| GB&T BANCSHARES INC 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 and the acquisition of First National Bank of Gwinnett in March 2005 |
| Additionally, effective December 19, 2005, we signed a definitive agreement to acquire Mountain Bancshares, Inc |
| and its subsidiary bank, Mountain State Bank which is expected to close in the second quarter of 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; 13 ______________________________________________________________________ • 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, 2005, approximately 89prca of our total loans were secured by real estate |
| Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse 14 ______________________________________________________________________ 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, Oconee, Gwinnett 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 |
| For example, our earnings achieved a compounded annual growth rate of more than 35prca between the end of 2001 and the end of 2005 |
| 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 15 ______________________________________________________________________ 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 |