**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   March 31, 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**

(Addressof principal executive offices)

 

**(770) 532-1212**

(Registrant’stelephone number, including area code)

 

**N/A**

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

 

Indicateby check mark whether the registrant (1) filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.    Yesx     Noo

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.

 
| Large accelerated filer | o | Accelerated filer     x | Non-accelerated filer o |
|-------------------------|---|--------------------------------------------------|-------------------------|

 

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

 

**APPLICABLE ONLY TO CORPORATEISSUERS**

 

State the number of shares outstanding of eachof the issuer’s classes of capital stock, as of May 1, 2007:    14,175,242 shares; no par value.

 

 

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**GB&T BANCSHARES, INC.**

**TABLE OF CONTENTS**
| **PART I.**  | ** FINANCIAL  INFORMATION**                                                                             | ** ** |
|--------------|--------------------------------------------------------------------------------------------------------------|------------|
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Item 1.  Financial Statements**                                                                            | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Consolidated  Balance Sheets – March 31, 2007 (Unaudited) and December 31, 2006**                     | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Consolidated  Statements of Income (Unaudited)-Three months ended March 31, 2007 and 2006**                | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Consolidated  Statements of Comprehensive Income (Unaudited)-Three months ended March 31,  2007 and 2006** | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Consolidated  Statements of Stockholders’ Equity (Unaudited)-Three months ended March 31,  2007**     | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Consolidated  Statements of Cash Flows (Unaudited) -Three months ended March 31, 2007 and  2006**          | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Notes to Consolidated Financial Statements (Unaudited)**                                                   | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations**      | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Item 3. Quantitative and Qualitative Disclosures About  Market Risk**                                      | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Item 4. Controls and Procedures**                                                                          | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| **PART II.** | **OTHER INFORMATION**                                                                                        | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Item  1. Legal Proceedings**                                                                               | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Item  1A. Risk Factors**                                                                                   | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds**                                     | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Item 3. Defaults Upon Senior Securities**                                                                  | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Item 4. Submission of Matters to a Vote of Security  Holders**                                             | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Item  5. Other Information**                                                                               | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Item 6.  Exhibits**                                                                                        | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Signatures**                                                                                               | ** ** |
| ** **   | ** **                                                                                                   | ** ** |
| ** **   | **Certifications**                                                                                           | ** ** |
|              |                                                                                                              |            |  |

 

2

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**PART I - FINANCIALINFORMATION**

**ITEM 1 -FINANCIAL STATEMENTS**

**GB&TBANCSHARES, INC. AND SUBSIDIARIESConsolidated Balance Sheets**
| ** **                                                                                                                                                                 | ** ** | **March 31,**                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2007**                             | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                 | ** ** | **(Unaudited)**                      | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                 | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                                                                                                                 |       |                                 |       |                  |       |
|                                                                                                                                                                       |       |                                 |       |                  |       |
| Cash and due from banks                                                                                                                                                    |       | $                                    | 24,266     |                  | $          | 25,876 |   |
| Interest-bearing  deposits in banks                                                                                                                                        |       | 1,932                                |       | 1,848                 |       |
| Federal funds sold                                                                                                                                                         |       | 4,378                                |       | 1,445                 |       |
| Securities available  for sale, at fair value                                                                                                                              |       | 215,022                              |       | 210,249               |       |
| Restricted equity  securities, at cost                                                                                                                                     |       | 9,888                                |       | 9,869                 |       |
|                                                                                                                                                                       |       |                                 |       |                  |       |
| Loans, net of unearned  income                                                                                                                                             |       | 1,524,746                            |       | 1,497,701             |       |
| Less allowance  for loan losses                                                                                                                                            |       | 25,022                               |       | 24,676                |       |
| Loans, net                                                                                                                                                                 |       | 1,499,724                            |       | 1,473,025             |       |
|                                                                                                                                                                       |       |                                 |       |                  |       |
| Premises and equipment,  net                                                                                                                                               |       | 41,375                               |       | 41,776                |       |
| Goodwill                                                                                                                                                                   |       | 87,116                               |       | 87,116                |       |
| Intangible assets                                                                                                                                                          |       | 5,440                                |       | 5,678                 |       |
| Other assets                                                                                                                                                               |       | 42,086                               |       | 43,494                |       |
|                                                                                                                                                                       |       |                                 |       |                  |       |
| **Total  assets**                                                                                                                                                          |       | $                                    | 1,931,227  |                  | $          | 1,900,376 |   |
|                                                                                                                                                                       |       |                                 |       |                  |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                             |       |                                 |       |                  |       |
| ** **                                                                                                                                                                 |       |                                 |       |                  |       |
| **Liabilities:**                                                                                                                                                           | ** ** | ** **                           | ** ** | ** **            | ** ** |
| Deposits:                                                                                                                                                                  |       |                                 |       |                  |       |
| Noninterest-bearing                                                                                                                                                        |       | $                                    | 152,293    |                  | $          | 151,529 |   |
| Interest-bearing  demand and savings                                                                                                                                       |       | 452,360                              |       | 447,994               |       |
| Time deposits                                                                                                                                                              |       | 908,791                              |       | 880,645               |       |
| Total deposits                                                                                                                                                             |       | 1,513,444                            |       | 1,480,168             |       |
| Federal funds  purchased and securities sold under repurchase agreements                                                                                                   |       | 31,975                               |       | 41,061                |       |
| Federal Home  Loan Bank advances                                                                                                                                           |       | 98,411                               |       | 96,498                |       |
| Other borrowings                                                                                                                                                           |       | 641                                  |       | 939                   |       |
| Other  liabilities                                                                                                                                                         |       | 20,511                               |       | 18,474                |       |
| Subordinated  debt                                                                                                                                                         |       | 29,898                               |       | 29,898                |       |
|                                                                                                                                                                       |       |                                 |       |                  |       |
| **Total  liabilities**                                                                                                                                                     |       | 1,694,880                            |       | 1,667,038             |       |
|                                                                                                                                                                       |       |                                 |       |                  |       |
| **Stockholders’ Equity:**                                                                                                                                             |       |                                 |       |                  |       |
| ** **                                                                                                                                                                 |       |                                 |       |                  |       |
| Capital stock, no par  value; 20,000,000 shares authorized, 14,173,992 and 14,131,891 shares issued  and outstanding at March 31, 2007 and December 31, 2006, respectively |       | 186,876                              |       | 186,539               |       |
| Retained  earnings                                                                                                                                                         |       | 50,583                               |       | 48,148                |       |
| Accumulated  other comprehensive loss                                                                                                                                      |       | (1,112                               | )          | (1,349                | )          |
|                                                                                                                                                                       |       |                                 |       |                  |       |
| **Total  stockholders’ equity**                                                                                                                                       |       | 236,347                              |       | 233,338               |       |
|                                                                                                                                                                       |       |                                 |       |                  |       |
| **Total liabilities and  stockholders’ equity**                                                                                                                       |       | $                                    | 1,931,227  |                  | $          | 1,900,376 |   |

 

See accompanying notes to consolidated financial statements.

3

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**GB&TBANCSHARES, INC. AND SUBSIDIARIESConsolidated Statements of Income(Unaudited)**
| ** **                                                                                                     | ** ** | **Three months ended**                                               | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **March 31,**                                                             | ** ** |
| ** **                                                                                                     | ** ** | **2007**                                                                       | ** ** | **2006** | ** ** |
| ** **                                                                                                     | ** ** | **(Dollars in thousands,  except per share amounts)** | ** ** |
| **Interest income:**                                                                                           | ** ** | ** **                                                                     | ** ** | ** ** | ** ** |
| Loans, including  fees                                                                                         |       | $                                                                              | 32,157     |   | $ | 24,532 |   |
| Taxable  securities                                                                                            |       | 2,308                                                                          |       | 1,912 |   |
| Nontaxable  securities                                                                                         |       | 261                                                                            |       | 117 |   |
| Federal funds sold                                                                                             |       | 108                                                                            |       | 99 |   |
| Interest-bearing  deposits in banks                                                                            |       | 26                                                                             |       | 8 |   |
|                                                                                                           |       |                                                                           |       |   |   |
| **Total  interest income**                                                                                     |       | 34,860                                                                         |       | 26,668 |   |
|                                                                                                           |       |                                                                           |       |   |   |
| **Interest expense:**                                                                                          | ** ** | ** **                                                                     | ** ** | ** ** | ** ** |
| Deposits                                                                                                       |       | 15,131                                                                         |       | 9,432 |   |
| Federal funds  purchased, securities sold under repurchase agreements, other borrowings and Subordinated  debt |       | 2,134                                                                          |       | 1,774 |   |
|                                                                                                           |       |                                                                           |       |   |   |
| **Total  interest expense**                                                                                    |       | 17,265                                                                         |       | 11,206 |   |
|                                                                                                           |       |                                                                           |       |   |   |
| Net interest  income                                                                                           |       | 17,595                                                                         |       | 15,462 |   |
|                                                                                                           |       |                                                                           |       |   |   |
| **Provision for loan losses**                                                                                  |       | 911                                                                            |       | 1,206 |   |
|                                                                                                           |       |                                                                           |       |   |   |
| Net interest  income after provision for loan losses                                                           |       | 16,684                                                                         |       | 14,256 |   |
|                                                                                                           |       |                                                                           |       |   |   |
| **Other income:**                                                                                              |       |                                                                           |       |   |   |
| Service charges  on deposit accounts                                                                           |       | 1,487                                                                          |       | 1,521 |   |
| Mortgage  origination fees                                                                                     |       | 714                                                                            |       | 525 |   |
| Insurance  commissions                                                                                         |       | —                                                                         |       | 2 |   |
| Other operating  income                                                                                        |       | 555                                                                            |       | 415 |   |
|                                                                                                           |       |                                                                           |       |   |   |
| **Total  other income**                                                                                        |       | 2,756                                                                          |       | 2,463 |   |
|                                                                                                           |       |                                                                           |       |   |   |
| **Other expenses:**                                                                                            | ** ** | ** **                                                                     | ** ** | ** ** | ** ** |
| Salaries and  employee benefits                                                                                |       | 8,238                                                                          |       | 7,180 |   |
| Occupancy and  equipment expenses, net                                                                         |       | 1,902                                                                          |       | 1,629 |   |
| Other operating  expenses                                                                                      |       | 3,723                                                                          |       | 2,935 |   |
|                                                                                                           |       |                                                                           |       |   |   |
| **Total  other expenses**                                                                                      |       | 13,863                                                                         |       | 11,744 |   |
|                                                                                                           |       |                                                                           |       |   |   |
| **Income  before income taxes**                                                                                |       | 5,577                                                                          |       | 4,975 |   |
|                                                                                                           |       |                                                                           |       |   |   |
| **Income tax expense**                                                                                         |       | 1,867                                                                          |       | 1,698 |   |
|                                                                                                           |       |                                                                           |       |   |   |
| **Net  income**                                                                                                |       | $                                                                              | 3,710      |   | $ | 3,277 |   |
|                                                                                                           |       |                                                                           |       |   |   |
| **Earnings per share:**                                                                                        | ** ** | ** **                                                                     | ** ** | ** ** | ** ** |
| Basic                                                                                                          |       | $                                                                              | 0.26       |   | $ | 0.26 |   |
| Diluted                                                                                                        |       | $                                                                              | 0.26       |   | $ | 0.25 |   |
|                                                                                                           |       |                                                                           |       |   |   |
| **Weighted average shares:**                                                                                   | ** ** | ** **                                                                     | ** ** | ** ** | ** ** |
| Basic                                                                                                          |       | 14,159                                                                         |       | 12,856 |   |
| Diluted                                                                                                        |       | 14,372                                                                         |       | 13,121 |   |
|                                                                                                           |       |                                                                           |       |   |   |
| **Cash dividends per common share**                                                                            |       | $                                                                              | 0.090      |   | $ | 0.085 |   |

 

See accompanying notes to consolidated financialstatements.

4

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## **GB&T BANCSHARES,INC. AND SUBSIDIARIESConsolidated Statements of ComprehensiveIncome****(Unaudited)**

|                                                                                                               | ** ** | **Three months ended**     | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                    | ** ** | **March 31,**                   | ** ** |
| ** **                                                                                                    | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                                          |       |                                 |       |   |   |
| **Net  Income**                                                                                               |       | $                                    | 3,710      |   | $ | 3,277 |   |
|                                                                                                          |       |                                 |       |   |   |
| Unrealized holding gains (losses) on securities available for sale  arising during period, net of tax benefit |       | 237                                  |       | (391 | ) |
|                                                                                                          |       |                                 |       |   |   |
| Other  comprehensive income (loss)                                                                            |       | 237                                  |       | (391 | ) |
|                                                                                                          |       |                                 |       |   |   |
| **Comprehensive income**                                                                                      |       | $                                    | 3,947      |   | $ | 2,886 |   |

 

See accompanying notes to consolidated financialstatements.

### **ConsolidatedStatements of Stockholders' EquityThree Months Ended March 31, 2007(Unaudited)**

| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | ** **                           | ** ** | **Capital** | ** ** | **Retained** | ** ** | **Other  Comprehensive** | ** ** | **TotalStockholders'** | ** ** |
| ** **                         | ** ** | **Shares**                           | ** ** | **Stock** | ** ** | **Earnings** | ** ** | **Loss** | ** ** | **Equity** | ** ** |
| Balance,  December 31, 2006        |       | 14,132                               |       | $ | 186,539 |   | $ | 48,148 |   | $ | (1,349 | ) | $ | 233,338 |   |
| Net income                         |       | —                               |       | — |   | 3,710 |   | — |   | 3,710 |   |
| Options exercised                  |       | 42                                   |       | 271 |   | — |   | — |   | 271 |   |
| Dividends declared $0.09 per share |       | —                               |       | — |   | (1,275 | ) | — |   | (1,275 | ) |
| Contributed capital                |       | —                               |       | 3 |   | 3 |   |   |   |   |   |
| Stock option expense               |       | —                               |       | 63 |   | — |   | — |   | 63 |   |
| Other comprehensive income         |       | —                               |       | — |   | — |   | 237 |   | 237 |   |
|                               |       |                                 |       |   |   |   |   |   |   |   |   |
| Balance, March 31, 2007            |       | 14,174                               |       | $ | 186,876 |   | $ | 50,583 |   | $ | (1,112 | ) | $ | 236,347 |   |

 

See accompanying notes to consolidated financialstatements.

5

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**GB&TBANCSHARES, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows(Unaudited)**
| ** **                                                                               | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                                                               | ** ** | **(In thousands)**                          | ** ** |
| **Operating Activities**                                                                 |       |                                             |       |   |   |
| Net income                                                                               |       | $                                                | 3,710      |   | $ | 3,277 |   |
| Adjustments to  reconcile net income to net cash Provided by operating activities:       |       |                                             |       |   |   |
| Depreciation                                                                             |       | 782                                              |       | 733 |   |
| Provision for  loan losses                                                               |       | 911                                              |       | 1,206 |   |
| Amortization and  (accretion), net                                                       |       | 231                                              |       | 246 |   |
| Net (increase)  decrease in other assets                                                 |       | 1,087                                            |       | (1,661 | ) |
| Net increase in  other liabilities                                                       |       | 2,037                                            |       | 2,464 |   |
| Net cash  provided by operating activities                                               |       | 8,758                                            |       | 6,265 |   |
|                                                                                     |       |                                             |       |   |   |
| **Investing Activities**                                                                 |       |                                             |       |   |   |
| Purchases of  securities available for sale                                              |       | (23,552                                          | )          | (3,560 | ) |
| Proceeds from  sales of securities available for sale                                    |       | —                                           |       | 608 |   |
| Proceeds from  maturities of securities available for sale                               |       | 19,144                                           |       | 8,043 |   |
| Net increase in  restricted equity securities                                            |       | (19                                              | )          | (89 | ) |
| Net increase in  interest-bearing deposits in banks                                      |       | (84                                              | )          | (82 | ) |
| Net increase in  federal funds sold                                                      |       | (2,933                                           | )          | (21,093 | ) |
| Net increase in  loans                                                                   |       | (28,031                                          | )          | (43,001 | ) |
| Proceeds from  sale of other real estate owned                                           |       | 684                                              |       | 525 |   |
| Purchase of  premises and equipment                                                      |       | (410                                             | )          | (690 | ) |
| Proceeds from  sale of premises and equipment                                            |       | 29                                               |       | 12 |   |
| Net cash used in  investing activities                                                   |       | (35,172                                          | )          | (59,327 | ) |
|                                                                                     |       |                                             |       |   |   |
| **Financing Activities**                                                                 |       |                                             |       |   |   |
| Net increase in  deposits                                                                |       | 33,276                                           |       | 79,430 |   |
| Net decrease in  federal funds purchased and securities sold under repurchase agreements |       | (9,086                                           | )          | (27,502 | ) |
| Proceeds from  other borrowings and Federal Home Loan Bank advances                      |       | 22,497                                           |       | 4,314 |   |
| Payments on  other borrowings and Federal Home Loan                                      |       |                                             |       |   |   |
| Bank advances                                                                            |       | (20,882                                          | )          | (11,117 | ) |
| Dividends paid                                                                           |       | (1,275                                           | )          | (1,093 | ) |
| Contributed  capital                                                                     |       | 3                                                |       | — |   |
| Proceeds from  exercise of stock options                                                 |       | 271                                              |       | 1,207 |   |
| Net cash  provided by financing activities                                               |       | 24,804                                           |       | 45,239 |   |
|                                                                                     |       |                                             |       |   |   |
| Net decrease in  cash and due from banks                                                 |       | (1,610                                           | )          | (7,823 | ) |
|                                                                                     |       |                                             |       |   |   |
| Cash and due from banks  at beginning of period                                          |       | 25,876                                           |       | 30,748 |   |
|                                                                                     |       |                                             |       |   |   |
| Cash and due from banks  at end of period                                                |       | $                                                | 24,266     |   | $ | 22,925 |   |
|                                                                                     |       |                                             |       |   |   |
| Supplemental disclosure  of cash paid during the period for:                             |       |                                             |       |   |   |
| Interest                                                                                 |       | $                                                | 16,090     |   | $ | 10,133 |   |
| Income taxes                                                                             |       | $                                                | —     |   | $ | 427 |   |

 

See accompanying notes to consolidated financial statements.

6

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

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

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

The accompanying unaudited consolidatedfinancial statements have been prepared in accordance with U.S. generallyaccepted accounting principles for interim financial information and with theinstructions for Form 10-Q.  Accordingly,they do not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.  In the opinion of management, all adjustments(consisting of normal and recurring adjustments) considered necessary for afair presentation have been included. The results of operations for the threemonth period ended March 31, 2007 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2007.  These statements should be read inconjunction with the consolidated financial statements and related notesincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006.

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

The Company has a stock optionplan in which 2,000,000 shares were approved for the granting of options todirectors, officers and employees.  Bothincentive stock options and nonqualified stock options may be granted under theplan.  Option prices are equal to thefair market value of the Company’s capital stock on the dates the options aregranted.  The options may be exercisedover a period of ten years in accordance with vesting schedules determined bythe Board of Directors.  Prior to January1, 2006, the Company accounted for the plan under the recognition andmeasurement principles of APB Opinion No. 25, Accounting for Stock Issued toEmployees, and related interpretations, as permitted by FASB Statement No. 123,Accounting for Stock-Based Compensation. No stock-based employee compensation cost was recognized in the Resultsof Operations for the years ended December 31, 2005 or 2004, as all optionsgranted under the plan had an exercise price equal to the market value of theunderlying stock on the date of grant. Effective January 1, 2006, the Company adopted the fair valuerecognition provisions of FASB Statement No. 123(R) (“SFAS 123 (R)”),Share-Based Payment, using the modified-prospective-transition method.  To give effect to the adoption of SFAS 123(R),  compensation cost recognized in 2006 includes(a) compensation cost for all share-based payments granted prior to, but notyet vested as of January 1, 2006, based on the grant date fair value estimatedin accordance with the original provisions of SFAS 123, and (b) compensationcost for all share-based payments granted subsequent to January 1, 2006, basedon the grant-date fair value estimated in accordance with the provisions ofSFAS 123(R).  Results for prior periodshave not been restated.

As permitted by SFAS 123, through December 31,2005, the Company accounted for share-based payments to employees using theintrinsic value method set forth in APB 25 and, as such, recognized nocompensation cost for employee stock options. Upon adoption of the fair value method under SFAS 123(R) on January 1,2006, the Company incurred expense of $57,844 for the three-month period endedMarch 31, 2006 and $63,326 for the three-month period ended March 31,2007.  In addition, had the Companyadopted SFAS 123(R) in prior periods, the impact of that standard andtherefore, the disclosure of pro forma net income and earnings per share wouldremain the same.  SFAS 123(R) alsorequires that tax deductions in excess of recognized compensation cost bereported as a financing cash flow, rather than as operating cash flow.  This requirement has reduced net operatingcash flow and increased net financing cash flow in all periods since theadoption of SFAS 123(R).

At March 31, 2007, therewas approximately $734,000 of unrecognized compensation cost related to stock-basedpayments, which is expected to be recognized over a weighted-average period of4.19 years.

7

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A summary of the status of the stock option planat March 31, 2007 and changes during the period is shown in the followingtable.
|                                                                                      | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                           | ** ** | **March 31, 2007**     | ** ** |
| ** **                                                                           | ** ** | ** **                       | ** ** | **Weighted-** | ** ** |
| ** **                                                                           | ** ** | ** **                       | ** ** | **Average** | ** ** |
| ** **                                                                           | ** ** | ** **                       | ** ** | **Exercise** | ** ** |
| ** **                                                                           | ** ** | **Shares**                       | ** ** | **Price** | ** ** |
|                                                                                 |       |                             |       |   |   |
| Outstanding at beginning of period                                                   |       | 771,384                          |       | $ | 11.95 |   |
| Granted                                                                              |       | 20,500                           |       | 19.14 |   |
| Exercised                                                                            |       | (49,365                          | )          | 8.62 |   |
| Forfeited                                                                            |       | (21,040                          | )          | 17.06 |   |
| Outstanding at end of period                                                         |       | 721,479                          |       | $ | 12.24 |   |
|                                                                                 |       |                             |       |   |   |
| Options exercisable at end of period                                                 |       | 552,607                          |       | $ | 10.05 |   |
| Weighted-average fair value of options granted  during period                        |       |                             |       | $ | 4.46 |   |
| Total intrinsic value of options exercised during  the period                        |       |                             |       | $ | 469,000 |   |
| Weighted average remaining contractual term of  exercisable options at end of period |       |                             |       | 4.30 years |   |
| Aggregate intrinsic value of options outstanding at  end of period                   |       |                             |       | $ | 4,250,000 |   |
| Aggregate  intrinsic value of exercisable options at end of period                   |       |                             |       | $ | 4,465,000 |   |

 

8

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A further summary of the options outstanding atMarch 31, 2007 follows.
|                                         | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                         | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding**      | ** ** | **Weighted-  Average  Remaining  Contractual  Life** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| $5.88 - $8.65                           |       | 430,438                      |       | 4.68 years                                           |       | $ | 8.13 |   | 411,688 |   | $ | 8.11 |   |
| $9.38 - $13.78                          |       | 87,584                       |       | 4.56 years                                           |       | 11.98 |   | 79,834 |   | 11.82 |   |
| $14.15 - $21.18                         |       | 85,841                       |       | 8.09 years                                           |       | 19.30 |   | 26,441 |   | 18.15 |   |
| $21.46 - $24.15                         |       | 117,616                      |       | 8.48 years                                           |       | 22.32 |   | 34,644 |   | 22.85 |   |
| Total                                   |       | 721,479                      |       | 5.69 years                                           |       | 12.24 |   | 552,607 |   | 10.05 |   |
|                                         |            |                              |            |                                                      |            |  |  |  |  |  |  |  |  |

 

Thetotal fair value of options vested during the period was approximately$343,000.  The total amount expensed foroptions vested during the period was approximately $63,000.

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:
|                         | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006**     | ** ** |
| Dividend yield          |       | 1.99%                            |       | 1.50%                            |       |
| Expected life           |       | 3  years                         |       | 3  years                         |       |
| Expected  volatility    |       | 31.69%                           |       | 10.81%                           |       |
| Risk-free interest rate |       | 4.62%                            |       | 4.80%                            |       |

 

9

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

Presented below is a summary of the componentsused to calculate basic and diluted earnings per share for the three-month periodsended March 31, 2007 and 2006.
| ** **                                                                                                                          | ** ** | **Three months ended March 31,**                  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2007**                                                              | ** ** | **2006** | ** ** |
| ** **                                                                                                                          | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Basic Earnings Per Share:                                                                                                           |       |                                                                  |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 14,159                                                                |       | 12,856 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Net income                                                                                                                          |       | $                                                                     | 3,710      |   | $ | 3 ,277 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Basic earnings per share                                                                                                            |       | $                                                                     | 0.26       |   | $ | 0.26 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Diluted Earnings Per Share:                                                                                                         |       |                                                                  |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 14,159                                                                |       | 12,856 |   |
| Net effect of the assumed  exercise of stock options based on the treasury stock method using average  market prices for the period |       | 213                                                                   |       | 265 |   |
| Total weighted average common  shares and common stock equivalents outstanding                                                      |       | 14,372                                                                |       | 13,121 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Net income                                                                                                                          |       | $                                                                     | 3,710      |   | $ | 3,277 |   |
|                                                                                                                                |       |                                                                  |       |   |   |
| Diluted earnings per share                                                                                                          |       | $                                                                     | 0.26       |   | $ | 0.25 |   |

 

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

On May 1, 2006, the Company completed theacquisition of Mountain Bancshares, Inc., the parent company of Mountain StateBank in Dawsonville, Dawson County, Georgia, which resulted in Mountain StateBank becoming a wholly owned subsidiary of the Company.  The aggregate purchase price was $39.8million, including the issuance of 1,088,924 shares of GB&T’s capital stockto Mountain Bancshares’ stockholders valued at $24.0 million, $10.3 million incash and stock options and warrants valued at $5.3 million and $197,000 indirect acquisition costs.  The value ofthe capital stock issued was determined based on the average market price ofGB&T’s capital stock over a two-day period before and after the terms ofthe acquisition were agreed upon and announced. The fair value of the stock options and warrants was determined based onthe Black-Scholes-Merton option pricing model. The acquisition was accounted for as a purchase resulting in estimatedgoodwill of approximately $26.0 million. The goodwill 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.  The resultsof operations for the three months ended March 31, 2006 do not include theresults of operations for Mountain State Bank.

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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 three months ended March 31, 2007 and 2006 as though thecompanies had combined as of January 1, 2006 are as follows:
| ** **                  | ** ** | **Three months ended**                                               | ** ** |
|-----------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **March 31,**                                                             | ** ** |
| ** **                  | ** ** | **2007**                                                                       | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **(Dollars in thousands,  except per share amounts)** | ** ** |
| Net interest  income        |       | $                                                                              | 17,631     |   | $ | 16,931 |   |
| Net income                  |       | 3,733                                                                          |       | 3,617 |   |
| Basic earnings  per share   |       | 0.26                                                                           |       | 0.26 |   |
| Diluted earnings per  share |       | 0.26                                                                           |       | 0.26 |   |
|                             |            |                                                                                |            |  |  |  |  |

 

**NOTE 5.****                        ****SUBSEQUENT EVENT**

On May 1, 2007, the Company announced theformation of a mortgage subsidiary, GB&T Mortgage, Inc.  This new mortgage subsidiary will allow theCompany to consolidate the mortgage lending services of its seven affiliatebanks under one umbrella.

**NOTE 6.****                        ****RECENT ACCOUNTING STANDARDS**

In September 2006, the FASB issued SFAS 157,Fair Value Measurements.  The standard provides guidance for using fairvalue to measure assets and liabilities.  It defines fair value,establishes a framework for measuring fair value under generally acceptedaccounting principles and expands disclosures about fair value measurement. Under the standard, fair value refers to the price that would be receivedto sell an asset or paid to transfer a liability in an orderly transactionbetween market participants in the market in which the reporting entitytransacts.  It clarifies the principle that fair value should be based onthe assumptions market participants would use when pricing the asset orliability.  In support of this principle, the standard establishes a fairvalue hierarchy that prioritizes the information used to develop thoseassumptions.  Under the standard, fair value measurements would beseparately disclosed by level within the fair value hierarchy.  SFAS 157is effective for financial 

11

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statements issued for fiscal years beginningafter November 15, 2007.  The Company is currently evaluating the impactthe adoption of this statement could have on its financial condition, resultsof operations and cash flows.

In February 2007, the FASB issued SFAS 159,"The Fair Value Option for Financial Assets and FinancialLiabilities." SFAS 159 permits entities to make an irrevocable election,at specified election dates, to measure eligible financial instruments andcertain other items at fair value. This statement also establishes presentationand disclosure requirements designed to facilitate comparisons between entitiesthat choose different measurement attributes for similar types of assets andliabilities. The provisions of this statement are effective as of the beginningof the first fiscal year that begins after November 15, 2007.   The Company has not elected to early adoptthis statement and is currently evaluating the impact the adoption of thisstatement could have on its financial condition, results of operations and cashflows.

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

The following is management’s discussion andanalysis of certain significant factors which have affected our financialposition and operating results including our wholly-owned subsidiaries,Gainesville Bank & Trust (“GBT”), United Bank & Trust (“UBT”),Community Trust Bank (“CTB”), HomeTown Bank of Villa Rica (“HTB”), FirstNational Bank of the South (“FNBS”), First National Bank of Gwinnett (“FNBG”)and Mountain State Bank (“MSB”) during the periods included in the accompanyingconsolidated financial statements.  Thisdiscussion should be read in conjunction with the accompanying consolidatedfinancial statements and the notes thereto and the consolidated financialstatements, related notes, and Management’s Discussion and Analysis of FinancialCondition and Results of Operations for the year ended December 31, 2006included in the Company’s 2006 Annual Report on Form 10-K.

**Cautionary Notice Regarding Forward-LookingStatements**

Some of the statements contained or incorporatedby reference in this Report, including, without limitation, matters discussedunder the caption "Management's Discussion and Analysis of FinancialCondition and Results of Operations," are "forward-lookingstatements" within the meaning of the Private Securities Litigation ReformAct of 1995. Forward-looking statements include statements about thecompetitiveness of the banking industry, potential regulatory obligations, ourentrance and expansion into other markets, our other business strategies andother statements that are not historical facts. Forward-looking statements arenot guarantees of performance or results. When we use words like"may," "plan," "contemplate,""anticipate," "believe," "intend," "continue,""expect," "project," "predict,""estimate," "could," "should," "would,""will," and similar expressions, you should consider them asidentifying forward-looking statements, although we may use other phrasing.These forward-looking statements involve risks and uncertainties and are basedon our beliefs and assumptions, and on the information available to us at thetime that these disclosures were prepared. Factors that may cause actualresults to differ materially from those expressed or implied by suchforward-looking statements include, among others, the following possibilities:(1) competitive pressures among depository and other financial institutions mayincrease significantly; (2) changes in the interest rate environment may reducemargins; (3) general economic conditions may be less favorable than expected,resulting in, among other things, a deterioration in credit quality and/or areduction in demand for credit; (4) economic, governmental or other factors mayprevent the projected population and commercial growth in the counties in whichwe operate;  (5) legislative orregulatory changes, including changes in accounting standards, may adverselyaffect the businesses in which we are engaged; (6) costs or difficulties related to the integration of our businesses maybe greater than expected; (7) deposit attrition, customer loss or revenue lossfollowing acquisitions may be greater than expected; (8) competitors may havegreater financial resources and develop products that enable such competitorsto compete more successfully than we can; and (9) adverse changes may occur inthe equity markets.  Many of thesefactors are beyond our ability to control or predict, and readers are cautionednot to put undue reliance on such forward-looking statements. We do not intendto, and assume no responsibility to update or revise any forward-lookingstatements contained in this Report, whether as a result of new information,future events or otherwise.

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**Critical Accounting Policies**

We have adopted various accounting policies thatgovern the application of accounting principles generally accepted in theUnited States and general practices within the banking industry in thepreparation of our financial statements. Our significant accounting policiesare reviewed and discussed periodically by our Audit Committee and are describedin the notes to our audited financial statements as of December 31, 2006.Certain accounting policies require management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereported period. Actual results could differ from those estimates. Estimatesand assumptions are reviewed periodically and the effects of revisions arereflected in the consolidated financial statements in the period they aredetermined to be necessary.  Managementhas discussed our critical accounting policies with the Audit Committee of theBoard of Directors.

*Allowance for Loan Losses*.    Webelieve that our determination of the allowance for loan losses is our mostsignificant judgment and estimate used in the preparation of our consolidatedfinancial statements. The allowance for loan losses is an amount thatmanagement believes will be adequate to absorb estimated losses in the loanportfolio. The calculation is an estimate of the amount of loss in the loanportfolios of our subsidiary banks. The allowance for loan losses is evaluatedon a regular basis by management and is based upon management's periodic reviewof the collectibility of the loans in light of historical experience, thenature and volume of the loan portfolio, adverse situations that may affect theborrower's ability to repay, estimated value of any underlying collateral andprevailing economic conditions. This evaluation is inherently subjective as itrequires estimates that are susceptible to significant revision as moreinformation becomes available. In addition, regulatory agencies, as an integralpart of their examination process, periodically review our allowance for loanlosses, and may require us to make additions to the allowance based on theirjudgment about information available to them at the time of their examinations.

The Company uses an 8 point rating system forits loans. Ratings of 1 to 4 are considered “pass ratings”, 5 is specialmention, 6 is substandard, 7 is doubtful, and 8 is loss. The originating loanofficer rates all loans based on this system, and the ratings are adjusted asneeded to reflect the current status of the loan. The loan officers are trainedto rate loans in a timely and accurate manner based on currentinformation.  These ratings are reviewedregularly by the loan committee of the respective bank subsidiary, an outsideindependent loan review firm, our accountants, and by the applicable regulatorfor accuracy.

A general allowance will be maintained for allloans rated 1 to 4 and for all homogeneous loan pools such as consumer, creditcard and residential mortgage. Management will develop a range of expected losses for each risk gradeand for each pool.  This range of losseswill be management’s best estimate based on actual loss experience, industryloss experience, loan portfolio trends and characteristics of the markets itserves.  On a quarterly basis, managementwill evaluate each of the loan categories and determine the expected losslevels from the range previously established.

All loans rated 5, 6, 7 and 8, as well as anyother impaired loan of a significant amount, will be individually analyzed anda specific reserve assigned.  Thisanalysis will include information from management’s Problem Asset ReviewCommittee which meets quarterly and reviews credit relationships of one millionand above and rated 5 through 8. Management, considering current information and events regarding aborrowers’ ability to repay its obligations, considers a loan to be impairedwhen the ultimate collection of all amounts due, according to the contractualterms of the loan agreement, is in doubt. When a loan is considered to beimpaired, the amount of impairment is measured based on the present value ofexpected future cash flows discounted at the loan’s effective interest rate. Ifthe loan is collateral dependent, the fair value of the collateral less estimatedselling costs is used to determine the amount of impairment. Impairment lossesare included in the allowance for loan losses through a charge to the provisionfor loan losses.  A majority of ourimpaired loans are collateral dependent. The allowance for loan losses on theseloans is determined based on fair value estimates (net of selling costs) of therespective collateral. The actual losses on these loans could differsignificantly if the fair value of the collateral is different from the estimatesused in determining the allocated allowance. Most of our collateral dependentimpaired loans are secured by real estate. The fair value of these real estateproperties is generally determined based upon appraisals performed by acertified or licensed appraiser. 

13

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Management also considers other factors orrecent developments which could result in adjustments to the collateral valueestimates indicated in the appraisals.

The remainder of the balance in the reserve forloan losses is unallocated.  The unallocatedreserve represents management’s estimate of the probable losses inherent in theloan portfolio that have not been fully provided for through the specificreserve calculations.  Factors consideredin determining the unallocated reserve are overall economic conditions, therapid rise of real estate prices over the past three years in our markets, therecent slowdown in real estate activity, the number of new and relativelyinexperienced banks and bankers entering our markets and offering aggressive termsand pricing, our concentration in commercial and consumer real estate loans andthe 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 July 2006, the required impairment testing of goodwill was performed and noimpairment existed as of the valuation date, as the fair value of our netassets exceeded their carrying value. If for any future period we determinethat there has been impairment in the carrying value of our goodwill balances,we will record a charge to our earnings, which could have a material adverseeffect on our net income.

**Summary**

Net income for the three months ended March 31,2007 was $3.7 million, an increase of 13.21% compared to the same period a yearago.  Diluted earnings per share was$0.26 for the three months ended March 31, 2007, compared to $0.25 for the sameperiod a year ago.  The return on averageassets was 0.79% and the return on average equity was 6.40% for the threemonths ended March 31, 2007.  Thiscompares to a return on average assets of 0.83% and a return on average equityof 6.60% for the same period a year ago.

MSB became part of the Company effective May 1,2006.  The merger was accounted for as apurchase transaction; therefore, results of operations for MSB are not includedin the results of operations for the three-month period ended March 31, 2006.

Total revenue, defined as net interest incomeplus other income, was $20.4 million for the three months ended March 31, 2007,an increase of $2.4 million, or 13.53%, from the $17.9 million reported for thesame period a year ago.  Other expensewas $13.9 million for the three months ended March 31, 2007, an increase of$2.1 million, or 18.04%, compared to the $11.7 million reported for the sameperiod a year ago.  Revenue growth hasbeen offset by increased expense growth resulting in an efficiency ratio forthe three months ended March 31, 2007 of 66.96% compared to 64.48% for thethree months ended March 31, 2006.

**Balance Sheets**

Our total assets increased $30.9 million to $1.9billion at March 31, 2007, or 1.62%, compared to December 31, 2006.  The increase consists primarily of anincrease in total loans of $27.0 million, or 1.81%, an increase in federalfunds sold of $2.9 million, and an increase in investment securities of $4.8million.

Total deposits increased $33.3 million to $1.5billion at March 31, 2007, or 2.25%, compared to December 31, 2006.  Noninterest-bearing deposits increased $0.8million to $152.3 million and interest-bearing deposits increased $32.5 millionto 

14

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$1.4 billion during the same period.   Deposit growth outpaced loan growthresulting in a loan to deposit ratio of 100.75% at March 31, 2007 compared to101.18% at December 31, 2006.

Total stockholders’ equity increased $3.0million to $236.3 million at March 31, 2007, or 1.29%, compared to December 31,2006.  This increase consisted of netincome of $3.7 million and $0.2 million from options exercised, which waspartially offset by the payment of dividends of $1.3 million.

**Asset Quality**

The allowance for loan losses at March 31, 2007was $25.0 million, or 1.64%, of total loans compared to $24.7 million, or1.65%, at December 31, 2006 and $13.7 million, or 1.08% at March 31, 2006.  The increase in the allowance from the prioryear period was due primarily to an additional provision taken at HTB in thefourth quarter of 2006 related to problem credits discovered at HTB in an FDICexam and an extensive internal loan review that followed.  Management has been diligent in pursuing anaggressive loan collection process on these loan relationships and hasconducted extensive reviews of our loan portfolio and has met with majorborrowers.   Management is comfortablewith the level of reserves at HTB and believes that as of March 31, 2007, theCompany’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 controls, implementation of more stringentcredit administration policies and centralization of our loan approval anddocumentation processes.  The allowancefor loan losses is evaluated monthly and adjusted to reflect the risk in theportfolio.

The provision for loan losses was $0.9 millionfor the three months ended March 31, 2007. Net charge-offs year-to-date have been $565,000.  Management believes the provision and netcharge-off amounts recorded in the first quarter of 2007 represent more normallevels for the Company.

The following table summarizes the allowance forloan losses for the three-month periods ended March 31, 2007 and 2006.  
|                                                            | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                 | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                                 | ** ** | **(Dollars in thousands)**             | ** ** |
| **Average amount of loans outstanding**                    |       | $                                                | 1,504,256  |   | $ | 1,244,261 |   |
| **Allowance for loan losses balance, beginning of period** |       | $                                                | 24,676     |   | $ | 12,773 |   |
| **Less charge-offs**                                       | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Commercial loans                                           |       | (11                                              | )          | (161 | ) |
| Real estate loans                                          |       | (531                                             | )          | (49 | ) |
| Consumer loans                                             |       | (110                                             | )          | (156 | ) |
| Total charge-offs                                          |       | (652                                             | )          | (366 | ) |
| **Plus recoveries**                                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Commercial loans                                           |       | 5                                                |       | 6 |   |
| Real estate loans                                          |       | 2                                                |       | 7 |   |
| Consumer loans                                             |       | 80                                               |       | 77 |   |
| Total recoveries                                           |       | 87                                               |       | 90 |   |
| **Net charge-offs**                                        |       | (565                                             | )          | (276 | ) |
| ** **                                                 | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Plus provision for loan losses**                         |       | 911                                              |       | 1,206 |   |
| ** **                                                 | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Allowance for loan losses balance, end of period**       |       | $                                                | 25,022     |   | $ | 13,703 |   |
| ** **                                                 | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Net  charge-offs to average loans (annualized)**         |       | 0.152                                            | %          | 0.090 | % |

 

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Thefollowing table is a summary of the Company’s nonaccrual, past due loans andrestructured loans at March 31, 2007 and March 31, 2006. The numbers indicatean increase of approximately $23.1 million in nonaccrual loans as of March 31,2007 as compared to March 31, 2006.  Themajority of the nonaccrual balance at March 31, 2007 resides at HTB with abalance of $19.7 million.  This balancerepresents four large loan relationships and multiple small relationshipsidentified in the FDIC exam of HTB and an extensive internal loan review thatfollowed.  The majority of the remainingbalance represents three relationships at other affiliates totaling $8.6million.  The Company has assigned allloans for which we have concerns to an experienced loan workout specialist fromwithin the Company, who will draft an action plan for the remediation of eachloan.  We are also conducting loan reviewmeetings and fully expect to see progress from this effort.  Although we believe we are making progress inour resolution of the problem assets at HTB, we nevertheless anticipate furtherincreases in nonperforming assets in the second quarter resulting from HTB’ssituation and an anticipated slowing of the real-estate market. Our goal,however, is that our efforts in resolving these issues result in lower levelsof nonperforming assets later this year. In addition to nonaccrual loans, the Company also has other real estate,which is considered a nonperforming asset. At March 31, 2007, the balance in other real estate was $4.2 millioncompared to $4.7 million at December 31, 2006. Management believes that all significant losses related to nonaccrualloans and other real estate have been identified and provided for.
|                    | ** ** | **March 31, 2007**         | ** ** |
|--------------------|------------|--------------------------------------|------------|
| ** **         | ** ** | ** **                           | ** ** | **Past Due** | ** ** | ** ** | ** ** |
| ** **         | ** ** | **Nonaccrual**                       | ** ** | **90 Days** | ** ** | **Restructured** | ** ** |
| ** **         | ** ** | **Loans**                            | ** ** | **Still Accruing** | ** ** | **Debt** | ** ** |
| ** **         | ** ** | **(Dollars in thousands)** | ** ** |
|               |       |                                 |       |   |   |   |   |
| Real estate  loans |       | $                                    | 27,992     |   | $ | — |   | $ | — |   |
| Commercial loans   |       | 2,047                                |       | — |   | — |   |
| Consumer loans     |       | 207                                  |       | 10 |   | — |   |
| Total              |       | $                                    | 30,246     |   | $ | 10 |   | $ | — |   |

 
|                   | ** ** | **March 31, 2006**         | ** ** |
|-------------------|------------|--------------------------------------|------------|
| ** **        | ** ** | ** **                           | ** ** | **Past Due** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Nonaccrual**                       | ** ** | **90 Days** | ** ** | **Restructured** | ** ** |
| ** **        | ** ** | **Loans**                            | ** ** | **Still Accruing** | ** ** | **Debt** | ** ** |
| ** **        | ** ** | **(Dollars in thousands)** | ** ** |
|              |       |                                 |       |   |   |   |   |
| Real estate loans |       | $                                    | 6,511      |   | $ | — |   | $ | 103 |   |
| Commercial loans  |       | 476                                  |       | — |   | — |   |
| Consumer loans    |       | 127                                  |       | — |   | — |   |
| Total             |       | $                                    | 7,114      |   | $ | — |   | $ | 103 |   |

 

Our bankingsubsidiaries’ policy is to discontinue the accrual of interest income when, inthe opinion of management, collection of such interest becomes doubtful.  This status is determined when: (1) there isa significant deterioration in the financial condition of the borrower and fullrepayment of principal and interest is not expected; and (2) the principal orinterest is more than 90 days past due, unless the loan is both well-securedand in the process of collection. Accrual of interest on such loans is resumed when, in management’sjudgment, the collection of interest and principal becomes probable.

Loans classified for regulatory purposes asloss, doubtful, substandard, or special mention that have not been included inthe table above do not represent or result from trends or uncertainties whichmanagement reasonably expects will materially impact future operating results,liquidity or capital resources.  Theseclassified loans do not represent material credits about which

16

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management is aware ofany information which causes management to have serious doubts as to theability of such borrowers to comply with their loan repayment terms, except asnoted above.

**Liquidity and Capital Resources**

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

Our liquidity and capital resources aremonitored on a periodic basis by management and state and federal regulatoryauthorities.  Our liquidity ratio was12.00% at March 31, 2007.  Liquidity ismeasured by the ratio of net cash, Federal funds sold and securities to netdeposits and short-term liabilities. In the event our subsidiary banks need togenerate additional liquidity, funding plans would be implemented as outlinedin the liquidity policy of the subsidiary banks. Our subsidiary banks havelines of credit available to meet any unforeseen liquidity needs.  Also, our subsidiary banks have relationshipswith the Federal Home Loan Bank of Atlanta, which provides funding for loangrowth on an as needed basis, however these amounts are subject to collateralpledging and therefore the full amount might not be available.  Management reviews liquidity on a periodicbasis to monitor and adjust liquidity as necessary.  Management has the ability to adjustliquidity by selling securities available for sale, selling participations inloans we generate and accessing available funds through various borrowingarrangements.  At March 31, 2007, we hadavailable borrowing capacity totaling approximately $245.4 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.

17

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As of March 31, 2007,each of our subsidiary banks was considered to be well-capitalized as definedin the Federal Deposit Insurance Corporation Improvement Act and based onregulatory minimum capital requirements. The Company and the subsidiary banks’ capital ratios are presented inthe following table:
| ** **                               | ** ** | ** **  | ** ** | **FOR CAPITAL** | ** ** | **TO BE**  | ** ** |
|------------------------------------------|------------|-------------|------------|----------------------|------------|-----------------|------------|
| ** **                               | ** ** | **CAPITAL** | ** ** | **ADEQUACY**         | ** ** | **WELL**        | ** ** |
| ** **                               | ** ** | **RATIOS**  | ** ** | **PURPOSES**         | ** ** | **CAPITALIZED** | ** ** |
|                                     |       |        |       |                 |       |            |       |
| As  of March 31, 2007                    |       |        |       |                 |       |            |       |
| Total  Capital to Risk Weighted Assets:  |       |        |       |                 |       |            |       |
| Consolidated                             |       | 12.09       | %          | 8.00                 | %          | N\A             |       |
| Gainesville Bank & Trust             |       | 11.58       | %          | 8.00                 | %          | 10.00           | %          |
| United Bank & Trust                  |       | 10.73       | %          | 8.00                 | %          | 10.00           | %          |
| Community Trust Bank                     |       | 10.76       | %          | 8.00                 | %          | 10.00           | %          |
| HomeTown Bank of Villa Rica              |       | 10.39       | %          | 8.00                 | %          | 10.00           | %          |
| First National Bank of the South         |       | 11.82       | %          | 8.00                 | %          | 10.00           | %          |
| First National Bank of Gwinnett          |       | 11.35       | %          | 8.00                 | %          | 10.00           | %          |
| Mountain State Bank                      |       | 10.78       | %          | 8.00                 | %          | 10.00           | %          |
| Tier  I Capital to Risk Weighted Assets: |       |        |       |                 |       |            |       |
| Consolidated                             |       | 10.83       | %          | 4.00                 | %          | N\A             |       |
| Gainesville Bank & Trust             |       | 10.61       | %          | 4.00                 | %          | 6.00            | %          |
| United Bank & Trust                  |       | 9.57        | %          | 4.00                 | %          | 6.00            | %          |
| Community Trust Bank                     |       | 9.51        | %          | 4.00                 | %          | 6.00            | %          |
| HomeTown Bank of Villa Rica              |       | 9.10        | %          | 4.00                 | %          | 6.00            | %          |
| First National Bank of the South         |       | 10.79       | %          | 4.00                 | %          | 6.00            | %          |
| First National Bank of Gwinnett          |       | 10.36       | %          | 4.00                 | %          | 6.00            | %          |
| Mountain State Bank                      |       | 9.67        | %          | 4.00                 | %          | 6.00            | %          |
| Tier  I Capital to Average Assets:       |       |        |       |                 |       |            |       |
| Consolidated                             |       | 9.54        | %          | 4.00                 | %          | N\A             |       |
| Gainesville Bank & Trust             |       | 9.06        | %          | 4.00                 | %          | 5.00            | %          |
| United Bank & Trust                  |       | 7.94        | %          | 4.00                 | %          | 5.00            | %          |
| Community Trust Bank                     |       | 8.58        | %          | 4.00                 | %          | 5.00            | %          |
| HomeTown Bank of Villa Rica              |       | 7.54        | %          | 4.00                 | %          | 5.00            | %          |
| First National Bank of the South         |       | 9.41        | %          | 4.00                 | %          | 5.00            | %          |
| First National Bank of Gwinnett          |       | 9.32        | %          | 4.00                 | %          | 5.00            | %          |
| Mountain  State Bank                     |       | 9.07        | %          | 4.00                 | %          | 5.00            | %          |

 

Our subsidiary banks aresubject to certain restrictions on the amount of dividends that may be declaredwithout prior regulatory approval.  AtMarch 31, 2007, approximately $10.3 million of retained earnings at oursubsidiary banks was available for dividend declaration without regulatory approval.

**Net Interest Income and Earning Assets**

Our profitability is determined by our abilityto effectively manage interest income and expense, to minimize loan andsecurity losses, to generate noninterest income, and to control operatingexpenses.  Because interest rates aredetermined by market forces and economic conditions beyond our control, ourability to generate net interest income depends upon our ability to obtain anadequate net interest spread between the rate paid on interest-bearingliabilities and the rate earned on interest-earning assets.  The net interest margin, on a tax equivalentbasis, was 4.19% for the three months ended March 31, 2007, compared to 4.35%for the same period in 2006, a decrease of 16 basis points.  This decrease resulted from an increase inthe yield on earning assets of 78 basis points which was more than offset by anincrease in the effective cost of funds of 92 basis points.  The increased yield on earning assets wasprimarily due to increased volumes and yields on loans and the increasedeffective cost of funds was due to higher average rates paid on time depositsand other borrowings.  The Companycontinues to experience growth in loans and deposits while maintaining itscompetitive pricing.

18

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The following table setsforth the amount of our interest income or interest expense for each categoryof interest-earning assets and interest-bearing liabilities and the averageinterest yield/rate for total interest-earning assets and totalinterest-bearing liabilities, net interest spread and net yield on averageinterest-earning assets.
| ** **                                                        | ** ** | **For the Three Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                        | ** ** | **March 31, 2007**                       | ** ** | **March 31, 2006**                       | ** ** |
| ** **                                                        | ** ** | **Average**                                        | ** ** | ** **                                         | ** ** | **Yields** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yields** | ** ** |
| ** **                                                        | ** ** | **Balances**                                       | ** ** | **Interest**                                       | ** ** | **/Rates** | ** ** | **Balances** | ** ** | **Interest** | ** ** | **/Rates** | ** ** |
| ** **                                                        | ** ** | **(Dollars in thousands)**               | ** ** |
| **Assets**                                                        | ** ** | ** **                                         | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest earning  assets:                                         |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Taxable  securities                                               |       | $                                                  | 202,119    |                                               | $          | 2,308 |   | 4.63 | % | $ | 190,059 |   | $ | 1,912 |   | 4.08 | % |
| Nontaxable  securities*                                           |       | 24,807                                             |       | 384                                                |       | 6.28 | % | 10,332 |   | 172 |   | 6.75 | % |
| Federal funds  sold                                               |       | 8,638                                              |       | 108                                                |       | 5.07 | % | 9,458 |   | 99 |   | 4.25 | % |
| Interest bearing  deposits in banks                               |       | 1,801                                              |       | 26                                                 |       | 5.85 | % | 666 |   | 8 |   | 4.87 | % |
| Loans, net of  unearned income                                    |       | 1,478,082                                          |       | 32,157                                             |       | 8.82 | % | 1,237,056 |   | 24,532 |   | 8.04 | % |
| Total interest  earning assets                                    |       | 1,715,447                                          |       | 34,983                                             |       | 8.27 | % | 1,447,571 |   | 26,723 |   | 7.49 | % |
| Noninterest earning  assets:                                      |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Unrealized gains  (losses) on securities                          |       | (2,638                                             | )          |                                               |       |   |   | (4,147 | ) |   |   |   |   |
| Allowance for  loan losses                                        |       | (24,956                                            | )          |                                               |       |   |   | (13,018 | ) |   |   |   |   |
| Nonaccrual loans                                                  |       | 26,174                                             |       |                                               |       |   |   | 7,205 |   |   |   |   |   |
| Cash and due  from banks                                          |       | 24,132                                             |       |                                               |       |   |   | 22,855 |   |   |   |   |   |
| Other assets                                                      |       | 177,397                                            |       |                                               |       |   |   | 136,413 |   |   |   |   |   |
| Total  noninterest earning assets                                 |       | 200,109                                            |       |                                               |       |   |   | 149,308 |   |   |   |   |   |
| Total assets                                                      |       | $                                                  | 1,915,556  |                                               |       |   |   |   | $ | 1,596,879 |   |   |   |   |   |
| **Liabilities & Stockholders’  Equity**                  |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities:                                    |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Interest bearing  demand & savings                            |       | $                                                  | 446,821    |                                               | 3,535      |   | 3.21 | % | $ | 412,978 |   | 2,646 |   | 2.60 | % |
| Time                                                              |       | 889,410                                            |       | 11,596                                             |       | 5.29 | % | 654,117 |   | 6,786 |   | 4.21 | % |
| Borrowings                                                        |       | 171,395                                            |       | 2,134                                              |       | 5.05 | % | 153,237 |   | 1,774 |   | 4.70 | % |
| Total interest  bearing liabilities                               |       | 1,507,626                                          |       | 17,265                                             |       | 4.64 | % | 1,220,332 |   | 11,206 |   | 3.72 | % |
| Noninterest bearing  liabilities & stockholders’ equity: |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Noninterest  bearing deposits                                     |       | 152,569                                            |       |                                               |       |   |   | 159,046 |   |   |   |   |   |
| Other  liabilities                                                |       | 20,179                                             |       |                                               |       |   |   | 16,209 |   |   |   |   |   |
| Stockholders’  equity                                        |       | 235,182                                            |       |                                               |       |   |   | 201,292 |   |   |   |   |   |
| Total  liabilities & stockholders’ equity                |       | $                                                  | 1,915,556  |                                               |       |   |   |   | $ | 1,596,879 |   |   |   |   |   |
| Net interest spread                                               |       |                                               |       |                                               |       | 3.63 | % |   |   |   |   | 3.77 | % |
| Net interest income*                                              |       |                                               |       | 17,718                                             |       |   |   |   |   | 15,517 |   |   |   |
| Less: Tax equivalent  adjustment                                  |       |                                               |       | 123                                                |       |   |   |   |   | 55 |   |   |   |
| Net interest income                                               |       |                                               |       | $                                                  | 17,595     |   |   |   |   |   | $ | 15,462 |   |   |   |
| Net interest margin*                                              |       |                                               |       |                                               |       | 4.19 | % |   |   |   |   | 4.35 | % |

 

----

*Fully taxequivalent

Net interest income increased $2.1 million, or13.80%, for the three months ended March 31, 2007 compared to the same periodin 2006.  The net increase consists of anincrease in interest income of $8.2 million, or 30.72%, less an increase ininterest expense of $6.1 million, or 54.07%, for the three-month period.  These increases reflect an increase of $267.9million in average interest-earning assets for the three months ended March 31,2007 as compared to the three months ended March 31, 2006.  The change in net interest income resultedfrom increases in volume and interest rates.

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**Other Income**

Other income for thethree months ended March 31, 2007, increased by $293,000, compared to the sameperiod in 2006.  Service charges ondeposit accounts decreased by $34,000, which was offset by an increase inmortgage origination fees of $189,000 for the three-month period.

**Other Expense**

Other expense increasedby approximately $2.1 million, or 18.04%, for the three months ended March 31,2007 compared to the same period in 2006. The increase is due primarily to an increase in salaries and employeebenefits expense of $1.1 million.  Netoccupancy and equipment expenses increased $273,000.  Included in the increase in other operatingexpenses for the three month period were increases in marketing and publicrelations of $105,000 and business development of $23,000, which are bothpartially related to the development and introduction of several new revenuegenerating products for 2007, and increases in legal and collection expense of$78,000, part of which is related to the loan collection efforts at HTB.  Increases were also noted in ATM and data processingexpenses of $57,000, supplies, postage and telephone of $33,000, education andtraining of $52,000, personnel administration expense related to search feesfor new employees of $50,000 and a $39,000 increase due to a loan charge-off atHTB.

**Income Tax Expense**

Income tax expenseincreased by $169,000 for the three-month period ended March 31, 2007, comparedto the same period in 2006.  Theeffective tax rate for the three-month period ended March 31, 2007 was 33.48%,compared to 34.13% for the same period in 2006.

**Net Income**

Net income increased by$433,000, or 13.21%, for the three months ended March 31, 2007, compared to thesame period in 2006.  These increases aredirectly related to the increase in net interest income which is partiallyoffset by the increases in other expenses as discussed above.

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

**Off Balance Sheet Arrangements**

Our financial statementsdo not reflect various commitments and contingent liabilities that arise in thenormal course of business.  Theseoff-balance sheet financial instruments include commitments to extend credit,standby letters of credit and credit card commitments.  Such financial instruments are included inthe financial statements when funds are distributed or the instruments becomepayable.  Our exposure to credit loss inthe event of nonperformance by the other party to the financial instrument forcommitments to extend credit, standby letters of credit and credit cardcommitments is represented by the contractual amount of those instruments.  We use the same credit policies in makingcommitments as we do for on-balance sheet instruments.  Although these amounts do not necessarilyrepresent future cash requirements, a summary of our commitments as of March31, 2007 and December 31, 2006 are as follows:

20

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|                                      | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **(In thousands)**      | ** ** |
|                                 |       |                         |       |                            |       |
| Commitments to extend  credit        |       | $                            | 413,967    |                            | $          | 425,391 |   |
| Financial standby  letters of credit |       | 7,266                        |       | 7,544                           |       |
| Other standby letters  of credit     |       | 1,321                        |       | 1,129                           |       |
| Credit card commitments              |       | 7,381                        |       | 6,595                           |       |
| Total                                |       | $                            | 429,935    |                            | $          | 440,659 |   |

 

**Item 3.      QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

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

A simple interest rate“gap” analysis by itself may not be an accurate indicator of how net interestincome will be affected by changes in interest rates. Accordingly, we alsoevaluate how the repayment of particular assets and liabilities is impacted bychanges in interest rates. Income associated with interest-earning assets andcosts associated with interest-bearing liabilities may not be affecteduniformly by changes in interest rates. In addition, the magnitude and durationof changes in interest rates may have a significant impact on net interestincome. For example, although certain assets and liabilities may have similarmaturities or periods of repricing, they may react in different degrees tochanges in market interest rates. Interest rates on certain types of assets andliabilities fluctuate in advance of changes in general market rates, whileinterest rates on other types may lag behind changes in general market rates.In addition, certain assets, such as adjustable rate mortgage loans, havefeatures (generally referred to as “interest rate caps and floors”) which limitthe amount of changes in interest rates. Prepayment and early withdrawal levelsalso could deviate significantly from those assumed in calculating the interestrate gap. The ability of many borrowers to service their debts also maydecrease during periods of rising interest rates.

Changes in interestrates also affect our liquidity position. We currently price deposits inresponse to market rates and it is management’s intention to continue thispolicy. If deposits are not priced in response to market rates, a loss ofdeposits could occur which would negatively affect our liquidity position.

Management believes thatgap analysis is a useful tool for measuring interest rate risk only when usedin conjunction with its simulation model. As of March 31, 2007, the Company maintained an asset sensitive interestrate risk position based on its simulation model results.  This positioning would be expected to resultin an increase in net interest income in a rising rate environment and adecrease 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 

21

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well as the mixexperienced over these time horizons. Market conditions and their resulting impact on loan, deposit, andfunding pricing would also be a primary determinant in the realized level ofnet interest income.  The table belowshows the impact on net interest margins over a twelve-month period whensubjected to an immediate 100 basis point increase and decrease in rate.

| Twelve-Month Net Interest Income Sensitivity                         | ** ** |
|------------------------------------------------------------------------------------------|------------|
| **Change in Short-Term Interest  Rates (in basis points)** | ** ** | **Estimated Change in Net  Interest Income** | ** ** |
| +100                                                                                     |       | 1.43 | % |
| Flat                                                                                     |       | — |   |
| -100                                                                                     |       | (5.17 | )% |

 

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

**Item 4.      CONTROLS AND PROCEDURES**

**Disclosure Controls andProcedures**

As of the end of theperiod covered by this report, an evaluation was carried out under thesupervision and with the participation of the Company’s Chief Executive Officerand Chief Financial Officer, of the effectiveness of the design and operationof its disclosure controls and procedures. Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that the designand operation of these disclosure controls and procedures were effective as ofthe end of the period covered by this report in alerting them on a timely basisto material information relating to the Company required to be included in theCompany’s reports filed or submitted under the Securities Exchange Act of 1934.

**Internal Control over FinancialReporting**

During the recentquarter, and in response to weaknesses uncovered by the situation at HTB, theCompany has relocated control functions related to loan approval anddisbursements from HTB to the holding company. These functions include, but arenot limited to, daily balancing, reconciling and review of all lendingactivity. Otherwise, there were no changes made in the Company’s internalcontrols over financial reporting that occurred during the Company’s mostrecent fiscal quarter that have materially affected, or are reasonably likelyto materially affect, the Company’s internal control over financial reporting.

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**PART II - OTHER INFORMATION**

**Item 1.          LEGAL PROCEEDINGS**

None.

**Item 1A.       RISK FACTORS**

Therehave been no material changes to the risk factors previously disclosed in theCompany’s Annual Report on Form 10-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**

None.

**Item 5.          OTHER INFORMATION**

None.

**Item 6.          EXHIBITS**
| Exhibits | ** ** | ** **                                                                                                                                                                                                                                    |
|----------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1     |       | Employment  Agreement by and between GB&T and Richard A. Hunt, dated as of March 5,  2007 (incorporated by reference from the Company’s Annual Report on Form 10-K  for the year ended December 31, 2006, filed on March 16, 2007).  |
| 10.2     |       | Employment  Agreement by and between GB&T and Gregory L. Hamby, dated as of March 7,  2007 (incorporated by reference from the Company’s Annual Report on Form 10-K  for the year ended December 31, 2006, filed on March 16, 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 therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| GB&T BANCSHARES, INC. |                  |                                   |
|---------------------------|-----------------------|----------------------------------------|
|                      |                  |                                   |
|                      |                  |                                   |
| DATE:                     |   5/10/2007 |                                   | BY: | /s/ Richard A. Hunt |   |
|                      |                  | Richard A. Hunt                        |
|                      |                  | President and  Chief Executive Officer |
|                      |                  |                                   |
|                      |                  |                                   |   |
| DATE:                     |   5/10/2007 |                                   | BY: | /s/ Gregory L. Hamby |   |
|                      |                  | Gregory L. Hamby                       |
|                      |                  | Executive Vice  President &        |
|                      |                  | Chief Financial  Officer               |
|                           |                       |                                        |  |  |  |  |

 

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