**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **Mark One**                                                                                                                                                                                                                                                              |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                      |   |   |
| **ý**                                                                                                                                                                                                                                                                | ** ** | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                      |   |   |
| **For the quarterly period ended  June 30, 2004**                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                      |   |   |
| **o**                                                                                                                                                                                                                                                                     | ** ** | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                      |   |   |
| **For the transition period  from                   to                   ** |

 

**Commission File Number:  000-24203**

 

| **GB&T Bancshares, Inc.**                                                       |
|-------------------------------------------------------------------------------------|
| (Exact  name of registrant as specified in its charter)                             |
|                                                                                |   |   |
| **Georgia**                                                                         | ** ** | **58-2400756** |
| (State  or other jurisdiction of                                                    |   | (IRS  Employer |
| incorporation  or organization)                                                     |   | Identification  No.) |
|                                                                                |   |   |
| **500 Jesse Jewell Parkway, S.E.  Gainesville, Georgia  30501**                |
| (Address  of principal executive offices)                                           |
|                                                                                |   |   |
| **(770) 532-1212**                                                                  |
| (Registrant’s  telephone number, including area code)                          |
|                                                                                |   |   |
| **N/A**                                                                             |
| (Former  name, former address and former fiscal year, if changed since last report) |

 

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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).  Yes ý  No o

 

**APPLICABLE ONLY TO CORPORATE ISSUERS**

 

Statethe number of shares outstanding of each of the issuer’s classes of capitalstock, as of July 30, 2004:    8,609,848shares; no par value

 

 

----

 

 

**GB&TBANCSHARES, INC.**

 

 

**TABLE OF CONTENTS**

 

 
| ** **   | ** **                                                                                                     |                                                                                                                 | ** ** |
|--------------|----------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------|------------|
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                      |                                                                                                                 |       |
|         |                                                                                                           |                                                                                                                 |       |
| ** **   | **Item 1.  FINANCIAL STATEMENTS**                                                                         |                                                                                                                 |       |
|         |                                                                                                           |                                                                                                                 |       |
| ** **   |                                                                                                           | **Consolidated Balance Sheets  – June 30, 2004 (Unaudited)  and December 31, 2003**                             |       |   |
| ** **   | ** **                                                                                                     | ** **                                                                                                           | ** ** | ** ** |
|         |                                                                                                           | **Consolidated  Statements of Income (Unaudited)-  Three and six months ended June 30, 2004 and 2003**               |       |   |
| ** **   | ** **                                                                                                     | ** **                                                                                                           |       |   |
| ** **   | ** **                                                                                                     | **Consolidated  Statements of Comprehensive Income (Unaudited)-  Three and six months ended June 30, 2004 and 2003** | ** ** |   |
|         |                                                                                                           |                                                                                                                 |       |   |
| ** **   | ** **                                                                                                     | **Consolidated  Statements of Stockholders’ Equity (Unaudited)-  Six months ended June 30, 2004**               |       |   |
| ** **   | ** **                                                                                                     | ** **                                                                                                           | ** ** | ** ** |
|         |                                                                                                           | **Consolidated  Statements of Cash Flows (Unaudited) -  Six months ended June 30, 2004 and 2003**                    |       |   |
| ** **   | ** **                                                                                                     | ** **                                                                                                           |       |   |
| ** **   | ** **                                                                                                     | **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 4.  Submission of Matters to a Vote of Security  Holders**                                         |                                                                                                                 |       |
|         |                                                                                                           |                                                                                                                 |       |
| ** **   | **Item  6.  Exhibits and Reports on Form 8-K**                                                            |                                                                                                                 |       |
|         |                                                                                                           |                                                                                                                 |       |
| ** **   | **Signatures**                                                                                                 |                                                                                                                 |       |
|         |                                                                                                           |                                                                                                                 |       |
| ** **   | **Certifications**                                                                                             |                                                                                                                 |       |

 

2

----

 

**PART I - FINANCIAL INFORMATION****ITEM 1 - FINANCIAL STATEMENTS**

 

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

**Consolidated Balance Sheets**

**(Unaudited)**

 
| ** **                                                                                                                                                                 | ** ** | **June 30,**               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2004**                   | ** ** | **2003**         | ** ** |
| ** **                                                                                                                                                                 | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                                                                                                                 |       |                       |       |             |       |
| ** **                                                                                                                                                                 |       |                       |       |             |       |
| Cash and due from banks                                                                                                                                                    |       | $                          | 19,090     |             | $          | 17,584 |   |
| Interest-bearing deposits in banks                                                                                                                                         |       | 961                        |       | 535              |       |
| Federal funds sold                                                                                                                                                         |       | 9,631                      |       | 6,534            |       |
| Securities available for sale                                                                                                                                              |       | 146,429                    |       | 132,945          |       |
| Restricted equity securities, at cost                                                                                                                                      |       | 5,388                      |       | 4,582            |       |
|                                                                                                                                                                       |       |                       |       |             |       |
| Loans, net of unearned income                                                                                                                                              |       | 745,437                    |       | 709,958          |       |
| Less allowance for loan losses                                                                                                                                             |       | 8,987                      |       | 8,726            |       |
| Loans, net                                                                                                                                                                 |       | 736,450                    |       | 701,232          |       |
|                                                                                                                                                                       |       |                       |       |             |       |
| Premises and equipment, net                                                                                                                                                |       | 26,454                     |       | 25,813           |       |
| Goodwill and intangible assets                                                                                                                                             |       | 32,825                     |       | 33,043           |       |
| Other assets                                                                                                                                                               |       | 23,291                     |       | 22,010           |       |
|                                                                                                                                                                       |       |                       |       |             |       |
| **Total assets**                                                                                                                                                           |       | $                          | 1,000,519  |             | $          | 944,278 |   |
|                                                                                                                                                                       |       |                       |       |             |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                              |       |                       |       |             |       |
| ** **                                                                                                                                                                 |       |                       |       |             |       |
| **Liabilities:**                                                                                                                                                           |       |                       |       |             |       |
| Deposits:                                                                                                                                                                  |       |                       |       |             |       |
| Noninterest-bearing                                                                                                                                                        |       | $                          | 94,548     |             | $          | 90,914 |   |
| Interest-bearing                                                                                                                                                           |       | 683,816                    |       | 637,715          |       |
| Total deposits                                                                                                                                                             |       | 778,364                    |       | 728,629          |       |
| Federal funds purchased and securities sold  under repurchase agreements                                                                                                   |       | 17,259                     |       | 17,314           |       |
| Federal Home Loan Bank advances                                                                                                                                            |       | 77,458                     |       | 75,703           |       |
| Other borrowings                                                                                                                                                           |       | 2,234                      |       | 300              |       |
| Other liabilities                                                                                                                                                          |       | 10,309                     |       | 10,025           |       |
| Subordinated debt                                                                                                                                                          |       | 15,464                     |       | 15,464           |       |
|                                                                                                                                                                       |       |                       |       |             |       |
| **Total liabilities**                                                                                                                                                      |       | 901,088                    |       | 847,435          |       |
|                                                                                                                                                                       |       |                       |       |             |       |
| **Stockholders’ Equity**:                                                                                                                                             |       |                       |       |             |       |
| ** **                                                                                                                                                                 |       |                       |       |             |       |
| Capital stock, no par value; 20,000,000  shares authorized,   8,592,223 and 8,492,685 shares issued and outstanding   at June 30, 2004 and December 31, 2003, respectively |       | 68,825                     |       | 67,983           |       |
| Retained earnings                                                                                                                                                          |       | 31,594                     |       | 28,393           |       |
| Accumulated other comprehensive income  (loss)                                                                                                                             |       | (988                       | )          | 467              |       |
|                                                                                                                                                                       |       |                       |       |             |       |
| **Total stockholders’ equity**                                                                                                                                        |       | 99,431                     |       | 96,843           |       |
|                                                                                                                                                                       |       |                       |       |             |       |
| **Total liabilities and stockholders’ equity**                                                                                                                        |       | $                          | 1,000,519  |             | $          | 944,278 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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

**Consolidated Statements of Income**

**(Unaudited)**

** **
| ** **                                                               | ** ** | **Three months ended  June 30,**                     | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                               | ** ** | **2004**                                             | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                               | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| Interest income:                                                         |       |                                                 |       |                           |       |   |   |   |   |
| Loans, including fees                                                    |       | $                                                    | 11,903     |                           | $          | 9,967 |   | $ | 23,548 |   | $ | 19,705 |   |
| Taxable securities                                                       |       | 1,040                                                |       | 950                            |       | 2,025 |   | 1,935 |   |
| Nontaxable securities                                                    |       | 186                                                  |       | 158                            |       | 370 |   | 326 |   |
| Federal funds sold                                                       |       | 33                                                   |       | 52                             |       | 60 |   | 106 |   |
| Interest-bearing deposits in banks                                       |       | 7                                                    |       | 6                              |       | 8 |   | 17 |   |
| Total interest income                                                    |       | 13,169                                               |       | 11,133                         |       | 26,011 |   | 22,089 |   |
|                                                                     |       |                                                 |       |                           |       |   |   |   |   |
| Interest expense:                                                        |       |                                                 |       |                           |       |   |   |   |   |
| Deposits                                                                 |       | 3,005                                                |       | 2,899                          |       | 5,908 |   | 5,876 |   |
| Federal funds purchased and securities sold  under repurchase agreements |       | 45                                                   |       | 42                             |       | 93 |   | 83 |   |
| Federal Home Loan Bank advances                                          |       | 801                                                  |       | 637                            |       | 1,601 |   | 1,365 |   |
| Other borrowings                                                         |       | 208                                                  |       | 214                            |       | 413 |   | 427 |   |
| Total interest expense                                                   |       | 4,059                                                |       | 3,792                          |       | 8,015 |   | 7,751 |   |
|                                                                     |       |                                                 |       |                           |       |   |   |   |   |
| Net interest income                                                      |       | 9,110                                                |       | 7,341                          |       | 17,996 |   | 14,338 |   |
|                                                                     |       |                                                 |       |                           |       |   |   |   |   |
| Provision for loan losses                                                |       | 325                                                  |       | 176                            |       | 609 |   | 390 |   |
|                                                                     |       |                                                 |       |                           |       |   |   |   |   |
| Net interest income after provision for  loan losses                     |       | 8,785                                                |       | 7,165                          |       | 17,387 |   | 13,948 |   |
|                                                                     |       |                                                 |       |                           |       |   |   |   |   |
| Other income:                                                            |       |                                                 |       |                           |       |   |   |   |   |
| Service charges on deposit accounts                                      |       | 1,487                                                |       | 1,182                          |       | 2,881 |   | 2,274 |   |
| Mortgage origination fees                                                |       | 511                                                  |       | 726                            |       | 971 |   | 1,283 |   |
| Insurance commissions                                                    |       | 157                                                  |       | 149                            |       | 301 |   | 293 |   |
| Gain on sale of securities                                               |       | 346                                                  |       | 49                             |       | 609 |   | 77 |   |
| Other operating income                                                   |       | 441                                                  |       | 286                            |       | 1,079 |   | 817 |   |
| Total other income                                                       |       | 2,942                                                |       | 2,392                          |       | 5,841 |   | 4,744 |   |
|                                                                     |       |                                                 |       |                           |       |   |   |   |   |
| Other expense:                                                           |       |                                                 |       |                           |       |   |   |   |   |
| Salaries and employee benefits                                           |       | 4,940                                                |       | 4,171                          |       | 9,873 |   | 8,295 |   |
| Occupancy and equipment expenses, net                                    |       | 1,204                                                |       | 1,030                          |       | 2,426 |   | 2,034 |   |
| Other operating expenses                                                 |       | 2,331                                                |       | 2,090                          |       | 4,524 |   | 3,763 |   |
| Total other expense                                                      |       | 8,475                                                |       | 7,291                          |       | 16,823 |   | 14,092 |   |
|                                                                     |       |                                                 |       |                           |       |   |   |   |   |
| Income before income taxes                                               |       | 3,252                                                |       | 2,266                          |       | 6,405 |   | 4,600 |   |
|                                                                     |       |                                                 |       |                           |       |   |   |   |   |
| Income tax expense                                                       |       | 1,019                                                |       | 533                            |       | 1,942 |   | 1,156 |   |
|                                                                     |       |                                                 |       |                           |       |   |   |   |   |
| Net income                                                               |       | $                                                    | 2,233      |                           | $          | 1,733 |   | $ | 4,463 |   | $ | 3,444 |   |
|                                                                     |       |                                                 |       |                           |       |   |   |   |   |
| Earnings per share:                                                      |       |                                                 |       |                           |       |   |   |   |   |
| Basic                                                                    |       | $                                                    | 0.26       |                           | $          | 0.26 |   | $ | 0.52 |   | $ | 0.51 |   |
| Diluted                                                                  |       | $                                                    | 0.26       |                           | $          | 0.25 |   | $ | 0.52 |   | $ | 0.50 |   |
|                                                                     |       |                                                 |       |                           |       |   |   |   |   |
| Weighted average shares                                                  |       |                                                 |       |                           |       |   |   |   |   |
| Basic                                                                    |       | 8,556                                                |       | 6,728                          |       | 8,533 |   | 6,714 |   |
| Diluted                                                                  |       | 8,700                                                |       | 6,973                          |       | 8,667 |   | 6,934 |   |
|                                                                     |       |                                                 |       |                           |       |   |   |   |   |
| Cash dividends per common share                                          |       | $                                                    | 0.076      |                           | $          | 0.072 |   | $ | 0.148 |   | $ | 0.140 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

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

**Consolidated Statements of ComprehensiveIncome**

 
| ** **                                                                           | ** ** | **Three months ended June 30,**         | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                                | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                           | ** ** | **(Dollars in thousands)  (unaudited)** | ** ** |
|                                                                                 |       |                                    |       |                          |       |   |   |   |   |
| Net Income                                                                           |       | $                                       | 2,233      |                          | $          | 1,733 |   | $ | 4,463 |   | $ | 3,444 |   |
|                                                                                 |       |                                    |       |                          |       |   |   |   |   |
| Unrealized holding gains  (losses) arising during period,  net of tax (benefit) |       | (1,808                                  | )          | 142                           |       | (1,077 | ) | (227 | ) |
|                                                                                 |       |                                    |       |                          |       |   |   |   |   |
| Reclassification adjustment for  gains realized in  net  income, net of taxes   |       | (215                                    | )          | (30                           | )          | (378 | ) | (48 | ) |
|                                                                                 |       |                                    |       |                          |       |   |   |   |   |
| Other comprehensive income  (loss)                                                   |       | (2,023                                  | )          | 112                           |       | (1,455 | ) | (275 | ) |
|                                                                                 |       |                                    |       |                          |       |   |   |   |   |
| Comprehensive income                                                                 |       | $                                       | 210        |                          | $          | 1,845 |   | $ | 3,008 |   | $ | 3,169 |   |

 

See accompanying notes toconsolidated financial statements.

 

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

### **Six Months Ended June 30, 2004**

 
| ** **                                                    | ** ** | **(Dollars in thousands)****    (unaudited)** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                    | ** ** | **Shares**                                         | ** ** | **Capital  Stock** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other****  Comprehensive  Income (Loss)** | ** ** | **Total****Stockholders’  Equity** | ** ** |
| Balance, December 31, 2003                                    |       | 8,493                                              |       | $ | 67,983 |   | $ | 28,393 |   | $ | 467 |   | $ | 96,843 |   |
| Net income                                                    |       | —                                             |       | — |   | 4,463 |   | — |   | 4,463 |   |
| Options excercised                                            |       | 100                                                |       | 856 |   | — |   | — |   | 856 |   |
|                                                          |       |                                               |       |   |   |   |   |   |   |   |   |
| Dividends declared  $0.148 per share                          |       | —                                             |       | — |   | (1,262 | ) | — |   | (1,262 | ) |
|                                                          |       |                                               |       |   |   |   |   |   |   |   |   |
| Payment for fractional shares  in Connection with stock split |       | (1                                                 | )          | (14 | ) | — |   | — |   | (14 | ) |
| Other comprehensive loss                                      |       | —                                             |       | — |   | — |   | (1,455 | ) | (1,455 | ) |
|                                                          |       |                                               |       |   |   |   |   |   |   |   |   |
| Balance, June 30, 2004                                        |       | 8,592                                              |       | $ | 68,825 |   | $ | 31,594 |   | $ | (988 | ) | $ | 99,431 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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**GB&T BANCSHARES, INC. AND SUBSIDIARIESCondensed Consolidated Statementsof Cash Flows**

**(Unaudited)**

 
| ** **                                                                               | ** ** | **Six months ended    June 30,** |
|------------------------------------------------------------------------------------------|------------|---------------------------------------|
| ** **                                                                               | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| ** **                                                                               | ** ** | **(Dollars in thousands)**            | ** ** |
| **Operating Activities**                                                                 |       |                                  |   |   |   |
| Net income                                                                               |       | $                                     | 4,463 |   | $ | 3,444 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:       |       |                                  |   |   |   |
| Depreciation                                                                             |       | 1,055                                 |   | 906 |   |
| Provision for loan losses                                                                |       | 609                                   |   | 390 |   |
| Amortization and (accretion), net                                                        |       | 612                                   |   | 358 |   |
| Gain on sale of securities                                                               |       | (609                                  | ) | (77 | ) |
| Net decrease in other assets                                                             |       | 29                                    |   | 1,072 |   |
| Net increase (decrease) in other  liabilities                                            |       | 284                                   |   | (4,895 | ) |
| Net cash provided by operating activities                                                |       | 6,443                                 |   | 1,198 |   |
|                                                                                     |       |                                  |   |   |   |
| **Investing Activities**                                                                 |       |                                  |   |   |   |
| Purchases of securities available for sale                                               |       | (46,223                               | ) | (55,826 | ) |
| Proceeds from sales of securities available  for sale                                    |       | 2,474                                 |   | 4,298 |   |
| Proceeds from maturities of securities  available for sale                               |       | 28,156                                |   | 43,870 |   |
| Net increase in restricted equity  securities                                            |       | (806                                  | ) | (2,013 | ) |
| (Increase) decrease in interest-bearing  deposits in banks                               |       | (426                                  | ) | 3,427 |   |
| (Increase) decrease in federal funds sold                                                |       | (3,097                                | ) | 9,563 |   |
| Net increase in loans                                                                    |       | (36,627                               | ) | (23,644 | ) |
| Proceeds from sale of other real estate  owned                                           |       | 359                                   |   | 767 |   |
| Purchase of premises and equipment                                                       |       | (1,696                                | ) | (2,189 | ) |
| Proceeds from disposals of premises and  equipment                                       |       | —                                |   | 1,481 |   |
| Net cash used in investing activities                                                    |       | (57,886                               | ) | (20,266 | ) |
|                                                                                     |       |                                  |   |   |   |
| **Financing Activities**                                                                 |       |                                  |   |   |   |
| Net increase in deposits                                                                 |       | 49,735                                |   | 24,815 |   |
| Net decrease in federal funds purchased and  securities sold under repurchase agreements |       | (55                                   | ) | (87 | ) |
| Proceeds from other borrowings and Federal  Home Loan Bank advances                      |       | 10,057                                |   | 5,913 |   |
| Payments on other borrowings and Federal  Home Loan Bank advances                        |       | (6,368                                | ) | (11,980 | ) |
| Dividends paid                                                                           |       | (1,262                                | ) | (939 | ) |
| Payment for fractional shares                                                            |       | (14                                   | ) | — |   |
| Proceeds from issuance of capital stock                                                  |       | 856                                   |   | 325 |   |
| Net cash provided by financing activities                                                |       | 52,949                                |   | 18,047 |   |
|                                                                                     |       |                                  |   |   |   |
| Net increase (decrease) in cash and due  from banks                                      |       | 1,506                                 |   | (1,021 | ) |
|                                                                                     |       |                                  |   |   |   |
| Cash and due from banks at beginning of  period                                          |       | 17,584                                |   | 18,113 |   |
|                                                                                     |       |                                  |   |   |   |
| Cash and due from banks at end of period                                                 |       | $                                     | 19,090 |   | $ | 17,092 |   |
|                                                                                     |       |                                  |   |   |   |
| Supplemental disclosure of cash paid during  the period for:                             |       |                                  |   |   |   |
| Interest                                                                                 |       | $                                     | 7,964 |   | $ | 7,727 |   |
| Income taxes                                                                             |       | $                                     | 2,322 |   | $ | 1,480 |   |

 

See accompanying notes toconsolidated financial statements.

 

6

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE 1.          BASISOF PRESENTATION**

 

Theunaudited consolidated financial statements include the accounts of GB&TBancshares, Inc. and its wholly-owned banking subsidiaries, Gainesville Bank& Trust, United Bank & Trust, Community Trust Bank, HomeTown Bank ofVilla Rica and First National Bank of the South, and its consumer financecompany, Community Loan Company (collectively, the “Company”).  Significant intercompany transactions andbalances have been eliminated in consolidation.

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America, for interim financial information and with instructions for Form10-Q.  Accordingly, they do not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, all adjustments (consisting of normal andrecurring adjustments) considered necessary for a fair presentation have beenincluded. The results of operations for the three and six-month periods endedJune 30, 2004 is not necessarily indicative of the results that may be expectedfor the year ending December 31, 2004.

 

 

**NOTE 2.          STOCKCOMPENSATION PLANS**

 

TheCompany has a stock option plan for granting of options to directors, officersand employees.  The options may beexercised over a period of ten years in accordance with vesting schedulesdetermined by the Board of Directors. The Company accounts for the plan under the recognition and measurementprinciples of APB Opinion No. 25, *Accounting for**Stock Issued to Employees*, and related Interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under the plan had an exerciseprice equal to the market value of the underlying stock on the date ofgrant.  The following table illustratesthe effect on net income and earnings per share if the Company had applied thefair value recognition provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation*, to stock-based employee compensation.

 
| ** **                                                                                                                                          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                          | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                          | ** ** | **(Dollars in thousands)**       | ** ** |
|                                                                                                                                                |       |                             |       |                           |       |   |   |   |   |
| Net income, as reported                                                                                                                             | ** ** | **$**                            | 2,233      |                           | $          | 1,733 | ** ** | **$** | 4,463 | ** ** | **$** | 3,444 | ** ** |
| Deduct:   Total stock-based employee compensation expense determined under fair  value based method for all awards, net of related tax effects |       | 32                               |       | 26                             |       | 61 |   | 52 |   |
| Pro forma net income                                                                                                                                |       | $                                | 2,201      |                           | $          | 1,707 |   | $ | 4,402 |   | $ | 3,392 |   |
| Earnings per share:                                                                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Basic - as reported                                                                                                                                 | ** ** | **$**                            | 0.26       |                           | $          | 0.26 | ** ** | **$** | 0.52 | ** ** | **$** | 0.51 | ** ** |
| Basic - pro forma                                                                                                                                   | ** ** | **$**                            | 0.26       |                           | $          | 0.25 | ** ** | **$** | 0.52 | ** ** | **$** | 0.51 | ** ** |
| Diluted - as reported                                                                                                                               | ** ** | **$**                            | 0.26       |                           | $          | 0.25 | ** ** | **$** | 0.52 | ** ** | **$** | 0.50 | ** ** |
| Diluted - pro forma                                                                                                                                 | ** ** | **$**                            | 0.25       |                           | $          | 0.24 | ** ** | **$** | 0.51 | ** ** | **$** | 0.49 | ** ** |

 

7

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**NOTE3.                EARNINGS PER COMMONSHARE**(in thousands, exceptper share amounts)

 

Presentedbelow is a summary of the components used to calculate basic and diluted earningsper share for the three and six-month periods ended June 30, 2004 and 2003.

 
| ** **                                                                                                                                | ** ** | **Three months ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| Basic Earnings Per Share:                                                                                                                 |       |                            |       |   |   |
| Weighted average common shares  outstanding                                                                                               |       | 8,556                           |       | 6,728 |   |
|                                                                                                                                      |       |                            |       |   |   |
| Net income                                                                                                                                |       | $                               | 2,233      |   | $ | 1,733 |   |
|                                                                                                                                      |       |                            |       |   |   |
| Basic earnings per share                                                                                                                  |       | $                               | 0.26       |   | $ | 0.26 |   |
|                                                                                                                                      |       |                            |       |   |   |
| Diluted Earnings Per Share:                                                                                                               |       |                            |       |   |   |
| Weighted average common shares  outstanding                                                                                               |       | 8,556                           |       | 6,728 |   |
| Net effect of the assumed  exercise of stock  options  based on the treasury stock method using average market prices for the period |       | 144                             |       | 245 |   |
| Total weighted average common  shares and common stock equivalents outstanding                                                            |       | 8,700                           |       | 6,973 |   |
|                                                                                                                                      |       |                            |       |   |   |
| Net income                                                                                                                                |       | $                               | 2,233      |   | $ | 1,733 |   |
|                                                                                                                                      |       |                            |       |   |   |
| Diluted earnings per share                                                                                                                |       | $                               | 0.26       |   | $ | 0.25 |   |

 

 
| ** **                                                                                                                          | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| Basic Earnings Per Share:                                                                                                           |       |                          |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 8,533                         |       | 6,714 |   |
|                                                                                                                                |       |                          |       |   |   |
| Net income                                                                                                                          |       | $                             | 4,463      |   | $ | 3,444 |   |
|                                                                                                                                |       |                          |       |   |   |
| Basic earnings per share                                                                                                            |       | $                             | 0.52       |   | $ | 0.51 |   |
|                                                                                                                                |       |                          |       |   |   |
| Diluted Earnings Per Share:                                                                                                         |       |                          |       |   |   |
| Weighted average common shares  outstanding                                                                                         |       | 8,533                         |       | 6,714 |   |
| Net effect of the assumed  exercise of stock options based on the treasury stock method using average  market prices for the period |       | 134                           |       | 220 |   |
| Total weighted average common shares  and common stock equivalents outstanding                                                      |       | 8,667                         |       | 6,934 |   |
|                                                                                                                                |       |                          |       |   |   |
| Net income                                                                                                                          |       | $                             | 4,463      |   | $ | 3,444 |   |
|                                                                                                                                |       |                          |       |   |   |
| Diluted earnings per share                                                                                                          |       | $                             | 0.52       |   | $ | 0.50 |   |

 

8

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**NOTE 4.          RECENTACCOUNTING STANDARDS**

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation of VariableInterest Entities, an interpretation of ARB No. 51”, and on December 24, 2003,the FASB issued FASB Interpretation No. 46 (Revised December 2003),“Consolidation of Variable Interest Entities” which replaced FIN 46. Theinterpretation addresses consolidation by business enterprises of variableinterest entities.  A variable interestentity is defined as an entity subject to consolidation according to theprovisions of the interpretation.  Therevised interpretation provided for special effective dates for entities thathad fully or partially applied the original interpretation as of December 24,2003. Otherwise, application of the interpretation is required in financialstatements of public entities that have interests in special-purpose entities,or SPEs, for periods ending after December 15, 2003. Application by publicentities, other than small business issuers, for all other types of variableinterest entities (i.e., non-SPEs) is required in financial statements forperiods ending after March 15, 2004. The Company early adopted the reportingrequirements of FIN 46R as of December 31, 2003.  The trust preferred securities weredeconsolidated as of December 31, 2003 and reported as other liabilities on theconsolidated balance sheet. The interpretations have not had a material effecton the Company’s financial condition or results of operations.

 

 

**NOTE 5.          OTHERDEVELOPMENTS**

 

OnFebruary 11, 2004, the Company signed a definitive agreement to acquire LumpkinCounty Bank.  The terms of the agreementcall for the exchange of 1.025 shares of GB&T Bancshares, Inc. stock foreach of the outstanding shares of Lumpkin County Bank.  The merger is subject to approval by theshareholders of Lumpkin County Bank at a special meeting to be held August 18,2004.  The transaction is expected toclose in the third quarter of 2004.

 

 

**NOTE 6.          SUBSEQUENTEVENTS**

 

OnAugust 3, 2004, the Company completed the merger of Southern Heritage Bancorp,Inc. the parent company of Southern Heritage Bank in Flowery Branch, HallCounty, Georgia.  The terms of theagreement call for the exchange of 1.32875 shares of GB&T Bancshares, Inc.stock for each of the outstanding shares of Southern Heritage Bancorp, Inc. orwithin limits, that a portion of the acquisition price be paid in cash, at theoption of Southern Heritage Bancorp, Inc. shareholders.   The acquisition was accounted for as apurchase.

 

OnJuly 22, 2004, the Company formed a second wholly-owned grantor trust to issuecumulative trust preferred securities in a private placement offering.  The grantor trust has invested the proceedsof the trust preferred securities in subordinated debentures of the Company.  The aggregate principal amount of trustpreferred certificates outstanding is $10,310,000.  The aggregate principal amount of debenturesoutstanding is $10,310,000.

 

9

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

 

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

 

Thefollowing is management’s discussion and analysis of certain significantfactors which have affected our financial position and operating resultsincluding our wholly-owned subsidiaries, Gainesville Bank & Trust, UnitedBank & Trust, Community Trust Bank (“CTB”), HomeTown Bank of Villa Rica(“HTB”), First National Bank of the South (“FNB”) and Community Loan Companyduring the periods included in the accompanying consolidated financialstatements.  This discussion should beread in conjunction with the accompanying consolidated financial statements andthe notes thereto.

 

 

**Cautionary Notice Regarding Forward-LookingStatements**

 

Someof the statements in this Report, including, without limitation, matters discussedunder the caption “Management’s Discussion and Analysis of Financial Conditionand Results of Operation,” of GB&T Bancshares, Inc. are “forward-lookingstatements” within the meaning of the federal securities laws.  Forward-looking statements include statementsabout the competitiveness of the banking industry, potential regulatoryobligations, our entrance and expansion into other markets, integration ofrecently acquired banks, pending or proposed acquisitions, our other businessstrategies, our expectations with respect to our allowance for loan losses andimpaired loans, anticipated capital expenditures for our operations center, andother statements that are not historical facts. When we use words like “anticipate”, “believe”, “intend”, “expect”,“estimate”, “could”, “should”, “will”, and similar expressions, you shouldconsider them as identifying forward-looking statements, although we may useother phrasing.  These forward-lookingstatements involve risks and uncertainties and are based on our beliefs andassumptions, and on the information available to us at the time that thesedisclosures were prepared.  Factors thatmay cause actual results to differ materially from those expressed or impliedby such forward-looking statements include, among others, the followingpossibilities: (1) competitive pressures among depository and other financialinstitutions may increase significantly; (2) changes in the interest rateenvironment may reduce margins; (3) general economic conditions may be lessfavorable than expected, resulting in, among other things, a deterioration incredit quality and/or a reduction in demand for credit; (4) legislative orregulatory changes, including changes in accounting standards, may adverselyaffect the businesses in which we are engaged; (5) costs or difficultiesrelated to the integration of our acquired businesses after consummation of thepending merger may be greater than expected; (6) deposit attrition, customerloss or revenue loss following acquisitions may be greater than expected; (7)competitors may have greater financial resources and develop products thatenable such competitors to compete more successfully than us; and (8) adversechanges may occur in the equity markets.

 

Manyof such factors are beyond our ability to control or predict, and readers arecautioned not to put undue reliance on such forward-looking statements.  We disclaim any obligation to update orrevise any forward-looking statements contained in this Report, whether as aresult of new information, future events or otherwise.

 

 

**CriticalAccounting Estimates**

 

Thepreparation of financial statements and related documents in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reported period. Actual results could differ from those estimates.  We believe that our determination of theallowance for loan losses affect our most significant judgments and estimatesused in the preparation of our consolidated financial statements.  Estimates and assumptions are reviewed periodicallyand the effects of revisions are reflected in the consolidated financialstatements in the period they are determined to be necessary.

 

10

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Theallowance for loan losses is an amount that management believes will beadequate to absorb estimated losses in the loan portfolio. The calculation isan estimate of the amount of loss in the loan portfolios of the affiliates inthe company.  This calculation is monitoredconstantly and updated when applicable. The Company uses an 8 point rating system for its loans. Ratings of 1 to4 are considered “pass ratings”, 5 is special mention, 6 is substandard, 7 isdoubtful, and 8 is loss. The originating officer rates all loans on thissystem. This rating is adjusted from time to time by the officer to accuratelyreflect the loan’s current status. These ratings are reviewed regularly by theLoan Committee, an outside independent loan review firm, our accountants, andby the applicable regulator for accuracy.

 

 Pass loans are separated into homogeneouspools. Currently, these pools consist of real estate, commercial, consumer andcredit card loans. Management assigns loss percentages to these categories ofhomogeneous pools of loans based on the greater of historic loss data in eachcategory or the minimum risk percentage for this category. Currently,management is developing the last eight quarters moving average net losses forthe historic loss percentage in each category. This number is reviewed and adjusted periodically, by pool, in light ofcurrent trends in past dues, changes in lending policies, underwritingstandards, economic conditions, and other factors that may affect thisnumber.  In addition to the homogeneouspools, management has specified certain industry risks and applied losspercentages to the specified industry risk categories.  Recently, because of low losses in mostcategories, management has assigned minimum percentages to each category.

 

Forloans rated 4, (pass/watch) a loss percentage of 1% is used.  For loans rated 5, a loss percentage of 5% isused.  All significant loans rated 6 and7 are individually analyzed and a specific reserve is assigned based onexposure or industry standards whichever is greater. These loans, theirreserves, and action plans to resolve their criticisms are reviewed monthly bythe Loan Committee. All other loans rated 6 and 7 are assigned loss percentagesof 15% and 50% respectively.   All loansrated 8 are assigned a specific reserve of 100%.

 

Theallowance for loan losses is evaluated on a regular basis by management and isbased upon management’s periodic review of the collectibility of the loans inlight of historical experience, the nature and volume of the loan portfolio,adverse situations that may affect the borrower’s ability to repay, estimatedvalue of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective asit requires estimates that are susceptible to significant revision as moreinformation becomes available.  Inaddition, regulatory agencies, as an integral part of their examinationprocess, periodically review the Company’s allowance for loan losses, and mayrequire the Company to make additions to the allowance based on their judgmentabout information available to them at the time of their examinations.

 

 

**Summary**

 

Netincome for the three months ended June 30, 2004 was $2.2 million, up 28.9% fromthe same period a year ago.  Diluted netincome per share was $0.26 for the three months ended June 30, 2004, up 4.0%from the same period a year ago.  Returnon average assets was 0.91% and return on average equity was 9.05% for thethree months ended June 30, 2004.  Thiscompares to a return on average assets of 0.92% and a return on average equityof 11.08% for the same period a year ago.

 

Theresults of operations for the three and six months ended June 30, 2004,includes FNB, which became part of the Company effective August 29, 2003.  The merger was accounted for as a purchase;therefore, results for FNB have been included since September 1, 2003 and arenot included in the three and six-month periods ended June 30, 2003.

 

11

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**BalanceSheets**

 

Ourtotal assets increased $56.2 million or 5.96% for the period ended June 30,2004 compared to December 31, 2003.  Theincrease consists primarily of an increase in loans of $35.5 million or 5.0%,an increase in federal funds sold of $3.1 million, and an increase insecurities of $13.5 million.

 

Totaldeposits have increased $49.7 million, or 6.83% for the period ended June 30,2004 compared to December 31, 2003. Noninterest-bearing deposits increased $3.6 million and interest-bearingdeposits increased $46.1 million during the period.   Deposit growth outpaced loan growthresulting in a loan to deposit ratio of 95.77% at June 30, 2004 compared to97.44% at December 31, 2003.

 

**AssetQuality**

 

Theallowance for loan losses at June 30, 2004 was $8,987,000 or 1.21% to totalloans compared to 1.33% at June 30, 2003. The analysis below indicates a decrease of $53,000 in net charge-offsfor the six months ended June 30, 2004 as compared to the same period in 2003which is directly attributable to the improvement at HTB which contributed$254,000 to the net charge-off balance at June 30, 2003.  Based on our evaluation, management believesthe allowance is adequate to absorb any potential loan losses at June 30,2004.  The allowance for loan lossesacquired in prior periods related to acquisitions has been sufficient to absorbestimated uncollectible nonperforming loans acquired in addition to any netwrite-offs related to nonperforming loans acquired. During 2003, we increasedthe allowance for loan losses for a loan that subsequent to the consummation ofthe acquisition of HTB in 2002 was classified in connection with a regulatoryexamination.  The loan was performing atthe time of the acquisition and continues to be a performing loan.  The allowance for loan losses is evaluatedmonthly and adjusted to reflect the risk in the portfolio.

 

Thefollowing table summarizes the allowance for loan losses for the six-monthperiod ended June 30, 2004 and 2003.

 
| ** **                                                        | ** ** | **2004**                   | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                        | ** ** | **(Dollars in thousands)** | ** ** |
| **Average amount  of loans outstanding**                          |       | $                          | 729,077    |     | $          | 559,991 |   |
| ** **                                                        |       |                       |       |     |       |
| **Allowance  for loan losses balance, beginning of  period** |       | $                          | 8,726      |     | $          | 7,538 |   |
| ** **                                                        |       |                       |       |     |       |
| **Less  charge-offs**                                             |       |                       |       |     |       |
| Commercial loans                                                  |       | (112                       | )          | —   |       |
| Real estate loans                                                 |       | (118                       | )          | —   |       |
| Consumer  loans                                              |       | (324                       | )          | (567     | )          |
| Total charge-offs                                                 |       | (554                       | )          | (567     | )          |
|                                                              |       |                       |       |     |       |
| **Plus  recoveries**                                              |       |                       |       |     |       |
| Commercial loans                                                  |       | 4                          |       | —   |       |
| Real estate loans                                                 |       | 10                         |       | 2        |       |
| Consumer loans                                                    |       | 192                        |       | 164      |       |
| Total recoveries                                                  |       | 206                        |       | 166      |       |
| **Net  charge-offs**                                              |       | (348                       | )          | (401     | )          |
|                                                              |       |                       |       |     |       |
| **Plus provision  for loan losses**                               |       | 609                        |       | 390      |       |
| ** **                                                        |       |                       |       |     |       |
| **Allowance  for loan losses balance, end of period**        |       | $                          | 8,987      |     | $          | 7,527 |   |
| ** **                                                        |       |                       |       |     |       |
| **Net  charge-offs to average loans (annualized)**                |       | 0.096                      | %          | 0.144    | %          |

 

12

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Theprovision for loan losses increased $149,000 or 84.66% for the three monthsended June 30, 2004 compared to the same period in 2003. Exclusive of FNB, theprovision for loan losses increased $109,000 or 61.93%.  The provision for loan losses increased$219,000 or 56.15% for the six months ended June 30, 2004 compared to the sameperiod in 2003.   Exclusive of FNB, theprovision for loan losses increased $119,000 or 30.51% for the six-monthperiod.   The increase can also beattributed to internal growth in the loan portfolio.

 

Thefollowing table is a summary of nonaccrual, past due and restructured debt. Thenumbers indicate a decrease of $821,000 in nonaccrual loans which was primarilyconcentrated at one affiliate, HTB.  Thelevel of nonaccrual loans has continued to decrease at HTB since itsacquisition in November 2002, which is consistent with the previous netcharge-off discussion.  A majority of theconsumer nonaccrual loan balance is related to Community Loan Company whichrepresents approximately 87.3%, or $419,000 of the balance.  The table presents an increase of $499,000 inpast due loans over 90 days.  Thisincrease represents two loans to the same customer totaling $552,000 located atCTB, which are both in the process of foreclosure at June 30, 2004.  As of June 30, 2004, we do not expect anysignificant losses relating to these two loans due to the value of theunderlying collateral.  Community LoanCompany accounts for approximately 48.4%, or $530,000 of the past due loanbalance at June 30, 2004.  Due to thenature of the consumer finance business, we believe that the level ofnonaccrual and past due loans over 90 days for Community Loan Company is normaland will consistently remain higher than those seen in the bankingindustry.  Community Loan Company’sreserve for loan loss is also higher to cover these higher levels of nonaccrualand past due loans.  The reserve for loanloss for Community Loan Company was 9.37% for the period ended June 30, 2004and 9.92% for the period ended June 30, 2003. There is minimal or no loss anticipated on the remaining real estateloans in nonaccrual and past due loans due to the value of the underlyingcollateral.

 
| ** **        | ** ** | **June 30, 2004**          | ** ** |
|-------------------|------------|----------------------------|------------|
| ** **        | ** ** | ** **                 | ** ** | **Past Due** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Nonaccrual**             | ** ** | **90 Days** | ** ** | **Restructured** | ** ** |
| ** **        | ** ** | **Loans**                  | ** ** | **Still Accruing** | ** ** | **Debt** | ** ** |
| ** **        | ** ** | **(Dollars in thousands)** | ** ** |
|              |       |                       |       |   |   |   |   |
| Real estate loans |       | $                          | 1,845      |   | $ | 552 |   | $ | — |   |
| Commercial loans  |       | 186                        |       | — |   | — |   |
| Consumer loans    |       | 480                        |       | 544 |   | — |   |
| Total             |       | $                          | 2,511      |   | $ | 1,096 |   | $ | — |   |
|              |       |                       |       |   |   |   |   |
|              |       | **June 30, 2003**          |       |
| ** **        | ** ** | ** **                 | ** ** | **Past Due** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Nonaccrual**             | ** ** | **90 Days** | ** ** | **Restructured** | ** ** |
| ** **        | ** ** | **Loans**                  | ** ** | **Still Accruing** | ** ** | **Debt** | ** ** |
| ** **        | ** ** | **(Dollars in thousands)** | ** ** |
|              |       |                       |       |   |   |   |   |
| Real estate loans |       | $                          | 2,446      |   | $ | 160 |   | $ | — |   |
| Commercial loans  |       | 284                        |       | — |   | — |   |
| Consumer loans    |       | 602                        |       | 437 |   | — |   |
| Total             |       | $                          | 3,332      |   | $ | 597 |   | $ | — |   |

 

13

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

 

Loansclassified for regulatory purposes as loss, doubtful, substandard, or specialmention that have not been included in the table above do not represent orresult from trends or uncertainties which management reasonably expects willmaterially impact future operating results, liquidity or capitalresources.  These classified loans do notrepresent material credits about which management is aware of any informationwhich causes management to have serious doubts as to the ability of suchborrowers to comply with their loan repayment terms, except as noted above.

 

 

**Liquidityand Capital Resources**

 

Liquiditymanagement involves the matching of the cash flow requirements of customers whomay be either depositors desiring to withdraw funds or borrowers needingassurance that sufficient funds will be available to meet their credit needsand our ability to meet those needs.  Weseek to meet liquidity requirements primarily through management of short-terminvestments, monthly amortizing loans, maturing single payment loans, andmaturities of securities and prepayments. Also we maintain relationships with correspondent banks which couldprovide funds on short notice.  As ofJune 30, 2004, we had borrowed under Federal funds purchase lines andsecurities sold under agreement to repurchase, $17.3 million compared to $17.3million at December 31, 2003.

 

Ourliquidity and capital resources are monitored on a periodic basis bymanagement, state and federal regulatory authorities.  Management reviews liquidity on a periodicbasis to monitor and adjust liquidity as necessary.  Management has the ability to adjustliquidity by selling securities available for sale, selling participations inloans we generate and accessing available funds through various borrowingarrangements.  At June 30, 2004, we hadavailable borrowing capacity totaling approximately $135.5 million throughvarious borrowing arrangements and available lines of credit.  Our short-term investments and availableborrowing arrangements are adequate to cover any reasonably anticipatedimmediate need for funds.

 

Ourliquidity ratio was 16.20% at June 30, 2004, above our policy minimum ratio of15%.  Liquidity is measured by the ratioof net cash, Federal funds sold and securities to net deposits and short-termliabilities. In the event the banks need to generate additional liquidity,funding plans would be implemented as outlined in the liquidity policy of thebanks. The subsidiary banks have lines of credit available to meet anyunforeseen liquidity needs.  Also, thebanks have relationships with the Federal Home Loan Bank of Atlanta, whichprovides funding for loan growth on an as needed basis.

 

Wepurchased property in May 2003 in Gainesville, Georgia for the purpose oflocating an operations center for the Company’s operations and data processing.The approximate cost of the property was $1,168,000. We anticipate theconstruction of the operations center to be completed in the fourth quarter of2004 with an approximate completed cost of $2,900,000.

 

14

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Asof June 30, 2004, the Company and the banks were considered to bewell-capitalized as defined in the Federal Deposit Insurance CorporationImprovement Act and based on regulatory minimum capital requirements.  The Company and the banks’ capital ratios arepresented in the following table.

 
| ** **                               | ** ** | ** **  | ** ** | **FOR CAPITAL** | ** ** | **TO BE**       | ** ** |
|------------------------------------------|------------|-------------|------------|-----------------|------------|-----------------|------------|
| ** **                               | ** ** | **CAPITAL** | ** ** | **ADEQUACY**    | ** ** | **WELL**        | ** ** |
| ** **                               | ** ** | **RATIOS**  | ** ** | **PURPOSES**    | ** ** | **CAPITALIZED** | ** ** |
|                                     |       |        |       |            |       |            |       |
| As of June 30, 2004                      |       |        |       |            |       |            |       |
| Total Capital to Risk Weighted  Assets:  |       |        |       |            |       |            |       |
| Consolidated                             |       | 11.66       | %          | 8               | %          | N\A             |       |
| Gainesville Bank & Trust             |       | 10.42       | %          | 8               | %          | 10              | %          |
| United Bank & Trust                  |       | 12.80       | %          | 8               | %          | 10              | %          |
| Community Trust Bank                     |       | 10.65       | %          | 8               | %          | 10              | %          |
| HomeTown Bank of Villa Rica              |       | 10.18       | %          | 8               | %          | 10              | %          |
| First National Bank of the  South        |       | 10.62       | %          | 8               | %          | 10              | %          |
| Tier I Capital to Risk Weighted  Assets: |       |        |       |            |       |            |       |
| Consolidated                             |       | 10.52       | %          | 4               | %          | N\A             |       |
| Gainesville Bank & Trust             |       | 9.27        | %          | 4               | %          | 6               | %          |
| United Bank & Trust                  |       | 11.67       | %          | 4               | %          | 6               | %          |
| Community Trust Bank                     |       | 9.64        | %          | 4               | %          | 6               | %          |
| HomeTown Bank of Villa Rica              |       | 8.93        | %          | 4               | %          | 6               | %          |
| First National Bank of the  South        |       | 9.72        | %          | 4               | %          | 6               | %          |
| Tier I Capital to Average  Assets:       |       |        |       |            |       |            |       |
| Consolidated                             |       | 8.67        | %          | 4               | %          | N\A             |       |
| Gainesville Bank & Trust             |       | 7.03        | %          | 4               | %          | 5               | %          |
| United Bank & Trust                  |       | 8.16        | %          | 4               | %          | 5               | %          |
| Community Trust Bank                     |       | 8.46        | %          | 4               | %          | 5               | %          |
| HomeTown Bank of Villa Rica              |       | 7.88        | %          | 4               | %          | 5               | %          |
| First National Bank of the  South        |       | 8.14        | %          | 4               | %          | 5               | %          |

 

 

**NetInterest Income and Earning Assets**

 

Ourprofitability is determined by our ability to effectively manage interestincome and expense, to minimize loan and security losses, to generatenoninterest income, and to control operating expenses.  Since interest rates are determined by marketforces and economic conditions beyond our control, our ability to generate netinterest income is dependent upon our ability to obtain an adequate netinterest spread between the rate paid on interest-bearing liabilities and therate earned on interest-earning assets. The net interest margin was 4.10% for the six months ended June 30,2004, compared to 4.17% for the same period in 2003, a decrease of 7 basispoints.  This decrease resulted from a 51basis point decrease in the yield on earning assets and a 44 basis pointdecrease in the effective cost of funds. The decreased yield on earning assets was primarily due to lower yieldson loans and the decreased effective cost of funds was due to lower averagerates paid on interest-bearing funding. The Company continues to experience growth in the portfolios whilemaintaining its competitive pricing during this low interest rate environment.

 

Netinterest income increased $1,769,000 or 24.10% for the three months ended June30, 2004 compared to the same period in 2003. The net increase consists of an increase in interest income of$2,036,000 or 18.29% less an increase in interest expense of $267,000 or 7.04%for the three-month period.  Thisincrease consists of a volume variance of $2,150,000 and a rate variance of($381,000).  Net interest incomeincreased $3,658,000 or 25.51% for the six months ended June 30, 2004 comparedto the same period in 2003.  The netincrease consists of an increase in interest income of $3,922,000 or 17.76%less an increase in interest expense of $264,000 or 3.41% for the six-monthperiod.  This increase consists of avolume variance of $3,932,000 and a rate variance of ($274,000).  These variances include the impact of theacquisition of FNB for the three and six-month periods ended June 30, 2004.

 

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**OtherIncome**

 

Otherincome for the three months ended June 30, 2004, increased by $550,000 or22.99% compared to the same period in 2003. Service charges increased by $305,000 and gain on sale of securitiesincreased by $297,000. Other income for the six months ended June 30, 2004,increased by $1,097,000 compared to the same period in 2003.  Service charges increased by $607,000 andgain on sale of securities increased by $532,000. The increases in servicecharges are directly related to the increase in deposit accounts and theinclusion of FNB for the three and six-month periods ended June 30, 2004.   Exclusive of FNB, other income increased by$102,000 or 4.26% and $211,000 or 4.45% for the three and six month periodsending June 30, 2004 compared to the same periods in 2003.

 

**OtherExpense**

 

Otherexpenses increased by approximately $1,184,000 or 16.24% for the three monthsended June 30, 2004 compared to the same period in 2003.  The increase is due primarily to an increasein salaries and employee benefits of $769,000. Net occupancy and equipment expenses increased $174,000 and otheroperating expenses increased $241,000. Other expenses increased by $2,731,000 for the six months ended June 30,2004.  Net occupancy and equipmentexpenses increased by $392,000 and other operating expenses increased by$761,000.  Salaries and employee benefitsincreased by $1,578,000.  The increase insalaries and employee benefits is partially due to FNB, which accounted for$1,414,000 of the six-month increase and the addition of 58 employees.  Exclusive of FNB, other operating expensesdecreased $184,000 or 4.89% and other expense increased $35,000 or 0.25% forthe six-month period ending June 30, 2004 compared to the same period in 2003.

 

**IncomeTax Expense**

 

Incometax expense increased by $486,000 for the three-month period ended June 30,2004, compared to the same period last year. The effective tax rate for thethree-month period ended June 30, 2004 was 31.33%, compared to 23.52% for thesame period in 2003.  Income tax expenseincreased by $786,000 for the six-month period ended June 30, 2004, compared tothe same period last year. The effective tax rate for the six-month periodended June 30, 2004 was 30.32%, compared to 25.13% for the same period in2003.   In 2003, the effective tax ratewas impacted by tax credits.

 

**NetIncome**

 

Netincome increased by $500,000 or 28.85% for the three months ended June 30,2004, compared to the same period in 2003.  Net income increased by $1,019,000 or 29.59% for the six months endedJune 30, 2004 compared to the same period in 2003.  These increases are directly related to theincrease in net interest income which is partially offset by the increases inother expenses as discussed above.

 

Weare not aware of any other known trends, events or uncertainties, other thanthe effect of events as described above, that will have or that are reasonablylikely to have a material effect on its liquidity, capital resources oroperations.  We are not aware of anycurrent recommendations by the regulatory authorities, which, if they wereimplemented, would have such an effect, except as noted above.

 

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**OffBalance Sheet Arrangements**

 

Ourfinancial statements do not reflect various commitments and contingentliabilities that arise in the normal course of business.  These off-balance sheet financial instrumentsinclude commitments to extend credit, standby letters of credit and credit cardcommitments.  Such financial instrumentsare included in the financial statements when funds are distributed or theinstruments become payable.  Our exposureto credit loss in the event of nonperformance by the other party to thefinancial instrument for commitments to extend credit, standby letters ofcredit and credit card commitments is represented by the contractual amount ofthose instruments.  We use the samecredit policies in making commitments as we do for on-balance sheetinstruments.  Although these amounts donot necessarily represent future cash requirements, a summary of ourcommitments as of June 30, 2004 and December 31, 2003 are as follows:
| ** **                          | ** ** | **June 30, 2004**          | ** ** | **December 31, 2003** | ** ** |
|-------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
|                                |       |                       |       |                  |       |
| Commitments to extend credit        |       | $                          | 171,967    |                  | $          | 138,310 |   |
| Financial standby letters of credit |       | 3,384                      |       | 3,718                 |       |
| Other standby letters of credit     |       | 926                        |       | 1,349                 |       |
| Credit card commitments             |       | 5,681                      |       | 5,302                 |       |
| Total                               |       | $                          | 181,958    |                  | $          | 148,679 |   |

 

 

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

 

 

Weare exposed only to U.S. dollar interest rate changes and accordingly, wemanage exposure by considering the possible changes in the net interest margin.We do not have any trading instruments nor do we classify any portion of theinvestment portfolio as held for trading. We do not engage in any hedging activities or enter into any derivativeinstruments with a higher degree of risk than mortgage-backed securities thatare commonly pass through securities. Finally, we have no exposure to foreigncurrency exchange rate risk, commodity price risk, and other market risks.Interest rates play a major part in the net interest income of a financialinstitution. The sensitivity to rate changes is known as “interest rate risk.”The repricing of interest earning assets and interest-bearing liabilities caninfluence the changes in net interest income. As part of our asset/liabilitymanagement program, the timing of repriced assets and liabilities is referredto as Gap management. It is our policy to maintain a Gap ratio in the one-yeartime horizon of .80 to 1.20.

 

GAPmanagement alone is not enough to properly manage interest rate sensitivity,because interest rates do not respond at the same speed or at the same level tomarket rate changes. For example, savings and money market rates are morestable than loans tied to a “prime” rate and thus respond with less volatilityto a market rate change.

 

Weuse a simulation model to monitor changes in net interest income due to changesin market rates. The model of rising, falling and stable interest ratescenarios allows management to monitor and adjust interest rate sensitivity tominimize the impact of market rate swings. The analysis of impact on netinterest margins as well as market value of equity over a twelve-month periodis subjected to a 200 basis point increase and decrease in rate. The Decembermodel reflects an increase of 2% in net interest income and a 14% decrease inmarket value of equity for a 200 basis point increase in rates. The same modelshows a 1% decrease in net interest income and a 16% increase in market valueof equity for a 200 basis point decrease in rates. Our policy is to allow nomore than +/- 8% change in net interest income and no more than +/- 25% changein market value of equity for these scenarios. Therefore, we are within ourpolicy guidelines and believe we are protected from any significant impact dueto market rate changes.

 

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

 

Asof the end of the period covered by this report, an evaluation was carried outunder the supervision and with the participation of the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of its disclosure controls and procedures. Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the design and operation of these disclosure controls and procedures wereeffective as of the end of the period covered by this report in alerting themon a timely basis to material information relating to the Company required tobe included in the Company’s reports filed or submitted under the SecuritiesExchange Act of 1934. In addition, no change in our internal control overfinancial reporting  occurred during thesecond quarter ended June 30, 2004 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

**PART II****- OTHER INFORMATION**

 

 

# **Item 4.    SUBMISSION OFMATTERS TO A VOTE OF SECURITIES HOLDERS**

 

Theannual meeting of the Stockholders of GB&T Bancshares, Inc. was held on May17,2004.  The meeting hadbeen called pursuant to written notice for (1) the purpose of considering andvoting upon the election of eleven directors to constitute the Board ofDirectors to serve until the next annual meeting and until their successors areelected and qualified;  (2) to amend theCompany’s Stock Option Plan of 1997 to increase the number of shares of commonstock that are available for the grant of awards under the Plan from 700,000 to1,200,000 shares; and (3) to consider such other business as might properlycome before the Annual Meeting.  The resultsof the voting were as follows:

 

| **(1) Election of Directors** | ** ** | **FOR**   | ** ** | **AGAINST** | ** ** | **WITHHELD** | ** ** |
|-------------------------------|------------|-----------|------------|-------------|------------|--------------|------------|
|                          |       |      |       |        |       |         |       |
| Larry B. Boggs                |       | 4,632,006 |       | 0           |       | 51,418       |       |
| Dr. John W. Darden            |       | 4,670,685 |       | 0           |       | 12,738       |       |
| W.A. Foster, III              |       | 4,670,542 |       | 0           |       | 12,881       |       |
| Bennie E. Hewett              |       | 4,670,698 |       | 0           |       | 12,725       |       |
| Richard A. Hunt               |       | 4,654,117 |       | 0           |       | 29,307       |       |
| James L. Lester               |       | 4,670,698 |       | 0           |       | 12,725       |       |
| Dr. T. Alan Maxwell           |       | 4,670,698 |       | 0           |       | 12,725       |       |
| James H. Moore                |       | 4,670,698 |       | 0           |       | 12,725       |       |
| Samuel L. Oliver              |       | 4,569,439 |       | 0           |       | 113,984      |       |
| Alan A. Wayne                 |       | 4,654,975 |       | 0           |       | 28,448       |       |
| Philip A. Wilheit             |       | 4,670,698 |       | 0           |       | 12,725       |       |

 

| ** **                                                 | ** ** | **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **BROKER   NON-VOTE** | ** ** |
|------------------------------------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|-----------------------|------------|
|                                                       |       |      |       |        |       |        |       |                  |       |
| (2) To increase the number  of shares of common stock |       | 2,868,334 |       | 435,439     |       | 30,462      |       | 1,349,189             |       |

 

 

**Item 6.    EXHIBITS AND REPORTS ON FORM 8-K**

 

 

(a)     Exhibits

31.1            Rule13a-14(a) Certification of Principal Executive Officer.

31.2            Rule13a-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.

 

 

(b)         Reports on Form 8-K

 

We furnished a report on Form 8-K on April 23, 2004 to report earningsfor the quarter ending March 31, 2004.  We also filed a report on Form 8-K on May 19, 2004 to report thedeclaration of a five-for-four stock split in the form of a stock dividend.

 

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| GB&T  BANCSHARES, INC. |
|----------------------------|
|                       |
|                       |   |   |
| DATE:                      | 8/9/2004 |   | BY: | /s/  Richard A. Hunt |   |   |
|                       |   |   |   | Richard  A. Hunt |   |
|                       |   |   |   | President  and Chief Executive Officer |   |
|                       |   |   |   |   |   |
|                       |   |   |   |   |   |
| DATE:                      | 8/9/2004 |   | BY: | /s/  Gregory L. Hamby |   |   |
|                       |   |   |   | Gregory  L. Hamby |   |
|                       |   |   |   | Executive  Vice President & |   |
|                       |   |   | Chief  Financial Officer |   |
|                            |  |  |  |  |  |  |  |

 

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