** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-Q**

**Mark One**
| **x**      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                      |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                              |
| ** ** | **For the quarterly period ended September 30,  2006**                                                                                                                                                                                                                                                            |
|       |                                                                                                                                                                                                                                                                                                              |
| **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&TBancshares, Inc.**

(Exactname of registrant as specified in its charter)

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

 

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

**Gainesville, Georgia 30501**

(Addressof principal executive offices)

**(770) 532-1212**

(Registrant’stelephone number, including area code)

**N/A**

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

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

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.
| Large accelerated filer o | Accelerated filer  x | Non-accelerated filer o |
|--------------------------------|--------------------------------|------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No x

**APPLICABLE ONLY TO CORPORATE ISSUERS**

Statethe number of shares outstanding of each of the issuer’s classes of capitalstock, as of November 1, 2006:  14,081,538 shares; no par value

 

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**GB&T BANCSHARES, INC.**

**TABLE OF CONTENTS**
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                  | ** ** |
|--------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Item  1. Financial Statements**                                                                                          | ** ** |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Consolidated Balance Sheets – September 30, 2006  (Unaudited)  and December 31, 2005**                              | ** ** |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Consolidated Statements of Income (Unaudited)-  Three and nine months ended September 30, 2006 and 2005**                | ** ** |
|         |                                                                                                                       |       |
| ** **   | **Consolidated Statements of Comprehensive Income  (Unaudited)-  Three and nine months ended September 30, 2006 and 2005** | ** ** |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Consolidated Statements of Stockholders’ Equity  (Unaudited)-  Nine months ended September 30, 2006**               | ** ** |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Consolidated Statements of Cash Flows (Unaudited) -  Nine months ended September 30, 2006 and 2005**                     | ** ** |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Notes to Consolidated Financial Statements (Unaudited)**                                                                 |       |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations**                    |       |
|         |                                                                                                                       |       |
| ** **   | **Item 3. Quantitative and Qualitative Disclosures About  Market Risk**                                                    | ** ** |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Item 4. Controls and Procedures**                                                                                        | ** ** |
| ** **   | ** **                                                                                                                 | ** ** |
| **PART II.** | **OTHER INFORMATION**                                                                                                      |       |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Item  1. Legal Proceedings**                                                                                             | ** ** |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Item  1A. Risk Factors**                                                                                                 | ** ** |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds**                                                   | ** ** |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Item 3. Defaults Upon Senior Securities**                                                                                | ** ** |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Item 4. Submission of Matters to a Vote of Security  Holders**                                                           | ** ** |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Item  5. Other Information**                                                                                             | ** ** |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Item 6. Exhibits**                                                                                                       | ** ** |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Signatures**                                                                                                             | ** ** |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Certifications**                                                                                                         | ** ** |
|              |                                                                                                                            |            |  |

 

2

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**PART I -FINANCIAL INFORMATION**

**ITEM 1 - FINANCIAL STATEMENTS**

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

**ConsolidatedBalance Sheets**
| ** **                                                                                                                                                                     | ** ** | **September 30,  2006**         | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **(Unaudited)**                      | ** ** | ** **                  | ** ** |
| ** **                                                                                                                                                                     | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                                                                                                           |       |                                 |       |                        |       |
| **Assets**                                                                                                                                                                     |       |                                 |       |                        |       |
| ** **                                                                                                                                                                     |       |                                 |       |                        |       |
| Cash and due from banks                                                                                                                                                        |       | $                                    | 20,255     |                        | $          | 30,748 |   |
| Interest-bearing  deposits in banks                                                                                                                                            |       | 3,502                                |       | 728                         |       |
| Federal funds sold                                                                                                                                                             |       | 23,287                               |       | 568                         |       |
| Securities available  for sale, at fair value                                                                                                                                  |       | 206,390                              |       | 188,127                     |       |
| Restricted equity  securities, at cost                                                                                                                                         |       | 9,725                                |       | 9,277                       |       |
|                                                                                                                                                                           |       |                                 |       |                        |       |
| Loans, net of unearned  income                                                                                                                                                 |       | 1,457,873                            |       | 1,231,410                   |       |
| Less allowance  for loan losses                                                                                                                                                |       | 16,720                               |       | 12,773                      |       |
| Loans, net                                                                                                                                                                     |       | 1,441,153                            |       | 1,218,637                   |       |
|                                                                                                                                                                           |       |                                 |       |                        |       |
| Premises and equipment,  net                                                                                                                                                   |       | 42,279                               |       | 37,014                      |       |
| Goodwill                                                                                                                                                                       |       | 87,047                               |       | 61,164                      |       |
| Intangible assets                                                                                                                                                              |       | 5,913                                |       | 5,586                       |       |
| Other assets                                                                                                                                                                   |       | 36,511                               |       | 32,245                      |       |
|                                                                                                                                                                           |       |                                 |       |                        |       |
| **Total  assets**                                                                                                                                                              |       | $                                    | 1,876,062  |                        | $          | 1,584,094 |   |
|                                                                                                                                                                           |       |                                 |       |                        |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                 |       |                                 |       |                        |       |
|                                                                                                                                                                           |       |                                 |       |                        |       |
| **Liabilities:**                                                                                                                                                               | ** ** | ** **                           | ** ** | ** **                  | ** ** |
| Deposits:                                                                                                                                                                      |       |                                 |       |                        |       |
| Noninterest-bearing                                                                                                                                                            |       | $                                    | 167,510    |                        | $          | 158,487 |   |
| Interest-bearing  demand and savings                                                                                                                                           |       | 433,452                              |       | 414,542                     |       |
| Time deposits                                                                                                                                                                  |       | 856,275                              |       | 623,997                     |       |
| Total deposits                                                                                                                                                                 |       | 1,457,237                            |       | 1,197,026                   |       |
| Federal funds  purchased and securities sold under repurchase agreements                                                                                                       |       | 43,442                               |       | 45,510                      |       |
| Federal Home  Loan Bank advances                                                                                                                                               |       | 92,636                               |       | 97,298                      |       |
| Other borrowings                                                                                                                                                               |       | 851                                  |       | 968                         |       |
| Other  liabilities                                                                                                                                                             |       | 17,802                               |       | 14,683                      |       |
| Subordinated  debt                                                                                                                                                             |       | 29,898                               |       | 29,898                      |       |
|                                                                                                                                                                           |       |                                 |       |                        |       |
| **Total  liabilities**                                                                                                                                                         |       | 1,641,866                            |       | 1,385,383                   |       |
|                                                                                                                                                                           |       |                                 |       |                        |       |
| **Stockholders’ Equity:**                                                                                                                                                 |       |                                 |       |                        |       |
| ** **                                                                                                                                                                     |       |                                 |       |                        |       |
| Capital stock, no par  value; 20,000,000 shares authorized, 14,053,746 and 12,784,397 shares issued  and outstanding at September 30, 2006 and December 31, 2005, respectively |       | 185,313                              |       | 157,875                     |       |
| Retained  earnings                                                                                                                                                             |       | 51,339                               |       | 43,404                      |       |
| Accumulated  other comprehensive loss                                                                                                                                          |       | (2,456                               | )          | (2,568                      | )          |
|                                                                                                                                                                           |       |                                 |       |                        |       |
| **Total  stockholders’ equity**                                                                                                                                           |       | 234,196                              |       | 198,711                     |       |
|                                                                                                                                                                           |       |                                 |       |                        |       |
| **Total liabilities and  stockholders’ equity**                                                                                                                           |       | $                                    | 1,876,062  |                        | $          | 1,584,094 |   |

 

See accompanying notes to consolidated financial statements.

3

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

**ConsolidatedStatements of Income**

**(Unaudited)**
| ** **                                                               | ** ** | **Three months ended**                                      | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                               | ** ** | **September 30,**                                                | ** ** | **September 30,**          | ** ** |
| ** **                                                               | ** ** | **2006**                                                              | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                               | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Interest income:                                                         |       |                                                                  |       |                            |       |   |   |   |   |
| Loans, including  fees                                                   |       | $                                                                     | 31,504     |                            | $          | 21,833 |   | $ | 84,565 |   | $ | 58,816 |   |
| Taxable  securities                                                      |       | 2,168                                                                 |       | 1,884                           |       | 6,058 |   | 5,360 |   |
| Nontaxable  securities                                                   |       | 142                                                                   |       | 153                             |       | 392 |   | 483 |   |
| Federal funds  sold                                                      |       | 294                                                                   |       | 132                             |       | 490 |   | 236 |   |
| Interest-bearing  deposits in banks                                      |       | 39                                                                    |       | 19                              |       | 84 |   | 34 |   |
| Total interest  income                                                   |       | 34,147                                                                |       | 24,021                          |       | 91,589 |   | 64,929 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Interest expense:                                                        |       |                                                                  |       |                            |       |   |   |   |   |
| Deposits                                                                 |       | 13,769                                                                |       | 7,647                           |       | 34,724 |   | 18,545 |   |
| Federal funds  purchased and securities sold under repurchase agreements |       | 287                                                                   |       | 161                             |       | 815 |   | 470 |   |
| Federal Home  Loan Bank advances                                         |       | 1,050                                                                 |       | 1,038                           |       | 3,002 |   | 2,903 |   |
| Other borrowings                                                         |       | 710                                                                   |       | 530                             |       | 1,944 |   | 1,500 |   |
| Total interest  expense                                                  |       | 15,816                                                                |       | 9,376                           |       | 40,485 |   | 23,418 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Net interest  income                                                     |       | 18,331                                                                |       | 14,645                          |       | 51,104 |   | 41,511 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Provision for loan  losses                                               |       | 1,789                                                                 |       | 635                             |       | 4,269 |   | 4,939 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Net interest  income after provision for loan losses                     |       | 16,542                                                                |       | 14,010                          |       | 46,835 |   | 36,572 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Other income:                                                            |       |                                                                  |       |                            |       |   |   |   |   |
| Service charges  on deposit accounts                                     |       | 1,588                                                                 |       | 1,659                           |       | 4,714 |   | 4,823 |   |
| Mortgage  origination fees                                               |       | 770                                                                   |       | 621                             |       | 1,911 |   | 1,744 |   |
| Insurance  commissions                                                   |       | 1                                                                     |       | 149                             |       | 8 |   | 442 |   |
| Gain on sale of  securities                                              |       | —                                                                |       | 552                             |       | — |   | 553 |   |
| Other operating  income                                                  |       | 405                                                                   |       | 495                             |       | 1,205 |   | 1,577 |   |
| Total other  income                                                      |       | 2,764                                                                 |       | 3,476                           |       | 7,838 |   | 9,139 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Other expense:                                                           |       |                                                                  |       |                            |       |   |   |   |   |
| Salaries and  employee benefits                                          |       | 7,603                                                                 |       | 6,865                           |       | 22,244 |   | 19,746 |   |
| Occupancy and  equipment expenses, net                                   |       | 1,808                                                                 |       | 1,631                           |       | 5,147 |   | 4,648 |   |
| Other operating  expenses                                                |       | 3,449                                                                 |       | 3,055                           |       | 9,791 |   | 9,025 |   |
| Total other  expense                                                     |       | 12,860                                                                |       | 11,551                          |       | 37,182 |   | 33,419 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Income before  income taxes                                              |       | 6,446                                                                 |       | 5,935                           |       | 17,491 |   | 12,292 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Income tax expense                                                       |       | 2,231                                                                 |       | 2,032                           |       | 6,045 |   | 3,990 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Net income                                                               |       | $                                                                     | 4,215      |                            | $          | 3,903 |   | $ | 11,446 |   | $ | 8,302 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Earnings per share:                                                      |       |                                                                  |       |                            |       |   |   |   |   |
| Basic                                                                    |       | $                                                                     | 0.30       |                            | $          | 0.31 |   | $ | 0.85 |   | $ | 0.66 |   |
| Diluted                                                                  |       | $                                                                     | 0.30       |                            | $          | 0.30 |   | $ | 0.83 |   | $ | 0.65 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Weighted average shares                                                  |       |                                                                  |       |                            |       |   |   |   |   |
| Basic                                                                    |       | 13,970                                                                |       | 12,723                          |       | 13,501 |   | 12,494 |   |
| Diluted                                                                  |       | 14,304                                                                |       | 13,089                          |       | 13,813 |   | 12,868 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Cash dividends per common share                                          |       | $                                                                     | 0.090      |                            | $          | 0.085 |   | $ | 0.265 |   | $ | 0.246 |   |

 

See accompanying notes toconsolidated financial statements.

4

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

**Consolidated Statements ofComprehensive Income**

**(unaudited)**
| ** **                                                                     | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                     | ** ** | **(Dollars in thousands)**                 | ** ** |
|                                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| **Net  Income**                                                                |       | $                                                    | 4,215      |                                                | $          | 3,903 |   | $ | 11,446 |   | $ | 8,302 |   |
|                                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Unrealized holding gains (losses) arising during period, net of tax  (benefit) |       | 1,696                                                |       | (271                                                | )          | 112 |   | (934 | ) |
|                                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Reclassification adjustment for gains realized in net income, net of  taxes    |       | —                                               |       | (342                                                | )          | — |   | (343 | ) |
|                                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Other  comprehensive income (loss)                                             |       | 1,696                                                |       | (613                                                | )          | 112 |   | (1,277 | ) |
|                                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| **Comprehensive income**                                                       |       | $                                                    | 5,911      |                                                | $          | 3,290 |   | $ | 11,558 |   | $ | 7,025 |   |

 

See accompanying notes toconsolidated financial statements.

### **ConsolidatedStatements of Stockholders’ Equity**

### **Nine Months EndedSeptember 30, 2006**

**(Unaudited)**
| ** **                                                                    | ** ** | ** **                           | ** ** | ** **  | ** ** | ** **   | ** ** | **Accumulated**          | ** ** | ** **             | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------|------------|--------------|------------|--------------------------|------------|------------------------|------------|
| ** **                                                                    | ** ** | ** **                           | ** ** | **Capital** | ** ** | **Retained** | ** ** | **Other  Comprehensive** | ** ** | **TotalStockholders'** | ** ** |
| ** **                                                                    | ** ** | **Shares**                           | ** ** | **Stock**   | ** ** | **Earnings** | ** ** | **Loss**                 | ** ** | **Equity**             | ** ** |
| ** **                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| Balance,  December 31, 2005                                                   |       | 12,784                               |       | $           | 157,875    |         | $          | 43,404                   |       | $                      | (2,568     | ) | $ | 198,711 |   |
|  Net income                                                              |       | —                               |       | —      |       | 11,446       |       | —                   |       | 11,446                 |       |
|                                                                          |       |                                 |       |        |       |         |       |                     |       |                   |       |
|  Options exercised                                                       |       | 441                                  |       | 3,475       |       | —       |       | —                   |       | 3,475                  |       |
|                                                                          |       |                                 |       |        |       |         |       |                     |       |                   |       |
|  Dividends declared $0.265 per  share                                    |       | —                               |       | —      |       | (3,511       | )          | —                   |       | (3,511                 | )          |
|                                                                          |       |                                 |       |        |       |         |       |                     |       |                   |       |
|  Purchase of Mountain Bancshares,  Inc.                                  |       | 1,089                                |       | 29,372      |       | —       |       | —                   |       | 29,372                 |       |
|                                                                          |       |                                 |       |        |       |         |       |                     |       |                   |       |
|  Payment for fractional shares In  connection with business Combinations |       | —                               |       | (6          | )          | —       |       | —                   |       | (6                     | )          |
|                                                                          |       |                                 |       |        |       |         |       |                     |       |                   |       |
|  Stock Repurchase                                                        |       | (260                                 | )          | (5,586      | )          |         |       |                     |       | (5,586                 | )          |
|                                                                          |       |                                 |       |        |       |         |       |                     |       |                   |       |
| Stock option expense                                                          |       | —                               |       | 183         |       | —       |       | —                   |       | 183                    |       |
|                                                                          |       |                                 |       |        |       |         |       |                     |       |                   |       |
| Other comprehensive income                                                    |       | —                               |       | —      |       | —       |       | 112                      |       | 112                    |       |
|                                                                          |       |                                 |       |        |       |         |       |                     |       |                   |       |
| Balance, September 30, 2006                                                   |       | 14,054                               |       | $           | 185,313    |         | $          | 51,339                   |       | $                      | (2,456     | ) | $ | 234,196 |   |

 

See accompanying notes to consolidated financialstatements.

5

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

**CondensedConsolidated Statements of Cash Flows**

**(Unaudited)**
| ** **                                                                                 | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                                                 | ** ** | **(In thousands)**                             | ** ** |
| **Operating Activities**                                                                   |       |                                                |       |   |   |
| Net income                                                                                 |       | $                                                   | 11,446     |   | $ | 8,302 |   |
| Adjustments to  reconcile net income to net cash Provided by operating activities:         |       |                                                |       |   |   |
| Depreciation                                                                               |       | 2,301                                               |       | 2,078 |   |
| Provision for  loan losses                                                                 |       | 4,269                                               |       | 4,939 |   |
| Amortization and  (accretion), net                                                         |       | 763                                                 |       | 952 |   |
| Gain on sale of  securities                                                                |       | —                                              |       | (553 | ) |
| Net increase in  other assets                                                              |       | (3,093                                              | )          | (2,207 | ) |
| Net increase in  other liabilities                                                         |       | 1,831                                               |       | 1,536 |   |
| Net cash  provided by operating activities                                                 |       | 17,517                                              |       | 15,047 |   |
|                                                                                       |       |                                                |       |   |   |
| **Investing Activities**                                                                   |       |                                                |       |   |   |
| Purchases of  securities available for sale                                                |       | (26,993                                             | )          | (26,958 | ) |
| Proceeds from  sales of securities available for sale                                      |       | 1,896                                               |       | 6,704 |   |
| Proceeds from  maturities of securities available for sale                                 |       | 25,920                                              |       | 27,691 |   |
| Net increase in  restricted equity securities                                              |       | —                                              |       | (1,504 | ) |
| Net increase in  interest-bearing deposits in banks                                        |       | (2,774                                              | )          | (171 | ) |
| Net increase in  federal funds sold                                                        |       | (22,182                                             | )          | (44,640 | ) |
| Net increase in  loans                                                                     |       | (122,811                                            | )          | (158,458 | ) |
| Net cash  acquired (paid) in business combinations                                         |       | (3,291                                              | )          | 11 |   |
| Proceeds from  sale of other real estate owned                                             |       | 2,656                                               |       | 1,246 |   |
| Purchase of  premises and equipment                                                        |       | (2,202                                              | )          | (4,293 | ) |
| Proceeds from  sale of premises and equipment                                              |       | 12                                                  |       | 99 |   |
| Net cash used in  investing activities                                                     |       | (149,769                                            | )          | (200,273 | ) |
|                                                                                       |       |                                                |       |   |   |
| **Financing Activities**                                                                   |       |                                                |       |   |   |
| Net increase in  deposits                                                                  |       | 136,234                                             |       | 195,283 |   |
| Net decrease in  federal funds purchased and securities sold under repurchase agreements   |       | (4,068                                              | )          | (16,951 | ) |
| Proceeds from  other borrowings and Federal Home Loan Bank advances                        |       | 25,318                                              |       | 21,394 |   |
| Payments on other  borrowings and Federal Home Loan Bank advances                          |       | (30,097                                             | )          | (7,941 | ) |
| Dividends paid                                                                             |       | (3,511                                              | )          | (3,054 | ) |
| Payment for  fractional shares                                                             |       | (6                                                  | )          | (3 | ) |
| Payment for  stock repurchase                                                              |       | (5,586                                              | )          | — |   |
| Proceeds from  exercise of stock options                                                   |       | 3,475                                               |       | 728 |   |
| Net cash provided  by financing activities                                                 |       | 121,759                                             |       | 189,456 |   |
|                                                                                       |       |                                                |       |   |   |
| Net increase  (decrease) in cash and due from banks                                        |       | (10,493                                             | )          | 4,230 |   |
|                                                                                       |       |                                                |       |   |   |
| Cash and due from banks  at beginning of period                                            |       | 30,748                                              |       | 20,723 |   |
|                                                                                       |       |                                                |       |   |   |
| Cash and due from banks  at end of period                                                  |       | $                                                   | 20,255     |   | $ | 24,953 |   |
|                                                                                       |       |                                                |       |   |   |
| Supplemental disclosure  of cash paid during the period for:                               |       |                                                |       |   |   |
| Interest                                                                                   |       | $                                                   | 37,813     |   | $ | 22,061 |   |
| Income taxes                                                                               |       | $                                                   | 8,350      |   | $ | 4,103 |   |
|                                                                                       |       |                                                |       |   |   |
| Acquisition of  subsidiary                                                                 |       |                                                |       |   |   |
| Capital stock  issued (see “Assets acquired (liabilities Assumed)” on next page) |       | $                                                   | 29,372     |   | $ | 24,216 |   |

 

6

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

 

See accompanying notes to consolidated financial statements.

7

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

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

**NOTE 1.****                        ****BASIS OF PRESENTATION**

The unauditedconsolidated financial statements include the accounts of GB&T Bancshares,Inc. and its wholly-owned banking subsidiaries, Gainesville Bank & Trust,United Bank & Trust, Community Trust Bank, HomeTown Bank of Villa Rica,First National Bank of the South, First National Bank of Gwinnett and MountainState Bank.  Significant intercompanytransactions and balances have been eliminated in consolidation.

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith U.S. generally accepted accounting principles for interim financialinformation and with the instructions for Form 10-Q.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments (consisting of normal and recurringadjustments) considered necessary for a fair presentation have been included.The results of operations for the three and nine-month periods ended September30, 2006 are not necessarily indicative of the results that may be expected forthe year ending December 31, 2006.  Thesestatements should be read in conjunction with the consolidated financialstatements and related notes included in the Company’s Annual Report on Form10-K for the year ended December 31, 2005.

**NOTE 2.****                        ****STOCK COMPENSATION PLANS**

At December 31, 2005,the Company had a stock option plan for grants of options to directors,officers and employees.  The options maybe exercised over a period of ten years in accordance with vesting schedulesdetermined by the Board of Directors. Prior to January 1, 2006, the Company accounted for the plan under therecognition and measurement principles of APB Opinion No. 25, *Accounting for**Stock Issued to Employees*,and related interpretations, as permitted by FASB Statement No. 123, *Accounting for Stock-Based**Compensation*.  No stock-based employee compensation cost wasrecognized in the Results of Operations for the years ended December 31, 2005or 2004, nor the three and nine-month periods ended September 30, 2005, as alloptions granted under the plan had an exercise price equal to the market valueof the underlying stock on the date of grant. Effective January 1, 2006, the Company adopted the fair valuerecognition provisions of FASB Statement No. 123(R), *Share-Based Payment*,using the modified-prospective-transition method.  To give effect to the adoption of Statement123(R),  compensation cost recognized in2006 includes (a) compensation cost for all share-based payments granted priorto, but not yet vested as of January 1, 2006, based on the grant date fairvalue estimated in accordance with the original provisions of Statement 123,and (b) compensation cost for all share-based payments granted subsequent toJanuary 1, 2006, based on the grant-date fair value estimated in accordancewith the provisions of Statement 123(R). Results for prior periods have not been restated.

At September 30, 2006,there was approximately $530,000 of unrecognized compensation cost related tostock-based payments, which is expected to be recognized over aweighted-average period of 5.43 years.

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

8

 

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Forpurposes of this pro forma disclosure, the value of the options is estimatedusing a Black-Scholes-Merton option-pricing formula and amortized to expenseover the options’ vesting period.
|                                                                                                                                               | ** ** | **Three months ended  September 30,**                           | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                                                                       | ** ** | **2005**                                            | ** ** |
| ** **                                                                                                                                    | ** ** | **(Dollars in thousands, except  per share amounts)** | ** ** |
|                                                                                                                                          |       |                                                                           |       |                                                |       |
| Net income, as  reported                                                                                                                      |       | $                                                                              | 3,903      |                                                | $          | 8,302 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | 75                                                                             |       | 213                                                 |       |
| Pro forma net  income                                                                                                                         |       | $                                                                              | 3,828      |                                                | $          | 8,089 |   |
| Earnings per  share:                                                                                                                          |       |                                                                           |       |                                                |       |
| Basic - as reported                                                                                                                           |       | $                                                                              | 0.31       |                                                | $          | 0.66 |   |
| Basic - pro forma                                                                                                                             |       | $                                                                              | 0.30       |                                                | $          | 0.65 |   |
| Diluted - as reported                                                                                                                         |       | $                                                                              | 0.30       |                                                | $          | 0.65 |   |
| Diluted - pro  forma                                                                                                                          |       | $                                                                              | 0.29       |                                                | $          | 0.63 |   |

 

Asummary of the status of the stock option plan at September 30, 2006 andchanges during the period is shown in the following table.
|                                                                                      | ** ** | **Nine months ended  September 30, 2006** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **Shares**                                                    | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|                                                                                 |       |                                                          |       |   |   |
| Outstanding at  beginning of period                                                  |       | 781,131                                                       |       | $ | 10.48 |   |
| Granted (1)                                                                          |       | 497,047                                                       |       | 9.48 |   |
| Exercised                                                                            |       | (440,709                                                      | )          | 7.88 |   |
| Forfeited                                                                            |       | (5,970                                                        | )          | 21.77 |   |
| Outstanding at end of  period                                                        |       | 831,499                                                       |       | $ | 11.20 |   |
|                                                                                 |       |                                                          |       |   |   |
| Options exercisable at  end of period                                                |       | 668,823                                                       |       | $ | 9.33 |   |
| Weighted-average fair  value of options granted during period                        |       |                                                          |       | $ | 2.69 |   |
| Total intrinsic value  of options exercised during the period                        |       |                                                          |       | $ | 5,804,000 |   |
| Weighted average  remaining contractual term of exercisable options at end of period |       |                                                          |       | 4.39 years |   |
| Aggregate intrinsic  value of exercisable options at end of period                   |       |                                                          |       | $ | 7,839,000 |   |

 

----

(1)Included in options granted for the period ended September 30, 2006, were436,640 options and warrants with a weighted average exercise price of $7.83which were assumed under the plan for Mountain Bancshares, Inc.

9

 

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A summary of the statusof the nonvested options at September 30, 2006 and changes during the ninemonth period ended on that date follows:
|                                                         | ** ** | **Nine months ended  September 30, 2006** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                              | ** ** | **Shares**                                                    | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** |
|                                                    |       |                                                          |       |   |   |
| Nonvested,  beginning of period                         |       | 147,365                                                       |       | $ | 5.73 |   |
| Granted                                                 |       | 60,407                                                        |       | 2.69 |   |
| Vested                                                  |       | (39,883                                                       | )          | 4.79 |   |
| Forfeited                                               |       | (5,213                                                        | )          | 6.71 |   |
| Nonvested, end  of period                               |       | 162,676                                                       |       | $ | 4.80 |   |
|                                                    |       |                                                          |       |   |   |
| Total fair value  of options vested during period       |       |                                                          |       | $ | 191,000 |   |
|                                                    |       |                                                          |       |   |   |
| Total amount expensed  for options vested during period |       |                                                          |       | $ | 181,841 |   |

 

Afurther summary of the options outstanding at September 30, 2006 follows.
|                                         | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                         | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding**      | ** ** | **Weighted-  Average  Remaining  Contractual  Life** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|                                    |       |                         |       |                                                 |       |   |   |   |   |   |   |
| $5.09 - $7.53                           |       | 88,439                       |       | 3.73 years                                           |       | $ | 7.18 |   | 88,439 |   | $ | 7.18 |   |
| $8.03 - $12.00                          |       | 523,551                      |       | 4.74 years                                           |       | 8.43 |   | 499,368 |   | 8.41 |   |
| $12.40 - $18.40                         |       | 79,415                       |       | 6.17 years                                           |       | 15.04 |   | 55,166 |   | 14.95 |   |
| $18.84 - $24.15                         |       | 140,094                      |       | 8.83 years                                           |       | 21.94 |   | 25,850 |   | 22.67 |   |
| Total                                   |       | 831,499                      |       | 5.46 years                                           |       | 11.20 |   | 668,823 |   | 9.33 |   |
|                                         |            |                              |            |                                                      |            |  |  |  |  |  |  |  |  |

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes-Merton option-pricing model with the following weighted-averageassumptions:
|                         | ** ** | **Nine months ended**  | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **September 30, 2006** | ** ** |
| Dividend yield          |       | 1.50                             | %          |
| Expected life           |       | 3 years                          |       |
| Expected  volatility    |       | 20.40                            | %          |
| Risk-free interest rate |       | 4.80                             | %          |

                                                                                                

10

 

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**NOTE 3.****                        ****EARNINGS PER COMMON SHARE**

Presentedbelow is a summary of the components used to calculate basic and diluted earningsper share for the three and nine-month periods ended September 30, 2006 and2005.
|                                                                                                                                     | ** ** | **Three months ended September 30,**              | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
| ** **                                                                                                                          | ** ** | **(In thousands, except per share amounts)** | ** ** |
|                                                                                                                                |       |                                                                  |       |   |   |
| Basic Earnings Per Share:                                                                                                           |       |                                                                  |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 13,970                                                                |       | 12,723 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Net income                                                                                                                          |       | $                                                                     | 4,215      |   | $ | 3 ,903 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Basic earnings per share                                                                                                            |       | $                                                                     | 0.30       |   | $ | 0.31 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Diluted Earnings Per Share:                                                                                                         |       |                                                                  |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 13,970                                                                |       | 12,723 |   |
| Net effect of the assumed  exercise of stock options based on the treasury stock method using average  market prices for the period |       | 334                                                                   |       | 366 |   |
| Total weighted average common  shares and common stock equivalents outstanding                                                      |       | 14,304                                                                |       | 13,089 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Net income                                                                                                                          |       | $                                                                     | 4,215      |   | $ | 3,903 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Diluted earnings per share                                                                                                          |       | $                                                                     | 0.30       |   | $ | 0.30 |   |

 
|                                                                                                                                     | ** ** | **Nine months ended September 30,**          | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| ** **                                                                                                                          | ** ** | **(In thousands, except per share amounts)** | ** ** |
|                                                                                                                                |       |                                         |       |   |   |
| Basic Earnings Per Share:                                                                                                           |       |                                         |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 13,501                                       |       | 12,494 |   |
|                                                                                                                                |       |                                         |       |   |   |
| Net income                                                                                                                          |       | $                                            | 11,446     |   | $ | 8,302 |   |
|                                                                                                                                |       |                                         |       |   |   |
| Basic earnings per share                                                                                                            |       | $                                            | 0.85       |   | $ | 0.66 |   |
|                                                                                                                                |       |                                         |       |   |   |
| Diluted Earnings Per Share:                                                                                                         |       |                                         |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 13,501                                       |       | 12,494 |   |
| Net effect of the assumed  exercise of stock options based on the treasury stock method using average  market prices for the period |       | 312                                          |       | 374 |   |
| Total weighted average common  shares and Common stock equivalents outstanding                                                      |       | 13,813                                       |       | 12,868 |   |
|                                                                                                                                |       |                                         |       |   |   |
| Net income                                                                                                                          |       | $                                            | 11,446     |   | $ | 8,302 |   |
|                                                                                                                                |       |                                         |       |   |   |
| Diluted earnings per share                                                                                                          |       | $                                            | 0.83       |   | $ | 0.65 |   |

 

11

 

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**NOTE 4.****                        ****BUSINESS COMBINATIONS**

On May 1, 2006, theCompany completed the acquisition of Mountain Bancshares, Inc., the parentcompany of Mountain State Bank in Dawsonville, Dawson County, Georgia, whichresulted in Mountain State Bank becoming a wholly owned subsidiary of theCompany.  The aggregate purchase pricewas $39.8 million, which included the issuance of 1,088,924 shares of ourcapital stock to Mountain Bancshares stockholders valued at $24.0 million,$10.3 million in cash and stock options and warrants valued at $5.3 million and$197,000 in direct acquisition costs. The value of the capital stock issued was determined based on theaverage market price of GB&T’s capital stock over a 2 day period before andafter the terms of the acquisition were agreed upon and announced.  The fair value of the stock options andwarrants was determined based on the Black-Scholes-Merton option pricingmodel.  The acquisition was accounted foras a purchase resulting in estimated goodwill of approximately $25.5million.  The goodwill will not bedeductible for tax purposes. Identifiable intangible assets of $971,000 acquired consist of a coredeposit premium with an estimated weighted average useful life of 5 years.  Mountain State Bank’s results of operationsfrom May 1, 2006, are included in the consolidated results of operations forthe three and nine months ended September 30, 2006.  The results of operations for the three andnine months ended September 30, 2005 do not include the results of operationsfor Mountain State Bank.

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

 

Unauditedpro forma consolidated results of operations for the nine months endedSeptember 30, 2006 and 2005 as though the companies had combined as of January1, 2006 and 2005 are as follows:
|                             | ** ** | **Nine months ended**                                                | ** ** |
|-----------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **September 30,**                                                         | ** ** |
| ** **                  | ** ** | **2006**                                                                       | ** ** | **2005** | ** ** |
| ** **                  | ** ** | **(Dollars in thousands,  except per share amounts)** | ** ** |
| Net interest  income        |       | $                                                                              | 53,207     |   | $ | 44,743 |   |
| Net income                  |       | 11,926                                                                         |       | 9,005 |   |
| Basic earnings  per share   |       | 0.88                                                                           |       | 0.66 |   |
| Diluted earnings per  share |       | 0.86                                                                           |       | 0.65 |   |
|                             |            |                                                                                |            |  |  |  |  |

 

12

 

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**NOTE 5.****                        ****STOCK REPURCHASE**

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

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

The following ismanagement’s discussion and analysis of certain significant factors which haveaffected our financial position and operating results including ourwholly-owned subsidiaries, Gainesville Bank & Trust (“GBT”), United Bank& Trust (“UBT”), Community Trust Bank (“CTB”), HomeTown Bank of Villa Rica(“HTB”), First National Bank of the South (“FNBS”), First National Bank ofGwinnett (“FNBG”) and Mountain State Bank (“MSB”) during the periods includedin the accompanying consolidated financial statements.  This discussion should be read in conjunctionwith the accompanying consolidated financial statements and the notes theretoand the consolidated financial statements, related notes, and Management’sDiscussion and Analysis of Financial Condition and Results of Operations forthe year ended December 31, 2005 included in the Company’s 2005 Annual Reporton Form 10-K.

**Cautionary Notice Regarding Forward-LookingStatements**

Some of the statementsof GB&T Bancshares, Inc. (the “Company”) contained or incorporated byreference in this Report, including, without limitation, matters discussedunder the caption “Management’s Discussion and Analysis of Financial Conditionand Results of Operation,” are “forward-looking statements” within the meaningof the Private Securities Litigation Reform Act of 1995. Forward-lookingstatements include statements about the competitiveness of the bankingindustry, potential regulatory obligations, our entrance and expansion intoother markets, our other business strategies and other statements that are nothistorical facts. Forward-looking statements are not guarantees of performanceor 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 should consider them asidentifying forward-looking statements, although we may use other phrasing. Theseforward-looking statements involve risks and uncertainties and are based on ourbeliefs and assumptions, and on the information available to us at the timethat these disclosures were prepared. Factors that may cause actual results todiffer materially from those expressed or implied by such forward-lookingstatements include, among others, the following possibilities: (1) competitivepressures among depository and other financial institutions may increasesignificantly; (2) changes in the interest rate environment may reduce margins;(3) general economic conditions may be less favorable than expected, resultingin, among other things, a deterioration in credit quality and/or a reduction indemand for credit; (4) economic, governmental or other factors may prevent theprojected population and commercial growth in the counties in which weoperate;  (5) legislative or regulatorychanges, including changes in accounting standards, may adversely affect thebusinesses in which we are engaged;  (6)costs or difficulties related to the integration of our businesses may begreater than expected; (7) deposit attrition, customer loss or revenue lossfollowing acquisitions may be greater than expected; (8) competitors may havegreater financial resources and develop products that enable such competitorsto compete more successfully than we can; and (9) adverse changes may occur inthe equity markets.  Many of thesefactors are beyond our ability to control or predict, and readers are cautionednot to put undue reliance on such forward-looking statements. We do not intendto, and assume no responsibility to update or revise any forward-lookingstatements contained in this Report, whether as a result of new information,future events or otherwise.

13

 

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**Critical Accounting Policies**

Wehave adopted various accounting policies that govern the application ofaccounting principles generally accepted in the United States and generalpractices within the banking industry in the preparation of our financialstatements. Our significant accounting policies are described in the notes toour audited financial statements as of December 31, 2005. Certain accountingpolicies require management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reported period. Actual resultscould differ from those estimates. Estimates and assumptions are reviewed periodicallyand the effects of revisions are reflected in the consolidated financialstatements in the period they are determined to be necessary.  Management has discussed our criticalaccounting policies with the Audit Committee of the Board of Directors.

*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, regulatoryagencies, as an integral part of their examination process, periodically reviewour allowance for loan losses, and may require us to make additions to theallowance based on their judgment about information available to them at thetime of their examinations.

 

The company uses an 8point rating system for its loans. Ratings of 1 to 3 are considered passratings, 4 is pass/watch, 5 is special mention, 6 is substandard, 7 isdoubtful, and 8 is loss. The originating officer rates all loans on thissystem. This rating is adjusted from time to time by the officer to accuratelyreflect the loan’s current status. These ratings are reviewed for accuracyregularly by the loan committee of the respective bank subsidiary, an outsideindependent loan review firm, internal auditors and by the applicableregulator.

The general allowanceconsists of “Pass” loans.  Pass loans areseparated into homogeneous pools. Currently, these pools consist of realestate, commercial, consumer and credit card. Management assigns loss percentagesto these categories of homogeneous pools of loans based on the greater ofhistoric loan loss data in each category or the minimum risk percentage forthis category. Currently, management is developing the moving average netlosses for the historic loss percentage in each category.  This number is reviewed and adjustedperiodically, by pool, in light of current trends in past dues, changes inlending policies, underwriting standards, economic conditions, and otherfactors that may affect this number.  Inaddition to the homogeneous pools management has specified certain industryrisks and applied loss percentages to the specified industry risk categories.Recently, because of low losses in most categories, management has assignedminimum percentages to each category.  These minimums are reviewed and may be adjusted from time to time toreflect current economic conditions, changes in lending practices, underwritingstandards and other matters that may be necessary.  Those minimums are indicated on our loan lossreserve adequacy calculation.

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

The specific allowanceconsists of loans that are classified as either, doubtful, substandard orspecial mention. All impaired or significant loans rated 5, 6 and 7 areindividually analyzed and a specific reserve assigned.  Management, considering currentinformation and events regarding a borrowers’ ability to repay its obligations,considers a loan to be impaired when the ultimate collectibility of all amountsdue, according to the contractual terms of the loan agreement, is in doubt.When a loan is considered to be impaired, the amount of impairment is measuredbased on the present value of expected future cash flows discounted at

14

 

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theloan’s effective interest rate. If the loan is collateral-dependent, the fairvalue of the collateral less estimated selling costs is used to determine theamount of impairment. Impairment losses are included in the allowance for loanlosses through a charge to the provision for losses on loans.  A majority of our impaired loans arecollateral dependent. The allowance for loan losses on these loans isdetermined based upon fair value estimates (net of selling costs) of the respectivecollateral. The actual losses on these loans could differ significantly if thefair value of the collateral is different from the estimates used indetermining the allocated allowance. Most of our collateral-dependent impairedloans are secured by real estate. The fair value of these real estateproperties is generally determined based upon appraisals performed by acertified or licensed appraiser. Management also considers other factors orrecent developments which could result in adjustments to the collateral valueestimates indicated in the appraisals.

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

Theremainder of the balance 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 in determining the adequacy of the unallocatedallowance include the economic environment, experience level of lenders,concentration in commercial and consumer real estate loans, size of individualloans and the continued strong loan growth in our markets. These factors aretempered by lending practices related to the real estate portfolio, thecontinuing positive performance within this segment of our loan portfolio, theknowledge and experience of our commercial lending staff, and the relationshipbanking philosophy maintained in our community banks.

*Goodwill*.    Our growth over thepast several years has been enhanced significantly by mergers and acquisitions.Prior to July 2001, all of our acquisitions were accounted for using thepooling-of-interests business combination method of accounting. Effective July1, 2001, we adopted SFAS No. 141, “Business Combinations,” which allows onlythe use of the purchase method of accounting. For purchase acquisitions, we arerequired to record the assets acquired, including identified intangible assets,and liabilities assumed at their fair value, which in many instances involvesestimates based on third party valuations, such as appraisals, or externalvaluations based on discounted cash flow analyses or other valuationtechniques. The determination of the useful lives of intangible assets issubjective as is the appropriate amortization period for such intangibleassets. In addition, purchase acquisitions typically result in recordinggoodwill, which is subject to ongoing periodic impairment tests based on thefair value of net assets acquired compared to the carrying value of goodwill.In August 2006, we performed the required impairment testing of goodwill and noimpairment existed as of the valuation date, as the fair value of our netassets exceeded their carrying value. If for any future period we determinethat there has been impairment in the carrying value of our goodwill balances,we will record a charge to our earnings, which could have a material adverseeffect on our net income.

**Summary**

Net income for the threemonths ended September 30, 2006 was $4.2 million, an increase of 7.99% comparedto the same period a year ago.  Dilutedearnings per share were $0.30 for the three months ended September 30, 2006,compared to $0.30 for the same period a year ago.  The return on average assets was 0.90% andthe return on average equity was 7.21% for the three months ended September 30,2006.  This compares to a return onaverage assets of 1.00% and a return on average equity of 7.64% for the sameperiod a year ago.

Net income for the ninemonths ended September 30, 2006 was $11.4 million, an increase of 37.87%compared to the same period a year ago. Diluted earnings per share were $0.83 for the nine months endedSeptember 30, 2006, compared to $0.65 for the same period a year ago.  The return on average assets was 0.88% andthe return on average equity was 7.01% for the nine months ended September 30,2006.  This compares to a return onaverage assets of 0.76% and a return on average equity of 5.67% for the sameperiod a year ago.

MSB became part of the Companyeffective May 1, 2006.  The merger wasaccounted for as a purchase transaction; therefore, results of operations forMSB since May 1, 2006 have been included in the Company’s results of operationsfor the three and

15

 

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nine-month periods endedSeptember 30, 2006, but are not included in the results of operations for thethree and nine-month periods ended September 30, 2005.  FNBG became part of the Company effectiveMarch 1, 2005.  The merger was accountedfor as a purchase transaction; therefore, results of operations for FNBG sinceMarch 1, 2005 have been included in the Company’s results of operations for thethree and nine-month periods ended September 30, 2005 and for all subsequentperiods.

Total revenue, defined as net interest incomeplus other income, was $21.1 million for the three months ended September 30,2006, an increase of $3.0 million, or 16.41%, from the $18.1 million reportedfor the same period a year ago.  Otherexpense was $12.9 million for the three months ended September 30, 2006, anincrease of $1.3 million, or 11.33%, compared to the $11.6 million reported forthe same period a year ago.  Revenuegrowth has outpaced expense growth resulting in an improving efficiency ratiofor the three months ended September 30, 2006 of 59.84% compared to 64.69% forthe three months ended September 30, 2005.

 

Total revenue, definedas net interest income plus other income, was $58.9 million for the nine monthsended September 30, 2006, an increase of $8.2 million, or 16.17%, from the$50.7 million reported for the same period a year ago.  Other expense was $37.2 million for the ninemonths ended September 30, 2006, an increase of $3.8 million, or 11.26%,compared to the $33.4 million reported for the same period a year ago.  Revenue growth has outpaced expense growthresulting in an improving efficiency ratio for the nine months ended September30, 2006 of 61.99% compared to 65.62% for the nine months ended September 30,2005.

**Balance Sheets**

Our total assetsincreased $292.0 million to $1.9 billion at September 30, 2006, or 18.43%,compared to December 31, 2005.  Theincrease consists primarily of an increase in total loans of $226.5 million, or18.39%, an increase in federal funds sold of $22.7 million, and an increase ininvestment securities of $18.3 million. Excluding the acquisition of MSB, total assets increased $121.8 millionor 7.69% during this same period.  Also,excluding the acquisition, total loans increased $110.3 million or 8.96%,federal funds sold increased $22.7 million, and investment securities were thesame.

Total deposits increased$260.2 million to $1.5 billion at September 30, 2006, or 21.74%, compared toDecember 31, 2005.  Noninterest-bearingdeposits increased $9.0 million to $167.5 million and interest-bearing depositsincreased $251.2 million to $1.3 billion during the same period.   Deposit growth outpaced loan growthresulting in a loan to deposit ratio of 100.04% at September 30, 2006 comparedto 102.87% at December 31, 2005. Excluding the acquisition of MSB discussed above, total depositsincreased $135.1 million or 11.29%.

Total stockholders’equity increased $35.5 million to $234.2 million at September 30, 2006, or17.86%, compared to December 31, 2005. This increase consisted primarily of the acquisition of MSB of $29.4million, net income of $11.4 million and $3.5 million from options exercised,which was partially offset by the payment of dividends of $3.5 million and $5.6million related to the stock repurchase activity previously discussed in Note 5to the Financial Statements included herein.

**Asset Quality**

The allowance for loanlosses at September 30, 2006 was $16.7 million, or 1.15%, of total loanscompared to $12.8 million, or 1.04%, at December 31, 2005.  The provision for loan losses was $4.3million for the nine months ended September 30, 2006.  Net charge-offs year-to-date have been$1,410,000.  Management believes that theCompany’s business fundamentals remain strong, and that the allowance isadequate to absorb any potential loan losses at September 30, 2006.  The allowance for loan losses is evaluatedmonthly and adjusted to reflect the risk in the portfolio.

16

 

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The following tablesummarizes the allowance for loan losses for the nine-month periods endedSeptember 30, 2006 and 2005.
|                                                                      | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                           | ** ** | **(Dollars in thousands)**                | ** ** |
| **Average amount of loans outstanding**                              |       | $                                                   | 1,347,891  |   | $ | 1,102,641 |   |
|                                                                 |       |                                                |       |   |   |
| **Allowance for loan losses balance, beginning of period**           |       | $                                                   | 12,773     |   | $ | 11,061 |   |
|                                                                 |       |                                                |       |   |   |
| **Less charge-offs**                                                 | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Commercial loans                                                     |       | (442                                                | )          | (552 | ) |
| Real estate loans                                                    |       | (856                                                | )          | (3,837 | ) |
| Consumer loans                                                       |       | (370                                                | )          | (1,001 | ) |
| Total charge-offs                                                    |       | (1,668                                              | )          | (5,390 | ) |
|                                                                 |       |                                                |       |   |   |
| **Plus recoveries**                                                  | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Commercial loans                                                     |       | 17                                                  |       | 92 |   |
| Real estate loans                                                    |       | 29                                                  |       | 49 |   |
| Consumer loans                                                       |       | 212                                                 |       | 247 |   |
| Total recoveries                                                     |       | 258                                                 |       | 388 |   |
| **Net charge-offs**                                                  |       | (1,410                                              | )          | (5,002 | ) |
| ** **                                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Plus provision for loan losses**                                   |       | 4,269                                               |       | 4,939 |   |
| **Plus allowance for loan losses acquired in business combinations** |       | 1,088                                               |       | 1,269 |   |
| ** **                                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Allowance for loan losses balance, end of period**                 |       | $                                                   | 16,720     |   | $ | 12,267 |   |
| ** **                                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Net  charge-offs to average loans (annualized)**                   |       | 0.140                                               | %          | 0.607 | % |

 

17

 

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Thefollowing table is a summary of the Company’s nonaccrual, past due loans andrestructured loans at September 30, 2006 and September 30, 2005. The numbersindicate an increase of approximately $9.0 million in nonaccrual loans as ofSeptember 30, 2006 as compared to September 30, 2005.  Although the significant nonperforming assetwe reported last quarter is still on our books, we have made substantialprogress on its eventual collection, and continue to have a high level ofconfidence in the value of the collateral securing the credit.  We have reached an agreement with theborrower that we expect to result in a resolution by the end of this calendaryear, which result may include foreclosure on the collateral.  In the event that we proceed withforeclosure, we may not achieve final resolution on this credit until the firstquarter of 2007.  In addition tononaccrual loans, the Company also has other real estate, which is considered anonperforming asset.  At September 30,2006, the balance in other real estate was $3.0 million compared to $3.4million at December 31, 2005.  Thefollowing table presents a decrease of $285,000 in past due loans over 90days.  The majority of the decreaserelates to loans at Community Loan Company and United Bank & Trust, whichmade up $145,000 and $151,000, respectively of the past due balance atSeptember 30, 2005.  Community LoanCompany was sold during the fourth quarter of 2005.  Management believes that all significantlosses related to nonaccrual loans and other real estate have been identifiedand provided for. 
|                   | ** ** | **September 30, 2006**     | ** ** |
|-------------------|------------|--------------------------------------|------------|
| ** **        | ** ** | ** **                           | ** ** | **Past Due** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Nonaccrual**                       | ** ** | **90 Days** | ** ** | **Restructured** | ** ** |
| ** **        | ** ** | **Loans**                            | ** ** | **Still Accruing** | ** ** | **Debt** | ** ** |
| ** **        | ** ** | **(Dollars in thousands)** | ** ** |
| ** **        | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Real estate loans |       | $                                    | 14,383     |   | $ | — |   | $ | — |   |
| Commercial loans  |       | 473                                  |       | — |   | 37 |   |
| Consumer loans    |       | 78                                   |       | 12 |   | — |   |
| Total             |       | $                                    | 14,934     |   | $ | 12 |   | $ | 37 |   |

 
|                   | ** ** | **September 30, 2005**     | ** ** |
|-------------------|------------|--------------------------------------|------------|
| ** **        | ** ** | ** **                           | ** ** | **Past Due** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Nonaccrual**                       | ** ** | **90 Days** | ** ** | **Restructured** | ** ** |
| ** **        | ** ** | **Loans**                            | ** ** | **Still Accruing** | ** ** | **Debt** | ** ** |
| ** **        | ** ** | **(Dollars in thousands)** | ** ** |
| ** **        | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Real estate loans |       | $                                    | 4,674      |   | $ | — |   | $ | 106 |   |
| Commercial loans  |       | 863                                  |       | 151 |   | — |   |
| Consumer loans    |       | 420                                  |       | 146 |   | 3 |   |
| Total             |       | $                                    | 5,957      |   | $ | 297 |   | $ | 109 |   |

 

Our banking subsidiaries’policy is to discontinue the accrual of interest income when, in the opinion ofmanagement, collection of such interest becomes doubtful.  This status is determined when: (1) there isa significant deterioration in the financial condition of the borrower and fullrepayment of principal and interest is not expected; and (2) the principal orinterest is more than 90 days past due, unless the loan is both well-secured andin the process of collection.

Loans classified forregulatory purposes as loss, doubtful, substandard, or special mention thathave not been included in the table above do not represent or result fromtrends or uncertainties which management reasonably expects will materiallyimpact future operating results, liquidity or capital resources.  These classified loans do not representmaterial credits about which management is aware of any information whichcauses management to have serious doubts as to the ability of such borrowers tocomply with their loan repayment terms, except as noted above.

18

 

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**Liquidity and Capital Resources**

Liquidity managementinvolves the matching of the cash flow requirements of customers who may beeither depositors desiring to withdraw funds or borrowers needing assurancethat sufficient funds will be available to meet their credit needs and ourability to meet those needs.  We seek tomeet liquidity requirements primarily through management of short-terminvestments, monthly amortizing loans, maturing single payment loans, andmaturities and prepayments of securities. Also, we maintain relationships with correspondent banks which couldprovide funds on short notice.

Our liquidity andcapital resources are monitored on a periodic basis by management, and stateand federal regulatory authorities.  Ourliquidity ratio was 12.69% at September 30, 2006.  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 additional liquidity,funding plans would be implemented as outlined in the liquidity policy of thesubsidiary banks. Our subsidiary banks have lines of credit available to meetany unforeseen liquidity needs.  Also,our subsidiary banks have relationships with the Federal Home Loan Bank ofAtlanta, which provides funding for loan growth on an as needed basis, howeverthese amounts are subject to collateral pledging and therefore the full amountmight not be available.  Managementreviews liquidity on a periodic basis to monitor and adjust liquidity as necessary.  Management has the ability to adjustliquidity by selling securities available for sale, selling participations inloans we generate and accessing available funds through various borrowingarrangements.  At September 30, 2006, wehad available borrowing capacity totaling approximately $240.0 million throughvarious borrowing arrangements and available lines of credit.  We believe our short-term investments andavailable borrowing arrangements are adequate to cover any reasonablyanticipated immediate need for funds.

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As of September 30,2006, each of our subsidiary banks was considered to be well-capitalized asdefined in the Federal Deposit Insurance Corporation Improvement Act and basedon regulatory minimum capital requirements. The Company and the subsidiary banks’ capital ratios are presented inthe following table:
| ** **                               | ** ** | ** **  | ** ** | **FOR CAPITAL** | ** ** | **TO BE**  | ** ** |
|------------------------------------------|------------|-------------|------------|----------------------|------------|-----------------|------------|
| ** **                               | ** ** | **CAPITAL** | ** ** | **ADEQUACY**         | ** ** | **WELL**        | ** ** |
| ** **                               | ** ** | **RATIOS**  | ** ** | **PURPOSES**         | ** ** | **CAPITALIZED** | ** ** |
|                                     |       |        |       |                 |       |            |       |
| As  of September 30, 2006                |       |        |       |                 |       |            |       |
| Total  Capital to Risk Weighted Assets:  |       |        |       |                 |       |            |       |
| Consolidated                             |       | 12.31       | %          | 8.00                 | %          | N\A             |       |
| Gainesville Bank & Trust             |       | 10.94       | %          | 8.00                 | %          | 10.00           | %          |
| United Bank & Trust                  |       | 10.60       | %          | 8.00                 | %          | 10.00           | %          |
| Community Trust Bank                     |       | 10.57       | %          | 8.00                 | %          | 10.00           | %          |
| HomeTown Bank of Villa Rica              |       | 10.48       | %          | 8.00                 | %          | 10.00           | %          |
| First National Bank of the South         |       | 11.26       | %          | 8.00                 | %          | 10.00           | %          |
| First National Bank of Gwinnett          |       | 11.49       | %          | 8.00                 | %          | 10.00           | %          |
| Mountain State Bank                      |       | 11.66       | %          | 8.00                 | %          | 10.00           | %          |
| Tier  I Capital to Risk Weighted Assets: |       |        |       |                 |       |            |       |
| Consolidated                             |       | 11.23       | %          | 4.00                 | %          | N\A             |       |
| Gainesville Bank & Trust             |       | 9.88        | %          | 4.00                 | %          | 6.00            | %          |
| United Bank & Trust                  |       | 9.41        | %          | 4.00                 | %          | 6.00            | %          |
| Community Trust Bank                     |       | 9.32        | %          | 4.00                 | %          | 6.00            | %          |
| HomeTown Bank of Villa Rica              |       | 9.52        | %          | 4.00                 | %          | 6.00            | %          |
| First National Bank of the South         |       | 10.26       | %          | 4.00                 | %          | 6.00            | %          |
| First National Bank of Gwinnett          |       | 10.31       | %          | 4.00                 | %          | 6.00            | %          |
| Mountain State Bank                      |       | 10.68       | %          | 4.00                 | %          | 6.00            | %          |
| Tier  I Capital to Average Assets:       |       |        |       |                 |       |            |       |
| Consolidated                             |       | 9.79        | %          | 4.00                 | %          | N\A             |       |
| Gainesville Bank & Trust             |       | 8.32        | %          | 4.00                 | %          | 5.00            | %          |
| United Bank & Trust                  |       | 7.64        | %          | 4.00                 | %          | 5.00            | %          |
| Community Trust Bank                     |       | 8.25        | %          | 4.00                 | %          | 5.00            | %          |
| HomeTown Bank of Villa Rica              |       | 8.00        | %          | 4.00                 | %          | 5.00            | %          |
| First National Bank of the South         |       | 8.67        | %          | 4.00                 | %          | 5.00            | %          |
| First National Bank of Gwinnett          |       | 9.26        | %          | 4.00                 | %          | 5.00            | %          |
| Mountain  State Bank                     |       | 9.81        | %          | 4.00                 | %          | 5.00            | %          |

 

Our subsidiary banks aresubject to certain restrictions on the amount of dividends that may be declaredwithout prior regulatory approval.  AtSeptember 30, 2006, approximately $2.3 million of retained earnings at oursubsidiary banks was available for dividend declaration without regulatoryapproval.

**Net Interest Income and EarningAssets**

Our profitability isdetermined by our ability to effectively manage interest income and expense, tominimize loan and security losses, to generate noninterest income, and tocontrol operating expenses.  Because interestrates are determined by market forces and economic conditions beyond ourcontrol, our ability to generate net interest income depends upon our abilityto obtain an adequate net interest spread between the rate paid oninterest-bearing liabilities and the rate earned on interest-earningassets.  The net interest margin, on atax equivalent basis, was 4.39% for the nine months ended September 30, 2006,compared to 4.26% for the same period in 2005, an increase of 13 basispoints.  The increased yield on earningassets was primarily due to increased volumes and yields on loans and theincreased effective cost of funds was due to higher average rates paid on timedeposits and other borrowings.  TheCompany continues to experience growth in loans and deposits while maintainingits competitive pricing.

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The following table sets forth the amount of our interestincome or interest expense for each category of interest-earning assets andinterest-bearing liabilities and the average interest yield/rate for totalinterest-earning assets and total interest-bearing liabilities, net interestspread and net yield on average interest-earning assets.
| ** **                                                        | ** ** | **For the Nine Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                        | ** ** | **September 30, 2006**                  | ** ** | **September 30, 2005**                  | ** ** |
| ** **                                                        | ** ** | **Average**                                       | ** ** | ** **                                        | ** ** | **Yields** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yields** | ** ** |
| ** **                                                        | ** ** | **Balances**                                      | ** ** | **Interest**                                      | ** ** | **/Rates** | ** ** | **Balances** | ** ** | **Interest** | ** ** | **/Rates** | ** ** |
| ** **                                                        | ** ** | **(Dollars in thousands)**              | ** ** |
| **Assets**                                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest earning  assets:                                         |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Taxable  securities                                               |       | $                                                 | 197,053    |                                              | $          | 6,058 |   | 4.11 | % | $ | 191,077 |   | $ | 5,360 |   | 3.75 | % |
| Nontaxable  securities*                                           |       | 11,067                                            |       | 576                                               |       | 6.96 | % | 14,671 |   | 711 |   | 6.48 | % |
| Federal funds  sold                                               |       | 15,760                                            |       | 490                                               |       | 4.16 | % | 9,693 |   | 236 |   | 3.26 | % |
| Interest bearing  deposits in banks                               |       | 1,937                                             |       | 84                                                |       | 5.80 | % | 1,224 |   | 34 |   | 3.71 | % |
| Loans, net of  unearned income                                    |       | 1,336,904                                         |       | 84,565                                            |       | 8.46 | % | 1,094,527 |   | 58,816 |   | 7.18 | % |
| Total interest  earning assets                                    |       | 1,562,721                                         |       | 91,773                                            |       | 7.85 | % | 1,311,192 |   | 65,157 |   | 6.64 | % |
| Noninterest earning  assets:                                      |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Unrealized gains  (losses) on securities                          |       | (4,998                                            | )          |                                              |       |   |   | (1,757 | ) |   |   |   |   |
| Allowance for  loan losses                                        |       | (14,460                                           | )          |                                              |       |   |   | (12,482 | ) |   |   |   |   |
| Nonaccrual loans                                                  |       | 10,987                                            |       |                                              |       |   |   | 8,114 |   |   |   |   |   |
| Cash and due  from banks                                          |       | 23,684                                            |       |                                              |       |   |   | 26,033 |   |   |   |   |   |
| Other assets                                                      |       | 156,640                                           |       |                                              |       |   |   | 133,366 |   |   |   |   |   |
| Total  noninterest earning assets                                 |       | 171,853                                           |       |                                              |       |   |   | 153,274 |   |   |   |   |   |
| Total assets                                                      |       | $                                                 | 1,734,574  |                                              |       |   |   |   | $ | 1,464,466 |   |   |   |   |   |
| **Liabilities & Stockholders’  Equity**                  |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities:                                    |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest bearing  demand & savings                            |       | $                                                 | 430,133    |                                              | 9,302      |   | 2.89 | % | $ | 405,074 |   | 5,858 |   | 1.93 | % |
| Time                                                              |       | 745,537                                           |       | 25,422                                            |       | 4.56 | % | 541,815 |   | 12,687 |   | 3.13 | % |
| Borrowings                                                        |       | 157,785                                           |       | 5,761                                             |       | 4.88 | % | 160,857 |   | 4,873 |   | 4.05 | % |
| Total interest  bearing liabilities                               |       | 1,333,455                                         |       | 40,485                                            |       | 4.06 | % | 1,107,746 |   | 23,418 |   | 2.83 | % |
| Noninterest bearing  liabilities & stockholders’ equity: |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Noninterest  bearing deposits                                     |       | 165,148                                           |       |                                              |       |   |   | 147,571 |   |   |   |   |   |
| Other  liabilities                                                |       | 17,587                                            |       |                                              |       |   |   | 13,313 |   |   |   |   |   |
| Stockholders’  equity                                        |       | 218,384                                           |       |                                              |       |   |   | 195,836 |   |   |   |   |   |
| Total  liabilities & stockholders’ equity                |       | $                                                 | 1,734,574  |                                              |       |   |   |   | $ | 1,464,466 |   |   |   |   |   |
| Net interest spread                                               |       |                                              |       |                                              |       | 3.79 | % |   |   |   |   | 3.81 | % |
| Net interest income*                                              |       |                                              |       | 51,288                                            |       |   |   |   |   | 41,739 |   |   |   |
| Less: Tax equivalent  adjustment                                  |       |                                              |       | 184                                               |       |   |   |   |   | 228 |   |   |   |
| Net interest income                                               |       |                                              |       | $                                                 | 51,104     |   |   |   |   |   | $ | 41,511 |   |   |   |
| Net interest margin*                                              |       |                                              |       |                                              |       | 4.39 | % |   |   |   |   | 4.26 | % |

 

----

*Fully tax equivalent

Net interest incomeincreased $3.7 million, or 25.17%, for the three months ended September 30, 2006compared to the same period in 2005.  Thenet increase consists of an increase in interest income of $10.1 million, or42.15%, less an increase in interest expense of $6.4 million, or 68.69%, forthe three-month period.  Net interestincome increased $9.6 million, or 23.11%, for the nine months ended September30, 2006 compared to the same period in 2005. The net increase consists of an increase in interest income of $26.7million, or 41.06%, less an increase in interest expense of $17.1 million, or72.88%, for the nine-month period.  Theseincreases reflect an increase of $252 million in average interest-earningassets for the nine months ended September 30, 2006 as compared to the ninemonths ended September 30, 2005.  Thechange in net interest income resulted from increases in volume and interestrates.  These variances include theimpact of the acquisition of MSB in May 2006 and FNBG in March 2005.

21

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**Other Income**

Other income for thethree months ended September 30, 2006, decreased by $712,000, compared to thesame period in 2005.  Service charges ondeposit accounts and mortgage origination fees remained stable compared withthe prior-year quarter. The majority of the decline in other income reflectsthe loss of insurance commissions due to the sale of Community Loan Company inthe fourth quarter of 2005, and a decrease in gain on sale of securities.  Other income for the nine months endedSeptember 30, 2006, decreased by $1,301,000, compared to the same period in2005.  Service charges on deposit accountsand mortgage origination fees remained stable compared with the prior-yearquarter.  The majority of the decline inother income reflects the loss of insurance commissions due to the sale ofCommunity Loan Company in the fourth quarter of 2005, a decrease in otherincome related to the culmination of certain outside service contracts and adecrease in gain on sale of securities.

**Other Expense**

Other expense increasedby approximately $1.3 million, or 11.33%, for the three months ended September30, 2006 compared to the same period in 2005. The increase is due primarily to an increase in salaries and employeebenefits expense of $738,000.  Netoccupancy and equipment expenses increased $177,000.  Other expense increased by approximately $3.8million, or 11.26%, for the nine months ended September 30, 2006 compared tothe same period in 2005.  The increase isdue primarily to an increase in salaries and employee benefits expense of$2,498,000.  Net occupancy and equipmentexpenses increased $499,000.  Theseincreases can be partially attributed to the inclusion of MSB since the date ofits acquisition.

**Income Tax Expense**

Income tax expenseincreased by $199,000 for the three-month period ended September 30, 2006,compared to the same period in 2005.  Theeffective tax rate for the three-month period ended September 30, 2006 was34.61%, compared to 34.24% for the same period in 2005.  Income tax expense increased by $2,055,000for the nine-month period ended September 30, 2006, compared to the same periodin 2005.  The effective tax rate for thenine-month period ended September 30, 2006 was 34.56%, compared to 32.46% forthe same period in 2005.

**Net Income**

Net income increased by$312,000, or 7.99%, for the three months ended September 30, 2006, compared tothe same period in 2005. Net income increased by $3,144,000, or 37.87%, for thenine months ended September 30, 2006, compared to the same period in 2005.

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

**Off Balance Sheet Arrangements**

Our financial statementsdo not reflect various commitments and contingent liabilities that arise in thenormal course of business.  Theseoff-balance sheet financial instruments include commitments to extend credit,standby letters of credit and credit card commitments.  Such financial instruments are included inthe financial statements when funds are distributed or the instruments becomepayable.  Our exposure to credit loss inthe event of nonperformance by the other party to the financial instrument forcommitments to extend credit, standby letters of credit and credit cardcommitments is represented by the contractual amount of those instruments.  We use the same credit policies in makingcommitments as we do for on-balance sheet instruments.  Although these amounts do not necessarilyrepresent future cash requirements, a summary of our commitments as ofSeptember 30, 2006 and December 31, 2005 are as follows:

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|                                      | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **(In thousands)**          | ** ** |
|                                 |       |                             |       |                            |       |
| Commitments to extend  credit        |       | $                                | 233,124    |                            | $          | 288,448 |   |
| Financial standby  letters of credit |       | 8,852                            |       | 8,650                           |       |
| Other standby letters  of credit     |       | 1,224                            |       | 1,569                           |       |
| Credit card commitments              |       | 6,552                            |       | 7,229                           |       |
| Total                                |       | $                                | 249,752    |                            | $          | 305,896 |   |

 

**Item 3.****                                  ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

Ourasset/liability mix is monitored on a regular basis and a report evaluating theinterest rate sensitive assets and interest rate sensitive liabilities isprepared and presented to the Investment Committee of the holding company’sboard of directors on a quarterly basis. The objective of this policy is tomonitor interest rate sensitive assets and liabilities so as to minimize theimpact of substantial movements in interest rates on earnings. An asset orliability is considered to be interest rate sensitive if it will reprice ormature within the time period analyzed, usually one year or less. The interestrate sensitivity 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 is considerednegative when the amount of interest rate sensitive liabilities exceeds theinterest rate sensitive assets. During a period of rising interest rates, anegative gap would tend to adversely affect net interest income, while apositive 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.

Asimple interest rate “gap” analysis by itself may not be an accurate indicatorof how net interest income will be affected by changes in interest rates.Accordingly, we also evaluate how the repayment of particular assets andliabilities is impacted by changes in interest rates. Income associated withinterest-earning assets and costs associated with interest-bearing liabilitiesmay not be affected uniformly by changes in interest rates. In addition, themagnitude and duration of changes in interest rates may have a significantimpact on net interest income. For example, although certain assets andliabilities may have similar maturities or periods of repricing, they may reactin different degrees to changes in market interest rates. Interest rates oncertain types of assets and liabilities fluctuate in advance of changes ingeneral market rates, while interest rates on other types may lag behindchanges in general market rates. In addition, certain assets, such asadjustable rate mortgage loans, have features (generally referred to as “interestrate caps and floors”) which limit the amount of changes in interest rates.Prepayment and early withdrawal levels also could deviate significantly fromthose assumed in calculating the interest rate gap. The ability of manyborrowers to service their debts also may decrease during periods of rising interestrates.

Changesin interest rates also affect our liquidity position. We currently pricedeposits in response to market rates and it is management’s intention tocontinue this policy. If deposits are not priced in response to market rates, aloss of deposits could occur which would negatively affect our liquidityposition.

Managementbelieves that gap analysis is a useful tool for measuring interest rate riskonly when used in conjunction with its simulation model.  As of September 30, 2006, 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 a decliningrate environment.  This is generally dueto a greater proportion of interest earning assets repricing on a variable ratebasis as compared to variable rate funding sources. This asset sensitivity isindicated by selected results of net interest income simulations.  The actual realized change in net interestincome would depend on several factors. These factors include, but are not limited to, actual realized growth inasset and liability volumes, as

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wellas the mix experienced over these time horizons.  Market conditions and their resulting impacton loan, deposit, and funding pricing would also be a primary determinant inthe realized level of net interest income. The table below shows the impact on net interest margins over atwelve-month period when subjected to an immediate 100 basis point increase anddecrease in rate. 
| Twelve-Month Net Interest Income Sensitivity                         | ** ** |
|------------------------------------------------------------------------------------------|------------|
| **Change in Short-Term Interest  Rates (in basis points)** | ** ** | **Estimated Change in Net  Interest Income** | ** ** |
| +100                                                                                     |       | 3.97 | % |
| Flat                                                                                     |       | — |   |
| -100                                                                                     |       | (4.25 | )% |

 

Weactively manage the mix of asset and liability maturities to control theeffects of changes in the general level of interest rates on net interestincome. Except for its effect on the general level of interest rates, inflationdoes not have a material impact on us due to the rate variability andshort-term maturities of our earning assets.

**Item 4.****                                  ****CONTROLS ANDPROCEDURES**

**Disclosure Controls and Procedures**

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 Chief Executive Officerand Chief Financial Officer, of the effectiveness of the design and operationof its disclosure controls and procedures based on paragraph (b) of Rule 13a-15and 15d-15 under the Securities Exchange Act of 1934. Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the design and operation of these disclosure controls and procedures wereeffective as of the end of the period covered by this report in alerting themon a timely basis to material information relating to the Company required tobe included in the Company’s reports filed or submitted under the SecuritiesExchange Act of 1934.

**Internal Control over Financial Reporting**

There were no changesmade in the Company’s internal controls over financial reporting that occurredduring the Company’s most recent fiscal quarter that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.

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**PART II - OTHER INFORMATION**

**Item1.****                                  ****LEGAL PROCEEDINGS**

None.

**Item1A.****                         ****RISK FACTORS**

There have been nomaterial changes to the risk factors previously disclosed in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2005.

**Item2.****                                  ****UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

There was no repurchaseactivity during the quarter ended September 30, 2006.  All repurchase activity occurred during thequarter ended June 30, 2006.

**Item3.****                                  ****DEFAULTS UPON SENIOR SECURITIES**

None.

**Item4.****                                  ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

None.

**Item5.****                                  ****OTHER INFORMATION**

None.

**Item 6.****                                  ****EXHIBITS**

Exhibits
| 31.1 | Rule 13a-14(a) Certification of Principal Executive  Officer. |
|------|---------------------------------------------------------------|
| 31.2 | Rule 13a-14(a) Certification of Principal Financial  Officer. |
| 32.1 | Section 1350 Certification of Principal Executive  Officer.   |
| 32.2 | Section 1350 Certification of Principal Financial  Officer.   |

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**SIGNATURES**

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.
| GB&T BANCSHARES, INC. |            |
|---------------------------|-----------------|
|                      |            |
|                      |            |
| DATE:                     |  11/9/2006 |   | BY: | /s/ Richard A. Hunt |   |
|                      |            |   |   | Richard A. Hunt |
|                      |            |   |   | President and Chief Executive Officer |
|                      |            |   |   |   |
|                      |            |   |   |   |
| DATE:                     |  11/9/2006 |   | BY: | /s/ Gregory L. Hamby |   |
|                      |            | Gregory L. Hamby |
|                      |            | Executive Vice President & |
|                      |            | Chief Financial Officer |
|                           |                 |  |  |  |  |  |  |

 

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