**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Forthe quarterly period ended   **June 30, 2006**

**x**                              TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Forthe transition period from                 to                 

**Commission File Number:  000-24203**

**GB&T Bancshares, Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **Georgia**                      |   | **58-2400756**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (IRS Employer        |
| incorporation or  organization)  |   | Identification  No.) |

 

**500 Jesse Jewell Parkway, S.E.**

**Gainesville, Georgia  30501**

(Addressof principal executive offices)

**(770) 532-1212**

(Registrant’stelephone number, including area code)

**N/A**

(Formername, former address and former fiscal year, if changed since last report)

Indicateby check mark whether the registrant (1) filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.    Yes x   No o

Indicate by check mark whether the registrant isa large accelerated filer, an accelerated filer, or a non-acceleratedfiler.  See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer  o | Accelerated filer  x | Non-accelerated filer  o |
|--------------------------------------|--------------------------------|------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  Yes o  No x

**APPLICABLE ONLY TO CORPORATE ISSUERS**

Statethe number of shares outstanding of each of the issuer’s classes of capitalstock, as of August 2, 2006:   13,926,166 shares; no par value

 

 

----

 

**GB&T BANCSHARES, INC.**

**TABLE OF CONTENTS**
|               | ** **                                                                                                                | ** ** | ** ** |
|---------------|---------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **PART  I.**  | **FINANCIAL  INFORMATION**                                                                                                |       |       |
| ** **    | ** **                                                                                                                |       |       |
| ** **    | **Item  1. Financial Statements**                                                                                         |       |       |
| ** **    |                                                                                                                      |       |       |
| ** **    | **Consolidated  Balance Sheets — June 30, 2006 (Unaudited) and December 31, 2005**                                   | ** ** | ** ** |
| ** **    |                                                                                                                      |       |       |
| ** **    | **Consolidated Statements of Income (Unaudited) — Three  and six months ended June 30, 2006 and 2005**               | ** ** | ** ** |
| ** **    |                                                                                                                      |       |       |
| ** **    | **Consolidated Statements of Comprehensive Income  (Unaudited) — Three and six months ended June 30, 2006 and 2005** | ** ** | ** ** |
| ** **    |                                                                                                                      |       |       |
| ** **    | **Consolidated Statements of Stockholders’ Equity  (Unaudited) — Six months ended June 30, 2006**               | ** ** | ** ** |
| ** **    |                                                                                                                      |       |       |
| ** **    | **Consolidated Statements of Cash Flows (Unaudited) —  Six months ended June 30, 2006 and 2005**                     | ** ** | ** ** |
| ** **    | ** **                                                                                                                |       | ** ** |
| ** **    | **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  1. Legal Proceedings**                                                                                            |       |       |
| ** **    | ** **                                                                                                                |       | ** ** |
| ** **    | **Item  1A. Risk Factors**                                                                                                |       |       |
| ** **    | ** **                                                                                                                |       | ** ** |
| ** **    | **Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds**                                                  |       |       |
| ** **    | ** **                                                                                                                |       | ** ** |
| ** **    | **Item 3. Defaults Upon Senior Securities**                                                                               |       |       |
| ** **    | ** **                                                                                                                |       | ** ** |
| ** **    | **Item 4. Submission of Matters to a Vote of Security  Holders**                                                          |       |       |
| ** **    | ** **                                                                                                                |       | ** ** |
| ** **    | **Item  5. Other Information**                                                                                            |       |       |
| ** **    | ** **                                                                                                                |       | ** ** |
| ** **    | **Item 6. Exhibits**                                                                                                      |       |       |
| ** **    | ** **                                                                                                                |       | ** ** |
| ** **    | **Signatures**                                                                                                            |       |       |
| ** **    | ** **                                                                                                                |       | ** ** |
| ** **    | **Certifications**                                                                                                        |       |       |

 

2

----

 

**PART I — FINANCIALINFORMATION**

**ITEM 1 — FINANCIAL STATEMENTS**

**GB&T BANCSHARES, INC. ANDSUBSIDIARIES**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                | ** ** | **June 30,  2006**              | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                | ** ** | **(Unaudited)**                      | ** ** | ** **                  | ** ** |
| ** **                                                                                                                                                                | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                                                                                                                |       |                                 |       |                        |       |
|                                                                                                                                                                      |       |                                 |       |                        |       |
| Cash and due from banks                                                                                                                                                   |       | $                                    | 29,632     |                        | $          | 30,748 |   |
| Interest-bearing  deposits in banks                                                                                                                                       |       | 1,596                                |       | 728                         |       |
| Federal funds sold                                                                                                                                                        |       | 10,970                               |       | 568                         |       |
| Securities available  for sale, at fair value                                                                                                                             |       | 198,602                              |       | 188,127                     |       |
| Restricted equity  securities, at cost                                                                                                                                    |       | 10,445                               |       | 9,277                       |       |
|                                                                                                                                                                      |       |                                 |       |                        |       |
| Loans, net of unearned  income                                                                                                                                            |       | 1,421,176                            |       | 1,231,410                   |       |
| Less allowance  for loan losses                                                                                                                                           |       | 15,460                               |       | 12,773                      |       |
| Loans, net                                                                                                                                                                |       | 1,405,716                            |       | 1,218,637                   |       |
|                                                                                                                                                                      |       |                                 |       |                        |       |
| Premises and equipment,  net                                                                                                                                              |       | 42,641                               |       | 37,014                      |       |
| Goodwill                                                                                                                                                                  |       | 86,688                               |       | 61,164                      |       |
| Intangible assets                                                                                                                                                         |       | 6,152                                |       | 5,586                       |       |
| Other assets                                                                                                                                                              |       | 37,258                               |       | 32,245                      |       |
|                                                                                                                                                                      |       |                                 |       |                        |       |
| **Total  assets**                                                                                                                                                         |       | $                                    | 1,829,700  |                        | $          | 1,584,094 |   |
|                                                                                                                                                                      |       |                                 |       |                        |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                            |       |                                 |       |                        |       |
| ** **                                                                                                                                                                |       |                                 |       |                        |       |
| **Liabilities:**                                                                                                                                                          |       |                                 |       |                        |       |
| Deposits:                                                                                                                                                                 |       |                                 |       |                        |       |
| Noninterest-bearing                                                                                                                                                       |       | $                                    | 168,772    |                        | $          | 158,487 |   |
| Interest-bearing  demand and savings                                                                                                                                      |       | 441,823                              |       | 414,542                     |       |
| Time deposits                                                                                                                                                             |       | 803,434                              |       | 623,997                     |       |
| Total deposits                                                                                                                                                            |       | 1,414,029                            |       | 1,197,026                   |       |
| Federal funds  purchased and securities sold under repurchase agreements                                                                                                  |       | 29,364                               |       | 45,510                      |       |
| Federal Home  Loan Bank advances                                                                                                                                          |       | 110,723                              |       | 97,298                      |       |
| Other borrowings                                                                                                                                                          |       | 543                                  |       | 968                         |       |
| Other  liabilities                                                                                                                                                        |       | 16,673                               |       | 14,683                      |       |
| Subordinated  debt                                                                                                                                                        |       | 29,898                               |       | 29,898                      |       |
|                                                                                                                                                                      |       |                                 |       |                        |       |
| **Total  liabilities**                                                                                                                                                    |       | 1,601,230                            |       | 1,385,383                   |       |
|                                                                                                                                                                      |       |                                 |       |                        |       |
| **Stockholders’ Equity:**                                                                                                                                            |       |                                 |       |                        |       |
| ** **                                                                                                                                                                |       |                                 |       |                        |       |
| Capital stock, no par  value; 20,000,000 shares authorized, 13,926,166 and 12,784,397 shares issued  and outstanding at June 30, 2006 and December 31, 2005, respectively |       | 184,244                              |       | 157,875                     |       |
| Retained  earnings                                                                                                                                                        |       | 48,378                               |       | 43,404                      |       |
| Accumulated  other comprehensive loss                                                                                                                                     |       | (4,152                               | )          | (2,568                      | )          |
|                                                                                                                                                                      |       |                                 |       |                        |       |
| **Total  stockholders’ equity**                                                                                                                                      |       | 228,470                              |       | 198,711                     |       |
|                                                                                                                                                                      |       |                                 |       |                        |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                      |       | $                                    | 1,829,700  |                        | $          | 1,584,094 |   |
|                                                                                                                                                                      |       |                                 |       |                        |       |

 

 See accompanying notes toconsolidated financial statements.

3

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**GB&TBANCSHARES, INC. AND SUBSIDIARIES**

**Consolidated Statements of Income**

**(Unaudited)**

** **
| ** **                                                               | ** ** | **Three months ended  June 30,**                       | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                                                              | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                               | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Interest income:                                                         |       |                                                                  |       |                                          |       |   |   |   |   |
| Loans, including fees                                                    |       | $                                                                     | 28,529     |                                          | $          | 20,024 |   | $ | 53,061 |   | $ | 36,983 |   |
| Taxable securities                                                       |       | 1,978                                                                 |       | 1,777                                         |       | 3,890 |   | 3,476 |   |
| Nontaxable securities                                                    |       | 133                                                                   |       | 165                                           |       | 250 |   | 330 |   |
| Federal funds sold                                                       |       | 97                                                                    |       | 57                                            |       | 196 |   | 103 |   |
| Interest-bearing deposits in banks                                       |       | 37                                                                    |       | 6                                             |       | 45 |   | 16 |   |
| Total interest income                                                    |       | 30,774                                                                |       | 22,029                                        |       | 57,442 |   | 40,908 |   |
|                                                                     |       |                                                                  |       |                                          |       |   |   |   |   |
| Interest  expense:                                                       |       |                                                                  |       |                                          |       |   |   |   |   |
| Deposits                                                                 |       | 11,523                                                                |       | 6,268                                         |       | 20,955 |   | 10,899 |   |
| Federal funds purchased and securities sold under  repurchase agreements |       | 304                                                                   |       | 153                                           |       | 528 |   | 308 |   |
| Federal Home Loan Bank advances                                          |       | 989                                                                   |       | 991                                           |       | 1,952 |   | 1,865 |   |
| Other borrowings                                                         |       | 647                                                                   |       | 497                                           |       | 1,234 |   | 970 |   |
| Total interest expense                                                   |       | 13,463                                                                |       | 7,909                                         |       | 24,669 |   | 14,042 |   |
|                                                                     |       |                                                                  |       |                                          |       |   |   |   |   |
| Net interest income                                                      |       | 17,311                                                                |       | 14,120                                        |       | 32,773 |   | 26,866 |   |
|                                                                     |       |                                                                  |       |                                          |       |   |   |   |   |
| Provision for  loan losses                                               |       | 1,274                                                                 |       | 3,822                                         |       | 2,480 |   | 4,304 |   |
|                                                                     |       |                                                                  |       |                                          |       |   |   |   |   |
| Net interest income after provision for loan losses                      |       | 16,037                                                                |       | 10,298                                        |       | 30,293 |   | 22,562 |   |
|                                                                     |       |                                                                  |       |                                          |       |   |   |   |   |
| Other income:                                                            |       |                                                                  |       |                                          |       |   |   |   |   |
| Service charges on deposit accounts                                      |       | 1,605                                                                 |       | 1,652                                         |       | 3,126 |   | 3,164 |   |
| Mortgage origination fees                                                |       | 616                                                                   |       | 658                                           |       | 1,141 |   | 1,123 |   |
| Insurance commissions                                                    |       | 5                                                                     |       | 146                                           |       | 7 |   | 293 |   |
| Gain on sale of securities                                               |       | —                                                                |       | —                                        |       | — |   | 1 |   |
| Other operating income                                                   |       | 385                                                                   |       | 450                                           |       | 800 |   | 1,082 |   |
| Total other income                                                       |       | 2,611                                                                 |       | 2,906                                         |       | 5,074 |   | 5,663 |   |
|                                                                     |       |                                                                  |       |                                          |       |   |   |   |   |
| Other expense:                                                           |       |                                                                  |       |                                          |       |   |   |   |   |
| Salaries and employee benefits                                           |       | 7,461                                                                 |       | 6,566                                         |       | 14,641 |   | 12,881 |   |
| Occupancy and equipment expenses, net                                    |       | 1,710                                                                 |       | 1,578                                         |       | 3,339 |   | 3,017 |   |
| Other operating expenses                                                 |       | 3,407                                                                 |       | 3,129                                         |       | 6,342 |   | 5,970 |   |
| Total other expense                                                      |       | 12,578                                                                |       | 11,273                                        |       | 24,322 |   | 21,868 |   |
|                                                                     |       |                                                                  |       |                                          |       |   |   |   |   |
| Income before income taxes                                               |       | 6,070                                                                 |       | 1,931                                         |       | 11,045 |   | 6,357 |   |
|                                                                     |       |                                                                  |       |                                          |       |   |   |   |   |
| Income tax  expense                                                      |       | 2,116                                                                 |       | 543                                           |       | 3,814 |   | 1,958 |   |
|                                                                     |       |                                                                  |       |                                          |       |   |   |   |   |
| Net income                                                               |       | $                                                                     | 3,954      |                                          | $          | 1,388 |   | $ | 7,231 |   | $ | 4,399 |   |
|                                                                     |       |                                                                  |       |                                          |       |   |   |   |   |
| Earnings per  share:                                                     |       |                                                                  |       |                                          |       |   |   |   |   |
| Basic                                                                    |       | $                                                                     | 0.29       |                                          | $          | 0.11 |   | $ | 0.54 |   | $ | 0.36 |   |
| Diluted                                                                  |       | $                                                                     | 0.28       |                                          | $          | 0.11 |   | $ | 0.53 |   | $ | 0.35 |   |
|                                                                     |       |                                                                  |       |                                          |       |   |   |   |   |
| Weighted average  shares                                                 |       |                                                                  |       |                                          |       |   |   |   |   |
| Basic                                                                    |       | 13,666                                                                |       | 12,686                                        |       | 13,263 |   | 12,380 |   |
| Diluted                                                                  |       | 14,000                                                                |       | 13,078                                        |       | 13,563 |   | 12,756 |   |
|                                                                     |       |                                                                  |       |                                          |       |   |   |   |   |
| Cash dividends  per common share                                         |       | $                                                                     | 0.090      |                                          | $          | 0.085 |   | $ | 0.175 |   | $ | 0.161 |   |

 

See accompanying notes toconsolidated financial statements.

4

----

 

## **GB&T BANCSHARES, INC. AND SUBSIDIARIES**

**Consolidated Statements of Comprehensive Income**

**(Unaudited)**

 
| ** **                                                                      | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                      | ** ** | **(Dollars in thousands)**            | ** ** |
| ** **                                                                      | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** |   |   |
| **Net Income**                                                                  |       | $                                               | 3,954      |                                          | $          | 1,388 |   | $ | 7,231 |   | $ | 4,399 |   |
| ** **                                                                      | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** |   |   |
| Unrealized holding gains  (losses) arising during period, net  of tax (benefit) |       | (1,193                                          | )          | 1,284                                         |       | (1,584 | ) | (663 | ) |
| ** **                                                                      | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** |   |   |
| Reclassification adjustment  for gains realized in net income,  net of taxes    |       | —                                          |       | —                                        |       | — |   | (1 | ) |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Other comprehensive income (loss)                                               |       | (1,193                                          | )          | 1,284                                         |       | (1,584 | ) | (664 | ) |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| **Comprehensive  income**                                                       |       | $                                               | 2,761      |                                          | $          | 2,672 |   | $ | 5,647 |   | $ | 3,735 |   |

 

See accompanying notes toconsolidated financial statements.

 

### **Consolidated Statements of Stockholders’Equity**

### **Six Months Ended June 30, 2006**

**(Unaudited)**

 
| ** **                                                              | ** ** | **Shares**                           | ** ** | **Capital  Stock** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **TotalStockholders’  Equity** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------|------------|------------------------|------------|---------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                              | ** ** | **(Dollars in thousands)** | ** ** |
| Balance, December 31, 2005                                              |       | 12,784                               |       | $                  | 157,875    |                   | $          | 43,404                                      |       | $                                   | (2,568     | ) | $ | 198,711 |   |
| Net income                                                              |       | —                               |       | —             |       | 7,231                  |       | —                                      |       | 7,231                               |       |
| Options exercised                                                       |       | 313                                  |       | 2,470              |       | —                 |       | —                                      |       | 2,470                               |       |
|                                                                    |       |                                 |       |               |       |                   |       |                                        |       |                                |       |
| Dividends declared $0.175 per share                                     |       | —                               |       | —             |       | (2,257                 | )          | —                                      |       | (2,257                              | )          |
|                                                                    |       |                                 |       |               |       |                   |       |                                        |       |                                |       |
| Purchase of Mountain Bancshares, Inc.                                   |       | 1,089                                |       | 29,372             |       | —                 |       | —                                      |       | 29,372                              |       |
|                                                                    |       |                                 |       |               |       |                   |       |                                        |       |                                |       |
| Payment for fractional shares  In connection with business Combinations |       | —                               |       | (6                 | )          | —                 |       | —                                      |       | (6                                  | )          |
|                                                                    |       |                                 |       |               |       |                   |       |                                        |       |                                |       |
| Stock Repurchase                                                        |       | (260                                 | )          | (5,586             | )          |                   |       |                                        |       | (5,586                              | )          |
| Stock option expense                                                    |       | —                               |       | 119                |       | —                 |       | —                                      |       | 119                                 |       |
| Other comprehensive loss                                                |       | —                               |       | —             |       | —                 |       | (1,584                                      | )          | (1,584                              | )          |
|                                                                    |       |                                 |       |               |       |                   |       |                                        |       |                                |       |
| Balance,  June 30, 2006                                                 |       | 13,926                               |       | $                  | 184,244    |                   | $          | 48,378                                      |       | $                                   | (4,152     | ) | $ | 228,470 |   |

 

See accompanying notes toconsolidated financial statements.

5

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**GB&T BANCSHARES, INC. ANDSUBSIDIARIES**

**CondensedConsolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                     | ** ** | **Six months ended  June 30,** | ** **    |
|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|---------------|
| ** **                                                                                     | ** ** | **2006**                                      | ** **    | **2005** | ** ** |
| ** **                                                                                     | ** ** | **(In thousands)**                       | ** **    |
| **Operating  Activities**                                                                      |       |                                          |          |   |   |
|  Net income                                                                               |       | $                                             | 7,231         |   | $ | 4,399 |   |
|  Adjustments to  reconcile net income to net cash   Provided by operating activities:     |       |                                          |          |   |   |
| Depreciation                                                                                   |       | 1,506                                         |          | 1,361 |   |
| Provision for loan losses                                                                      |       | 2,480                                         |          | 4,304 |   |
| Amortization and (accretion), net                                                              |       | 510                                           |          | 642 |   |
| Gain on sale of securities                                                                     |       | —                                        |          | (1 | ) |
| Net increase in other assets                                                                   |       | (2,341                                        | )             | (831 | ) |
| Net increase (decrease) in other liabilities                                                   |       | 1,412                                         |          | (327 | ) |
| Net cash provided by operating activities                                                      |       | 10,798                                        |          | 9,547 |   |
|                                                                                           |       |                                          |          |   |   |
| **Investing  Activities**                                                                      |       |                                          |          |   |   |
|  Purchases of  securities available for sale                                              |       | (9,167                                        | )             | (12,899 | ) |
|  Proceeds from  sales of securities available for sale                                    |       | 1,896                                         |          | 1,106 |   |
|  Proceeds from  maturities of securities available for sale                               |       | 13,774                                        |          | 17,748 |   |
|  Net increase  in restricted equity securities                                            |       | (1,168                                        | )             | (1,777 | ) |
|  Net increase  in interest-bearing deposits in banks                                      |       | (868                                          | )             | (5,149 | ) |
|  Net increase  in federal funds sold                                                      |       | (9,865                                        | )             | (8,720 | ) |
|  Net increase  in loans                                                                   |       | (84,674                                       | )             | (99,639 | ) |
|  Net cash  acquired (paid) in business combinations                                       |       | (3,291                                        | )             | 11 |   |
|  Proceeds from  sale of other real estate owned                                           |       | 705                                           |          | 637 |   |
|  Purchase of  premises and equipment                                                      |       | (1,769                                        | )             | (3,399 | ) |
|  Proceeds from  sale of premises and equipment                                            |       | 12                                            |          | 7 |   |
| Net cash used in investing activities                                                          |       | (94,415                                       | )             | (112,074 | ) |
|                                                                                           |       |                                          |          |   |   |
| **Financing  Activities**                                                                      |       |                                          |          |   |   |
|  Net increase  in deposits                                                                |       | 93,026                                        |          | 120,663 |   |
|  Net decrease  in federal funds purchased and securities sold under repurchase agreements |       | (18,146                                       | )             | (18,918 | ) |
|  Proceeds from  other borrowings and Federal Home Loan Bank advances                      |       | 24,890                                        |          | 20,202 |   |
|  Payments on  other borrowings and Federal Home Loan Bank advances                        |       | (11,890                                       | )             | (6,842 | ) |
|  Dividends paid                                                                           |       | (2,257                                        | )             | (1,973 | ) |
|  Payment for  fractional shares                                                           |       | (6                                            | )             | (3 | ) |
|  Payment for  stock repurchase                                                            |       | (5,586                                        | )             | — |   |
|  Proceeds from  exercise of stock options                                                 |       | 2,470                                         |          | 609 |   |
| Net cash provided by financing activities                                                      |       | 82,501                                        |          | 113,738 |   |
|                                                                                           |       |                                          |          |   |   |
| Net increase (decrease) in cash and due from banks                                             |       | (1,116                                        | )             | 11,211 |   |
|                                                                                           |       |                                          |          |   |   |
| Cash and due from  banks at beginning of period                                                |       | 30,748                                        |          | 20,723 |   |
|                                                                                           |       |                                          |          |   |   |
| Cash and due from  banks at end of period                                                      |       | $                                             | 29,632        |   | $ | 31,934 |   |
|                                                                                           |       |                                          |          |   |   |
| Supplemental  disclosure of cash paid during the period for:                                   |       |                                          |          |   |   |
| Interest                                                                                       |       | $                                             | 22,786        |   | $ | 13,147 |   |
| Income taxes                                                                                   |       | $                                             | 5,056         |   | $ | 2,778 |   |
|                                                                                           |       |                                          |          |   |   |
| Acquisition of  subsidiary                                                                     |       |                                          |          |   |   |
| Capital stock issued (see “Assets acquired  (liabilities   Assumed)” on next page)   |       | $                                             |   29,372 |   | $ |  24,594 |   |

 

6

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**GB&T BANCSHARES, INC. ANDSUBSIDIARIES**

**Condensed Consolidated Statementsof Cash Flows (Continued)**

**(Unaudited)**

 
| ** **                                 | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(In thousands)**                       | ** ** |
| **Assets  acquired (liabilities assumed)** |       |                                          |       |   |   |
|                                       |       |                                          |       |   |   |
| Cash and due  from banks, net of cash paid |       | $                                             | (3,291     | ) | $ | 11 |   |
|                                       |       |                                          |       |   |   |
| Federal funds  sold                        |       | 537                                           |       | 4,889 |   |
|                                       |       |                                          |       |   |   |
| Securities  available for sale             |       | 17,909                                        |       | 10,872 |   |
|                                       |       |                                          |       |   |   |
| Restricted  equity securities              |       | 1,554                                         |       | 634 |   |
|                                       |       |                                          |       |   |   |
| Loans, net                                 |       | 106,279                                       |       | 100,229 |   |
|                                       |       |                                          |       |   |   |
| Premises and  equipment                    |       | 5,628                                         |       | 3,755 |   |
|                                       |       |                                          |       |   |   |
| Goodwill                                   |       | 25,525                                        |       | 19,342 |   |
|                                       |       |                                          |       |   |   |
| Core deposit  intangible                   |       | 971                                           |       | 697 |   |
|                                       |       |                                          |       |   |   |
| Other assets                               |       | 546                                           |       | 1,451 |   |
|                                       |       |                                          |       |   |   |
| Deposits                                   |       | (123,708                                      | )          | (109,628 | ) |
|                                       |       |                                          |       |   |   |
| Other borrowings                           |       | (2,000                                        | )          | (7,150 | ) |
|                                       |       |                                          |       |   |   |
| Other  liabilities                         |       | (578                                          | )          | (508 | ) |
|                                       |       |                                          |       |   |   |
|                                       |       | $                                             | 29,372     |   | $ | 24,594 |   |

 

See accompanying notes to consolidated financial statements.

7

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**GB&T BANCSHARES, INC. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

**NOTE 1.    BASIS OFPRESENTATION**

The unaudited consolidated financial statementsinclude the accounts of GB&T Bancshares, Inc. and its wholly-owned bankingsubsidiaries, Gainesville Bank & Trust, United Bank & Trust, CommunityTrust Bank, HomeTown Bank of Villa Rica, First National Bank of the South,First National Bank of Gwinnett and Mountain State Bank.  Significant intercompany transactions andbalances have been eliminated in consolidation.

The accompanying unaudited consolidatedfinancial statements have been prepared in accordance with U.S. generallyaccepted accounting principles for interim financial information and with theinstructions for Form 10-Q.  Accordingly,they do not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.  In the opinion of management, all adjustments(consisting of normal and recurring adjustments) considered necessary for afair presentation have been included. The results of operations for the threeand six-month periods ended June 30, 2006 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2006.  These statements should be read inconjunction with the consolidated financial statements and related notesincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005.

**NOTE 2.    STOCK COMPENSATIONPLANS**

At December 31, 2005,the Company had a stock option plan for grants of options to directors,officers and employees.  The options maybe exercised over a period of ten years in accordance with vesting schedulesdetermined by the Board of Directors. Prior to January 1, 2006, the Company accounted for the plan under therecognition and measurement principles of APB Opinion No. 25, *Accounting for**Stock Issued to Employees*,and related interpretations, as permitted by FASB Statement No. 123, *Accounting for Stock-Based**Compensation*.  No stock-based employee compensation cost wasrecognized in the Results of Operations for the years ended December 31, 2005or 2004, nor the three and six-month periods ended June 30, 2005, as alloptions granted under the plan had an exercise price equal to the market valueof the underlying stock on the date of grant. Effective January 1, 2006, the Company adopted the fair valuerecognition provisions of FASB Statement No. 123(R), *Share-Based Payment*, using themodified-prospective-transition method.  Togive effect to the adoption of Statement 123(R), compensation cost recognizedin 2006 includes (a) compensation cost for all share-based payments grantedprior to, but not yet vested as of January 1, 2006, based on the grant datefair value estimated in accordance with the original provisions of Statement123, and (b) compensation cost for all share-based payments granted subsequentto January 1, 2006, based on the grant-date fair value estimated in accordancewith the provisions of Statement 123(R). Results for prior periods have not been restated.

At June 30, 2006, therewas approximately $583,000 of unrecognized compensation cost related tostock-based payments, which is expected to be recognized over a weighted-averageperiod of 5.43 years.

Pro forma informationregarding the impact of total stock-based compensation on net income and incomeper share for prior periods as if the Company had accounted for its employeestock options under the fair value method during the first six months of 2005is illustrated in the table on the following page.

8

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For purposes of this proforma disclosure, the value of the options is estimated using aBlack-Scholes-Merton option-pricing formula and amortized to expense over theoptions’ vesting period.

 

|                                                                                                                                               | ** ** | **Three  months ended  June 30,**                          | ** ** | **Six  months ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                                                             | ** ** | **2005**                                  | ** ** |
| ** **                                                                                                                                    | ** ** | **(Dollars in thousands, except  per share amounts)** | ** ** |
|                                                                                                                                          |       |                                                                 |       |                                      |       |
| Net income, as  reported                                                                                                                      |       | $                                                                    | 1,388      |                                      | $          | 4,399 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based method  for all awards, net of related tax effects |       | 95                                                                   |       | 138                                       |       |
| Pro forma net  income                                                                                                                         |       | $                                                                    | 1,293      |                                      | $          | 4,261 |   |
| Earnings per  share:                                                                                                                          |       |                                                                 |       |                                      |       |
| Basic - as reported                                                                                                                           |       | $                                                                    | 0.11       |                                      | $          | 0.36 |   |
| Basic - pro forma                                                                                                                             |       | $                                                                    | 0.10       |                                      | $          | 0.35 |   |
| Diluted - as reported                                                                                                                         |       | $                                                                    | 0.11       |                                      | $          | 0.35 |   |
| Diluted - pro  forma                                                                                                                          |       | $                                                                    | 0.10       |                                      | $          | 0.34 |   |

 

A summary of the status of the stock option planat June 30, 2006 and changes during the period is shown in the following table.

 

|                                                                                      | ** ** | **Six months ended  June 30, 2006** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **Shares**                                              | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Outstanding at  beginning of period                                                  |       | 781,131                                                 |       | $ | 10.48 |   |
| Granted (1)                                                                          |       | 492,047                                                 |       | 9.36 |   |
| Exercised                                                                            |       | (312,846                                                | )          | 7.89 |   |
| Forfeited                                                                            |       | (4,313                                                  | )          | 21.83 |   |
| Outstanding at  end of period                                                        |       | 956,019                                                 |       | $ | 10.72 |   |
|                                                                                 |       |                                                    |       |   |   |
| Options  exercisable at end of period                                                |       | 770,867                                                 |       | $ | 9.02 |   |
| Weighted-average  fair value of options granted during period                        |       |                                                    |       | $ | 2.60 |   |
| Total intrinsic  value of options exercised during the period                        |       |                                                    |       | $ | 4,339,000 |   |
| Weighted average  remaining contractual term of exercisable options at end of period |       |                                                    |       | 4.88 years |   |
| Aggregate intrinsic  value of exercisable options at end of period                   |       |                                                    |       | $ | 9,821,000 |   |

----

(1)Included in options granted for the period ended June 30, 2006, were 436,640options and warrants with a weighted average exercise price of $7.83 which wereassumed under the plan for Mountain Bancshares, Inc.

9

----

 

A summary of the status of the nonvested optionsat June 30, 2006 and changes during the six month period ended on that datefollows:

 

|                                                   | ** ** | **Six months ended  June 30, 2006** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                        | ** ** | **Shares**                                              | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** |
| Nonvested,  beginning of period                   |       | 147,365                                                 |       | $ | 5.73 |   |
| Granted                                           |       | 55,407                                                  |       | 2.60 |   |
| Vested                                            |       | (13,607                                                 | )          | 6.33 |   |
| Forfeited                                         |       | (4,013                                                  | )          | 6.61 |   |
| Nonvested, end  of period                         |       | 185,152                                                 |       | $ | 4.73 |   |
|                                              |       |                                                    |       |   |   |
| Total fair value of  options vested during period |       |                                                    |       | $ | 86,000 |   |

 

A further summary of the options outstanding atJune 30, 2006 follows.

 

|                                         | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                         | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding**      | ** ** | **Weighted-  Average  Remaining  Contractual  Life** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| $5.09 - $7.53                           |       | 88,439                       |       | 3.98 years                                           |       | $ | 7.18 |   | 88,439 |   | $ | 7.18 |   |
| $8.03 - $12.00                          |       | 651,320                      |       | 5.33 years                                           |       | 8.32 |   | 609,012 |   | 8.27 |   |
| $12.40 - $18.40                         |       | 79,666                       |       | 6.42 years                                           |       | 15.03 |   | 49,166 |   | 14.78 |   |
| $18.84 - $24.15                         |       | 136,594                      |       | 9.03 years                                           |       | 21.98 |   | 24,250 |   | 22.73 |   |
| Total                                   |       | 956,019                      |       | 5.83 years                                           |       | 10.72 |   | 770,867 |   | 9.02 |   |
|                                         |            |                              |            |                                                      |            |  |  |  |  |  |  |  |  |

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model with the following weighted-averageassumptions:

|                         | ** ** | **Six months  ended  June 30, 2006** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|
| Dividend yield          |       | 1.50%                                               |       |
| Expected life           |       | 3 years                                             |       |
| Expected  volatility    |       | 10.81%                                              |       |
| Risk-free interest rate |       | 4.80%                                               |       |

 

 

10

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**NOTE 3.                EARNINGS PER COMMON SHARE**

Presented below is asummary of the components used to calculate basic and diluted earnings pershare for the three and six-month periods ended June 30, 2006 and 2005.
| ** **                                                                                                                          | ** ** | **Three months ended June 30,**               | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| ** **                                                                                                                          | ** ** | **(In thousands,  except per share amounts)** | ** ** |
| Basic  Earnings Per Share:                                                                                                          |       |                                                              |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 13,666                                                            |       | 12,686 |   |
| Net income                                                                                                                          |       | $                                                                 | 3,954      |   | $ | 1 ,388 |   |
| Basic earnings per share                                                                                                            |       | $                                                                 | 0.29       |   | $ | 0.11 |   |
| Diluted  Earnings Per Share:                                                                                                        |       |                                                              |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 13,666                                                            |       | 12,686 |   |
| Net effect of the assumed  exercise of stock options based on the treasury stock method using average  market prices for the period |       | 334                                                               |       | 392 |   |
| Total weighted average common  shares and common stock equivalents outstanding                                                      |       | 14,000                                                            |       | 13,078 |   |
| Net income                                                                                                                          |       | $                                                                 | 3,954      |   | $ | 1,388 |   |
| Diluted  earnings per share                                                                                                         |       | $                                                                 | 0.28       |   | $ | 0.11 |   |

 
| ** **                                                                                                                          | ** ** | **Six months ended June 30,**                 | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| ** **                                                                                                                          | ** ** | **(In thousands,  except per share amounts)** | ** ** |
| Basic  Earnings Per Share:                                                                                                          |       |                                                              |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 13,263                                                            |       | 12,380 |   |
| Net income                                                                                                                          |       | $                                                                 | 7,231      |   | $ | 4,399 |   |
| Basic earnings per share                                                                                                            |       | $                                                                 | 0.54       |   | $ | 0.36 |   |
| Diluted  Earnings Per Share:                                                                                                        |       |                                                              |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 13,263                                                            |       | 12,380 |   |
| Net effect of the assumed  exercise of stock options based on the treasury stock method using average  market prices for the period |       | 300                                                               |       | 376 |   |
| Total weighted average common  shares and common stock equivalents outstanding                                                      |       | 13,563                                                            |       | 12,756 |   |
| Net income                                                                                                                          |       | $                                                                 | 7,231      |   | $ | 4,399 |   |
| Diluted  earnings per share                                                                                                         |       | $                                                                 | 0.53       |   | $ | 0.35 |   |

** **

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**NOTE 4.                BUSINESS COMBINATIONS**

On May 1, 2006, the Company completed theacquisition of Mountain Bancshares, Inc., the parent company of Mountain StateBank in Dawsonville, Dawson County, Georgia, which resulted in Mountain StateBank becoming a wholly owned subsidiary of the Company.  The aggregate purchase price was $39.8million, which included 1,088,924 shares of capital stock valued at $24.0million, $10.3 million in cash and stock options and warrants valued at $5.3million and $197,000 in direct acquisition costs.  The value of the capital stock issued wasdetermined based on the average market price of GB&T’s capital stock over a2 day period before and after the terms of the acquisition were agreed upon andannounced.  The fair value of the stockoptions and warrants was determined based on the Black-Scholes option pricingmodel.  The acquisition was accounted foras a purchase resulting in estimated goodwill of approximately $25.5 million.  The goodwill will not be deductible for taxpurposes.  Identifiable intangible assetsof $971,000 acquired consist of a core deposit premium with an estimatedweighted average useful life of 5 years. Mountain State Bank’s results of operations from May 1, 2006, areincluded in the consolidated results of operations for the three and six monthsended June 30, 2006.  The results ofoperations for the three and six months ended June 30, 2005 do not include theresults of operations for Mountain State Bank.

The following table summarizes the estimatedfair values of the assets acquired and liabilities assumed at the date ofacquisition.  The Company obtainedthird-party valuations of the core deposit intangible and fair valueadjustments for loans and deposits.  Inaddition, the Company obtained independent appraisals of acquired premises.
| ** **                                 | ** ** | **Total**               | ** ** |
|--------------------------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **(In thousands)** | ** ** |
| Cash and due  from banks, net of cash paid |       | $                       | (3,291     | ) |
| Federal funds  sold                        |       | 537                     |       |
| Securities  available for sale             |       | 17,909                  |       |
| Restricted  equity securities              |       | 1,554                   |       |
| Loans, net                                 |       | 106,279                 |       |
| Premises and  equipment                    |       | 5,628                   |       |
| Goodwill                                   |       | 25,525                  |       |
| Core deposit  intangible                   |       | 971                     |       |
| Other assets                               |       | 546                     |       |
| Total assets acquired                      |       | $                       | 155,658    |   |
| Deposits                                   |       | $                       | 123,708    |   |
| Other borrowings                           |       | 2,000                   |       |
| Other  liabilities                         |       | 578                     |       |
| Total liabilities assumed                  |       | $                       | 126,286    |   |
| Net assets  acquired                       |       | $                       | 29,372     |   |

 

Unaudited pro forma consolidated results ofoperations for the six months ended June 30, 2006 and 2005 as though thecompanies had combined as of January 1, 2006 and 2005 are as follows:
| ** **                  | ** ** | **Six months ended  June 30,**                                  | ** ** |
|-----------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                                                       | ** ** | **2005** | ** ** |
| ** **                  | ** ** | **(Dollars in thousands,  except per share amounts)** | ** ** |
| Net interest  income        |       | $                                                                              | 34,841     |   | $ | 28,960 |   |
| Net income                  |       | 7,688                                                                          |       | 4,981 |   |
| Basic earnings  per share   |       | 0.55                                                                           |       | 0.37 |   |
| Diluted earnings per  share |       | 0.54                                                                           |       | 0.36 |   |
|                             |            |                                                                                |            |  |  |  |  |

 

12

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**NOTE 5.                STOCK REPURCHASE**

On January 30, 2006, the Company’s Board ofDirectors approved the repurchase of up to approximately 2% of the Company’soutstanding common stock, no par value per share.  SunTrust Robinson Humphrey administered thepurchases in open market transactions, on behalf of the Company.  The purchases were made in accordance withthe volume and timing guidelines of Rule 10b-18 of the Exchange Act applicableto the Company and Rule 10b5-1 of the Exchange Act.  As of June 30, 2006, the Company had repurchaseda total of 260,000 shares for a total cost of $5.6 million, the maximum sharerepurchase permitted by the Board.

**Item2.**                          MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s discussion andanalysis of certain significant factors which have affected our financialposition and operating results including our wholly-owned subsidiaries,Gainesville Bank & Trust (“GBT”), United Bank & Trust (“UBT”),Community Trust Bank (“CTB”), HomeTown Bank of Villa Rica (“HTB”), FirstNational Bank of the South (“FNBS”), First National Bank of Gwinnett (“FNBG”)and Mountain State Bank (“MSB”) during the periods included in the accompanyingconsolidated financial statements.  Thisdiscussion should be read in conjunction with the accompanying consolidatedfinancial statements and the notes thereto and the consolidated financialstatements, related notes, and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations for the year ended December 31,2005 included in the Company’s 2005 Annual Report on Form 10-K.

**Cautionary Notice Regarding Forward-LookingStatements**

Some of the statements of GB&T Bancshares,Inc. (the “Company”) contained or incorporated by reference in this Report,including, without limitation, matters discussed under the caption “Management’sDiscussion and Analysis of Financial Condition and Results of Operation,” are “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-looking statements include statements about thecompetitiveness of the banking industry, potential regulatory obligations, ourentrance and expansion into other markets, our other business strategies andother statements that are not historical facts. Forward-looking statements arenot guarantees of performance or results. When we use words like “may,” “plan,”“contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,”“predict,” “estimate,” “could,” “should,” “would,” “will,” and similarexpressions, you should consider them as identifying forward-lookingstatements, although we may use other 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 that may cause actual results to differmaterially from those expressed or implied by such forward-looking statementsinclude, among others, the following possibilities: (1) competitive pressuresamong depository and other financial institutions may increase significantly;(2) changes in the interest rate environment may reduce margins; (3) generaleconomic conditions may be less favorable than expected, resulting in, amongother things, a deterioration in credit quality and/or a reduction in demandfor credit; (4) economic, governmental or other factors may prevent theprojected population and commercial growth in the counties in which weoperate;  (5) legislative or regulatorychanges, including changes in accounting standards, may adversely affect thebusinesses in which we are engaged;  (6)costs or difficulties related to the integration of our businesses may begreater than expected; (7) deposit attrition, customer loss or revenue lossfollowing acquisitions may be greater than expected; (8) competitors may havegreater financial resources and develop products that enable such competitorsto compete more successfully than we can; and (9) adverse changes may occur inthe equity markets.  Many of thesefactors are beyond our ability to control or predict, and readers are cautionednot to put undue reliance on such forward-looking statements. We do not intendto, and assume no responsibility to update or revise any forward-looking statementscontained in this Report, whether as a result of new information, future eventsor otherwise.

13

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**Critical Accounting Policies**

We have adoptedvarious accounting policies that govern the application of accountingprinciples generally accepted in the United States and general practices withinthe banking industry in the preparation of our financial statements. Oursignificant accounting policies are described in the notes to our auditedfinancial statements as of December 31, 2005. Certain accounting policiesrequire management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reported period. Actual results could differfrom those estimates. Estimates and assumptions are reviewed periodically andthe effects of revisions are reflected in the consolidated financial statementsin the period they are determined to be necessary.

        *Allowance for Loan Losses*.    We believe that our determination of theallowance for loan losses is our most significant judgment and estimate used inthe preparation of our consolidated financial statements. The allowance forloan losses is an amount that management believes will be adequate to absorbestimated losses in the loan portfolio. The calculation is an estimate of theamount of loss in the loan portfolios of our subsidiary banks and financecompany. The allowance for loan losses is evaluated on a regular basis bymanagement and is based upon management’s periodic review of the collectibilityof the loans in light of historical experience, the nature and volume of theloan portfolio, adverse situations that may affect the borrower’s ability torepay, estimated value of any underlying collateral and prevailing economicconditions. This evaluation is inherently subjective as it requires estimatesthat are susceptible to significant revision as more information becomesavailable. In addition, regulatory agencies, as an integral part of theirexamination process, periodically review our allowance for loan losses, and mayrequire us to make additions to the allowance based on their judgment aboutinformation available to them at the time of their examinations.

The company uses an 8 point rating system forits loans. Ratings of 1 to 3 are considered pass ratings, 4 is pass/watch, 5 isspecial mention, 6 is substandard, 7 is doubtful, and 8 is loss. Theoriginating officer rates all loans on this system. This rating is adjustedfrom time to time by the officer to accurately reflect the loan’s currentstatus. These ratings are reviewed for accuracy regularly by the loan committeeof the respective bank subsidiary, an outside independent loan review firm,internal auditors and by the applicable regulator.

The general allowance consists of “Pass”loans.  Pass loans are separated intohomogeneous pools. Currently, these pools consist of real estate, commercial,consumer and credit card. Management assigns loss percentages to thesecategories of homogeneous pools of loans based on the greater of historic lossdata in each category or the minimum risk percentage for this category.Currently, management is developing the moving average net losses for thehistoric loss percentage in each category. This number is reviewed and adjusted periodically, by pool, in light ofcurrent trends in past dues, changes in lending policies, underwritingstandards, economic conditions, and other factors that may affect thisnumber.  In addition to the homogeneouspools management has specified certain industry risks and applied losspercentages to the specified industry risk categories. Recently, because of lowlosses in most categories, management has assigned minimum percentages to eachcategory.   These minimums are reviewedand may be adjusted from time to time to reflect current economic conditions,changes in lending practices, underwriting standards and other matters that maybe necessary.  Those minimums are indicatedon our loan loss reserve adequacy calculation.

For loans rated 4, (pass/watch) a losspercentage of 1% is used.

The specific allowance consists of loans thatare classified as either, doubtful, substandard or special mention. Allimpaired or significant loans rated 5, 6 and 7 are individually analyzed and aspecific reserve assigned.  Management,considering current information and events regarding a borrowers’ ability torepay its obligations, considers a loan to be impaired when the ultimate collectibilityof all amounts due, according to the contractual terms of the loan agreement,is in doubt. When a loan is considered to be impaired, the amount of impairmentis measured based on the present value of expected future cash flows discountedat the loan’s effective interest rate. If the loan is collateral-dependent, thefair value of the collateral less estimated selling costs is used to determinethe amount of impairment. Impairment losses are included in the allowance forloan losses through a charge

14

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to the provision forlosses on loans.  A majority of ourimpaired loans are collateral dependent. The allowance for loan losses on theseloans is determined based upon fair value estimates (net of selling costs) of therespective collateral. The actual losses on these loans could differsignificantly if the fair value of the collateral is different from theestimates used in determining the allocated allowance. Most of ourcollateral-dependent impaired loans are secured by real estate. The fair value ofthese real estate properties is generally determined based upon appraisalsperformed by a certified or licensed appraiser. Management also considers otherfactors or recent developments which could result in adjustments to thecollateral value estimates indicated in the appraisals.

All other loans rated 5, 6, 7 and 8 are assignedloss percentages of 5%, 15%, 50% and 100%, respectively.

The remainder of thebalance in the reserve for loan losses is unallocated.  Management believes that the unallocated allowanceis adequate to provide for probable losses that are inherent in the loanportfolio and that have not been fully provided for through the allocatedallowance. Factors considered in determining the adequacy of the unallocatedallowance include the economic environment, experience level of lenders,concentration in commercial and consumer real estate loans, size of individualloans and the continued strong loan growth in our markets. These factors aretempered by lending practices related to the real estate portfolio, thecontinuing positive performance within this segment of our loan portfolio, theknowledge and experience of our commercial lending staff, and the relationshipbanking philosophy maintained in our community banks.

        *Goodwill*.    Our growth over the past several years hasbeen enhanced significantly by mergers and acquisitions. Prior to July 2001,all of our acquisitions were accounted for using the pooling-of-interestsbusiness combination method of accounting. Effective July 1, 2001, we adoptedSFAS No. 141, “Business Combinations,” which allows only the use of thepurchase method of accounting. For purchase acquisitions, we are required torecord the assets acquired, including identified intangible assets, andliabilities assumed at their fair value, which in many instances involvesestimates based on third party valuations, such as appraisals, or externalvaluations based on discounted cash flow analyses or other valuationtechniques. The determination of the useful lives of intangible assets issubjective as is the appropriate amortization period for such intangibleassets. In addition, purchase acquisitions typically result in recordinggoodwill, which is subject to ongoing periodic impairment tests based on thefair value of net assets acquired compared to the carrying value of goodwill.In August 2005, we performed the required impairment testing of goodwill and noimpairment existed as of the valuation date, as the fair value of our netassets exceeded their carrying value. If for any future period we determinethat there has been impairment in the carrying value of our goodwill balances,we will record a charge to our earnings, which could have a material adverseeffect on our net income.

**Summary**

Net income for the three months ended June 30,2006 was $3.9 million, an increase of 184.87% compared to the same period ayear ago.  This increase reflects anadditional $2.9 million provision for loan loss taken in the second quarter of2005 due to the further impairment of an inherited single loan relationshiporiginated at HTB prior to the Company’s acquisition of HTB.  Diluted earnings per share was $0.28 for thethree months ended June 30, 2006, compared to $0.11 for the same period a yearago.  The return on average assets was0.91% and the return on average equity was 7.23% for the three months endedJune 30, 2006.  This compares to a returnon average assets of 0.37% and a return on average equity of 2.76% for the sameperiod a year ago.

Net income for the six months ended June 30, 2006was $7.2 million, an increase of 64.38% compared to the same period a yearago.  Diluted earnings per share was$0.53 for the six months ended June 30, 2006, compared to $0.35 for the sameperiod a year ago.  The return on averageassets was 0.87% and the return on average equity was 6.93% for the six monthsended June 30, 2006.  This compares to areturn on average assets of 0.62% and a return on average equity of 4.61% forthe same period a year ago.

15

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MSB became part of the Company effective May 1,2006.  The merger was accounted for as apurchase transaction; therefore, results of operations for MSB since May 1,2006 have been included in the Company’s results of operations for the threeand six-month periods ended June 30, 2006, but are not included in the resultsof operations for the three and six-month periods ended June 30, 2005.  FNBG became part of the Company effectiveMarch 1, 2005.  The merger was accountedfor as a purchase transaction; therefore, results of operations for FNBG sinceMarch 1, 2005 have been included in the Company’s results of operations for thethree and six-month periods ended June 30, 2005 and for all subsequent periods.

Total revenue, defined as net interest incomeplus other income, was $19.9 million for the three months ended June 30, 2006,an increase of $2.9 million, or 17.01%, from the $17.0 million reported for thesame period a year ago.  Other expensewas $12.6 million for the three months ended June 30, 2006, an increase of $1.3million, or 11.58%, compared to the $11.3 million reported for the same perioda year ago.  Revenue growth has outpacedexpense growth resulting in an improving efficiency ratio for the three monthsended June 30, 2006 of 62.03% compared to 66.21% for the three months endedJune 30, 2005.

Total revenue, defined as net interest incomeplus other income, was $37.8 million for the six months ended June 30, 2006, anincrease of $5.3 million, or 16.35%, from the $32.5 million reported for thesame period a year ago.  Other expensewas $24.3 million for the six months ended June 30, 2006, an increase of $2.4million, or 11.22%, compared to the $21.9 million reported for the same perioda year ago.  Revenue growth has outpacedexpense growth resulting in an improving efficiency ratio for the six monthsended June 30, 2006 of 63.19% compared to 66.13% for the six months ended June30, 2005.

**Balance Sheets**

Our total assets increased $245.6 million to$1.8 billion at June 30, 2006, or 15.50%, compared to December 31, 2005.  The increase consists primarily of anincrease in total loans of $189.8 million, or 15.41%, an increase in federalfunds sold of $10.4 million, an increase in investment securities of $10.5million.  Excluding the acquisition ofMSB, total assets increased $80.1 million or 5.06% during this sameperiod.  Also, excluding the acquisition,total loans increased $82.3 million, federal funds sold increased $9.9 million,and investment securities decreased $7.8 million.

Total deposits increased $217.0 million to $1.4billion at June 30, 2006, or 18.13%, compared to December 31, 2005.  Noninterest-bearing deposits increased $10.3million to $168.8 million and interest-bearing deposits increased $206.7million to $1.2 billion during the same period.   Deposit growth outpaced loan growth resultingin a loan to deposit ratio of 100.51% at June 30, 2006 compared to 102.87% atDecember 31, 2005.  Excluding theacquisition of MSB discussed above, total deposits increased $93 million or7.77%.

Total stockholders’ equity increased $29.8million to $228.5 million at June 30, 2006, or 14.98%, compared to December 31,2005.  This increase consisted primarilyof the acquisition of MSB of $29.4, net income of $7.2 million and $2.5 millionfrom options exercised, which was partially offset by the payment of dividendsof $2.3 million and $5.6 million related to the stock repurchase activitypreviously discussed.

16

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**Asset Quality**

The allowance for loan losses at June 30, 2006was $15.5 million, or 1.09%, of total loans compared to $12.8 million, or1.04%, at December 31, 2005.  Theprovision for loan losses was $2.5 million at June 30, 2006.  Net charge-offs year-to-date have been$881,000.  Management believes that theCompany’s business fundamentals remain strong, and that the allowance isadequate to absorb any potential loan losses at June 30, 2006.  The allowance for loan losses is evaluatedmonthly and adjusted to reflect the risk in the portfolio.

The following table summarizes the allowance forloan losses for the six-month periods ended June 30, 2006 and 2005.  
| ** **                                                           | ** ** | **Six months ended  June 30,** | ** **    |
|----------------------------------------------------------------------|------------|-----------------------------------------------|---------------|
| ** **                                                           | ** ** | **2006**                                      | ** **    | **2005** | ** ** |
| ** **                                                           | ** ** | **(Dollars in thousands)**          | ** **    |
| **Average amount of loans outstanding**                              | ** ** | **$**                                         | **1,305,354** | ** ** | **$** | **1,066,041** | ** ** |
|                                                                 |       |                                          |          |   |   |
| **Allowance for loan losses balance, beginning of period**           | ** ** | **$**                                         | **12,773**    | ** ** | **$** | **11,061** | ** ** |
|                                                                 |       |                                          |          |   |   |
| **Less  charge-offs**                                                | ** ** | ** **                                    | ** **    | ** ** | ** ** |
| Commercial loans                                                     | ** ** | **(268**                                      | **)**         | **(527** | **)** |
| Real estate loans                                                    | ** ** | **(530**                                      | **)**         | **(1,098** | **)** |
| Consumer loans                                                       | ** ** | **(260**                                      | **)**         | **(721** | **)** |
| Total charge-offs                                                    | ** ** | **(1,058**                                    | **)**         | **(2,346** | **)** |
|                                                                 |       |                                          |          |   |   |
| **Plus  recoveries**                                                 | ** ** | ** **                                    | ** **    | ** ** | ** ** |
| Commercial loans                                                     | ** ** | **16**                                        | ** **    | **87** | ** ** |
| Real estate loans                                                    | ** ** | **19**                                        | ** **    | **45** | ** ** |
| Consumer loans                                                       | ** ** | **142**                                       | ** **    | **161** | ** ** |
| Total recoveries                                                     | ** ** | **177**                                       | ** **    | **293** | ** ** |
| **Net charge-offs**                                                  | ** ** | **(881**                                      | **)**         | **(2,053** | **)** |
| ** **                                                           | ** ** | ** **                                    | ** **    | ** ** | ** ** |
| **Plus provision for loan losses**                                   | ** ** | **2,480**                                     | ** **    | **4,304** | ** ** |
| **Plus allowance for loan losses acquired in business combinations** | ** ** | **1,088**                                     | ** **    | **1,269** | ** ** |
| ** **                                                           | ** ** | ** **                                    | ** **    | ** ** | ** ** |
| **Allowance for loan losses balance, end of period**                 | ** ** | **$**                                         | **15,460**    | ** ** | **$** | **14,581** | ** ** |
| ** **                                                           | ** ** | ** **                                    | ** **    | ** ** | ** ** |
| **Net  charge-offs to average loans (annualized)**                   | ** ** | **0.136**                                     | **%**         | **0.388** | **%** |

 

17

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The following table is a summary of the Company’snonaccrual, past due loans and restructured loans at June 30, 2006 and June 30,2005. The numbers indicate an increase of approximately $7.0 million innonaccrual loans as of June 30, 2006 as compared to June 30, 2005.  This increase is believed to be short-termand not related to any changes in the strength of our markets.  We believe we are well-secured by propertyand personal guaranties for the overwhelming majority of nonperforming assets,and we do not see any significant exposures. We have resolved $1.8 million since quarter-end.  In addition to nonaccrual loans, the Companyalso has other real estate, which is considered a nonperforming asset.  At June 30, 2006, the balance in other realestate was $4.2 million compared to $3.4 million at December 31, 2005.  The following table presents a decrease of$119,000 in past due loans over 90 days. The majority of the decrease relates to loans at Community Loan Company,which made up $124,000 of the past due balance at June 30, 2005.  Community Loan Company was sold during thefourth quarter of 2005.  Managementbelieves that all significant losses related to nonaccrual loans and other realestate have been identified and provided for.

 
| ** **        | ** ** | **June 30, 2006**          | ** ** |
|-------------------|------------|--------------------------------------|------------|
| ** **        | ** ** | ** **                           | ** ** | **Past Due** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Nonaccrual**                       | ** ** | **90 Days** | ** ** | **Restructured** | ** ** |
| ** **        | ** ** | **Loans**                            | ** ** | **Still Accruing** | ** ** | **Debt** | ** ** |
| ** **        | ** ** | **(Dollars in thousands)** | ** ** |
| Real estate loans |       | $                                    | 13,068     |   | $ | — |   | $ | 23 |   |
| Commercial loans  |       | 707                                  |       | — |   | — |   |
| Consumer loans    |       | 44                                   |       | 7 |   | — |   |
| Total             |       | $                                    | 13,819     |   | $ | 7 |   | $ | 23 |   |

 
| ** **        | ** ** | **June 30, 2005**          | ** ** |
|-------------------|------------|--------------------------------------|------------|
| ** **        | ** ** | **Past Due**                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Nonaccrual**                       | ** ** | **90 Days** | ** ** | **Restructured** | ** ** |
| ** **        | ** ** | **Loans**                            | ** ** | **Still Accruing** | ** ** | **Debt** | ** ** |
| ** **        | ** ** | **(Dollars in thousands)** | ** ** |
| Real estate loans |       | $                                    | 5,960      |   | $ | — |   | $ | 29 |   |
| Commercial loans  |       | 483                                  |       | — |   | — |   |
| Consumer loans    |       | 368                                  |       | 126 |   | 8 |   |
| Total             |       | $                                    | 6,811      |   | $ | 126 |   | $ | 37 |   |

 

Our banking subsidiaries’ policy is todiscontinue the accrual of interest income when, in the opinion of management,collection of such interest becomes doubtful. This status is determined when: (1) there is a significant deteriorationin the financial condition of the borrower and full repayment of principal andinterest is not expected; and (2) the principal or interest is more than 90days past due, unless the loan is both well-secured and in the process ofcollection.

Loans classified for regulatory purposes asloss, doubtful, substandard, or special mention that have not been included inthe table above do not represent or result from trends or uncertainties whichmanagement reasonably expects will materially impact future operating results,liquidity or capital resources.  Theseclassified loans do not represent material credits about which management isaware of any information which causes management to have serious doubts as tothe ability of such borrowers to comply with their loan repayment terms, exceptas noted above.

 

18

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**Liquidity and Capital Resources**

Liquidity management involves the matching ofthe cash flow requirements of customers who may be either depositors desiringto withdraw funds or borrowers needing assurance that sufficient funds will beavailable to meet their credit needs and our ability to meet those needs.  We seek to meet liquidity requirementsprimarily through management of short-term investments, monthly amortizingloans, maturing single payment loans, and maturities and prepayments ofsecurities.  Also, we maintainrelationships with correspondent banks which could provide funds on shortnotice.

Our liquidity and capital resources aremonitored on a periodic basis by management, and state and federal regulatoryauthorities.  Our liquidity ratio was 13.23%at June 30, 2006.  Liquidity is measuredby the ratio of net cash, Federal funds sold and securities to net deposits andshort-term liabilities. In the event our subsidiary banks need to generateadditional liquidity, funding plans would be implemented as outlined in theliquidity policy of the subsidiary banks. Our subsidiary banks have lines ofcredit available to meet any unforeseen liquidity needs.  Also, our subsidiary banks have relationshipswith the Federal Home Loan Bank of Atlanta, which provides funding for loangrowth on an as needed basis, however these amounts are subject to collateralpledging and therefore the full amount might not be available.  Management reviews liquidity on a periodicbasis to monitor and adjust liquidity as necessary.  Management has the ability to adjustliquidity by selling securities available for sale, selling participations inloans we generate and accessing available funds through various borrowingarrangements.  At June 30, 2006, we hadavailable borrowing capacity totaling approximately $212.0 million throughvarious borrowing arrangements and available lines of credit.  We believe our short-term investments andavailable borrowing arrangements are adequate to cover any reasonablyanticipated immediate need for funds.

19

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As of June 30, 2006, our subsidiary banks wereconsidered to be well-capitalized as defined in the Federal Deposit InsuranceCorporation Improvement Act and based on regulatory minimum capitalrequirements.  The Company and thesubsidiary banks’ capital ratios are presented in the following table:
| ** **                               | ** ** | **CAPITAL  RATIOS** | ** ** | **FOR CAPITAL  ADEQUACY  PURPOSES** | ** ** | **TO BE  WELL  CAPITALIZED** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------------------------|------------|-----------------------------------|------------|
| As  of June 30, 2006                     |       |                |       |                                     |       |                              |       |
| Total  Capital to Risk Weighted Assets:  |       |                |       |                                     |       |                              |       |
| Consolidated                             |       | 12.26               | %          | 8.00                                     | %          | N\A                               |       |
| Gainesville Bank & Trust             |       | 10.83               | %          | 8.00                                     | %          | 10.00                             | %          |
| United Bank & Trust                  |       | 11.53               | %          | 8.00                                     | %          | 10.00                             | %          |
| Community Trust Bank                     |       | 10.20               | %          | 8.00                                     | %          | 10.00                             | %          |
| HomeTown Bank of Villa Rica              |       | 10.44               | %          | 8.00                                     | %          | 10.00                             | %          |
| First National Bank of the South         |       | 10.82               | %          | 8.00                                     | %          | 10.00                             | %          |
| First National Bank of Gwinnett          |       | 10.92               | %          | 8.00                                     | %          | 10.00                             | %          |
| Mountain State Bank                      |       | 12.34               | %          | 8.00                                     | %          | 10.00                             | %          |
| Tier  I Capital to Risk Weighted Assets: |       |                |       |                                     |       |                              |       |
| Consolidated                             |       | 11.23               | %          | 4.00                                     | %          | N\A                               |       |
| Gainesville Bank & Trust             |       | 9.75                | %          | 4.00                                     | %          | 6.00                              | %          |
| United Bank & Trust                  |       | 10.32               | %          | 4.00                                     | %          | 6.00                              | %          |
| Community Trust Bank                     |       | 9.07                | %          | 4.00                                     | %          | 6.00                              | %          |
| HomeTown Bank of Villa Rica              |       | 9.66                | %          | 4.00                                     | %          | 6.00                              | %          |
| First National Bank of the South         |       | 9.86                | %          | 4.00                                     | %          | 6.00                              | %          |
| First National Bank of Gwinnett          |       | 9.81                | %          | 4.00                                     | %          | 6.00                              | %          |
| Mountain State Bank                      |       | 11.37               | %          | 4.00                                     | %          | 6.00                              | %          |
| Tier  I Capital to Average Assets:       |       |                |       |                                     |       |                              |       |
| Consolidated                             |       | 10.19               | %          | 4.00                                     | %          | N\A                               |       |
| Gainesville Bank & Trust             |       | 8.24                | %          | 4.00                                     | %          | 5.00                              | %          |
| United Bank & Trust                  |       | 8.01                | %          | 4.00                                     | %          | 5.00                              | %          |
| Community Trust Bank                     |       | 8.51                | %          | 4.00                                     | %          | 5.00                              | %          |
| HomeTown Bank of Villa Rica              |       | 8.32                | %          | 4.00                                     | %          | 5.00                              | %          |
| First National Bank of the South         |       | 8.68                | %          | 4.00                                     | %          | 5.00                              | %          |
| First National Bank of Gwinnett          |       | 9.22                | %          | 4.00                                     | %          | 5.00                              | %          |
| Mountain  State Bank                     |       | 10.27               | %          | 4.00                                     | %          | 5.00                              | %          |

 

At June 30, 2006, the Company’s construction inprocess included costs related to the construction of a branch in Athens,Georgia, for the Athens division of Gainesville Bank & Trust.  The construction of the Athens branchbuilding was completed in July, 2006 with an approximate cost of $1.1 million.

Our subsidiary banks are subject to certainrestrictions on the amount of dividends that may be declared without priorregulatory approval.  At June 30, 2006,approximately $2.3 million of retained earnings at our subsidiary banks wasavailable for dividend declaration without regulatory approval.

20

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**Net Interest Income and Earning Assets**

Our profitability is determined by our abilityto effectively manage interest income and expense, to minimize loan andsecurity losses, to generate noninterest income, and to control operatingexpenses.  Because interest rates aredetermined by market forces and economic conditions beyond our control, ourability to generate net interest income depends upon our ability to obtain anadequate net interest spread between the rate paid on interest-bearingliabilities and the rate earned on interest-earning assets.  The net interest margin, on a tax equivalentbasis, was 4.39% for the six months ended June 30, 2006, compared to 4.29% forthe same period in 2005, an increase of 10 basis points.  The increased yield on earning assets wasprimarily due to increased volumes and yields on loans and the increasedeffective cost of funds was due to higher average rates paid on time depositsand other borrowings.  The Companycontinues to experience growth in loans and deposits while maintaining itscompetitive pricing.

The following table setsforth the amount of our interest income or interest expense for each categoryof interest-earning assets and interest-bearing liabilities and the averageinterest yield/rate for total interest-earning assets and totalinterest-bearing liabilities, net interest spread and net yield on averageinterest-earning assets.
| ** **                                                       | ** ** | **For the Six Months Ended  June 30, 2006** | ** ** | **For the Six Months Ended  June 30, 2005** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                       | ** ** | **Average**                                 | ** ** | ** **                                  | ** ** | **Yields** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yields** | ** ** |
| ** **                                                       | ** ** | **Balances**                                | ** ** | **Interest**                                | ** ** | **/Rates** | ** ** | **Balances** | ** ** | **Interest** | ** ** | **/Rates** | ** ** |
| ** **                                                       | ** ** | **(Dollars in thousands)**                  | ** ** |
| **Assets**                                                       |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest earning assets:                                         |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Taxable securities                                               |       | $194,189                                    |       | $3,890                                      |       | 4.04 | % | $190,778 |   | $3,476 |   | 3.67 | % |
| Nontaxable securities*                                           |       | 10,459                                      |       | 368                                         |       | 7.10 | % | 14,736 |   | 486 |   | 6.65 | % |
| Federal funds sold                                               |       | 8,699                                       |       | 196                                         |       | 4.54 | % | 7,415 |   | 103 |   | 2.80 | % |
| Interest bearing  deposits in banks                              |       | 1,151                                       |       | 45                                          |       | 7.88 | % | 925 |   | 16 |   | 3.49 | % |
| Loans, net of unearned  income                                   |       | 1,295,911                                   |       | 53,061                                      |       | 8.26 | % | 1,057,082 |   | 36,983 |   | 7.06 | % |
| Total interest earning  assets                                   |       | 1,510,409                                   |       | 57,560                                      |       | 7.68 | % | 1,270,936 |   | 41,064 |   | 6.52 | % |
| Noninterest earning assets:                                      |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Unrealized gains  (losses) on securities                         |       | (4,752                                      | )          |                                        |       |   |   | (1,582 | ) |   |   |   |   |
| Allowance for loan  losses                                       |       | (13,812                                     | )          |                                        |       |   |   | (11,401 | ) |   |   |   |   |
| Nonaccrual loans                                                 |       | 9,443                                       |       |                                        |       |   |   | 8,959 |   |   |   |   |   |
| Cash and due from banks                                          |       | 23,213                                      |       |                                        |       |   |   | 27,032 |   |   |   |   |   |
| Other assets                                                     |       | 148,451                                     |       |                                        |       |   |   | 128,975 |   |   |   |   |   |
| Total noninterest  earning assets                                |       | 162,543                                     |       |                                        |       |   |   | 151,983 |   |   |   |   |   |
| Total assets                                                     |       | $1,672,952                                  |       |                                        |       |   |   | $1,422,919 |   |   |   |   |   |
| **Liabilities & Stockholders’ Equity**                  |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest bearing liabilities:                                    |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest bearing demand  & savings                           |       | $425,456                                    |       | 5,753                                       |       | 2.73 | % | $399,232 |   | 3,107 |   | 1.57 | % |
| Time                                                             |       | 701,143                                     |       | 15,202                                      |       | 4.37 | % | 513,497 |   | 7,792 |   | 3.06 | % |
| Borrowings                                                       |       | 155,551                                     |       | 3,714                                       |       | 4.81 | % | 160,540 |   | 3,143 |   | 3.95 | % |
| Total interest bearing  liabilities                              |       | 1,282,150                                   |       | 24,669                                      |       | 3.88 | % | 1,073,269 |   | 14,042 |   | 2.64 | % |
| Noninterest bearing liabilities & stockholders’ equity: |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Noninterest bearing  deposits                                    |       | 163,474                                     |       |                                        |       |   |   | 144,122 |   |   |   |   |   |
| Other liabilities                                                |       | 17,013                                      |       |                                        |       |   |   | 13,063 |   |   |   |   |   |
| Stockholders’ equity                                        |       | 210,315                                     |       |                                        |       |   |   | 192,465 |   |   |   |   |   |
| Total liabilities &  stockholders’ equity               |       | $1,672,952                                  |       |                                        |       |   |   | $1,422,919 |   |   |   |   |   |
| Net interest spread                                              |       |                                        |       |                                        |       | 3.80 | % |   |   |   |   | 3.88 | % |
| Net interest income*                                             |       |                                        |       | 32,891                                      |       |   |   |   |   | 27,022 |   |   |   |
| Less: Tax equivalent adjustment                                  |       |                                        |       | 118                                         |       |   |   |   |   | 156 |   |   |   |
| Net interest income                                              |       |                                        |       | $32,773                                     |       |   |   |   |   | $26,866 |   |   |   |
| Net interest margin*                                             |       |                                        |       |                                        |       | 4.39 | % |   |   |   |   | 4.29 | % |

----

*                    Fullytax equivalent

21

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Net interest income increased $3.2 million, or22.60%, for the three months ended June 30, 2006 compared to the same period in2005.  The net increase consists of anincrease in interest income of $8.7 million, or 39.70%, less an increase ininterest expense of $5.6 million, or 70.22%, for the three-month period.  Net interest income increased $5.9 million,or 21.99%, for the six months ended June 30, 2006 compared to the same periodin 2005.  The net increase consists of anincrease in interest income of $16.5 million, or 40.42%, less an increase ininterest expense of $10.6 million, or 75.68%, for the six-month period.  These increases reflect an increase of $239million in interest-earning assets for the six months ended June 30, 2006 ascompared to the six months ended June 30, 2005. The change in net interest income resulted from decreases in net loanvolume and an increase in interest rates. These variances include the impact of the acquisition of MSB in May 2006and FNBG in March 2005.

**Other Income**

Other income for the three months ended June 30,2006, decreased by $295,000, compared to the same period in 2005.  Service charges on deposit accounts andmortgage origination fees remained stable compared with the prior-year quarter.The majority of the decline in other income reflects the loss of insurancecommissions due to the sale of Community Loan Company in the fourth quarter of2005, and a decrease in other income related to the termination of certainoutside service contracts.  Other incomefor the six months ended June 30, 2006, decreased by $589,000, compared to thesame period in 2005.  Service charges ondeposit accounts and mortgage origination fees remained stable compared withthe prior-year quarter.  The majority ofthe decline in other income reflects the loss of insurance commissions due tothe sale of Community Loan Company in the fourth quarter of 2005, and adecrease in other income related to the culmination of certain outside servicecontracts.

**Other Expense**

Other expense increased by approximately $1.3million, or 11.58%, for the three months ended June 30, 2006 compared to thesame period in 2005.  The increase is dueprimarily to an increase in salaries and employee benefits expense of$895,000.  Net occupancy and equipmentexpenses increased $132,000.  Otherexpense increased by approximately $2.5 million, or 11.22%, for the six monthsended June 30, 2006 compared to the same period in 2005.  The increase is due primarily to an increasein salaries and employee benefits expense of $1,760,000.  Net occupancy and equipment expensesincreased $322,000.  These increases canbe partially attributed to the inclusion of MSB since the date of acquisition.

**Income Tax Expense**

Income tax expense increased by $1,573,000 forthe three-month period ended June 30, 2006, compared to the same period in2005.  The effective tax rate for thethree-month period ended June 30, 2006 was 34.86%, compared to 28.12% for thesame period in 2005.  The increase isprimarily due to the additional loan loss provision recorded in the secondquarter of 2005.  Income tax expense increasedby $1,856,000 for the six-month period ended June 30, 2006, compared to thesame period in 2005.  The effective taxrate for the six-month period ended June 30, 2006 was 34.53%, compared to30.80% for the same period in 2005.

**Net Income**

Net income increased by $2,566,000, or 184.87%,for the three months ended June 30, 2006, compared to the same period in 2005.Net income increased by $2,832,000, or 64.38%, for the six months ended June30, 2006, compared to the same period in 2005. These increases were directly impacted by the additional provision forloan loss recorded in the second quarter of 2005 as previously discussed.

We are not aware of any other known trends,events or uncertainties, other than the effect of events as described above,that will have or that are reasonably likely to have a material effect on ourliquidity, capital resources or operations. We are not 

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aware of any current recommendations by theregulatory authorities, which, if they were implemented, would have such aneffect.

**Off Balance Sheet Arrangements**

Our financial statements do not reflect variouscommitments and contingent liabilities that arise in the normal course ofbusiness.  These off-balance sheetfinancial instruments include commitments to extend credit, standby letters ofcredit and credit card commitments.  Suchfinancial instruments are included in the financial statements when funds aredistributed or the instruments become payable. Our exposure to credit loss in the event of nonperformance by the otherparty to the financial instrument for commitments to extend credit, standby lettersof credit and credit card commitments is represented by the contractual amountof those instruments.  We use the samecredit policies in making commitments as we do for on-balance sheetinstruments.  Although these amounts donot necessarily represent future cash requirements, a summary of ourcommitments as of June 30, 2006 and December 31, 2005 are as follows:

|                                      | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **(In thousands)**     | ** ** |
| Commitments to  extend credit        |       | $                           | 408,724    |                            | $          | 288,448 |   |
| Financial  standby letters of credit |       | 8,477                       |       | 8,650                           |       |
| Other standby  letters of credit     |       | 1,738                       |       | 1,569                           |       |
| Credit card  commitments             |       | 6,383                       |       | 7,229                           |       |
| Total                                |       | $                           | 425,322    |                            | $          | 305,896 |   |

 

**Item 3.    QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Our asset/liabilitymix is monitored on a regular basis and a report evaluating the interest ratesensitive assets and interest rate sensitive liabilities is prepared andpresented to the Investment Committee of the holding company’s board ofdirectors on a quarterly basis. The objective of this policy is to monitorinterest rate sensitive assets and liabilities so as to minimize the impact ofsubstantial movements in interest rates on earnings. An asset or liability isconsidered to be interest rate sensitive if it will reprice or mature withinthe time period analyzed, usually one year or less. The interest ratesensitivity gap is the difference between the interest-earning assets andinterest-bearing liabilities scheduled to mature or reprice within such timeperiod. A gap is considered positive when the amount of interest rate sensitiveassets exceeds the amount of interest rate sensitive liabilities. A gap isconsidered negative when the amount of interest rate sensitive liabilitiesexceeds the interest rate sensitive assets. During a period of rising interestrates, a negative gap would tend to adversely affect net interest income, whilea positive gap would tend to result in an increase in net interest income.Conversely, during a period of falling interest rates, a negative gap wouldtend to result in an increase in net interest income, while a positive gapwould tend to adversely affect net interest income. If our assets andliabilities were equally flexible and moved concurrently, the impact of anyincrease or decrease in interest rates on net interest income would be minimal.

A simple interest rate“gap” analysis by itself may not be an accurate indicator of how net interestincome will be affected by changes in interest rates. Accordingly, we alsoevaluate how the repayment of particular assets and liabilities is impacted bychanges in interest rates. Income associated with interest-earning assets andcosts associated with interest-bearing liabilities may not be affecteduniformly by changes in interest rates. In addition, the magnitude and durationof changes in interest rates may have a significant impact on net interestincome. For example, although certain assets and liabilities may have similarmaturities or periods of repricing, they may react in different degrees to changesin market interest rates. Interest rates on certain types of assets andliabilities fluctuate in advance of changes in general market rates, whileinterest rates on other types may lag behind changes in general market rates.In addition, certain assets, such as adjustable rate mortgage loans, have 

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features (generallyreferred to as “interest rate caps and floors”) which limit the amount ofchanges in interest rates. Prepayment and early withdrawal levels also coulddeviate significantly from those assumed in calculating the interest rate gap.The ability of many borrowers to service their debts also may decrease duringperiods of rising interest rates.

Changes in interestrates also affect our liquidity position. We currently price deposits in responseto market rates and it is management’s intention to continue this policy. Ifdeposits are not priced in response to market rates, a loss of deposits couldoccur which would negatively affect our liquidity position.

Managementbelieves that gap analysis is a useful tool for measuring interest rate riskonly when used in conjunction with its simulation model.  As of June 30, 2006, the Company maintainedan asset sensitive interest rate risk position based on its simulation modelresults.  This positioning would beexpected to result in an increase in net interest income in a rising rateenvironment and a decrease in net interest income in a declining rateenvironment.  This is generally due to agreater proportion of interest earning assets repricing on a variable ratebasis as compared to variable rate funding sources. This asset sensitivity isindicated by selected results of net interest income simulations.  The actual realized change in net interestincome would depend on several factors. These factors include, but are not limited to, actual realized growth inasset and liability volumes, as well as the mix experienced over these timehorizons.  Market conditions and theirresulting impact on loan, deposit, and funding pricing would also be a primarydeterminant in the realized level of net interest income.  The table below shows the impact on netinterest margins over a twelve-month period when subjected to an immediate 100basis point increase and decrease in rate.

**Twelve-Month Net Interest IncomeSensitivity**

 

| Change in Short-Term Interest  Rates (in basis points) | ** ** | **Estimated Change in Net  Interest Income** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| +100                                                                                 |       | 3.32 %                                                      |       |
| Flat                                                                                 |       | —                                                           |       |
| -100                                                                                 |       | (4.18)%                                                          |       |

 

We actively manage themix of asset and liability maturities to control the effects of changes in thegeneral level of interest rates on net interest income. Except for its effecton the general level of interest rates, inflation does not have a materialimpact on us due to the rate variability and short-term maturities of ourearning assets.

**Item 4.      CONTROLS AND PROCEDURES**

**DisclosureControls and Procedures**

As of the end of the period covered by thisreport, an evaluation was carried out under the supervision and with theparticipation of the Company’s Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of its disclosurecontrols and procedures based on paragraph (b) of Rule 13a-15 and 13d-15 underthe Securities and Exchange Act of 1934. Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the design andoperation of these disclosure controls and procedures were effective as of theend of the period covered by this report in alerting them on a timely basis tomaterial information relating to the Company required to be included in theCompany’s reports filed or submitted under the Securities Exchange Act of 1934.

**InternalControl over Financial Reporting**

The management of GB&T Bancshares, Inc. andsubsidiaries is responsible for establishing and maintaining adequate internalcontrol over financial reporting as defined in Rules 13a-15 and 15d-15.  This internal control system has beendesigned to provide reasonable assurance to the Company’s management and boardof directors regarding the reliability of financial 

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reporting and the preparation and fairpresentation of financial statements for external purposes in accordance withaccounting principles generally accepted in the United States of America.

All internal control systems, no matter how welldesigned, have inherent limitations.  Therefore, even those systemsdetermined to be effective can provide only reasonable assurance with respectto financial statement preparation and presentation.

 The management of GB&T Bancshares,Inc. and subsidiaries has assessed the effectiveness of the company’s internalcontrol over financial reporting as of June 30, 2006.  To make this assessment, we used the criteriafor effective internal control over financial reporting described in InternalControl — Integrated Framework, issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  Based on our assessmentand based on such criteria, we believe that, as of June 30, 2006, the Company’sinternal control over financial reporting was effective.  There were no changes made in the Company’sinternal controls over financial reporting that occurred during the Company’smost recent fiscal quarter that have materially affected, or are reasonablylikely to materially affect, the Company’s control over financial reporting.

**PART II — OTHER INFORMATION**

**Item 1.     LEGAL PROCEEDINGS**

           None.

**Item 1A.     RISK FACTORS**

          There have been no material changes to the risk factors previouslydisclosed in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005.

**Item 2.     UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS**

           None.

**Item 3.     DEFAULTS UPON SENIOR SECURITIES**

           None.

**Item 4.     SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

Theannual meeting of the Stockholders of GB&T Bancshares, Inc. was held on May11,2006. The meeting had been called pursuant to written notice for (1) thepurpose of considering and voting upon the election of 12 directors toconstitute the Board of Directors to serve until the next annual meeting anduntil their successors are elected and qualified, (2) amending the Plan toincrease the number of shares of common stock available for grants under theCompany’s Stock Option Plan of 1997 from 1,500,000 to 2,000,000 and to extendthe term of the Plan by five years and (3) to consider such other business asmight properly come before the Annual Meeting. The results of the voting were as follows:

| (1) Election of Directors | ** ** | ** ** | ** ** | **FOR** | ** ** | **WITHHELD** | ** ** |
|------------------------------------------|------------|------------|------------|---------|------------|--------------|------------|
| Lowell S.  (Casey) Cagle                 |       | 9,462,098  |       | 99,489  |       |
| Dr. John W.  Darden                      |       | 9,466,123  |       | 95,465  |       |
| William A.  Foster, III                  |       | 9,466,445  |       | 95,143  |       |
| Bennie E. Hewett                         |       | 9,455,067  |       | 106,521 |       |
| Richard A. Hunt                          |       | 8,793,855  |       | 767,732 |       |
| James L. Lester                          |       | 9,493,589  |       | 67,998  |       |
| John E. Mansour                          |       | 9,466,435  |       | 95,153  |       |
| Dr. T. Alan  Maxwell                     |       | 9,493,798  |       | 67,790  |       |
| James H. Moore                           |       | 9,466,435  |       | 95,153  |       |
| Samuel L. Oliver                         |       | 9,326,028  |       | 235,560 |       |
| Alan A. Wayne                            |       | 8,636,150  |       | 925,438 |       |
| Philip A. Wilheit                        |       | 9,454,367  |       | 107,221 |       |

 

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| (2) Increase Shares Available for Grant | ** ** | **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **BROKER  NON-VOTE** | ** ** |
|------------------------------------------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|----------------------|------------|
|                                                             |       | 6,100,552 |       | 470,674     |       | 84,586      |       | 2,905,775            |       |
|                                                             |       |      |       |        |       |        |       |                 |       |

 

Accordingly, all nominateddirectors were duly elected and the amendment of the Plan was approved. Theamendment to the Plan is set forth on Exhibit 10.1 to the Company’s Form 8-Kfiled on July 21, 2006.

**Item 5.     OTHER INFORMATION**

           None.

**Item 6.    EXHIBITS**

| 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 1350 Certification of Principal Executive  Officer.   |
| 32.2     |       | Section 1350 Certification of Principal Financial  Officer.   |

** **

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** **

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                       |   |   |   |                                                                      |
|----------------------------|--------|--------|--------|---------------------------------------------------------------------------|
| GB&T BANCSHARES, INC.  |   |   |   |                                                                      |
|                       |   |   |   |                                                                      |
|                       |   |   |   |                                                                      |
| DATE:   8/9/2006 |   | BY:    |   | /s/ RICHARD A.  HUNT                                                      |
|                       |   |   |   | Richard A. Hunt  President and Chief Executive Officer                    |
|                       |   |   |   |                                                                      |
|                       |   |   |   |                                                                      |
| DATE:   8/9/2006 |   | BY:    |   | /s/ GREGORY L.  HAMBY                                                     |
|                       |   |   |   | Gregory L. Hamby  Executive Vice President &  Chief Financial Officer |

 

 

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