**UNITED STATES SECURITIES ANDEXCHANGECOMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-K**

 

**(Mark One)**

**x****        AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

**Forthe Fiscal Year Ended December 31, 2007**

** **

**o****        TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

**For the transition period from                    to**

 

**Commissionfile number 000-24203**

 

**GB&TBancshares, Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **Georgia**                                                     | ** ** | **58-2400756**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |       | (I.R.S.  Employer Identification No.) |
|                                                            |       |                                  |
| **500  Jesse Jewell Parkway, S.E.**                             |       |                                  |
| **Gainesville,  Georgia**                                       | ** ** | **30501**                             |
| (Address  of principal executive offices)                       |       | (Zip  code)                           |

 

Registrant’stelephone number, including area code:****(770) 532-1212**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

| **Common  Stock, no par value** | ** ** | **The  Nasdaq Stock Market LLC (Nasdaq Global Select Market)** |
|---------------------------------|------------|----------------------------------------------------------------|
| (Title  of Class)               |       | (Name  of Exchange on which Registered)                        |

 

Securities registered pursuant to Section 12(g) ofthe Act:  None

 

                Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.  Yes o No x

 

                Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act. Yes oNo x

 

                Indicateby check mark whether the registrant:  (1) hasfiled all 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 x No o

 

Indicate by check markif disclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.x

 

                Indicate by check mark whether the registrant isa large accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company.  See thedefinitions of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer o | Accelerated  filer x | Non-accelerated  filer o                     | Smaller  reporting company o |
|----------------------------|----------------------|----------------------------------------------|------------------------------|
|                       |                 | (Do not check if  smaller reporting company) |                         |

 

                Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o Nox

The aggregate marketvalue of the registrant’s common stock held by nonaffiliates as of June 30,2007 was approximately $218,098,009 based on the closing price of the commonstock on the Nasdaq Global Select Market of $16.70 per share on that date.  For this purpose, directors and executiveofficers have been assumed to be affiliates.

 

                Asof February 28, 2008, the Company had issued and outstanding 14,230,796 shares of the 20,000,000 authorizedshares of its no par value common stock.

 

 

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**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of thisAnnual Report on Form 10-K, to be filed in connection with the 2008 AnnualMeeting of Shareholders or as an amendment to this Form 10-K, are incorporatedby reference into Part III of this report.

 

**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKINGSTATEMENTS**

 

Some of the statements contained or incorporatedby reference in this Report, including, without limitation, matters discussedunder the caption “Management’sDiscussion and Analysis of Financial Condition and Results of Operation,” ofGB&T Bancshares, Inc. (the “Company”) are “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements include statements about the competitiveness of thebanking industry, potential regulatory obligations, our entrance and expansioninto other markets, our ability to recover on the impaired loans, our otherbusiness strategies and other statements that are not historical facts.Forward-looking statements are not guarantees of performance or results. Whenwe use words like “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,”“continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,”“will,” and similar expressions, you should consider them as identifyingforward-looking statements, although we may use other phrasing. Theseforward-looking statements involve risks and uncertainties and are based on ourbeliefs and assumptions, and on the information available to us at the timethat these disclosures were prepared. Factors that may cause actual results todiffer materially from those expressed or implied by such forward-lookingstatements include, among others, the following possibilities: (1) competitivepressures among depository and other financial institutions may increasesignificantly; (2) changes in the interest rate environment may reducemargins; (3) general economic conditions may be less favorable thanexpected (both generally and in our markets), resulting in, among other things,a deterioration in credit quality and/or a reduction in demand for credit; (4) declinesin local real estate values;  (5) economic,governmental or other factors may prevent the projected population andcommercial growth in the counties in which we operate;  (6) legislative or regulatory changes,including changes in accounting standards, may adversely affect the businessesin which we are engaged;  (7) costsor difficulties related to the integration of our acquired businesses may begreater than expected; (8) deposit attrition, customer loss or revenueloss following acquisitions may be greater than expected; (9) competitorsmay have greater financial resources and develop products that enable suchcompetitors to compete more successfully than we can; (10) adverse changesmay occur in the equity markets; and (11) our transaction with  SunTrust Banks, Inc. may not beconsummated or may be significantly delayed. You should refer to the risksdetailed below under the heading “Risk Factors” and throughout this Report andin our periodic and current reports filed with the Securities and ExchangeCommission for specific factors which could cause our actual results to bematerially different from those expressed or implied by these forward-lookingstatements. Many of these factors are beyond our ability to control or predict,and readers are cautioned not to put undue reliance on such forward-lookingstatements. We do not intend to, and assume no responsibility for updating orrevising any forward-looking statements contained in this Report, whether as aresult of new information, future events or otherwise.

 

 

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**PART I**

 

**ITEM 1.  BUSINESS**

 

**The Company**

 

GB&T Bancshareswas formed in 1998 as a bank holding company existing under the laws of theState of Georgia. On April 24, 1998, we completed a reorganization ofGainesville Bank & Trust to the current holding company structure byacquiring all of the outstanding common stock of Gainesville Bank &Trust in exchange for 1,676,160 shares of GB&T Bancshares common stock. Theacquisition was accounted for as a pooling of interests. We operate as amulti-bank holding company. All of our business activities are conductedthrough our subsidiaries. At December 31, 2007, we had seven wholly ownedbank subsidiaries, Gainesville Bank & Trust, (“GBT”), United Bank &Trust, (“UBT”), Community Trust Bank, (“CTB”), HomeTown Bank of Villa Rica, (“HTB”),First National Bank of the South, (“FNBS”), First National Bank of Gwinnett, (“FNBG”),Mountain State Bank (“MSB”) and one mortgage company which is a subsidiary ofGBT.

 

Through our subsidiarybanks, we offer a wide range of lending services, including real estate, consumerand commercial loans to individuals, small businesses and other organizationsthat are located in or conduct a substantial portion of their business in ourmarkets. We complement our lending operations with a full array of retaildeposit products and fee-based services to support our clients includingchecking accounts, money market accounts, savings accounts and certificates ofdeposit. We also offer a variety of other traditional banking services to ourcustomers, including drive-up and night depository facilities, 24-hourautomated teller machines, internet banking, telephone banking and limitedtrust services.

 

**Market Areas and Competition**

 

We currently conductbusiness through 35 branches in our subsidiary banks’ market areas of Hall,Polk, Paulding, Cobb, Carroll, Baldwin, Bartow, Putnam, Houston, Clarke,Gwinnett, Dawson, Forsyth, Fulton and Lumpkin Counties, Georgia.  These market areas geographically surroundmetropolitan Atlanta.

 

As a whole, thebanking industry in Georgia is highly competitive. Our subsidiary banks competewith local as well as with national and regional financial institutions in ourmarkets. In addition, our banks compete with credit unions, brokerage firms andmoney market funds. We compete with institutions which may have much greaterfinancial resources than our subsidiary banks, and which may be able to offermore services to customers. In recent years, intense market demands, economicpressures, and increased customer awareness of products and services, and theavailability of electronic services have forced banks to diversify theirservices and become more cost-effective. Our subsidiary banks face strongcompetition in attracting and retaining deposits and loans.

 

Direct competition fordeposits comes from other commercial banks, savings institutions, credit unionsand issuers of securities, such as shares in money market funds. Interest rateson deposit accounts, convenience of banking facilities, products and services,and marketing are all significant factors in the competition for deposits.

 

Competition for loanscomes from other commercial banks, savings institutions, insurance companies,consumer finance companies, credit unions, mortgage banking firms and otherinstitutional lenders. We compete for loan originations through interest ratescharged on loans, loan fees, our efficiency in closing and handling of loans,and the overall quality of service. Competition is affected by the availabilityof lendable funds, general and local economic conditions, interest rates, andother factors that are not readily predictable.

 

Management expectsthat competition will continue in the future due to statewide branching lawsand the entry of additional bank and nonbank competitors to our markets.

 

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**Recent Developments**

 

On November 2,2007, we entered into a definitive merger agreement with SunTrust Banks, Inc.(“SunTrust”), pursuant to which SunTrust will acquire GB&T.  At the effective time of the merger, byvirtue of the merger and without any action on the part of the holders of anycapital stock of GB&T, each share of common stock of GB&T issued andoutstanding immediately prior to the effective time (excluding shares owned byGB&T or SunTrust) will be converted into the right to receive 0.1562 sharesof SunTrust common stock (the “Exchange Ratio”). Cash will be paid in lieu offractional shares. The Agreement also provides that each issued and outstandingoption to purchase shares of GB&T common stock will be converted into anoption to purchase the number of whole shares of SunTrust common stock equal tothe number of shares of GB&T common stock subject to the stock optionmultiplied by the Exchange Ratio (rounded down to the nearest whole share). Theexercise price per share of the SunTrust stock option will equal the exerciseprice for the GB&T stock option divided by the Exchange Ratio.

 

The merger has beenapproved by the Boards of Directors of both companies.  The completion of the merger is subject tovarious closing conditions, including obtaining the approval of GB&Tshareholders, and is expected to be completed in the second quarter of2008.  GB&T and SunTrust willcontinue to operate separately until the transaction closes.  SunTrust has filed a registration statementon Form S-4 in connection with the proposed merger, which includesadditional information related to the proposed merger and GB&T’s proxystatement and SunTrust’s prospectus for the proposed transaction.

 

**Our Strategy**

 

We intend to achieveour primary goal of maximizing shareholder value by focusing on the followingobjectives:

 

·                                          Improve our earnings through efficientmanagement of our infrastructure, capital base and other resources;

 

·                                          Continue to build market share in highgrowth markets in Georgia where we believe we have a competitive advantage andan opportunity for growth;

 

·                                          Continue our primary focus on commercialand retail customers in our market areas with the goal of providing superior,personal customer service and building strong asset quality;

 

·                                          Maintain local authority andaccountability at our subsidiary banks;

 

·                                          Expand our financial products andservices to meet the needs of our customers and to increase our fee income; and

 

·                                          Ensure management’s interests are alignedwith shareholders.

 

*Community Banking*.  We believe that, in our market areas,customers are attracted and retained primarily through personal customerservice and a local, community-oriented atmosphere in which they can feelcomfortable and trust the bank personnel with whom they are dealing. In orderto maintain this atmosphere, as we have acquired new banks and growninternally, we generally maintain the management team of each separate bank,allowing it to retain its local entrepreneurial identity, autonomy and decisionmaking. By keeping with this community banking strategy, we feel that ouremployees and customers will forge long-term, mutually beneficialrelationships. By keeping management local and accessible to customers, webelieve our banks can respond more quickly to our customers’ needs than other,larger banks.  Although we intend tomaintain the relatively autonomous community bank atmosphere, due to the growthour company has experienced in the past several years, we focused our attentionon maintaining asset and credit quality at all of our bank subsidiaries from acentralized, holding company level.  Tofurther this effort, in 2006 we appointed Sid J. Sims, a twenty-eight yearbanking veteran, to the newly created position of Executive Vice President andChief Credit Officer.  Mr. Sims isresponsible for managing asset and credit quality throughout our company.  With the current economy, this role has grownrapidly, and quickly evolved into a more centralized asset quality function.

 

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*Growth Strategy*.  Ourstrategy is to continue pursuing expansion into attractive, high growth marketsaround the metropolitan Atlanta area through selective acquisitions ofcommunity banks as market conditions permit, and the establishment of de novobranch offices. Since February 2000, we have integrated eight bankacquisitions through mergers with their holding companies or merging the banksinto Gainesville Bank & Trust. We focus our acquisition strategy onhigh-quality community banks with proven management teams that view combiningwith us as forging a partnership rather than as an exit strategy. Our goal isto maintain the management team of each acquired bank, allowing it to retainits local entrepreneurial identity, autonomy and decision making, whilesimultaneously increasing efficiency by consolidating administrative and backoffice operations.  While selectiveacquisitions will remain a part of our long-term strategy, we believe thatcurrent economic and market conditions are not conducive to active acquisitionactivities.

 

We intend to continueto expand internally where possible by growing our existing banks in theirrespective market areas and nearby attractive markets. We believe that ourdecentralized community banking strategy allows our banks to effectivelycompete with our larger competitors by providing superior, personalizedcustomer service, leveraging local decision making capabilities, and stayingattuned to community matters.

 

**Trust Preferred Securities**

 

In 2002, our holdingcompany formed a wholly owned grantor trust and issued $15.5 million inaggregate principal amount of trust preferred securities in a private placementoffering. The grantor trust has invested the proceeds of the trust preferredsecurities in subordinated debentures of our holding company. The trustpreferred securities can be redeemed, in whole or in part, from time to time,prior to maturity at our option on or after October 30, 2007. The soleassets of the grantor trust are the subordinated debentures of GB&TBancshares. The debentures have the same variable interest rate as the trustpreferred securities. We have the right to defer interest payments on thedebentures for up to 20 consecutive quarterly periods (five years), so long aswe are not in default under the debentures.

 

On July 22, 2004,we issued an additional $10.3 million in aggregate principal amount of trustpreferred securities through a wholly owned grantor trust in a privateplacement. The grantor trust has invested the proceeds of the trust preferredsecurities in subordinated debentures of our holding company. The trustpreferred securities can be redeemed, in whole or in part, from time to time,prior to maturity at our option on or after September 30, 2009. The soleassets of the grantor trust are the subordinated debentures of GB&TBancshares.

 

In addition, inconnection with the acquisition of Southern Heritage Bank, which now operatesas a division of GBT, we assumed $4.1 million in aggregate principal amount oftrust preferred securities which have substantially the same terms as our othertrust preferred securities except that they have a fixed rate of interest andmay be redeemed at our option on or after June 26, 2008. As of December 31,2007, we had $29.9 million in aggregate principal amount of trust preferredsecurities outstanding. See the notes to the consolidated financial statementsfor further information on our trust preferred securities.

 

**Lending Activities**

 

We originate loansprimarily secured by single and multi-family real estate, residentialconstruction, and owner-occupied commercial buildings. In addition, we makeloans to small and medium-sized commercial businesses, as well as to consumersfor a variety of purposes. We also lend to residential contractors anddevelopers in our market areas. We attempt to obtain a security interest inreal estate whenever possible. As of December 31, 2007, approximately 90%of our loan portfolio was secured by real estate.

 

We also providecommercial and consumer installment loans to our customers that are secured byreal estate and other collateral.  Suchloans are typically of multiple-year duration and, if not variable rate, bearinterest at a rate tied to our cost of funds of equivalent maturity.

 

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Our loan portfolio at December 31,2007 was comprised as follows:

 
| **Type**                 | ** ** | **Dollar Amount**           | ** ** | **Percentage of  Portfolio** | ** ** |
|--------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **(Dollars  in thousands)** | ** ** | ** **                   | ** ** |
|                     |       |                        |       |                         |       |
| Real Estate-Mortgage     |       | $                           | 662,025    |                         | 44.1       | % |
| Real Estate-Construction |       | 695,182                     |       | 46.4                         |       |
| Commercial               |       | 111,537                     |       | 7.4                          |       |
| Consumer                 |       | 27,515                      |       | 1.8                          |       |
| Other                    |       | 4,445                       |       | 0.3                          |       |
| Total                    |       | $                           | 1,500,704  |                         | 100.0      | % |

 

*Real Estate-*Mortgage. We make commercial mortgage loans to finance the purchase of realproperty as well as loans to smaller business ventures, credit lines forworking capital and short-term seasonal or inventory financing, includingletters of credit, that are also secured by real estate. Commercial mortgagelending typically involves higher loan principal amounts, and the repayment ofloans is dependent, in large part, on sufficient income from the propertiescollateralizing the loans to cover operating expenses and debt service. As ageneral practice, we require our commercial mortgage loans to be collateralizedby income producing property having either actual or projected income toservice the debt with adequate margins and to be guaranteed by responsibleparties. In addition, a substantial percentage of our commercial mortgage loanportfolio is secured by owner-occupied commercial buildings. We look foropportunities where cash flow from the collateral provides adequate debtservice coverage and the guarantor’s net worth is centered on assets other thanthe project we are financing. Our commercial mortgage loans are generallycollateralized by first liens on real estate, have fixed or floating interestrates and amortize over a 15 to 25-year period with balloon payments due at theend of one to nine years. Payments on loans collateralized by such propertiesare often dependent on the successful operation or management of theproperties. Accordingly, repayment of these loans may by subject to adverseconditions in the real estate market.

 

In underwritingcommercial mortgage loans, we seek to minimize our risks in a variety of ways,including giving careful consideration to the property’s operating history,future operating projections, current and projected occupancy, location andphysical condition. Our underwriting analysis also includes credit checks,reviews of appraisals and environmental hazards or EPA reports and a review ofthe financial condition of the borrower. We attempt to limit our risk byanalyzing our borrowers’ cash flow and collateral value on an ongoing basis.

 

Our residentialmortgage loans consist of originating residential loans for the purchase ofresidential property to individuals for other third-party lenders. Residentialloans to individuals held in our loan portfolio primarily consist of homeequity loans and lines of credit. These loans are generally made on the basisof the borrower’s ability to repay the loan from his or her employment andother income and are secured by residential real estate, the value of which isreasonably ascertainable. We expect that these loan-to-value ratios will besufficient to compensate for fluctuations in real estate market value and tominimize losses that could result from a downturn in the residential realestate market. Other than originating residential mortgage loans for otherlenders, we infrequently make consumer residential real estate loans consistingprimarily of first and second mortgage loans for residential properties. Wegenerally do not retain long term, fixed rate residential real estate loans inour portfolio due to interest rate and collateral risks and low levels ofprofitability.

 

*Real Estate-Construction*.  Wealso make construction and development loans to residential and, to a lesserextent, commercial contractors and developers located within our market areas.Construction loans generally are secured by first liens on real estate and havefloating interest rates. Construction loans involve additional risksattributable to the fact that loan funds are advanced upon the security of aproject under construction, and the value of the project is dependent on itssuccessful completion. As a result of these uncertainties, construction lendingoften involves the disbursement of substantial funds with repayment dependent,in part, upon the success of the ultimate project rather than the ability of aborrower or guarantor to repay the loan. If we are forced to foreclose on aproject prior to completion, there is no assurance that we will be able torecover all of the unpaid portion of the loan. In addition, we may be requiredto fund additional amounts to complete a project and may have to hold theproperty for an indeterminate period of time. While we 

 

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have underwriting procedures designed toidentify what we believe to be acceptable levels of risks in constructionlending, no assurance can be given that these procedures will prevent lossesfrom the risks described above.

 

*Commercial Lending*.  Ourcommercial loan portfolio includes loans to smaller business ventures, creditlines for working capital and short-term seasonal or inventory financing, aswell as letters of credit that are generally secured by collateral other thanreal estate. Commercial borrowers typically secure their loans with assets ofthe business, personal guaranties of their principals, and sometimes mortgageson the principals’ personal residences. Our commercial loans are primarily madewithin our market areas and are underwritten on the basis of the commercialborrower’s ability to service the debt from income. The risk in commercialloans is the expectation that the loans generally will be serviced from theoperations of the business, and those operations may not be successful.  Additionally, commercial loans may be securedby more specialized collateral which can result in lower levels of recovery.

 

*Consumer Loans*.  Wemake a variety of loans to individuals for personal, family and householdpurposes, including secured and unsecured installment and term loans. Consumerloans entail greater risk than other loans, particularly in the case ofconsumer loans that are unsecured or secured by depreciating assets such asautomobiles. In these cases, any repossessed collateral for a defaultedconsumer loan may not provide an adequate source of repayment for theoutstanding loan balance. In addition, consumer loan collections are dependenton the borrower’s continuing financial stability, and thus are more likely tobe affected by job loss, divorce, illness or personal bankruptcy.

 

*Credit Risks*.  Theprincipal economic risk associated with each category of the loans that we makeis the creditworthiness of the borrower and the ability of the borrower torepay the loan. General economic conditions and the strength of the servicesand retail market segments affect borrower creditworthiness. General factorsaffecting a commercial borrower’s ability to repay include interest rates,inflation and the demand for the commercial borrower’s products and services,as well as other factors affecting a borrower’s customers, suppliers andemployees.

 

Risks associated withreal estate loans also include fluctuations in the value of real estate, newjob creation trends, tenant vacancy rates and, in the case of commercialborrowers, the quality of the borrower’s management. Consumer loan repaymentsdepend upon the borrower’s financial stability and are more likely to beadversely affected by divorce, job loss, illness and personal bankruptcy orother hardships.

 

*Lending Policies*.  Theboards of directors of our subsidiary banks establish and periodically reviewthe subsidiary banks’ lending policies and procedures. Our board of directorsadopted a company-wide lending policy in 2004. Despite our centralized policy,we may grant our subsidiary banks the flexibility to adapt our lending policyto conditions in their specific market areas. However, in order to properlyrecognize the benefits of that flexibility within the parameters of our lendingpolicy, in late 2006 we appointed Sid J. Sims as our Chief Credit Officer tooversee the lending practices of all our subsidiary banks.  There are also regulatory restrictions on thedollar amount of loans available for each lending relationship. State bankingregulations provide that no secured loan relationship may exceed 25% of thesubsidiary banks’ statutory capital or net assets, as defined, and no unsecuredloan relationship may exceed 15% of statutory capital, except in limitedcircumstances. National banking regulations provide that no loan relationshipmay exceed 15% of the subsidiary banks’ Tier 1 capital. Our subsidiary banksoccasionally sell participation interests in loans to other lenders, includingour other subsidiary banks, primarily when a loan exceeds the subsidiary banks’legal lending limits.

 

**Deposits**

 

Our principal sourceof funds for loans and investing in securities is core deposits. We offer awide range of deposit services, including checking, savings, money marketaccounts, and certificates of deposit. We obtain most of our deposits fromindividuals and businesses in our market areas. We believe that the rates weoffer for core deposits are competitive with those offered by other financialinstitutions in our market areas. A secondary source of funding is throughadvances from the Federal Home Loan Bank of Atlanta, subordinated debt andother borrowings which enable us to borrow funds at rates and terms, which attimes, are more beneficial to us.

 

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**Other Banking Services**

 

We offer a range ofproducts and services, including 24-hour internet banking, trust services,direct deposit, traveler’s checks, safe deposit boxes, United States savingsbonds and automatic account transfers. We earn fees for most of these services.We also receive ATM transaction fees from transactions performed by ourcustomers participating in a shared network of automated teller machines and adebit card system that our customers can use throughout Georgia and in otherstates.

 

**Investment Securities**

 

After establishingnecessary cash reserves and funding loans, we invest our remaining liquidassets in securities allowed under banking laws and regulations. We investprimarily in obligations of the United States or obligations guaranteed as toprincipal and interest by the United States, other taxable securities and incertain obligations of states and municipalities. We also invest excess fundsin federal funds with our correspondent banks and primarily act as a net sellerof such funds. The sale of federal funds represents a short-term loan from usto another bank. Risks associated with securities include, but are not limitedto, interest rate fluctuation, maturity, and concentration.

 

**Asset/Liability Management**

 

It is our objective tomanage our assets and liabilities to provide a satisfactory and consistentlevel of profitability within the framework of established cash, loan,securities, borrowing and capital policies. Our overall philosophy is tosupport asset growth primarily through the growth of core deposits, whichinclude deposits of all categories from individuals and businesses. Managementseeks to invest the largest portion of our assets in loans.

 

Our asset-liabilitymix is monitored on a periodic basis with a report reflectinginterest-sensitive assets and interest-sensitive liabilities being prepared andpresented to the Investment Committee of the holding company’s board ofdirectors on a quarterly basis. The objective of this policy is to manageinterest-sensitive assets and liabilities so as to minimize the impact ofsubstantial movements in interest rates on our earnings.

 

**Employees**

 

As of December 31,2007, we had 476 full-time equivalent employees, of which 142 were employed byGainesville Bank & Trust, 27 were employed by GB&T Mortgage, Inc.,a subsidiary of GBT, 26 were employed by United Bank & Trust, 60 wereemployed by Community Trust Bank, 34 were employed by HomeTown Bank of VillaRica, 44 were employed by First National Bank of the South, 22 were employed byFirst National Bank of Gwinnett, 42 were employed by Mountain State Bank and 79were employed by the holding company.  Weare not a party to any collective bargaining agreement and, in the opinion ofmanagement, we enjoy satisfactory relations with our employees.

 

**Supervision and Regulation**

 

We, like the rest ofthe banking industry, are subject to extensive state and federal banking lawsand regulations that impose specific requirements or restrictions on andprovide for general regulatory oversight of virtually all aspects of ouroperations. These laws and regulations are generally intended to protectdepositors, not shareholders.

 

Legislation andregulations authorized by legislation influence, among other things:

 

·                                          How, when and where we may expandgeographically;

 

·                                          What product or service market we mayenter;

 

·                                          How we must manage our assets; and

 

·                                          Under what circumstances money may ormust flow between the parent bank holding company and the subsidiary bank.

 

Set forth below is anexplanation of the major pieces of legislation affecting our industry and howthat legislation affects our actions. The following summary is qualified by reference to the statutory andregulatory provisions discussed. Changes in applicable laws or regulations mayhave a material effect on our business and prospects, and legislative 

 

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changes and the policies of variousregulatory authorities may significantly affect our operations. We cannotpredict the effect that fiscal or monetary policies, or new federal or statelegislation may have on our business and earnings in the future.

 

*General*. The Company is a bank holding company registered with the Board ofGovernors of the Federal Reserve System (the “Federal Reserve”) and the GeorgiaDepartment of Banking and Finance (the “Georgia Department”) under the BankHolding Company Act of 1956, as amended (the “BHC Act”) and the FinancialInstitutions Code of Georgia (the “FICG”), respectively.

 

GBT, UBT, CTB, HTB andMSB are state banks incorporated under the laws of Georgia and are subject toexamination by the Georgia Department and the Federal Deposit Insurance Corporation(“FDIC”).  FNBS and FNBG are nationallychartered banks incorporated under the laws of the United States and aresubject to examination by the FDIC and the Office of the Comptroller of theCurrency (“OCC”).  All of our banks’deposits are insured by the FDIC to the maximum extent provided by law.  The FDIC, OCC, the Federal Reserve and theGeorgia Department regularly examine our operations and have the authority toapprove or disapprove mergers, consolidations, the establishment of branches,and similar corporate actions.  Theagencies also have the power to prevent the continuance or development ofunsafe or unsound banking practices or other violations of law.

 

On November 26, 2007, HTB executed andentered into a Stipulation and Consent Agreement with the FDIC and the GeorgiaDepartment agreeingto the issuance of a Cease and Desist Order (the “Order”).  The Orderbecame effective on December 6, 2007 and addressed the supervision andeducation of HTB’s board of directors, management team, equity capital andreserves in relation to the volume and quality of assets held, level of poorquality loans, allowance for loan and lease losses, lending and collectionpractices, routine and internal controls policies, and alleged violations ofcertain laws, regulations and FDIC statements of policy.  Under the terms of the Order, HTB has agreedto take a number of affirmative steps, many of which have been implemented overthe past few months.

 

*Acquisitions. *The BHC Act requires every bank holding companyto obtain the prior approval of the Federal Reserve before:  (i) it may acquire direct or indirectownership or control of any voting shares of any bank if, after suchacquisition, the bank holding company will directly or indirectly own orcontrol more than 5% of the voting shares of the bank; (ii) it or any ofits subsidiaries, other than a bank, may acquire all or substantially all ofthe assets of any bank; or (iii) it may merge or consolidate with anyother bank holding company.

 

The BHC Act furtherprovides that the Federal Reserve may not approve any transaction that wouldresult in a monopoly or would be in furtherance of any combination orconspiracy to monopolize or attempt to monopolize the business of banking inany section of the United States, or the effect of which may be substantiallyto lessen competition or to tend to create a monopoly in any section of thecountry, or that in any other manner would be in restraint of trade, unless theanticompetitive effects of the proposed transaction are clearly outweighed bythe public interest in meeting the convenience and needs of the communities tobe served.  The Federal Reserve is alsorequired to consider the financial and managerial resources and futureprospects of the bank holding companies and banks involved and the convenienceand needs of the communities to be served. Consideration of financial resources generally focuses on capitaladequacy, and consideration of convenience and needs issues generally focuses onthe parties’ performance under the Community Reinvestment Act of 1977.

 

Under the Riegle-NealInterstate Banking and Branching Efficiency Act, the restrictions on interstateacquisitions of banks by bank holding companies were repealed.  As a result, the Company, and any other bankholding company located in Georgia, is able to acquire a bank located in anyother state, and a bank holding company located outside of Georgia can acquireany Georgia-based bank, in either case subject to certain deposit percentageand other restrictions.  The legislationprovides that unless an individual state has elected to prohibit out-of-statebanks from operating interstate branches within its territory, adequatelycapitalized and managed bank holding companies are able to consolidate theirmultistate banking operations into a single bank subsidiary and to branchinterstate through acquisitions.  De novobranching by an out-of-state bank is permitted only if it is expresslypermitted by the laws of the host state. Georgia does not permit de novo branching by an out-of-state bank.  Therefore, the only method by which anout-of-state bank or bank holding company may enter Georgia is through anacquisition.  Georgia has adopted aninterstate banking statute that removed restrictions on the ability of banks tobranch interstate through mergers, consolidations and acquisitions.

 

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However, Georgia law prohibits a bankholding company from acquiring control of a financial institution until thetarget financial institution has been incorporated for three years.

 

*Restrictions on Transactions withAffiliates.*  We and our subsidiary banks are subject tothe provisions of Section 23A of the Federal Reserve Act.  Section 23A places limits on: the amountof a bank’s loans or extensions of credit to affiliates; a bank’s investment inaffiliates; assets a bank may purchase from affiliates, except for real andpersonal property exemption by the Federal Reserve; the amount of loans orextensions of credit to third parties collateralized by the securities orobligations of affiliates; and a bank’s guarantee, acceptance or letter ofcredit issued on behalf of an affiliate.

 

The total amount of the above transactions islimited in amount, as to any one affiliate, to 10.0% of a bank’s capital andsurplus and, as to all affiliates combined, to 20.0% of a bank’s capital andsurplus.  In addition to the limitationon the amount of these transactions, each of the above transactions must alsomeet specified collateral requirements. The Bank must also comply with other provisions designed to avoid thetaking of low-quality assets.

 

We and our subsidiary banks are also subject tothe provisions of Section 23B of the Federal Reserve Act which, amongother things, prohibit an institution from engaging in the above transactionswith affiliates unless the transactions are on terms substantially the same, orat least as favorable to the institution or its subsidiaries, as thoseprevailing at the time for comparable transactions with nonaffiliatedcompanies.

 

We are also subject to restrictions onextensions of credit to our executive officers, directors, principal shareholdersand their related interests.  Theseextensions of credit must be made on substantially the same terms, includinginterest rates and collateral, as those prevailing at the time for comparabletransactions with third parties, and must not involve more than the normal riskof repayment or present other unfavorable features.

 

*                Activities. *The BHC Act has generally prohibited a bankholding company from engaging in activities other than banking or managing orcontrolling banks or other permissible subsidiaries and from acquiring orretaining direct or indirect control of any company engaged in any activitiesother than those determined by the Federal Reserve to be closely related tobanking or managing or controlling banks as to be a proper incidentthereto.  Provisions of theGramm-Leach-Bliley Act (the “GLB Act”), discussed below, have expanded thepermissible activities of a bank holding company that qualifies as a financialholding company.  In determining whethera particular activity is permissible, the Federal Reserve must consider whetherthe performance of such an activity can be reasonably expected to producebenefits to the public, such as a greater convenience, increased competition,or gains in efficiency, that outweigh possible adverse effects such as undueconcentration of resources, decreased or unfair competition, conflicts ofinterest, or unsound banking practices.

 

*                Gramm-Leach-BlileyAct. *The GLB Act implemented major changes to thestatutory framework for providing banking and other financial services in theUnited States.  The GLB Act, among otherthings, eliminated many of the restrictions on affiliations among banks andsecurities firms, insurance firms, and other financial service providers.  A bank holding company that qualifies as afinancial holding company will be permitted to engage in activities that arefinancial in nature or incidental or complimentary to a financialactivity.  The GLB Act specifies certainactivities that are deemed to be financial in nature, including underwritingand selling insurance, providing financial and investment advisory services,underwriting, dealing in, or making a market in securities, limited merchantbanking activities, and any activity currently permitted for bank holdingcompanies under Section 4(c)(8) of the BHC Act.

 

                Tobecome eligible for these expanded activities, a bank holding company mustqualify as a financial holding company. To qualify as a financial holding company, each insured depositoryinstitution controlled by the bank holding company must be well-capitalized,well-managed, and have at least a satisfactory rating under the CommunityReinvestment Act.  In addition, the bankholding company must file a declaration with the Federal Reserve of itsintention to become a financial holding company. The Company has not filed anapplication to become a financial holding company.

 

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                TheGLB Act designates the Federal Reserve as the overall umbrella supervisor ofthe new financial services holding companies. The GLB Act adopts a system of functional regulation where the primaryregulator is determined by the nature of activity rather than the type ofinstitution.  Under this principle,securities activities are regulated by the Securities and Exchange Commission(the “SEC”) and other securities regulators, insurance activities by the stateinsurance authorities, and banking activities by the appropriate bankingregulator.  As a result, to the extentthat we engage in non-banking activities permitted under the GLB Act, we willbe subject to the regulatory authority of the SEC or state insurance authority,as applicable.

 

*                Paymentof Dividends*.  The Company is a legal entity separate anddistinct from its subsidiaries.  Itsprincipal source of cash flow is dividends from its subsidiary banks.  There are statutory and regulatorylimitations on the payment of dividends by the subsidiary banks to the Company,as well as by the Company to its shareholders.

 

                If,in the opinion of the federal banking agencies, a depository institution underits jurisdiction is engaged in or is about to engage in an unsafe or unsoundpractice (which, depending on the financial condition of the depositoryinstitution, could include the payment of dividends), such authority mayrequire, after notice and hearing, that such institution cease and desist fromsuch practice.  The federal bankingagencies have indicated that paying dividends that deplete a depositoryinstitution’s capital base to an inadequate level would be an unsafe andunsound banking practice.  Under theFederal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), adepository institution may not pay any dividend if payment would cause it tobecome undercapitalized or if it already is undercapitalized.  See “Prompt Corrective Action”.  Moreover, the federal agencies have issuedpolicy statements that provide that bank holding companies and insured banksshould generally pay dividends only out of current operating earnings.

 

                During2007, the Company paid a total of $0.38 per share to its shareholders.  At December 31, 2007, the Company coulddeclare approximately $9.1 million in dividends without further regulatoryapproval.

 

*                CapitalAdequacy*.  We are required to comply with the capitaladequacy standards established by the federal banking agencies.  There are two basic measures of capitaladequacy for bank holding companies that have been promulgated by the FederalReserve: a risk-based measure and a leverage measure.  All applicable capital standards must besatisfied for a bank holding company to be considered in compliance.

 

                Therisk-based capital standards are designed to make regulatory capitalrequirements more sensitive to differences in risk profiles among banks andbank holding companies, to account for off-balance-sheet exposure, and tominimize disincentives for holding liquid assets.  Assets and off-balance-sheet items areassigned to broad risk categories, each with appropriate weights.  The resulting capital ratios representcapital as a percentage of total risk-weighted assets and off-balance-sheetitems.

 

                Theminimum guideline for the ratio of Total Capital to risk-weighted assets(including certain off-balance-sheet items, such as standby letters of credit)is 8.0%.  Total Capital consists of Tier1 Capital, which is comprised of common stock, undivided profits, minorityinterests in the equity accounts of consolidated subsidiaries and noncumulativeperpetual preferred stock, less goodwill and certain other intangible assets,and Tier 2 Capital, which consists of subordinated debt, other preferred stock,and a limited amount of loan loss reserves. At December 31, 2007, our consolidated Total Capital Ratio and ourTier 1 Capital Ratio were 11.44% and 10.18%, respectively.

 

                Inaddition, the Federal Reserve has established minimum leverage ratio guidelinesfor bank holding companies.  Theseguidelines provide for a minimum ratio (the “Leverage Ratio”) of Tier 1 Capitalto average assets, less goodwill and certain other intangible assets, of 3.0%for bank holding companies that meet certain specified criteria, includingthose having the highest regulatory rating. All other bank holding companies generally are required to maintain aLeverage Ratio of at least 3.0%, plus an additional cushion of 1.0% to2.0%.  Our Leverage Ratio at December 31,2007 was 8.66%.  The guidelines alsoprovide that bank holding companies experiencing internal growth or makingacquisitions will be expected to maintain strong capital positions substantiallyabove the minimum supervisory levels without significant reliance on intangibleassets.  Furthermore, the Federal Reservehas indicated that it will consider a “tangible Tier 1 Capital Leverage Ratio”(deducting all intangibles) and other indicators of capital strength inevaluating proposals for expansion or new activities.

 

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                TheBanks are subject to risk-based and leverage capital requirements adopted byits federal banking regulators, which are substantially similar to thoseadopted by the Federal Reserve for bank holding companies.

 

                Failureto meet capital guidelines could subject a bank or bank holding company to avariety of enforcement remedies, including issuance of a capital directive, thetermination of deposit insurance by the FDIC, a prohibition on the taking ofbrokered deposits, and certain other restrictions on its business.  As described below, substantial additionalrestrictions can be imposed upon FDIC-insured depository institutions that failto meet applicable capital requirements. See “Prompt Corrective Action”.

 

                Thefederal bank agencies continue to indicate their desire to raise capitalrequirements applicable to banking organizations beyond their currentlevels.  In this regard, the FederalReserve and the FDIC have, pursuant to FDICIA, recently adopted finalregulations requiring regulators to consider interest rate risk (when theinterest rate sensitivity of an institution’s assets does not match thesensitivity of its liabilities or its off-balance-sheet position) in theevaluation of a bank’s capital adequacy. The bank regulatory agencies have concurrently proposed a methodologyfor evaluating interest rate risk that would require banks with excessiveinterest rate risk exposure to hold additional amounts of capital against suchexposures.

 

                *Support of Subsidiary Institutions*.  Under Federal Reserve policy, we are expectedto act as a source of financial strength for, and to commit resources tosupport, our subsidiary banks.  Thissupport may be required at times when, absent such Federal Reserve policy, wemay not be inclined to provide such support. In addition, any capital loans by a bank holding company to any of itsbanking subsidiaries are subordinate in right of payment to deposits and tocertain other indebtedness of such subsidiary banks.  In the event of a bank holding company’sbankruptcy, any commitment by a bank holding company to a federal bankregulatory agency to maintain the capital of a banking subsidiary will beassumed by the bankruptcy trustee and entitled to a priority of payment*.*

 

*                PromptCorrective Action. *FDICIA established a system of promptcorrective action to resolve the problems of undercapitalizedinstitutions.  Under this system, thefederal banking regulators have established five capital categories (wellcapitalized, adequately capitalized, undercapitalized, significantlyundercapitalized and critically undercapitalized), and are required to takecertain mandatory supervisory actions, and are authorized to take otherdiscretionary actions, with respect to institutions in the threeundercapitalized categories.  Theseverity of the action will depend upon the capital category in which theinstitution is placed.  Generally,subject to a narrow exception, the banking regulator must appoint a receiver orconservator for an institution that is critically undercapitalized.  The federal banking agencies have specifiedby regulation the relevant capital level for each category.

 

                Aninstitution that is categorized as undercapitalized, significantlyundercapitalized, or critically undercapitalized is required to submit anacceptable capital restoration plan to its appropriate federal bankingagency.  A bank holding company mustguarantee that a subsidiary depository institution meets its capitalrestoration plan, subject to certain limitations.  The controlling holding company’s obligationto fund a capital restoration plan is limited to the lesser of 5.0% of anundercapitalized subsidiary’s assets or the amount required to meet regulatorycapital requirements.  Anundercapitalized institution is also generally prohibited from increasing itsaverage total assets, making acquisitions, establishing any branches or engagingin any new line of business, except under an accepted capital restoration planor with FDIC approval.  In addition, theappropriate federal banking agency may treat an undercapitalized institution inthe same manner as it treats a significantly undercapitalized institution if itdetermines that those actions are necessary.

 

AtDecember 31, 2007, all of our banks had the requisite capital level toqualify as “well capitalized” under the regulatory framework for promptcorrective action.

 

*FDIC Insurance Assessments. *The FDICestablishes rates for the payment of premiums by federally insured banks andthrifts for deposit insurance.  Memberinstitutions pay deposit insurance assessments to the Deposit Insurance Fund,or the “DIF.”  The FDIC previouslymaintained the Savings Association Insurance Fund and the Bank Insurance Fund,which primarily insured the deposits of banks and state chartered savingsbanks.  These two funds were merged intothe DIF effective March 31, 2006.

 

TheFDIC recently amended its risk-based assessment system for 2007 to implementauthority that the FDIC was granted under the Federal Deposit Insurance ReformAct of 2005, or the “Reform Act.”  Underthe revised system, 

 

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insuredinstitutions are assigned to one of four risk categories based on supervisoryevaluations, regulatory capital levels and other factors.  The new regulation allows the FDIC to moreclosely tie each financial institution’s deposit insurance premiums to the riskit poses to the DIF. The assessment rate of an institution depends upon thecategory to which it is assigned.  RiskCategory I, which contains the least risky depository institutions, is expectedto include more than 90 percent of all institutions.  Risk Category I, unlike the other riskcategories, contains further risk differentiation based on the FDIC’s analysisof financial ratios, examination components and other information.  The new assessment rates for nearly allfinancial institutions (Risk Category I) are expected to vary between five andseven basis points, or five to seven cents for every $100 of domesticdeposits.  The riskiest institutions(Risk Category IV) may be assessed up to 43 basis points.  The FDIC may adjust rates uniformly from onequarter to the next, except that no single adjustment can exceed three basispoints.

 

Inaddition to the assessments for deposit insurance, institutions are required tomake payments on bonds which were issued in the late 1980s by the FinancingCorporation in order to recapitalize the predecessor to the Savings AssociationInsurance Fund.  During 2007, FinancingCorporation payments for Savings Association Insurance Fund membersapproximated 1.14 basis points of assessable deposits. These assessments, whichare adjusted quarterly, will continue until the Financing Corporation bondsmature in 2017.

 

The FDIC may terminate itsinsurance of deposits if it finds that the institution has engaged in unsafeand unsound practices, is in an unsafe or unsound condition to continueoperations or has violated any applicable law, regulation, rule, order orcondition imposed by the FDIC.

 

*                Safetyand Soundness Standards.*  The FDIA, as amended by the FDICIA and theRiegle Community Development and Regulatory Improvement Act of 1994, requiresthe federal bank regulatory agencies to prescribe standards, by regulations orguidelines, relating to internal controls, information systems and internalaudit systems, loan documentation, credit underwriting, interest rate riskexposure, asset growth, asset quality, earnings, stock valuation andcompensation, fees and benefits, and such other operational and managerialstandards as the agencies deem appropriate. The federal bank regulatory agencies have adopted a set of guidelinesprescribing safety and soundness standards pursuant to FDICIA, as amended.  The guidelines establish general standardsrelating to internal controls and information systems, internal audit systems,loan documentation, credit underwriting, interest rate exposure, asset growthand compensation and fees and benefits. In general, the guidelines require, among other things, appropriatesystems and practices to identify and manage the risks and exposures specifiedin the guidelines.  The guidelinesprohibit excessive compensation as an unsafe and unsound practice and describecompensation as excessive when the amounts paid are unreasonable ordisproportionate to the services performed by an executive officer, employee,director, or principal shareholder.  Inaddition, the agencies adopted regulations that authorize, but do not require,an agency to order an institution that has been given notice by an agency thatit is not satisfying any of such safety and soundness standards to submit acompliance plan.  If, after being sonotified, an institution fails to submit an acceptable compliance plan or failsin any material respect to implement an acceptable compliance plan, the agencymust issue an order directing action to correct the deficiency and may issue anorder directing other actions of the types to which an undercapitalizedinstitution is subject under the “prompt corrective action” provisions ofFDICIA.  See “Prompt Corrective Action”.  If an institution fails to comply with suchan order, the agency may seek to enforce such order in judicial proceedings andto impose civil money penalties.  Thefederal regulatory agencies also proposed guidelines for asset quality andearnings standards.

 

*                CommunityReinvestment Act. *Under the Community Reinvestment Act (“CRA”),our subsidiary banks, as FDIC insured institutions, have a continuing andaffirmative obligation to help meet the credit needs of the entire community,including low- and moderate-income neighborhoods, consistent with safe andsound banking practices. The CRA requires the appropriate federal regulator, inconnection with its examination of an insured institution, to assess theinstitution’s record of meeting the credit needs of its community and to takesuch record into account in its evaluation of certain applications, such asapplications for a merger or the establishment of a branch.  An unsatisfactory rating may be used as thebasis for the denial of an application by the federal banking regulator.  The Banks have received satisfactory ratingsin their CRA examinations.

 

*                Privacy. *The GLB Act also modified laws related tofinancial privacy.  The new financialprivacy provisions generally prohibit a financial institution from disclosingnonpublic personal financial information about consumers to third partiesunless consumers have the opportunity to “opt out” of the disclosure.  A financial institution is also required toprovide its privacy policy annually to its customers.  Compliance with the implementing regulationswas mandatory effective July 1, 2001. Our subsidiary banks implemented the required financial privacyprovisions by July 1, 2001.

 

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*                Effectof Governmental Monetary Policies. *The earnings of our subsidiary banks areaffected by domestic and foreign conditions, particularly by the monetary andfiscal policies of the United States government and its agencies.  The Federal Reserve has had, and willcontinue to have, an important impact on the operating results of commercialbanks through its power to implement monetary policy in order, among otherthings, to mitigate recessionary and inflationary pressures by regulating thenational money supply.  The techniquesused by the Federal Reserve include setting the reserve requirements of memberbanks and establishing the discount rate on member bank borrowings.  The Federal Reserve also conducts open markettransactions in United States government securities.

 

                *USA Patriot Act of 2001*.** In October 2001, the USA Patriot Act of2001 (the “Patriot Act”) was enacted in response to the terrorist attacks inNew York, Pennsylvania, and Washington, D.C. that occurred on September 11,2001.  The Patriot Act impacts financialinstitutions in particular through its anti-money laundering and financialtransparency laws.  The Patriot Actamended the Bank Secrecy Act and the rules and regulations of the Officeof Foreign Assets Control to establish regulations which, among others, setstandards for identifying customers who open an account and promotingcooperation with law enforcement agencies and regulators in order toeffectively identify parties that may be associated with, or involved in,terrorist activities or money laundering*.*

 

On March 2, 2006, Congress passed the USAPatriot Act Improvement and Reauthorization Act of 2005.  This act reauthorized all provisions of thePatriot Act that would otherwise have expired, made 14 of the 16 sunsettingprovisions permanent, and extended the sunset period of the remaining two foran additional four years.

 

                *Proposed Legislation and Regulatory Action*.  New regulations and statutes are regularlyproposed that contain certain wide-ranging proposals for altering thestructures, regulations, and competitive relationships of the nation’sfinancial institutions.  We cannotpredict whether or in what form any proposed regulation or statute will beadopted or the extent to which our business may be affected by any newregulation or statute.

 

**AvailableInformation**

 

**               **The Companyfiles annual, quarterly and current reports, proxy statements and otherinformation with the Securities and Exchange Commission.  These filings are available to the public atthe SEC’s website at http://www.sec.gov.  The Company also has a website at http://www.gbtbancshares.com.  On the website, the Company provideshyperlinks to copies of the annual, quarterly and current reports that theCompany files with the SEC, any amendments to those reports and press releases,as well as the Company’s code of ethics policy.

 

**ITEM 1A.               RISK FACTORS**

 

*               **Our business is subject tocertain risks, including those described below. Readers of this Annual Report on Form 10-K should take such risksinto account in evaluating any investment decision involving our commonstock.  The risks below do not describeall risks applicable to our business and are intended only as a summary ofcertain material factors that affect our operations in the industries in whichwe operate.  More detailed informationconcerning these and other risks is contained in other sections of this AnnualReport on Form 10-K, including “Business” and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.”*

 

**Our proposed merger with SunTrust may not be consummated ormay be delayed, which may adversely affect our anticipated results ofoperations and financial condition, or both.**

 

In November 2007, we announced that we had signed a definitivemerger agreement with SunTrust pursuant to which SunTrust would acquireGB&T. The merger is expected to close in the second quarter of 2008,subject to the satisfaction of customary closing conditions, including thereceipt of regulatory and GB&T shareholder approvals to the merger. Therecan be no assurance that all of these conditions will be satisfied. If theseconditions are not satisfied or waived, we may be unable to complete the merger.

 

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                Upon completion of the merger,each share of common stock of GB&T issued and outstanding immediately priorto the effective time (excluding shares owned by GB&T or SunTrust) will beconverted into the right to receive 0.1562 shares of SunTrust common stock.Cash will be paid in lieu of fractional shares. The Agreement also providesthat each issued and outstanding option to purchase shares of GB&T commonstock will be converted into an option to purchase the number of whole sharesof SunTrust common stock equal to the number of shares of GB&T common stocksubject to the stock option multiplied by 0.1562 (rounded down to the nearestwhole share). The exercise price per share of the SunTrust stock option willequal the exercise price for the GB&T stock option divided by the0.1562.  Accordingly, if the price ofSunTrust common stock declines prior to the completion of the merger, the valueof the stock to be received by GB&T stockholders in the merger willdecrease as compared to the value on the date the merger was announced.

 

As is typical with change of control transactions, GB&T employeesmay experience uncertainty about their future role with the combined company.These employees may leave GB&T prior to or after the closing of the merger.This may adversely affect GB&T’s ability to attract and retain keymanagement, sales, marketing, technical and other personnel, pending theclosing of the merger. Similarly, GB&T’s customers may, in response to theannouncement of the merger, delay or defer purchasing decisions. Any delay ordeferral in purchasing decisions by GB&T’s customers could harm thebusiness of GB&T in the short-term, and the combined company in thelong-term.

 

Ifthe merger is not completed, the price of GB&T common stock may decline tothe extent that the current market price of GB&T reflects a marketassumption that the merger will be completed. The management team would havebeen distracted from running the business and GB&T will incur significantcosts related to the merger, such as legal, accounting and some of the fees andexpenses of their financial advisors, some of which costs must be paid even ifthe merger is not completed.

 

**Significant risks accompany ourrecent rapid expansion**.

 

       We have recently experienced significant growth through acquisitions,including the acquisitions of Lumpkin County Bank and Southern Heritage Bank inAugust 2004, the acquisition of First National Bank of Gwinnett in March 2005and the acquisition of Mountain State Bank in May 2006.  These acquisitions could place a strain onour resources, systems, operations and cash flow. Our ability to manage theseacquisitions will depend on our ability to monitor operations and controlcosts, maintain effective quality controls, expand our internal management andtechnical and accounting systems and otherwise successfully integrate acquiredbusinesses into our company. If we fail to do so, our business, financialcondition and operating results will be negatively impacted.

 

**If our allowance for loan lossesis not sufficient to cover actual loan losses, our earnings could decrease**.

 

       Our loan customers may not repay their loans according to the terms ofthe loans, and the collateral securing the payment of these loans may beinsufficient to assure repayment. We may experience significant loan losseswhich could have a material adverse effect on our operating results. Managementmakes various assumptions and judgments about the collectibility of our loan portfolio,including the creditworthiness of our borrowers and the value of the realestate and other assets serving as collateral for the repayment of many of ourloans. We maintain an allowance for loan losses in an attempt to cover any loanlosses which may occur. In determining the size of the allowance, we rely on ananalysis of our loan portfolio based on historical loss experience, volume andtypes of loans, trends in classification, volume, delinquencies andnon-accruals, national and local economic conditions and other pertinentinformation.

 

       As we expand into new markets, our determination of the size of theallowance could be understated due to our lack of familiarity withmarket-specific factors. If our assumptions are wrong, our current allowancemay not be sufficient to cover future loan losses, and adjustments may benecessary to allow for different economic conditions or adverse developments inour loan portfolio. Additions to our allowance would significantly decrease ournet income.

 

        In addition, federal and stateregulators periodically review our allowance for loan losses and may require usto increase our provision for loan losses or recognize further loancharge-offs, based on judgments different than those of our management. Anyincrease in our allowance for loan losses or loan charge-offs as required bythese regulatory agencies could have a negative effect on our operatingresults.

 

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**Deterioratingcredit quality, particularly in real estate loans, has adversely impacted usand may continue to adversely impact us, leading to higher loan charge-offs or an increase in the our provision for loanlosses.**

 

Thesecond half of 2007 was highlighted by volatility in the financial marketsassociated with subprime mortgages, including adverse impacts on credit qualityand liquidity within the financial markets. The volatility has been exacerbatedby a general decline in the real estate and housing market along withsignificant mortgage loan related losses reported by many other financialinstitutions.  The market areassurrounding metropolitan Atlanta in which our subsidiary banks operate havebeen significantly impacted by the decline in the real estate and housingmarket.  Loan defaults result in adecrease in interest income and may require the establishment of or an increasein loan loss reserves. Furthermore, the decrease in interest income resultingfrom a loan default or defaults may be for a prolonged period of time as weseek to recover, primarily through legal proceedings, the outstanding principalbalance, accrued interest and default interest due on a defaulted loan plus thelegal costs incurred in pursuing our legal remedies.  No assurance can be given that theseconditions will not result in our need to increase loan loss reserves orcharge-off a higher percentage of loans, thereby reducing net income.Furthermore, because our subsidiary banks rely more heavily on loans secured byreal estate, a decrease in real estate values could cause higher loan lossesand require higher loan loss provisions.

 

**Our business is subject to thesuccess of the local economies where we operate**.

 

       Our success significantly depends upon the growth in population, incomelevels, deposits and housing starts in our market areas. If the communities inwhich we operate do not grow or if prevailing economic conditions locally ornationally are unfavorable, our business may be negatively impacted. Inaddition, the economies of the communities in which we operate aresubstantially dependent on the growth of the economy in metropolitan Atlanta.To the extent that economic conditions in metropolitan Atlanta are unfavorableor do not continue to grow as projected, the economies in our market areaswould be adversely affected. Moreover, we cannot give any assurance that wewill benefit from any market growth or favorable economic conditions in ourmarket areas if they do occur.

 

       In addition, the market value of the real estate securing loans as collateralcould be adversely affected by unfavorable changes in market and economicconditions. As of December 31, 2007, approximately 90% of our total loanswere secured by real estate. Any sustained period of increased paymentdelinquencies, foreclosures or losses caused by adverse market or economicconditions in our market areas could adversely affect the value of our assets,our revenues, results of operations and financial condition.

 

**Risks associated withunpredictable economic and political conditions may be amplified as a result ofour limited market areas**.

 

       Conditions such as inflation, recession, unemployment, high interestrates, short money supply, scarce natural resources, international disorders,terrorism and other factors beyond our control may adversely affect ourprofitability. Because the majority of our borrowers are individuals andbusinesses located and doing business in Hall, Polk, Paulding, Cobb, Carroll,Bartow, Baldwin, Putnam, Houston, Clarke, Gwinnett, Dawson, Forsyth, Fulton andLumpkin Counties, Georgia, our success will depend significantly upon theeconomic conditions in those and the surrounding counties. Unfavorable economicconditions in those and the surrounding counties may result in, among otherthings, a deterioration in credit quality or a reduced demand for credit andmay harm the financial stability of our customers. Due to our limited marketareas, these negative conditions may have a more noticeable effect on us thanwould be experienced by a larger institution more able to spread these risks ofunfavorable local economic conditions across a large number of diversifiedeconomies.

 

**Our historical operating resultsmay not be indicative of our future operating results**.

 

       We may not be able to sustain our historical rate of growth or may noteven be able to grow our business at all. In addition, our rapid growth overthe past few years, including our growth through acquisitions, may distort someof our historical financial ratios and statistics. Our strong performanceduring this time period was, in part, the result of an extremely favorableresidential mortgage refinancing market and our successful integration ofacquisitions which occurred during that period. In the future, we may not havethe benefit of a favorable interest rate environment, a strong residentialmortgage market, or the ability to find suitable candidates for acquisition.Various factors, such as economic conditions, regulatory and legislativeconsiderations and competition, may also impede or prohibit our ability toexpand our market 

 

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presence. If we experience a significantdecrease in our historical rate of growth, our results of operations andfinancial condition may be adversely affected due to a high percentage of ouroperating costs being fixed expenses.

 

**Departures of our key personnelmay harm our ability to operate successfully**.

 

       Our success has been and continues to be largely dependent upon theservices of Richard A. Hunt, our President and Chief Executive Officer, othermembers of our senior management team, including our senior loan officers, andour board of directors, many of whom have significant relationships with ourcustomers. Our continued success will depend, to a significant extent, on thecontinued service of these key personnel. The prolonged unavailability or theunexpected loss of any of them could have an adverse effect on our financialcondition and results of operations. We cannot be assured of the continuedservice of our senior management team or our board of directors with us.

 

**Competition from financialinstitutions and other financial service providers may adversely affect ourprofitability**.

 

       The banking business is highly competitive, and we experiencecompetition in each of our market areas from many other financial institutions.We compete with commercial banks, credit unions, savings and loan associations,mortgage banking firms, consumer finance companies, securities brokerage firms,insurance companies, money market funds, and other mutual funds, as well asother super-regional, national and international financial institutions such asBank of America, BB&T, Regions Bank, SunTrust, Synovus and Wachovia thatoperate offices in our market areas and elsewhere.

 

       We compete with these institutions both in attracting deposits and inmaking loans. In addition, we have to attract our customer base from otherexisting financial institutions and from new residents. Many of our competitorsare well-established, larger financial institutions. While we believe we canand do successfully compete with these other financial institutions in ourmarket areas, we may face a competitive disadvantage as a result of our smallersize, lack of geographic diversification and inability to spread our marketingcosts across a broader market. Although we attempt to compete by concentratingour marketing efforts in our market areas with local advertisements, personalcontacts, and greater flexibility and responsiveness in working with localcustomers, we can give no assurance that this strategy will be successful.

 

**We are subject to extensiveregulation that could limit or restrict our activities and adversely affect ourearnings**.

 

       We operate in a highly regulated industry and are subject toexamination, supervision, and comprehensive regulation by various federal andstate agencies. Our compliance with these regulations is costly and restrictscertain of our activities, including payment of dividends, mergers andacquisitions, investments, loans and interest rates charged, interest ratespaid on deposits and locations of offices. We are also subject tocapitalization guidelines established by our regulators, which require us tomaintain adequate capital to support our growth. Many of these regulations areintended to protect depositors, the public and the FDIC rather thanshareholders.

 

       The laws and regulations applicable to the banking industry could changeat any time, and we cannot predict the effects of these changes on our businessand profitability. Because government regulation greatly affects the businessand financial results of all commercial banks and bank holding companies, ourcost of compliance could adversely affect our earnings. In addition, theSarbanes-Oxley Act of 2002, and the related rules and regulationspromulgated by the Securities and Exchange Commission and Nasdaq that areapplicable to us, have increased the scope, complexity and cost of corporategovernance, reporting and disclosure practices, including the costs ofcompleting our audit and maintaining our internal controls.

 

**We facerisks arising from any supervisory actions taken by our regulators, andHomeTown Bank of Villa Rica is currently operating under a Cease and Desist Orderfrom the FDIC.**

 

                On November 26, 2007, oursubsidiary bank HomeTown Bank of Villa Rica executed and entered into aStipulation and Consent Agreement with the FDIC and the Georgia Department ofBanking and Finance agreeing to the issuance of a Cease and Desist Order (the “Order”). The Order became effective on December 6, 2007 and addressed thesupervision and education of HTB’s board of directors, management team, equitycapital and reserves in relation to the volume and quality of assets held,level of poor quality loans, allowance for loan and lease losses, lending andcollection practices, routine and internal controls policies, and allegedviolations of certain laws, regulations and FDIC statements of 

 

16

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policy.   Under the terms of the Order, HTB has agreedto take a number of affirmative steps, including, among other things,increasing the participation of the board of directors in its affairs;assessing the qualifications and experience of management to comply with therequirements of the Order; achieving and maintaining a Tier 1 Capital ratioequal to or exceeding 7.0% of HTB’s total assets; in addition to a fully fundedloan reserve, developing a plan to meet the minimum risk-based capital requirementsas described in the FDIC Statement of Policy on Risk-Based Capital; eliminatingcertain assets classified as “loss”, “doubtful” or “substandard;” performing arisk segmentation analysis and reducing concentrations in the loan portfolio;establishing effective systems for loan review and grading, loan documentation,and allowance for loan and lease losses; and establishing a written strategicbusiness plan.

 

                Over the past few months, HTBhas begun the implementation of many of the items contained in the Order, andmany of the conditions imposed by the Order are extensions of these actions,but we may not be able to cause HTB to adequately comply with the order.  Failure by us to comply with the terms ofthis order or other applicable laws and regulations could have a materialadverse effect on our business, financial condition or operating results.  In addition, other of our subsidiary banksmay be subject to possible regulatory action in the future.

 

**Our ability to pay dividends islimited and we may be unable to pay future dividends**.

 

       Our ability to pay dividends is limited by regulatory restrictions andthe need to maintain sufficient consolidated capital. The ability of our banksubsidiaries to pay dividends to us is limited by their obligations to maintainsufficient capital and by other general restrictions on their dividends thatare applicable to our regulated bank subsidiaries. If these regulatoryrequirements are not met, our subsidiary banks will not be able to paydividends to us, and we may be unable to pay dividends on our common stock.

 

**We have reported that our internalcontrol over financial reporting is not effective, and any unidentifiedmaterial weaknesses could cause us to fail to meet our SEC and other reportingrequirements.**

 

Inconnection with an evaluation of the effectiveness of our internal control overfinancial reporting for the year ended December 31, 2007, managementdetermined the Company’s internal control over financial reporting was noteffective, as demonstrated by a material weakness in the controls over loanapproval procedures related to loan proceeds disbursement on construction anddevelopment loans, and problem loan identification and reporting.  We can provide no assurances that thesematerial weaknesses have been fully corrected or that additional materialweaknesses or significant deficiencies in our internal control over financialreporting will not be discovered in the future. If we fail to remediate any such material weaknesses, our operatingresults or client relationships could be adversely affected or we may fail tomeet our SEC reporting requirements or our financial statements may contain amaterial misstatement.

 

Internalcontrol over financial reporting cannot provide absolute assurance of achievingfinancial reporting objectives or of preventing fraud due to its inherentlimitations, regardless of how well designed or implemented. Internal controlover financial reporting is a process that involves human diligence andcompliance and is subject to lapses in judgment and breakdowns resulting fromhuman failures. Because of these limitations, there is a risk that materialmisstatements or instances of fraud may not be prevented or detected on atimely basis by our internal control over financial reporting.

** **

**ITEM1B.               UNRESOLVED STAFFCOMMENTS**

** **

**                Not applicable.**

** **

**ITEM2.                  PROPERTIES**

** **

                TheCompany’s corporate headquarters are located at 500 Jesse Jewell Parkway, S.E.,Gainesville, Georgia, in the main office of the lead bank, Gainesville Bank &Trust.  The building is jointly owned byGainesville Bank & Trust and a related party.  The Company also has an operations centerlocated at 1480 Jesse Jewell Parkway, Gainesville, Georgia.  Data Processing, Deposit Operations, HumanResources, Accounting and Audit are located in this facility.   The Company’s seven subsidiary banks conductbusiness from facilities the majority of which are owned by the respectivebanks, all of which are in good state of repair and appropriately designed foruse as banking facilities.  Thesubsidiaries provide services from 35 locations, of which 21 locations areowned and 14 are leased.   In the opinionof management, all properties including improvements and furnishings areadequately insured.

 

17

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**ITEM 3.****                                                    ****LEGAL PROCEEDINGS**

 

                We are not a party to, nor isany of our property the subject of, any material pending legal proceedings,other than ordinary routine proceedings incidental to our business, nor to theknowledge of the management are any such proceedings contemplated or threatenedagainst us.

 

**ITEM 4.****                                                    ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

**               **None.

 

**PART II**

 

**ITEM 5.****                                                    ****MARKET FOR REGISTRANT’S COMMONEQUITY, RELATED****STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

(a)          Our common stock is quoted on the NasdaqGlobal Select Market under the symbol “GBTB.” The following table sets forth the high and low closing prices for ourcommon stock as reported by the Nasdaq Global Select Market and the cashdividends declared per share of our common stock for the indicated periods.

 
| ** **          | ** ** | **Closing Price** | ** ** | **Dividends  Declared Per** | ** ** |
|---------------------|------------|-------------------|------------|-----------------------------|------------|
| **Calendar Period** | ** ** | **High**          | ** ** | **Low**                     | ** ** | **Share** | ** ** |
|                |       |              |       |                        |       |   |   |
| **2006**            |       |              |       |                        |       |   |   |
| First Quarter       |       | $                 | 22.39      |                        | $          | 20.50 |   | $ | 0.085 |   |
| Second Quarter      |       | 22.78             |       | 20.62                       |       | 0.090 |   |
| Third Quarter       |       | 21.98             |       | 20.20                       |       | 0.090 |   |
| Fourth Quarter      |       | 22.74             |       | 20.66                       |       | 0.090 |   |
|                |       |              |       |                        |       |   |   |
| **2007**            |       |              |       |                        |       |   |   |
| First Quarter       |       | $                 | 22.17      |                        | $          | 17.65 |   | $ | 0.090 |   |
| Second Quarter      |       | 18.71             |       | 16.01                       |       | 0.095 |   |
| Third Quarter       |       | 17.02             |       | 12.90                       |       | 0.095 |   |
| Fourth Quarter      |       | 13.25             |       | 8.80                        |       | 0.095 |   |

 

(b)                                 As of February 22, 2008, there wereapproximately 3,789 holders ofrecord of our common stock.

 

(c)                                  Dividends are paid at the discretion ofour board of directors. We have historically paid dividends on a quarterlybasis as set forth in the table above. We intend to continue paying cashdividends, but the amount and frequency of cash dividends, if any, will bedetermined by our board of directors after consideration of earnings, capitalrequirements and our financial condition and will depend on cash dividends paidto us by our subsidiary banks. Dividends from our subsidiary banks are ourprimary source of funds for the payment of dividends to our shareholders, andthere are various legal and regulatory limits on the extent to which oursubsidiary banks may pay dividends or otherwise supply funds to us.  See “Supervision and Regulation” sectiondiscussed earlier in this Report. In addition, federal and state agencies havethe authority to prevent us from paying a dividend to our shareholders. Thus,while we intend to continue paying dividends, we can make no assurances that wewill continue to pay dividends or that we will not reduce the amount ofdividends paid in the future.

 

(d)                                 During the fourth quarter of 2007, theCompany did not repurchase any of its equity securities.

 

 

18

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**ITEM 6.                  SELECTED FINANCIAL DATA**

 

                                                                The following table presents selected historicalconsolidated financial information for us and our subsidiaries and is derivedfrom the consolidated financial statements and related notes included in thisAnnual Report on Form 10-K.  Thisinformation is only a summary and should be read in conjunction with ourhistorical financial statements and related notes.  The year ended December 31, 2006includes the acquisition of Mountain Bancshares, Inc. which was completedon May 1, 2006 and accounted for as a purchase.  See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” for further discussion on thisand our prior acquisitions.

 
| ** **                          | ** ** | **As of  and For the Year Ended December 31,**   | ** ** |
|-------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                          | ** ** | **(Dollars  in thousands, except per share amounts)** | ** ** |
|                                |       |                                                  |       |   |   |   |   |   |   |   |   |
| **Summary Balance Sheet Data:**     |       |                                                  |       |   |   |   |   |   |   |   |   |
| Total loans                         |       | $                                                     | 1,500,704  |   | $ | 1,497,701 |   | $ | 1,231,410 |   | $ | 955,880 |   | $ | 709,958 |   |
| Allowance for loan losses           |       | 27,369                                                |       | 24,676 |   | 12,773 |   | 11,061 |   | 8,726 |   |
| Net loans (1)                       |       | 1,473,335                                             |       | 1,473,025 |   | 1,218,637 |   | 944,819 |   | 701,232 |   |
| Earning assets (2)                  |       | 1,672,795                                             |       | 1,708,509 |   | 1,427,484 |   | 1,144,540 |   | 850,505 |   |
| Total assets                        |       | 1,939,012                                             |       | 1,900,376 |   | 1,584,094 |   | 1,274,136 |   | 944,278 |   |
| Total deposits                      |       | 1,495,432                                             |       | 1,480,168 |   | 1,197,026 |   | 928,603 |   | 728,629 |   |
| Subordinated debt                   |       | 29,898                                                |       | 29,898 |   | 29,898 |   | 29,898 |   | 15,464 |   |
| Stockholders’ equity (3)       |       | 218,399                                               |       | 233,338 |   | 198,711 |   | 174,715 |   | 96,843 |   |
|                                |       |                                                  |       |   |   |   |   |   |   |   |   |
| **Summary Income Statement:**       |       |                                                  |       |   |   |   |   |   |   |   |   |
| Interest income                     |       | 137,105                                               |       | 126,575 |   | 90,815 |   | 58,274 |   | 46,792 |   |
| Interest expense                    |       | 72,647                                                |       | 57,393 |   | 33,836 |   | 17,952 |   | 15,288 |   |
| Net interest income                 |       | 64,458                                                |       | 69,182 |   | 56,979 |   | 40,322 |   | 31,504 |   |
| Provision for loan losses           |       | 23,727                                                |       | 15,744 |   | 5,916 |   | 1,406 |   | 1,406 |   |
| Net interest income after provision |       | 40,731                                                |       | 53,438 |   | 51,063 |   | 38,916 |   | 30,098 |   |
| Other income                        |       | 11,364                                                |       | 10,513 |   | 11,631 |   | 11,778 |   | 9,928 |   |
| Other expense                       |       | 68,015                                                |       | 50,159 |   | 44,825 |   | 36,180 |   | 29,693 |   |
| Income (loss) before income taxes   |       | (15,920                                               | )          | 13,792 |   | 17,869 |   | 14,514 |   | 10,333 |   |
| Provision for income taxes          |       | (3,431                                                | )          | 4,271 |   | 5,878 |   | 4,676 |   | 2,608 |   |
| Net income (loss)                   |       | (12,489                                               | )          | 9,521 |   | 11,991 |   | 9,838 |   | 7,725 |   |
|                                |       |                                                  |       |   |   |   |   |   |   |   |   |
| **Net Income Per Share:**           |       |                                                  |       |   |   |   |   |   |   |   |   |
| Basic                               |       | (0.88                                                 | )          | 0.70 |   | 0.96 |   | 1.05 |   | 1.06 |   |
| Diluted                             |       | (0.87                                                 | )          | 0.68 |   | 0.93 |   | 1.04 |   | 1.03 |   |
| Cash dividends declared             |       | 0.38                                                  |       | 0.36 |   | 0.33 |   | 0.30 |   | 0.29 |   |
| Book value                          |       | 15.35                                                 |       | 16.51 |   | 15.54 |   | 14.84 |   | 11.40 |   |
| Tangible book value                 |       | 9.60                                                  |       | 9.95 |   | 10.32 |   | 10.19 |   | 7.51 |   |
|                                |       |                                                  |       |   |   |   |   |   |   |   |   |
| **Average Balances:**               |       |                                                  |       |   |   |   |   |   |   |   |   |
| Total loans                         |       | 1,528,509                                             |       | 1,379,203 |   | 1,131,883 |   | 807,340 |   | 608,131 |   |
| Earning assets                      |       | 1,732,578                                             |       | 1,598,719 |   | 1,343,345 |   | 973,246 |   | 740,818 |   |
| Intangible assets                   |       | 92,282                                                |       | 84,108 |   | 70,947 |   | 42,030 |   | 17,331 |   |
| Total assets                        |       | 1,962,831                                             |       | 1,776,709 |   | 1,496,792 |   | 1,082,701 |   | 813,134 |   |
| Total deposits                      |       | 1,525,203                                             |       | 1,374,419 |   | 1,123,577 |   | 834,100 |   | 637,688 |   |
| Stockholders’ equity           |       | 234,960                                               |       | 223,112 |   | 198,004 |   | 118,271 |   | 73,144 |   |
|                                |       |                                                  |       |   |   |   |   |   |   |   |   |
| **Other Data:**                     |       |                                                  |       |   |   |   |   |   |   |   |   |
| Number of:                          |       |                                                  |       |   |   |   |   |   |   |   |   |
| Common shares  outstanding          |       | 14,231                                                |       | 14,132 |   | 12,784 |   | 11,772 |   | 8,493 |   |
| Basic average  shares outstanding   |       | 14,192                                                |       | 13,652 |   | 12,562 |   | 9,340 |   | 7,313 |   |
| Diluted average  shares outstanding |       | 14,325                                                |       | 13,956 |   | 12,880 |   | 9,472 |   | 7,469 |   |
|                                     |            |                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

19

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| **Performance Ratios:**                                 |   |   |   |   |   |   |   |   |   |   |   |
|---------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Return on average assets                                |   | (0.64  | )      | 0.54   |   | 0.80   |   | 0.91   |   | 0.95   |   |
| Return on average equity                                |   | (5.32  | )      | 4.27   |   | 6.06   |   | 8.32   |   | 10.56  |   |
| Return on average tangible assets                       |   | (0.67  | )      | 0.56   |   | 0.84   |   | 0.95   |   | 0.97   |   |
| Return on average tangible equity                       |   | (8.75  | )      | 6.85   |   | 9.44   |   | 12.90  |   | 13.84  |   |
| Average loans to average deposits                       |   | 100.22 |   | 100.35 |   | 100.74 |   | 96.79  |   | 95.36  |   |
|                                                    |   |   |   |   |   |   |   |   |   |   |   |
| **Asset Quality Ratios:**                               |   |   |   |   |   |   |   |   |   |   |   |
| Nonperforming loans to net loans (1)(4)                 |   | 8.24   |   | 1.74   |   | 0.54   |   | 1.10   |   | 0.55   |   |
| Nonperforming assets to total assets (5)                |   | 8.34   |   | 1.59   |   | 0.63   |   | 0.86   |   | 0.60   |   |
| Net charge-offs to average total loans                  |   | 1.38   |   | 0.36   |   | 0.47   |   | 0.14   |   | 0.18   |   |
| Allowance for loan losses to total nonperforming  loans |   | 22.56  |   | 96.50  |   | 194.15 |   | 106.49 |   | 227.12 |   |
| Allowance for loan losses to total loans                |   | 1.82   |   | 1.65   |   | 1.04   |   | 1.16   |   | 1.23   |   |
|                                                    |   |   |   |   |   |   |   |   |   |   |   |
| **Capital Ratios:**                                     |   |   |   |   |   |   |   |   |   |   |   |
| Average equity to average assets                        |   | 11.97  |   | 12.56  |   | 13.23  |   | 10.92  |   | 9.00   |   |
| Average tangible equity to average tangible assets      |   | 7.63   |   | 8.21   |   | 8.91   |   | 7.33   |   | 7.01   |   |
| Tangible equity to tangible assets                      |   | 7.36   |   | 7.78   |   | 8.70   |   | 9.84   |   | 7.00   |   |
| Leverage ratio                                          |   | 8.66   |   | 9.44   |   | 10.71  |   | 12.58  |   | 8.63   |   |
| Tier 1 risk-based capital ratio                         |   | 10.18  |   | 10.86  |   | 12.80  |   | 15.15  |   | 10.62  |   |
| Total risk-based capital ratio                          |   | 11.44  |   | 12.12  |   | 13.80  |   | 16.27  |   | 11.80  |   |

----

(1) Net loansinclude the outstanding principal balances of loans less unearned income, netdeferred fees and the allowance for loan losses.

 

(2) Earning assetsinclude interest-bearing deposits in banks, federal funds sold, securitiesavailable for sale, restricted equity securities, loans net of unearned income,less unrealized gains (losses) on securities and nonaccrual loans.

 

(3) The increase instockholders’ equity for the years ended December 31, 2006 and 2005related to business combinations was 15% and 12%, respectively. Net income lessdividends declared represented 2% and 4% of the total increase for the sameperiods, respectively.  The net loss plusdividends declared represented 8% of the total decrease for the year ended December 31,2007.

 

(4) Nonperformingloans include nonaccrual loans, other impaired loans and loans past due 90 daysor more and still accruing interest.

 

(5) Nonperformingassets include nonperforming loans and foreclosed assets.

 

**GAAP Reconciliation andManagement Explanation for Non-GAAP Financial Measures**

 

Certain financialinformation included in “selected consolidated financial data” above isdetermined by methods other than in accordance with GAAP. These non-GAAPfinancial measures are “tangible book value per share”, “tangible equity totangible assets”, “return on average tangible equity”, “return on averagetangible assets”, “average tangible equity to average tangible assets” and “earningassets.” Our management uses these non-GAAP measures in its analysis of ourperformance.

 

·              “Tangible book value per share” isdefined as total equity reduced by recorded intangible assets divided by totalcommon shares outstanding. This measure is important to investors interested inchanges from period to period in book value per share exclusive of changes inintangible assets. Goodwill, an intangible asset that is recorded in a purchasebusiness combination, has the effect of increasing total book value while notincreasing the tangible assets of the company. For companies such as ours thathave engaged in multiple business combinations, purchase accounting can resultin the recording of significant amounts of goodwill related to suchtransactions.

 

·              “Tangible equity to tangibleassets” is defined as total equity reduced by recorded intangible assetsdivided by total assets reduced by recorded intangible assets. This measure isimportant to investors interested in the equity to assets ratio exclusive ofthe effect of changes in intangible assets on equity and total assets.

 

20

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·              “Return on average tangibleequity” is defined as annualized earnings for the period divided by averageequity reduced by average goodwill and other intangible assets. “Return on averagetangible assets” is defined as annualized earnings for the period divided byaverage assets reduced by average goodwill and other intangible assets. Webelieve these measures are important when measuring the company’s performanceexclusive of the effects of goodwill and other intangibles recorded in recentacquisitions, and these measures are used by many investors as part of theiranalysis of the company’s performance.

 

·              “Average tangible equity toaverage tangible assets” is defined as average total equity reduced by recordedaverage intangible assets divided by average total assets reduced by recordedaverage intangible assets. This measure is important to many investors that areinterested in the equity to asset ratio exclusive of the effect of changes inaverage intangible assets on average equity and average total assets.

 

·              “Earning assets”is defined as total assets plus the allowance for loan losses less cash and duefrom banks, premises and equipment, goodwill and intangible assets, other assets,unrealized gains (losses) on securities and nonaccrual loans. This measure isimportant to many investors because for financial institutions, their netinterest income is directly related to their level of earning assets.

 

       These disclosures should not be viewed as a substitute for resultsdetermined in accordance with GAAP, and are not necessarily comparable tonon-GAAP performance measures which may be presented by other companies. Thefollowing reconciliation table provides a more detailed analysis of thesenon-GAAP performance measures.

 
| ** **                                         | ** ** | **As of and For the Year Ended December 31,**   | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                         | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                         | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
|                                               |       |                                                 |       |   |   |   |   |   |   |   |   |
| Book value per common share                        |       | $                                                    | 15.35      |   | $ | 16.51 |   | $ | 15.54 |   | $ | 14.84 |   | $ | 11.40 |   |
| Effect of intangible assets per share              |       | (5.75                                                | )          | (6.56 | ) | (5.22 | ) | (4.65 | ) | (3.89 | ) |
| Tangible book value per common share               |       | $                                                    | 9.60       |   | $ | 9.95 |   | $ | 10.32 |   | $ | 10.19 |   | $ | 7.51 |   |
|                                               |       |                                                 |       |   |   |   |   |   |   |   |   |
| Equity to assets                                   |       | 11.26                                                |       | 12.28 |   | 12.54 |   | 13.71 |   | 10.26 |   |
| Effect of intangible assets                        |       | (3.90                                                | )          | (4.50 | ) | (3.84 | ) | (3.87 | ) | (3.26 | ) |
| Tangible equity to tangible assets                 |       | 7.36                                                 |       | 7.78 |   | 8.70 |   | 9.84 |   | 7.00 |   |
|                                               |       |                                                 |       |   |   |   |   |   |   |   |   |
| Return on average assets                           |       | (0.64                                                | )          | 0.54 |   | 0.80 |   | 0.91 |   | 0.95 |   |
| Effect of intangible assets                        |       | (0.03                                                | )          | 0.02 |   | 0.04 |   | 0.04 |   | 0.02 |   |
| Return on average tangible assets                  |       | (0.67                                                | )          | 0.56 |   | 0.84 |   | 0.95 |   | 0.97 |   |
|                                               |       |                                                 |       |   |   |   |   |   |   |   |   |
| Return on average equity                           |       | (5.32                                                | )          | 4.27 |   | 6.06 |   | 8.32 |   | 10.56 |   |
| Effect of intangible assets                        |       | (3.43                                                | )          | 2.58 |   | 3.38 |   | 4.58 |   | 3.28 |   |
| Return on average tangible equity                  |       | (8.75                                                | )          | 6.85 |   | 9.44 |   | 12.90 |   | 13.84 |   |
|                                               |       |                                                 |       |   |   |   |   |   |   |   |   |
| Average equity to average assets                   |       | 11.97                                                |       | 12.56 |   | 13.23 |   | 10.92 |   | 9.00 |   |
| Effect of average intangible assets                |       | (4.34                                                | )          | (4.35 | ) | (4.32 | ) | (3.59 | ) | (1.99 | ) |
| Average tangible equity to average tangible assets |       | 7.63                                                 |       | 8.21 |   | 8.91 |   | 7.33 |   | 7.01 |   |
|                                               |       |                                                 |       |   |   |   |   |   |   |   |   |
| Total assets                                       |       | $                                                    | 1,939,012  |   | $ | 1,900,376 |   | $ | 1,584,094 |   | $ | 1,274,136 |   | $ | 944,278 |   |
| Plus:                                              |       |                                                 |       |   |   |   |   |   |   |   |   |
| Allowance for  loan losses                         |       | 27,369                                               |       | 24,676 |   | 12,773 |   | 11,061 |   | 8,726 |   |
| Less:                                              |       |                                                 |       |   |   |   |   |   |   |   |   |
| Cash and due from  banks                           |       | (22,361                                              | )          | (25,876 | ) | (30,748 | ) | (20,723 | ) | (17,584 | ) |
| Premises and  equipment                            |       | (40,137                                              | )          | (41,776 | ) | (37,014 | ) | (31,548 | ) | (25,813 | ) |
| Intangible assets                                  |       | (81,754                                              | )          | (92,794 | ) | (66,750 | ) | (54,745 | ) | (33,043 | ) |
| Other assets                                       |       | (78,422                                              | )          | (43,494 | ) | (32,245 | ) | (23,646 | ) | (22,010 | ) |
| Unrealized  (gains) losses on securities           |       | (312                                                 | )          | 2,187 |   | 3,936 |   | 64 |   | (716 | ) |
| Nonaccrual loans                                   |       | (70,600                                              | )          | (14,790 | ) | (6,562 | ) | (10,059 | ) | (3,333 | ) |
| Earning assets                                     |       | $                                                    | 1,672,795  |   | $ | 1,708,509 |   | $ | 1,427,484 |   | $ | 1,144,540 |   | $ | 850,505 |   |

 

 

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**ITEM7.****                                                    ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND**

**RESULTSOF OPERATIONS**

 

       The following discussion reviews our results of operations and assessesour financial condition. The purpose of this discussion is to focus oninformation about our financial condition and results of operations which isnot otherwise apparent from the consolidated financial statements included orincorporated by reference in this Report. Reference should be made to thosestatements and the selected financial data presented elsewhere or incorporatedby reference in this Report for an understanding of the following discussionand analysis. Historical results of operations and any trends which may appearare not necessarily indicative of the results to be expected in future years.

 

**Executive Summary**

 

       The Company, headquartered in Gainesville, Georgia, consists of anetwork of community banks in growth areas of Georgia with approximately $1.9billion in total consolidated assets as of December 31, 2007. We believethat maintaining autonomy within our subsidiary banks serves the unique needsof each community we serve. We focus on strong asset quality and soundmanagement teams and use economies of scale to enhance our profitability. Ourresults reflect a combination of internal and acquisition growth. Prior to2006, we had completed seven acquisitions. On May 1, 2006, we completed the acquisition of Mountain Bancshares, Inc.and its banking subsidiary Mountain State Bank.    We continue to build infrastructure tosupport our growth.

 

       As a bank holding company, our results of operations are almost entirelydependent on the results of operations of our subsidiary banks. The followingtable sets forth our subsidiary banks and selected data related to each bank asof December 31, 2007:

 
| **Bank**                                                                                                                                  | ** ** | **Number of Branches** | ** ** | **Market Area  Counties**         | ** ** | **Total Assets at  December 31, 2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------------|------------|---------------------------------------------|------------|
|                                                                                                                                      |       |                   |       |                              |       | **(in  thousands)**                         |       |
| Gainesville Bank & Trust (with divisions Southern Heritage  Bank and Bank of Athens and subsidiary GB&T Mortgage, Inc.) |       | 12                     |       | Hall, Forsyth, Clarke,  Cobb      |       | $                                           | 674,234    |   |
| United Bank &  Trust                                                                                                             |       | 4                      |       | Polk, Bartow                      |       | 115,659                                     |       |
| Community Trust Bank                                                                                                                      |       | 6                      |       | Paulding, Cobb                    |       | 317,073                                     |       |
| HomeTown Bank of Villa  Rica                                                                                                              |       | 3                      |       | Carroll, Paulding                 |       | 232,244                                     |       |
| First National Bank of the  South                                                                                                         |       | 4                      |       | Baldwin, Putnam, Houston          |       | 215,404                                     |       |
| First National Bank of  Gwinnett                                                                                                          |       | 1                      |       | Gwinnett                          |       | 204,771                                     |       |
| Mountain State Bank                                                                                                                       |       | 5                      |       | Dawson, Forsyth, Lumpkin,  Fulton |       | 202,923                                     |       |
|                                                                                                                                           |            |                        |            |                                   |            |                                             |            |  |

 

    Wederive the majority of our income from interest received on our loans andinvestments. Our primary source of funds for making these loans and investmentsis our deposits, on which we pay interest. Approximately 91% of our totaldeposits are interest-bearing.  Consequently,one of the key measures of our success is our amount of net interest income, orthe difference between the income on our interest-earning assets, such as loansand investments, and the expense on our interest-bearing liabilities, such asdeposits and borrowings. Another key measure is the spread between the yield weearn on these interest-earning assets and the rate we pay on ourinterest-bearing liabilities, which is called our net interest spread.

 

       There are risks inherent in all loans, so we maintain an allowance forloan losses to absorb probable losses on existing loans that may becomeuncollectible. We maintain this allowance by charging a provision for loanlosses against our operating earnings for each period. We have included a detaileddiscussion of this process, as well as several tables describing our allowancefor loan losses.  The financialperformance for the year ended December 31, 2007 was impacted by theadditional loan loss provisions taken in the fourth quarter of 2007 as well asthe goodwill impairment at one of our affiliates.  Please see “*Results ofOperations — Asset Quality*” for further discussion concerning theadditional loan loss provision and goodwill impairment.

 

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In addition to earning interest on our loans andinvestments, we earn income through fees and other charges to our clients. Wehave also included a discussion of the various components of this noninterestincome, as well as of our noninterest expense.

 

The followingdiscussion and analysis also identifies significant factors that have affectedour financial position and operating results during the periods included in thefinancial statements accompanying or incorporated by reference in this report.We encourage you to read this discussion and analysis inconjunction with our financial statements and the other statistical informationincluded and incorporated by reference in this report.

 

We measure and monitor the following factors as keyindicators of our financial performance:

 

·              Netincome

 

·              Earningsper share

 

·              Loanand deposit growth

 

·              Creditquality

 

Below is a summary of the performance of these keyindicators for the year ended December 31, 2007 as compared to the yearended December 31, 2006:

 

·              Netloss of $12.5 million compared to net income of $9.5 million

 

·              Dilutedearnings per share of $(0.87) compared to $0.68

 

·              Netinterest margin of 3.75% compared to 4.34%

 

·              Loangrowth of $3.0 million or 2.0%

 

·              Depositgrowth of $15.3 million or 1.0%

 

·              Returnon average assets of (0.64)% compared to 0.54%

 

·              Returnon average equity of (5.32)% compared to 4.27%

 

·              Nonperfomingassets ratio of 8.34% compared to 1.59%

 

·              Netcharge-off ratio of 1.38% compared to 0.36%

 

**Effect of Economic Trends**

 

During the three yearsended December 31, 2004, our rates on both short-term or variable rateinterest-earning assets and short-term or variablerate interest-bearing liabilities declined primarily as a result of the actionstaken by the Federal Reserve, however during 2005 and continuing through 2006,both these rates increased.  Then during2007, these rates began to decline again due to actions taken by the FederalReserve.

 

During most of 2001 and during 2002, the United Statesexperienced an economic decline. During this period, the economy was affectedby lower returns of the stock markets. Economic data led the Federal Reserve tobegin an aggressive program of reducing rates that moved the federal funds ratedown 11 times during 2001 for a total reduction of 475 basis points. During thefourth quarter of 2002 and the first quarter of 2003, the Federal Reservereduced the federal funds rate down an additional 75 basis points, bringing thefederal funds rate to its lowest level in 40 years.

 

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Despite sharply lowershort-term rates, stimulus to the economy during 2003 was muted and consumerdemand and business investment activity remained weak. During all of 2003 andsubstantially all of 2004, the financial markets operated under historicallylow interest rates. As a result of these unusual conditions, Congress passed aneconomic stimulus plan in 2003. During 2004, many economists believed theeconomy began to show signs of strengthening, and the Federal Reserve increasedthe short-term interest rate by 100 basis points during the second, third andfourth quarters of 2004 and by 200 basis points during 2005. In 2006, theshort-term interest rate continued to increase by 50 basis points during thefirst quarter and another 50 basis points during the second quarter of2006.  In late 2007, due to concernsrelating to the overall economy, the Federal Reserve decreased rates in thethird quarter by 50 basis points and an additional 50 basis points in thefourth quarter.  The Federal Reservedecreased the short-term interest rate by 125 basis points in January 2008.  Many economists believe the Federal Reservewill continue to lower rates during 2008. No assurance can be given that theFederal Reserve will actually lower interest rates or that the results weanticipate will actually occur.

 

The specific economicand credit risks associated with our loan portfolio, especially the real estateportfolio, include, but are not limited to, a general downturn in the economy whichcould affect unemployment rates in our market areas, general real estate marketdeterioration, interest rate fluctuations, deteriorated collateral, titledefects, inaccurate appraisals, and financial deterioration of borrowers.Construction and development lending can also present other specific risks tothe lender such as whether developers can find builders to buy lots for homeconstruction, whether the builders can obtain financing for the construction,whether the builders can sell the home to a buyer, and whether the buyer canobtain permanent financing. Currently, real estate values and employment trendsin our market areas have shown signs of weakness due to the decline in theresidential housing market. The general economy and loan demand declinedslightly during 2001 and continued to decline throughout 2002. In 2003, theeconomy began to show signs of improvement which continued through 2004, 2005and 2006.  However during 2007, there wassignificant deterioration in the residential real estate market, whichsignificantly impacted our loan growth and credit quality.

 

**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 reviewed and discussed periodically by ourAudit Committee and are described in the notes to our consolidated financialstatements as of December 31, 2007 included in this report. Certainaccounting policies require management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reported period.Actual results could differ from those estimates. Estimates and assumptions arereviewed periodically and the effects of revisions are reflected in the consolidatedfinancial statements in 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. The allowance for loan losses isevaluated on a regular basis by management and is based upon management’speriodic review of the collectibility of the loans in light of historicalexperience, the nature and volume of the loan portfolio, adverse situationsthat may affect the borrower’s ability to repay, estimated value of anyunderlying collateral and prevailing economic conditions. This evaluation isinherently 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 originating loanofficer rates all loans based on this system, and the ratings are adjusted asneeded to reflect the current status of the loan. The loan officers are trainedto rate loans in a timely and accurate manner based on current information.These ratings are reviewed regularly by the loan committee of the respectivebank subsidiary, an outside independent loan review firm and by the applicableregulator for accuracy.

 

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A specific allowance will be maintained for allloans rated 1- 5 and for all homogeneous loan pools such as consumer, creditcard and residential mortgage. Management will develop a range of expectedlosses for each risk grade and for each loan pool. This range of losses will bemanagement’s best estimate based on actual loss experience, industry lossexperience, loan portfolio trends and characteristics of the markets it serves.On a quarterly basis management will evaluate each of the loan categories anddetermine the expected loss levels from the higher of the range previouslyestablished or the historical loss history calculation. The range of expectedlosses shown below will be used until management determines changes are needed.

 

| Risk  Rating 1- 3                                                                    |   | 0.20%-0.50% |
|--------------------------------------------------------------------------------------|--------|-------------|
| Risk  Rating 4                                                                       |   | 0.50%-1.25% |
| Risk  Rating 5                                                                       |   | 1.50%-5.00% |
| Consumer                                                                             |   | 0.50%-1.25% |
| Credit  Cards                                                                        |   | 2.00%-3.00% |
| Real  Estate                                                                         |   | 0.25%-1.00% |
| Commercial                                                                           |   | 0.30%-1.00% |
| Hotel, Retail  Business, Industrial Warehouse, Convenience Store and Office Building |   | 0.50%-1.25% |

 

All loans rated 6, 7 and 8 as well as any otherimpaired loan of a significant amount will be individually analyzed and aspecific reserve assigned. This analysis will include information from theProblem Asset Review Committee, a subcommittee of the Company’s Loan Committee,which meets quarterly and reviews credit relationships of one million and aboveand rated 5-8. Management, considering current information and events regardinga borrower’s ability to repay its obligations, considers a loan to be impairedwhen the ultimate collection of all amounts due, according to the contractual terms of the loan agreement,is in doubt. When a loan is considered to be impaired, the amount of theimpairment is measured based on the present value of expected future cash flowsdiscounted at the loan’s effective interest rate. If the loan is collateraldependent, the fair value of the collateral less estimated selling costs isused to determine the amount of impairment. Impairment losses are included inthe allowance for loan losses through a charge to the provision for loanlosses. Traditionally, a majority of our impaired loans have been collateraldependent. The allowance for loan losses on these loans is determined based onfair value estimates (net of selling costs) of the respective collateral. Theactual losses on these loans could differ significantly if the fair value ofthe collateral is different from the estimates used in determining theallocated allowance. Traditionally most of our collateral dependent impairedloans have been secured by real estate. The fair value of these real estateproperties is generally determined based on appraisals performed by a certifiedor licensed appraiser. Management also considers other factors or recentdevelopments which could result in adjustments to the collateral valueestimates indicated in the appraisals. These estimates will be made inaccordance with FASB 114.

 

The remainder of the balance in the reserve forloan losses is unallocated. The unallocated reserve represents management’scurrent estimate of the probable losses inherent in the loan portfolio thathave not been fully provided for through the specific reserve calculations.Factors considered in determining the unallocated reserve are overall economicconditions, the rapid rise of real estate prices over the past three years inour markets, the recent slowdown in real estate activity, the number of new andrelatively inexperienced banks and bankers entering our markets and offeringaggressive terms and pricing, our concentration in commercial and consumer realestate and the experience and historic performance of our lenders.

 

*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 

 

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on third party valuations, such asappraisals, or internal valuations based on discounted cash flow analyses orother valuation techniques. The determination of the useful lives of intangibleassets is subjective as is the appropriate amortization period for suchintangible assets. In addition, purchase acquisitions typically result inrecording goodwill, which is subject to ongoing periodic impairment tests basedon the fair value of net assets acquired compared to the carrying value ofgoodwill. In July 2007, the required impairment testing of goodwill wasperformed and no impairment existed as of the valuation date, as the fair valueof our net assets exceeded their carrying value. Due to the deterioration inthe residential real estate market, an additional impairment test was performedas of December 31, 2007 and it was determined there was impairment in thecarrying value of our goodwill balances at one of our affiliates and werecorded a charge to our earnings.

 

**Effect of Recent BusinessAcquisitions**

 

On May 1, 2006, the Company completed theacquisition of Mountain Bancshares, Inc. the parent company of MountainState Bank, which is headquartered in Dawsonville, Dawson County, Georgia, andhas branches in Dawson, Forsyth, Fulton and Lumpkin Counties.  Mountain State Bank became a wholly ownedsubsidiary of the Company.  The Companyissued 1,088,924 shares of its capital stock and approximately $10.3 million incash in exchange for all of the issued and outstanding common shares ofMountain Bancshares, Inc.  Theacquisition was accounted for as a purchase resulting in estimated goodwill ofapproximately $26.0 million.  MountainState Bank’s results of operations from May 1, 2006 are included in theconsolidated results of operations for the year ended December 31,2006.  The results of operations for theyears ended December 31, 2005 and 2004 do not include the results ofoperations of Mountain Bancshares, Inc.

 

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 theCompany.  The Company issued 845,128shares of its capital stock and approximately $3.8 million in cash in exchangefor all of the issued and outstanding common shares of FNBG Bancshares, Inc.  The acquisition was accounted for as apurchase resulting in estimated goodwill of approximately $16.4 million.  First National Bank of Gwinnett’s results ofoperations from March 1, 2005, are included in the consolidated results ofoperations for the year ended December 31, 2005.  The results of operations for the year ended December 31,2004 does not include the results of operations of FNBG Bancshares, Inc.

 

**Financial Condition**

 

       *Total Assets*.    Our total assets increased $38.6 million or2.0% during 2007 compared to $316.3 million or 20.0% during 2006. The increasein 2007 consists primarily of an increase in total loans of $3.0 million or2.0%, and an increase in other real estate and repossessions of $35.7million.  Asset growth and credit qualitywere negatively impacted by the decline in the residential real estatemarket.  For the year ended December 31,2006 as compared with the year ended December 31, 2005, the acquisition ofMountain Bancshares, Inc. accounted for approximately $165.5 million ofthe increase in total assets.  Thecompetition for deposits plays an important role in our overall growth.

 

       *Total Loans*.    Our primary focus is to maximize earningsthrough lending activities. Any excess funds are invested according to ourinvestment policy. Total loans increased 2.0% or $3.0 million for the yearended December 31, 2007.  Thisincrease is compared to an increase of $266.3 million or 21.6% during 2006.  Exclusive of the acquisition of MountainBancshares, Inc., which represented $107.5 million of the increase in2006, total loans increased $158.8 million or 12.9%.  As of December 31, 2007 and 2006, ourloan-to-deposit ratio was 100.4% and 101.2%, respectively. At December 31,2007 and 2006, we had total outstanding borrowings of $209.6 million and $168.4million, respectively. These funds have been used to fund loan growth. Theutilization of borrowings to fund loan growth enables us to maintain a higherloan to deposit ratio and maintain an adequate liquidity ratio. Ourloan-to-funds ratio was 88.0% and 90.8% at December 31, 2007 and 2006,respectively.

 

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       *Total Deposits*.    During 2007, total deposits grew by $15.3million or 1.0% compared to an increase of $283.1 million or 23.7% in 2006,including the acquisition of Mountain Bancshares, Inc., which accountedfor $124.0 million of this increase.

 

**Results of Operations—For theYears Ended December 31, 2007, 2006 and 2005**

 

       *Net Interest Income and Earning Assets*.   During 2007 and 2006, we continued toexperience moderate internal growth in interest-earning and total assets whichwas funded by increases in deposits and the retention of net profits. During2006, we experienced additional growth through the acquisition of MountainBancshares, Inc. as explained above. We recorded a net loss of $12.5million for the year ended December 31, 2007 and net income of $9.5million and $12.0 million for the years ended December 31, 2006 and 2005,respectively.

 

    Our profitability is determined by ourability to effectively manage interest income and expense, to minimize loan andsecurity losses, to generate noninterest income, and to control operatingexpenses. Because interest rates are determined by market forces and economicconditions beyond our control, our ability to generate net interest incomedepends upon our ability to obtain an adequate net interest spread between therate earned on interest-earning assets and the rate paid on interest-bearingliabilities. The net yield on average interest-earning assets decreased to3.75% for the year ended December 31, 2007 from 4.34% for the year ended December 31,2006. This decrease is primarily attributable to decreases in interest rates bythe Federal Reserve in 2007. In 2007, the average yield on interest-earningassets increased to 7.95% from 7.93% in 2006 and the average yield oninterest-bearing liabilities increased to 4.68% in 2007 from 4.20% in 2006. Theoverall change in the interest rate spread from 2006 to 2007 was a decrease of46 basis points. The decrease in the net interest spread is a result ofincreases in time deposit volume at an average rate 60 basis points above theaverage in 2006, increases in interest-bearing demand and savings volume at anaverage rate 21 basis points above the 2006 average as well as increases inborrowings volume at an average rate 22 basis points above the average in 2006.Total average interest-earning assets increased by $133.9 million, to $1,732.6million at December 31, 2007 as compared to 2006 and averageinterest-bearing liabilities increased by $183.5 million, to $1,551.2 millionfor the same period. We continue to experience slight growth in our portfolioswhile maintaining our competitive pricing.

 

       The net yield on average interest-earning assets increased by 8 basispoints to 4.34% from 4.26% for the year ended December 31, 2006 ascompared to 2005. The increased net yield in 2006 was primarily attributable toincreases in loan volume in addition to increases in interest rates.

 

       Net interest income decreased by $4.7 million to $64.5 million in 2007,compared to an increase of $12.2 million in 2006. The decrease in 2007 reflectsthe increased level of nonaccrual loans as well as the increase ininterest-bearing liabilities along with increased rates, which was onlypartially offset by the increase in interest-earning assets with no increase inrates from the prior year.  The increasein 2006 reflects the increase in interest-earning assets during 2006 ascompared to 2005. The change in net interest income is primarily the result ofminimal increases in net volume versus increased changes in net interest rates.These variances include the impact of the acquisition of Mountain Bancshares, Inc.  in 2006.

 

       *Other Income*.  Other income increased during 2007 by$851,000 compared to a decrease of $1.1 million in 2006. For the year ended December 31,2007, service charges on deposit accounts increased by $1,041,000.  This increase was partially offset by adecrease in mortgage origination fees of $347,000.  For the year ended December 31, 2006,service charges on deposit accounts decreased by $135,000, other servicecharges and fees decreased by $151,000 and securities transactions, netdecreased by $569,000.  These decreaseswere partially offset by an increase in mortgage origination fees of $398,000.

 

       *Other Expense*.    Other expense increased $17.9 million for theyear ended December 31, 2007. Increases in other operating expenses represented the most significantportion of the increase for 2007, which increased by $15.0 million.  This increase is primarily related to theimpairment of goodwill and core deposit intangible as of December 31, 2007of $10.0 million.  Also included in thiscategory is the provision for other real estate losses taken in 2007 of $1.7million.  Salaries and employee benefitsincreased for 2007 as compared to 2006 by $2.4 million partially due to theinclusion of Mountain Bancshares, Inc. for a full year in 2007 compared toeight months in 2006, along with increases in profit sharing contributions,health insurance costs, incentive compensation and normal salary increases.

 

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Other expenseincreased $5.3 million for the year ended December 31, 2006.  Increases in salaries and employee benefitsrepresent the most significant portion of this increase, which increased by$3.7 million.  The number of full-timeequivalent employees increased by 34 employees in May 2006 due to theacquisition of Mountain Bancshares, Inc. Other operating expenses increased by $882,000 for the year ended December 31,2006. The increase in other operating expenses included increases in marketingand public relations of $124,000, ATM and data processing expense of $82,000,supplies, postage and telephone expense of $68,000 and a loss of $306,000recorded in the fourth quarter of 2005 on the sale of Community Loan Company.

 

       *Income Tax Expense*.   Income tax expense decreased by $7.7 millionto a tax benefit of $3.4 million in 2007 from tax expense of $4.3 million in2006. The decrease in 2007 was attributable to decreased profits primarilyrelated to additional loan loss provisions taken in 2007 along with provisionstaken for other real estate losses as discussed below.  The effective tax rate for year ended December 31,2007 was 21.6%, compared to 31.0% for 2006.

 

Income tax expensedecreased by $1.6 million to $4.3 million in 2006 from $5.9 million in2005.  The decrease in 2006 wasattributable to decreased profits primarily related to the additional loan lossprovision taken in the fourth quarter of 2006. The effective tax rate for the year ended December 31, 2006 was31.0%, compared to 32.9% for 2005.

 

       *Net Income*.    Net income decreased by $22.0 million forthe year ended December 31, 2007 when compared to 2006.  This decrease is primarily related to theexpense recorded for the impairment in the goodwill and core deposit intangiblecarrying balances as of December 31, 2007 in addition to increased loanloss provisions taken in 2007 along with provisions taken for other real estatelosses as discussed below.  The decreasein net income for the year ended December 31, 2006 was $2.5 million whencompared to 2005.  This decrease isprimarily related to the additional loan loss provision taken in the fourthquarter of 2006.

 

      *Asset Quality*.    The provision for loan losses was $23.7million during 2007, compared to $15.7 million in 2006.  This increase was due to additional loan lossprovisions needed because of deterioration in the real estate market during thelast half of 2007. The increased provision reflects the decline in theresidential real estate market and the elevated level of chargeoffs weexperienced during 2007.  The provisionfor loan losses is the charge to operations which management believes isnecessary to fund the allowance for loan losses. This provision is based onmanagement’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. Our evaluation isinherently 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. Loans acquired in businessacquisitions were acquired at their estimated fair value, including an adequateallowance for loan losses.  See also ourdiscussion of the loan loss allowance in the “Critical Accounting Policies”section included in this report.

 

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       The following table presents details of the provision for loan losses,nonaccrual loans and related categories. The increase in nonaccrual loans is related to our exposure to thedeclining residential real estate market that has affected all of the marketsin which we operate.  As shown in “Summaryof Loan Loss Experience” below, the consumer related charge-offs consist ofmany smaller balance loans while the real estate related charge-offs consist ofseveral larger balance loans. Real estate loans are normally secured by one tofour family residences or other real estate with values exceeding the originalloan balance, however, due to the downturn in the residential real estatemarket and the corresponding decline in real estate values, we experiencedsubstantial net chargeoffs in the latter half of 2007.  Consumer loans, however, may be secured byconsumer goods and automobiles, or may be unsecured, and therefore subject togreater loss in the event of charge-off. During a recession, losses are morelikely and the risk of loss is greater in the consumer portfolio. The allowancefor loan losses as a percentage of nonperforming loans at December 31,2007 was 22.56%, which was down from 96.50% at December 31, 2006. Thisdecrease is due to nonaccrual loans increasing to $70.6 million at December 31,2007 from $14.8 million at December 31, 2006 as well as the increase inthe provision for loan losses in 2007 to $23.7 million compared to $15.7million for 2006.  Based on management’sevaluations, management believes the allowance for loan losses is adequate toabsorb potential losses on existing loans.

 

| ** **                                  | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands)**        | ** ** |
| ** **                                  | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Total charge-offs                           |       | $                                 | 21,709     |   | $ | 5,570 |   |
| Total recoveries                            |       | 675                               |       | 641 |   |
| Net charge-offs  (recoveries)               |       | 21,034                            |       | 4,929 |   |
| Total nonaccrual loans                      |       | 70,600                            |       | 14,790 |   |
| Loans past due 90 days                      |       | 993                               |       | 10 |   |
| Other real estate and  repossessions        |       | 40,375                            |       | 4,673 |   |
| Provision for loan losses                   |       | 23,727                            |       | 15,744 |   |
| Allowance/Total loans                       |       | 1.82                              | %          | 1.65 | % |
| Net charge-offs  (recoveries)/Average loans |       | 1.376                             | %          | 0.357 | % |
| Allowance/Nonperforming  loans              |       | 22.56                             | %          | 96.50 | % |
|                                             |            |                                   |            |  |  |  |  |

 

**Effects of Inflation**

 

       The impact of inflation on banks differs from its impact onnon-financial institutions. Banks, as financial intermediaries, have assetswhich are primarily monetary in nature and which tend to fluctuate in concertwith inflation. A bank can reduce the impact of inflation if it can manage itsinterest rate sensitivity gap. This gap represents the difference between ratesensitive assets and rate sensitive liabilities. Through the InvestmentCommittee of our holding company’s board of directors, we attempt to structurethe assets and liabilities and manage the rate sensitivity gap of eachsubsidiary bank, thereby seeking to minimize the potential effects ofinflation. For information on the management of our interest rate sensitiveassets and liabilities, see “Asset/Liability Management” above.

 

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**Off-Balance Sheet Arrangements**

 

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

 

| ** **                           | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **(Dollars in thousands)**  | ** ** |
| Commitments to extend  credit        |       | $                           | 253,530    |                        | $          | 425,391 |   |
| Financial standby letters  of credit |       | 9,279                       |       | 7,544                       |       |
| Other standby letters of  credit     |       | —                      |       | 1,129                       |       |
| Credit card commitments              |       | 8,023                       |       | 6,595                       |       |
| Total                                |       | $                           | 270,832    |                        | $          | 440,659 |   |

 

**Liquidity and Capital Resources**

 

       Liquidity represents the ability of a company to convert assets intocash or cash equivalents without significant loss and the ability to raiseadditional funds by increasing liabilities. Liquidity management involvesmonitoring our sources and uses of funds in order to meet our day-to-day cashflow requirements while maximizing profits. We seek to meet liquidityrequirements primarily through management of short-term investments, monthlyamortizing loans, maturing single payment loans, and maturities of securitiesand prepayments. Also, we maintain relationships with correspondent banks whichcould provide funds on short notice. As of December 31, 2007, we hadamounts borrowed under federal funds purchase lines and securities sold under repurchaseagreements of $62.4 million compared to $41.1 million as of December 31,2006. These borrowings typically mature within one to four business days.

 

       The following table sets forth certain information about contractualcash obligations as of December 31, 2007.

 

| ** **                          | ** ** | **Payments Due after December 31, 2007** | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                     | ** ** | **1 Year  Or Less** | ** ** | **1 — 3  Years** | ** ** | **4 — 5  Years** | ** ** | **After 5 Years** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)**                    | ** ** |
|                                |       |                                          |       |   |   |   |   |   |   |   |   |
| Subordinated debt                   |       | $                                             | 29,898     |   | $ | — |   | $ | — |   | $ | — |   | $ | 29,898 |   |
| Operating leases                    |       | 13,943                                        |       | 1,187 |   | 2,359 |   | 2,229 |   | 8,168 |   |
| Line of credit with a bank          |       | 1,700                                         |       | 1,700 |   | — |   | — |   | — |   |
| Federal Home Loan Bank  advances    |       | 115,148                                       |       | 85,737 |   | 20,951 |   | 3,000 |   | 5,460 |   |
| Total contractual cash  obligations |       | $                                             | 160,689    |   | $ | 88,624 |   | $ | 23,310 |   | $ | 5,229 |   | $ | 43,526 |   |

 

       Our operating leases represent obligations with maturities of five yearsor less, with the exception of one lease entered into in 2005 which has amaturity of 25 years.  Many of theoperating leases have thirty-day cancellation provisions.

 

       Our liquidity and capital resources are monitored on a periodic basis bymanagement and state and federal regulatory authorities. At December 31,2007, our liquidity ratio was 11.05%. Our liquidity ratio is measured by theratio of net cash, federal funds sold and securities to net deposits andshort-term liabilities. In the event our subsidiary banks need to generateadditional liquidity, funding plans would be implemented as outlined in theliquidity policy of the banks. Our banks have lines of credit available to meetany unforeseen liquidity needs. Also, our banks have relationships with theFederal Home Loan Bank of Atlanta, which provides funding for loan growth on anas needed basis. Management reviews liquidity on a periodic basis to monitorand adjust liquidity as necessary. Management has the ability to adjustliquidity by 

 

30

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selling securities available for sale,selling participations in loans and accessing available funds through variousborrowing arrangements. At December 31, 2007, we had available borrowingcapacity totaling approximately $230.9 million through various borrowingarrangements and available lines of credit. We believe our short-terminvestments and available borrowing arrangements are adequate to cover anyreasonably anticipated immediate need for funds.

 

       As of December 31, 2007, the Company and its subsidiary banks wereconsidered to be well-capitalized as defined in the FDICIA and based onregulatory minimum capital requirements. The Company and its subsidiary banks’ capital ratios as of December 31,2007 are presented in the following table:

 

| ** **                               | ** ** | **Capital  Ratios** | ** ** | **For  Capital  Adequacy  Purposes** | ** ** | **To Be Well  Capitalized** | ** ** |
|------------------------------------------|------------|---------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| Total Capital to Risk  Weighted Assets:  |       |                |       |                                 |       |                        |       |
| Consolidated                             |       | 11.44               | %          | 8.00                                 | %          | N/A                         |       |
| Gainesville Bank & Trust        |       | 11.03               |       | 8.00                                 |       | 10.00                       | %          |
| United Bank & Trust             |       | 10.38               |       | 8.00                                 |       | 10.00                       |       |
| Community Trust Bank                     |       | 10.18               |       | 8.00                                 |       | 10.00                       |       |
| HomeTown Bank of Villa Rica              |       | 10.59               |       | 8.00                                 |       | 10.00                       |       |
| First National Bank of the South         |       | 11.60               |       | 8.00                                 |       | 10.00                       |       |
| First National Bank of Gwinnett          |       | 10.03               |       | 8.00                                 |       | 10.00                       |       |
| Mountain State Bank                      |       | 10.90               |       | 8.00                                 |       | 10.00                       |       |
|                                     |       |                |       |                                 |       |                        |       |
| Tier 1 Capital to Risk  Weighted Assets: |       |                |       |                                 |       |                        |       |
| Consolidated                             |       | 10.18               | %          | 4.00                                 | %          | N/A                         |       |
| Gainesville Bank & Trust        |       | 10.17               |       | 4.00                                 |       | 6.00                        | %          |
| United Bank & Trust             |       | 9.12                |       | 4.00                                 |       | 6.00                        |       |
| Community Trust Bank                     |       | 8.92                |       | 4.00                                 |       | 6.00                        |       |
| HomeTown Bank of Villa Rica              |       | 9.31                |       | 4.00                                 |       | 6.00                        |       |
| First National Bank of the South         |       | 10.57               |       | 4.00                                 |       | 6.00                        |       |
| First National Bank of Gwinnett          |       | 9.05                |       | 4.00                                 |       | 6.00                        |       |
| Mountain State Bank                      |       | 9.64                |       | 4.00                                 |       | 6.00                        |       |
|                                     |       |                |       |                                 |       |                        |       |
| Tier 1 Capital to Average  Assets:       |       |                |       |                                 |       |                        |       |
| Consolidated                             |       | 8.66                | %          | 4.00                                 | %          | N/A                         |       |
| Gainesville Bank & Trust        |       | 8.48                |       | 4.00                                 |       | 5.00                        | %          |
| United Bank & Trust             |       | 7.65                |       | 4.00                                 |       | 5.00                        |       |
| Community Trust Bank                     |       | 7.43                |       | 4.00                                 |       | 5.00                        |       |
| HomeTown Bank of Villa Rica              |       | 7.14                |       | 4.00                                 |       | 5.00                        |       |
| First National Bank of the South         |       | 9.05                |       | 4.00                                 |       | 5.00                        |       |
| First National Bank of Gwinnett          |       | 8.18                |       | 4.00                                 |       | 5.00                        |       |
| Mountain State Bank                      |       | 7.85                |       | 4.00                                 |       | 5.00                        |       |

 

       Management is not aware of any knowntrends, events or uncertainties, other than those discussed above, that willhave or are reasonably likely to have a material effect on our liquidity,capital resources, or operations. Management is also not aware of any currentrecommendations by the regulatory authorities which, if they were implemented,would have such an effect.

 

       Our subsidiary banks are subject to certain restrictions on the amountof dividends that may be declared without prior regulatory approval. At December 31,2007, approximately $9.1 million of retained earnings at our subsidiary bankswere available for dividend declaration without regulatory approval.

 

31

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**Selected Financial Informationand Statistical Data**

 

       The tables and schedules on the following pages set forth certainfinancial information and statistical data with respect to: the distribution ofassets, liabilities and stockholders’ equity; interest rates and interestdifferentials; interest rate sensitivity gap ratios; our securities portfolio;our loan portfolio, including types of loans, maturities and sensitivities tochanges in interest rates and information on nonperforming loans; summary ofthe loan loss experience and allowance for loan losses; types of deposits; andthe return on equity and assets.

 

**Distribution of Assets,Liabilities and Stockholders’ Equity; Interest Rates and Interest Differentials**

 

       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.

 
| ** **                                    | ** ** | **Years  Ended December 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|
| ** **                                    | ** ** | **2007**                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **Average**                        | ** ** | **Income/** | ** ** | **Yields/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yields/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yields/** | ** ** |
| ** **                                    | ** ** | **Balances(1)**                    | ** ** | **Expense** | ** ** | **Rates** | ** ** | **Balances(1)** | ** ** | **Expense** | ** ** | **Rates** | ** ** | **Balances(1)** | ** ** | **Expense** | ** ** | **Rates** | ** ** |
| ** **                                    | ** ** | **(Dollars  in thousands)**        | ** ** |
|                                          |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable securities                            |       | $                                  | 204,915    |   | $ | 9,467 |   | 4.62 | % | $ | 200,983 |   | $ | 8,436 |   | 4.20 | % | $ | 194,093 |   | $ | 7,287 |   | 3.75 | % |
| Nontaxable securities (5)                     |       | 29,172                             |       | 1,807 |   | 6.19 |   | 13,516 |   | 866 |   | 6.41 |   | 14,023 |   | 910 |   | 6.49 |   |
| Federal funds sold                            |       | 9,410                              |       | 469 |   | 4.98 |   | 16,014 |   | 812 |   | 5.07 |   | 9,842 |   | 327 |   | 3.32 |   |
| Interest-bearing deposits in banks            |       | 6,500                              |       | 296 |   | 4.55 |   | 2,176 |   | 145 |   | 6.66 |   | 1,077 |   | 42 |   | 3.90 |   |
| Loans (2) (4)                            |       | 1,482,581                          |       | 125,644 |   | 8.47 |   | 1,366,030 |   | 116,593 |   | 8.54 |   | 1,124,310 |   | 82,541 |   | 7.34 |   |
|                                          |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                 |       | 1,732,578                          |       | 137,683 |   | 7.95 | % | 1,598,719 |   | 126,852 |   | 7.93 | % | 1,343,345 |   | 91,107 |   | 6.78 | % |
|                                          |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized gains (losses) on securities       |       | (2,405                             | )          |   |   |   |   | (4,483 | ) |   |   |   |   | (2,175 | ) |   |   |   |   |
| Allowance for loan losses                     |       | (26,315                            | )          |   |   |   |   | (15,247 | ) |   |   |   |   | (12,499 | ) |   |   |   |   |
| Nonaccrual loans                              |       | 45,927                             |       |   |   |   |   | 13,174 |   |   |   |   |   | 7,573 |   |   |   |   |   |
| Cash and due from banks                       |       | 22,571                             |       |   |   |   |   | 23,566 |   |   |   |   |   | 24,996 |   |   |   |   |   |
| Other assets                                  |       | 190,475                            |       |   |   |   |   | 160,980 |   |   |   |   |   | 135,552 |   |   |   |   |   |
|                                          |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                         |       | $                                  | 1,962,831  |   |   |   |   |   | $ | 1,776,709 |   |   |   |   |   | $ | 1,496,792 |   |   |   |   |   |
|                                          |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand & savings    |       | $                                  | 451,545    |   | 14,376 |   | 3.18 | % | $ | 430,143 |   | 12,786 |   | 2.97 | % | $ | 407,551 |   | 8,337 |   | 2.05 | % |
| Time                                          |       | 917,531                            |       | 48,850 |   | 5.32 |   | 776,798 |   | 36,652 |   | 4.72 |   | 560,786 |   | 18,816 |   | 3.36 |   |
| Borrowings                                    |       | 182,165                            |       | 9,421 |   | 5.17 |   | 160,820 |   | 7,955 |   | 4.95 |   | 161,370 |   | 6,683 |   | 4.14 |   |
|                                          |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities            |       | 1,551,241                          |       | 72,647 |   | 4.68 | % | 1,367,761 |   | 57,393 |   | 4.20 | % | 1,129,707 |   | 33,836 |   | 3.00 | % |
|                                          |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing demand                    |       | 156,127                            |       |   |   |   |   | 167,477 |   |   |   |   |   | 155,241 |   |   |   |   |   |
| Other liabilities                             |       | 20,503                             |       |   |   |   |   | 18,359 |   |   |   |   |   | 13,840 |   |   |   |   |   |
| Stockholders’ equity (3)                 |       | 234,960                            |       |   |   |   |   | 223,112 |   |   |   |   |   | 198,004 |   |   |   |   |   |
|                                          |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                         |       | $                                  | 1,962,831  |   |   |   |   |   | $ | 1,776,709 |   |   |   |   |   | $ | 1,496,792 |   |   |   |   |   |
|                                          |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                           |       |                               |       | $ | 65,036 |   |   |   |   |   | $ | 69,459 |   |   |   |   |   | $ | 57,271 |   |   |   |
| Net interest spread                           |       |                               |       |   |   | 3.27 | % |   |   |   |   | 3.73 | % |   |   |   |   | 3.78 | % |
| Net yield on  average interest-earning assets |       |                               |       |   |   | 3.75 | % |   |   |   |   | 4.34 | % |   |   |   |   | 4.26 | % |

 

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| (1) |   | Average  balances were determined using the daily average balances.                                                                                                                                                        |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Average  balances of loans are net of deferred costs and fees and nonaccrual loans.                                                                                                                                        |
| (3) |   | Average  unrealized gains (losses) on securities available for sale, net of tax, have  been included in stockholders’ equity at ($1,499,000), ($2,842,000), and  ($1,306,000) for 2007, 2006, and 2005, respectively. |
| (4) |   | Interest  and fees on loans include $5,503,000, $6,690,000 and $5,944,000 of loan fee  income for the years ended December 31, 2007, 2006 and 2005,  respectively.                                                    |
| (5) |   | Yields  on nontaxable securities are presented on a tax-equivalent basis.                                                                                                                                                  |

 

32

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**Rate and Volume Analysis**

 

       The following table describes the extent to which changes in interestrates and changes in volume of interest-earning assets and interest-bearingliabilities have affected our interest income and expense during the yearsindicated. For each category of interest-earning assets and interest-bearingliabilities, information is provided on changes attributable to: (1) changein volume (change in volume multiplied by old rate); (2) change in rate(change in rate multiplied by old volume); and (3) a combination of changein rate and change in volume. The changes in interest income and interestexpense attributable to both volume and rate have been allocatedproportionately to the change due to volume and the change due to rate.

 
| ** **                                                        | ** ** | **Years Ended December 31,**         | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                        | ** ** | **2007 to 2006**                          | ** ** | **2006 to 2005** | ** ** |
| ** **                                                        | ** ** | **Increase (decrease)  due to change in** | ** ** | **Increase (decrease)  due to change in** | ** ** |
| ** **                                                        | ** ** | **Rate**                                  | ** ** | **Volume** | ** ** | **Net** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Net** | ** ** |
| ** **                                                        | ** ** | **(Dollars in thousands)**                | ** ** |
|                                                              |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Income from  interest-earning assets:                             |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Interest and fees on loans                                        |       | $                                         | (950       | ) | $ | 10,001 |   | $ | 9,051 |   | $ | 14,710 |   | $ | 19,342 |   | $ | 34,052 |   |
| Interest on taxable securities                                    |       | 862                                       |       | 169 |   | 1,031 |   | 887 |   | 262 |   | 1,149 |   |
| Interest on nontaxable securities                                 |       | (31                                       | )          | 972 |   | 941 |   | (11 | ) | (33 | ) | (44 | ) |
| Interest on federal funds sold                                    |       | (14                                       | )          | (329 | ) | (343 | ) | 221 |   | 264 |   | 485 |   |
| Interest on interest-bearing deposits in other banks              |       | (59                                       | )          | 210 |   | 151 |   | 42 |   | 61 |   | 103 |   |
| Total interest income                                             |       | (192                                      | )          | 11,023 |   | 10,831 |   | 15,849 |   | 19,896 |   | 35,745 |   |
|                                                              |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Expense from interest-bearing liabilities:                        |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Interest on interest-bearing demand deposits and savings deposits |       | 932                                       |       | 658 |   | 1,590 |   | 3,960 |   | 489 |   | 4,449 |   |
| Interest on time deposits                                         |       | 5,030                                     |       | 7,168 |   | 12,198 |   | 9,139 |   | 8,697 |   | 17,836 |   |
| Interest on borrowings                                            |       | 368                                       |       | 1,098 |   | 1,466 |   | 1,295 |   | (23 | ) | 1,272 |   |
| Total interest expense                                            |       | 6,330                                     |       | 8,924 |   | 15,254 |   | 14,394 |   | 9,163 |   | 23,557 |   |
|                                                              |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                               |       | $                                         | (6,522     | ) | $ | 2,099 |   | $ | (4,423 | ) | $ | 1,455 |   | $ | 10,733 |   | $ | 12,188 |   |

 

33

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** **

**Market Risk and Interest RateSensitivity**

 

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 may have a significant impact on net interestincome. For example, although certain assets and liabilities may have similarmaturities or periods of repricing, they may react in different degrees tochanges in market interest rates. Interest rates on certain types of assets andliabilities fluctuate in advance of changes in general market rates, whileinterest rates on other types may lag behind changes in general market rates.In addition, certain assets, such as adjustable rate mortgage loans, havefeatures (generally referred to as “interest rate caps and floors”) which limitthe amount of changes in interest rates. Prepayment and early withdrawal levelsalso could deviate significantly from those assumed in calculating the interestrate gap. The ability of many borrowers to service their debts also maydecrease during periods of rising interest rates.

 

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

 

At December 31,2007 our cumulative one year interest rate sensitivity gap ratio was 1.00. Thisindicates that our interest-bearing liabilities will reprice during this periodat the same rate as our interest-earning assets.

 

The following tablesets forth the distribution of the repricing of our interest-earning assets andinterest-bearing liabilities as of December 31, 2007, the interest ratesensitivity gap (i.e., interest rate sensitive assets less interest ratesensitive liabilities), the cumulative interest rate sensitivity gap, theinterest rate sensitivity gap ratio (i.e., interest rate sensitive assetsdivided by interest rate sensitive liabilities) and the cumulative interestrate sensitivity gap ratio.

 

The table also setsforth the time periods in which interest-earning assets and interest-bearingliabilities will mature or may reprice in accordance with their contractualterms. However, the table does not necessarily indicate the impact of generalinterest rate movements on the net interest margin since the repricing ofvarious categories of assets and liabilities is subject to competitivepressures and the needs of our customers. In addition, various assets andliabilities indicated as repricing within the same period may in fact repriceat different times within such period and at different rates.

 

 

34

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| ** **                                      | ** ** | ** **                 | ** ** | **After**    | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|--------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                                      | ** ** | ** **                 | ** ** | **Three**    | ** ** | **After**      | ** ** | ** **     | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | ** **                 | ** ** | **Months**   | ** ** | **One Year**   | ** ** | ** **     | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Within**                 | ** ** | **But**      | ** ** | **But**        | ** ** | ** **     | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Three**                  | ** ** | **Within**   | ** ** | **Within**     | ** ** | **After**      | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Months**                 | ** ** | **One Year** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** | **Total**  | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)** | ** ** |
| Interest-earning assets:                        |       |                       |       |         |       |           |       |           |       |       |       |
| Interest-bearing deposits                       |       | $                          | 10,881     |         | $          | —         |       | $              | —     |       | $          | — |   | $ | 10,881 |   |
| Federal funds sold                              |       | 3,575                      |       | —       |       | —         |       | —         |       | 3,575      |       |
| Securities (1)                                  |       | 73,481                     |       | 41,563       |       | 62,392         |       | 40,457         |       | 217,893    |       |
| Loans                                           |       | 1,062,648                  |       | 209,007      |       | 228,997        |       | 52             |       | 1,500,704  |       |
|                                            |       |                       |       |         |       |           |       |           |       |       |       |
| Total interest-earning assets                   |       | 1,150,585                  |       | 250,570      |       | 291,389        |       | 40,509         |       | 1,733,053  |       |
|                                            |       |                       |       |         |       |           |       |           |       |       |       |
| Interest-bearing  liabilities:                  |       |                       |       |         |       |           |       |           |       |       |       |
| Interest-bearing demand and savings             |       | $                          | 439,738    |         | $          | —         |       | $              | —     |       | $          | — |   | $ | 439,738 |   |
| Time deposits                                   |       | 222,546                    |       | 589,918      |       | 108,319        |       | 76             |       | 920,859    |       |
| Federal funds purchased and                     |       |                       |       |         |       |           |       |           |       |       |       |
| repurchase agreements                           |       | 62,428                     |       | —       |       | —         |       | —         |       | 62,428     |       |
| Other borrowings                                |       | 52,982                     |       | 34,910       |       | 23,951         |       | 35,358         |       | 147,201    |       |
|                                            |       |                       |       |         |       |           |       |           |       |       |       |
| Total interest-bearing liabilities              |       | $                          | 777,694    |         | $          | 624,828        |       | $              | 132,270    |       | $          | 35,434 |   | $ | 1,570,226 |   |
|                                            |       |                       |       |         |       |           |       |           |       |       |       |
| Interest rate sensitivity  gap                  |       | $                          | 372,891    |         | $          | (374,258       | )          | $              | 159,119    |       | $          | 5,075 |   | $ | 162,827 |   |
|                                            |       |                       |       |         |       |           |       |           |       |       |       |
| Cumulative interest rate  sensitivity gap       |       | $                          | 372,891    |         | $          | (1,367         | )          | $              | 157,752    |       | $          | 162,827 |   |   |   |
|                                            |       |                       |       |         |       |           |       |           |       |       |       |
| Interest rate sensitivity  gap ratio            |       | 1.48                       | %          | 0.40         | %          | 2.20           | %          | 1.14           | %          |       |       |
|                                            |       |                       |       |         |       |           |       |           |       |       |       |
| Cumulative interest rate  sensitivity gap ratio |       | 1.48                       | %          | 1.00         | %          | 1.10           | %          | 1.10           | %          |       |       |

 

----

(1) Does not include restricted equitysecurities, which consist of Federal Home Loan Bank of Atlanta stock, FederalReserve Bank stock and The Bankers Bank stock, as such assets are not interestrate sensitive.

 

Management believesthat gap analysis is a useful tool for measuring interest rate risk only whenused in conjunction with its simulation model. As of December 31, 2007, the Company maintained an asset sensitiveinterest rate risk position based on its simulation model results.  This positioning would be expected to resultin an increase in net interest income in a rising rate environment and adecrease in net interest income in a declining rate environment.  This is generally due to a greater proportionof interest earning assets repricing on a variable rate basis as compared tovariable rate funding sources. This asset sensitivity is indicated by selectedresults of net interest income simulations. The actual realized change in net interest income would depend onseveral factors.  These factors include,but are not limited to, actual realized growth in asset and liability volumes,as well as the mix experienced over these time horizons.  Market conditions and their resulting impacton loan, deposit, and funding pricing would also be a primary determinant inthe realized level of net interest income. The table below shows the impact on net interest margins over atwelve-month period when subjected to an immediate 100 basis point increase anddecrease in rate.

 

**TwelveMonth Net Interest Income Sensitivity**

 

| **Change in Short-Term Interest   Rates (in basis points)** | ** ** | **Estimated Change in Net   Interest Income** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------|------------|
|                                                        |       |                                          |       |
| +100                                                        |       | 10.42                                         | %          |
| Flat                                                        |       | —                                        |       |
| -100                                                        |       | (10.39                                        | )%         |

 

 

35

----

 

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. In particular, as of December 31, 2007, approximately 85%of the loan portfolio is comprised of loans which have variable rate terms ormature within one year. Most mortgage loans are made on a variable rate basiswith rates being adjusted every one to five years.

 

**Securities Portfolio**

 

*Types of Securities*

 

The following tablesets forth the carrying value of securities held by us as of the datesindicated:

 

| ** **                                                    | ** ** | **December 31,**      | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                    | ** ** | **2007**                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands)** | ** ** |
|                                                          |       |                       |       |   |   |   |   |
| U. S. Treasury and U. S. government agencies and corporations |       | $                          | 102,996    |   | $ | 101,806 |   | $ | 77,363 |   |
| Mortgage-backed securities                                    |       | 80,041                     |       | 83,697 |   | 97,729 |   |
| State and municipal  securities                               |       | 31,802                     |       | 21,731 |   | 11,327 |   |
| Equity securities (1)                                         |       | 12,352                     |       | 11,567 |   | 10,985 |   |
| Corporate bonds                                               |       | 1,356                      |       | 1,317 |   | — |   |
|                                                          |       | $                          | 228,547    |   | $ | 220,118 |   | $ | 197,404 |   |

 

----

(1)  Equitysecurities consist of Federal Home Loan Bank of Atlanta stock, Federal ReserveBank stock and The Bankers Bank stock. For presentation purposes, the equity securities are not included in thematurity table below because they have no contractual maturity date.

 

*Maturities*

 

The amounts of debtsecurities as of December 31, 2007 are shown in the following tableaccording to contractual maturities.

 
| ** **                         | ** ** | **U. S. Treasury**         | ** ** | ** **               | ** ** | ** ** | ** ** |
|------------------------------------|------------|----------------------------|------------|--------------------------|------------|------------|------------|
| ** **                         | ** ** | **And U. S.**              | ** ** | ** **               | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Government Agencies**    | ** ** | **State and**            | ** ** |
| ** **                         | ** ** | **and Corporations**       | ** ** | **Municipal Securities** | ** ** |
| ** **                         | ** ** | ** **                 | ** ** | **Yield**                | ** ** | ** ** | ** ** | **Yield** | ** ** |
| ** **                         | ** ** | **Amount**                 | ** ** | **(1)**                  | ** ** | **Amount** | ** ** | **(1)(2)** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
| Maturity:                          |       |                       |       |                     |       |       |       |   |   |
| One year or less                   |       | $                          | 23,834     |                     | 2.91       | %          | $          | 441 |   | 5.79 | % |
| After one year through five years  |       | 59,414                     |       | 4.37                     |       | 2,166      |       | 4.99 |   |
| After five years through ten years |       | 38,522                     |       | 5.45                     |       | 2,586      |       | 4.46 |   |
| After ten years                    |       | 62,623                     |       | 4.84                     |       | 26,609     |       | 4.06 |   |
|                               |       | $                          | 184,393    |                     | 4.57       | %          | $          | 31,802 |   | 4.18 | % |

 

----

(1)                                  Yieldswere computed using coupon interest rates, including discount accretion andpremium amortization.  The weightedaverage yield for each maturity range was computed using the carrying value ofeach security in that range.

(2)           Yieldson municipal securities are not stated on a tax-equivalent basis.

 

 

36

----

 

**Loan Portfolio**

 

*Types of Loans*

 

The following tablesets forth our loans by type of collateral as of the dates indicated therein:

 
| ** **                      | ** ** | **December 31,**      | ** ** |
|---------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **2007**                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(Dollars in thousands)** | ** ** |
|                            |       |                       |       |   |   |   |   |   |   |   |   |
| Commercial                      |       | $                          | 111,537    |   | $ | 115,792 |   | $ | 99,640 |   | $ | 74,437 |   | $ | 50,997 |   |
| Real estate — construction |       | 695,182                    |       | 702,809 |   | 481,332 |   | 294,817 |   | 185,397 |   |
| Real estate — mortgage     |       | 662,025                    |       | 643,765 |   | 615,594 |   | 545,614 |   | 439,779 |   |
| Consumer                        |       | 27,515                     |       | 31,756 |   | 33,260 |   | 37,248 |   | 30,088 |   |
| Other                           |       | 4,445                      |       | 3,579 |   | 1,584 |   | 3,764 |   | 3,697 |   |
|                            |       | 1,500,704                  |       | 1,497,701 |   | 1,231,410 |   | 955,880 |   | 709,958 |   |
| Less allowance for loan  losses |       | (27,369                    | )          | (24,676 | ) | (12,773 | ) | (11,061 | ) | (8,726 | ) |
| Net loans (1)                   |       | $                          | 1,473,335  |   | $ | 1,473,025 |   | $ | 1,218,637 |   | $ | 944,819 |   | $ | 701,232 |   |

 

----

(1)  Loans are net ofdeferred loan fees.

 

*Maturities and Sensitivities toChanges in Interest Rates*

 

Total loans as of December 31,2007 are shown in the following table according to contractual maturity.

 
| ** **                   | ** ** | **(Dollars in thousands)** | ** ** |
|------------------------------|------------|----------------------------|------------|
|                         |       |                       |       |
| Commercial                   |       |                       |       |
| One year or less             |       | $                          | 74,135     |   |
| After one through five years |       | 35,275                     |       |
| After five years             |       | 2,127                      |       |
|                         |       | 111,537                    |       |
|                         |       |                       |       |
| Real Estate - Construction   |       |                       |       |
| One year or less             |       | 620,762                    |       |
| After one through five years |       | 71,624                     |       |
| After five years             |       | 2,796                      |       |
|                         |       | 695,182                    |       |
|                         |       |                       |       |
| Other                        |       |                       |       |
| One year or less             |       | 300,104                    |       |
| After one through five years |       | 356,342                    |       |
| After five years             |       | 37,539                     |       |
|                         |       | 693,985                    |       |
|                         |       | $                          | 1,500,704  |   |

 

The following tablesummarizes loans at December 31, 2007 with the due dates after one yearfor predetermined and floating or adjustable interest rates.

 
| ** **                             | ** ** | **(Dollars in Thousands)** | ** **  |
|----------------------------------------|------------|----------------------------|-------------|
|                                   |       |                       |        |
| Predetermined interest  rates          | ** ** | **$**                      | **302,263** | ** ** |
| Floating or adjustable  interest rates |       | 203,440                    |        |
|                                   | ** ** | **$**                      | **505,703** | ** ** |

 

 

37

----

 

*Risk Elements*

 

The following tablepresents the aggregate of nonperforming loans for the categories and as of thedates indicated.

 
| ** **                                                                                                                                                                       | ** ** | **December 31,**      | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **2007**                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                                       | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                                                                                                             |       |                       |       |   |   |   |   |   |   |   |   |
| Loans accounted for on a  nonaccrual basis                                                                                                                                       |       | $                          | 70,600     |   | $ | 14,790 |   | $ | 6,562 |   | $ | 10,059 |   | $ | 3,333 |   |
|                                                                                                                                                                             |       |                       |       |   |   |   |   |   |   |   |   |
| Loans contractually past due 90 days or more to interest or principal  payments and still accruing                                                                               |       | 993                        |       | 10 |   | 17 |   | 328 |   | 509 |   |
|                                                                                                                                                                             |       |                       |       |   |   |   |   |   |   |   |   |
| Loans, the term of which have been renegotiated to provide a reduction  or deferral of interest or principal because of deterioration in the  financial position of the borrower |       | —                     |       | — |   | 106 |   | 33 |   | 62 |   |
|                                                                                                                                                                             |       |                       |       |   |   |   |   |   |   |   |   |
| Loans now current about which there are serious doubts as to the  ability of the borrower to comply with present loan repayment terms                                            |       | 49,739                     |       | 10,771 |   | — |   | — |   | — |   |
|                                                                                                                                                                                  |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The reduction ininterest income associated with nonaccrual loans as of December 31, 2007is as follows:

 
| ** **                                                                              | ** ** | **(Dollars in thousands)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                              | ** ** | ** **                 | ** ** |
| Interest income that would  have been recorded on nonaccrual loans under original terms |       | $                          | 7,022      |   |
|                                                                                    |       |                       |       |
| Interest income that was  recorded on nonaccrual loans                                  |       | $                          | 2,558      |   |

 

Management includesnonaccrual loans in its definition of impaired loans as determined by FinancialAccounting Standards Board Statement Numbers 114 and 118.

 

Our 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) thereis a significant deterioration in the financial condition of the borrower andfull repayment of principal and interest is not expected; and (2) theprincipal or interest is more than 90 days past due, unless the loan is bothwell-secured and in the process of collection. Accrual of interest on such loans is resumed when, in management’sjudgment, the collection of interest and principal becomes probable. Loansclassified for regulatory purposes as loss, doubtful, substandard, or specialmention that have not been included in the table above do not represent orresult from trends or uncertainties which management reasonably expects willmaterially impact future operating results, liquidity, or capital resources.These classified loans do not represent material credits about which managementis aware and which cause management to have serious doubts as to the ability ofsuch borrowers to comply with the loan repayment terms. In the event ofnon-performance by the borrower, these loans have collateral pledged whichwould prevent the recognition of substantial losses.

 

 

38

----

** **

**Summary of Loan Loss Experience**

 

       The following table summarizes average loan balances for the periods setforth therein determined using the daily average balances during the year;changes in the allowance for loan losses arising from loans charged off andrecoveries on loans previously charged off; additions to the allowance whichhave been charged to expense; and the ratio of net charge-offs during the yearto average loans.

 
| ** **                                                                  | ** ** | **December 31,**      | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                  | ** ** | **2007**                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                  | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                        |       |                       |       |   |   |   |   |   |   |   |   |
| Average amount of loans  outstanding (1)                                    |       | $                          | 1,528,509  |   | $ | 1,379,203 |   | $ | 1,131,887 |   | $ | 807,340 |   | $ | 608,131 |   |
|                                                                        |       |                       |       |   |   |   |   |   |   |   |   |
| Balance of allowance for loan losses at beginning of year                   |       | $                          | 24,676     |   | $ | 12,773 |   | $ | 11,061 |   | $ | 8,726 |   | $ | 7,538 |   |
|                                                                        |       |                       |       |   |   |   |   |   |   |   |   |
| Loans charged off:                                                          |       |                       |       |   |   |   |   |   |   |   |   |
| Real estate                                                                 |       | (19,916                    | )          | (4,344 | ) | (3,863 | ) | (422 | ) | (469 | ) |
| Commercial                                                                  |       | (1,071                     | )          | (681 | ) | (666 | ) | (185 | ) | (295 | ) |
| Consumer                                                                    |       | (693                       | )          | (526 | ) | (1,177 | ) | (1,001 | ) | (700 | ) |
| Credit cards                                                                |       | (29                        | )          | (19 | ) | (55 | ) | (20 | ) | (2 | ) |
|                                                                        |       | (21,709                    | )          | (5,570 | ) | (5,761 | ) | (1,628 | ) | (1,466 | ) |
|                                                                        |       |                       |       |   |   |   |   |   |   |   |   |
| Recoveries of loans  previously charged off:                                |       |                       |       |   |   |   |   |   |   |   |   |
| Real estate                                                                 |       | 95                         |       | 360 |   | 68 |   | 113 |   | 53 |   |
| Commercial                                                                  |       | 245                        |       | 29 |   | 95 |   | 66 |   | 31 |   |
| Consumer                                                                    |       | 315                        |       | 248 |   | 269 |   | 292 |   | 286 |   |
| Credit cards                                                                |       | 20                         |       | 4 |   | 20 |   | 11 |   | 14 |   |
|                                                                        |       | 675                        |       | 641 |   | 452 |   | 482 |   | 384 |   |
|                                                                        |       |                       |       |   |   |   |   |   |   |   |   |
| Net loans charged off  during the year                                      |       | (21,034                    | )          | (4,929 | ) | (5,309 | ) | (1,146 | ) | (1,082 | ) |
| Allowance for loan losses  acquired (sold)                                  |       | —                     |       | 1,088 |   | 1,105 |   | 2,075 |   | 864 |   |
|                                                                        |       |                       |       |   |   |   |   |   |   |   |   |
| Additions to allowance charged to expense during year                       |       | 23,727                     |       | 15,744 |   | 5,916 |   | 1,406 |   | 1,406 |   |
|                                                                        |       |                       |       |   |   |   |   |   |   |   |   |
| Balance of allowance for  loan losses at end of year                        |       | $                          | 27,369     |   | $ | 24,676 |   | $ | 12,773 |   | $ | 11,061 |   | $ | 8,726 |   |
|                                                                        |       |                       |       |   |   |   |   |   |   |   |   |
| Ratio of net loans charged off during the year to average loans outstanding |       | 1.38                       | %          | 0.36 | % | 0.47 | % | 0.14 | % | 0.18 | % |

----

(1)           Average total loans include nonaccrual loans.

 

39

----

 

       The following table sets forth the allowance for loan losses to totalallowance for loan losses and the percent of loans to total loans in each ofthe categories listed at the dates indicated:

 
| ** **               | ** ** | **December 31,**      | ** ** |
|--------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **2007**                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **               | ** ** | ** **                 | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **               | ** ** | ** **                 | ** ** | **of Loans** | ** ** | ** ** | ** ** | **of Loans** | ** ** | ** ** | ** ** | **of Loans** | ** ** | ** ** | ** ** | **of Loans** | ** ** | ** ** | ** ** | **of Loans** | ** ** |
| ** **               | ** ** | ** **                 | ** ** | **in Each** | ** ** | ** ** | ** ** | **in Each** | ** ** | ** ** | ** ** | **in Each** | ** ** | ** ** | ** ** | **in Each** | ** ** | ** ** | ** ** | **in Each** | ** ** |
| ** **               | ** ** | ** **                 | ** ** | **Category** | ** ** | ** ** | ** ** | **Category** | ** ** | ** ** | ** ** | **Category** | ** ** | ** ** | ** ** | **Category** | ** ** | ** ** | ** ** | **Category** | ** ** |
| ** **               | ** ** | ** **                 | ** ** | **to Total** | ** ** | ** ** | ** ** | **to Total** | ** ** | ** ** | ** ** | **to Total** | ** ** | ** ** | ** ** | **to Total** | ** ** | ** ** | ** ** | **to Total** | ** ** |
| ** **               | ** ** | **Amount**                 | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| ** **               | ** ** | **(Dollars in thousands)** | ** ** |
| Commercial               |       | $                          | 2,081      |   | 7.45 | % | $ | 1,876 |   | 7.73 | % | $ | 971 |   | 8.09 | % | $ | 840 |   | 7.79 | % | $ | 663 |   | 7.19 | % |
| Real estate-construction |       | 6,212                      |       | 46.37 |   | 5,601 |   | 46.93 |   | 1,597 |   | 39.09 |   | 1,383 |   | 30.84 |   | 1,091 |   | 26.11 |   |
| Real estate-mortgage     |       | 14,807                     |       | 44.11 |   | 13,350 |   | 42.98 |   | 7,600 |   | 49.99 |   | 6,581 |   | 57.08 |   | 5,192 |   | 61.94 |   |
| Consumer and other       |       | 4,269                      |       | 2.07 |   | 3,849 |   | 2.36 |   | 2,605 |   | 2.83 |   | 2,257 |   | 4.29 |   | 1,780 |   | 4.76 |   |
| Total allowance          |       | $                          | 27,369     |   | 100.00 | % | $ | 24,676 |   | 100.00 | % | $ | 12,773 |   | 100.00 | % | $ | 11,061 |   | 100.00 | % | $ | 8,726 |   | 100.00 | % |

 

       The allowance for loan losses is established through provisions for loanlosses charged to operations. Loans are charged against the allowance for loanlosses when management believes that the collection of principal is unlikely.Subsequent recoveries are added to the allowance. Management’s evaluation ofthe adequacy of the allowance for loan losses is based on a formal analysiswhich assesses the risk within the loan portfolio. Management believes that theallowance for loan losses is adequate. While management uses availableinformation to recognize losses on loans, future additions to the allowance forloan losses may be necessary based on changes in economic conditions. Inaddition, various regulatory agencies, as an integral part of their examinationprocess, periodically review the subsidiary banks’ allowances for loan losses.Such agencies may require our subsidiary banks to recognize additions to theallowance for loan losses based on their judgments about information availableto them at the time of their examination. See also our allowance for loan lossdiscussion in “Critical Accounting Policies.”

 

       Our allowance for loan losses was approximately $27,369,000 at December 31,2007, representing 1.82% of total loans, compared with $24,676,000 at December 31,2006, which represented 1.65% of total loans.

 

**Deposits**

 

       Average amounts of deposits and average rates paid thereon, classifiedas to noninterest-bearing demand deposits, interest-bearing demand and savingsdeposits and time deposits, are presented below. Average balances weredetermined using daily average balances.

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **Amount**                       | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)**       | ** ** |
|                                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing demand  deposits         |       | $                                | 156,127    |   | — | % | $ | 167,477 |   | — | % | $ | 155,241 |   | — | % |
| Interest-bearing demand and savings deposits |       | 451,545                          |       | 3.18 |   | 430,143 |   | 2.97 |   | 407,551 |   | 2.05 |   |
| Time deposits                                |       | 917,531                          |       | 5.32 |   | 776,798 |   | 4.72 |   | 560,786 |   | 3.36 |   |
| Total deposits                               |       | $                                | 1,525,203  |   |   |   | $ | 1,374,418 |   |   |   | $ | 1,123,578 |   |   |   |

 

40

----

 

                The amounts of time certificates of depositissued in amounts of $100,000 or more as of December 31, 2007 are shownbelow by category.

 

| ** **                     | ** ** | **(Dollars in thousands)** | ** **  |
|--------------------------------|------------|----------------------------|-------------|
|                           |       |                       |        |
| Three months or less           | ** ** | **$**                      | **112,368** | ** ** |
| Over three through six  months |       | 121,391                    |        |
| Over six through 12 months     |       | 128,125                    |        |
| Over 12 months                 |       | 55,813                     |        |
| Total                          | ** ** | **$**                      | **417,697** | ** ** |

 

**Return on Equity and Assets**

 

                The following table sets forthrate of return information for the periods indicated.

 

 

| ** **                 | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                       |       |                              |       |   |   |   |   |
| Return on assets (1)       |       | (0.64                             | )%         | 0.54 | % | 0.80 | % |
| Return on equity (2)       |       | (5.32                             | )          | 4.27 |   | 6.06 |   |
| Dividend payout ratio (3)  |       | (43.10                            | )          | 52.21 |   | 35.48 |   |
| Equity to assets ratio (4) |       | 11.97                             |       | 12.56 |   | 13.23 |   |

 

----

| (1) |   | Net  income divided by average total assets.                         |
|-----|--------|----------------------------------------------------------------------|
| (2) |   | Net  income divided by average equity.                               |
| (3) |   | Dividends  declared per share divided by diluted earnings per share. |
| (4) |   | Average equity divided by  average total assets.                     |

 

**Borrowings**

 

       As part of our operating strategy, we have utilized federal fundspurchased and securities sold under repurchase agreements as an alternative toretail deposits to fund our operations when borrowings are less costly and canbe invested at a positive interest rate spread or when we need additional fundsto satisfy loan demand. By utilizing federal funds purchased and securitiessold under repurchase agreements, which possess varying stated maturities, wecan meet our liquidity needs without otherwise being dependent upon retaildeposits and revising our deposit rates to attract retail deposits, which,other than certificates of deposit, have no stated maturities and are subjectto withdrawal from us at any time. At December 31, 2007, we had $62.4million in outstanding federal funds purchased and securities sold underrepurchase agreements.

 

       The following table sets forth certain information regarding federalfunds purchased and securities sold under repurchase agreements at or for theperiods ended on the dates indicated:

 

| ** **                                                   | ** ** | **At or For the Year Ended  December 31,** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                   | ** ** | **(Dollars in thousands)**                      | ** ** |
|                                                         |       |                                            |       |   |   |   |   |
| Average balance  outstanding                                 |       | $                                               | 43,394     |   | $ | 35,720 |   | $ | 33,130 |   |
| Maximum amount outstanding  at any month-end during the year |       | 62,428                                          |       | 44,086 |   | 47,527 |   |
| Balance outstanding at end  of year                          |       | 62,428                                          |       | 41,061 |   | 45,510 |   |
| Weighted average interest  rate during year                  |       | 5.10                                            | %          | 5.05 | % | 3.30 | % |
| Weighted average interest  rate at end of year               |       | 4.40                                            | %          | 5.15 | % | 4.09 | % |
|                                                              |            |                                                 |            |  |  |  |  |  |  |  |

 

41

----

 

**ITEM7A.****                                           ****QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

                See“Market Risk and Interest Rate Sensitivity” section of “Management’s Discussionand Analysis of Financial Condition and Results of Operations” in this reportfor a discussion of market risk.

 

**ITEM8.****                                                    ****FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 
|   | Consolidated  Balance Sheets - December 31, 2007 and 2006.                                                         |
|--------|-------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                    |
|   | Consolidated Statements of Income —  Three Years Ended December 31, 2007, 2006, and 2005.                     |
|   |                                                                                                                    |
|   | Consolidated Statements of  Comprehensive Income — Three Years Ended December 31, 2007, 2006, and  2005.      |
|   |                                                                                                                    |
|   | Consolidated Statements of  Stockholders’ Equity — Three Years Ended December 31, 2007, 2006, and  2005. |
|   |                                                                                                                    |
|   | Consolidated Statements of Cash Flows —  Three Years Ended December 31, 2007, 2006, and 2005.                 |
|   |                                                                                                                    |
|   | Notes to Consolidated Financial  Statements.                                                                            |

 

 

**ITEM 9.****                                                    ****CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING****AND FINANCIAL DISCLOSURE**

 

                Notapplicable

 

**ITEM9A.****                                           ****CONTROLS AND PROCEDURES**

 

**Disclosure Controls andProcedures**

 

As of the end of theperiod covered by this report, an evaluation was carried out under thesupervision and with the participation of the Company’s Chief Executive Officerand Chief Financial Officer, of the effectiveness of the design and operationof the Company’s disclosure controls and procedures. Based upon that evaluationand due to the material weakness in the Company’s internal control overfinancial reporting as described below, the Chief Executive Officer and ChiefFinancial Officer concluded that the design and operation of these disclosurecontrols and procedures were not effective as of the end of the period coveredby this Report in alerting them on a timely basis to material informationrelating to the Company required to be included in the Company’s reports filedor submitted under the Securities Exchange Act of 1934.

 

**Internal Control over FinancialReporting**

 

The management of theCompany and subsidiaries is responsible for establishing and maintainingadequate internal control over financial reporting as defined in Rules 13a-15fand 15d-15f.  This internal controlsystem has been designed to provide reasonable assurance to the Company’smanagement and board of directors regarding the reliability of financialreporting and the preparation and fair presentation of financial statements forexternal purposes in accordance with accounting principles generally acceptedin the United States of America.

 

All internal controlsystems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide onlyreasonable assurance with respect to financial statement preparation andpresentation.

 

The management of theCompany and subsidiaries has assessed the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2007.  To make this assessment, we used the criteriafor effective 

 

42

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internal control over financial reporting described in Internal Control— Integrated Framework, issued by the Committee of Sponsoring Organizations ofthe Treadway Commission.  Based on our assessment and based on suchcriteria, we believe that, as of December 31, 2007, the Company’s internalcontrol over financial reporting was not effective, as demonstrated by a materialweakness. Controls over loan approval procedures related to loan proceedsdisbursement on construction and development loans and problem loanidentification and reporting have not been implemented effectively andconsistently throughout the subsidiary banks.

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors

GB&TBancshares, Inc.

Gainesville,Georgia

 

Wehave audited GB&T Bancshares, Inc.’s internal control over financialreporting as of December 31, 2007, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  GB&T Bancshares, Inc.’s managementis responsible for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internal control overfinancial reporting included in the Company’s annual report on Form 10K.  Our responsibility is to express an opinionon the company’s internal control over financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financialreporting was maintained in all material respects. Our audit included obtainingan understanding of internal control over financial reporting, assessing therisk that a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk.  Our audit also included performing such otherprocedures as we considered necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Amaterial weakness is a deficiency, or a combination of deficiencies, ininternal control over financial reporting, such that there is a reasonablepossibility that a material misstatement of the company’s annual or interimfinancial statements will not be prevented or detected on a timely basis.  The following material weakness has beenidentified and included in management’s assessment.  Controls over loan approval proceduresrelated to loan proceeds disbursement on construction and development loans andproblem loan identification and reporting have not been implemented effectivelyand consistently throughout the subsidiary banks.  This material weakness was considered indetermining the nature, timing, and extent of audit tests applied in our auditof the 2007 financial statements, and this report does not affect our reportdated February 28, 2008 on those financial statements.

 

43

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Inour opinion, because of the effect of the material weakness described above onthe achievement of the objectives of the control criteria, GB&T Bancshares, Inc.has not maintained effective internal control over financial reporting as of December 31,2007, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).”

 

/s/ MAULDIN & JENKINS, LLC

 

Atlanta,Georgia

February 28,2008

 

**Changesin Internal Control Over Financial Reporting**

 

During the fourth quarter of the year ended December 31, 2007, nochange in the Company’s internal control over financial reporting occurred thathas materially affected or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

**ITEM9B.****                                           ****OTHER INFORMATION**

 

**               **None.

 

**PART III**

 

**ITEM10.****                                             ****DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

                Theinformation set forth under the caption “Directors, Executive Officers,Promoters and Control Persons”, “Code of Ethics”, “Compliance with Section 16(a) ofthe Exchange Act” and “Corporate Governance” to be filed in connection with the2008 Annual Meeting of Shareholders or as an amendment to this Form 10-Kis incorporated herein by reference.

 

**ITEM11.****                                             ****EXECUTIVE COMPENSATION**

 

                Certaininformation set forth under the caption “Executive Compensation”, “CompensationDiscussion and Analysis” and “Compensation Committee Report” will be includedin the Company’s proxy statement for the 2008 Annual Meeting of Shareholders orin an amendment to this Form 10-K and is incorporated herein by reference.

 

44

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**ITEM12.****                                             ****SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

                Theinformation set forth under the caption “Security Ownership of CertainBeneficial Owners and Management” to be filed in connection with the 2008Annual Meeting of Shareholders or as an amendment to this Form 10-K isincorporated herein by reference.

 

**Equity Compensation PlanInformation**

 

                The followingtable gives information about shares of the Company’s common stock that may beissued upon the exercise of options, warrants and rights under all existingequity compensation plansas of December 31, 2007.

 

 
| ******Plan Category**                                          | ** ** | ******Number of securities to be issued upon exercise of outstanding  options, warrants and rights** | ** ** | ******Weighted-average exercise price of outstanding options, warrants and  rights** | ** ** | **Number  of securities remaining available for future issuance under equity  compensation plans (excluding securities reflected in first column)** |
|----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| Equity compensation plans approved bysecurity  holders (1)     |       | 688,349                                                                                              |       | $                                                                                    | 12.38      |                                                                                                                                                | 1,067,768 |
| Equity compensation plans not approved by security  holders(2) |       | —                                                                                               |       | —                                                                               |       | —                                                                                                                                              |
| Total                                                          |       | 688,349                                                                                              |       | N/A                                                                                  |       | 1,067,768                                                                                                                                           |
|                                                                |            |                                                                                                      |            |                                                                                      |            |                                                                                                                                                     |  |

 

----

| (1) |   | GB&T Bancshares 2007 Omnibus  Long-Term Incentive Plan and 1997 Stock Incentive Plan |
|-----|--------|------------------------------------------------------------------------------------------|
| (2) |   | N/A                                                                                      |

 

**ITEM13.****                                             ****CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

                Theinformation set forth under the caption “Transactions with Related Persons,Promoters, and Certain Control Persons” and “Corporate Governance” to be filedin connection with the 2008 Annual Meeting of Shareholders or as an amendmentto this Form 10-K is incorporated herein by reference.

 

**ITEM14.****                                             ****PRINCIPAL ACCOUNTING FEES ANDSERVICES**

 

The information setforth under the caption “Independent Accountants” to be filed in connectionwith the 2008 Annual Meeting of Shareholders or as an amendment to this Form 10-Kis incorporated herein by reference.

 

45

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** **

**PART IV**

 

**ITEM15.****                                       ****EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

 

(a)                                  Contents:

 

1.                             Consolidated financial statements:

 

(a)                  GB&T Bancshares, Inc. and Subsidiaries:

 

(i)                                     Consolidated Balance Sheets - December 31,2007 and 2006

 

(ii)                                  Consolidated Statements of Income — ThreeYears Ended December 31, 2007, 2006, and 2005

 

(iii)                               Consolidated Statements of ComprehensiveIncome — Three Years EndedDecember 31, 2007, 2006, and 2005

 

(iv)                              Consolidated Statements of Stockholders’Equity — Three Years EndedDecember 31, 2007, 2006, and 2005

 

(v)                                 Consolidated Statements of Cash Flows —Three Years EndedDecember 31, 2007, 2006, and 2005

 

(vi)                              Notes to Consolidated FinancialStatements

 

2.                             Financial statement schedules:

 

All schedules are omitted as the requiredinformation is inapplicable or the information is presented in the financialstatements or related notes.

 

 

46

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(b)           Exhibits:

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                              |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **No.**     | ** ** | **Description**                                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                    |
| 2.1         |       | Agreement and Plan of Merger, dated as  of November 2, 2007, by and between SunTrust Banks, Inc. and the  Registrant (incorporated herein by reference to the Registrant’s  Form 8-K filed on November 6, 2007).               |
|        |       |                                                                                                                                                                                                                                                    |
| 3.1         |       | Articles of Incorporation of the  Registrant (incorporated herein by reference to the Registrant’s Registration  Statement on Form S-3, Registration No. 333-64197 filed on  September 24, 1998).                                   |
|        |       |                                                                                                                                                                                                                                                    |
| 3.2         |       | Articles of Amendment of the  Registrant, dated July 8, 1998 (incorporated herein by reference to the  Registrant’s Registration Statement on Form S-3, Registration  No. 333-64197 filed on September 24, 1998).              |
|        |       |                                                                                                                                                                                                                                                    |
| 3.3         |       | Articles of Amendment of the  Registrant, dated effective June 30, 2002 (incorporated herein by  reference from the Registrant’s Registration Statement on Form S-4,  Registration No. 333-99461 filed on September 12, 2002). |
|        |       |                                                                                                                                                                                                                                                    |
| 3.4         |       | Articles of Amendment of the  Registrant, dated October 15, 2004 (incorporated by reference from the  Registrant’s Current Report on Form 8-K filed October 21, 2004).                                                              |
|        |       |                                                                                                                                                                                                                                                    |
| 3.5         |       | By-Laws of the Registrant (incorporated  herein by reference to the Registrant’s Registration Statement on  Form S-3, Registration No. 333-64197).                                                                                       |
|        |       |                                                                                                                                                                                                                                                    |
| 3.6         |       | Amendment to By-Laws of the Registrant  (incorporated herein by reference to the Registrant’s Form 8-K filed on  November 27, 2007).                                                                                                     |
|        |       |                                                                                                                                                                                                                                                    |
| 4.1         |       | See Exhibits 3.1 and 3.2 herein for  provisions of the Registrant’s Articles of Incorporation and By-Laws which  define the rights of the holders of Common Stock of the Registrant.                                                               |
|        |       |                                                                                                                                                                                                                                                    |
| *10.1       |       | Dividend Reinvestment and Share  Purchase Plan of the Registrant (incorporated herein by reference to the  Registration’s Registration Statement on Form S-3, Registration  No.333-64197).                                                    |
|        |       |                                                                                                                                                                                                                                                    |
| *10.2       |       | Employment Agreement, by and between  GB&T and Richard A. Hunt, dated as of March 5, 2007 (incorporated  herein by reference to the Registrant’s Form 10-K filed on  March 16, 2007).                                           |
|        |       |                                                                                                                                                                                                                                                    |
| *10.3       |       | Employment Agreement, by and between  GB&T and Gregory L. Hamby, dated as of March 7, 2007 (incorporated  herein by reference to the Registrant’s Form 10-K filed on  March 16, 2007).                                          |
|        |       |                                                                                                                                                                                                                                                    |
| *10.4       |       | GB&T Bancshares, Inc. Stock Option Plan of 1997 (incorporated herein  by reference to the Registrant’s Form 10-K filed on March 31,  2003).                                                                                     |
|        |       |                                                                                                                                                                                                                                                    |
| *10.5       |       | GB&T Bancshares, Inc. 2007 Omnibus Long-Term Incentive Plan (incorporated herein by reference  to the Registrant’s Form 8-K filed on May 23, 2007).                                                                             |
|        |       |                                                                                                                                                                                                                                                    |
| 21.1        |       | Subsidiaries of the Registrant.                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                    |
| 23.1        |       | Consent of Mauldin & Jenkins,  LLC.                                                                                                                                                                                                            |

 

 

47

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| 24.1   |   | Power of Attorney (included on the  signatures page hereto).       |
|--------|--------|-------------------------------------------------------------------------|
|   |   |                                                                    |
| 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.        |

 

 

*Each management contract or compensationplan required to be filed as an exhibit is identified by an asterisk.

 

 

48

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**SIGNATURES**

 

                Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, as amended, the Registrant has duly caused this Report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|                            | GB&T  BANCSHARES, INC. |
|---------------------------------|----------------------------|
|                            |                       |   |
|  Dated: March 5, 2008 | By:                        |    /s/ Richard A. Hunt |
|                            |                       | Richard  A. Hunt, President and CEO |

 

 

**POWER OF ATTORNEY**

 

**               **KNOW ALL MEN BY THESEPRESENTS, that each person whose signature appears below constitutes andappoints Richard A. Hunt and Samuel L. Oliver,****andeach of them, as his true and lawful attorneys-in-fact and agents, with fullpowers of substitution and resubstitution for him, in his name place and stead,in any and all capacities, to sign any and all amendments to this Annual Reporton Form 10-K, and to file the same, with all exhibits thereto, and otherdocuments in connection therewith, with the Securities and Exchange Commission,granting unto said attorneys-in-fact and agents full power and authority to doand perform each and every act and thing requisite and necessary to be done inand about the premises as fully and to all intents and purposes as he might orcould do in person, hereby ratifying and confirming all that saidattorneys-in-fact and agents may lawfully do or cause to be done by virtuehereof.

 

 

49

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                Pursuant to the requirements ofthe Securities Exchange Act of 1934, as amended, this Report has been signedbelow by the following persons on behalf of the Registrant, in the capacitiesand on the dates indicated.

 
| **GB&T  BANCSHARES, INC.** |
|--------------------------------|
|                           |   |   |   |   |
| By:                            | /s/ Richard A. Hunt |   | DATE | March 5, 2008 |
|                           | Richard  A. Hunt, President, Chief |   |   |   |
|                           | Executive  Officer and Director |   |   |   |
|                           | (Principal  Executive Officer) |   |   |   |
|                           |   |   |   |   |
| By:                            | /s/ Gregory L. Hamby |   | DATE | March 5, 2008 |
|                           | Gregory  L. Hamby, Executive Vice President |   |   |   |
|                           | and  Chief Financial Officer |   |   |   |
|                           | (Principal  Financial and Accounting Officer) |   |   |   |
|                           |   |   |   |   |
| By:                            | /s/ Philip A. Wilheit |   | DATE | March 5, 2008 |
|                           | Philip A. Wilheit, Chairman and  Director |   |   |   |
|                           |   |   |   |   |
| By:                            | /s/ Samuel L. Oliver |   | DATE | March 5, 2008 |
|                           | Samuel L. Oliver, Vice Chairman and |   |   |   |
|                           | Director |   |   |   |
|                           |   |   |   |   |
| By:                            | /s/ Alan A. Wayne |   | DATE | March 5, 2008 |
|                           | Alan A. Wayne, Secretary and Director |   |   |   |
|                           |   |   |   |   |
| By:                            | /s/ Anna B. Williams |   | DATE | March 5, 2008 |
|                           | Anna B. Williams, Director |   |   |   |
|                           |   |   |   |   |
| By:                            | /s/ Dr. John W. Darden |   | DATE | March 5, 2008 |
|                           | Dr. John W. Darden, Director |   |   |   |
|                           |   |   |   |   |
| By:                            | /s/ William A. Foster, III |   | DATE | March 5, 2008 |
|                           | William A. Foster, III, Director |   |   |   |
|                           |   |   |   |   |
| By:                            | /s/ Bennie E. Hewett |   | DATE | March 5, 2008 |
|                           | Bennie E. Hewett, Director |   |   |   |
|                           |   |   |   |   |
| By:                            | /s/ James L. Lester |   | DATE | March 5, 2008 |
|                           | James L. Lester, Director |   |   |   |
|                           |   |   |   |   |
| By:                            | /s/ T. Alan Maxwell |   | DATE | March 5, 2008 |
|                           | T. Alan Maxwell, Director |   |   |   |
|                           |   |   |   |   |
| By:                            | /s/ Lowell S. (Casey) Cagle |   | DATE | March 5, 2008 |
|                           | Lowell S. (Casey) Cagle, Director |   |   |   |
|                           |   |   |   |   |
| By:                            | /s/ John E. Mansour |   | DATE | March 5, 2008 |
|                           | John E. Mansour, Director |   |   |   |

 

 

50

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**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

** **

**CONSOLIDATED FINANCIAL REPORT**

** **

**DECEMBER 31, 2007**

 

51

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**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

** **

**CONSOLIDATED FINANCIAL REPORT**

**DECEMBER 31, 2007**

** **

**TABLE OF CONTENTS**

** **
| ** **                                                   | **Page**   |
|--------------------------------------------------------------|------------|
| ** **                                                   | ** ** |
| **REPORT OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM** | **53**     |
| ** **                                                   | ** ** |
| **CONSOLIDATED  FINANCIAL STATEMENTS**                       | ** ** |
| ** **                                                   | ** ** |
| **Consolidated  balance sheets**                             | **54**     |
| **Consolidated  statements of income**                       | **55**     |
| **Consolidated  statements of comprehensive income**         | **56**     |
| **Consolidated  statements of stockholders' equity**         | **57**     |
| **Consolidated  statements of cash flows**                   | **58-59**  |
| **Notes to consolidated  financial statements**              | **60-92**  |

 

52

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors

GB&TBancshares, Inc.

Gainesville,Georgia

 

  Wehave audited the consolidated balance sheets of GB&T Bancshares, Inc. andsubsidiaries as of December 31, 2007 and 2006, and the related consolidatedstatements of income, comprehensive income, stockholders’ equity and cash flowsfor each of the three years in the period ended December 31, 2007.  These financial statements are theresponsibility of the Company's management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of GB&TBancshares, Inc. and subsidiaries as of December 31, 2007 and 2006, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2007, in conformity with U.S. generally acceptedaccounting principles.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), GB&T Bancshares, Inc. andsubsidiaries’ internal control over financial reporting as of December 31,2007, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).  Our report dated February 28, 2008,expressed an opinion that GB&T Bancshares, Inc. and subsidiaries’ had notmaintained effective internal control over financial reporting as of December31, 2007, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).

 

  
|   | /s/  MAULDIN & JENKINS, LLC |
|--------|---------------------------------|

 

 

Atlanta,Georgia

February28, 2008

 

53

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**GB&TBANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2007 AND 2006**

**(Dollars in thousands)**

 
| ** **                                                                                                                                                            | ** ** | **2007**      | ** **    | **2006**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|---------------|------------|------------|
| **Assets**                                                                                                                                                            |       |          |          |       |       |
| Cash and due from banks                                                                                                                                               | ** ** | **$**         | **22,361**    |       | $          | 25,876 |   |
| Interest-bearing deposits  in banks                                                                                                                                   | ** ** | **10,881**    |          | 1,848      |       |
| Federal funds sold                                                                                                                                                    | ** ** | **3,575**     |          | 1,445      |       |
| Securities available for  sale                                                                                                                                        | ** ** | **217,893**   |          | 210,249    |       |
| Restricted equity  securities, at cost                                                                                                                                | ** ** | **10,654**    |          | 9,869      |       |
|                                                                                                                                                                  |       |          |          |       |       |
| Loans, net of unearned  income                                                                                                                                        | ** ** | **1,500,704** |          | 1,497,701  |       |
| Less allowance for loan  losses                                                                                                                                       | ** ** | **27,369**    |          | 24,676     |       |
| Loans, net                                                                                                                                                            | ** ** | **1,473,335** |          | 1,473,025  |       |
|                                                                                                                                                                  |       |          |          |       |       |
| Premises and equipment,  net                                                                                                                                          | ** ** | **40,137**    |          | 41,776     |       |
| Goodwill                                                                                                                                                              | ** ** | **77,353**    |          | 87,116     |       |
| Intangible assets                                                                                                                                                     | ** ** | **4,401**     |          | 5,678      |       |
| Other real estate and  repossessions                                                                                                                                  | ** ** | **40,375**    |          | 4,673      |       |
| Other assets                                                                                                                                                          | ** ** | **38,047**    |          | 38,821     |       |
|                                                                                                                                                                  |       |          |          |       |       |
| **Total assets**                                                                                                                                                      | ** ** | **$**         | **1,939,012** |       | $          | 1,900,376 |   |
|                                                                                                                                                                  |       |          |          |       |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                         | ** ** | ** **    | ** **    | ** ** | ** ** |
|                                                                                                                                                                  |       |          |          |       |       |
| **Liabilities:**                                                                                                                                                      | ** ** | ** **    | ** **    | ** ** | ** ** |
| Deposits:                                                                                                                                                             |       |          |          |       |       |
| Noninterest-bearing                                                                                                                                                   | ** ** | **$**         | **134,835**   |       | $          | 151,529 |   |
| Interest-bearing                                                                                                                                                      | ** ** | **1,360,597** |          | 1,328,639  |       |
| Total deposits                                                                                                                                                        | ** ** | **1,495,432** |          | 1,480,168  |       |
| Federal funds purchased  and securities sold under repurchase agreements                                                                                              | ** ** | **62,428**    |          | 41,061     |       |
| Other borrowings                                                                                                                                                      | ** ** | **117,303**   |          | 97,437     |       |
| Other liabilities                                                                                                                                                     | ** ** | **15,552**    |          | 18,474     |       |
| Subordinated debt                                                                                                                                                     | ** ** | **29,898**    |          | 29,898     |       |
| Total liabilities                                                                                                                                                     | ** ** | **1,720,613** |          | 1,667,038  |       |
|                                                                                                                                                                  |       |          |          |       |       |
| **Commitments and contingencies**                                                                                                                                     | ** ** | ** **    | ** **    | ** ** | ** ** |
|                                                                                                                                                                  |       |          |          |       |       |
| **Stockholders’ equity :**                                                                                                                                       | ** ** | ** **    | ** **    | ** ** | ** ** |
| Capital stock, no par value; 20,000,000 shares authorized, 14,230,796  and 14,131,891 shares issued and outstanding at December 31, 2007 and  2006, respectively | ** ** | **187,764**   |          | 186,539    |       |
| Retained earnings                                                                                                                                                     | ** ** | **30,337**    |          | 48,148     |       |
| Accumulated other comprehensive income (loss)                                                                                                                         | ** ** | **298**       |          | (1,349     | )          |
|                                                                                                                                                                  |       |          |          |       |       |
| **Total stockholders’ equity**                                                                                                                                   | ** ** | **218,399**   |          | 233,338    |       |
|                                                                                                                                                                  |       |          |          |       |       |
| **Total liabilities and stockholders’ equity**                                                                                                                   | ** ** | **$**         | **1,939,012** |       | $          | 1,900,376 |   |

 

 

**See Notesto Consolidated Financial Statements.**

 

54

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**GB&TBANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF INCOME (LOSS)**

**YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005**

**(Dollars in thousands, except per share amounts)**

 
| ** **                                                                                                    | ** ** | **2007**    | ** **  | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|------------|------------|
| **Interest income:**                                                                                          | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Loans, including fees                                                                                         | ** ** | **$**       | **125,644** |       | $          | 116,593    |       | $ | 82,541 |   |
| Taxable securities                                                                                            | ** ** | **9,467**   |        | 8,436      |       | 7,287      |       |
| Nontaxable securities                                                                                         | ** ** | **1,229**   |        | 589        |       | 618        |       |
| Federal funds sold                                                                                            | ** ** | **469**     |        | 812        |       | 327        |       |
| Interest-bearing deposits in banks                                                                            | ** ** | **296**     |        | 145        |       | 42         |       |
| Total interest income                                                                                         | ** ** | **137,105** |        | 126,575    |       | 90,815     |       |
|                                                                                                          |       |        |        |       |       |       |       |
| **Interest expense:**                                                                                         | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Deposits                                                                                                      | ** ** | **63,226**  |        | 49,438     |       | 27,153     |       |
| Federal funds purchased, securities sold under repurchase agreements,  other borrowings and subordinated debt | ** ** | **9,421**   |        | 7,955      |       | 6,683      |       |
| Total interest expense                                                                                        | ** ** | **72,647**  |        | 57,393     |       | 33,836     |       |
|                                                                                                          |       |        |        |       |       |       |       |
| Net interest income                                                                                           | ** ** | **64,458**  |        | 69,182     |       | 56,979     |       |
| **Provision for loan losses**                                                                                 | ** ** | **23,727**  |        | 15,744     |       | 5,916      |       |
| Net interest income after provision for loan losses                                                           | ** ** | **40,731**  |        | 53,438     |       | 51,063     |       |
|                                                                                                          |       |        |        |       |       |       |       |
| **Other income:**                                                                                             | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Service charges on deposit accounts                                                                           | ** ** | **7,319**   |        | 6,278      |       | 6,413      |       |
| Other service charges and fees                                                                                | ** ** | **531**     |        | 586        |       | 737        |       |
| Gain (loss) on sale of securities                                                                             | ** ** | **22**      |        | (16        | )          | 553        |       |
| Mortgage origination fees                                                                                     | ** ** | **2,314**   |        | 2,661      |       | 2,263      |       |
| Trust fees                                                                                                    | ** ** | **468**     |        | 370        |       | 379        |       |
| Other operating income                                                                                        | ** ** | **710**     |        | 634        |       | 1,286      |       |
| Total other income                                                                                            | ** ** | **11,364**  |        | 10,513     |       | 11,631     |       |
|                                                                                                          |       |        |        |       |       |       |       |
| **Other expenses:**                                                                                           | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Salaries and employee benefits                                                                                | ** ** | **32,359**  |        | 29,979     |       | 26,248     |       |
| Occupancy and equipment expenses, net                                                                         | ** ** | **7,501**   |        | 7,055      |       | 6,334      |       |
| Impairment on long-lived assets                                                                               | ** ** | **10,092**  |        | —     |       | —     |       |
| Other operating expenses                                                                                      | ** ** | **18,063**  |        | 13,125     |       | 12,243     |       |
| Total other expenses                                                                                          | ** ** | **68,015**  |        | 50,159     |       | 44,825     |       |
|                                                                                                          |       |        |        |       |       |       |       |
| Income (loss) before income taxes                                                                             | ** ** | **(15,920** | **)**       | 13,792     |       | 17,869     |       |
|                                                                                                          |       |        |        |       |       |       |       |
| **Income tax expense (benefit)**                                                                              | ** ** | **(3,431**  | **)**       | 4,271      |       | 5,878      |       |
|                                                                                                          |       |        |        |       |       |       |       |
| Net income (loss)                                                                                             | ** ** | **$**       | **(12,489** | **)**      | $          | 9,521      |       | $ | 11,991 |   |
|                                                                                                          |       |        |        |       |       |       |       |
| **Basic earnings (loss) per share**                                                                           | ** ** | **$**       | **(0.88**   | **)**      | $          | 0.70       |       | $ | 0.96 |   |
|                                                                                                          |       |        |        |       |       |       |       |
| **Diluted earnings (loss) per  share**                                                                        | ** ** | **$**       | **(0.87**   | **)**      | $          | 0.68       |       | $ | 0.93 |   |

 

**See Notes to Consolidated Financial Statements.**

 

55

----

 

**GB&TBANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**

**YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005**

**(Dollars in thousands)**

 
| ** **                                                                                                                             | ** ** | **2007**   | ** **  | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|------------|------------|
| **Net income (loss)**                                                                                                                  | ** ** | **$**      | **(12,489** | **)**      | $          | 9,521      |       | $ | 11,991 |   |
|                                                                                                                                   |       |       |        |       |       |       |       |
| **Other comprehensive income  (loss):**                                                                                                | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                             | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** |
| Unrealized holding gains (losses) arising during period, net of tax  (benefit) of $860, $528 and $(1,136), respectively                | ** ** | **1,661**  |        | 1,209      |       | (2,183     | )          |
|                                                                                                                                   |       |       |        |       |       |       |       |
| Reclassification adjustment for (gains) losses realized in net income,  net of taxes (benefit) of $8, $(6) and $210, respectively | ** ** | **(14**    | **)**       | 10         |       | (343       | )          |
|                                                                                                                                   |       |       |        |       |       |       |       |
| **Other comprehensive income  (loss)**                                                                                                 | ** ** | **1,647**  |        | 1,219      |       | (2,526     | )          |
|                                                                                                                                   |       |       |        |       |       |       |       |
| **Comprehensive income (loss)**                                                                                                        | ** ** | **$**      | **(10,842** | **)**      | $          | 10,740     |       | $ | 9,465 |   |

 

**See Notes to Consolidated Financial Statements.**

 

56

----

 

**GB&TBANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005**

**(Amounts in thousands, except per share amounts)**

 
| ** **                                                                              | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **             | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|--------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                              | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | **Other**         | ** ** | **Total**              | ** ** |
| ** **                                                                              | ** ** | ** ** | ** ** | **Capital** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                                                                              | ** ** | **Shares** | ** ** | **Stock**   | ** ** | **Earnings** | ** ** | **Income (Loss)** | ** ** | **Equity**             | ** ** |
|                                                                                    |       |       |       |        |       |         |       |              |       |                   |       |
| **Balance, December 31, 2004**                                                     |       | 11,772     |       | $           | 139,207    |         | $          | 35,550            |       | $                      | (42        | ) | $ | 174,715 |   |
| Net income                                                                              |       | —     |       | —      |       | 11,991       |       | —            |       | 11,991                 |       |
| Options exercised, net of repurchases                                                   |       | 167        |       | 1,019       |       | —       |       | —            |       | 1,019                  |       |
| Purchase of FNBG Bancshares, Inc.                                                  |       | 845        |       | 21,290      |       | —       |       | —            |       | 21,290                 |       |
| Tax benefit of nonqualified stock options                                               |       | —     |       | 173         |       | —       |       | —            |       | 173                    |       |
| Payment for fractional shares in connection with stock split and  business combinations |       | —     |       | (4          | )          | —       |       | —            |       | (4                     | )          |
| Adjustment on purchase of Southern Heritage Bancorp, Inc. and  Lumpkin County Bank |       | —     |       | (3,810      | )          | —       |       | —            |       | (3,810                 | )          |
| Dividends declared, $0.33 per share                                                     |       | —     |       | —      |       | (4,137       | )          | —            |       | (4,137                 | )          |
| Other comprehensive loss                                                                |       | —     |       | —      |       | —       |       | (2,526            | )          | (2,526                 | )          |
| **Balance, December 31, 2005**                                                     |       | 12,784     |       | 157,875     |       | 43,404       |       | (2,568            | )          | 198,711                |       |
| Net income                                                                              |       | —     |       | —      |       | 9,521        |       | —            |       | 9,521                  |       |
| Options exercised, net of repurchases                                                   |       | 519        |       | 3,961       |       | —       |       | —            |       | 3,961                  |       |
| Purchase of Mountain Bancshares, Inc.                                              |       | 1,089      |       | 29,372      |       | —       |       | —            |       | 29,372                 |       |
| Tax benefit of nonqualified stock options                                               |       | —     |       | 676         |       | —       |       | —            |       | 676                    |       |
| Payment for fractional shares in connection with business  combinations                 |       | —     |       | (6          | )          | —       |       | —            |       | (6                     | )          |
| Stock repurchase                                                                        |       | (260       | )          | (5,586      | )          | —       |       | —            |       | (5,586                 | )          |
| Stock option expense                                                                    |       | —     |       | 247         |       | —       |       | —            |       | 247                    |       |
| Dividends declared, $0.36 per share                                                     |       | —     |       | —      |       | (4,777       | )          | —            |       | (4,777                 | )          |
| Other comprehensive income                                                              |       | —     |       | —      |       | —       |       | 1,219             |       | 1,219                  |       |
| **Balance, December 31, 2006**                                                     |       | 14,132     |       | 186,539     |       | 48,148       |       | (1,349            | )          | 233,338                |       |
| Net loss                                                                                |       | —     |       | —      |       | (12,489      | )          | —            |       | (12,489                | )          |
| Options exercised, net of repurchases                                                   |       | 99         |       | 761         |       | —       |       | —            |       | 761                    |       |
| Tax benefit of nonqualified stock options                                               |       | —     |       | 139         |       | —       |       | —            |       | 139                    |       |
| Contributed capital                                                                     |       | —     |       | 3           |       | —       |       | —            |       | 3                      |       |
| Stock option expense                                                                    |       | —     |       | 322         |       | —       |       | —            |       | 322                    |       |
| Dividends declared, $0.38 per share                                                     |       | —     |       | —      |       | (5,322       | )          | —            |       | (5,322                 | )          |
| Other comprehensive income                                                              |       | —     |       | —      |       | —       |       | 1,647             |       | 1,647                  |       |
| **Balance, December 31, 2007**                                                     |       | 14,231     |       | $           | 187,764    |         | $          | 30,337            |       | $                      | 298        |   | $ | 218,399 |   |

 

**See Notes to Consolidated Financial Statements.**

 

 

57

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**GB&TBANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005**

**(Dollars in thousands)**

 
| ** **                                                                                           | ** ** | **2007**     | ** **  | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------|-------------|------------|------------|------------|------------|
| **OPERATING ACTIVITIES**                                                                             | ** ** | ** **   | ** **  | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                    | ** ** | **$**        | **(12,489** | **)**      | $          | 9,521      |       | $ | 11,991 |   |
| Adjustments to reconcile net income (loss) to   net cash provided by operating activities:           |       |         |        |       |       |       |       |
| Depreciation and amortization, net                                                                   | ** ** | **3,700**    |        | 3,937      |       | 3,973      |       |
| Provision for loan losses                                                                            | ** ** | **23,727**   |        | 15,744     |       | 5,916      |       |
| Provision for losses on other real estate owned                                                      | ** ** | **1,711**    |        | —     |       | —     |       |
| (Gain) loss on sale of securities                                                                    | ** ** | **(22**      | **)**       | 16         |       | (553       | )          |
| Loss on sale of other real estate owned                                                              | ** ** | **622**      |        | 143        |       | 18         |       |
| Gain on disposal of premises and equipment                                                           | ** ** | **(20**      | **)**       | (12        | )          | (21        | )          |
| Deferred income taxes                                                                                | ** ** | **1,014**    |        | (4,649     | )          | (522       | )          |
| (Increase) decrease in interest receivable                                                           | ** ** | **1,060**    |        | (3,912     | )          | (3,188     | )          |
| Increase in interest payable                                                                         | ** ** | **1,731**    |        | 4,619      |       | 2,890      |       |
| Increase in cash surrender value of life insurance                                                   | ** ** | **(779**     | **)**       | (800       | )          | (728       | )          |
| Net other operating activities                                                                       | ** ** | **4,268**    |        | (1,777     | )          | 1,369      |       |
|                                                                                                 |       |         |        |       |       |       |       |
| Net cash provided by operating activities                                                            | ** ** | **24,523**   |        | 22,830     |       | 21,145     |       |
|                                                                                                 |       |         |        |       |       |       |       |
| **INVESTING ACTIVITIES**                                                                             | ** ** | ** **   | ** **  | ** ** | ** ** | ** ** | ** ** |
| Increase in interest-bearing deposits in banks                                                       | ** ** | **(9,033**   | **)**       | (1,120     | )          | (28        | )          |
| Purchases of securities available for sale                                                           | ** ** | **(196,814** | **)**       | (108,497   | )          | (109,841   | )          |
| Purchases of restricted equity securities                                                            | ** ** | **(2,890**   | **)**       | (1,605     | )          | (2,302     | )          |
| Proceeds from sale of restricted equity securities                                                   | ** ** | **2,105**    |        | 1,296      |       | 885        |       |
| Proceeds from maturities of securities available for sale                                            | ** ** | **149,664**  |        | 85,432     |       | 112,752    |       |
| Proceeds from sales of securities available for sale                                                 | ** ** | **42,320**   |        | 22,032     |       | 6,431      |       |
| Net (increase) decrease in federal funds sold                                                        | ** ** | **(2,130**   | **)**       | (340       | )          | 4,414      |       |
| Net increase in loans                                                                                | ** ** | **(69,093**  | **)**       | (167,420   | )          | (182,907   | )          |
| Net cash acquired (provided) in business combinations                                                | ** ** | **—**   |        | (3,291     | )          | 11         |       |
| Purchase of premises and equipment                                                                   | ** ** | **(1,573**   | **)**       | (2,505     | )          | (4,681     | )          |
| Proceeds from disposals of premises and equipment                                                    | ** ** | **164**      |        | 12         |       | 99         |       |
| Proceeds from sale of other real estate owned                                                        | ** ** | **7,164**    |        | 2,149      |       | 1,298      |       |
|                                                                                                 |       |         |        |       |       |       |       |
| Net cash used in investing activities                                                                | ** ** | **(80,116**  | **)**       | (173,857   | )          | (173,869   | )          |
|                                                                                                 |       |         |        |       |       |       |       |
| **FINANCING ACTIVITIES**                                                                             | ** ** | ** **   | ** **  | ** ** | ** ** | ** ** | ** ** |
| Net increase in deposits                                                                             | ** ** | **15,264**   |        | 159,165    |       | 158,580    |       |
| Net increase (decrease) in federal funds purchased   and securities sold under repurchase agreements |       | **21,367**   |        | (6,449     | )          | (2,072     | )          |
| Proceeds from other borrowings                                                                       | ** ** | **80,769**   |        | 30,008     |       | 42,927     |       |
| Repayment of other borrowings                                                                        | ** ** | **(60,903**  | **)**       | (30,837    | )          | (33,737    | )          |
| Proceeds from exercise of stock options                                                              | ** ** | **761**      |        | 3,961      |       | 1,019      |       |
| Dividends paid                                                                                       | ** ** | **(5,322**   | **)**       | (4,777     | )          | (4,137     | )          |
| Tax benefit of nonqualified stock options                                                            | ** ** | **139**      |        | 676        |       | 173        |       |
| Payment for fractional shares                                                                        | ** ** | **—**   |        | (6         | )          | (4         | )          |
| Payment for stock repurchase                                                                         | ** ** | **—**   |        | (5,586     | )          | —     |       |
| Contributed capital                                                                                  | ** ** | **3**        |        | —     |       | —     |       |
|                                                                                                 |       |         |        |       |       |       |       |
| Net cash provided by financing activities                                                            | ** ** | **52,078**   |        | 146,155    |       | 162,749    |       |
|                                                                                                      |            |              |             |            |            |            |            |  |  |  |

 

58

----

 

 

 

**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005**

**(Dollars in thousands)**

 
| ** **                                          | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net increase (decrease) in  cash and due from banks | ** ** | **$**      | **(3,515** | **)**      | $          | (4,872     | )          | $ | 10,025 |   |
|                                                |       |       |       |       |       |       |       |
| Cash and due from banks at  beginning of year       | ** ** | **25,876** |       | 30,748     |       | 20,723     |       |
|                                                |       |       |       |       |       |       |       |
| Cash and due from banks at  end of year             | ** ** | **$**      | **22,361** |       | $          | 25,876     |       | $ | 30,748 |   |
|                                                |       |       |       |       |       |       |       |
| **SUPPLEMENTAL DISCLOSURES**                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid for:                                      |       |       |       |       |       |       |       |
| Interest                                            | ** ** | **$**      | **70,916** |       | $          | 52,774     |       | $ | 31,111 |   |
| Income taxes                                        | ** ** | **$**      | **3,244**  |       | $          | 10,739     |       | $ | 6,123 |   |
|                                                |       |       |       |       |       |       |       |
| **NONCASH TRANSACTIONS**                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other real estate acquired in settlement of loans   | ** ** | **$**      | **45,825** |       | $          | 4,573      |       | $ | 3,516 |   |
| Financed sales of other real estate owned           | ** ** | **$**      | **769**    |       | $          | 1,006      | ** ** | $ | **—** | ** ** |
| Increase in cash surrender value of life insurance  | ** ** | **$**      | **779**    |       | $          | 800        |       | $ | 728 |   |
|                                                |       |       |       |       |       |       |       |
| **BUSINESS ACQUISITIONS**                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital stock issued                                | ** ** | **$**      | **—** |       | $          | 29,372     |       | $ | 21,290 |   |
|                                                |       |       |       |       |       |       |       |
| Assets acquired  (liabilities assumed)              |       |       |       |       |       |       |       |
| Cash and due from banks, net of cash paid           | ** ** | **$**      | **—** |       | $          | (3,291     | )          | $ | 11 |   |
| Federal funds sold                                  | ** ** | **—** |       | 537        |       | 4,889      |       |
| Securities available for sale                       | ** ** | **—** |       | 17,909     |       | 10,872     |       |
| Restricted equity securities                        | ** ** | **—** |       | 1,554      |       | 634        |       |
| Loans, net                                          | ** ** | **—** |       | 106,279    |       | 100,229    |       |
| Premises and equipment                              | ** ** | **—** |       | 5,628      |       | 3,755      |       |
| Goodwill                                            | ** ** | **—** |       | 25,952     |       | 16,416     |       |
| Core deposit intangible                             | ** ** | **—** |       | 971        |       | 697        |       |
| Other assets                                        | ** ** | **—** |       | 546        |       | 1,451      |       |
| Deposits                                            | ** ** | **—** |       | (123,708   | )          | (109,628   | )          |
| Other borrowings                                    | ** ** | **—** |       | (2,000     | )          | (7,150     | )          |
| Other liabilities                                   | ** ** | **—** |       | (1,005     | )          | (508       | )          |
|                                                | ** ** | **$**      | **—** |       | $          | 29,372     |       | $ | 21,668 |   |

 

**See Notes to Consolidated Financial Statements.**

 

59

----

 

**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**NOTE 1.****                                             ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

** **

**Nature of Operations**

 

GB&TBancshares, Inc. (the “Company”) is a multi-bank holding company whose businessis conducted by its wholly-owned commercial bank subsidiaries, Gainesville Bank& Trust, United Bank & Trust, Community Trust Bank, HomeTown Bank ofVilla Rica, First National Bank of the South, First National Bank of Gwinnettand Mountain State Bank (the “Banks”).  GainesvilleBank & Trust is located in Gainesville, Hall County, Georgia with the mainoffice and five branches located in Gainesville, two branches located inOakwood, Georgia, one branch located in Buford, Georgia, one branch located inAthens, Georgia, one loan production office located in Marietta, Georgia andone mortgage company located in Cumming, Georgia.  United Bank & Trust is located inRockmart, Polk County, Georgia with the main office located in Rockmart, onebranch in Cedartown, Georgia and one branch and one loan production office inCartersville, Georgia.  Community TrustBank is located in Hiram, Paulding County, Georgia with the main office and onebranch in Hiram, one branch in Dallas, Georgia, one branch in Marietta,Georgia, one branch in Kennesaw, Georgia and one branch in Acworth,Georgia.  HomeTown Bank of Villa Rica islocated in Villa Rica, Carroll County, Georgia with the main office and onebranch located in Villa Rica and one branch located in Hiram, Georgia.  First National Bank of the South is locatedin Milledgeville, Baldwin County, Georgia with the main office and one branchlocated in Milledgeville, one branch located at Lake Oconee, Putnam County andone loan production office in Warner Robins, Georgia.  First National Bank of Gwinnett has onebranch located in Duluth, Gwinnett County, Georgia.  Mountain State Bank is located inDawsonville, Dawson County, Georgia with the main office in Dawsonville, twobranches in Dahlonega, Georgia, one branch in Cumming, Georgia and one loanproduction office in Duluth, Georgia. The Banks provide a full range of banking services to individual andcorporate customers in their primary market areas of Hall, Clarke, Polk,Bartow, Paulding, Cobb, Carroll, Baldwin, Putnam, Houston, Gwinnett, Dawson,Lumpkin, Forsyth and Fulton Counties, respectively, and the surroundingcounties.

 

TheCompany sold its wholly-owned subsidiary, Community Loan Company (“CLC”) onOctober 31, 2005.  CLC was acquired aspart of the acquisition of Community Trust Financial Services Corporation in2001 and was originally incorporated in 1995 for the purpose of acquiring andoperating existing consumer finance companies. The Company has included the results of operations for CLC through thedate of sale.  A before-tax loss of$306,000 was recorded on the sale in the fourth quarter of 2005.

 

**Basis of Presentation andAccounting Estimates**

 

Theconsolidated financial statements include the accounts of the Company and itssubsidiaries.  Significant intercompanytransactions and balances have been eliminated in consolidation.

 

Thepreparation of the consolidated financial statements in accordance withaccounting principles generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities as of the balance sheet date and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.  Material estimates that are particularly susceptibleto significant change in the near term relate to the determination of theallowance for loan losses, the valuation of foreclosed assets, goodwill,intangible assets and deferred taxes.  The determination of the adequacy of theallowance for loan losses is based on estimates that are susceptible tosignificant changes in the economic environment and market conditions.  In connection with the determination of theestimated losses on loans and the valuation of foreclosed real estate,management obtains independent appraisals for significant collateral.

 

60

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 1.****                                             ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)**

 

**Cash, Due from Banks and CashFlows**

 

For purposes of reporting cash flows, cash and due from banksinclude cash on hand, cashitems in process of collection and amounts due from banks.  Cash flows from loans, federal funds sold, federalfunds purchased and securities sold under repurchase agreements and depositsare reported net.

 

TheBanks are required to maintain reserve balances in cash or on deposit with theFederal Reserve Bank, based on a percentage of deposits.  The total of those reserve balances wasapproximately $8,300,000 and $11,063,000 at December 31, 2007 and 2006,respectively.

 

**Securities**

 

Debtsecurities that management has the positive intent and ability to hold tomaturity would be classified as held to maturity and recorded at amortizedcost.  Securities not classified as heldto maturity, including equity securities with readily determinable fair values,are classified as available for sale and recorded at fair value with unrealizedgains and losses excluded from earnings and reported in the Statements ofComprehensive Income, net of the related deferred tax effect.  Equity securities, including restrictedequity securities, without a readily determinable fair value are recorded atcost.

 

Theamortization of premiums and accretion of discounts are recognized in interestincome using the interest method over the life of the securities.  Realized gains and losses on the sale ofsecurities are determined using the specific identification method and areincluded in earnings on the settlement date. Declines in the fair value of held to maturity and available for salesecurities below their cost that are deemed to be other than temporary would bereflected in earnings as realized losses. In estimating other-than-temporary impairment losses, managementconsiders (1) the length of time and the extent to which the fair value hasbeen less than cost, (2) the financial condition and near-term prospects of theissuer, and (3) the intent and ability of the Company to retain its investmentin the issuer for a period of time sufficient to allow for any anticipatedrecovery in fair value.

 

**Loans**

 

Loansare reported at their outstanding principal balances less unearned income, netdeferred fees and the allowance for loan losses.  Interest income is accrued on the outstandingprincipal balance.  Loan originationfees, net of certain direct loan origination costs, are deferred and recognizedas an adjustment of the related loan yield over the life of the loan using amethod which approximates a level yield.

 

Theaccrual of interest on loans is discontinued when, in management's opinion, theborrower may be unable to meet payments as they become due.  All interest accrued but not collected forloans that are placed on nonaccrual or are charged off is reversed againstinterest income.  Loans are returned toaccrual status when all the principal and interest amounts are brought currentand future payments are reasonably assured.

 

**Allowancefor Loan Losses**

 

Theallowance for loan losses is established through a provision for loan lossescharged to expense.  Loan losses arecharged against the allowance when management believes the collectibility ofthe principal is unlikely.  Subsequentrecoveries are credited to the allowance.

 

61

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1.****                                             ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)**

** **

**Allowance for Loan Losses(Continued)**

 

Theallowance is an amount that management believes will be adequate to absorbestimated losses relating to specifically identified loans, as well as probablecredit losses inherent in the balance of the loan portfolio, based on anevaluation of the collectibility of existing loans and prior loss experience. This evaluation also takes intoconsideration such factors as changes in the nature and volume of the loanportfolio, overall portfolio quality, review of specific problem loans,concentrations and current economic conditions that may affect the borrower'sability to pay.  This evaluation does notinclude the effects of expected losses on specific loans or groups of loansthat are related to future events or expected changes in economicconditions.  While management uses thebest information available to make its evaluation, future adjustments to theallowance may be necessary if there are significant changes in economicconditions.  In addition, regulatoryagencies, as an integral part of their examination process, periodically reviewthe Banks’ allowance for loan losses, and may require the Banks to makeadditions to their allowance based on their judgment about informationavailable to them at the time of their examinations.

 

The company uses an 8 point rating system for itsloans. Ratings of 1 to 4 are considered “pass ratings”, 5 is special mention, 6is substandard, 7 is doubtful, and 8 is loss. The originating loan officerrates all loans based on this system, and the ratings are adjusted as needed toreflect the current status of the loan. The loan officers are trained to rateloans in a timely and accurate manner based on current information. Theseratings are reviewed regularly by the loan committee of the respective banksubsidiary, an outside independent loan review firm and by the applicableregulator for accuracy.

 

A specific allowance will be maintained for all loansrated 1- 5 and for all homogeneous loan pools such as consumer, credit card andresidential mortgage. Management will develop a range of expected losses foreach risk grade and for each loan pool. This range of losses will bemanagement’s best estimate based on actual loss experience, industry lossexperience, loan portfolio trends and characteristics of the markets it serves.On a quarterly basis management will evaluate each of the loan categories anddetermine the expected loss levels from the higher of the range previouslyestablished or the historical loss history calculation. The range of expectedlosses shown below will be used until management determines changes are needed.

 

| Risk Rating 1- 3                                                                      |   | 0.20%-0.50% |
|---------------------------------------------------------------------------------------|--------|-------------|
| Risk Rating 4                                                                         |   | 0.50%-1.25% |
| Risk Rating 5                                                                         |   | 1.50%-5.00% |
| Consumer                                                                              |   | 0.50%-1.25% |
| Credit Cards                                                                          |   | 2.00%-3.00% |
| Real Estate                                                                           |   | 0.25%-1.00% |
| Commercial                                                                            |   | 0.30%-1.00% |
| Hotel , Retail  Business, Industrial Warehouse, Convenience Store and Office Building |   | 0.50%-1.25% |

 

 

All loans rated 6, 7 and 8 as well as any otherimpaired loan of a significant amount will be individually analyzed and aspecific reserve assigned. This analysis will include information from theProblem Asset Review Committee which meets quarterly and reviews creditrelationships of one million and above and rated 5-8. Management, consideringcurrent information and events regarding a borrower's, ability to repay itsobligations, considers a loan to be impaired when the ultimate collection ofall  amounts due, according to thecontractual terms of the loan agreement, is in doubt. When a loan is consideredto be impaired, the amount of the impairment is measured based on the presentvalue of expected future cash flows discounted at the loan’s effective interestrate. If the loan is collateral dependent the fair value of the collateral lessestimated selling costs is used to determine the amount of impairment.Impairment losses are included in the allowance for loan losses through acharge to the provision for loan losses. Traditionally, a majority of ourimpaired loans have been collateral dependent. The allowance for loan losses onthese loans is determined based on fair value estimates (net of selling costs)of the respective collateral. The actual losses on these loans could differsignificantly if the fair value of the collateral is different from theestimates used in determining the allocated allowance. Traditionally most ofour collateral dependent impaired loans have been secured by real estate. Thefair value of these real estate properties is generally determined based onappraisals performed by a certified or licensed appraiser.

 

62

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** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1.****                                             ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)**

** **

**Allowance for Loan Losses(Continued)**

 

Management also considers other factors or recentdevelopments which could result in adjustments to the collateral valueestimates indicated in the appraisals. These estimates will be made inaccordance with SFAS 114.

 

The remainder of the balance in the reserve for loanlosses is unallocated. The unallocated reserve represents management’s currentestimate of the probable losses inherent in the loan portfolio that have notbeen fully provided for through the specific reserve calculations. Factorsconsidered in determining the unallocated reserve are overall economicconditions, the rapid rise of real estate prices over the past three years inour markets, the recent slowdown in real estate activity, the number of new andrelatively inexperienced banks and bankers entering our markets and offeringaggressive terms and pricing, our concentration in commercial and consumer realestate and the experience and historic performance of our lenders.

 

 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 indetermining the adequacy of the unallocated allowance include the economicenvironment, experience level of lenders, concentration in commercial andconsumer real estate loans, size of individual loans and the continued strongloan growth in our markets.  Thesefactors are tempered by lending practices related to the real estate portfolio,the continuing positive performance within this segment of our loan portfolio,the knowledge and experience of our commercial lending staff, and therelationship banking philosophy maintained in our community banks.

 

Aloan is considered impaired when it is probable the Company will be unable tocollect all principal and interest payments due in accordance with thecontractual terms of the loan agreement. Impaired loans are measured by either the present value of expectedfuture cash flows discounted at the loan’s effective interest rate, the loan’sobtainable market price, or the fair value of the collateral if the loan iscollateral dependent.  The amount ofimpairment, if any, and any subsequent changes are included in the allowancefor loan losses.

 

**Premises and Equipment**

 

Landis carried at cost.  Premises andequipment are stated at cost less accumulated depreciation computed principallyby the straight-line method over the estimated useful lives of the assets.  The range of estimated useful lives forpremises and equipment are:

 

| Buildings  and improvements |   | 20  – 40 years |
|-----------------------------|--------|---------------------|
| Furniture  and equipment    |   | 3  – 10 years  |

 

**Foreclosed Assets**

 

Assets acquired through, or in lieu of, loan foreclosure areheld for sale and are initially recorded at fair value at the date offoreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed bymanagement and the assets are carried at the lower of carrying amount or fairvalue less cost to sell.  Revenue andexpenses from operations and changes in the valuation allowance are included innet expenses from foreclosed assets.  Thecarrying amount of foreclosed assets at December 31, 2007 and 2006 was$40,375,000 and $4,673,000, respectively.

 

63

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 1.****                                             ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)**

 

**Goodwill and Intangible Assets**

 

Goodwill represents the excess of cost over the fair value ofthe net assets purchased in business combinations.  Goodwill is required to be tested annuallyfor impairment, or whenever events occur that may indicate that the recoverabilityof the carrying amount is not probable. In the event of an impairment, the amount by which the carrying amountexceeds the fair value would be charged to earnings.  The Company performed its annual test of impairmentin the third quarter and determined that there was no impairment of thecarrying value as of July 31, 2007, 2006 and 2005.  Due to deterioration in the residential realestate market, the Company performed an additional impairment test as ofDecember 31, 2007 and it was determined there was impairment in the carryingvalue of goodwill as of December 31, 2007. The Company recorded the impairment as a reduction to net income for theyear ended December 31, 2007.  Goodwillimpairment recognized in 2007 was $9,762,896.

 

Intangibleassets consist of core deposit premiums acquired in connection with businesscombinations.  The core deposit premiumis initially recognized based on an independent valuation performed as of theconsummation date.  The core depositpremium is amortized by the straight-line method over the average remaininglife of the acquired customer deposits, or a weighted average life of 10years.  Amortization periods are reviewedannually in connection with the annual impairment testing of goodwill.  As of December 31, 2007, there was impairmentto the carrying value of the core deposit premium which the Company recorded asa reduction in net income for the year ended December 31, 2007.  Impairment of the core deposit intangiblerecognized in 2007 was $329,058.

 

**Income Taxes**

 

Deferred income tax assets and liabilities are determinedusing the balance sheet method.  Underthis method, the net deferred tax asset or liability is determined based on thetax effects of the temporary differences between the book and tax bases of thevarious balance sheet assets and liabilities and gives current recognition tochanges in tax rates and laws.

 

**Profit-Sharing Plan**

 

Profit-sharing plan costs are based on a percentage ofindividual employee’s salary, not to exceed the amount that can be deducted forfederal income tax purposes.  The Banksmake matching contributions up to 100% of the first 6% of each participant’ssalary contribution based on the individual Bank’s performance.

 

**Stock-Based Compensation**

 

At December 31, 2007, the Company had a stock option plan forgrants of 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.  Prior to January 1, 2006, theCompany accounted for the plan under the recognition and measurement principlesof APB Opinion No. 25, Accounting for Stock Issued to Employees, and relatedinterpretations, as permitted by FASB Statement No. 123, Accounting forStock-Based Compensation.  No stock-basedemployee compensation cost was recognized in the Results of Operations for theyear ended December 31, 2005, as all options granted under the plan had anexercise price equal to the market value of the underlying stock on the date ofgrant.  Effective January 1, 2006, theCompany adopted the fair value recognition provisions of FASB Statement No.123(R), Share-Based Payment, using the modified-prospective-transitionmethod.  To give effect to the adoptionof Statement 123(R),  compensation costrecognized includes (a) compensation cost for all share-based payments grantedprior to, but not yet vested as of January 1, 2006, based  on the  grant  date fair  value  estimated in  accordance  with the  original  provisions  of Statement 123, and

 

64

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1.****                                             ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)**

** **

**Stock-Based Compensation(Continued)**

 

(b) compensation cost for all share-based payments grantedsubsequent to January 1, 2006, based on the grant-date fair value estimated inaccordance with the provisions of Statement 123(R).  Results for prior periods have not beenrestated.  The Company’s stock-based employeecompensation plan is described more fully in Note 12.

 

Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of SFAS No. 123, *Accounting for Stock-Based Compensation,* to stock-basedemployee compensation for the year ended December 31, 2005.

 
| ** **                                                                                                                                    | ** ** | **Year ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                     | ** ** |
| ** **                                                                                                                                    | ** ** | **Dollars in thousands**     | ** ** |
|                                                                                                                                          |       |                         |       |
| Net income, as reported                                                                                                                       |       | $                            | 11,991     |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based method  for all awards, net of related tax effects |       | 199                          |       |
| Pro forma net income                                                                                                                          |       | $                            | 11,792     |   |
| Earnings per share:                                                                                                                           |       |                         |       |
| Basic - as  reported                                                                                                                          |       | $                            | 0.96       |   |
| Basic - pro  forma                                                                                                                            |       | $                            | 0.94       |   |
| Diluted - as  reported                                                                                                                        |       | $                            | 0.93       |   |
| Diluted - pro  forma                                                                                                                          |       | $                            | 0.91       |   |

 

As permitted by SFAS123, through December 31, 2005, the Company accounted for share-based paymentsto employees using the intrinsic value method set forth in APB 25 and, as such,recognized no compensation cost for employee stock options.  Upon adoption of the fair value method underSFAS 123(R) on January 1, 2006, the Company incurred expense of $322,000 and$247,000 for the years ended December 31, 2007 and 2006, respectively.  In addition, had the Company adopted SFAS123(R) in prior periods, the impact of that standard and therefore, thedisclosure of pro forma net income and earnings per share above would remainthe same.  SFAS 123(R) also requires thattax deductions in excess of recognized compensation cost be reported as afinancing cash flow, rather than as operating cash flow.  This requirement has reduced net operatingcash flow and increased net financing cash flow in all periods since theadoption of SFAS 123(R).

 

**Earnings Per Share**

 

Basicearnings per share are computed by dividing net income by the weighted-averagenumber of shares of capital stock outstanding. Diluted earnings per share are computed by dividing net income by thesum of the weighted-average number of shares of capital stock outstanding anddilutive potential capital shares. Potential capital shares consist of stock options.

 

Options to purchase210,381 shares of common stock at prices ranging from $15.53 to $24.15 pershare were outstanding during the year but were not included in the computationof diluted EPS because the options' exercise price was greater than the averagemarket price of the common shares. The options were still outstanding as ofDecember 31, 2007.

 

65

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1.****                                             ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)**

 

  **Comprehensive Income (Loss)**

 

Accountingprinciples generally require that recognized revenue, expenses, gains andlosses be included in net income. Although certain changes in assets and liabilities, such as unrealizedgains and losses on available for sale securities, are reported as a separatecomponent of the equity section of the balance sheet, such items, along withnet income (loss), are components of comprehensive income (loss).

 

  **Recent Accounting Standards**

 

In July 2006, the FASBissued Interpretation No. 48, *Accounting forUncertainty in Income Taxes – An Interpretation of FASB Statement No. 109.*  This interpretation addressesthe accounting for uncertainty in income taxes recognized in a Company’sfinancial statements in accordance with FASB Statement No. 109, *Accounting for Income Taxes**.*  It prescribes a comprehensive model for recognizing,measuring, presenting and disclosing in the financial statements tax positionstaken or expected to be taken in a tax return.  It requires that onlybenefits from tax positions that are more-likely-than-not of being sustainedupon examination should be recognized in the financial statements.  Thesebenefits would be recorded at amounts considered to be the maximum amountsmore-likely-than-not of being sustained.  At the time these positionsbecome more-likely-than-not to be disallowed, their recognition would bereversed.  This interpretation is effective for fiscal years beginningafter December 15, 2006 and is not expected to have a material impact on theCompany’s financial condition or results of operations.

 

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

 

In February 2007, theFASB issued SFAS 159, "The Fair Value Option for Financial Assets andFinancial Liabilities." SFAS 159 permits entities to make an irrevocableelection, at specified election dates, to measure eligible financialinstruments and certain other items at fair value. This statement alsoestablishes presentation and disclosure requirements designed to facilitatecomparisons between entities that choose different measurement attributes forsimilar types of assets and liabilities. The provisions of this statement areeffective as of the beginning of the first fiscal year that begins afterNovember 15, 2007.   The Company has notelected to early adopt this statement and is currently evaluating the impactthe adoption of this statement could have on its financial condition, resultsof operations and cash flows.

 

In March 2007, the FASBratified the consensus the Emerging Issues Task Force (“EITF”) reachedregarding EITF Issue No. 06-10, “Accounting for Collateral AssignmentSplit-Dollar Life Insurance Arrangements” (“Issue 06-10”), which providesaccounting guidance for postretirement benefits related to collateralassignment split-dollar life insurance arrangements, whereby the employee ownsand controls the insurance policies. The consensus concludes that an employershould recognize a liability for the postretirement benefit in accordance withStatement 106 or APB 12, as well as recognize an asset based on the substanceof the arrangement with the employee. Issue 06-10 is effective for fiscal yearsbeginning after December 15, 2007 with early applicationpermitted. The Company is currently evaluating the impact the adoption ofthis statement could have on its financial condition, results of operations andcash flows.

 

66

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 1.****                                             ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)**

** **

**Recent Accounting Standards(Continued)**

 

In December 2007, theFASB issued SFAS No. 141R, Business Combinations. This Statement replaces FASBSFAS No. 141. SFAS 141R establishes principles and requirements for how theacquirer of a business recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest in the acquiree. SFAS 141R also provides guidance for recognizing andmeasuring the goodwill acquired in the business combination and determines whatinformation to disclose to enable users of the financial statements to evaluatethe nature and financial effects of the business combination. This Statementapplies prospectively to business combinations for which the acquisition dateis on or after the beginning of the first annual reporting period beginning onor after December 15, 2008. The Company believes the adoption of thispronouncement will not have a material impact on its financial statements.

 

In December 2007, theFASB issued SFAS No. 160, Noncontrolling Interests in Consolidated FinancialStatements—an amendment of ARB No. 51. This Statement amends ARB 51 to establishaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary. It clarifies that anoncontrolling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements. In addition to the amendments to ARB 51, this Statementamends FASB Statement No. 128, Earnings per Share; so that earnings-per-sharedata will continue to be calculated the same way those data were calculatedbefore this Statement was issued. This Statement is effective for fiscal years,and interim periods within those fiscal years, beginning on or after December15, 2008. The Company believes the adoption of this pronouncement will not havea material impact on its financial statements.

 

**NOTE 2.****                                           ****BUSINESS COMBINATION**

 

On May1, 2006, the Company completed the acquisition of Mountain Bancshares, Inc. theparent company of Mountain State Bank in Dawsonville, Dawson County, Georgia,which resulted in Mountain State Bank becoming a wholly owned subsidiary of theCompany.  The aggregate purchase pricewas $39.8 million including 1,088,924  shares ofits capital stock valued at $24.0 million, $10.3 million in cash and stockoptions and warrants valued at $5.3 million and $197,000 in direct acquisitioncosts.  The value of the capital stockissued was determined based on the average market price of GB&T’s capitalstock over a 2 day period before and after the terms of the acquisition wereagreed upon and announced.  The fairvalue of the stock options was determined based on the Black-Scholes-Mertonoption pricing model.  The acquisitionwas accounted for as a purchase  resultingin estimated goodwill of approximately $26.0 million.  The goodwill is not deductible for taxpurposes.  Identifiable intangible assetsof $971,000 acquired consist of a core deposit premium with an estimatedweighted average useful life of 5 years. Mountain State Bank’s results of operations from May 1, 2006 areincluded in the consolidated results of operations for the year ended  December 31, 2006. The results of operations for the year ended December 31, 2005 does not  include the results of operations of MountainBancshares, Inc.

 

Unaudited pro formaconsolidated results of operations for years ended December 31, 2007 and 2006as though the companies had combined as of January 1, 2007 and 2006 are asfollows:

 
| ** **                 | ** ** | **2007**                   | ** ** | **2006** | ** ** |
|----------------------------|------------|----------------------------|------------|----------|------------|
| ** **                 | ** ** | **(Dollars in thousands)** | ** ** |
| Net interest income        |       | $                          | 64,600     |     | $          | 71,179 |   |
| Net income                 |       | (12,320                    | )          | 9,931    |       |
| Basic earnings per share   |       | (0.87                      | )          | 0.73     |       |
| Diluted earnings per share |       | (0.86                      | )          | 0.71     |       |
|                            |            |                            |            |          |            |  |  |

 

67

----

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 3.****                                                  ****SECURITIES**

 

Theamortized cost and fair value of securities available for sale are summarizedas follows:

 
| ** **                                      | ** ** | **Amortized  Cost**        | ** **  | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|-------------------------------------------------|------------|----------------------------|-------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| ** **                                      | ** ** | **(Dollars in thousands)** | ** **  |
| **December 31, 2007:**                     | ** ** | ** **                 | ** **  |
| **U.S. Government sponsored agency securities** | ** ** | **$**                      | **102,080** | ** **                   | **$**      | **966**                       | ** ** | **$**           | **(50**    | **)** | **$** | **102,996** | ** ** |
| **State and municipal securities**              | ** ** | **31,661**                 | ** **  | **384**                      | ** ** | **(243**                      | **)**      | **31,802**      | ** ** |
| **Mortgage-backed securities**                  | ** ** | **80,855**                 | ** **  | **202**                      | ** ** | **(1,016**                    | **)**      | **80,041**      | ** ** |
| **Equity securities**                           | ** ** | **1,698**                  | ** **  | **—**                   | ** ** | **—**                    | ** ** | **1,698**       | ** ** |
| **Corporate bonds**                             | ** ** | **1,287**                  | ** **  | **71**                       | ** ** | **(2**                        | **)**      | **1,356**       | ** ** |
| ** **                                      | ** ** | **$**                      | **217,581** | ** **                   | **$**      | **1,623**                     | ** ** | **$**           | **(1,311** | **)** | **$** | **217,893** | ** ** |
|                                            |       |                       |        |                         |       |                          |       |            |       |
| December 31, 2006:                         |       |                       |        |                         |       |                          |       |            |       |
| U.S. Government sponsored agency securities     |       | $                          | 102,765     |                         | $          | 182                           |       | $               | (1,141     | ) | $ | 101,806 |   |
| State and municipal securities                  |       | 21,417                     |        | 359                          |       | (45                           | )          | 21,731          |       |
| Mortgage-backed securities                      |       | 85,272                     |        | 147                          |       | (1,722                        | )          | 83,697          |       |
| Equity securities                               |       | 1,698                      |        | **—**                   |       | **—**                    |       | 1,698           |       |
| Corporate bonds                                 |       | 1,284                      |        | 36                           |       | (3                            | )          | 1,317           |       |
|                                            |       | $                          | 212,436     |                         | $          | 724                           |       | $               | (2,911     | ) | $ | 210,249 |   |

 

Theamortized cost and fair value of debt securities available for sale as of December 31,2007 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because issuersmay have the right to call or prepay obligations with or without call orprepayment penalties.

 
| ** **                 | ** ** | **Amortized  Cost**        | ** ** | **Fair  Value** | ** ** |
|----------------------------|------------|----------------------------|------------|-----------------|------------|
| ** **                 | ** ** | **(Dollars in thousands)** | ** ** |
|                       |       |                       |       |            |       |
| Due within one year        |       | $                          | 23,888     |            | $          | 23,869 |   |
| Due from one to five years |       | 41,660                     |       | 41,835          |       |
| Due from five to ten years |       | 31,933                     |       | 32,572          |       |
| Due after ten years        |       | 37,547                     |       | 37,878          |       |
| Mortgage-backed securities |       | 80,855                     |       | 80,041          |       |
|                       |       | $                          | 215,883    |            | $          | 216,195 |   |

 

 

68

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 3.****                                                ****SECURITIES (Continued)**

 

Securitieswith an approximate carrying value of $111,962,000 and $92,500,000 at December 31,2007 and 2006, respectively, were pledged to secure public deposits and forother purposes required or permitted by law.

 

Gainsand losses on sales of securities available for sale consist of the following:

 
| ** **                 | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **(Dollars in thousands)**        | ** ** |
|                       |       |                              |       |   |   |   |   |
| Gross gains                | ** ** | **$**                             | **25**     |   | $ | — |   | $ | 621 |   |
| Gross losses               | ** ** | **(3**                            | **)**      | (16 | ) | (68 | ) |
| Net realized gains(losses) | ** ** | **$**                             | **22**     |   | $ | (16 | ) | $ | 553 |   |

 

Thefollowing table shows the gross unrealized losses and fair value of securities,aggregated by category and length of time that securities have been in acontinuous unrealized loss position at December 31, 2007 and 2006.

 
| ** **                                   | ** ** | **Less Than 12 Months**    | ** ** | **12 Months or More**  | ** ** | **Total**       | ** ** |
|----------------------------------------------|------------|----------------------------|------------|------------------------|------------|-----------------|------------|
| **Description of Securities:**               | ** ** | **Fair  Value**            | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)** | ** ** |
| **December 31, 2007**                   | ** ** | ** **                 | ** ** | ** **             | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Government sponsored  agency securities |       | $                          | 16,860     |                   | $          | 26              |       | $ | 6,346 |   | $ | 24 |   | $ | 23,206 |   | $ | 50 |   |
| State and municipal  securities              |       | 14,314                     |       | 205                    |       | 813             |       | 38 |   | 15,127 |   | 243 |   |
| Mortgage-backed securities                   |       | 36,727                     |       | 627                    |       | 21,333          |       | 389 |   | 58,060 |   | 1,016 |   |
| Corporate bonds                              |       | 300                        |       | 2                      |       | —          |       | — |   | 300 |   | 2 |   |
| Total temporarily impaired  securities       |       | $                          | 68,201     |                   | $          | 860             |       | $ | 28,492 |   | $ | 451 |   | $ | 96,693 |   | $ | 1,311 |   |
|                                         | ** ** | ** **                 | ** ** | ** **             | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **December 31, 2006**                   | ** ** | ** **                 | ** ** | ** **             | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Government sponsored  agency securities |       | $                          | 36,323     |                   | $          | 391             |       | $ | 45,137 |   | $ | 751 |   | $ | 81,460 |   | $ | 1,142 |   |
| State and municipal  securities              |       | 1,416                      |       | 19                     |       | 910             |       | 26 |   | 2,326 |   | 45 |   |
| Mortgage-backed securities                   |       | 30,902                     |       | 720                    |       | 37,834          |       | 1,001 |   | 68,736 |   | 1,721 |   |
| Corporate bonds                              |       | 300                        |       | 3                      |       | —          |       | — |   | 300 |   | 3 |   |
| Total temporarily impaired  securities       |       | $                          | 68,941     |                   | $          | 1,133           |       | $ | 83,881 |   | $ | 1,778 |   | $ | 152,822 |   | $ | 2,911 |   |
|                                              |            |                            |            |                        |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

AtDecember 31, 2007, the unrealized losses are the result of the currentyield environment.  The depreciationwithin the portfolio is 1.34% of the Company’s amortized cost basis.  In analyzing an issuer’s financial condition,management considers whether the securities are issued by the federalgovernment or its agencies, whether downgrades by bond rating agencies haveoccurred, and industry analysts’ reports. As management has the ability to hold debt securities until maturity, orfor the foreseeable future if classified as available for sale, no declines aredeemed to be other than temporary.

 

 

69

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 4.****                                                ****LOANS**

 

Thecomposition of loans is summarized as follows:

 
| ** **                              | ** ** | **December 31,**      | ** **    |
|-----------------------------------------|------------|----------------------------|---------------|
| ** **                              | ** ** | **2007**                   | ** **    | **2006** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)** | ** **    |
|                                    |       |                       |          |   |   |
| Commercial, financial and  agricultural | ** ** | **$**                      | **111,879**   |   | $ | 115,965 |   |
| Real estate — construction         | ** ** | **695,182**                |          | 702,809 |   |
| Real estate — mortgage             | ** ** | **662,025**                |          | 643,765 |   |
| Consumer                                | ** ** | **27,515**                 |          | 31,756 |   |
| Other                                   | ** ** | **4,445**                  |          | 3,579 |   |
| ** **                              |       | **1,501,046**              |          | 1,497,874 |   |
| Unearned income and  deferred loan fees | ** ** | **(342**                   | **)**         | (173 | ) |
| Allowance for loan losses               | ** ** | **(27,369**                | **)**         | (24,676 | ) |
| Loans, net                              | ** ** | **$**                      | **1,473,335** |   | $ | 1,473,025 |   |

 

Changes in the allowance for loan losses are asfollows:

 
| ** **                                           | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                 | ** ** | **(Dollars  in thousands)**       | ** ** |
|                                                 |       |                              |       |   |   |   |   |
| Balance, beginning of year                           | ** ** | **$**                             | **24,676** |   | $ | 12,773 |   | $ | 11,061 |   |
| Provision for loan losses                            | ** ** | **23,727**                        |       | 15,744 |   | 5,916 |   |
| Loans charged off                                    | ** ** | **(21,709**                       | **)**      | (5,570 | ) | (5,761 | ) |
| Recoveries of loans previously charged off           | ** ** | **675**                           |       | 641 |   | 452 |   |
| Allowance for loan losses related to acquired loans  | ** ** | —                            |       | 1,088 |   | 1,269 |   |
| Allowance for loan losses related to the sale of CLC | ** ** | —                            |       | — |   | (164 | ) |
| Balance, end of year                                 | ** ** | **$**                             | **27,369** |   | $ | 24,676 |   | $ | 12,773 |   |

 

 

70

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 4.****                                                ****LOANS (Continued)**

 

The following is a summary of information pertainingto nonperforming loans:

 
| ** **                                                      | ** ** | **As of and for the Years Ended  December 31,** | ** **  |
|-----------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| ** **                                                      | ** ** | **2007**                                             | ** **  | **2006** | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(Dollars in thousands)**                           | ** **  |
|                                                            |       |                                                 |        |   |   |   |   |
| Impaired loans without a  valuation allowance                   | ** ** | **$**                                                | —      |   | $ | — |   | $ | — |   |
| Impaired loans with a valuation  allowance                      | ** ** | **120,339**                                          |        | 25,561 |   | 6,668 |   |
| Total impaired loans                                            | ** ** | **$**                                                | **120,339** |   | $ | 25,561 |   | $ | 6,668 |   |
| Valuation allowance  related to impaired loans                  | ** ** | **$**                                                | **12,701**  |   | $ | 4,314 |   | $ | 1,024 |   |
| Average investment in  impaired loans                           | ** ** | **$**                                                | **72,950**  |   | $ | 12,353 |   | $ | 7,647 |   |
| Interest income recognized  on impaired loans                   | ** ** | **$**                                                | **4,400**   |   | $ | 164 |   | $ | 118 |   |
| Nonaccrual loans                                                | ** ** | **$**                                                | **70,600**  |   | $ | 14,790 |   | $ | 6,562 |   |
| Loans past due ninety days  or more and still accruing interest | ** ** | **$**                                                | **993**     |   | $ | 10 |   | $ | 17 |   |

 

Inthe ordinary course of business, the Company has granted loans to certainrelated parties, including executive officers, directors and theiraffiliates.  The interest rates on theseloans were substantially the same as rates prevailing at the time of thetransaction and repayment terms are customary for the type of loan.  Changes in related party loans for the yearended December 31, 2007 are as follows:

 
| ** **                 | ** ** | **(Dollars in  thousands)** | ** ** |
|----------------------------|------------|-----------------------------|------------|
|                       |       |                        |       |
| Balance, beginning of year | ** ** | **$**                       | **28,492** | ** ** |
| Advances                   |       | 46,252                      |       |
| Repayments                 |       | (37,112                     | )          |
| Change in directors        |       | 631                         |       |
| Balance, end of year       | ** ** | **$**                       | **38,263** | ** ** |

 

**NOTE 5.****                                                ****PREMISES AND EQUIPMENT**

 

Premisesand equipment are summarized as follows:

 
| ** **               | ** ** | **December 31,**      | ** ** |
|--------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| ** **               | ** ** | **(Dollars in thousands)** | ** ** |
|                     |       |                       |       |   |   |
| Land                     | ** ** | **$**                      | **7,014**  |   | $ | 7,013 |   |
| Land improvements        | ** ** | **973**                    |       | 945 |   |
| Buildings                | ** ** | **31,200**                 |       | 31,133 |   |
| Leasehold improvements   | ** ** | **4,840**                  |       | 4,829 |   |
| Furniture and equipment  | ** ** | **20,414**                 |       | 19,154 |   |
| Automobiles              | ** ** | **339**                    |       | 450 |   |
| Construction in progress | ** ** | **190**                    |       | 196 |   |
| ** **               |       | **64,970**                 |       | 63,720 |   |
| Accumulated depreciation | ** ** | **(24,833**                | **)**      | (21,944 | ) |
| ** **               |       | **$**                      | **40,137** |   | $ | 41,776 |   |

 

71

----

 

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 5.****                                             ****PREMISES AND EQUIPMENT (Continued)**

 

Depreciationexpense was $3,036,000, $3,104,000 and $2,825,000 for the years ended December 31,2007, 2006 and 2005, respectively.

 

TheGainesville Bank & Trust main office banking facility is owned by apartnership that is 50% owned by Gainesville Bank & Trust and 50%owned by a related party.

 

AtDecember 31, 2007, the Company’s 50% interest in the Gainesville Bank &Trust main office banking facility with a total carrying value (including land)of $3,016,000 was pledged to a subsidiary bank to secure a $142,733 borrowingof the related party.

 

At December 31, 2007, construction in processincluded costs related to the construction of three new branches, computerequipment not yet in service and a couple of small renovation projects still inprocess.  At December 31, 2006,construction in process included costs related to deposits paid on softwarepurchases, computer equipment not yet in service and several small renovationprojects still in process.  Theconstruction of the Athens branch building was completed in the second quarterof 2006 with an approximate cost of $1.5 million.

 

**Leases**

 

TheCompany leases the Gainesville Bank & Trust main office bankingfacility under a noncancelable operating lease agreement from 400 Church StreetProperties, a partnership that is 50% owned by Gainesville Bank &Trust and 50% owned by a related party. The lease has an initial lease term of 10 years with four five-yearrenewal options.

 

TheCompany also leases various other branches under noncancelable operating leaseagreements.

 

Rentalexpense under all operating leases amounted to $1,277,000, $980,000 and$846,000 for the years ended December 31, 2007, 2006 and 2005,respectively.

 

Futureminimum lease payments on noncancelable operating leases are summarized asfollows:

 
| ** ** | ** ** | **(Dollars in  thousands)** | ** ** |
|------------|------------|-----------------------------|------------|
|       |       |                        |       |
| 2008       |       | $                           | 1,187      |   |
| 2009       |       | 1,201                       |       |
| 2010       |       | 1,158                       |       |
| 2011       |       | 1,170                       |       |
| 2012       |       | 1,059                       |       |
| Thereafter |       | 8,168                       |       |
|       |       | $                           | 13,943     |   |

 

 

72

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 6.****                                             ****INTANGIBLE ASSETS**

 

Followingis a summary of information related to acquired intangible assets:

 
| ** **                  | ** ** | **December 31, 2007** | ** ** | **December 31, 2006**     | ** ** |
|-----------------------------|------------|----------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **Gross Amount**           | ** ** | **Accumulated   Amortization** | ** ** | **Gross Amount** | ** ** | **Accumulated   Amortization** | ** ** |
| ** **                  | ** ** | **(Dollars in thousands)** | ** ** |
| Amortized intangible assets |       | ** **                 |       | ** **                     |       |   |   |   |   |
| Core deposit premiums       |       | **$**                      | **7,584**  |                           | **$**      | **3,183** |   | $ | 7,913 |   | $ | 2,235 |   |
|                             |            |                            |            |                                |            |  |  |  |  |  |  |  |  |

 

Theaggregate amortization expense was $948,000, $879,000 and $729,000 for theyears ended December 31, 2007, 2006 and 2005, respectively.

 

Theestimated amortization expense for each of the next five years is as follows:

 
| ** ** | ** ** | **(Dollars in  thousands)** | ** ** |
|------------|------------|-----------------------------|------------|
|       |       |                        |       |
| 2008       |       | $                           | 948        |   |
| 2009       |       | 853                         |       |
| 2010       |       | 746                         |       |
| 2011       |       | 746                         |       |
| 2012       |       | 501                         |       |
|            |            |                             |            |  |

 

Changesin the carrying amount of goodwill are as follows:

 
| ** **                                                                                 | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2007**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                       |       |                                     |       |   |   |   |   |
| Beginning balance                                                                          | ** ** | **$**                                    | **87,116** |   | $ | 61,164 |   | $ | 49,127 |   |
| Goodwill acquired                                                                          | ** ** | **—**                               |       | 25,952 |   | 16,416 |   |
| Write-off of CLC goodwill                                                                  | ** ** | **—**                               |       | **—** |   | (566 | ) |
| Adjustment of Southern Heritage Bancorp, Inc. and Lumpkin County  Bank purchase price | ** ** | **—**                               |       | **—** |   | (3,813 | ) |
| Goodwill impairment                                                                        | ** ** | **(9,763**                               | **)**      | **—** |   | **—** |   |
| Ending balance                                                                             | ** ** | **$**                                    | **77,353** |   | $ | 87,116 |   | $ | 61,164 |   |

 

Inconnection with the sale of CLC in 2005, goodwill with a carrying amount of$566,000 was written off and recognized in the net loss on sale.

 

Thedetermination of the Southern Heritage Bancorp, Inc. and Lumpkin CountyBank aggregate purchase prices were adjusted in 2005 to properly reflect thefair value of stock options issued in the business combination using theBlack-Scholes-Merton option pricing model.

 

In2007, $9,763,000 of goodwill was determined to be impaired as a result of thedownturn in the economy and the effects of such on one of the subsidiarybanks.  Also, $329,000 of the coredeposit premium intangible asset identified above was determined to be impairedand written off in 2007.

 

 

73

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 7.****                                             ****DEPOSITS**

 

The aggregate amount of time deposits indenominations of $100,000 or more at December 31, 2007 and 2006 wasapproximately $417,697,000 and $411,632,000 respectively.  The scheduled maturities of time deposits at December 31,2007 are as follows:

 
| ** ** | ** ** | **(Dollars in  thousands)** | ** **  |
|------------|------------|-----------------------------|-------------|
|       |       |                        |        |
| 2008       | ** ** | **$**                       | **812,464** | ** ** |
| 2009       |       | 48,962                      |        |
| 2010       |       | 31,812                      |        |
| 2011       |       | 16,418                      |        |
| 2012       |       | 11,127                      |        |
| Thereafter |       | 76                          |        |
|       | ** ** | **$**                       | **920,859** | ** ** |

 

TheCompany had brokered time deposits at December 31, 2007 and 2006 of$102,740,000 and $104,876,000, respectively.

 

AtDecember 31, 2007 and 2006, overdraft demand deposits reclassified toloans totaled $531,000 and $823,000, respectively.

 

**NOTE 8.****                                          ****SECURITIES SOLD UNDER REPURCHASE AGREEMENTS**

 

Securitiessold under repurchase agreements, which are secured borrowings, generallymature within one to four days from the transaction date.  Securities sold under repurchase agreementsare reflected at the amount of cash received in connection with thetransactions.  The Company pledges assetsto collateralize repurchase agreements based on the fair value of theunderlying securities.  The Companymonitors the fair value of the underlying securities on a daily basis.  Securities sold under repurchase agreementsat December 31, 2007 and 2006 were $49,132,000 and $37,460,000,respectively.

 

**NOTE 9.****                                          ****OTHER BORROWINGS**

 

Otherborrowings consist of the following:

 
| ** **                                                                                                                                                                                         | ** ** | **December 31,**      | ** **  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|
| ** **                                                                                                                                                                                         | ** ** | **2007**                   | ** **  | **2006** | ** ** |
| ** **                                                                                                                                                                                         | ** ** | **(Dollars in thousands)** | ** **  |
| FHLB advances, interest payable at fixed rates ranging from 2.735% to  6.2%; advances mature at various maturity dates from January 25, 2008  through September 23, 2013.                |       | **$**                      | **90,648**  |   | $ | 65,888 |   |
| FHLB advances, interest payable at variable rates tied to LIBOR and overnight  funds market; advances mature at various maturity dates from October 20,  2008 through December 31, 2008. |       | **24,500**                 |        | 30,610 |   |
| Line of credit with bank with interest due quarterly at prime less  1.25% or 6.00% at December 31, 2007.                                                                                      |       | **1,700**                  |        | **—** |   |
| Treasury, tax and loan note option account due on demand, bearing interest  equal to the 90-day Treasury bill rate.                                                                                |       | **455**                    |        | 939 |   |
|                                                                                                                                                                                               | ** ** | **$**                      | **117,303** |   | $ | 97,437 |   |

 

 

74

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 9.****                                          ****OTHER BORROWINGS (Continued)**

 

Contractualmaturities of other borrowings as of December 31, 2007 are as follows:

 
| ** ** | ** ** | **(Dollars in  thousands)** | ** ** |
|------------|------------|-----------------------------|------------|
|       |       |                        |       |
| 2008       |       | $                           | 87,892     |   |
| 2009       |       | 15,106                      |       |
| 2010       |       | 5,845                       |       |
| 2011       |       | 3,000                       |       |
| 2012       |       | **—**                  |       |
| Thereafter |       | 5,460                       |       |
|       |       | $                           | 117,303    |   |

 

Theadvances from the Federal Home Loan Bank are collateralized by blanket floatingliens on qualifying first mortgage, home equity and commercial loans of approximately$90,529,000, available for sale securities of approximately $15,255,000,Federal Home Loan Bank stock of $5,171,000 and cash of $10,054,000.

 

TheCompany and subsidiaries have available unused lines of credit with variousfinancial institutions totaling approximately $230,869,000 at December 31,2007.  There were no other advancesoutstanding at December 31, 2007.

 

**NOTE 10.****                                      ****SUBORDINATED DEBT**

 

On October 30,2002, the Company formed a wholly-owned grantor trust to issue $15,464,000 invariable rate cumulative trust preferred securities in a private placementoffering.  The grantor trust has investedthe proceeds of the trust preferred securities in subordinated debentures ofthe Company.  The trust preferredsecurities can be redeemed, in whole or in part, from time to time, prior tomaturity (October 30, 2032) at the option of the Company on or after October 30,2007.  The sole assets of the grantortrust are the subordinated debentures of the Company.    The Company has the right to redeem the debentures,in whole or in part, from time to time, on or after October 30, 2007, at aredemption price equal to 100% of the principal amount to be redeemed plus anyaccrued and unpaid interest.  Bothfinancial instruments bear an identical annual rate of interest of 8.63% and8.77% at December 31, 2007 and 2006, respectively.

 

On July 22, 2004, the Company formed a secondwholly-owned grantor trust to issue $10,310,000 in variable rate cumulativetrust preferred securities in a private placement offering.  Thegrantor trust has invested the proceeds of the trust preferred securities insubordinated debentures of the Company.  The trust preferred securities can be redeemed, in whole or in part,from time to time, prior to maturity (July 30, 2034) at the option of theCompany on or after September 30, 2009. The sole assets of the grantor trust are the subordinated debentures ofthe Company.  Both financial instrumentsbear an identical annual rate of interest of 7.88% and 8.02% at December 31,2007 and 2006, respectively.

 

Inaddition, in connection with the acquisition of Southern Heritage Bancorp, Inc.,the Company assumed $4,124,000 in aggregate principal amount of fixed ratetrust preferred securities which have substantially the same terms as our othertrust preferred securities except that they may be redeemed on or after June 26,2008. The annual rate of interest on the trust preferred securities and on thedebentures was 5.55% at December 31, 2007 and 2006.

 

 

75

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 10.****                                      ****SUBORDINATED DEBT (Continued)**

 

Thedebentures have the same interest rates as the trust preferred securities.  The Company has the right to defer interestpayments on the debentures up to twenty consecutive quarterly periods (fiveyears), so long as the Company is not in default under the subordinateddebentures.  Interest compounds duringthe deferral period.  No deferral periodmay extend beyond the maturity date. Distributions on the trust preferred securities are paid quarterly.  Interest on the debentures is paid on thecorresponding dates.

 

TheCompany has guaranteed the payment of all distributions its trust subsidiariesare obligated to make, but only to the extent the Trust has sufficient funds tosatisfy those payments.  The Company andthe Trust believe that, taken together, the obligations of the Company underthe Guarantee Agreement, the Trust Agreement, the Subordinated Debentures, andthe Indenture provide, in the aggregate, a full, irrevocable and unconditionalguarantee of all of the obligations of the Trust under the Preferred Securitieson a subordinated basis.

 

TheCompany is required by the Federal Reserve Board to maintain certain levels ofcapital for bank regulatory purposes.  TheFederal Reserve Board has determined that certain cumulative preferredsecurities having the characteristics of trust preferred securities qualify asminority interest, which is included in Tier 1 capital for bank and financialholding companies.  In calculating theamount of Tier l qualifying capital, the trust preferred securities can only beincluded up to the amount constituting 25% of total Tier 1 capital elements(including trust preferred securities). Such Tier 1 capital treatment provides the Company with a morecost-effective means of obtaining capital for bank regulatory purposes than ifthe Company were to issue preferred stock.

 

As of December 31, 2007, the Company had$29.9 million in aggregate principal amount of trust preferred securitiesoutstanding and $29.9 million in aggregate principal amount of debenturesoutstanding.

 

**NOTE 11.****                                      ****EMPLOYEE BENEFIT PLANS**

 

**Profit Sharing Plan**

 

TheCompany has a 401(k) Employee Profit-Sharing Plan available to alleligible employees, subject to certain minimum age and servicerequirements.  The contributions expensedwere $511,000, $763,000 and $360,000 for the years ended December 31,2007, 2006 and 2005, respectively.

 

**Deferred Compensation Plans**

 

TheCompany has various deferred compensation plans providing for death andretirement benefits for certain officers and directors.  The estimated amounts to be paid under thecompensation plans have been partially provided through the purchase of lifeinsurance policies on certain officers and directors.  Accrued deferred compensation of $7,160,000and $6,641,000 is included in other liabilities as of December 31, 2007and 2006, respectively.  Cash surrendervalues of $13,515,000 and $12,736,000 on the insurance policies is included inother assets at December 31, 2007 and 2006, respectively.

 

 

76

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 11.****                                      ****EMPLOYEE BENEFIT PLANS (Continued)**

 

**Stock Purchase Plan**

 

In2003, the Company adopted a stock purchase plan.  Under the plan, all full-time employees anddirectors of the Company or a subsidiary meeting certain eligibilityrequirements are eligible to participate in the plan.  Participants in the plan may participatethrough payroll deduction, direct contribution or a combination thereof.  Payroll deductions are limited to $3,500 fordirectors and the lesser of 10% of gross pay or $3,500 for employees.  The Company matches payroll deductions and directcontributions at a rate of 50% of the amount contributed.  The purchase price of the shares of capitalstock is based on the current market price. All administrative costs are borne by the Company.  For the years ended December 31, 2007and 2006, 39,231 and 31,222 shares were purchased under the plan.  Contributions expensed for the years ended December 31,2007, 2006 and 2005 were $184,000, $207,000 and $193,000, respectively.

 

**Dividend Reinvestment Plan**

 

TheCompany has a dividend reinvestment and share purchase plan.  Under the plan, all holders of record ofcapital stock are eligible to participate in the plan.  Participants in the plan may direct the planadministrator to invest cash dividends declared with respect to all or anyportion of their capital stock. Participants may also make optional cash payments that will be investedthrough the plan.  All cash dividendspaid to the plan administrator are invested within 30 days of the cash dividendpayment date.  Cash dividends andoptional cash payments will be used to purchase capital stock of the Company inthe open market, from newly-issued shares, from shares held in treasury, innegotiated transactions, or in any combination of the foregoing.  The purchase price of the shares of capitalstock is based on the average market price. All administrative costs are borne by the Company.  For the years ended December 31, 2007and 2006, 63,350 and 38,989 shares were purchased under the plan, respectively.

 

 

77

----

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 12.****                                      ****STOCK-BASED COMPENSATION**

 

InMay 2007, the stockholders of the Company approved the 2007 OmnibusLong-Term Incentive Plan (the “2007 Incentive Plan”). The 2007 Incentive Planallows the Company to grant stock-based and performance-based incentive awardsto officers and others who provide substantial service to the Company or any ofits subsidiaries. The 2007 Incentive Plan provides for the granting ofincentive stock options, nonstatutory stock options, restricted stock awards,restricted stock units, deferred stock units, stock appreciation rights (“SARs”),performance awards, performance-based cash awards, dividend equivalents, andqualified stock based awards (collectively, the “awards”) to officers,directors and key employees to purchase shares of common stock. The 2007Incentive Plan allows the Company to issue up to 1,000,000 shares. The GB&TBancshares, Inc. 1997 Incentive Plan (the “1997 Incentive Plan”) alsoremains in effect and all options previously issued under the 1997 IncentivePlan continue to remain outstanding in accordance with their terms. The totalnumber of shares issuable under the 1997 Incentive Plan may not exceed2,000,000 shares of the Company’s common stock. As of May 2007, there were174,218 unused shares of common stock available under the 1997 Incentive Plan. AtDecember 31, 2007, the Company can grant options and other awardsamounting to an aggregate of 1,067,768 shares of common stock. Option pricesare equal to the fair market value of the Company’s capital stock on the datesthe options are granted. The options may be exercised over a period of tenyears in accordance with vesting schedules determined by the Board ofDirectors.

 

Otherpertinent information related to the options is as follows:

 
| ** **                                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                    | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                    | ** ** | **Shares**                        | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Outstanding at beginning of year                                                              | ** ** | **771,384**                       | ** ** | **$** | **11.95** |   | 781,131 |   | $ | 10.48 |   | 680,281 |   | $ | 10.14 |   |
| Granted (1)                                                                                   | ** ** | **91,947**                        | ** ** | **16.07** |   | 522,569 |   | 10.12 |   | 323,248 |   | 10.06 |   |
| Exercised                                                                                     | ** ** | **(107,117**                      | **)**      | **8.69** |   | (526,346 | ) | 7.83 |   | (192,336 | ) | 8.16 |   |
| Terminated                                                                                    | ** ** | **(67,865**                       | **)**      | **18.35** |   | (5,970 | ) | 21.77 |   | (30,062 | ) | 13.04 |   |
| Outstanding at end of year                                                                    | ** ** | **688,349**                       | ** ** | **$** | **12.38** |   | 771,384 |   | $ | 11.95 |   | 781,131 |   | $ | 10.48 |   |
|                                                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Options exercisable at year-end                                                               | ** ** | **519,724**                       | ** ** | **$** | **10.34** |   | 598,186 |   | $ | 9.75 |   | 633,766 |   | $ | 9.04 |   |
| Weighted-average fair value of options granted during the year                                |       |                              |       | **$** | **4.42** |   |   |   | $ | 3.07 |   |   |   | $ | 6.89 |   |
| Total intrinsic value of options exercised during the year                                    |       |                              |       | **$** | **72,000** |   |   |   | $ | 7,548,000 |   |   |   | $ | 2,548,000 |   |
| Weighted-average remaining contractual term of exercisable options at  end of year (in years) |       |                              |       | **3.98** |   |   |   | 4.20 |   |   |   | 4.43 |   |
| Aggregate intrinsic value of options outstanding at end of year                               |       |                              |       | **$** | **(2,079,000** | **)** |   |   | $ | 7,884,000 |   |   |   | $ | 8,178,000 |   |
| Aggregate intrinsic value of exercisable options at end of year                               |       |                              |       | **$** | **(509,000** | **)** |   |   | $ | 7,429,000 |   |   |   | $ | 7,840,000 |   |

 

----

(1) Includedin options granted for the year ended December 31, 2006, were 436,639options and warrants with a weighted average exercise price of $7.89 which wereassumed under the plan for Mountain Bancshares, Inc.  Included in options granted for the yearended December 31, 2005, were 268,748 options and warrants with a weightedaverage exercise price of $7.47 which were assumed under the plan for FNBGBancshares, Inc.

 

 

78

----

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 12.****                                      ****STOCK-BASED COMPENSATION(Continued)**

 

Informationpertaining to options outstanding at December 31, 2007 is as follows:

 

| ** **                    | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                              | ** ** |
|-------------------------------|------------|-------------------------|------------|------------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding** | ** ** | **Weighted-  Average  Remaining  Contractual  Life** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| ** **                    | ** ** | ** **              | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $ 5.89 - $8.65           |       | 367,883                 |       | 4.53 years                                           |       | $ | 8.06 |   | 367,883 |   | $ | 8.06 |   |
| $ 9.38 - $13.78          |       | 107,834                 |       | 5.14 years                                           |       | 11.88 |   | 83,834 |   | 11.93 |   |
| $ 14.15 - $21.18         |       | 116,516                 |       | 8.07 years                                           |       | 18.34 |   | 31,116 |   | 18.55 |   |
| $ 21.46 - $24.15         |       | 96,116                  |       | 7.77 years                                           |       | 22.27 |   | 36,891 |   | 22.61 |   |
| Total                         |       | 688,349                 |       | 5.68 years                                           |       | 12.38 |   | 519,724 |   | 10.34 |   |
|                               |            |                         |            |                                                      |            |  |  |  |  |  |  |  |  |

 

Thetotal fair value of options vested during 2007 was $938,000.  The total amount expensed for options vestedduring 2007 was $322,000.

 

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

 

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

 

| ** **               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Dividend  yield          | ** ** | **4.29**                          | **%**      | 1.66 | % | $ | 1.57 | % |
| Expected  life           | ** ** | **5 years**                       |       | 3 years |   | 10 years |   |
| Expected  volatility     | ** ** | **34.63**                         | **%**      | 22.36 | % | 19.82 | % |
| Risk-free  interest rate | ** ** | **3.08**                          | **%**      | 4.59 | % | 4.46 | % |
|                          |            |                                   |            |  |  |  |  |  |

 

AtDecember 31, 2007, there was approximately $540,000 of unrecognizedcompensation cost related to stock based payments which is expected to berecognized over a weighted average period of 3.97 years.

 

**NOTE 13.****                                      ****INCOME TAXES**

 

Thecomponents of income tax expense are as follows:

 

| ** **                     | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| ** **                     | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **Dollars in thousands**          | ** ** |
|                           |       |                              |       |   |   |   |   |
| Current                        | ** ** | **$**                             | **(4,445** | **)** | $ | 8,920 |   | $ | 6,400 |   |
| Deferred                       | ** ** | **1,014**                         |       | (4,649 | ) | (522 | ) |
| Change  in valuation allowance | ** ** | **—**                        |       | **—** |   | **—** |   |
| ** **                     | ** ** | **$**                             | **(3,431** | **)** | **$** | **4,271** | ** ** | **$** | **5,878** |   |

 

 

79

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 13.****                                      ****INCOME TAXES (Continued)**

** **

The Company’s income taxexpense differs from the amounts computed by applying the federal income taxstatutory rates to income before income taxes. A reconciliation of thedifferences is as follows:

 

| ** **                               | ** ** | **Years  Ended December 31,** | ** ** |
|------------------------------------------|------------|------------------------------------|------------|
|                                     | ** ** | **2007**                           |       | **2006** | ** ** | **2005** |   |
|                                     | ** ** | **(Dollars  in thousands)**        | ** ** |
|                                     |       |                               |       |   |   |   |   |
| Tax  provision at statutory federal rate | ** ** | **$**                              | **(2,330** | **)** | $ | 4,827 |   | $ | 6,254 |   |
| Tax-exempt interest                      | ** ** | **(431**                           | **)**      | (206 | ) | (216 | ) |
| Disallowed interest                      | ** ** | **76**                             |       | 31 |   | 22 |   |
| Life insurance                           | ** ** | **(149**                           | **)**      | (154 | ) | (133 | ) |
| State income taxes, net of credits       | ** ** | **(379**                           | **)**      | (146 | ) | 200 |   |
| Other                                    | ** ** | **(218**                           | **)**      | (81 | ) | (249 | ) |
| Income  tax expense                      | ** ** | **$**                              | **(3,431** | **)** | $ | 4,271 |   | $ | 5,878 |   |

 

Thecomponents of deferred income taxes are as follows:

** **

| ** **                          | ** ** | **2007**                   | ** ** | **2006** | ** ** |
|-------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
| Deferred  tax assets:               |       |                       |       |     |       |
| Loan loss reserves                  | ** ** | **$**                      | **10,301** |     | $          | 9,285 |   |
| Other real estate write-down        | ** ** | **770**                    |       | 124      |       |
| Deferred compensation               | ** ** | **2,898**                  |       | 2,868    |       |
| Deferred loan fees                  | ** ** | **122**                    |       | 92       |       |
| Net operating loss carryforward     | ** ** | **454**                    |       | 539      |       |
| Securities available for sale       | ** ** | **(14**                    | **)**      | 838      |       |
| Other                               | ** ** | **(113**                   | **)**      | 86       |       |
|                                | ** ** | **14,418**                 |       | 13,832   |       |
| Deferred  tax liabilities:          |       |                       |       |     |       |
| Depreciation                        | ** ** | **1,346**                  |       | 1,386    |       |
| Accretion of discount on securities | ** ** | **74**                     |       | 82       |       |
| Purchase adjustment                 | ** ** | **2,542**                  |       | 3,148    |       |
|                                | ** ** | **3,962**                  |       | 4,616    |       |
|                                |       |                       |       |     |       |
| Net  deferred tax assets            | ** ** | **$**                      | **10,456** |     | $          | 9,216 |   |

 

Forthe year ended December 31, 2006, net deferred tax assets increased by$692,000 as a result of the acquisition of Mountain Bancshares, Inc.  For the year ended December 31, 2005,net deferred tax assets increased by $100,000 as a result of the acquisition ofFNBG Bancshares, Inc.

 

80

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 14.****                                      ****EARNINGS PER SHARE**

 

Presentedbelow is a summary of the components used to calculate basic and dilutedearnings per share:

 

| ** **                                                                                                  | ** ** | **Years Ended December 31,** | ** **  |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                                                                                  | ** ** | **2007**                          | ** **  | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                  | ** ** | **(Amounts in thousands)**        | ** **  |
|                                                                                                        |       |                              |        |   |   |   |   |
| Net income (loss)                                                                                           | ** ** | **$**                             | **(12,489** | **)** | $ | 9,521 |   | $ | 11,991 |   |
|                                                                                                        |       |                              |        |   |   |   |   |
| Weighted average number of capital shares  outstanding                                                      |       | **14,192**                        |        | 13,652 |   | 12,562 |   |
| Effect of dilutive options                                                                                  | ** ** | **133**                           |        | 304 |   | 318 |   |
| Weighted average number of capital shares  outstanding used to calculate dilutive earnings (loss) per share |       | **14,325**                        |        | 13,956 |   | 12,880 |   |
|                                                                                                             |            |                                   |             |  |  |  |  |  |  |  |

** **

**NOTE 15.****                                      ****COMMITMENTS AND CONTINGENCIES**

 

**Loan Commitments**

 

TheCompany is a party to financial instruments with off-balance sheet risk in thenormal course of business to meet the financing needs of its customers.  These financial instruments includecommitments to extend credit and standby letters of credit.  Such commitments involve, to varying degrees,elements of credit risk and interest rate risk in excess of the amountrecognized in the balance sheets.  Themajority of all commitments to extend credit and standby letters of credit arevariable rate instruments.

 

TheCompany’s exposure to credit loss in the event of nonperformance by the otherparty to the financial instrument for commitments to extend credit and standbyletters of credit is represented by the contractual amount of thoseinstruments.  The Company uses the same credit policies inmaking commitments as it does for on-balance sheet instruments.  A summary of the Company’s commitments is asfollows:

 

| ** **                           | ** ** | **December 31,**      | ** **  |
|--------------------------------------|------------|----------------------------|-------------|
| ** **                           | ** ** | **2007**                   | ** **  | **2006** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)** | ** **  |
|                                 |       |                       |        |   |   |
| Commitments  to extend credit        | ** ** | **$**                      | **253,530** |   | $ | 425,391 |   |
| Financial  standby letters of credit | ** ** | **9,279**                  |        | 7,544 |   |
| Other  standby letters of credit     | ** ** | **—**                 |        | 1,129 |   |
| Credit  card commitments             | ** ** | **8,023**                  |        | 6,595 |   |
| ** **                           |       | **$**                      | **270,832** |   | $ | 440,659 |   |

 

Commitments to extend credit are agreements to lend to acustomer as long as there is no violation of any condition established in thecontract.  Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee.  Since many of the commitments areexpected to expire without being drawn upon, the total commitment amounts donot necessarily represent future cash requirements.  The amount of collateral obtained, if deemednecessary by the Company upon extension of credit, is based on management’scredit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory,property and equipment, residential real estate and income-producing commercialproperties.

 

81

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 15.****                                      ****COMMITMENTS AND CONTINGENCIES(Continued)**

 

**Loan Commitments (Continued)**

 

Creditcard commitments are granted on an unsecured basis.

 

Standbyletters of credit are conditional commitments issued by the Company toguarantee the performance of a customer to a third party.  Those guarantees are primarily issued tosupport public and private borrowing arrangements.  The credit risk involved in issuing lettersof credit is essentially the same as that involved in extending loans tocustomers.  Collateral held varies asspecified above and is required in instances that the Company deems necessary.

 

AtDecember 31, 2007 and 2006, the carrying amount of liabilities related tothe Company’s obligation to perform under financial standby letters of creditwas insignificant.  The Company has notbeen required to perform on any financial standby letters of credit, and theCompany has not incurred any losses on financial standby letters of credit forthe years ended December 31, 2007 and 2006.

 

**Contingencies**

 

Inthe normal course of business, the Company is involved in various legalproceedings.  In the opinion ofmanagement, any liability resulting from such proceedings would not have amaterial effect on the Company’s financial statements.

 

**NOTE 16.****                                      ****CONCENTRATIONS OF CREDIT**

** **

TheBanks originate primarily commercial real estate, residential real estate andconsumer loans to customers in Hall, Clarke, Bartow, Cobb, Polk, Paulding,Carroll, Baldwin, Putnam, Gwinnett, Dawson, Forsyth, Fulton, Lumpkin andsurrounding counties.  The ability of themajority of the Company’s customers to honor their contractual obligations isdependent on their local economies as well as the metropolitan Atlanta, Georgiaeconomy.

 

Ninetypercent of the Company’s loan portfolio is concentrated in loans secured byreal estate.  A substantial portion ofthese loans is in the Company’s primary market areas.  In addition, a substantial portion of theother real estate owned is located in those same markets.  Accordingly, the ultimate collectibility ofthe Company’s loan portfolio and recovery of the carrying amount of other realestate owned are susceptible to changes in market conditions in the Company’smarket areas.  The other significantconcentrations of credit by type of loan are set forth in Note 4.

 

TheCompany, as a matter of policy, does not generally extend credit to any singleborrower or group of related borrowers in excess of regulatory limits, orapproximately $11,505,000, $2,056,000, $6,139,000, $4,464,000, $4,892,000,$4,255,000 and $4,334,000 for Gainesville Bank & Trust, United Bank &Trust, Community Trust Bank, HomeTown Bank of Villa Rica, First National Bankof the South, First National Bank of Gwinnett and Mountain State Bank,respectively.

 

82

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 17.****                                      ****REGULATORY MATTERS**

 

**Dividend Restrictions**

 

TheBanks are subject to certain restrictions on the amount of dividends that maybe declared without prior regulatory approval. At December 31, 2007, approximately $9,100,000 of retained earningswere available for dividend declaration without regulatory approval.

 

**Capital Requirements**

 

TheCompany and Banks are subject to various regulatory capital requirementsadministered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certainmandatory, and possibly additional discretionary actions by regulators that, ifundertaken, could have a direct material effect on the consolidated financialstatements.  Under capital adequacyguidelines and the regulatory framework for prompt corrective action, the Companyand the Banks must meet specific capital guidelines that involve quantitativemeasures of the Company’s and Banks’ assets, liabilities, and certainoff-balance sheet items as calculated under regulatory accountingpractices.  Capital amounts and classificationare also subject to qualitative judgments by the regulators about components,risk weightings, and other factors.

 

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany and the Banks to maintain minimum amounts and ratios of total and TierI capital to risk-weighted assets, as defined, and of Tier I capital to averageassets.  Management believes, as of December 31,2007 the Company and the Banks met all capital adequacy requirements to whichthey are subject.

 

As of December 31, 2007, based on the regulatory framework forprompt corrective action, all of the affiliate banks are considered to be wellcapitalized.  To be categorized as wellcapitalized, the Banks must maintain minimum total risk-based, Tier Irisk-based, and Tier I leverage ratios as set forth in the followingtable.  Prompt corrective actionprovisions are not applicable to bank holding companies.

 

83

----

 

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 17.****                                         ****REGULATORY MATTERS (Continued)**

 

**Capital Requirements (Continued)**

** **

TheCompany and Banks’ actual capital amounts and ratios are presented in thefollowing table.

 
| ** **                              | ** ** | ** **                 | ** ** | ** **      | ** ** | **To Be Well**        | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-----------------|------------|-----------------------|------------|
| ** **                              | ** ** | ** **                 | ** ** | **For Capital** | ** ** | **Capitalized Under** | ** ** |
| ** **                              | ** ** | ** **                 | ** ** | **Adequacy**    | ** ** | **Prompt Corrective** | ** ** |
| ** **                              | ** ** | **Actual**                 | ** ** | **Purposes**    | ** ** | **Action Provisions** | ** ** |
| ** **                              | ** ** | **Amount**                 | ** ** | **Ratio**       | ** ** | **Amount**            | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)** | ** ** |
| **As of December 31, 2007:**            | ** ** | ** **                 | ** ** | ** **      | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total Capital to Risk Weighted Assets:  |       |                       |       |            |       |                  |       |   |   |   |   |   |   |
| Consolidated                            |       | $                          | 185,730    |            | 11.44      | %                     | $          | 129,893 |   | 8 | % | N/A |   | N/A |   |
| Gainesville Bank  & Trust           |       | $                          | 61,769     |            | 11.03      | %                     | $          | 44,814 |   | 8 | % | $ | 56,018 |   | 10 | % |
| United Bank  & Trust                |       | $                          | 10,159     |            | 10.38      | %                     | $          | 7,832 |   | 8 | % | $ | 9,790 |   | 10 | % |
| Community Trust  Bank                   |       | $                          | 29,419     |            | 10.18      | %                     | $          | 23,108 |   | 8 | % | $ | 28,885 |   | 10 | % |
| HomeTown Bank of  Villa Rica            |       | $                          | 18,727     |            | 10.59      | %                     | $          | 14,143 |   | 8 | % | $ | 17,679 |   | 10 | % |
| First National  Bank of the South       |       | $                          | 19,566     |            | 11.60      | %                     | $          | 13,495 |   | 8 | % | $ | 16,868 |   | 10 | % |
| First National  Bank of Gwinnett        |       | $                          | 17,021     |            | 10.03      | %                     | $          | 13,581 |   | 8 | % | $ | 16,976 |   | 10 | % |
| Mountain State  Bank                    |       | $                          | 17,985     |            | 10.90      | %                     | $          | 13,202 |   | 8 | % | $ | 16,503 |   | 10 | % |
| Tier I Capital to Risk Weighted Assets: |       |                       |       |            |       |                  |       |   |   |   |   |   |   |
| Consolidated                            |       | $                          | 165,347    |            | 10.18      | %                     | $          | 64,947 |   | 4 | % | N/A |   | N/A |   |
| Gainesville Bank  & Trust           |       | $                          | 56,995     |            | 10.17      | %                     | $          | 22,407 |   | 4 | % | $ | 33,611 |   | 6 | % |
| United Bank  & Trust                |       | $                          | 8,930      |            | 9.12       | %                     | $          | 3,916 |   | 4 | % | $ | 5,874 |   | 6 | % |
| Community Trust  Bank                   |       | $                          | 25,755     |            | 8.92       | %                     | $          | 11,554 |   | 4 | % | $ | 17,331 |   | 6 | % |
| HomeTown Bank of  Villa Rica            |       | $                          | 16,465     |            | 9.31       | %                     | $          | 7,071 |   | 4 | % | $ | 10,607 |   | 6 | % |
| First National  Bank of the South       |       | $                          | 17,824     |            | 10.57      | %                     | $          | 6,747 |   | 4 | % | $ | 10,121 |   | 6 | % |
| First National  Bank of Gwinnett        |       | $                          | 15,370     |            | 9.05       | %                     | $          | 6,790 |   | 4 | % | $ | 10,186 |   | 6 | % |
| Mountain State  Bank                    |       | $                          | 15,909     |            | 9.64       | %                     | $          | 6,601 |   | 4 | % | $ | 9,902 |   | 6 | % |
| Tier I Capital to Average Assets:       |       |                       |       |            |       |                  |       |   |   |   |   |   |   |
| Consolidated                            |       | $                          | 165,347    |            | 8.66       | %                     | $          | 76,385 |   | 4 | % | N/A |   | N/A |   |
| Gainesville Bank  & Trust           |       | $                          | 56,995     |            | 8.48       | %                     | $          | 26,899 |   | 4 | % | $ | 33,624 |   | 5 | % |
| United Bank  & Trust                |       | $                          | 8,930      |            | 7.65       | %                     | $          | 4,670 |   | 4 | % | $ | 5,838 |   | 5 | % |
| Community Trust  Bank                   |       | $                          | 25,755     |            | 7.43       | %                     | $          | 13,857 |   | 4 | % | $ | 17,321 |   | 5 | % |
| HomeTown Bank of  Villa Rica            |       | $                          | 16,465     |            | 7.14       | %                     | $          | 9,223 |   | 4 | % | $ | 11,529 |   | 5 | % |
| First National  Bank of the South       |       | $                          | 17,824     |            | 9.05       | %                     | $          | 7,881 |   | 4 | % | $ | 9,851 |   | 5 | % |
| First National  Bank of Gwinnett        |       | $                          | 15,370     |            | 8.18       | %                     | $          | 7,515 |   | 4 | % | $ | 9,394 |   | 5 | % |
| Mountain State  Bank                    |       | $                          | 15,909     |            | 7.85       | %                     | $          | 8,111 |   | 4 | % | $ | 10,139 |   | 5 | % |

 

 

84

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 17.****                                         ****REGULATORY MATTERS (Continued)**

** **

**Capital Requirements (Continued)**

 
| ** **                              | ** ** | ** **                 | ** ** | ** **      | ** ** | **To Be Well**        | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-----------------|------------|-----------------------|------------|
| ** **                              | ** ** | ** **                 | ** ** | **For Capital** | ** ** | **Capitalized Under** | ** ** |
| ** **                              | ** ** | ** **                 | ** ** | **Adequacy**    | ** ** | **Prompt Corrective** | ** ** |
| ** **                              | ** ** | **Actual**                 | ** ** | **Purposes**    | ** ** | **Action Provisions** | ** ** |
| ** **                              | ** ** | **Amount**                 | ** ** | **Ratio**       | ** ** | **Amount**            | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)** | ** ** |
| **As of December 31, 2006:**            | ** ** | ** **                 | ** ** | ** **      | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total Capital to Risk Weighted Assets:  |       |                       |       |            |       |                  |       |   |   |   |   |   |   |
| Consolidated                            |       | $                          | 190,622    |            | 12.12      | %                     | $          | 125,868 |   | 8 | % | N/A |   | N/A |   |
| Gainesville Bank  & Trust           |       | $                          | 61,041     |            | 11.47      | %                     | $          | 42,559 |   | 8 | % | $ | 53,199 |   | 10 | % |
| United Bank  & Trust                |       | $                          | 8,419      |            | 10.09      | %                     | $          | 6,677 |   | 8 | % | $ | 8,346 |   | 10 | % |
| Community Trust  Bank                   |       | $                          | 30,560     |            | 10.73      | %                     | $          | 22,791 |   | 8 | % | $ | 28,488 |   | 10 | % |
| HomeTown Bank of  Villa Rica            |       | $                          | 17,983     |            | 8.54       | %                     | $          | 16,846 |   | 8 | % | $ | 21,058 |   | 10 | % |
| First National  Bank of the South       |       | $                          | 18,163     |            | 11.57      | %                     | $          | 12,560 |   | 8 | % | $ | 15,699 |   | 10 | % |
| First National  Bank of Gwinnett        |       | $                          | 15,426     |            | 11.27      | %                     | $          | 10,954 |   | 8 | % | $ | 13,693 |   | 10 | % |
| Mountain State  Bank                    |       | $                          | 16,784     |            | 10.29      | %                     | $          | 13,044 |   | 8 | % | $ | 16,305 |   | 10 | % |
| Tier I Capital to Risk Weighted Assets: |       |                       |       |            |       |                  |       |   |   |   |   |   |   |
| Consolidated                            |       | $                          | 170,893    |            | 10.86      | %                     | $          | 62,934 |   | 4 | % | N/A |   | N/A |   |
| Gainesville Bank  & Trust           |       | $                          | 55,733     |            | 10.48      | %                     | $          | 21,280 |   | 4 | % | $ | 31,919 |   | 6 | % |
| United Bank  & Trust                |       | $                          | 7,459      |            | 8.94       | %                     | $          | 3,339 |   | 4 | % | $ | 5,008 |   | 6 | % |
| Community Trust  Bank                   |       | $                          | 26,989     |            | 9.47       | %                     | $          | 11,395 |   | 4 | % | $ | 17,093 |   | 6 | % |
| HomeTown Bank of  Villa Rica            |       | $                          | 15,269     |            | 7.25       | %                     | $          | 8,423 |   | 4 | % | $ | 12,635 |   | 6 | % |
| First National  Bank of the South       |       | $                          | 16,603     |            | 10.58      | %                     | $          | 6,280 |   | 4 | % | $ | 9,420 |   | 6 | % |
| First National  Bank of Gwinnett        |       | $                          | 14,075     |            | 10.28      | %                     | $          | 5,477 |   | 4 | % | $ | 8,216 |   | 6 | % |
| Mountain State  Bank                    |       | $                          | 14,914     |            | 9.15       | %                     | $          | 6,522 |   | 4 | % | $ | 9,783 |   | 6 | % |
| Tier I Capital to Average Assets:       |       |                       |       |            |       |                  |       |   |   |   |   |   |   |
| Consolidated                            |       | $                          | 170,893    |            | 9.44       | %                     | $          | 72,389 |   | 4 | % | N/A |   | N/A |   |
| Gainesville Bank  & Trust           |       | $                          | 55,733     |            | 8.41       | %                     | $          | 26,514 |   | 4 | % | $ | 33,142 |   | 5 | % |
| United Bank  & Trust                |       | $                          | 7,459      |            | 7.49       | %                     | $          | 3,981 |   | 4 | % | $ | 4,977 |   | 5 | % |
| Community Trust  Bank                   |       | $                          | 26,989     |            | 7.99       | %                     | $          | 13,503 |   | 4 | % | $ | 16,879 |   | 5 | % |
| HomeTown Bank of  Villa Rica            |       | $                          | 15,269     |            | 5.74       | %                     | $          | 10,632 |   | 4 | % | $ | 13,290 |   | 5 | % |
| First National  Bank of the South       |       | $                          | 16,603     |            | 9.12       | %                     | $          | 7,281 |   | 4 | % | $ | 9,102 |   | 5 | % |
| First National  Bank of Gwinnett        |       | $                          | 14,075     |            | 9.24       | %                     | $          | 6,091 |   | 4 | % | $ | 7,614 |   | 5 | % |
| Mountain State  Bank                    |       | $                          | 14,914     |            | 9.77       | %                     | $          | 6,108 |   | 4 | % | $ | 7,635 |   | 5 | % |

** **

**Cease and Desist Order**

** **

OnNovember 26, 2007, HTB executed and entered into a Stipulation and ConsentAgreement with the FDIC and the Georgia Department agreeing to the issuance ofa Cease and Desist Order (the “Order”).  The Order became effective onDecember 6, 2007 and addressed the supervision and education of HTB’s board ofdirectors, management team, equity capital and reserves in relation to thevolume and quality of assets held, level of poor quality loans, allowance forloan and lease losses, lending and collection practices, routine and internalcontrols policies, and alleged violations of certain laws, regulations and FDICstatements of policy.  Under the terms ofthe Order, HTB has agreed to take a number of affirmative steps, many of whichhave been implemented over the past few months.

** **

 

85

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 18.****                                         ****FAIR VALUE OF FINANCIAL INSTRUMENTS**

** **

The fair value of a financial instrument is the currentamount that would be exchanged between willing parties, other than in a forcedliquidation.  Fair value is bestdetermined based upon quoted market prices. However, in many instances, there are no quoted market prices for theCompany’s various financial instruments. In cases where quoted market prices are not available, fair value isbased on discounted cash flows or other valuation techniques.  These techniques are significantly affectedby the assumptions used, including the discount rate and estimates of futurecash flows.  Accordingly, the fair valueestimates may not be realized in an immediate settlement of theinstrument.  SFAS No. 107, *Disclosures about Fair Value of Financial Instruments,*excludes certain financial instruments and all nonfinancial instruments fromits disclosure requirements. Accordingly, the aggregate fair value amounts presented may notnecessarily represent the underlying fair value of the Company.

 

Thefollowing methods and assumptions were used by the Company in estimating thefair value of its financial instruments.

 

**Cash, Due From Banks, Interest-Bearing Deposits inBanks and Federal Funds Sold: **Thecarrying amount of cash, due from banks, interest-bearing deposits in banks andfederal funds sold approximates fair value.

 

**Securities: **Fair values ofsecurities are based on available quoted market prices.  The carrying amount of equity securities withno readily determinable fair value approximates fair value.

 

**Loans: **Thecarrying amount of variable-rate loans that reprice frequently and have nosignificant change in credit risk approximates fair value.  The fair value of fixed-rate loans isestimated based on discounted contractual cash flows, using interest ratescurrently being offered for loans with similar terms to borrowers with similarcredit quality.  The fair value ofimpaired loans is estimated based on discounted contractual cash flows orunderlying collateral values, where applicable.

 

**Deposits: **Thecarrying amount of demand deposits, savings deposits, and variable-ratecertificates of deposit approximates fair value.  The fair value of fixed-rate certificates ofdeposit is estimated based on discounted contractual cash flows using interestrates currently being offered for certificates of similar maturities.

 

**Federal Funds Purchased, Repurchase Agreements andOther Borrowings: **Thecarrying amount of variable rate borrowings, federal funds purchased, andsecurities sold under repurchase agreements approximate fair value.  The fair value of fixed rate other borrowingsare estimated based on discounted contractual cash flows using the currentincremental borrowing rates for similar type borrowing arrangements.

 

**Subordinated Debt: **The carrying amount ofthe Company’s variable rate subordinated debt approximates the fair value.  The fair value of the fixed-rate subordinateddebt is estimated based on discounted contractual cash flows.

 

**Accrued Interest: **The carrying amount ofaccrued interest approximates their fair value.

 

**Off-Balance Sheet Instruments: **Thecarrying amount of commitments to extend credit and standby letters of creditapproximates fair value.  The carryingamount of the off-balance sheet financial instruments is based on feescurrently charged to enter into such agreements.

 

 

86

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 18.****                                         ****FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)**

 

Thecarrying amount and estimated fair value of the Company's financial instrumentswere as follows:

 
| ** **                                                                       | ** ** | **December 31, 2007**      | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                                                                       | ** ** | **Carrying**               | ** ** | **Fair**              | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                                                       | ** ** | **Amount**                 | ** ** | **Value**             | ** ** | **Amount** | ** ** | **Value** | ** ** |
| ** **                                                                       | ** ** | **(Dollars in thousands)** | ** ** |
| Financial assets:                                                                |       |                       |       |                  |       |   |   |   |   |
| Cash, due from  banks, interest-bearing deposits in banks and federal funds sold |       | **$**                      | **36,817** |                  | **$**      | **36,817** |   | $ | 29,169 |   | $ | 29,169 |   |
| Securities                                                                       | ** ** | **217,893**                | ** ** | **217,893**           |       | 210,249 |   | 210,249 |   |
| Restricted  equity securities                                                    | ** ** | **10,654**                 | ** ** | **10,654**            |       | 9,869 |   | 9,869 |   |
| Loans                                                                            | ** ** | **1,473,335**              | ** ** | **1,472,991**         |       | 1,473,025 |   | 1,463,077 |   |
| Accrued interest  receivable                                                     | ** ** | **12,058**                 | ** ** | **12,058**            |       | 13,118 |   | 13,118 |   |
|                                                                             |       |                       |       |                  |       |   |   |   |   |
| Financial liabilities:                                                           |       |                       |       |                  |       |   |   |   |   |
| Deposits                                                                         | ** ** | **1,495,432**              | ** ** | **1,495,432**         |       | 1,480,168 |   | 1,480,841 |   |
| Federal funds  purchased and securities sold under repurchase agreements         |       | **62,428**                 |       | **62,428**            |       | 41,061 |   | 41,061 |   |
| Other borrowings                                                                 | ** ** | **117,303**                | ** ** | **116,788**           |       | 97,437 |   | 97,115 |   |
| Subordinated  debt                                                               | ** ** | **29,898**                 | ** ** | **28,989**            |       | 29,898 |   | 30,444 |   |
| Accrued interest  payable                                                        | ** ** | **13,199**                 | ** ** | **13,199**            |       | 11,468 |   | 11,468 |   |
|                                                                                  |            |                            |            |                       |            |  |  |  |  |  |  |  |  |

** **

**NOTE 19.****                                         ****SUPPLEMENTAL FINANCIAL DATA**

 

Componentsof other operating expenses in excess of 1% of total revenue are as follows:

 

 

| ** **                                      | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **2007**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)**   | ** ** |
|                                            |       |                         |       |   |   |   |   |
| Audit and professional fees                     | ** ** | **$**                        | **1,037**  |   | $ | 745 |   | $ | 946 |   |
| Stationery, forms and supplies                  | ** ** | **808**                      |       | 745 |   | 744 |   |
| Provision for other real estate losses          | ** ** | **1,711**                    |       | — |   | — |   |
| Goodwill and core deposit intangible impairment | ** ** | **10,092**                   |       | — |   | — |   |
|                                                 |            |                              |            |  |  |  |  |  |  |  |

 

 

87

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** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 20.****                                         ****PARENT COMPANY FINANCIAL INFORMATION**

 

Thefollowing information presents the condensed balance sheets as of December 31,2007 and 2006 and statements of income and cash flows of GB&T Bancshares,Inc. for the years ended December 31, 2007, 2006 and 2005.

 

**CONDENSED BALANCE SHEETS**

 
| ** **                                       | ** ** | **2007**                   | ** **  | **2006**   | ** ** |
|--------------------------------------------------|------------|----------------------------|-------------|------------|------------|
| ** **                                       | ** ** | **(Dollars in thousands)** | ** **  |
| **Assets**                                       |       |                       |        |       |       |
| Cash                                             | ** ** | **$**                      | **1,746**   |       | $          | 946 |   |
| Securities  available for sale                   | ** ** | **2,861**                  |        | 15,421     |       |
| Investment in subsidiaries                       | ** ** | **240,147**                |        | 242,645    |       |
| Premises and  equipment                          | ** ** | **3,944**                  |        | 4,319      |       |
| Other assets                                     | ** ** | **4,862**                  |        | 4,837      |       |
|                                             |       |                       |        |       |       |
| Total assets                                     | ** ** | **$**                      | **253,560** |       | $          | 268,168 |   |
|                                             |       |                       |        |       |       |
| **Liabilities**                                  |       |                       |        |       |       |
| Securities sold  under agreements to repurchase  | ** ** | **$**                      | **3,000**   |       | $          | 4,500 |   |
| Other borrowings                                 | ** ** | **1,700**                  |        | —     |       |
| Subordinated  debt                               | ** ** | **29,898**                 |        | 29,898     |       |
| Other  liabilities                               | ** ** | **563**                    |        | 432        |       |
| ** **                                       | ** ** | ** **                 | ** **  | ** ** | ** ** |
| Total  liabilities                               | ** ** | **35,161**                 |        | 34,830     |       |
|                                             |       |                       |        |       |       |
| **Stockholders’ equity**                    | ** ** | **218,399**                |        | 233,338    |       |
|                                             |       |                       |        |       |       |
| Total  liabilities and stockholders’ equity | ** ** | **$**                      | **253,560** | ** ** | **$**      | **268,168** | ** ** |

 

** **

88

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 20.****                                         ****PARENT COMPANY FINANCIAL INFORMATION (Continued)**

 

**CONDENSED STATEMENTS OF INCOME (LOSS)**

 

| ** **                                                                                  | ** ** | **2007**                   | ** **  | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------|-------------|----------|------------|----------|------------|
| ** **                                                                                  | ** ** | **(Dollars in thousands)** | ** **  |
| Income                                                                                      |       |                       |        |     |       |     |       |
| Dividends from  subsidiaries                                                                | ** ** | **$**                      | **8,036**   |     | $          | 7,224    |       | $ | 5,324 |   |
| Management fees                                                                             | ** ** | **2,001**                  |        | 1,637    |       | 1,312    |       |
| Other income                                                                                | ** ** | **3,943**                  |        | 3,227    |       | 3,365    |       |
|                                                                                        | ** ** | **13,980**                 |        | 12,088   |       | 10,001   |       |
|                                                                                        |       |                       |        |     |       |     |       |
| Expense                                                                                     |       |                       |        |     |       |     |       |
| Interest                                                                                    | ** ** | **2,688**                  |        | 2,657    |       | 2,049    |       |
| Other operating  expense                                                                    | ** ** | **10,247**                 |        | 8,447    |       | 6,594    |       |
|                                                                                        | ** ** | **12,935**                 |        | 11,104   |       | 8,643    |       |
|                                                                                        |       |                       |        |     |       |     |       |
| Income before  income tax benefit and equity in undistributed income (loss) of subsidiaries | ** ** | **1,045**                  |        | 984      |       | 1,358    |       |
|                                                                                        |       |                       |        |     |       |     |       |
| Income tax benefits                                                                         | ** ** | **2,533**                  |        | 2,336    |       | 1,635    |       |
|                                                                                        |       |                       |        |     |       |     |       |
| Income before  equity in undistributed income (loss) of subsidiaries                        | ** ** | **3,578**                  |        | 3,320    |       | 2,993    |       |
|                                                                                        |       |                       |        |     |       |     |       |
| Equity in undistributed income (loss) of  subsidiaries                                      | ** ** | **(16,067**                | **)**       | 6,201    |       | 8,998    |       |
|                                                                                        |       |                       |        |     |       |     |       |
| Net income  (loss)                                                                          | ** ** | **$**                      | **(12,489** | **)**    | $          | 9,521    |       | $ | 11,991 |   |

 

89

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** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 20.****                                         ****PARENT COMPANY FINANCIAL INFORMATION****(Continued**)

 

**CONDENSED STATEMENTS OF CASH FLOWS**

 

| ** **                                                                                | ** ** | **2007**                   | ** **  | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------|-------------|------------|------------|------------|------------|
| ** **                                                                                | ** ** | **(Dollars in thousands)** | ** **  |
| ** **                                                                                | ** ** | ** **                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| **OPERATING ACTIVITIES**                                                                  |       |                       |        |       |       |       |       |
| Net income  (loss)                                                                        | ** ** | **$**                      | **(12,489** | **)**      | $          | 9,521      |       | $ | 11,991 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                       |        |       |       |       |       |
| Undistributed  (income) loss of subsidiaries                                              | ** ** | **16,067**                 |        | (6,201     | )          | (8,998     | )          |
| Depreciation                                                                              | ** ** | **586**                    |        | 641        |       | 591        |       |
| Gain on sale of  assets                                                                   | ** ** | **—**                 |        | —     |       | (2         | )          |
| Net other  operating activities                                                           | ** ** | **(938**                   | **)**       | 1,492      |       | (789       | )          |
|                                                                                      |       |                       |        |       |       |       |       |
| Net cash  provided by operating activities                                                | ** ** | **3,226**                  |        | 5,453      |       | 2,793      |       |
|                                                                                      |       |                       |        |       |       |       |       |
| **INVESTING ACTIVITIES**                                                                  |       |                       |        |       |       |       |       |
| Proceeds from  maturities of securities available for sale                                | ** ** | **3,827**                  |        | 4,028      |       | 4,080      |       |
| Purchase of  premises and equipment                                                       | ** ** | **(195**                   | **)**       | (268       | )          | (1,389     | )          |
| Proceeds from  sale of premises and equipment                                             | ** ** | **—**                 |        | —     |       | 2          |       |
| Capital  investment in subsidiaries                                                       | ** ** | **(1,700**                 | **)**       | (10,925    | )          | (4,577     | )          |
|                                                                                      |       |                       |        |       |       |       |       |
| Net cash  provided by (used in) investing activities                                      | ** ** | **1,932**                  |        | (7,165     | )          | (1,884     | )          |
|                                                                                      |       |                       |        |       |       |       |       |
| **FINANCING ACTIVITIES**                                                                  |       |                       |        |       |       |       |       |
| Dividends paid                                                                            | ** ** | **(5,322**                 | **)**       | (4,777     | )          | (4,137     | )          |
| Proceeds from  purchased funds and other short term borrowings                            | ** ** | **3,700**                  |        | 4,500      |       | —     |       |
| Payment of  purchased funds and other short term borrowings                               | ** ** | **(3,500**                 | **)**       | —     |       | —     |       |
| Proceeds from  issuance of common stock                                                   | ** ** | **761**                    |        | 3,961      |       | 1,019      |       |
| Payment to  repurchase common stock                                                       | ** ** | **—**                 |        | (5,586     | )          | —     |       |
| Payment for  fractional shares                                                            | ** ** | **—**                 |        | (6         | )          | (4         | )          |
| Contributed  capital                                                                      | ** ** | **3**                      |        | —     |       | —     |       |
| Proceeds from  note payable                                                               | ** ** | **—**                 |        | —     |       | 1,000      |       |
| Repayment of  note payable                                                                | ** ** | **—**                 |        | —     |       | (3,150     | )          |
|                                                                                      |       |                       |        |       |       |       |       |
| Net cash used in  financing activities                                                    | ** ** | **(4,358**                 | **)**       | (1,908     | )          | (5,272     | )          |
|                                                                                      |       |                       |        |       |       |       |       |
| Net increase (decrease) in cash                                                           | ** ** | **800**                    |        | (3,620     | )          | (4,363     | )          |
|                                                                                      |       |                       |        |       |       |       |       |
| Cash at beginning of year                                                                 | ** ** | **946**                    |        | 4,566      |       | 8,929      |       |
|                                                                                      |       |                       |        |       |       |       |       |
| Cash at end of year                                                                       | ** ** | **$**                      | **1,746**   |       | $          | 946        |       | $ | 4,566 |   |

 

90

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** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 21.****                                         ****QUARTERLY DATA (Unaudited)**

 

| ** **                                           | ** ** | **Years Ended December 31,**                      | ** **  |
|------------------------------------------------------|------------|---------------------------------------------------|-------------|
| ** **                                           | ** ** | **2007**                                          | ** **  | **2006** | ** ** |
| ** **                                           | ** ** | **Fourth**                                        | ** **  | **Third** | ** ** | **Second** | ** ** | **First** | ** ** | **Fourth** | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** |
| ** **                                           | ** ** | **Quarter**                                       | ** **  | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands, except per share data)** | ** **  |
|                                                 |       |                                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                      | ** ** | **$**                                             | **32,494**  | ** ** | **$** | **34,584** | ** ** | **$** | **35,167** | ** ** | **$** | **34,860** |   | $ | 34,985 |   | $ | 34,147 |   | $ | 30,774 |   | $ | 26,668 |   |
| Interest expense                                     | ** ** | **18,198**                                        | ** **  | **18,824** | ** ** | **18,360** | ** ** | **17,265** |   | 16,907 |   | 15,816 |   | 13,463 |   | 11,206 |   |
|                                                 |       |                                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                  | ** ** | **14,296**                                        | ** **  | **15,760** | ** ** | **16,807** | ** ** | **17,595** |   | 18,078 |   | 18,331 |   | 17,311 |   | 15,462 |   |
| Provision for loan losses                            | ** ** | **7,846**                                         | ** **  | **14,056** | ** ** | **914** | ** ** | **911** |   | 11,475 |   | 1,789 |   | 1,274 |   | 1,206 |   |
|                                                 |       |                                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income after provision for loan losses | ** ** | **6,450**                                         | ** **  | **1,704** | ** ** | **15,893** | ** ** | **16,684** |   | 6,603 |   | 16,542 |   | 16,037 |   | 14,256 |   |
| Other income                                         | ** ** | **2,840**                                         | ** **  | **2,990** | ** ** | **2,778** | ** ** | **2,756** |   | 2,675 |   | 2,764 |   | 2,611 |   | 2,463 |   |
| Other expenses                                       | ** ** | **24,571**                                        | ** **  | **15,467** | ** ** | **14,114** | ** ** | **13,863** |   | 12,977 |   | 12,860 |   | 12,578 |   | 11,744 |   |
|                                                 |       |                                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before  income taxes                   | ** ** | **(15,281**                                       | **)**       | **(10,773** | **)** | **4,557** | ** ** | **5,577** |   | (3,699 | ) | 6,446 |   | 6,070 |   | 4,975 |   |
| Provision for  income taxes (benefits)               | ** ** | **(2,277**                                        | **)**       | **(4,475** | **)** | **1,454** | ** ** | **1,867** |   | (1,774 | ) | 2,231 |   | 2,116 |   | 1,698 |   |
|                                                 |       |                                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                    | ** ** | **$**                                             | **(13,004** | **)** | **$** | **(6,298** | **)** | **$** | **3,103** | ** ** | **$** | **3,710** |   | $ | (1,925 | ) | $ | 4,215 |   | $ | 3,954 |   | $ | 3,277 |   |
|                                                 |       |                                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings (loss) per share:                           |       |                                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                | ** ** | **$**                                             | **(0.91**   | **)** | **$** | **(0.44** | **)** | **$** | **0.22** | ** ** | **$** | **0.26** |   | $ | (0.14 | ) | $ | 0.30 |   | $ | 0.29 |   | $ | 0.26 |   |
| Diluted                                              | ** ** | **$**                                             | **(0.91**   | **)** | **$** | **(0.44** | **)** | **$** | **0.22** | ** ** | **$** | **0.26** |   | $ | (0.13 | ) | $ | 0.30 |   | $ | 0.28 |   | $ | 0.25 |   |

** **

**NOTE 22.****                                    ****STOCK REPURCHASE**

 

OnJune 18, 2007, the Company’s Board of Directors approved the repurchase of upto $10,000,000 of the Company’s outstanding common stock, no par value pershare.  The purchases may be made in theopen market or in privately negotiated transactions at prevailing prices.  The timing and volume of purchases under theprogram will depend on market conditions. The purchases will be accomplished in accordance with the volume andtiming guidelines of Rule 10b-18 of the Exchange Act applicable to the Companyand Rule 10b5-1 of the Exchange Act.  Asof December 31, 2007, no shares had been repurchased by the Company.

 

91

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 23.****                                    ****PENDING BUSINESS COMBINATION**

 

OnNovember 2, 2007, the Company signed a definitive agreement under whichSunTrust Banks, Inc. will acquire GB&T Bancshares, Inc.  Under the terms of the agreement, GB&Tshareholders would receive 0.1562 shares of SunTrust common stock for eachshare of GB&T common stock held.  The acquisition, which is subject toapproval by regulatory authorities and GB&T shareholders, is expected toclose in the second quarter of 2008.  In connection with the proposed merger, SunTrust has filed aregistration statement on Form S-4, which includes additional informationrelated to the proposed merger and GB&T’s proxy statement and SunTrust’sprospectus for the proposed transaction.

 

92

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ExhibitIndex

** **

** **
| **Exhibit No.** | ** ** | **Description**                                              |
|-----------------|------------|--------------------------------------------------------------|
|            |       |                                                         |
| 21.1            |       | Subsidiaries  of the Registrant                              |
|            |       |                                                         |
| 23.1            |       | Consent  of Mauldin & Jenkins, LLC                       |
|            |       |                                                         |
| 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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