UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Mark One

 

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended   March 31, 2005
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from                               to

 

Commission File Number:  000-24203

 

GB&T Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

Georgia				58-2400756
(State or other jurisdiction of incorporation or organization)				(IRS Employer Identification No.)
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 capital stock, as of May 3, 2005:    12,677,407 shares; no par value

 

 

GB&T BANCSHARES, INC.

 

TABLE OF CONTENTS

 

PART I.		FINANCIAL INFORMATION
		Item 1. FINANCIAL STATEMENTS
			Consolidated Balance Sheets – March 31, 2005 (Unaudited) and December 31, 2004
			Consolidated Statements of Income (Unaudited)- Three months ended March 31, 2005 and 2004
			Consolidated Statements of Comprehensive Income (Unaudited)- Three months ended March 31, 2005 and 2004
			Consolidated Statements of Stockholders’ Equity (Unaudited)- Three months ended March 31, 2005
			Consolidated Statements of Cash Flows (Unaudited) - Three months ended March 31, 2005 and 2004
			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
		Signatures
	Certifications

 

2

 

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

 

GB&T BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

		March 31, 2005			December 31, 2004
		(Dollars in thousands)
Assets
Cash and due from banks		$	29,522		$	20,723
Interest-bearing deposits in banks		823			700
Federal funds sold		10,818			93
Securities available for sale, at fair value		196,613			190,636
Restricted equity securities, at cost		8,734			7,226
Loans, net of unearned income		1,098,155			955,880
Less allowance for loan losses		11,277			11,061
Loans, net		1,086,878			944,819
Premises and equipment, net		36,096			31,548
Goodwill		68,405			49,127
Intangible assets		6,145			5,618
Other assets		26,540			23,646
Total assets		$	1,470,574		$	1,274,136
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing		$	142,496		$	125,704
Interest-bearing		953,694			802,899
Total deposits		1,096,190			928,603
Federal funds purchased and securities sold under repurchase agreements		30,584			47,582
Federal Home Loan Bank advances		97,891			80,992
Other borrowings		838			934
Other liabilities		15,806			11,412
Subordinated debt		29,898			29,898
Total liabilities		1,271,207			1,099,421
Stockholders’ Equity:
Capital stock, no par value; 20,000,000 shares authorized, 12,641,076 and 11,772,352 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively		163,691			139,207
Retained earnings		37,666			35,550
Accumulated other comprehensive loss		(1,990		)	(42		)
Total stockholders’ equity		199,367			174,715
Total liabilities and stockholders’ equity		$	1,470,574		$	1,274,136

 

See accompanying notes to consolidated financial statements.

 

3

 

GB&T BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

 

		Three months ended March 31,
		2005			2004
		(Dollars in thousands, except per share amounts)
Interest income:
Loans, including fees		$	16,959		$	11,645
Taxable securities		1,699			985
Nontaxable securities		165			184
Federal funds sold		46			27
Interest-bearing deposits in banks		10			1
Total interest income		18,879			12,842
Interest expense:
Deposits		4,631			2,903
Federal funds purchased, securities sold under Repurchase agreements, other borrowings and subordinated debt		1,502			1,053
Total interest expense		6,133			3,956
Net interest income		12,746			8,886
Provision for loan losses		482			284
Net interest income after provision for loan losses		12,264			8,602
Other income:
Service charges on deposit accounts		1,512			1,394
Mortgage origination fees		465			460
Insurance commissions		147			144
Gain on sale of securities		1			263
Other operating income		632			638
Total other income		2,757			2,899
Other expenses:
Salaries and employee benefits		6,315			4,933
Occupancy and equipment expenses, net		1,439			1,222
Other operating expenses		2,841			2,193
Total other expenses		10,595			8,348
Income before income taxes		4,426			3,153
Income tax expense		1,415			923
Net income		$	3,011		$	2,230
Earnings per share:
Basic		$	0.25		$	0.26
Diluted		$	0.25		$	0.26
Weighted average shares:
Basic		12,069			8,511
Diluted		12,245			8,679
Cash dividends per common share		$	0.076		$	0.072

 

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,
		2005			2004
		(Dollars in thousands)
Net Income		$	3,011		$	2,230
Unrealized holding gains (losses) on securities available for sale arising during period, net of tax (benefit)		(1,947		)	731
Reclassification adjustment for gains realized on securities available for sale in net income, net of taxes		(1		)	(163		)
Other comprehensive income (loss)		(1,948		)	568
Comprehensive income		$	1,063		$	2,798

 

See accompanying notes to consolidated financial statements.

 

Consolidated Statements of Stockholders’ Equity

Three Months Ended March 31, 2005

 

		(Dollars in thousands) (unaudited)
		Shares		Capital Stock			Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
Balance, December 31, 2004		11,772		$	139,207		$	35,550		$	(42	)	$	174,715
Net income		—		—			3,011			—			3,011
Options exercised		18		170			—			—			170
Dividends declared $0.076 per share		—		—			(895		)	—			(895		)
Purchase of FNBG Bancshares, Inc.		851		24,347			—			—			24,347
Payment for fractional shares in connection with business combinations		—		(3		)	—			—			(3		)
Tax benefit of nonqualified stock Options		—		(30		)	—			—			(30		)
Other comprehensive income		—		—			—			(1,948		)	(1,948		)
Balance, March 31, 2005		12,641		$	163,691		$	37,666		$	(1,990	)	$	199,367

 

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,
		2005			2004
		(Dollars in thousands)
Operating Activities
Net income		$	3,011		$	2,230
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		640			533
Provision for loan losses		482			284
Amortization and (accretion), net		310			293
Gain on sale of securities		(1		)	(263		)
Net increase in other assets		(130		)	(1,083		)
Net increase in other liabilities		3,920			336
Net cash provided by operating activities		8,232			2,330
Investing Activities
Purchases of securities available for sale		(8,016		)	(16,178		)
Proceeds from sales of securities available for sale		1,106			2,271
Proceeds from maturities of securities available for sale		8,948			10,615
Net increase in restricted equity securities		(1,508		)	(324		)
Net increase in interest-bearing deposits in banks		(123		)	(11		)
Net increase in federal funds sold		(5,836		)	(9,772		)
Net increase in loans		(42,595		)	(14,768		)
Net cash acquired in business combinations		142			—
Proceeds from sale of other real estate owned		210			359
Purchase of premises and equipment		(1,432		)	(670		)
Net cash used in investing activities		(49,104		)	(28,478		)
Financing Activities
Net increase in deposits		57,744			29,549
Net decrease in federal funds purchased and securities sold under repurchase agreements		(16,998		)	(5,341		)
Proceeds from other borrowings and Federal Home Loan Bank advances		16,063			6,608
Payments on other borrowings and Federal Home Loan
Bank advances		(6,410		)	(3,701		)
Dividends paid		(895		)	(611		)
Payment for fractional shares		(3		)	—
Proceeds from exercise of stock options		170			297
Net cash provided by financing activities		49,671			26,801
Net increase in cash and due from banks		8,799			653
Cash and due from banks at beginning of period		20,723			17,584
Cash and due from banks at end of period		$	29,522		$	18,237
Supplemental disclosure of cash paid during the period for:
Interest		$	6,328		$	4,214
Income taxes		$	5		$	524
Acquisition of subsidiary Capital stock issued		$	24,347		$	—

 

6

 

		Three months ended March 31,
		2005			2004
		(Dollars in thousands)
Assets acquired (liabilities assumed)
Cash and due from banks, net of cash paid		$	142		$	—
Federal funds sold		4,889			—
Securities available for sale		10,872			—
Restricted equity securities		634			—
Loans, net		100,229			—
Premises and equipment		3,755			—
Goodwill		19,278			—
Core deposit intangible		697			—
Other assets		1,451			—
Deposits		(109,628		)	—
Other borrowings		(7,150		)	—
Other liabilities		(444		)	—
		$	24,725		$	—

 

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, First National Bank of the South and First National Bank of Gwinnett, 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 U.S. generally accepted accounting principles for interim financial information and with the 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, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

 

 

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.

 

 

		Three months ended March 31,
		2005			2004
		(Dollars in thousands)
Net income, as reported		$	3,011		$	2,230
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		43			29
Pro forma net income		$	2,968		$	2,201
Earnings per share:
Basic - as reported		$	0.25		$	0.26
Basic - pro forma		$	0.25		$	0.26
Diluted - as reported		$	0.25		$	0.26
Diluted - pro forma		$	0.25		$	0.26

 

8

 

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

 

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, 2005 and 2004.

 

		Three months ended March 31,
		2005			2004
Basic Earnings Per Share:
Weighted average common shares outstanding		12,069			8,511
Net income		$	3,011		$	2,230
Basic earnings per share		$	0.25		$	0.26
Diluted Earnings Per Share:
Weighted average common shares outstanding		12,069			8,511
Net effect of the assumed exercise of stock options based on the treasury stock method using average market prices for the period		176			168
Total weighted average common shares and common stock equivalents outstanding		12,245			8,679
Net income		$	3,011		$	2,230
Diluted earnings per share		$	0.25		$	0.26

 

 

NOTE 4.                         RECENT ACCOUNTING STANDARDS

 

In December 2004, the Financial Accounting Standards Board (“FASB”) published FASB Statement No. 123 (revised 2004), Share-Based Payment (“FAS 123(R)” or the “Statement”). FAS 123(R) requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. FAS 123(R) covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. FAS 123(R) is a replacement of FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretive guidance.

 

The effect of the Statement will be to require entities to measure the cost of employee services received in exchange for stock options based on the grant-date fair value of the award, and to recognize the cost over the period the employee is required to provide services for the award. FAS 123(R) permits entities to use any option-pricing model that meets the fair value objective in the Statement.

 

The Company will be required to apply FAS 123(R) as of the beginning of its first interim period that begins after December 15, 2005, which will be the quarter ending March 31, 2006.

 

9

 

FAS 123(R) allows two methods for determining the effects of the transition: the modified prospective transition method and the modified retrospective method of transition.  Under the modified prospective transition method, an entity would use the fair value based accounting method for all employee awards granted, modified, or settled after the effective date. As of the effective date, compensation cost related to the nonvested portion of awards outstanding as of that date would be based on the grant-date fair value of those awards as calculated under the original provisions of Statement No. 123; that is, an entity would not re-measure the grant-date fair value estimate of the unvested portion of awards granted prior to the effective date of FAS 123(R).  An entity will have the further option to either apply the Statement to only the quarters in the period of adoption and subsequent periods, or apply the Statement to all quarters in the fiscal year of adoption. Under the modified retrospective method of transition, an entity would revise its previously issued financial statements to recognize employee compensation cost for prior periods presented in accordance with the original provisions of Statement No. 123.

 

The Company has not yet completed its study of the available transition methods or made any decisions about how it will adopt FAS 123(R).   The impact of this Statement on the Company in fiscal year 2006 and beyond will depend upon various factors, including our future compensation strategy. The pro forma compensation costs presented in the table above and in prior filings for the Company have been calculated using a Black-Scholes option pricing model and may not be indicative of amounts which should be expected in future years. No decisions have been made as to which option-pricing model is most appropriate for the Company for future awards.

 

In December 2003 the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.  This SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes such loans acquired in purchase business combinations and applies to all nongovernmental entities, including not-for-profit organizations. This SOP does not apply to loans originated by the entity. This SOP limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. This SOP requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual, or valuation allowance. This SOP prohibits investors from displaying accretable yield and nonaccretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as impairment.

 

This SOP prohibits “carrying over” or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this SOP. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination.

 

The Company adopted SOP 03-3 as of January 1, 2005.

 

 

NOTE 5.                         BUSINESS COMBINATIONS

 

On March 1, 2005, the Company completed the acquisition of FNBG Bancshares, Inc. the parent company of First National Bank of Gwinnett in Duluth, Gwinnett County, Georgia, which resulted in First National Bank of Gwinnett becoming a wholly owned subsidiary of the Company.   The Company issued 851,154 shares of its capital stock and approximately $3,699,502 in cash in exchange for all of the issued and outstanding common shares of FNBG Bancshares, Inc.  The acquisition was accounted for as a purchase resulting in estimated goodwill of approximately $19,278,000.  First National Bank of Gwinnett’s results of operations from March 1, 2005 are included in the consolidated results of operations for the three months ended March 31, 2005.  The results of operations for the three months ended March 31, 2004 do not include the results of operations for First National Bank of Gwinnett.

 

10

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.  The Company obtained third-party valuations of the core deposit intangible and other fair value adjustments.

 

 

		Total
Cash and due from banks, net of cash paid		$	142
Interest-bearing deposits in banks		—
Federal funds sold		4,889
Securities available for sale		10,872
Restricted equity securities		634
Loans, net		100,229
Premises and equipment		3,755
Goodwill		19,278
Core deposit intangible		697
Other assets		1,451
Total assets acquired		$	141,947
Deposits		$	109,628
Other borrowings		7,150
Other liabilities		444
Total liabilities assumed		$	117,222
Net assets acquired		$	24,725

 

Unaudited pro forma consolidated results of operations for the three months ended March 31, 2005 and 2004 as though the companies had combined as of January 1, 2005 and 2004 are as follows:

 

		Three months ended March 31,
		2005			2004
Net interest income		$	13,553		$	9,770
Net income		3,084			2,331
Basic earnings per share		0.26			0.25
Diluted earnings per share		0.25			0.25

 

11

 

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 (“GBT”), United Bank & Trust (“UBT”), Community Trust Bank (“CTB”), HomeTown Bank of Villa Rica (“HTB”), First National Bank of the South (“FNBS”), First National Bank of Gwinnett (“FNBG”) 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 of GB&T Bancshares, Inc. (the “Company”) contained or incorporated by reference in this Report, including, without limitation, matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about the competitiveness of the banking industry, potential regulatory obligations, our entrance and expansion into other markets, our other business strategies and other statements that are not historical facts. Forward-looking statements are not guarantees of performance or results. When we use words like “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,” “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) economic, governmental or other factors may prevent the projected population and commercial growth in the counties in which we operate;  (5) legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which we are engaged;  (6) costs or difficulties related to the integration of our businesses may be greater than expected; (7) deposit attrition, customer loss or revenue loss following acquisitions may be greater than expected; (8) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than we can; and (9) adverse changes may occur in the equity markets.  Many of these factors are beyond our ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. We do not intend to, and assume no responsibility 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 Policies

 

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the notes to our audited financial statements as of December 31, 2004. Certain accounting policies require 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. 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.

 

12

 

Allowance for Loan Losses.    We believe that our determination of the allowance for loan losses is our most significant judgment and estimate used in the preparation of our consolidated financial statements. The allowance for loan losses is an amount that management believes will be adequate to absorb estimated losses in the loan portfolio. The calculation is an estimate of the amount of loss in the loan portfolios of our subsidiary banks and finance company. 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 our allowance for loan losses, and may require us to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

 

We use an 8 point rating system for our 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 for accuracy regularly by the loan committee of the respective bank subsidiary, an outside independent loan review firm, our accountants, and by the applicable regulator.

 

“Pass” loans are separated into homogeneous pools. Currently, these pools consist of real estate, commercial, consumer and credit card loans. Management assigns loss percentages to these categories of homogeneous pools of loans based on the greater of historic loss data in each category or the minimum risk percentage for this category. Management tracks the last eight quarters moving average net losses for the historic loss percentage in each category. This historic loss percentage is 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. In addition to the homogeneous pools, management has specified certain industry risks and applied loss percentages to the specified industry risk categories. Recently, because of low losses in most categories, management has assigned minimum percentages to each category.

 

For loans rated 4 (“pass/watch”), a loss percentage of 1% is used. For loans rated 5, a 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 loans, their reserves, and action plans to resolve their criticisms are reviewed monthly by the loan committee of each subsidiary bank. All other loans rated 6 and 7 are assigned loss percentages of 15% and 50% respectively. All loans rated 8 are assigned a specific reserve of 100%.

 

The remainder of the balance in the reserve for loan losses is unallocated.  Management believes that the unallocated allowance is adequate to provide for probable losses that are inherent in the loan portfolio and that have not been fully provided for through the allocated allowance.  Factors considered in determining the adequacy of the unallocated allowance include the economic environment, experience level of lenders, concentration in commercial and consumer real estate loans, size of individual loans and the continued strong loan growth in our markets.  These factors are tempered by lending practices related to the real estate portfolio, the continuing positive performance within this segment of our loan portfolio, the knowledge and experience of our commercial lending staff, and the relationship banking philosophy maintained in our community banks.

 

Goodwill.    Our growth over the past several years has been enhanced significantly by mergers and acquisitions. Prior to July 2001, all of our acquisitions were accounted for using the pooling-of-interests business combination method of accounting. Effective July 1, 2001, we adopted SFAS No. 141, “Business Combinations,” which allows only the use of the purchase method of accounting. For purchase acquisitions, we are required to record the assets acquired, including identified intangible assets, and liabilities assumed at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. The determination of the useful lives of intangible assets is subjective as is the appropriate amortization period for such intangible assets. In addition, purchase acquisitions typically result in recording goodwill, which is subject to ongoing periodic impairment tests based on the

 

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fair value of net assets acquired compared to the carrying value of goodwill. In July 2004, the required impairment testing of goodwill was performed and no impairment existed as of the valuation date, as the fair value of our net assets exceeded their carrying value. If for any future period we determine that there has been impairment in the carrying value of our goodwill balances, we will record a charge to our earnings, which could have a material adverse effect on our net income.

 

Summary

 

Net income for the three months ended March 31, 2005 was $3.0 million, up 35.02% from the same period a year ago.  Diluted earnings per share was $0.25 for the three months ended March 31, 2005, compared to $0.26 for the same period a year ago.  The return on average assets was 0.91% and the return on average equity was 6.65% for the three months ended March 31, 2005.  This compares to a return on average assets of 0.93% and a return on average equity of 9.14% for the same period a year ago.

 

FNBG became part of the Company effective March 1, 2005.  The merger was accounted for as a purchase transaction; therefore, results of operations for FNBG since March 1, 2005 have been included in the Company’s results of operations for the three-month period ended March 31, 2005, but are not included in the results of operations for the three-month period ended March 31, 2004.  Also included in the results of operations for the three months ended March 31, 2005, are the results of operations related to the acquisitions of Southern Heritage Bank (“SHB”) and Lumpkin County Bank (“LCB”) both of which were completed in August 2004, which are not included in the results of operations for the period ended March 31, 2004.

 

Balance Sheets

 

Our total assets increased $196.4 million to $1.5 billion at March 31, 2005, or 15.42% compared to December 31, 2004.  The increase consists primarily of an increase in total loans of $142.3 million, or 14.88%, an increase in securities of $7.5 million, an increase in federal funds sold of $10.7 million and an increase in goodwill and intangible assets of $19.8 million. Excluding the acquisition of FNBG, total assets increased $54.5 million or 4.28% during this same period.  Also excluding the acquisition, total loans increased $42.0 million, securities decreased $4.0 million and federal funds sold increased $5.8 million.

 

Total deposits have increased $167.6 million to $1.1 billion at March 31, 2005, or 18.05% compared to December 31, 2004.  Noninterest-bearing deposits increased $16.8 million to $142.5 million and interest-bearing deposits increased $150.8 million to $953.7 million during the same period.   Deposit growth outpaced loan growth resulting in a loan to deposit ratio of 100.18% at March 31, 2005 compared to 102.94% at December 31, 2004.   Excluding the acquisition of FNBG discussed above, deposits increased $58.0 million, or 6.24%.

 

Asset Quality

 

The allowance for loan losses at March 31, 2005 was $11.3 million or 1.03% of total loans compared to 1.24% at March 31, 2004.  The Company adopted SOP 03-3 as of January 1, 2005, which requires the allowance for loan losses of an acquired company to be included in gross loans.  The analysis below indicates an increase of $260,000 in net charge-offs for the three months ended March 31, 2005 as compared to the same period in 2004.  The increase in net charge-offs is primarily attributable to the loans acquired in the acquisition of LCB in August 2004 which represented approximately $105,000 of this increase. Based on its evaluation, management believes the allowance is adequate to absorb any potential loan losses at March 31, 2005.  The allowance for loan losses acquired in prior periods related to acquisitions has been sufficient to absorb estimated uncollectible nonperforming loans acquired in addition to any net write-offs related to nonperforming loans acquired.  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 periods ended March 31, 2005 and 2004.

 

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		Three months ended March 31,
		2005			2004
		(Dollars in thousands)
Average amount of loans outstanding		$	1,004,191		$	720,063
Allowance for loan losses balance, beginning of period		$	11,061		$	8,726
Less charge-offs
Commercial loans		(96		)	—
Real estate loans		(32		)	—
Consumer loans		(205		)	(141		)
Total charge-offs		(333		)	(141		)
Plus recoveries
Commercial loans		9			44
Real estate loans		4			3
Consumer loans		54			88
Total recoveries		67			135
Net charge-offs		(266		)	(6		)
Plus provision for loan losses		482			284
Allowance for loan losses balance, end of period		$	11,277		$	9,004
Net charge-offs to average loans (annualized)		0.107		%	0.003		%

 

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The provision for loan losses increased $198,000 or 69.72% for the three months ended March 31, 2005 compared to the same period in 2004.  The increase for the three-month period related to FNBG was $67,000, which represents one month’s provision taken at FNBG.  Also, CTB did not record a provision for loan loss for the period ended March 31, 2004, but recorded a provision for loan loss of $68,000 for the period ended March 31, 2005.

 

The following table is a summary of nonaccrual, past due loans and restructured loans. The numbers indicate an increase of approximately $7.3 million in nonaccrual loans as of March 31, 2005 as compared to March 31, 2004.  This increase is the result of a combination of an increase at GBT in nonaccrual loans of approximately $1,470,000 directly related to the acquisition of LCB; an increase at CTB of $180,000; an increase at HTB of approximately $4.8 million and an increase of $115,000 related to the acquisition of FNBG.  The increase at HTB of approximately $4.8 million represents one loan relationship consisting of four loans which are all secured by real estate and have specific reserves allocated in accordance with Company policy.  A significant portion of the consumer nonaccrual loan balance is related to Community Loan Company which represents approximately 66.27%, or $281,000 of the consumer balance.  The table presents a decrease of $689,000 in past due loans over 90 days.  The majority of the decrease consists of two loans to the same customer totaling $552,000 located at CTB, which were classified as past due at March 31, 2004, but were moved to nonaccrual status as of March 31, 2005.  Community Loan Company accounts for approximately 98.70%, or $303,000 of the consumer past due loan balance at March 31, 2005.  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 our banking subsidiaries.  Community Loan Company’s reserve for loan loss is also higher to cover these higher levels of nonaccrual and past due loans.  The allowance for loan losses to total loans for Community Loan Company was 6.00% for the period ended March 31, 2005 and 9.12% for the period ended March 31, 2004.  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.

 

		March 31, 2005
		Nonaccrual Loans			Past Due 90 Days Still Accruing			Restructured Debt
		(Dollars in thousands)
Real estate loans		$	8,982		$	4		$	31
Commercial loans		807			53			—
Consumer loans		424			307			8
Total		$	10,213		$	364		$	39

 

		March 31, 2004
		Nonaccrual Loans			Past Due 90 Days Still Accruing			Restructured Debt
		(Dollars in thousands)
Real estate loans		$	2,118		$	552		$	—
Commercial loans		274			—			—
Consumer loans		559			501			—
Total		$	2,951		$	1,053		$	—

 

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Our banking subsidiaries’ 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.  Community Loan Company accrues interest until management determines that full repayment of principal and interest is not probable, which in many 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.

 

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 and prepayments of securities.  Also, we maintain relationships with correspondent banks which could provide funds on short notice.  As of March 31, 2005, we had borrowed under Federal funds purchase lines and securities sold under agreement to repurchase, $30.6 million compared to $47.6 million at December 31, 2004.

 

Our liquidity and capital resources are monitored on a periodic basis by management, and state and federal regulatory authorities.  Our liquidity ratio was 14.81% at March 31, 2005, slightly below 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 our subsidiary banks need to generate additional liquidity, funding plans would be implemented as outlined in the liquidity policy of the subsidiary banks. Our subsidiary banks have lines of credit available to meet any unforeseen liquidity needs.  Also, our subsidiary banks have relationships with the Federal Home Loan Bank of Atlanta, which provides funding for loan growth on an as needed basis.  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, 2005, we had available borrowing capacity totaling approximately $188.8 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.

 

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 As of March 31, 2005, our subsidiary 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 the subsidiary banks’ capital ratios are presented in the following table.

 

		CAPITAL RATIOS		FOR CAPITAL ADEQUACY PURPOSES		TO BE WELL CAPITALIZED
As of March 31, 2005
Total Capital to Risk Weighted Assets:
Consolidated		14.70	%	8.00	%	N\A
Gainesville Bank & Trust		10.97	%	8.00	%	10.00	%
United Bank & Trust		13.58	%	8.00	%	10.00	%
Community Trust Bank		10.73	%	8.00	%	10.00	%
HomeTown Bank of Villa Rica		10.64	%	8.00	%	10.00	%
First National Bank of the South		10.90	%	8.00	%	10.00	%
First National Bank of Gwinnett		10.52	%	8.00	%	10.00	%
Tier I Capital to Risk Weighted Assets:
Consolidated		13.71	%	4.00	%	N\A
Gainesville Bank & Trust		9.83	%	4.00	%	6.00	%
United Bank & Trust		12.36	%	4.00	%	6.00	%
Community Trust Bank		9.80	%	4.00	%	6.00	%
HomeTown Bank of Villa Rica		9.46	%	4.00	%	6.00	%
First National Bank of the South		10.01	%	4.00	%	6.00	%
First National Bank of Gwinnett		10.47	%	4.00	%	6.00	%
Tier I Capital to Average Assets:
Consolidated		12.31	%	4.00	%	N\A
Gainesville Bank & Trust		7.96	%	4.00	%	5.00	%
United Bank & Trust		8.61	%	4.00	%	5.00	%
Community Trust Bank		8.32	%	4.00	%	5.00	%
HomeTown Bank of Villa Rica		8.25	%	4.00	%	5.00	%
First National Bank of the South		8.62	%	4.00	%	5.00	%
First National Bank of Gwinnett		10.66	%	4.00	%	5.00	%

 

In January 2005, the Company completed the construction of an operations center for the Company’s operations and data processing departments.  The estimated cost of the building, including furniture, fixtures and equipment was approximately $2.7 million.

 

Also in January 2005, the Company began a major renovation project at the lead bank, GBT.  The estimated cost of this project is $1.1 million and is expected to be completed in the third quarter of 2005.

 

Our subsidiary banks are subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval.  At March 31, 2005, approximately $5.2 million of retained earnings at our subsidiary banks were available for dividend declaration without regulatory approval.

 

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.  Because interest rates are determined by market forces and economic conditions beyond our control, our ability to generate net interest income depends 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 4.29% for the three months ended March 31, 2005, compared to 4.13% for the same period in 2004, an increase of 16 basis points.  This increase resulted from a 42 basis point increase in the yield on earning assets

 

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