**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**Mark One**

 
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                     |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
|       |       | **For the quarterly period  ended   March 31, 2005**                                                                                                                                                                                                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                    |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                            |
| ** ** | ** ** | **For the 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  incorporation or organization)                    |       |   |   | (IRS Employer  Identification No.) |
|                                                                                |       |   |   |                               |
| **500 Jesse Jewell Parkway, S.E.  Gainesville, Georgia 30501**                      |
| (Address of principal  executive offices)                                           |
|                                                                                |       |   |   |                               |
| **(770) 532-1212**                                                                  |
| (Registrant’s  telephone number, including area code)                          |
|                                                                                |
| **N/A**                                                                             |
| (Former name, former  address and former fiscal year, if changed since last report) |

 

Indicate by check mark whether the registrant(1) filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2)has been subject to such filing requirements for the past 90 days.   Yes ý   No o

 

Indicate by check mark whether the registrant isan accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   Yes ý   No o

 

 

**APPLICABLE ONLY TO CORPORATEISSUERS**

 

State the number of shares outstanding of eachof the issuer’s classes of capital stock, as of May 3, 2005:    12,677,407 shares; no par value

 

 

----

 

**GB&T BANCSHARES, INC.**

 

**TABLE OF CONTENTS**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                          | ** ** |
|--------------|--------------------------------------------------------------------------------------------------------------------|------------|
| ** **   | ** **                                                                                                         |
| ** **   | **Item 1. FINANCIAL  STATEMENTS**                                                                                  | ** ** |
| ** **   | ** **                                                                                                         |
| ** **   | **Consolidated Balance Sheets  – March 31, 2005 (Unaudited) and December 31, 2004**                 | ** ** |
|         |                                                                                                               |       |
| ** **   | **Consolidated  Statements of Income (Unaudited)-  Three months ended March 31, 2005 and 2004**               | ** ** |
| ** **   | ** **                                                                                                         | ** ** |
| ** **   | **Consolidated  Statements of Comprehensive Income (Unaudited)-  Three months ended March 31, 2005 and 2004** | ** ** |
| ** **   | ** **                                                                                                         | ** ** |
| ** **   | **Consolidated  Statements of Stockholders’ Equity (Unaudited)-  Three months ended March 31, 2005**     | ** ** |
| ** **   | ** **                                                                                                         | ** ** |
| ** **   | **Consolidated  Statements of Cash Flows (Unaudited) -  Three months ended March 31, 2005 and 2004**          | ** ** |
| ** **   | ** **                                                                                                         | ** ** |
| ** **   | **Notes to  Consolidated Financial Statements (Unaudited)**                                                        | ** ** |
|         |                                                                                                               |
|         | **Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations**           |       |
| ** **   | ** **                                                                                                         |
| ** **   | **Item  3. Quantitative and Qualitative Disclosures About Market Risk**                                            | ** ** |
| ** **   | ** **                                                                                                         |
| ** **   | **Item 4. Controls and  Procedures**                                                                               | ** ** |
| ** **   | ** **                                                                                                         |
| **PART II.** | **OTHER INFORMATION**                                                                                              |       |
|         |                                                                                                               |
| ** **   | **Item 6. Exhibits**                                                                                               | ** ** |
| ** **   | ** **                                                                                                         | ** ** |
| ** **   | **Signatures**                                                                                                     | ** ** |
| ** **   | ** **                                                                                                         |
| ** **   | **Certifications**                                                                                                 | ** ** |
|              |                                                                                                                    |            |  |  |

 

2

----

 

**PART I - FINANCIAL INFORMATION**

**ITEM 1 - FINANCIAL STATEMENTS**

 

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

**Consolidated Balance Sheets**

**(Unaudited)**

 
| ** **                                                                                                                                                                           | ** ** | **March 31,  2005**   | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                           | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                                                                                                                           |       |                       |       |                        |       |
| ** **                                                                                                                                                                           |       |                       |       |                        |       |
| Cash and due from banks                                                                                                                                                              |       | $                          | 29,522     |                        | $          | 20,723 |   |
| Interest-bearing deposits in banks                                                                                                                                                   |       | 823                        |       | 700                         |       |
| Federal funds sold                                                                                                                                                                   |       | 10,818                     |       | 93                          |       |
| Securities available for sale, at fair value                                                                                                                                         |       | 196,613                    |       | 190,636                     |       |
| Restricted equity securities, at cost                                                                                                                                                |       | 8,734                      |       | 7,226                       |       |
|                                                                                                                                                                                 |       |                       |       |                        |       |
| Loans, net of unearned income                                                                                                                                                        |       | 1,098,155                  |       | 955,880                     |       |
| Less allowance for loan losses                                                                                                                                                       |       | 11,277                     |       | 11,061                      |       |
| Loans, net                                                                                                                                                                           |       | 1,086,878                  |       | 944,819                     |       |
|                                                                                                                                                                                 |       |                       |       |                        |       |
| Premises and equipment, net                                                                                                                                                          |       | 36,096                     |       | 31,548                      |       |
| Goodwill                                                                                                                                                                             |       | 68,405                     |       | 49,127                      |       |
| Intangible assets                                                                                                                                                                    |       | 6,145                      |       | 5,618                       |       |
| Other assets                                                                                                                                                                         |       | 26,540                     |       | 23,646                      |       |
|                                                                                                                                                                                 |       |                       |       |                        |       |
| **Total assets**                                                                                                                                                                     |       | $                          | 1,470,574  |                        | $          | 1,274,136 |   |
|                                                                                                                                                                                 |       |                       |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                        |       |                       |       |                        |       |
| ** **                                                                                                                                                                           |       |                       |       |                        |       |
| **Liabilities:**                                                                                                                                                                     |       |                       |       |                        |       |
| Deposits:                                                                                                                                                                            |       |                       |       |                        |       |
| Noninterest-bearing                                                                                                                                                                  |       | $                          | 142,496    |                        | $          | 125,704 |   |
| Interest-bearing                                                                                                                                                                     |       | 953,694                    |       | 802,899                     |       |
| Total deposits                                                                                                                                                                       |       | 1,096,190                  |       | 928,603                     |       |
| Federal funds purchased and securities sold under  repurchase agreements                                                                                                             |       | 30,584                     |       | 47,582                      |       |
| Federal Home Loan Bank advances                                                                                                                                                      |       | 97,891                     |       | 80,992                      |       |
| Other borrowings                                                                                                                                                                     |       | 838                        |       | 934                         |       |
| Other liabilities                                                                                                                                                                    |       | 15,806                     |       | 11,412                      |       |
| Subordinated debt                                                                                                                                                                    |       | 29,898                     |       | 29,898                      |       |
|                                                                                                                                                                                 |       |                       |       |                        |       |
| **Total liabilities**                                                                                                                                                                |       | 1,271,207                  |       | 1,099,421                   |       |
|                                                                                                                                                                                 |       |                       |       |                        |       |
| **Stockholders’ Equity:**                                                                                                                                                       |       |                       |       |                        |       |
| ** **                                                                                                                                                                           |       |                       |       |                        |       |
| Capital stock, no par value; 20,000,000 shares  authorized, 12,641,076 and 11,772,352 shares issued and outstanding at March 31,  2005 and December 31, 2004, respectively |       | 163,691                    |       | 139,207                     |       |
| Retained earnings                                                                                                                                                                    |       | 37,666                     |       | 35,550                      |       |
| Accumulated other comprehensive loss                                                                                                                                                 |       | (1,990                     | )          | (42                         | )          |
|                                                                                                                                                                                 |       |                       |       |                        |       |
| **Total stockholders’ equity**                                                                                                                                                  |       | 199,367                    |       | 174,715                     |       |
|                                                                                                                                                                                 |       |                       |       |                        |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                  |       | $                          | 1,470,574  |                        | $          | 1,274,136 |   |
|                                                                                                                                                                                 |       |                       |       |                        |       |

 

See accompanying notes toconsolidated financial statements.

 

3

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

**Consolidated Statements of Income**

**(Unaudited)**

 
| ** **                                                                                                    | ** ** | **Three months ended  March 31,**                | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2005**                                              | ** ** | **2004** | ** ** |
| ** **                                                                                                    | ** ** | **(Dollars in thousands,  except per share amounts)** | ** ** |
| **Interest income:**                                                                                          |       |                                                  |       |   |   |
| Loans, including fees                                                                                         |       | $                                                     | 16,959     |   | $ | 11,645 |   |
| Taxable securities                                                                                            |       | 1,699                                                 |       | 985 |   |
| Nontaxable securities                                                                                         |       | 165                                                   |       | 184 |   |
| Federal funds sold                                                                                            |       | 46                                                    |       | 27 |   |
| Interest-bearing deposits in banks                                                                            |       | 10                                                    |       | 1 |   |
|                                                                                                          |       |                                                  |       |   |   |
| **Total interest income**                                                                                     |       | 18,879                                                |       | 12,842 |   |
|                                                                                                          |       |                                                  |       |   |   |
| **Interest expense:**                                                                                         |       |                                                  |       |   |   |
| Deposits                                                                                                      |       | 4,631                                                 |       | 2,903 |   |
| Federal funds purchased, securities sold under  Repurchase agreements, other borrowings and subordinated debt |       | 1,502                                                 |       | 1,053 |   |
| **Total interest expense**                                                                                    |       | 6,133                                                 |       | 3,956 |   |
|                                                                                                          |       |                                                  |       |   |   |
| Net interest income                                                                                           |       | 12,746                                                |       | 8,886 |   |
|                                                                                                          |       |                                                  |       |   |   |
| **Provision for loan losses**                                                                                 |       | 482                                                   |       | 284 |   |
|                                                                                                          |       |                                                  |       |   |   |
| Net interest income after provision for loan losses                                                           |       | 12,264                                                |       | 8,602 |   |
|                                                                                                          |       |                                                  |       |   |   |
| **Other income:**                                                                                             |       |                                                  |       |   |   |
| Service charges on deposit accounts                                                                           |       | 1,512                                                 |       | 1,394 |   |
| Mortgage origination fees                                                                                     |       | 465                                                   |       | 460 |   |
| Insurance commissions                                                                                         |       | 147                                                   |       | 144 |   |
| Gain on sale of securities                                                                                    |       | 1                                                     |       | 263 |   |
| Other operating income                                                                                        |       | 632                                                   |       | 638 |   |
|                                                                                                          |       |                                                  |       |   |   |
| **Total other income**                                                                                        |       | 2,757                                                 |       | 2,899 |   |
|                                                                                                          |       |                                                  |       |   |   |
| **Other expenses:**                                                                                           |       |                                                  |       |   |   |
| Salaries and employee benefits                                                                                |       | 6,315                                                 |       | 4,933 |   |
| Occupancy and equipment expenses, net                                                                         |       | 1,439                                                 |       | 1,222 |   |
| Other operating expenses                                                                                      |       | 2,841                                                 |       | 2,193 |   |
|                                                                                                          |       |                                                  |       |   |   |
| **Total other expenses**                                                                                      |       | 10,595                                                |       | 8,348 |   |
|                                                                                                          |       |                                                  |       |   |   |
| **Income before income taxes**                                                                                |       | 4,426                                                 |       | 3,153 |   |
|                                                                                                          |       |                                                  |       |   |   |
| **Income tax expense**                                                                                        |       | 1,415                                                 |       | 923 |   |
|                                                                                                          |       |                                                  |       |   |   |
| **Net income**                                                                                                |       | $                                                     | 3,011      |   | $ | 2,230 |   |
|                                                                                                          |       |                                                  |       |   |   |
| **Earnings per share:**                                                                                       |       |                                                  |       |   |   |
| Basic                                                                                                         |       | $                                                     | 0.25       |   | $ | 0.26 |   |
| Diluted                                                                                                       |       | $                                                     | 0.25       |   | $ | 0.26 |   |
|                                                                                                          |       |                                                  |       |   |   |
| **Weighted average shares:**                                                                                  |       |                                                  |       |   |   |
| Basic                                                                                                         |       | 12,069                                                |       | 8,511 |   |
| Diluted                                                                                                       |       | 12,245                                                |       | 8,679 |   |
|                                                                                                          |       |                                                  |       |   |   |
| **Cash dividends per common share**                                                                           |       | $                                                     | 0.076      |   | $ | 0.072 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

----

 

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

**ConsolidatedStatements of Comprehensive Income**

**(unaudited)**

 
| ** **                                                                                                       | ** ** | **Three  months ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **                                                                                                       | ** ** | **(Dollars  in thousands)**             | ** ** |
|                                                                                                             |       |                                    |       |   |   |
| **Net Income**                                                                                                   |       | $                                       | 3,011      |   | $ | 2,230 |   |
|                                                                                                             |       |                                    |       |   |   |
| Unrealized holding gains  (losses) on securities available for sale arising during period, net of tax  (benefit) |       | (1,947                                  | )          | 731 |   |
|                                                                                                             |       |                                    |       |   |   |
| Reclassification adjustment  for gains realized on securities available for sale in net income, net of  taxes    |       | (1                                      | )          | (163 | ) |
|                                                                                                             |       |                                    |       |   |   |
| Other comprehensive income  (loss)                                                                               |       | (1,948                                  | )          | 568 |   |
|                                                                                                             |       |                                    |       |   |   |
| **Comprehensive income**                                                                                         |       | $                                       | 1,063      |   | $ | 2,798 |   |

 

See accompanying notes toconsolidated financial statements.

 

### **Consolidated Statementsof Stockholders’ Equity**

### **Three Months Ended March 31, 2005**

 
| ** **                                                              | ** ** | **(Dollars  in thousands)  (unaudited)** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                              | ** ** | **Shares**                               | ** ** | **Capital  Stock** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Total  Stockholders’  Equity** | ** ** |
| Balance, December 31,  2004                                        |       | 11,772                                   |       | $ | 139,207 |   | $ | 35,550 |   | $ | (42 | ) | $ | 174,715 |   |
| Net income                                                              |       | —                                   |       | — |   | 3,011 |   | — |   | 3,011 |   |
| Options exercised                                                       |       | 18                                       |       | 170 |   | — |   | — |   | 170 |   |
| Dividends declared $0.076 per  share                                    |       | —                                   |       | — |   | (895 | ) | — |   | (895 | ) |
| Purchase of FNBG Bancshares,  Inc.                                      |       | 851                                      |       | 24,347 |   | — |   | — |   | 24,347 |   |
| Payment for fractional shares  in connection with business combinations |       | —                                   |       | (3 | ) | — |   | — |   | (3 | ) |
| Tax benefit of nonqualified  stock Options                              |       | —                                   |       | (30 | ) | — |   | — |   | (30 | ) |
| Other comprehensive income                                              |       | —                                   |       | — |   | — |   | (1,948 | ) | (1,948 | ) |
|                                                                    |       |                                     |       |   |   |   |   |   |   |   |   |
| Balance, March 31, 2005                                            |       | 12,641                                   |       | $ | 163,691 |   | $ | 37,666 |   | $ | (1,990 | ) | $ | 199,367 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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

**Condensed Consolidated Statementsof Cash Flows**

**(Unaudited)**

 
| ** **                                                                               | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                               | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                                                               | ** ** | **(Dollars in thousands)**             | ** ** |
| **Operating Activities**                                                                 |       |                                   |       |   |   |
| Net income                                                                               |       | $                                      | 3,011      |   | $ | 2,230 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:       |       |                                   |       |   |   |
| Depreciation                                                                             |       | 640                                    |       | 533 |   |
| Provision for loan losses                                                                |       | 482                                    |       | 284 |   |
| Amortization and (accretion), net                                                        |       | 310                                    |       | 293 |   |
| Gain on sale of securities                                                               |       | (1                                     | )          | (263 | ) |
| Net increase in other assets                                                             |       | (130                                   | )          | (1,083 | ) |
| Net increase in other liabilities                                                        |       | 3,920                                  |       | 336 |   |
| Net cash provided by operating activities                                                |       | 8,232                                  |       | 2,330 |   |
|                                                                                     |       |                                   |       |   |   |
| **Investing Activities**                                                                 |       |                                   |       |   |   |
| Purchases of securities available for sale                                               |       | (8,016                                 | )          | (16,178 | ) |
| Proceeds from sales of securities available for sale                                     |       | 1,106                                  |       | 2,271 |   |
| Proceeds from maturities of securities available for  sale                               |       | 8,948                                  |       | 10,615 |   |
| Net increase in restricted equity securities                                             |       | (1,508                                 | )          | (324 | ) |
| Net increase in interest-bearing deposits in banks                                       |       | (123                                   | )          | (11 | ) |
| Net increase in federal funds sold                                                       |       | (5,836                                 | )          | (9,772 | ) |
| Net increase in loans                                                                    |       | (42,595                                | )          | (14,768 | ) |
| Net cash acquired in business combinations                                               |       | 142                                    |       | — |   |
| Proceeds from sale of other real estate owned                                            |       | 210                                    |       | 359 |   |
| Purchase of premises and equipment                                                       |       | (1,432                                 | )          | (670 | ) |
| Net cash used in investing activities                                                    |       | (49,104                                | )          | (28,478 | ) |
|                                                                                     |       |                                   |       |   |   |
| **Financing Activities**                                                                 |       |                                   |       |   |   |
| Net increase in deposits                                                                 |       | 57,744                                 |       | 29,549 |   |
| Net decrease in federal funds purchased and  securities sold under repurchase agreements |       | (16,998                                | )          | (5,341 | ) |
| Proceeds from other borrowings and Federal Home Loan  Bank advances                      |       | 16,063                                 |       | 6,608 |   |
| Payments on other borrowings and Federal Home Loan                                       |       |                                   |       |   |   |
| Bank advances                                                                            |       | (6,410                                 | )          | (3,701 | ) |
| Dividends paid                                                                           |       | (895                                   | )          | (611 | ) |
| Payment for fractional shares                                                            |       | (3                                     | )          | — |   |
| Proceeds from exercise of stock options                                                  |       | 170                                    |       | 297 |   |
| Net cash provided by financing activities                                                |       | 49,671                                 |       | 26,801 |   |
|                                                                                     |       |                                   |       |   |   |
| Net increase in cash and due from banks                                                  |       | 8,799                                  |       | 653 |   |
|                                                                                     |       |                                   |       |   |   |
| Cash and due  from banks at beginning of period                                          |       | 20,723                                 |       | 17,584 |   |
|                                                                                     |       |                                   |       |   |   |
| Cash and due  from banks at end of period                                                |       | $                                      | 29,522     |   | $ | 18,237 |   |
|                                                                                     |       |                                   |       |   |   |
| Supplemental  disclosure of cash paid during the period for:                             |       |                                   |       |   |   |
| Interest                                                                                 |       | $                                      | 6,328      |   | $ | 4,214 |   |
| Income taxes                                                                             |       | $                                      | 5          |   | $ | 524 |   |
|                                                                                     |       |                                   |       |   |   |
| Acquisition of  subsidiary Capital stock issued                                          |       | $                                      | 24,347     |   | $ | — |   |

 

6

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| ** **                                | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)**             | ** ** |
| **Assets acquired (liabilities assumed)** |       |                                   |       |   |   |
| ** **                                |       |                                   |       |   |   |
| Cash and due from banks, net of cash paid |       | $                                      | 142        |   | $ | — |   |
|                                      |       |                                   |       |   |   |
| Federal funds sold                        |       | 4,889                                  |       | — |   |
|                                      |       |                                   |       |   |   |
| Securities available for sale             |       | 10,872                                 |       | — |   |
|                                      |       |                                   |       |   |   |
| Restricted equity securities              |       | 634                                    |       | — |   |
|                                      |       |                                   |       |   |   |
| Loans, net                                |       | 100,229                                |       | — |   |
|                                      |       |                                   |       |   |   |
| Premises and equipment                    |       | 3,755                                  |       | — |   |
|                                      |       |                                   |       |   |   |
| Goodwill                                  |       | 19,278                                 |       | — |   |
|                                      |       |                                   |       |   |   |
| Core deposit intangible                   |       | 697                                    |       | — |   |
|                                      |       |                                   |       |   |   |
| Other assets                              |       | 1,451                                  |       | — |   |
|                                      |       |                                   |       |   |   |
| Deposits                                  |       | (109,628                               | )          | — |   |
|                                      |       |                                   |       |   |   |
| Other borrowings                          |       | (7,150                                 | )          | — |   |
|                                      |       |                                   |       |   |   |
| Other liabilities                         |       | (444                                   | )          | — |   |
|                                      |       |                                   |       |   |   |
|                                      |       | $                                      | 24,725     |   | $ | — |   |

 

See accompanying notes toconsolidated financial statements.

 

7

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

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE1.****                          ****BASIS OF PRESENTATION**

 

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 andFirst National Bank of Gwinnett, and its consumer finance company, CommunityLoan Company (collectively, the “Company”). Significant intercompany transactions and balances have been eliminatedin consolidation.

 

The accompanying unaudited consolidatedfinancial statements have been prepared in accordance with U.S. generallyaccepted accounting principles for interim financial information and with the instructionsfor Form 10-Q.  Accordingly, they do notinclude all of the information and footnotes required by generally acceptedaccounting 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 three-monthperiod ended March 31, 2005 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2005.

 

 

**NOTE2.****                        ****STOCK COMPENSATION PLANS**

 

The Company has a stock option plan for grantingof options to directors, officers and employees.  The options may be exercised over a period often years in accordance with vesting schedules determined by the Board ofDirectors.  The Company accounts for theplan under the recognition and measurement principles of APB Opinion No. 25, *Accounting for**Stock Issued to Employees*,and related Interpretations.  Nostock-based employee compensation cost is reflected in net income, as alloptions granted under the plan had an exercise price equal to the market valueof the underlying stock on the date of grant. The following table illustrates the effect on net income and earningsper share if the Company had applied the fair value recognition provisions ofSFAS No. 123, *Accounting for Stock-Based Compensation*,to stock-based employee compensation.

 

 
| ** **                                                                                                                                    | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                                                                                                                    | ** ** | **(Dollars in thousands)**             | ** ** |
|                                                                                                                                          |       |                                   |       |   |   |
| Net income, as reported                                                                                                                       | ** ** | **$**                                  | 3,011      |   | $ | 2,230 |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | 43                                     |       | 29 |   |
| Pro forma net income                                                                                                                          |       | $                                      | 2,968      |   | $ | 2,201 |   |
| Earnings per share:                                                                                                                           |       |                                   |       |   |   |
| Basic - as reported                                                                                                                           | ** ** | **$**                                  | 0.25       |   | **$** | 0.26 |   |
| Basic - pro forma                                                                                                                             | ** ** | **$**                                  | 0.25       |   | **$** | 0.26 |   |
| Diluted - as reported                                                                                                                         | ** ** | **$**                                  | 0.25       |   | **$** | 0.26 |   |
| Diluted - pro forma                                                                                                                           | ** ** | **$**                                  | 0.25       |   | **$** | 0.26 |   |

 

8

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**NOTE3.****                        ****EARNINGS PER COMMON SHARE**(inthousands, except per share amounts)

 

Presented below is a summary of the componentsused to calculate basic and diluted earnings per share for the three-monthperiods ended March 31, 2005 and 2004.

 
| ** **                                                                                                                          | ** ** | **Three  months ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Basic Earnings Per Share:                                                                                                           |       |                                   |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 12,069                                 |       | 8,511 |   |
|                                                                                                                                |       |                                   |       |   |   |
| Net income                                                                                                                          |       | $                                      | 3,011      |   | $ | 2,230 |   |
|                                                                                                                                |       |                                   |       |   |   |
| Basic earnings per share                                                                                                            |       | $                                      | 0.25       |   | $ | 0.26 |   |
|                                                                                                                                |       |                                   |       |   |   |
| Diluted Earnings Per Share:                                                                                                         |       |                                   |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 12,069                                 |       | 8,511 |   |
| Net effect of the assumed  exercise of stock options based on the treasury stock method using average  market prices for the period |       | 176                                    |       | 168 |   |
| Total weighted average common  shares and common stock equivalents outstanding                                                      |       | 12,245                                 |       | 8,679 |   |
|                                                                                                                                |       |                                   |       |   |   |
| Net income                                                                                                                          |       | $                                      | 3,011      |   | $ | 2,230 |   |
|                                                                                                                                |       |                                   |       |   |   |
| Diluted earnings per share                                                                                                          |       | $                                      | 0.25       |   | $ | 0.26 |   |

 

 

**NOTE4.****                        ****RECENT ACCOUNTING STANDARDS**

 

In December 2004, the Financial Accounting StandardsBoard (“FASB”) published FASB Statement No. 123 (revised 2004), Share-BasedPayment (“FAS 123(R)” or the “Statement”). FAS 123(R) requires that thecompensation cost relating to share-based payment transactions, includinggrants of employee stock options, be recognized in financial statements. Thatcost will be measured based on the fair value of the equity or liabilityinstruments issued. FAS 123(R) covers a wide range of share-based compensationarrangements including stock options, restricted share plans, performance-basedawards, share appreciation rights, and employee share purchase plans. FAS123(R) is a replacement of FASB Statement No. 123, Accounting for Stock-BasedCompensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued toEmployees, and its related interpretive guidance.

 

The effect of the Statement will be to requireentities to measure the cost of employee services received in exchange forstock options based on the grant-date fair value of the award, and to recognizethe cost over the period the employee is required to provide services for theaward. FAS 123(R) permits entities to use any option-pricing model that meetsthe fair value objective in the Statement.

 

The Company will be required to apply FAS 123(R)as of the beginning of its first interim period that begins after December 15,2005, which will be the quarter ending March 31, 2006.

 

9

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FAS 123(R) allows two methods for determiningthe effects of the transition: the modified prospective transition method andthe modified retrospective method of transition.  Under the modified prospective transitionmethod, an entity would use the fair value based accounting method for allemployee awards granted, modified, or settled after the effective date. As ofthe effective date, compensation cost related to the nonvested portion ofawards outstanding as of that date would be based on the grant-date fair valueof those awards as calculated under the original provisions of Statement No.123; that is, an entity would not re-measure the grant-date fair value estimateof the unvested portion of awards granted prior to the effective date of FAS123(R).  An entity will have the furtheroption to either apply the Statement to only the quarters in the period ofadoption and subsequent periods, or apply the Statement to all quarters in thefiscal year of adoption. Under the modified retrospective method of transition,an entity would revise its previously issued financial statements to recognizeemployee compensation cost for prior periods presented in accordance with theoriginal provisions of Statement No. 123.

 

The Company has not yet completed its study ofthe available transition methods or made any decisions about how it will adoptFAS 123(R).   The impact of thisStatement on the Company in fiscal year 2006 and beyond will depend uponvarious factors, including our future compensation strategy. The pro formacompensation costs presented in the table above and in prior filings for theCompany have been calculated using a Black-Scholes option pricing model and maynot be indicative of amounts which should be expected in future years. Nodecisions have been made as to which option-pricing model is most appropriatefor the Company for future awards.

 

In December 2003 the American Institute ofCertified Public Accountants issued Statement of Position (“SOP”) 03-3,Accounting for Certain Loans or Debt Securities Acquired in a Transfer.  This SOP addresses accounting for differencesbetween contractual cash flows and cash flows expected to be collected from aninvestor’s initial investment in loans or debt securities (loans) acquired in atransfer if those differences are attributable, at least in part, to creditquality. It includes such loans acquired in purchase business combinations andapplies to all nongovernmental entities, including not-for-profitorganizations. This SOP does not apply to loans originated by the entity. ThisSOP limits the yield that may be accreted (accretable yield) to the excess ofthe investor’s estimate of undiscounted expected principal, interest, and othercash flows (cash flows expected at acquisition to be collected) over theinvestor’s initial investment in the loan. This SOP requires that the excess ofcontractual cash flows over cash flows expected to be collected (nonaccretabledifference) not be recognized as an adjustment of yield, loss accrual, orvaluation allowance. This SOP prohibits investors from displaying accretableyield and nonaccretable difference in the balance sheet. Subsequent increasesin cash flows expected to be collected generally should be recognizedprospectively through adjustment of the loan’s yield over its remaining life.Decreases in cash flows expected to be collected should be recognized asimpairment.

 

This SOP prohibits “carrying over” or creationof valuation allowances in the initial accounting of all loans acquired in atransfer that are within the scope of this SOP. The prohibition of thevaluation allowance carryover applies to the purchase of an individual loan, apool of loans, a group of loans, and loans acquired in a purchase businesscombination.

 

The Company adopted SOP 03-3 as of January 1,2005.

 

 

**NOTE5.****                        ****BUSINESS COMBINATIONS**

 

On March 1, 2005, the Company completed theacquisition of FNBG Bancshares, Inc. the parent company of First National Bankof Gwinnett in Duluth, Gwinnett County, Georgia, which resulted in FirstNational Bank of Gwinnett becoming a wholly owned subsidiary of the Company.   The Companyissued 851,154 shares of its capital stock and approximately $3,699,502 in cashin exchange for all of the issued and outstanding common shares of FNBG Bancshares,Inc.  The acquisition was accounted foras a purchase resulting in estimated goodwill of approximately $19,278,000.  First National Bank of Gwinnett’s results ofoperations from March 1, 2005 are included in the consolidated results ofoperations for the three months ended March 31, 2005.  The results of operations for the threemonths ended March 31, 2004 do not include the results of operations for FirstNational Bank of Gwinnett.

 

10

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The following table summarizes the estimatedfair values of the assets acquired and liabilities assumed at the date of acquisition.  The Company obtained third-party valuationsof the core deposit intangible and other fair value adjustments.

 

 
| ** **                                | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-----------|------------|
|                                      |       |      |       |
| Cash and due from banks, net of cash paid |       | $         | 142        |   |
| Interest-bearing deposits in banks        |       | —    |       |
| Federal funds sold                        |       | 4,889     |       |
| Securities available for sale             |       | 10,872    |       |
| Restricted equity securities              |       | 634       |       |
| Loans, net                                |       | 100,229   |       |
| Premises and equipment                    |       | 3,755     |       |
| Goodwill                                  |       | 19,278    |       |
| Core deposit intangible                   |       | 697       |       |
| Other assets                              |       | 1,451     |       |
| Total assets acquired                     |       | $         | 141,947    |   |
|                                      |       |      |       |
| Deposits                                  |       | $         | 109,628    |   |
| Other borrowings                          |       | 7,150     |       |
| Other liabilities                         |       | 444       |       |
| Total liabilities assumed                 |       | $         | 117,222    |   |
|                                      |       |      |       |
| Net assets acquired                       |       | $         | 24,725     |   |

 

Unaudited pro forma consolidated results ofoperations for the three months ended March 31, 2005 and 2004 as thoughthe companies had combined as of January 1, 2005 and 2004 are as follows:

 
| ** **                 | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                       |       |                                  |       |   |   |
| Net interest income        |       | $                                     | 13,553     |   | $ | 9,770 |   |
| Net income                 |       | 3,084                                 |       | 2,331 |   |
| Basic earnings per share   |       | 0.26                                  |       | 0.25 |   |
| Diluted earnings per share |       | 0.25                                  |       | 0.25 |   |
|                            |            |                                       |            |  |  |  |  |

 

11

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

 

**Item2.****              ****MANAGEMENT’S DISCUSSION 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 Community Loan Company during the periods included in the accompanyingconsolidated financial statements.  Thisdiscussion should be read in conjunction with the accompanying consolidatedfinancial statements and the notes thereto.

 

**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 and otherstatements that are not historical facts. Forward-looking statements are notguarantees 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 similar expressions, you shouldconsider them as identifying forward-looking statements, although we may useother phrasing. These forward-looking statements involve risks anduncertainties and are based on our beliefs and assumptions, and on theinformation available to us at the time that these disclosures were prepared.Factors that may cause actual results to differ materially from those expressedor implied by such forward-looking statements include, among others, thefollowing possibilities: (1) competitive pressures among depository and otherfinancial institutions may increase significantly; (2) changes in the interestrate environment may reduce margins; (3) general economic conditions may beless favorable than expected, resulting in, among other things, a deteriorationin credit quality and/or a reduction in demand for credit; (4) economic,governmental or other factors may prevent the projected population andcommercial growth in the counties in which we operate;  (5) legislative or regulatory changes,including changes in accounting standards, may adversely affect the businessesin which we are engaged;  (6) costs ordifficulties related to the integration of our businesses may be greater thanexpected; (7) deposit attrition, customer loss or revenue loss followingacquisitions may be greater than expected; (8) competitors may have greaterfinancial resources and develop products that enable such competitors tocompete more successfully than we can; and (9) adverse changes may occur in theequity markets.  Many of these factorsare beyond our ability to control or predict, and readers are cautioned not toput undue reliance on such forward-looking statements. We do not intend to, andassume no responsibility to update or revise any forward-looking statementscontained in this Report, whether as a result of new information, future eventsor otherwise.

 

**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, 2004. 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.

 

12

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*Allowancefor Loan Losses*.    Webelieve that our determination of the allowance for loan losses is our mostsignificant judgment and estimate used in the preparation of our consolidatedfinancial statements. The allowance for loan losses is an amount thatmanagement believes will be adequate to absorb estimated losses in the loanportfolio. The calculation is an estimate of the amount of loss in the loanportfolios of our subsidiary banks and finance company. The allowance for loanlosses is evaluated on a regular basis by management and is based uponmanagement’s periodic review of the collectibility of the loans in light ofhistorical experience, the nature and volume of the loan portfolio, adversesituations that may affect the borrower’s ability to repay, estimated value ofany underlying collateral and prevailing economic conditions. This evaluationis inherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available. In addition,regulatory agencies, as an integral part of their examination process,periodically review our allowance for loan losses, and may require us to make additionsto the allowance based on their judgment about information available to them atthe time of their examinations.

 

We use an 8 pointrating system for our loans. Ratings of 1 to 4 are considered pass ratings, 5is special 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, ouraccountants, and by the applicable regulator.

 

“Pass” loans areseparated into homogeneous pools. Currently, these pools consist of realestate, commercial, consumer and credit card loans. Management assigns losspercentages to these categories of homogeneous pools of loans based on thegreater of historic loss data in each category or the minimum risk percentagefor this category. Management tracks the last eight quarters moving average netlosses for the historic loss percentage in each category. This historic losspercentage is reviewed and adjusted periodically, by pool, in light of currenttrends in past dues, changes in lending policies, underwriting standards, economicconditions, and other factors that may affect this number. In addition to thehomogeneous pools, management has specified certain industry risks and appliedloss percentages to the specified industry risk categories. Recently, becauseof low losses in most categories, management has assigned minimum percentagesto each category.

 

For loans rated 4 (“pass/watch”),a loss percentage of 1% is used. For loans rated 5, a loss percentage of 5% isused. All significant loans rated 6 and 7 are individually analyzed and aspecific reserve is assigned based on exposure or industry standards, whicheveris greater. These loans, their reserves, and action plans to resolve theircriticisms are reviewed monthly by the loan committee of each subsidiary bank.All other loans rated 6 and 7 are assigned loss percentages of 15% and 50%respectively. All loans rated 8 are assigned a specific reserve of 100%.

 

The remainder of thebalance in the reserve for loan losses is unallocated.  Management believes that the unallocatedallowance is adequate to provide for probable losses that are inherent in theloan portfolio and that have not been fully provided for through the allocatedallowance.  Factors considered indetermining the adequacy of the unallocated allowance include the economicenvironment, experience level of lenders, concentration in commercial andconsumer real estate loans, size of individual loans and the continued strongloan growth in our markets.  Thesefactors are tempered by lending practices related to the real estate portfolio,the continuing positive performance within this segment of our loan portfolio,the knowledge and experience of our commercial lending staff, and therelationship banking philosophy maintained in our community banks.

 

*Goodwill*.    Our growth overthe past several years has been enhanced significantly by mergers andacquisitions. Prior to July 2001, all of our acquisitions were accountedfor using the pooling-of-interests business combination method of accounting.Effective July 1, 2001, we adopted SFAS No. 141, “Business Combinations,”which allows only the use of the purchase method of accounting. For purchaseacquisitions, we are required to record the assets acquired, includingidentified intangible assets, and liabilities assumed at their fair value,which in many instances involves estimates based on third party valuations,such as appraisals, or internal valuations based on discounted cash flowanalyses or other valuation techniques. The determination of the useful livesof intangible assets is subjective as is the appropriate amortization periodfor such intangible assets. In addition, purchase acquisitions typically resultin recording goodwill, which is subject to ongoing periodic impairment testsbased on the

 

13

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fair value of netassets acquired compared to the carrying value of goodwill. In July 2004,the required impairment testing of goodwill was performed and no impairmentexisted as of the valuation date, as the fair value of our net assets exceededtheir carrying value. If for any future period we determine that there has beenimpairment in the carrying value of our goodwill balances, we will record acharge to our earnings, which could have a material adverse effect on our netincome.

 

**Summary**

 

Net income for the three months ended March 31,2005 was $3.0 million, up 35.02% from the same period a year ago.  Diluted earnings per share was $0.25 for thethree months ended March 31, 2005, compared to $0.26 for the same period ayear ago.  The return on average assetswas 0.91% and the return on average equity was 6.65% for the three months endedMarch 31, 2005.  This compares to areturn on average assets of 0.93% and a return on average equity of 9.14% forthe same period a year ago.

 

FNBG became part of the Company effective March 1,2005.  The merger was accounted for as a purchasetransaction; therefore, results of operations for FNBG since March 1, 2005have been included in the Company’s results of operations for the three-monthperiod ended March 31, 2005, but are not included in the results ofoperations for the three-month period ended March 31, 2004.  Also included in the results of operationsfor the three months ended March 31, 2005, are the results of operationsrelated to the acquisitions of Southern Heritage Bank (“SHB”) and LumpkinCounty Bank (“LCB”) both of which were completed in August 2004, which arenot included in the results of operations for the period ended March 31,2004.

 

**Balance Sheets**

 

Our total assets increased $196.4 million to $1.5billion at March 31, 2005, or 15.42% compared to December 31, 2004.  The increase consists primarily of anincrease in total loans of $142.3 million, or 14.88%, an increase in securitiesof $7.5 million, an increase in federal funds sold of $10.7 million and anincrease in goodwill and intangible assets of $19.8 million. Excluding theacquisition of FNBG, total assets increased $54.5 million or 4.28% during thissame period.  Also excluding theacquisition, total loans increased $42.0 million, securities decreased $4.0million and federal funds sold increased $5.8 million.

 

Total deposits have increased $167.6 million to$1.1 billion at March 31, 2005, or 18.05% compared to December 31,2004.  Noninterest-bearing deposits increased$16.8 million to $142.5 million and interest-bearing deposits increased $150.8million to $953.7 million during the same period.   Deposit growth outpaced loan growthresulting in a loan to deposit ratio of 100.18% at March 31, 2005 comparedto 102.94% at December 31, 2004.   Excludingthe acquisition of FNBG discussed above, deposits increased $58.0 million, or6.24%.

 

**Asset Quality**

 

The allowance for loan losses at March 31,2005 was $11.3 million or 1.03% of total loans compared to 1.24% at March 31,2004.  The Company adopted SOP 03-3 as ofJanuary 1, 2005, which requires the allowance for loan losses of an acquired companyto be included in gross loans.  Theanalysis below indicates an increase of $260,000 in net charge-offs for the threemonths ended March 31, 2005 as compared to the same period in 2004.  The increase in net charge-offs is primarily attributableto the loans acquired in the acquisition of LCB in August 2004 whichrepresented approximately $105,000 of this increase. Based on its evaluation,management believes the allowance is adequate to absorb any potential loanlosses at March 31, 2005.  Theallowance for loan losses acquired in prior periods related to acquisitions hasbeen sufficient to absorb estimated uncollectible nonperforming loans acquiredin addition to any net write-offs related to nonperforming loans acquired.  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 three-month periods ended March 31, 2005 and 2004.

 

14

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| ** **                                                  | ** ** | **Three  months ended  March 31,** | ** **    |
|-------------------------------------------------------------|------------|-----------------------------------------|---------------|
| ** **                                                  | ** ** | **2005**                                | ** **    | **2004** | ** ** |
| ** **                                                  | ** ** | **(Dollars  in thousands)**             | ** **    |
| **Average amount of loans  outstanding**                    | ** ** | **$**                                   | **1,004,191** |   | $ | 720,063 |   |
|                                                        |       |                                    |          |   |   |
| **Allowance for loan losses  balance, beginning of period** | ** ** | **$**                                   | **11,061**    |   | $ | 8,726 |   |
|                                                        |       |                                    |          |   |   |
| **Less charge-offs**                                        |       |                                    |          |   |   |
| Commercial loans                                            | ** ** | **(96**                                 | **)**         | — |   |
| Real estate loans                                           | ** ** | **(32**                                 | **)**         | — |   |
| Consumer loans                                              | ** ** | **(205**                                | **)**         | (141 | ) |
| Total charge-offs                                           | ** ** | **(333**                                | **)**         | (141 | ) |
|                                                        |       |                                    | ** **    |   |   |
| **Plus recoveries**                                         |       |                                    | ** **    |   |   |
| Commercial loans                                            | ** ** | **9**                                   | ** **    | 44 |   |
| Real estate loans                                           | ** ** | **4**                                   | ** **    | 3 |   |
| Consumer loans                                              | ** ** | **54**                                  | ** **    | 88 |   |
| Total recoveries                                            | ** ** | **67**                                  | ** **    | 135 |   |
| **Net charge-offs**                                         | ** ** | **(266**                                | **)**         | (6 | ) |
|                                                        |       |                                    | ** **    |   |   |
| **Plus provision for loan losses**                          | ** ** | **482**                                 | ** **    | 284 |   |
|                                                        |       |                                    | ** **    |   |   |
| **Allowance for loan losses balance,  end of period**       | ** ** | **$**                                   | **11,277**    | ** ** | $ | 9,004 |   |
|                                                        |       |                                    | ** **    |   |   |
| **Net charge-offs to average  loans (annualized)**          | ** ** | **0.107**                               | **%**         | 0.003 | % |

 

15

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The provision for loan losses increased $198,000or 69.72% for the three months ended March 31, 2005 compared to the sameperiod in 2004.  The increase for thethree-month period related to FNBG was $67,000, which represents one month’sprovision taken at FNBG.  Also, CTB didnot record a provision for loan loss for the period ended March 31, 2004,but recorded a provision for loan loss of $68,000 for the period ended March 31,2005.

 

The following table is a summary of nonaccrual, pastdue loans and restructured loans. The numbers indicate an increase of approximately$7.3 million in nonaccrual loans as of March 31, 2005 as compared to March 31,2004.  This increase is the result of acombination of an increase at GBT in nonaccrual loans of approximately $1,470,000directly related to the acquisition of LCB; an increase at CTB of $180,000; an increaseat HTB of approximately $4.8 million and an increase of $115,000 related to theacquisition of FNBG.  The increase at HTBof approximately $4.8 million represents one loan relationship consisting offour loans which are all secured by real estate and have specific reservesallocated in accordance with Company policy. A significant portion of the consumer nonaccrual loan balance is relatedto Community Loan Company which represents approximately 66.27%, or $281,000 ofthe consumer balance.  The table presentsa decrease of $689,000 in past due loans over 90 days.  The majority of the decrease consists of twoloans to the same customer totaling $552,000 located at CTB, which wereclassified as past due at March 31, 2004, but were moved to nonaccrual statusas of March 31, 2005.  CommunityLoan Company accounts for approximately 98.70%, or $303,000 of the consumer pastdue loan balance at March 31, 2005. Due to the nature of the consumer finance business, we believe that thelevel of nonaccrual and past due loans over 90 days for Community Loan Companyis normal and will consistently remain higher than those seen in our banking subsidiaries.  Community Loan Company’s reserve for loanloss is also higher to cover these higher levels of nonaccrual and past dueloans.  The allowance for loan losses tototal loans for Community Loan Company was 6.00% for the period ended March 31,2005 and 9.12% for the period ended March 31, 2004.  There is minimal or no loss anticipated onthe remaining real estate loans in nonaccrual and past due loans due to thevalue of the underlying collateral.

 
| ** **        | ** ** | **March 31,  2005**    | ** ** |
|-------------------|------------|-----------------------------|------------|
| ** **        | ** ** | **Nonaccrual  Loans**       | ** ** | **Past Due  90 Days  Still Accruing** | ** ** | **Restructured  Debt** | ** ** |
| ** **        | ** ** | **(Dollars  in thousands)** | ** ** |
|              |       |                        |       |   |   |   |   |
| Real estate loans |       | $                           | 8,982      |   | $ | 4 |   | $ | 31 |   |
| Commercial loans  |       | 807                         |       | 53 |   | — |   |
| Consumer loans    |       | 424                         |       | 307 |   | 8 |   |
| Total             |       | $                           | 10,213     |   | $ | 364 |   | $ | 39 |   |

 
| ** **        | ** ** | **March 31,  2004**    | ** ** |
|-------------------|------------|-----------------------------|------------|
| ** **        | ** ** | **Nonaccrual  Loans**       | ** ** | **Past Due  90 Days  Still Accruing** | ** ** | **Restructured  Debt** | ** ** |
| ** **        | ** ** | **(Dollars  in thousands)** | ** ** |
|              |       |                        |       |   |   |   |   |
| Real estate loans |       | $                           | 2,118      |   | $ | 552 |   | $ | — |   |
| Commercial loans  |       | 274                         |       | — |   | — |   |
| Consumer loans    |       | 559                         |       | 501 |   | — |   |
| Total             |       | $                           | 2,951      |   | $ | 1,053 |   | $ | — |   |

 

16

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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.  Community Loan Companyaccrues interest until management determines that full repayment of principaland interest is not probable, which in many cases exceeds 90 days pastdue.  Accrual of interest on such loansis resumed when, in management’s judgment, the collection of interest andprincipal becomes probable.

 

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.

 

 

**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 of securities.  Also, we maintain relationships withcorrespondent banks which could provide funds on short notice.  As of March 31, 2005, we had borrowedunder Federal funds purchase lines and securities sold under agreement torepurchase, $30.6 million compared to $47.6 million at December 31, 2004.

 

Our liquidity and capital resources aremonitored on a periodic basis by management, and state and federal regulatoryauthorities.  Our liquidity ratio was 14.81%at March 31, 2005, slightly below our policy minimum ratio of 15%.  Liquidity is measured by the ratio of netcash, Federal funds sold and securities to net deposits and short-termliabilities. In the event our subsidiary banks need to generate additionalliquidity, funding plans would be implemented as outlined in the liquiditypolicy of the subsidiary banks. Our subsidiary banks have lines of creditavailable 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.  Managementreviews liquidity on a periodic basis to monitor and adjust liquidity asnecessary.  Management has the ability toadjust liquidity by selling securities available for sale, sellingparticipations in loans we generate and accessing available funds throughvarious borrowing arrangements.  At March 31,2005, we had available borrowing capacity totaling approximately $188.8 millionthrough various borrowing arrangements and available lines of credit.  Our short-term investments and availableborrowing arrangements are adequate to cover any reasonably anticipatedimmediate need for funds.

 

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 As of March 31,2005, our subsidiary banks were considered to be well-capitalized as defined inthe Federal Deposit Insurance Corporation Improvement Act and based onregulatory minimum capital requirements. The Company and the subsidiary banks’ capital ratios are presented inthe following table.

 
| ** **                               | ** ** | **CAPITAL  RATIOS** | ** ** | **FOR CAPITAL  ADEQUACY  PURPOSES** | ** ** | **TO BE  WELL  CAPITALIZED** | ** ** |
|------------------------------------------|------------|---------------------|------------|-------------------------------------|------------|------------------------------|------------|
|                                     |       |                |       |                                |       |                         |       |
| As of March 31, 2005                |       |                |       |                                |       |                         |       |
| Total Capital to Risk Weighted  Assets:  |       |                |       |                                |       |                         |       |
| Consolidated                             |       | 14.70               | %          | 8.00                                | %          | N\A                          |       |
| Gainesville Bank & Trust             |       | 10.97               | %          | 8.00                                | %          | 10.00                        | %          |
| United Bank & Trust                  |       | 13.58               | %          | 8.00                                | %          | 10.00                        | %          |
| Community Trust Bank                     |       | 10.73               | %          | 8.00                                | %          | 10.00                        | %          |
| HomeTown Bank of Villa Rica              |       | 10.64               | %          | 8.00                                | %          | 10.00                        | %          |
| First National Bank of the  South        |       | 10.90               | %          | 8.00                                | %          | 10.00                        | %          |
| First National Bank of  Gwinnett         |       | 10.52               | %          | 8.00                                | %          | 10.00                        | %          |
| Tier I Capital to Risk Weighted  Assets: |       |                |       |                                |       |                         |       |
| Consolidated                             |       | 13.71               | %          | 4.00                                | %          | N\A                          |       |
| Gainesville Bank & Trust             |       | 9.83                | %          | 4.00                                | %          | 6.00                         | %          |
| United Bank & Trust                  |       | 12.36               | %          | 4.00                                | %          | 6.00                         | %          |
| Community Trust Bank                     |       | 9.80                | %          | 4.00                                | %          | 6.00                         | %          |
| HomeTown Bank of Villa Rica              |       | 9.46                | %          | 4.00                                | %          | 6.00                         | %          |
| First National Bank of the  South        |       | 10.01               | %          | 4.00                                | %          | 6.00                         | %          |
| First National Bank of  Gwinnett         |       | 10.47               | %          | 4.00                                | %          | 6.00                         | %          |
| Tier I Capital to Average  Assets:       |       |                |       |                                |       |                         |       |
| Consolidated                             |       | 12.31               | %          | 4.00                                | %          | N\A                          |       |
| Gainesville Bank & Trust             |       | 7.96                | %          | 4.00                                | %          | 5.00                         | %          |
| United Bank & Trust                  |       | 8.61                | %          | 4.00                                | %          | 5.00                         | %          |
| Community Trust Bank                     |       | 8.32                | %          | 4.00                                | %          | 5.00                         | %          |
| HomeTown Bank of Villa Rica              |       | 8.25                | %          | 4.00                                | %          | 5.00                         | %          |
| First National Bank of the  South        |       | 8.62                | %          | 4.00                                | %          | 5.00                         | %          |
| First National Bank of  Gwinnett         |       | 10.66               | %          | 4.00                                | %          | 5.00                         | %          |

 

In January 2005, the Company completed theconstruction of an operations center for the Company’s operations and dataprocessing departments.  The estimatedcost of the building, including furniture, fixtures and equipment wasapproximately $2.7 million.

 

Also in January 2005, the Company began amajor renovation project at the lead bank, GBT. The estimated cost of this project is $1.1 million and is expected to becompleted in the third quarter of 2005.

 

Our subsidiary banks are subject to certainrestrictions on the amount of dividends that may be declared without priorregulatory approval.  At March 31,2005, approximately $5.2 million of retained earnings at our subsidiary bankswere available for dividend declaration without regulatory approval.

 

**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 was 4.29% for the threemonths ended March 31, 2005, compared to 4.13% for the same period in 2004,an increase of 16 basis points.  This increaseresulted from a 42 basis point increase in the yield on earning assets

 

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offset by a 26 basis point increase in theeffective cost of funds.  The increasedyield on earning assets was primarily due to increased volumes and yields onloans and the increased effective cost of funds was due to higher average ratespaid on time deposits and other borrowings. The Company continues to experience growth in the portfolios whilemaintaining its competitive pricing.

 

Net interest income increased $3.9 million or 43.44%for the three months ended March 31, 2005 compared to the same period in2004.  The net increase consists of anincrease in interest income of $6.0 million or 47.01% less an increase ininterest expense of $2.2 million or 55.03% for the three-month period.  The increase continues to reflect thecontinued increase in interest-earning assets during the first quarter of 2005compared to the first quarter of 2004. The change in net interest income is the result of the increases in netvolume and an increase in net interest rates. These variances include the impact of the acquisition of FNBG in March 2005as well as the acquisitions of SHB and LCB in August 2004.

 

**Other Income**

 

Other income for the three months ended March 31,2005, decreased by $142,000 or 4.90% compared to the same period in 2004.  Service charges increased by $118,000 which wasoffset by a decrease in gain on sale of securities of $262,000 for the threemonth period.

 

**Other Expense**

 

Other expenses increased by approximately $2.2million or 26.92% for the three months ended March 31, 2005 compared tothe same period in 2004.  The increase isdue primarily to an increase in salaries and employee benefits expense of $1,382,000.  Net occupancy and equipment expensesincreased $217,000.  Included in theincrease in other operating expenses for the three month period were increasesin ATM and data processing expenses of $104,000 and legal and collectionexpenses of $87,000.  Also, increaseswere noted in supplies, postage and telephone of $77,000 and marketing andpublic relations of $44,000.  Theincreases in all of the above categories can be partially attributed to theinclusion in 2005 of FNBG for one month and SHB and LCB for three months andthe addition of 63 employees, related to these acquisitions.

 

**Income Tax Expense**

 

Income tax expense increased by $492,000 for thethree-month period ended March 31, 2005, compared to the same period in2004. The effective tax rate for the three-month period ended March 31,2005 was 31.97%, compared to 29.27% for the same period in 2004.

 

**Net Income**

 

Net income increased by $781,000 or 35.02% forthe three months ended March 31, 2005, compared to the same period in 2004.  These increases are directly related to theincrease in net interest income which is partially offset by the increases inother expenses as discussed above.

 

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 itsliquidity, capital resources or operations. We are not aware of any current recommendations by the regulatoryauthorities, which, if they were implemented, would have such an effect, exceptas noted above.

 

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**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, standbyletters of credit and credit card commitments is represented by the contractualamount of those instruments.  We use thesame credit 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 March 31, 2005 and December 31, 2004 are asfollows:

 
| ** **                          | ** ** | **March 31, 2005**    | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
|                                |       |                       |       |                       |       |
| Commitments to extend credit        |       | $                          | 231,706    |                       | $          | 192,294 |   |
| Financial standby letters of credit |       | 8,041                      |       | 7,354                      |       |
| Other standby letters of credit     |       | 2,617                      |       | 1,357                      |       |
| Credit card commitments             |       | 6,137                      |       | 5,235                      |       |
| Total                               |       | $                          | 248,501    |                       | $          | 206,240 |   |

 

**Item3.****              ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET 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 tochanges in 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, havefeatures (generally referred to as “interest rate caps and floors”) which limitthe amount of changes in interest rates. Prepayment and early withdrawal levelsalso could deviate significantly from those assumed in calculating the interestrate gap. The ability of many borrowers to service their debts also maydecrease during periods of rising interest rates.

 

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Changes in interestrates also affect our liquidity position. We currently price deposits inresponse to market rates and it is management’s intention to continue thispolicy. If deposits are not priced in response to market rates, a loss ofdeposits could occur 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 December 31, 2004, the Companymaintained an asset sensitive interest rate risk position based on itssimulation model results.  Thispositioning would be expected to result in an increase in net interest incomein a rising rate environment and a decrease in net interest income in adeclining rate environment.  This isgenerally due to a greater proportion of interest earning assets repricing on avariable rate basis as compared to variable rate funding sources. This asset sensitivityis indicated 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                                                       |       | 8.40                                         | %          |
| Flat                                                       |       | —                                       |       |
| -100                                                       |       | 7.98                                         | %          |

 

 

 We actively manage the mix of asset andliability maturities to control the effects of changes in the general level ofinterest rates on net interest income. Except for its effect on the generallevel of interest rates, inflation does not have a material impact on us due tothe rate variability and short-term maturities of our earning assets.

 

 

**Item 4.****          ****CONTROLSAND PROCEDURES**

 

**Disclosure Controls andProcedures**

 

As of the end of theperiod covered by this report, an evaluation was carried out under thesupervision and with the participation of the Company’s President and ChiefFinancial Officer, of the effectiveness of the design and operation of itsdisclosure controls and procedures. Based upon that evaluation, the Presidentand Chief Financial Officer concluded that the design and operation of thesedisclosure controls and procedures were effective as of the end of the periodcovered by this report in alerting them on a timely basis to materialinformation relating to the Company required to be included in the Company’sreports filed or submitted under the Securities Exchange Act of 1934.

 

**Internal Control over FinancialReporting**

 

Asof the date of filing of this Form 10-Q, the Company is not aware of anymaterial weaknesses in its internal control over financial reporting.  No change in our internal control overfinancial reporting occurred during the first quarter of 2005 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**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&TBANCSHARES, INC.

 

 
| DATE:  | 5/10/2005                              |   | BY: | /s/ Richard A. Hunt  |   |
|--------|----------------------------------------|--------|-----|----------------------|--------|
|   | Richard A. Hunt                        |
|   | President and Chief Executive  Officer |
|   |                                   |
|   |                                   |
| DATE:  | 5/10/2005                              |   | BY: | /s/ Gregory L. Hamby |   |
|   | Gregory L. Hamby                       |
|   | Executive Vice  President &        |
|   | Chief Financial  Officer               |
|        |                                        |        |     |                      |        |  |  |

 

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