ITEM 1. BUSINESS
The Company
GB&T Bancshares was formed in 1998 as a bank holding company existing under the laws of the State of Georgia. On April 24, 1998, we completed a reorganization of Gainesville Bank & Trust to the current holding company structure by acquiring all of the outstanding common stock of Gainesville Bank & Trust in exchange for 1,676,160 shares of GB&T Bancshares common stock. The acquisition was accounted for as a pooling of interests. We operate as a multi-bank holding company. All of our business activities are conducted through our subsidiaries. At December 31, 2006, we had seven wholly owned bank 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 Mountain State Bank (“MSB”).
Through our subsidiary banks, we offer a wide range of lending services, including real estate, consumer and commercial loans to individuals, small businesses and other organizations that are located in or conduct a substantial portion of their business in our markets. We complement our lending operations with a full array of retail deposit products and fee-based services to support our clients including checking accounts, money market accounts, savings accounts and certificates of deposit. We also offer a variety of other traditional banking services to our customers, including drive-up and night depository facilities, 24-hour automated teller machines, internet banking, telephone banking and limited trust services.
Market Areas and Competition
We currently conduct business through 32 branches in our subsidiary banks’ market areas of Hall, Polk, Paulding, Cobb, Carroll, Baldwin, Bartow, Putnam, Clarke, Gwinnett, Dawson, Forsyth, Fulton and Lumpkin Counties, Georgia. These market areas geographically surround metropolitan Atlanta. According to 2005 data from the U.S. Census Bureau, the average projected population growth in our markets from 2005 to 2010 is expected to be 22.7% compared to a U.S. average of 6.3%.
As a whole, the banking industry in Georgia is highly competitive. Our subsidiary banks compete with local as well as with national and regional financial institutions in our markets. In addition, our banks compete with credit unions, brokerage firms and money market funds. We compete with institutions which may have much greater financial resources than our subsidiary banks, and which may be able to offer more services to customers. In recent years, intense market demands, economic pressures, and increased customer awareness of products and services, and the availability of electronic services have forced banks to diversify their services and become more cost-effective. Our subsidiary banks face strong competition in attracting and retaining deposits and loans.
Direct competition for deposits comes from other commercial banks, savings institutions, credit unions and issuers of securities, such as shares in money market funds. Interest rates on deposit accounts, convenience of banking facilities, products and services, and marketing are all significant factors in the competition for deposits.
Competition for loans comes from other commercial banks, savings institutions, insurance companies, consumer finance companies, credit unions, mortgage banking firms and other institutional lenders. We compete for loan originations through interest rates charged on loans, loan fees, our efficiency in closing and handling of loans, and the overall quality of service. Competition is affected by the availability of lendable funds, general and local economic conditions, interest rates, and other factors that are not readily predictable.
Management expects that competition will continue in the future due to statewide branching laws and the entry of additional bank and nonbank competitors.
Our Strategy
We intend to achieve our primary goal of maximizing shareholder value by focusing on the following objectives:
· Continue expansion, through selective acquisitions and opening strategically located branches, into high growth markets in Georgia where we believe we have a competitive advantage and an opportunity for growth;
· Continue our primary focus on commercial and retail customers in our existing market areas with the goal of providing superior, personal customer service and maintaining strong asset quality;
· Maintain local autonomy and accountability at our subsidiary banks;
· Improve our financial performance through efficient management of our infrastructure and capital base;
· Expand our financial products and services to meet the needs of our customers and to increase our fee income; and
· Ensure management’s interests are aligned with shareholders.
Community Banking. We believe that, in our market areas, customers are attracted and retained primarily through personal customer service and a local, community-oriented atmosphere in which they can feel comfortable and trust the bank personnel with whom they are dealing. In order to maintain this atmosphere, as we have acquired new banks and grown internally, we generally maintain the management team of each separate bank, allowing it to retain its local entrepreneurial identity, autonomy and decision making. By keeping with this community banking strategy, we feel that our employees and customers will forge long-term, mutually beneficial relationships. By keeping management local and accessible to customers, we believe our banks can respond more quickly to our customers’ needs than other, larger banks. Although we intend to maintain the relatively autonomous community bank atmosphere, due to the growth our company has experienced in the past several years, we focused our attention on maintaining asset and credit quality at all of our bank subsidiaries from a centralized, holding company level. To further this effort, in 2006 we appointed Sid J. Sims, a twenty-eight year banking veteran, to the newly created position of Executive Vice President and Chief Credit Officer, who has assumed the responsibility of managing asset and credit quality throughout our company.
Growth Strategy. Our strategy is to continue pursuing expansion into attractive, high growth markets around the metropolitan Atlanta area through acquisitions of community banks and the establishment of de novo branch offices. Since February 2000, we have integrated eight bank acquisitions through mergers with their holding companies or merging the banks into Gainesville Bank & Trust. We focus our acquisition strategy on high-quality community banks with proven management teams that view combining with us as forging a partnership rather than as an exit strategy. Our goal is to maintain the management team of each acquired bank, allowing it to retain its local entrepreneurial identity, autonomy and decision making, while simultaneously increasing efficiency by consolidating administrative and back office operations.
In addition to our strategy of expansion through combinations with other banks, we intend to continue to expand internally where possible by growing our existing banks in their respective market areas and nearby attractive markets. We believe that our decentralized community banking strategy allows our banks to effectively compete with our larger competitors by providing superior, personalized customer service, leveraging local decision making capabilities, and staying attuned to community matters.
Trust Preferred Securities
In 2002, our holding company formed a wholly owned grantor trust and issued $15.5 million in aggregate principal amount of trust preferred securities in a private placement offering. The grantor trust has invested the proceeds of the trust preferred securities in subordinated debentures of our holding company. The trust preferred securities can be redeemed, in
whole or in part, from time to time, prior to maturity at our option on or after October 30, 2007. The sole assets of the grantor trust are the subordinated debentures of GB&T Bancshares. The debentures have the same variable interest rate as the trust preferred securities. We have the right to defer interest payments on the debentures for up to 20 consecutive quarterly periods (five years), so long as we are not in default under the debentures.
On July 22, 2004, we issued an additional $10.3 million in aggregate principal amount of trust preferred securities through a wholly owned grantor trust in a private placement. The grantor trust has invested the proceeds of the trust preferred securities in subordinated debentures of our holding company. The trust preferred securities can be redeemed, in whole or in part, from time to time, prior to maturity at our option on or after September 30, 2009. The sole assets of the grantor trust are the subordinated debentures of GB&T Bancshares.
In addition, in connection with the acquisition of Southern Heritage Bank, which now operates as a division of GBT, we assumed $4.1 million in aggregate principal amount of trust preferred securities which have substantially the same terms as our other trust preferred securities except that they have a fixed rate of interest and may be redeemed at our option on or after June 26, 2008. As of December 31, 2006, we had $29.9 million in aggregate principal amount of trust preferred securities outstanding. See the notes to the consolidated financial statements for further information on the trust preferred securities.
Lending Activities
We originate loans primarily secured by single and multi-family real estate, residential construction, and owner-occupied commercial buildings. In addition, we make loans to small and medium-sized commercial businesses, as well as to consumers for a variety of purposes. We also lend to residential contractors and developers in our market areas. We attempt to obtain a security interest in real estate whenever possible. As of December 31, 2006, approximately 90% of our loan portfolio was secured by real estate.
We also provide commercial and consumer installment loans to our customers that are secured by collateral other than real estate. Such loans are typically of multiple-year duration and, if not variable rate, bear interest at a rate tied to our cost of funds of equivalent maturity.
Our loan portfolio at December 31, 2006 was comprised as follows:
Real Estate-Mortgage. We make commercial mortgage loans to finance the purchase of real property as well as loans to smaller business ventures, credit lines for working capital and short-term seasonal or inventory financing, including letters of credit, that are also secured by real estate. Commercial mortgage lending typically involves higher loan principal amounts, and the repayment of loans is dependent, in large part, on sufficient income from the properties collateralizing the loans to cover operating expenses and debt service. As a general practice, we require our commercial mortgage loans to be collateralized by well-managed, income producing property with adequate margins and to be guaranteed by responsible parties. In addition, a substantial percentage of our commercial mortgage loan portfolio is secured by owner-occupied commercial buildings. We look for opportunities where cash flow from the collateral provides adequate debt service coverage and the guarantor’s net worth is centered on assets other than the project we are financing. Our commercial mortgage loans are generally collateralized by first liens on real estate, have fixed or floating interest rates and amortize over a 15 to 25-year period with balloon payments due at the end of one to nine years. Payments on
loans collateralized by such properties are often dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may by subject to adverse conditions in the real estate market.
In underwriting commercial mortgage loans, we seek to minimize our risks in a variety of ways, including giving careful consideration to the property’s operating history, future operating projections, current and projected occupancy, location and physical condition. Our underwriting analysis also includes credit checks, reviews of appraisals and environmental hazards or EPA reports and a review of the financial condition of the borrower. We attempt to limit our risk by analyzing our borrowers’ cash flow and collateral value on an ongoing basis.
Our residential mortgage loans consist of originating residential loans for the purchase of residential property to individuals for other third-party lenders. Residential loans to individuals held in our loan portfolio primarily consist of home equity loans and lines of credit. These loans are generally made on the basis of the borrower’s ability to repay the loan from his or her employment and other income and are secured by residential real estate, the value of which is reasonably ascertainable. We expect that these loan-to-value ratios will be sufficient to compensate for fluctuations in real estate market value and to minimize losses that could result from a downturn in the residential real estate market. Other than originating residential mortgage loans for other lenders, we infrequently make consumer residential real estate loans consisting primarily of first and second mortgage loans for residential properties. We generally do not retain long term, fixed rate residential real estate loans in our portfolio due to interest rate and collateral risks and low levels of profitability.
Real Estate-Construction. We also make construction and development loans to residential and, to a lesser extent, commercial contractors and developers located within our market areas. Construction loans generally are secured by first liens on real estate and have floating interest rates. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the value of the project is dependent on its successful completion. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, upon the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If we are forced to foreclose on a project prior to completion, there is no assurance that we will be able to recover all of the unpaid portion of the loan. In addition, we may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time. While we have underwriting procedures designed to identify what we believe to be acceptable levels of risks in construction lending, no assurance can be given that these procedures will prevent losses from the risks described above.
Commercial Lending. Our commercial loan portfolio includes loans to smaller business ventures, credit lines for working capital and short-term seasonal or inventory financing, as well as letters of credit that are generally secured by collateral other than real estate. Commercial borrowers typically secure their loans with assets of the business, personal guaranties of their principals, and often mortgages on the principals’ personal residences. Our commercial loans are primarily made within our market areas and are underwritten on the basis of the commercial borrower’s ability to service the debt from income. In general, commercial loans involve more credit risk than residential and commercial mortgage loans. The increased risk in commercial loans is generally due to the type of assets collateralizing these loans. The increased risk also derives from the expectation that commercial loans generally will be serviced from the operations of the business, and those operations may not be successful.
Consumer Loans. We make a variety of loans to individuals for personal, family and household purposes, including secured and unsecured installment and term loans. Consumer loans entail greater risk than other loans, particularly in the case of consumer loans that are unsecured or secured by depreciating assets such as automobiles. In these cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by job loss, divorce, illness or personal bankruptcy.
Credit Risks. The principal economic risk associated with each category of the loans that we make is the creditworthiness of the borrower and the ability of the borrower to repay the loan. General economic conditions and the strength of the services and retail market segments affect borrower creditworthiness. General factors affecting a commercial borrower’s ability to repay include interest rates, inflation and the demand for the commercial borrower’s products and services, as well as other factors affecting a borrower’s customers, suppliers and employees.
Risks associated with real estate loans also include fluctuations in the value of real estate, new job creation trends, tenant vacancy rates and, in the case of commercial borrowers, the quality of the borrower’s management. Consumer loan repayments depend upon the borrower’s financial stability and are more likely to be adversely affected by divorce, job loss, illness and personal bankruptcy or other hardships.
Lending Policies. The boards of directors of our subsidiary banks establish and periodically review the subsidiary banks’ lending policies and procedures. Our board of directors adopted a company-wide lending policy in 2004. Despite our centralized policy, we may grant our subsidiary banks the flexibility to adapt our lending policy to conditions in their specific market areas. However, in order to properly recognize the benefits of that flexibility within the parameters of our lending policy, in late 2006 we appointed Sid J. Sims as our Chief Credit Officer to oversee the lending practices of all our subsidiary banks. There are also regulatory restrictions on the dollar amount of loans available for each lending relationship. State banking regulations provide that no secured loan relationship may exceed 25% of the subsidiary banks’ statutory capital or net assets, as defined, and no unsecured loan relationship may exceed 15% of statutory capital, except in limited circumstances. National banking regulations provide that no loan relationship may exceed 15% of the subsidiary banks’ Tier 1 capital. Our subsidiary banks occasionally sell participation interests in loans to other lenders, including our other subsidiary banks, primarily when a loan exceeds the subsidiary banks’ legal lending limits.
Deposits
Our principal source of funds for loans and investing in securities is core deposits. We offer a wide range of deposit services, including checking, savings, money market accounts, and certificates of deposit. We obtain most of our deposits from individuals and businesses in our market areas. We believe that the rates we offer for core deposits are competitive with those offered by other financial institutions in our market areas. A secondary source of funding is through advances from the Federal Home Loan Bank of Atlanta, subordinated debt and other borrowings which enable us to borrow funds at rates and terms, which at times, are more beneficial to us.
Other Banking Services
We offer a range of products and services, including 24-hour internet banking, trust services, direct deposit, traveler’s checks, safe deposit boxes, United States savings bonds and automatic account transfers. We earn fees for most of these services. We also receive ATM transaction fees from transactions performed by our customers participating in a shared network of automated teller machines and a debit card system that our customers can use throughout Georgia and in other states.
Investment Securities
After establishing necessary cash reserves and funding loans, we invest our remaining liquid assets in securities allowed under banking laws and regulations. We invest primarily in obligations of the United States or obligations guaranteed as to principal and interest by the United States, other taxable securities and in certain obligations of states and municipalities. We also invest excess funds in federal funds with our correspondent banks and primarily act as a net seller of such funds. The sale of federal funds represents a short-term loan from us to another bank. Risks associated with securities include, but are not limited to, interest rate fluctuation, maturity, and concentration.
Asset/Liability Management
It is our objective to manage our assets and liabilities to provide a satisfactory and consistent level of profitability within the framework of established cash, loan, securities, borrowing and capital policies. Our overall philosophy is to support asset growth primarily through the growth of core deposits, which include deposits of all categories from individuals and businesses. Management seeks to invest the largest portion of our assets in loans.
Our asset-liability mix is monitored on a periodic basis with a report reflecting interest-sensitive assets and interest-sensitive liabilities being prepared and presented to the Investment Committee of the holding company’s board of directors on a quarterly basis. The objective of this policy is to manage interest-sensitive assets and liabilities so as to minimize the impact of substantial movements in interest rates on our earnings.
Employees
As of December 31, 2006, we had 505 full-time equivalent employees, of which 154 were employed by Gainesville Bank & Trust, 35 were employed by United Bank & Trust, 73 were employed by Community Trust Bank, 49 were employed by HomeTown Bank of Villa Rica, 51 were employed by First National Bank of the South, 20 were employed by First National Bank of Gwinnett, 50 were employed by Mountain State Bank and 73 were employed by the holding company. We are not a party to any collective bargaining agreement and, in the opinion of management, we enjoy satisfactory relations with our employees.
Supervision and Regulation
We, like the rest of the banking industry, are subject to extensive state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory oversight of virtually all aspects of our operations. These laws and regulations are generally intended to protect depositors, not shareholders.
Legislation and regulations authorized by legislation influence, among other things:
· How, when and where we may expand geographically;
· Into what product or service market we may enter;
· How we must manage our assets; and
· Under what circumstances money may or must flow between the parent bank holding company and the subsidiary bank.
Set forth below is an explanation of the major pieces of legislation affecting our industry and how that legislation affects our actions. The following summary is qualified by reference to the statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on our business and prospects, and legislative changes and the policies of various regulatory authorities may significantly affect our operations. We cannot predict the effect that fiscal or monetary policies, or new federal or state legislation may have on our business and earnings in the future.
General. The Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Georgia Department of Banking and Finance (the “Georgia Department”) under the Bank Holding Company Act of 1956, as amended (the “BHC Act”) and the Financial Institutions Code of Georgia (the “FICG”), respectively.
GBT, UBT, CTB, HTB and MSB are state banks incorporated under the laws of Georgia and are subject to examination by the Georgia Department and the Federal Deposit Insurance Corporation (“FDIC”). FNBS and FNBG are nationally chartered banks incorporated under the laws of the United States and are subject to examination by the FDIC and the Office of the Comptroller of the Currency (“OCC”). All of our banks’ deposits are insured by the FDIC to the maximum extent provided by law. The FDIC, OCC, the Board of Governors of the Federal Reserve (the “Federal Reserve”) and the Georgia Department regularly examine our operations and are given authority to approve or disapprove mergers, consolidations, the establishment of branches, and similar corporate actions. The agencies also have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.
Acquisitions. The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before: (i) it may acquire direct or indirect ownership or control of any voting shares of any bank if, after such acquisition, the bank holding company will directly or indirectly own or control more than 5% of the voting shares of the bank; (ii) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank; or (iii) it may merge or consolidate with any other bank holding company.
The BHC Act further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be substantially to lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade,
unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the communities to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved and the convenience and needs of the communities to be served. Consideration of financial resources generally focuses on capital adequacy, and consideration of convenience and needs issues generally focuses on the parties’ performance under the Community Reinvestment Act of 1977.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act, the restrictions on interstate acquisitions of banks by bank holding companies were repealed. As a result, the Company, and any other bank holding company located in Georgia, is able to acquire a bank located in any other state, and a bank holding company located outside of Georgia can acquire any Georgia-based bank, in either case subject to certain deposit percentage and other restrictions. The legislation provides that unless an individual state has elected to prohibit out-of-state banks from operating interstate branches within its territory, adequately capitalized and managed bank holding companies are able to consolidate their multistate banking operations into a single bank subsidiary and to branch interstate through acquisitions. De novo branching by an out-of-state bank is permitted only if it is expressly permitted by the laws of the host state. Georgia does not permit de novo branching by an out-of-state bank. Therefore, the only method by which an out-of-state bank or bank holding company may enter Georgia is through an acquisition. Georgia has adopted an interstate banking statute that removed restrictions on the ability of banks to branch interstate through mergers, consolidations and acquisitions. However, Georgia law prohibits a bank holding company from acquiring control of a financial institution until the target financial institution has been incorporated for three years.
Restrictions on Transactions with Affiliates. We and our subsidiary banks are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on: the amount of a bank’s loans or extensions of credit to affiliates; a bank’s investment in affiliates; assets a bank may purchase from affiliates, except for real and personal property exemption by the Federal Reserve; the amount of loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.
The total amount of the above transactions is limited in amount, as to any one affiliate, to 10.0% of a bank’s capital and surplus and, as to all affiliates combined, to 20.0% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. The Bank must also comply with other provisions designed to avoid the taking of low-quality assets.
We and our subsidiary banks are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.
We are also subject to restrictions on extensions of credit to our executive officers, directors, principal shareholders and their related interests. These extensions of credit must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and must not involve more than the normal risk of repayment or present other unfavorable features.
Activities. The BHC Act has generally prohibited a bank holding company from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those determined by the Federal Reserve to be closely related to banking or managing or controlling banks as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley Act (the “GLB Act”), discussed below, have expanded the permissible activities of a bank holding company that qualifies as a financial holding company. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity can be reasonably expected to produce benefits to the public, such as a greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices.
Gramm-Leach-Bliley Act. The GLB Act implemented major changes to the statutory framework for providing banking and other financial services in the United States. The GLB Act, among other things, eliminated many of the restrictions on affiliations among banks and securities firms, insurance firms, and other financial service providers. A bank holding company that qualifies as a financial holding company will be permitted to engage in activities that are financial in nature or incidental or complimentary to a financial activity. The GLB Act specifies certain activities that are deemed to be financial in nature, including underwriting and selling insurance, providing financial and investment advisory services, underwriting, dealing in, or making a market in securities, limited merchant banking activities, and any activity currently permitted for bank holding companies under Section 4(c)(8) of the BHC Act.
To become eligible for these expanded activities, a bank holding company must qualify as a financial holding company. To qualify as a financial holding company, each insured depository institution controlled by the bank holding company must be well-capitalized, well-managed, and have at least a satisfactory rating under the Community Reinvestment Act. In addition, the bank holding company must file a declaration with the Federal Reserve of its intention to become a financial holding company. The Company has not filed an application to become a financial holding company.
The GLB Act designates the Federal Reserve as the overall umbrella supervisor of the new financial services holding companies. The GLB Act adopts a system of functional regulation where the primary regulator is determined by the nature of activity rather than the type of institution. Under this principle, securities activities are regulated by the Securities and Exchange Commission (the “SEC”) and other securities regulators, insurance activities by the state insurance authorities, and banking activities by the appropriate banking regulator. As a result, to the extent that we engage in non-banking activities permitted under the GLB Act, we will be subject to the regulatory authority of the SEC or state insurance authority, as applicable.
Payment of Dividends. The Company is a legal entity separate and distinct from its subsidiaries. Its principal source of cash flow is dividends from its subsidiary banks. There are statutory and regulatory limitations on the payment of dividends by the subsidiary banks to the Company, as well as by the Company to its shareholders.
If, in the opinion of the federal banking agencies, a depository institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the depository institution, could include the payment of dividends), such authority may require, after notice and hearing, that such institution cease and desist from such practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. See “Prompt Corrective Action”. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally pay dividends only out of current operating earnings.
During 2006, the Company paid a total of $0.36 per share to its shareholders. At December 31, 2006, the Company could declare approximately $12.5 million in dividends without further regulatory approval.
Capital Adequacy. We are required to comply with the capital adequacy standards established by the federal banking agencies. There are two basic measures of capital adequacy for bank holding companies that have been promulgated by the Federal Reserve: a risk-based measure and a leverage measure. All applicable capital standards must be satisfied for a bank holding company to be considered in compliance.
The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.
The minimum guideline for the ratio of Total Capital to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8.0%. Total Capital consists of Tier 1 Capital, which is comprised of common
stock, undivided profits, minority interests in the equity accounts of consolidated subsidiaries and noncumulative perpetual preferred stock, less goodwill and certain other intangible assets, and Tier 2 Capital, which consists of subordinated debt, other preferred stock, and a limited amount of loan loss reserves. At December 31, 2006, our consolidated Total Capital Ratio and our Tier 1 Capital Ratio were 12.12% and 10.86%, respectively.
In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio (the “Leverage Ratio”) of Tier 1 Capital to average assets, less goodwill and certain other intangible assets, of 3.0% for bank holding companies that meet certain specified criteria, including those having the highest regulatory rating. All other bank holding companies generally are required to maintain a Leverage Ratio of at least 3.0%, plus an additional cushion of 1.0% to 2.0%. Our Leverage Ratio at December 31, 2006 was 9.44%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider a “tangible Tier 1 Capital Leverage Ratio” (deducting all intangibles) and other indicators of capital strength in evaluating proposals for expansion or new activities.
The Banks are subject to risk-based and leverage capital requirements adopted by its federal banking regulators, which are substantially similar to those adopted by the Federal Reserve for bank holding companies.
Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on the taking of brokered deposits, and certain other restrictions on its business. As described below, substantial additional restrictions can be imposed upon FDIC-insured depository institutions that fail to meet applicable capital requirements. See “Prompt Corrective Action”.
The federal bank agencies continue to indicate their desire to raise capital requirements applicable to banking organizations beyond their current levels. In this regard, the Federal Reserve and the FDIC have, pursuant to FDICIA, recently adopted final regulations requiring regulators to consider interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in the evaluation of a bank’s capital adequacy. The bank regulatory agencies have concurrently proposed a methodology for evaluating interest rate risk that would require banks with excessive interest rate risk exposure to hold additional amounts of capital against such exposures.
Support of Subsidiary Institutions. Under Federal Reserve policy, we are expected to act as a source of financial strength for, and to commit resources to support, our subsidiary banks. This support may be required at times when, absent such Federal Reserve policy, we may not be inclined to provide such support. In addition, any capital loans by a bank holding company to any of its banking subsidiaries are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by a bank holding company to a federal bank regulatory agency to maintain the capital of a banking subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Prompt Corrective Action. FDICIA established a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized), and are required to take certain mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to institutions in the three undercapitalized categories. The severity of the action will depend upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.
An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to certain limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5.0% of an undercapitalized subsidiary’s assets or the amount required to meet regulatory capital requirements. An
undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. In addition, the appropriate federal banking agency may test an undercapitalized institution in the same manner as it treats a significantly undercapitalized institution if it determines that those actions are necessary.
At December 31, 2006, all our banks had the requisite capital level to qualify as “well capitalized” under the regulatory framework for prompt corrective action, except for HTB which was considered “adequately capitalized”. On March 1, 2007, the Company injected sufficient capital at HTB for it to obtain “well capitalized” status.
FDIC Insurance Assessments. The FDIC establishes rates for the payment of premiums by federally insured banks and thrifts for deposit insurance. Member institutions pay deposit insurance assessments to the Deposit Insurance Fund, or the “DIF.” The FDIC previously maintained the Savings Association Insurance Fund and the Bank Insurance Fund, which primarily insured the deposits of banks and state chartered savings banks. These two funds were merged into the DIF effective March 31, 2006.
The FDIC recently amended its risk-based assessment system for 2007 to implement authority that the FDIC was granted under the Federal Deposit Insurance Reform Act of 2005, or the “Reform Act.” Under the revised system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and other factors. The new regulation allows the FDIC to more closely tie each financial institution’s deposit insurance premiums to the risk it poses to the DIF. The assessment rate of an institution depends upon the category to which it is assigned. Risk Category I, which contains the least risky depository institutions, is expected to include more than 90 percent of all institutions. Risk Category I, unlike the other risk categories, contains further risk differentiation based on the FDIC’s analysis of financial ratios, examination components and other information. The new assessment rates for nearly all financial institutions (Risk Category I) are expected to vary between five and seven basis points, or five to seven cents for every $100 of domestic deposits. The riskiest institutions (Risk Category IV) may be assessed up to 43 basis points. The FDIC may adjust rates uniformly from one quarter to the next, except that no single adjustment can exceed three basis points.
In addition to the assessments for deposit insurance, institutions are required to make payments on bonds which were issued in the late 1980s by the Financing Corporation in order to recapitalize the predecessor to the Savings Association Insurance Fund. During 2006, Financing Corporation payments for Savings Association Insurance Fund members approximated 1.28 basis points of assessable deposits. These assessments, which are adjusted quarterly, will continue until the Financing Corporation bonds mature in 2017.
The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Safety and Soundness Standards. The FDIA, as amended by the FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994, requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. The federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to FDICIA, as amended. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation and fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder. In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of FDICIA. See “Prompt Corrective Action”. If an institution fails to comply with
such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties. The federal regulatory agencies also proposed guidelines for asset quality and earnings standards.
Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), our subsidiary banks, as FDIC insured institutions, have a continuing and affirmative obligation to help meet the credit needs of the entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices. The CRA requires the appropriate federal regulator, in connection with its examination of an insured institution, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as applications for a merger or the establishment of a branch. An unsatisfactory rating may be used as the basis for the denial of an application by the federal banking regulator. The Banks have received satisfactory ratings in their CRA examinations.
Privacy. The GLB Act also modified laws related to financial privacy. The new financial privacy provisions generally prohibit a financial institution from disclosing nonpublic personal financial information about consumers to third parties unless consumers have the opportunity to “opt out” of the disclosure. A financial institution is also required to provide its privacy policy annually to its customers. Compliance with the implementing regulations was mandatory effective July 1, 2001. Our subsidiary banks implemented the required financial privacy provisions by July 1, 2001.
Effect of Governmental Monetary Policies. The earnings of our subsidiary banks are affected by domestic and foreign conditions, particularly by the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve has had, and will continue to have, an important impact on the operating results of commercial banks through its power to implement monetary policy in order, among other things, to mitigate recessionary and inflationary pressures by regulating the national money supply. The techniques used by the Federal Reserve include setting the reserve requirements of member banks and establishing the discount rate on member bank borrowings. The Federal Reserve also conducts open market transactions in United States government securities.
USA Patriot Act of 2001. In October 2001, the USA Patriot Act of 2001 (the “Patriot Act”) was enacted in response to the terrorist attacks in New York, Pennsylvania, and Washington, D.C. that occurred on September 11, 2001. The Patriot Act impacts financial institutions in particular through its anti-money laundering and financial transparency laws. The Patriot Act amended the Bank Secrecy Act and the rules and regulations of the Office of Foreign Assets Control to establish regulations which, among others, set standards for identifying customers who open an account and promoting cooperation with law enforcement agencies and regulators in order to effectively identify parties that may be associated with, or involved in, terrorist activities or money laundering.
On March 2, 2006, Congress passed the USA Patriot Act Improvement and Reauthorization Act of 2005. This act reauthorized all provisions of the Patriot Act that would otherwise have expired, made 14 of the 16 sunsetting provisions permanent, and extended the sunset period of the remaining two for an additional four years.
Proposed Legislation and Regulatory Action. New regulations and statutes are regularly proposed that contain certain wide-ranging proposals for altering the structures, regulations, and competitive relationships of the nation’s financial institutions. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.
Available Information
The Company files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. These filings are available to the public at the SEC’s website at http://www.sec.gov. The Company also has a website at http://www.gbtbancshares.com. On the website, the Company provides hyperlinks to copies of the annual, quarterly and current reports that the Company files with the SEC, any amendments to those reports and press releases as well as the Company’s code of ethics policy.
ITEM 1A.
ITEM 1A. RISK FACTORS
Our business is subject to certain risks, including those described below. Readers of this Annual Report on Form 10-K should take such risks into account in evaluating any investment decision involving our common stock. The risks below do not describe all risks applicable to our business and are intended only as a summary of certain material factors that affect our operations in the industries in which we operate. More detailed information concerning these and other risks is contained in other sections of this Annual Report on Form 10-K, including “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Significant risks accompany our recent rapid expansion.
We have recently experienced significant growth through acquisitions, including the acquisitions of Lumpkin County Bank and Southern Heritage Bank in August 2004, the acquisition of First National Bank of Gwinnett in March 2005 and the acquisition of Mountain State Bank in May 2006. These acquisitions could place a strain on our resources, systems, operations and cash flow. Our ability to manage these acquisitions will depend on our ability to monitor operations and control costs, maintain effective quality controls, expand our internal management and technical and accounting systems and otherwise successfully integrate acquired businesses into our company. If we fail to do so, our business, financial condition and operating results will be negatively impacted.
We face risks with respect to future expansion and acquisitions or mergers.
We continuously seek to acquire other financial institutions or parts of those institutions and may continue to engage in de novo branch expansion in the future. Acquisitions and mergers involve a number of risks, including:
· the time and costs associated with identifying and evaluating potential acquisitions and merger partners may negatively affect our business;
· the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution may not be accurate;
· the time and costs of evaluating new markets, hiring experienced local management and opening new offices and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion may negatively affect our business;
· we may not be able to finance an acquisition without diluting our existing shareholders;
· the diversion of our management’s attention to the negotiation of a transaction may detract from their business productivity;
· we may enter into new markets where we lack experience;
· we may introduce new products and services into our business with which we have no prior experience; and
· we may incur an impairment of goodwill associated with an acquisition and experience adverse short-term effects on our results of operations.
In addition, no assurance can be given that we will be able to integrate our operations after an acquisition without encountering difficulties including, without limitation, the loss of key employees and customers, the disruption of our respective ongoing businesses or possible inconsistencies in standards, controls, procedures and policies. Successful integration of our operations with another entity’s will depend primarily on our ability to consolidate operations, systems and procedures and to eliminate redundancies and costs. If we have difficulties with the integration, we might not achieve the economic benefits we expect to result from any particular acquisition or merger. In addition, we may experience greater than expected costs or difficulties relating to such integration.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
Our loan customers may not repay their loans according to the terms of the loans, and the collateral securing the payment of these loans may be insufficient to assure repayment. We may experience significant loan losses which could have a material adverse effect on our operating results. Management makes various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an allowance for loan losses in an attempt to cover any loan losses which may occur. In determining the size of the allowance, we rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume, delinquencies and non-accruals, national and local economic conditions and other pertinent information.
As we expand into new markets, our determination of the size of the allowance could be understated due to our lack of familiarity with market-specific factors. If our assumptions are wrong, our current allowance may not be sufficient to cover future loan losses, and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Additions to our allowance would significantly decrease our net income.
In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a negative effect on our operating results.
Our business is subject to the success of the local economies where we operate.
Our success significantly depends upon the growth in population, income levels, deposits and housing starts in our market areas. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may be negatively impacted. In addition, the economies of the communities in which we operate are substantially dependent on the growth of the economy in metropolitan Atlanta. To the extent that economic conditions in metropolitan Atlanta are unfavorable or do not continue to grow as projected, the economies in our market areas would be adversely affected. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our market areas if they do occur.
In addition, the market value of the real estate securing loans as collateral could be adversely affected by unfavorable changes in market and economic conditions. As of December 31, 2006, approximately 90% of our total loans were secured by real estate. Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in our market areas could adversely affect the value of our assets, our revenues, results of operations and financial condition.
Risks associated with unpredictable economic and political conditions may be amplified as a result of our limited market areas.
Conditions such as inflation, recession, unemployment, high interest rates, short money supply, scarce natural resources, international disorders, terrorism and other factors beyond our control may adversely affect our profitability. Because the majority of our borrowers are individuals and businesses located and doing business in Hall, Polk, Paulding, Cobb, Carroll, Bartow, Baldwin, Putnam, Clarke, Gwinnett, Dawson, Forsyth, Fulton and Lumpkin Counties, Georgia, our success will depend significantly upon the economic conditions in those and the surrounding counties. Unfavorable economic conditions in those and the surrounding counties may result in, among other things, a deterioration in credit quality or a reduced demand for credit and may harm the financial stability of our customers. Due to our limited market areas, these negative conditions may have a more noticeable effect on us than would be experienced by a larger institution more able to spread these risks of unfavorable local economic conditions across a large number of diversified economies.
Our recent operating results may not be indicative of our future operating results.
We may not be able to sustain our historical rate of growth or may not even be able to grow our business at all. In addition, our recent and rapid growth, including our growth through acquisitions, may distort some of our historical financial ratios and statistics. Our strong performance during this time period was, in part, the result of an extremely favorable residential mortgage refinancing market and our successful integration of acquisitions which occurred during that period. In the future, we may not have the benefit of a favorable interest rate environment, a strong residential mortgage market, or the ability to find suitable candidates for acquisition. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence. If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected due to a high percentage of our operating costs being fixed expenses.
Departures of our key personnel may harm our ability to operate successfully.
Our success has been and continues to be largely dependent upon the services of Richard A. Hunt, our President and Chief Executive Officer, other members of our senior management team, including our senior loan officers, and our board of directors, many of whom have significant relationships with our customers. Our continued success will depend, to a significant extent, on the continued service of these key personnel. The prolonged unavailability or the unexpected loss of any of them could have an adverse effect on our financial condition and results of operations. We cannot be assured of the continued service of our senior management team or our board of directors with us.
Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our capital resources will continue to satisfy our capital requirements for the foreseeable future. We may at some point, however, need to raise additional capital to support our continued growth.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed on favorable terms. If we cannot raise additional capital when needed, our ability to expand our operations through internal growth and acquisitions could be materially impaired.
Competition from financial institutions and other financial service providers may adversely affect our profitability.
The banking business is highly competitive, and we experience competition in each of our market areas from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national and international financial institutions such as Bank of America, BB&T, Regions Bank, SunTrust, Synovus and Wachovia that operate offices in our market areas and elsewhere.
We compete with these institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established, larger financial institutions. While we believe we can and do successfully compete with these other financial institutions in our market areas, we may face a competitive disadvantage as a result of our smaller size, lack of geographic diversification and inability to spread our marketing costs across a broader market. Although we attempt to compete by concentrating our marketing efforts in our market areas with local advertisements, personal contacts, and greater flexibility and responsiveness in working with local customers, we can give no assurance that this strategy will be successful.
We are subject to extensive regulation that could limit or restrict our activities and adversely affect our earnings.
We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various federal and state agencies. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid
on deposits and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth. Many of these regulations are intended to protect depositors, the public and the FDIC rather than shareholders.
The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our earnings. In addition, the Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission and Nasdaq that are now applicable to us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices, including the costs of completing our audit and maintaining our internal controls.
Our ability to pay dividends is limited and we may be unable to pay future dividends.
Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of our bank subsidiaries to pay dividends to us is limited by their obligations to maintain sufficient capital and by other general restrictions on their dividends that are applicable to our regulated bank subsidiaries. If these regulatory requirements are not met, our subsidiary banks will not be able to pay dividends to us, and we may be unable to pay dividends on our common stock.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
The Company’s corporate headquarters are located at 500 Jesse Jewell Parkway, S.E., Gainesville, Georgia, in the main office of the lead bank, Gainesville Bank & Trust. The building is jointly owned by Gainesville Bank & Trust and a related party. The Company also has an operations center located at 1480 Jesse Jewell Parkway, Gainesville, Georgia. Data Processing, Deposit Operations, Human Resources, Accounting and Audit are located in this facility. The Company’s seven subsidiary banks conduct business from facilities the majority of which are owned by the respective banks, all of which are in good state of repair and appropriately designed for use as banking facilities. The subsidiaries provide services from 32 locations, of which 21 locations are owned and 11 are leased. In the opinion of management, all properties including improvements and furnishings are adequately insured.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to, nor are any of our property the subject of, any material pending legal proceedings, other than ordinary routine proceedings incidental to our business, nor to the knowledge of the management are any such proceedings contemplated or threatened against us.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our common stock is quoted on the Nasdaq Global Select Market under the symbol “GBTB.” The following table sets forth the high and low closing prices for our common stock as reported by the Nasdaq Global Select Market and the cash dividends declared per share of our common stock for the indicated periods.
(b) As of March 1, 2007, there were approximately 3,854 holders of record of our common stock.
(c) Dividends are paid at the discretion of our board of directors. We have historically paid dividends on a quarterly basis as set forth in the table above. We intend to continue paying cash dividends, but the amount and frequency of cash dividends, if any, will be determined by our board of directors after consideration of earnings, capital requirements and our financial condition and will depend on cash dividends paid to us by our subsidiary banks. Dividends from our subsidiary banks are our primary source of funds for the payment of dividends to our shareholders, and there are various legal and regulatory limits on the extent to which our subsidiary banks may pay dividends or otherwise supply funds to us. See “Supervision and Regulation” section discussed earlier in this Report. In addition, federal and state agencies have the authority to prevent us from paying a dividend to our shareholders. Thus, while we intend to continue paying dividends, we can make no assurances that we will continue to pay dividends or that we will not reduce the amount of dividends paid in the future.
(d) During the fourth quarter of 2006, the Company did not repurchase any of its equity securities.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial information for us and our subsidiaries and is derived from the consolidated financial statements and related notes included in this annual report. This information is only a summary and should be read in conjunction with our historical financial statements and related notes. The year ended December 31, 2006 includes the acquisition of Mountain Bancshares, Inc. which was completed on May 1, 2006 and accounted for as a purchase. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion on this and our prior acquisitions.
(1) Net loans include the outstanding principal balances of loans less unearned income, net deferred fees and the allowance for loan losses.
(2) Earning assets include interest-bearing deposits in banks, federal funds sold, securities available for sale, restricted equity securities, loans net of unearned income, less unrealized gains (losses) on securities and nonaccrual loans.
(3) The increase in stockholders’ equity for the years ended December 31, 2006, 2005 and 2004 related to business combinations was 15%, 12% and 34%, respectively. Net income less dividends declared represented 2%, 4% and 7% of the total increase for the same periods, respectively.
(4) Nonperforming loans include nonaccrual loans, other impaired loans and loans past due 90 days or more and still accruing interest.
(5) Nonperforming assets include nonperforming loans and foreclosed assets.
GAAP Reconciliation and Management Explanation for Non-GAAP Financial Measures
Certain financial information included in “selected consolidated financial data” above is determined by methods other than in accordance with GAAP. These non-GAAP financial measures are “tangible book value per share”, “tangible equity to tangible assets”, “return on average tangible equity”, “return on average tangible assets”, “average tangible equity to average tangible assets” and “earning assets.” Our management uses these non-GAAP measures in its analysis of our performance.
· “Tangible book value per share” is defined as total equity reduced by recorded intangible assets divided by total common shares outstanding. This measure is important to investors interested in changes from period to period in book value per share exclusive of changes in intangible assets. Goodwill, an intangible asset that is recorded in a purchase business combination, has the effect of increasing total book value while not increasing the tangible assets of the company. For companies such as ours that have engaged in multiple business combinations, purchase accounting can result in the recording of significant amounts of goodwill related to such transactions.
· “Tangible equity to tangible assets” is defined as total equity reduced by recorded intangible assets divided by total assets reduced by recorded intangible assets. This measure is important to investors interested in the equity to assets ratio exclusive of the effect of changes in intangible assets on equity and total assets.
· “Return on average tangible equity” is defined as annualized earnings for the period divided by average equity reduced by average goodwill and other intangible assets. “Return on average tangible assets” is defined as annualized earnings for the period divided by average assets reduced by average goodwill and other intangible assets. We believe these measures are important when measuring the company’s performance exclusive of the effects of goodwill and other intangibles recorded in recent acquisitions, and these measures are used by many investors as part of their analysis of the company’s performance.
· “Average tangible equity to average tangible assets” is defined as average total equity reduced by recorded average intangible assets divided by average total assets reduced by recorded average intangible assets. This measure is important to many investors that are interested in the equity to asset ratio exclusive of the effect of changes in average intangible assets on average equity and average total assets.
· “Earning assets” is defined as total assets plus the allowance for loan losses less cash and due from banks, premises and equipment, goodwill and intangible assets, other assets, unrealized gains (losses) on securities and nonaccrual loans. This measure is important to many investors because for financial institutions, their net interest income is directly related to their level of earning assets.
These disclosures should not be viewed as a substitute for results determined in accordance with GAAP, and are not necessarily comparable to non-GAAP performance measures which may be presented by other companies. The following reconciliation table provides a more detailed analysis of these non-GAAP performance measures.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion reviews our results of operations and assesses our financial condition. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from the consolidated financial statements included or incorporated by reference in this Report. Reference should be made to those statements and the selected financial data presented elsewhere or incorporated by reference in this report for an understanding of the following discussion and analysis. Historical results of operations and any trends which may appear are not necessarily indicative of the results to be expected in future years.
Executive Summary
The Company, headquartered in Gainesville, Georgia, consists of a network of community banks in growth areas of Georgia with approximately $1.9 billion in total consolidated assets as of December 31, 2006. We believe that maintaining autonomy within our subsidiary banks serves the unique needs of each community we serve. We focus on strong asset quality and sound management teams and use economies of scale to enhance our profitability. Our results reflect a combination of internal and acquisition growth. Prior to 2006, we had completed seven acquisitions. On May 1, 2006, we completed the acquisition of Mountain Bancshares, Inc. and its banking subsidiary Mountain State Bank. We continue to build infrastructure to support our growth.
As a bank holding company, our results of operations are almost entirely dependent on the results of operations of our subsidiary banks. The following table sets forth our subsidiary banks and selected data related to each bank as of December 31, 2006:
We derive the majority of our income from interest received on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Approximately 90% of our total deposits are interest-bearing. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities, which is called our net interest spread.
There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We maintain this allowance by charging a provision for loan losses against our operating earnings for each period. We have included a detailed discussion of this process, as well as several tables describing our allowance for loan losses. The financial performance for the year ended December 31, 2006 was impacted by the additional loan loss provision taken in the fourth quarter of 2006 related to several loan relationships at HomeTown Bank of Villa Rica determined to have multiple policy violations. Please see “Results of Operations - Asset Quality” for further discussion concerning the additional loan loss provision.
In addition to earning interest on our loans and investments, we earn income through fees and other charges to our clients. We have also included a discussion of the various components of this noninterest income, as well as of our noninterest expense.
The following discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the financial statements accompanying or incorporated by reference in this report. We encourage you to read this discussion and analysis in conjunction with our financial statements and the other statistical information included and incorporated by reference in this report.
We measure and monitor the following factors as key indicators of our financial performance:
· Net income
· Earnings per share
· Loan and deposit growth
· Credit quality
Below is a summary of the performance of these key indicators for the year ended December 31, 2006 as compared to the year ended December 31, 2005:
· Net income of $9.5 million compared to $12.0 million
· Diluted earnings per share of $0.68 compared to $0.93
· Net interest margin of 4.34% compared to 4.26%
· Loan growth of $266.3 million or 21.6% (12.9% excluding acquisition of Mountain Bancshares, Inc.)
· Deposit growth of $283.1 million or 23.7% (13.3% excluding acquisition of Mountain Bancshares, Inc.)
· Return on average assets of 0.54% compared to 0.80%
· Return on average equity of 4.27% compared to 6.06%
· Nonperfoming assets ratio of 1.59% compared to 0.63%
· Net charge-off ratio of 0.36% compared to 0.47%
Effect of Economic Trends
During the three years ended December 31, 2004, our rates on both short-term or variable rate interest-earning assets and short-term or variable rate interest-bearing liabilities declined primarily as a result of the actions taken by the Federal Reserve, however during 2005 and continuing through 2006, both these rates increased.
During most of 2001 and during 2002, the United States experienced an economic decline. During this period, the economy was affected by lower returns of the stock markets. Economic data led the Federal Reserve to begin an aggressive program of reducing rates that moved the federal funds rate down 11 times during 2001 for a total reduction of 475 basis points. During the fourth quarter of 2002 and the first quarter of 2003, the Federal Reserve reduced the federal funds rate down an additional 75 basis points, bringing the federal funds rate to its lowest level in 40 years.
Despite sharply lower short-term rates, stimulus to the economy during 2003 was muted and consumer demand and business investment activity remained weak. During all of 2003 and substantially all of 2004, the financial markets operated under historically low interest rates. As a result of these unusual conditions, Congress passed an economic stimulus plan in 2003. During 2004, many economists believed the economy began to show signs of strengthening, and the Federal Reserve increased the short-term interest rate by 100 basis points during the second, third and fourth quarters of 2004 and by 200 basis points during 2005. In 2006, the short-term interest rate continued to increase by 50 basis points during the first quarter and another 50 basis points during the second quarter of 2006. Many economists believe that the Federal Reserve will lower rates during 2007. No assurance can be given that the Federal Reserve will actually lower interest rates or that the results we anticipate will actually occur.
The specific economic and credit risks associated with our loan portfolio, especially the real estate portfolio, include, but are not limited to, a general downturn in the economy which could affect unemployment rates in our market areas, general real estate market deterioration, interest rate fluctuations, deteriorated collateral, title defects, inaccurate appraisals, and financial deterioration of borrowers. Construction and development lending can also present other specific risks to the lender such as whether developers can find builders to buy lots for home construction, whether the builders can obtain financing for the construction, whether the builders can sell the home to a buyer, and whether the buyer can obtain permanent financing. Currently, real estate values and employment trends in our market areas have remained stable. The general economy and loan demand declined slightly during 2001 and continued to decline throughout 2002. In 2003, the economy began to show signs of improvement which continued through 2004, 2005 and 2006. Our growth has not been significantly impacted by the previously mentioned economic conditions.
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 reviewed and discussed periodically by our Audit Committee and are described in the notes to our consolidated financial statements as of December 31, 2006 included in this report. 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.
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. 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 loan officer rates all loans based on this system, and the ratings are adjusted as needed to reflect the current status of the loan. The loan officers are trained to rate loans in a timely and accurate manner based on current information. These ratings are reviewed regularly by the loan committee of the respective bank subsidiary, an outside independent loan review firm, our accountants, and by the applicable regulator for accuracy.
A general allowance will be maintained for all loans rated 1 to 4 and for all homogeneous loan pools such as consumer, credit card and residential mortgage. Management will develop a range of expected losses for each risk grade and for each pool. This range of losses will be management’s best estimate based on actual loss experience, industry loss
experience, loan portfolio trends and characteristics of the markets it serves. On a quarterly basis, management will evaluate each of the loan categories and determine the expected loss levels from the range previously established.
All loans rated 5, 6, 7 and 8, as well as any other impaired loan of a significant amount, will be individually analyzed and a specific reserve assigned. This analysis will include information from management’s Problem Asset Review Committee which meets quarterly and reviews credit relationships of one million and above and rated 5 through 8. Management, considering current information and events regarding a borrower’s ability to repay its obligations, considers a loan to be impaired when the ultimate collection of all amounts due, according to the contractual terms of the loan agreement, is in doubt. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. If the loan is collateral dependent, the fair value of the collateral less estimated selling costs is used to determine the amount of impairment. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. A majority of our impaired loans are collateral dependent. The allowance for loan losses on these loans is determined based on fair value estimates (net of selling costs) of the respective collateral. The actual losses on these loans could differ significantly if the fair value of the collateral is different from the estimates used in determining the allocated allowance. Most of our collateral dependent impaired loans are secured by real estate. The fair value of these real estate properties is generally determined based on appraisals performed by a certified or licensed appraiser. Management also considers other factors or recent developments which could result in adjustments to the collateral value estimates indicated in the appraisals.
The remainder of the balance in the reserve for loan losses is unallocated. The unallocated reserve represents management’s estimate of the probable losses inherent in the loan portfolio that have not been fully provided for through the specific reserve calculations. Factors considered in determining the unallocated reserve are overall economic conditions, the rapid rise of real estate prices over the past three years in our markets, the recent slowdown in real estate activity, the number of new and relatively inexperienced banks and bankers entering our markets and offering aggressive terms and pricing, our concentration in commercial and consumer real estate loans and the experience and historic performance of our lenders.
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 fair value of net assets acquired compared to the carrying value of goodwill. In July 2006, 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.
Effect of Recent Business Acquisitions
On May 1, 2006, the Company completed the acquisition of Mountain Bancshares, Inc. the parent company of Mountain State Bank, which is headquartered in Dawsonville, Dawson County, Georgia, and has branches in Dawson, Forsyth, Fulton and Lumpkin Counties. Mountain State Bank became a wholly owned subsidiary of the Company. The Company issued 1,088,924 shares of its capital stock and approximately $10.3 million in cash in exchange for all of the issued and outstanding common shares of Mountain Bancshares, Inc. The acquisition was accounted for as a purchase resulting in estimated goodwill of approximately $26.0 million. Mountain State Bank’s results of operations from May 1, 2006, are included in the consolidated results of operations for the year ended December 31, 2006. The results of
operations for the years ended December 31, 2005 and 2004 do not include the results of operations of Mountain Bancshares, Inc.
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 845,128 shares of its capital stock and approximately $3.8 million 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 $16.4 million. First National Bank of Gwinnett’s results of operations from March 1, 2005, are included in the consolidated results of operations for the year ended December 31, 2005. The results of operations for the year ended December 31, 2004 does not include the results of operations of FNBG Bancshares, Inc.
On August 3, 2004, the Company completed the acquisition of Southern Heritage Bancorp, Inc., the parent company of Southern Heritage Bank, in Flowery Branch, Georgia. Southern Heritage Bank merged with and into, and became a division of, the Company’s lead bank, Gainesville Bank & Trust. The Company issued 1,141,628 shares of its common stock and approximately $869,172 in cash in exchange for all of the issued and outstanding common shares of Southern Heritage Bancorp, Inc. The acquisition was accounted for as a purchase resulting in goodwill of approximately $14,901,000. The results of operations for the year ended December 31, 2004 include Southern Heritage Bank’s results of operations since the date of acquisition, which represents approximately five months of operations.
On August 19, 2004, the Company completed the acquisition of Lumpkin County Bank in Dahlonega, Georgia. Lumpkin County Bank merged with and into, and became a division of, the Company’s lead bank, Gainesville Bank & Trust. The Company issued 262,682 shares of its common stock in exchange for all of the issued and outstanding common shares of Lumpkin County Bank. The acquisition was accounted for as a purchase resulting in goodwill of approximately $331,000. The results of operations for the year ended December 31, 2004 include Lumpkin County Bank’s results of operations since the date of acquisition, which represents approximately four and one-half months of operations.
Financial Condition
Total Assets. Our total assets increased $316.3 million or 20.0% during 2006 compared to $310.0 million or 24.3% during 2005. The increase in 2006 consists primarily of an increase in total loans of $266.3 million or 21.6%, and an increase in goodwill and intangible assets of $26.0 million. Excluding the acquisition of Mountain Bancshares, Inc., total assets increased $150.8 million, or 9.5%, during 2006. Also, excluding the acquisition, total loans increased $158.8 million or 12.9%. For the year ended December 31, 2005 as compared with the year ended December 31, 2004, the acquisition of FNBG Bancshares, Inc. accounted for approximately $139.0 million of the increase in total assets. The overall growth in 2006 and 2005 is consistent with management’s plans. The competition for deposits plays an important role in our overall growth.
Total Loans. Our primary focus is to maximize earnings through lending activities. Any excess funds are invested according to our investment policy. Total loans increased 21.6% or $266.3 million for the year ended December 31, 2006. Exclusive of the acquisition of Mountain Bancshares, Inc., which represented $107.5 million of this increase, total loans increased $158.8 million or 12.9%. This increase is compared to an increase of $275.5 million or 28.8% during 2005. Exclusive of the acquisition of FNBG Bancshares, Inc., which represented $101.5 million of the increase in 2005, total loans increased $174.0 million or 18.2%. As of December 31, 2006 and 2005, our loan-to-deposit ratio was 101.2% and 102.9%, respectively. At December 31, 2006 and 2005, we had total outstanding borrowings of $168.4 million and $173.7 million, respectively. These funds have been used to fund loan growth. The utilization of borrowings to fund loan growth enables us to maintain a higher loan to deposit ratio and maintain an adequate liquidity ratio. Our loan-to-funds ratio was 90.8% and 89.8% at December 31, 2006 and 2005, respectively.
Total Deposits. During 2006, total deposits grew by $283.1 million or 23.7%. Exclusive of the acquisition of Mountain Bancshares, Inc., which accounted for $124.0 million of this increase, total deposits grew $159.1 million or
13.3% during 2006 compared to an increase of $158.8 million or 17.1% in 2005, exclusive of the acquisition of FNBG Bancshares, Inc.
Results of Operations-For the Years Ended December 31, 2006, 2005 and 2004
Net Interest Income and Earning Assets. During 2006 and 2005, we continued to experience moderate internal growth in interest-earning and total assets which was funded by increases in deposits and the retention of net profits. During 2006, we experienced additional growth through the acquisition of Mountain Bancshares, Inc. and in 2005 through the acquisition of FNBG Bancshares, Inc. as explained above. We recorded net income of $9.5 million, $12.0 million and $9.8 million for the years ended December 31, 2006, 2005 and 2004, respectively.
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 4.34% for the year ended December 31, 2006 from 4.26% for the year ended December 31, 2005. This increase is attributable to increases in interest rates by the Federal Reserve in 2005 and 2006 in addition to increased loan volume. In 2006, the average yield on interest-earning assets increased to 7.93% from 6.78% in 2005 and the average yield on interest-bearing liabilities increased to 4.20% in 2006 from 3.00% in 2005. The overall change in the interest rate spread from 2005 to 2006 was a decrease of 5 basis points. The decrease in the net interest spread is a result of increases in time deposit volume at an average rate 136 basis points above the average in 2005 and increases in interest-bearing demand and savings volume at an average rate 92 basis points above the 2005 average, partially offset by increases in loan volume at an average rate 120 basis points above the average in 2005. Total average interest-earning assets increased by $255.4 million, to $1,598.7 million at December 31, 2006 as compared to 2005 and average interest-bearing liabilities increased by $238.1 million, to $1,367.8 million for the same period. We continue to experience growth in our portfolios while maintaining our competitive pricing.
The net yield on average interest-earning assets increased by 8 basis points to 4.26% from 4.18% for the year ended December 31, 2005 as compared to 2004. The increased net yield in 2005 was primarily attributable to increases in loan volume in addition to increases in interest rates.
Net interest income increased by $12.2 million to $69.2 million in 2006, compared to an increase of $16.7 million in 2005. The increase for both years continues to reflect the continued increase in interest-earning assets during 2006 and 2005. The change in net interest income is primarily the result of the increases in net volume versus changes in net interest rates. These variances include the impact of the acquisition of Mountain Bancshares in 2006 and the acquisition of FNBG Bancshares in 2005.
Other Income. Other income decreased during 2006 by $1.1 million compared to a decrease of $147,000 in 2005. For the year ended December 31, 2006, service charges on deposit accounts decreased by $135,000, other service charges and fees decreased by $151,000 and securities transactions, net decreased by $569,000. These decreases were partially offset by an increase in mortgage origination fees of $398,000. For the year ended December 31, 2005, service charges on deposit accounts increased by $292,000 and mortgage origination fees increased by $275,000, which was offset by a decrease in other service charges and fees of $712,000. The decrease in other service charges and fees can be attributed to the loss of insurance commissions due to the sale of Community Loan Company in 2005 and the loss of processing fees due to an expired contract.
Other Expense. Other expense increased $5.3 million and $8.6 million for the years ended December 31, 2006 and 2005, respectively. Increases in salaries and employee benefits represent the most significant portions of these increases, which increased by $3.7 million and $5.4 million for the years ended 2006 and 2005, respectively. The number of full-time equivalent employees increased by 34 employees in May 2006 due to the acquisition of Mountain Bancshares, Inc. In addition to the additional salary expense related to new employees for eight months of 2006, we incurred increases due to increases in profit sharing contributions, health insurance costs, incentive compensation, certain severance payments and normal salary increases for the years ended December 31, 2006 and 2005. Other operating expenses increased by $882,000 and $2.1 million, respectively, for the years ended December 31, 2006 and 2005. The increase in other operating
expenses in 2006 included increases in marketing and public relations of $124,000, ATM and data processing expense of $82,000, supplies, postage and telephone expense of $68,000 and a loss of $306,000 recorded in the fourth quarter of 2005 on the sale of Community Loan Company. The increases in all of the above categories can be partially attributed to the inclusion of Mountain Bancshares, Inc. for the year ended December 31, 2006, since the acquisition date of May 1, 2006.
Income Tax Expense. Income tax expense decreased by $1.6 million to $4.3 million in 2006 from $5.9 million in 2005. The decrease in 2006 was attributable to decreased profits primarily related to the additional loan loss provision taken in the fourth quarter of 2006 as discussed below. The effective tax rate for year ended December 31, 2006 was 31.0%, compared to 32.9% for 2005.
Income tax expense increased by $1.2 million to $5.9 million in 2005 from $4.7 million in 2004. The increase in 2005 was attributable to increased profits. The effective tax rate for the year ended December 31, 2005 was 32.9%, compared to 32.2% for 2004.
Net Income. Net income decreased by $2.5 million for the year ended December 31, 2006 when compared to 2005. This decrease is primarily attributable to the additional loan loss provision taken in the fourth quarter of 2006 as discussed below. The increase in net income for the year ended December 31, 2005 was $2.2 million or 21.9% when compared to 2004. This increase is directly related to the increase in net interest income and the inclusion of First National Bank of Gwinnett in 2005, which is partially offset by increases in other expenses and the additional loan loss provision taken in the second quarter of 2005.
Asset Quality. The provision for loan losses was $15.7 million during 2006, compared to $5.9 million in 2005. This increase was due primarily to an additional provision of $9.7 million taken in the fourth quarter of 2006 at HTB arising from a recent examination conducted by the FDIC and relates to several loan relationships originated by the president of that bank in which it has become apparent that this officer did not follow numerous bank loan policies and procedures, including loan approval authorities, collateral requirements, inadequate documentation, and other underwriting guidelines. This officer is no longer employed by the bank. Management, along with the assistance of its external loan reviewer, has conducted a review of all loans within this officer’s portfolio. Management has also consulted with the FDIC following the conclusion of its examination regarding its recommendations as to the appropriate amount for the increase in the reserve. The Company is actively pursuing several courses of action to improve its position on the impaired loans and to mitigate any actual losses on these loans. However, as of the date of this report, it is too early to determine the success of these actions.
The provision for loan losses is the charge to operations which management believes is necessary to fund the allowance for loan losses. This provision is based on 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. Our 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. Loans acquired in business acquisitions were acquired at their estimated fair value, including an adequate allowance for loan losses. See also our discussion of the loan loss allowance in the “Critical Accounting Policies” section included in this report.
The following table presents details of the provision for loan losses, nonaccrual loans and related categories. The increase in nonaccrual loans is related to two large loan relationships totaling $9.4 million at HTB and CTB. As shown in “Summary of Loan Loss Experience” below, the consumer related charge-offs consist of many smaller balance loans while the real estate related 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 nonperforming loans at December 31, 2006 was 96.50%, which was down from 194.15% at December 31, 2005. This decrease is due to nonaccrual loans increasing to $14.8 million at December 31, 2006 from $6.6 million at December 31, 2005 as well as the
increase in the provision for loan losses in 2006 to $15.7 million compared to $5.9 million for 2005. Based on management’s evaluations, management believes the allowance for loan losses is adequate to absorb potential losses on existing loans.
Effects of Inflation
The impact of inflation on banks differs from its impact on non-financial institutions. Banks, as financial intermediaries, have assets which are primarily monetary in nature and which tend to fluctuate in concert with inflation. A bank can reduce the impact of inflation if it can manage its interest rate sensitivity gap. This gap represents the difference between rate sensitive assets and rate sensitive liabilities. Through the Investment Committee of our holding company’s board of directors, we attempt to structure the assets and liabilities and manage the rate sensitivity gap of each subsidiary bank, thereby seeking to minimize the potential effects of inflation. For information on the management of our interest rate sensitive assets and liabilities, see “Asset/Liability Management” below.
Off-Balance Sheet Arrangements
Our financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of business. These off-balance sheet financial instruments include commitments to extend credit, standby letters of credit and credit card commitments. Such financial instruments are included in the financial statements when funds are distributed or the instruments become payable. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and credit card commitments is represented by the contractual amount of those instruments. We use the same credit policies in making such commitments as we do for on-balance sheet instruments. Although these amounts do not necessarily represent future cash requirements, a summary of our commitments as of December 31, 2006 and December 31, 2005 are as follows:
Liquidity and Capital Resources
Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. We seek to meet liquidity requirements primarily through management of short-term investments, monthly amortizing loans, maturing single payment loans, and maturities of securities and prepayments. Also, we maintain relationships with correspondent banks which could provide funds on short notice. As of December 31, 2006, we had amounts borrowed under federal funds purchase lines and securities sold under repurchase agreements of $41.1 million compared to $45.5 million as of December 31, 2005. These borrowings typically mature within one to four business days. In November 2004, the Company completed the sale of 1,651,680 shares of its common stock in a secondary stock offering receiving net proceeds of approximately $35.4 million. The Company used the proceeds of the offering for general corporate purposes.
The following table sets forth certain information about contractual cash obligations as of December 31, 2006.
Our operating leases represent short-term obligations, normally with maturities of one year or less, with the exception of one lease entered into in 2005 which has a maturity of 25 years. Many of the operating leases have thirty-day cancellation provisions.
Our liquidity and capital resources are monitored on a periodic basis by management and state and federal regulatory authorities. At December 31, 2006, our liquidity ratio was 11.76%. Our liquidity ratio 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 banks. Our banks have lines of credit available to meet any unforeseen liquidity needs. Also, our 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 and accessing available funds through various borrowing arrangements. At December 31, 2006, we had available borrowing capacity totaling approximately $262.7 million through various borrowing arrangements and available lines of credit. We believe our short-term investments and available borrowing arrangements are adequate to cover any reasonably anticipated immediate need for funds.
As of December 31, 2006, the Company and its subsidiary banks were considered to be well-capitalized as defined in the FDICIA and based on regulatory minimum capital requirements, with the exception of HTB which was considered adequately capitalized. The Company has infused capital into HTB during the first quarter of 2007 to bring them back to a well-capitalized status. The Company and its subsidiary banks’ capital ratios as of December 31, 2006 are presented in the following table:
In 2005, the Company began construction of a branch in Athens, Georgia for the Athens division of Gainesville Bank & Trust. The cost of the building, including furniture, fixtures and equipment was approximately $1.5 million. The building was completed in the second quarter of 2006.
Management is not aware of any known trends, events or uncertainties, other than those discussed above, that will have or are reasonably likely to have a material effect on our liquidity, capital resources, or operations. Management is also not aware of any current recommendations by the regulatory authorities which, if they were implemented, would have such an effect.
Our subsidiary banks are subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 2006, approximately $12.5 million of retained earnings at our subsidiary banks were available for dividend declaration without regulatory approval.
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; our securities portfolio; our 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.
Distribution of Assets, Liabilities and Stockholders’ Equity Interest Rates and Interest Differentials
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.
(1) Average balances were determined using the daily average balances.
(2) Average balances of loans are net of deferred costs and fees and nonaccrual loans.
(3) Average unrealized gains (losses) on securities available for sale, net of tax, have been included in stockholders’ equity at ($2,842,000), ($1,306,000), and $210,000 for 2006, 2005, and 2004, respectively.
(4) Interest and fees on loans include $6,690,000, $5,944,000 and $4,146,000 of loan fee income for the years ended December 31, 2006, 2005 and 2004, respectively.
(5) Yields on nontaxable securities are presented on a tax-equivalent basis.
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.
Market Risk and Interest Rate Sensitivity
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 Investment Committee of the holding company’s board of directors on a quarterly 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, 2006 our cumulative one year interest rate sensitivity gap ratio was 0.99. This indicates that our interest-bearing liabilities will reprice during this period at a slightly faster rate 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, 2006, 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.
(1)Does not include restricted equity securities, which consist of Federal Home Loan Bank of Atlanta stock, Federal Reserve Bank stock and The Bankers Bank stock, as such assets are not interest rate sensitive.
Management believes that gap analysis is a useful tool for measuring interest rate risk only when used in conjunction with its simulation model. As of December 31, 2006, the Company maintained an asset sensitive interest rate risk position based on its simulation model results. This positioning would be expected to result in an increase in net interest income in a rising rate environment and a decrease in net interest income in a declining rate environment. This is generally due to a greater proportion of interest earning assets repricing on a variable rate basis as compared to variable rate funding sources. This asset sensitivity is indicated by selected results of net interest income simulations. The actual realized change in net interest income would depend on several factors. These factors include, but are not limited to, actual realized growth in asset and liability volumes, as well as the mix experienced over these time horizons. Market conditions and their resulting impact on loan, deposit, and funding pricing would also be a primary determinant in the realized level of net interest income. The table below shows the impact on net interest margins over a twelve-month period when subjected to an immediate 100 basis point increase and decrease in rate.
Twelve Month Net Interest Income Sensitivity
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, as of December 31, 2006, approximately 81% 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
Types of Securities
The following table sets forth the carrying value of securities held by us as of the dates indicated:
(1) Equity securities consist of Federal Home Loan Bank of Atlanta stock, Federal Reserve Bank stock and The Bankers Bank stock. 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, 2006 are shown in the following table according to contractual maturities.
(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
The following table sets forth our loans by type of collateral as of the dates indicated therein:
(1) Loans are net of deferred loan fees.
Maturities and Sensitivities to Changes in Interest Rates
Total loans as of December 31, 2006 are shown in the following table according to contractual maturity.
The following table summarizes loans at December 31, 2006 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 and as of the dates indicated.
The reduction in interest income associated with nonaccrual loans as of December 31, 2006 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 cause 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.
Summary of Loan Loss Experience
The following table summarizes average loan balances for the periods set forth therein 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.
(1) Average total loans include nonaccrual 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:
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. 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 our 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. See also our allowance for loan loss discussion in “Critical Accounting Policies.”
Our allowance for loan losses was approximately $24,676,000 at December 31, 2006, representing 1.65% of total loans, compared with $12,773,000 at December 31, 2005, which represented 1.04% 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. Average balances were determined using daily average balances.
The amounts of time certificates of deposit issued in amounts of $100,000 or more as of December 31, 2006 are shown below by category.
Return on Equity and Assets
The following table sets forth rate of return information for the periods indicated.
(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.
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, other than certificates of deposit, have no stated maturities and are subject to withdrawal from us at any time. At December 31, 2006, we had $41.1 million 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 periods ended on the dates indicated:
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Market Risk and Interest Rate Sensitivity” section of “Management’s Discussion and Analysis of Financial Information and Results of Operations” in this report for a discussion of market risk.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets - December 31, 2006 and 2005.
Consolidated Statements of Income - Three Years Ended December 31, 2006, 2005, and 2004.
Consolidated Statements of Comprehensive Income - Three Years Ended December 31, 2006, 2005, and 2004.
Consolidated Statements of Stockholders’ Equity - Three Years Ended December 31, 2006, 2005, and 2004.
Consolidated Statements of Cash Flows - Three Years Ended December 31, 2006, 2005, and 2004.
Notes to Consolidated Financial Statements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this Report in alerting them on a timely basis to material information relating to the Company required to be included in the Company’s reports filed or submitted under the Securities Exchange Act of 1934.
Internal Control over Financial Reporting
The management of the Company and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15f and 15d-15f. This internal control system has been designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The management of the Company and subsidiaries has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. To make this assessment, we used the criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment and based on such criteria, we believe that, as of December 31, 2006, the Company’s internal control over financial reporting was not effective, as demonstrated
by a material weakness in the controls over loan approval, loan proceeds disbursement on construction and development loans, and problem loan reporting at HomeTown Bank of Villa Rica. The individuals charged with implementing these controls were either overridden or intimidated, thus rendering the controls ineffective.
Mauldin & Jenkins, LLC, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting as of December 31, 2006. The report is included in this Item under the heading “Attestation Report of Independent Registered Public Accounting Firm.”
ATTESTATION REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
GB&T Bancshares, Inc.
Gainesville, Georgia
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that GB&T Bancshares, Inc. did not maintain effective internal control over financial reporting as of December 31, 2006, because of the effect of the breakdown of controls over loan approval, loan proceeds disbursement on construction and development loans, and problem loan reporting at HomeTown Bank of Villa Rica, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. GB&T Bancshares Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment. As a result of the breakdown in controls over loan approval, loan proceeds disbursement on construction and development loans, and problem loan reporting at HomeTown Bank of Villa Rica, additional risks of losses within the loan portfolio were incurred and went unidentified and unreported. Subsequent identification of these problem loans and the risks associated
with them required additional loan loss provisions and a material adjustment to the financial statements of the Company. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2006 financial statements, and this report does not affect our report dated March 12, 2007 on those financial statements.
In our opinion, management’s assessment that GB&T Bancshares, Inc. did not maintain effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, GB&T Bancshares, Inc. has not maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Changes in Internal Control Over Financial Reporting
During the fourth quarter of the year ended December 31, 2006, no change in the Company’s internal control over financial reporting occurred that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information set forth under the caption “Election of Directors” “Directors, Executive Officers Promoters and Control Persons” “Code of Ethics” and “Corporate Governance” in the definitive Proxy Statement to be filed in connection with our 2007 Annual Shareholders Meeting is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption “Executive Compensation” and “Compensation Committee Report” in the definitive Proxy Statement to be filed in connection with our 2007 Annual Shareholders meeting is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the definitive Proxy Statement to be filed in connection with our 2007 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, 2006.
(1) GB&T Bancshares 1997 Stock Incentive Plan
(2) N/A
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information set forth under the caption “Certain Transactions with Related Persons, Promoters, and Certain Control Persons” in the definitive Proxy Statement to be filed in connection with our 2007 Annual Shareholders meeting is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the caption “Independent Accountants” in the definitive Proxy Statement to be filed in connection with our 2007 Annual Shareholders Meeting is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Contents:
1. Consolidated financial statements:
(a) GB&T Bancshares, Inc. and Subsidiaries:
(i) Consolidated Balance Sheets - December 31, 2006 and 2005
(ii) Consolidated Statements of Income - Three Years Ended December 31, 2006, 2005, and 2004
(iii) Consolidated Statements of Comprehensive Income - Three Years Ended December 31, 2006, 2005, and 2004
(iv) Consolidated Statements of Stockholders’ Equity - Three Years Ended December 31, 2006, 2005, and 2004
(v) Consolidated Statements of Cash Flows - Three Years Ended December 31, 2006, 2005, and 2004
(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) Exhibits:
Exhibit
No.
Description
3.1
Articles of Incorporation of the Registrant (incorporated herein by reference to the Registrant’s Registration Statement on Form S-3, Registration No. 333-64197 filed on September 24, 1998).
3.2
Articles of Amendment of the Registrant, dated July 8, 1998 (incorporated herein by reference to the Registrant’s Registration Statement on Form S-3, Registration No. 333-64197 filed on September 24, 1998)
3.3
Articles of Amendment of the Registrant, dated effective June 30, 2002 (incorporated herein by reference from the Registrant’s Registration Statement on Form S-4, Registration No. 333-99461 filed on September 12, 2002)
3.4
Articles of Amendment of the Registrant, dated October 15, 2004 (incorporated by reference from the Registrant’s Current Report on Form 8-K filed October 21, 2004).
3.5
By-Laws of the Registrant (incorporated herein by reference to the Registrant’s Registration Statement on Form S-3, Registration No. 333-64197).
4.1
See Exhibits 3.1 and 3.2 herein for provisions of the Registrant’s Articles of Incorporation and By-Laws which define the rights of the holders of Common Stock of the Registrant.
*10.1
Dividend Reinvestment and Share Purchase Plan of the Registrant (incorporated herein by reference to the Registration’s Registration Statement on Form S-3, Registration No.333-64197).
*10.2
Employment Agreement, by and between GB&T and Richard A. Hunt, dated as of March 5, 2007.
*10.3
Employment Agreement, by and between GB&T and Gregory L. Hamby, dated as of March 7, 2007.
*10.4
GB&T Bancshares, Inc. Stock Option Plan of 1997 (incorporated herein by reference to the Registrant’s Form 10-K filed on March 31, 2003).
21.1
Subsidiaries of the Registrant.
23.1
Consent of Mauldin & Jenkins, LLC.
24.1
Power of Attorney (included on the signatures page hereto).
31.1
Rule 13a-14(a) Certification of Principal Executive Officer.
31.2
Rule 13a-14(a) Certification of Principal Financial Officer.
32.1
Section 1350 Certification of Principal Executive Officer.
32.2
Section 1350 Certification of Principal Financial Officer.
*Each management contract or compensation plan required to be filed as an exhibit is identified by an asterisk.
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.
GB&T BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2006
GB&T BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets
Consolidated statements of income
Consolidated statements of comprehensive income
Consolidated statements of stockholders’ equity
Consolidated statements of cash flows
Notes to consolidated financial statements
GB&T BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
(Dollars in thousands)
See Notes to Consolidated Financial Statements.
GB&T BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(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, 2006, 2005 AND 2004
(Dollars in thousands)
See Notes to Consolidated Financial Statements.
GB&T BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Amounts in thousands, except per share amounts)
See Notes to Consolidated Financial Statements.
GB&T BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Dollars in thousands)
GB&T BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Dollars in thousands)
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 Operations
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, HomeTown Bank of Villa Rica, First National Bank of the South, First National Bank of Gwinnett and Mountain State Bank (the “Banks”). Gainesville Bank & Trust is located in Gainesville, Hall County, Georgia with the main office and five branches located in Gainesville, two branches located in Oakwood, Georgia, one branch located in Buford, Georgia, one branch located in Athens, Georgia and one loan production office located in Marietta, Georgia. United Bank & Trust is located in Rockmart, Polk County, Georgia with the main office located in Rockmart, one branch in Cedartown, Georgia and one branch in Cartersville, Georgia. Community Trust Bank is located in Hiram, Paulding County, Georgia with the main office and one branch in Hiram, one branch in Dallas, Georgia, one branch in Marietta, Georgia, one branch in Kennesaw, Georgia and one branch in Acworth, Georgia. HomeTown Bank of Villa Rica is located in Villa Rica, Carroll County, Georgia with the main office and one branch located in Villa Rica and one branch located in Hiram, Georgia. First National Bank of the South is located in Milledgeville, Baldwin County, Georgia with the main office and one branch located in Milledgeville and one branch located at Lake Oconee, Putnam County. First National Bank of Gwinnett has one branch located in Duluth, Gwinnett County, Georgia. Mountain State Bank is located in Dawsonville, Dawson County, Georgia with the main office in Dawsonville, two branches in Dahlonega, Georgia, one branch in Cumming, Georgia and one loan production office in Duluth, Georgia. The Banks provide a full range of banking services to individual and corporate customers in their primary market areas of Hall, Clarke, Polk, Bartow, Paulding, Cobb, Carroll, Baldwin, Putnam, Gwinnett, Dawson, Lumpkin, Forsyth and Fulton Counties, respectively, and the surrounding counties.
The Company sold its wholly-owned subsidiary, Community Loan Company (“CLC”) on October 31, 2005. CLC was acquired as part of the acquisition of Community Trust Financial Services Corporation in 2001 and was originally incorporated in 1995 for the purpose of acquiring and operating existing consumer finance companies. The Company has included the results of operations for CLC through the date of sale. A before-tax loss of $306,000 was recorded on the sale in the fourth quarter of 2005.
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 the consolidated financial statements in accordance 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 assets, goodwill, intangible assets and deferred taxes. The determination of the adequacy of the allowance for loan losses is based on estimates that are susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans and the valuation of foreclosed real estate, management obtains independent appraisals for significant collateral.
Cash, Due from Banks and Cash Flows
For purposes of reporting cash flows, cash and due from banks include 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 and deposits 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 $11,063,000 and $11,398,000 at December 31, 2006 and 2005, respectively.
Securities
Debt securities that management has the positive intent and ability to hold to maturity would be 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 the Statements of Comprehensive Income, net of the related deferred tax effect. Equity securities, including restricted equity securities, without a readily determinable fair value are recorded at cost.
The amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the life of the securities. Realized gains and losses on the sale of securities are determined using the specific identification method and are included in earnings on the settlement date. 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 would be reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Loans
Loans are reported at their outstanding principal balances less unearned income, net deferred fees and the allowance for loan losses. Interest income is accrued on the outstanding principal 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.. All interest accrued but not collected for loans that are placed on nonaccrual or are charged off is reversed against interest income. Loans are returned to accrual status when all the principal and interest amounts are brought current and future payments are reasonably assured.
Allowance for Loan Losses
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 relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, concentrations and current economic conditions that may affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. 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 Banks’ allowance for loan losses, and may require the Banks to make additions to their allowance based on their judgment about information available to them at the time of their examinations.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
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.
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:
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. The carrying amount of foreclosed assets at December 31, 2006 and 2005 was $4,673,000 and $3,431,000, respectively.
Goodwill and Intangible Assets
Goodwill represents the excess of cost over the fair value of the net assets purchased in business combinations. Goodwill is required to be tested annually for impairment, or whenever events occur that may indicate that the recoverability of the carrying amount is not probable. In the event of an impairment, the amount by which the carrying amount exceeds the fair value would be charged to earnings. The Company performed its annual test of impairment in the third quarter and determined that there was no impairment of the carrying value as of July 31, 2006, 2005 and 2004.
Intangible assets consist of core deposit premiums acquired in connection with business combinations. The core deposit premium is initially recognized based on an independent valuation performed as of the consummation date. The core deposit premium is amortized by the straight-line method over the average remaining life of the acquired customer deposits, or a weighted average life of 10 years. Amortization periods are reviewed annually in connection with the annual impairment testing of goodwill.
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-Based Compensation
At December 31, 2006, the Company had a stock option plan for grants 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. Prior to January 1, 2006, the Company accounted for the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation. No stock-based employee compensation cost was recognized in the Results of Operations for the years ended December 31, 2005 or 2004, 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. Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, using the modified-prospective-transition method. To give effect to the adoption of Statement 123(R), compensation cost recognized in 2006 includes (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of
Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R). Results for prior periods have not been restated. The Company’s stock-based employee compensation plan is described more fully in Note 12.
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 for the years ended December 31, 2005 and 2004.
As permitted by SFAS 123, through December 31, 2005, the Company accounted for share-based payments to employees using the intrinsic value method set forth in APB 25 and, as such, recognized no compensation cost for employee stock options. Upon adoption of the fair value method under SFAS 123(R) on January 1, 2006, the Company incurred expense of $247,000 for the year ended December 31, 2006. In addition, had the Company adopted SFAS 123(R) in prior periods, the impact of that standard and therefore, the disclosure of pro forma net income and earnings per share above would remain the same. SFAS 123(R) also requires that tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as operating cash flow. This requirement has reduced net operating cash flow and increased net financing cash flow in all periods since the adoption of SFAS 123(R).
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.
Options to purchase 106,866 shares of common stock at prices ranging from $21.60 to $24.15 per share were outstanding during the year but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. The options were still outstanding as of December 31, 2006.
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.
Recent Accounting Standards
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109. This interpretation addresses the accounting for uncertainty in income taxes recognized in a Company’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. It prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken in a tax return. It requires that only benefits from tax positions that are more-likely-than-not of being sustained upon examination should be recognized in the financial statements. These benefits would be recorded at amounts considered to be the maximum amounts more-likely-than-not of being sustained. At the time these positions become more-likely-than-not to be disallowed, their recognition would be reversed. This interpretation is effective for fiscal years beginning after December 15, 2006 and is not expected to have a material impact on the Company’s financial condition or results of operations.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. The standard provides guidance for using fair value to measure assets and liabilities. It defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurement. Under the standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. It clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. Statement 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.
NOTE 2. BUSINESS COMBINATION
On May 1, 2006, the Company completed the acquisition of Mountain Bancshares, Inc. the parent company of Mountain State Bank in Dawsonville, Dawson County, Georgia, which resulted in Mountain State Bank becoming a wholly owned subsidiary of the Company. The aggregate purchase price was $39.8 million including 1,088,924 shares of its capital stock valued at $24.0 million, $10.3 million in cash and stock options and warrants valued at $5.3 million and $197,000 in direct acquisition costs. The value of the capital stock issued was determined based on the average market price of GB&T’s capital stock over a 2 day period before and after the terms of the acquisition were agreed upon and announced. The fair value of the stock options was determined based on the Black-Scholes-Merton option pricing model. The acquisition was accounted for as a purchase resulting in estimated goodwill of approximately $26.0 million. The goodwill will not be deductible for tax purposes. Identifiable intangible assets of $971,000 acquired consist of a core deposit premium with an estimated weighted average useful life of 5 years. Mountain State Bank’s results of operations from May 1, 2006 are included in the consolidated results of operations for the year ended December 31, 2006. The results of operations for the years ended December 31, 2005 and 2004 do not include the results of operations of Mountain Bancshares, Inc.
Unaudited pro forma consolidated results of operations for years ended December 31, 2006 and 2005 as though the companies had combined as of January 1, 2006 and 2005 are as follows:
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 available for sale as of December 31, 2006 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities with an approximate carrying value of $92,500,000 and $99,496,000 at December 31, 2006 and 2005, 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:
The following table shows the gross unrealized losses and fair value of securities, aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2006 and 2005.
At December 31, 2006, the unrealized losses are the result of the current yield environment. The depreciation within the portfolio is 1.87% of the Company’s amortized cost basis. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary.
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 nonperforming 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, 2006 are as follows:
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
Depreciation expense was $3,104,000, $2,825,000 and $2,268,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
The Gainesville Bank & Trust main office banking facility is owned by a partnership that is 50% owned by Gainesville Bank & Trust and 50% owned by a related party.
At December 31, 2006, the Company's 50% interest in the Gainesville Bank & Trust main office banking facility with a total carrying value (including land) of $3,016,000 was pledged to a subsidiary bank to secure a $259,273 borrowing of the related party.
At December 31, 2006, construction in process included costs related to deposits paid on software purchases, computer equipment not yet in service and several small renovation projects still in process. At December 31, 2005, construction in process included costs related to the construction of a branch in Athens, Georgia, for the Athens division of Gainesville Bank and Trust. The construction of the Athens branch building was completed in the second quarter of 2006 with an approximate cost of $1.5 million.
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 related party. The lease has 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 $980,000, $846,000 and $707,000 for the years ended December 31, 2006, 2005 and 2004, 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 $879,000, $729,000 and $468,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
The estimated amortization expense for each of the next five years is as follows:
Changes in the carrying amount of goodwill are as follows:
In connection with the sale of CLC in 2005, goodwill with a carrying amount of $566,000 was written off and recognized in the net loss on sale.
The determination of the Southern Heritage Bancorp, Inc. and Lumpkin County Bank aggregate purchase prices were adjusted in 2005 to properly reflect the fair value of stock options issued in the business combination using the Black-Scholes-Merton option pricing model.
NOTE 7. DEPOSITS
The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2006 and 2005 was approximately $411,632,000 and $250,694,000 respectively. The scheduled maturities of time deposits at December 31, 2006 are as follows:
The Company had brokered time deposits at December 31, 2006 and 2005 of $104,876,000 and $41,218,000, respectively.
At December 31, 2006 and 2005, overdraft demand deposits reclassified to loans totaled $823,000 and $335,000, respectively.
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 pledges assets to collateralize repurchase agreements 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, 2006 and 2005 were $37,460,000 and $20,209,000, respectively.
NOTE 9. OTHER BORROWINGS
Other borrowings consist of the following:
Contractual maturities of other borrowings as of December 31, 2006 are as follows:
The advances from the Federal Home Loan Bank are collateralized by blanket floating liens on qualifying first mortgage, home equity and commercial loans of approximately $141,973,000, available for sale securities of approximately $7,905,000, Federal Home Loan Bank stock of $7,888,000 and cash of $1,144,000.
The Company and subsidiaries have available unused lines of credit with various financial institutions totaling approximately $262,742,000 at December 31, 2006. There were no other advances outstanding at December 31, 2006.
NOTE 10. SUBORDINATED DEBT
On October 30, 2002, the Company formed a wholly-owned grantor trust to issue $15,464,000 in variable rate 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 (October 30, 2032) 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 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. Both financial instruments bear an identical annual rate of interest of 8.77% and 7.42% at December 31, 2006 and 2005, respectively.
On July 22, 2004, the Company formed a second wholly-owned grantor trust to issue $10,310,000 in variable rate 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 (July 30, 2034) at the option of the Company on or after September 30, 2009. The sole assets of the grantor trust are the subordinated debentures of the Company. Both financial instruments bear an identical annual rate of interest of 8.02% and 6.67% at December 31, 2006 and 2005, respectively.
In addition, in connection with the acquisition of Southern Heritage Bancorp, Inc., the Company assumed $4,124,000 in aggregate principal amount of fixed rate trust preferred securities which have substantially the same terms as our other trust preferred securities except that they may be redeemed on or after June 26, 2008. The annual rate of interest on the trust preferred securities and on the debentures was 5.55% at December 31, 2006 and 2005.
The debentures have the same interest rates 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. Distributions on the trust preferred securities are paid quarterly. Interest on the debentures is paid on the corresponding dates.
The Company has guaranteed the payment of all distributions its trust subsidiaries are 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.
As of December 31, 2006, the Company had $29.9 million in aggregate principal amount of trust preferred securities outstanding and $29.9 million in aggregate principal amount of debentures outstanding.
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 $763,000, $360,000 and $493,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
Deferred Compensation Plans
The Company has various deferred compensation plans providing for death and retirement benefits for certain officers and directors. The estimated amounts to be paid under the compensation plans have been partially provided through the purchase of life insurance policies on certain officers and directors. Accrued deferred compensation of $6,641,000 and $6,255,000 is included in other liabilities as of December 31, 2006 and 2005, respectively. Cash surrender values of $12,736,000 and $11,936,000 on the insurance policies is included in other assets at December 31, 2006 and 2005, respectively.
Stock Purchase Plan
In 2003, the Company adopted a stock purchase plan. Under the plan, all full-time employees and directors of the Company or a subsidiary meeting certain eligibility requirements are eligible to participate in the plan. Participants in the plan may participate through payroll deduction, direct contribution or a combination thereof. Payroll deductions are limited to $3,500 for directors and the lesser of 10% of gross pay or $3,500 for employees. The Company matches payroll deductions and direct contributions at a rate of 50% of the amount contributed. The purchase price of the shares of capital stock is based on the current market price. All administrative costs are borne by the Company. For the years ended December 31, 2006 and 2005, 31,222 and 25,973 shares were purchased under the plan. Contributions expensed for the years ended December 31, 2006, 2005 and 2004 were $207,000, $193,000 and $186,000, respectively.
Dividend Reinvestment Plan
The Company has a dividend reinvestment and share purchase plan. Under the plan, all holders of record of capital stock are eligible to participate in the plan. Participants in the plan may direct the plan administrator to invest cash dividends declared with respect to all or any portion of their capital stock. Participants may also make optional cash payments that will be invested through the plan. All cash dividends paid to the plan administrator are invested within 30 days of the cash dividend payment date. Cash dividends and optional cash payments will be used to purchase capital stock of the Company in the open market, from newly-issued shares, from shares held in treasury, in negotiated transactions, or in any combination of the foregoing. The purchase price of the shares of capital stock is based on the average market price. All administrative costs are borne by the Company. For the years ended December 31, 2006 and 2005, 38,989 and 34,988 shares were purchased under the plan, respectively.
NOTE 12. STOCK-BASED COMPENSATION
The Company has a stock option plan in which 2,000,000 shares were approved for the granting of options to directors, officers, and employees. Both incentive stock options and non-qualified stock options may be granted under the Plan. Option prices are equal to 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:
(1) Included in options granted for the year ended December 31, 2006, were 436,639 options and warrants with a weighted average exercise price of $7.89 which were assumed under the plan for Mountain Bancshares, Inc. Included in options granted for the year ended December 31, 2005, were 268,748 options and warrants with a weighted average exercise price of $7.47 which were assumed under the plan for FNBG Bancshares, Inc. Included in options granted for the year ended December 31, 2004, were 355,652 options and warrants with a weighted average exercise price of $8.58 which were assumed under the plans for Southern Heritage Bancorp, Inc. and Lumpkin County Bank.
Information pertaining to options outstanding at December 31, 2006 is as follows:
The total fair value of options vested during 2006 was $273,000. The total amount expensed for options vested during 2006 was $247,000.
The Company uses historical data to estimate volatility, option exercise, employee terminations, forfeitures and expected dividends within the valuation model.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted-average assumptions:
At December 31, 2006, there was approximately $708,000 of unrecognized compensation cost related to stock based payments which is expected to be recognized over a weighted average period of 3.97 years.
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:
For the year ended December 31, 2006, net deferred tax assets increased by $692,000 as a result of the acquisition of Mountain Bancshares, Inc. For the year ended December 31, 2005, net deferred tax assets increased by $100,000 as a result of the acquisition of FNBG Bancshares, Inc.
NOTE 14. EARNINGS PER SHARE
Presented below is a summary of the components used to calculate basic and diluted earnings per share:
NOTE 15. COMMITMENTS AND CONTINGENCIES
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 and standby letters of credit. 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 majority of all commitments to extend credit and standby letters of credit are variable rate instruments.
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 and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments 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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may
include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties.
Loan Commitments (Continued)
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 guarantees 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 held varies as specified above and is required in instances that the Company deems necessary.
At December 31, 2006 and 2005, the carrying amount of liabilities related to the Company’s obligation to perform under financial standby letters of credit was insignificant. The Company has not been required to perform on any financial standby letters of credit, and the Company has not incurred any losses on financial standby letters of credit for the years ended December 31, 2006 and 2005.
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 Banks originate primarily commercial real estate, residential real estate and consumer loans to customers in Hall, Clarke, Bartow, Cobb, Polk, Paulding, Carroll, Baldwin, Putnam, Gwinnett, Dawson, Forsyth, Fulton, Lumpkin and surrounding counties. The ability of the majority of the Company’s customers to honor their contractual obligations is dependent on their local economies as well as the metropolitan Atlanta, Georgia economy.
Ninety percent of the Company’s loan portfolio is concentrated in loans secured by real estate. A substantial portion of these loans is 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 4.
The Company, as a matter of policy, does not generally extend credit to any single borrower or group of related borrowers in excess of regulatory limits, or approximately $14,178,000, $1,687,000, $5,501,000, $3,888,000, $4,541,000, $3,857,000 and $4,232,000 for Gainesville Bank & Trust, United Bank & Trust, Community Trust Bank, HomeTown Bank of Villa Rica, First National Bank of the South, First National Bank of Gwinnett and Mountain State Bank, 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, 2006, approximately $12,500,000 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 consolidated 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 Company’s and Banks’ assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
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. Management believes, as of December 31, 2006 the Company and the Banks met all capital adequacy requirements to which they are subject.
As of December 31, 2006, based on the regulatory framework for prompt corrective action, all of the affiliate banks are considered to be well capitalized except for HTB, which was adequately capitalized. 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. On March 1, 2007, the Company injected sufficient capital at HTB for it to obtain well capitalized status. Prompt corrective action provisions are not applicable to bank holding companies.
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 value is based on discounted cash flows or other valuation techniques. These 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 the fair value of its financial instruments.
Cash, Due From Banks, Interest-Bearing Deposits in Banks and Federal Funds Sold: The carrying amount of cash, due from banks, interest-bearing deposits in banks and federal funds sold approximates fair value.
Securities: Fair values of securities are based on available quoted market prices. The carrying amount of equity securities with no readily determinable fair value approximates fair value.
Loans: The carrying amount of variable-rate loans that reprice frequently and have no significant change in credit risk approximates fair value. The fair value of fixed-rate loans is estimated based on discounted contractual cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of impaired loans is estimated based on discounted contractual cash flows or underlying collateral values, where applicable.
Deposits: The carrying amount of demand deposits, savings deposits, and variable-rate certificates of deposit approximates fair value. The fair value of fixed-rate certificates of deposit is estimated based on discounted contractual cash flows using interest rates currently being offered for certificates of similar maturities.
Federal Funds Purchased, Repurchase Agreements and Other Borrowings: The carrying amount of variable rate borrowings, federal funds purchased, and securities sold under repurchase agreements approximate fair value. The fair value of fixed rate other borrowings are estimated based on discounted contractual cash flows using the current incremental borrowing rates for similar type borrowing arrangements.
Subordinated Debt: The carrying amount of the Company’s variable rate subordinated debt approximates the fair value. The fair value of the fixed-rate subordinated debt is estimated based on discounted contractual cash flows.
Accrued Interest: The carrying amount of accrued interest approximates their fair value.
Off-Balance Sheet Instruments: The carrying amount of commitments to extend credit and standby letters of credit approximates fair value. The carrying amount of the off-balance sheet financial instruments is based on fees currently charged to enter into such agreements.
The carrying amount and estimated fair value of the Company’s financial instruments were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2006 and 2005 and statements of income and cash flows of GB&T Bancshares, Inc. for the years ended December 31, 2006, 2005 and 2004.
CONDENSED BALANCE SHEETS
CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF CASH FLOWS
NOTE 21. QUARTERLY DATA (Unaudited)
NOTE 22. STOCK REPURCHASE
On January 30, 2006, the Company’s Board of Directors approved the repurchase of up to approximately 2% of the Company’s outstanding common stock, no par value per share. SunTrust Robinson Humphrey administered the purchases in open market transactions, on behalf of the Company. The purchases were made in accordance with the volume and timing guidelines of Rule 10b-18 of the Exchange Act applicable to the Company and Rule 10b5-1 of the Exchange Act. During the second quarter of 2006, the Company repurchased a total of 260,000 shares for a total cost of $5.6 million, the maximum share repurchase permitted by the Board.
NOTE 23. SUBSEQUENT EVENT
On February 20, 2007, the Company filed a Form 8-K with the Securities and Exchange Commission to report the issuance of a press release on the same date revising its results for the quarter and year ended December 31, 2006 as a result of an increase in the Company’s allowance for loan losses. The Company reported that it would increase its allowance for loan losses through an additional provision of approximately $9.7 million in the fourth quarter ended December 31, 2006. The approximate after tax effect of this provision resulted in a reduction in net income of $5.9 million for the fourth quarter and year ended December 31, 2006. In addition, loans totaling $10.8 million were placed on nonaccrual status.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
GB&T Bancshares, Inc.
Gainesville, Georgia
We have audited the consolidated balance sheets of GB&T Bancshares, Inc. and Subsidiaries as of December 31, 2006 and 2005, 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, 2006. 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 conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 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, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of GB&T Bancshares, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our report dated March 12, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of GB&T Bancshares, Inc.’s internal control over financial reporting and an opinion that GB&T Bancshares, Inc. had not maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Exhibit Index
Exhibit No.
Description
10.2
Employment Agreement, by and between GB&T and Richard A. Hunt, dated as of March 5, 2007.
10.3
Employment Agreement, by and between GB&T and Gregory L. Hamby, dated as of March 7, 2007.
21.1
Subsidiaries of the Registrant
23.1
Consent of Mauldin & Jenkins, LLC
31.1
Rule 13a-14(a) Certification of Principal Executive Officer
31.2
Rule 13a-14(a) Certification of Principal Financial Officer
32.1
Section 1350 Certification of Principal Executive Officer
32.2
Section 1350 Certification of Principal Financial Officer