**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM10-Q**

 
| **Mark One** |                                                                                                                                                           |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                           |
| **x**        | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                   |
|         |                                                                                                                                                           |
|         | **  For the quarterly period ended  September 30, 2007**                                                                                             |
|         |                                                                                                                                                           |
| **o**        | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                            |
|         |                                                                                                                                                           |
|         | **  For the transition period from                    to** |
|              |                                                                                                                                                                |  |

 

**Commission File Number:  000-24203**

** **

**GB&T Bancshares, Inc.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

**Gainesville, Georgia  30501**

(Address of principalexecutive offices)

 

**(770) 532-1212**

(Registrant’s telephonenumber, including area code)

 

**N/A**

(Former name, formeraddress and former fiscal year, if changed since last report)

 

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

 

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

 

Largeaccelerated filer o                  Acceleratedfiler x                    Non-acceleratedfiler o

 

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

 

**APPLICABLE ONLY TO CORPORATEISSUERS**

 

Statethe number of shares outstanding of each of the issuer’s classes of capitalstock, as of November 1, 2007: 14,230,796 shares; no par value.

 

 

----

 

**GB&T BANCSHARES, INC.**

**TABLE OF CONTENTS**

 
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                                 |       |
|--------------|----------------------------------------------------------------------------------------------------------------------------|------------|
|         |                                                                                                                       |       |
|         | **Item 1. Financial Statements**                                                                                           |       |
|         |                                                                                                                       |       |
|         | **Consolidated Balance Sheets –  September 30, 2007 (Unaudited) and December 31, 2006**                               |       |
|         |                                                                                                                       |       |
|         | **Consolidated Statements of  Income (Unaudited)-  Three and nine months ended September 30, 2007 and 2006**               |       |
|         |                                                                                                                       |       |
|         | **Consolidated  Statements of Comprehensive Income (Unaudited)-  Three and nine months ended September 30, 2007 and 2006** |       |
|         |                                                                                                                       |       |
|         | **Consolidated Statements of  Stockholders’ Equity (Unaudited)-  Nine months ended September 30, 2007**               |       |
|         |                                                                                                                       |       |
|         | **Consolidated Statements of  Cash Flows (Unaudited) -  Nine months ended September 30, 2007 and 2006**                    |       |
|         |                                                                                                                       |       |
| ** **   | **Notes to  Consolidated Financial Statements (Unaudited)**                                                                | ** ** |
|         |                                                                                                                       |       |
|         | **Item 2.  Management’s Discussion and Analysis of  Financial Condition and Results of Operations**                   |       |
|         |                                                                                                                       |       |
|         | **Item 3.  Quantitative and Qualitative Disclosures About Market Risk**                                                    |       |
|         |                                                                                                                       |       |
|         | **Item 4. Controls  and Procedures**                                                                                       |       |
|         |                                                                                                                       |       |
| **PART II.** | **OTHER INFORMATION**                                                                                                      |       |
|         |                                                                                                                       |       |
|         | **Item 1. Legal  Proceedings**                                                                                             |       |
|         |                                                                                                                       |       |
|         | **Item 1A. Risk Factors**                                                                                                  |       |
|         |                                                                                                                       |       |
|         | **Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds**                                                   |       |
|         |                                                                                                                       |       |
|         | **Item 3.  Defaults Upon Senior Securities**                                                                               |       |
|         |                                                                                                                       |       |
|         | **Item 4.  Submission of Matters to a Vote of Security Holders**                                                           |       |
|         |                                                                                                                       |       |
|         | **Item  5. Other Information**                                                                                             |       |
|         |                                                                                                                       |       |
|         | **Item 6. Exhibits**                                                                                                       |       |
|         |                                                                                                                       |       |
|         | **Signatures**                                                                                                             |       |
| ** **   | ** **                                                                                                                 | ** ** |
| ** **   | **Certifications**                                                                                                         | ** ** |
|              |                                                                                                                            |            |  |

 

2

----

 

**PART I - FINANCIAL INFORMATION**

**ITEM 1 - FINANCIAL STATEMENTS**

 

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

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                      | ** ** | **September 30,**               | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **2007**                             | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                      | ** ** | **(Unaudited)**                      | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                      | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                                                                                                                      |       |                                 |       |                  |       |
| ** **                                                                                                                                                                      |       |                                 |       |                  |       |
| Cash and due  from banks                                                                                                                                                        |       | $                                    | 22,864     |                  | $          | 25,876 |   |
| Interest-bearing  deposits in banks                                                                                                                                             |       | 11,391                               |       | 1,848                 |       |
| Federal funds  sold                                                                                                                                                             |       | 2,147                                |       | 1,445                 |       |
| Securities  available for sale, at fair value                                                                                                                                   |       | 213,564                              |       | 210,249               |       |
| Restricted  equity securities, at cost                                                                                                                                          |       | 10,294                               |       | 9,869                 |       |
|                                                                                                                                                                            |       |                                 |       |                  |       |
| Loans, net of  unearned income                                                                                                                                                  |       | 1,529,013                            |       | 1,497,701             |       |
| Less allowance  for loan losses                                                                                                                                                 |       | 32,346                               |       | 24,676                |       |
| Loans, net                                                                                                                                                                      |       | 1,496,667                            |       | 1,473,025             |       |
|                                                                                                                                                                            |       |                                 |       |                  |       |
| Premises and  equipment, net                                                                                                                                                    |       | 40,641                               |       | 41,776                |       |
| Goodwill                                                                                                                                                                        |       | 87,116                               |       | 87,116                |       |
| Intangible  assets                                                                                                                                                              |       | 4,968                                |       | 5,678                 |       |
| Other real  estate and repossessed assets                                                                                                                                       |       | 34,293                               |       | 4,673                 |       |
| Other assets                                                                                                                                                                    |       | 39,971                               |       | 38,821                |       |
|                                                                                                                                                                            |       |                                 |       |                  |       |
| **Total  assets**                                                                                                                                                               |       | $                                    | 1,963,916  |                  | $          | 1,900,376 |   |
|                                                                                                                                                                            |       |                                 |       |                  |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                  |       |                                 |       |                  |       |
| ** **                                                                                                                                                                      |       |                                 |       |                  |       |
| **Liabilities:**                                                                                                                                                                |       |                                 |       |                  |       |
| Deposits:                                                                                                                                                                       |       |                                 |       |                  |       |
| Noninterest-bearing                                                                                                                                                             |       | $                                    | 143,157    |                  | $          | 151,529 |   |
| Interest-bearing  demand and savings                                                                                                                                            |       | 454,586                              |       | 447,994               |       |
| Time deposits                                                                                                                                                                   |       | 930,357                              |       | 880,645               |       |
| Total deposits                                                                                                                                                                  |       | 1,528,100                            |       | 1,480,168             |       |
| Federal funds  purchased and securities sold under repurchase agreements                                                                                                        |       | 48,765                               |       | 41,061                |       |
| Federal Home  Loan Bank advances                                                                                                                                                |       | 107,236                              |       | 96,498                |       |
| Other borrowings                                                                                                                                                                |       | 854                                  |       | 939                   |       |
| Other  liabilities                                                                                                                                                              |       | 18,172                               |       | 18,474                |       |
| Subordinated  debt                                                                                                                                                              |       | 29,898                               |       | 29,898                |       |
|                                                                                                                                                                            |       |                                 |       |                  |       |
| **Total  liabilities**                                                                                                                                                          |       | 1,733,025                            |       | 1,667,038             |       |
|                                                                                                                                                                            |       |                                 |       |                  |       |
| **Stockholders’  Equity:**                                                                                                                                                 |       |                                 |       |                  |       |
| ** **                                                                                                                                                                      |       |                                 |       |                  |       |
| Capital stock,  no par value; 20,000,000 shares authorized, 14,230,796 and 14,131,891 shares  issued and outstanding at September 30, 2007 and December 31, 2006,  respectively |       | 187,533                              |       | 186,539               |       |
| Retained  earnings                                                                                                                                                              |       | 44,694                               |       | 48,148                |       |
| Accumulated  other comprehensive loss                                                                                                                                           |       | (1,336                               | )          | (1,349                | )          |
|                                                                                                                                                                            |       |                                 |       |                  |       |
| **Total  stockholders’ equity**                                                                                                                                            |       | 230,891                              |       | 233,338               |       |
|                                                                                                                                                                            |       |                                 |       |                  |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                            |       | $                                    | 1,963,916  |                  | $          | 1,900,376 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

----

 

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

**Consolidated Statements of Income**

**(Unaudited)**

 
| ** **                                                               | ** ** | **Three months ended**                                      | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                               | ** ** | **September 30,**                                                | ** ** | **September 30,**          | ** ** |
| ** **                                                               | ** ** | **2007**                                                              | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                               | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Interest income:                                                         |       |                                                                  |       |                            |       |   |   |   |   |
| Loans, including  fees                                                   |       | $                                                                     | 31,666     |                            | $          | 31,504 |   | $ | 96,264 |   | $ | 84,565 |   |
| Taxable  securities                                                      |       | 2,348                                                                 |       | 2,168                           |       | 6,927 |   | 6,058 |   |
| Nontaxable  securities                                                   |       | 328                                                                   |       | 142                             |       | 899 |   | 392 |   |
| Federal funds  sold                                                      |       | 137                                                                   |       | 294                             |       | 352 |   | 490 |   |
| Interest-bearing  deposits in banks                                      |       | 105                                                                   |       | 39                              |       | 169 |   | 84 |   |
| Total interest  income                                                   |       | 34,584                                                                |       | 34,147                          |       | 104,611 |   | 91,589 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Interest  expense:                                                       |       |                                                                  |       |                            |       |   |   |   |   |
| Deposits                                                                 |       | 16,370                                                                |       | 13,769                          |       | 47,494 |   | 34,724 |   |
| Federal funds  purchased and securities sold under repurchase agreements |       | 466                                                                   |       | 287                             |       | 1,256 |   | 815 |   |
| Federal Home  Loan Bank advances                                         |       | 1,333                                                                 |       | 1,050                           |       | 3,755 |   | 3,002 |   |
| Other borrowings                                                         |       | 655                                                                   |       | 710                             |       | 1,944 |   | 1,944 |   |
| Total interest  expense                                                  |       | 18,824                                                                |       | 15,816                          |       | 54,449 |   | 40,485 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Net interest  income                                                     |       | 15,760                                                                |       | 18,331                          |       | 50,162 |   | 51,104 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Provision for  loan losses                                               |       | 14,056                                                                |       | 1,789                           |       | 15,881 |   | 4,269 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Net interest  income after provision for loan losses                     |       | 1,704                                                                 |       | 16,542                          |       | 34,281 |   | 46,835 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Other income:                                                            |       |                                                                  |       |                            |       |   |   |   |   |
| Service charges  on deposit accounts                                     |       | 2,010                                                                 |       | 1,588                           |       | 5,255 |   | 4,714 |   |
| Mortgage  origination fees                                               |       | 498                                                                   |       | 770                             |       | 1,748 |   | 1,911 |   |
| Insurance  commissions                                                   |       | 3                                                                     |       | 1                               |       | 7 |   | 8 |   |
| Other operating  income                                                  |       | 479                                                                   |       | 405                             |       | 1,513 |   | 1,205 |   |
| Total other  income                                                      |       | 2,990                                                                 |       | 2,764                           |       | 8,523 |   | 7,838 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Other expense:                                                           |       |                                                                  |       |                            |       |   |   |   |   |
| Salaries and  employee benefits                                          |       | 8,319                                                                 |       | 7,603                           |       | 24,719 |   | 22,244 |   |
| Occupancy and  equipment expenses, net                                   |       | 1,884                                                                 |       | 1,808                           |       | 5,637 |   | 5,147 |   |
| Other operating  expenses                                                |       | 5,264                                                                 |       | 3,449                           |       | 13,087 |   | 9,791 |   |
| Total other  expense                                                     |       | 15,467                                                                |       | 12,860                          |       | 43,443 |   | 37,182 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Income (loss)  before income taxes                                       |       | (10,773                                                               | )          | 6,446                           |       | (639 | ) | 17,491 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Income tax  expense (benefit)                                            |       | (4,475                                                                | )          | 2,231                           |       | (1,154 | ) | 6,045 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Net income  (loss)                                                       |       | $                                                                     | (6,298     | )                               | $          | 4,215 |   | $ | 515 |   | $ | 11,446 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Earnings per  share:                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Basic                                                                    |       | $                                                                     | (0.44      | )                               | $          | 0.30 |   | $ | 0.04 |   | $ | 0.85 |   |
| Diluted                                                                  |       | $                                                                     | (0.44      | )                               | $          | 0.30 |   | $ | 0.04 |   | $ | 0.83 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Weighted average  shares:                                                |       |                                                                  |       |                            |       |   |   |   |   |
| Basic                                                                    |       | 14,202                                                                |       | 13,970                          |       | 14,179 |   | 13,501 |   |
| Diluted                                                                  |       | 14,310                                                                |       | 14,304                          |       | 14,341 |   | 13,813 |   |
|                                                                     |       |                                                                  |       |                            |       |   |   |   |   |
| Cash dividends  per common share                                         |       | $                                                                     | 0.095      |                            | $          | 0.090 |   | $ | 0.280 |   | $ | 0.265 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

----

 

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

**ConsolidatedStatements of Comprehensive Income**

**(unaudited)**

 
| ** **                                                 | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                 | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                 | ** ** | **(Dollars in thousands)**                 | ** ** |
|                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| **Net Income (Loss)**                                      |       | $                                                    | (6,298     | )                                                   | $          | 4,215 |   | $ | 515 |   | $ | 11,446 |   |
|                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Unrealized holding gains arising during period, net of tax |       | 1,714                                                |       | 1,696                                               |       | 13 |   | 112 |   |
|                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Other comprehensive income                                 |       | 1,714                                                |       | 1,696                                               |       | 13 |   | 112 |   |
|                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| **Comprehensive income (loss)**                            |       | $                                                    | (4,584     | )                                                   | $          | 5,911 |   | $ | 528 |   | $ | 11,558 |   |

 

See accompanying notes toconsolidated financial statements.

 

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

### **Nine Months EndedSeptember 30, 2007**

**(Unaudited)**

 
| ** **                           | ** ** | **(Dollars in thousands)** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Other** | ** ** | **Total**** ** | ** ** |
| ** **                           | ** ** | ** **                           | ** ** | **Capital** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                           | ** ** | **Shares**                           | ** ** | **Stock** | ** ** | **Earnings** | ** ** | **Loss** | ** ** | **Equity** | ** ** |
| Balance, December 31, 2006           |       | 14,132                               |       | $ | 186,539 |   | $ | 48,148 |   | $ | (1,349 | ) | $ | 233,338 |   |
| Net income                           |       | —                               |       | — |   | 515 |   | — |   | 515 |   |
| Options exercised                    |       | 99                                   |       | 761 |   | — |   | — |   | 761 |   |
| Dividends declared  $0.28 per  share |       | —                               |       | — |   | (3,969 | ) | — |   | (3,969 | ) |
| Contributed capital                  |       | —                               |       | 3 |   | — |   | — |   | 3 |   |
| Stock option expense                 |       | —                               |       | 230 |   | — |   | — |   | 230 |   |
| Other comprehensive income           |       | —                               |       | — |   | — |   | 13 |   | 13 |   |
|                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Balance, September 30, 2007          |       | 14,231                               |       | $ | 187,533 |   | $ | 44,694 |   | $ | (1,336 | ) | $ | 230,891 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                           | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                                                                                           | ** ** | **(In thousands)**                             | ** ** |
| **Operating  Activities**                                                                            |       |                                                |       |   |   |
| Net income                                                                                           |       | $                                                   | 515        |   | $ | 11,446 |   |
| Adjustments to  reconcile net income to net cash Provided by operating activities:                   |       |                                                |       |   |   |
| Depreciation                                                                                         |       | 2,295                                               |       | 2,301 |   |
| Provision for  loan losses                                                                           |       | 15,881                                              |       | 4,269 |   |
| Provision for  other real estate losses                                                              |       | 1,385                                               |       | — |   |
| Amortization and  (accretion), net                                                                   |       | 690                                                 |       | 763 |   |
| Stock option  expense                                                                                |       | 230                                                 |       | 183 |   |
| Loss on sale of  other real estate                                                                   |       | 318                                                 |       | 127 |   |
| Net increase in  other assets                                                                        |       | (1,451                                              | )          | (4,113 | ) |
| Net increase  (decrease) in other liabilities                                                        |       | (302                                                | )          | 2,541 |   |
| Net cash  provided by operating activities                                                           |       | 19,561                                              |       | 17,517 |   |
|                                                                                                 |       |                                                |       |   |   |
| **Investing  Activities**                                                                            |       |                                                |       |   |   |
| Purchases of  securities available for sale                                                          |       | (45,825                                             | )          | (26,993 | ) |
| Proceeds from  sales of securities available for sale                                                |       | —                                              |       | 1,896 |   |
| Proceeds from  maturities of securities available for sale                                           |       | 42,545                                              |       | 25,920 |   |
| Net increase in  restricted equity securities                                                        |       | (425                                                | )          | — |   |
| Net increase in  interest-bearing deposits in banks                                                  |       | (9,543                                              | )          | (2,774 | ) |
| Net increase in  federal funds sold                                                                  |       | (702                                                | )          | (22,182 | ) |
| Net increase in  loans                                                                               |       | (73,348                                             | )          | (122,811 | ) |
| Net cash paid in  business combinations                                                              |       | —                                              |       | (3,291 | ) |
| Proceeds from  sale of other real estate owned                                                       |       | 2,801                                               |       | 2,656 |   |
| Purchase of  premises and equipment                                                                  |       | (1,249                                              | )          | (2,202 | ) |
| Proceeds from  sale of premises and equipment                                                        |       | 89                                                  |       | 12 |   |
| Net cash used in  investing activities                                                               |       | (85,657                                             | )          | (149,769 | ) |
|                                                                                                 |       |                                                |       |   |   |
| **Financing  Activities**                                                                            |       |                                                |       |   |   |
| Net increase in  deposits                                                                            |       | 47,932                                              |       | 136,234 |   |
| Net increase  (decrease) in federal funds purchased and securities sold under repurchase  agreements |       | 7,704                                               |       | (4,068 | ) |
| Proceeds from  other borrowings and Federal Home Loan Bank advances                                  |       | 58,975                                              |       | 25,318 |   |
| Payments on  other borrowings and Federal Home Loan Bank advances                                    |       | (48,322                                             | )          | (30,097 | ) |
| Dividends paid                                                                                       |       | (3,969                                              | )          | (3,511 | ) |
| Payment for  fractional shares                                                                       |       | —                                              |       | (6 | ) |
| Payment for  stock repurchase                                                                        |       | —                                              |       | (5,586 | ) |
| Contributed  capital                                                                                 |       | 3                                                   |       | — |   |
| Proceeds from  exercise of stock options                                                             |       | 761                                                 |       | 3,475 |   |
| Net cash  provided by financing activities                                                           |       | 63,084                                              |       | 121,759 |   |
|                                                                                                 |       |                                                |       |   |   |
| Net decrease in  cash and due from banks                                                             |       | (3,012                                              | )          | (10,493 | ) |
|                                                                                                 |       |                                                |       |   |   |
| Cash and due  from banks at beginning of period                                                      |       | 25,876                                              |       | 30,748 |   |
|                                                                                                 |       |                                                |       |   |   |
| Cash and due  from banks at end of period                                                            |       | $                                                   | 22,864     |   | $ | 20,255 |   |
|                                                                                                 |       |                                                |       |   |   |
| Supplemental  disclosure of cash paid during the period for:                                         |       |                                                |       |   |   |
| Interest                                                                                             |       | $                                                   | 53,816     |   | $ | 37,813 |   |
| Income taxes                                                                                         |       | $                                                   | 1,211      |   | $ | 8,350 |   |
|                                                                                                 |       |                                                |       |   |   |
| Noncash  transaction:                                                                                |       |                                                |       |   |   |
| Other real  estate acquired in settlement of loans                                                   |       | $                                                   | 35,022     |   | $ | 2,432 |   |
|                                                                                                 |       |                                                |       |   |   |
| Business  acquisition:                                                                               |       |                                                |       |   |   |
| Capital stock  issued                                                                                |       | $                                                   | —     |   | $ | 29,372 |   |

 

See accompanying notes toconsolidated financial statements.

 

6

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| ** **                                               | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                               | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                                               | ** ** | **(In thousands)**                             | ** ** |
| **Assets acquired (liabilities assumed)** |       |                                                |       |   |   |
| ** **                                               |       |                                                |       |   |   |
| Cash and due  from banks, net of cash paid               |       | $                                                   | —     |   | $ | (3,291 | ) |
|                                                     |       |                                                |       |   |   |
| Federal funds  sold                                      |       | —                                              |       | 537 |   |
|                                                     |       |                                                |       |   |   |
| Securities  available for sale                           |       | —                                              |       | 17,909 |   |
|                                                     |       |                                                |       |   |   |
| Restricted equity  securities                            |       | —                                              |       | 1,554 |   |
|                                                     |       |                                                |       |   |   |
| Loans, net                                               |       | —                                              |       | 106,279 |   |
|                                                     |       |                                                |       |   |   |
| Premises and  equipment                                  |       | —                                              |       | 5,628 |   |
|                                                     |       |                                                |       |   |   |
| Goodwill                                                 |       | —                                              |       | 25,525 |   |
|                                                     |       |                                                |       |   |   |
| Core deposit  intangible                                 |       | —                                              |       | 971 |   |
|                                                     |       |                                                |       |   |   |
| Other assets                                             |       | —                                              |       | 546 |   |
|                                                     |       |                                                |       |   |   |
| Deposits                                                 |       | —                                              |       | (123,708 | ) |
|                                                     |       |                                                |       |   |   |
| Other borrowings                                         |       | —                                              |       | (2,000 | ) |
|                                                     |       |                                                |       |   |   |
| Other  liabilities                                       |       | —                                              |       | (578 | ) |
|                                                     |       |                                                |       |   |   |
|                                                     |       | $                                                   | —     |   | $ | 29,372 |   |

 

See accompanying notes toconsolidated financial statements.

 

7

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

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**NOTE 1.  BASIS OF PRESENTATION**

 

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

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with U.S. generally accepted accounting principles for interimfinancial information and with the instructions for Form 10-Q. Accordingly,they do not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements. In theopinion of management, all adjustments (consisting of normal and recurringadjustments) considered necessary for a fair presentation have been included.The results of operations for the three and nine-month periods ended September30, 2007 are not necessarily indicative of the results that may be expected forthe year ending December 31, 2007. These statements should be read inconjunction with the consolidated financial statements and related notesincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006.

 

**NOTE 2. STOCK COMPENSATION PLANS**

 

In May 2007, the stockholders of the Company approved the2007 Omnibus Long-Term Incentive Plan (the “2007 Incentive Plan”). The 2007Incentive Plan allows the Company to grant stock-based and performance-basedincentive awards to officers and others who provide substantial service to theCompany or any of its subsidiaries. The 2007 Incentive Plan provides for thegranting of incentive stock options, nonstatutory stock options, restrictedstock awards, restricted stock units, deferred stock units, stock appreciationrights (“SARs”), performance awards, performance-based cash awards, dividendequivalents, and qualified stock based awards (collectively, the “awards”) toofficers, directors and key employees to purchase shares of common stock. The2007 Incentive Plan allows the Company to issue up to 1,000,000 shares. The GB&TBancshares, Inc. 1997 Incentive Plan (the “1997 Incentive Plan”) also remainsin effect and all options previously issued under the 1997 Incentive Plancontinue to remain outstanding in accordance with their terms. The total numberof shares issuable under the 1997 Incentive Plan may not exceed 2,000,000shares of the Company’s common stock. As of May 2007, there were 174,218 unusedshares of common stock available under the 1997 Incentive Plan. Therefore, theCompany can grant options and other awards amounting to an aggregate of1,174,218 shares of common stock.

 

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

 

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

 

AtSeptember 30, 2007, there was approximately $627,000 of unrecognizedcompensation cost related to stock-based payments, which is expected to berecognized over a weighted-average period of 3.95 years.

 

8

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Asummary of the status of the stock option plan at September 30, 2007 andchanges during the period is shown in the following table.

 
| ** **                                                                           | ** ** | **Nine months ended  September 30, 2007** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **Shares**                                                    | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|                                                                                 |       |                                                          |       |   |   |
| Outstanding at  beginning of period                                                  |       | 771,384                                                       |       | $ | 11.95 |   |
| Granted                                                                              |       | 81,947                                                        |       | 16.88 |   |
| Exercised                                                                            |       | (107,117                                                      | )          | 8.69 |   |
| Forfeited                                                                            |       | (50,718                                                       | )          | 17.61 |   |
| Outstanding at  end of period                                                        |       | 695,496                                                       |       | $ | 12.63 |   |
|                                                                                 |       |                                                          |       |   |   |
| Options  exercisable at end of period                                                |       | 506,621                                                       |       | $ | 10.17 |   |
| Weighted-average  fair value of options granted during period                        |       |                                                          |       | $ | 3.82 |   |
| Total intrinsic  value of options exercised during the period                        |       |                                                          |       | $ | 487,000 |   |
| Weighted average  remaining contractual term of exercisable options at end of period |       |                                                          |       | 4.18 years |   |
| Aggregate  intrinsic value of options outstanding at end of period                   |       |                                                          |       | $ | 424,000 |   |
| Aggregate  intrinsic value of exercisable options at end of period                   |       |                                                          |       | $ | 1,555,000 |   |

 

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

 
| ** **                              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                         | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding**      | ** ** | **Weighted-  Average  Remaining  Contractual  Life** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| $5.88 - $8.65                           |       | 367,883                      |       | 4.78 years                                           |       | $ | 8.06 |   | 367,883 |   | $ | 8.06 |   |
| $9.38 - $13.78                          |       | 98,459                       |       | 4.90 years                                           |       | 12.13 |   | 76,959 |   | 11.77 |   |
| $14.15 - $21.18                         |       | 122,038                      |       | 8.25 years                                           |       | 18.30 |   | 27,088 |   | 18.22 |   |
| $21.46 - $24.15                         |       | 107,116                      |       | 7.95 years                                           |       | 22.32 |   | 34,691 |   | 22.76 |   |
| Total                                   |       | 695,496                      |       | 5.90 years                                           |       | 12.63 |   | 506,621 |   | 10.17 |   |
|                                         |            |                              |            |                                                      |            |  |  |  |  |  |  |  |  |

 

9

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Thetotal fair value of options vested during the period was approximately $884,000.The total amount expensed for options vested during the period was approximately$230,000.

 

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

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes-Merton option-pricing model with the following weighted-averageassumptions:

 
| ** **               | ** ** | **Nine months ended**  | ** ** | **Nine months ended**  | ** ** |
|--------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** |
| Dividend yield           |       | 2.87                             | %          | 1.50                             | %          |
| Expected life            |       | 5 years                          |       | 3 years                          |       |
| Expected  volatility     |       | 32.03                            | %          | 20.40                            | %          |
| Risk-free  interest rate |       | 4.51                             | %          | 4.80                             | %          |

 

10

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**NOTE 3. EARNINGSPER COMMON SHARE**

 

Presented below is a summary of the componentsused to calculate basic and diluted earnings per share for the three andnine-month periods ended September 30, 2007 and 2006.

 
| ** **                                                                                                                         | ** ** | **Three months ended September 30,**              | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **2007**                                                              | ** ** | **2006** | ** ** |
| ** **                                                                                                                         | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Basic Earnings (Loss) Per Share:                                                                                                   |       |                                                                  |       |   |   |
| Weighted average common shares outstanding                                                                                         |       | 14,202                                                                |       | 13,970 |   |
|                                                                                                                               |       |                                                                  |       |   |   |
| Net income (loss)                                                                                                                  |       | $                                                                     | (6,298     | ) | $ | 4,  215 |   |
|                                                                                                                               |       |                                                                  |       |   |   |
| Basic earnings (loss) per share                                                                                                    |       | $                                                                     | (0.44      | ) | $ | 0.30 |   |
|                                                                                                                               |       |                                                                  |       |   |   |
| Diluted Earnings (Loss) Per Share:                                                                                                 |       |                                                                  |       |   |   |
| Weighted average common shares outstanding                                                                                         |       | 14,202                                                                |       | 13,970 |   |
| Net effect of the assumed exercise of stock options based on the  treasury stock method using average market prices for the period |       | 108                                                                   |       | 334 |   |
| Total weighted average common shares and common stock equivalents  outstanding                                                     |       | 14,310                                                                |       | 14,304 |   |
|                                                                                                                               |       |                                                                  |       |   |   |
| Net income (loss)                                                                                                                  |       | $                                                                     | (6,298     | ) | $ | 4,215 |   |
|                                                                                                                               |       |                                                                  |       |   |   |
| Diluted earnings (loss) per share                                                                                                  |       | $                                                                     | (0.44      | ) | $ | 0.30 |   |

 
| ** **                                                                                                                         | ** ** | **Nine months ended September 30,**               | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **2007**                                                              | ** ** | **2006** | ** ** |
| ** **                                                                                                                         | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Basic Earnings Per Share:                                                                                                          |       |                                                                  |       |   |   |
| Weighted average common shares outstanding                                                                                         |       | 14,179                                                                |       | 13,501 |   |
|                                                                                                                               |       |                                                                  |       |   |   |
| Net income                                                                                                                         |       | $                                                                     | 515        |   | $ | 11,446 |   |
|                                                                                                                               |       |                                                                  |       |   |   |
| Basic earnings per share                                                                                                           |       | $                                                                     | 0.04       |   | $ | 0.85 |   |
|                                                                                                                               |       |                                                                  |       |   |   |
| Diluted Earnings Per Share:                                                                                                        |       |                                                                  |       |   |   |
| Weighted average common shares outstanding                                                                                         |       | 14,179                                                                |       | 13,501 |   |
| Net effect of the assumed exercise of stock options based on the  treasury stock method using average market prices for the period |       | 162                                                                   |       | 312 |   |
| Total weighted average common shares and common stock equivalents  outstanding                                                     |       | 14,341                                                                |       | 13,813 |   |
|                                                                                                                               |       |                                                                  |       |   |   |
| Net income                                                                                                                         |       | $                                                                     | 515        |   | $ | 11,446 |   |
|                                                                                                                               |       |                                                                  |       |   |   |
| Diluted earnings per share                                                                                                         |       | $                                                                     | 0.04       |   | $ | 0.83 |   |

 

11

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** **

**NOTE 4. BUSINESS COMBINATIONS**

 

OnMay 1, 2006, the Company completed the acquisition of Mountain Bancshares,Inc., the parent company of Mountain State Bank in Dawsonville, Dawson County,Georgia, which resulted in Mountain State Bank becoming a wholly ownedsubsidiary of the Company. The aggregate purchase price was $39.8 million,including the issuance of 1,088,924 shares of GB&T’s capital stock toMountain Bancshares’ stockholders valued at $24.0 million, $10.3 million incash and stock options and warrants valued at $5.3 million, and $197,000 indirect acquisition costs. The value of the capital stock issued was determinedbased on the average market price of GB&T’s capital stock over a two-dayperiod before and after the terms of the acquisition were agreed upon andannounced. The fair value of the stock options and warrants was determinedbased on the Black-Scholes-Merton option pricing model. The acquisition wasaccounted for as a purchase resulting in estimated goodwill of approximately$26.0 million. The goodwill will not be deductible for tax purposes. Identifiableintangible assets of $971,000 acquired consist of a core deposit premium withan estimated weighted average useful life of five years. Mountain State Bank’sresults of operations from May 1, 2006, are included in the consolidatedresults of operations for the three and nine months ended September 30, 2006.

 

Thefollowing table summarizes the estimated fair values of the assets acquired andliabilities assumed at the date of the Mountain Bancshares acquisition. TheCompany obtained third-party valuations of the core deposit intangible and fairvalue adjustments for loans and deposits. In addition, the Company obtainedindependent appraisals of acquired premises.

 
| ** **                                 | ** ** | **Total**          | ** ** |
|--------------------------------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **(In thousands)** | ** ** |
| Cash and due  from banks, net of cash paid |       | $                  | (3,291     | ) |
| Federal funds  sold                        |       | 537                |       |
| Securities  available for sale             |       | 17,909             |       |
| Restricted equity  securities              |       | 1,554              |       |
| Loans, net                                 |       | 106,279            |       |
| Premises and  equipment                    |       | 5,628              |       |
| Goodwill                                   |       | 25,952             |       |
| Core deposit  intangible                   |       | 971                |       |
| Other assets                               |       | 546                |       |
| Total assets  acquired                     |       | $                  | 156,085    |   |
| Deposits                                   |       | $                  | 123,708    |   |
| Other borrowings                           |       | 2,000              |       |
| Other  liabilities                         |       | 1,005              |       |
| Total  liabilities assumed                 |       | $                  | 126,713    |   |
|                                       |       |               |       |
| Net assets  acquired                       |       | $                  | 29,372     |   |

 

Unauditedpro forma consolidated results of operations for the nine months endedSeptember 30, 2007 and 2006 as though the companies had combined as of January1, 2007 and 2006 are as follows:

 
| ** **                  | ** ** | **Nine months ended**                                                | ** ** |
|-----------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **September 30,**                                                         | ** ** |
| ** **                  | ** ** | **2007**                                                                       | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **(Dollars in thousands,  except per share amounts)** | ** ** |
| Net interest  income        |       | $                                                                              | 50,269     |   | $ | 53,065 |   |
| Net income                  |       | 633                                                                            |       | 11,790 |   |
| Basic earnings  per share   |       | 0.05                                                                           |       | 0.87 |   |
| Diluted earnings  per share |       | 0.04                                                                           |       | 0.85 |   |
|                             |            |                                                                                |            |  |  |  |  |

 

12

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**NOTE 5.    STOCK REPURCHASE**

 

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

 

**NOTE 6.    RECENT ACCOUNTINGSTANDARDS**

 

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

 

InFebruary 2007, the FASB issued SFAS 159, “The Fair Value Option for FinancialAssets and Financial Liabilities.” SFAS 159 permits entities to make anirrevocable election, at specified election dates, to measure eligiblefinancial instruments and certain other items at fair value. This statementalso establishes presentation and disclosure requirements designed tofacilitate comparisons between entities that choose different measurementattributes for similar types of assets and liabilities. The provisions of thisstatement are effective as of the beginning of the first fiscal year thatbegins after November 15, 2007. The Company has not elected to early adopt thisstatement and is currently evaluating the impact the adoption of this statementcould have on its financial condition, results of operations and cash flows.

 

**NOTE 7.    SUBSEQUENT EVENT**

 

On November 2, 2007, the Company signed adefinitive agreement under which SunTrust Banks, Inc. will acquire GB&TBancshares, Inc. Under the terms of the agreement, GB&T shareholders wouldreceive 0.1562 shares of SunTrust common stock for each share of GB&Tcommon stock held.  Based on SunTrust’s closing price of $69.13 on Nov. 1,2007, and the 14,230,796 shares of GB&T outstanding as of October 31,2007, the transaction value would be approximately $153.7 million. Theacquisition, which is subject to approval by regulatory authorities andGB&T shareholders, is expected to close in the second quarter of 2008.

 

**Item2.     MANAGEMENT’SDISCUSSION 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 (“GBT”),United Bank & Trust (“UBT”), Community Trust Bank (“CTB”), HomeTown Bank ofVilla Rica (“HTB”), First National Bank of the South (“FNBS”), First NationalBank of Gwinnett (“FNBG”) and Mountain State Bank (“MSB”) during the periodsincluded in the accompanying consolidated financial statements. This discussionshould be read in conjunction with the accompanying consolidated financialstatements and the notes thereto and the consolidated financial statements,related notes, and Management’s Discussion and Analysis of

 

13

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FinancialCondition and Results of Operations for the year ended December 31, 2006included in the Company’s 2006 Annual Report on Form 10-K.

 

**Cautionary Notice Regarding Forward-LookingStatements**

 

Someof the statements contained or incorporated by reference in this Report,including, without limitation, matters discussed under the caption “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” are “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-looking statements include statements about our outlook oncredit quality, the competitiveness of the banking industry, potentialregulatory obligations, our entrance and expansion into other markets, ourother business strategies and other statements that are not historical facts.Forward-looking statements are not guarantees of performance or results. Whenwe use words like “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,”“continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,”“will,” and similar expressions, you should consider them as identifyingforward-looking statements, although we may use other phrasing. Theseforward-looking statements involve risks and uncertainties and are based on ourbeliefs and assumptions, and on the information available to us at the timethat these disclosures were prepared. Factors that may cause actual results todiffer materially from those expressed or implied by such forward-lookingstatements include, among others, the following possibilities: (1) competitivepressures among depository and other financial institutions may increasesignificantly; (2) changes in the interest rate environment may reduce margins;(3) general economic conditions may be less favorable than expected, resultingin, among other things, a deterioration in credit quality and/or a reduction indemand for credit; (4) real estate values in our markets may decline; (5)economic, governmental or other factors may prevent the projected populationand commercial growth in the counties in which we operate;  (6) legislative or regulatory changes,including changes in accounting standards, may adversely affect the businessesin which we are engaged;  (7) costs ordifficulties related to the integration of our businesses may be greater thanexpected; (8) deposit attrition, customer loss or revenue loss followingacquisitions may be greater than expected; (9) competitors may have greater financialresources and develop products that enable such competitors to compete moresuccessfully than we can; and (10) adverse changes may occur in the equitymarkets. Many of these factors are beyond our ability to control or predict,and readers are cautioned not to put undue reliance on such forward-lookingstatements. We do not intend to, and assume no responsibility to update orrevise any forward-looking statements contained in this Report, whether as aresult of new information, future events or otherwise.

 

**Critical Accounting Policies**

 

Wehave adopted various accounting policies that govern the application ofaccounting principles generally accepted in the United States and generalpractices within the banking industry in the preparation of our financialstatements. Our significant accounting policies are reviewed and discussedperiodically by our Audit Committee and are described in the notes to ouraudited financial statements as of December 31, 2006. Certain accountingpolicies require management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reported period. Actual resultscould differ from those estimates. Estimates and assumptions are reviewedperiodically and the effects of revisions are reflected in the consolidatedfinancial statements in the period they are determined to be necessary. Managementhas discussed our critical accounting policies with the Audit Committee of theBoard of Directors.

 

*Allowance for Loan Losses*.We believe that our determination of the allowance for loan losses is our mostsignificant judgment and estimate used in the preparation of our consolidatedfinancial statements. The allowance for loan losses is an amount thatmanagement believes will be adequate to absorb estimated losses in the loanportfolio. The calculation is an estimate of the amount of loss in the loanportfolios of our subsidiary banks. The allowance for loan losses is evaluatedon a regular basis by management and is based upon management’s periodic reviewof the collectibility of the loans in light of historical experience, thenature and volume of the loan portfolio, adverse situations that may affect theborrower’s ability to repay, estimated value of any underlying collateral andprevailing economic conditions. This evaluation is inherently subjective as itrequires estimates that are susceptible to significant revision as moreinformation becomes available. In addition, regulatory 

 

14

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

 

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

 

Ageneral allowance is maintained for all loans rated 1 to 4 and for allhomogeneous loan pools such as consumer, credit card and residential mortgage. Managementhas developed a range of expected losses for each risk grade and for each pool.This range of losses is management’s best estimate based on actual lossexperience, industry loss experience, loan portfolio trends and characteristicsof the markets it serves. On a quarterly basis, management will evaluate eachof the loan categories and determine the expected loss levels from the rangepreviously established.

 

Allloans rated 5, 6, 7 and 8, as well as any other impaired loan of a significantamount, are individually analyzed and a specific reserve assigned. Thisanalysis includes information from management’s Problem Asset Review Committeewhich meets quarterly and reviews credit relationships of $1 million and aboveand rated 5 through 8. Management, considering current information and eventsregarding a borrowers’ ability to repay its obligations, considers a loan to beimpaired when the ultimate collection of all amounts due, according to thecontractual terms of the loan agreement, is in doubt. When a loan is consideredto be impaired, the amount of impairment is measured based on the present valueof expected future cash flows discounted at the loan’s effective interest rate.If the loan is collateral dependent, the fair value of the collateral lessestimated selling costs is used to determine the amount of impairment.Impairment losses are included in the allowance for loan losses through acharge to the provision for loan losses. A majority of our impaired loans arecollateral dependent. The allowance for loan losses on these loans isdetermined based on fair value estimates (net of selling costs) of therespective collateral. The actual losses on these loans could differsignificantly if the fair value of the collateral is different from theestimates used in determining the allocated allowance. Most of our collateraldependent impaired loans are secured by real estate. The fair value of thesereal estate properties is generally determined based upon appraisals performedby a certified or licensed appraiser. Management also considers other factorsor recent developments which could result in adjustments to the collateralvalue estimates indicated in the appraisals.

 

Theremainder of the balance in the reserve for loan losses represents management’sestimate of the probable losses inherent in the loan portfolio that have notbeen fully provided for through the specific reserve calculations. Factorsconsidered in the reserve methodology are overall economic conditions, therecent slowdown in real estate activity, the number of new and relativelyinexperienced banks and bankers entering our markets and offering aggressive termsand pricing, our concentration in commercial and consumer real estate loans andthe experience and historic performance of our lenders.

 

*Goodwill*.Our growth over the past several years has been enhanced significantly bymergers and acquisitions. Prior to July 2001, all of our acquisitions wereaccounted for using the pooling-of-interests business combination method ofaccounting. Effective July 1, 2001, we adopted SFAS No. 141, “BusinessCombinations,” which allows only the use of the purchase method of accounting.For purchase acquisitions, we are required to record the assets acquired,including identified intangible assets, and liabilities assumed at their fairvalue, which in many instances involves estimates based on third partyvaluations, such as appraisals, or external valuations based on discounted cashflow analyses or other valuation techniques. The determination of the usefullives of intangible assets is subjective as is the appropriate amortizationperiod for such intangible assets. In addition, purchase acquisitions typicallyresult in recording goodwill, which is subject to ongoing periodic impairmenttests based on the fair value of net assets acquired compared to the carryingvalue of goodwill. As of July 31, 2007, the required impairment testing ofgoodwill was performed and preliminary indications are that no impairmentexisted as of the valuation date, as the fair value of our net assets exceededtheir carrying value. If the recent slowdown in real estate activity in ournewer markets continues, the 

 

15

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potentialfor goodwill impairment may exist. If for any future period we determine thatthere has been impairment in the carrying value of our goodwill balances, wewill record a charge to our earnings, which could have a material adverseeffect on our net income.

 

**Summary**

 

Netloss for the three months ended September 30, 2007 was $6.3 million, or $0.44per diluted share, compared to net income of $4.2 million, or $0.30 per dilutedshare, for the three months ended September 30, 2006. Net income for the ninemonths ended September 30, 2007 was $515,000, or $0.04 per diluted share,compared with $11.4 million, or $0.83 per diluted share for the nine monthsended September 30, 2006. The return on average assets was 0.04% and the returnon average equity was 0.29% for the nine months ended September 30, 2007. Thiscompares to a return on average assets of 0.88% and a return on average equityof 7.01% for the same period a year ago. These results reflect a $14.1 millionloan loss provision taken in the third quarter of 2007 as discussed in detailbelow.

 

MountainState Bank (“MSB”) became part of the Company effective May 1, 2006. The mergerwas accounted for as a purchase transaction; therefore, results of operationsfor MSB are included in the results of operations for the three and nine-monthperiods ended September 30, 2006 from the acquisition date of May 1, 2006.

 

Totalrevenue, defined as net interest income plus other income, was $18.8 millionfor the three months ended September 30, 2007, a decrease of $2.3 million, or11.12%, from the $21.1 million reported for the same period a year ago. Otherexpense was $15.5 million for the three months ended September 30, 2007, anincrease of $2.6 million, or 20.27%, compared to the $12.9 million reported forthe same period a year ago. Revenue growth has been offset by increased expensegrowth as well as the additional loan loss provision discussed in more detailbelow, resulting in an efficiency ratio for the three months ended September30, 2007 of 81.23% compared to 59.84% for the three months ended September 30,2006.

 

Totalrevenue was $58.7 million for the nine months ended September 30, 2007, adecrease of $0.2 million, or 0.44%, from the $58.9 million reported for thesame period a year ago. Other expense was $43.4 million for the nine monthsended September 30, 2007, an increase of $6.2 million, or 16.84%, compared tothe $37.2 million reported for the same period a year ago. Revenue growth hasbeen offset by increased expense growth as well as the additional loan lossprovision discussed in more detail below, resulting in an efficiency ratio forthe nine months ended September 30, 2007 of 72.81% compared to 61.99% for thenine months ended September 30, 2006.

 

**Balance Sheets**

 

Ourtotal assets increased $63.5 million to $2.0 billion at September 30, 2007, or3.34%, compared to December 31, 2006. The increase consists primarily of anincrease in total loans of $31.3 million, or 2.09%, an increase in other realestate owned of $29.6 million and an increase in interest-bearing deposits inbanks of $9.5 million.

 

Totaldeposits increased $47.9 million to $1.5 billion at September 30, 2007, or3.24%, compared to December 31, 2006. Noninterest-bearing deposits decreased$8.4 million to $143.2 million and interest-bearing deposits increased $56.3million to $1.4 billion during the same period. Deposit growth outpaced loangrowth resulting in a loan to deposit ratio of 100.06% at September 30, 2007compared to 101.18% at December 31, 2006.

 

Totalstockholders’ equity decreased $2.4 million to $230.9 million at September 30,2007, or 1.05%, compared to December 31, 2006. This decrease consisted of netincome of $515,000 and $761,000 from options exercised and $230,000 in stockoption expense, which was more than offset by the payment of dividends of $4.0million.

 

16

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**Asset Quality**

 

Theallowance for loan losses at September 30, 2007 was $32.3 million, or 2.12%, oftotal loans compared to $24.7 million, or 1.65%, at December 31, 2006 and $16.7million, or 1.15% at September 30, 2006. The increase in the allowance from theprior year period is due primarily to an additional $14.1 million loan lossprovision taken in the third quarter of 2007 to provide the Company withoptions for the resolution of problem assets. Management has been diligent inmonitoring the portfolio and continues to aggressively work the problem assets.In addition, management believes that the Company’s business fundamentals havebeen and will continue to be strengthened because of improvements to internalcontrols, implementation of more stringent credit administration policies andcentralization of our loan approval and documentation processes. However, wecan make no assurances that the Company will not see a further deterioration incredit quality before the benefits of these improvements are realized. Theallowance for loan losses is evaluated monthly at the subsidiary level andadjusted to reflect the risk in the portfolio.

 

Theprovision for loan losses was $15.9 million for the nine months ended September30, 2007. Net charge-offs year-to-date have been $8.2 million. Managementbelieves the provision and net charge-off amounts recorded in the nine-monthperiod ended September 30, 2007, reflects the deterioration in creditconditions we have experienced as a result of the continued slowing residentialreal estate market. If real estate conditions continue to worsen, the Companymay experience additional charge-offs.

 

Thefollowing table summarizes the allowance for loan losses for the nine-monthperiods ended September 30, 2007 and 2006. 

 
| ** **                                                           | ** ** | **Nine months ended****September 30,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                              | ** ** | **2006** | ** ** |
| ** **                                                           | ** ** | **(Dollars in thousands)**                  | ** ** |
| **Average amount of loans outstanding**                              |       | $                                                     | 1,531,334  |   | $ | 1,347,891 |   |
| **Allowance for loan losses balance, beginning of period**           |       | $                                                     | 24,676     |   | $ | 12,773 |   |
| **Less charge-offs**                                                 |       |                                                  |       |   |   |
| Commercial loans                                                     |       | (354                                                  | )          | (442 | ) |
| Real estate loans                                                    |       | (7,808                                                | )          | (856 | ) |
| Credit cards                                                         |       | (11                                                   | )          | (19 | ) |
| Consumer loans                                                       |       | (549                                                  | )          | (351 | ) |
| Total charge-offs                                                    |       | (8,722                                                | )          | (1,668 | ) |
| **Plus recoveries**                                                  |       |                                                  |       |   |   |
| Commercial loans                                                     |       | 243                                                   |       | 17 |   |
| Real estate loans                                                    |       | 35                                                    |       | 29 |   |
| Credit cards                                                         |       | 5                                                     |       | 2 |   |
| Consumer loans                                                       |       | 228                                                   |       | 210 |   |
| Total recoveries                                                     |       | 511                                                   |       | 258 |   |
| **Net charge-offs**                                                  |       | (8,211                                                | )          | (1,410 | ) |
|                                                                 |       |                                                  |       |   |   |
| **Plus provision for loan losses**                                   |       | 15,881                                                |       | 4,269 |   |
| **Plus allowance for loan losses acquired in business combinations** |       | —                                                |       | 1,088 |   |
| **Allowance for loan losses balance, end of period**                 |       | $                                                     | 32,346     |   | $ | 16,720 |   |
| **Net charge-offs to average loans (annualized)**                    |       | 0.717                                                 | %          | 0.140 | % |

 

17

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Thefollowing table is a summary of the Company’s nonaccrual, past due loans and restructuredloans at September 30, 2007 and September 30, 2006. The numbers indicate anincrease of approximately $39.7 million in nonaccrual loans as of September 30,2007 as compared to September 30, 2006. The majority of the nonaccrual balanceat September 30, 2007 resides at HTB with a balance of $31.3 million. Thisbalance represents several large loan relationships and multiple smallrelationships identified in extensive loan reviews. The Company has assignedall loans for which we have concerns to an experienced loan workout specialistfrom within the Company, who has implemented an action plan for the remediationof each loan. We continue to conduct loan review meetings and fully expect tosee progress from this effort. Although we believe we have put the rightprocesses in place to produce reductions in our nonperforming assets,nonperforming assets may continue to increase if the real estate downturncontinues. In addition to nonaccrual loans, the Company also has other realestate, which is considered a nonperforming asset. At September 30, 2007, thebalance in other real estate was $34.3 million compared to $4.7 million atDecember 31, 2006. The Company’s practice is to write down loan balances toexpected realizable value based on current appraisals prior to transfer toother real estate. Included in the $89 million in total nonperforming assets atSeptember 30, 2007, were ten relationships ranging from $7.2 million to $2.9million which accounted for 45% of total nonperforming assets. The breakdown oftotal nonperforming assets includes $38.5 million related to residentialhousing, $6.1 million related to commercial real estate, $35.3 million ofvacant lots and acreage and $9.1 million in other.

 
| ** **        | ** ** | **September 30, 2007**     | ** ** |
|-------------------|------------|--------------------------------------|------------|
| ** **        | ** ** | ** **                           | ** ** | **Past Due** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Nonaccrual**                       | ** ** | **90 Days** | ** ** | **Restructured** | ** ** |
| ** **        | ** ** | **Loans**                            | ** ** | **Still Accruing** | ** ** | **Debt** | ** ** |
| ** **        | ** ** | **(Dollars in thousands)** | ** ** |
|              |       |                                 |       |   |   |   |   |
| Real estate loans |       | $                                    | 52,991     |   | $ | — |   | $ | — |   |
| Commercial loans  |       | 1,526                                |       | — |   | — |   |
| Consumer loans    |       | 151                                  |       | 9 |   | — |   |
| Total             |       | $                                    | 54,668     |   | $ | 9 |   | $ | — |   |

 
| ** **        | ** ** | **September 30, 2006**     | ** ** |
|-------------------|------------|----------------------------|------------|
| ** **        | ** ** | ** **                 | ** ** | **Past Due** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Nonaccrual**             | ** ** | **90 Days** | ** ** | **Restructured** | ** ** |
| ** **        | ** ** | **Loans**                  | ** ** | **Still Accruing** | ** ** | **Debt** | ** ** |
| ** **        | ** ** | **(Dollars in thousands)** | ** ** |
|              |       |                       |       |   |   |   |   |
| Real estate loans |       | $                          | 14,383     |   | $ | — |   | $ | — |   |
| Commercial loans  |       | 473                        |       | — |   | 37 |   |
| Consumer loans    |       | 78                         |       | 12 |   | — |   |
| Total             |       | $                          | 14,934     |   | $ | 12 |   | $ | 37 |   |

 

Ourbanking subsidiaries’ policy is to discontinue the accrual of interest incomewhen, in the opinion of management, collection of such interest becomesdoubtful. This status is determined when: (1) there is a significant deteriorationin the financial condition of the borrower and full repayment of principal andinterest is not expected; and (2) the principal or interest is more than 90days past due, unless the loan is both well-secured and in the process ofcollection. Accrual of interest on such loans is resumed when, in management’sjudgment, the collection of interest and principal becomes 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 capital resources. Theseclassified loans do not represent material credits about which 

 

18

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managementis aware of any information which causes management to have serious doubts asto the ability of such borrowers to comply with their loan repayment terms,except as noted above.

 

**Liquidity and Capital Resources**

 

Liquiditymanagement involves the matching of the cash flow requirements of customers whomay be either depositors desiring to withdraw funds or borrowers needingassurance that sufficient funds will be available to meet their credit needsand our ability to meet those needs. We seek to meet liquidity requirementsprimarily through management of short-term investments, monthly amortizingloans, maturing single payment loans, and maturities and prepayments ofsecurities. Also, we maintain relationships with correspondent banks whichcould provide funds on short notice.

 

Ourliquidity and capital resources are monitored on a periodic basis by managementand state and federal regulatory authorities. Our liquidity ratio was 11.26% atSeptember 30, 2007. Liquidity is measured by the ratio of net cash, Federalfunds sold and securities to net deposits and short-term liabilities. In theevent our subsidiary banks need to generate additional liquidity, funding planswould be implemented as outlined in the liquidity policy of the subsidiarybanks. Our subsidiary banks have lines of credit available to meet anyunforeseen liquidity needs. Also, our subsidiary banks have relationships withthe Federal Home Loan Bank of Atlanta, which provides funding for loan growthon an as needed basis, however these amounts are subject to collateral pledgingand therefore the full amount might not be available. Management reviewsliquidity on a periodic basis to monitor and adjust liquidity as necessary. Managementhas the ability to adjust liquidity by selling securities available for sale,selling participations in loans we generate and accessing available fundsthrough various borrowing arrangements. At September 30, 2007, we had availableborrowing capacity totaling approximately $253.8 million through variousborrowing arrangements and available lines of credit. We believe our short-terminvestments and available borrowing arrangements are adequate to cover anyreasonably anticipated immediate need for funds.

 

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Asof September 30, 2007, each of our subsidiary banks was considered to bewell-capitalized as defined in the Federal Deposit Insurance CorporationImprovement Act and based on regulatory minimum capital requirements. TheCompany and the subsidiary banks’ capital ratios are presented in the followingtable:

 
| ** **                              | ** ** | ** **  | ** ** | **FOR CAPITAL** | ** ** | **TO BE**  | ** ** |
|-----------------------------------------|------------|-------------|------------|----------------------|------------|-----------------|------------|
| ** **                              | ** ** | **CAPITAL** | ** ** | **ADEQUACY**         | ** ** | **WELL**        | ** ** |
| ** **                              | ** ** | **RATIOS**  | ** ** | **PURPOSES**         | ** ** | **CAPITALIZED** | ** ** |
|                                    |       |        |       |                 |       |            |       |
| As of September 30, 2007                |       |        |       |                 |       |            |       |
| Total Capital to Risk Weighted Assets:  |       |        |       |                 |       |            |       |
| Consolidated                            |       | 11.52       | %          | 8.00                 | %          | N\A             |       |
| Gainesville Bank & Trust            |       | 10.90       | %          | 8.00                 | %          | 10.00           | %          |
| United Bank & Trust                 |       | 10.43       | %          | 8.00                 | %          | 10.00           | %          |
| Community Trust Bank                    |       | 10.03       | %          | 8.00                 | %          | 10.00           | %          |
| HomeTown Bank of Villa Rica             |       | 10.04       | %          | 8.00                 | %          | 10.00           | %          |
| First National Bank of the South        |       | 11.90       | %          | 8.00                 | %          | 10.00           | %          |
| First National Bank of Gwinnett         |       | 10.37       | %          | 8.00                 | %          | 10.00           | %          |
| Mountain State Bank                     |       | 10.42       | %          | 8.00                 | %          | 10.00           | %          |
| Tier I Capital to Risk Weighted Assets: |       |        |       |                 |       |            |       |
| Consolidated                            |       | 10.26       | %          | 4.00                 | %          | N\A             |       |
| Gainesville Bank & Trust            |       | 9.93        | %          | 4.00                 | %          | 6.00            | %          |
| United Bank & Trust                 |       | 9.27        | %          | 4.00                 | %          | 6.00            | %          |
| Community Trust Bank                    |       | 8.76        | %          | 4.00                 | %          | 6.00            | %          |
| HomeTown Bank of Villa Rica             |       | 8.74        | %          | 4.00                 | %          | 6.00            | %          |
| First National Bank of the South        |       | 10.77       | %          | 4.00                 | %          | 6.00            | %          |
| First National Bank of Gwinnett         |       | 9.37        | %          | 4.00                 | %          | 6.00            | %          |
| Mountain State Bank                     |       | 9.15        | %          | 4.00                 | %          | 6.00            | %          |
| Tier I Capital to Average Assets:       |       |        |       |                 |       |            |       |
| Consolidated                            |       | 8.95        | %          | 4.00                 | %          | N\A             |       |
| Gainesville Bank & Trust            |       | 8.50        | %          | 4.00                 | %          | 5.00            | %          |
| United Bank & Trust                 |       | 7.64        | %          | 4.00                 | %          | 5.00            | %          |
| Community Trust Bank                    |       | 7.72        | %          | 4.00                 | %          | 5.00            | %          |
| HomeTown Bank of Villa Rica             |       | 6.88        | %          | 4.00                 | %          | 5.00            | %          |
| First National Bank of the South        |       | 9.14        | %          | 4.00                 | %          | 5.00            | %          |
| First National Bank of Gwinnett         |       | 8.64        | %          | 4.00                 | %          | 5.00            | %          |
| Mountain State Bank                     |       | 7.86        | %          | 4.00                 | %          | 5.00            | %          |

 

Oursubsidiary banks are subject to certain restrictions on the amount of dividendsthat may be declared without prior regulatory approval. At September 30, 2007,approximately $6.1 million of retained earnings at our subsidiary banks wasavailable for dividend declaration without regulatory approval.

 

**Net Interest Income and Earning Assets**

 

Ourprofitability is determined by our ability to effectively manage interestincome and expense, to minimize loan and security losses, to generatenoninterest income, and to control operating expenses. Because interest ratesare determined by market forces and economic conditions beyond our control, ourability to generate net interest income depends upon our ability to obtain anadequate net interest spread between the rate paid on interest-bearingliabilities and the rate earned on interest-earning assets. The net interestmargin, on a tax equivalent basis, was 3.90% for the nine months endedSeptember 30, 2007, compared to 4.39% for the same period in 2006, a decreaseof 49 basis points. This decrease resulted from an increase in the yield onearning assets of 25 basis points which was more than offset by an increase inthe effective cost of funds of 65 basis points. Also impacting the decreasednet interest margin was the reversal of interest income on loans placed onnonaccrual during 2007 as well as a lower level of loan fees. The increasedyield on earning assets was primarily due to increased volumes and yields onloans and the increased effective cost of funds was due to higher average ratespaid on time deposits and other 

 

20

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borrowings.Due to the company’s asset-sensitive position, management believes we willcontinue to see further compression in the net interest margin as a result ofdecreases in the prime rate.

 

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

 
| ** **                                                        | ** ** | **For the Nine Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                        | ** ** | **September 30, 2007**                  | ** ** | **September 30, 2006**                  | ** ** |
| ** **                                                        | ** ** | **Average**                                       | ** ** | ** **                                        | ** ** | **Yields** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yields** | ** ** |
| ** **                                                        | ** ** | **Balances**                                      | ** ** | **Interest**                                      | ** ** | **/Rates** | ** ** | **Balances** | ** ** | **Interest** | ** ** | **/Rates** | ** ** |
| ** **                                                        | ** ** | **(Dollars in thousands)**              | ** ** |
| **Assets**                                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest earning  assets:                                         |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Taxable  securities                                               |       | $                                                 | 200,177    |                                              | $          | 6,927 |   | 4.63 | % | $ | 197,053 |   | $ | 6,058 |   | 4.11 | % |
| Nontaxable  securities*                                           |       | 28,333                                            |       | 1,322                                             |       | 6.24 | % | 11,067 |   | 576 |   | 6.96 | % |
| Federal funds  sold                                               |       | 9,042                                             |       | 352                                               |       | 5.20 | % | 15,760 |   | 490 |   | 4.16 | % |
| Interest bearing  deposits in banks                               |       | 5,168                                             |       | 169                                               |       | 4.37 | % | 1,937 |   | 84 |   | 5.80 | % |
| Loans, net of  unearned income                                    |       | 1,491,114                                         |       | 96,264                                            |       | 8.63 | % | 1,336,904 |   | 84,565 |   | 8.46 | % |
| Total interest  earning assets                                    |       | 1,733,834                                         |       | 105,034                                           |       | 8.10 | % | 1,562,721 |   | 91,773 |   | 7.85 | % |
| Noninterest  earning assets:                                      |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Unrealized gains  (losses) on securities                          |       | (2,940                                            | )          |                                              |       |   |   | (4,998 | ) |   |   |   |   |
| Allowance for  loan losses                                        |       | (24,975                                           | )          |                                              |       |   |   | (14,460 | ) |   |   |   |   |
| Nonaccrual loans                                                  |       | 40,220                                            |       |                                              |       |   |   | 10,987 |   |   |   |   |   |
| Cash and due  from banks                                          |       | 23,407                                            |       |                                              |       |   |   | 23,684 |   |   |   |   |   |
| Other assets                                                      |       | 183,666                                           |       |                                              |       |   |   | 156,640 |   |   |   |   |   |
| Total  noninterest earning assets                                 |       | 219,378                                           |       |                                              |       |   |   | 171,853 |   |   |   |   |   |
| Total assets                                                      |       | $                                                 | 1,953,212  |                                              |       |   |   |   | $ | 1,734,574 |   |   |   |   |   |
| **Liabilities  & Stockholders’ Equity**                  |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities:                                    |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest bearing  demand & savings                            |       | $                                                 | 451,977    |                                              | 10,963     |   | 3.24 | % | $ | 430,133 |   | 9,302 |   | 2.89 | % |
| Time                                                              |       | 915,188                                           |       | 36,531                                            |       | 5.34 | % | 745,537 |   | 25,422 |   | 4.56 | % |
| Borrowings                                                        |       | 176,969                                           |       | 6,955                                             |       | 5.25 | % | 157,785 |   | 5,761 |   | 4.88 | % |
| Total interest  bearing liabilities                               |       | 1,544,134                                         |       | 54,449                                            |       | 4.71 | % | 1,333,455 |   | 40,485 |   | 4.06 | % |
| Noninterest  bearing liabilities & stockholders’ equity: |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Noninterest  bearing deposits                                     |       | 152,161                                           |       |                                              |       |   |   | 165,148 |   |   |   |   |   |
| Other  liabilities                                                |       | 21,062                                            |       |                                              |       |   |   | 17,587 |   |   |   |   |   |
| Stockholders’  equity                                        |       | 235,855                                           |       |                                              |       |   |   | 218,384 |   |   |   |   |   |
| Total  liabilities & stockholders’ equity                |       | $                                                 | 1,953,212  |                                              |       |   |   |   | $ | 1,734,574 |   |   |   |   |   |
| Net interest  spread                                              |       |                                              |       |                                              |       | 3.39 | % |   |   |   |   | 3.79 | % |
| Net interest  income*                                             |       |                                              |       | 50,585                                            |       |   |   |   |   | 51,288 |   |   |   |
| Less: Tax  equivalent adjustment                                  |       |                                              |       | 423                                               |       |   |   |   |   | 184 |   |   |   |
| Net interest  income                                              |       |                                              |       | $                                                 | 50,162     |   |   |   |   |   | $ | 51,104 |   |   |   |
| Net interest  margin*                                             |       |                                              |       |                                              |       | 3.90 | % |   |   |   |   | 4.39 | % |
|                                                                   |            |                                                   |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

*Fully taxequivalent

 

Netinterest income decreased $2.6 million, or 14.03%, for the three months endedSeptember 30, 2007 compared to the same period in 2006. The net decreaseconsists of an increase in interest income of $437,000, or 1.28%, less anincrease in interest expense of $3.0 million, or 19.02%, for the three-monthperiod. Net interest income decreased $942,000, or 1.84%, for the nine monthsended September 30, 2007 compared to the same period in 2006. The net decreaseconsists of an increase in interest income of $13.0 million, or 14.22%, less anincrease in interest expense of $14.0 million, or 34.49%, for the nine-monthperiod. These changes reflect an increase of $171.1 million in averageinterest-earning assets for the nine months ended September 

 

21

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30,2007 as compared to the nine months ended September 30, 2006. The change in netinterest income was negatively impacted by the reversal of interest income onnonaccrual loans and the lower level of loan fees as mentioned above as well asthe normal increases in volume and interest rates.

 

**Other Income**

 

Otherincome for the three months ended September 30, 2007, increased by $226,000,compared to the same period in 2006. Service charges on deposit accountsincreased by $422,000, which was partially offset by a decrease in mortgageorigination fees of $272,000 for the three-month period. Other income for thenine months ended September 30, 2007, increased by $685,000, compared to thesame period in 2006. Service charges on deposit accounts increased by $541,000,trust and investment services increased by $83,000 and gain on sale of loansincreased by $72,000. These increases were partially offset by a decrease inmortgage origination fees of $163,000 for the nine-month period.

 

**Other Expense**

 

Otherexpense increased by approximately $2.6 million, or 20.27%, for the threemonths ended September 30, 2007 compared to the same period in 2006. Theincrease is due primarily to a $1.4 million provision for potential other realestate losses, in addition to a $217,000 increase in costs related to theresolution of the problem loan portfolio and a $93,000 increase in the FDICinsurance assessment over 2006. Increases are also noted in salaries andemployee benefits expense of $716,000 and net occupancy and equipment expensesof $76,000. Other expense increased by approximately $6.3 million, or 16.84%,for the nine months ended September 30, 2007 compared to the same period in2006. The increase is due primarily to an increase in salaries and employeebenefits expense of $2.5 million. Net occupancy and equipment expensesincreased $490,000. Included in the increase in other operating expenses forthe nine-month period was the $1.4 million provision for potential other realestate losses taken in the third quarter of 2007 as mentioned above, as well asprofessional fees of $374,000 that were paid to attorneys and consultantsrelated to the resolution of the Company’s problem loan portfolio. Alsoincluded in other operating expenses, was an increase in loss on sale of otherreal estate of $241,000 related to the identified problem loan portfolio, aswell as an increase in other real estate expenses of $138,000. Increases werealso noted in marketing and public relations of $169,000, personneladministration expense related to search fees for new employees of $109,000,increased FDIC insurance assessments of $93,000 and a $39,000 increase in otheroperating expense due to a charge-off at HTB during the first quarter of 2007.

 

**Income Tax Expense**

 

Theincome tax benefit for the three-month period ended September 30, 2007 was $4.5million, compared to income tax expense of $2.2 million for the same period in2006. The income tax benefit for the nine-month period ended September 30, 2007was $1.2 million, compared to income tax expense of $6.0 million for the sameperiod in 2006. Both periods in 2007 were impacted by the additional loan lossprovision of $14.1 million taken in the third quarter of 2007 as well as thereversal of interest income due to the increase in nonaccrual loans.

 

**Net Income**

 

Thenet loss for the three months ended September 30, 2007 was $6.3 million,compared to net income of $4.2 million for the three months ended September 30,2006. Net income for the nine months ended September 30, 2007 was $515,000,compared to $11.4 million for the same period in 2006. These decreases aredirectly related to the additional loan loss provision and reversal of interestincome on nonaccrual loans 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 our liquidity, capital resources oroperations. We are not 

 

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

 

**Off Balance Sheet Arrangements**

 

Ourfinancial statements do not reflect various commitments and contingentliabilities that arise in the normal course of business. These off-balancesheet financial instruments include commitments to extend credit, standbyletters of credit and credit card commitments. Such financial instruments areincluded in the financial statements when funds are distributed or theinstruments become payable. Our exposure to credit loss in the event ofnonperformance by the other party to the financial instrument for commitmentsto extend credit, standby letters of credit and credit card commitments isrepresented by the contractual amount of those instruments. We use the samecredit policies in making commitments as we do for on-balance sheet instruments.Although these amounts do not necessarily represent future cash requirements, asummary of our commitments as of September 30, 2007 and December 31, 2006 areas follows:

 
| ** **                           | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **(In thousands)**          | ** ** |
|                                 |       |                             |       |                            |       |
| Commitments to  extend credit        |       | $                                | 515,080    |                            | $          | 425,391 |   |
| Financial  standby letters of credit |       | 8,899                            |       | 7,544                           |       |
| Other standby  letters of credit     |       | —                           |       | 1,129                           |       |
| Credit card  commitments             |       | 7,767                            |       | 6,595                           |       |
| Total                                |       | $                                | 531,746    |                            | $          | 440,659 |   |

 

 

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

 

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

 

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

 

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

 

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

 

Managementbelieves that gap analysis is a useful tool for measuring interest rate riskonly when used in conjunction with its simulation model. As of September 30,2007, the Company maintained an asset sensitive interest rate risk positionbased on its simulation model results. This positioning would be expected toresult in an increase in net interest income in a rising rate environment and adecrease in net interest income in a declining rate environment. This isgenerally due to a greater proportion of interest earning assets repricing on avariable rate basis as compared to variable rate funding sources. This assetsensitivity is indicated by selected results of net interest income simulations.The actual realized change in net interest income would depend on severalfactors. These factors include, but are not limited to, actual realized growthin asset and liability volumes, as well as the mix experienced over these timehorizons. Market conditions and their resulting impact on loan, deposit, andfunding pricing would also be a primary determinant in the realized level ofnet interest income. The table below shows the impact on net interest marginsover a twelve-month period when subjected to an immediate 100 basis pointincrease and decrease in rate.

 
| **Twelve-Month Net Interest Income Sensitivity**                     | ** ** |
|------------------------------------------------------------------------------------------|------------|
| **Change in Short-Term Interest  Rates (in basis points)** | ** ** | **Estimated Change in Net  Interest Income** | ** ** |
| +100                                                                                     |       | 2.22 | % |
| Flat                                                                                     |       | — |   |
| -100                                                                                     |       | (7.45 | )% |

 

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

 

**Item 4. CONTROLSAND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

Asof the end of the period covered by this report, an evaluation was carried outunder the supervision and with the participation of the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of its disclosure controls and procedures. Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the design and operation of these disclosure controls and procedures wereeffective as of the end of the period covered by this report in alerting themon a timely basis to material information relating to the Company required tobe included in the Company’s reports filed or submitted under the SecuritiesExchange Act of 1934.

 

**Internal Control over Financial Reporting**

 

Duringthe recent quarter, the Company has continued to relocate control functionsrelated to loan approval and disbursements from its bank affiliates to theholding company. These functions include, but are not limited to, dailybalancing, reconciling and review of all lending activity. Otherwise, therewere no changes made in the Company’s internal controls over financialreporting that occurred during the Company’s most recent fiscal quarter thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**Item 1.    LEGAL PROCEEDINGS**

 

None.

 

**Item 1A.    RISK FACTORS**

 

There have been no material changes to the riskfactors previously disclosed in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2006.

 

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

 

None.

 

**Item 3.    DEFAULTS UPON SENIORSECURITIES**

 

None.

 

**Item 4.    SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

None.

 

**Item 5.    OTHER INFORMATION**

 

None.

 

**Item 6.    EXHIBITS**

 

Exhibits

 

31.1 Rule 13a-14(a) Certification of PrincipalExecutive Officer.

31.2 Rule 13a-14(a) Certification of PrincipalFinancial Officer.

32.1 Section 1350 Certification of PrincipalExecutive Officer.

32.2 Section 1350 Certification of PrincipalFinancial Officer.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
| GB&T  BANCSHARES, INC. |      |                                   |
|----------------------------|-----------|----------------------------------------|
|                       |      |                                   |
|                       |      |                                   |
| DATE:                      | 11/9/2007 |                                   |   | BY: | /s/  Richard A. Hunt |   |
|                       |      | Richard A. Hunt                        |
|                       |      | President and Chief  Executive Officer |
|                       |      |                                   |
|                       |      |                                   |
| DATE:                      | 11/9/2007 |                                   |   | BY: | /s/  Gregory L. Hamby |   |
|                       |      | Gregory L. Hamby                       |
|                       |      | Executive Vice President  &        |
|                       |      | Chief Financial  Officer               |
|                            |           |                                        |  |  |  |  |  |

 

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