**UNITED STATES SECURITIES ANDEXCHANGE 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 June 30, 2007**                                                                                                                                                                             |
| ** **                                                                                                                                                                                                                    | ** ** | ** ** |
| **o******                                                                                                                                                                                                                     | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                    |
| **For the  transition period from                  to                ** |

**Commission File Number:  000-24203**

**GB&T Bancshares, Inc.**

(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**                                                     |
| (Address of  principal executive offices)                                           |
|                                                                                |
| **(770)  532-1212**                                                                 |
| (Registrant’s  telephone number, including area code)                          |
|                                                                                |
| **N/A**                                                                             |
| (Former name,  former address and former fiscal year, if changed since last report) |

 

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 filing requirementsfor the past 90 days.     Yes x     No o

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

Indicate by check mark whether the registrant isa shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o        No  x

**APPLICABLE ONLY TO CORPORATE ISSUERS**

Statethe number of shares outstanding of each of the issuer’s classes of capitalstock, as of August 1, 2007:   14,196,260 shares; no par value.

 

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**GB&T BANCSHARES, INC.**

**TABLE OFCONTENTS**
| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                                             | ** ** | ** ** |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **   | ** ** | ** **                                                                                                            | ** ** | ** ** |
| ** **   | ** ** | **Item 1. Financial  Statements**                                                                                     | ** ** | ** ** |
| ** **   | ** ** | ** **                                                                                                            | ** ** | ** ** |
| ** **   | ** ** | **Consolidated  Balance Sheets – June 30, 2007 (Unaudited)   and December 31, 2006**                             | ** ** | ** ** |
| ** **   | ** ** | ** **                                                                                                            | ** ** | ** ** |
| ** **   | ** ** | **Consolidated  Statements of Income (Unaudited)-   Three and six months ended June 30, 2007 and 2006**               | ** ** | ** ** |
|         |       |                                                                                                                  |       |       |
| ** **   | ** ** | **Consolidated  Statements of Comprehensive Income (Unaudited)-   Three and six months ended June 30, 2007 and 2006** | ** ** | ** ** |
| ** **   | ** ** | ** **                                                                                                            | ** ** | ** ** |
| ** **   | ** ** | **Consolidated  Statements of Stockholders’ Equity (Unaudited)-   Six months ended June 30, 2007**               | ** ** | ** ** |
| ** **   | ** ** | ** **                                                                                                            | ** ** | ** ** |
| ** **   | ** ** | **Consolidated  Statements of Cash Flows (Unaudited) -   Six months ended June 30, 2007 and 2006**                    | ** ** | ** ** |
| ** **   | ** ** | ** **                                                                                                            | ** ** | ** ** |
| ** **   | ** ** | **Notes to Consolidated Financial Statements (Unaudited)**                                                            |       |       |
| ** **   | ** ** | ** **                                                                                                            | ** ** | ** ** |
| ** **   |       | **Item 2. Management’s Discussion and Analysis ofFinancial 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&T BANCSHARES, INC. ANDSUBSIDIARIES**

**Consolidated Balance Sheets**
| ** **                                                                                                                                                                | ** ** | **June 30,**                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                | ** ** | **2007**                             | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                | ** ** | **(Unaudited)**                      | ** ** |
| ** **                                                                                                                                                                | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                                                                                                                |       |                                 |       |                  |       |
| Cash and due from banks                                                                                                                                                   |       | $                                    | 20,735     |                  | $          | 25,876 |   |
| Interest-bearing deposits in banks                                                                                                                                        |       | 4,965                                |       | 1,848                 |       |
| Federal funds sold                                                                                                                                                        |       | 9,062                                |       | 1,445                 |       |
| Securities available for sale, at fair value                                                                                                                              |       | 217,432                              |       | 210,249               |       |
| Restricted equity securities, at cost                                                                                                                                     |       | 10,204                               |       | 9,869                 |       |
|                                                                                                                                                                      |       |                                 |       |                  |       |
| Loans, net of unearned income                                                                                                                                             |       | 1,558,628                            |       | 1,497,701             |       |
|   Less allowance for loan losses                                                                                                                                |       | 24,551                               |       | 24,676                |       |
| Loans, net                                                                                                                                                                |       | 1,534,077                            |       | 1,473,025             |       |
|                                                                                                                                                                      |       |                                 |       |                  |       |
| Premises and equipment, net                                                                                                                                               |       | 40,987                               |       | 41,776                |       |
| Goodwill                                                                                                                                                                  |       | 87,116                               |       | 87,116                |       |
| Intangible assets                                                                                                                                                         |       | 5,204                                |       | 5,678                 |       |
| Other assets                                                                                                                                                              |       | 55,348                               |       | 43,494                |       |
|                                                                                                                                                                      |       |                                 |       |                  |       |
| **Total assets**                                                                                                                                                          |       | $                                    | 1,985,130  |                  | $          | 1,900,376 |   |
|                                                                                                                                                                      |       |                                 |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                             |       |                                 |       |                  |       |
| ** **                                                                                                                                                                |       |                                 |       |                  |       |
| **Liabilities:**                                                                                                                                                          | ** ** | ** **                           | ** ** | ** **            | ** ** |
|   Deposits:                                                                                                                                                     |       |                                 |       |                  |       |
| Noninterest-bearing                                                                                                                                                       |       | $                                    | 166,570    |                  | $          | 151,529 |   |
| Interest-bearing demand  and savings                                                                                                                                      |       | 453,307                              |       | 447,994               |       |
| Time deposits                                                                                                                                                             |       | 928,537                              |       | 880,645               |       |
| Total deposits                                                                                                                                                            |       | 1,548,414                            |       | 1,480,168             |       |
|  Federal funds purchased and  securities sold under repurchase agreements                                                                                            |       | 44,551                               |       | 41,061                |       |
|  Federal Home Loan Bank  advances                                                                                                                                    |       | 105,323                              |       | 96,498                |       |
|  Other borrowings                                                                                                                                                    |       | 719                                  |       | 939                   |       |
|  Other liabilities                                                                                                                                                   |       | 19,964                               |       | 18,474                |       |
|  Subordinated debt                                                                                                                                                   |       | 29,898                               |       | 29,898                |       |
|                                                                                                                                                                      |       |                                 |       |                  |       |
| **Total liabilities**                                                                                                                                                     |       | 1,748,869                            |       | 1,667,038             |       |
|                                                                                                                                                                      |       |                                 |       |                  |       |
| **Stockholders’ Equity:**                                                                                                                                            |       |                                 |       |                  |       |
| ** **                                                                                                                                                                |       |                                 |       |                  |       |
| Capital stock, no par value; 20,000,000 shares authorized, 14,176,260  and 14,131,891 shares issued and outstanding at June 30, 2007 and December  31, 2006, respectively |       | 186,972                              |       | 186,539               |       |
|  Retained earnings                                                                                                                                                   |       | 52,339                               |       | 48,148                |       |
|  Accumulated other  comprehensive loss                                                                                                                               |       | (3,050                               | )          | (1,349                | )          |
|                                                                                                                                                                      |       |                                 |       |                  |       |
| **Total stockholders’ equity**                                                                                                                                       |       | 236,261                              |       | 233,338               |       |
|                                                                                                                                                                      |       |                                 |       |                  |       |
| **Total liabilities and stockholders’  equity**                                                                                                                      |       | $                                    | 1,985,130  |                  | $          | 1,900,376 |   |

 

 See accompanying notes toconsolidated financial statements.

3

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

**ConsolidatedStatements of Income**

**(Unaudited)**
| ** **                                                                     | ** ** | **Three months ended**                                      | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **June 30,**                                                     | ** ** | **June 30,**              | ** ** |
| ** **                                                                     | ** ** | **2007**                                                              | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                     | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Interest income:                                                               |       |                                                                  |       |                           |       |   |   |   |   |
|  Loans, including fees                                                    |       | $                                                                     | 32,441     |                           | $          | 28,529 |   | $ | 64,598 |   | $ | 53,061 |   |
|  Taxable securities                                                       |       | 2,271                                                                 |       | 1,978                          |       | 4,579 |   | 3,890 |   |
|  Nontaxable securities                                                    |       | 310                                                                   |       | 133                            |       | 571 |   | 250 |   |
|  Federal funds sold                                                       |       | 107                                                                   |       | 97                             |       | 215 |   | 196 |   |
|  Interest-bearing deposits in banks                                       |       | 38                                                                    |       | 37                             |       | 64 |   | 45 |   |
| Total interest income                                                          |       | 35,167                                                                |       | 30,774                         |       | 70,027 |   | 57,442 |   |
|                                                                           |       |                                                                  |       |                           |       |   |   |   |   |
| Interest expense:                                                              |       |                                                                  |       |                           |       |   |   |   |   |
|  Deposits                                                                 |       | 15,993                                                                |       | 11,523                         |       | 31,124 |   | 20,955 |   |
|  Federal funds purchased and securities sold  under repurchase agreements |       | 397                                                                   |       | 304                            |       | 790 |   | 528 |   |
|  Federal Home Loan Bank advances                                          |       | 1,323                                                                 |       | 989                            |       | 2,422 |   | 1,952 |   |
|  Other borrowings                                                         |       | 647                                                                   |       | 647                            |       | 1,289 |   | 1,234 |   |
| Total interest expense                                                         |       | 18,360                                                                |       | 13,463                         |       | 35,625 |   | 24,669 |   |
|                                                                           |       |                                                                  |       |                           |       |   |   |   |   |
| Net interest income                                                            |       | 16,807                                                                |       | 17,311                         |       | 34,402 |   | 32,773 |   |
|                                                                           |       |                                                                  |       |                           |       |   |   |   |   |
| Provision for loan losses                                                      |       | 914                                                                   |       | 1,274                          |       | 1,825 |   | 2,480 |   |
|                                                                           |       |                                                                  |       |                           |       |   |   |   |   |
| Net interest income  after provision for loan losses                           |       | 15,893                                                                |       | 16,037                         |       | 32,577 |   | 30,293 |   |
|                                                                           |       |                                                                  |       |                           |       |   |   |   |   |
|  Other income:                                                            |       |                                                                  |       |                           |       |   |   |   |   |
|  Service charges on deposit accounts                                      |       | 1,758                                                                 |       | 1,605                          |       | 3,245 |   | 3,126 |   |
|  Mortgage origination fees                                                |       | 536                                                                   |       | 616                            |       | 1,250 |   | 1,141 |   |
|  Insurance commissions                                                    |       | 4                                                                     |       | 5                              |       | 4 |   | 7 |   |
|  Other operating income                                                   |       | 480                                                                   |       | 385                            |       | 1,035 |   | 800 |   |
| Total other income                                                             |       | 2,778                                                                 |       | 2,611                          |       | 5,534 |   | 5,074 |   |
|                                                                           |       |                                                                  |       |                           |       |   |   |   |   |
| Other expense:                                                                 |       |                                                                  |       |                           |       |   |   |   |   |
|  Salaries and employee benefits                                           |       | 8,162                                                                 |       | 7,461                          |       | 16,400 |   | 14,641 |   |
|  Occupancy and equipment expenses, net                                    |       | 1,851                                                                 |       | 1,710                          |       | 3,753 |   | 3,339 |   |
|  Other operating expenses                                                 |       | 4,101                                                                 |       | 3,407                          |       | 7,824 |   | 6,342 |   |
| Total other expense                                                            |       | 14,114                                                                |       | 12,578                         |       | 27,977 |   | 24,322 |   |
|                                                                           |       |                                                                  |       |                           |       |   |   |   |   |
| Income before income  taxes                                                    |       | 4,557                                                                 |       | 6,070                          |       | 10,134 |   | 11,045 |   |
|                                                                           |       |                                                                  |       |                           |       |   |   |   |   |
| Income tax expense                                                             |       | 1,454                                                                 |       | 2,116                          |       | 3,321 |   | 3,814 |   |
|                                                                           |       |                                                                  |       |                           |       |   |   |   |   |
| Net income                                                                     |       | $                                                                     | 3,103      |                           | $          | 3,954 |   | $ | 6,813 |   | $ | 7,231 |   |
|                                                                           |       |                                                                  |       |                           |       |   |   |   |   |
| Earnings per share:                                                            |       |                                                                  |       |                           |       |   |   |   |   |
|  Basic                                                                    |       | $                                                                     | 0.22       |                           | $          | 0.29 |   | $ | 0.48 |   | $ | 0.54 |   |
|  Diluted                                                                  |       | $                                                                     | 0.22       |                           | $          | 0.28 |   | $ | 0.47 |   | $ | 0.53 |   |
|                                                                           |       |                                                                  |       |                           |       |   |   |   |   |
| Weighted average shares:                                                       |       |                                                                  |       |                           |       |   |   |   |   |
|  Basic                                                                    |       | 14,175                                                                |       | 13,666                         |       | 14,167 |   | 13,263 |   |
|  Diluted                                                                  |       | 14,343                                                                |       | 14,000                         |       | 14,357 |   | 13,563 |   |
|                                                                           |       |                                                                  |       |                           |       |   |   |   |   |
| Cash dividends per common share                                                |       | $                                                                     | 0.095      |                           | $          | 0.090 |   | $ | 0.185 |   | $ | 0.175 |   |

 

See accompanying notes to consolidated financial statements.

4

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

**Consolidated Statements of Comprehensive Income**

**(unaudited)**
| ** **                                                         | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                         | ** ** | **(Dollars in thousands)**            | ** ** |
|                                                               |       |                                            |       |                                          |       |   |   |   |   |
| **Net  Income**                                                    |       | $                                               | 3,103      |                                          | $          | 3,954 |   | $ | 6,813 |   | $ | 7,231 |   |
| ** **                                                         | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Unrealized holding losses arising during period,net of tax benefit |       | (1,938)                                         |       | (1,193)                                       |       | (1,701) |   | (1,584) |   |
|                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Other  comprehensive loss                                          |       | (1,938)                                         |       | (1,193)                                       |       | (1,701) |   | (1,584) |   |
|                                                               |       |                                            |       |                                          |       |   |   |   |   |
| **Comprehensive income**                                           |       | $                                               | 1,165      |                                          | $          | 2,761 |   | $ | 5,112 |   | $ | 5,647 |   |

 

See accompanying notes to consolidated financial statements.

### **Consolidated Statements of Stockholders'Equity**

### **Six Months Ended June 30, 2007**

**(Unaudited)**
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Other ** | ** ** | **Total ** | ** ** |
| ** **                         | ** ** | ** **                           | ** ** | **Capital** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Stockholders'** | ** ** |
| ** **                         | ** ** | **Shares**                           | ** ** | **Stock** | ** ** | **Earnings** | ** ** | **Loss** | ** ** | **Equity** | ** ** |
| Balance, December 31, 2006         |       | 14,132                               |       | $ | 186,539 |   | $ | 48,148 |   | $ | (1,349) |   | $ | 233,338 |   |
| Net income                         |       |  —                         |       |  — |   | 6,813 |   |  — |   | 6,813 |   |
| Options exercised                  |       | 44                                   |       | 288 |   |  — |   |  — |   | 288 |   |
|                               |       |                                 |       |   |   |   |   |   |   |   |   |
| Dividends declared$0.19 per  share |       |  —                         |       |  — |   | (2,622) |   |  — |   | (2,622) |   |
| Contributed capital                |       |  —                         |       | 3 |   | 3 |   |   |   |   |   |
| Stock option expense               |       |  —                         |       | 142 |   |  — |   |  — |   | 142 |   |
| Other comprehensive loss           |       |  —                         |       |  — |   |  — |   | (1,701) |   | (1,701) |   |
|                               |       |                                 |       |   |   |   |   |   |   |   |   |
| Balance,  June 30, 2007            |       | 14,176                               |       | $ | 186,972 |   | $ | 52,339 |   | $ | (3,050) |   | $ | 236,261 |   |

 

See accompanying notes to consolidated financial statements.

5

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

**CondensedConsolidated Statements of Cash Flows**

**(Unaudited)**
| ** **                                                                                                 | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                                                                                 | ** ** | **(In thousands)**                       | ** ** |
| **Operating  Activities**                                                                                  |       |                                          |       |   |   |
| Net income                                                                                                 |       | $                                             | 6,813      |   | $ | 7,231 |   |
| Adjustments to reconcile net income to net cash  Provided by operating activities:                         |       |                                          |       |   |   |
| Depreciation                                                                                               |       | 1,548                                         |       | 1,506 |   |
| Provision for loan losses                                                                                  |       | 1,825                                         |       | 2,480 |   |
| Amortization and (accretion), net                                                                          |       | 464                                           |       | 510 |   |
| Stock option expense                                                                                       |       | 142                                           |       | 119 |   |
| Loss on sale of other real estate                                                                          |       | 289                                           |       | 29 |   |
| Net increase in other assets                                                                               |       | (117                                          | )          | (2,489 | ) |
| Net increase in other liabilities                                                                          |       | 1,490                                         |       | 1,412 |   |
| Net cash provided by operating activities                                                                  |       | 12,454                                        |       | 10,798 |   |
|                                                                                                       |       |                                          |       |   |   |
| **Investing  Activities**                                                                                  |       |                                          |       |   |   |
|  Purchases of  securities available for sale                                                          |       | (38,494                                       | )          | (9,167 | ) |
|  Proceeds from  sales of securities available for sale                                                |       | —                                        |       | 1,896 |   |
|  Proceeds from  maturities of securities available for sale                                           |       | 28,731                                        |       | 13,774 |   |
|  Net increase  in restricted equity securities                                                        |       | (335                                          | )          | (1,168 | ) |
|  Net increase  in interest-bearing deposits in banks                                                  |       | (3,117                                        | )          | (868 | ) |
|  Net increase  in federal funds sold                                                                  |       | (7,617                                        | )          | (9,865 | ) |
|  Net increase  in loans                                                                               |       | (75,595                                       | )          | (84,674 | ) |
|  Net cash paid  in business combinations                                                              |       | —                                        |       | (3,291 | ) |
|  Proceeds from  sale of other real estate owned                                                       |       | 1,581                                         |       | 705 |   |
|  Purchase of  premises and equipment                                                                  |       | (788                                          | )          | (1,769 | ) |
|  Proceeds from  sale of premises and equipment                                                        |       | 29                                            |       | 12 |   |
| Net cash used in investing activities                                                                      |       | (95,605                                       | )          | (94,415 | ) |
|                                                                                                       |       |                                          |       |   |   |
| **Financing  Activities**                                                                                  |       |                                          |       |   |   |
|  Net increase  in deposits                                                                            |       | 68,246                                        |       | 93,026 |   |
|  Net increase  (decrease) in federal funds purchased and securities sold under repurchase  agreements |       | 3,490                                         |       | (18,146 | ) |
|  Proceeds from  other borrowings and Federal Home Loan Bank advances                                  |       | 48,840                                        |       | 24,890 |   |
|  Payments on  other borrowings and Federal Home Loan Bank advances                                    |       | (40,235                                       | )          | (11,890 | ) |
|  Dividends  paid                                                                                      |       | (2,622                                        | )          | (2,257 | ) |
|  Payment for  fractional shares                                                                       |       | —                                        |       | (6 | ) |
|  Payment for  stock repurchase                                                                        |       | —                                        |       | (5,586 | ) |
|  Contributed  capital                                                                                 |       | 3                                             |       | — |   |
|  Proceeds from  exercise of stock options                                                             |       | 288                                           |       | 2,470 |   |
| Net cash provided by financing activities                                                                  |       | 78,010                                        |       | 82,501 |   |
|                                                                                                       |       |                                          |       |   |   |
| Net decrease in cash and due from banks                                                                    |       | (5,141                                        | )          | (1,116 | ) |
|                                                                                                       |       |                                          |       |   |   |
| Cash and due  from banks at beginning of period                                                            |       | 25,876                                        |       | 30,748 |   |
|                                                                                                       |       |                                          |       |   |   |
| Cash and due  from banks at end of period                                                                  |       | $                                             | 20,735     |   | $ | 29,632 |   |
|                                                                                                       |       |                                          |       |   |   |
| Supplemental  disclosure of cash paid during the period for:                                               |       |                                          |       |   |   |
| Interest                                                                                                   |       | $                                             | 34,000     |   | $ | 22,786 |   |
| Income taxes                                                                                               |       | $                                             | 855        |   | $ | 5,056 |   |
|                                                                                                       |       |                                          |       |   |   |
| Noncash  transaction:                                                                                      |       |                                          |       |   |   |
| Other real  estate acquired in settlement of loans                                                         |       | $                                             | 13,199     |   | $ | 1,521 |   |

 

See accompanying notes to consolidated financial statements.

6

----

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

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

** **

**NOTE 1.         BASIS OF PRESENTATION**

** **

Theunaudited consolidated financial statements include the accounts of GB&TBancshares, Inc. and its wholly-owned banking subsidiaries, Gainesville Bank& Trust, United Bank & Trust, Community Trust Bank, HomeTown Bank ofVilla Rica, First National Bank of the South, First National Bank of Gwinnettand Mountain State Bank.  Significantintercompany transactions and balances have been eliminated in consolidation.

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with U.S. generally accepted accounting principles for interimfinancial information 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 six-month periods ended June 30,2007 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2007.  These statementsshould be read in conjunction with the consolidated financial statements andrelated notes included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2006.

 

**NOTE 2.         STOCK COMPENSATION PLANS**

 

In May 2007, the stockholders of the Company voted to adoptthe 2007 Omnibus Long-Term Incentive Plan (the “2007 Incentive Plan”).  The 2007 Incentive Plan allows the Company togrant stock-based and performance-based incentive awards to officers and otherswho provide substantial service to the Company or any of its subsidiaries.  The 2007 Incentive Plan provides for thegranting of incentive stock options, nonstatutory stock options, restrictedstock awards, restricted stock units, deferred stock units, stock appreciationrights ("SARs"), performance awards, performance-based cash awards,dividend equivalents, and qualified stock based awards (collectively, the"awards") to officers, directors and key employees to purchase sharesof common stock.  The 2007 Incentive Planallows the Company to issue up to 1,000,000 shares.  The GB&TBancshares, Inc. 1997 Incentive Plan (the "1997 Incentive Plan") alsoremains in effect and all options previously issued under the 1997 IncentivePlan continue to remain outstanding in accordance with their terms.  The total number of shares issuable under the1997 Incentive Plan may not exceed 2,000,000 shares of the Company’s commonstock.  As of May 2007, there were174,218 unused shares of common stock available under the 1997 IncentivePlan.  Therefore, the Company can grantoptions and other awards amounting to an aggregate of 1,174,218 shares ofcommon stock.

 

In accordance with the fair value recognition provisions ofFASB Statement No. 123(R) (“SFAS 123 (R)”), Share-Based Payment the Companyrecognized compensation cost  (a) for allshare-based payments granted prior to, but not yet vested as of January 1,2006, based  on  the grant  date  fair value  estimated  in accordance  with  the original  provisions of SFAS 123,and (b) for all share-based payments granted subsequent to January 1, 2006,based on the grant-date fair value estimated in accordance with the provisionsof SFAS 123(R).

 

SFAS123(R) also requires that tax deductions in excess of recognized compensationcost be reported as a financing cash flow, rather than as operating cash flow.

 

At June 30, 2007, there was approximately$695,000 of unrecognized compensation cost related to stock-based payments,which is expected to be recognized over a weighted-average period of 4.10years.

7

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A summary of the status of the stock option planat June 30, 2007 and changes during the period is shown in the following table.

 
|                                                                                      | ** ** | **Six months ended  June 30, 2007** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **Shares**                                              | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| ** **                                                                           | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Outstanding at  beginning of period                                                  |       | 771,384                                                 |       | $ | 11.95 |   |
| Granted                                                                              |       | 56,947                                                  |       | 18.03 |   |
| Exercised                                                                            |       | (52,580                                                 | )          | 8.71 |   |
| Forfeited                                                                            |       | (34,696                                                 | )          | 18.47 |   |
| Outstanding at  end of period                                                        |       | 741,055                                                 |       | $ | 12.35 |   |
| ** **                                                                           | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Options  exercisable at end of period                                                |       | 568,630                                                 |       | $ | 10.02 |   |
| Weighted-average  fair value of options granted during period                        |       |                                                    |       | $ | 5.55 |   |
| Total intrinsic  value of options exercised during the period                        |       |                                                    |       | $ | 420,000 |   |
| Weighted average  remaining contractual term of exercisable options at end of period |       |                                                    |       | 4.10 years |   |
| Aggregate  intrinsic value of options outstanding at end of period                   |       |                                                    |       | $ | 3,224,000 |   |
| Aggregate  intrinsic value of exercisable options at end of period                   |       |                                                    |       | $ | 3,498,000 |   |

 

Afurther summary of the options outstanding at June 30, 2007 follows.

 
|                          | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | ** **                   | ** ** | **Weighted-**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of**        | ** ** | **Number**                   | ** ** | **Contractual**              | ** ** | **Exercise ** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **Outstanding**              | ** ** | **Life**                     | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $5.88 - $8.65            |       | 428,317                      |       | 4.45 years                   |       | $ | 8.13 |   | 428,317 |   | $ | 8.13 |   |
| $9.38 - $13.78           |       | 85,084                       |       | 4.33 years                   |       | 11.93 |   | 77,584 |   | 11.77 |   |
| $14.15 - $21.18          |       | 119,038                      |       | 8.39 years                   |       | 18.71 |   | 27,538 |   | 18.20 |   |
| $21.46 - $24.15          |       | 108,616                      |       | 8.20 years                   |       | 22.33 |   | 35,191 |   | 22.76 |   |
| Total                    |       | 741,055                      |       | 5.62 years                   |       | 12.35 |   | 568,630 |   | 10.02 |   |
|                          |            |                              |            |                              |            |  |  |  |  |  |  |  |  |

 

8

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Thetotal fair value of options vested during the period was approximately$915,000.  The total amount expensed foroptions vested during the period was approximately $142,000.

 

TheCompany uses historical data to estimate volatility, option exercise, employeeterminations, forfeitures and expected dividends within the valuation model.

 

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:

 
|                         | ** ** | **Six months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **June 30, 2007**    | ** ** | **June 30, 2006**    | ** ** |
| Dividend yield          |       | 2.28                           | %          | 1.50                           | %          |
| Expected life           |       | 5 years                        |       | 3 years                        |       |
| Expected  volatility    |       | 35.58                          | %          | 10.81                          | %          |
| Risk-free interest rate |       | 5.06                           | %          | 4.80                           | %          |

 

9

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**NOTE 3.     EARNINGS PER COMMON SHARE**

 

Presented below is asummary of the components used to calculate basic and diluted earnings pershare for the three and six-month periods ended June 30, 2007 and 2006.
| ** **                                                                                                                          | ** ** | **Three months ended June 30,**                   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2007**                                                              | ** ** | **2006** | ** ** |
| ** **                                                                                                                          | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Basic Earnings Per Share:                                                                                                           |       |                                                                  |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 14,175                                                                |       | 13,666 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Net income                                                                                                                          |       | $                                                                     | 3,103      |   | $ | 3 ,954 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Basic earnings per share                                                                                                            |       | $                                                                     | 0.22       |   | $ | 0.29 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Diluted Earnings Per Share:                                                                                                         |       |                                                                  |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 14,175                                                                |       | 13,666 |   |
| Net effect of the assumed  exercise of stock options based on the treasury stock method using average  market prices for the period |       | 168                                                                   |       | 334 |   |
| Total weighted average common  shares and common stock equivalents outstanding                                                      |       | 14,343                                                                |       | 14,000 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Net income                                                                                                                          |       | $                                                                     | 3,103      |   | $ | 3,954 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Diluted earnings per share                                                                                                          |       | $                                                                     | 0.22       |   | $ | 0.28 |   |

 
| ** **                                                                                                                          | ** ** | **Six months ended June 30,**                     | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2007**                                                              | ** ** | **2006** | ** ** |
| **:**                                                                                                                               | ** ** | **(In thousands, except per share amounts)** | ** ** |
|  Basic Earnings Per Share                                                                                                      |       |                                                                  |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 14,167                                                                |       | 13,263 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Net income                                                                                                                          |       | $                                                                     | 6,813      |   | $ | 7,231 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Basic earnings per share                                                                                                            |       | $                                                                     | 0.48       |   | $ | 0.54 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Diluted Earnings Per Share:                                                                                                         |       |                                                                  |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 14,167                                                                |       | 13,263 |   |
| Net effect of the assumed  exercise of stock options based on the treasury stock method using average  market prices for the period |       | 190                                                                   |       | 300 |   |
| Total weighted average common  shares and common stock equivalents outstanding                                                      |       | 14,357                                                                |       | 13,563 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Net income                                                                                                                          |       | $                                                                     | 6,813      |   | $ | 7,231 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Diluted earnings per share                                                                                                          |       | $                                                                     | 0.47       |   | $ | 0.53 |   |

 

10

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**NOTE 4.       BUSINESS COMBINATIONS**

 

OnMay 1, 2006, the Company completed the acquisition of Mountain Bancshares,Inc., the parent company of Mountain State Bank in Dawsonville, Dawson County,Georgia, which resulted in Mountain State Bank becoming a wholly ownedsubsidiary of the Company.  The aggregatepurchase price was $39.8 million, including the issuance of 1,088,924 shares ofGB&T’s capital stock to Mountain Bancshares’ stockholders valued at $24.0million, $10.3 million in cash and stock options and warrants valued at $5.3million, and $197,000 in direct acquisition costs.  The value of the capital stock issued wasdetermined based on the average market price of GB&T’s capital stock over atwo-day period before and after the terms of the acquisition were agreed uponand announced.  The fair value of thestock options and warrants was determined based on the Black-Scholes-Mertonoption pricing model.  The acquisitionwas accounted for as a purchase resulting in estimated goodwill ofapproximately $26.0 million.  Thegoodwill will not be deductible for tax purposes.  Identifiable intangible assets of $971,000acquired consist of a core deposit premium with an estimated weighted averageuseful life of five years.  MountainState Bank’s results of operations from May 1, 2006, are included in the consolidatedresults of operations for the three and six months ended June 30, 2006.

 

The following table summarizes the estimatedfair values of the assets acquired and liabilities assumed at the date of theMountain Bancshares acquisition.  TheCompany obtained third-party valuations of the core deposit intangible and fairvalue adjustments for loans and deposits. In addition, the Company obtained independent appraisals of acquiredpremises.
|                                            | ** ** | **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                                   |       | 25,952             |       |
| Core deposit  intangible                   |       | 971                |       |
| Other assets                               |       | 546                |       |
| Total assets acquired                      |       | $                  | 156,085    |   |
| Deposits                                   |       | $                  | 123,708    |   |
| Other borrowings                           |       | 2,000              |       |
| Other  liabilities                         |       | 1,005              |       |
| Total liabilities assumed                  |       | $                  | 126,713    |   |
|                                       |       |               |       |
| Net assets  acquired                       |       | $                  | 29,372     |   |

 

Unaudited pro forma consolidated results ofoperations for the six months ended June 30, 2007 and 2006 as though thecompanies had combined as of January 1, 2007 and 2006 are as follows:
| ** **                  | ** ** | **Six months ended**                                                 | ** ** |
|-----------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **June 30,**                                                              | ** ** |
| ** **                  | ** ** | **2007**                                                                       | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **(Dollars in thousands,  except per share amounts)** | ** ** |
| Net interest  income        |       | $                                                                              | 34,473     |   | $ | 34,770 |   |
| Net income                  |       | 6,879                                                                          |       | 7,641 |   |
| Basic earnings  per share   |       | 0.49                                                                           |       | 0.58 |   |
| Diluted earnings per  share |       | 0.48                                                                           |       | 0.56 |   |
|                             |            |                                                                                |            |  |  |  |  |

 

11

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**NOTE 5.       STOCK REPURCHASE**

** **

OnJune 18, 2007, the Company’s Board of Directors approved the repurchase of upto $10,000,000 of the Company’s outstanding common stock, no par value pershare.  The purchases will be made in theopen market or in privately negotiated transactions at prevailing prices.  The timing and volume of purchases under theprogram will depend on market conditions. The purchases will be accomplished in accordance with the volume andtiming guidelines of Rule 10b-18 of the Exchange Act applicable to the Companyand Rule 10b5-1 of the Exchange Act.  Asof June 30, 2007, no shares had been repurchased by the Company.

** **

**NOTE 6.       RECENT ACCOUNTING STANDARDS**

** **

InSeptember 2006, the FASB issued SFAS 157, Fair Value Measurements.  Thestandard provides guidance for using fair value to measure assets andliabilities.  It defines fair value, establishes a framework for measuringfair value under generally accepted accounting principles and expandsdisclosures about fair value measurement.  Under the standard, fair valuerefers to the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants in the marketin which the reporting entity transacts.  It clarifies the principle thatfair value should be based on the assumptions market participants would usewhen pricing the asset or liability.  In support of this principle, thestandard establishes a fair value hierarchy that prioritizes the informationused to develop those assumptions.  Under the standard, fair valuemeasurements would be separately disclosed by level within the fair valuehierarchy.  SFAS 157 is effective for financial statements issued forfiscal years beginning after November 15, 2007.  The Company is currentlyevaluating the impact the adoption of this statement could have on itsfinancial condition, results of operations and cash flows.

** **

InFebruary 2007, the FASB issued SFAS 159, "The Fair Value Option forFinancial Assets and Financial Liabilities." SFAS 159 permits entities tomake an irrevocable election, at specified election dates, to measure eligiblefinancial instruments and certain other items at fair value. This statementalso establishes presentation and disclosure requirements designed tofacilitate comparisons between entities that choose different measurementattributes for similar types of assets and liabilities. The provisions of thisstatement are effective as of the beginning of the first fiscal year thatbegins after November 15, 2007.   TheCompany has not elected to early adopt this statement and is currentlyevaluating the impact the adoption of this statement could have on itsfinancial condition, results of operations and cash flows.

** **

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

** **

Thefollowing is management’s discussion and analysis of certain significant factorswhich have affected 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, 2006 included in the Company’s 2006 Annual Reporton Form 10-K.

** **

**CautionaryNotice Regarding Forward-Looking Statements**

 

Someof the statements contained or incorporated by reference in this Report,including, without limitation, matters discussed under the caption"Management's Discussion and Analysis of Financial Condition and Resultsof Operations," are "forward-looking statements" within themeaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements include statements about the competitiveness of thebanking industry, potential regulatory obligations, our entrance and expansioninto other markets, our other business strategies and other statements that arenot historical facts. Forward-looking 

12

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statementsare not guarantees of performance or results. When we use words like"may," "plan," "contemplate,""anticipate," "believe," "intend,""continue," "expect," "project,""predict," "estimate," "could,""should," "would," "will," and similarexpressions, you should consider them as identifying forward-lookingstatements, although we may use other phrasing. These forward-lookingstatements involve risks and uncertainties and are based on our beliefs andassumptions, and on the information available to us at the time that thesedisclosures were prepared. Factors that may cause actual results to differmaterially from those expressed or implied by such forward-looking statementsinclude, among others, the following possibilities: (1) competitive pressuresamong depository and other financial institutions may increase significantly;(2) changes in the interest rate environment may reduce margins; (3) generaleconomic conditions may be less favorable than expected, resulting in, amongother things, a deterioration in credit quality and/or a reduction in demandfor credit; (4) economic, governmental or other factors may prevent theprojected population and commercial growth in the counties in which weoperate;  (5) legislative or regulatorychanges, including changes in accounting standards, may adversely affect thebusinesses in which we are engaged;  (6)costs or difficulties related to the integration of our businesses may begreater than expected; (7) deposit attrition, customer loss or revenue lossfollowing acquisitions may be greater than expected; (8) competitors may havegreater financial resources and develop products that enable such competitorsto compete more successfully than we can; and (9) adverse changes may occur inthe equity markets.  Many of these factorsare beyond our ability to control or predict, and readers are cautioned not toput undue reliance on such forward-looking statements. We do not intend to, andassume no responsibility to update or revise any forward-looking statementscontained in this Report, whether as a result of new information, future eventsor otherwise.

** **

**CriticalAccounting 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 reviewed and discussedperiodically by our Audit Committee and are described in the notes to ouraudited financial statements as of December 31, 2006. 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 reviewedperiodically and the effects of revisions are reflected in the consolidatedfinancial statements in the period they are determined to be necessary.  Management has discussed our criticalaccounting policies with the Audit Committee of the Board of Directors.

 

*Allowance for Loan Losses*.    We believe that our determination of theallowance for loan losses is our most significant judgment and estimate used inthe preparation of our consolidated financial statements. The allowance forloan losses is an amount that management believes will be adequate to absorbestimated losses in the loan portfolio. The calculation is an estimate of theamount of loss in the loan portfolios of our subsidiary banks. The allowancefor loan losses is evaluated on a regular basis by management and is based uponmanagement's periodic review of the collectibility of the loans in light ofhistorical experience, the nature and volume of the loan portfolio, adversesituations that may affect the borrower's ability to repay, estimated value ofany underlying collateral and prevailing economic conditions. This evaluationis inherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available. In addition,regulatory agencies, as an integral part of their examination process,periodically review our allowance for loan losses, and may require us to make additionsto the allowance based on their judgment about information available to them atthe time of their examinations.

 

TheCompany uses an 8 point rating system for its loans. Ratings of 1 to 4 areconsidered “pass ratings”, 5 is special mention, 6 is substandard, 7 isdoubtful, and 8 is loss. The originating loan officer rates all loans based onthis system, and the ratings are adjusted as needed to reflect the currentstatus of the loan. The loan officers are trained to rate loans in a timely andaccurate manner based on current information. These ratings are reviewed regularly by the loan committee of therespective bank subsidiary, an outside independent loan review firm and by theapplicable regulator for accuracy.

 

13

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Ageneral allowance will be maintained for all loans rated 1 to 4 and for allhomogeneous loan pools such as consumer, credit card and residentialmortgage.  Management will develop arange of expected losses for each risk grade and for each pool.  This range of losses will be management’sbest estimate based on actual loss experience, industry loss experience, loanportfolio trends and characteristics of the markets it serves.  On a quarterly basis, management willevaluate each of the loan categories and determine the expected loss levelsfrom the range previously established.

 

Allloans rated 5, 6, 7 and 8, as well as any other impaired loan of a significantamount, will be individually analyzed and a specific reserve assigned.  This analysis will include information frommanagement’s Problem Asset Review Committee which meets quarterly and reviewscredit relationships of $1 million and above and rated 5 through 8.  Management, considering current informationand events regarding a borrowers’ ability to repay its obligations, considers aloan to be impaired when the ultimate collection of all amounts due, accordingto the contractual terms of the loan agreement, is in doubt. When a loan isconsidered to be impaired, the amount of impairment is measured based on thepresent value of expected future cash flows discounted at the loan’s effectiveinterest rate. If the loan is collateral dependent, the fair value of thecollateral less estimated selling costs is used to determine the amount ofimpairment. Impairment losses are included in the allowance for loan lossesthrough a charge to the provision for loan losses.  A majority of our impaired loans arecollateral dependent. The allowance for loan losses on these loans isdetermined based on 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.

 

Theremainder of the balance in the reserve for loan losses is unallocated.  The unallocated reserve representsmanagement’s estimate of the probable losses inherent in the loan portfoliothat have not been fully provided for through the specific reservecalculations.  Factors considered indetermining the unallocated reserve are overall economic conditions, the rapidrise of real estate prices over the past three years in our markets, the recentslowdown in real estate activity, the number of new and relativelyinexperienced banks and bankers entering our markets and offering aggressiveterms and pricing, our concentration in commercial and consumer real estateloans and the experience and historic performance of our lenders.

 

*Goodwill*.    Our growth over the past several years hasbeen enhanced significantly by mergers and acquisitions. Prior to July 2001,all of our acquisitions were accounted for using the pooling-of-interestsbusiness combination method of accounting. Effective July 1, 2001, we adoptedSFAS No. 141, "Business Combinations," which allows only the use ofthe purchase method of accounting. For purchase acquisitions, we are requiredto record the assets acquired, including identified intangible assets, andliabilities assumed at their fair value, which in many instances involvesestimates based on third party valuations, such as appraisals, or externalvaluations based on discounted cash flow analyses or other valuationtechniques. The determination of the useful lives of intangible assets issubjective as is the appropriate amortization period for such intangibleassets. In addition, purchase acquisitions typically result in recordinggoodwill, which is subject to ongoing periodic impairment tests based on thefair value of net assets acquired compared to the carrying value of goodwill.In August 2006, the required impairment testing of goodwill was performed andno impairment 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**

** **

Netincome for the three months ended June 30, 2007 was $3.1 million, a decrease of21.5% compared to the same period a year ago. Diluted earnings per share were $0.22 for the three months ended June30, 2007, compared to $0.28 for the same period a year ago.  The return on average assets was 0.63% andthe return on average equity was 5.24% for the three months ended June 30,2007.  This compares to a return on averageassets of 0.91% and a return on average equity of 7.23% for the same period ayear ago.

 

14

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Netincome for the six months ended June 30, 2007 was $6.8 million, a decrease of5.8% compared to the same period a year ago. Diluted earnings per share were $0.47 for the six months ended June 30,2007, compared to $0.53 for the same period a year ago.  The return on average assets was 0.71% andthe return on average equity was 5.82% for the six months ended June 30,2007.  This compares to a return onaverage assets of 0.87% and a return on average equity of 6.93% for the sameperiod a year ago.

 

MountainState Bank (“MSB”) became part of the Company effective May 1, 2006.  The merger was accounted for as a purchasetransaction; therefore, results of operations for MSB are included in theresults of operations for the three and six-month periods ended June 30, 2006from the acquisition date of May 1, 2006.

 

Totalrevenue, defined as net interest income plus other income, was $19.6 millionfor the three months ended June 30, 2007, a decrease of $0.3 million, or 1.69%,from the $19.9 million reported for the same period a year ago.  Other expense was $14.1 million for the threemonths ended June 30, 2007, an increase of $1.5 million, or 12.21%, compared tothe $12.6 million reported for the same period a year ago.  Revenue growth has been offset by increasedexpense growth resulting in an efficiency ratio for the three months ended June30, 2007 of 70.85% compared to 62.03% for the three months ended June 30, 2006.

 

Totalrevenue was $39.9 million for the six months ended June 30, 2007, an increaseof $2.1 million, or 5.52%, from the $37.8 million reported for the same perioda year ago.  Other expense was $28.0million for the six months ended June 30, 2007, an increase of $3.7 million, or15.03%, compared to the $24.3 million reported for the same period a yearago.  Revenue growth has been offset byincreased expense growth resulting in an efficiency ratio for the six monthsended June 30, 2007 of 68.87% compared to 63.19% for the six months ended June30, 2006.

 

**BalanceSheets**

** **

Ourtotal assets increased $84.8 million to $2.0 billion at June 30, 2007, or4.46%, compared to December 31, 2006. The increase consists primarily of an increase in total loans of $60.9million, or 4.07%, an increase in federal funds sold of $7.6 million, and anincrease in investment securities of $7.5 million.

 

Totaldeposits increased $68.2 million to $1.5 billion at June 30, 2007, or 4.61%,compared to December 31, 2006. Noninterest-bearing deposits increased $15.0 million to $166.6 millionand interest-bearing deposits increased $53.2 million to $1.4 billion duringthe same period.   Deposit growthoutpaced loan growth resulting in a loan to deposit ratio of 100.66% at June30, 2007 compared to 101.18% at December 31, 2006.

 

Totalstockholders’ equity increased $2.9 million to $236.3 million at June 30, 2007,or 1.25%, compared to December 31, 2006. This increase consisted of net income of $6.8 million and $0.3 millionfrom options exercised, which was partially offset by the payment of dividendsof $2.6 million and $1.7 million from the change in other comprehensive income.

 

**Asset Quality**

** **

Theallowance for loan losses at June 30, 2007 was $24.6 million, or 1.58%, oftotal loans compared to $24.7 million, or 1.65%, at December 31, 2006 and $15.5million, or 1.09% at June 30, 2006.  Theincrease in the allowance from the prior year period was due primarily to anadditional provision taken at HTB in the fourth quarter of 2006 related toproblem credits discovered at HTB in extensive loan reviews. Management hasbeen diligent in pursuing an aggressive loan collection process on these loanrelationships and has conducted extensive reviews of our loan portfolio and hasmet with major borrowers.   Management iscomfortable with the level of reserves at HTB and believes that as of June 30,2007, the Company’s allowance is adequate to absorb any potential losses.  In addition, management believes that theCompany’s business fundamentals have been and will continue to be strengthenedbecause of improvements to internal 

15

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controls,implementation of more stringent credit administration policies andcentralization of our loan approval and documentation processes.  The allowance for loan losses is evaluatedmonthly and adjusted to reflect the risk in the portfolio.

 

Theprovision for loan losses was $1.8 million for the six months ended June 30,2007.  Net charge-offs year-to-date havebeen $2.0 million.  Management believesthe provision and net charge-off amounts recorded in the first half of 2007reflect the continued progress of the improvements being made in the loan area.

 

The following table summarizes the allowance forloan losses for the six-month periods ended June 30, 2007 and 2006.  
|                                                                      | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                                           | ** ** | **(Dollars in thousands)**          | ** ** |
| **Average amount of loans outstanding**                              |       | $                                             | 1,522,476  |   | $ | 1,305,354 |   |
| **Allowance for loan losses balance, beginning of period**           |       | $                                             | 24,676     |   | $ | 12,773 |   |
| **Less charge-offs**                                                 | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Commercial loans                                                     |       | (145                                          | )          | (268 | ) |
| Real estate loans                                                    |       | (1,843                                        | )          | (530 | ) |
| Credit cards                                                         |       | (10                                           | )          | (18 | ) |
| Consumer loans                                                       |       | (301                                          | )          | (242 | ) |
| Total charge-offs                                                    |       | (2,299                                        | )          | (1,058 | ) |
| **Plus recoveries**                                                  | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Commercial loans                                                     |       | 207                                           |       | 16 |   |
| Real estate loans                                                    |       | 4                                             |       | 19 |   |
| Credit cards                                                         |       | 1                                             |       | 2 |   |
| Consumer loans                                                       |       | 137                                           |       | 140 |   |
| Total recoveries                                                     |       | 349                                           |       | 177 |   |
| **Net charge-offs**                                                  |       | (1,950                                        | )          | (881 | ) |
| ** **                                                           | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| **Plus provision for loan losses**                                   |       | 1,825                                         |       | 2,480 |   |
| **Plus allowance for loan losses acquired in business combinations** |       | —                                        |       | 1,088 |   |
| ** **                                                           | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| **Allowance for loan losses balance, end of period**                 |       | $                                             | 24,551     |   | $ | 15,460 |   |
| ** **                                                           | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| **Net  charge-offs to average loans (annualized)**                   |       | 0.258                                         | %          | 0.136 | % |

 

16

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Thefollowing table is a summary of the Company’s nonaccrual, past due loans andrestructured loans at June 30, 2007 and June 30, 2006. The numbers indicate anincrease of approximately $26.6 million in nonaccrual loans as of June 30, 2007as compared to June 30, 2006.  Themajority of the nonaccrual balance at June 30, 2007 resides at HTB with abalance of $24.4 million.  This balancerepresents several large loan relationships and multiple small relationshipsidentified in extensive loan reviews. The Company has assigned all loans for which we have concerns to anexperienced loan workout specialist from within the Company, who hasimplemented an action plan for the remediation of each loan.  We continue to conduct loan review meetingsand fully expect to see progress from this effort.  Although we believe we have put the rightprocesses in place to produce reductions in our nonperforming assets, ourprogress could be slowed by a continued downturn in the real estatemarket.  Our goal, however, is that ourefforts in resolving these issues will result in lower levels of nonperformingassets later this year.  In addition tononaccrual loans, the Company also has other real estate, which is considered anonperforming asset.  At June 30, 2007,the balance in other real estate was $15.6 million compared to $4.7 million atDecember 31, 2006.  Included in the $56million in total nonperforming assets at June 30, 2007, were 9 relationshipsranging from $2.0 million to $8.6 million which accounted for 69% of totalnonperforming assets.  The breakdown oftotal nonperforming assets includes $25 million related to residential housing,$16.9 million related to commercial real estate, $7.8 million of vacant lotsand acreage and $6.9 million in other. Management believes that all significant losses related to nonperformingassets have been identified and provided for.

 
|                   | ** ** | **June 30, 2007**          | ** ** |
|-------------------|------------|--------------------------------------|------------|
| ** **        | ** ** | ** **                           | ** ** | **Past Due** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Nonaccrual**                       | ** ** | **90 Days** | ** ** | **Restructured** | ** ** |
| ** **        | ** ** | **Loans**                            | ** ** | **Still Accruing** | ** ** | **Debt** | ** ** |
| ** **        | ** ** | **(Dollars in thousands)** | ** ** |
| Real estate loans |       | $                                    | 38,798     |   | $ | — |   | $ | — |   |
| Commercial loans  |       | 1,481                                |       | — |   | — |   |
| Consumer loans    |       | 125                                  |       | 12 |   | — |   |
| Total             |       | $                                    | 40,404     |   | $ | 12 |   | $ | — |   |

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

 

Ourbanking subsidiaries’ policy is to discontinue the accrual of interest incomewhen, in the opinion of management, collection of such interest becomesdoubtful.  This status is determinedwhen: (1) there is a significant deterioration in the financial condition ofthe borrower and full repayment of principal and interest is not expected; and(2) the principal or interest is more than 90 days past due, unless the loan isboth well-secured and in the process of collection.  Accrual of interest on such loans is resumedwhen, in management’s judgment, the collection of interest and principalbecomes probable.

 

Loansclassified for regulatory purposes as loss, doubtful, substandard, or specialmention that have not been included in the table above do not represent orresult from trends or uncertainties which management reasonably expects willmaterially impact

17

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futureoperating 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.

** **

**Liquidity and Capital Resources**

 

Liquiditymanagement involves the matching of the cash flow requirements of customers whomay be either depositors desiring to withdraw funds or borrowers needingassurance that sufficient funds will be available to meet their credit needsand our ability to meet those needs.  Weseek to meet 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.

 

Ourliquidity and capital resources are monitored on a periodic basis by managementand state and federal regulatory authorities. Our liquidity ratio was 11.95% at June 30, 2007.  Liquidity is measured by the ratio of netcash, Federal funds sold and securities to net deposits and short-termliabilities. In the event our subsidiary banks need to generate additionalliquidity, funding plans would be implemented as outlined in the liquiditypolicy of the subsidiary banks. Our subsidiary banks have lines of creditavailable to meet any unforeseen liquidity needs.  Also, our subsidiary banks have relationshipswith the Federal Home Loan Bank of Atlanta, which provides funding for loangrowth on an as needed basis, however these amounts are subject to collateralpledging and therefore the full amount might not be available.  Management reviews liquidity on a periodicbasis to monitor and adjust liquidity as necessary.  Management has the ability to adjustliquidity by selling securities available for sale, selling participations inloans we generate and accessing available funds through various borrowingarrangements.  At June 30, 2007, we hadavailable borrowing capacity totaling approximately $241.8 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.

 

18

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As of June 30, 2007, each of our subsidiarybanks was considered to be well-capitalized as defined in the Federal Deposit InsuranceCorporation Improvement Act and based on regulatory minimum capitalrequirements.  The Company and thesubsidiary banks’ capital ratios are presented in the following table:
| ** **                               | ** ** | ** **  | ** ** | **FOR CAPITAL** | ** ** | **TO BE**  | ** ** |
|------------------------------------------|------------|-------------|------------|----------------------|------------|-----------------|------------|
| ** **                               | ** ** | **CAPITAL** | ** ** | **ADEQUACY**         | ** ** | **WELL**        | ** ** |
| ** **                               | ** ** | **RATIOS**  | ** ** | **PURPOSES**         | ** ** | **CAPITALIZED** | ** ** |
| As  of June 30, 2007                     |       |        |       |                 |       |            |       |
| Total  Capital to Risk Weighted Assets:  |       |        |       |                 |       |            |       |
| Consolidated                             |       | 11.69%      |       | 8.00%                |       | N\A             |       |
| Gainesville Bank & Trust             |       | 10.52%      |       | 8.00%                |       | 10.00%          |       |
| United Bank & Trust                  |       | 10.31%      |       | 8.00%                |       | 10.00%          |       |
| Community Trust Bank                     |       | 10.59%      |       | 8.00%                |       | 10.00%          |       |
| HomeTown Bank of Villa Rica              |       | 10.95%      |       | 8.00%                |       | 10.00%          |       |
| First National Bank of the South         |       | 11.79%      |       | 8.00%                |       | 10.00%          |       |
| First National Bank of Gwinnett          |       | 10.62%      |       | 8.00%                |       | 10.00%          |       |
| Mountain State Bank                      |       | 10.93%      |       | 8.00%                |       | 10.00%          |       |
| Tier  I Capital to Risk Weighted Assets: |       |        |       |                 |       |            |       |
| Consolidated                             |       | 10.44%      |       | 4.00%                |       | N\A             |       |
| Gainesville Bank & Trust             |       | 9.61%       |       | 4.00%                |       | 6.00%           |       |
| United Bank & Trust                  |       | 9.13%       |       | 4.00%                |       | 6.00%           |       |
| Community Trust Bank                     |       | 9.34%       |       | 4.00%                |       | 6.00%           |       |
| HomeTown Bank of Villa Rica              |       | 9.67%       |       | 4.00%                |       | 6.00%           |       |
| First National Bank of the South         |       | 10.65%      |       | 4.00%                |       | 6.00%           |       |
| First National Bank of Gwinnett          |       | 9.69%       |       | 4.00%                |       | 6.00%           |       |
| Mountain State Bank                      |       | 9.80%       |       | 4.00%                |       | 6.00%           |       |
| Tier  I Capital to Average Assets:       |       |        |       |                 |       |            |       |
| Consolidated                             |       | 9.42%       |       | 4.00%                |       | N\A             |       |
| Gainesville Bank & Trust             |       | 8.75%       |       | 4.00%                |       | 5.00%           |       |
| United Bank & Trust                  |       | 7.55%       |       | 4.00%                |       | 5.00%           |       |
| Community Trust Bank                     |       | 8.62%       |       | 4.00%                |       | 5.00%           |       |
| HomeTown Bank of Villa Rica              |       | 7.68%       |       | 4.00%                |       | 5.00%           |       |
| First National Bank of the South         |       | 9.27%       |       | 4.00%                |       | 5.00%           |       |
| First National Bank of Gwinnett          |       | 9.09%       |       | 4.00%                |       | 5.00%           |       |
| Mountain  State Bank                     |       | 8.69%       |       | 4.00%                |       | 5.00%           |       |

** **

Oursubsidiary banks are subject to certain restrictions on the amount of dividendsthat may be declared without prior regulatory approval.  At June 30, 2007, approximately $8.2 millionof retained earnings at our subsidiary banks was available for dividenddeclaration without regulatory approval.

** **

**NetInterest Income and Earning Assets**

** **

Ourprofitability is determined by our ability to effectively manage interestincome and expense, to minimize loan and security losses, to generatenoninterest income, and to control operating expenses.  Because interest rates are determined bymarket forces and economic conditions beyond our control, our ability togenerate net interest income depends upon our ability to obtain an adequate netinterest spread between the rate paid on interest-bearing liabilities and therate earned on interest-earning assets. The net interest margin, on a tax equivalent basis, was 4.04% for thesix months ended June 30, 2007, compared to 4.39% for the same period in 2006,a decrease of 35 basis points.  Thisdecrease resulted from an increase in the yield on earning assets of 52 basispoints which was more than offset by an increase in the effective cost

19

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offunds of 87 basis points.  Also impactingthe decreased net interest margin was the reversal of interest income on loansplaced on nonaccrual during 2007 of approximately $1.0 million and $1.8 millionfor the three and six month periods ended June 30, 2007, respectively.  The increased yield on earning assets wasprimarily due to increased volumes and yields on loans and the increasedeffective cost of funds was due to higher average rates paid on time depositsand other borrowings.  The Company continuesto experience growth in loans and deposits while maintaining its competitivepricing.

 

Thefollowing table sets forth the amount of our interest income or interestexpense for each category of interest-earning assets and interest-bearingliabilities and the average interest yield/rate for total interest-earningassets and total interest-bearing liabilities, net interest spread and netyield on average interest-earning assets.

 
| ** **                                                        | ** ** | **For the Six Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                        | ** ** | **June 30, 2007**                      | ** ** | **June 30, 2006**                      | ** ** |
| ** **                                                        | ** ** | **Average**                                      | ** ** | ** **                                       | ** ** | **Yields** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yields** | ** ** |
| ** **                                                        | ** ** | **Balances**                                     | ** ** | **Interest**                                     | ** ** | **/Rates** | ** ** | **Balances** | ** ** | **Interest** | ** ** | **/Rates** | ** ** |
| ** **                                                        | ** ** | **(Dollars in thousands)**             | ** ** |
| **Assets**                                                        |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest earning  assets:                                         |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Taxable  securities                                               |       | $                                                | 201,817    |                                             | $          | 4,579 |   | 4.58% |   | $ | 194,189 |   | $ | 3,890 |   | 4.04% |   |
| Nontaxable  securities*                                           |       | 26,805                                           |       | 840                                              |       | 6.32% |   | 10,459 |   | 368 |   | 7.10% |   |
| Federal funds  sold                                               |       | 8,439                                            |       | 215                                              |       | 5.14% |   | 8,699 |   | 196 |   | 4.54% |   |
| Interest bearing  deposits in banks                               |       | 2,845                                            |       | 64                                               |       | 4.54% |   | 1,151 |   | 45 |   | 7.88% |   |
| Loans, net of  unearned income                                    |       | 1,489,715                                        |       | 64,598                                           |       | 8.74% |   | 1,295,911 |   | 53,061 |   | 8.26% |   |
| Total interest  earning assets                                    |       | 1,729,621                                        |       | 70,296                                           |       | 8.20% |   | 1,510,409 |   | 57,560 |   | 7.68% |   |
| Noninterest earning  assets:                                      |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Unrealized gains  (losses) on securities                          |       | (2,510)                                          |       |                                             |       |   |   | (4,752) |   |   |   |   |   |
| Allowance for  loan losses                                        |       | (25,208)                                         |       |                                             |       |   |   | (13,812) |   |   |   |   |   |
| Nonaccrual loans                                                  |       | 32,760                                           |       |                                             |       |   |   | 9,443 |   |   |   |   |   |
| Cash and due  from banks                                          |       | 23,532                                           |       |                                             |       |   |   | 23,213 |   |   |   |   |   |
| Other assets                                                      |       | 179,928                                          |       |                                             |       |   |   | 148,451 |   |   |   |   |   |
| Total  noninterest earning assets                                 |       | 208,502                                          |       |                                             |       |   |   | 162,543 |   |   |   |   |   |
| Total assets                                                      |       | $                                                | 1,938,123  |                                             |       |   |   |   | $ | 1,672,952 |   |   |   |   |   |
| **Liabilities & Stockholders’  Equity**                  |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities:                                    |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest bearing  demand & savings                            |       | $                                                | 448,502    |                                             | 7,230      |   | 3.25% |   | $ | 425,456 |   | 5,753 |   | 2.73% |   |
| Time                                                              |       | 904,765                                          |       | 23,894                                           |       | 5.33% |   | 701,143 |   | 15,202 |   | 4.37% |   |
| Borrowings                                                        |       | 173,778                                          |       | 4,501                                            |       | 5.22% |   | 155,551 |   | 3,714 |   | 4.81% |   |
| Total interest  bearing liabilities                               |       | 1,527,045                                        |       | 35,625                                           |       | 4.70% |   | 1,282,150 |   | 24,669 |   | 3.88% |   |
| Noninterest bearing  liabilities & stockholders’ equity: |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Noninterest  bearing deposits                                     |       | 153,832                                          |       |                                             |       |   |   | 163,474 |   |   |   |   |   |
| Other  liabilities                                                |       | 20,994                                           |       |                                             |       |   |   | 17,013 |   |   |   |   |   |
| Stockholders’  equity                                        |       | 236,252                                          |       |                                             |       |   |   | 210,315 |   |   |   |   |   |
| Total  liabilities & stockholders' equity                     |       | $                                                | 1,938,123  |                                             |       |   |   |   | $ | 1,672,952 |   |   |   |   |   |
| Net interest spread                                               |       |                                             |       |                                             |       | 3.50% |   |   |   |   |   | 3.80% |   |
| Net interest income*                                              |       |                                             |       | 34,671                                           |       |   |   |   |   | 32,891 |   |   |   |
| Less: Tax equivalent  adjustment                                  |       |                                             |       | 269                                              |       |   |   |   |   | 118 |   |   |   |
| Net interest income                                               |       |                                             |       | $                                                | 34,402     |   |   |   |   |   | $ | 32,773 |   |   |   |
| Net interest margin*                                              |       |                                             |       |                                             |       | 4.04% |   |   |   |   |   | 4.39% |   |

 

 

----

*Fully tax equivalent

Netinterest income decreased $0.5 million, or 2.91%, for the three months endedJune 30, 2007 compared to the same period in 2006.  The net decrease consists of an increase ininterest income of $4.4 million, or 14.28%, less an increase in interestexpense of $4.9 million, or 36.37%, for the three-month period.  Net interest income increased $1.6 million,or 4.97%, for the six months ended June 30, 2007 compared to the same period in2006.  The net increase consists of anincrease in interest income of $12.6 million, or 21.91%, less an increase ininterest expense of $11.0 million, or 4.44%, for the six-month period.  These increases reflect an increase of $219.2million in average interest-earning assets for the six months ended June 30,2007 as

20

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comparedto the six months ended June 30, 2006. The change in net interest income was negatively impacted by thereversal of interest income on nonaccrual loans as mentioned above as well asthe normal increases in volume and interest rates.

 

**Other Income**

 

Otherincome for the three months ended June 30, 2007, increased by $167,000,compared to the same period in 2006. Service charges on deposit accounts increased by $153,000, which waspartially offset by a decrease in mortgage origination fees of $80,000 for thethree-month period.  Other income for thesix months ended June 30, 2007, increased by $460,000, compared to the sameperiod in 2006.  Service charges ondeposit accounts increased by $119,000 and mortgage origination fees increasedby $109,000 for the six-month period. Also, increases occurred in trust and investment services of $58,000 andthere was a $62,000 gain on sale of other real estate in the first half of2007.

 

**Other Expense**

 

Otherexpense increased by approximately $1.5 million, or 12.21%, for the threemonths ended June 30, 2007 compared to the same period in 2006.  The increase is due primarily to an increasein salaries and employee benefits expense of $0.7 million.  Net occupancy and equipment expensesincreased $141,000.  Included in the increasein other operating expenses for the three-month period were professional feesof $186,000 that were paid to lawyers and consultants related to the resolutionof the problems related to the Company’s loan portfolio at HTB.   Also included in other operating expenses,was a $294,000 loss on sale of other real estate related to the identifiedproblem loan portfolio.  Other expenseincreased by approximately $3.7 million, or 15.03%, for the six months endedJune 30, 2007 compared to the same period in 2006.  The increase is due primarily to an increasein salaries and employee benefits expense of $1.8 million.  Net occupancy and equipment expensesincreased $414,000.  Included in theincrease in other operating expenses for the six-month period were professionalfees of $203,000 that were paid to lawyers and consultants related to theresolution of the Company’s problem loan portfolio.   Also included in other operating expenses,was a $355,000 loss on sale of other real estate related to the identifiedproblem loan portfolio.  Increases werealso noted in marketing and public relations of $181,000, education andtraining of $94,000, personnel administration expense related to search feesfor new employees of $60,000 and a $39,000 increase in other operating expensedue to a charge-off at HTB during the first quarter of 2007.

 

**Income Tax Expense**

 

Incometax expense decreased by $662,000 for the three-month period ended June 30,2007, compared to the same period in 2006. The effective tax rate for the three-month period ended June 30, 2007was 31.91%, compared to 34.86% for the same period in 2006.  The decrease is primarily due to the reversalof interest income on nonaccrual loans as discussed above.  Income tax expense decreased by $493,000 forthe six-month period ended June 30, 2007, compared to the same period in2006.  The effective tax rate for thesix-month period ended June 30, 2007 was 32.77%, compared to 34.53% for thesame period in 2006.

 

**Net Income**

 

Netincome decreased by $851,000, or 21.52%, for the three months ended June 30,2007, compared to the same period in 2006. Net income decreased by $418,000, or 5.78%, for the six months endedJune 30, 2007, compared to the same period in 2006.  These decreases are directly related to thedecrease in net interest income related to the reversal of interest income onnonaccrual loans of $1.0 million and $1.8 million for the respective three andsix-month periods as well as the increases in other expenses as discussedabove.

 

Weare not aware of any other known trends, events or uncertainties, other thanthe effect of events as described above, that will have or that are reasonablylikely to have a material effect on our liquidity, capital resources oroperations.  We are not

21

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awareof any current recommendations by the regulatory authorities, which, if theywere implemented, would have such an effect.

** **

**Off Balance Sheet Arrangements**

 

Ourfinancial statements do not reflect various commitments and contingentliabilities that arise in the normal course of business.  These off-balance sheet financial instrumentsinclude commitments to extend credit, standby letters of credit and credit cardcommitments.  Such financial instrumentsare included in the financial statements when funds are distributed or theinstruments become payable.  Our exposureto credit loss in the event of nonperformance by the other party to thefinancial instrument for commitments to extend credit, standby letters ofcredit and credit card commitments is represented by the contractual amount ofthose instruments.  We use the samecredit policies in making commitments as we do for on-balance sheetinstruments.  Although these amounts donot necessarily represent future cash requirements, a summary of ourcommitments as of June 30, 2007 and December 31, 2006 are as follows:

 

|                                      | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **(In thousands)**     | ** ** |
| Commitments to  extend credit        |       | $                           | 552,664    |                            | $          | 425,391 |   |
| Financial  standby letters of credit |       | 9,131                       |       | 7,544                           |       |
| Other standby  letters of credit     |       | —                      |       | 1,129                           |       |
| Credit card  commitments             |       | 7,631                       |       | 6,595                           |       |
| Total                                |       | $                           | 569,426    |                            | $          | 440,659 |   |

** **

**Item 3.    QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET 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 and interest-bearingliabilities scheduled to mature or reprice within such time period. A gap isconsidered positive when the amount of interest rate sensitive assets exceedsthe amount of interest rate sensitive liabilities. A gap is considered negativewhen the amount of interest rate sensitive liabilities exceeds the interestrate sensitive assets. During a period of rising interest rates, a negative gapwould tend to adversely affect net interest income, while a positive gap wouldtend to result in an increase in net interest income. Conversely, during aperiod of falling interest rates, a negative gap would tend to result in anincrease in net interest income, while a positive gap would tend to adverselyaffect net interest income. If our assets and liabilities were equally flexibleand moved concurrently, the impact of any increase or decrease in interestrates on net interest income would be minimal.

 

Asimple interest rate "gap" analysis by itself may not be an accurateindicator of how net interest income will be affected by changes in interestrates. 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"interest rate caps and floors") which limit the amount of changes ininterest rates. Prepayment

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andearly withdrawal levels also could deviate significantly from those assumed incalculating the interest rate gap. The ability of many borrowers to servicetheir debts also may decrease during periods of rising interest rates.

 

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 June 30, 2007, the Company maintainedan asset sensitive interest rate risk position based on its simulation modelresults.  This positioning would beexpected to result in an increase in net interest income in a rising rateenvironment and a decrease in net interest income in a declining rate environment.  This is generally due to a greater proportionof interest earning assets repricing on a variable rate basis as compared tovariable rate funding sources. This asset sensitivity is indicated by selectedresults of net interest income simulations. The actual realized change in net interest income would depend onseveral factors.  These factors include,but are not limited to, actual realized growth in asset and liability volumes,as well as 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 a twelve-monthperiod when subjected to an immediate 100 basis point increase and decrease inrate.

 
| Twelve-Month Net Interest Income Sensitivity                         | ** ** |
|------------------------------------------------------------------------------------------|------------|
| **Change in Short-Term Interest  Rates (in basis points)** | ** ** | **Estimated Change in Net  Interest Income** | ** ** |
| +100                                                                                     |       | 0.14 | % |
| Flat                                                                                     |       | — |   |
| -100                                                                                     |       | (6.28 | )% |

 

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.    CONTROLSAND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

Asof the end of the period covered by this report, an evaluation was carried outunder the supervision and with the participation of the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of its disclosure controls and procedures. 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**

** **

Duringthe recent quarter, the Company has continued to relocate control functionsrelated to loan approval and disbursements from its bank affiliates to theholding company.  These functionsinclude, but are not limited to, daily balancing, reconciling and review of alllending activity.  Otherwise, there wereno changes made in the Company’s internal controls over financial reportingthat occurred during the Company’s most recent fiscal quarter that havematerially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

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**PART II - OTHER INFORMATION**

**Item 1.    LEGAL PROCEEDINGS**

 

           None.

 

**Item 1A.    RISK FACTORS**

 

           There have been no material changesto the risk factors previously disclosed in the Company’s Annual Report on Form10-K for the year ended December 31, 2006.

 

**Item 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

           None.

 

**Item 3.    DEFAULTS UPON SENIOR SECURITIES**

 

           None.

 

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

 

Theannual meeting of the stockholders of GB&T Bancshares, Inc. was held on May17,2007.  The meeting had been called pursuant towritten notice (1) to elect 13 directors to constitute the Board of Directorsto serve until the next annual meeting and until their successors are elected andqualified, (2) to ratify the appointment of Mauldin & Jenkins, LLC as theCompany’s independent registered public accounting firm for the year endingDecember 31, 2007, (3) to approve the GB&T Bancshares, Inc. 2007 OmnibusLong-Term Incentive Plan and  (4) toconsider such other business as might properly come before the AnnualMeeting.  The results of the voting wereas follows:

 
| (1) Election of Directors | ** ** | **FOR**   | ** ** | **WITHHELD** | ** ** |
|------------------------------------------|------------|-----------|------------|--------------|------------|
| Lowell S.  (Casey) Cagle                 |       | 9,450,496 |       | 297,762      |       |
| Dr. John W.  Darden                      |       | 9,587,322 |       | 160,936      |       |
| William A.  Foster, III                  |       | 9,562,283 |       | 185,975      |       |
| Bennie E. Hewett                         |       | 9,589,949 |       | 158,309      |       |
| Richard A. Hunt                          |       | 9,508,507 |       | 239,751      |       |
| James L. Lester                          |       | 9,606,600 |       | 141,658      |       |
| John E. Mansour                          |       | 9,606,350 |       | 141,908      |       |
| Dr. T. Alan  Maxwell                     |       | 9,606,600 |       | 141,658      |       |
| James H. Moore                           |       | 9,606,350 |       | 141,908      |       |
| Samuel L. Oliver                         |       | 9,569,419 |       | 183,236      |       |
| Alan A. Wayne                            |       | 9,167,072 |       | 581,186      |       |
| Philip A.  Wilheit                       |       | 9,547,988 |       | 200,270      |       |
| Anna B. Williams                         |       | 9,604,100 |       | 144,158      |       |

 
| (2) Ratification of Auditors | ** ** | **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **BROKER  NON-VOTE** | ** ** |
|---------------------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|----------------------|------------|
|                                             |       | 9,458,399 |       | 276,816     |       | 13,042      |       | —               |       |

 
| (3) Adopt 2007 Omnibus  Long-Term Incentive Plan | ** ** | **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **BROKER  NON-VOTE** | ** ** |
|--------------------------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|----------------------|------------|
|                                                  |       | 5,202,313 |       | 714,220     |       | 87,446      |       | 3,744,278            |       |

 

Accordingly,all nominated directors were duly elected, the auditors were appointed and the2007 Incentive Plan was adopted.

 

**Item 5.    OTHER INFORMATION**

 

           None.

 

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**Item 6.     EXHIBITS**

** **
| Exhibits | ** ** | ** **                                                                                                                                                                              |
|----------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1     |       | GB&T Bancshares, Inc. 2007 Omnibus Long-Term  Incentive Plan (incorporated by reference from Exhibit 10.1 to the Company’s  Current Report on Form 8-K filed on May 23, 2007). |
| 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 requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
| GB&T BANCSHARES, INC. |     |                                   |
|---------------------------|----------|----------------------------------------|
|                      |     |                                   |
|                      |     |                                   |
| DATE:                     | 8/9/2007 |                                   |   | BY: | /s/ Richard A. Hunt |   |
|                      |     | Richard A. Hunt                        |
|                      |     | President and Chief  Executive Officer |
|                      |     |                                   |
|                      |     |                                   |
| DATE:                     | 8/9/2007 |                                   |   | BY: | /s/ Gregory L. Hamby |   |
|                      |     | Gregory L. Hamby                       |
|                      |     | Executive Vice  President &        |
|                      |     | Chief Financial Officer                |
|                           |          |                                        |  |  |  |  |  |  |  |  |

 

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