** **

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

** **

**Mark One**

 
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES**                                                                                                                                                                                                       |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                    |
| ** ** | ** ** | **For the quarterly period ended    September 30, 2005**                                                                                                                                                                                                                 |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                              |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES**                                                                                                                                                                                                      |
| ** ** | ** ** | **EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                    |
| ** ** | ** ** | **For the transition period from                     to                      ** |

 

**Commission File Number:  000-24203**

 

**GB&T Bancshares, Inc.**

(Exact name of registrantas 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)

 

Indicate by check mark whether the registrant (1) filedall reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  ý   No  o

 

Indicate by check mark whether the registrant isan accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  ý   No  o

 

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

 

**APPLICABLE ONLY TO CORPORATEISSUERS**

 

State the number of shares outstanding of eachof the issuer’s classes of capital stock, as of November 2, 2005:    12,754,973 shares; no par value

 

 

----

 

**GB&T BANCSHARES, INC.**

** **

**TABLE OF CONTENTS**

 
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                                      | ** ** |
|-------------------|---------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **        | ** **                                                                                                                      | ** ** |
| ** **        | **Item  1. FINANCIAL STATEMENTS**                                                                                               | ** ** |
| ** **        | ** **                                                                                                                      | ** ** |
| ** **        | **Consolidated  Balance Sheets – September 30, 2005 (Unaudited)  and December 31, 2004**                         | ** ** |
| ** **        | ** **                                                                                                                      |       |
| ** **        | **Consolidated  Statements of Income (Unaudited)-  Three and nine months ended September 30, 2005 and 2004**               | ** ** |
| ** **        | ** **                                                                                                                      | ** ** |
| ** **        | **Consolidated Statements of  Comprehensive Income (Unaudited)-  Three and nine months ended September 30, 2005 and 2004** | ** ** |
| ** **        | ** **                                                                                                                      | ** ** |
| ** **        | **Consolidated  Statements of Stockholders’ Equity (Unaudited)-  Nine months ended September 30, 2005**               | ** ** |
| ** **        | ** **                                                                                                                      | ** ** |
| ** **        | **Consolidated Statements of  Cash Flows (Unaudited) -  Nine months ended September 30, 2005 and 2004**                    | ** ** |
| ** **        | ** **                                                                                                                      |       |
| ** **        | **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 6.  Exhibits**                                                                                                           | ** ** |
| ** **        | ** **                                                                                                                      | ** ** |
| ** **        | **Signatures**                                                                                                                  | ** ** |
| ** **        | ** **                                                                                                                      | ** ** |
| ** **        | **Certifications**                                                                                                              | ** ** |

 

2

----

 

**PART I - FINANCIALINFORMATION**

**ITEM 1 - FINANCIAL STATEMENTS**

** **

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

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| ** **                                                                                                                                                                                | ** ** | **(Dollars in thousands)**   | ** ** |
| **Assets**                                                                                                                                                                                |       |                         |       |                        |       |
| ** **                                                                                                                                                                                |       |                         |       |                        |       |
| Cash and due from banks                                                                                                                                                                   |       | $                            | 24,953     |                        | $          | 20,723 |   |
| Interest-bearing deposits in banks                                                                                                                                                        |       | 871                          |       | 700                         |       |
| Federal funds sold                                                                                                                                                                        |       | 49,622                       |       | 93                          |       |
| Securities available for sale, at fair value                                                                                                                                              |       | 192,561                      |       | 190,636                     |       |
| Restricted equity securities, at cost                                                                                                                                                     |       | 8,730                        |       | 7,226                       |       |
|                                                                                                                                                                                      |       |                         |       |                        |       |
| Loans, net of unearned income                                                                                                                                                             |       | 1,208,031                    |       | 955,880                     |       |
| Less allowance  for loan losses                                                                                                                                                           |       | 12,267                       |       | 11,061                      |       |
| Loans, net                                                                                                                                                                                |       | 1,195,764                    |       | 944,819                     |       |
|                                                                                                                                                                                      |       |                         |       |                        |       |
| Premises and equipment, net                                                                                                                                                               |       | 37,420                       |       | 31,548                      |       |
| Goodwill                                                                                                                                                                                  |       | 68,469                       |       | 49,127                      |       |
| Intangible assets                                                                                                                                                                         |       | 5,756                        |       | 5,618                       |       |
| Other assets                                                                                                                                                                              |       | 29,660                       |       | 23,646                      |       |
|                                                                                                                                                                                      |       |                         |       |                        |       |
| **Total  assets**                                                                                                                                                                         |       | $                            | 1,613,806  |                        | $          | 1,274,136 |   |
|                                                                                                                                                                                      |       |                         |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                             |       |                         |       |                        |       |
| ** **                                                                                                                                                                                |       |                         |       |                        |       |
| **Liabilities:**                                                                                                                                                                          |       |                         |       |                        |       |
| Deposits:                                                                                                                                                                                 |       |                         |       |                        |       |
| Noninterest-bearing                                                                                                                                                                       |       | $                            | 173,504    |                        | $          | 125,704 |   |
| Interest-bearing  demand and savings                                                                                                                                                      |       | 446,372                      |       | 367,078                     |       |
| Time deposits                                                                                                                                                                             |       | 613,853                      |       | 435,821                     |       |
| Total deposits                                                                                                                                                                            |       | 1,233,729                    |       | 928,603                     |       |
| Federal funds  purchased and securities sold under repurchase agreements                                                                                                                  |       | 30,631                       |       | 47,582                      |       |
| Federal Home  Loan Bank advances                                                                                                                                                          |       | 101,691                      |       | 80,992                      |       |
| Other borrowings                                                                                                                                                                          |       | 838                          |       | 934                         |       |
| Other  liabilities                                                                                                                                                                        |       | 13,422                       |       | 11,412                      |       |
| Subordinated  debt                                                                                                                                                                        |       | 29,898                       |       | 29,898                      |       |
|                                                                                                                                                                                      |       |                         |       |                        |       |
| **Total  liabilities**                                                                                                                                                                    |       | 1,410,209                    |       | 1,099,421                   |       |
|                                                                                                                                                                                      |       |                         |       |                        |       |
| **Stockholders’ Equity:**                                                                                                                                                            |       |                         |       |                        |       |
|                                                                                                                                                                                      |       |                         |       |                        |       |
| Capital stock,  no par value; 20,000,000 shares authorized, 12,729,224 and 11,772,352 shares  issued and outstanding at September 30, 2005 and December 31, 2004,  respectively |       | 164,118                      |       | 139,207                     |       |
| Retained earnings                                                                                                                                                                         |       | 40,798                       |       | 35,550                      |       |
| Accumulated  other comprehensive loss                                                                                                                                                     |       | (1,319                       | )          | (42                         | )          |
|                                                                                                                                                                                      |       |                         |       |                        |       |
| **Total  stockholders’ equity**                                                                                                                                                      |       | 203,597                      |       | 174,715                     |       |
|                                                                                                                                                                                      |       |                         |       |                        |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                                      |       | $                            | 1,613,806  |                        | $          | 1,274,136 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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

**Consolidated Statements of Income**

**(Unaudited)**

 
| ** **                                                               | ** ** | **Three months ended  September 30,**   | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                                     | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                               | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Interest income:                                                         |       |                                         |       |                                      |       |   |   |   |   |
| Loans, including  fees                                                   |       | $                                            | 21,833     |                                      | $          | 13,713 |   | $ | 58,816 |   | $ | 37,261 |   |
| Taxable  securities                                                      |       | 1,884                                        |       | 1,250                                     |       | 5,360 |   | 3,275 |   |
| Nontaxable  securities                                                   |       | 153                                          |       | 184                                       |       | 483 |   | 554 |   |
| Federal funds  sold                                                      |       | 132                                          |       | 55                                        |       | 236 |   | 115 |   |
| Interest-bearing  deposits in banks                                      |       | 19                                           |       | 9                                         |       | 34 |   | 17 |   |
| Total interest  income                                                   |       | 24,021                                       |       | 15,211                                    |       | 64,929 |   | 41,222 |   |
|                                                                     |       |                                         |       |                                      |       |   |   |   |   |
| Interest expense:                                                        |       |                                         |       |                                      |       |   |   |   |   |
| Deposits                                                                 |       | 7,647                                        |       | 3,429                                     |       | 18,545 |   | 9,337 |   |
| Federal funds  purchased and securities sold under repurchase agreements |       | 161                                          |       | 57                                        |       | 470 |   | 150 |   |
| Federal Home  Loan Bank advances                                         |       | 1,038                                        |       | 760                                       |       | 2,903 |   | 2,361 |   |
| Other borrowings                                                         |       | 530                                          |       | 355                                       |       | 1,500 |   | 768 |   |
| Total interest  expense                                                  |       | 9,376                                        |       | 4,601                                     |       | 23,418 |   | 12,616 |   |
|                                                                     |       |                                         |       |                                      |       |   |   |   |   |
| Net interest  income                                                     |       | 14,645                                       |       | 10,610                                    |       | 41,511 |   | 28,606 |   |
|                                                                     |       |                                         |       |                                      |       |   |   |   |   |
| Provision for loan losses                                                |       | 635                                          |       | 332                                       |       | 4,939 |   | 941 |   |
|                                                                     |       |                                         |       |                                      |       |   |   |   |   |
| Net interest  income after provision for loan losses                     |       | 14,010                                       |       | 10,278                                    |       | 36,572 |   | 27,665 |   |
|                                                                     |       |                                         |       |                                      |       |   |   |   |   |
| Other income:                                                            |       |                                         |       |                                      |       |   |   |   |   |
| Service charges  on deposit accounts                                     |       | 1,659                                        |       | 1,598                                     |       | 4,823 |   | 4,479 |   |
| Mortgage  origination fees                                               |       | 621                                          |       | 504                                       |       | 1,744 |   | 1,475 |   |
| Insurance  commissions                                                   |       | 149                                          |       | 155                                       |       | 442 |   | 456 |   |
| Gain on sale of  securities                                              |       | 552                                          |       | -                                         |       | 553 |   | 609 |   |
| Other operating  income                                                  |       | 495                                          |       | 442                                       |       | 1,577 |   | 1,521 |   |
| Total other  income                                                      |       | 3,476                                        |       | 2,699                                     |       | 9,139 |   | 8,540 |   |
|                                                                     |       |                                         |       |                                      |       |   |   |   |   |
| Other expense:                                                           |       |                                         |       |                                      |       |   |   |   |   |
| Salaries and  employee benefits                                          |       | 6,865                                        |       | 5,369                                     |       | 19,746 |   | 15,242 |   |
| Occupancy and  equipment expenses, net                                   |       | 1,631                                        |       | 1,292                                     |       | 4,648 |   | 3,718 |   |
| Other operating  expenses                                                |       | 3,055                                        |       | 2,795                                     |       | 9,025 |   | 7,319 |   |
| Total other  expense                                                     |       | 11,551                                       |       | 9,456                                     |       | 33,419 |   | 26,279 |   |
|                                                                     |       |                                         |       |                                      |       |   |   |   |   |
| Income before  income taxes                                              |       | 5,935                                        |       | 3,521                                     |       | 12,292 |   | 9,926 |   |
|                                                                     |       |                                         |       |                                      |       |   |   |   |   |
| Income tax expense                                                       |       | 2,032                                        |       | 1,121                                     |       | 3,990 |   | 3,063 |   |
|                                                                     |       |                                         |       |                                      |       |   |   |   |   |
| Net income                                                               |       | $                                            | 3,903      |                                      | $          | 2,400 |   | $ | 8,302 |   | $ | 6,863 |   |
|                                                                     |       |                                         |       |                                      |       |   |   |   |   |
| Earnings per share:                                                      |       |                                         |       |                                      |       |   |   |   |   |
| Basic                                                                    |       | $                                            | 0.31       |                                      | $          | 0.25 |   | $ | 0.66 |   | $ | 0.78 |   |
| Diluted                                                                  |       | $                                            | 0.30       |                                      | $          | 0.25 |   | $ | 0.65 |   | $ | 0.77 |   |
|                                                                     |       |                                         |       |                                      |       |   |   |   |   |
| Weighted average shares                                                  |       |                                         |       |                                      |       |   |   |   |   |
| Basic                                                                    |       | 12,723                                       |       | 9,491                                     |       | 12,494 |   | 8,855 |   |
| Diluted                                                                  |       | 13,089                                       |       | 9,621                                     |       | 12,868 |   | 8,888 |   |
|                                                                     |       |                                         |       |                                      |       |   |   |   |   |
| Cash dividends per common share                                          |       | $                                            | 0.085      |                                      | $          | 0.076 |   | $ | 0.246 |   | $ | 0.224 |   |

 

See accompanying notes to consolidated financial statements.

 

4

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

**ConsolidatedStatements of Comprehensive Income**

**(Unaudited)**

 
| ** **                                                                     | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                     | ** ** | **(Dollars in thousands)**                 | ** ** |
|                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| **Net Income**                                                                 |       | $                                          | 3,903      |                                      | $          | 2,400 |   | $ | 8,302 |   | $ | 6,863 |   |
|                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Unrealized holding gains (losses) arising during period, net of tax  (benefit) |       | (271                                       | )          | 1,588                                     |       | (934 | ) | 511 |   |
|                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Reclassification adjustment for gains realized in net income, net of  taxes    |       | (342                                       | )          | —                                    |       | (343 | ) | (378 | ) |
|                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Other comprehensive income  (loss)                                             |       | (613                                       | )          | 1,588                                     |       | (1,277 | ) | 133 |   |
|                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| **Comprehensive income**                                                       |       | $                                          | 3,290      |                                      | $          | 3,988 |   | $ | 7,025 |   | $ | 6,996 |   |

 

See accompanying notes to consolidated financial statements.

 

### **Consolidated Statements of Stockholders’ Equity**

### **Nine Months Ended September 30,2005**

**(Unaudited)**

 
| ** **                                                             | ** ** | **(In thousands)** | ** ** |
|------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                             | ** ** | **Shares**         | ** ** | **Capital  Stock** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other****Comprehensive  Loss** | ** ** | **Total  Stockholders’  Equity** | ** ** |
| ** **                                                             | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance, December 31, 2004                                        |       | 11,772             |       | $ | 139,207 |   | $ | 35,550 |   | $ | (42 | ) | $ | 174,715 |   |
|                                                                   |       |               |       |   |   |   |   |   |   |   |   |
| Net income                                                             |       | —             |       | — |   | 8,302 |   | — |   | 8,302 |   |
|                                                                   |       |               |       |   |   |   |   |   |   |   |   |
| Options exercised                                                      |       | 112                |       | 728 |   | — |   | — |   | 728 |   |
|                                                                   |       |               |       |   |   |   |   |   |   |   |   |
| Dividends declared $0.246 per share                                    |       | —             |       | — |   | (3,054 | ) | — |   | (3,054 | ) |
|                                                                   |       |               |       |   |   |   |   |   |   |   |   |
| Purchase of FNBG Bancshares, Inc.                                      |       | 845                |       | 24,216 |   | — |   | — |   | 24,216 |   |
|                                                                   |       |               |       |   |   |   |   |   |   |   |   |
| Payment for fractional shares in connection with business combinations |       | —             |       | (3 | ) | — |   | — |   | (3 | ) |
|                                                                   |       |               |       |   |   |   |   |   |   |   |   |
| Tax benefit of nonqualified stock Options                              |       | —             |       | (30 | ) | — |   | — |   | (30 | ) |
|                                                                   |       |               |       |   |   |   |   |   |   |   |   |
| Other comprehensive loss                                               |       | —             |       | — |   | — |   | (1,277 | ) | (1,277 | ) |
|                                                                   |       |               |       |   |   |   |   |   |   |   |   |
| Balance, September 30,  2005                                      |       | 12,729             |       | $ | 164,118 |   | $ | 40,798 |   | $ | (1,319 | ) | $ | 203,597 |   |

 

See accompanying notes to consolidated financial statements.

 

5

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

**Condensed Consolidated Statementsof Cash Flows**

**(Unaudited)**

 
| ** **                                                                                          | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                                                                          | ** ** | **(In thousands)**                        | ** ** |
| **Operating Activities**                                                                            |       |                                      |       |   |   |
| Net income                                                                                          |       | $                                         | 8,302      |   | $ | 6,863 |   |
| Adjustments to  reconcile net income to net cash Provided by operating activities:                  |       |                                      |       |   |   |
| Depreciation                                                                                        |       | 2,078                                     |       | 1,644 |   |
| Provision for  loan losses                                                                          |       | 4,939                                     |       | 941 |   |
| Amortization and  (accretion), net                                                                  |       | 952                                       |       | 915 |   |
| Gain on sale of  securities                                                                         |       | (553                                      | )          | (609 | ) |
| Net increase in  other assets                                                                       |       | (2,207                                    | )          | (457 | ) |
| Net increase in  other liabilities                                                                  |       | 1,536                                     |       | 1,156 |   |
| Net cash  provided by operating activities                                                          |       | 15,047                                    |       | 10,453 |   |
|                                                                                                |       |                                      |       |   |   |
| **Investing Activities**                                                                            |       |                                      |       |   |   |
| Purchases of  securities available for sale                                                         |       | (26,958                                   | )          | (69,559 | ) |
| Proceeds from  sales of securities available for sale                                               |       | 6,704                                     |       | 3,434 |   |
| Proceeds from  maturities of securities available for sale                                          |       | 27,691                                    |       | 42,551 |   |
| Net increase in  restricted equity securities                                                       |       | (1,504                                    | )          | (691 | ) |
| Net increase in  interest-bearing deposits in banks                                                 |       | (171                                      | )          | (2,114 | ) |
| Net increase  (decrease) in federal funds sold                                                      |       | (44,640                                   | )          | 11,738 |   |
| Net increase in  loans                                                                              |       | (158,458                                  | )          | (47,433 | ) |
| Net cash  acquired in business combinations                                                         |       | 11                                        |       | 4,308 |   |
| Proceeds from  sale of other real estate owned                                                      |       | 1,246                                     |       | 1,343 |   |
| Purchase of  premises and equipment                                                                 |       | (4,293                                    | )          | (4,088 | ) |
| Proceeds from  sale of premises and equipment                                                       |       | 99                                        |       | 5 |   |
| Net cash used in  investing activities                                                              |       | (200,273                                  | )          | (60,506 | ) |
|                                                                                                |       |                                      |       |   |   |
| **Financing Activities**                                                                            |       |                                      |       |   |   |
| Net increase in  deposits                                                                           |       | 195,283                                   |       | 48,603 |   |
| Net increase (decrease)  in federal funds purchased and securities sold under repurchase agreements |       | (16,951                                   | )          | 3,165 |   |
| Proceeds from  other borrowings and Federal Home Loan Bank advances                                 |       | 21,394                                    |       | 10,455 |   |
| Payments on  other borrowings and Federal Home Loan Bank advances                                   |       | (7,941                                    | )          | (16,022 | ) |
| Dividends paid                                                                                      |       | (3,054                                    | )          | (1,917 | ) |
| Payment for  fractional shares                                                                      |       | (3                                        | )          | (30 | ) |
| Proceeds from  issuance of subordinated debt                                                        |       | —                                    |       | 10,310 |   |
| Proceeds from  exercise of stock options                                                            |       | 728                                       |       | 1,347 |   |
| Net cash  provided by financing activities                                                          |       | 189,456                                   |       | 55,911 |   |
|                                                                                                |       |                                      |       |   |   |
| Net increase in  cash and due from banks                                                            |       | 4,230                                     |       | 5,858 |   |
|                                                                                                |       |                                      |       |   |   |
| Cash and due from banks at beginning of period                                                      |       | 20,723                                    |       | 17,584 |   |
|                                                                                                |       |                                      |       |   |   |
| Cash and due from banks at end of period                                                            |       | $                                         | 24,953     |   | $ | 23,442 |   |
|                                                                                                |       |                                      |       |   |   |
| Supplemental disclosure of cash paid during the  period for:                                        |       |                                      |       |   |   |
| Interest                                                                                            |       | $                                         | 22,061     |   | $ | 12,258 |   |
| Income taxes                                                                                        |       | $                                         | 4,103      |   | $ | 3,515 |   |
|                                                                                                |       |                                      |       |   |   |
| Acquisition of subsidiary                                                                           |       |                                      |       |   |   |
| Capital stock  issued (see “Assets acquired (liabilities assumed)” on next page)          |       | $                                         | 24,216     |   | $ | 33,213 |   |

 

6

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| ** **                                | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(In thousands)**                        | ** ** |
| **Assets acquired (liabilities assumed)** |       |                                      |       |   |   |
|                                      |       |                                      |       |   |   |
| Cash and due from banks, net of cash paid |       | $                                         | 11         |   | $ | 4,308 |   |
|                                      |       |                                      |       |   |   |
| Interest-bearing deposits in banks        |       | —                                    |       | 9 |   |
|                                      |       |                                      |       |   |   |
| Federal funds sold                        |       | 4,889                                     |       | 19,199 |   |
|                                      |       |                                      |       |   |   |
| Securities available for sale             |       | 10,872                                    |       | 8,179 |   |
|                                      |       |                                      |       |   |   |
| Restricted equity securities              |       | 634                                       |       | 496 |   |
|                                      |       |                                      |       |   |   |
| Loans, net                                |       | 100,229                                   |       | 146,290 |   |
|                                      |       |                                      |       |   |   |
| Premises and equipment                    |       | 3,755                                     |       | 4,916 |   |
|                                      |       |                                      |       |   |   |
| Goodwill                                  |       | 19,342                                    |       | 19,054 |   |
|                                      |       |                                      |       |   |   |
| Core deposit intangible                   |       | 697                                       |       | 3,154 |   |
|                                      |       |                                      |       |   |   |
| Other assets                              |       | 1,451                                     |       | 2,108 |   |
|                                      |       |                                      |       |   |   |
| Deposits                                  |       | (109,628                                  | )          | (164,237 | ) |
|                                      |       |                                      |       |   |   |
| Other borrowings                          |       | (7,150                                    | )          | (9,391 | ) |
|                                      |       |                                      |       |   |   |
| Other liabilities                         |       | (508                                      | )          | (872 | ) |
|                                      |       |                                      |       |   |   |
|                                      |       | $                                         | 24,594     |   | $ | 33,213 |   |

 

See accompanying notes to consolidated financial statements.

 

7

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

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE 1.        BASIS OF PRESENTATION**

 

The unaudited consolidated financial statementsinclude the accounts of GB&T Bancshares, Inc. and its wholly-ownedbanking subsidiaries, Gainesville Bank & Trust, United Bank &Trust, Community Trust Bank, HomeTown Bank of Villa Rica, First National Bankof the South and First National Bank of Gwinnett, and its consumer finance company,Community Loan Company (collectively, the “Company”).  Significant intercompany transactions andbalances have been eliminated in consolidation.

 

The accompanying unaudited consolidatedfinancial statements have been prepared in accordance with U.S. generallyaccepted accounting principles for interim financial information and with the instructionsfor Form 10-Q.  Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of management, all adjustments(consisting of normal and recurring adjustments) considered necessary for afair presentation have been included. The results of operations for the threeand nine-month periods ended September 30, 2005 are not necessarilyindicative of the results that may be expected for the year ending December 31,2005.  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 ended December 31,2004.

 

**NOTE 2.        STOCK COMPENSATION PLANS**

 

The Company has a stock option plan for grantingof options to directors, officers and employees.  The options may be exercised over a period often years in accordance with vesting schedules determined by the Board ofDirectors.  The Company accounts for theplan under the recognition and measurement principles of APB Opinion No. 25,*Accounting for**Stock Issuedto Employees*, and related Interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under the plan had an exerciseprice equal to the market value of the underlying stock on the date ofgrant.  The following table illustratesthe effect on net income and earnings per share if the Company had applied thefair value recognition provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation*, to stock-based employee compensation.

 
| ** **                                                                                                                                    | ** ** | **Three months ended  September 30,**   | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                                     | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                    | ** ** | **(In thousands, except per share amounts)** | ** ** |
|                                                                                                                                          |       |                                         |       |                                      |       |   |   |   |   |
| Net income, as reported                                                                                                                       | ** ** | $                                            | 3,903      |                                      | $          | 2,400 |   | $ | 8,302 |   | $ | 6,863 | ** ** |
| Deduct: Total  stock-based employee compensation expense determined under fair value based method  for all awards, net of related tax effects |       | 75                                           |       | 178                                       |       | 213 |   | 239 |   |
| Pro forma net income                                                                                                                          |       | $                                            | 3,828      |                                      | $          | 2,222 |   | $ | 8,089 |   | $ | 6,624 |   |
| Earnings per share:                                                                                                                           |       |                                         |       |                                      |       |   |   |   |   |
| Basic - as  reported                                                                                                                          | ** ** | $                                            | 0.31       |                                      | $          | 0.25 |   | $ | 0.66 |   | $ | 0.78 | ** ** |
| Basic – pro  forma                                                                                                                       | ** ** | $                                            | 0.30       |                                      | $          | 0.23 |   | $ | 0.65 |   | $ | 0.75 | ** ** |
| Diluted - as  reported                                                                                                                        | ** ** | $                                            | 0.30       |                                      | $          | 0.25 |   | $ | 0.65 |   | $ | 0.77 | ** ** |
| Diluted - pro  forma                                                                                                                          | ** ** | $                                            | 0.29       |                                      | $          | 0.23 |   | $ | 0.63 |   | $ | 0.75 | ** ** |

 

8

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**NOTE3.****                        ****EARNINGS PER COMMON SHARE**

 

Presentedbelow is a summary of the components used to calculate basic and dilutedearnings per share for the three and nine-month periods ended September 30,2005 and 2004.

 
| ** **                                                                                                                         | ** ** | **Three months ended  September 30,**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| ** **                                                                                                                         | ** ** | **(In thousands, except per share  amounts)** | ** ** |
| Basic Earnings Per Share:                                                                                                          |       |                                          |       |   |   |
| Weighted average common shares outstanding                                                                                         |       | 12,723                                        |       | 9,491 |   |
|                                                                                                                               |       |                                          |       |   |   |
| Net income                                                                                                                         |       | $                                             | 3,903      |   | $ | 2,400 |   |
|                                                                                                                               |       |                                          |       |   |   |
| Basic earnings per share                                                                                                           |       | $                                             | 0.31       |   | $ | 0.25 |   |
|                                                                                                                               |       |                                          |       |   |   |
| Diluted Earnings Per Share:                                                                                                        |       |                                          |       |   |   |
| Weighted average common shares outstanding                                                                                         |       | 12,723                                        |       | 9,491 |   |
| Net effect of the assumed exercise of stock options based on the  treasury stock method using average market prices for the period |       | 366                                           |       | 130 |   |
| Total weighted average common shares and Common stock equivalents  outstanding                                                     |       | 13,089                                        |       | 9,621 |   |
|                                                                                                                               |       |                                          |       |   |   |
| Net income                                                                                                                         |       | $                                             | 3,903      |   | $ | 2,400 |   |
|                                                                                                                               |       |                                          |       |   |   |
| Diluted earnings per share                                                                                                         |       | $                                             | 0.30       |   | $ | 0.25 |   |

 
| ** **                                                                                                                         | ** ** | **Nine months ended  September 30,**     | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| ** **                                                                                                                         | ** ** | **(In thousands, except per share  amounts)** | ** ** |
| Basic Earnings Per Share:                                                                                                          |       |                                          |       |   |   |
| Weighted average common shares outstanding                                                                                         |       | 12,494                                        |       | 8,855 |   |
|                                                                                                                               |       |                                          |       |   |   |
| Net income                                                                                                                         |       | $                                             | 8,302      |   | $ | 6,863 |   |
|                                                                                                                               |       |                                          |       |   |   |
| Basic earnings per share                                                                                                           |       | $                                             | 0.66       |   | $ | 0.78 |   |
|                                                                                                                               |       |                                          |       |   |   |
| Diluted Earnings Per Share:                                                                                                        |       |                                          |       |   |   |
| Weighted average common shares outstanding                                                                                         |       | 12,494                                        |       | 8,855 |   |
| Net effect of the assumed exercise of stock options based on the  treasury stock method using average market prices for the period |       | 374                                           |       | 33 |   |
| Total weighted average common shares and Common stock equivalents  outstanding                                                     |       | 12,868                                        |       | 8,888 |   |
|                                                                                                                               |       |                                          |       |   |   |
| Net income                                                                                                                         |       | $                                             | 8,302      |   | $ | 6,863 |   |
|                                                                                                                               |       |                                          |       |   |   |
| Diluted earnings per share                                                                                                         |       | $                                             | 0.65       |   | $ | 0.77 |   |

 

9

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**NOTE4.****                        ****RECENT ACCOUNTING STANDARDS**

 

In December 2004, the Financial AccountingStandards Board (“FASB”) published FASB Statement No. 123 (revised 2004),Share-Based Payment (“FAS 123(R)” or the “Statement”). FAS 123(R) requires thatthe compensation cost relating to share-based payment transactions, includinggrants of employee stock options, be recognized in financial statements. Thatcost will be measured based on the fair value of the equity or liabilityinstruments issued. FAS 123(R) covers a wide range of share-based compensationarrangements including stock options, restricted share plans, performance-basedawards, share appreciation rights, and employee share purchase plans. FAS123(R) is a replacement of FASB Statement No. 123, Accounting forStock-Based Compensation, and supersedes APB Opinion No. 25, Accountingfor Stock Issued to Employees, and its related interpretive guidance.

 

The effect of the Statement will be to requireentities to measure the cost of employee services received in exchange forstock options based on the grant-date fair value of the award, and to recognizethe cost over the period the employee is required to provide services for theaward. FAS 123(R) permits entities to use any option-pricing model that meetsthe fair value objective in the Statement.

 

The Company will be required to apply FAS 123(R)as of the beginning of its first interim period that begins after December 15,2005, which will be the quarter ending March 31, 2006.

 

FAS 123(R) allows two methods for determiningthe effects of the transition: the modified prospective transition method andthe modified retrospective method of transition.  Under the modified prospective transitionmethod, an entity would use the fair value based accounting method for allemployee awards granted, modified, or settled after the effective date. As ofthe effective date, compensation cost related to the nonvested portion ofawards outstanding as of that date would be based on the grant-date fair valueof those awards as calculated under the original provisions of Statement No. 123;that is, an entity would not re-measure the grant-date fair value estimate ofthe unvested portion of awards granted prior to the effective date of FAS123(R).  An entity will have the furtheroption to either apply the Statement to only the quarters in the period ofadoption and subsequent periods, or apply the Statement to all quarters in thefiscal year of adoption. Under the modified retrospective method of transition,an entity would revise its previously issued financial statements to recognizeemployee compensation cost for prior periods presented in accordance with theoriginal provisions of Statement No. 123.

 

The Company has not yet completed its study ofthe available transition methods or made any decisions about how it will adoptFAS 123(R).   The impact of thisStatement on the Company in fiscal year 2006 and beyond will depend uponvarious factors, including our future compensation strategy. The pro formacompensation costs presented in the table above and in prior filings for theCompany have been calculated using a Black-Scholes option pricing model and maynot be indicative of amounts which should be expected in future years. Nodecisions have been made as to which option-pricing model is most appropriatefor the Company for future awards.

 

In December 2003 the American Institute ofCertified Public Accountants issued Statement of Position (“SOP”) 03-3,Accounting for Certain Loans or Debt Securities Acquired in a Transfer.  This SOP addresses accounting for differencesbetween contractual cash flows and cash flows expected to be collected from aninvestor’s initial investment in loans or debt securities (loans) acquired in atransfer if those differences are attributable, at least in part, to creditquality. It includes such loans acquired in purchase business combinations.This SOP does not apply to loans originated by the entity. This SOP limits theyield that may be accreted (accretable yield) to the excess of the investor’sestimate of undiscounted expected principal, interest, and other cash flows(cash flows expected at acquisition to be collected) over the investor’s initialinvestment in the loan. This SOP requires that the excess of contractual cashflows over cash flows expected to be collected (nonaccretable difference) notbe recognized as an adjustment of yield, loss accrual, or valuation allowance.This SOP prohibits investors from displaying accretable yield and nonaccretabledifference in the balance sheet. Subsequent increases in cash flows expected tobe

 

10

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collected generally should be recognizedprospectively through adjustment of the loan’s yield over its remaining life.Decreases in cash flows expected to be collected should be recognized asimpairment.

 

This SOP prohibits “carrying over” or creationof valuation allowances in the initial accounting of all loans acquired in atransfer that are within the scope of this SOP. The prohibition of thevaluation allowance carryover applies to the purchase of an individual loan, apool of loans, a group of loans, and loans acquired in a purchase businesscombination.

 

The Company adopted SOP 03-3 as of January 1,2005.

 

**NOTE5.****                        ****BUSINESS COMBINATIONS**

 

On March 1, 2005, the Company completed theacquisition of FNBG Bancshares, Inc. the parent company of First NationalBank of Gwinnett in Duluth, Gwinnett County, Georgia, which resulted in FirstNational Bank of Gwinnett becoming a wholly owned subsidiary of the Company.   The Companyissued 845,128 shares of its capital stock and approximately $3.8 million incash in exchange for all of the issued and outstanding common shares of FNBGBancshares, Inc.  The acquisitionwas accounted for as a purchase resulting in estimated goodwill ofapproximately $19.3 million.  FirstNational Bank of Gwinnett’s results of operations from March 1, 2005 areincluded in the consolidated results of operations for the three and nine monthsended September 30, 2005.  Theresults of operations for the three and nine months ended September 30,2004 do not include the results of operations for First National Bank ofGwinnett.

 

The following table summarizes the estimatedfair values of the assets acquired and liabilities assumed at the date ofacquisition.  The Company obtainedthird-party valuations of the core deposit intangible and fair valueadjustments for loans and deposits.  Inaddition, the Company obtained independent appraisals of acquired premises.

 

| ** **                                | ** ** | **Total**          | ** ** |
|-------------------------------------------|------------|--------------------|------------|
| ** **                                | ** ** | **(In thousands)** | ** ** |
|                                      |       |               |       |
| Cash and due from banks, net of cash paid |       | $                  | 11         |   |
| Federal funds sold                        |       | 4,889              |       |
| Securities available for sale             |       | 10,872             |       |
| Restricted equity securities              |       | 634                |       |
| Loans, net                                |       | 100,229            |       |
| Premises and equipment                    |       | 3,755              |       |
| Goodwill                                  |       | 19,342             |       |
| Core deposit intangible                   |       | 697                |       |
| Other assets                              |       | 1,451              |       |
| Total assets  acquired                    |       | $                  | 141,880    |   |
|                                      |       |               |       |
| Deposits                                  |       | $                  | 109,628    |   |
| Other borrowings                          |       | 7,150              |       |
| Other liabilities                         |       | 508                |       |
| Total liabilities  assumed                |       | $                  | 117,286    |   |
|                                      |       |               |       |
| Net assets  acquired                      |       | $                  | 24,594     |   |

 

11

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Unaudited pro forma consolidated results ofoperations for the nine months ended September 30, 2005 and 2004 as thoughthe companies had combined as of January 1, 2005 and 2004 are as follows:

 
| ** **                 | ** ** | **Nine months ended  September 30,**    | ** ** |
|----------------------------|------------|----------------------------------------------|------------|
| ** **                 | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
| ** **                 | ** ** | **(In thousands, except per share amounts)** | ** ** |
|                       |       |                                         |       |
| Net interest  income       |       | $                                            | 42,426     |   | $ | 31,536 |   |
| Net income                 |       | 8,446                                        |       | 7,287 |   |
| Basic earnings per share   |       | 0.68                                         |       | 0.75 |   |
| Diluted earnings per share |       | 0.66                                         |       | 0.75 |   |
|                            |            |                                              |            |  |  |  |  |

 

**NOTE6.****                        ****SUBSEQUENT EVENT**

 

On November 3, 2005, the Company soldsubstantially all of the assets of its consumer finance company, CLC forapproximately $3.3 million.  Managementexpects upon the sale and liquidation of CLC, the loss to be insignificant tothe Company’s financial statements.

 

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

 

The following is management’s discussion andanalysis of certain significant factors which have affected our financialposition and operating results including our wholly-owned subsidiaries,Gainesville Bank & Trust (“GBT”), United Bank & Trust (“UBT”),Community Trust Bank (“CTB”), HomeTown Bank of Villa Rica (“HTB”), FirstNational Bank of the South (“FNBS”), First National Bank of Gwinnett (“FNBG”)and Community Loan Company (“CLC”) during the periods included in theaccompanying consolidated financial statements. This discussion should be read in conjunction with the accompanyingconsolidated financial statements and the notes thereto and the consolidatedfinancial statements, related notes, and Management’s Discussion and Analysisof Financial Condition and Results of Operations for the year ended December 31,2004 included in the Company’s 2004 Annual Report on Form 10-K.

 

**Cautionary Notice Regarding Forward-LookingStatements**

 

Some of the statements of GB&T Bancshares, Inc.(the “Company”) 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 Operation,” are “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-looking statements include statements about thecompetitiveness of the banking industry, potential regulatory obligations, ourentrance and expansion into other markets, our other business strategies andother statements that are not historical facts. Forward-looking statements arenot guarantees of performance or results. When we use words like “may,” “plan,”“contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,”“predict,” “estimate,” “could,” “should,” “would,” “will,” and similarexpressions, you should consider them as identifying forward-lookingstatements, although we may use other phrasing. These forward-lookingstatements involve risks and uncertainties and are based on our beliefs andassumptions, and on the information available to us at the time that thesedisclosures were prepared. Factors that may cause

 

12

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actual results to differ materially from thoseexpressed or implied by such forward-looking statements include, among others,the following possibilities: (1) competitive pressures among depositoryand other financial institutions may increase significantly; (2) changesin the interest rate environment may reduce margins; (3) general economicconditions may be less favorable than expected, resulting in, among otherthings, a deterioration in credit quality and/or a reduction in demand forcredit; (4) economic, governmental or other factors may prevent theprojected population and commercial growth in the counties in which weoperate;  (5) legislative orregulatory changes, including changes in accounting standards, may adverselyaffect the businesses in which we are engaged; (6) costs or difficulties related to the integration of ourbusinesses may be greater than expected; (7) deposit attrition, customerloss or revenue loss following acquisitions may be greater than expected; (8) competitorsmay have greater financial resources and develop products that enable suchcompetitors to compete more successfully than we can; and (9) adversechanges may occur in the equity markets.  Many of these factors are beyond our abilityto control or predict, and readers are cautioned not to put undue reliance onsuch forward-looking statements. We do not intend to, and assume no responsibilityto update or revise any forward-looking statements contained in this Report,whether as a result of new information, future events or otherwise.

 

**Critical Accounting Policies**

** **

We have adoptedvarious accounting policies that govern the application of accountingprinciples generally accepted in the United States and general practices withinthe banking industry in the preparation of our financial statements. Oursignificant accounting policies are described in the notes to our auditedfinancial statements as of December 31, 2004. Certain accounting policiesrequire management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reported period. Actual results could differfrom those estimates. Estimates and assumptions are reviewed periodically andthe effects of revisions are reflected in the consolidated financial statementsin the period they are determined to be necessary.

 

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

 

The company uses an 8 point rating system forits loans. Ratings of 1 to 4 are considered “pass ratings”, 5 is specialmention, 6 is substandard, 7 is doubtful, and 8 is loss. The originatingofficer rates all loans on this system. This rating is adjusted from time totime by the officer to accurately reflect the loan’s current status. Theseratings are reviewed regularly by the Loan Committee, an outside independentloan review firm, our accountants, and by the applicable regulator foraccuracy.

 

The general allowance consists of “Pass”loans.  Pass loans are separated intohomogeneous pools. Currently, these pools consist of real estate, commercial,consumer and credit card. Management assigns loss percentages to thesecategories of homogeneous pools of loans based on the greater of historic lossdata in each category or the minimum risk percentage for this category.Currently, management is developing the moving average net losses for thehistoric loss percentage in each category. This number is reviewed and adjusted periodically, by pool, in light ofcurrent trends in past dues, changes in lending policies, underwritingstandards, economic conditions, and other factors that may affect thisnumber.  In addition to the homogeneouspools management has specified certain industry risks and applied losspercentages to the specified industry risk categories.

 

13

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Recently, because of low losses in mostcategories, management has assigned minimum percentages to each category.   These minimums are reviewed and may beadjusted from time to time to reflect current economic conditions, changes inlending practices, underwriting standards and other matters that may benecessary.  Those minimums are indicatedon our loan loss reserve adequacy calculation.

 

For loans rated 4, (“pass/watch”) a losspercentage of 1% is used.

 

The specific allowance consists of loans thatare classified as either, doubtful, substandard or special mention. Allimpaired or significant loans rated 5, 6 and 7 are individually analyzed and aspecific reserve assigned.  Management, considering current information andevents regarding a borrowers’ ability to repay its obligations, considers aloan to be impaired when the ultimate collectibility of all amounts due,according to the contractual terms of the loan agreement, is in doubt. When aloan is considered to be impaired, the amount of impairment is measured basedon the present value of expected future cash flows discounted at the loan’seffective interest rate. If the loan is collateral-dependent, the fair value ofthe collateral less estimated selling costs is used to determine the amount ofimpairment. Impairment losses are included in the allowance for loan lossesthrough a charge to the provision for losses on loans.  A majority of our impaired loans arecollateral dependent. The allowance for loan losses on these loans is determinedbased upon fair value estimates (net of selling costs) of the respectivecollateral. The actual losses on these loans could differ significantly if thefair value of the collateral is different from the estimates used indetermining the allocated allowance. Most of our collateral-dependent impairedloans are secured by real estate. The fair value of these real estateproperties is generally determined based upon appraisals performed by acertified or licensed appraiser. Management also considers other factors orrecent developments which could result in adjustments to the collateral valueestimates indicated in the appraisals.

 

All other loans rated 5, are assigned a losspercentage of 5%.

 

All other loans rated 6 and 7 are assigned losspercentages of 15% and 50% respectively.

 

All other loans rated 8 are assigned a specificreserve of 100%.

 

The remainder of thebalance in the reserve for loan losses is unallocated.  Management believes that the unallocatedallowance is adequate to provide for probable losses that are inherent in theloan portfolio and that have not been fully provided for through the allocatedallowance. Factors considered in determining the adequacy of the unallocatedallowance include the economic environment, experience level of lenders,concentration in commercial and consumer real estate loans, size of individualloans and the continued strong loan growth in our markets. These factors aretempered by lending practices related to the real estate portfolio, thecontinuing positive performance within this segment of our loan portfolio, theknowledge and experience of our commercial lending staff, and the relationshipbanking philosophy maintained in our community banks.

 

*Goodwill*.   Our growth over the past several years has been enhanced significantlyby mergers and acquisitions. Prior to July 2001, all of our acquisitionswere accounted for using the pooling-of-interests business combination methodof accounting. 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 party valuations,such as appraisals, or external valuations based on discounted cash flowanalyses or other valuation techniques. The determination of the useful livesof intangible assets is subjective as is the appropriate amortization periodfor such intangible assets. In addition, purchase acquisitions typically resultin recording goodwill, which is subject to ongoing periodic impairment testsbased on the fair value of net assets acquired compared to the carrying valueof goodwill. In July 2005, we performed the required impairment testing ofgoodwill and no impairment existed as of the valuation date, as the fair valueof our net assets exceeded their carrying value. If for any future period wedetermine that there has been impairment in the carrying value of our goodwillbalances, we will record a charge to our earnings, which could have a materialadverse effect on our net income.

 

14

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**Summary**

 

Net income for the three months ended September 30,2005 was $3.9 million, an increase of 62.63% compared to the same period a yearago.  Diluted earnings per share was $0.30for the three months ended September 30, 2005, compared to $0.25 for thesame period a year ago.  The return onaverage assets was 1.00% and the return on average equity was 7.64% for thethree months ended September 30, 2005. This compares to a return on average assets of 0.84% and a return onaverage equity of 7.80% for the same period a year ago.

 

Net income for the nine months ended September 30,2005 was $8.3 million, an increase of 20.97% from the same period a yearago.  Net income was impacted by an additional$2.9 million provision for loan loss taken in the second quarter of 2005 due tothe further impairment of an inherited single loan relationship originated atHTB prior to the Company’s acquisition of HTB. Diluted earnings per share was $0.65 for the nine months ended September 30,2005, compared to $0.77 for the same period a year ago.  The return on average assets was 0.76% andthe return on average equity was 5.67% for the nine months ended September 30,2005.  This compares to a return onaverage assets of 0.89% and a return on average equity of 8.60% for the sameperiod a year ago.

 

FNBG became part of the Company effective March 1,2005.  The merger was accounted for as a purchasetransaction; therefore, results of operations for FNBG since March 1, 2005have been included in the Company’s results of operations for the three and nine-monthperiods ended September 30, 2005, but are not included in the results ofoperations for the three and nine-month periods ended September 30, 2004.

 

Total revenue, defined as net interest incomeplus other income, was $18.1 million for the three months ended September 30,2005, an increase of $4.8 million, or 36.16%, from the $13.3 million reportedfor the same period a year ago.  Other expensewas $11.6 million for the three months ended September 30, 2005, anincrease of $2.1 million, or 22.16%, compared to the $9.5 million reported for thesame period a year ago.  Revenue growthhas outpaced expense growth resulting in an improving efficiency ratio for thethree months ended September 30, 2005 of 65.75% compared to 69.51% for thethree months ended September 30, 2004.

 

Total revenue was $50.6 million for the ninemonths ended September 30, 2005, an increase of $13.5 million, or 36.35%,from the $37.1 million reported for the same period a year ago.  Other expense was $33.4 million for the ninemonths ended September 30, 2005, an increase of $7.1 million, or 27.17%,compared to the $26.3 million reported for the same period a year ago.  Revenue growth has outpaced expense growthresulting in an improving efficiency ratio for the nine months ended September 30,2005 of 66.71% compared to 71.92% for the nine months ended September 30,2004.

 

**Balance Sheets**

 

Our total assets increased $339.7 million to $1.6billion at September 30, 2005, or 26.66%, compared to December 31,2004.  The increase consists primarily ofan increase in total loans of $252.2 million, or 26.38%, an increase in securitiesof $3.4 million, an increase in federal funds sold of $49.5 million and anincrease in goodwill and intangible assets of $19.5 million. Excluding theacquisition of FNBG, total assets increased $197.8 million, or 15.52%, duringthis same period.  Also excluding theacquisition, total loans increased $150.7 million, securities decreased $8.1million and federal funds sold increased $44.6 million.

 

Total deposits increased $305.1 million to $1.2billion at September 30, 2005, or 32.86%, compared to December 31,2004.  Noninterest-bearing depositsincreased $47.8 million to $173.5 million and interest-bearing depositsincreased $257.3 million to

 

15

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$1.1 billion during the same period.   Deposit growth outpaced loan growthresulting in a loan to deposit ratio of 97.92% at September 30, 2005compared to 102.94% at December 31, 2004.  Excluding the acquisition of FNBG, total deposits increased $195.5million, or 21.05%, since December 31, 2004.

 

Total stockholders’ equity increased $28.9million to $203.6 million at September 30, 2005, or 16.53%, compared to December 31,2004.  This increase consisted primarilyof net income of $8.3 million, the acquisition of FNBG of $24.2 millionpartially offset by the payment of dividends of $3.1 million.

 

**Asset Quality**

** **

The allowance for loan losses at September 30,2005 was $12.3 million, or 1.02%, of total loans compared to $11.1 million, or 1.16%,at December 31, 2004.  The provisionfor loan losses was $4.9 million at September 30, 2005, which included theadditional provision of $2.9 million taken in the second quarter of 2005 at HTBas discussed above.  Net charge-offsyear-to-date have been $5.0 million, which included $3.4 million also relatedto the loan relationship at HTB, $501,000 related to CLC and $210,000 relatedto loans acquired in the acquisition of Lumpkin County Bank, a division of GBT.  Management believes that the Company’sbusiness fundamentals remain strong, and that the allowance is adequate toabsorb any potential loan losses at September 30, 2005.  The allowance for loan losses is evaluatedmonthly and adjusted to reflect the risk in the portfolio.

 

The following table summarizes the allowance forloan losses for the nine-month periods ended September 30, 2005 and 2004.

 
| ** **                                                            | ** ** | **Nine months ended  September 30,** | ** **    |
|-----------------------------------------------------------------------|------------|-------------------------------------------|---------------|
| ** **                                                            | ** ** | **2005**                                  | ** **    | **2004** | ** ** |
| ** **                                                            | ** ** | **(Dollars in thousands)**                | ** **    |
| **Average amount of loans  outstanding**                              | ** ** | **$**                                     | **1,102,641** |   | $ | 766,511 |   |
|                                                                  |       |                                      |          |   |   |
| **Allowance for loan losses  balance, beginning of period**           | ** ** | **$**                                     | **11,061**    |   | $ | 8,726 |   |
|                                                                  |       |                                      |          |   |   |
| **Less charge-offs**                                                  |       |                                      |          |   |   |
| Commercial loans                                                      | ** ** | **(552**                                  | **)**         | (137 | ) |
| Real estate loans                                                     | ** ** | **(3,837**                                | **)**         | (184 | ) |
| Consumer loans                                                        | ** ** | **(1,001**                                | **)**         | (440 | ) |
| Total charge-offs                                                     | ** ** | **(5,390**                                | **)**         | (761 | ) |
|                                                                  |       |                                      |          |   |   |
| **Plus recoveries**                                                   |       |                                      |          |   |   |
| Commercial loans                                                      | ** ** | **92**                                    |          | 57 |   |
| Real estate loans                                                     | ** ** | **49**                                    |          | 21 |   |
| Consumer loans                                                        | ** ** | **247**                                   |          | 203 |   |
| Total recoveries                                                      | ** ** | **388**                                   |          | 281 |   |
| **Net charge-offs**                                                   | ** ** | **(5,002**                                | **)**         | (480 | ) |
|                                                                  |       |                                      | ** **    |   |   |
| **Plus provision for loan losses**                                    | ** ** | **4,939**                                 | ** **    | 941 |   |
| ** **                                                            | ** ** | ** **                                | ** **    |   |   |
| **Plus allowance for loan losses  acquired in business combinations** | ** ** | **1,269**                                 | ** **    | 2,075 |   |
|                                                                  |       |                                      | ** **    |   |   |
| **Allowance for loan losses  balance, end of period**                 | ** ** | **$**                                     | **12,267**    | ** ** | $ | 11,262 |   |
|                                                                  |       |                                      | ** **    |   |   |
| **Net charge-offs to average  loans**                                 | ** ** | **0.454**                                 | **%**         | 0.063 | % |

 

16

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The following table is a summary of nonaccrual, pastdue loans and restructured loans. The numbers indicate an increase of approximately$1.1 million in nonaccrual loans as of September 30, 2005 as compared to September 30,2004.  This increase is the result of anincrease at GBT in nonaccrual loans of approximately $526,000, an increase at CTBof $892,000 and a decrease of $312,000 at CLC. Subsequent to September 30, 2005, GBT had a nonaccrual loan ofapproximately $1.2 million that was paid out. In addition to nonaccrual loans, the Company also has other real estate,which is considered a nonperforming asset. At September 30, 2005, the balance in other real estate was $2.9million compared to $620,000 at December 31, 2004.  This increase consists of approximately $1.0million related to the loan relationship at HTB discussed above, approximately $550,000at CTB and approximately $800,000 at FNBG. The following table presents a decrease of $813,000 in past due loansover 90 days.  The majority of the decreaseconsists of two loans to the same customer totaling $552,000 located at CTB,which were classified as past due at September 30, 2004, and thensubsequently moved to other real estate. CLC also reported a decrease in past dues of approximately $381,000.  Community Loan Company accounts for approximately99.32%, or $145,000, of the consumer past due loan balance at September 30,2005.  Due to the nature of the consumerfinance business, we believe that the level of nonaccrual and past due loansover 90 days for Community Loan Company is normal and will consistently remainhigher than those seen in our banking subsidiaries.  CLC’s reserve for loan loss is also higher tocover these higher levels of nonaccrual and past due loans.  The allowance for loan losses to total loans forCLC was 5.62% for the period ended September 30, 2005 and 9.40% for theperiod ended September 30, 2004 (See Note 6 regarding the recentdisposition of CLC’s assets).  Managementbelieves that all significant losses related to nonaccrual loans and other realestate have been identified.

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

 
| ** **        | ** ** | **September 30, 2004** | ** ** |
|-------------------|------------|-----------------------------|------------|
| ** **        | ** ** | **Nonaccrual  Loans**       | ** ** | **Past Due  90 Days  Still Accruing** | ** ** | **Restructured  Debt** | ** ** |
| ** **        | ** ** | **(Dollars in thousands)**  | ** ** |
|              |       |                        |       |   |   |   |   |
| Real estate loans |       | $                           | 3,690      |   | $ | 579 |   | $ | — |   |
| Commercial loans  |       | 627                         |       | — |   | — |   |
| Consumer loans    |       | 588                         |       | 531 |   | — |   |
| Total             |       | $                           | 4,905      |   | $ | 1,110 |   | $ | — |   |

 

17

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Our banking subsidiaries’ policy is todiscontinue the accrual of interest income when, in the opinion of management,collection of such interest becomes doubtful. This status is determined when: (1) there is a significantdeterioration in the financial condition of the borrower and full repayment ofprincipal and interest is not expected; and (2) the principal or interestis more than 90 days past due, unless the loan is both well-secured and in theprocess of collection.  Community LoanCompany accrues interest until management determines that full repayment ofprincipal and interest is not probable, which in many cases exceeds 90 dayspast due.  Accrual of interest on suchloans is resumed when, in management’s judgment, the collection of interest andprincipal becomes probable.

 

Loans classified for regulatory purposes asloss, doubtful, substandard, or special mention that have not been included inthe table above do not represent or result from trends or uncertainties whichmanagement reasonably expects will materially impact future operating results,liquidity or capital resources.  Theseclassified loans do not represent material credits about which management isaware of any information which causes management to have serious doubts as tothe ability of such borrowers to comply with their loan repayment terms, exceptas noted above.

 

**Liquidity and Capital Resources**

 

Liquidity management involves the matching ofthe cash flow requirements of customers who may be either depositors desiringto withdraw funds or borrowers needing assurance that sufficient funds will beavailable to meet their credit needs and 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 maintainrelationships with correspondent banks which could provide funds on shortnotice.

 

Our liquidity and capital resources aremonitored on a periodic basis by management, and state and federal regulatoryauthorities.  Our liquidity ratio was 16.01%at September 30, 2005, above our policy minimum ratio of 15%.  Liquidity is measured by the ratio of netcash, Federal funds sold and securities to net deposits and short-termliabilities. In the event our subsidiary banks need to generate additionalliquidity, funding plans would be implemented as outlined in the liquiditypolicy of the subsidiary banks. Our subsidiary banks have lines of creditavailable to meet any unforeseen liquidity needs.  Also, our subsidiary banks have relationshipswith the Federal Home Loan Bank of Atlanta, which provides funding for loangrowth on an as needed basis, however these amounts are subject to collateralpledging and therefore the full amount might not be available.  Management reviews liquidity on a periodicbasis to monitor and adjust liquidity as necessary.  Management has the ability to adjustliquidity by selling securities available for sale, selling participations inloans we generate and accessing available funds through various borrowingarrangements.  At September 30, 2005,we had available borrowing capacity totaling approximately $218.8 millionthrough various borrowing arrangements and available lines of credit.  We believe our short-term investments andavailable borrowing arrangements are adequate to cover any reasonablyanticipated immediate need for funds.

 

18

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As of September 30, 2005, our subsidiary bankswere considered to be well-capitalized as defined in the Federal DepositInsurance Corporation Improvement Act and based on regulatory minimum capitalrequirements.  The Company and thesubsidiary banks’ capital ratios are presented in the following table.

 
| ** **                              | ** ** | **CAPITAL  RATIOS** | ** ** | **FOR CAPITAL  ADEQUACY  PURPOSES** | ** ** | **TO BE  WELL  CAPITALIZED** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-------------------------------------|------------|------------------------------|------------|
|                                    |       |                |       |                                |       |                         |       |
| As of September 30, 2005           |       |                |       |                                |       |                         |       |
| Total Capital to Risk Weighted  Assets: |       |                |       |                                |       |                         |       |
| Consolidated                            |       | 13.72               | %          | 8.00                                | %          | N\A                          |       |
| Gainesville Bank & Trust       |       | 10.72               | %          | 8.00                                | %          | 10.00                        | %          |
| United Bank & Trust            |       | 13.69               | %          | 8.00                                | %          | 10.00                        | %          |
| Community Trust Bank                    |       | 10.04               | %          | 8.00                                | %          | 10.00                        | %          |
| HomeTown Bank of Villa Rica             |       | 10.69               | %          | 8.00                                | %          | 10.00                        | %          |
| First National Bank of the South        |       | 10.15               | %          | 8.00                                | %          | 10.00                        | %          |
| First National Bank of Gwinnett         |       | 11.31               | %          | 8.00                                | %          | 10.00                        | %          |
| Tier I Capital to Risk Weighted Assets: |       |                |       |                                |       |                         |       |
| Consolidated                            |       | 12.74               | %          | 4.00                                | %          | N\A                          |       |
| Gainesville Bank & Trust       |       | 9.66                | %          | 4.00                                | %          | 6.00                         | %          |
| United Bank & Trust            |       | 12.46               | %          | 4.00                                | %          | 6.00                         | %          |
| Community Trust Bank                    |       | 9.17                | %          | 4.00                                | %          | 6.00                         | %          |
| HomeTown Bank of Villa Rica             |       | 10.02               | %          | 4.00                                | %          | 6.00                         | %          |
| First National Bank of the South        |       | 9.27                | %          | 4.00                                | %          | 6.00                         | %          |
| First National Bank of Gwinnett         |       | 10.15               | %          | 4.00                                | %          | 6.00                         | %          |
| Tier I Capital to Average Assets:       |       |                |       |                                |       |                         |       |
| Consolidated                            |       | 10.91               | %          | 4.00                                | %          | N\A                          |       |
| Gainesville Bank & Trust       |       | 8.16                | %          | 4.00                                | %          | 5.00                         | %          |
| United Bank & Trust            |       | 8.76                | %          | 4.00                                | %          | 5.00                         | %          |
| Community Trust Bank                    |       | 8.34                | %          | 4.00                                | %          | 5.00                         | %          |
| HomeTown Bank of Villa Rica             |       | 8.24                | %          | 4.00                                | %          | 5.00                         | %          |
| First National Bank of the South        |       | 8.34                | %          | 4.00                                | %          | 5.00                         | %          |
| First National Bank of Gwinnett         |       | 9.20                | %          | 4.00                                | %          | 5.00                         | %          |

 

In January 2005, the Company completed theconstruction of an operations center for the Company’s operations and dataprocessing departments.  The cost of thebuilding, including furniture, fixtures and equipment was approximately $2.9million.

 

Also in January 2005, the Company began amajor renovation project at our lead bank, GBT. The project was completed in the third quarter of 2005 with a cost of approximately$1.4 million.

 

In October 2005, the Company purchasedproperty in Athens, Georgia for the purpose of building a branch for the Athensdivision of GBT.  The approximate cost ofthe property was $1.1 million. We anticipate the construction of the Athensbranch building to be completed in the second quarter of 2006 with anapproximate completed cost of $1.4 million.

 

Our subsidiary banks are subject to certainrestrictions on the amount of dividends that may be declared without priorregulatory approval.  At September 30,2005, approximately $3.2 million of retained earnings at our subsidiary banks wasavailable for dividend declaration without regulatory approval.

 

19

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**Net Interest Income and Earning Assets**

 

Our profitability is determined by our abilityto effectively manage interest income and expense, to minimize loan andsecurity losses, to generate noninterest income, and to control operatingexpenses.  Because interest rates aredetermined by market forces and economic conditions beyond our control, ourability to generate net interest income depends upon our ability to obtain anadequate net interest spread between the rate paid on interest-bearingliabilities and the rate earned on interest-earning assets.  The net interest margin was 4.23% for the ninemonths ended September 30, 2005, compared to 4.12% for the same period in2004, an increase of 11 basis points. This increase resulted from a 68 basis point increase in the yield onearning assets, offset by a 64 basis point increase in the effective cost offunds.  The increased yield on earningassets was primarily due to increased volumes and yields on loans and the increasedeffective cost of funds was due to higher average rates paid on time depositsand other borrowings.  The Companycontinues to experience growth in loans and deposits while maintaining itscompetitive pricing.

 

The following table sets forth the amount of our interest income orinterest expense for each category of interest-earning assets andinterest-bearing liabilities and the average interest yield/rate for totalinterest-earning assets and total interest-bearing liabilities, net interestspread and net yield on average interest-earning assets.

 

 
| ** **                                                        |   | **For the Nine Months Ended  September 30, 2005** |       | **For the Nine Months Ended  September 30, 2004** |       |
|-------------------------------------------------------------------|--------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                        |   | **Average  balances**                                  | ** ** | **Interest**                                           | ** ** | **Yields  /Rates** | ** ** | **Average  Balances** | ** ** | **Interest** | ** ** | **Yields  /Rates** |   |
| ** **                                                        |   | **(Dollars in thousands)**                             |       |
| **Assets**                                                        |   |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Interest earning assets:                                          |   |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Taxable  securities                                               |   | $                                                      | 191,077    |                                                   | $          | 5,360 |   | 3.75 | % | $ | 131,346 |   | $ | 3,275 |   | 3.33 | % |
| Nontaxable  securities                                            |   | 14,671                                                 |       | 483                                                    |       | 4.40 | % | 16,082 |   | 554 |   | 4.60 | % |
| Federal funds  sold                                               |   | 9,693                                                  |       | 236                                                    |       | 3.26 | % | 13,922 |   | 115 |   | 1.10 | % |
| Interest bearing  deposits in banks                               |   | 1,224                                                  |       | 34                                                     |       | 3.71 | % | 2,219 |   | 17 |   | 1.02 | % |
| Loans, net of  unearned income                                    |   | 1,094,527                                              |       | 58,816                                                 |       | 7.18 | % | 763,176 |   | 37,262 |   | 6.52 | % |
| Total interest  earning assets                                    |   | $                                                      | 1,311,192  |                                                   | $          | 64,929 |   | 6.62 | % | $ | 926,745 |   | $ | 41,223 |   | 5.94 | % |
| Noninterest earning assets:                                       |   |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Unrealized gains  (losses) on securities                          |   | (1,757                                                 | )          |                                                   |       |   |   | 272 |   |   |   |   |   |
| Allowance for  loan losses                                        |   | (12,482                                                | )          |                                                   |       |   |   | (9,394 | ) |   |   |   |   |
| Nonaccrual loans                                                  |   | 8,114                                                  |       |                                                   |       |   |   | 3,335 |   |   |   |   |   |
| Cash and due  from banks                                          |   | 26,033                                                 |       |                                                   |       |   |   | 18,685 |   |   |   |   |   |
| Other assets                                                      |   | 133,366                                                |       |                                                   |       |   |   | 88,169 |   |   |   |   |   |
| Total  noninterest earning assets                                 |   | 153,274                                                |       |                                                   |       |   |   | 101,067 |   |   |   |   |   |
| Total assets                                                      |   | $                                                      | 1,464,466  |                                                   |       |   |   |   | $ | 1,027,812 |   |   |   |   |   |
| **Liabilities & Shareholders’ Equity**              |   |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Interest bearing liabilities:                                     |   |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Interest bearing  demand & savings                       |   | $                                                      | 405,074    |                                                   | 5,858      |   | 1.93 | % | $ | 317,569 |   | 2,745 |   | 1.15 | % |
| Time                                                              |   | 541,815                                                |       | 12,687                                                 |       | 3.13 | % | 379,503 |   | 6,593 |   | 2.32 | % |
| Borrowings                                                        |   | 160,857                                                |       | 4,873                                                  |       | 4.05 | % | 114,636 |   | 3,279 |   | 3.82 | % |
| Total interest  bearing liabilities                               |   | 1,107,746                                              |       | 23,418                                                 |       | 2.83 | % | 811,708 |   | 12,617 |   | 2.08 | % |
| Noninterest  bearing liabilities & shareholders’ equity: |   |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Noninterest  bearing deposits                                     |   | 147,571                                                |       |                                                   |       |   |   | 98,791 |   |   |   |   |   |
| Other  liabilities                                                |   | 13,313                                                 |       |                                                   |       |   |   | 10,680 |   |   |   |   |   |
| Shareholder’s  equity                                        |   | 195,836                                                |       |                                                   |       |   |   | 106,633 |   |   |   |   |   |
| Total  liabilities & shareholders’ equity           |   | $                                                      | 1,464,466  |                                                   |       |   |   |   | $ | 1,027,812 |   |   |   |   |   |
| Interest rate differential                                        |   |                                                   |       |                                                   |       | 3.79 | % |   |   |   |   | 3.86 | % |
| Net interest income                                               |   |                                                   |       | 41,511                                                 |       |   |   |   |   | 28,606 |   |   |   |
| Net interest margin                                               |   |                                                   |       |                                                   |       | 4.23 | % |   |   |   |   | 4.12 | % |

 

20

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Net interest income increased $4.0 million, or 38.03%,for the three months ended September 30, 2005 compared to the same periodin 2004.  The net increase consists of anincrease in interest income of $8.8 million, or 57.92%, less an increase ininterest expense of $4.8 million, or 103.78%, for the three-month period.  Net interest income increased $12.9 million,or 45.11%, for the nine months ended September 30, 2005 compared to the sameperiod in 2004.  The net increaseconsists of an increase in interest income of $23.7 million, or 57.51%, less anincrease in interest expense of $10.8 million, or 85.62%, for the nine-monthperiod.  These increases reflect thecontinued increase in interest-earning assets during the first nine months of2005 compared to the first nine months of 2004. The change in net interest income resulted from increases in net loan volumeand an increase in interest rates.  Thesevariances include the impact of the acquisition of FNBG in March 2005.

 

**Other Income**

** **

Other income for the three months ended September 30,2005, increased by $777,000, or 28.79%, compared to the same period in 2004.  Service charges increased by $61,000, mortgageorigination fees increased by $117,000 and gain on sale of securities, netincreased by $552,000 for the three-month period.  Other income for the nine months ended September 30,2005, increased by $599,000, or 7.01%, compared to the same period in2004.  Service charges increased by $344,000and mortgage origination fees increased by $269,000, which were offset by adecrease in gain on sale of securities of $56,000 for the nine-month periodended September 30, 2005.

 

**Other Expense**

** **

Other expenses increased by approximately $2.1 million,or 22.16%, for the three months ended September 30, 2005 compared to thesame period in 2004.  The increase is dueprimarily to an increase in salaries and employee benefits expense of $1,496,000.  Net occupancy and equipment expensesincreased $339,000.  Included in theincrease in other operating expenses for the three month period were increasesin supplies, postage and telephone of $137,000, loan acquisition costs of $46,000,legal and collection expense of $48,000 and conventions and meetings of $23,000.  Other expenses increased by approximately $7.1million, or 27.17%, for the nine months ended September 30, 2005 comparedto the same period in 2004.  The increaseis primarily due to an increase in salaries and employee benefits expense of $4.5million.  Net occupancy and equipmentexpenses increased $930,000.  Included inthe increase in other operating expenses for the nine month period ended September 30,2005 were increases in supplies, postage and telephone of $321,000, loanacquisition costs of $139,000, legal and collection expense of $189,000 andmarketing and public relations of $101,000. The increases in all of the above categories can be partially attributedto the inclusion in 2005 of FNBG for the three and nine-month periods and theaddition of 22 employees related to the acquisition of FNBG.

 

**Income Tax Expense**

** **

Income tax expense increased by $911,000 for thethree-month period ended September 30, 2005, compared to the same period in2004.  Income tax expense increased by $927,000for the nine month period ended September 30, 2005 compared to the sameperiod in 2004.  The effective tax ratefor the nine-month period ended September 30, 2005 was 32.46%, compared to30.86% for the same period in 2004.

 

**Net Income**

** **

Net income increased by $1.5 million, or 62.63%,for the three months ended September 30, 2005, compared to the same periodin 2004.  Net income increased by $1.4million, or 20.97%, for the nine months ended September 30, 2005 comparedto the same period in 2004.  The increasefor the nine-month period was impacted by the additional provision for loanloss recorded in the second quarter of 2005, which is partially offset byincreases in net interest income as discussed above.

 

We are not aware of any other known trends,events or uncertainties, other than the effect of events as described above,that will have or that are reasonably likely to have a material effect on itsliquidity, capital resources or operations. We are not aware

 

21

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of any current recommendations by the regulatoryauthorities, which, if they were implemented, would have such an effect, exceptas noted above.

 

**Off Balance Sheet Arrangements**

** **

Our financial statements do not reflect variouscommitments and contingent liabilities that arise in the normal course ofbusiness.  These off-balance sheetfinancial instruments include commitments to extend credit, standby letters ofcredit and credit card commitments.  Suchfinancial instruments are included in the financial statements when funds aredistributed or the instruments become payable. Our exposure to credit loss in the event of nonperformance by the otherparty to the financial instrument for commitments to extend credit, standbyletters of credit and credit card commitments is represented by the contractualamount of those instruments.  We use thesame credit policies in making commitments as we do for on-balance sheetinstruments.  Although these amounts donot necessarily represent future cash requirements, a summary of ourcommitments as of September 30, 2005 and December 31, 2004 are asfollows:

 
| ** **                          | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **(In thousands)**          | ** ** |
|                                |       |                        |       |                       |       |
| Commitments to extend credit        |       | $                           | 252,069    |                       | $          | 192,294 |   |
| Financial standby letters of credit |       | 8,448                       |       | 7,354                      |       |
| Other standby letters of credit     |       | 1,539                       |       | 1,357                      |       |
| Credit card commitments             |       | 7,112                       |       | 5,235                      |       |
| Total                               |       | $                           | 269,168    |                       | $          | 206,240 |   |

** **

**Item 3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

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

 

A simple interest rate“gap” analysis by itself may not be an accurate indicator of how net interestincome will be affected by changes in interest rates. Accordingly, we alsoevaluate how the repayment of particular assets and liabilities is impacted bychanges in interest rates. Income associated with interest-earning assets andcosts associated with interest-bearing liabilities may not be affecteduniformly by changes in interest rates. In addition, the magnitude and durationof changes in interest rates

 

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may have a significantimpact on net interest income. For example, although certain assets andliabilities may have similar maturities or periods of repricing, they may reactin different degrees to changes in market interest rates. Interest rates oncertain types of assets and liabilities fluctuate in advance of changes ingeneral market rates, while interest rates on other types may lag behindchanges in general market rates. In addition, certain assets, such asadjustable rate mortgage loans, have features (generally referred to as “interestrate caps and floors”) which limit the amount of changes in interest rates.Prepayment and early withdrawal levels also could deviate significantly fromthose assumed in calculating the interest rate gap. The ability of manyborrowers to service their debts also may decrease during periods of risinginterest rates.

 

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

 

Management believes that gap analysis is auseful tool for measuring interest rate risk only when used in conjunction withits simulation model.  As of August 31,2005, the Company maintained an asset sensitive interest rate risk positionbased on its simulation model results. This positioning would be expected to result in an increase in netinterest income in a rising rate environment and a decrease in net interestincome in a declining rate environment. This is generally due to a greater proportion of interest earning assetsrepricing on a variable rate basis as compared to variable rate fundingsources. This asset sensitivity is indicated by selected results of netinterest income simulations.  The actualrealized change in net interest income would depend on several factors.  These factors include, but are not limitedto, actual realized growth in asset and liability volumes, as well as the mixexperienced over these time horizons. Market conditions and their resulting impact on loan, deposit, andfunding pricing would also be a primary determinant in the realized level ofnet interest income.  The table belowshows the impact on net interest margins over a twelve-month period whensubjected to an immediate 100 basis point increase and decrease in rate.

 

**Twelve-Month Net Interest Income Sensitivity**

 

| **Change in Short-Term Interest  Rates (in basis points)** | ** ** | **Estimated Change in Net  Interest Income** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------|------------|
|                                                       |       |                                         |       |
| +100                                                       |       | 8.85                                         | %          |
| Flat                                                       |       | —                                       |       |
| -100                                                       |       | 11.09                                        | %          |

 

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

 

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**Item 4.    CONTROLSAND PROCEDURES**

** **

**Disclosure Controls andProcedures**

 

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

 

**Internal Control over FinancialReporting**

** **

Asof the date of filing of this Form 10-Q, the Company is not aware of anymaterial weaknesses in its internal control over financial reporting.  No change in our internal control overfinancial reporting occurred during the third quarter of 2005 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**PART II - OTHER INFORMATION**

 

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

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

 

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**SIGNATURES**

 

 

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

 

 
| GB&T BANCSHARES,  INC. |      |                                   |
|----------------------------|-----------|----------------------------------------|
|                       |      |                                   |
|                       |      |                                   |
| DATE:                      | 11/9/2005 |                                   |   | BY: | /s/ Richard A. Hunt |   |
|                       |      | Richard A. Hunt                        |
|                       |      | President and Chief  Executive Officer |
|                       |      |                                   |
|                       |      |                                   |
| DATE:                      | 11/9/2005 |                                   |   | BY: | /s/ Gregory L. Hamby |   |
|                       |      | Gregory L. Hamby                       |
|                       |      | Executive Vice  President &   |
|                       |      | Chief Financial  Officer               |
|                            |           |                                        |  |  |  |  |  |

 

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