**U.S. SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 
| **(Mark One)**                                                                                                                                                                                                                                                                              |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý****Annual Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**                                                                                                                                                                               |
| **For the Fiscal Year  Ended December 31, 2005**                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                        |
| **o****Transition Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**                                                                                                                                                                                |
| **For the transition  period from                        to                      ** |

 

**Commission file number 000-24203**

 

**GB&T Bancshares, Inc.**

(Exact name of registrant asspecified 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’s telephone number, including area code:* ***(770)532-1212**

 

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

 

Securities registered pursuant to Section 12(g) ofthe Act:  **CommonStock, no par value**

(Title of class)

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o  No ý

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. Yes o  No ý

 

Indicate by check markwhether 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 ý  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained 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.ý

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

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

 

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

 

The aggregate market valueof the registrant’s common stock held by nonaffiliates as of June 30, 2005was approximately $275,286,330 based on the closing price of the common stockon the Nasdaq National Market of $23.76 per share on that date. For thispurpose, directors and executive officers have been assumed to be affiliates.

 

As of March 1, 2006,the Company had issued and outstanding 12,841,835 shares of the 20,000,000 authorized shares of its no parvalue common stock.

 

**DOCUMENTS INCORPORATED BYREFERENCE**

 

Portions of the Proxy Statement for the 2006 Annual Meeting ofStockholders to be filed with the Securities and Exchange Commission within 120days of the Registrant’s 2005 fiscal year end are incorporated by referenceinto Part III of this report.

 

 

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKINGSTATEMENTS**

 

Some of the statements contained or incorporated by reference in thisReport, including, without limitation, matters discussed under 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 of1995. Forward-looking statements include statements about the competitivenessof the banking industry, potential regulatory obligations, our entrance andexpansion into other markets, our other business strategies and otherstatements that are not historical facts. Forward-looking statements are notguarantees of performance or results. When we use words like “may,” “plan,” “contemplate,”“anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,”“could,” “should,” “would,” “will,” and similar expressions, you shouldconsider them as identifying forward-looking statements, although we may useother phrasing. These forward-looking statements involve risks anduncertainties and are based on our beliefs and assumptions, and on theinformation available to us at the time that these disclosures were prepared.Factors that may cause actual results to differ materially from thoseexpressed or implied by such forward-looking statements include, among others,the following possibilities: (1) competitive pressures among depositoryand other financial institutions may increase significantly; (2) changesin the interest rate environment may reduce margins; (3) generaleconomic conditions may be less favorable than expected, resulting in,among other things, a deterioration in credit quality and/or a reduction indemand for credit; (4) economic, governmental or other factors may preventthe projected population and commercial growth in the counties in which weoperate;  (5) we may be unableto obtain required shareholder or regulatory approval for our futureacquisitions; (6) legislative or regulatory changes, including changes inaccounting standards, may adversely affect the businesses in which we areengaged;  (7) costs or difficultiesrelated to the integration of our acquired businesses may be greater thanexpected; (8) deposit attrition, customer loss or revenue loss followingacquisitions may be greater than expected; (9) competitors may havegreater financial resources and develop products that enable such competitorsto compete more successfully than we can; and (10) adverse changes may occurin the equity markets. You should refer to the risks detailed below under theheading “Risk Factors” and throughout this Report and in our periodic andcurrent reports filed with the Securities and Exchange Commission for specificfactors which could cause our actual results to be materially different fromthose expressed or implied by these forward-looking statements. Many of thesefactors are beyond our ability to control or predict, and readers are cautionednot to put undue reliance on such forward-looking statements. We do not intendto, and assume no responsibility for updating or revising any forward-lookingstatements contained in this Report, whether as a result of new information,future events or otherwise.

 

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**PART I**

 

**ITEM 1.****    ****BUSINESS**

 

**The Company**

 

GB&T Bancshares wasformed in 1998 as a bank holding company existing under the laws of the Stateof 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 inexchange 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, 2005, we had six 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”) and First National Bank of Gwinnett,(“FNBG”). On October 31, 2005, the Company sold its consumer financecompany, Community Loan Company, (“CLC”). On December 19, 2005, weannounced the plan to acquire Mountain Bancshares, Inc. and its whollyowned subsidiary, Mountain State Bank, as described below.

 

Through our subsidiarybanks, we offer a wide range of lending services, including real estate,consumer and commercial loans, to individuals, small businesses and otherorganizations that are located in or conduct a substantial portion of theirbusiness in our markets. We complement our lending operations with a full array of retail deposit productsand fee-based services to support our clients including checking accounts,money market accounts, savings accounts and certificates of deposit. We alsooffer a variety of other traditional banking services to our customers,including drive-up and night depository facilities, 24-hour automated tellermachines, internet banking, telephone banking and limited trust services.

 

On December 19, 2005,we announced the execution of a definitive agreement to acquire MountainBancshares, Inc., the parent company of the $130 million-asset MountainState Bank which is headquartered in Dawsonville, Georgia. Under the terms ofthe agreement, Mountain Bancshares shareholders will receive 0.8911 shares ofour common stock and $8.40 in cash, or approximately $10.3 million, in exchangefor each share of Mountain Bancshares common stock. The merger is expected toclose in the second quarter of 2006, pending regulatory and shareholderapprovals.

 

**Market Areas and Competition**

 

We currently conductbusiness through 27 branches in our subsidiary banks’ market areas of Hall,Polk, Paulding, Cobb, Carroll, Baldwin, Bartow, Putnam, Clarke, Oconee,Gwinnett and Lumpkin Counties, Georgia. Additionally, when the merger withMountain Bancshares, Inc. is completed, we will expand our market area into Dawsonand Forsyth counties. These market areas geographically surround metropolitanAtlanta. According to 2005 data from the U.S. Census Bureau, the averageprojected population growth in our markets from 2005 to 2010 is expected to be22.7% versus a U.S. average of 6.3%.

 

As a whole, the bankingindustry in Georgia is highly competitive. Our subsidiary banks compete withlocal 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 greater financial resourcesthan our subsidiary banks, and which may be able to offer more services tocustomers. In recent years, intense market demands, economic pressures, andincreased customer awareness of products and services, and the availability ofelectronic services have forced banks to diversify their services and becomemore cost-effective. Our subsidiary banks face strong competition in attractingand 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 loans comesfrom 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 

 

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overall quality of service. Competition is affectedby the availability of lendable funds, general and local economic conditions,interest rates, and other factors that are not readily predictable.

 

Management expects that competition will continue in the future dueto statewide branching laws and the entry of additional bank and nonbankcompetitors.

 

**Our Strategy**

 

We intend to achieve our primary goal of maximizing shareholdervalue by focusing on the following objectives:

 

•                  Continue expansion, through selectiveacquisitions and opening strategically located branches, into high growthmarkets in Georgia where we believe we have a competitive advantage and anopportunity for growth;

 

•                  Continue our primary focus on commercial andretail customers in our existing market areas with the goal of providingsuperior, personal customer service and maintaining strong asset quality;

 

•                  Maintain local autonomy and accountability atour subsidiary banks;

 

•                  Improve our financial performance throughefficient management of our infrastructure and capital base;

 

•                  Expand our financial products and services tomeet 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 our employeesand customers will forge long-term, mutually beneficial relationships. Bykeeping management local and accessible to customers, we believe our banks canrespond more quickly to our customers’ needs than other, larger banks.

 

*Growth Strategy*. Our strategy is to pursue expansion intoattractive, high growth markets around the metropolitan Atlanta area throughacquisitions of community banks and the establishment of de novo branchoffices. Since February 2000, we have integrated seven bank acquisitionsthrough mergers with their holding companies and/or merging the banks intoGainesville Bank & Trust. We focus our acquisition strategy on high-quality community banks with provenmanagement teams that view combining with us as forging a partnership ratherthan as an exit strategy. Our goal is to maintain the management team of eachacquired bank, allowing it to retain its local entrepreneurial identity,autonomy and decision making, while simultaneously increasing efficiency byconsolidating administrative and back office operations.

 

In addition to our strategyof expansion through combinations with other banks, we intend to continue toexpand internally where possible by growing our existing banks in their respective market areas andnearby attractive markets. We believe that our decentralized community bankingstrategy allows our banks to effectively compete with our larger competitors byproviding superior, personalized customer service, leveraging local decisionmaking capabilities, and staying attuned to community matters.

 

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**Trust Preferred Securities**

 

In 2002, our holding companyformed a wholly owned grantor trust and issued $15.5 million in aggregateprincipal amount of trust preferred securities in a private placement offering.The grantor trust has invested the proceeds of the trust preferred securitiesin subordinated debentures of our holding company. The trust preferredsecurities 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 sole assets of the grantor trust are the subordinated debentures ofGB&T Bancshares. The debentures have the same variable interest rate as thetrust preferred 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 inaggregate principal amount of trust preferred securities through a wholly ownedgrantor trust in a private placement. The grantor trust has invested theproceeds of the trust preferred securities in subordinated debentures of ourholding company. The trust preferred securities can be redeemed, in whole or inpart, from time to time, prior to maturity at our option on or after September 30,2009. The sole assets of the grantor trust are the subordinated debentures ofGB&T Bancshares.

 

 In addition, in connection with theacquisition of Southern Heritage, we assumed $4.1 million in aggregateprincipal amount of trust preferred securities which have substantially thesame terms as our other trust preferred securities except that they have afixed rate of interest and may be redeemed at our option on or after June 26,2008. As of December 31, 2005, we had $29.9 million in aggregate principalamount of trust preferred securities outstanding. See the notes to theconsolidated financial statements for further information on the trustpreferred securities.

 

**Lending Activities**

 

We originate loans primarilysecured by single and multi-family real estate, residential construction, andowner-occupied commercial buildings. In addition, we make loans to small andmedium-sized commercial businesses, as well as to consumers for a variety ofpurposes. We also lend to residential contractors and developers in our marketareas. We attempt to obtain a security interest in real estate wheneverpossible. As of December 31, 2005, approximately 89% of our loan portfoliowas secured by real estate.

 

We also provide commercialand consumer installment loans to our customers that are secured by collateralother than real estate. Such loans are typically of multiple-year duration and, if not variable rate,bear interest at a rate tied to our cost of funds of equivalent maturity.

 

Our loan portfolio at December 31, 2005 was comprised as follows:

 
| **Type**                             | ** ** | **Dollar Amount** | ** ** | **Percentage of  Portfolio** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------------------|------------|
| **(Dollars in thousands)** | ** ** |
|                                 |       |                   |       |                              |       |
| Real Estate-Mortgage                 |       | $                      | 615,594    |                              | 50.0       | % |
| Real Estate-Construction             |       | 481,332                |       | 39.1                              |       |
| Commercial                           |       | 99,640                 |       | 8.1                               |       |
| Consumer                             |       | 33,260                 |       | 2.7                               |       |
| Other                                |       | 1,584                  |       | 0.1                               |       |
| Total                                |       | $                      | 1,231,410  |                              | 100.0      | % |

 

*Real Estate-Mortgage*. We make commercial mortgage loans tofinance the purchase of real property as well as loans to smaller businessventures, credit lines for working capital and short-term seasonal or inventoryfinancing, including letters of credit, that are also secured by real estate.Commercial mortgage lending typically involves higher loan principal amountsand the repayment of loans is dependent, in large part, on sufficient incomefrom the properties collateralizing the loans to cover operating expenses anddebt service. As a general practice, we require our commercial 

 

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mortgage loans to be collateralized by well-managedincome producing property with adequate margins and to be guaranteed byresponsible parties. In addition, a substantial percentage of our commercialmortgage loan portfolio is secured by owner-occupied commercial buildings. Welook for opportunities where cash flow from the collateral provides adequatedebt service coverage and the guarantor’s net worth is centered on assets otherthan the 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 toadverse conditions in the real estate market.

 

In underwriting commercialmortgage loans, we seek to minimize our risks in a variety of ways, includinggiving careful consideration to the property’s operating history, futureoperating projections, current and projected occupancy, location and physicalcondition. Our underwriting analysis also includes credit checks, reviews ofappraisals and environmental hazards or EPA reports and a review of thefinancial condition of the borrower. We attempt to limit our risk by analyzingour borrowers’ cash flow and collateral value on an ongoing basis.

 

Our residential mortgageloans consist of originating residential loans for the purchase of residentialproperty to individuals for other third-party lenders. Residential loans toindividuals held in our loan portfolio primarily consist of home equity loansand lines of credit. These loans are generally made on the basis of theborrower’s ability to repay the loan from his or her employment and otherincome 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*. We also make construction and developmentloans to residential and, to a lesser extent, commercial contractors anddevelopers located within our market areas. Construction loans generally aresecured by first liens on real estate and have floating interest rates.Construction loans involveadditional risks attributable to the fact that loan funds are advanced upon thesecurity of a project under construction, and the value of the project isdependent on its successful completion. As a result of these uncertainties,construction lending often involves the disbursement of substantial funds withrepayment dependent, in part, upon the success of the ultimate project ratherthan the ability of a borrower or guarantor to repay the loan. If we are forcedto foreclose on a project prior to completion, there is no assurance that wewill be able to recover all of the unpaid portion of the loan. In addition, we may berequired to fund additional amounts to complete a project and may have tohold the property for an indeterminate period of time. While we haveunderwriting procedures designed to identify what we believe to be acceptablelevels of risks in construction lending, no assurance can be given that these procedureswill prevent losses from the risks described above.

 

*Commercial Lending*. Our commercial loan portfolio includesloans to smaller business ventures, credit lines for working capital andshort-term seasonal or inventory financing, as well as letters of credit thatare generally secured by collateral other than real estate. Commercialborrowers typically secure their loans with assets of the business, personalguaranties of their principals, and often mortgages on the principals’ personalresidences. Our commercial loans are primarily made within our market areas andare underwritten on the basis of the commercial borrower’s ability to service the debt from income. In general,commercial loans involve more credit risk than residential and commercial mortgageloans. The increased risk in commercial loans is generally due to the type ofassets collateralizing these loans. The increased risk also derives from theexpectation that commercial loans generally will be serviced from theoperations of the business, and those operations may not be successful.

 

*Consumer Loans*. We make a variety of loans to individualsfor personal, family and household purposes, including secured and unsecuredinstallment and term loans. Consumer loans entail greater risk than otherloans, particularly in the case of consumer loans that are unsecured or securedby 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.

 

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*Credit Risks*. The principal economic risk associated witheach category of the loans that we make is the creditworthiness of the borrowerand the ability of the borrowerto repay 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 with realestate loans also include fluctuations in the value of real estate, new jobcreation trends, tenant vacancy rates and, in the case of commercial borrowers,the quality of the borrower’s management. Consumer loan repayments depend uponthe borrower’s financial stability and are more likely to be adversely affectedby divorce, job loss, illness and personal hardships.

 

*Lending Policies*. The boards of directors of our subsidiarybanks establish and periodically review the subsidiary banks’ lending policiesand procedures. Our board of directors adopted a company-wide lending policy in2004. Despite our centralized policy, we may grant our subsidiary banksthe flexibility to adapt our lending policy to conditions in their specificmarket areas. There are regulatory restrictions on the dollar amount of loans available for each lendingrelationship. State banking regulations provide that no secured loanrelationship may exceed 25% of the subsidiary banks’ statutory capital ornet assets, as defined, and no unsecured loan relationship may exceed 15%of statutory capital, except in limited circumstances. National bankingregulations provide that no loan relationship may exceed 15% of thesubsidiary banks’ Tier 1 capital. Our subsidiary banks occasionally sellparticipation interests in loans to other lenders, including our othersubsidiary banks, primarily when a loan exceeds the subsidiary banks’ legallending limits.

 

**Deposits**

 

Our principal source offunds for loans and investing in securities is core deposits. We offer a widerange of deposit services, including checking, savings, money market accounts,and certificates of deposit. We obtain most of our deposits from individualsand businesses in our market areas. We believe that the rates we offer for coredeposits are competitive with those offered by other financial institutions inour market areas. A secondary source of funding is through advances from theFederal Home Loan Bank of Atlanta, subordinated debt and other borrowings whichenable us to borrow funds at rates and terms, which at times, are morebeneficial to us.

 

**Other Banking Services**

 

Given client demand forincreased convenience andaccount access, we offer a range of products and services, including 24-hourinternet banking, trust services, direct deposit, traveler’s checks, safedeposit boxes, United States savings bonds and automatic account transfers. Weearn fees for most of these services. We also receive ATM transaction fees fromtransactions performed by our customers participating in a shared network ofautomated teller machines and a debit card system that our customers can usethroughout Georgia and in other states.

 

**Investment Securities**

 

After establishing necessarycash reserves and funding loans, we invest our remaining liquid assets insecurities allowed under banking laws and regulations. We invest primarily inobligations of the United States or obligations guaranteed as to principal and interestby the United States, other taxable securities and in certain obligations ofstates and municipalities. We also invest excess funds in federal funds withour correspondent banksand primarily act as a net seller of such funds. The sale of federal fundsrepresents a short-term loan from us to another bank. Risks associated withsecurities include, but are not limited to, 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.

 

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Our asset-liability mix ismonitored on a periodic basis with a report reflecting interest-sensitiveassets and interest-sensitive liabilities being prepared and presented 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 31,2005, we had 452 full-time equivalent employees, of which 164 were employed byGainesville Bank & Trust, 34 were employed by United Bank & Trust, 80 were employed by Community Trust Bank,51 were employed by HomeTown Bank of Villa Rica, 48 were employed by FirstNational Bank of the South, 25 were employed by First National Bank of Gwinnettand 50 were employed by the holding company. We are not a party to anycollective bargaining agreement and, in the opinion of management, we enjoysatisfactory relations with our employees.

 

**Supervision and Regulation**

 

We are subject to extensivestate and federal banking laws and regulations that impose specificrequirements or restrictions on and provide for general regulatory oversight ofvirtually all aspects of our operations. These laws and regulations aregenerally intended to protect depositors, not shareholders. The followingsummary is qualified by reference to the statutory and regulatory provisionsdiscussed. Changes in applicable laws or regulations may have a materialeffect on our business and prospects. Beginning with the enactment of theFinancial Institutions Reform Recovery and Enforcement Act in 1989 andfollowing with the FDIC Improvement Act in 1991, numerous additional regulatoryrequirements have been placed on the banking industry in the past several yearsand additional changes have been proposed. Legislative changes and the policiesof various regulatory authorities may significantly affect our operations.We cannot predict the effect that fiscal or monetary policies, or new federalor state legislation may have on our business and earnings in the future.

 

*General*. The Company is a bank holding companyregistered with the Board of Governors of the Federal Reserve System (the “FederalReserve”) and the Georgia Department of Banking and Finance (the “GeorgiaDepartment”) under the Bank Holding Company Act of 1956, as amended (the “BHCAct”) and the Financial Institutions Code of Georgia (the “FICG”),respectively.

 

GBT, UBT, CTB, and HTB arestate banks incorporated under the laws of Georgia and are subject toexamination by the Georgia Department and the Federal Deposit InsuranceCorporation (“FDIC”). FNBS and FNBG are nationally chartered banks incorporatedunder the laws of the United States and are subject to examination by the FDICand the Office of the Comptroller of the Currency (“OCC”). The Banks’ depositsare insured by the FDIC to the maximum extent provided by law. The FDIC, OCCand the Georgia Department regularly examine our operations and are givenauthority to approve or disapprove mergers, consolidations, the establishmentof branches, and similar corporate actions. The agencies also have the power toprevent the continuance or development of unsafe or unsound banking practicesor other violations of law.

 

*Acquisitions.*The BHC Act requires every bank holdingcompany to obtain the prior approval of the Federal Reserve before:  (i) it may acquire direct orindirect ownership 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 allof the assets of any bank; or (iii) it may merge or consolidate withany other bank holding company.

 

The BHC Act further providesthat the Federal Reserve may not approve any transaction that would resultin a monopoly or would be in furtherance of any combination or conspiracy tomonopolize or attempt to monopolize the business of banking in any section ofthe United States, or the effect of which may be substantially to lessencompetition or to tend to create a monopoly in any section of the country,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 also required to consider the financial andmanagerial resources and future prospects of the bank holding companies andbanks involved and the convenience and needs of the communities to be served. Considerationof financial resources generally focuses on capital adequacy, 

 

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and consideration of convenience and needs issuesgenerally focuses on the parties’ performance under the Community ReinvestmentAct 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, theCompany, and any other bank holding company located in Georgia, is able toacquire a bank located in any other state, and a bank holding company locatedoutside of Georgia can acquire any Georgia-based bank, in either case subjectto certain deposit percentage and other restrictions. The legislation providesthat unless an individual state has elected to prohibit out-of-state banks fromoperating interstate branches within its territory, adequately capitalized andmanaged bank holding companies are able to consolidate their multistate bankingoperations into a single bank subsidiary and to branch interstate throughacquisitions. De novo branching by an out-of-state bank is permitted only if itis expressly permitted by the laws of the host state. Georgia does not permitde novo branching by an out-of-state bank. Therefore, the only method by whichan out-of-state bank or bank holding company may enter Georgia is throughan acquisition. Georgia has adopted an interstate banking statute that removesrestrictions on the ability of banks to branch interstate through mergers,consolidations and acquisitions. However, Georgia law prohibits a bank holdingcompany from acquiring control of a financial institution until the targetfinancial institution has been incorporated for three years.

 

*Affiliate Transactions*. Unless an exemption applies, sections 23Aand 23B of the Federal Reserve Act (i) limit the extent to which afinancial institution or its subsidiaries may engage in “coveredtransactions” with an affiliate, to an amount equal to 10% of such institution’scapital and surplus and an aggregate limit on all such transactions with allaffiliates to an amount equal to 20% of such capital and surplus and (ii) requirethat all transactions with an affiliate be on terms substantially the same, orat least as favorable to the institution or subsidiary, as those provided to anon-affiliate. The term “covered transaction” includes the making of loans,purchase of assets, issuance of a guarantee and other similar types oftransactions.

 

*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 incident thereto. Provisionsof the Gramm-Leach-Bliley Act (the “GLB Act”), discussed below, have expandedthe permissible activities of a bank holding company that qualifies as afinancial holding company. In determining whether a particular activity ispermissible, the Federal Reserve must consider whether the performance of suchan activity can be reasonably expected to produce benefits to the public, suchas a greater convenience, increased competition, or gains in efficiency, thatoutweigh possible adverse effects such as undue concentration of resources,decreased or unfair competition, conflicts of interest, or unsound bankingpractices.

 

*Gramm-Leach-Bliley Act.*The GLB Act implemented major changes to thestatutory framework for providing banking and other financial services in theUnited States. The GLB Act, among other things, eliminated many of therestrictions on affiliations among banks and securities firms, insurance firms,and other financial service providers. A bank holding company that qualifies asa financial holding company will be permitted to engage in activities that arefinancial in nature or incidental or complimentary to a financial activity. TheGLB Act specifies certain activities that are deemed to be financial in nature,including underwriting and selling insurance, providing financial and investmentadvisory services, underwriting, dealing in, or making a market in securities,limited merchant banking activities, and any activity currently permitted forbank holding companies under Section 4(c)(8) of the BHC Act.

 

To become eligible for theseexpanded activities, a bank holding company must qualify as a financial holdingcompany. 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 bank holding company must file declarationwith the Federal Reserve of its intention to become a financial holdingcompany. The Company has not filed an application to become a financial holdingcompany.

 

The GLB Act designates theFederal Reserve as the overall umbrella supervisor of the new financialservices holding companies. The GLB Act adopts a system of functionalregulation where the primary regulator is determined by the nature of activityrather than the type of institution. Under this principle, securitiesactivities are regulated by the 

 

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Securities and Exchange Commission (the “SEC”) andother securities regulators, insurance activities by the state insuranceauthorities, and banking activities by the appropriate banking regulator. As aresult, to the extent that we engage in non-banking activities permitted underthe GLB Act, we will be subject to the regulatory authority of the SEC or stateinsurance authority, as applicable.

 

*Payment of Dividends*. The Company is a legal entity separate anddistinct from its subsidiaries. Its principal source of cash flow is dividendsfrom its subsidiary banks. There are statutory and regulatory limitations onthe payment of dividends by the subsidiary banks to the Company, as well as bythe Company to its shareholders.

 

If, in the opinion of thefederal banking agencies, a depository institution under its jurisdiction isengaged in or is about to engage in an unsafe or unsound practice (which,depending on the financial condition of the depository institution, couldinclude the payment of dividends), such authority may require, afternotice and hearing, that such institution cease and desist from such practice. Thefederal banking agencies have indicated that paying dividends that deplete adepository institution’s capital base to an inadequate level would be an unsafeand unsound banking practice. Under the Federal Deposit Insurance CorporationImprovement Act of 1991 (“FDICIA”), a depository institution may not payany dividend if payment would cause it to become undercapitalized or if italready is undercapitalized. Moreover, the federal agencies have issued policystatements that provide that bank holding companies and insured banks shouldgenerally pay dividends only out of current operating earnings.

 

*Capital Adequacy*. We are required to comply with the capitaladequacy standards established by the federal banking agencies. There are twobasic measures of capital adequacy for bank holding companies that have beenpromulgated by the Federal Reserve: a risk-based measure and a leverage measure.All applicable capital standards must be satisfied for a bank holding companyto be considered in compliance.

 

The risk-based capitalstandards are designed to make regulatory capital requirements more sensitiveto differences in risk profiles among banks and bank holding companies, toaccount for off-balance-sheet exposure, and to minimize disincentives forholding liquid assets. Assets and off-balance-sheet items are assigned to broadrisk categories, each with appropriate weights. The resulting capital ratiosrepresent capital as a percentage of total risk-weighted assets andoff-balance-sheet items.

 

The minimum guideline forthe ratio of Total Capital to risk-weighted assets (including certainoff-balance-sheet items, such as standby letters of credit) is 8.0%. TotalCapital consists of Tier 1 Capital, which is comprised of common stock, undividedprofits, minority interests in the equity accounts of consolidated subsidiariesand noncumulative perpetual preferred stock, less goodwill and certain otherintangible assets, and Tier 2 Capital, which consists of subordinated debt,other preferred stock, and a limited amount of loan loss reserves.

 

In addition, the FederalReserve has established minimum leverage ratio guidelines for bank holdingcompanies. These guidelines provide for a minimum ratio (the “Leverage Ratio”)of Tier 1 Capital to average assets, less goodwill and certain other intangibleassets, of 3.0% for bank holding companies that meet certain specifiedcriteria, including those having the highest regulatory rating. All other bankholding companies generally are required to maintain a Leverage Ratio of atleast 3.0%, plus an additional cushion of 1.0% to 2.0%. The guidelines alsoprovide that bank holding companies experiencing internal growth or makingacquisitions will be expected to maintain strong capital positionssubstantially above the minimum supervisory levels without significant relianceon intangible assets. Furthermore, the Federal Reserve has indicated that itwill consider a “tangible Tier 1 Capital Leverage Ratio” (deducting allintangibles) and other indicators of capital strength in evaluating proposalsfor expansion or new activities.

 

The Banks are subject torisk-based and leverage capital requirements adopted by its federal bankingregulators, which are substantially similar to those adopted by the FederalReserve for bank holding companies.

 

Failure to meet capitalguidelines could subject a bank or bank holding company to a variety ofenforcement 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 describedbelow, substantial additional restrictions can be imposed upon FDIC-insureddepository institutions that fail to meet applicable capital requirements.

 

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The federal bank agenciescontinue to indicate their desire to raise capital requirements applicable tobanking organizations beyond their current levels. In this regard, the FederalReserve and the FDIC have, pursuant to FDICIA, adopted final regulationsrequiring regulators to consider interest rate risk (when the interest ratesensitivity of an institution’s assets does not match the sensitivity of itsliabilities or its off-balance-sheet position) in the evaluation of a bank’scapital adequacy. The bank regulatory agencies have concurrently proposed amethodology for evaluating interest rate risk that would require banks withexcessive interest rate risk exposure to hold additional amounts of capitalagainst such exposures.

 

*Support of SubsidiaryInstitutions*. UnderFederal Reserve policy, we are expected to act as a source of financialstrength for, and to commit resources to support, the Banks. This support may berequired at times when, absent such Federal Reserve policy, we may not beinclined to provide such support. In addition, any capital loans by a bankholding company to any of its banking subsidiaries are subordinate in right ofpayment to deposits and to certain other indebtedness of such subsidiary banks.In the event of a bank holding company’s bankruptcy, any commitment by a bankholding company to a federal bank regulatory agency to maintain the capital ofa banking subsidiary will be assumed by the bankruptcy trustee and entitled toa priority of payment*.*

 

*Prompt Corrective Action.*FDICIA established a system of promptcorrective action to resolve the problems of undercapitalized institutions. Underthis system, the federal banking regulators have established five capitalcategories (well capitalized, adequately capitalized, undercapitalized,significantly undercapitalized and critically undercapitalized), and arerequired to take certain mandatory supervisory actions, and are authorized totake other discretionary actions, with respect to institutions in the threeundercapitalized categories. The severity of the action will depend upon thecapital category in which the institution is placed. Generally, subject to anarrow exception, the banking regulator must appoint a receiver or conservatorfor an institution that is critically undercapitalized. The federal bankingagencies have specified by regulation the relevant capital level for eachcategory.

 

An institution that iscategorized as undercapitalized, significantly undercapitalized, or critically undercapitalizedis required to submit an acceptable capital restoration plan to its appropriatefederal banking agency. A bank holding company must guarantee that a subsidiarydepository institution meets its capital restoration plan, subject to certain limitations.The controlling holding company’s obligation to fund a capital restoration planis limited to the lesser of 5.0% of an undercapitalized subsidiary’s assets orthe amount required to meet regulatory capital requirements. Anundercapitalized institution is also generally prohibited from increasing itsaverage total assets, making acquisitions, establishing any branches orengaging in any new line of business, except under an accepted capitalrestoration plan or with FDIC approval. In addition, the appropriate federalbanking agency may test an undercapitalized institution in the same manneras it treats a significantly undercapitalized institution if it determines thatthose actions are necessary.

 

*FDIC Insurance Assessments.*The FDIC has adopted a risk-based assessmentsystem for insured depository institutions that takes into account the risksattributable to different categories and concentrations of assets andliabilities. The system assigns an institution to one of three capitalcategories: (i) well capitalized; (ii) adequately capitalized; and (iii) undercapitalized.These three categories are substantially similar to the prompt correctiveaction categories described above, with the “undercapitalized” categoryincluding institutions that are undercapitalized, significantlyundercapitalized, and critically undercapitalized for prompt corrective actionpurposes. The FDIC also assigns an institution to one of three supervisorysubgroups within each capital group. The supervisory subgroup to which aninstitution is assigned is based on a supervisory evaluation that theinstitution’s primary federal regulator provides to the FDIC and informationthat the FDIC determines to be relevant to the institution’s financialcondition and the risk posed to the deposit insurance funds. The FDIC thendetermines an institution’s insurance assessment rate based on the institution’scapital category and supervisory category. Under the risk-based assessmentsystem, there are nine combinations of capital groups and supervisory subgroupsto which different assessment rates are applied. Assessments range from 0 to 27cents per $100 of deposits, depending on the institution’s capital group andsupervisory subgroup. The FDIC may terminate its insurance of deposits ifit finds that the institution has engaged in unsafe and unsound practices, isin an unsafe or unsound condition to continue operations or has violated anyapplicable law, regulation, rule, order or condition imposed by the FDIC.

 

*Safety and Soundness Standards.*The FDIA, as amended by FDICIA and the RiegleCommunity Development and Regulatory Improvement Act of 1994, requires thefederal 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 and 

 

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compensation, fees and benefits, and such otheroperational and managerial standards as the agencies deem appropriate. Thefederal bank regulatory agencies have adopted a set of guidelines prescribingsafety and soundness standards pursuant to FDICIA, as amended. The guidelinesestablish general standards relating to internal controls and informationsystems, internal audit systems, loan documentation, credit underwriting,interest rate exposure, asset growth and compensation and fees and benefits. Ingeneral, the guidelines require, among other things, appropriate systems andpractices to identify and manage the risks and exposures specified in theguidelines. The guidelines prohibit excessive compensation as an unsafe andunsound practice and describe compensation as excessive when the amounts paidare unreasonable or disproportionate to the services performed by an executiveofficer, employee, director, or principal shareholder. In addition, theagencies adopted regulations that authorize, but do not require, an agency toorder an institution that has been given notice by an agency that it is notsatisfying any of such safety and soundness standards to submit a complianceplan. If, after being so notified, an institution fails to submit an acceptablecompliance plan or fails in any material respect to implement an acceptablecompliance plan, the agency must issue an order directing action to correct thedeficiency and may issue an order directing other actions of the types towhich an undercapitalized institution is subject under the “prompt correctiveaction” provisions of FDICIA. If an institution fails to comply with such anorder, the agency may seek to enforce such order in judicial proceedingsand to impose civil money penalties. The federal regulatory agencies alsoproposed guidelines for asset quality and earnings standards.

 

*Community Reinvestment Act.*Under the Community Reinvestment Act (“CRA”),the Banks, as FDIC insured institutions, have a continuing and affirmativeobligation to help meet the credit needs of the entire community, includinglow- and moderate-income neighborhoods, consistent with safe and sound bankingpractices. The CRA requires the appropriate federal regulator, in connectionwith its examination of an insured institution, to assess the institution’srecord of meeting the credit needs of its community and to take such recordinto account in its evaluation of certain applications, such as applicationsfor a merger or the establishment of a branch. An unsatisfactory rating may beused as the basis for the denial of an application by the federal bankingregulator. The Banks have received satisfactory ratings in their CRAexaminations.

 

*Privacy.*The GLB Act also modified laws related tofinancial privacy. The new financial privacy provisions generally prohibit afinancial institution from disclosing nonpublic personal financial informationabout consumers to third parties unless consumers have the opportunity to “optout” of the disclosure. A financial institution is also required to provide itsprivacy policy annually to its customers. Compliance with the implementingregulations was mandatory effective July 1, 2001. The Banks implementedthe required financial privacy provisions by July 1, 2001.

 

*Monetary Policy.*The earnings of the Banks are affected bydomestic and foreign conditions, particularly by the monetary and fiscalpolicies of the United States government and its agencies. The Federal Reservehas had, and will continue to have, an important impact on the operatingresults of commercial banks through its power to implement monetary policy inorder, among other things, to mitigate recessionary and inflationary pressuresby regulating the national money supply. The techniques used by the FederalReserve include setting the reserve requirements of member banks and establishingthe discount rate on member bank borrowings. The Federal Reserve also conductsopen market transactions in United States government securities.

 

*USA Patriot Act of 2001*. In October 2001, the USA Patriot Actof 2001 (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 financial institutions in particular through itsanti-money laundering and financial transparency laws. The Patriot Actestablishes regulations which, among others, set standards for identifyingcustomers who open an account and promoting cooperation with law enforcementagencies and regulators in order to effectively identify parties that may beassociated with, or involved in, terrorist activities or money laundering*.*

 

On March 2, 2006, Congress passed the USA PatriotAct Improvement and Reauthorization Act of 2005. This act reauthorized allprovisions of the Patriot Act that would otherwise have expired, made 14 of the16 sunsetting provisions permanent, and extended the sunset period of theremaining two for an additional four years.

 

*Georgia Fair Lending Act*.                                                The Georgia Fair Lending Act (“GFLA”) imposesnew restrictions and procedural requirements on most mortgage loans made inGeorgia, including home equity loans and lines of credit. GFLA became effectiveon October 1, 2002 and was amended on March 7, 2003. While selectedprovisions of GFLA 

 

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apply regardless of the interest rate or charges onthe loan, the majority of the requirements apply only to “high cost home loans,”as defined by GFLA. We have implemented procedures to comply with all GFLArequirements.

 

On July 31, 2003, theOCC issued a Preemption Determination and Order declaring most of the GFLApreempted by federal law and, therefore, inapplicable to nationally charteredbanks. The Georgia Department issued a complying Declaratory Ruling on August 5,2003. The order purported to preempt all of the GFLA, and even though there may beseveral parts of the GFLA that remain effective as to national banks, thosenon-preempted parts are likely inapplicable or moot due to the articulatedpreemption of most other operative parts of the GFLA. The preemption-parityprovisions of the GFLA level the playing field for state-chartered banks inthat aspects of GFLA preempted by federal law become inapplicable tostate-chartered as well as nationally-chartered banks.

 

**Available Information**

 

The Company filesannual, quarterly and current reports, proxy statements and other informationwith the Securities and Exchange Commission. These filings are available to thepublic at the SEC’s website at http://www.sec.gov. The Companyalso has a website at http://www.gbtbancshares.com. On thewebsite, the Company provides hyperlinks to copies of the annual, quarterly andcurrent reports that the Company files with the SEC, any amendments to thosereports 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 Reporton Form 10-K should take such risks into account in evaluating anyinvestment decision involving our common stock. 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 information concerning these and other risks iscontained in other sections of this Annual Report on Form 10-K, including “Business”and “Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”*

 

**Significant risks accompany our recent rapid expansion**.

 

We have recently experiencedsignificant growth through acquisitions, including the acquisitions of LumpkinCounty Bank and Southern Heritage Bank in August 2004 and the acquisitionof First National Bank of Gwinnett in March 2005. Additionally, effective December 19,2005, we signed a definitive agreement to acquire Mountain Bancshares, Inc.and its subsidiary bank, Mountain State Bank which is expected to close in thesecond quarter of 2006. These acquisitions could place a strain on ourresources, 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.

 

**We face risks with respect to future expansion and acquisitions ormergers**.

 

We continuously seek toacquire other financialinstitutions or parts of those institutions and may continue to engage inde novo branch expansion in the future. Acquisitions and mergers involve anumber of risks, including:

 

•                  the time and costs associated withidentifying and evaluating potential acquisitions and merger partners may negativelyaffect our business;

 

•                  the estimates and judgments used to evaluatecredit, operations, management and market risks with respect to the targetinstitution may not be accurate;

 

•                  the time and costs of evaluating new markets,hiring experienced local management and opening new offices and the time lagsbetween these activities and the generation of sufficient assets and depositsto support the costs of the expansion may negatively affect our business;

 

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•                  we may not be able to finance anacquisition without diluting our existing shareholders;

 

•                  the diversion of our management’s attentionto the negotiation of a transaction may detract from their businessproductivity;

 

•                  we may enter into new markets where welack experience;

 

•                  we may introduce new products andservices into our business with which we have no prior experience; and

 

•                  we may incur an impairment of goodwillassociated with an acquisition and experience adverse short-term effects on ourresults of operations.

 

In addition, no assurancecan be given that we will be able to integrate our operations after anacquisition without encountering difficulties including, without limitation, the loss of key employees andcustomers, the disruption of our respective ongoing businesses or possibleinconsistencies in standards, controls, procedures and policies. Successfulintegration of our operations with another entity’s will depend primarily onour ability to consolidate operations, systems and procedures and to eliminateredundancies and costs. If we have difficulties with the integration, we mightnot achieve the economic benefits we expect to result from any particularacquisition or merger. In addition, we may experience greater thanexpected costs or difficulties relating to such integration.

 

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

 

Our loan customers may not repay their loans according to the termsof the loans, and the collateral securing the payment of these loans may beinsufficient to assure repayment. We may experience significant loanlosses which could have a material adverse effect on our operating results.Management makes various assumptions and judgments about the collectibility ofour loan portfolio, including the creditworthiness of our borrowers and thevalue of the real estate and other assets serving as collateral for therepayment of many of our loans. We maintain an allowance for loan losses in anattempt to cover any loan losses which may occur. In determining the sizeof the allowance, we rely on an analysis of our loan portfolio based onhistorical loss experience, volume and types of loans, trends inclassification, volume, delinquencies and non-accruals, national and localeconomic conditions and other pertinent information.

 

As we expand into newmarkets, our determination of the size of the allowance could be understateddue to our lack of familiarity with market-specific factors. If our assumptions are wrong, our current allowance may notbe 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 andstate regulators periodically review our allowance for loan losses and may requireus to increase our provision for loan losses or recognize further loan charge-offs, based on judgmentsdifferent than those of our management. Any increase in our allowance for loanlosses or loan charge-offs as required by these regulatory agencies could havea negative effect on our operating results.

 

**Our business is subject to the success of the local economies where weoperate**.

 

Our success significantlydepends upon the growth in population, income levels, deposits and housingstarts in our market areas. If the communities in which we operate do not growor if prevailing economic conditions locally or nationally are unfavorable, ourbusiness may be negatively impacted. In addition, the economies of thecommunities in which we operate are substantially dependent on the growth of the economy in metropolitan Atlanta. To theextent that economic conditions in metropolitan Atlanta are unfavorable or donot continue to grow as projected, the economies in our market areas would beadversely affected. Moreover, we cannot give any assurance that we will benefitfrom any market growth or favorable economic conditions in our market areas ifthey do occur.

 

In addition, the marketvalue of the real estate securing loans as collateral could be adverselyaffected by unfavorable changes in market and economic conditions. As of December 31,2005, approximately 89% of our total loans were secured by real estate. Anysustained period ofincreased payment delinquencies, foreclosures or losses caused by adverse 

 

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market or economic conditions in our market areascould adversely affect the value of our assets, our revenues, results ofoperations and financial condition.

 

**Risks associated with unpredictable economic and political conditions may beamplified as a result of our limited market areas**.

 

Conditions such as inflation,recession, unemployment, high interest rates, short money supply, scarcenatural resources, international disorders, terrorism and other factors beyondour control may adversely affect our profitability. Because the majorityof our borrowers are individuals and businesses located and doing business inHall, Polk, Paulding, Cobb, Carroll, Bartow, Baldwin, Putnam, Clarke, Oconee,Gwinnett and Lumpkin Counties, Georgia, our success will depend significantlyupon the economic conditions in those and the surrounding counties. Unfavorableeconomic conditions in those and the surrounding counties may result in,among other things, a deterioration in credit quality or a reduced demand forcredit and may harm the financial stability of our customers. Due to ourlimited market areas, these negative conditions may have a more noticeableeffect on us than would be experienced by a larger institution more able tospread these risks of unfavorable local economic conditions across a largenumber of diversified economies.

 

**Our recent operating results may not be indicative of our futureoperating results**.

 

We may not be able tosustain our historical rate of growth or may not even be able to grow ourbusiness at all. In addition, our recent and rapid growth, including our growththrough acquisitions, may distort some of our historical financial ratiosand statistics. For example, our earnings achieved a compounded annual growthrate of more than 35% between the end of 2001 and the end of 2005. Our strongperformance during this time period was, in part, the result of an extremelyfavorable residential mortgage refinancing market and our successfulintegration of acquisitions which occurred during that period. In the future,we may not have the benefit of a favorable interest rate environment, astrong residential mortgage market, or the ability to find suitable candidatesfor acquisition. Various factors, such as economic conditions, regulatory andlegislative considerations and competition, may also impede or prohibit ourability to expand our market presence. If we experience a significant decreasein our historical rate of growth, our results of operations and financialcondition may be adversely affected due to a high percentage of ouroperating costs being fixed expenses.

 

**Departures of our key personnel may harm our ability to operatesuccessfully**.

 

Our success has been andcontinues to be largely dependent upon the services of Richard A. Hunt, ourPresident and Chief Executive Officer, other members of our senior managementteam, including our senior loan officers, and our board of directors, many ofwhom have significant relationships with our customers. Our continued successwill depend, to a significant extent, on the continued service of these keypersonnel. The prolonged unavailability or the unexpected loss of any of themcould have an adverse effect on our financial condition and results ofoperations. We cannot be assured of the continued service of our seniormanagement team or our board of directors with us.

 

**Our continued pace of growth may require us to raise additionalcapital in the future, but that capital may not be available when it isneeded**.

 

We are required by federaland state regulatory authorities to maintain adequate levels of capital tosupport our operations. We anticipate that our capital resources will continueto satisfy our capital requirements for the foreseeable future. We may atsome point, however, need to raise additional capital to support our continuedgrowth.

 

Our ability to raise additionalcapital, if needed, will depend on conditions in the capital markets at thattime, which are outside our control, and on our financial performance.Accordingly, we cannot assure you of our ability to raise additional capital ifneeded on favorable terms. If we cannot raise additional capital when needed,our ability to expand our operations through internal growth and acquisitionscould be materially impaired.

 

**Competition from financial institutions and other financial serviceproviders may adversely affect our profitability**.

 

The banking business ishighly competitive, and we experience competition in each of our market areasfrom many other financial institutions. We compete with commercial banks,credit unions, savings and loan associations, mortgage 

 

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banking firms, consumer finance companies,securities brokerage firms, insurance companies, money market funds, and othermutual funds, as well as other super-regional, national and internationalfinancial institutions such as Bank of America, BB&T, Regions Bank,SunTrust, Synovus and Wachovia that operate offices in our market areas andelsewhere.

 

We compete with theseinstitutions both in attracting deposits and in making loans. In addition, wehave to attract our customer base from other existing financial institutionsand from new residents. Many of our competitors are well-established, largerfinancial institutions. While we believe we can and do successfully competewith these other financial institutions in our market areas, we may face acompetitive disadvantage as a result of our smaller size, lack of geographicdiversification and inability to spread our marketing costs across a broadermarket. Although we attempt to compete by concentrating our marketing effortsin our market areas with local advertisements, personal contacts, and greaterflexibility and responsiveness in working with local customers, we can give noassurance that this strategy will be successful.

 

**We are subject to extensive regulation that could limit or restrict ouractivities and adversely affect our earnings**.

 

We operate in a highlyregulated industry and are subject to examination, supervision, andcomprehensive regulation by various federal and state agencies. Our compliancewith these regulations is costly and restricts certain of our activities,including payment of dividends, mergers and acquisitions, investments, loansand interest rates charged, interest rates paid on deposits and locations ofoffices. We are also subject to capitalization guidelines established by ourregulators, which require us to maintain adequate capital to support ourgrowth. Many of these regulations are intended to protect depositors, thepublic and the FDIC rather than shareholders.

 

The laws and regulationsapplicable to the banking industry could change at any time, and we cannotpredict the effects of these changes on our business and profitability. Becausegovernment regulation greatly affects the business and financial results of allcommercial banks and bankholding companies, our cost of compliance could adversely affect our earnings.In addition, the Sarbanes-Oxley Act of 2002, and the related rules andregulations promulgated by the Securities and Exchange Commission and Nasdaq thatare now applicable to us, have increased the scope, complexity and cost ofcorporate governance, reporting and disclosure practices, including the costsof completing our audit and maintaining our internal controls.

 

**Our ability to pay dividends is limited and we may be unable topay future dividends**.

 

Our ability to pay dividendsis limited by regulatory restrictions and the need to maintain sufficientconsolidated capital. The ability of our bank subsidiaries to pay dividends tous is limited by their obligations to maintain sufficient capital and by othergeneral restrictions on their dividends that are applicable to our regulated bank subsidiaries. If theseregulatory requirements are not met, our subsidiary banks will not be able topay dividends to us, and we may be unable to pay dividends on our commonstock.

 

**ITEM 1B.****                                           ****UNRESOLVED STAFF COMMENTS**

 

**Not applicable.**

 

**ITEM 2.****    ****PROPERTIES**

 

The Company’s corporateheadquarters 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 by Gainesville Bank & Trust and arelated party. The Company has recently completed the construction of anoperations center located at 1480 Jesse Jewell Parkway, Gainesville, Georgia. DataProcessing, Deposit Operations, Human Resources, Accounting and Audit arelocated in this facility. The Company’s six subsidiary banks conduct businessfrom facilities the majority of which are owned by the respective banks, all ofwhich are in good state of repair and appropriately designed for use as bankingfacilities. The subsidiaries provide services from 27 locations, of which 17locations are owned and 10 are leased. In the opinion of management, allproperties including improvements and furnishings are adequately insured.

 

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

 

We are not a party to, norare any 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 AND RELATED STOCKHOLDER MATTERS**

 

(a)                                  Our common stock is quoted on the NasdaqNational Market under the symbol “GBTB.” The following table sets forth the high and low closing prices for ourcommon stock as reported by the Nasdaq National Market and the cash dividendsdeclared per share of our common stock for the indicated periods. The stockprices and dividend information presented below have been adjusted to giveeffect to the five-for-four stock split effected in the form of a stockdividend on June 18, 2004.

 
| ** **          | ** ** | **Closing Price** | ** ** | **Dividends   Declared Per ** | ** ** |
|---------------------|------------|------------------------|------------|----------------------------------------------|------------|
| **Calendar Period** | ** ** | **High**               | ** ** | **Low**                                      | ** ** | **Share** | ** ** |
|                |       |                   |       |                                         |       |   |   |
| **2004**            |       |                   |       |                                         |       |   |   |
| First Quarter       |       | $                      | 22.52      |                                         | $          | 17.28 |   | $ | 0.072 |   |
| Second Quarter      |       | 25.00                  |       | 20.73                                        |       | 0.076 |   |
| Third Quarter       |       | 23.73                  |       | 19.25                                        |       | 0.076 |   |
| Fourth Quarter      |       | 25.96                  |       | 21.77                                        |       | 0.076 |   |
|                |       |                   |       |                                         |       |   |   |
| **2005**            |       |                   |       |                                         |       |   |   |
| First Quarter       |       | $                      | 24.39      |                                         | $          | 21.66 |   | $ | 0.076 |   |
| Second Quarter      |       | 24.45                  |       | 19.05                                        |       | 0.085 |   |
| Third Quarter       |       | 24.12                  |       | 20.61                                        |       | 0.085 |   |
| Fourth Quarter      |       | 23.57                  |       | 19.93                                        |       | 0.085 |   |

 

(b)                                 As of March 1, 2006, there wereapproximately 3,489 holders ofrecord of our common stock.

 

(c)                                  Dividends are paid at the discretion of ourboard of directors. We have historically paid dividends on a quarterly basis asset forth in the table above. We intend to continue paying cash dividends, butthe amount and frequency of cash dividends, if any, will be determined by ourboard of directors after consideration of earnings, capital requirements andour financial condition and will depend on cash dividends paid to us by our subsidiarybanks. Dividends from our subsidiary banks are our primary source of funds forthe payment of dividends to our shareholders, and there are various legal andregulatory limits on the extent to which our subsidiary banks may paydividends or otherwise supply funds to us – See “Supervision and Regulation” section discussedearlier in this Report. In addition, federal and state agencies have theauthority to prevent us from paying a dividend to our shareholders. Thus, whilewe intend to continue paying dividends, we can make no assurances that we willcontinue to pay dividends or that we will not reduce the amount of dividendspaid in the future.

 

(d)                                 During the fourth quarter, the Company didnot repurchase any of its equity securities. On January 30, 2006, theCompany’s Board of Directors approved the repurchase of up to approximately 2%of the Company’s outstanding common stock, no par value per share. SunTrustRobinson Humphrey will purchase from time to time, on behalf of the Company, ona best-efforts basis, up to 260,000 shares of the Common Stock in open-markettransactions. The purchases will be accomplished in accordance with the volumeand timing guidelines of Rule 10b-18 of the Exchange Act applicable to theCompany and Rule 10b5-1 of the Exchange Act. Therefore, due to the pendingproposed merger between the Company and Mountain Bancshares, Inc.,repurchases of common stock will not commence until the shareholders ofMountain Bancshares approve the proposed merger at a special shareholders’ meetingexpected to occur in the second quarter of 2006.

 

17

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**ITEM 6.    SELECTED FINANCIAL DATA**

 

The following table presentsselected historical consolidated financial information for us and oursubsidiaries and is derived from the consolidated financial statements andrelated notes included in this annual report. This information is only asummary and should be read in conjunction with our historical financialstatements and related notes. The year ended December 31, 2005 includesthe acquisition of FNBG Bancshares, Inc. which was completed on March 1,2005 and accounted for as a purchase. See “Management’s Discussion and Analysisof Financial Condition and Results of Operations” for further discussion on thisand our prior acquisitions.

 
| ** **                                              | ** ** | **As of and For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                              | ** ** | **(Dollars in thousands, except per share amounts)**    | ** ** |
|                                                    |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| **Summary Balance Sheet Data:**                         |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Total loans                                             |       | $                                                                                     | 1,231,410  |   | $ | 955,880 |   | $ | 709,958 |   | $ | 542,834 |   | $ | 418,656 |   |
| Allowance for loan losses                               |       | 12,773                                                                                |       | 11,061 |   | 8,726 |   | 7,538 |   | 5,522 |   |
| Net loans (1)                                           |       | 1,218,637                                                                             |       | 944,819 |   | 701,232 |   | 535,296 |   | 413,134 |   |
| Earning assets (2)                                      |       | 1,427,484                                                                             |       | 1,144,540 |   | 850,505 |   | 678,315 |   | 507,156 |   |
| Total assets                                            |       | 1,584,094                                                                             |       | 1,274,136 |   | 944,278 |   | 742,232 |   | 547,845 |   |
| Total deposits                                          |       | 1,197,026                                                                             |       | 928,603 |   | 728,629 |   | 580,248 |   | 426,758 |   |
| Subordinated debt                                       |       | 29,898                                                                                |       | 29,898 |   | 15,464 |   | 15,000 |   | — |   |
| Stockholders’ equity (3)                           |       | 198,711                                                                               |       | 174,715 |   | 96,843 |   | 60,353 |   | 44,369 |   |
|                                                    |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| **Summary Income Statement:**                           |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Interest income                                         |       | 90,815                                                                                |       | 58,274 |   | 46,792 |   | 38,956 |   | 42,349 |   |
| Interest expense                                        |       | 33,836                                                                                |       | 17,952 |   | 15,288 |   | 14,897 |   | 20,893 |   |
| Net interest income                                     |       | 56,979                                                                                |       | 40,322 |   | 31,504 |   | 24,059 |   | 21,456 |   |
| Provision for loan losses                               |       | 5,916                                                                                 |       | 1,406 |   | 1,406 |   | 845 |   | 1,306 |   |
| Net interest income after provision                     |       | 51,063                                                                                |       | 38,916 |   | 30,098 |   | 23,214 |   | 20,150 |   |
| Other income                                            |       | 11,631                                                                                |       | 11,778 |   | 9,928 |   | 8,062 |   | 6,329 |   |
| Other expense                                           |       | 44,825                                                                                |       | 36,180 |   | 29,693 |   | 21,748 |   | 21,158 |   |
| Income before income taxes                              |       | 17,869                                                                                |       | 14,514 |   | 10,333 |   | 9,528 |   | 5,321 |   |
| Provision for income taxes                              |       | 5,878                                                                                 |       | 4,676 |   | 2,608 |   | 3,019 |   | 1,745 |   |
| Net income                                              |       | 11,991                                                                                |       | 9,838 |   | 7,725 |   | 6,509 |   | 3,576 |   |
|                                                    |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| **Net Income Per Share:**                               |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Basic                                                   |       | 0.96                                                                                  |       | 1.05 |   | 1.06 |   | 1.08 |   | 0.61 |   |
| Diluted                                                 |       | 0.93                                                                                  |       | 1.04 |   | 1.03 |   | 1.06 |   | 0.59 |   |
| Cash dividends declared                                 |       | 0.33                                                                                  |       | 0.30 |   | 0.29 |   | 0.27 |   | 0.23 |   |
| Book value                                              |       | 15.54                                                                                 |       | 14.84 |   | 11.40 |   | 9.01 |   | 7.49 |   |
| Tangible book value                                     |       | 10.32                                                                                 |       | 10.19 |   | 7.51 |   | 7.59 |   | 7.39 |   |
| ** **                                              | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Average Balances:**                                   | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total loans                                             |       | 1,131,883                                                                             |       | 807,340 |   | 608,131 |   | 446,518 |   | 397,496 |   |
| Earning assets                                          |       | 1,343,345                                                                             |       | 973,246 |   | 740,818 |   | 544,672 |   | 494,198 |   |
| Intangible assets                                       |       | 70,947                                                                                |       | 42,030 |   | 17,331 |   | 632 |   | 598 |   |
| Total assets                                            |       | 1,496,792                                                                             |       | 1,082,701 |   | 813,134 |   | 587,330 |   | 531,086 |   |
| Total deposits                                          |       | 1,123,577                                                                             |       | 834,100 |   | 637,688 |   | 456,769 |   | 419,329 |   |
| Stockholders’ equity                               |       | 198,004                                                                               |       | 118,271 |   | 73,144 |   | 47,443 |   | 41,930 |   |
| ** **                                              | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other Data:**                                         | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number of:                                              | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common shares outstanding                               |       | 12,784                                                                                |       | 11,772 |   | 8,493 |   | 6,696 |   | 5,924 |   |
| Basic average shares outstanding                        |       | 12,562                                                                                |       | 9,340 |   | 7,313 |   | 6,016 |   | 5,845 |   |
| Diluted average shares outstanding                      |       | 12,880                                                                                |       | 9,472 |   | 7,469 |   | 6,125 |   | 6,020 |   |
|                                                    |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| **Performance Ratios:**                                 | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Return on average assets                                |       | 0.80                                                                                  |       | 0.91 |   | 0.95 |   | 1.11 |   | 0.67 |   |
| Return on average equity                                |       | 6.06                                                                                  |       | 8.32 |   | 10.56 |   | 13.72 |   | 8.53 |   |
| Return on average tangible assets                       |       | 0.84                                                                                  |       | 0.95 |   | 0.97 |   | 1.11 |   | 0.67 |   |
| Return on average tangible equity                       |       | 9.44                                                                                  |       | 12.90 |   | 13.84 |   | 13.90 |   | 8.65 |   |
| Average loans to average deposits                       |       | 100.74                                                                                |       | 96.79 |   | 95.36 |   | 97.76 |   | 94.79 |   |
|                                                    |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| **Asset Quality Ratios:**                               |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Nonperforming loans to net loans (1)(4)                 |       | 0.54                                                                                  |       | 1.10 |   | 0.55 |   | 1.37 |   | 0.16 |   |
| Nonperforming assets to total assets (5)                |       | 0.63                                                                                  |       | 0.86 |   | 0.60 |   | 1.11 |   | 0.40 |   |
| Net charge-offs to average total loans                  |       | 0.47                                                                                  |       | 0.14 |   | 0.18 |   | 0.15 |   | 0.22 |   |
| Allowance for loan losses to total nonperforming  loans |       | 194.15                                                                                |       | 106.49 |   | 227.12 |   | 102.98 |   | 825.41 |   |
| Allowance for loan losses to total loans                |       | 1.04                                                                                  |       | 1.16 |   | 1.23 |   | 1.39 |   | 1.32 |   |
|                                                    |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| **Capital Ratios:**                                     |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Average equity to average assets                        |       | 13.23                                                                                 |       | 10.92 |   | 9.00 |   | 8.08 |   | 7.90 |   |
| Average tangible equity to average tangible assets      |       | 8.91                                                                                  |       | 7.33 |   | 7.01 |   | 7.98 |   | 7.79 |   |
| Tangible equity to tangible assets                      |       | 8.70                                                                                  |       | 9.84 |   | 7.00 |   | 6.94 |   | 8.00 |   |
| Leverage ratio                                          |       | 10.71                                                                                 |       | 12.58 |   | 8.63 |   | 10.22 |   | 7.87 |   |
| Tier 1 risk-based capital ratio                         |       | 12.80                                                                                 |       | 15.15 |   | 10.62 |   | 11.26 |   | 9.93 |   |
| Total risk-based capital ratio                          |       | 13.80                                                                                 |       | 16.27 |   | 11.80 |   | 12.51 |   | 11.19 |   |
|                                                         |            |                                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

18

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(1)          Net loans include theoutstanding principal balances of loans less unearned income, net deferred feesand the allowance for loan losses.

 

(2)          Earning assets includeinterest-bearing deposits in banks, federal funds sold, securities availablefor sale, restricted equity securities, loans net of unearned income, lessunrealized gains (losses) on securities and nonaccrual loans.

 

(3)          The increase instockholders’ equity for the years ended December 31, 2005, 2004 and 2003related to business combinations was 12%, 34% and 53%, respectively. Net incomeless dividends declared represented 4%, 7% and 9% of the total increase for thesame periods, respectively.

 

(4)          Nonperforming loansinclude nonaccrual loans and loans past due 90 days or more and still accruinginterest.

 

(5)          Nonperforming assetsinclude nonperforming loans and foreclosed assets.

 

**GAAP Reconciliation and Management Explanation for Non-GAAP FinancialMeasures**

 

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” is defined astotal equity reduced by recorded intangible assets divided by total commonshares 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 tangible assets” isdefined as total equity reduced by recorded intangible assets divided by totalassets reduced by recorded intangible assets. This measure is important toinvestors interested in the equity to assets ratio exclusive of the effect ofchanges in intangible assets on equity and total assets.

 

19

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•                  “Return on average tangible equity” isdefined as annualized earnings for the period divided by average equity reducedby average goodwill and other intangible assets. “Return on average tangibleassets” is defined as annualized earnings for the period divided by averageassets reduced by average goodwill and other intangible assets. We believethese measures are important when measuring the company’s performance exclusiveof the effects of goodwill and other intangibles recorded in recentacquisitions, and these measures are used by many investors as part oftheir analysis of the company’s performance.

 

•                  “Average tangible equity to average tangibleassets” is defined as average total equity reduced by recorded averageintangible assets divided by average total assets reduced by recorded averageintangible assets. This measure is important to many investors that areinterested in the equity to asset ratio exclusive of the effect of changes in averageintangible assets on average equity and average total assets.

 

•                  “Earning assets” is defined as total assetsplus the allowance for loan losses less cash and due from banks, premises andequipment, goodwill and intangible assets, other assets, unrealized gains(losses) on securities and nonperforming loans. This measure is important tomany investors because for financial institutions, their net interest income isdirectly related to their level of earning assets.

 

These disclosures should notbe viewed as a substitute for results determined in accordance with GAAP, andare not necessarily comparable to non-GAAP performance measures which may bepresented by other companies. The following reconciliation table provides amore detailed analysis of these non-GAAP performance measures.

 
| ** **                                         | ** ** | **As of and For the Year Ended December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                         | ** ** | **(Dollars in thousands, except per share amounts)**    | ** ** |
|                                               |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Book value per common share                        |       | $                                                                                     | 15.54      |   | $ | 14.84 |   | $ | 11.40 |   | $ | 9.01 |   | $ | 7.49 |   |
| Effect of intangible assets per share              |       | (5.22                                                                                 | )          | (4.65 | ) | (3.89 | ) | (1.42 | ) | (0.10 | ) |
| Tangible book value per common share               |       | $                                                                                     | 10.32      |   | $ | 10.19 |   | $ | 7.51 |   | $ | 7.59 |   | $ | 7.39 |   |
|                                               |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Equity to assets                                   |       | 12.54                                                                                 |       | 13.71 |   | 10.26 |   | 8.13 |   | 8.10 |   |
| Effect of intangible assets                        |       | (3.84                                                                                 | )          | (3.87 | ) | (3.26 | ) | (1.19 | ) | (0.10 | ) |
| Tangible equity to tangible assets                 |       | 8.70                                                                                  |       | 9.84 |   | 7.00 |   | 6.94 |   | 8.00 |   |
|                                               |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Return on average assets                           |       | 0.80                                                                                  |       | 0.91 |   | 0.95 |   | 1.11 |   | 0.67 |   |
| Effect of intangible assets                        |       | 0.04                                                                                  |       | 0.04 |   | 0.02 |   | — |   | — |   |
| Return on average tangible assets                  |       | 0.84                                                                                  |       | 0.95 |   | 0.97 |   | 1.11 |   | 0.67 |   |
|                                               |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Return on average equity                           |       | 6.06                                                                                  |       | 8.32 |   | 10.56 |   | 13.72 |   | 8.53 |   |
| Effect of intangible assets                        |       | 3.38                                                                                  |       | 4.58 |   | 3.28 |   | 0.18 |   | 0.12 |   |
| Return on average tangible equity                  |       | 9.44                                                                                  |       | 12.90 |   | 13.84 |   | 13.90 |   | 8.65 |   |
|                                               |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Average equity to average assets                   |       | 13.23                                                                                 |       | 10.92 |   | 9.00 |   | 8.08 |   | 7.90 |   |
| Effect of average intangible assets                |       | (4.32                                                                                 | )          | (3.59 | ) | (1.99 | ) | (0.10 | ) | (0.11 | ) |
| Average tangible equity to average Tangible assets |       | 8.91                                                                                  |       | 7.33 |   | 7.01 |   | 7.98 |   | 7.79 |   |
|                                               |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Total assets                                       |       | $                                                                                     | 1,584,094  |   | $ | 1,274,136 |   | $ | 944,278 |   | $ | 742,232 |   | $ | 547,845 |   |
| Plus:                                              | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allowance for loan losses                          |       | 12,773                                                                                |       | 11,061 |   | 8,726 |   | 7,538 |   | 5,522 |   |
| Less:                                              | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and due from banks                            |       | (30,748                                                                               | )          | (20,723 | ) | (17,584 | ) | (18,113 | ) | (18,097 | ) |
| Premises and equipment                             |       | (37,014                                                                               | )          | (31,548 | ) | (25,813 | ) | (20,774 | ) | (14,807 | ) |
| Intangible assets                                  |       | (66,750                                                                               | )          | (54,745 | ) | (33,043 | ) | (9,522 | ) | (566 | ) |
| Other assets                                       |       | (32,245                                                                               | )          | (23,646 | ) | (22,010 | ) | (14,525 | ) | (10,685 | ) |
| Unrealized (gains) losses on securities            |       | 3,936                                                                                 |       | 64 |   | (716 | ) | (3,015 | ) | (1,583 | ) |
| Nonaccrual loans                                   |       | (6,562                                                                                | )          | (10,059 | ) | (3,333 | ) | (5,506 | ) | (473 | ) |
| Earning assets                                     |       | $                                                                                     | 1,427,484  |   | $ | 1,144,540 |   | $ | 850,505 |   | $ | 678,315 |   | $ | 507,156 |   |

 

20

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| **ITEM 7.** | ** ** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

The following discussionreviews our results of operations and assesses our financial condition. Thepurpose of this discussion is to focus on information about our financialcondition and results of operations which is not otherwise apparent from theconsolidated financial statements included or incorporated by reference in thisreport. Reference should be made to those statements and the selected financialdata presented elsewhere or incorporated by reference in this report for anunderstanding of the following discussion and analysis. Historical results ofoperations and any trends which may appear are not necessarily indicativeof the results to be expected in future years.

 

**Executive Summary**

 

GB&T Bancshares, Inc.,headquartered in Gainesville, Georgia, consists of a network of community banksin growth areas of Georgia with approximately $1.6 billion in totalconsolidated assets as of December 31, 2005. We believe that maintainingautonomy within our subsidiary banks serves the unique needs of each communitywe serve. We focus on strong asset quality and sound management teams and useeconomies of scale to enhance our profitability. Our results reflect acombination of internal and acquisition growth. Prior to 2005, we had completedsix acquisitions. On March 1, 2005, we completed the acquisition of FNBGBancshares, Inc. and its banking subsidiary First National Bank ofGwinnett. We continue to build infrastructure to support our growth.

 

As a bank holding company,our results of operations are almost entirely dependent on the results ofoperations of our subsidiary banks. The following table sets forth our subsidiarybanks and selected data related to each bank as of December 31, 2005:

 
| **Bank**                                                                                                           | ** ** | **Number of   Branches** | ** ** | **Market Area   Counties** | ** ** | **Total Assets at   December 31, 2005** |    |
|--------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|------------------------------------------------------------------|---------|
| ** **                                                                                                         | ** ** | ** **                         | ** ** | ** **                           | ** ** | **(in thousands)**                                               |    |
| Gainesville Bank & Trust (with divisions  Lumpkin County Bank, Southern Heritage Bank and Bank of Athens) |       | 11                                 |       | Hall, Lumpkin,  Clarke               |       | $                                                                | 641,495 |   |
| United Bank & Trust                                                                                       |       | 3                                  |       | Polk, Bartow                         |       | 74,969                                                           |    |
| Community Trust Bank                                                                                               |       | 6                                  |       | Paulding, Cobb                       |       | 270,442                                                          |    |
| HomeTown Bank of Villa Rica                                                                                        |       | 3                                  |       | Carroll,  Paulding                   |       | 238,583                                                          |    |
| First National Bank of the South                                                                                   |       | 3                                  |       | Baldwin, Putnam                      |       | 192,260                                                          |    |
| First National Bank of Gwinnett                                                                                    |       | 1                                  |       | Gwinnett                             |       | 159,825                                                          |    |
|                                                                                                                    |            |                                    |            |                                      |            |                                                                  |         |  |

 

Like most community banks,we derive 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 87% of our totaldeposits are interest-bearing. Consequently, one of the key measures of oursuccess is our amount of net interest income, or the difference between theincome on our interest-earning assets, such as loans and investments, and theexpense on our interest-bearing liabilities, such as deposits and borrowings.Another key measure is the spread between the yield we earn on these interest-earningassets and the rate we pay on our interest-bearing liabilities, which is calledour net interest spread.

 

There are risks inherent inall loans, so we maintain an allowance for loan losses to absorb probablelosses on existing loans that may become uncollectible. We maintain thisallowance by charging a provision for loan losses against our operatingearnings for each period. We have included a detailed discussion of thisprocess, as well as several tables describing our allowance for loan losses.

 

In addition to earninginterest on our loans and investments, we earn income through fees and othercharges to our clients. We have also included a discussion of the variouscomponents of this noninterest income, as well as of our noninterest expense.

 

21

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The following discussion andanalysis also identifies significant factors that have affected our financialposition and operating results during the periods included in the financialstatements accompanying or incorporated by reference in this report. Weencourage you to read this discussion and analysis in conjunction with ourfinancial statements and the other statistical information included andincorporated by reference in this report.

 

We measure and monitor thefollowing factors as key indicators of our financial performance:

 

•                  Net income

 

•                  Earnings per share

 

•                  Loan and deposit growth

 

•                  Credit quality

 

Financial performance forthe year ended December 31, 2005 versus the year ended December 31,2004:

 

•                  Net income of $12.0 million, up 21.9% from$9.8 million

 

•                  Diluted earnings per share of $0.93 comparedto $1.04

 

•                  Net interest margin of 4.24% compared to4.14%

 

•                  Loan growth of $275.5 million or 28.8% (18.2%excluding acquisition of FNBG)

 

•                  Deposit growth of $268.4 million or 28.9%(17.1% excluding acquisition of FNBG)

 

•                  Return on average assets of 0.80% compared to0.91%

 

•                  Return on average equity of 6.06% compared to8.32%

 

•                  Nonperfoming assets ratio of 0.63% comparedto 0.86%

 

•                  Net charge-off ratio of 0.47% compared to0.14%

 

**Effect of Economic Trends**

 

During the three years endedDecember 31, 2004, our rates on both short-term or variable rateinterest-earning assets and short-term or variable rate interest-bearingliabilities declined primarily as a result of the actions taken by the FederalReserve, however during 2005, both these rates increased.

 

During most of 2001 andduring 2002, the United States experienced an economic decline. During thisperiod, the economy was affected by lower returns of the stock markets.Economic data led the Federal Reserve to begin an aggressive program ofreducing rates that moved the federal funds rate down 11 times during 2001 fora total reduction of 475 basis points. During the fourth quarter of 2002 and thefirst quarter of 2003, the Federal Reserve reduced the federal funds rate downan additional 75 basis points, bringing the federal funds rate to its lowestlevel in 40 years.

 

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, as of thedate of this report, the Federal Reserve had raised the 

 

22

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short-term interest rate by 25 basis points. Manyeconomists believe that the Federal Reserve will continue to increase ratesduring 2006. No assurance can be given that the Federal Reserve will actuallycontinue to raise interest rates or that the results we anticipate willactually occur.

 

The specific economic andcredit risks associated with our loan portfolio, especially the real estateportfolio, include, but are not limited to, a general downturn in the economywhich could affect unemployment rates in our market areas, general real estatemarket deterioration, interest rate fluctuations, deteriorated collateral,title defects, 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 remained stable. The general economy and loan demanddeclined slightly during 2001 and continued to decline throughout 2002. In2003, the economy began to show signs of improvement which continued through2004 and 2005. Our growth has not been significantly impacted by the previouslymentioned economic conditions.

 

**Critical Accounting Policies**

 

We have adopted variousaccounting policies that govern the application of accounting principlesgenerally accepted in the United States and general practices within thebanking industry in the preparation of our financial statements. Oursignificant accounting policies are described in the notes to our consolidatedfinancial statements as of December 31, 2005 included in this report.Certain accounting policies require management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereported period. Actual results could differ from those estimates. Estimatesand assumptions are reviewed periodically and the effects of revisions arereflected in the consolidated financial statements in the period they aredetermined to be necessary.

 

*Allowance for Loan Losses*. We believe that our determination of theallowance for loan losses is our most significant judgment and estimate used inthe preparation of our consolidated financial statements. The allowance forloan losses is an amount that management believes will be adequate to absorbestimated losses in the loan portfolio. The calculation is an estimate of theamount of loss in the loan portfolios of our subsidiary banks. The allowancefor loan losses is evaluated on a regular basis by management and is based uponmanagement’s periodic review of the collectibility of the loans in light ofhistorical experience, the nature and volume of the loan portfolio, adversesituations that may affect the borrower’s ability to repay, estimatedvalue of any underlying collateral and prevailing economic conditions. Thisevaluation is inherently subjective as it requires estimates that aresusceptible to significant revision as more information becomes available. Inaddition, regulatory agencies, as an integral part of their examinationprocess, periodically review our allowance for loan losses, and may requireus to make additions to the allowance based on their judgment about informationavailable to them at the time of their examinations.

 

We use an 8 point ratingsystem for our loans. Ratings of 1 to 3 are considered pass ratings, 4 ispass/watch, 5 is special mention, 6 is substandard, 7 is doubtful, and 8 isloss. The originating officer rates all loans on this system. This rating isadjusted from time to time by the officer to accurately reflect the loan’scurrent status. These ratings are reviewed for accuracy regularly by the loancommittee of the respective bank subsidiary, an outside independent loan reviewfirm, internal auditors, and by the applicable regulator.

 

The general allowanceconsists of “Pass” loans. Pass loans are separated into homogeneous pools.Currently, these pools consist of real estate, commercial, consumer and creditcard loans. Management assigns loss percentages to these categories ofhomogeneous pools of loans based on the greater of historic loss data in eachcategory or the minimum risk percentage for this category. Management tracksthe last eight quarters moving average net losses for the historic losspercentage in each category. This historic loss percentage is reviewed andadjusted periodically, by pool, in light of current trends in past dues,changes in lending policies, underwriting standards, economic conditions, andother factors that may affect this number. In addition to the homogeneouspools, management has specified certain industry risks and applied losspercentages to the specified industry risk categories. Recently, because of lowlosses in most categories, management has assigned minimum percentages to eachcategory. These minimums are reviewed and may be adjusted from time totime to reflect current economic conditions, changes in lending practices,underwriting standards and other matters that may be necessary. Thoseminimums are indicated on our loan loss reserve adequacy calculation.

 

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For loans rated 4(pass/watch), a loss percentage of 1% is used.

 

The specific allowance consists of loans that areclassified as either, doubtful, substandard or special mention. All impaired orsignificant loans rated 5, 6 and 7 are individually analyzed and a specificreserve assigned. Management, considering current information and eventsregarding a borrowers’ ability to repay its obligations, considers a loan to beimpaired when the ultimate collectibility of all amounts due, according to thecontractual terms of the loan agreement, is in doubt. When a loan is consideredto be impaired, the amount of impairment is measured based on the present valueof expected future cash flows discounted at the loan’s effective interest rate.If the loan is collateral-dependent, the fair value of the collateral lessestimated selling costs is used to determine the amount of impairment.Impairment losses are included in the allowance for loan losses through acharge to the provision for losses on loans. The majority of our impaired loansare collateral dependent. The allowance for loan losses on these loans isdetermined based upon fair value estimates (net of selling costs) of therespective collateral. The actual losses on these loans could differsignificantly if the fair value of the collateral is different from theestimates used in determining the allocated allowance. Most of ourcollateral-dependent impaired loans are secured by real estate. The fair valueof these real estate properties is generally determined based upon appraisalsperformed by a certified or licensed appraiser. Management also considers otherfactors or recent developments which could result in adjustments to thecollateral value estimates indicated in the appraisals.

 

For loans rated 5, a losspercentage of 5% is used. All significant loans rated 6 and 7 are individuallyanalyzed and a specific reserve is assigned based on exposure or industrystandards, whichever is greater. These loans, their reserves, and action plansto resolve their criticisms are reviewed monthly by the loan committee of each subsidiarybank. All other loans rated 6 and 7 are assigned loss percentages of 15% and50% respectively. All loans rated 8 are assigned a specific reserve of 100%.

 

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

 

*Goodwill*. Our growth over the past several years hasbeen enhanced significantly by mergers and acquisitions. Prior to July 2001,all of our acquisitions were accounted for using the pooling-of-interestsbusiness combination method of accounting. Effective July 1, 2001, weadopted SFAS No. 141, “Business Combinations,” which allows only the use ofthe purchase method of accounting. For purchase acquisitions, we are requiredto record the assets acquired, including identified intangible assets, andliabilities assumed at their fair value, which in many instances involvesestimates based on third party valuations, such as appraisals, or internalvaluations based on discounted cash flow analyses or other valuationtechniques. The determination of the useful lives of intangible assets issubjective as is the appropriate amortization period for such intangibleassets. In addition, purchase acquisitions typically result in recordinggoodwill, which is subject to ongoing periodic impairment tests based on thefair value of net assets acquired compared to the carrying value of goodwill.In July 2005, the required impairment testing of goodwill was performedand no impairment existed as of the valuation date, as the fair value of ournet assets exceeded their carrying value. If for any future period we determinethat there has been impairment in the carrying value of our goodwill balances,we will record a charge to our earnings, which could have a material adverseeffect on our net income.

 

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**Effect of Recent Business Acquisitions**

 

On December 19, 2005,the Company signed a definitive agreement to acquire Mountain Bancshares, Inc.,the parent company of the $130 million asset Mountain State Bank which isheadquartered in Dawsonville, Georgia. Under the terms of the agreement,Mountain Bancshares shareholders will receive 0.8911 shares of our common stockand $8.40 per share, or approximately $10.3 million in cash, in exchange foreach share of Mountain Bancshares common stock. The transaction is expected tobe completed in the second quarter of 2006, pending shareholder and regulatoryapprovals. Accordingly, the results ofoperations included in this report do not include the results of operations ofMountain Bancshares.

 

On March 1, 2005, the Company completed theacquisition of FNBG Bancshares, Inc. the parent company of First NationalBank of Gwinnett in Duluth, Gwinnett County, Georgia, which resulted in FirstNational Bank of Gwinnett becoming a wholly owned subsidiary of the Company. TheCompany issued 845,128 shares of its capital stock and approximately $3.8million in cash in exchange for all of the issued and outstanding common sharesof FNBG Bancshares, Inc. The acquisition was accounted for as a purchaseresulting in estimated goodwill of approximately $16.4 million. First NationalBank of Gwinnett’s results of operations from March 1, 2005 are includedin the consolidated results of operations for the year ended December 31,2005. The results of operations for the years ended December 31, 2004 and2003 do not include the results of operations of FNBG Bancshares, Inc.

 

OnAugust 3, 2004, the Company completed the acquisition of Southern HeritageBancorp, Inc., the parent company of Southern Heritage Bank, in FloweryBranch, Georgia. Southern Heritage Bank merged with and into, and became adivision of, the Company’s lead bank, Gainesville Bank & Trust. TheCompany issued 1,141,628 shares of its common stock and approximately $869,172in cash in exchange for all of the issued and outstanding common shares ofSouthern Heritage Bancorp, Inc. The acquisition was accounted for as apurchase resulting in goodwill of approximately $14,901,000. The results ofoperations for the year ended December 31, 2004 include Southern HeritageBank’s results of operations since the date of acquisition, which representsapproximately five months of operations. The results of operations for the yearended December 31, 2003 do not include the results of operations forSouthern Heritage Bank.

 

OnAugust 19, 2004, the Company completed the acquisition of Lumpkin CountyBank in Dahlonega, Georgia. Lumpkin County Bank merged with and into, andbecame a division of, the Company’s lead bank, Gainesville Bank &Trust. The Company issued 262,682 shares of its common stock in exchange forall of the issued and outstanding common shares of Lumpkin County Bank. Theacquisition was accounted for as a purchase resulting in goodwill ofapproximately $331,000. The results of operations for the year ended December 31,2004 include Lumpkin County Bank’s results of operations since the date ofacquisition, which represents approximately four and one-half months ofoperations. The results of operations for the year ended December 31, 2003do not include the results of operations for Lumpkin County Bank.

 

On August 31, 2003, theCompany completed the acquisition of Baldwin Bancshares, Inc., the parentcompany of First National Bank of the South in Milledgeville, Georgia. TheCompany issued 1,397,451 shares of its common stock in exchange for all of theissued and outstanding common shares of Baldwin Bancshares, Inc. Theacquisition was accounted for as a purchase resulting in goodwill ofapproximately $21,318,000. The results of operations for the year ended December 31,2003 include the results of operations for First National Bank of the Southsince the date of acquisition, which represents four months of operations.

 

**Financial Condition**

 

*Total Assets*. Our total assets increased $310.0 millionor 24.3% for the year ended December 31, 2005 compared to $329.9 millionor 34.9% for the same period in 2004. The increase in 2005 consists primarilyof an increase in total loans of $275.5 million or 28.8%, and an increase ingoodwill and intangible assets of $12.0 million. Excluding the acquisition ofFNBG Bancshares, Inc., total assets increased $171.0 million, or 13.4%,during 2005. Also, excluding the acquisition, total loans increased $174.0million. For the year ended December 31, 2004 as compared with the yearended December 31, 2003, the acquisitions of Southern Heritage Bank andLumpkin County Bank accounted for approximately $207.7 million of the increasein total assets. The overall growth in 2005 and 2004 is consistent withmanagement’s plans. The competition for deposits plays an important role in ouroverall growth.

 

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*Total Loans*. Our primary focus is to maximize earningsthrough lending activities. Anyexcess funds are invested according to our investment policy. Total loansincreased 28.8% or $275.5 million for the year ended December 31, 2005. Exclusiveof the acquisition of FNBG Bancshares, Inc., which represented $101.5million of this increase, total loans increased $174.0 million or 18.2%. Thisincrease is compared to an increase of $245.9 million or 34.6% during 2004. Exclusiveof the acquisitions of Southern Heritage Bank and Lumpkin County Bank, whichrepresented $148.4 million of the increase in 2004, total loans increased $97.6million or 13.7%. As of December 31, 2005 and 2004, our loan-to-depositratio remained constant at 102.9% for both years. At December 31, 2005 and2004, we had total outstanding borrowings of $173.7 million and $159.4 million,respectively. These funds have been used to fund loan growth. The utilizationof borrowings to fund loan growth enables us to maintain a higher loan todeposit ratio and maintain an adequate liquidity ratio. Our loan-to-funds ratiowas 89.8% and 87.9% at December 31, 2005 and 2004, respectively.

 

*Total Deposits*. During 2005, total deposits grew by $268.4million, or 28.9%. Exclusive of the acquisition of FNBG Bancshares, Inc.,which accounted for $109.6million of this increase, total deposits grew $158.8 million or 17.1% during2005 compared to an increase of $35.7 million or 4.9% in 2004, exclusive of theacquisitions of Southern Heritage Bank and Lumpkin County Bank.

 

**Results of Operations—For the Years Ended December 31, 2005, 2004and 2003**

 

*Net Interest Income and EarningAssets*. During 2005and 2004, we continued to experience moderate internal growth ininterest-earning and total assets which was funded by increases in deposits,borrowings, the retention of net profits and proceeds from a stock offering.During 2005, we experiencedadditional growth through the acquisition of FNBG Bancshares, Inc. and in2004 through the acquisitions of Southern Heritage Bank and Lumpkin County Bankas explained above. We recorded net income of $12.0 million, $9.8 million and$7.7 million for the years ended December 31, 2005, 2004 and 2003,respectively.

 

Our profitability isdetermined by our ability to effectively manage interest income and expense, tominimize loan and security losses, to generate noninterest income, and tocontrol operating expenses. Because interest rates are determined by marketforces and economic conditions beyond our control, our ability to generate net interest income depends uponour ability to obtain an adequate net interest spread between the rate earnedon interest-earning assets and the rate paid on interest-bearing liabilities.The net yield on average interest-earning assets increased to 4.24% for theyear ended December 31, 2005 from 4.14% for the year ended December 31,2004. This increase is attributable to increases in interest rates by theFederal Reserve in 2005 in addition to increased loan volume. In 2005, theaverage yield on interest-earning assets increased to 6.76% from 5.99% in 2004and the average yield on interest-bearing liabilities increased to 3.00% in2005 from 2.13% in 2004. The overall change in the interest rate spread from2004 to 2005 was a decrease of 10 basis points. The decrease in the netinterest spread is a result of increases in time deposit volume at an averagerate 99 basis points above the average in 2004 and increases ininterest-bearing demand and savings volume at an average rate 83 basis points abovethe 2004 average, partially offset by increases in loan volume at an averagerate 78 basis points above the average in 2004. Total average interest-earningassets increased by $370.1 million, to $1,343.3 million at December 31,2005 as compared to 2004 and average interest-bearing liabilities increased by$285.1 million, to $1,129.7 million for the same period. We continue toexperience growth in our portfolios while maintaining our competitive pricing.

 

The net yield on average interest-earning assets decreased by 11 basis pointsto 4.14% from 4.25% for the year ended December 31, 2004 as compared to2003. The decreased net yield in 2004 was primarily attributable to increasesin loan volume at lower interest rates.

 

Net interest income increased by $16.7 million to $57.0 million in 2005,compared to an increase of $8.8 million in 2004. The increase for both yearscontinues to reflect the continued increase in interest-earning assets during2005 and 2004. The change in net interest income is primarily the result of theincreases in net volume versus changes in net interest rates. These variancesinclude the impact of the acquisition of FNBG Bancshares in 2005 and theacquisitions of Southern Heritage Bank and Lumpkin County Bank in 2004.

 

*Other Income*. Other income decreased during 2005 by$147,000 compared to an increase of $1.9 million in 2004. For the year ended December 31,2005, service charges on deposit accounts increased by $292,000 and mortgageorigination fees increased by $275,000, which was offset by a decrease in otherservice charges and fees of $712,000. 

 

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The decrease in other service charges and fees canbe attributed to the loss of insurance commissions due to the sale of CLC andthe loss of processing fees due to an expired contract. For the year ended December 31,2004, service charges on deposit accounts increased $1.2 million, other servicecharges and fees increased by $305,000, security transactions, net increased by$227,000 and we recorded a gain on the sale of property at the operationscenter of $372,000. This increase was partially offset by a decrease inmortgage origination fees of $452,000. The increases in service charges aredirectly related to the increase in deposit accounts and the inclusion of FNBGBancshares, Inc. for part of 2005, and Southern Heritage Bank andLumpkin County Bank for part of ended 2004.

 

*Other Expense*. Other expense increased $8.6 million and$6.5 million for the years ended December 31, 2005 and 2004, respectively.Increases in salaries and employee benefits represent the most significantportions of these increases, which increased by $5.4 million and $3.7 millionfor the years ended 2005 and2004, respectively. The number of full-time equivalent employees increased by22 employees in March 2005 due to the acquisition of FNBG Bancshares, Inc.,however the number decreased by 23 when Community Loan Company was sold on October 31,2005. In addition to the additional salary expense related to new employees foreight months of 2005, we incurred increases due to increases in profit sharingcontributions, health insurance costs, incentive compensation, certainseverance payments and normal salary increases for the years ended December 31,2005 and 2004. Other operating expenses increased by $2.1 million and $2.0million, respectively, for the years ended December 31, 2005 and 2004. Theincrease in other operating expenses in 2005 included increases in supplies,postage and telephone expense of $325,000, loan acquisition costs of $176,000,legal and collection expenses of $134,000 and a loss of $306,000 recorded inthe fourth quarter of 2005 on the sale of Community Loan Company. The increasesin all of the above categories can be partially attributed to the inclusion ofFNBG Bancshares, Inc. for the year ended December 31, 2005, since theacquisition date of March 1, 2005.

 

*Income Tax Expense*. Income tax expense increased by $1.2 million to $5.9 million in 2005 from$4.7 million in 2004. The increase in 2005 was attributable to increasedprofits. The effective tax rate for year ended December 31, 2005 was32.9%, compared to 32.2% for 2004.

 

*Net Income*. Net income increased by $2.2 million or 21.9% for the year ended December 31,2005 when compared to 2004. The increase in net income for the year ended December 31,2004 was $2.1 million or 27.4% when compared to 2003. These increases aredirectly related to the increase in net interest income and the inclusion ofFirst National Bank of the Gwinnett in 2005, and Southern Heritage Bank andLumpkin County Bank in 2004, which are partially offset by the increases inother expenses as discussed above and the additional loan loss provision takenin 2005, as discussed below.

 

*Asset Quality*. Provision for loan losses was $5.9 millionduring 2005, compared to $1.4 million in 2004. This increase was due primarilyto an additional provision of $2.9 million taken in the second quarter of 2005at HTB due to the further impairment of an inherited single loan relationshipprior to the Company’s acquisition of HTB. The additional increase in theprovision was due to loan growth. The provision for loan losses is the chargeto operations which management believes is necessary to fund the allowance forloan losses. This provision is based on management’s periodic review of thecollectibility of the loans in light of historical experience, the nature andvolume of the loan portfolio, adverse situations that may affect theborrower’s ability to repay, estimated value of any underlying collateral andprevailing economic conditions. Our evaluation is inherently subjective as itrequires estimates that are susceptible to significant revision as moreinformation becomes available. In addition, regulatory agencies, as an integralpart of their examination process, periodically review our allowance forloan losses, and may require us to make additions to the allowance basedon their judgment about information available to them at the time of theirexaminations. Loans acquired in business acquisitions were acquired at theirestimated fair value, including an adequate allowance for loan losses. See alsoour discussion of the loan loss allowance in the “Critical Accounting Policies”section included in this report.

 

The following table presentsdetails of the provision for loan losses, nonaccrual loans and relatedcategories for each subsidiary as well as on a consolidated basis. The decreasein nonaccrual loans is related to five loans at HTB totaling $4.6 millionrepresenting one loan relationship, of which $1.0 million was moved to otherreal estate and $3.6 million was charged off. As shown in the “Summary of LoanLoss Experience”, the consumer related charge-offs consist of many smaller balance loans while thereal estate related charge-offs consist of only a few larger balance loans.Real estate loans are normally secured by one to four family residences orother real estate with values exceeding the original loan balance, thereforeminimizing the risk of loss. However in the current year, real estatecharge-offs were increased significantly due to the one-time $3.6 millioncharge-off discussed above. Consumer loans, however, may be secured byconsumer goods 

 

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and automobiles, or may be unsecured, andtherefore subject to greater loss in the event of charge-off. During arecession, losses are more likely and the risk of loss is greater in theconsumer portfolio. The allowance for loan losses as a percentage ofnonperforming loans at December 31, 2005 was 194.15%, which was up from106.49% at December 31, 2004. This increase is due to nonaccrual loansdecreasing to $6.6 million at December 31, 2005 from $10.1 million at December 31,2004 as well as the increase in the provision for loan losses in 2005 to $5.9million compared to $1.4 million for 2004. During 2005, other problem loans,including past due loans greater than 90 days past due, decreased by $311,000compared to a decrease of $181,000 in 2004. Based on management’s evaluations,management believes the allowance for loan losses is adequate to absorbpotential losses on existing loans.

 
| ** **                                 | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **(Dollars in thousands)**        | ** ** |
|                                       |       |                                        |       |   |   |
| Total charge-offs                          |       | $                                           | 5,761      |   | $ | 1,628 |   |
| Total recoveries                           |       | 452                                         |       | 482 |   |
| Net charge-offs (recoveries)               |       | 5,309                                       |       | 1,146 |   |
| Total nonaccrual loans                     |       | 6,562                                       |       | 10,059 |   |
| Loans past due 90 days                     |       | 17                                          |       | 328 |   |
| Other real estate                          |       | 3,431                                       |       | 620 |   |
| Provision for loan losses                  |       | 5,916                                       |       | 1,406 |   |
| Allowance/Total loans                      |       | 1.04                                        | %          | 1.16 | % |
| Net charge-offs (recoveries)/Average loans |       | 0.469                                       | %          | 0.142 | % |
| Allowance/Nonperforming loans              |       | 194.15                                      | %          | 106.49 | % |
|                                            |            |                                             |            |  |  |  |  |

 

**Effects of Inflation**

 

The impact of inflation onbanks differs from its impact on non-financial institutions. Banks, asfinancial intermediaries, have assets which are primarily monetary in natureand which tend to fluctuate in concert with inflation. A bank can reduce theimpact of inflation if it can manage its interest rate sensitivity gap. Thisgap represents the difference between rate sensitive assets and rate sensitiveliabilities. Through the Investment Committee of our holding company’s board ofdirectors, we attempt to structure the assets and liabilities and manage therate sensitivity gap of each subsidiary bank, thereby seeking to minimize thepotential effects of inflation. For information on the management of ourinterest rate sensitive assets and liabilities, see “Asset/Liability Management”below.

 

**Off-Balance Sheet Arrangements**

 

Our financial statements donot reflect various commitments and contingent liabilities that arise in thenormal course of business. These off-balance sheet financial instrumentsinclude commitments to extend credit, standby letters of credit and credit cardcommitments. Such financial instruments are included in the financial statementswhen funds are distributed or the instruments become payable. Our exposure tocredit loss in the event of nonperformance by the other party to the financialinstrument for commitments to extend credit, standby letters of credit and credit card commitmentsis represented 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, 2005 and December 31,2004 are as follows:

 
| ** **                          | ** ** | **December 31,   2005** | ** ** | **December 31,   2004** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                          | ** ** | **(Dollars in thousands)**        | ** ** |
| Commitments to extend credit        |       | $                                 | 288,448    |                              | $          | 192,294 |   |
| Financial standby letters of credit |       | 8,650                             |       | 7,354                             |       |
| Other standby letters of credit     |       | 1,569                             |       | 1,357                             |       |
| Credit card commitments             |       | 7,229                             |       | 5,235                             |       |
| Total                               |       | $                                 | 305,896    |                              | $          | 206,240 |   |

 

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**Liquidity and Capital Resources**

 

Liquidity represents theability of a company to convert assets into cash or cash equivalents withoutsignificant loss and the ability to raise additional funds by increasingliabilities. Liquidity management involves monitoring our sources and uses offunds in order to meet our day-to-day cash flow requirements while maximizingprofits. We seek to meet liquidity requirements primarily through management ofshort-term investments, monthly amortizing loans, maturing single paymentloans, and maturities of securities and prepayments. Also, we maintainrelationships with correspondent banks which could provide funds on shortnotice. As of December 31, 2005, we had amounts borrowed under federalfunds purchase lines and securities sold under repurchase agreements of $45.5million compared to $47.6 million as of December 31, 2004. Theseborrowings typically mature within one to four business days. In November 2004,the Company completed the sale of 1,651,680 shares of its common stock in asecondary stock offering receiving net proceeds of approximately $35.4 million.The Company used the proceeds of the offering for general corporate purposes.

 

The following table setsforth certain informationabout contractual cash obligations as of December 31, 2005.

 
| ** **                         | ** ** | **Payments Due after December 31, 2005** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                         | ** ** | **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                   |       | 9,264                                                             |       | 896 |   | 1,722 |   | 1,118 |   | 5,528 |   |
| Federal Home Loan Bank advances    |       | 97,298                                                            |       | 30,651 |   | 36,410 |   | 21,618 |   | 8,619 |   |
| Total contractual cash obligations |       | $                                                                 | 136,460    |   | $ | 31,547 |   | $ | 38,132 |   | $ | 22,736 |   | $ | 44,045 |   |

 

Our operating leasesrepresent short-term obligations, normally with maturities of one year or less,with the exception of one lease entered into in 2005 which has a maturity of 25 years. Many ofthe operating leases have thirty-day cancellation provisions.

 

Our liquidity and capitalresources are monitored on a periodic basis by management and state and federalregulatory authorities. At December 31, 2005, our liquidity ratio was12.95%. Liquidity is measured by the ratio of net cash, federal funds sold andsecurities to net deposits and short-term liabilities. In the event oursubsidiary banks need to generate additional liquidity, funding plans would beimplemented as outlinedin the liquidity policy of the banks. Our banks have lines of credit availableto meet any unforeseen liquidity needs. Also, our banks have relationships withthe Federal Home Loan Bank of Atlanta, which provides funding for loan growthon an as needed basis. Management reviews liquidity on a periodic basis tomonitor and adjust liquidity as necessary. Management has the ability to adjustliquidity by selling securities available for sale, selling participations inloans and accessing available funds through various borrowing arrangements. At December 31,2005, we had available borrowing capacity totaling approximately $186.4 millionthrough various borrowing arrangements and available lines of credit. We believeour short-term investments and available borrowing arrangements are adequate tocover any reasonably anticipated immediate need for funds.

 

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As of December 31,2005, GB&T Bancshares, Inc. and its subsidiary banks were consideredto be well-capitalized as defined in the FDICIA and based on regulatory minimum capital requirements. GB&TBancshares, Inc. and its subsidiary banks’ capital ratios as of December 31,2005 are presented in the following table:

 
| ** **                              | ** ** | **Capital   Ratios** | ** ** | **For   Capital   Adequacy   Purposes** | ** ** | **To Be Well   Capitalized** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------|------------|
| Total Capital to Risk Weighted Assets:  |       |                      |       |                                                   |       |                                        |       |
| Consolidated                            |       | 13.80                     | %          | 8.00                                                   | %          | N/A                                         |       |
| Gainesville Bank & Trust       |       | 11.41                     |       | 8.00                                                   |       | 10.00                                       | %          |
| United Bank & Trust            |       | 13.94                     |       | 8.00                                                   |       | 10.00                                       |       |
| Community Trust Bank                    |       | 10.19                     |       | 8.00                                                   |       | 10.00                                       |       |
| HomeTown Bank of Villa Rica             |       | 10.59                     |       | 8.00                                                   |       | 10.00                                       |       |
| First National Bank of the South        |       | 10.59                     |       | 8.00                                                   |       | 10.00                                       |       |
| First National Bank of Gwinnett         |       | 11.18                     |       | 8.00                                                   |       | 10.00                                       |       |
|                                    |       |                      |       |                                                   |       |                                        |       |
| Tier 1 Capital to Risk Weighted Assets: |       |                      |       |                                                   |       |                                        |       |
| Consolidated                            |       | 12.80                     | %          | 4.00                                                   | %          | N/A                                         |       |
| Gainesville Bank & Trust       |       | 10.28                     |       | 4.00                                                   |       | 6.00                                        | %          |
| United Bank & Trust            |       | 12.69                     |       | 4.00                                                   |       | 6.00                                        |       |
| Community Trust Bank                    |       | 9.28                      |       | 4.00                                                   |       | 6.00                                        |       |
| HomeTown Bank of Villa Rica             |       | 9.90                      |       | 4.00                                                   |       | 6.00                                        |       |
| First National Bank of the South        |       | 9.66                      |       | 4.00                                                   |       | 6.00                                        |       |
| First National Bank of Gwinnett         |       | 10.02                     |       | 4.00                                                   |       | 6.00                                        |       |
|                                    |       |                      |       |                                                   |       |                                        |       |
| Tier 1 Capital to Average Assets:       |       |                      |       |                                                   |       |                                        |       |
| Consolidated                            |       | 10.71                     | %          | 4.00                                                   | %          | N/A                                         |       |
| Gainesville Bank & Trust       |       | 8.18                      |       | 4.00                                                   |       | 5.00                                        | %          |
| United Bank & Trust            |       | 8.99                      |       | 4.00                                                   |       | 5.00                                        |       |
| Community Trust Bank                    |       | 8.07                      |       | 4.00                                                   |       | 5.00                                        |       |
| HomeTown Bank of Villa Rica             |       | 8.34                      |       | 4.00                                                   |       | 5.00                                        |       |
| First National Bank of the South        |       | 8.39                      |       | 4.00                                                   |       | 5.00                                        |       |
| First National Bank of Gwinnett         |       | 9.14                      |       | 4.00                                                   |       | 5.00                                        |       |

 

Wepurchased property in May 2003 in Gainesville, Georgia for the purpose ofestablishing an operations center for the holding company’s operations and dataprocessing. The cost of the land, including land development costs wasapproximately $2,314,000. In December 2004, the Company sold four of thesurrounding lots and recorded a gain after tax of approximately $232,000. Thecost of the building, including furniture, fixtures and equipment wasapproximately $2,900,000. The building was completed in the first quarter of2005. We also have begun construction of a branch in Athens, Georgia for theAthens division of GBT. The branch is expected to be complete in the secondquarter of 2006 with an approximate cost of $1.1 million.

 

Management is not aware ofany known trends, events or uncertainties, other than those discussed above,that will have or are reasonably likely to have a material effect on ourliquidity, capital resources, or operations. Management is also not aware ofany current recommendations by the regulatory authorities which, if they wereimplemented, would have such an effect.

 

Our subsidiary banks aresubject to certain restrictions on the amount of dividends that may bedeclared without prior regulatory approval. At December 31, 2005,approximately $9.6 million of retained earnings at our subsidiary banks wereavailable for dividend declaration without regulatory approval.

 

30

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**SelectedFinancial Information and Statistical Data**

 

Thetables and schedules on the following pages set forth certain financialinformation and statistical data with respect to: the distribution of assets,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 of theloan loss experience and allowance for loan losses; types of deposits; and thereturn on equity and assets.

 

**Distributionof Assets, Liabilities and Stockholders’ Equity Interest Rates and InterestDifferentials**

 

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

 
| ** **                                    | ** ** | **Years  Ended December 31,** | ** ** |
|-----------------------------------------------|------------|-------------------------------|------------|
| ** **                                    | ** ** | **Average  Balances(1)**      | ** ** | **2005  Income/  Expense** | ** ** | **Yields/  Rates** | ** ** | **Average  Balances(1)** | ** ** | **2004  Income/  Expense** | ** ** | **Yields/  Rates** | ** ** | **Average  Balances(1)** | ** ** | **2003  Income/  Expense** | ** ** | **Yields/  Rates** | ** ** |
| ** **                                    | ** ** | **(Dollars  in thousands)**   | ** ** |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable securities                            |       | $                             | 194,093    |   | $ | 7,287 |   | 3.75 | % | $ | 139,054 |   | $ | 4,706 |   | 3.38 | % | $ | 103,660 |   | $ | 3,753 |   | 3.62 | % |
| Nontaxable securities (5)                     |       | 14,023                        |       | 618 |   | 4.41 |   | 16,063 |   | 736 |   | 4.58 |   | 18,172 |   | 688 |   | 3.79 |   |
| Federal funds sold                            |       | 9,842                         |       | 327 |   | 3.32 |   | 13,106 |   | 163 |   | 1.24 |   | 12,897 |   | 145 |   | 1.12 |   |
| Interest-bearing deposits in banks            |       | 1,077                         |       | 42 |   | 3.90 |   | 2,329 |   | 27 |   | 1.16 |   | 2,378 |   | 30 |   | 1.26 |   |
| Loans (2) (4)                                 |       | 1,124,310                     |       | 82,541 |   | 7.34 |   | 802,694 |   | 52,642 |   | 6.56 |   | 603,711 |   | 42,176 |   | 6.99 |   |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                 |       | 1,343,345                     |       | 90,815 |   | 6.76 | % | 973,246 |   | 58,274 |   | 5.99 | % | 740,818 |   | 46,792 |   | 6.32 | % |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized gains (losses) on securities       |       | (2,175                        | )          |   |   |   |   | 324 |   |   |   |   |   | 2,330 |   |   |   |   |   |
| Allowance for loan losses                     |       | (12,499                       | )          |   |   |   |   | (9,856 | ) |   |   |   |   | (7,932 | ) |   |   |   |   |
| Nonaccrual loans                              |       | 7,573                         |       |   |   |   |   | 4,646 |   |   |   |   |   | 4,420 |   |   |   |   |   |
| Cash and due from banks                       |       | 24,996                        |       |   |   |   |   | 20,347 |   |   |   |   |   | 17,026 |   |   |   |   |   |
| Other assets                                  |       | 135,552                       |       |   |   |   |   | 93,994 |   |   |   |   |   | 56,472 |   |   |   |   |   |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                         |       | $                             | 1,496,792  |   |   |   |   |   | $ | 1,082,701 |   |   |   |   |   | $ | 813,134 |   |   |   |   |   |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand & savings         |       | $                             | 407,551    |   | 8,337 |   | 2.05 | % | $ | 331,999 |   | 4,053 |   | 1.22 | % | $ | 239,731 |   | 2,579 |   | 1.08 | % |
| Time                                          |       | 560,786                       |       | 18,816 |   | 3.36 |   | 393,352 |   | 9,326 |   | 2.37 |   | 320,974 |   | 8,892 |   | 2.77 |   |
| Borrowings                                    |       | 161,370                       |       | 6,683 |   | 4.14 |   | 119,291 |   | 4,573 |   | 3.83 |   | 94,880 |   | 3,817 |   | 4.02 |   |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities            |       | 1,129,707                     |       | 33,836 |   | 3.00 | % | 844,642 |   | 17,952 |   | 2.13 | % | 655,585 |   | 15,288 |   | 2.33 | % |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing demand                    |       | 155,241                       |       |   |   |   |   | 108,749 |   |   |   |   |   | 76,983 |   |   |   |   |   |
| Other liabilities                             |       | 13,840                        |       |   |   |   |   | 11,039 |   |   |   |   |   | 7,422 |   |   |   |   |   |
| Stockholders’ equity (3)                 |       | 198,004                       |       |   |   |   |   | 118,271 |   |   |   |   |   | 73,144 |   |   |   |   |   |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                         |       | $                             | 1,496,792  |   |   |   |   |   | $ | 1,082,701 |   |   |   |   |   | $ | 813,134 |   |   |   |   |   |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                           |       |                          |       | $ | 56,979 |   |   |   |   |   | $ | 40,322 |   |   |   |   |   | $ | 31,504 |   |   |   |
| Net interest spread                           |       |                          |       |   |   | 3.76 | % |   |   |   |   | 3.86 | % |   |   |   |   | 3.99 | % |
| Net yield on average interest-earning  assets |       |                          |       |   |   | 4.24 | % |   |   |   |   | 4.14 | % |   |   |   |   | 4.25 | % |

 

----

(1)           Averagebalances were determined using the daily average balances.

(2)           Averagebalances of loans are net of deferred costs and fees and nonaccrual loans.

(3)           Averageunrealized gains (losses) on securities available for sale, net of tax, havebeen included in stockholders’ equity at ($1,306,000), $210,000, and $1,260,000for 2005, 2004, and 2003, respectively.

(4)           Interest andfees on loans include $5,944,000, $4,146,000 and $3,412,000 of loan fee incomefor the years ended December 31, 2005, 2004 and 2003, respectively.

(5)           Yields onnontaxable securities are not presented on a tax-equivalent basis.

 

31

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**Rateand Volume Analysis**

 

Thefollowing table describes the extent to which changes in interest rates andchanges in volume of interest-earning assets and interest-bearing liabilitieshave affected our interest income and expense during the years indicated. Foreach category of interest-earning assets and interest-bearing liabilities,information is provided on changes attributable to: (1) change in volume(change in volume multiplied by old rate); (2) change in rate (change in ratemultiplied by old volume); and (3) a combination of change in rate and changein volume. The changes in interest income and interest expense attributable toboth volume and rate have been allocated proportionately to the change due tovolume and the change due to rate.

 
| ** **                                                         | ** ** | **Years  Ended December 31,**              | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                         | ** ** | **2005 to  2004**                          | ** ** | **2004 to  2003** | ** ** |
| ** **                                                         | ** ** | **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                                         |       | $                                          | 6,842      |   | $ | 23,057 |   | $ | 29,899 |   | $ | (2,729 | ) | $ | 13,195 |   | $ | 10,466 |   |
| Interest on taxable securities                                     |       | 559                                        |       | 2,022 |   | 2,581 |   | (262 | ) | 1,215 |   | 953 |   |
| Interest on nontaxable securities                                  |       | (27                                        | )          | (91 | ) | (118 | ) | 134 |   | (86 | ) | 48 |   |
| Interest on federal funds sold                                     |       | 213                                        |       | (49 | ) | 164 |   | 16 |   | 2 |   | 18 |   |
| Interest on interest-bearing deposits in  other banks              |       | 36                                         |       | (21 | ) | 15 |   | (2 | ) | (1 | ) | (3 | ) |
| Total interest income                                              |       | 7,623                                      |       | 24,918 |   | 32,541 |   | (2,843 | ) | 14,325 |   | 11,482 |   |
|                                                               |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Expense from interest-bearing Liabilities:                         |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest on interest-bearing demand deposits  and savings deposits |       | 3,210                                      |       | 1,074 |   | 4,284 |   | 372 |   | 1,102 |   | 1,474 |   |
| Interest on time deposits                                          |       | 4,700                                      |       | 4,790 |   | 9,490 |   | (1,396 | ) | 1,830 |   | 434 |   |
| Interest on borrowings                                             |       | 394                                        |       | 1,716 |   | 2,110 |   | (187 | ) | 943 |   | 756 |   |
| Total interest expense                                             |       | 8,304                                      |       | 7,580 |   | 15,884 |   | (1,211 | ) | 3,875 |   | 2,664 |   |
|                                                               |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                                |       | $                                          | (681       | ) | $ | 17,338 |   | $ | 16,657 |   | $ | (1,632 | ) | $ | 10,450 |   | $ | 8,818 |   |

 

32

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**MarketRisk and Interest Rate Sensitivity**

 

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

 

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

 

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

 

AtDecember 31, 2005 our cumulative one year interest rate sensitivity gap ratiowas 1.05. This indicates that our interest-bearing assets will reprice duringthis period at a rate faster than our interest-earning liabilities.

 

Thefollowing table sets forth the distribution of the repricing of ourinterest-earning assets and interest-bearing liabilities as of December 31,2005, the interest rate sensitivity gap (i.e., interest rate sensitive assetsless interest rate sensitive liabilities), the cumulative interest ratesensitivity gap, the interest rate sensitivity gap ratio (i.e., interest ratesensitive assets divided by interest rate sensitive liabilities) and thecumulative interest rate sensitivity gap ratio.

 

Thetable also sets forth the time periods in which interest-earning assets andinterest-bearing liabilities will mature or may reprice in accordance withtheir contractual terms. However, the table does not necessarily indicate theimpact of general interest rate movements on the net interest margin since therepricing of various categories of assets and liabilities is subject tocompetitive pressures and the needs of our customers. In addition, variousassets and liabilities indicated as repricing within the same period may infact reprice at different times within such period and at different rates.

 

33

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| ** **                                         | ** ** | **Within  Three  Months**   | ** ** | **After  Three  Months  But  Within  One Year** | ** ** | **After  One Year  But  Within  Five Years** | ** ** | **After  Five Years** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|-------------------------------------------------|------------|----------------------------------------------|------------|-----------------------|------------|-----------|------------|
| ** **                                         | ** ** | **(Dollars  in thousands)** | ** ** |
| Interest-earning assets:                           |       |                        |       |                                            |       |                                         |       |                  |       |      |       |
| Interest-bearing deposits                          |       | $                           | 728        |                                            | $          | —                                       |       | $                     | —     |      | $          | — |   | $ | 728 |   |
| Federal funds sold                                 |       | 568                         |       | —                                          |       | —                                       |       | —                |       | 568       |       |
| Securities (1)                                     |       | 22,289                      |       | 19,686                                          |       | 112,880                                      |       | 33,272                |       | 188,127   |       |
| Loans                                              |       | 756,673                     |       | 175,961                                         |       | 294,000                                      |       | 4,776                 |       | 1,231,410 |       |
|                                               |       |                        |       |                                            |       |                                         |       |                  |       |      |       |
| Total interest-earning assets                      |       | 780,258                     |       | 195,647                                         |       | 406,880                                      |       | 38,048                |       | 1,420,833 |       |
|                                               |       |                        |       |                                            |       |                                         |       |                  |       |      |       |
| Interest-bearing liabilities:                      |       |                        |       |                                            |       |                                         |       |                  |       |      |       |
| Interest-bearing demand and savings                |       | $                           | 414,542    |                                            | $          | —                                       |       | $                     | —     |      | $          | — |   | $ | 414,542 |   |
| Time deposits                                      |       | 107,546                     |       | 333,312                                         |       | 183,065                                      |       | 73                    |       | 623,996   |       |
| Federal funds purchased and Repurchase  agreements |       | 45,510                      |       | —                                          |       | —                                       |       | —                |       | 45,510    |       |
| Other borrowings                                   |       | 8,369                       |       | 23,250                                          |       | 58,028                                       |       | 38,517                |       | 128,164   |       |
|                                               |       |                        |       |                                            |       |                                         |       |                  |       |      |       |
| Total interest-bearing liabilities                 |       | $                           | 575,967    |                                            | $          | 356,562                                      |       | $                     | 241,093    |      | $          | 38,590 |   | $ | 1,212,212 |   |
|                                               |       |                        |       |                                            |       |                                         |       |                  |       |      |       |
| Interest rate sensitivity gap                      |       | $                           | 204,291    |                                            | $          | (160,915                                     | )          | $                     | 165,787    |      | $          | (542 | ) | $ | 208,621 |   |
|                                               |       |                        |       |                                            |       |                                         |       |                  |       |      |       |
| Cumulative interest rate sensitivity gap           |       | $                           | 204,291    |                                            | $          | 43,376                                       |       | $                     | 209,163    |      | $          | 208,621 |   |   |   |
|                                               |       |                        |       |                                            |       |                                         |       |                  |       |      |       |
| Interest rate sensitivity gap ratio                |       | 1.35                        | %          | 0.55                                            | %          | 1.69                                         | %          | 0.99                  | %          |      |       |
|                                               |       |                        |       |                                            |       |                                         |       |                  |       |      |       |
| Cumulative interest rate sensitivity gap  ratio    |       | 1.35                        | %          | 1.05                                            | %          | 1.18                                         | %          | 1.17                  | %          |      |       |

 

----

(1)Doesnot include restricted equity securities, which consist of Federal Home LoanBank of Atlanta stock and The Bankers Bank stock, as such assets are notinterest rate sensitive.

 

Managementbelieves that gap analysis is a useful tool for measuring interest rate riskonly when used in conjunction with its simulation model.  As of December 31, 2005, the Companymaintained an asset sensitive interest rate risk position based on itssimulation model results.  Thispositioning would be expected to result in an increase in net interest incomein a rising rate environment and a decrease in net interest income in adeclining rate environment.  This isgenerally due to a greater proportion of interest earning assets repricing on avariable rate basis as compared to variable rate funding sources. This assetsensitivity is indicated by selected results of net interest incomesimulations.  The actual realized changein net interest income would depend on several factors.  These factors include, but are not limitedto, actual realized growth in asset and liability volumes, as well as the mixexperienced over these time horizons. Market conditions and their resulting impact on loan, deposit, andfunding pricing would also be a primary determinant in the realized level ofnet interest income.  The table belowshows the impact on net interest margins over a twelve-month period whensubjected to an immediate 100 basis point increase and decrease in rate.

 

**Twelve Month Net Interest Income Sensitivity**

 

| **Change in Short-Term Interest  Rates (in basis points)** | ** ** | **Estimated Change in Net  Interest Income** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------|------------|
|                                                       |       |                                         |       |
| +100                                                       |       | 8.87                                         | %          |
| Flat                                                       |       | —                                       |       |
| -100                                                       |       | (8.16                                        | )%         |

 

34

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Weactively manage the mix of asset and liability maturities to control theeffects of changes in the general level of interest rates on net interestincome. Except for its effect on the general level of interest rates, inflationdoes not have a material impact on us due to the rate variability andshort-term maturities of our earning assets. In particular, as of December 31,2005 approximately 72% of the loan portfolio is comprised of loans which havevariable rate terms or mature within one year. Most mortgage loans are made ona variable rate basis with rates being adjusted every one to five years.

 

**SecuritiesPortfolio**

 

*Typesof Securities*

 

Thefollowing table sets forth the carrying value of securities held by us as ofthe dates indicated:

 
| ** **                                                     | ** ** | **December 31,**            | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                     | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                     | ** ** | **(Dollars  in thousands)** | ** ** |
| U. S. Treasury and U. S. government  agencies and corporations |       | $                           | 77,363     |   | $ | 59,966 |   | $ | 42,639 |   |
| Mortgage-backed securities                                     |       | 97,729                      |       | 111,344 |   | 69,872 |   |
| State and municipal securities                                 |       | 11,327                      |       | 16,790 |   | 17,576 |   |
| Equity securities (1)                                          |       | 10,985                      |       | 9,762 |   | 7,440 |   |
|                                                           |       | $                           | 197,404    |   | $ | 197,862 |   | $ | 137,527 |   |

 

----

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

 

*Maturities*

 

Theamounts of debt securities as of December 31, 2005 are shown in the followingtable according to contractual maturities.

 
| ** **                         | ** ** | **U. S.  Treasury  And U. S.  Government Agencies  And Corporations** | ** ** | **State  and  Municipal Securities** | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | **Amount**                                                            | ** ** | **Yield  (1)**                       | ** ** | **Amount** | ** ** | **Yield  (1)(2)** | ** ** |
| ** **                         | ** ** | **(Dollars  in thousands)**                                           | ** ** |
| Maturity:                          |       |                                                                  |       |                                 |       |   |   |   |   |
| One year or less                   |       | $                                                                     | 4,010      |                                 | 3.19       | % | $ | 1,607 |   | 4.77 | % |
| After one year through five years  |       | 77,463                                                                |       | 3.73                                 |       | 3,959 |   | 4.78 |   |
| After five years through ten years |       | 36,284                                                                |       | 4.45                                 |       | 3,876 |   | 5.00 |   |
| After ten years                    |       | 57,335                                                                |       | 4.43                                 |       | 1,885 |   | 4.29 |   |
|                               |       | $                                                                     | 175,092    |                                 | 4.10       | % | $ | 11,327 |   | 4.77 | % |

 

----

(1)           Yields werecomputed using coupon interest rates, including discountaccretionand premium amortization.  The weightedaverage yield for each maturity range was computed using the carrying value ofeach security in that range.

(2)           Yields on municipal securities are not statedon a tax-equivalent basis.

 

35

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**LoanPortfolio**

 

*Typesof Loans*

 

Thefollowing table sets forth our loans by type of collateral as of the datesindicated therein:

 
| ** **                      | ** ** | **December 31,**            | ** ** |
|---------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                      | ** ** | **(Dollars  in thousands)** | ** ** |
|                            |       |                        |       |   |   |   |   |   |   |   |   |
| Commercial                      |       | $                           | 99,640     |   | $ | 74,437 |   | $ | 50,997 |   | $ | 43,011 |   | $ | 38,597 |   |
| Real estate – construction |       | 481,332                     |       | 294,817 |   | 185,397 |   | 120,922 |   | 99,473 |   |
| Real estate – mortgage     |       | 615,594                     |       | 545,614 |   | 439,779 |   | 348,229 |   | 247,311 |   |
| Consumer                        |       | 33,260                      |       | 37,248 |   | 30,088 |   | 29,630 |   | 29,286 |   |
| Other                           |       | 1,584                       |       | 3,764 |   | 3,697 |   | 1,042 |   | 3,989 |   |
|                            |       | 1,231,410                   |       | 955,880 |   | 709,958 |   | 542,834 |   | 418,656 |   |
| Less allowance for loan losses  |       | (12,773                     | )          | (11,061 | ) | (8,726 | ) | (7,538 | ) | (5,522 | ) |
| Net loans                       |       | $                           | 1,218,637  |   | $ | 944,819 |   | $ | 701,232 |   | $ | 535,296 |   | $ | 413,134 |   |

 

Loans are net of deferredloan fees.

 

*Maturitiesand Sensitivities to Changes in Interest Rates*

 

Totalloans as of December 31, 2005 are shown in the following table according tocontractual maturity.

 
| ** **                   | ** ** | **(Dollars  in thousands)** | ** ** |
|------------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | ** **                  | ** ** |
| Commercial                   |       |                        |       |
| One year or less             |       | $                           | 57,486     |   |
| After one through five years |       | 37,254                      |       |
| After five years             |       | 4,900                       |       |
|                         |       | 99,640                      |       |
| Real Estate - Construction   |       |                        |       |
| One year or less             |       | 415,992                     |       |
| After one through five years |       | 62,170                      |       |
| After five years             |       | 3,170                       |       |
|                         |       | 481,332                     |       |
| Other                        |       |                        |       |
| One year or less             |       | 213,856                     |       |
| After one through five years |       | 402,685                     |       |
| After five years             |       | 33,897                      |       |
|                         |       | 650,438                     |       |
|                         |       |                        |       |
|                         |       | $                           | 1,231,410  |   |

 

Thefollowing table summarizes loans at December 31, 2005 with the due dates after oneyear for predetermined and floating or adjustable interest rates.

 
| ** **                            | ** ** | **(Dollars in  thousands)** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|
|                                  |       |                        |       |
| Predetermined interest rates          | ** ** | $                           | 341,342    | ** ** |
| Floating or adjustable interest rates |       | 202,734                     |       |
| ** **                            |       | $                           | 544,076    |   |

 

36

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*RiskElements*

 

Thefollowing table presents the aggregate of nonperforming loans for thecategories and as of the dates indicated.

 
| ** **                                                                                                                                                                       | ** ** | **December 31,**            | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                                                                                                                       | ** ** | **(Dollars  in thousands)** | ** ** |
|                                                                                                                                                                             |       |                        |       |   |   |   |   |   |   |   |   |
| Loans accounted for on a nonaccrual basis                                                                                                                                        |       | $                           | 6,562      |   | $ | 10,059 |   | $ | 3,333 |   | $ | 5,506 |   | $ | 473 |   |
|                                                                                                                                                                             |       |                        |       |   |   |   |   |   |   |   |   |
| Loans contractually past due 90 days or  more to interest or principal payments and still Accruing                                                                               |       | 17                          |       | 328 |   | 509 |   | 1,814 |   | 196 |   |
|                                                                                                                                                                             |       |                        |       |   |   |   |   |   |   |   |   |
| 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 |   | 12 |   | 14 |   |
|                                                                                                                                                                             |       |                        |       |   |   |   |   |   |   |   |   |
| Loans now current about which there are  serious doubts as to the ability of the borrower to comply with present loan repayment  terms                                           |       | —                      |       | — |   | — |   | — |   | — |   |
|                                                                                                                                                                                  |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thereduction in interest income associated with nonaccrual loans as ofDecember 31, 2005 is as follows:

 
| ** **                                                                              | ** ** | **(Dollars in thousands)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------|------------|
| Interest income that would have been recorded on nonaccrual  loans under original terms |       | $                          | 432        |   |
|                                                                                    |       |                       |       |
| Interest income that was recorded on  nonaccrual loans                                  |       | $                          | 118        |   |

 

Managementincludes nonaccrual loans in its definition of impaired loans as determined byFinancial Accounting Standards Board Statement Numbers 114 and 118.

 

Ourpolicy is to discontinue the accrual of interest income when, in the opinion ofmanagement, collection of such interest becomes doubtful. This status isdetermined when: (1) there is a significant deterioration in the financialcondition of the borrower and full repayment of principal and interest is notexpected; and (2) the principal or interest is more than 90 days past due,unless the loan is both well-secured and in the process of collection.  Accrual of interest on such loans is resumedwhen, in management’s judgment, the collection of interest and principalbecomes probable. Loans classified for regulatory purposes as loss, doubtful,substandard, or special mention that have not been included in the table abovedo not represent or result from trends or uncertainties which managementreasonably expects will materially impact future operating results, liquidity,or capital resources. These classified loans do not represent material creditsabout which management is aware and which cause management to have seriousdoubts as to the ability of such borrowers to comply with the loan repaymentterms. In the event of non-performance by the borrower, these loans havecollateral pledged which would prevent the recognition of substantial losses.

 

37

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**Summaryof Loan Loss Experience**

 

Thefollowing table summarizes average loan balances for the periods set forththerein determined using the daily average balances during the year; changes inthe allowance for loan losses arising from loans charged off and recoveries onloans previously charged off; additions to the allowance which have beencharged to expense; and the ratio of net charge-offs during the year to averageloans.

 
| ** **                                                                   | ** ** | **December 31,**            | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                   | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                   | ** ** | **(Dollars  in thousands)** | ** ** |
|                                                                         |       |                        |       |   |   |   |   |   |   |   |   |
| Average amount of loans outstanding (1)                                      |       | $                           | 1,131,887  |   | $ | 807,340 |   | $ | 608,131 |   | $ | 446,518 |   | $ | 397,496 |   |
|                                                                         |       |                        |       |   |   |   |   |   |   |   |   |
| Balance of allowance for loan losses at  beginning of year                   |       | $                           | 11,061     |   | $ | 8,726 |   | $ | 7,538 |   | $ | 5,522 |   | $ | 5,099 |   |
|                                                                         |       |                        |       |   |   |   |   |   |   |   |   |
| Loans charged off:                                                           |       |                        |       |   |   |   |   |   |   |   |   |
| Real estate                                                                  |       | (3,863                      | )          | (422 | ) | (469 | ) | (190 | ) | (211 | ) |
| Commercial                                                                   |       | (666                        | )          | (185 | ) | (295 | ) | (77 | ) | (78 | ) |
| Consumer                                                                     |       | (1,177                      | )          | (1,001 | ) | (700 | ) | (799 | ) | (801 | ) |
| Credit cards                                                                 |       | (55                         | )          | (20 | ) | (2 | ) | (28 | ) | (28 | ) |
|                                                                         |       | (5,761                      | )          | (1,628 | ) | (1,466 | ) | (1,094 | ) | (1,118 | ) |
|                                                                         |       |                        |       |   |   |   |   |   |   |   |   |
| Recoveries of loans previously charged off:                                  |       |                        |       |   |   |   |   |   |   |   |   |
| Real estate                                                                  |       | 68                          |       | 113 |   | 53 |   | 175 |   | 21 |   |
| Commercial                                                                   |       | 95                          |       | 66 |   | 31 |   | 2 |   | 8 |   |
| Consumer                                                                     |       | 269                         |       | 292 |   | 286 |   | 246 |   | 192 |   |
| Credit cards                                                                 |       | 20                          |       | 11 |   | 14 |   | 1 |   | 14 |   |
|                                                                         |       | 452                         |       | 482 |   | 384 |   | 424 |   | 235 |   |
|                                                                         |       |                        |       |   |   |   |   |   |   |   |   |
| Net loans charged off during the year                                        |       | (5,309                      | )          | (1,146 | ) | (1,082 | ) | (670 | ) | (883 | ) |
| Allowance for loan losses acquired (sold)                                    |       | 1,105                       |       | 2,075 |   | 864 |   | 1,841 |   | — |   |
|                                                                         |       |                        |       |   |   |   |   |   |   |   |   |
| Additions to allowance charged to expense  during year                       |       | 5,916                       |       | 1,406 |   | 1,406 |   | 845 |   | 1,306 |   |
|                                                                         |       |                        |       |   |   |   |   |   |   |   |   |
| Balance of allowance for loan losses at end  of year                         |       | $                           | 12,773     |   | $ | 11,061 |   | $ | 8,726 |   | $ | 7,538 |   | $ | 5,522 |   |
|                                                                         |       |                        |       |   |   |   |   |   |   |   |   |
| Ratio of net loans charged off during the  year to average loans outstanding |       | 0.47                        | %          | 0.14 | % | 0.18 | % | 0.15 | % | 0.22 | % |

 

----

(1)   Average total loans include nonaccrual loans.

 

38

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Thefollowing table sets forth the allowance for loan losses to total allowance forloan losses and the percent of loans to total loans in each of the categorieslisted at the dates indicated:

 
| ** **               | ** ** | **December  31,**           | ** ** |
|--------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **               | ** ** | **Amount**                  | ** ** | **Percent  of Loans  in Each  Category  to Total  Loans** | ** ** | **Amount** | ** ** | **Percent  of Loans  in Each  Category  to Total  Loans** | ** ** | **Amount** | ** ** | **Percent  of Loans  in Each  Category  to Total  Loans** | ** ** | **Amount** | ** ** | **Percent  of Loans  in Each  Category  to Total  Loans** | ** ** | **Amount** | ** ** | **Percent  of Loans  in Each  Category  to Total  Loans** | ** ** |
| ** **               | ** ** | **(Dollars  in thousands)** | ** ** |
|                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial               |       | $                           | 971        |   | 8.09 | % | $ | 840 |   | 7.79 | % | $ | 663 |   | 7.19 | % | $ | 573 |   | 7.92 | % | $ | 418 |   | 9.22 | % |
| Real estate-construction |       | 1,597                       |       | 39.09 |   | 1,383 |   | 30.84 |   | 1,091 |   | 26.11 |   | 942 |   | 22.28 |   | 690 |   | 23.76 |   |
| Real estate-mortgage     |       | 7,600                       |       | 49.99 |   | 6,581 |   | 57.08 |   | 5,192 |   | 61.94 |   | 4,485 |   | 64.15 |   | 3,287 |   | 59.07 |   |
| Consumer and other       |       | 2,605                       |       | 2.83 |   | 2,257 |   | 4.29 |   | 1,780 |   | 4.76 |   | 1,538 |   | 5.65 |   | 1,127 |   | 7.95 |   |
| Total allowance          |       | $                           | 12,773     |   | 100.00 | % | $ | 11,061 |   | 100.00 | % | $ | 8,726 |   | 100.00 | % | $ | 7,538 |   | 100.00 | % | $ | 5,522 |   | 100.00 | % |

 

Theallowance for loan losses is established through provisions for loan lossescharged to operations. Loans are charged against the allowance for loan losseswhen 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.”

 

Ourallowance for loan losses was approximately $12,773,000 at December 31, 2005,representing 1.04% of total loans, compared with $11,061,000 at December 31,2004, which represented 1.16% of total loans.

 

**Deposits**

 

Averageamounts of deposits and average rates paid thereon, classified as tononinterest-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,** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | **Amount**                  | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| ** **                                    | ** ** | **(Dollars  in thousands)** | ** ** |
|                                          |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing demand deposits           |       | $                           | 155,241    |   | — | % | $ | 108,749 |   | — | % | $ | 76,983 |   | — | % |
| Interest-bearing demand and savings  deposits |       | 407,551                     |       | 2.05 |   | 331,999 |   | 1.22 |   | 239,731 |   | 1.08 |   |
| Time deposits                                 |       | 560,786                     |       | 3.36 |   | 393,352 |   | 2.37 |   | 320,974 |   | 2.77 |   |
| Total deposits                                |       | $                           | 1,123,578  |   |   |   | $ | 834,100 |   |   |   | $ | 637,688 |   |   |   |

 

39

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Theamounts of time certificates of deposit issued in amounts of $100,000 or moreas of December 31, 2005 are shown below by category.

 
| ** **                     | ** ** | **(Dollars in  thousands)** | ** **  |
|--------------------------------|------------|-----------------------------|-------------|
|                           |       |                        |        |
| Three months  or less          | ** ** | $                           | 39,346      |   |
| Over three  through six months |       | 33,804                      |        |
| Over six  through 12 months    |       | 83,277                      |        |
| Over 12  months                |       | 94,267                      |        |
| Total                          | ** ** | **$**                       | **250,694** | ** ** |

 

**Returnon Equity and Assets**

 

Thefollowing table sets forth rate of return information for the periodsindicated.

 
| ** **                 | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|                       |       |                         |       |   |   |   |   |
| Return on assets (1)       |       | 0.80                         | %          | 0.91 | % | 0.95 | % |
| Return on equity (2)       |       | 6.06                         |       | 8.32 |   | 10.56 |   |
| Dividend payout ratio (3)  |       | 35.48                        |       | 28.85 |   | 28.16 |   |
| Equity to assets ratio (4) |       | 13.23                        |       | 10.92 |   | 9.00 |   |

 

----

(1)           Net incomedivided by average total assets.

(2)           Net incomedivided by average equity.

(3)           Dividendsdeclared per share divided by diluted earnings per share.

(4)           Average equity divided by average totalassets.

 

**Borrowings**

 

Aspart of our operating strategy, we have utilized federal funds purchased andsecurities sold under repurchase agreements as an alternative to retaildeposits to fund our operations when borrowings are less costly and can beinvested at a positive interest rate spread or when we need additional funds tosatisfy loan demand. By utilizing federal funds purchased and securities soldunder repurchase agreements, which possess varying stated maturities, we canmeet our liquidity needs without otherwise being dependent upon retail depositsand revising our deposit rates to attract retail deposits, which, other thancertificates of deposit, have no stated maturities and are subject towithdrawal from us at any time. At December 31, 2005, we had $45.5 million inoutstanding federal funds purchased and securities sold under repurchaseagreements.

 

Thefollowing table sets forth certain information regarding federal fundspurchased and securities sold under repurchase agreements at or for the periodsended on the dates indicated:

 
| ** **                                                   | ** ** | **At or For the Year Ended  December 31,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                   | ** ** | **(Dollars  in thousands)**                | ** ** |
|                                                         |       |                                       |       |   |   |   |   |
| Average balance outstanding                                  |       | $                                          | 33,130     |   | $ | 19,906 |   | $ | 13,882 |   |
| Maximum amount outstanding at any month-end  during the year |       | 47,527                                     |       | 47,582 |   | 21,343 |   |
| Balance outstanding at end of year                           |       | 45,510                                     |       | 47,582 |   | 17,314 |   |
| Weighted average interest rate during year                   |       | 3.30                                       | %          | 1.49 | % | 1.06 | % |
| Weighted average interest rate at end of  year               |       | 4.09                                       | %          | 2.10 | % | 0.85 | % |
|                                                              |            |                                            |            |  |  |  |  |  |  |  |

 

40

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**ITEM 7A.****              ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

**ITEM 8.****                 ****FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

ConsolidatedBalance Sheets - December 31, 2005 and 2004.

 

ConsolidatedStatements of Income – Three Years Ended December 31, 2005, 2004, and 2003.

 

ConsolidatedStatements of Comprehensive Income – Three Years Ended December 31, 2005, 2004,and 2003.

 

ConsolidatedStatements of Stockholders’ Equity – Three Years Ended December 31, 2005, 2004,and 2003.

 

ConsolidatedStatements of Cash Flows – Three Years Ended December 31, 2005, 2004, and 2003.

 

Notesto Consolidated Financial Statements.

 
| **ITEM 9.** | ** ** | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|------------|-------------------------------------------------------------------------------------------|

 

Notapplicable

 

**ITEM 9A.****             ****CONTROLS AND PROCEDURES**

 

**DisclosureControls and Procedures**

 

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

 

**InternalControl over Financial Reporting**

 

Themanagement of GB&T Bancshares, Inc. and subsidiaries is responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Rules 13a-15 and 15d-15. This internal control system has been designed to provide reasonableassurance to the Company’s management and board of directors regarding thereliability of financial reporting and the preparation and fair presentation offinancial statements for external purposes in accordance with accountingprinciples generally accepted in the United States of America.

 

Allinternal control systems, no matter how well designed, have inherentlimitations.  Therefore, even those systems determined to be effective canprovide only reasonable assurance with respect to financial statementpreparation and presentation.

 

Themanagement of GB&T Bancshares, Inc. and subsidiaries has assessed theeffectiveness of the company’s internal control over financial reporting as ofDecember 31, 2005.  To make thisassessment, we used the criteria for effective internal control over financialreporting described in Internal Control – Integrated Framework, issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and based on such criteria, we believe that, as ofDecember 31, 2005, the Company’s internal control over financial reporting waseffective.

 

41

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Mauldin& Jenkins, LLC, the independent registered public accounting firm thataudited the consolidated financial statements of the Company included in thisAnnual Report on Form 10-K, has issued an attestation report on management’sassessment of the Company’s internal control over financial reporting as ofDecember 31, 2005.  The report,which expresses an unqualified opinion on management’s assessment and on theeffectiveness of the Company’s internal control over financial reporting as ofDecember 31, 2005, is included in this Item under the heading “AttestationReport of the Independent Registered Public Accounting Firm.”

 

**ATTESTATIONREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors

GB&TBancshares, Inc.

Gainesville,Georgia

 

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl over Financial Reporting that GB&T Bancshares, Inc. maintainedeffective internal control over financial reporting as of December 31, 2005,based on criteria established in *Internal Control –Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  GB&T Bancshares Inc.’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting.  Our responsibility is toexpress an opinion on management’s assessment and an opinion on theeffectiveness of the company’s internal control over financial reporting basedon our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances.  We believe that our auditprovides a reasonable basis for our opinion.

 

A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management’sassessment that GB&T Bancshares, Inc. maintained effective internal controlover financial reporting as of December 31, 2005, is fairly stated, in allmaterial respects, based on criteria established in *InternalControl – Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  Also in our opinion, GB&T Bancshares,Inc. maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2005, based on criteria established in *Internal Control – Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).

 

42

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We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of GB&T Bancshares, Inc.and Subsidiaries as of December 31, 2005 and 2004, and the related consolidatedstatements of income, comprehensive income, stockholders’ equity and cash flowsfor each of the three years in the period ended December 31, 2005, and ourreport dated February 3, 2006 expressed an unqualified opinion.

 

 
|             | /s/ MAULDIN & JENKINS, LLC |   |
|------------------|--------------------------------|--------|
|             |                           |
| Atlanta, Georgia |                           |
| February 3, 2006 |                           |

 

**Changes in Internal Control Over Financial Reporting**

 

Duringthe fourth quarter of the year ended December 31, 2005, no change in theCompany’s internal control over financial reporting occurred that hasmaterially affected or is reasonably likely to materially affect, the Company’sinternal control over financial reporting

 

**ITEM 9B.****             ****OTHER INFORMATION**

 

None.

 

**PART III**

 

**ITEM 10.****              ****DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Theinformation set forth under the caption “Election of Directors” and “ExecutiveOfficers” in the definitive Proxy Statement to be filed in connection with our2006 Annual Shareholders Meeting is incorporated herein by reference.

 

**ITEM 11.****              ****EXECUTIVE COMPENSATION**

 

Theinformation set forth under the caption “Executive Compensation” in thedefinitive Proxy Statement to be filed in connection with our 2006 AnnualShareholders meeting is incorporated herein by reference.

 

43

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| **ITEM  12.** |   | **SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS** |
|---------------|--------|------------------------------------------------------------------------------------------------------|

 

Theinformation set forth under the caption “Security Ownership of CertainBeneficial Owners and Management” in the definitive Proxy Statement to be filedin connection with our 2006 Annual Shareholders meeting is incorporated hereinby reference.

** **

**Equity Compensation Plan Information**

 

Thefollowing table gives information about shares of the Company’s common stockthat may be issued upon the exercise of options, warrants and rights under allexisting equity compensation plans as of December 31, 2005.

 
| **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 plansapproved by security  holders (1)     |       | 781,131                                                                                             |       | $                                                                                  | 10.48      |                                                                                                                                                    | 356,418    |   |
| Equity compensation plans not approved by  security holders(2) |       | —                                                                                              |       | —                                                                             |       | —                                                                                                                                                  |       |
| Total                                                          |       | 781,131                                                                                             |       | N/A                                                                                |       | 356,418                                                                                                                                                 |       |
|                                                                |            |                                                                                                     |            |                                                                                    |            |                                                                                                                                                         |            |  |

 

----

(1)           GB&TBancshares 1997 Stock Incentive Plan

(2)           N/A

 

**ITEM 13.****              ****CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

Theinformation set forth under the caption “Certain Transactions” in thedefinitive Proxy Statement to be filed in connection with our 2006 AnnualShareholders meeting is incorporated herein by reference.

 

**ITEM 14.****              ****PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

Theinformation set forth under the caption “Independent Accountants” in thedefinitive Proxy Statement to be filed in connection with our 2006 AnnualShareholders Meeting is incorporated herein by reference.

 

44

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**PART IV**

 

**ITEM15.****              ****EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

(a)           Contents:

 

1.             Consolidatedfinancial statements:

 

(a)           GB&TBancshares, Inc. and Subsidiaries:

 

(i)            ConsolidatedBalance Sheets - December 31, 2005 and 2004

 

(ii)           ConsolidatedStatements of Income – Three Years Ended December 31, 2005, 2004, and 2003

 

(iii)          ConsolidatedStatements of Comprehensive Income – Three Years Ended December 31, 2005, 2004,and 2003

 

(iv)          ConsolidatedStatements of Stockholders’ Equity – Three Years Ended December 31, 2005, 2004,and 2003

 

(v)           ConsolidatedStatements of Cash Flows – Three Years Ended December 31, 2005, 2004, and 2003

 

(vi)          Notes toConsolidated Financial Statements

 

2.             Financialstatement schedules:

 

Allschedules are omitted as the required information isinapplicable orthe information is presented in the financial statements or related notes.

 

45

----

 
| (b)        |       | Exhibits:        |       |                                                                                                                                                                                                   |
|------------|------------|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |             |       |                                                                                                                                                                                                   |
| ** ** | ** ** | **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                        |
|       |       | 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).                              |
|       |       |             |       |                                                                                                                                                                                                   |
|       |       | 3.2              |       | Articles  of Amendment of the Registrant, dated July 8, 1998 (incorporated herein by  reference from the Registrant’s Registration Statement on Form S-3,  Registration No. 333-64197)            |
|       |       |             |       |                                                                                                                                                                                                   |
|       |       | 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) |
|       |       |             |       |                                                                                                                                                                                                   |
|       |       | 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).                                                |
|       |       |             |       |                                                                                                                                                                                                   |
|       |       | 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 December  30, 2002 (incorporated herein by reference to the Registrant’s Form 10-K  filed on March 31, 2003).     |
|       |       |             |       |                                                                                                                                                                                                   |
|       |       | *10.3            |       | Employment  Agreement, by and between GB&T and Gregory L. Hamby, dated as of December  30, 2002 (incorporated herein by reference to the Registrant’s Form 10-K  filed on March 31, 2003).    |
|       |       |             |       |                                                                                                                                                                                                   |
|       |       | *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).                                                   |
|       |       |             |       |                                                                                                                                                                                                   |
|       |       | 21.1             |       | Subsidiaries  of the Registrant.                                                                                                                                                                       |
|       |       |             |       |                                                                                                                                                                                                   |
|       |       | 23.1             |       | Consent  of Mauldin & Jenkins, LLC.                                                                                                                                                                |
|       |       |             |       |                                                                                                                                                                                                   |
|       |       | 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.                                                                                                                                            |

 

----

*Eachmanagement contract or compensation plan required to be filed as an exhibit isidentified by an asterisk.

 

46

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d)of the Securities Exchange Act of 1934, as amended, the Registrant has dulycaused this Report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|                        | GB&T BANCSHARES, INC. |
|-----------------------------|---------------------------|
|                        |                      |
| Dated:  March 16, 2006 | 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.

 

47

----

 

Pursuant to the requirementsof the 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  16, 2006 |
|                          | Richard  A. Hunt, President, Chief |   |   |
|                          |  Executive Officer and Director |   |   |
|                          |  (Principal Executive Officer) |   |   |
|                          |   |   |   |
| By:                           | /s/  Gregory L. Hamby | DATE | March  16, 2006 |
|                          | Gregory  L. Hamby, Executive Vice President |   |   |
|                          |  and Chief Financial Officer |   |   |
|                          |  (Principal Financial and Accounting Officer) |   |   |
|                          |   |   |   |
| By:                           | /s/  Philip A. Wilheit | DATE | March  16, 2006 |
|                          | Philip  A. Wilheit, Chairman and Director |   |   |
|                          |   |   |   |
| By:                           | /s/  Samuel L. Oliver | DATE | March  16, 2006 |
|                          | Samuel  L. Oliver, Vice Chairman and  Director |   |   |
|                          |   |   |   |
|                          |   |   |   |
| By:                           | /s/  Alan A. Wayne | DATE | March  16, 2006 |
|                          | Alan  A. Wayne, Secretary and Director |   |   |
|                          |   |   |   |
| By:                           | /s/  Larry B. Boggs | DATE | March  16, 2006 |
|                          | Larry  B. Boggs, Director |   |   |
|                          |   |   |   |
| By:                           | /s/  James H. Moore | DATE | March  16, 2006 |
|                          | James  H. Moore, Director |   |   |
|                          |   |   |   |
| By:                           | /s/  Dr. John W. Darden | DATE | March  16, 2006 |
|                          | Dr.  John W. Darden, Director |   |   |
|                          |   |   |   |
| By:                           | /s/  William A. Foster, III | DATE | March  16, 2006 |
|                          | William  A. Foster, III, Director |   |   |
|                          |   |   |   |
| By:                           | /s/  Bennie E. Hewett | DATE | March  16, 2006 |
|                          | Bennie  E. Hewett, Director |   |   |
|                          |   |   |   |
| By:                           | /s/  James L. Lester | DATE | March  16, 2006 |
|                          | James  L. Lester, Director |   |   |
|                          |   |   |   |
| By:                           | /s/  T. Allen Maxwell. | DATE | March  16, 2006 |
|                          | T.  Allen Maxwell, Director |   |   |
|                          |   |   |   |
| By:                           | /s/  Lowell S. (Casey) Cagle. | DATE | March  16, 2006 |
|                          | Lowell  S. (Casey) Cagle, Director |   |   |
|                          |   |   |   |
| By:                           | /s/  John E. Mansour. | DATE | March  16, 2006 |
|                          | John  E. Mansour, Director |   |   |

 

48

----

 

**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

** **

**CONSOLIDATED FINANCIAL REPORT**

** **

**DECEMBER 31, 2005**

 

----

 

**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**CONSOLIDATEDFINANCIAL REPORT**

**DECEMBER 31, 2005**

 

**TABLE OF CONTENTS**

 
| ** **                                                   |   |
|--------------------------------------------------------------|--------|
|                                                         |   |
| **CONSOLIDATED FINANCIAL STATEMENTS**                        |   |
|                                                         |   |
| **Consolidated balance sheets**                              |   |
| **Consolidated statements of  income**                       |   |
| **Consolidated statements of  comprehensive income**         |   |
| **Consolidated statements of  stockholders’ equity**    |   |
| **Consolidated statements of  cash flows**                   |   |
| **Notes to consolidated  financial statements**              |   |
| ** **                                                   |   |
| **REPORT  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM** |   |

 

----

 

**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

** **

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2005 AND 2004**

**(Dollars in thousands)**

 
| ** **                                                                                                                                                       | ** ** | **2005**      | ** **    | **2004**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|---------------|------------|------------|
| **Assets**                                                                                                                                                       | ** ** | ** **    | ** **    | ** ** | ** ** |
| Cash and due from banks                                                                                                                                          | ** ** | **$**         | **30,748**    |       | $          | 20,723 |   |
| Interest-bearing deposits in banks                                                                                                                               | ** ** | **728**       |          | 700        |       |
| Federal funds sold                                                                                                                                               | ** ** | **568**       |          | 93         |       |
| Securities available for sale                                                                                                                                    | ** ** | **188,127**   |          | 190,636    |       |
| Restricted equity securities, at cost                                                                                                                            | ** ** | **9,277**     |          | 7,226      |       |
|                                                                                                                                                             |       |          |          |       |       |
| Loans, net of unearned income                                                                                                                                    | ** ** | **1,231,410** |          | 955,880    |       |
| Less allowance for loan losses                                                                                                                                   | ** ** | **12,773**    |          | 11,061     |       |
| Loans, net                                                                                                                                                       | ** ** | **1,218,637** |          | 944,819    |       |
|                                                                                                                                                             |       |          |          |       |       |
| Premises and equipment, net                                                                                                                                      | ** ** | **37,014**    |          | 31,548     |       |
| Goodwill                                                                                                                                                         | ** ** | **61,164**    |          | 49,127     |       |
| Intangible assets                                                                                                                                                | ** ** | **5,586**     |          | 5,618      |       |
| Other assets                                                                                                                                                     | ** ** | **32,245**    |          | 23,646     |       |
|                                                                                                                                                             |       |          |          |       |       |
| **Total assets**                                                                                                                                                 | ** ** | **$**         | **1,584,094** |       | $          | 1,274,136 |   |
|                                                                                                                                                             |       |          |          |       |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                   |       |          |          |       |       |
|                                                                                                                                                             |       |          |          |       |       |
| **Liabilities:**                                                                                                                                                 |       |          |          |       |       |
| Deposits:                                                                                                                                                        |       |          |          |       |       |
| Noninterest-bearing                                                                                                                                              | ** ** | **$**         | **158,487**   |       | $          | 125,704 |   |
| Interest-bearing                                                                                                                                                 | ** ** | **1,038,539** |          | 802,899    |       |
| Total deposits                                                                                                                                                   | ** ** | **1,197,026** |          | 928,603    |       |
| Federal funds purchased and securities sold  under repurchase agreements                                                                                         | ** ** | **45,510**    |          | 47,582     |       |
| Other borrowings                                                                                                                                                 | ** ** | **98,266**    |          | 81,926     |       |
| Other liabilities                                                                                                                                                | ** ** | **14,683**    |          | 11,412     |       |
| Subordinated debt                                                                                                                                                | ** ** | **29,898**    |          | 29,898     |       |
| Total liabilities                                                                                                                                                | ** ** | **1,385,383** |          | 1,099,421  |       |
|                                                                                                                                                             |       |          |          |       |       |
| **Commitments and contingencies**                                                                                                                                |       |          |          |       |       |
|                                                                                                                                                             |       |          |          |       |       |
| **Stockholders’ equity :**                                                                                                                                  |       |          |          |       |       |
| Capital stock, no par value; 20,000,000  shares authorized, 12,784,397 and 11,772,352 shares issued and outstanding at  December 31, 2005 and 2004, respectively | ** ** | **157,875**   |          | 139,207    |       |
| Retained earnings                                                                                                                                                | ** ** | **43,404**    |          | 35,550     |       |
| Accumulated other comprehensive loss                                                                                                                             | ** ** | **(2,568**    | )             | (42        | )          |
|                                                                                                                                                             |       |          |          |       |       |
| **Total stockholders’ equity**                                                                                                                              | ** ** | **198,711**   |          | 174,715    |       |
|                                                                                                                                                             |       |          |          |       |       |
| **Total liabilities and stockholders’ equity**                                                                                                              | ** ** | **$**         | **1,584,094** |       | $          | 1,274,136 |   |

** **

**See Notesto Consolidated Financial Statements.**

 

2

----

 

**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF INCOME**

**YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

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

 
| ** **                                                                                                    | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                                                                                                    |       |       |       |     |       |     |       |
| **Interest income:**                                                                                          |       |       |       |     |       |     |       |
| Loans, including fees                                                                                         | ** ** | **$**      | **82,541** |     | $          | 52,642   |       | $ | 42,176 |   |
| Taxable securities                                                                                            | ** ** | **7,287**  |       | 4,706    |       | 3,753    |       |
| Nontaxable securities                                                                                         | ** ** | **618**    |       | 736      |       | 688      |       |
| Federal funds sold                                                                                            | ** ** | **327**    |       | 163      |       | 145      |       |
| Interest-bearing deposits in banks                                                                            | ** ** | **42**     |       | 27       |       | 30       |       |
| Total interest income                                                                                         | ** ** | **90,815** |       | 58,274   |       | 46,792   |       |
|                                                                                                          |       |       |       |     |       |     |       |
| **Interest expense:**                                                                                         |       |       |       |     |       |     |       |
| Deposits                                                                                                      | ** ** | **27,153** |       | 13,379   |       | 11,471   |       |
| Federal funds purchased, securities sold  under repurchase agreements, other borrowings and subordinated debt | ** ** | **6,683**  |       | 4,573    |       | 3,817    |       |
| Total interest expense                                                                                        | ** ** | **33,836** |       | 17,952   |       | 15,288   |       |
|                                                                                                          |       |       |       |     |       |     |       |
| Net interest income                                                                                           | ** ** | **56,979** |       | 40,322   |       | 31,504   |       |
| **Provision for loan losses**                                                                                 | ** ** | **5,916**  |       | 1,406    |       | 1,406    |       |
| Net interest income after provision for  loan losses                                                          | ** ** | **51,063** |       | 38,916   |       | 30,098   |       |
|                                                                                                          |       |       |       |     |       |     |       |
| **Other income:**                                                                                             |       |       |       |     |       |     |       |
| Service charges on deposit accounts                                                                           | ** ** | **6,413**  |       | 6,121    |       | 4,953    |       |
| Other service charges and fees                                                                                | ** ** | **737**    |       | 1,449    |       | 1,144    |       |
| Gain on sale of securities                                                                                    | ** ** | **553**    |       | 609      |       | 382      |       |
| Mortgage origination fees                                                                                     | ** ** | **2,263**  |       | 1,988    |       | 2,440    |       |
| Trust fees                                                                                                    | ** ** | **379**    |       | 403      |       | 279      |       |
| Other operating income                                                                                        | ** ** | **1,286**  |       | 1,208    |       | 730      |       |
| Total other income                                                                                            | ** ** | **11,631** |       | 11,778   |       | 9,928    |       |
|                                                                                                          |       |       |       |     |       |     |       |
| **Other expenses:**                                                                                           |       |       |       |     |       |     |       |
| Salaries and employee benefits                                                                                | ** ** | **26,248** |       | 20,893   |       | 17,193   |       |
| Occupancy and equipment expenses, net                                                                         | ** ** | **6,334**  |       | 5,099    |       | 4,352    |       |
| Other operating expenses                                                                                      | ** ** | **12,243** |       | 10,188   |       | 8,148    |       |
| Total other expenses                                                                                          | ** ** | **44,825** |       | 36,180   |       | 29,693   |       |
|                                                                                                          |       |       |       |     |       |     |       |
| Income before income taxes                                                                                    | ** ** | **17,869** |       | 14,514   |       | 10,333   |       |
|                                                                                                          |       |       |       |     |       |     |       |
| **Income tax expense**                                                                                        | ** ** | **5,878**  |       | 4,676    |       | 2,608    |       |
|                                                                                                          |       |       |       |     |       |     |       |
| Net income                                                                                                    | ** ** | **$**      | **11,991** |     | $          | 9,838    |       | $ | 7,725 |   |
|                                                                                                          |       |       |       |     |       |     |       |
| **Basic earnings per share**                                                                                  | ** ** | **$**      | **0.96**   |     | $          | 1.05     |       | $ | 1.06 |   |
|                                                                                                          |       |       |       |     |       |     |       |
| **Diluted earnings per share**                                                                                | ** ** | **$**      | **0.93**   |     | $          | 1.04     |       | $ | 1.03 |   |

 

**See Notesto Consolidated Financial Statements.**

 

3

----

 

**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

**YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

**(Dollars in thousands)**

 
| ** **                                                                                                       | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
|                                                                                                             |       |       |       |     |       |     |       |
| **Net income**                                                                                                   | ** ** | **$**      | **11,991** |     | $          | 9,838    |       | $ | 7,725 |   |
|                                                                                                             |       |       |       |     |       |     |       |
| **Other comprehensive loss:**                                                                                    |       |       |       |     |       |     |       |
|                                                                                                             |       |       |       |     |       |     |       |
| Unrealized holding losses arising during period,  net of tax benefit of $1,136, $40 and $632, respectively       | ** ** | **(2,183** | )          | (131     | )          | (1,285   | )          |
|                                                                                                             |       |       |       |     |       |     |       |
| Reclassification adjustment for gains  realized in net income, net of taxes of $210, $231 and $145, respectively | ** ** | **(343**   | )          | (378     | )          | (237     | )          |
|                                                                                                             |       |       |       |     |       |     |       |
| **Other comprehensive loss**                                                                                     | ** ** | **(2,526** | )          | (509     | )          | (1,522   | )          |
|                                                                                                             |       |       |       |     |       |     |       |
| **Comprehensive income**                                                                                         | ** ** | **$**      | **9,465**  |     | $          | 9,329    |       | $ | 6,203 |   |

 

**See Notesto Consolidated Financial Statements.**

 

4

----

 

**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

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

 
| ** **                                                                              | ** ** | **Shares** | ** ** | **Capital  Stock** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|--------------------|------------|------------------------|------------|------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                              | ** ** | ** ** | ** ** | ** **         | ** ** | ** **             | ** ** | ** **                                           | ** ** | ** **                            | ** ** |
| **Balance, December 31, 2002**                                                          |       | 5,357      |       | $                  | 35,658     |                   | $          | 22,706                                               |       | $                                     | 1,989      |   | $ | 60,353 |   |
| Net income                                                                              |       | —     |       | —             |       | 7,725                  |       | —                                               |       | 7,725                                 |       |
| Options exercised, net of repurchases                                                   |       | 41         |       | 380                |       | —                 |       | —                                               |       | 380                                   |       |
| Purchase of Baldwin Bancshares, Inc.                                                    |       | 1,397      |       | 31,869             |       | —                 |       | —                                               |       | 31,869                                |       |
| Tax benefit of nonqualified stock options                                               |       | —     |       | 74                 |       | —                 |       | —                                               |       | 74                                    |       |
| Payment for fractional shares in connection  with business combinations                 |       | (1         | )          | (9                 | )          | —                 |       | —                                               |       | (9                                    | )          |
| Contributed capital                                                                     |       | —     |       | 11                 |       | —                 |       | —                                               |       | 11                                    |       |
| Dividends declared, $.29 per share                                                      |       | —     |       | —             |       | (2,038                 | )          | —                                               |       | (2,038                                | )          |
| Other comprehensive (loss)                                                              |       | —     |       | —             |       | —                 |       | (1,522                                               | )          | (1,522                                | )          |
| **Balance, December 31, 2003**                                                          |       | 6,794      |       | 67,983             |       | 28,393                 |       | 467                                                  |       | 96,843                                |       |
| Net income                                                                              |       | —     |       | —             |       | 9,838                  |       | —                                               |       | 9,838                                 |       |
| Options exercised, net of repurchases                                                   |       | 224        |       | 1,981              |       | —                 |       | —                                               |       | 1,981                                 |       |
| Purchase of Southern Heritage Bancorp, Inc.  and Lumpkin County Bank                    |       | 1,404      |       | 33,201             |       | —                 |       | —                                               |       | 33,201                                |       |
| Tax benefit of nonqualified stock options                                               |       | —     |       | 654                |       | —                 |       | —                                               |       | 654                                   |       |
| Payment for fractional shares in connection  with stock split and business combinations |       | (1         | )          | (30                | )          | —                 |       | —                                               |       | (30                                   | )          |
| Capital issued in stock offering                                                        |       | 1,652      |       | 35,418             |       | —                 |       | —                                               |       | 35,418                                |       |
| Five-for-four stock split                                                               |       | 1,699      |       | —             |       | —                 |       | —                                               |       | —                                |       |
| Dividends declared, $.30 per share                                                      |       | —     |       | —             |       | (2,681                 | )          | —                                               |       | (2,681                                | )          |
| Other comprehensive (loss)                                                              |       | —     |       | —             |       | —                 |       | (509                                                 | )          | (509                                  | )          |
| **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 business combinations                 |       | —     |       | (4                 | )          | —                 |       | —                                               |       | (4                                    | )          |
| Adjustment on purchase of Southern Heritage  Bancorp, Inc. and Lumpkin County Bank      |       | —     |       | (3,810             | )          | —                 |       | —                                               |       | (3,810                                | )          |
| Dividends declared, $.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 |   |

 

**See Notesto Consolidated Financial Statements.**

 

5

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**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

**(Dollars in thousands)**

 
| ** **                                                                                          | ** ** | **2005**     | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------|------------|----------|------------|----------|------------|
| **OPERATING ACTIVITIES**                                                                            |       |         |       |     |       |     |       |
| Net income                                                                                          | ** ** | **$**        | **11,991** |     | $          | 9,838    |       | $ | 7,725 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:                  |       |         |       |     |       |     |       |
| Depreciation and amortization, net                                                                  | ** ** | **3,973**    |       | 3,486    |       | 2,917    |       |
| Provision for loan losses                                                                           | ** ** | **5,916**    |       | 1,406    |       | 1,406    |       |
| Provision for losses on other real estate  owned                                                    | ** ** | **—**   |       | —   |       | 65       |       |
| Gain on sale of securities                                                                          | ** ** | **(553**     | )          | (609     | )          | (382     | )          |
| (Gain) loss on sale of other real estate  owned                                                     | ** ** | **18**       |       | 44       |       | (37      | )          |
| (Gain) loss on disposal of premises and  equipment                                                  | ** ** | **(21**      | )          | (468     | )          | 295      |       |
| Deferred income taxes                                                                               | ** ** | **(522**     | )          | 77       |       | (582     | )          |
| (Increase) decrease in interest receivable                                                          | ** ** | **(3,188**   | )          | (1,317   | )          | 324      |       |
| Increase (decrease) in interest payable                                                             | ** ** | **2,890**    |       | 600      |       | (561     | )          |
| Increase in cash surrender value of life  insurance                                                 | ** ** | **(728**     | )          | (772     | )          | (505     | )          |
| Net other operating activities                                                                      | ** ** | **1,542**    |       | 2,793    |       | (2,411   | )          |
|                                                                                                |       |         |       |     |       |     |       |
| Net cash provided by operating activities                                                           | ** ** | **21,318**   |       | 15,078   |       | 8,254    |       |
|                                                                                                |       |         |       |     |       |     |       |
| **INVESTING ACTIVITIES**                                                                            |       |         |       |     |       |     |       |
| (Increase) decrease in interest-bearing  deposits in banks                                          | ** ** | **(28**      | )          | (156     | )          | 7,720    |       |
| Purchases of securities available for sale                                                          | ** ** | **(109,841** | )          | (141,580 | )          | (111,808 | )          |
| Purchases of restricted equity securities                                                           | ** ** | **(2,302**   | )          | (3,273   | )          | (685     | )          |
| Proceeds from sale of restricted equity  securities                                                 | ** ** | **885**      |       | 1,116    |       | 500      |       |
| Proceeds from maturities of securities  available for sale                                          | ** ** | **112,752**  |       | 88,778   |       | 80,200   |       |
| Proceeds from sales of securities available  for sale                                               | ** ** | **6,431**    |       | 2,318    |       | 18,802   |       |
| Net decrease in federal funds sold                                                                  | ** ** | **4,414**    |       | 25,640   |       | 21,615   |       |
| Net increase in loans                                                                               | ** ** | **(182,907** | )          | (99,572  | )          | (80,886  | )          |
| Net cash acquired in business combinations                                                          | ** ** | **11**       |       | 4,308    |       | 5,452    |       |
| Purchase of premises and equipment                                                                  | ** ** | **(4,681**   | )          | (6,376   | )          | (4,937   | )          |
| Proceeds from disposals of premises and  equipment                                                  | ** ** | **99**       |       | 2,534    |       | 2,198    |       |
| Proceeds from sale of other real estate  owned                                                      | ** ** | **1,298**    |       | 1,996    |       | 864      |       |
|                                                                                                |       |         |       |     |       |     |       |
| Net cash used in investing activities                                                               | ** ** | **(173,869** | )          | (124,267 | )          | (60,965  | )          |
|                                                                                                |       |         |       |     |       |     |       |
| **FINANCING ACTIVITIES**                                                                            |       |         |       |     |       |     |       |
| Net increase in deposits                                                                            | ** ** | **158,580**  |       | 36,339   |       | 44,905   |       |
| Net increase (decrease) in federal funds  purchased and securities sold under repurchase agreements | ** ** | **(2,072**   | )          | 30,268   |       | 5,776    |       |
| Proceeds from other borrowings                                                                      | ** ** | **42,927**   |       | 17,411   |       | 16,852   |       |
| Repayment of other borrowings                                                                       | ** ** | **(33,737**  | )          | (16,688  | )          | (13,695  | )          |
| Proceeds from issuance of subordinated debt                                                         | ** ** | **—**   |       | 10,310   |       | —   |       |
| Proceeds from exercise of stock options                                                             | ** ** | **1,019**    |       | 1,981    |       | 380      |       |
| Dividends paid                                                                                      | ** ** | **(4,137**   | )          | (2,681   | )          | (2,038   | )          |
| Payment for fractional shares                                                                       | ** ** | **(4**       | )          | (30      | )          | (9       | )          |
| Proceeds from stock offering                                                                        | ** ** | **—**   |       | 35,418   |       | 11       |       |
|                                                                                                |       |         |       |     |       |     |       |
| Net cash provided by financing activities                                                           | ** ** | **162,576**  |       | 112,328  |       | 52,182   |       |
|                                                                                                     |            |              |            |          |            |          |            |  |  |  |

 

6

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| ** **                                          | ** ** | **2005**     | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|--------------|------------|----------|------------|----------|------------|
|                                                |       |         |       |     |       |     |       |
| Net increase (decrease) in cash and due  from banks | ** ** | **$**        | **10,025** |     | $          | 3,139    |       | $ | (529 | ) |
|                                                |       |         |       |     |       |     |       |
| Cash and due from banks at beginning of  year       | ** ** | **20,723**   |       | 17,584   |       | 18,113   |       |
|                                                |       |         |       |     |       |     |       |
| Cash and due from banks at end of year              | ** ** | **$**        | **30,748** |     | $          | 20,723   |       | $ | 17,584 |   |
|                                                |       |         |       |     |       |     |       |
| **SUPPLEMENTAL DISCLOSURES**                        |       |         |       |     |       |     |       |
| Cash paid for:                                      |       |         |       |     |       |     |       |
| Interest                                            | ** ** | **$**        | **31,111** |     | $          | 17,353   |       | $ | 15,849 |   |
| Income taxes                                        | ** ** | **$**        | **6,123**  |     | $          | 4,848    |       | $ | 2,524 |   |
|                                                |       |         |       |     |       |     |       |
| **NONCASH TRANSACTIONS**                            |       |         |       |     |       |     |       |
| Other real estate acquired in settlement of  loans  | ** ** | **$**        | **3,516**  |     | $          | 1,062    |       | $ | 2,010 |   |
| Financed sales of other real estate owned           | ** ** | **$**        | **—** |     | $          | —   |       | $ | 84 |   |
| Increase in cash surrender value of life  insurance | ** ** | **$**        | **728**    |     | $          | 772      |       | $ | 505 |   |
|                                                |       |         |       |     |       |     |       |
| **BUSINESS ACQUISITIONS**                           |       |         |       |     |       |     |       |
| Capital stock issued                                | ** ** | **$**        | **21,290** |     | $          | 33,213   |       | $ | 31,869 |   |
|                                                |       |         |       |     |       |     |       |
| Assets acquired (liabilities assumed)               |       |         |       |     |       |     |       |
| Cash and due from banks, net of cash paid           | ** ** | **$**        | **11**     |     | $          | 4,308    |       | $ | 5,452 |   |
| Interest-bearing deposits in banks                  | ** ** | **—**   |       | 9        |       | 50       |       |
| Federal funds sold                                  | ** ** | **4,889**    |       | 19,199   |       | 2,979    |       |
| Securities available for sale                       | ** ** | **10,872**   |       | 8,179    |       | 16,239   |       |
| Restricted equity securities                        | ** ** | **634**      |       | 496      |       | 652      |       |
| Loans, net                                          | ** ** | **100,229**  |       | 146,290  |       | 88,467   |       |
| Premises and equipment                              | ** ** | **3,755**    |       | 4,916    |       | 5,662    |       |
| Goodwill                                            | ** ** | **16,416**   |       | 19,054   |       | 21,318   |       |
| Core deposit intangible                             | ** ** | **697**      |       | 3,154    |       | 2,354    |       |
| Other assets                                        | ** ** | **1,451**    |       | 2,108    |       | 7,540    |       |
| Deposits                                            | ** ** | **(109,628** | )          | (164,237 | )          | (104,092 | )          |
| Other borrowings                                    | ** ** | **(7,150**   | )          | (9,391   | )          | (9,522   | )          |
| Other liabilities                                   | ** ** | **(508**     | )          | (872     | )          | (5,230   | )          |
| ** **                                          |       | **$**        | **21,668** |     | $          | 33,213   |       | $ | 31,869 |   |

 

**See Notesto Consolidated Financial Statements.**

 

7

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**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**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 and First National Bank ofGwinnett (the “Banks”).  Gainesville Bank& Trust is located in Gainesville, Hall County, Georgia with the mainoffice and four branches located in Gainesville, two branches located inOakwood, Georgia, one branch located in Buford, Georgia, two branches locatedin Dahlonega, Georgia and one branch located in Athens, Georgia.  United Bank & Trust is located inRockmart, Polk County, Georgia with the main office located in Rockmart, onebranch in Cedartown, Georgia and one branch in Cartersville, Georgia.  Community Trust Bank is located in Hiram,Paulding County, Georgia with the main office in Hiram, two branches in Dallas,Georgia, one branch in Marietta, Georgia, one branch in Kennesaw, Georgia andone branch in Acworth, Georgia.  HomeTownBank of Villa Rica is located in Villa Rica, Carroll County, Georgia with themain office and one branch located in Villa Rica and one branch located inHiram, Georgia.  First National Bank ofthe South is located in Milledgeville, Baldwin County, Georgia with the mainoffice and one branch located in Milledgeville and one branch located at Lake Oconee,Putnam County.  First National Bank ofGwinnett has one branch located in Duluth, Gwinnett County, Georgia.  The Banks provide a full range of bankingservices to individual and corporate customers in their primary market areas ofHall, Lumpkin, Clarke, Polk, Bartow, Paulding, Cobb, Carroll, Baldwin, Putnamand Gwinnett Counties, respectively, and the surrounding counties.

 

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 and Accounting 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.

 

8

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**Cash, Due from Banks and Cash Flows**

 

For purposes of reporting cash flows, cash and due from banksinclude cash on hand, cash items in process of collection andamounts due from banks.  Cash flows fromloans, federal funds sold, federal funds purchased and securities sold underrepurchase agreements and deposits are 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 $11,398,000 and $10,880,000 at December 31, 2005 and 2004,respectively.

 

**Securities**

 

Debt securities that management has thepositive intent and ability to hold to maturity would be classified as held tomaturity and recorded at amortized cost. Securities not classified as held to maturity, including equitysecurities with readily determinable fair values, are classified as availablefor sale and recorded at fair value with unrealized gains and losses excludedfrom earnings and reported in the Statements of Comprehensive Income, net of therelated deferred tax effect.  Equitysecurities, including restricted equity securities, without a readilydeterminable fair value are recorded at cost.

 

The amortization of premiums andaccretion of discounts are recognized in interest income using the interestmethod over the life of the securities. Realized gains and losses on the sale of securities are determined usingthe specific identification method and are included in earnings on thesettlement date.  Declines in the fairvalue of held to maturity and available for sale securities below their costthat are deemed to be other than temporary would be reflected in earnings asrealized losses.  In estimatingother-than-temporary impairment losses, management considers (1) the length oftime and the extent to which the fair value has been less than cost, (2) thefinancial condition and near-term prospects of the issuer, and (3) the intentand ability of the Company to retain its investment in the issuer for a periodof time sufficient to allow for any anticipated recovery in fair value.

 

**Loans**

 

Loans are reported at their outstandingprincipal balances less unearned income, net deferred fees and the allowancefor loan losses.  Interest income isaccrued on the outstanding principal balance. Loan origination fees, net of certain direct loan origination costs, aredeferred and recognized as an adjustment of the related loan yield over thelife of the loan using a method which approximates a level yield.

 

The accrual of interest on loans isdiscontinued when, in management’s opinion, the borrower may be unable to meetpayments as they become due, unless the loan is well-secured.  All interest accrued but not collected forloans that are placed on nonaccrual or are charged off is reversed againstinterest income.  Interest income onnonaccrual loans is subsequently recognized only to the extent cash paymentsare received, until the loans are returned to accrual status.  Loans are returned to accrual status when allthe principal and interest amounts are brought current and future payments arereasonably assured.

 

**Allowance for Loan Losses**

 

The allowance for loan losses isestablished through a provision for loan losses charged to expense.  Loan losses are charged against the allowancewhen management believes the collectibility of the principal is unlikely.  Subsequent recoveries are credited to theallowance.

 

9

----

 

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 lossexperience.  This evaluation also takesinto consideration 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 the allowancemay be necessary if there are significant changes in economic conditions.  In addition, regulatory agencies, as anintegral part of their examination process, periodically review the Banks’allowance for loan losses, and may require the Banks to make additions to theirallowance based on their judgment about information available to them at thetime of their examinations.

 

Theallowance consists of specific, general and unallocated components.  The specific component relates to loans thatare classified as doubtful, substandard or special mention.  For such loans that are also classified asimpaired, an allowance is established when the discounted cash flows (orcollateral value or observable market price) of the impaired loan is lower thanthe carrying value of that loan.  Thegeneral component covers non-classified loans and is based on historical lossexperience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that couldaffect management’s estimate of probable losses.  The unallocated component of the allowancereflects the margin of imprecision inherent in the underlying assumptions usedin the methodologies for estimating specific and general losses in the portfolio.

 

 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 expected futurecash 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  |

 

10

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**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, 2005 and 2004 was$3,431,000 and $620,000, respectively.

 

**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 therecoverability of the carrying amount is not probable.  In the event of an impairment, the amount bywhich the carrying amount exceeds the fair value would be charged to earnings.  The Company performed its annual test ofimpairment in the third quarter and determined that there was no impairment ofthe carrying value as of July 31, 2005.

 

Intangibleassets consist of core deposit premiums acquired in connection with businesscombinations.  The core deposit premium isinitially 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.

 

**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**

 

Statementof Financial Accounting Standards (SFAS) No. 123, *Accountingfor Stock-Based**Compensation*,encourages all entities to adopt a fair value based method of accounting foremployee stock compensation plans, whereby compensation cost is measured at thegrant date based on the value of the award and is recognized over the serviceperiod, which is usually the vesting period. However, it also allows an entity to continue to measure compensationcost for those plans using the intrinsic value based method of accountingprescribed by Accounting Principles Board Opinion No. 25, *Accountingfor**Stock Issued to Employees*,whereby compensation cost is the excess, if any, of the quoted market price ofthe stock at the grant date (or other measurement date) over the amount anemployee must pay to acquire the stock. The Company has elected to continue with the accounting methodology inOpinion No. 25.  Stock options issuedunder the Company’s stock option plan have no intrinsic value at the grantdate, and under Opinion No. 25 no compensation cost is recognized forthem.  The Company’s stock-based employeecompensation plan is described more fully in Note 12.

 

11

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The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*, to stock-basedemployee compensation.

 
| ** **                                                                                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                    | ** ** | **(Dollars  in thousands)**       | ** ** |
|                                                                                                                                          |       |                              |       |   |   |   |   |
| Net income, as reported                                                                                                                       | ** ** | **$**                             | **11,991** |   | $ | 9,838 |   | $ | 7,725 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects | ** ** | **199**                           |       | 144 |   | 109 |   |
| Pro forma net income                                                                                                                          | ** ** | **$**                             | **11,792** |   | $ | 9,694 |   | $ | 7,616 |   |
| Earnings per share:                                                                                                                           |       |                              |       |   |   |   |   |
| Basic - as reported                                                                                                                           | ** ** | **$**                             | **0.96**   |   | $ | 1.05 |   | $ | 1.06 |   |
| Basic - pro forma                                                                                                                             | ** ** | **$**                             | **0.94**   |   | $ | 1.04 |   | $ | 1.04 |   |
| Diluted - as reported                                                                                                                         | ** ** | **$**                             | **0.93**   |   | $ | 1.04 |   | $ | 1.03 |   |
| Diluted - pro forma                                                                                                                           | ** ** | **$**                             | **0.91**   |   | $ | 1.02 |   | $ | 1.02 |   |

 

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting StandardsNo. 123(revised), “Share-Based Payment” (“SFAS 123(R)”), a revision of SFASNo. 123.  SFAS123(R) supersedes APB25 and amends Statement of Financial Accounting Standards No. 95 “Statementof Cash Flows”(“SFAS 95”).  SFAS 123(R)is similar to the approach described in SFAS 123 except that SFAS 123(R)requires all share-based payments to employees, including grants of employeestock options, to be recognized in the consolidated statements of income, inlieu of pro forma disclosure as provided above. SFAS 123(R) is effective for annual periods beginning afterDecember 15, 2005.  The Companyadopted the provisions of SFAS 123(R) as of January 1, 2006 and currentlyintends to use the modified-prospective method and choose the Black-Scholesmodel for estimating the fair value of equity compensation.

 

As permitted by SFAS 123, through December 31,2005, the Company accounted for share-based payments to employees using theintrinsic value method set forth in APB 25 and, as such, recognized nocompensation cost for employee stock options. Accordingly, the adoption of the fair value method under SFAS 123(R)will have an impact on the Company’s consolidated statements of income.  However, the Company’s overall financialposition will not be significantly affected by the adoption of SFAS123(R).  The actual impact of SFAS 123(R)cannot be predicted at this time because it will depend on levels ofshare-based payments granted in the future and other factors.  However, had the Company adopted SFAS 123(R)in prior periods, the impact of that standard and therefore, the disclosure ofpro forma net income and earnings per share above would remain the same.  SFAS 123(R) also requires that tax deductionsin excess of recognized compensation cost be reported as a financing cash flow,rather than as operating cash flow.  Thisrequirement will reduce net operating cash flow and increase net financing cashflow in periods after the adoption of SFAS 123(R).  The impact on the Company’s financialstatements for the period ending December 31, 2006, due to the adoption ofSFAS 123(R) is expected to be approximately $212,000, in addition to expenseassociated with any new options granted in 2006.

 

12

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**Earnings Per Share**

 

Basic earnings per shareare computed by dividing net income by the weighted-average number of shares ofcapital stock outstanding.  Dilutedearnings per share are computed by dividing net income by the sum of theweighted-average number of shares of capital stock outstanding and dilutivepotential capital shares.  Potentialcapital shares consist of stock options.

 

Options to purchase 48,000 shares of commonstock at prices ranging from $22.25 to $24.15 per share were outstanding duringthe year but were not included in the computation of diluted EPS because theoptions’ exercise price was greater than the average market price of the commonshares. The options were still outstanding as of December 31, 2005.

 

**Comprehensive Income**

 

Accounting principlesgenerally require that recognized revenue, expenses, gains and losses beincluded in net income.  Although certainchanges in assets and liabilities, such as unrealized gains and losses onavailable for sale securities, are reported as a separate component of theequity section of the balance sheet, such items, along with net income,are components of comprehensive income.

 

**Recent Accounting Standards**

 

On December 16,2004, FASB issued SFAS 123(R), which is a revision of SFAS 123.  SFAS 123(R) supersedes APB 25 and amends SFAS95.  Generally, the approach in SFAS123(R) is similar to the approach described in SFAS 123.  However, SFAS 123(R) requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the consolidated statements of income based on their fair values.  Pro forma disclosure is no longer analternative.

 

The Company will adoptthe provisions of SFAS 123(R) as of the beginning of its first interim periodthat begins after December 15, 2005, which will be the quarter endingMarch 31, 2006 and currently intends to use the modified-prospective methodand the Black-Scholes valuation model for estimating the fair value of equitycompensation.

 

13

----

 

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

 

On March 1, 2005,the Company completed the acquisition of FNBG Bancshares, Inc. the parentcompany of First National Bank of Gwinnett in Duluth, Gwinnett County, Georgia,which resulted in First National Bank of Gwinnett becoming a wholly ownedsubsidiary of the Company.  The aggregatepurchase price was $25.6 million including 845,128                shares of its capital stock valued at$18.4 million, $3.8 million in cash and stock options and warrants valued at$2.9 million and $523,000 in direct acquisition costs.  The value of the capital stock issued was determinedbased on the average market price of GB&T’s capital stock over a 2 dayperiod before and after the terms of the acquisition were agreed upon andannounced.  The fair value of the stockoptions was determined based on the Black-Scholes option pricing model.  The acquisition was accounted for as apurchase resulting in estimated goodwill of approximately $16.4 million.  The goodwill will not be deductible for taxpurposes.  Identifiable intangible assetsof $697,000 acquired consist of a core deposit premium with an estimated weightedaverage useful life of 7 years.  FirstNational Bank of Gwinnett’s results of operations from March 1, 2005 areincluded in the consolidated results of operations for the year ended December 31,2005.  The results of operations for theyears ended December 31, 2004 and 2003 do not include the results ofoperations of FNBG Bancshares, Inc.

 

Unaudited pro formaconsolidated results of operations for years ended December 31, 2005 and2004 as though the companies had combined as of January 1, 2005 and 2004 areas follows:

 
| ** **                 | ** ** | **2005**                   | ** ** | **2004** | ** ** |
|----------------------------|------------|----------------------------|------------|----------|------------|
| ** **                 | ** ** | **(Dollars in thousands)** | ** ** |
| Net interest income        |       | $                          | 57,947     |     | $          | 44,405 |   |
| Net income                 |       | 12,171                     |       | 10,559   |       |
| Basic earnings per share   |       | 0.97                       |       | 1.04     |       |
| Diluted earnings per share |       | 0.94                       |       | 1.02     |       |
|                            |            |                            |            |          |            |  |  |

 

**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, 2005:**               | ** ** | ** **                 | ** **  | ** **                   | ** ** | ** **                    | ** ** | ** **      | ** ** |
| **U.S. Government and agency securities** | ** ** | **$**                      | **78,938**  | ** **                   | **$**      | **5**                         | ** ** | **$**           | **(1,580** | **)** | **$** | **77,363** | ** ** |
| **State and municipal securities**        | ** ** | **11,140**                 | ** **  | **232**                      | ** ** | **(45**                       | **)**      | **11,327**      | ** ** |
| **Mortgage-backed securities**            | ** ** | **100,277**                | ** **  | **181**                      | ** ** | **(2,729**                    | **)**      | **97,729**      | ** ** |
| **Equity securities**                     | ** ** | **1,708**                  | ** **  | **—**                   | ** ** | **—**                    | ** ** | **1,708**       | ** ** |
| ** **                                | ** ** | **$**                      | **192,063** | ** **                   | **$**      | **418**                       | ** ** | **$**           | **(4,354** | **)** | **$** | **188,127** | ** ** |
| ** **                                | ** ** | ** **                 | ** **  | ** **                   | ** ** | ** **                    | ** ** | ** **      | ** ** |
| December 31, 2004:                   | ** ** | ** **                 | ** **  | ** **                   | ** ** | ** **                    | ** ** | ** **      | ** ** |
| U.S. Government and agency securities     |       | $                          | 60,063      |                         | $          | 244                           |       | $               | (341       | ) | $ | 59,966 |   |
| State and municipal securities            |       | 16,211                     |        | 598                          |       | (19                           | )          | 16,790          |       |
| Mortgage-backed securities                |       | 111,892                    |        | 423                          |       | (971                          | )          | 111,344         |       |
| Equity securities                         |       | 2,033                      |        | —                       |       | 0                             |       | 2,033           |       |
| Corporate bonds                           |       | 501                        |        | 2                            |       | 0                             |       | 503             |       |
|                                      |       | $                          | 190,700     |                         | $          | 1,267                         |       | $               | (1,331     | ) | $ | 190,636 |   |

 

14

----

 

The amortized cost andfair value of debt securities available for sale as of December 31, 2005by 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        |       | $                          | 5,547      |            | $          | 5,483 |   |
| Due from one to five years |       | 69,328                     |       | 68,001          |       |
| Due from five to ten years |       | 13,324                     |       | 13,322          |       |
| Due after ten years        |       | 1,879                      |       | 1,884           |       |
| Mortgage-backed securities |       | 100,277                    |       | 97,729          |       |
|                       |       | $                          | 190,355    |            | $          | 186,419 |   |

 

Securities with anapproximate carrying value of $99,496,000 and $101,229,000 at December 31,2005 and 2004, respectively, were pledged to secure public deposits and forother purposes required or permitted by law.

 

Gains and losses onsales of securities available for sale consist of the following:

 
| ** **         | ** ** | **Years Ended December 31,** | ** ** |
|--------------------|------------|-----------------------------------|------------|
| ** **         | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **         | ** ** | **(Dollars  in thousands)**       | ** ** |
|               |       |                              |       |   |   |   |   |
| Gross gains        | ** ** | **$**                             | **621**    |   | $ | 638 |   | $ | 460 |   |
| Gross losses       | ** ** | **(68**                           | )          | (29 | ) | (78 | ) |
| Net realized gains | ** ** | **$**                             | **553**    |   | $ | 609 |   | $ | 382 |   |

 

The following tableshows the gross unrealized losses and fair value of securities, aggregated bycategory and length of time that securities have been in a continuousunrealized loss position at December 31, 2005 and 2004.

 
| ** **                            | ** ** | **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, 2005**            | ** ** | ** **                  | ** ** | ** **             | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Government and agency securities |       | $                           | 41,523     |                   | $          | 693             |       | $ | 34,114 |   | $ | 887 |   | $ | 75,637 |   | $ | 1,580 |   |
| State and municipal securities        |       | 1,088                       |       | 40                     |       | 606             |       | 5 |   | 1,694 |   | 45 |   |
| Mortgage-backed securities            |       | 28,585                      |       | 628                    |       | 65,280          |       | 2,091 |   | 93,865 |   | 2,729 |   |
| Total temporarily impaired securities |       | $                           | 71,196     |                   | $          | 1,361           |       | $ | 100,000 |   | $ | 2,983 |   | $ | 171,196 |   | $ | 4,354 |   |
|                                  |       |                        |       |                   |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **December 31, 2004**            | ** ** | ** **                  | ** ** | ** **             | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Government and agency securities |       | $                           | 32,110     |                   | $          | 234             |       | $ | 4,191 |   | $ | 107 |   | $ | 36,301 |   | $ | 341 |   |
| State and municipal securities        |       | 724                         |       | 5                      |       | 514             |       | 14 |   | 1,238 |   | 19 |   |
| Mortgage-backed securities            |       | 53,850                      |       | 562                    |       | 23,420          |       | 409 |   | 77,270 |   | 971 |   |
| Total temporarily impaired securities |       | $                           | 86,684     |                   | $          | 801             |       | $ | 28,125 |   | $ | 530 |   | $ | 114,809 |   | $ | 1,331 |   |

 

15

----

 

At December 31,2005, the unrealized losses are the result of the current yieldenvironment.  The depreciation within theportfolio is 2.48% 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.

 

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

 

Thecomposition of loans is summarized as follows:

 
| ** **                             | ** ** | **December 31,**       | ** **    |
|----------------------------------------|------------|-----------------------------|---------------|
| ** **                             | ** ** | **2005**                    | ** **    | **2004** | ** ** |
| ** **                             | ** ** | **(Dollars  in thousands)** | ** **    |
|                                   |       |                        |          |   |   |
| Commercial, financial and agricultural | ** ** | **$**                       | **99,919**    |   | $ | 74,437 |   |
| Real estate – construction        | ** ** | **481,332**                 |          | 294,817 |   |
| Real estate – mortgage            | ** ** | **615,583**                 |          | 545,721 |   |
| Consumer                               | ** ** | **33,260**                  |          | 37,248 |   |
| Other                                  | ** ** | **1,584**                   |          | 3,764 |   |
| ** **                             |       | **1,231,678**               |          | 955,987 |   |
| Unearned income and deferred loan fees | ** ** | **(268**                    | )             | (107 | ) |
| Allowance for loan losses              | ** ** | **(12,773**                 | )             | (11,061 | ) |
| Loans, net                             | ** ** | **$**                       | **1,218,637** |   | $ | 944,819 |   |

 

Changes in the allowancefor loan losses are as follows:

 
| ** **                                            | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                            | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                            | ** ** | **(Dollars  in thousands)**       | ** ** |
|                                                  |       | ** **                        |       |   |   |   |   |
| Balance, beginning of year                            | ** ** | **$**                             | **11,061** |   | $ | 8,726 |   | $ | 7,538 |   |
| Provision for loan losses                             | ** ** | **5,916**                         |       | 1,406 |   | 1,406 |   |
| Loans charged off                                     | ** ** | **(5,761**                        | )          | (1,628 | ) | (1,466 | ) |
| Recoveries of loans previously charged off            | ** ** | **452**                           |       | 482 |   | 384 |   |
| Allowance for loan losses related to acquired  loans  | ** ** | **1,269**                         |       | 2,075 |   | 864 |   |
| Allowance for loan losses related to the  sale of CLC | ** ** | **(164**                          | )          | — |   | — |   |
| Balance, end of year                                  | ** ** | **$**                             | **12,773** |   | $ | 11,061 |   | $ | 8,726 |   |

 

16

----

 

Thefollowing is a summary of information pertaining to non-performing loans:

 
| ** **                                                      | ** ** | **As of and for the Years Ended  December 31,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                      | ** ** | **(Dollars  in thousands)**                          | ** ** |
|                                                            |       |                                                 |       |   |   |   |   |
| Impaired loans without a valuation  allowance                   | ** ** | **$**                                                | **—** |   | $ | — |   | $ | 3 |   |
| Impaired loans with a valuation allowance                       | ** ** | **6,668**                                            |       | 10,092 |   | 3,392 |   |
| Total impaired loans                                            | ** ** | **$**                                                | **6,668**  |   | $ | 10,092 |   | $ | 3,395 |   |
| Valuation allowance related to impaired  loans                  | ** ** | **$**                                                | **1,024**  |   | $ | 1,721 |   | $ | 608 |   |
| Average investment in impaired loans                            | ** ** | **$**                                                | **7,647**  |   | $ | 4,647 |   | $ | 3,925 |   |
| Interest income recognized on impaired loans                    | ** ** | **$**                                                | **118**    |   | $ | 34 |   | $ | 100 |   |
| Nonaccrual loans                                                | ** ** | **$**                                                | **6,562**  |   | $ | 10,059 |   | $ | 3,333 |   |
| Loans past due ninety days or more and still  accruing interest | ** ** | **$**                                                | **17**     |   | $ | 328 |   | $ | 509 |   |

 

In the ordinary courseof business, the Company has granted loans to certain related parties,including executive officers, directors and their affiliates.  The interest rates on these loans weresubstantially the same as rates prevailing at the time of the transaction andrepayment terms are customary for the type of loan.  Changes in related party loans for the yearended December 31, 2005 are as follows:

 
| ** **                  | ** ** | **(Dollars in  thousands)** | ** ** |
|-----------------------------|------------|-----------------------------|------------|
|                        |       |                        |       |
| Balance,  beginning of year | ** ** | $                           | 20,677     | ** ** |
| Advances                    |       | 37,241                      |       |
| Repayments                  |       | (31,586                     | )          |
| Change in directors         |       | 4,275                       |       |
| Balance, end  of year       | ** ** | $                           | 30,607     | ** ** |

 

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

 

Premisesand equipment are summarized as follows:

 
| ** **                | ** ** | **December 31,**       | ** ** |
|---------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| ** **                | ** ** | **(Dollars  in thousands)** | ** ** |
|                      |       |                        |       |   |   |
| Land                      | ** ** | **$**                       | **5,628**  |   | $ | 4,956 |   |
| Land  improvements        | ** ** | **916**                     |       | 763 |   |
| Buildings                 | ** ** | **25,805**                  |       | 20,488 |   |
| Leasehold  improvements   | ** ** | **4,758**                   |       | 2,848 |   |
| Furniture  and equipment  | ** ** | **17,592**                  |       | 14,955 |   |
| Automobiles               | ** ** | **431**                     |       | 370 |   |
| Construction  in progress | ** ** | **504**                     |       | 2,619 |   |
| ** **                |       | **55,634**                  |       | 46,999 |   |
| Accumulated  depreciation | ** ** | **(18,620**                 | )          | (15,451 | ) |
| ** **                |       | **$**                       | **37,014** |   | $ | 31,548 |   |

 

17

----

 

Depreciation expense was$2,825,000, $2,268,000 and $1,705,000 for the years ended December 31,2005, 2004 and 2003, respectively.

 

The GainesvilleBank & Trust main office banking facility is owned by a partnershipthat is 50% owned by Gainesville Bank & Trust and 50% owned by arelated party.

 

At December 31,2005, the Company’s 50% interest in the Gainesville Bank & Trust mainoffice banking facility with a total carrying value (including land) of$3,016,000 was pledged to a subsidiary bank to secure a $369,347 borrowing ofthe related party.

 

At December 31, 2005, construction in process included costs relatedto the construction of a branch in Athens, Georgia, for the Athens division ofGainesville Bank and Trust.  Theconstruction of the Athens branch building is expected to be complete in thesecond quarter of 2006 with an approximate cost of $1.1 million.  At December 31, 2004, construction inprocess included the cost of the operations center that was completed in thefirst quarter of 2005.  The cost of theland, including land development costs was approximately $2,314,000.  In December 2004, the Company sold 4 ofthe surrounding lots and recorded a gain after tax of approximately $232,000.

 

**Leases**

 

The Company leases theGainesville Bank & Trust main office banking facility under anoncancelable operating lease agreement from 400 Church Street Properties, apartnership that is 50% owned by Gainesville Bank & Trust and 50%owned by a related party.  The lease hasan initial lease term of 10 years with four five-year renewal options.  

 

The Company also leasesvarious other branches under noncancelable operating lease agreements.

 

Rental expense under alloperating leases amounted to $846,000, $707,000 and $688,000 for the years endedDecember 31, 2005, 2004 and 2003, respectively.

 

Future minimum leasepayments on noncancelable operating leases are summarized as follows:

 
| ** ** | ** ** | **(Dollars in  thousands)** | ** ** |
|------------|------------|-----------------------------|------------|
|       |       |                        |       |
| 2006       |       | $                           | 896        |   |
| 2007       |       | 907                         |       |
| 2008       |       | 815                         |       |
| 2009       |       | 814                         |       |
| 2010       |       | 304                         |       |
| Thereafter |       | 5,528                       |       |
|       |       | $                           | 9,264      |   |

 

18

----

 

**NOTE 6.****                INTANGIBLEASSETS**

 

Followingis a summary of information related to acquired intangible assets:

 
| ** **                                         | ** ** | **December 31, 2005**  | ** ** | **December 31, 2004**    | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **Gross  Amount**           | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                                         | ** ** | **(Dollars  in thousands)** | ** ** |
| ** **                                         | ** ** | ** **                  | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Amortized intangible assets Core deposit  premiums |       | $                           | 6,942      |                          | $          | 1,356 |   | $ | 6,245 |   | $ | 627 |   |
|                                                    |            |                             |            |                               |            |  |  |  |  |  |  |  |  |

 

Theaggregate amortization expense was $729,000, $468,000 and $151,000 for the yearsended December 31, 2005, 2004 and 2003, respectively.

 

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

 
| ** ** | ** ** | **(Dollars in  thousands)** | ** ** |
|------------|------------|-----------------------------|------------|
|       |       |                        |       |
| 2006       |       | $                           | 746        |   |
| 2007       |       | 746                         |       |
| 2008       |       | 746                         |       |
| 2009       |       | 746                         |       |
| 2010       |       | 746                         |       |
|            |            |                             |            |  |

 

Changesin the carrying amount of goodwill are as follows:

 
| ** **                                                                                 | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                       |       |                                     |       |   |   |   |   |
| Beginning  balance                                                                         | ** ** | **$**                                    | **49,127** |   | $ | 30,111 |   | $ | 8,388 |   |
| Goodwill  acquired                                                                         | ** ** | **16,416**                               |       | 19,054 |   | 21,318 |   |
| Write-off of  CLC goodwill                                                                 | ** ** | **(566**                                 | **)**      | — |   | — |   |
| Adjustment of Southern Heritage  Bancorp, Inc. and Lumpkin County Bank purchase price | ** ** | **(3,813**                               | **)**      | (38 | ) | 405 |   |
| Ending  balance                                                                            | ** ** | **$**                                    | **61,164** |   | $ | 49,127 |   | $ | 30,111 |   |

 

In connection with thesale of CLC in 2005, goodwill with a carrying amount of $566,000 was writtenoff and recognized in the net loss on sale.

 

The determination of theSouthern Heritage Bancorp, Inc. and Lumpkin County Bank aggregate purchaseprices were adjusted in 2005 to properly reflect the fair value of stockoptions issued in the business combination using the Black-Scholes optionpricing model.

 

19

----

 

Theaggregate amount of time deposits in denominations of $100,000 or more atDecember 31, 2005 and 2004 was approximately $250,694,000 and $163,496,000respectively.  The scheduled maturitiesof time deposits at December 31, 2005 are as follows:

 
| ** ** | ** ** | **(Dollars in  thousands)** | ** ** |
|------------|------------|-----------------------------|------------|
|       |       |                        |       |
| 2006       | ** ** | $                           | 440,760    | ** ** |
| 2007       |       | 109,972                     |       |
| 2008       |       | 32,186                      |       |
| 2009       |       | 15,692                      |       |
| 2010       |       | 25,386                      |       |
| ** ** |       | $                           | 623,996    |   |

 

The Company had brokeredtime deposits at December 31, 2005 and 2004 of $41,218,000 and $2,500,000,respectively.

 

At December 31,2005 and 2004, overdraft demand deposits reclassified to loans totaled $335,000and $1,493,000, 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, 2005 and 2004 were $20,209,000 and $32,733,000,respectively.

 

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

 

Otherborrowings consist of the following:

 
| ** **                                                                                                                                                                                         | ** ** | **December 31,**       | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                                         | ** ** | **(Dollars  in thousands)** | ** ** |
| FHLB advances, interest payable at fixed  rates ranging from 1.95% to 6.10%; advances mature at various maturity dates  from March 8, 2006 through September 23, 2013.                   | ** ** | **$**                       | **71,648** |   | $ | 69,992 |   |
| FHLB advances, interest payable at variable  rates tied to LIBOR and overnight funds market; advances mature at various  maturity dates from January 25, 2006 through December 29, 2006. | ** ** | **25,650**                  |       | 11,000 |   |
| Treasury, tax and loan note option account  due on demand, bearing interest equal to the 90 day Treasury bill rate.                                                                                | ** ** | **968**                     |       | 934 |   |
| ** **                                                                                                                                                                                         |       | **$**                       | **98,266** |   | $ | 81,926 |   |

 

20

----

 

Contractual maturitiesof other borrowings as of December 31, 2005 are as follows:

 
| ** ** | ** ** | **(Dollars in  thousands)** | ** ** |
|------------|------------|-----------------------------|------------|
|       |       |                        |       |
| 2006       |       | $                           | 31,619     |   |
| 2007       |       | 21,500                      |       |
| 2008       |       | 14,910                      |       |
| 2009       |       | 15,487                      |       |
| 2010       |       | 6,131                       |       |
| Thereafter |       | 8,619                       |       |
|       |       | $                           | 98,266     |   |

 

The advances from theFederal Home Loan Bank are collateralized by blanket floating liens onqualifying first mortgage, home equity and commercial loans of approximately$138,011,000, available for sale securities of approximately $10,168,000 andFederal Home Loan Bank stock of $7,239,000.

 

The Company andsubsidiaries have available unused lines of credit with various financialinstitutions totaling approximately $186,388,000 at December 31,2005.  There were no other advancesoutstanding at December 31, 2005.

 

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

 

On October 30, 2002, the Company formed awholly-owned grantor trust to issue $15,464,000 in variable rate cumulativetrust preferred securities in a private placement offering.  The grantor trust has invested the proceedsof the trust preferred securities in subordinated debentures of theCompany.  The trust preferred securitiescan be redeemed, in whole or in part, from time to time, prior to maturity(October 30, 2032) at the option of the Company on or afterOctober 30, 2007.  The sole assetsof the grantor trust are the subordinated debentures of the Company (the “Debentures”).    The Company has the right to redeem thedebentures, in whole or in part, from time to time, on or afterOctober 30, 2007, at a redemption price equal to 100% of the principalamount to be redeemed plus any accrued and unpaid interest.  Both financial instruments bear an identicalannual rate of interest of 7.42% and 5.375% at December 31, 2005 and 2004,respectively.

 

On July 22, 2004, theCompany formed a second wholly-owned grantor trust to issue $10,310,000 invariable rate cumulative trust preferred securities in a private placementoffering.  The grantor trust hasinvested the proceeds of the trust preferred securities in subordinateddebentures of the Company.   The trustpreferred securities can be redeemed, in whole or in part, from time to time,prior to maturity (July 30, 2034) at the option of the Company on or afterSeptember 30, 2009.  The sole assetsof the grantor trust are the subordinated debentures of the Company.  Both financial instruments bear an identicalannual rate of interest of 6.67% and 4.625% at December 31, 2005 and 2004,respectively.

 

In addition, in connection with the acquisition ofSouthern Heritage Bancorp, Inc., the Company assumed $4,124,000 inaggregate principal amount of fixed rate trust preferred securities which havesubstantially the same terms as our other trust preferred securities exceptthat they may be redeemed on or after June 26, 2008. The annual rate ofinterest on the trust preferred securities and on the debentures was 5.55% atDecember 31, 2005 and 2004.

 

21

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The Debentures have the same interest rates as the trustpreferred securities.  The Company hasthe right to defer interest payments on the Debentures up to twenty consecutivequarterly periods (five years), so long as the Company is not in default underthe subordinated debentures.  Interestcompounds during the deferral period.  Nodeferral period may extend beyond the maturity date.  Distributions on the trust preferredsecurities are paid quarterly.  Intereston the Debentures is paid on the corresponding dates.

 

The Company has guaranteed the payment of alldistributions the Trust is obligated to make, but only to the extent the Trusthas sufficient funds to satisfy those payments. The Company and the Trust believe that, taken together, the obligationsof the Company under the Guarantee Agreement, the Trust Agreement, theSubordinated Debentures, and the Indenture provide, in the aggregate, a full,irrevocable and unconditional guarantee of all of the obligations of the Trustunder the Preferred Securities on a subordinated basis.

 

The Company is required by the Federal Reserve Boardto maintain certain levels of capital for bank regulatory purposes.  The Federal Reserve Board has determined thatcertain cumulative preferred securities having the characteristics of trustpreferred securities qualify as minority interest, which is included in Tier 1capital for bank and financial holding companies.  In calculating the amount of Tier lqualifying capital, the trust preferred securities can only be included up tothe amount constituting 25% of total Tier 1 capital elements (including trustpreferred securities).  Such Tier 1capital treatment provides the Company with a more cost-effective means ofobtaining capital for bank regulatory purposes than if the Company were toissue preferred stock.

 

 As of December 31, 2005, 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**

 

The Company has a 401(k)Employee Profit-Sharing Plan available to all eligible employees, subject tocertain minimum age and service requirements. The contributions expensed were $360,000, $493,000 and $391,000 for theyears ended December 31, 2005, 2004 and 2003, respectively.

 

**Deferred Compensation Plans**

 

The Company has variousdeferred compensation plans providing for death and retirement benefits forcertain officers and directors.  Theestimated amounts to be paid under the compensation plans have been partiallyprovided through the purchase of life insurance policies on certain officersand directors.  Accrued deferredcompensation of $6,255,000 and $5,851,000 is included in other liabilities asof December 31, 2005 and 2004, respectively.  Cash surrender values of $11,936,000 and$11,208,000 on the insurance policies is included in other assets atDecember 31, 2005 and 2004, respectively.

 

22

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**Stock Purchase Plan**

 

In 2003, the Companyadopted a stock purchase plan.  Under theplan, all full-time employees and directors of the Company or a subsidiarymeeting certain eligibility requirements are eligible to participate in theplan.  Participants in the plan mayparticipate through payroll deduction, direct contribution or a combinationthereof.  Payroll deductions are limitedto $3,500 for directors and the lesser of 10% of gross pay or $3,500 foremployees.  The Company matches payrolldeductions and direct contributions at a rate of 50% of the amountcontributed.  The purchase price of theshares of capital stock is based on the current market price.  All administrative costs are borne by theCompany.  For the years endedDecember 31, 2005 and 2004, 25,973 and 28,109 shares were purchased underthe plan.  Contributions expensed for theyears ended December 31, 2005, 2004 and 2003 were $193,000, $186,000 and$162,000, respectively.

 

**Dividend Reinvestment Plan**

 

The Company has adividend reinvestment and share purchase plan. Under the plan, all holders of record of capital stock are eligible toparticipate in the plan.  Participants inthe plan may direct the plan administrator to invest cash dividends declaredwith respect to all or any portion of their capital stock.  Participants may also make optional cashpayments that will be invested through the plan.  All cash dividends paid to the planadministrator are invested within 30 days of the cash dividend paymentdate.  Cash dividends and optional cashpayments will be used to purchase capital stock of the Company in the openmarket, from newly-issued shares, from shares held in treasury, in negotiatedtransactions, 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, 2005and 2004, 34,988 and 27,484 shares were purchased under the plan, respectively.

 

23

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

 

The Company has a stockoption plan in which 1,500,000 shares were approved for the granting of optionsto directors, officers, and employees. Both incentive stock options and non-qualified stock options may begranted under the Plan.  Option pricesreflect the fair market value of the Company’s capital stock on the dates theoptions are granted.  The options may beexercised over a period of ten years in accordance with vesting schedulesdetermined by the Board of Directors.

 

Other pertinentinformation related to the options is as follows:

 
| ** **                                                      | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                      | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                      | ** ** | **Shares**                        | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| ** **                                                      | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding at beginning of year                                | ** ** | **680,281**                       | ** ** | **$** | **0.14** | ** ** | 528,836 |   | $ | 9.78 |   | 558,287 |   | $ | 9.30 |   |
| Granted (1)                                                     | ** ** | **323,248**                       | ** ** | **10.06** |   | 399,402 |   | 9.97 |   | 33,805 |   | 17.64 |   |
| Exercised                                                       | ** ** | **(192,336**                      | **)**      | **8.16** |   | (224,331 | ) | 8.84 |   | (51,130 | ) | 7.69 |   |
| Terminated                                                      | ** ** | **(30,062**                       | **)**      | **13.04** |   | (23,626 | ) | 12.10 |   | (12,126 | ) | 12.52 |   |
| Outstanding at end of year                                      | ** ** | **781,131**                       | ** ** | **$** | **10.48** |   | 680,281 |   | $ | 10.14 |   | 528,836 |   | $ | 9.78 |   |
|                                                            |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Options exercisable at year-end                                 | ** ** | **633,766**                       | ** ** | **$** | **9.04** |   | 518,095 |   | $ | 8.86 |   | 337,231 |   | $ | 8.79 |   |
| Weighted-average fair value of options  granted during the year | ** ** | ** **                        |       | **$** | **6.89** |   |   |   | $ | 8.74 |   |   |   | $ | 6.96 |   |
|                                                                 |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Included inoptions granted for the year ended December 31, 2005, were 268,748 optionsand warrants with a weighted average exercise price of $7.47 which were assumedunder the plan for FNBG Bancshares, Inc. Included in options granted for the year ended December 31, 2004,were 355,652 options and warrants with a weighted average exercise price of$8.58 which were assumed under the plans for Southern HeritageBancorp, Inc. and Lumpkin County Bank.

 

Information pertainingto options outstanding at December 31, 2005 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** | ** ** |
| ** **                    | ** ** | ** **              | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $5.09 - $7.53                 |       | 168,259                 |       | 4.62 years                                           |       | $ | 7.13 |   | 168,259 |   | $ | 7.13 |   |
| $8.03 - $12.00                |       | 447,519                 |       | 4.77 years                                           |       | 8.66 |   | 403,029 |   | 8.61 |   |
| $12.40 - $18.40               |       | 79,978                  |       | 6.92 years                                           |       | 15.03 |   | 44,803 |   | 14.62 |   |
| $18.84 - $24.15               |       | 85,375                  |       | 9.06 years                                           |       | 22.37 |   | 17,675 |   | 22.91 |   |
| Total                         |       | 781,131                 |       | 5.43 years                                           |       | 10.48 |   | 633,766 |   | 9.04 |   |
|                               |            |                         |            |                                                      |            |  |  |  |  |  |  |  |  |

 

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions:

 
| ** **              | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------|------------|-----------------------------------|------------|
| ** **              | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Dividend yield          | ** ** | **1.57**                          | **%**      | 1.36 | % | $ | 1.60 | % |
| Expected life           | ** ** | **10 years**                      | ** ** | 10 years |   | 10 years |   |
| Expected volatility     | ** ** | **19.82**                         | **%**      | 28.41 | % | 32.42 | % |
| Risk-free interest rate | ** ** | **4.46**                          | **%**      | 4.66 | % | 3.95 | % |
|                         |            |                                   |            |  |  |  |  |  |

 

24

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

 

Thecomponents of income tax expense are as follows:

 
| ** **                    | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|
| ** **                    | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                    | ** ** | **(Dollars  in thousands)**       | ** ** |
| ** **                    | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current                       | ** ** | **$**                             | **6,400**  |   | $ | 4,599 |   | $ | 3,190 |   |
| Deferred                      | ** ** | **(522**                          | **)**      | 77 |   | (246 | ) |
| Change in valuation allowance | ** ** | **—**                        |       | — |   | (336 | ) |
| ** **                    | ** ** | **$**                             | **5,878**  | ** ** | $ | 4,676 |   | $ | 2,608 |   |

 

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 the differences is as follows:

 
| ** **                              | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|
| ** **                              | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                              | ** ** | **(Dollars  in thousands)**       | ** ** |
|                                    |       |                              |       |   |   |   |   |
| Tax provision at statutory federal rate | ** ** | **$**                             | **6,254**  |   | $ | 5,080 |   | $ | 3,513 |   |
| Tax-exempt interest                     | ** ** | **(216**                          | **)**      | (265 | ) | (234 | ) |
| Disallowed interest                     | ** ** | **22**                            | ** ** | 16 |   | 17 |   |
| Life insurance                          | ** ** | **(133**                          | **)**      | (153 | ) | (93 | ) |
| State income taxes, net of credits      | ** ** | **200**                           | ** ** | 48 |   | (149 | ) |
| Change in valuation allowance           | ** ** | **—**                        | ** ** | — |   | (336 | ) |
| Other                                   | ** ** | **(249**                          | **)**      | (50 | ) | (110 | ) |
| Income tax expense                      | ** ** | **$**                             | **5,878**  | ** ** | $ | 4,676 |   | $ | 2,608 |   |

 

The components ofdeferred income taxes are as follows:

 
| ** **                          | ** ** | **2005**                   | ** ** | **2004** | ** ** |
|-------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
| Deferred tax assets:                |       |                       |       |     |       |
| Loan loss reserves                  | ** ** | **$**                      | **4,455**  |     | $          | 3,536 |   |
| Other real estate write-down        | ** ** | **121**                    |       | 122      |       |
| Deferred compensation               | ** ** | **2,612**                  |       | 2,409    |       |
| Deferred loan fees                  | ** ** | **137**                    |       | 193      |       |
| CLC bad debt reserve                | ** ** | **—**                 |       | 80       |       |
| Net operating loss carryforward     | ** ** | **624**                    |       | 727      |       |
| Securities available for sale       | ** ** | **1,360**                  |       | 49       |       |
| Other                               | ** ** | **—**                 |       | 15       |       |
| ** **                          |       | **9,309**                  |       | 7,131    |       |
| Deferred tax liabilities:           |       |                       |       |     |       |
| Depreciation                        | ** ** | **1,283**                  |       | 1,449    |       |
| Accretion of discount on securities | ** ** | **49**                     |       | 20       |       |
| Purchase adjustment                 | ** ** | **2,880**                  |       | 2,298    |       |
| ** **                          |       | **4,212**                  |       | 3,767    |       |
|                                |       |                       |       |     |       |
| Net deferred tax assets             | ** ** | **$**                      | **5,097**  |     | $          | 3,364 |   |

 

25

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For the year endedDecember 31, 2005, net deferred tax assets increased by $100,000 as aresult of the acquisition of FNBG Bancshares, Inc.  For the year ended December 31, 2004,net deferred tax assets increased by $287,000 as a result of the acquisitionsof Southern Heritage Bancorp, Inc. and Lumpkin County Bank.

 

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

 

Presented below is asummary of the components used to calculate basic and diluted earnings pershare:

 
| ** **                                                                                           | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                           | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                           | ** ** | **(Amounts  in thousands)**       | ** ** |
| ** **                                                                                           | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                           | ** ** | **$**                             | **11,991** |   | $ | 9,838 |   | $ | 7,725 |   |
|                                                                                                 |       |                              |       |   |   |   |   |
| Weighted  average number of capital shares outstanding                                               | ** ** | **12,562**                        |       | 9,340 |   | 7,313 |   |
| Effect of  dilutive options                                                                          | ** ** | **318**                           |       | 132 |   | 156 |   |
| Weighted average number of capital shares  outstanding used to calculate dilutive earnings per share | ** ** | **12,880**                        |       | 9,472 |   | 7,469 |   |
|                                                                                                      |            |                                   |            |  |  |  |  |  |  |  |

 

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

 

**Loan Commitments**

 

The Company is a partyto financial instruments with off-balance sheet risk in the normal course ofbusiness 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.

 

The Company’s exposureto credit loss in the event of nonperformance by the other party to thefinancial instrument for commitments to extend credit and standby letters ofcredit is represented by the contractual amount of those instruments.  The Companyuses the same credit policies in making commitments as it does for on-balancesheet instruments.  A summary ofthe Company’s commitments is as follows:

 
| ** **                          | ** ** | **December 31,**       | ** **  |
|-------------------------------------|------------|-----------------------------|-------------|
| ** **                          | ** ** | **2005**                    | ** **  | **2004** | ** ** |
| ** **                          | ** ** | **(Dollars  in thousands)** | ** **  |
|                                |       |                        |        |   |   |
| Commitments to extend credit        | ** ** | **$**                       | **288,448** |   | $ | 192,294 |   |
| Financial standby letters of credit | ** ** | **8,650**                   |        | 7,354 |   |
| Other standby letters of credit     | ** ** | **1,569**                   |        | 1,357 |   |
| Credit card commitments             | ** ** | **7,229**                   |        | 5,235 |   |
| ** **                          |       | **$**                       | **305,896** |   | $ | 206,240 |   |

 

26

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**Loan Commitments (Continued)**

 

Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Commitments generally have fixed expirationdates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected toexpire without being drawn upon, the total commitment amounts do notnecessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Companyupon extension of credit, is based on management’s credit evaluation of theparty.  Collateral held varies, but mayinclude accounts receivable, inventory, property and equipment, residentialreal estate and income-producing commercial properties.

 

Credit card commitmentsare granted on an unsecured basis.

 

Standby letters ofcredit are conditional commitments issued by the Company to guarantee theperformance of a customer to a third party. Those guarantees are primarily issued to support public and privateborrowing arrangements.  The credit riskinvolved in issuing letters of credit is essentially the same as that involvedin extending loans to customers.  Collateralheld varies as specified above and is required in instances that the Companydeems necessary.

 

At December 31,2005 and 2004, the carrying amount of liabilities related to the Company’sobligation to perform under financial standby letters of credit wasinsignificant.  The Company has not beenrequired to perform on any financial standby letters of credit, and the Companyhas not incurred any losses on financial standby letters of credit for theyears ended December 31, 2005 and 2004.

 

**Contingencies**

 

In the normal course ofbusiness, the Company is involved in various legal proceedings.  In the opinion of management, any liabilityresulting from such proceedings would not have a material effect on the Company’sfinancial statements.

 

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

 

The Banks originateprimarily commercial real estate, residential real estate and consumer loans tocustomers in Hall, Lumpkin, Clarke, Bartow, Cobb, Polk, Paulding, Carroll,Baldwin, Putnam, Gwinnett and surrounding counties.  The ability of the majority of the Company’scustomers to honor their contractual obligations is dependent on their localeconomies as well as the metropolitan Atlanta, Georgia economy.

 

Eighty-nine percent ofthe Company’s loan portfolio is concentrated in loans secured by realestate.  A substantial portion of theseloans is in the Company’s primary market areas. In addition, a substantial portion of the other real estate owned islocated in those same markets. Accordingly, the ultimate collectibility of the Company’s loan portfolioand recovery of the carrying amount of other real estate owned are susceptibleto changes in market conditions in the Company’s market areas.  The other significant concentrations ofcredit by type of loan are set forth in Note 4.

 

The Company, as a matterof policy, does not generally extend credit to any single borrower or group ofrelated borrowers in excess of regulatory limits, or approximately $13,512,000,$1,500,000, $4,625,000, $4,813,000, $3,837,000 and $3,657,000 for GainesvilleBank & Trust, United Bank & Trust, Community Trust Bank,HomeTown Bank of Villa Rica, First National Bank of the South, and FirstNational Bank of Gwinnett, respectively.

 

27

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

 

The Banks are subject tocertain restrictions on the amount of dividends that may be declared withoutprior regulatory approval.  AtDecember 31, 2005, approximately $9,600,000 of retained earnings wereavailable for dividend declaration without regulatory approval.

 

The Company and Banksare subject to various regulatory capital requirements administered by the federalbanking agencies.  Failure to meetminimum capital requirements can initiate certain mandatory, and possiblyadditional discretionary actions by regulators that, if undertaken, could havea direct material effect on the consolidated financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Company and the Banksmust meet specific capital guidelines that involve quantitative measures of theCompany’s and Banks’ assets, liabilities, and certain off-balance sheet itemsas calculated under regulatory accounting practices.  Capital amounts and classification are alsosubject to qualitative judgments by the regulators about components, riskweightings, and other factors.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company andthe Banks to maintain minimum amounts and ratios of total and Tier I capital torisk-weighted assets, as defined, and of Tier I capital to average assets.  Management believes, as of December 31,2005 the Company and the Banks met all capital adequacy requirements to whichthey are subject.

 

As of December 31,2005, based on the regulatory framework for prompt corrective action, all ofthe affiliate banks are considered to be well capitalized.  To be categorized as well capitalized, theBanks must maintain minimum total risk-based, Tier I risk-based, and Tier Ileverage ratios as set forth in the following table.  There are no conditions or events since thatnotification that management believes have changed the Banks’ categories.  Prompt corrective action provisions are notapplicable to bank holding companies.

 

28

----

 

The Company and Banks’actual capital amounts and ratios are presented in the following table.

 
| ** **                              | ** ** | **Actual**                  | ** ** | **For  Capital  Adequacy  Purposes** | ** ** | **To Be  Well  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|--------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **Amount**                  | ** ** | **Ratio**                            | ** ** | **Amount**                                                               | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                              | ** ** | **(Dollars  in thousands)** | ** ** |
| **As of December 31, 2005:**       | ** ** | ** **                  | ** ** | ** **                           | ** ** | ** **                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total Capital to Risk Weighted Assets:  |       |                        |       |                                 |       |                                                                     |       |   |   |   |   |   |   |
| Consolidated                            |       | $                           | 176,302    |                                 | 13.80      | %                                                                        | $          | 102,186 |   | 8 | % | N/A |   | N/A |   |
| Gainesville Bank & Trust       |       | $                           | 58,099     |                                 | 11.41      | %                                                                        | $          | 40,726 |   | 8 | % | $ | 50,908 |   | 10 | % |
| United Bank & Trust            |       | $                           | 7,476      |                                 | 13.94      | %                                                                        | $          | 4,290 |   | 8 | % | $ | 5,363 |   | 10 | % |
| Community Trust Bank                    |       | $                           | 24,146     |                                 | 10.19      | %                                                                        | $          | 18,965 |   | 8 | % | $ | 23,706 |   | 10 | % |
| HomeTown Bank of Villa Rica             |       | $                           | 20,331     |                                 | 10.59      | %                                                                        | $          | 15,354 |   | 8 | % | $ | 19,193 |   | 10 | % |
| First National Bank of the South        |       | $                           | 15,346     |                                 | 10.59      | %                                                                        | $          | 11,597 |   | 8 | % | $ | 14,496 |   | 10 | % |
| First National Bank of Gwinnett         |       | $                           | 14,629     |                                 | 11.18      | %                                                                        | $          | 10,470 |   | 8 | % | $ | 13,088 |   | 10 | % |
| Tier I Capital to Risk Weighted Assets: |       |                        |       |                                 |       |                                                                     |       |   |   |   |   |   |   |
| Consolidated                            |       | $                           | 163,529    |                                 | 12.80      | %                                                                        | $          | 51,093 |   | 4 | % | N/A |   | N/A |   |
| Gainesville Bank & Trust       |       | $                           | 52,334     |                                 | 10.28      | %                                                                        | $          | 20,363 |   | 4 | % | $ | 30,545 |   | 6 | % |
| United Bank & Trust            |       | $                           | 6,806      |                                 | 12.69      | %                                                                        | $          | 2,145 |   | 4 | % | $ | 3,218 |   | 6 | % |
| Community Trust Bank                    |       | $                           | 21,999     |                                 | 9.28       | %                                                                        | $          | 9,482 |   | 4 | % | $ | 14,224 |   | 6 | % |
| HomeTown Bank of Villa Rica             |       | $                           | 19,002     |                                 | 9.90       | %                                                                        | $          | 7,677 |   | 4 | % | $ | 11,516 |   | 6 | % |
| First National Bank of the South        |       | $                           | 14,001     |                                 | 9.66       | %                                                                        | $          | 5,798 |   | 4 | % | $ | 8,697 |   | 6 | % |
| First National Bank of Gwinnett         |       | $                           | 13,118     |                                 | 10.02      | %                                                                        | $          | 5,235 |   | 4 | % | $ | 7,853 |   | 6 | % |
| Tier I Capital to Average Assets:       |       |                        |       |                                 |       |                                                                     |       |   |   |   |   |   |   |
| Consolidated                            |       | $                           | 163,529    |                                 | 10.71      | %                                                                        | $          | 61,051 |   | 4 | % | N/A |   | N/A |   |
| Gainesville Bank & Trust       |       | $                           | 52,334     |                                 | 8.18       | %                                                                        | $          | 25,597 |   | 4 | % | $ | 31,996 |   | 5 | % |
| United Bank & Trust            |       | $                           | 6,806      |                                 | 8.99       | %                                                                        | $          | 3,028 |   | 4 | % | $ | 3,785 |   | 5 | % |
| Community Trust Bank                    |       | $                           | 21,999     |                                 | 8.07       | %                                                                        | $          | 10,900 |   | 4 | % | $ | 13,625 |   | 5 | % |
| HomeTown Bank of Villa Rica             |       | $                           | 19,002     |                                 | 8.34       | %                                                                        | $          | 9,119 |   | 4 | % | $ | 11,398 |   | 5 | % |
| First National Bank of the South        |       | $                           | 14,001     |                                 | 8.39       | %                                                                        | $          | 6,679 |   | 4 | % | $ | 8,348 |   | 5 | % |
| First National Bank of Gwinnett         |       | $                           | 13,118     |                                 | 9.14       | %                                                                        | $          | 5,741 |   | 4 | % | $ | 7,176 |   | 5 | % |
|                                         |            |                             |            |                                      |            |                                                                          |            |  |  |  |  |  |  |  |  |  |  |

 

29

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| ** **                              | ** ** | **Actual**                  | ** ** | **For  Capital  Adequacy  Purposes** | ** ** | **To Be  Well  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|--------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **Amount**                  | ** ** | **Ratio**                            | ** ** | **Amount**                                                               | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                              | ** ** | **(Dollars  in thousands)** | ** ** |
| ** **                              |       |                        |       |                                 |       |                                                                     |       |   |   |   |   |   |   |
| **As of December 31, 2004:**       | ** ** | ** **                  | ** ** | ** **                           | ** ** | ** **                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total Capital to Risk Weighted Assets:  |       |                        |       |                                 |       |                                                                     |       |   |   |   |   |   |   |
| Consolidated                            |       | $                           | 160,971    |                                 | 16.27      | %                                                                        | $          | 79,140 |   | 8 | % | N/A |   | N/A |   |
| Gainesville Bank & Trust       |       | $                           | 52,850     |                                 | 10.92      | %                                                                        | $          | 38,732 |   | 8 | % | $ | 48,414 |   | 10 | % |
| United Bank & Trust            |       | $                           | 7,153      |                                 | 13.48      | %                                                                        | $          | 4,246 |   | 8 | % | $ | 5,308 |   | 10 | % |
| Community Trust Bank                    |       | $                           | 18,461     |                                 | 11.21      | %                                                                        | $          | 13,172 |   | 8 | % | $ | 16,466 |   | 10 | % |
| HomeTown Bank of Villa Rica             |       | $                           | 17,410     |                                 | 11.18      | %                                                                        | $          | 12,453 |   | 8 | % | $ | 15,567 |   | 10 | % |
| First National Bank of the South        |       | $                           | 13,653     |                                 | 11.08      | %                                                                        | $          | 9,862 |   | 8 | % | $ | 12,327 |   | 10 | % |
| Tier I Capital to Risk Weighted Assets: |       |                        |       |                                 |       |                                                                     |       |   |   |   |   |   |   |
| Consolidated                            |       | $                           | 149,910    |                                 | 15.15      | %                                                                        | $          | 39,570 |   | 4 | % | N/A |   | N/A |   |
| Gainesville Bank & Trust       |       | $                           | 47,231     |                                 | 9.76       | %                                                                        | $          | 19,366 |   | 4 | % | $ | 29,049 |   | 6 | % |
| United Bank & Trust            |       | $                           | 6,532      |                                 | 12.31      | %                                                                        | $          | 2,123 |   | 4 | % | $ | 3,185 |   | 6 | % |
| Community Trust Bank                    |       | $                           | 16,856     |                                 | 10.24      | %                                                                        | $          | 6,586 |   | 4 | % | $ | 9,879 |   | 6 | % |
| HomeTown Bank of Villa Rica             |       | $                           | 15,490     |                                 | 9.95       | %                                                                        | $          | 6,227 |   | 4 | % | $ | 9,340 |   | 6 | % |
| First National Bank of the South        |       | $                           | 12,569     |                                 | 10.20      | %                                                                        | $          | 4,931 |   | 4 | % | $ | 7,396 |   | 6 | % |
| Tier I Capital to Average Assets:       |       |                        |       |                                 |       |                                                                     |       |   |   |   |   |   |   |
| Consolidated                            |       | $                           | 149,910    |                                 | 12.58      | %                                                                        | $          | 47,658 |   | 4 | % | N/A |   | N/A |   |
| Gainesville Bank & Trust       |       | $                           | 47,231     |                                 | 7.88       | %                                                                        | $          | 23,972 |   | 4 | % | $ | 29,965 |   | 5 | % |
| United Bank & Trust            |       | $                           | 6,532      |                                 | 8.46       | %                                                                        | $          | 3,089 |   | 4 | % | $ | 3,861 |   | 5 | % |
| Community Trust Bank                    |       | $                           | 16,856     |                                 | 8.16       | %                                                                        | $          | 8,266 |   | 4 | % | $ | 10,333 |   | 5 | % |
| HomeTown Bank of Villa Rica             |       | $                           | 15,490     |                                 | 8.68       | %                                                                        | $          | 7,136 |   | 4 | % | $ | 8,920 |   | 5 | % |
| First National Bank of the South        |       | $                           | 12,569     |                                 | 8.91       | %                                                                        | $          | 5,644 |   | 4 | % | $ | 7,055 |   | 5 | % |

 

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

 

Thefair value of a financial instrument is the current amount that would beexchanged between willing parties, other than in a forced liquidation.  Fair value is best determined based uponquoted market prices.  However, in manyinstances, there are no quoted market prices for the Company’s variousfinancial instruments.  In cases wherequoted market prices are not available, fair value is based on discounted cashflows or other valuation techniques. These techniques are significantly affected by the assumptions used,including the discount rate and estimates of future cash flows.  Accordingly, the fair value estimates may notbe realized in an immediate settlement of the instrument.  SFAS No. 107, *Disclosuresabout Fair Value of Financial Instruments,* excludes certainfinancial instruments and all nonfinancial instruments from its disclosurerequirements.  Accordingly, the aggregatefair value amounts presented may not necessarily represent the underlying fairvalue of the Company.

 

The following methodsand assumptions were used by the Company in estimating the fair value of itsfinancial instruments.

 

**Cash, Due From Banks,Interest-Bearing Deposits in Banks and Federal Funds Sold: **The carrying amount of cash, due frombanks, interest-bearing deposits in banks and federal funds sold approximatesfair value.

 

**Securities: **Fair values of securities are based onavailable quoted market prices.  Thecarrying amount of equity securities with no readily determinable fair valueapproximates fair value.

 

30

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**Loans: **The carrying amount of variable-rateloans that reprice frequently and have no significant change in credit riskapproximates fair value.  The fair valueof fixed-rate loans is estimated based on discounted contractual cash flows,using interest rates currently being offered for loans with similar terms toborrowers with similar credit quality. The fair value of impaired loans is estimated based on discountedcontractual cash flows or underlying collateral values, where applicable.

 

**Deposits: **The carrying amount of demand deposits,savings deposits, and variable-rate certificates of deposit approximates fairvalue.  The fair value of fixed-ratecertificates of deposit is estimated based on discounted contractual cash flowsusing interest rates currently being offered for certificates of similarmaturities.

 

**Federal Funds Purchased,Repurchase Agreements and Other Borrowings: **The carrying amount of variable rate borrowings, federalfunds purchased, and securities sold under repurchase agreements approximatefair value.  The fair value of fixed rateother borrowings are estimated based on discounted contractual cash flows usingthe current incremental borrowing rates for similar type borrowingarrangements.

 

**Subordinated Debt: **The carrying amount of the Company’svariable 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 of accrued interestapproximates their fair value.

 

**Off-Balance SheetInstruments: **The carryingamount 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.

 

The carrying amount andestimated fair value of the Company’s financial instruments were as follows:

 
| ** **                                                                       | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                       | ** ** | **Carrying  Amount**        | ** ** | **Fair  Value**             | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| ** **                                                                       | ** ** | **(Dollars  in thousands)** | ** ** |
| Financial assets:                                                                |       |                        |       |                        |       |   |   |   |   |
| Cash, due from banks, interest-bearing  deposits in banks and federal funds sold | ** ** | **$**                       | **32,044** | ** **                  | **$**      | **32,044** |   | $ | 21,516 |   | $ | 21,516 |   |
| Securities                                                                       | ** ** | **188,127**                 | ** ** | **188,127**                 |       | 190,636 |   | 190,636 |   |
| Restricted equity securities                                                     | ** ** | **9,277**                   | ** ** | **9,277**                   |       | 7,226 |   | 7,226 |   |
| Loans                                                                            | ** ** | **1,218,637**               | ** ** | **1,208,643**               |       | 944,819 |   | 936,255 |   |
| Accrued interest receivable                                                      | ** ** | **8,498**                   | ** ** | **8,498**                   |       | 5,310 |   | 5,310 |   |
|                                                                             |       |                        |       |                        |       |   |   |   |   |
| Financial  liabilities:                                                          |       |                        |       |                        |       |   |   |   |   |
| Deposits                                                                         | ** ** | **1,197,026**               | ** ** | **1,185,874**               |       | 928,603 |   | 926,128 |   |
| Federal funds purchased and securities sold  under repurchase agreements         | ** ** | **45,510**                  | ** ** | **45,510**                  |       | 47,582 |   | 47,582 |   |
| Other borrowings                                                                 | ** ** | **98,266**                  | ** ** | **97,719**                  |       | 81,926 |   | 84,097 |   |
| Subordinated debt                                                                | ** ** | **29,898**                  | ** ** | **29,749**                  |       | 29,898 |   | 29,898 |   |
| Accrued interest payable                                                         | ** ** | **6,609**                   | ** ** | **6,609**                   |       | 3,719 |   | 3,719 |   |
|                                                                                  |            |                             |            |                             |            |  |  |  |  |  |  |  |  |

 

31

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

 

Components of otheroperating expenses in excess of 1% of total revenue are as follows:

 
| ** **                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(Dollars  in thousands)**       | ** ** |
|                            |       |                              |       |   |   |   |   |
| Audit and  professional fees    | ** ** | **$**                             | **946**    |   | $ | 860 |   | $ | 615 |   |
| Stationery,  forms and supplies | ** ** | **744**                           |       | 661 |   | 617 |   |
|                                 |            |                                   |            |  |  |  |  |  |  |  |

 

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

 

The followinginformation presents the condensed balance sheets as of December 31, 2005and 2004 and statements of income and cash flows of GB&TBancshares, Inc. for the years ended December 31, 2005, 2004 and2003.

 

**CONDENSEDBALANCE SHEETS**

 
| ** **                                      | ** ** | **2005**                             | ** **  | **2004**   | ** ** |
|-------------------------------------------------|------------|--------------------------------------|-------------|------------|------------|
| ** **                                      | ** ** | **(Dollars in thousands)** | ** **  |
| **Assets**                                      |       |                                 |        |       |       |
| Cash                                            | ** ** | **$**                                | **4,566**   |       | $          | 8,929 |   |
| Securities available for sale                   | ** ** | **24,060**                           |        | 32,226     |       |
| Investment in subsidiaries                      | ** ** | **191,779**                          |        | 157,322    |       |
| Premises and equipment                          | ** ** | **4,646**                            |        | 3,749      |       |
| Other assets                                    | ** ** | **3,893**                            |        | 2,802      |       |
|                                            |       |                                 |        |       |       |
| Total assets                                    | ** ** | **$**                                | **228,944** |       | $          | 205,028 |   |
|                                            |       |                                 |        |       |       |
| **Liabilities**                                 |       |                                 |        |       |       |
| Subordinated debt                               | ** ** | **$**                                | **29,898**  |       | $          | 29,898 |   |
| Other liabilities                               | ** ** | **335**                              |        | 415        |       |
|                                            |       |                                 |        |       |       |
| Total liabilities                               | ** ** | **30,233**                           |        | 30,313     |       |
|                                            |       |                                 |        |       |       |
| **Stockholders’ equity**                   | ** ** | **198,711**                          |        | 174,715    |       |
|                                            |       |                                 |        |       |       |
| Total liabilities and stockholders’ equity | ** ** | **$**                                | **228,944** | ** ** | **$**      | **205,028** | ** ** |

 

32

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**CONDENSEDSTATEMENTS OF INCOME**

 
| ** **                                                                           | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                           | ** ** | **(Dollars in thousands)** | ** ** |
| Income                                                                               |       |                                 |       |     |       |     |       |
| Dividends from subsidiaries                                                          | ** ** | **$**                                | **5,324**  |     | $          | 3,350    |       | $ | 3,080 |   |
| Management fees                                                                      | ** ** | **1,312**                            |       | 1,148    |       | 1,048    |       |
| Other income                                                                         | ** ** | **3,365**                            |       | 1,936    |       | 142      |       |
| ** **                                                                           |       | **10,001**                           |       | 6,434    |       | 4,270    |       |
|                                                                                 |       |                                 |       |     |       |     |       |
| Expense                                                                              |       |                                 |       |     |       |     |       |
| Interest                                                                             | ** ** | **2,049**                            |       | 1,190    |       | 822      |       |
| Other operating expense                                                              | ** ** | **6,594**                            |       | 4,998    |       | 2,522    |       |
| ** **                                                                           |       | **8,643**                            |       | 6,188    |       | 3,344    |       |
|                                                                                 |       |                                 |       |     |       |     |       |
| Income before income tax benefit and equity  in undistributed income of subsidiaries | ** ** | **1,358**                            |       | 246      |       | 926      |       |
|                                                                                 |       |                                 |       |     |       |     |       |
| Income tax  benefits                                                                 | ** ** | **1,635**                            |       | 1,241    |       | 819      |       |
|                                                                                 |       |                                 |       |     |       |     |       |
| Income before equity in undistributed income  of subsidiaries                        | ** ** | **2,993**                            |       | 1,487    |       | 1,745    |       |
|                                                                                 |       |                                 |       |     |       |     |       |
| Equity in  undistributed income of subsidiaries                                      | ** ** | **8,998**                            |       | 8,351    |       | 5,980    |       |
|                                                                                 |       |                                 |       |     |       |     |       |
| Net income                                                                           | ** ** | **$**                                | **11,991** |     | $          | 9,838    |       | $ | 7,725 |   |

 

33

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**CONDENSEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                                   | ** ** | **2005**                             | ** ** | **2004**   | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|----------|------------|
| ** **                                                                                   | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                         |       |                                 |       |       |       |     |       |
| **OPERATING ACTIVITIES**                                                                     |       |                                 |       |       |       |     |       |
| Net income                                                                                   | ** ** | **$**                                | **11,991** | ** ** | $          | 9,838    |       | $ | 7,725 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |       |                                 | ** ** |       |       |     |       |
| Undistributed income of subsidiaries                                                         | ** ** | **(8,998**                           | **)**      | (8,351     | )          | (5,980   | )          |
| Depreciation                                                                                 | ** ** | **591**                              | ** ** | 300        |       | 42       |       |
| (Gain) loss on sale of assets                                                                | ** ** | **(2**                               | **)**      | (371       | )          | 316      |       |
| Net other operating activities                                                               | ** ** | **(789**                             | **)**      | (1,981     | )          | (2,406   | )          |
|                                                                                         |       |                                 | ** ** |       |       |     |       |
| Net cash provided by (used in) operating  activities                                         | ** ** | **2,793**                            | ** ** | (565       | )          | (303     | )          |
|                                                                                         |       |                                 | ** ** |       |       |     |       |
| **INVESTING ACTIVITIES**                                                                     |       |                                 | ** ** |       |       |     |       |
| Purchase of securities available for sale                                                    |       | **—**                           | ** ** | (31,259    | )          | (723     | )          |
| Proceeds from sale of securities available  for sale                                         |       | **—**                           | ** ** | —     |       | 693      |       |
| Proceeds from maturities of securities available  for sale                                   | ** ** | **4,080**                            | ** ** | —     |       | —   |       |
| Purchase of premises and equipment                                                           | ** ** | **(1,389**                           | **)**      | (4,422     | )          | (1,394   | )          |
| Proceeds from sale of premises and  equipment                                                | ** ** | **2**                                | ** ** | 2,223      |       | 1,144    |       |
| Capital investment in subsidiaries                                                           | ** ** | **(4,577**                           | **)**      | (6,000     | )          | (4,628   | )          |
|                                                                                         |       |                                 | ** ** |       |       |     |       |
| Net cash used in investing activities                                                        | ** ** | **(1,884**                           | **)**      | (39,458    | )          | (4,908   | )          |
|                                                                                         |       |                                 | ** ** |       |       |     |       |
| **FINANCING ACTIVITIES**                                                                     |       |                                 | ** ** |       |       |     |       |
| Dividends paid                                                                               | ** ** | **(4,137**                           | **)**      | (2,681     | )          | (2,038   | )          |
| Proceeds from issuance of common stock                                                       | ** ** | **1,019**                            | ** ** | 37,399     |       | 380      |       |
| Payment for fractional shares                                                                | ** ** | **(4**                               | **)**      | (30        | )          | (9       | )          |
| Proceeds from issuance of subordinated  debentures                                           |       | —                               | ** ** | 10,310     |       | —   |       |
| Proceeds from note payable                                                                   | ** ** | **1,000**                            | ** ** | —     |       | —   |       |
| Repayment of note payable                                                                    | ** ** | **(3,150**                           | **)**      | —     |       | —   |       |
|                                                                                         |       |                                 | ** ** |       |       |     |       |
| Net cash provided by (used in) financing  activities                                         | ** ** | **(5,272**                           | **)**      | 44,998     |       | (1,667   | )          |
|                                                                                         |       |                                 | ** ** |       |       |     |       |
| Net increase (decrease) in cash                                                              | ** ** | **(4,363**                           | **)**      | 4,975      |       | (6,878   | )          |
|                                                                                         |       |                                 | ** ** |       |       |     |       |
| Cash at beginning of year                                                                    | ** ** | **8,929**                            | ** ** | 3,954      |       | 10,832   |       |
|                                                                                         |       |                                 | ** ** |       |       |     |       |
| Cash at end of year                                                                          | ** ** | **$**                                | **4,566**  | ** ** | $          | 8,929    |       | $ | 3,954 |   |

 

34

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

 
| ** **                                           | ** ** | **Years Ended December 31,**        | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                           | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **Fourth  Quarter**                                | ** ** | **Third****Quarter** | ** ** | **Second****Quarter** | ** ** | **First****Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Third****Quarter** | ** ** | **Second****Quarter** | ** ** | **First****Quarter** | ** ** |
| ** **                                           | ** ** | **(Dollars  in thousands, except per share data)** | ** ** |
|                                                 |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                      | ** ** | **$**                                              | **25,886** | ** ** | **$** | **24,021** | ** ** | **$** | **22,029** | ** ** | **$** | **18,879** |   | $ | 17,052 | ** ** | $ | 15,211 |   | $ | 13,169 |   | $ | 12,842 |   |
| Interest expense                                     | ** ** | **10,418**                                         | ** ** | **9,376** | ** ** | **7,909** | ** ** | **6,133** |   | 5,336 |   | 4,601 |   | 4,059 |   | 3,956 |   |
|                                                 |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                  | ** ** | **15,468**                                         | ** ** | **14,645** | ** ** | **14,120** | ** ** | **12,746** |   | 11,716 |   | 10,610 |   | 9,110 |   | 8,886 |   |
| Provision for loan losses                            | ** ** | **977**                                            | ** ** | **635** | ** ** | **3,822** | ** ** | **482** |   | 465 |   | 332 |   | 325 |   | 284 |   |
|                                                 |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income after provision for  loan losses | ** ** | **14,491**                                         | ** ** | **14,010** | ** ** | **10,298** | ** ** | **12,264** |   | 11,251 |   | 10,278 |   | 8,785 |   | 8,602 |   |
| Noninterest income                                   | ** ** | **2,492**                                          | ** ** | **3,476** | ** ** | **2,906** | ** ** | **2,757** |   | 3,238 |   | 2,699 |   | 2,942 |   | 2,899 |   |
| Noninterest expenses                                 | ** ** | **11,406**                                         | ** ** | **11,551** | ** ** | **11,273** | ** ** | **10,595** |   | 9,901 |   | 9,456 |   | 8,475 |   | 8,348 |   |
|                                                 |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes                           | ** ** | **5,577**                                          | ** ** | **5,935** | ** ** | **1,931** | ** ** | **4,426** |   | 4,588 |   | 3,521 |   | 3,252 |   | 3,153 |   |
| Provision for income taxes                           | ** ** | **1,888**                                          | ** ** | **2,032** | ** ** | **543** | ** ** | **1,415** |   | 1,613 |   | 1,121 |   | 1,019 |   | 923 |   |
|                                                 |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                           | ** ** | **$**                                              | **3,689**  | ** ** | **$** | **3,903** | ** ** | **$** | **1,388** | ** ** | **$** | **3,011** |   | $ | 2,975 |   | $ | 2,400 |   | $ | 2,233 |   | $ | 2,230 |   |
| ** **                                           | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Earnings per share:                                  | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                | ** ** | **$**                                              | **0.29**   | ** ** | **$** | **0.31** | ** ** | **$** | **0.11** | ** ** | **$** | **0.25** |   | $ | 0.28 |   | $ | 0.25 |   | $ | 0.26 |   | $ | 0.26 |   |
| Diluted                                              | ** ** | **$**                                              | **0.28**   | ** ** | **$** | **0.30** | ** ** | **$** | **0.11** | ** ** | **$** | **0.25** |   | $ | 0.27 |   | $ | 0.25 |   | $ | 0.26 |   | $ | 0.26 |   |

 

**NOTE 22.****             ****PENDING ACQUISITION**

 

On December 19,2005, the Company announced the execution of a definitive agreement to acquireMountain Bancshares, Inc., the parent company of the $130 million-assetMountain State Bank headquartered in Dawsonville, Georgia.  Under the terms of the agreement, MountainBancshares shareholders will receive 0.8911 shares of our common stock and$8.40 in cash, or approximately $10.3 million, in exchange for each share ofMountain Bancshares common stock. The merger is expected to close in the secondquarter of 2006, pending shareholder and regulatory approval.

 

**NOTE 23.****             ****SUBSEQUENT EVENT**

 

On January 30,2006, the Company’s Board of Directors approved the repurchase of up toapproximately 2% of the Company’s outstanding common stock, no par value pershare.  SunTrust Robinson Humphrey willpurchase from time to time, on behalf of the Company, on a best-efforts basis,up to 260,000 shares of the Common Stock in open-market transactions.  The purchases will be accomplished inaccordance with the volume and timing guidelines of Rule 10b-18 of theExchange Act applicable to the Company and Rule 10b5-1 of the ExchangeAct. Therefore, due to the pending proposed merger between the Company andMountain Bancshares, Inc., repurchases of common stock will not commenceuntil the shareholders of Mountain Bancshares approve the proposed merger at aspecial shareholders’ meeting expected to occur in the second quarter of 2006.

 

35

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Board of Directors

GB&T Bancshares, Inc.

Gainesville, Georgia

 

We have audited theconsolidated balance sheets of GB&T Bancshares, Inc. and Subsidiariesas of December 31, 2005 and 2004, and the related consolidated statementsof income, comprehensive income, stockholders’ equity and cash flows for eachof the three years in the period ended December 31, 2005.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of GB&T Bancshares, Inc. andSubsidiaries as of December 31, 2005 and 2004, and the results of their operationsand their cash flows for each of the three years in the period endedDecember 31, 2005, in conformity with U.S. generally accepted accountingprinciples.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of GB&T Bancshares, Inc. andSubsidiaries’ internal control over financial reporting as of December 31,2005, based on criteria established in*Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO)and our report dated February 3, 2006 expressed an unqualified opinion onmanagement’s assessment of the effectiveness of GB&T Bancshares, Inc.’sinternal control over financial reporting and an unqualified opinion on theeffectiveness of GB&T Bancshares, Inc.’s internal control overfinancial reporting.

 

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

 

Atlanta, Georgia

February 3, 2006

 

36

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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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