-bearing deposits decreased $4.1 million while interest-bearing deposits increased $33.7 million during the period.   Deposit growth outpaced loan growth resulting in a loan to deposit ratio of 95.53% at March 31, 2004 compared to 97.44% at December 31, 2003.  Federal funds purchased decreased during the period by $5.3 million.

 

10

 

Asset Quality

 

The allowance for loan losses at March 31, 2004 was $9,004,000 or 1.24% to total loans compared to 1.32% at March 31, 2003.  The analysis below indicates a decrease of $308,000 in net charge-offs for the three months ended March 31, 2004 as compared to the same period in 2003 which is directly attributable to HTB which contributed $230,000 to the net charge-off balance at March 31, 2003.  Based on its evaluation, management believes the allowance is adequate to absorb any potential loan losses at March 31, 2004.  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 three month period ended March 31, 2004 and 2003.

 

		2004			2003
		(Dollars in thousands)
Average amount of loans outstanding		$	720,063		$	555,727
Allowance for loan losses balance, beginning of period		$	8,726		$	7,538
Less charge-offs
Commercial loans		—			—
Real estate loans		—			(232		)
Consumer loans		(141		)	(167		)
Total charge-offs		(141		)	(399		)
Plus recoveries
Commercial loans		44			21
Real estate loans		3			1
Consumer loans		88			63
Total recoveries		135			85
Net charge-offs		(6		)	(314		)
Plus provision for loan losses		284			214
Allowance for loan losses balance, end of period		$	9,004		$	7,438
Net charge-offs to average loans (annualized)		0.003		%	0.229		%

 

11

 

The following table is a summary of nonaccrual, past due and restructured debt. The numbers indicate a decrease of $1,159,000 in nonaccrual loans which was primarily concentrated at one affiliate, HTB.  The level of nonaccrual loans has continued to decrease at HTB since its acquisition in November 2002.  A majority of the consumer nonaccrual loan balance is related to Community Loan Company which represents approximately 76.4%, or $427,000 of the balance.  The table presents an increase of $613,000 in past due loans over 90 days.  This increase represents one loan in the amount of $552,000 located at CTB, which was in the process of foreclosure at March 31, 2004.  Community Loan Company accounts for approximately 43.8%, or $461,000 of the past due loan balance at March 31, 2004.  Due to the nature of the consumer finance business, we believe that the level of nonaccrual 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.  The reserve for loan loss for Community Loan Company was 9.12% for the period ended March 31, 2004 and 10.42% for the period ended March 31, 2003.  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.

 

 

 

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.

 

12

 

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.

 

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 March 31, 2004, we had borrowed under Federal funds purchase lines and securities sold under agreement to repurchase, $12.0 million compared to $17.3 million at December 31, 2003.

 

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.  At March 31, 2004, we had available borrowing capacity totaling approximately $131.9 million through various borrowing arrangements and available lines of credit.  Our short-term investments and available borrowing arrangements are adequate to cover any reasonably anticipated immediate need for funds.

 

Our liquidity ratio was 16.67% at March 31, 2004, 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 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 the third quarter of 2004 with an approximate cost of $2.9 million.

 

13

 

As of March 31, 2004, 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 March 31, 2004
Total Capital to Risk Weighted Assets:
Consolidated		11.78	%	8	%	N\A
Gainesville Bank & Trust		10.16	%	8	%	10	%
United Bank & Trust		12.73	%	8	%	10	%
Community Trust Bank		11.30	%	8	%	10	%
HomeTown Bank of Villa Rica		10.14	%	8	%	10	%
First National Bank of the South		10.66	%	8	%	10	%
Tier I Capital to Risk Weighted Assets:
Consolidated		10.60	%	4	%	N\A
Gainesville Bank & Trust		9.05	%	4	%	6	%
United Bank & Trust		11.48	%	4	%	6	%
Community Trust Bank		10.20	%	4	%	6	%
HomeTown Bank of Villa Rica		8.89	%	4	%	6	%
First National Bank of the South		9.75	%	4	%	6	%
Tier I Capital to Average Assets:
Consolidated		8.71	%	4	%	N\A
Gainesville Bank & Trust		7.13	%	4	%	5	%
United Bank & Trust		7.90	%	4	%	5	%
Community Trust Bank		8.57	%	4	%	5	%
HomeTown Bank of Villa Rica		7.69	%	4	%	5	%
First National Bank of the South		8.18	%	4	%	5	%

 

Net Interest Income and Earning Assets

 

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 4.11% for the three months ended March 31, 2004, compared to 4.14% for the same period in 2003, a decrease of 3 basis points.  This decrease resulted from a 55 basis point decrease in the yield on earning assets and a 52 basis point decrease in the effective cost of funds.  The decreased yield on earning assets was primarily due to lower yields on loans and the decreased effective cost of funds was due to lower average rates paid on interest-bearing funding.  The Company continues to maintain the volumes needed and competitive pricing during this low interest rate environment.

 

The results of operations for the three months ended March 31, 2004, 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 and are not included in quarter ended March 31, 2003.

 

Net interest income increased $1,889,000 or 27.00% for the three months ended March 31, 2004 compared to the same period in 2003.  The net increase consists of an increase in interest income of $1,886,000 or 17.21% plus a decrease in interest expense of $3,000 or -0.08% for the three-month period.  This increase consists of a volume variance of $1,881,098 and a rate variance of $7,902. Exclusive of FNB, net interest income increased $531,000 or 7.59%.

 

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Other Income

 

Other income for the three months ended March 31, 2004, increased by $547,000 or 23.26% compared to the same period in 2003.  Service charges increased by $302,000 and gain on sale of securities increased by $235,000. The increase in service charges is directly related to the increase in deposit accounts and the inclusion of FNB for the three-month period ended March 31, 2004 which accounted for $200,000 of the increase.   Exclusive of FNB, other income increased by $109,000 or 4.63%.

 

Other Expense

 

Other expenses increased by approximately $1,547,000 or 22.75% for the three months ended March 31, 2004 compared to the same period in 2003.  The increase is due primarily to an increase in salaries and employee benefits of $809,000.  Net occupancy and equipment expenses increased $218,000 and other operating expenses increased $520,000.  The increase in salaries and employee benefits is partially due to FNB, which accounted for $678,000 of the increase and an increase of 60 employees.  Exclusive of FNB, other expense increased $237,000 or 3.48% and other operating expenses increased $55,000 or 3.29%.

 

Income Tax Expense

 

Income tax expense increased by $300,000 for the three month period ended March 31, 2004, compared to the same period last year. The effective tax rate for the period ended March 31, 2004 was 29.27%, compared to 26.69% for the same period in 2003.

 

Net Income

 

Net income increased by $519,000 or 30.33%, for the three months ended March 31, 2004 compared to the same period in 2003.   This increase is directly related to the increase in net interest income which is partially offset by the increase in other expenses as discussed above.

 

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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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 March 31, 2004 and December 31, 2003 are as follows:

 

		March 31, 2004			December 31, 2003
		(Dollars in thousands)
Commitments to extend credit		$	159,759		$	138,310
Financial standby letters of credit		3,199			3,718
Other standby letters of credit		1,248			1,349
Credit card commitments		5,451			5,302
Total		$	169,657		$	148,679

 

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed only to U.S. dollar interest rate changes and accordingly, we manage exposure by considering the possible changes in the net interest margin. We do not have any trading instruments nor do we classify any portion of the investment portfolio as held for trading.  We do not engage in any hedging activities or enter into any derivative instruments with a higher degree of risk than mortgage-backed securities that are commonly pass through securities. Finally, we have no exposure to foreign currency exchange rate risk, commodity price risk, and other market risks. Interest rates play a major part in the net interest income of a financial institution. The sensitivity to rate changes is known as “interest rate risk.” The repricing of interest earning assets and interest-bearing liabilities can influence the changes in net interest income. As part of our asset/liability management program, the timing of repriced assets and liabilities is referred to as Gap management. It is our policy to maintain a Gap ratio in the one-year time horizon of .80 to 1.20.

 

GAP management alone is not enough to properly manage interest rate sensitivity, because interest rates do not respond at the same speed or at the same level to market rate changes. For example, savings and money market rates are more stable than loans tied to a “Prime” rate and thus respond with less volatility to a market rate change.

 

We use a simulation model to monitor changes in net interest income due to changes in market rates. The model of rising, falling and stable interest rate scenarios allow management to monitor and adjust interest rate sensitivity to minimize the impact of market rate swings. The analysis of impact on net interest margins as well as market value of equity over a twelve-month period is subjected to a 200 basis point increase and decrease in rate. The December model reflects an increase of 2% in net interest income and a 14% decrease in market value equity for a 200 basis point increase in rates. The same model shows a 1% decrease in net interest income and a 16% increase in market value equity for a 200 basis point decrease in rates. Our policy is to allow no more than +/- 8% change in net interest income and no more than +/- 25% change in market value equity for these scenarios. Therefore, we are within our policy guidelines and are protected from any significant impact due to market rate changes.

 

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Item 4.    CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company’s President and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, the President and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this report in alerting them on a timely basis to material information relating to the Company required to be included in the Company’s reports filed or submitted under the Securities Exchange Act of 1934. In addition, no change in our internal control over financial reporting  occurred during the first quarter ended March 31, 2004 that has materially affected, or is 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 January 30, 2004 to report earnings for the quarter ending December 31, 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:	5/10/2004		BY:	/s/ Richard A. Hunt
				Richard A. Hunt
				President and Chief Executive Officer
DATE:	5/10/2004		BY:	/s/ Gregory L. Hamby
				Gregory L. Hamby
				Executive Vice President &
				Chief Financial Officer

 

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