Item 1 of this report.
Results of Operations-For the Years Ended December 31, 2002, 2001 and 2000
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 earned on interest-earning assets and the rate paid on interest-bearing liabilities. The net yield on average interest-earning assets increased to 4.39% in 2002 from 4.33% in 2001. This increase is attributable primarily to increases in volume. In 2002, the average yield on interest-earning assets decreased to 7.11% from 8.55% in 2001 while the average yield on interest-bearing liabilities decreased to 3.13% in 2002 from 4.85% in 2001. The overall change in the interest rate spread from 2001 to 2002 was an increase of 28 basis points. The increase in the net interest spread is a result of increases in volume, which is offset by continued decreases in rates. Total interest-earning assets increased by $52.4 million, to $547,662,000 at December 31, 2002 from the same period of 2001 while interest-bearing liabilities only increased by $45.5 million, to $476,646,000 for the same period.
The net yield on average interest-earning assets decreased by 41 basis points to 4.33% from 4.74% for the year ended December 31, 2001 as compared to 2000. The decreased net yield in 2001 was primarily attributable to the continued decrease in interest rates in 2001. During 2001, the prime interest rate decreased 475 basis points.
Net Interest Income. Net interest income increased by $2,603,000 to $24.1 million in 2002, compared to an increase of $459,000 in 2001. The increase for both years continues to reflect the continued increase in interest-earning assets during 2002 and 2001. As shown in Table 1 and Table 2 included in this annual report, the change in net interest income is the result of the increases in net volume versus changes in net interest rates.
Provision for Loan Loss. Provisions for loan losses decreased by $461,000 during 2002 compared to an increase of $157,000 during 2001. The provision for loan losses is the charge to operations which management feels is necessary to fund the allowance for loan losses. This provision is based on the growth of the loan portfolio, the amount of historical net charge-offs incurred, consideration of peer group averages, and the general economy as well as the local economies. The allowance for loan loss was $7,538,000 or 1.39% of total loans at December 31, 2002 compared to $5,522,000 or 1.32% of total loans at December 31, 2001. We incurred net charge offs of $670,000, $883,000 and $268,000 for the years ended December 31, 2002, 2001 and 2000, respectively. The percentage of net charge-offs to average loans outstanding was .15% and .22% for the years ended December 31, 2002 and 2001. The decrease in the provision for loan losses in 2002 was due to decreases at two subsidiaries based on
positive trends in the loan portfolio and recoveries. The decrease in net charge-offs of $213,000 is primarily a result of recoveries during 2002 at two of the subsidiaries of $171,000 and $107,000. The consumer related charge-offs consist of many smaller balance loans while the real estate charge-offs consist of only a few larger balance loans. Real estate loans are normally secured by one to four family residences or other real estate with values exceeding the original loan balance, therefore minimizing the risk of loss. Consumer loans, however, may be secured by consumer goods and automobiles, or may be unsecured, and therefore subject to greater loss in the event of charge-off. During a recession, losses are more likely and the risk of loss is greater in the consumer portfolio. The allowance for loan losses as a percentage of nonaccrual loans at December 31, 2002 was 136.9%, which was down significantly from 1167.4% in 2001. This decrease is due to nonaccrual loans increasing to $5,506,000 at December 31, 2002 from $473,000 at December 31, 2001. This increase in nonaccrual loans was primarily attributable to the acquisition of HTB whose nonaccrual loan balance at December 31, 2002 was $3,846,000. Currently, HTB's nonaccrual loan balance has decreased by approximately $2,678,000 representing loans which have been either brought current or brought to resolution. During the same period, other problem loans, including past due loans greater than 90 days past due, increased by $1,618,000 compared to a decrease of $563,000 in 2001. The increase in past due loans is primarily attributable to one loan at a bank subsidiary of $1,414,000. Based on management's evaluations, the allowance for loan losses is adequate to absorb potential losses on existing loans.
Other Income. Other income increased during 2002 by $1,733,000 compared to an increase of $1,967,000 in 2001. For the year ended December 31, 2002, the most significant portion of the net increase consisted of an increase of $189,000 in service charges on deposit accounts, an increase of $445,000 in mortgage origination fees and an increase in security transactions, net of $772,000. For the same period in 2001, service charges increased by $1,245,000 and mortgage origination fees increased by $611,000. The increase in service charges was related to growth in transaction accounts and new service charge income related to a new product. The increase in mortgage origination fees is directly related to the decrease in prime rate which also impacts the mortgage rates. In a decreasing rate environment, refinancing of mortgage loans has provided an excellent opportunity for us to generate other fee income.
Other Expense. Other expense increased $1,195,000 and $2,712,000 for the years ended December 31, 2002 and 2001, respectively. Increases in salaries and employee benefits represent the most significant portions of these increases, which increased by $1,197,000 and $1,219,000 for the years ended 2002 and 2001, respectively. The number of full-time equivalent employees increased by 79 from December of 2001 to December of 2002, 48 of which related to the acquisition of HTB. In addition to the additional salary expense related to new employees, we incurred increases due to increases in profit sharing contributions, health insurance costs, incentive compensation and normal salary increases for the years ended December 31, 2002 and 2001. The increase in salaries and employee benefits in 2001 is related to one-time expenses incurred for salary continuation benefits related to the acquisition of Community Trust Financial Services Corporation. Other operating expenses increased by $62,000 and $1,005,000, respectively, for the years ended December 31, 2002 and 2001. The increase in other operating expenses in 2001 included professional and merger related expenses of $618,678 which were recognized in other operating expenses due to the business combination of Community Trust Financial Services Corporation being accounted for as a pooling of interests.
Income Tax Expense. Income tax expense increased $1,044,000 to $3,030,000 in 2002 from $1,986,000 in 2001. The effective tax rate was 32% for the year ended December 31, 2002 and 33% for the year ended December 31, 2001.
Net Income. Net income increased by $2,558,000 for the year ended December 31, 2002, or by 64.43%. The decrease in net income for the same period in 2001 was $339,000, or 7.91%. The increase in net income in 2002 was the net of a combination of significant growth in interest-earning assets, moderate increases in other expenses, a decrease in provision for loan losses and increased non-interest income. The decrease in net income in 2001 is due to a decrease in growth rate of interest-earning assets, an overall decline in yields on interest-earning assets and one-time merger expenses recognized in connection with the aforementioned business combination.
SELECTED FINANCIAL INFORMATION AND STATISTICAL DATA
The tables and schedules on the following pages set forth certain financial information and statistical data with respect to: the distribution of assets, liabilities and stockholders' equity; interest rates and interest differentials; interest rate sensitivity gap ratios; the securities portfolio; the loan portfolio; including types of loans, maturities and sensitivities to changes in interest rates and information on nonperforming loans; summary of the loan loss experience and allowance for loan losses; types of deposits; and the return on equity and assets.
The following table sets forth the amount of our interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest yield/rate for total interest-earning assets and total interest-bearing liabilities, net interest spread and net yield on average interest-earning assets.
Table 1-Distribution of Assets, Liabilities and Stockholders' Equity Interest Rates and Interest Differentials
(1)Average balances were determined using the daily average balances. (2)Average balances of loans include nonaccrual loans and are net of deferred interest and fees. (3)Average unrealized gains (losses) on securities available for sale, net of tax, have been included in stockholders' equity at $1,365,000, $844,000, and $(540,000) for 2002, 2001, and 2000, respectively. (4)Interest and fees on loans include $3,038,000, $2,916,000 and $2,390,000 of loan fee income for the years ended December 31, 2002, 2001 and 2000, respectively. (5)Yields on nontaxable securities are not presented on a tax-equivalent basis.
Table 2-Rate and Volume Analysis
The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected our interest income and expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) change in volume (change in volume multiplied by old rate); (2) change in rate (change in rate multiplied by old volume); and (3) a combination of change in rate and change in volume. The changes in interest income and interest expense attributable to both volume and rate have been allocated proportionately to the change due to volume and the change due to rate.
Asset/Liability Management
Our asset/liability mix is monitored on a regular basis and a report evaluating the interest rate sensitive assets and interest rate sensitive liabilities is prepared and presented to the Board of Directors on a monthly basis. The objective of this policy is to monitor interest rate sensitive assets and liabilities so as to minimize the impact of substantial movements in interest rates on earnings. An asset or liability is considered to be interest rate-sensitive if it will reprice or mature within the time period analyzed, usually one year or less. The interest rate-sensitivity gap is the difference between the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within such time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the interest rate-sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If our assets and liabilities were equally flexible and moved
concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.
A simple interest rate "gap" analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates. Accordingly, we also evaluate how the repayment of particular assets and liabilities is impacted by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as "interest rate caps and floors") which limit the amount of changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the interest rate gap. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates.
Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates and it is management's intention to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively affect our liquidity position.
At December 31, 2002 our cumulative one year interest rate sensitivity gap ratio was .90%. Our targeted ratio is 80% to 120% in this time horizon. This indicates that our interest-bearing liabilities will reprice during this period at a rate faster than our interest-earning assets.
The following table sets forth the distribution of the repricing of our interest-earning assets and interest-bearing liabilities as of December 31, 2002, the interest rate sensitivity gap (i.e., interest rate sensitive assets less interest rate sensitive liabilities), the cumulative interest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e., interest rate sensitive assets divided by interest rate sensitive liabilities) and the cumulative interest rate sensitivity gap ratio.
The table also sets forth the time periods in which interest-earning assets and interest-bearing liabilities will mature or may reprice in accordance with their contractual terms. However, the table does not necessarily indicate the impact of general interest rate movements on the net interest margin since the repricing of various categories of assets and liabilities is subject to competitive pressures and
the needs of our customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times within such period and at different rates.
We actively manage the mix of asset and liability maturities to control the effects of changes in the general level of interest rates on net interest income. Except for its effect on the general level of interest rates, inflation does not have a material impact on us due to the rate variability and short-term maturities of our earning assets. In particular, approximately 61.2% of the loan portfolio is comprised of loans which have variable rate terms or mature within one year. Most mortgage loans are made on a variable rate basis with rates being adjusted every one to five years.
SECURITIES PORTFOLIO
The carrying value at the dates indicated of securities are as follows:
(1)Other securities consist of Federal Home Loan Bank of Atlanta stock, The Bankers Bank stock, common stock of two de novo banks and corporate notes. For presentation purposes, the equity securities are not included in the maturity table below because they have no contractual maturity date. Maturities
The amounts of debt securities as of December 31, 2002 are shown in the following table according to contractual maturities classified as; (1) one year or less; (2) after one year through five years; (3) after five years through ten years; and (4) after ten years.
(1)Yields were computed using coupon interest rates, including discount accretion and premium amortization. The weighted average yield for each maturity range was computed using the carrying value of each security in that range.
(2)Yields on municipal securities are not stated on a tax-equivalent basis.
LOAN PORTFOLIO
Types of Loans
Loans by type of collateral are presented below:
(1)Real estate-mortgage loans are net of deferred loan fees. Maturities and Sensitivities to Changes in Interest Rates
Total loans as of December 31, 2002 are shown in the following table according to contractual maturity classifications (1) one year or less, (2) after one year through five years, and (3) after five years.
The following table summarizes loans at December 31, 2002 with the due dates after one year for predetermined and floating or adjustable interest rates.
Risk Elements
The following table presents the aggregate of nonperforming loans for the categories indicated.
The reduction in interest income associated with nonaccrual loans as of December 31, 2002 is as follows:
Management includes nonaccrual loans in its definition of impaired loans as determined by Financial Accounting Standards Board Statement Numbers 114 and 118.
Our 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. 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 and which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. In the event of non-performance by the borrower, these loans have collateral pledged which would prevent the recognition of substantial losses.
Commitments and Lines of Credit
We will, in the normal course of business, commit to extend credit in the form of letters of credit, lines of credit, and credit cards. The amount of outstanding loan commitments at December 31, 2002 and 2001 was $108.7 million and $79.6 million, respectively. These commitments are recorded in the financial statements when funds are disbursed or the financial instruments become payable. We use the same credit and collateral policies for these off balance sheet commitments as we do for financial instruments that are recorded in the financial statements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitment amounts expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes average loan balances for each year determined using the daily average balances during the year; changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off; additions to the allowance which have been charged to expense; and the ratio of net charge-offs during the year to average loans.
The following table sets forth the allowance for loan losses to total allowance for loan losses and the percent of loans to total loans in each of the categories listed at the dates indicated.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collection of principal is unlikely. Subsequent recoveries are added to the allowance. Management's evaluation of the adequacy of the allowance for loan losses is based on a formal analysis which assesses the risk within the loan portfolio. This analysis includes consideration of historical performance, current economic conditions, level of nonperforming loans, loan concentrations, and review of certain individual loans.
Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the subsidiary banks' allowances for loan losses. Such agencies may require the subsidiary banks to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Our allowance for loan losses was approximately $7,538,000 at December 31, 2002, representing 1.39% of total loans, compared with $5,522,000 at December 31, 2001, which represented 1.32% of total loans.
DEPOSITS
Average amounts of deposits and average rates paid thereon, classified as to noninterest-bearing demand deposits, interest-bearing demand and savings deposits and time deposits, are presented below.(1)
(1)Average balances were determined using the daily average balances.
The amounts of time certificates of deposit issued in amounts of $100,000 or more as of December 31, 2002 are shown below by category, which is based on time remaining until maturity of (1) three months or less, (2) over three through 12 months, and (3) over 12 months.
RETURN ON EQUITY AND ASSETS
The following rate of return information for the periods indicated is presented below.
(1)Net income divided by average total assets. (2)Net income divided by average equity. (3)Dividends declared per share divided by diluted earnings per share. (4)Average equity divided by average total assets.
SHORT TERM BORROWINGS
Other Borrowings
As part of our operating strategy, we have utilized Federal funds purchased and securities sold under repurchase agreements as an alternative to retail deposits to fund our operations when borrowings are less costly and can be invested at a positive interest rate spread or when we need additional funds to satisfy loan demand. By utilizing Federal funds purchased and securities sold under repurchase agreements, which possess varying stated maturities, we can meet our liquidity needs without otherwise being dependent upon retail deposits and revising our deposit rates to attract retail deposits, which have no stated maturities, except for certificates of deposit, which are interest rate sensitive and which are subject to withdrawal from us at any time. At December 31, 2002, we had $11,538,000 in outstanding Federal funds purchased and securities sold under repurchase agreements.
The following table sets forth certain information regarding Federal funds purchased and securities sold under repurchase agreements at or for the years ended on the dates indicated:
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.
ITEM 7A. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets-December 31, 2002 and 2001.
Consolidated Statements of Income-Three Years Ended December 31, 2002, 2001, and 2000.
Consolidated Statements of Comprehensive Income-Three Years Ended December 31, 2002, 2001, and 2000.
Consolidated Statements of Stockholders' Equity-Three Years Ended December 31, 2002, 2001, and 2000.
Consolidated Statements of Cash Flows-Three Years Ended December 31, 2002, 2001, and 2000.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors" and "Executive Officers" in the definitive Proxy Statement filed in connection with our 2003 Annual Shareholders Meeting is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the definitive Proxy Statement filed in connection with our 2003 Annual Shareholders meeting is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the definitive Proxy Statement filed in connection with our 2003 Annual Shareholders meeting is incorporated herein by reference.
Equity Compensation Plan Information
The following table gives information about shares of the Company's common stock that may be issued upon the exercise of options, warrants and rights under all existing equity compensation plans as of December 31, 2002.
(1)GB&T Bancshares 1997 Stock Incentive Plan
(2)N/A
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" in the definitive Proxy Statement filed in connection with our 2003 Annual Shareholders meeting is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this report, we carried out an evaluation, under the supervision and with the participation of our President and the Chief Financial Officer, of the design and operation of our disclosure controls and procedures. Based on this evaluation, our President 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 President 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 new rules, we are in the process of further reviewing and documenting 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 significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of this evaluation.
PART IV
ITEM 15. EXHIBITS AND REPORTS ON FORM 8K
(a) Contents:
1.Consolidated financial statements:
(a)G B & T Bancshares, Inc. and Subsidiaries:
(i)Consolidated Balance Sheets-December 31, 2002 and 2001
(ii)Consolidated Statements of Income-Three Years Ended December 31, 2002, 2001, and 2000
(iii)Consolidated Statements of Comprehensive Income-Three Years Ended December 31, 2002, 2001, and 2000
(iv)Consolidated Statements of Stockholders' Equity-Three Years Ended December 31, 2002, 2001, and 2000
(v)Consolidated Statements of Cash Flows-Three Years Ended December 31, 2002, 2001, and 2000
(vi)Notes to Consolidated Financial Statements
2.Financial statement schedules:
All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
(b) Reports of Form 8-K:
On December 10, 2002, we filed a current report on Form 8-K under Item 5 to report the Company's acquisition of HomeTown Bank of Villa Rica.
(c) Exhibits:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard A. Hunt and Samuel L. Oliver, and each of them, as his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution for him, in his name place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant, in the capacities and on the dates indicated.
GB&T BANCSHARES, INC.
By:
/s/ RICHARD A. HUNT Richard A. Hunt, President, Chief Executive Officer and Director
DATE March 31, 2003
By:
/s/ GREGORY L. HAMBY Gregory L. Hamby, Executive Vice President and Chief Financial Officer
DATE March 31, 2003
By:
/s/ PHILIP A. WILHEIT Philip A. Wilheit, Chairman and Director
DATE March 31, 2003
By:
/s/ SAMUEL L. OLIVER Samuel L. Oliver, Vice Chairman and Director
DATE March 31, 2003
By:
/s/ ALAN A. WAYNE Alan A. Wayne, Secretary and Director
DATE March 31, 2003
By:
/s/ LARRY B. BOGGS Larry B. Boggs, Director
DATE March 31, 2003
By:
/s/ DONALD J. CARTER Donald J. Carter, Director
DATE March 31, 2003
By:
/s/ JOHN W. DARDEN John W. Darden, Director
DATE March 31, 2003
By:
/s/ WILLIAM A. FOSTER, III William A. Foster, III, Director
DATE March 31, 2003
By:
/s/ BENNIE E. HEWETT Bennie E. Hewett, Director
DATE March 31, 2003
By:
/s/ JAMES L. LESTER James L. Lester, Director
DATE March 31, 2003
By:
/s/ JOHN E. MANSFIELD, SR. John E. Mansfield, Sr., Director
DATE March 31, 2003
DATE March 31, 2003
CERTIFICATIONS
I, Richard A. Hunt, certify that:
1.I have reviewed this annual report on Form 10-K of GB&T Bancshares, Inc.;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
By:
/s/ RICHARD A. HUNT Richard A. Hunt, President and CEO
CERTIFICATIONS
I, Gregory L. Hamby, certify that:
1.I have reviewed this annual report on Form 10-K of GB&T Bancshares, Inc.;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
By:
/s/ GREGORY L. HAMBY Gregory L. Hamby, EVP and CFO
GB&T BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2002
GB&T BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2002
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
GB&T Bancshares, Inc. and Subsidiaries
Gainesville, Georgia
We have audited the accompanying consolidated balance sheets of GB&T Bancshares, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 2000 financial statements of Community Trust Financial Services Corporation and subsidiaries, a company which was pooled with GB&T Bancshares, Inc. in 2001, as explained in Note 2 to the consolidated financial statements, which statements are included in the restated 2000 statements of income, comprehensive income, stockholders' equity and cash flows and reflect revenues constituting 25% of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion for 2000 insofar as it relates to the amounts included for Community Trust Financial Services Corporation, is based solely upon the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GB&T Bancshares, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.
/s/ Mauldin & Jenkins, LLC
Atlanta, Georgia
January 24, 2003
GB&T BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(Dollars in thousands)
See Notes to Consolidated Financial Statements.
GB&T BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, except per share amounts)
See Notes to Consolidated Financial Statements.
GB&T BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands)
See Notes to Consolidated Financial Statements.
GB&T BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Amounts in thousands)
See Notes to Consolidated Financial Statements.
GB&T BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands)
GB&T BANCSHARES, INC.
AND SUBSIDIARIES
See Notes to Consolidated Financial Statements
GB&T BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
GB&T Bancshares, Inc. (the "Company") is a multi-bank holding company whose business is conducted by its wholly-owned commercial bank subsidiaries, Gainesville Bank & Trust, United Bank & Trust, Community Trust Bank, and HomeTown Bank of Villa Rica (the "Banks"). Gainesville Bank & Trust is located in Gainesville, Hall County, Georgia with the main office and four branches located in Gainesville, one branch located in Oakwood, Georgia and one branch located in Buford, Georgia. United Bank & Trust is located in Rockmart, Polk County, Georgia with a branch in Cedartown, Georgia and a branch in Cartersville, Georgia. Community Trust Bank is located in Hiram, Paulding County, Georgia with one branch in Dallas, Georgia, one branch in Marietta, Georgia, and one branch in Kennesaw, Georgia. HomeTown Bank of Villa Rica is located in Villa Rica, Carroll County, Georgia with the main office and one additional branch in Villa Rica and one branch in Hiram, Georgia. The Banks provide a full range of banking services to individual and corporate customers in their primary market areas of Hall, Polk, Paulding, and Carroll Counties, respectively, and the surrounding counties.
The consolidated financial statements also include the Company's wholly-owned subsidiary, Community Loan Company ("CLC"). CLC was incorporated in 1995 for the purpose of acquiring and operating existing consumer finance companies under the direction of the Company. The operations of CLC, located in the Georgia cities of Rockmart, Rossville, Gainesville, Woodstock, Cartersville, Dahlonega, Dalton and Rome, are funded principally through a line of credit arrangement with another financial institution.
The Company sold its 49% interest in Cash Transactions, L.L.C. ("CashTrans"), a company that sells, leases and services automated teller machines, as of January 31, 2002. The investment had been accounted for using the equity method of accounting.
Basis of Presentation and Accounting Estimates
The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate and deferred taxes.
Cash, Due from Banks and Cash Flows
For purposes of reporting cash flows, cash and due from banks includes cash on hand, cash items in process of collection and amounts due from banks. Cash flows from loans, federal funds sold, federal funds purchased and securities sold under repurchase agreements, deposits and other borrowings are reported net.
The Banks are required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of those reserve balances was approximately $7,556,000 at December 31, 2002.
Securities
Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Securities not classified as held-to-maturity, including equity securities with readily determinable fair values, are classified as available-for-sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of the related deferred tax effect. Equity securities, including restricted stock, without a readily determinable fair value are recorded at cost.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are determined using the specific identification method. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.
Loans
Loans are reported at their outstanding principal balances less unearned income and the allowance for loan losses. Interest income is accrued on the unpaid balance. Loan origination fees, net of certain direct loan origination costs, are deferred and recognized as an adjustment of the related loan yield over the life of the loan using a method which approximates a level yield.
The accrual of interest on loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due, unless the loan is well-secured. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. Interest income on nonaccrual loans is subsequently recognized only to the extent cash payments are received, until the loans are returned to accrual status.
The allowance for loan losses is established through a provision for loan losses charged to expense. Loan losses are charged against the allowance when management believes the collectibility of the principal is unlikely. Subsequent recoveries are credited to the allowance.
The allowance 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. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. 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.
A loan is considered impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation computed principally by the straight-line method over the estimated useful lives of the assets. The range of estimated useful lives for premises and equipment are:
Other Real Estate Owned
Other real estate owned represents properties acquired through foreclosure. Other real estate owned is held for sale and is carried at the lower of cost or fair value less estimated costs to sell. Any write-down to fair value at the time of transfer to other real estate owned is charged to the allowance for loan losses. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. The carrying amount of other real estate owned at December 31, 2002 and 2001 was $890,713 and $1,522,874, respectively.
Income Taxes
Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
Profit-Sharing Plan
Profit-sharing plan costs are based on a percentage of individual employee's salary, not to exceed the amount that can be deducted for federal income tax purposes. The Banks make matching contributions up to 100% of the first 6% of each participant's salary contribution based on the individual Bank's performance.
Stock Compensation Plans
At December 31, 2002, the Company has a stock-based employee compensation plan, which is described more fully in Note 12. 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.
Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted-average number of shares of capital stock outstanding. Diluted earnings per share are computed by dividing net income by the sum of the weighted-average number of shares of capital stock outstanding and dilutive potential capital shares. Potential capital shares consist of stock options.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
Accounting Standards
In June 2001, the Financial Accounting Standards Board, ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142. Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations consummated after June 30, 2001 be accounted for by the purchase method unless the combination was initiated on or prior to that date and it meets the conditions to be accounted by the pooling-of-interests method in accordance with APB Opinion No. 16, Business Combinations. Under SFAS No. 142, goodwill and intangible assets that management concludes have indefinite useful lives will no longer be amortized, but will be subject to impairment tests performed at
least annually. SFAS No. 142 also requires the Company to perform a transitional impairment test of all previously recognized goodwill and to assign all recognized assets and liabilities to reporting units. Other identifiable intangible assets will continue to be amortized over their useful lives.
During 2002, the Company performed the first of the required annual impairment tests of goodwill and indefinite lived intangible assets. As a result of this test, no amount was charged to earnings for impairment in 2002. Application of the nonamortization provisions of SFAS No. 142 resulted in an increase of $108,000 ($.02 per basic share and $.02 per diluted share) in net income for 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. The Company has not elected to adopt the recognition provisions of this Statement for stock-based employee compensation and has elected to continue with accounting methodology in Opinion No. 25 as permitted by SFAS No. 123.
NOTE 2. BUSINESS COMBINATIONS
On November 30, 2002, the Company completed the merger of HomeTown Bank of Villa Rica. The Company issued 562,994 shares of its capital stock and approximately $4,819,000 in cash in exchange for all of the issued and outstanding common shares of HomeTown Bank of Villa Rica. The acquisition has been accounted for as a purchase resulting in goodwill of approximately $7,822,000. HomeTown Bank of Villa Rica's results of operations from December 1, 2002 are included in the consolidated results of operations for the year ended December 31, 2002.
On June 30, 2001, the Company effected a business combination with Community Trust Financial Services Corporation ("CTF") by exchanging 1,890,662 shares of its common stock for all of the common stock of CTF. The combination has been accounted for as a pooling of interests and, accordingly, all prior periods financial statements have been restated to include CTF.
NOTE 3. SECURITIES
The amortized cost and fair value of securities available-for-sale are summarized as follows:
The amortized cost and fair value of debt securities as of December 31, 2002 by contractual maturity are shown below. Maturities may differ from contractual maturities of mortgage-backed securities because the mortgages underlying the securities may be called or repaid without penalty. Therefore, these securities are not included in the maturity categories in the following summary.
Securities with an approximate carrying value of $45,791,000 and $39,160,000 at December 31, 2002 and 2001, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
Gains and losses on sales of securities available-for-sale consist of the following:
NOTE 4. LOANS
The composition of loans is summarized as follows:
Changes in the allowance for loan losses are as follows:
The following is a summary of information pertaining to impaired loans:
In the ordinary course of business, the Company has granted loans to certain related parties, including executive officers, directors and their affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan. Changes in related party loans for the year ended December 31, 2002 are as follows:
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
Depreciation expense was $1,489,000, $1,477,000 and $1,206,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
At December 31, 2002, the Company's 50% interest in the Gainesville Bank & Trust main office banking facility with a total carrying value (including land) of $1,775,000 was pledged to a subsidiary bank to secure a $660,885 borrowing of a director who is the owner of the remaining 50% interest in the building.
At December 31, 2002, construction in process consisted of computer equipment not yet in service. There are no significant amounts remaining to be incurred in completion of the project. At December 31, 2001, computer installation and construction in progress consisted of costs incurred in constructing a new branch and a software upgrade.
Leases
The Company leases the Gainesville Bank & Trust main office banking facility under a noncancelable operating lease agreement from 400 Church Street Properties, a partnership that is 50% owned by Gainesville Bank & Trust and 50% owned by a director. The lease had an initial lease term of 10 years with four five-year renewal options.
The Company also leases various other branches under noncancelable operating lease agreements.
Rental expense under all operating leases amounted to $697,000, $708,000 and $651,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Future minimum lease payments on noncancelable operating leases are summarized as follows:
NOTE 6. INTANGIBLE ASSETS
Following is a summary of information related to acquired intangible assets:
The aggregate amortization expense was $8,000, $65,000 and $69,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
The estimated amortization expense for each of the next five years is as follows:
There were no changes in the carrying amount of goodwill during the year ended December 31, 2002.
Following is a summary of net income and earnings per share that would have been reported exclusive of amortization expense recognized in those periods related to goodwill and intangible assets that are no longer being amortized.
NOTE 7. DEPOSITS
The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2002 and 2001 was approximately $95,407,000 and $57,661,000 respectively. The scheduled maturities of time deposits at December 31, 2002 are as follows:
NOTE 8. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements, which are secured borrowings, generally mature within one to four days from the transaction date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transactions. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The
Company monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements at December 31, 2002 and 2001 were $10,173,000 and $10,664,000, respectively.
NOTE 9. OTHER BORROWINGS
Other borrowings consist of the following:
Contractual maturities of other borrowings as of December 31, 2002 are as follows:
The advances from the Federal Home Loan Bank are collateralized by blanket floating liens on qualifying first mortgage and commercial loans of approximately $72,131,000, available-for-sale securities of approximately $8,628,000 and Federal Home Loan Bank stock of $3,174,000.
NOTE 10. TRUST PREFERRED
In 2002, the Company formed a wholly-owned grantor trust to issue cumulative trust preferred securities in a private placement offering. The grantor trust has invested the proceeds of the trust
preferred securities in subordinated debentures of the Company. The trust preferred securities can be redeemed, in whole or in part, from time to time, prior to maturity at the option of the Company on or after October 30, 2007. The sole assets of the grantor trust are the Subordinated Debentures of the Company (the Debentures). The Debentures have the same interest rate (5.1875%) as the trust preferred securities. The Company has the right to defer interest payments on the Debentures up to twenty consecutive quarterly periods (five years), so long as the Company is not in default under the subordinated debentures. Interest compounds during the deferral period. No deferral period may extend beyond the maturity date.
The preferred securities are subject to redemption, in whole or in part, upon repayment of the subordinated debentures at maturity on October 30, 2032 or their earlier redemption. The Company has the right to redeem the debentures, in whole or in part, from time to time, on or after October 30, 2007, at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest.
The Company has guaranteed the payment of all distributions the Trust is obligated to make, but only to the extent the Trust has sufficient funds to satisfy those payments. The Company and the Trust believe that, taken together, the obligations of the Company under the Guarantee Agreement, the Trust Agreement, the Subordinated Debentures, and the Indenture provide, in the aggregate, a full, irrevocable and unconditional guarantee of all of the obligations of the Trust under the Preferred Securities on a subordinated basis.
The Company is required by the Federal Reserve Board to maintain certain levels of capital for bank regulatory purposes. The Federal Reserve Board has determined that certain cumulative preferred securities having the characteristics of trust preferred securities qualify as minority interest, which is included in Tier 1 capital for bank and financial holding companies. In calculating the amount of Tier l qualifying capital, the trust preferred securities can only be included up to the amount constituting 25% of total Tier 1 capital elements (including trust preferred securities). Such Tier 1 capital treatment provides the Company with a more cost-effective means of obtaining capital for bank regulatory purposes than if the Company were to issue preferred stock.
The trust preferred securities and the related Debentures were issued on October 30, 2002. Both financial instruments bear an identical annual rate of interest of 5.1875%. Distributions on the trust preferred securities are paid quarterly on March 31, June 30, September 30 and December 31 of each year, beginning December 31, 2002. Interest on the Debentures is paid on the corresponding dates. The aggregate principal amount of trust preferred certificates outstanding at December 31, 2002 was $15,000,000. The aggregate principal amount of Debentures outstanding at December 31, 2002 was $15,464,000.
NOTE 11. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
The Company has a 401(k) Employee Profit-Sharing Plan available to all eligible employees, subject to certain minimum age and service requirements. The contributions expensed were $283,000, $240,000 and $229,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Deferred Compensation Plan
The Company has various deferred compensation plans providing for death and retirement benefits for certain officers. The estimated amounts to be paid under the compensation plans have been funded through the purchase of life insurance policies on the officers. Accrued deferred compensation of $510,000 and $360,000 is included in other liabilities as of December 31, 2002 and 2001, respectively. Cash surrender values of $4,766,000 and $4,321,000 on the insurance policies is included in other assets at December 31, 2002 and 2001, respectively.
NOTE 12. STOCK COMPENSATION PLAN
The Company has a 1997 stock option plan for the granting of options to directors, officers, and employees. Option prices reflect the fair market value of the Company's capital stock on the dates the options are granted. The options may be exercised over a period of ten years in accordance with vesting schedules determined by the Board of Directors.
Other pertinent information related to the options is as follows:
Information pertaining to options outstanding at December 31, 2002 is as follows:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
NOTE 13. INCOME TAXES
The components of income tax expense are as follows:
The Company's income tax expense differs from the amounts computed by applying the federal income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows:
The components of deferred income taxes are as follows:
NOTE 14. EARNINGS PER SHARE
Presented below is a summary of the components used to calculate basic and diluted earnings per share:
Loan Commitments
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and credit card commitments. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets.
The Company's 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. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Company's commitments is as follows:
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Credit card commitments are granted on an unsecured basis.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances which the Company deems necessary.
Contingencies
In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material effect on the Company's financial statements.
NOTE 16. CONCENTRATIONS OF CREDIT
The Company originates primarily commercial, residential and consumer loans to customers in Hall, Polk, Paulding, Carroll and surrounding counties. The ability of the majority of the Company's customers to honor their contractual obligations is dependent on the local and metropolitan Atlanta, Georgia economies.
Eighty-six percent of the Company's loan portfolio is concentrated in loans secured by real estate. A substantial portion of these loans are in the Company's primary market areas. In addition, a substantial portion of the other real estate owned is located in those same markets. Accordingly, the ultimate collectibility of the Company's loan portfolio and recovery of the carrying amount of other real estate owned are susceptible to changes in market conditions in the Company's market areas. The other significant concentrations of credit by type of loan are set forth in Note 3.
The Company, as a matter of policy, does not generally extend credit to any single borrower or group of related borrowers in excess of 25% of each Bank's statutory capital, or approximately $4,471,000, $1,368,000, $2,500,000, and $1,680,000 for Gainesville Bank & Trust, United Bank & Trust, Community Trust Bank, and HomeTown Bank of Villa Rica, respectively.
NOTE 17. REGULATORY MATTERS
The Banks are subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 2002, approximately $3,105,000 of retained earnings were available for dividend declaration without regulatory approval.
The Company and Banks are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets, as defined, and of Tier I capital to average assets, as defined. Management believes, as of December 31, 2002 and 2001, the Company and the Banks met all capital adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notification from the Federal Deposit Insurance Corporation categorized HomeTown Bank of Villa Rica as under capitalized and Gainesville Bank & Trust, United Bank & Trust and Community Trust Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Banks' categories.
The Company and Banks' actual capital amounts and ratios are presented in the following table.
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS No. 107, Disclosures about Fair Value of Financial Instruments, excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments.
Cash, Due From Banks, Interest-Bearing Deposits in Banks and Federal Funds Sold: The carrying amounts of cash, due from banks, interest-bearing deposits in banks and federal funds sold approximate fair value.
Securities: Fair values for securities are based on available quoted market prices. The carrying values of equity securities with no readily determinable fair value approximate fair values.
Loans: For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For other loans, the fair values are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Deposits: The carrying amounts of demand deposits, savings deposits, and variable-rate certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal Funds Purchased, Repurchase Agreements and Other Borrowings: The fair values of the Company's fixed rate other borrowings are estimated using discounted cash flow models based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts of all other variable rate borrowings, federal funds purchased, and securities sold under repurchase agreements approximate their fair values.
Trust Preferred Securities: The fair values of the Company's fixed rate trust preferred securities approximates the carrying value at December 31, 2002.
Accrued Interest: The carrying amounts of accrued interest approximate their fair values.
Off-Balance Sheet Instruments: Fair values of the Company's off-balance sheet financial instruments are based on fees currently charged to enter into similar agreements. Since the majority of
the Company's off-balance-sheet instruments consist of nonfee-producing, variable-rate commitments, the Company has determined they do not have a distinguishable fair value.
The carrying amounts and estimated fair value of the Company's financial instruments were as follows:
NOTE 19. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total revenue are as follows:
NOTE 20. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheets as of December 31, 2002 and 2001 and statements of income and cash flows of GB&T Bancshares, Inc. for the years ended December 31, 2002, 2001 and 2000.
CONDENSED BALANCE SHEETS
CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF CASH FLOWS
NOTE 21. QUARTERLY DATA (Unaudited)
Exhibit Index
DOCUMENTS INCORPORATED BY REFERENCE
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
PART I
ITEM 1. BUSINESS
REGULATION AND SUPERVISION
ITEM 2.
ITEM 2. PROPERTIES
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELECTED FINANCIAL INFORMATION AND STATISTICAL DATA
SECURITIES PORTFOLIO
LOAN PORTFOLIO
SUMMARY OF LOAN LOSS EXPERIENCE
DEPOSITS
RETURN ON EQUITY AND ASSETS
SHORT TERM BORROWINGS
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Equity Compensation Plan Information
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND REPORTS ON FORM 8K
SIGNATURES
POWER OF ATTORNEY
CERTIFICATIONS
CERTIFICATIONS
INDEPENDENT AUDITOR'S REPORT
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (Dollars in thousands)
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Dollars in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Dollars in thousands)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Amounts in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Dollars in thousands)
GB&T BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Exhibit Index