**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C.20549**

 

**FORM 10-Q**

 

**MarkOne**

 

| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                       |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                                      |
|       | **For the quarterly period  ended      September 30, 2003**                                                                                                                                                                                                                                                                                                 |
|       |                                                                                                                                                                                                                                                                                                                                                                                      |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                             |
|       |                                                                                                                                                                                                                                                                                                                                                                                      |
|       | **For the transition period from                                to                             ** |
|       |                                                                                                                                                                                                                                                                                                                                                                                      |

 

**Commission FileNumber:  000-24203**

 

**GB&T Bancshares, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Georgia**                                                                         |   | **58-2400756**                     |
|-------------------------------------------------------------------------------------|--------|------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                     |   | (IRS Employer  Identification No.) |
|                                                                                |   |                               |
| **500 Jesse Jewell Parkway, S.E.  Gainesville, Georgia  30501**                |
| (Address of principal executive offices)                                            |
|                                                                                |
| **(770) 532-1212**                                                                  |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |
| **N/A**                                                                             |
| (Former name, former address and former fiscal year, if changed since  last report) |

 

Indicate by check mark whetherthe registrant (1) filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports)and (2) has been subject to such filing requirements for the past 90days.      Yes    ý    No    o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).      Yes    o    No    ý

 

**APPLICABLE ONLY TOCORPORATE ISSUERS**

 

State the number of sharesoutstanding of each of the issuer’s classes of common stock, as of November 10,2003:    6,792,326 shares; no par value

 

 

----

 

**GB&T BANCSHARES,INC.**

 

**TABLE OF CONTENTS**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                      |                                                                                                                       |
|--------------|----------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                           |                                                                                                                       |
|         | **Item 1.  FINANCIAL STATEMENTS**                                                                         |                                                                                                                       |
|         |                                                                                                           |                                                                                                                       |
|         |                                                                                                           | **Consolidated Balance Sheets – September 30, 2003 (Unaudited) and  December 31, 2002**                               |   |
|         |                                                                                                           |                                                                                                                       |   |
|         |                                                                                                           | **Consolidated Statements of Income  (Unaudited)-  Three and nine months ended September 30, 2003 and 2002**               |   |
|         |                                                                                                           |                                                                                                                       |   |
|         |                                                                                                           | **Consolidated Statements of Comprehensive  Income (Unaudited)-  Three and nine months ended September 30, 2003 and 2002** |   |
|         |                                                                                                           |                                                                                                                       |   |
|         |                                                                                                           | **Consolidated Statements of Stockholders’  Equity (Unaudited)  Nine months ended September 30, 2003**                |   |
|         |                                                                                                           |                                                                                                                       |   |
|         |                                                                                                           | **Consolidated  Statements of Cash Flows (Unaudited) -  Nine months ended September 30, 2003 and 2002**                    |   |
|         |                                                                                                           |                                                                                                                       |   |
|         |                                                                                                           | **Notes to Consolidated Financial Statements  (Unaudited)**                                                                |   |
|         |                                                                                                           |                                                                                                                       |
|         | **Item  2.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations** |                                                                                                                       |
|         |                                                                                                           |                                                                                                                       |
|         | **Item  3.  Quantitative and Qualitative  Disclosures About Market Risk**                                 |                                                                                                                       |
|         |                                                                                                           |                                                                                                                       |
|         | **Item  4.  Controls and Procedures**                                                                     |                                                                                                                       |
|         |                                                                                                           |                                                                                                                       |
| **PART II.** | **OTHER INFORMATION**                                                                                          |                                                                                                                       |
|         |                                                                                                           |                                                                                                                       |
|         | **Item  6.  Exhibits and Reports on Form 8-K**                                                            |                                                                                                                       |
|         |                                                                                                           |                                                                                                                       |
|         | **Signatures**                                                                                                 |                                                                                                                       |

 

2

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**PART I - FINANCIAL INFORMATION****ITEM 1 - FINANCIAL STATEMENTS**

** **

**GB&TBANCSHARES, INC. AND SUBSIDIARIESConsolidated Balance Sheets(Unaudited)**

 
|                                                                                                                                                                                                                      |   | **September  30,  2003**                        |    | **December  31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|---------|-------------------------|--------|
|                                                                                                                                                                                                                      |   | **(amounts  in thousands,  except share data)** |    |
| **Assets**                                                                                                                                                                                                                |   |                                            |    |                    |   |
| Cash and due from banks                                                                                                                                                                                                   |   | $                                               | 24,960  |                    | $      | 18,113 |   |
| Interest-bearing deposits in banks                                                                                                                                                                                        |   | 542                                             |    | 8,205                   |   |
| Federal funds sold                                                                                                                                                                                                        |   | —                                          |    | 25,170                  |   |
| Securities available for sale, at fair  value                                                                                                                                                                             |   | 136,429                                         |    | 106,843                 |   |
| Restricted equity securities                                                                                                                                                                                              |   | 4,582                                           |    | 3,784                   |   |
|                                                                                                                                                                                                                      |   |                                            |    |                    |   |
| Loans, net of unearned income                                                                                                                                                                                             |   | 685,098                                         |    | 542,834                 |   |
| Less allowance for loan losses                                                                                                                                                                                            |   | 9,079                                           |    | 7,538                   |   |
| Loans, net                                                                                                                                                                                                                |   | 676,019                                         |    | 535,296                 |   |
| Premises and equipment                                                                                                                                                                                                    |   | 26,117                                          |    | 20,774                  |   |
| Goodwill and intangible assets                                                                                                                                                                                            |   | 30,851                                          |    | 9,522                   |   |
| Other assets                                                                                                                                                                                                              |   | 19,728                                          |    | 14,265                  |   |
| **Total assets**                                                                                                                                                                                                          |   | $                                               | 919,228 |                    | $      | 741,972 |   |
|                                                                                                                                                                                                                      |   |                                            |    |                    |   |
| Liabilities and Stockholders’ Equity                                                                                                                                                                                 |   |                                            |    |                    |   |
| Liabilities:                                                                                                                                                                                                              |   |                                            |    |                    |   |
| Deposits:                                                                                                                                                                                                                 |   |                                            |    |                    |   |
| Noninterest-bearing demand deposits                                                                                                                                                                                       |   | $                                               | 96,406  |                    | $      | 56,795 |   |
| Interest-bearing deposits                                                                                                                                                                                                 |   | 615,883                                         |    | 523,453                 |   |
| Total deposits                                                                                                                                                                                                            |   | 712,289                                         |    | 580,248                 |   |
|                                                                                                                                                                                                                      |   |                                            |    |                    |   |
| Federal funds purchased and securities sold  Under repurchase agreements                                                                                                                                                  |   | 14,455                                          |    | 11,538                  |   |
| Federal Home Loan Bank advances                                                                                                                                                                                           |   | 75,825                                          |    | 63,654                  |   |
| Other borrowings                                                                                                                                                                                                          |   | 233                                             |    | 820                     |   |
| Other liabilities                                                                                                                                                                                                         |   | 6,254                                           |    | 9.935                   |   |
| Company guaranteed trust preferred  securities                                                                                                                                                                            |   | 15,000                                          |    | 15,000                  |   |
| **Total liabilities**                                                                                                                                                                                                     |   | 824,056                                         |    | 681,195                 |   |
|                                                                                                                                                                                                                      |   |                                            |    |                    |   |
|                                                                                                                                                                                                                      |   |                                            |    |                    |   |
| Stockholders’ Equity:  Capital Stock-no par value. Authorized 20,000,000 Shares.  6,792,326 shares issued and outstanding at  September 30, 2003; 5,356,946 shares issued and outstanding at December 31,  2002 |   | 67,888                                          |    | 35,658                  |   |
| Retained earnings                                                                                                                                                                                                         |   | 26,626                                          |    | 23,130                  |   |
| Accumulated other comprehensive income, net  of tax                                                                                                                                                                       |   | 658                                             |    | 1,989                   |   |
| **Total stockholders’ equity**                                                                                                                                                                                       |   | 95,172                                          |    | 60,777                  |   |
| **Total liabilities and stockholders’ equity**                                                                                                                                                                       |   | $                                               | 919,228 |                    | $      | 741,972 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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**GB&TBANCSHARES, INC. AND SUBSIDIARIESConsolidated Statements of Income(Unaudited)**

 
|                                                                     |   | **Three  months ended  September 30,**             |   | **Nine  months ended  September 30,** |   |
|--------------------------------------------------------------------------|--------|----------------------------------------------------|--------|---------------------------------------|--------|
|                                                                     |   | **2003**                                           |   | **2002**                              |   | **2003** |   | **2002** |   |
|                                                                     |   | **(amounts  in thousands, except per share data)** |   |
| Interest income:                                                         |   |                                               |   |                                  |   |   |   |   |   |
| Loans, including fees                                                    |   | $                                                  | 10,480 |                                  | $      | 8,604 |   | $ | 30,185 |   | $ | 25,220 |   |
| Investment securities:                                                   |   |                                               |   |                                  |   |   |   |   |   |
| Taxable                                                                  |   | 882                                                |   | 948                                   |   | 2,817 |   | 2,938 |   |
| Nontaxable                                                               |   | 169                                                |   | 173                                   |   | 495 |   | 526 |   |
| Federal funds sold                                                       |   | 11                                                 |   | 30                                    |   | 117 |   | 69 |   |
| Interest-bearing deposits in banks                                       |   | 9                                                  |   | 7                                     |   | 26 |   | 25 |   |
| Total interest income                                                    |   | 11,551                                             |   | 9,762                                 |   | 33,640 |   | 28,778 |   |
|                                                                     |   |                                               |   |                                  |   |   |   |   |   |
| Interest expense:                                                        |   |                                               |   |                                  |   |   |   |   |   |
| Deposits                                                                 |   | 2,723                                              |   | 2,738                                 |   | 8,599 |   | 8,627 |   |
| Federal funds purchased and securities sold  under repurchase agreements |   | 45                                                 |   | 57                                    |   | 128 |   | 190 |   |
| Federal Home Loan Bank advances                                          |   | 703                                                |   | 743                                   |   | 2,068 |   | 2,193 |   |
| Other borrowings                                                         |   | 215                                                |   | 38                                    |   | 642 |   | 92 |   |
| Total interest expense                                                   |   | 3,686                                              |   | 3,576                                 |   | 11,437 |   | 11,102 |   |
|                                                                     |   |                                               |   |                                  |   |   |   |   |   |
| Net interest income                                                      |   | 7,865                                              |   | 6,186                                 |   | 22,203 |   | 17,676 |   |
|                                                                     |   |                                               |   |                                  |   |   |   |   |   |
| Provision for loan losses                                                |   | 861                                                |   | 202                                   |   | 1,251 |   | 589 |   |
|                                                                     |   |                                               |   |                                  |   |   |   |   |   |
| Net interest income after Provision for  loan losses                     |   | 7,004                                              |   | 5,984                                 |   | 20,952 |   | 17,087 |   |
|                                                                     |   |                                               |   |                                  |   |   |   |   |   |
| Other income:                                                            |   |                                               |   |                                  |   |   |   |   |   |
| Service charges on deposit accounts                                      |   | 1,266                                              |   | 852                                   |   | 3,540 |   | 2,610 |   |
| Mortgage origination fees                                                |   | 698                                                |   | 429                                   |   | 1,981 |   | 964 |   |
| Insurance commissions                                                    |   | 138                                                |   | 152                                   |   | 431 |   | 447 |   |
| Gain on sale of securities                                               |   | 78                                                 |   | 33                                    |   | 155 |   | 170 |   |
| Other operating income                                                   |   | 344                                                |   | 444                                   |   | 1,161 |   | 1,208 |   |
| Total other income                                                       |   | 2,524                                              |   | 1,910                                 |   | 7,268 |   | 5,399 |   |
|                                                                     |   |                                               |   |                                  |   |   |   |   |   |
| Other expense:                                                           |   |                                               |   |                                  |   |   |   |   |   |
| Salaries and employee benefits                                           |   | 4,391                                              |   | 3,178                                 |   | 12,686 |   | 9,102 |   |
| Net occupancy and equipment expense                                      |   | 1,103                                              |   | 843                                   |   | 3,137 |   | 2,414 |   |
| Other operating expenses                                                 |   | 1,825                                              |   | 1,595                                 |   | 5,588 |   | 4,304 |   |
| Total other expense                                                      |   | 7,319                                              |   | 5,616                                 |   | 21,411 |   | 15,820 |   |
|                                                                     |   |                                               |   |                                  |   |   |   |   |   |
| Income before income taxes                                               |   | 2,209                                              |   | 2,278                                 |   | 6,809 |   | 6,666 |   |
|                                                                     |   |                                               |   |                                  |   |   |   |   |   |
| Income tax expense                                                       |   | 731                                                |   | 744                                   |   | 1,887 |   | 2,156 |   |
|                                                                     |   |                                               |   |                                  |   |   |   |   |   |
| Net income                                                               |   | $                                                  | 1,478  |                                  | $      | 1,534 |   | $ | 4,922 |   | $ | 4,510 |   |
|                                                                     |   |                                               |   |                                  |   |   |   |   |   |
| Earnings per share:                                                      |   |                                               |   |                                  |   |   |   |   |   |
| Basic                                                                    |   | $                                                  | 0.25   |                                  | $      | 0.32 |   | $ | 0.89 |   | $ | 0.95 |   |
| Diluted                                                                  |   | $                                                  | 0.24   |                                  | $      | 0.31 |   | $ | 0.86 |   | $ | 0.92 |   |
|                                                                     |   |                                               |   |                                  |   |   |   |   |   |
| Weighted average shares                                                  |   |                                               |   |                                  |   |   |   |   |   |
| Basic                                                                    |   | 5,848                                              |   | 4,767                                 |   | 5,532 |   | 4,762 |   |
| Diluted                                                                  |   | 6,054                                              |   | 4,918                                 |   | 5,717 |   | 4,903 |   |
|                                                                     |   |                                               |   |                                  |   |   |   |   |   |
| Cash dividends per common share                                          |   | $                                                  | 0.090  |                                  | $      | 0.085 |   | $ | 0.265 |   | $ | 0.250 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

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**GB&T BANCSHARES,INC. AND SUBSIDIARIESConsolidated Statements of Comprehensive Income**

 
|                                                                                                       |   | **Three months ended September 30,**    |   | **Nine months ended September 30,** |   |
|------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|-------------------------------------|--------|
|                                                                                                       |   | **2003**                                |   | **2002**                            |   | **2003** |   | **2002** |   |
|                                                                                                       |   | **(Dollars in thousands)  (unaudited)** |   |
|                                                                                                       |   |                                    |   |                                |   |   |   |   |   |
| **Net Income**                                                                                             |   | $                                       | 1,478  |                                | $      | 1,534 |   | $ | 4,922 |   | $ | 4,510 |   |
|                                                                                                       |   |                                    |   |                                |   |   |   |   |   |
| Unrealized gains (losses) on  securities Available-for-sale arising during period, net of tax              |   | (1,008                                  | )      | 622                                 |   | (1,235 | ) | 1,104 |   |
|                                                                                                       |   |                                    |   |                                |   |   |   |   |   |
| Reclassification adjustment for  gains realized on Securities available-for-sale in net income, net of tax |   | (48                                     | )      | (20                                 | )      | (96 | ) | (105 | ) |
|                                                                                                       |   |                                    |   |                                |   |   |   |   |   |
| Other comprehensive income  (loss)                                                                         |   | (1,056                                  | )      | 602                                 |   | (1,331 | ) | 999 |   |
|                                                                                                       |   |                                    |   |                                |   |   |   |   |   |
| **Comprehensive income**                                                                                   |   | $                                       | 422    |                                | $      | 2,136 |   | $ | 3,591 |   | $ | 5,509 |   |

 

See accompanying notes toconsolidated financial statements.

 

**Consolidated Statements of Stockholders’Equity****Nine Months Ended September 30, 2003**

 
|                                                                    |   | **(Dollars in thousands)** |   |
|-------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                    |   | **Shares**                 |   | **Capital  Stock** |   | **Retained  Earnings** |   | **Accumulated****Other  Comprehensive  Income** |   | **Total  Stockholders’  Equity** |   |
| Balance, December 31, 2002                                              |   | 5,357                      |   | $ | 35,658 |   | $ | 23,130 |   | $ | 1,989 |   | $ | 60,777 |   |
|                                                                    |   |                       |   |   |   |   |   |   |   |   |   |
| Net income                                                              |   | —                     |   | — |   | 4,922 |   | — |   | 4,922 |   |
|                                                                    |   |                       |   |   |   |   |   |   |   |   |   |
| Options excercised                                                      |   | 39                         |   | 370 |   | — |   | — |   | 370 |   |
|                                                                    |   |                       |   |   |   |   |   |   |   |   |   |
| Dividends declared $0.265 per  share                                    |   | —                     |   | — |   | (1,426 | ) | — |   | (1,426 | ) |
|                                                                    |   |                       |   |   |   |   |   |   |   |   |   |
| Purchase of First National Bank  of the South                           |   | 1,397                      |   | 31,869 |   |   |   |   |   | 31,869 |   |
|                                                                    |   |                       |   |   |   |   |   |   |   |   |   |
| Payment for fractional shares  in connection with business combinations |   | (1                         | )      | (9 | ) | — |   | — |   | (9 | ) |
|                                                                    |   |                       |   |   |   |   |   |   |   |   |   |
| Other comprehensive loss                                                |   | —                     |   | — |   | — |   | (1,331 | ) | (1,331 | ) |
|                                                                    |   |                       |   |   |   |   |   |   |   |   |   |
| Balance, September 30, 2003                                             |   | 6,792                      |   | $ | 67,888 |   | $ | 26,626 |   | $ | 658 |   | $ | 95,172 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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**GB&TBANCSHARES, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows(Unaudited)**

 
|                                                                                                |   | **Nine  months ended  September 30,** |   |
|-----------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                                |   | **2003**                              |   | **2002** |   |
|                                                                                                |   | **(amounts  in thousands)**           |   |
| **Operating Activities**                                                                            |   |                                  |   |   |   |
| Net income                                                                                          |   | $                                     | 4,922  |   | $ | 4,510 |   |
| Adjustments to reconcile net income to net  cash Provided by operating activities:                  |   |                                  |   |   |   |
| Depreciation                                                                                        |   | 1,378                                 |   | 1,078 |   |
| Provision for loan losses                                                                           |   | 1,251                                 |   | 387 |   |
| Amortization and (accretion), net                                                                   |   | 654                                   |   | 126 |   |
| Securities (gains) losses, net                                                                      |   | (155                                  | )      | (170 | ) |
| Net (increase) decrease in other assets                                                             |   | 1,017                                 |   | (2,207 | ) |
| Net decrease in other liabilities                                                                   |   | (4,297                                | )      | (1,412 | ) |
| Net cash provided by operating activities                                                           |   | 4,770                                 |   | 2,312 |   |
|                                                                                                |   |                                  |   |   |   |
| **Investing Activities**                                                                            |   |                                  |   |   |   |
| Purchase of investment securities available  for sale                                               |   | (85,363                               | )      | (26,802 | ) |
| Proceeds from sales of investment  securities available for sale                                    |   | 7,641                                 |   | 17,345 |   |
| Principal collections and maturities of  investment securities available for sale                   |   | 61,767                                |   | 14,303 |   |
| Net (increase) decrease in Federal Home  Loan Bank stock                                            |   | (146                                  | )      | (1,766 | ) |
| Net (increase) decrease in interest-bearing  deposits in other banks                                |   | 7,713                                 |   | (1,440 | ) |
| Net (increase) decrease in federal funds  sold                                                      |   | 28,149                                |   | (18,319 | ) |
| Net increase in loans                                                                               |   | (54,686                               | )      | (32,835 | ) |
| Net cash acquired in business combination                                                           |   | 5,452                                 |   | — |   |
| Proceeds from sales of real estate acquired  through foreclosure                                    |   | 779                                   |   | 383 |   |
| Purchases of premises and equipment                                                                 |   | (3,998                                | )      | (2,313 | ) |
| Sales of premises and equipment                                                                     |   | 1,497                                 |   | — |   |
| Net cash used in investing activities                                                               |   | (31,195                               | )      | (51,444 | ) |
|                                                                                                |   |                                  |   |   |   |
| **Financing Activities**                                                                            |   |                                  |   |   |   |
| Net increase in deposits                                                                            |   | 28,565                                |   | 42,658 |   |
| Net increase (decrease) in federal funds  purchased and securities sold under repurchase agreements |   | 2,917                                 |   | (5,318 | ) |
| Proceeds from issuance of long-term debt,  other borrowings and Federal Home Loan Bank advances     |   | 15,502                                |   | 19,689 |   |
| Payments on long-term debt, other borrowings  and Federal Home Loan Bank advances                   |   | (12,656                               | )      | (8,303 | ) |
| Dividends paid to stockholders                                                                      |   | (1,426                                | )      | (1,190 | ) |
| Proceeds from issuance of common stock                                                              |   | 370                                   |   | 217 |   |
| Net cash provided by financing activities                                                           |   | 33,272                                |   | 47,753 |   |
|                                                                                                |   |                                  |   |   |   |
| Net increase (decrease) in cash and due  from banks                                                 |   | 6,847                                 |   | (1,379 | ) |
|                                                                                                |   |                                  |   |   |   |
| Cash and due from banks at beginning of  period                                                     |   | 18,113                                |   | 18,097 |   |
|                                                                                                |   |                                  |   |   |   |
| Cash and due from banks at end of period                                                            |   | $                                     | 24,960 |   | $ | 16,718 |   |
|                                                                                                |   |                                  |   |   |   |
| Supplemental disclosure of cash paid during  the period for:                                        |   |                                  |   |   |   |
| Interest                                                                                            |   | $                                     | 11,859 |   | $ | 12,867 |   |
| Income taxes                                                                                        |   | $                                     | 2,134  |   | $ | 2,771 |   |
|                                                                                                |   |                                  |   |   |   |
| Acquisition of Subsidiary                                                                           |   |                                  |   |   |   |   |   |
| Capital stock issued                                                                                |   | $                                     | 31,869 |   | $ | — |   |

 

6

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| Assets acquired (liabilities assumed) |   |     |   |
|---------------------------------------|--------|----------|--------|
|                                  |   |     |   |
| Cash and due from banks               |   | $        | 5,452  |   |
|                                  |   |     |   |
| Securities available for sale         |   | 16,891   |   |
|                                  |   |     |   |
| Federal funds sold                    |   | 2,979    |   |
|                                  |   |     |   |
| Interest-bearing deposits in banks    |   | 50       |   |
|                                  |   |     |   |
| Loans, net                            |   | 88,467   |   |
|                                  |   |     |   |
| Premises and equipment                |   | 5,662    |   |
|                                  |   |     |   |
| Goodwill                              |   | 19,043   |   |
|                                  |   |     |   |
| Core deposit intangible               |   | 2,354    |   |
|                                  |   |     |   |
| Other assets                          |   | 6,280    |   |
|                                  |   |     |   |
| Deposits                              |   | (104,092 | )      |
|                                  |   |     |   |
| Other borrowings                      |   | (9,522   | )      |
|                                  |   |     |   |
| Other liabilites                      |   | (1,695   | )      |
|                                  |   |     |   |
|                                  |   | $        | 31,869 |   |

 

See accompanying notes toconsolidated financial statements.

 

7

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**GB&T BANCSHARES,INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIALSTATEMENTS(Unaudited)**

 

**NOTE 1.        BASISOF PRESENTATION**

 

The unaudited consolidatedfinancial statements include the accounts of GB&T Bancshares, Inc. and itswholly-owned banking subsidiaries, Gainesville Bank & Trust, United Bank& Trust, Community Trust Bank, HomeTown Bank of Villa Rica and FirstNational Bank of the South, and its consumer finance company, Community LoanCompany (collectively “the Company”). Significant intercompany transactions and balances have been eliminatedin consolidation.

 

The accompanying unauditedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America, forinterim financial information and with instructions for Form 10-Q.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments (consisting of normal and recurringadjustments) considered necessary for a fair presentation have been included.The results of operations for the three and nine-month periods ended September30, 2003 is not necessarily indicative of the results that may be expected forthe year ending December 31, 2003.

 

**NOTE 2.        STOCKCOMPENSATION PLANS**

 

The Company has a stock optionplan for granting of options to directors, officers and employees.  The options may be exercised over a periodof ten years in accordance with vesting schedules determined by the Board ofDirectors.  The Company accounts for theplan under the recognition and measurement principles of APB Opinion No. 25, *Accountingfor**Stock Issued to Employees*, and related Interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under the plan had an exerciseprice equal to the market value of the underlying stock on the date ofgrant.  The following table illustratesthe effect on net income and earnings per share if the Company had applied thefair value recognition provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*,to stock-based employee compensation.

 

|                                                                                                                                                |   | **September  30,**          |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                                                                                                |   | **2003**                    |       | **2002** |   |
|                                                                                                                                                |   | **(Dollars  in thousands)** | ** ** |
|                                                                                                                                                |   |                        |       |   |   |
| Net income, as reported                                                                                                                             |   | **$**                       | 4,922      |   | $ | 4,510 |   |
| Deduct:   Total stock-based employee compensation expense determined under fair  value based method for all awards, net of related tax effects |   | 79                          |       | 59 |   |
| Pro forma net income                                                                                                                                |   | $                           | 4,843      |   | $ | 4,451 |   |
| Earnings per share:                                                                                                                                 |   |                        |       |   |   |
| Basic - as reported                                                                                                                                 |   | **$**                       | 0.89       |   | $ | 0.95 |   |
| Basic - pro forma                                                                                                                                   |   | **$**                       | 0.88       |   | $ | 0.94 |   |
| Diluted - as reported                                                                                                                               |   | **$**                       | 0.86       |   | $ | 0.92 |   |
| Diluted - pro forma                                                                                                                                 |   | **$**                       | 0.85       |   | $ | 0.91 |   |

 

8

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**NOTE 3.        EARNINGSPER COMMON SHARE**(in thousands, except per share data)

 

Presented below is a summary ofthe components used to calculate basic and diluted earnings per share for thethree and nine month periods ended September 30, 2003 and 2002.

 
|                                                                                                                                |   | **Quarters ended September 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                                                |   | **2003**                         |   | **2002** |   |
| Basic Earnings Per Share:                                                                                                           |   |                             |   |   |   |
| Weighted average common shares  outstanding                                                                                         |   | 5,848                            |   | 4,767 |   |
|                                                                                                                                |   |                             |   |   |   |
| Net income                                                                                                                          |   | $                                | 1,478  |   | $ | 1,534 |   |
|                                                                                                                                |   |                             |   |   |   |
| Basic earnings per share                                                                                                            |   | $                                | 0.25   |   | $ | 0.32 |   |
|                                                                                                                                |   |                             |   |   |   |
| Diluted Earnings Per Share:                                                                                                         |   |                             |   |   |   |
| Weighted average common shares  outstanding                                                                                         |   | 5,848                            |   | 4,767 |   |
| Net effect of the assumed  exercise of stock Options based on the treasury stock method Using average  market prices for the period |   | 206                              |   | 151 |   |
| Total weighted average common  shares and Common stock equivalents outstanding                                                      |   | 6,054                            |   | 4,918 |   |
|                                                                                                                                |   |                             |   |   |   |
| Net income                                                                                                                          |   | $                                | 1,478  |   | $ | 1,534 |   |
|                                                                                                                                |   |                             |   |   |   |
| Diluted earnings per share                                                                                                          |   | $                                | 0.24   |   | $ | 0.31 |   |

 
|                                                                                                                                |   | **Nine Months ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|------------|
|                                                                                                                                |   | **2003**                            |       | **2002** | ** ** |
| Basic Earnings Per Share:                                                                                                           |   |                                |       |   |   |
| Weighted average common shares  outstanding                                                                                         |   | 5,532                               |       | 4,762 |   |
|                                                                                                                                |   |                                |       |   |   |
| Net income                                                                                                                          |   | $                                   | 4,922      |   | $ | 4,510 |   |
|                                                                                                                                |   |                                |       |   |   |
| Basic earnings per share                                                                                                            |   | $                                   | 0.89       |   | $ | 0.95 |   |
|                                                                                                                                |   |                                |       |   |   |
| Diluted Earnings Per Share:                                                                                                         |   |                                |       |   |   |
| Weighted average common shares  outstanding                                                                                         |   | 5,532                               |       | 4,762 |   |
| Net effect of the assumed  exercise of stock Options based on the treasury stock method using average  market prices for the period |   | 185                                 |       | 141 |   |
| Total weighted average common  shares and Common stock equivalents outstanding                                                      |   | 5,717                               |       | 4,903 |   |
|                                                                                                                                |   |                                |       |   |   |
| Net income                                                                                                                          |   | $                                   | 4,922      |   | $ | 4,510 |   |
|                                                                                                                                |   |                                |       |   |   |
| Diluted earnings per share                                                                                                          |   | $                                   | 0.86       |   | $ | 0.92 |   |

 

9

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**NOTE 4.        MERGERAGREEMENT WITH BALDWIN BANCSHARES, INC.**

 

On August 29, 2003, the Companycompleted the merger of Baldwin Bancshares, Inc., the parent company of FirstNational Bank of the South, (“FNB”) in Milledgeville, Georgia.  The Company issued 1,397,584 shares of itscapital stock in exchange for all of the issued and outstanding common sharesof Baldwin Bancshares, Inc.  Theacquisition has been accounted for as a purchase resulting in goodwill ofapproximately $19,043,000.  FirstNational Bank of the South’s results of operations from September 1, 2003 toSeptember 30, 2003 are included in the consolidated results of operations forthe quarter and year ended September 30, 2003.

 

The following unaudited proforma information for revenues and net income presents results as if thecombination had occurred at the beginning of each period.

 

|                      |   | **Nine  Months Ended  September 30,** |   |
|---------------------------|--------|---------------------------------------|--------|
|                      |   | **2003**                              |   | **2002** |   |
|                      |   | **(Dollars  in thousands)**           |   |
|                      |   |                                  |   |   |   |
| Revenues                  |   |                                  |   |   |   |
| GB&T Bancshares, Inc. |   | **$**                                 | 40,109 |   | $ | 34,096 |   |
| Baldwin Bancshares, Inc.  |   | 6,955                                 |   | 7,386 |   |
| Total Revenues            |   | $                                     | 47,064 |   | $ | 41,482 |   |
|                      |   |                                  |   |   |   |
| Net Income                |   |                                  |   |   |   |
| GB&T Bancshares, Inc. |   | **$**                                 | 4,788  |   | $ | 4,510 |   |
| Baldwin Bancshares, Inc.  |   | 981                                   |   | 1,206 |   |
| Total Net Income          |   | **$**                                 | 5,769  |   | $ | 5,716 |   |

 

**NOTE 5.        RECENTACCOUNTING DEVELOPMENTS**

 

In November 2002, the FinancialAccounting Standards Board (“FASB”) issued FASB Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others”.  The interpretation addresses the disclosures to be made by aguarantor in its interim and annual financial statements about its obligationsunder guarantees.  The interpretationalso clarifies the requirements related to the recognition of a liability by aguarantor at the inception of a guarantee, for the fair value of the obligationundertaken in issuing the guarantee. The initial recognition and initial measurement provisions of theinterpretation are to be applied to guarantees issued or modified afterDecember 31, 2002.  As of September 30,2003, the interpretation has not had a material effect on the financialcondition or results of operations, and there are no guarantees required todisclose.

 

**NOTE 6.        RECENTDEVELOPMENTS**

 

On August 29, 2003, GB&TBancshares, Inc. entered into a letter of intent to acquire Southern HeritageBancorp, a Georgia corporation (“Southern Heritage”), and its wholly ownedsubsidiary, Southern Heritage Bank.  Negotiations with respect to theproposed acquisition are ongoing.  Theproposed acquisition is subject to the execution of a definitive agreement andappropriate corporate shareholder and regulatory approvals.  There can be no assurances that thisproposed acquisition will be consummated.

 

10

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**Item 2.****    MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL****CONDITION AND RESULTS OF OPERATIONS**

 

The following is management’sdiscussion and analysis of certain significant factors which have affected ourfinancial position and operating results including our wholly-ownedsubsidiaries, Gainesville Bank & Trust, United Bank & Trust, CommunityTrust Bank, HomeTown Bank of Villa Rica (“HTB”), First National Bank of theSouth (“FNB”) and Community Loan Company during the periods included in theaccompanying consolidated financial statements.  This discussion should be read in conjunction with theaccompanying consolidated financial statements and the notes thereto.

 

**Cautionary Notice Regarding Forward-LookingStatements**

 

Some of the statements in thisReport, including, without limitation, matters discussed under the caption“Management’s Discussion and Analysis of Financial Condition and Results ofOperation,” of GB&T Bancshares, Inc. (the “Company”) are “forward-lookingstatements” within the meaning of the federal securities laws.  Forward-looking statements include statementsabout the competitiveness of the banking industry, potential regulatoryobligations, our entrance and expansion into other markets, integration ofrecently acquired banks, our other business strategies, our expectations withrespect to our allowance for loan losses and impaired loans, and otherstatements that are not historical facts. When we use words like “anticipate”, “believe”, “intend”, “expect”,“estimate”, “could”, “should”, “will”, and similar expressions, you shouldconsider them as identifying forward-looking statements, although we may useother phrasing.  These forward-lookingstatements involve risks and uncertainties and are based on our beliefs andassumptions, and on the information available to us at the time that thesedisclosures were prepared.  Factors thatmay cause actual results to differ materially from those expressed or impliedby such forward-looking statements include, among others, the followingpossibilities: (1) competitive pressures among depository and other financialinstitutions may increase significantly; (2) changes in the interest rateenvironment may reduce margins; (3) general economic conditions may be lessfavorable than expected, resulting in, among other things, a deterioration incredit quality and/or a reduction in demand for credit; (4) legislative orregulatory changes, including changes in accounting standards, may adverselyaffect the businesses in which we are engaged; (5) costs or difficultiesrelated to the integration of our businesses, may be greater than expected; (6)deposit attrition, customer loss or revenue loss following acquisitions may begreater than expected; (7) competitors may have greater financial resources anddevelop products that enable such competitors to compete more successfully thanus; and (8) adverse changes may occur in the equity markets.

 

Many of such factors are beyondour ability to control or predict, and readers are cautioned not to put unduereliance on such forward-looking statements. We disclaim any obligation to update or revise any forward-lookingstatements contained in this Report, whether as a result of new information,future events or otherwise.

 

**Balance Sheets**

 

Our total assets increased$177.3 million or 23.89% for the period ended September 30, 2003 compared toDecember 31, 2002.  The acquisition ofFNB accounted for approximately $149.9 million of this increase.  The increase, exclusive of FNB, consists ofan increase in loans of $51.4 million and an increase in securities of $14.1million.  This increase is partiallyoffset by decreases in federal funds sold of $25.2 million and interest-earningdeposits of $7.7 million.

 

Total deposits have increased$132.0 million, or 22.76% during the period ended September 30, 2003 comparedto December 31, 2002.  The acquisitionof FNB accounted for approximately $105.3 of this increase.  Noninterest-bearing deposits increased $18.6million and interest-bearing deposits increased $8.1 million during the period,both exclusive of FNB.   Loan growth wasahead of deposit growth resulting in a loan to deposit ratio of 96.18% atSeptember 30, 2003 compared to 93.55% at December 31, 2002.

 

11

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**Liquidity and Capital Resources**

 

Liquidity management involvesthe matching of the cash flow requirements of customers who may be eitherdepositors desiring to withdraw funds or borrowers needing assurance thatsufficient funds will be available to meet their credit needs and our abilityto meet those needs.  We seek to meetliquidity requirements primarily through management of short-term investments,monthly amortizing loans, maturing single payment loans, and maturities ofsecurities and prepayments.  Also wemaintain relationships with correspondent banks which could provide funds onshort notice.  As of September 30, 2003,we had borrowed under Federal funds purchase lines and securities sold underagreement to repurchase, $14.5 million compared to $11.5 million at December31, 2002.

 

Our liquidity and capitalresources are monitored on a periodic basis by management, State and Federalregulatory authorities.  Managementreviews liquidity on a periodic basis to monitor and adjust liquidity asnecessary.  Management has the abilityto adjust liquidity by selling securities available for sale, sellingparticipations in loans we generate and accessing available funds throughvarious borrowing arrangements.  Ourshort-term investments and available borrowing arrangements are adequate tocover any reasonably anticipated immediate need for funds.

 

Our liquidity ratio was 16.72%at September 30, 2003, above our policy minimum ratio of 15%.  Liquidity is measured by the ratio of netcash, Federal funds sold and securities to net deposits and short-termliabilities. In the event the banks need to generate additional liquidity,funding plans would be implemented as outlined in the liquidity policy of thebanks. The subsidiary banks have lines of credit available to meet anyunforeseen liquidity needs.  Also, theBanks have relationships with the Federal Home Loan Bank of Atlanta, whichprovide funding for loan growth on an as needed basis.

 

We purchased a piece ofproperty in May 2003 in Gainesville, Georgia for the purpose of locating anoperations center for the Company’s operations and data processing. Theapproximate cost of the property was $1,168,000. We anticipate the constructionof the operations center to be completed in 2004 with an approximate cost of$2.7 million.

 

12

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As of September 30, 2003, theCompany and the Banks were considered to be well-capitalized as defined in theFederal Deposit Insurance Corporation Improvement Act and based on regulatoryminimum capital requirements.  TheCompany and its bank subsidiaries’ actual capital ratios are presented in thefollowing table.

 
|                                     |   | **ACTUAL** |   | **FOR CAPITAL  ADEQUACY  PURPOSES** |   | **TO BE  WELL  CAPITALIZED** |   |
|------------------------------------------|--------|------------|--------|-------------------------------------|--------|------------------------------|--------|
|                                     |   |       |   |                                |   |                         |   |
| As of September 30, 2003                 |   |       |   |                                |   |                         |   |
| Total Capital to Risk Weighted  Assets:  |   |       |   |                                |   |                         |   |
| Consolidated                             |   | 12.34      | %      | 8                                   | %      | N\A                          |   |
| Gainesville Bank & Trust             |   | 10.07      | %      | 8                                   | %      | 10                           | %      |
| United Bank & Trust                  |   | 12.58      | %      | 8                                   | %      | 10                           | %      |
| Community Trust Bank                     |   | 12.23      | %      | 8                                   | %      | 10                           | %      |
| HomeTown Bank of Villa Rica              |   | 10.62      | %      | 8                                   | %      | 10                           | %      |
| First National Bank of the  South        |   | 11.25      | %      | 8                                   | %      | 10                           | %      |
| Tier I Capital to Risk Weighted  Assets: |   |       |   |                                |   |                         |   |
| Consolidated                             |   | 11.08      | %      | 4                                   | %      | N\A                          |   |
| Gainesville Bank & Trust             |   | 8.95       | %      | 4                                   | %      | 6                            | %      |
| United Bank & Trust                  |   | 11.36      | %      | 4                                   | %      | 6                            | %      |
| Community Trust Bank                     |   | 10.98      | %      | 4                                   | %      | 6                            | %      |
| HomeTown Bank of Villa Rica              |   | 9.36       | %      | 4                                   | %      | 6                            | %      |
| First National Bank of the  South        |   | 10.41      | %      | 4                                   | %      | 6                            | %      |
| Tier I Capital to Average  Assets:       |   |       |   |                                |   |                         |   |
| Consolidated                             |   | 9.69       | %      | 4                                   | %      | N\A                          |   |
| Gainesville Bank & Trust             |   | 7.10       | %      | 4                                   | %      | 5                            | %      |
| United Bank & Trust                  |   | 8.41       | %      | 4                                   | %      | 5                            | %      |
| Community Trust Bank                     |   | 8.80       | %      | 4                                   | %      | 5                            | %      |
| HomeTown Bank of Villa Rica              |   | 7.19       | %      | 4                                   | %      | 5                            | %      |
| First National Bank of the  South        |   | 8.08       | %      | 4                                   | %      | 5                            | %      |

 

**Results of Operations**

 

Our profitability is determinedby our ability to effectively manage interest income and expense, to minimizeloan and security losses, to generate noninterest income, and to controloperating expenses.  Since interestrates are determined by market forces and economic conditions beyond ourcontrol, our ability to generate net interest income is dependent upon ourability to obtain an adequate net interest spread between the rate paid oninterest-bearing liabilities and the rate earned on interest-earningassets.  The net interest margin was4.17% for the nine months ended September 30, 2003, compared to 4.44% for thesame period in 2002, a decrease of 27 basis points.  This decrease resulted from a 91 basis point decrease in theyield on earning assets and a 67 basis point decrease in the effective cost offunds.  The decreased yield on earningassets was primarily due to lower yields on loans.  This was largely due to a 50 basis point decrease in the averagePrime rate as compared to the prior year to date.  The decreased effective cost of funds was due to lower averagerates paid on interest-bearing funding.

 

The results of operations forthe three and nine months ended September 30, 2003, includes First NationalBank of the South, which became part of the Company effective August 29,2003.  The merger was accounted for as apurchase; therefore, results for FNB have been included since September 1,2003.

 

13

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*Net Interest Income*.  Net interest income increased $1,679,000 or27.14% for the three months ended September 30, 2003 compared to the sameperiod in 2002.  The net increaseconsists of an increase in interest income of $1,789,000 or 18.33% less anincrease in interest expense of $110,000 or 3.08% for the three monthperiod.  This increase consists of avolume variance of $2,255,541 and a rate variance of ($576,541).  Net interest income increased $4,527,000 or25.61% for the nine months ended September 30, 2003 compared to the same periodin 2002.  The net increase consists ofan increase in interest income of $4,862,000 or 16.89% less an increase ininterest expense of $335,000 or 3.02% for the nine-month period.   This increase consists of a volume varianceof $5,930,520 and a rate variance of ($1,403,520).

 

*Provision for Loan Losses*.  Our provision for loan losses increased by$659,000 or 326.24% during the three months ended September 30, 2003 ascompared to the same period in 2002. Our provision for loan losses increased by $662,000 or 112.39% duringthe nine months ended September 30, 2003 as compared to the same period in2002.  These increases directly relateto a provision taken in September at HTB attributable to one loan relationshipcommented on by its regulators.  Theloan is currently performing and is secured by real estate.  The Company believes that there issufficient collateral to cover this loan. The analysis below indicates an increase of $236,000 in net charge-offsfor the nine months ended September 30, 2003 as compared to the same period in2002 which is directly attributable to the acquisitions of HTB and FNB.  HTB had net charge-offs of $291,000 and FNBhad net recoveries of $19,000 for the nine months ended September 30, 2003.  Other changes compared to 2002 include adecrease in recoveries at one affiliate bank and a decrease in net charge-offsat Community Loan Company, our consumer finance company.  The allowance for loan losses at September30, 2003 was $9,079,000 or 1.33% of total loans compared to 1.28% at September30, 2002.  Based on its evaluation,management believes the allowance is adequate to absorb any potential loanlosses at September 30, 2003.  Theallowance for loan losses is evaluated monthly and adjusted to reflect the riskin the portfolio.

 

The following table summarizesthe allowance for loan losses for the nine-month period ended September 30,2003 and 2002.

 
|                                                        |   | **2003**                   |        | **2002**   |       |
|-------------------------------------------------------------|--------|----------------------------|-------------|------------|------------|
|                                                        |   | **(Dollars in Thousands)** |        |
| **Average amount of loans outstanding**                     |   | $                          | **577,171** | ** ** | $          | 435,408 |   |
|                                                        |   |                       | ** **  |       |       |
| **Allowance for loan losses balance, beginning  of period** |   | $                          | **7,538**   | ** ** | $          | 5,522 |   |
|                                                        |   |                       | ** **  |       |       |
| **Less charge-offs**                                        |   |                       | ** **  |       |       |
| Commercial loans                                            |   | **(83**                    | **)**       | **—** | ** ** |
| Real estate loans                                           |   | **(284**                   | **)**       | (2         | )          |
| Consumer  loans                                        |   | **(478**                   | **)**       | (680       | )          |
| Total Charge-offs                                           |   | **(845**                   | **)**       | (682       | )          |
|                                                        |   |                       | ** **  |       |       |
| **Plus recoveries**                                         |   |                       | ** **  |       |       |
| Commercial loans                                            |   | **22**                     | ** **  | 1          |       |
| Real estate loans                                           |   | **19**                     | ** **  | 174        |       |
| Consumer loans                                              |   | **246**                    | ** **  | 185        |       |
| Total recoveries                                            |   | **287**                    | ** **  | 360        |       |
| **Net charge-offs**                                         |   | **(558**                   | **)**       | (322       | )          |
|                                                        |   |                       | ** **  |       |       |
| **Plus provision for loan losses**                          |   | **1,251**                  | ** **  | 589        |       |
|                                                        |   |                       | ** **  |       |       |
| **Plus allowance related to acquired loans**                |   | **848**                    | ** **  | —     |       |
|                                                        |   |                       | ** **  |       |       |
| **Allowance for loan losses balance, end of  period**       |   | $                          | **9,079**   | ** ** | $          | 5,789 |   |
|                                                        |   |                       | ** **  |       |       |
| **Net charge-offs to average loans  (annualized)**          |   | **0.13**                   | **%**       | 0.10       | %          |

 

14

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The following table is asummary of nonaccrual, past due and restructured debt. The numbers indicate anincrease of $3,468,000 in nonaccrual loans which was partially due to theacquisitions of HTB and FNB, which represented $1,191,000 and $67,000,respectively, of the increase.  Theremaining increase represents two loans at the lead bank for $1,408,000and  $812,000, both of which are securedby real estate.  The Company believesthere is sufficient collateral to cover these loans, therefore any loss onthese loans is expected to be minimal. Approximately 59%, or $428,000 of the nonaccrual consumer loan balanceat September 30, 2003, is related to Community Loan Company.  The table presents a decrease of $141,000 inpast due loans over 90 days.  Thisdecrease consists of net decreases at two of the affiliate banks of $587,000offset by an increase of $162,000 at Community Loan Company and an increase of$297,000 due to the acquisition of FNB. Community Loan Company accounts for approximately 59%, or $440,000 ofthe past due loan balance at September 30, 2003.  Due to the nature of the consumer finance business, we believethat the level of nonaccrual loans and past due loans over 90 days forCommunity Loan Company is normal and will consistently remain higher than thoseseen in the banking industry.  CommunityLoan Company’s reserve for loan loss is also higher to cover these higherlevels of nonaccrual and past due loans.  There is minimal or no loss anticipated on the remaining real estateloans in nonaccrual and past due loans due to the value of the underlying collateral.

 
|              |   | **September 30, 2003**     |   |
|-------------------|--------|----------------------------|--------|
|              |   | **Nonaccrual  Loans**      |   | **Past Due  90 Days  Still Accruing** |   | **Restructured  Debt** |   |
|              |   | **(Dollars in Thousands)** |   |
|              |   |                       |   |   |   |   |   |
| Real estate loans |   | $                          | 3,802  |   | $ | — |   | $ | — |   |
| Commercial loans  |   | 322                        |   | — |   | — |   |
| Consumer loans    |   | 725                        |   | 750 |   | — |   |
| Total             |   | $                          | 4,849  |   | $ | 750 |   | $ | — |   |

 
|              |   | **September 30, 2002**     | ** ** |
|-------------------|--------|----------------------------|------------|
|              |   | **Nonaccrual  Loans**      | ** ** | **Past Due  90 Days  Still Accruing** | ** ** | **Restructured  Debt** | ** ** |
|              |   | **(Dollars in Thousands)** | ** ** |
|              |   |                       |       |   |   |   |   |
| Real estate loans |   | $                          | 643        |   | $ | 466 |   | $ | — |   |
| Commercial loans  |   | 172                        |       | 5 |   | — |   |
| Consumer loans    |   | 566                        |       | 420 |   | — |   |
| Total             |   | $                          | 1,381      |   | $ | 891 |   | $ | — |   |

 

Our banking subsidiary policyis to discontinue the accrual of interest income when, in the opinion ofmanagement, collection of such interest becomes doubtful.  This status is determined when; (1) there isa significant deterioration in the financial condition of the borrower and fullrepayment of principal and interest is not expected; and (2) the principal orinterest is more than 90 days past due, unless the loan is both well-securedand in the process of collection.  Ourconsumer finance company accrues interest until management determines that fullrepayment of principal and interest is not probable, which in some casesexceeds 90 days past due.  Accrual ofinterest on such loans is resumed when, in management’s judgment, thecollection of interest and principal becomes probable.

 

15

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Loans classified for regulatorypurposes as loss, doubtful, substandard, or special mention that have not beenincluded in the table above do not represent or result from trends oruncertainties which management reasonably expects will materially impact futureoperating results, liquidity or capital resources.  These classified loans do not represent material credits aboutwhich management is aware of any information which causes management to haveserious doubts as to the ability of such borrowers to comply with their loanrepayment terms, except as noted above.

 

*Other Income*.  Other income for the three months ended September30, 2003, increased by $614,000 or 32.15% compared to the same period in2002.  Service charges increased by$414,000 and mortgage origination fees increased by $269,000. The increase inservice charges is directly related to the increase in deposit accounts and theinclusion of HTB for the three and nine month periods ended September 30, 2003and FNB for September 2003.  Otherincome for the nine months ended September 30, 2003, increased $1,869,000 or34.62% compared to the same period in 2002. Mortgage origination fees increased by $1,017,000 and service chargesincreased by $930,000.  Mortgageorigination fees increased as a result of refinancing activity spurred by thedecline in mortgage rates.

 

*Other Expense*.  Other expenses increased by approximately$1,703,000 or 30.32% for the three months ended September 30, 2003 compared tothe same period in 2002.  The increaseis due primarily to an increase in salaries and employee benefits of$1,213,000.  Net occupancy and equipmentexpenses increased $260,000 and other operating expenses increased$230,000.  Other expenses increased byapproximately $5,591,000 or 35.34% for the nine months ended September 30, 2003compared to the same period in 2002. The increase is due primarily to an increase in salaries and employeebenefits of $3,584,000, an increase in net occupancy and equipment expense of$723,000, an increase in marketing and public relations of $223,000, and anincrease of $308,000 in supplies, postage and telephone.  Also, a loss of $315,000 recorded on thesale of a building in Hiram, Georgia resulted in an increase to other operatingexpenses.  The increase in salaries andemployee benefits is partially due to HTB and FNB, which accounted for $1,519,000and $209,000, respectively, of the increase and also an increase of 11employees, exclusive of HTB and FNB, as of September 30, 2003, compared to thesame period in 2002.

 

*Income Tax Expense*.  Income tax expense decreased by $269,000 forthe nine-month period ended September 30, 2003, compared to the same periodlast year. The effective tax rate for the period ended September 30, 2003 was27.71%, compared to 32.34% for the same period in 2002.  The decrease in the effective tax rate isprimarily due to the tax effect of the net operating loss carry forward at HTB.

 

*Net Income*.  Net income decreased by $56,000 or 3.65%,for the three months ended September 30, 2003 compared to the same period in2002.  Net income increased by $412,000or 9.14% for the nine months ended September 30, 2003 compared to the sameperiod in 2002.

 

We are not aware of any otherknown trends, events or uncertainties, other than the effect of events asdescribed above, that will have or that are reasonably likely to have amaterial effect on its liquidity, capital resources or operations.  We are not aware of any currentrecommendations by the regulatory authorities, which, if they were implemented,would have such an effect, except as noted above.

 

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**Critical Accounting Policies**

 

The preparation of financialstatements and related documents in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereported period.  Actual results coulddiffer from those estimates.  We believethat our determination of the allowance for loan losses affect our mostsignificant judgments and estimates used in the preparation of our consolidatedfinancial statements.  Estimates andassumptions are reviewed periodically and the effects of revisions arereflected in the consolidated financial statements in the period they aredetermined to be necessary.

 

The allowance for loan lossesis an amount that management believes will be adequate to absorb estimatedlosses in the loan portfolio.  Theallowance for loan losses is evaluated on a regular basis by management and isbased upon management’s periodic review of the collectibility of the loans inlight of historical experience, the nature and volume of the loan portfolio,adverse situations that may affect the borrower’s ability to repay, estimatedvalue of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective asit requires estimates that are susceptible to significant revision as moreinformation becomes available.  Inaddition, regulatory agencies, as an integral part of their examinationprocess, periodically review the Company’s allowance for loan losses, and mayrequire the Company to make additions to the allowance based on their judgmentabout information available to them at the time of their examinations.

 

**Off Balance Sheet Arrangements**

 

Our financial statements do notreflect various commitments and contingent liabilities that arise in the normalcourse of business.  These off-balancesheet financial instruments include commitments to extend credit, standbyletters of credit and credit card commitments. Such financial instruments are included in the financial statements whenfunds are distributed or the instruments become payable.  Our exposure to credit loss in the event ofnonperformance by the other party to the financial instrument for commitmentsto extend credit, standby letters of credit and credit card commitments isrepresented by the contractual amount of those instruments.  We use the same credit policies in makingcommitments as we do for on-balance sheet instruments.  Although these amounts do not necessarilyrepresent future cash requirements, a summary of our commitments as ofSeptember 30, 2003 and December 31, 2002 are as follows:

 
|                         |   | **September  30, 2003**     |    | **December  31, 2002** |   |
|------------------------------|--------|-----------------------------|---------|------------------------|--------|
|                         |   | **(Dollars  in thousands)** |    |
|                         |   |                        |    |                   |   |
| Commitments to extend credit |   | $                           | 123,089 |                   | $      | 99,362 |   |
| Standby letters of credit    |   | 5,005                       |    | 4,388                  |   |
| Credit card commitments      |   | 5,449                       |    | 4,975                  |   |
| Total                        |   | $                           | 133,543 |                   | $      | 108,725 |   |

 

**Item3.****    QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our net interest income and thefair value of our financial instruments (interest earning assets and interestbearing liabilities) are influenced by changes in market interest rates. Weactively manage our exposure to interest rate fluctuations through policiesestablished by the Asset/Liability Management Committee (the “ALCO”). The ALCOmeets regularly and is responsible for approving asset/liability managementpolicies, developing and implementing strategies to improve balance sheetpositioning and net interest income and assessing the interest rate sensitivityof the Banks.  Management believes thatthe market risk of the Company’s financial instruments has not changedmaterially since December 31, 2002.  See“Item 7A” of the Company’s Annual Report on Form 10-K for a more completediscussion.

 

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**Item4.****    CONTROLS ANDPROCEDURES**

 

As of the end of the periodcovered by this report, we carried out an evaluation, under the supervision andwith the participation of our Chief Executive Officer and the Chief FinancialOfficer, of the design and operation of our disclosure controls andprocedures.  Based on this evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures are effective for gathering, analyzing anddisclosing the information that we are required to disclose in the reports wefile under the Securities Exchange Act of 1934, within the time periodsspecified in the SEC’s rules and forms. Our Chief Executive Officer and Chief Financial Officer also concludedthat our disclosure controls and procedures are effective in timely alertingthem to material information relating to our company required to be included inour periodic SEC filings.  In connectionwith the rules, we continually review and document our disclosure controls andprocedures, including our internal controls and procedures for financial reporting,and may from time to time make changes designed to enhance their effectivenessand to ensure that our systems evolve with our business.

 

There have been no changes inour internal control over financial reporting identified in connection withthis evaluation that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

 

**PART II - OTHER INFORMATION**

 

 

**Item6.****    EXHIBITS ANDREPORTS ON FORM 8-K**

 

(a)          Exhibits

31.1         Rule 13a-14(a)Certification of Principal Executive Officer

31.2         Rule 13a-14(a)Certification of Principal Financial Officer

32.1         Section 1350Certification of Principal Executive Officer

32.2         Section 1350Certification of Principal Financial Officer

 

(b)         Reportson Form 8-K

 

We furnished areport on Form 8-K on July 17, 2003 to report earnings for the quarter endingJune 30, 2003.  We filed a report onForm8-K on September 10, 2003 to report the completion of the acquisition ofBaldwin Bancshares, Inc. and to report the signing of a letter of intent toacquire Southern Heritage Bancorp, both effective August 29, 2003.

 

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**SIGNATURES**

 

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| GB&T  BANCSHARES, INC. |             |
|----------------------------|------------------|
|                       |             |
|                       |             |
| DATE:                      |  11/14/2003 |   | BY: | /s/ Richard  A. Hunt |   |
|                       |             |   |   | Richard A.  Hunt  President and Chief Executive Officer |
|                       |             |   |   |
|                       |             |   |   |
| DATE:                      |  11/14/2003 |   | BY: | /s/ Gregory  L. Hamby |   |
|                       |             | Gregory L.  Hamby  Executive Vice President &  Chief Financial Officer |   |

 

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