**U.S. SECURITIES AND EXCHANGECOMMISSION****WASHINGTON, D.C.  20549**

 

**FORM 10-K**

 

**(MarkOne)****ý****  Annual Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

**Forthe Fiscal Year Ended December 31, 2004**

 

**o****  Transition Report Pursuant to Section13 or 15(d) of the Securities Exchange Act of 1934**

 

**Forthe transition period from             to            **

 

**Commissionfile****number 000-24203**

 

**GB&TBancshares, Inc.**(Exact name of registrant as specified inits 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, includingarea code:* ***(770) 532-1212**

 

Securities registered pursuant to Section12(b) of the Act:  **None**

 

Securities registered pursuant to Section12(g) of the Act:  **CommonStock, no par value**
|   | (Title of class) |
|--------|------------------|

 

Indicate by check markwhether the registrant:  (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý   No o

 

Indicate by check markif disclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  ý

 

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

 

The aggregate marketvalue of the registrant’s common stock held by nonaffiliates as of June 30,2004 was approximately $186,089,248 based on the closing price of the commonstock on the Nasdaq National Market of $23.90 per share on that date.  For this purpose, directors and executiveofficers have been assumed to be affiliates.

 

As of March 1, 2005,the Company had issued and outstanding 11**,**774,609 shares of the 20,000,000authorized shares of its no par value common stock.

 

 

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**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of the ProxyStatement for the 2005 Annual Meeting of Stockholders to be filed with theSecurities and Exchange Commission within 120 days of the Registrant’s 2004fiscal year end are incorporated by reference into Part III of this report.

 

**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKINGSTATEMENTS**

 

Some of the statements contained or incorporatedby reference in this Report, including, without limitation, matters discussedunder the caption “Management’s Discussion and Analysis of Financial Conditionand Results of Operation,” of GB&T Bancshares, Inc. (the “Company”) are “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-looking statements include statements about thecompetitiveness of the banking industry, potential regulatory obligations, ourentrance and expansion into other markets, our other business strategies andother statements that are not historical facts. Forward-looking statements arenot guarantees of performance or results. When we use words like “may,” “plan,”“contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,”“predict,” “estimate,” “could,” “should,” “would,” “will,” and similarexpressions, you should consider them as identifying forward-lookingstatements, although we may use other phrasing. These forward-lookingstatements involve risks and uncertainties and are based on our beliefs andassumptions, and on the information available to us at the time that thesedisclosures were prepared. Factors that may cause actual results to differmaterially from those expressed or implied by such forward-looking statementsinclude, among others, the following possibilities: (1) competitive pressuresamong depository and other financial institutions may increase significantly;(2) changes in the interest rate environment may reduce margins; (3) generaleconomic conditions may be less favorable than expected, resulting in, amongother things, a deterioration in credit quality and/or a reduction in demandfor credit; (4) economic, governmental or other factors may prevent theprojected population and commercial growth in the counties in which weoperate;  (5) we may be unable to obtainrequired shareholder or regulatory approval for our future acquisitions; (6)legislative or regulatory changes, including changes in accounting standards,may adversely affect the businesses in which we are engaged;  (7) costs or difficulties related to theintegration of our businesses may be greater than expected; (8) depositattrition, customer loss or revenue loss following acquisitions may be greaterthan expected; (9) competitors may have greater financial resources and developproducts that enable such competitors to compete more successfully than us; and(10) adverse changes may occur in the equity markets. You should refer to therisks detailed below under the heading “Risk Factors” and throughout thisReport and in our periodic and current reports filed with the Securities andExchange Commission for specific factors which could cause our actual resultsto be significantly different from those expressed or implied by theseforward-looking statements. Many of these factors are beyond our ability tocontrol or predict, and readers are cautioned not to put undue reliance on suchforward-looking statements. We do not intend to, and assume no responsibilityfor updating or revising any forward-looking statements contained in thisReport, whether as a result of new information, future events or otherwise.

 

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**RISKFACTORS**

 

*Our business is subject tocertain risks, including those described below. Readers of this Annual Report on Form 10-K should take such risks intoaccount in evaluating any investment decision involving our common stock.  The risks below do not describe all risksapplicable to our business and are intended only as a summary of certainmaterial factors that affect our operations in the industries in which weoperate.  More detailed informationconcerning these and other risks is contained in other sections of this AnnualReport on Form 10-K, including “Business” and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.”*

 

**Significant risks accompany ourrecent rapid expansion**.

 

We have recentlyexperienced significant growth through acquisitions, including the acquisitionsof Lumpkin County Bank and Southern Heritage Bank in August 2004. Additionally,effective March 1, 2005, we have closed on the merger with FNBG Bancshares,Inc. and its subsidiary bank, First National Bank of Gwinnett. Theseacquisitions could place a strain on our resources, systems, operations andcash flow. Our ability to manage these acquisitions will depend on our abilityto monitor operations and control costs, maintain effective quality controls,expand our internal management and technical and accounting systems andotherwise successfully integrate acquired businesses into our company. If wefail to do so, our business, financial condition and operating results will benegatively impacted.

 

**We face risks with respect tofuture expansion and acquisitions or mergers**.

 

We continuously seekto acquire other financial institutions or parts of those institutions and maycontinue to engage in de novo branch expansion in the future. Acquisitions andmergers involve a number of risks, including:

 

*      thetime and costs associated with identifying and evaluating potentialacquisitions and merger partners may negatively affect our business;

 

*      the estimatesand judgments used to evaluate credit, operations, management and market riskswith respect to the target institution may not be accurate;

 

*      the time andcosts of evaluating new markets, hiring experienced local management andopening new offices and the time lags between these activities and thegeneration of sufficient assets and deposits to support the costs of theexpansion may negatively affect our business;

 

*      wemay not be able to finance an acquisition without diluting our existingshareholders;

 

*      thediversion of our management’s attention to the negotiation of a transaction maydetract from their business productivity;

 

*      wemay enter into new markets where we lack experience;

 

*      wemay introduce new products and services into our business with which we have noprior experience; and

 

*      wemay incur an impairment of goodwill associated with an acquisition andexperience adverse short-term effects on our results of operations.

 

In addition, noassurance can be given that we will be able to integrate our operations afteran acquisition without encountering difficulties including, without limitation,the loss of key employees and customers, the disruption of our respectiveongoing businesses or possible inconsistencies in standards, controls, proceduresand policies. Successful integration of our operations with another entity’swill depend primarily on our ability to consolidate operations, systems andprocedures and to eliminate redundancies and costs. If we have difficultieswith the integration, we might not achieve the economic benefits we expect toresult from any particular acquisition or merger. In addition, we mayexperience greater than expected costs or difficulties relating to suchintegration.

 

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

 

Our loan customers maynot repay their loans according to the terms of the loans, and the collateralsecuring the payment of these loans may be insufficient to assure repayment. Wemay experience significant loan losses which could have a material adverseeffect on our operating results. Management makes various assumptions andjudgments about the collectibility of our loan portfolio, including thecreditworthiness of our borrowers and the value of the real estate and otherassets serving as collateral for the repayment of many of our loans. Wemaintain an allowance for loan losses in an attempt to cover any loan losseswhich may occur. In determining the size of the allowance, we rely on ananalysis of our loan portfolio based on historical loss experience, volume andtypes of loans, trends in classification, volume, delinquencies andnon-accruals, national and local economic conditions and other pertinentinformation.

 

As we expand into newmarkets, our determination of the size of the allowance could be understateddue to our lack of familiarity with market-specific factors. If our assumptionsare wrong, our current allowance may not be sufficient to cover future loanlosses, and adjustments may be necessary to allow for different economicconditions or adverse developments in our loan portfolio. Additions to ourallowance would significantly decrease our net income.

 

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

 

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

 

Our successsignificantly depends upon the growth in population, income levels, depositsand housing starts in our market areas. If the communities in which we operatedo not grow or if prevailing economic conditions locally or nationally areunfavorable, our business may be negatively impacted. In addition, theeconomies of the communities in which we operate are substantially dependent onthe growth of the economy in metropolitan Atlanta. To the extent that economicconditions in metropolitan Atlanta are unfavorable or do not continue to growas projected, the economies in our market areas would be adversely affected.Moreover, we cannot give any assurance that we will benefit from any marketgrowth or favorable economic conditions in our market areas if they do occur.

 

In addition, themarket value of the real estate securing loans as collateral could be adverselyaffected by unfavorable changes in market and economic conditions. As ofDecember 31, 2004, approximately 88% of our total loans were secured by realestate. Any sustained period of increased payment delinquencies, foreclosuresor losses caused by adverse 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 unpredictableeconomic and political conditions may be amplified as a result of our limitedmarket areas**.

 

Conditions such asinflation, recession, unemployment, high interest rates, short money supply,scarce natural resources, international disorders, terrorism and other factorsbeyond our 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, amongother things, a deterioration in credit quality or a reduced demand for creditand may harm the financial stability of our customers. Due to our limitedmarket areas, these negative conditions may have a more noticeable effect on usthan would be experienced by a larger institution more able to spread theserisks of unfavorable local economic conditions across a large number ofdiversified economies.

 

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**Our recent operating results maynot be indicative of our future operating 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 ratios andstatistics. For example, our earnings achieved a compounded annual growth rateof more than 23% between the end of 2000 and the end of 2004. 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, a strongresidential mortgage market, or the ability to find suitable candidates foracquisition. 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 our operatingcosts being fixed expenses.

 

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

 

Our success has beenand continues 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 mayrequire us to raise additional capital in the future, but that capital may notbe available when it is needed**.

 

We are required byfederal and state regulatory authorities to maintain adequate levels of capitalto support our operations. We anticipate that our capital resources followingthis offering will satisfy our capital requirements for the foreseeable future.We may at some point, however, need to raise additional capital to support ourcontinued growth.

 

Our ability to raiseadditional capital, if needed, will depend on conditions in the capital marketsat that time, 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 financialinstitutions and other financial service providers may adversely affect ourprofitability**.

 

The banking businessis highly competitive, and we experience competition in each of our marketareas from many other financial institutions. We compete with commercial banks,credit unions, savings and loan associations, mortgage banking firms, consumerfinance companies, securities brokerage firms, insurance companies, moneymarket funds, and other mutual funds, as well as other super-regional, nationaland international financial institutions such as Bank of America, BB&T,Regions Bank, SunTrust, Synovus and Wachovia that operate offices in our marketareas and elsewhere.

 

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.

 

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

 

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 ondeposits and locations of offices. We are also subject to capitalizationguidelines established by our regulators, which require us to maintain adequatecapital to support our growth. Many of these regulations are intended toprotect depositors, the public and the FDIC rather than shareholders.

 

The laws andregulations applicable to the banking industry could change at any time, and wecannot predict the effects of these changes on our business and profitability.Because government regulation greatly affects the business and financialresults of all commercial banks and bank holding companies, our cost of compliancecould adversely affect our earnings. In addition, the Sarbanes-Oxley Act of2002, and the related rules and regulations promulgated by the Securities andExchange Commission and Nasdaq that are now applicable to us, have increasedthe scope, complexity and cost of corporate governance, reporting anddisclosure practices, including the costs of completing our audit andmaintaining our internal controls.

 

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

 

Our ability to paydividends is limited by regulatory restrictions and the need to maintainsufficient consolidated capital. The ability of our bank subsidiaries to paydividends to us is limited by their obligations to maintain sufficient capitaland by other general restrictions on their dividends that are applicable to ourregulated bank subsidiaries. If these regulatory requirements are not met, oursubsidiary banks will not be able to pay dividends to us, and we may be unableto pay dividends on our common stock.

 

**PARTI**

 

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

 

**The Company**

 

GB&T Bancshareswas formed in 1998 as a bank holding company existing under the laws of theState of Georgia. On April 24, 1998, we completed a reorganization ofGainesville Bank & Trust to the current holding company structure byacquiring all of the outstanding common stock of Gainesville Bank & Trustin exchange for 1,676,160 shares of GB&T Bancshares common stock. Theacquisition was accounted for as a pooling of interests. We operate as amulti-bank holding company. All of our business activities are conductedthrough our subsidiaries. At December 31, 2004, we had five wholly owned banksubsidiaries, Gainesville Bank & Trust, (“GBT”), United Bank & Trust, (“UBT”),Community Trust Bank, (“CTB”), HomeTown Bank of Villa Rica, (“HTB”) and FirstNational Bank of the South, (“FNBS”), and a wholly owned consumer financecompany, Community Loan Company, (“CLC”). In August of 2004, we completed theacquisitions of Southern Heritage Bank, based in Oakwood, Georgia, and LumpkinCounty Bank, based in Dahlonega, Georgia, by merging the two banks intoGainesville Bank & Trust.  On March1, 2005, we completed the acquisition of FNBG Bancshares and its wholly ownedsubsidiary First National Bank of Gwinnett 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 arrayof retail deposit products and fee-based services to support our clientsincluding checking accounts, money market accounts, savings accounts andcertificates of deposit. We also offer a variety of other traditional bankingservices to our customers, including drive-up and night depository facilities,24-hour automated teller machines, internet banking, telephone banking andlimited trust services. We operate a consumer finance company, Community LoanCompany, which was formed in 1995. This business typically makes loans of lessthan $3,000 to individuals, which loans are primarily secured by personalproperty.

 

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On October 4, 2004, weannounced the execution of a definitive agreement to acquire FNBG Bancshares,Inc., the parent company of the $115 million-asset First National Bank ofGwinnett. Under the terms of the agreement, FNBG Bancshares shareholders mayelect to receive either 1.38 shares of our common stock, $30 in cash, or acombination of cash and our common stock, in exchange for each share of FNBGBancshares common stock, subject to an overall limit of 30% to be paid in cash.As of the date of this filing, a final consideration amount to be paid in cashhad not been determined.  The merger wascompleted effective close of business on March 1, 2005.

 

In September 2004, weopened Bank of Athens as a division of Gainesville Bank & Trust. Bank ofAthens offers a range of deposit and loan products and services, includinginternet banking with cash management for both business and personal accounts.We also plan to acquire property and develop plans for the construction of anew bank building for Bank of Athens during 2005.

 

**Market Areas and Competition**

 

We currently conductbusiness through 25 branches in our subsidiary banks’ market areas of Hall,Polk, Paulding, Cobb, Carroll, Baldwin, Bartow, Putnam, Clarke, Oconee andLumpkin Counties, Georgia. Additionally, we have recently closed on the mergerwith FNBG Bancshares, Inc. and its bank subsidiary, First National Bank ofGwinnett, which has added Gwinnett County to our market areas. These marketareas geographically surround metropolitan Atlanta. According to 2004 data fromthe U.S. Census Bureau, the average projected population growth in our marketsfrom 2004 to 2009 is expected to be 15.34% versus a U.S. average of 4.84%.

 

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

 

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

 

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

 

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

 

**Our Strategy**

 

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

 

*      Continueexpansion, through selective acquisitions and opening strategically locatedbranches, into high growth markets in Georgia where we believe we have acompetitive advantage and an opportunity for growth;

 

*      Continue ourprimary focus on commercial and retail customers in our existing market areaswith the goal of providing superior, personal customer service and maintainingstrong asset quality;

 

*      Maintain localautonomy and accountability at our subsidiary banks;

 

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*      Improve ourfinancial performance through efficient management of our infrastructure andcapital base;

 

*      Expand ourfinancial products and services to meet the needs of our customers and toincrease our fee income; and

 

*      Ensuremanagement’s interests are aligned with 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 which they are dealing. In orderto maintain this atmosphere, as we have acquired new banks and growninternally, we generally maintain the management team of each separate bank,allowing it to retain its local entrepreneurial identity, autonomy and decisionmaking. By keeping with this community banking strategy, we feel that ouremployees and customers will forge long-term, mutually beneficialrelationships. By keeping management local and accessible to customers, webelieve our banks can respond more quickly to our customers’ needs than other,larger banks.

 

*GrowthStrategy*.  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 six bank acquisitions throughmergers with their holding companies and/or merging the banks into GainesvilleBank & Trust. We focus our acquisition strategy on high-quality communitybanks with proven management teams that view combining with us as forging apartnership rather than as an exit strategy. Our goal is to maintain themanagement team of each acquired bank, allowing it to retain its localentrepreneurial identity, autonomy and decision making, while simultaneouslyincreasing efficiency by consolidating administrative and back officeoperations.

 

In addition to ourstrategy of expansion through combinations with other banks, we intend tocontinue to expand internally where possible by growing our existing banks intheir respective market areas and nearby attractive markets. We believe thatour decentralized community banking strategy allows our banks to effectivelycompete with our larger competitors by providing superior, personalizedcustomer service, leveraging local decision making capabilities, and stayingattuned to community matters.

 

**Trust Preferred Securities**

 

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

 

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

 

In addition, inconnection with the acquisition of Southern Heritage, we assumed $4.1 millionin aggregate principal amount of 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. As of December 31, 2004,we had $29.9 million in aggregate principal amount of trust preferredsecurities outstanding. See the notes to the consolidated financial statementsfor further information on the trust preferred securities.

 

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**Lending Activities**

 

We originate loansprimarily secured by single and multi-family real estate, residentialconstruction, and owner-occupied commercial buildings. In addition, we makeloans to small and medium-sized commercial businesses, as well as to consumersfor a variety of purposes. We also lend to residential contractors anddevelopers in our market areas. We attempt to obtain a security interest inreal estate whenever possible. As of December 31, 2004, approximately 88% ofour loan portfolio was secured by real estate.

 

We also providecommercial and consumer installment loans to our customers that are secured bycollateral other than real estate. Such loans are typically of multiple-yearduration and, if not variable rate, bear interest at a rate tied to our cost offunds of equivalent maturity.

 

Our loan portfolio atDecember 31, 2004 was comprised as follows:

 
| **Type**                 | ** ** | **Dollar Amount**          | ** ** | **Percentage of  Portfolio** | ** ** |
|--------------------------|------------|----------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **(Dollars in thousands)** | ** ** | ** **                   | ** ** |
|                     |       |                       |       |                         |       |
| Real Estate-Mortgage     |       | $                          | 545,614    |                         | 57.1       | % |
| Real Estate-Construction |       | 294,817                    |       | 30.8                         |       |
| Commercial               |       | 74,437                     |       | 7.8                          |       |
| Consumer                 |       | 37,248                     |       | 3.9                          |       |
| Other                    |       | 3,764                      |       | 0.4                          |       |
| Total                    |       | $                          | 955,880    |                         | 100.0      | % |

 

*RealEstate-Mortgage*.  We make commercial mortgage loans to financethe purchase of real property as well as loans to smaller business ventures,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 mortgage loansto be collateralized by well-managed income producing property with adequatemargins and to be guaranteed by responsible parties. In addition, a substantialpercentage of our commercial mortgage loan portfolio is secured byowner-occupied commercial buildings. We look for opportunities where cash flowfrom the collateral provides adequate debt service coverage and the guarantor’snet worth is centered on assets other than the project we are financing. Ourcommercial mortgage loans are generally collateralized by first liens on realestate, have fixed or floating interest rates and amortize over a 15 to 25-yearperiod with balloon payments due at the end of one to nine years. Payments onloans collateralized by such properties are often dependent on the successfuloperation or management of the properties. Accordingly, repayment of theseloans may by subject to adverse conditions in the real estate market.

 

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

 

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

 

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*RealEstate-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 involve additional risks attributable to the fact that loanfunds are advanced upon the security of a project under construction, and thevalue of the project is dependent on its successful completion. As a result ofthese uncertainties, construction lending often involves the disbursement ofsubstantial funds with repayment dependent, in part, upon the success of theultimate project rather than the ability of a borrower or guarantor to repaythe loan. If we are forced to foreclose on a project prior to completion, thereis no assurance that we will be able to recover all of theunpaid portion of the loan. In addition, we may be required to fund additionalamounts to complete a project and may have to hold the property for anindeterminate period of time. While we have underwriting procedures designed toidentify what we believe to be acceptable levels of risks in constructionlending, no assurance can be given that these procedures will prevent lossesfrom the risks described above.

 

*CommercialLending*.  Our commercial loan portfolio includes loansto smaller business ventures, credit lines for working capital and short-termseasonal or inventory financing, as well as letters of credit that aregenerally secured by collateral other than real estate. Commercial borrowerstypically secure their loans with assets of the business, personal guarantiesof 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 servicethe debt from income. In general, commercial loans involve more credit riskthan residential and commercial mortgage loans. The increased risk incommercial loans is generally due to the type of assets collateralizing theseloans. The increased risk also derives from the expectation that commercialloans generally will be serviced from the operations of the business, and thoseoperations may not be successful.

 

*ConsumerLoans*.  We make a variety of loans to individuals forpersonal, 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 as automobiles. In these cases, any repossessedcollateral for a defaulted consumer loan may not provide an adequate source ofrepayment for the outstanding loan balance. In addition, consumer loancollections are dependent on the borrower’s continuing financial stability, andthus are more likely to be affected by job loss, divorce, illness or personalbankruptcy.

 

*CreditRisks*.  The principal economic risk associated witheach category of the loans that we make is the creditworthiness of the borrowerand the ability of the borrower to repay the loan. General economic conditionsand the strength of the services and retail market segments affect borrowercreditworthiness. General factors affecting a commercial borrower’s ability torepay include interest rates, inflation and the demand for the commercialborrower’s products and services, as well as other factors affecting a borrower’scustomers, suppliers and employees.

 

Risks associated withreal estate loans also include fluctuations in the value of real estate, newjob creation trends, tenant vacancy rates and, in thecase of commercial borrowers, the quality of the borrower’s management.Consumer loan repayments depend upon the borrower’s financial stability and aremore likely to be adversely affected by divorce, job loss, illness and personalhardships.

 

*LendingPolicies*.  The boards of directors of our subsidiarybanks establish and periodically review the subsidiary banks’ lending policiesand procedures. Our board of directors has recently adopted a company-widelending policy and the boards of directors of our subsidiary banks are in theprocess of implementing this policy. Despite our centralized policy, we maygrant our subsidiary banks the flexibility to adapt our lending policy toconditions in their specific market areas. There are regulatory restrictions onthe dollar amount of loans available for each lending relationship. Statebanking regulations provide that no secured loan relationship may exceed 25% ofthe subsidiary banks’ statutory capital or net assets, as defined, and nounsecured loan relationship may exceed 15% of statutory capital, except inlimited circumstances. National banking regulations provide that no loanrelationship may exceed 15% of the subsidiary banks’ Tier 1 capital. Oursubsidiary banks occasionally sell participation interests in loans to otherlenders, including our other subsidiary banks, primarily when a loan exceedsthe subsidiary banks’ legal lending limits.

 

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**Deposits**

 

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

 

**Other Banking Services**

 

Given client demandfor increased convenience and account access, we offer a range of products andservices, including 24-hour internet banking, direct deposit, traveler’schecks, safe deposit boxes, United States savings bonds and automatic accounttransfers. We earn fees for most of these services. We also receive ATMtransaction fees from transactions performed by our customers participating ina shared network of automated teller machines and a debit card system that ourcustomers can use throughout Georgia and in other states.

 

**Securities**

 

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

 

**Asset/Liability Management**

 

It is our objective tomanage our assets and liabilities to provide a satisfactory and consistent levelof profitability within the framework of established cash, loan, securities,borrowing and capital policies. Our overall philosophy is to support assetgrowth primarily through the growth of core deposits, which include deposits ofall categories from individuals and businesses. Management seeks to invest thelargest portion of our assets in loans.

 

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

 

**Employees**

 

As of December 31,2004, we had 453 full-time equivalent employees, of which 166 were employed byGainesville Bank & Trust, 34 were employed by United Bank & Trust, 74were employed by Community Trust Bank, 25 were employed by Community LoanCompany, 56 were employed by HomeTown Bank of Villa Rica, 53 were employed byFirst National Bank of the South and 45 were employed by the holding company.The increase in holding company employees represents a move of staff operationsfrom Gainesville Bank & Trust to the holding company. We are not a party toany collective bargaining agreement and, in the opinion of management,we enjoy satisfactory relations with our employees.

 

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**SUPERVISION AND REGULATION**

 

We are subject toextensive state 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 material effecton our business and prospects. Beginning with the enactment of the FinancialInstitutions Reform Recovery and Enforcement Act in 1989 and following with theFDIC Improvement Act in 1991, numerous additional regulatory requirements havebeen placed on the banking industry in the past several years and additionalchanges have been proposed. Legislative changes and the policies of variousregulatory authorities may significantly affect our operations. We cannotpredict the effect that fiscal or monetary policies, or new federal or statelegislation may have on our business and earnings in the future.

 

*General*.  The Company is a bank holding 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 HTBare state banks incorporated under the laws of Georgia and are subject toexamination by the Georgia Department and the Federal Deposit InsuranceCorporation (“FDIC”).  FNBS is anationally chartered bank incorporated under the laws of the United States andis subject to examination by the FDIC and the Office of the Comptroller of theCurrency (“OCC”).  The Banks’ depositsare insured by the FDIC to the maximum extent provided by law.  The FDIC, OCC and the Georgia Departmentregularly examine our operations and are given authority to approve ordisapprove mergers, consolidations, the establishment of branches, and similarcorporate actions.  The agencies alsohave the power to prevent the continuance or development of unsafe or unsoundbanking practices or other violations of law.

 

*Acquisitions.** *TheBHC Act requires every bank holding company to obtain the prior approval of theFederal Reserve before:  (i) it mayacquire direct or indirect ownership or control of any voting shares of anybank if, after such acquisition, the bank holding company will directly orindirectly own or control more than 5% of the voting shares of the bank;(ii) it or any of its subsidiaries, other than a bank, may acquire all orsubstantially all of the assets of any bank; or (iii) it may merge orconsolidate with any other bank holding company.

 

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

 

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

 

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acquisitions.  However, Georgia law prohibits a bank holdingcompany from acquiring control of a financial institution until the targetfinancial institution has been incorporated three years.

 

*Affiliate Transactions*.  Unless an exemption applies, sections 23A and23B of the Federal Reserve Act (i) limit the extent to which a financialinstitution or its subsidiaries may engage in “covered transactions” with anaffiliate, to an amount equal to 10% of such institution’s capital and surplusand an aggregate limit on all such transactions with all affiliates to anamount equal to 20% of such capital and surplus and (ii) require that alltransactions with an affiliate be on terms substantially the same, or at leastas favorable to the institution or subsidiary, as those provided to anon-affiliate.  The term “coveredtransaction” includes the making of loans, purchase of assets, issuance of aguarantee and other similar types of transactions.

 

*Activities.** *TheBHC Act has generally prohibited a bank holding company from engaging inactivities other than banking or managing or controlling banks or otherpermissible subsidiaries and from acquiring or retaining direct or indirectcontrol of any company engaged in any activities other than those determined bythe Federal Reserve to be closely related to banking or managing or controllingbanks as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley Act (the “GLB Act”), discussedbelow, have expanded the permissible activities of a bank holding company thatqualifies as a financial holding company. In determining whether a particular activity is permissible, the FederalReserve must consider whether the performance of such an activity can bereasonably expected to produce benefits to the public, such as a greaterconvenience, increased competition, or gains in efficiency, that outweighpossible adverse effects such as undue concentration of resources, decreased orunfair competition, conflicts of interest, or unsound banking practices.

 

*Gramm-Leach-BlileyAct.** *The GLB Act implemented major changes tothe statutory framework for providing banking and other financial services inthe United States.  The GLB Act, amongother things, eliminated many of the restrictions on affiliations among banksand securities firms, insurance firms, and other financial serviceproviders.  A bank holding company thatqualifies as a financial holding company will be permitted to engage inactivities that are financial in nature or incidental or complimentary to afinancial activity.  The GLB Actspecifies certain activities that are deemed to be financial in nature,including underwriting and selling insurance, providing financial andinvestment advisory services, underwriting, dealing in, or making a market insecurities, limited merchant banking activities, and any activity currentlypermitted for bank holding companies under Section 4(c)(8) of the BHC Act.

 

To become eligible forthese expanded activities, a bank holding company must qualify as a financialholding company.  To qualify as afinancial holding company, each insured depository institution controlled bythe bank holding company must be well-capitalized, well-managed, and have atleast a satisfactory rating under the Community Reinvestment Act.  In addition, the bank holding company mustfile declaration with the Federal Reserve of its intention to become afinancial holding company. The Company has not filed an application to become afinancial holding company.

 

The GLB Act designatesthe Federal Reserve as the overall umbrella supervisor of the new financialservices holding companies.  The GLB Actadopts a system of functional regulation where the primary regulator isdetermined by the nature of activity rather than the type of institution.  Under this principle, securities activitiesare regulated by the Securities and Exchange Commission (the “SEC”) and othersecurities regulators, insurance activities by the state insurance authorities,and banking activities by the appropriate banking regulator.  As a result, to the extent that we engage innon-banking activities permitted under the GLB Act, we will be subject to theregulatory authority of the SEC or state insurance authority, as applicable.

 

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

 

If, in the opinion ofthe federal banking agencies, a depository institution under its jurisdictionis engaged 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, after notice andhearing, that such institution cease and desist from such practice.  The federal banking agencies have indicatedthat paying dividends that deplete a depository institution’s capital base toan inadequate level would be an unsafe and unsound banking practice.

 

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Under the Federal Deposit InsuranceCorporation Improvement Act of 1991 (“FDICIA”), a depository institution maynot pay any dividend if payment would cause it to become undercapitalized or ifit already is undercapitalized. Moreover, the federal agencies have issued policy statements thatprovide that bank holding companies and insured banks should generally paydividends 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 two basic measures of capitaladequacy for bank holding companies that have been promulgated by the Federal Reserve:a risk-based measure and a leverage measure. All applicable capital standards must be satisfied for a bank holdingcompany to 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 andoff-balance-sheet items are assigned to broad risk categories, each withappropriate weights.  The resultingcapital ratios represent capital as a percentage of total risk-weighted assetsand off-balance-sheet items.

 

The minimum guidelinefor the ratio of Total Capital to risk-weighted assets (including certainoff-balance-sheet items, such as standby letters of credit) is 8.0%.  Total Capital consists of Tier 1 Capital,which is comprised of common stock, undivided profits, minority interests inthe equity accounts of consolidated subsidiaries and noncumulative perpetualpreferred stock, less goodwill and certain other intangible assets, and Tier 2Capital, which consists of subordinated debt, other preferred stock, and alimited amount of loan loss reserves.

 

In addition, theFederal Reserve has established minimum leverage ratio guidelines for bankholding companies.  These guidelinesprovide for a minimum ratio (the “Leverage Ratio”) of Tier 1 Capital to averageassets, less goodwill and certain other intangible assets, of 3.0% for bankholding companies that meet certain specified criteria, including those havingthe highest regulatory rating.  All otherbank holding companies generally are required to maintain a Leverage Ratio ofat least 3.0%, plus an additional cushion of 1.0% to 2.0%.  The guidelines also provide that bank holdingcompanies experiencing internal growth or making acquisitions will be expectedto maintain strong capital positions substantially above the minimumsupervisory levels without significant reliance on intangible assets.  Furthermore, the Federal Reserve hasindicated that it will consider a “tangible Tier 1 Capital Leverage Ratio”(deducting all intangibles) and other indicators of capital strength inevaluating proposals for expansion or new activities.

 

The Banks are subjectto risk-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 meetcapital guidelines 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 described below, substantial additionalrestrictions can be imposed upon FDIC-insured depository institutions that failto meet applicable capital requirements.

 

The federal bankagencies continue to indicate their desire to raise capital requirementsapplicable to banking organizations beyond their current levels.  In this regard, the Federal Reserve and theFDIC have, pursuant to FDICIA, adopted final regulations requiring regulatorsto consider interest rate risk (when the interest rate sensitivity of aninstitution’s assets does not match the sensitivity of its liabilities or itsoff-balance-sheet position) in the evaluation of a bank’s capitaladequacy.  The bank regulatory agencieshave concurrently proposed a methodology for evaluating interest rate risk thatwould require banks with excessive interest rate risk exposure to holdadditional amounts of capital against such exposures.

 

*Supportof Subsidiary Institutions*.  Under Federal Reserve policy, we are expectedto act as a source of financial strength for, and to commit resources tosupport, the Banks.  This support may berequired at times when, absent such Federal Reserve policy, we may not beinclined to provide such support.  Inaddition, any capital loans by a bank holding company to any of its bankingsubsidiaries are subordinate in right of payment to deposits and to certainother indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by abank holding company to a federal bank regulatory agency to maintain thecapital of a banking subsidiary will be assumed by the bankruptcy trustee andentitled to a priority of payment*.*

 

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*Prompt Corrective Action. *FDICIAestablished a system of prompt corrective action to resolve the problems ofundercapitalized 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.  Theseverity of the action will depend upon the capital category in which theinstitution is placed.  Generally,subject to a narrow exception, the banking regulator must appoint a receiver orconservator for an institution that is critically undercapitalized.  The federal banking agencies have specifiedby regulation the relevant capital level for each category.

 

An institution that iscategorized as undercapitalized, significantly undercapitalized, or criticallyundercapitalized is required to submit an acceptable capital restoration planto its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depositoryinstitution meets its capital restoration plan, subject to certainlimitations.  The controlling holdingcompany’s obligation to fund a capital restoration plan is limited to the lesser of 5.0% of an undercapitalized subsidiary’s assets orthe amount required to meet regulatory capital requirements.  An undercapitalized institution is alsogenerally prohibited from increasing its average total assets, makingacquisitions, establishing any branches or engaging in any new line ofbusiness, except under an accepted capital restoration plan or with FDICapproval.  In addition, the appropriatefederal banking agency may test an undercapitalized institution in the samemanner as it treats a significantly undercapitalized institution if itdetermines that those actions are necessary.

 

*FDICInsurance Assessments.** *The FDIC hasadopted a risk-based assessment system for insured depository institutions thattakes into account the risks attributable to different categories andconcentrations of assets and liabilities. The system assigns an institution to one of three capital categories:(i) well capitalized; (ii) adequately capitalized; and (iii) undercapitalized.  These three categories are substantiallysimilar to the prompt corrective action categories described above, with the “undercapitalized”category including institutions that are undercapitalized, significantlyundercapitalized, and critically undercapitalized for prompt corrective actionpurposes.  The FDIC also assigns aninstitution to one of three supervisory subgroups within each capitalgroup.  The supervisory subgroup to whichan institution 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 then determines an institution’sinsurance assessment rate based on the institution’s capital category andsupervisory category.  Under therisk-based assessment system, there are nine combinations of capital groups andsupervisory subgroups to which different assessment rates are applied.  Assessments range from 0 to 27 cents per $100of deposits, depending on the institution’s capital group and supervisorysubgroup. The FDIC may terminate its insurance of deposits if it finds that theinstitution has engaged in unsafe and unsound practices, is in an unsafe orunsound condition to continue operations or has violated any applicable law,regulation, rule, order or condition imposed by the FDIC.

 

*Safetyand 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 andcompensation, fees and benefits, and such other operational and managerialstandards as the agencies deem appropriate. The federal bank regulatory agencies have adopted a set of guidelinesprescribing safety and soundness standards pursuant to FDICIA, as amended.  The guidelines establish general standardsrelating to internal controls and information systems, internal audit systems,loan documentation, credit underwriting, interest rate exposure, asset growthand compensation and fees and benefits. In general, the guidelines require, among other things, appropriatesystems and practices to identify and manage the risks and exposures specifiedin the guidelines.  The guidelinesprohibit excessive compensation as an unsafe and unsound practice and describecompensation as excessive when the amounts paid are unreasonable ordisproportionate to the services performed by an executive officer, employee,director, or principal shareholder.  Inaddition, the agencies adopted regulations that authorize, but do not require,an agency to order an institution that has been given notice by an agency thatit is not satisfying any of such safety and soundness standards to submit acompliance plan.  If, after being sonotified, an institution fails to submit an acceptable compliance plan or failsin any material respect to implement an acceptable compliance plan, the agencymust issue an order directing action to correct the deficiency and may issue anorder directing other actions of the types to which an undercapitalizedinstitution is subject under the “prompt corrective action” provisions ofFDICIA.  If an institution fails tocomply with such an order, the agency may

 

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seekto enforce such order in judicial proceedings and to impose civil moneypenalties.  The federal regulatoryagencies also proposed guidelines for asset quality and earnings standards.

 

*CommunityReinvestment 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 be used as the basis for the denial of anapplication by the federal banking regulator. The Banks have received satisfactory ratings in their CRA examinations.

 

*Privacy.** *TheGLB Act also modified laws related to financial privacy.  The new financial privacy provisionsgenerally prohibit a financial institution from disclosing nonpublic personalfinancial information about consumers to third parties unless consumers havethe opportunity to “opt out” of the disclosure. A financial institution is also required to provide its privacy policyannually to its customers.  Compliancewith the implementing regulations was mandatory effective July 1, 2001.  The Banks implemented the required financialprivacy provisions by July 1, 2001.

 

*MonetaryPolicy.** *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 Reserve has had, and willcontinue to have, an important impact on the operating results of commercialbanks through its power to implement monetary policy in order, among otherthings, to mitigate recessionary and inflationary pressures by regulating thenational money supply.  The techniquesused by the Federal Reserve include setting the reserve requirements of memberbanks and establishing the discount rate on member bank borrowings.  The Federal Reserve also conducts open markettransactions in United States government securities.

 

*USAPatriot Act of 2001*.** In October 2001, the USA Patriot Act of 2001(the “Patriot Act”) was enacted in response to the terrorist attacks in NewYork, Pennsylvania, and Washington, D.C. that occurred on September 11,2001.  The Patriot Act impacts financialinstitutions in particular through its anti-money laundering and financialtransparency laws.  The Patriot 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*.*

 

*Georgia Fair Lending Act.** *The Georgia FairLending Act (“GFLA”) imposes new restrictions and procedural requirements onmost mortgage loans made in Georgia, including home equity loans and lines ofcredit.  GFLA became effective on October1, 2002 and was amended on March 7, 2003. While selected provisions of GFLA apply regardless of the interest rateor charges on the loan, the majority of the requirements apply only to “highcost home loans,” as defined by GFLA.  Wehave implemented procedures to comply with all GFLA requirements.

 

On July 31,2003, the OCC issued a Preemption Determination and Order declaring most of theGFLA preempted by federal law and, therefore, inapplicable to nationallychartered banks.  The Georgia Departmentissued a complying Declaratory Ruling on August 5, 2003.  The order purported to preempt all of theGFLA, and even though there may be several parts of the GFLA that remaineffective as to national banks, those non-preempted parts are likelyinapplicable or moot due to the articulated preemption of most other operativeparts 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 files annual, quarterly and currentreports, proxy statements and other information with the Securities andExchange Commission.  These filings areavailable to the public at the SEC’s website at http://www.sec.gov.  The Company also has a website athttp://www.gbt.com.  On the website, theCompany provides hyperlinks to copies of the annual, quarterly and currentreports that the Company files with the SEC, any amendments to those reports andpress releases as well as the Company’s code of ethics policy.

 

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

 

The Company’scorporate headquarters are located at 500 Jesse Jewell Parkway, S.E.,Gainesville, Georgia, in the main office of the lead bank, Gainesville Bank& Trust.  The building is jointlyowned by Gainesville Bank & Trust and a related party.  The Company has recently completed theconstruction of an operations center located at 1480 Jesse Jewell Parkway,Gainesville, Georgia.  Data Processing,Deposit Operations, Human Resources, Accounting and Audit are located in thisfacility.   The Company’s five subsidiarybanks conduct business from facilities primarily owned by the respective banks,all of which are in good state of repair and appropriately designed for use asbanking facilities.  The subsidiariesprovide services from 25 locations, of which 16 locations are owned and 9 areleased.  The Company’s consumer financecompany has eight offices in north Georgia, all of which are leasedfacilities.  In the opinion ofmanagement, all properties including improvements and furnishings areadequately insured.

 

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

 

We are not a party to,nor are any of our property the subject of, any material pending legalproceedings, other than ordinary routine proceedings incidental to ourbusiness, nor to the knowledge of the management are any such proceedingscontemplated or threatened against us.

 

**ITEM 4.****                 ****SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

At a special meetingheld on October 13, 2004, the shareholders of GB&T Bancshares, Inc. votedto approve an amendment to its Articles of Incorporation to eliminate thepreemptive rights of holders of GB&T’s common stock.  At the meeting, 5,968,315 shares were votedin favor of the amendment and 224,190 shares were voted against theamendment.  The result of the amendmentis that the holders of GB&T’s common stock no longer have the right topurchase additional shares of common stock from GB&T on a pro-rata basis inthe event that GB&T determines to issue additional common stock.

 

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**PARTII**

 

**ITEM 5.****                 ****MARKET FOR REGISTRANT’S COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS**

 

(a)           Ourcommon stock is quoted on the Nasdaq National Market under the symbol “GBTB.”  The following table sets forth the high andlow closing prices for our common stock as reported by the Nasdaq NationalMarket and the cash dividends declared per share of our common stock for theindicated periods.  The stock prices anddividend information presented below have been adjusted to give effect to thefive-for-four stock split effected in the form of astock dividend on June 18, 2004.

 
| **Calendar Period** | ** ** | ** ** | ** ** | ** ** | ** ** | **Dividends  Declared Per  Share** | ** ** |
|---------------------|------------|------------|------------|------------|------------|------------------------------------|------------|
| **Closing Price**   |
| **High**            | ** ** | **Low**    |
|                |       |       |       |       |       |                               |       |
| **2003**            |       |       |       |       |       |                               |       |
| First Quarter       |       | $          | 15.49      |       | $          | 14.22                              |       | $ | 0.068 |   |
| Second Quarter      |       | 20.00      |       | 15.18      |       | 0.072                              |       |
| Third Quarter       |       | 20.31      |       | 17.44      |       | 0.072                              |       |
| Fourth Quarter      |       | 19.58      |       | 17.80      |       | 0.072                              |       |
|                |       |       |       |       |       |                               |       |
| **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                              |       |

 

(b)           Asof March 1, 2005, there were approximately 3**,**252 holders of record of our commonstock.

 

(c)           Dividendsare paid at the discretion of our board of directors. We have historically paiddividends on a quarterly basis as set forth in the table above. We intend tocontinue paying cash dividends, but the amount and frequency of cash dividends,if any, will be determined by our board of directors after consideration ofearnings, capital requirements and our financial condition and will depend oncash dividends paid to us by our subsidiary banks. Dividends from oursubsidiary banks are our primary source of funds for the payment of dividends toour shareholders, and there are various legal and regulatory limits on theextent to which our subsidiary banks may pay dividends or otherwise supplyfunds to us – See “Supervision and Regulation” section discussed earlier inthis Report. In addition, federal and state agencies have the authority toprevent us from paying a dividend to our shareholders. Thus, while we intend tocontinue paying dividends, we can make no assurances that we will continue topay dividends or that we will not reduce the amount of dividends paid in thefuture.

 

(d)           Duringthe fourth quarter, the Company did not repurchase any of its equitysecurities.

 

18

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**ITEM 6.****                 ****SELECTED FINANCIAL DATA**

 

Thefollowing table presents selected historical consolidated financial informationfor us and our subsidiaries and is derived from the consolidated financialstatements and related notes included in this annual report.  This information is only a summary and shouldbe read in conjunction with our historical financial statements and relatednotes.  The year ended December 31, 2004includes the acquisitions of Southern Heritage Bancorp, Inc. and Lumpkin CountyBank, which were accounted for as purchases. See “Management’s Discussion and Analysis of Financial Condition andResults of Operations” for further discussion on these and our prioracquisitions.  The financial informationpresented below does not include the results of operations of FNBG Bancshareswhich was acquired on March 1, 2005.  Theper share financial data presented below has been adjusted to give effect tothe five-for-four stock split effected in the form of a stock dividend on June18, 2004.

 
| ** **                                              | ** ** | **As of and For the Year Ended December 31,**        | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                              | ** ** | **2004**                                             | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                              | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
|                                                    |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Summary Balance Sheet Data:**                         |       |                                                 |       |   |   |   |   |   |   |   |   |
| Total loans                                             |       | $                                                    | 955,880    |   | $ | 709,958 |   | $ | 542,834 |   | $ | 418,656 |   | $ | 384,691 |   |
| Allowance for loan losses                               |       | 11,061                                               |       | 8,726 |   | 7,538 |   | 5,522 |   | 5,099 |   |
| Net loans (1)                                           |       | 944,819                                              |       | 701,232 |   | 535,296 |   | 413,134 |   | 379,592 |   |
| Earning assets (2)                                      |       | 1,144,540                                            |       | 850,505 |   | 678,315 |   | 507,156 |   | 474,997 |   |
| Total assets                                            |       | 1,274,136                                            |       | 944,278 |   | 742,232 |   | 547,845 |   | 512,496 |   |
| Total deposits                                          |       | 928,603                                              |       | 728,629 |   | 580,248 |   | 426,758 |   | 401,302 |   |
| Subordinated debt                                       |       | 29,898                                               |       | 15,464 |   | 15,000 |   | — |   | — |   |
| Stockholders’ equity (3)                           |       | 174,715                                              |       | 96,843 |   | 60,353 |   | 44,369 |   | 40,543 |   |
|                                                    |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Summary Income Statement:**                           |       |                                                 |       |   |   |   |   |   |   |   |   |
| Interest income                                         |       | 58,274                                               |       | 46,792 |   | 38,956 |   | 42,349 |   | 41,794 |   |
| Interest expense                                        |       | 17,952                                               |       | 15,288 |   | 14,897 |   | 20,893 |   | 20,797 |   |
| Net interest income                                     |       | 40,322                                               |       | 31,504 |   | 24,059 |   | 21,456 |   | 20,997 |   |
| Provision for loan losses                               |       | 1,406                                                |       | 1,406 |   | 845 |   | 1,306 |   | 1,149 |   |
| Net interest income after provision                     |       | 38,916                                               |       | 30,098 |   | 23,214 |   | 20,150 |   | 19,848 |   |
| Other income                                            |       | 11,778                                               |       | 9,928 |   | 8,062 |   | 6,329 |   | 4,362 |   |
| Other expense                                           |       | 36,180                                               |       | 29,693 |   | 21,748 |   | 21,158 |   | 17,831 |   |
| Income before income taxes                              |       | 14,514                                               |       | 10,333 |   | 9,528 |   | 5,321 |   | 6,379 |   |
| Provision for income taxes                              |       | 4,676                                                |       | 2,608 |   | 3,019 |   | 1,745 |   | 2,082 |   |
| Net income                                              |       | 9,838                                                |       | 7,725 |   | 6,509 |   | 3,576 |   | 4,297 |   |
|                                                    |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Net Income Per Share:**                               |       |                                                 |       |   |   |   |   |   |   |   |   |
| Basic                                                   |       | 1.05                                                 |       | 1.06 |   | 1.08 |   | 0.61 |   | 0.74 |   |
| Diluted                                                 |       | 1.04                                                 |       | 1.03 |   | 1.06 |   | 0.59 |   | 0.72 |   |
| Cash dividends declared                                 |       | 0.30                                                 |       | 0.29 |   | 0.27 |   | 0.23 |   | 0.19 |   |
| Book value                                              |       | 14.84                                                |       | 11.40 |   | 9.01 |   | 7.49 |   | 6.97 |   |
| Tangible book value                                     |       | 10.19                                                |       | 7.51 |   | 7.59 |   | 7.39 |   | 6.86 |   |
| ** **                                              | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Average Balances:**                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total loans                                             |       | 807,340                                              |       | 608,131 |   | 446,518 |   | 397,496 |   | 356,051 |   |
| Earnings assets                                         |       | 973,246                                              |       | 740,818 |   | 544,672 |   | 494,198 |   | 442,278 |   |
| Intangible assets                                       |       | 42,030                                               |       | 17,331 |   | 632 |   | 598 |   | 663 |   |
| Total assets                                            |       | 1,082,701                                            |       | 813,134 |   | 587,330 |   | 531,086 |   | 475,337 |   |
| Total deposits                                          |       | 834,100                                              |       | 637,688 |   | 456,769 |   | 419,329 |   | 367,772 |   |
| Stockholder’ equity                                |       | 118,271                                              |       | 73,144 |   | 47,443 |   | 41,930 |   | 37,051 |   |
| ** **                                              | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other Data:**                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number of:                                              | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common shares outstanding                               |       | 11,772                                               |       | 8,493 |   | 6,696 |   | 5,924 |   | 5,814 |   |
| Basic average shares outstanding                        |       | 9,340                                                |       | 7,313 |   | 6,016 |   | 5,845 |   | 5,800 |   |
| Diluted average shares outstanding                      |       | 9,472                                                |       | 7,469 |   | 6,125 |   | 6,020 |   | 5,989 |   |
| ** **                                              | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Performance Ratios:**                                 | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Return on average assets                                |       | 0.91                                                 |       | 0.95 |   | 1.11 |   | 0.67 |   | 0.90 |   |
| Return on average equity                                |       | 8.32                                                 |       | 10.56 |   | 13.72 |   | 8.53 |   | 11.60 |   |
| Return on average tangible assets                       |       | 0.95                                                 |       | 0.97 |   | 1.11 |   | 0.67 |   | 0.91 |   |
| Return on average tangible equity                       |       | 12.90                                                |       | 13.84 |   | 13.90 |   | 8.65 |   | 11.81 |   |
| Average loans to average deposits                       |       | 96.79                                                |       | 95.36 |   | 97.76 |   | 94.79 |   | 96.81 |   |
|                                                    |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Asset Quality Ratios:**                               |       |                                                 |       |   |   |   |   |   |   |   |   |
| Nonperforming loans to net loans (1)(4)                 |       | 1.10                                                 |       | 0.55 |   | 1.37 |   | 0.16 |   | 0.63 |   |
| Nonperforming assets to total assets (5)                |       | 0.86                                                 |       | 0.60 |   | 1.11 |   | 0.40 |   | 0.51 |   |
| Net charge-offs to average total loans                  |       | 0.14                                                 |       | 0.18 |   | 0.15 |   | 0.22 |   | 0.08 |   |
| Allowance for loan losses to total  nonperforming loans |       | 106.49                                               |       | 227.12 |   | 102.98 |   | 825.41 |   | 214.69 |   |
| Allowance for loan losses to total loans                |       | 1.16                                                 |       | 1.23 |   | 1.39 |   | 1.32 |   | 1.33 |   |
|                                                    |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Capital Ratios:**                                     |       |                                                 |       |   |   |   |   |   |   |   |   |
| Average equity to average assets                        |       | 10.92                                                |       | 9.00 |   | 8.08 |   | 7.90 |   | 7.79 |   |
| Average tangible equity to average tangible  assets     |       | 7.33                                                 |       | 7.01 |   | 7.98 |   | 7.79 |   | 7.67 |   |
| Tangible equity to tangible assets                      |       | 9.84                                                 |       | 7.00 |   | 6.94 |   | 8.00 |   | 7.80 |   |
| Leverage ratio                                          |       | 12.58                                                |       | 8.63 |   | 10.22 |   | 7.87 |   | 7.99 |   |
| Tier 1 risk-based capital ratio                         |       | 15.15                                                |       | 10.62 |   | 11.26 |   | 9.93 |   | 9.78 |   |
| Total risk-based capital ratio                          |       | 16.27                                                |       | 11.80 |   | 12.51 |   | 11.19 |   | 11.00 |   |
|                                                         |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

19

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----

(1)   Net loans include the outstandingprincipal balances of loans less unearned income, net deferred fees and theallowance for loan losses.

(2)   Earning assets include interest-bearingdeposits in banks, federal funds sold, securities available for sale,restricted equity securities, loans net of unearned income, less unrealizedgains (losses) on securities and nonperforming loans.

(3)   The increase in stockholders’ equity forthe years ended December 31, 2004 and 2003 related to business combinations was34% and 53%, respectively. Net income less dividends declared represented 7%and 9% of the total increase for the same periods, respectively.

(4)   Nonperforming loans include nonaccrualloans and loans past due 90 days or more and still accruing interest.

(5)   Nonperforming assets includenonperforming loans and foreclosed assets.

 

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

 

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

 

*       “Tangible bookvalue per share” is defined as total equity reduced by recorded intangibleassets divided by total common shares outstanding. This measure is important toinvestors interested in changes from period to period in book value per shareexclusive of changes in intangible assets. Goodwill, an intangible asset thatis recorded in a purchase business combination, has the effect of increasing totalbook value while not increasing the tangible assets of the company. Forcompanies such as ours that have engaged in multiple business combinations,purchase accounting can result in the recording of significant amounts ofgoodwill related to such transactions.

 

*       “Tangibleequity to tangible assets” is defined as total equity reduced by recordedintangible assets divided by total assets reduced by recorded intangibleassets. This measure is important to investors interested in the equity toassets ratio exclusive of the effect of changes in intangible assets on equityand total assets.

 

20

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*       “Return onaverage tangible equity” is defined as annualized earnings for the perioddivided by average equity reduced by average goodwill and other intangibleassets. “Return on average tangible assets” is defined as annualized earningsfor the period divided by average assets reduced by average goodwill and otherintangible assets. We believe these measures are important when measuring thecompany’s performance exclusive of the effects of goodwill and otherintangibles recorded in recent acquisitions, and these measures are used bymany investors as part of their analysis of the   company’s performance.

 

*       “Average tangibleequity to average tangible assets” is defined as average total equity reducedby recorded average intangible assets divided by average total assets reducedby recorded average intangible assets. This measure is important to manyinvestors that are interested in the equity to asset ratio exclusive of theeffect of changes in average intangible assets on average equity and averagetotal assets.

 

*       “Earning assets”is defined as total assets plus the allowance for loan losses less cash and duefrom banks, premises and equipment, goodwill and intangible assets, otherassets, unrealized gains (losses) on securities and nonperforming loans. Thismeasure is important to many investors because for financial institutions,their net interest income is directly related to their level of earning assets.

 

These disclosuresshould not be viewed as a substitute for results determined in accordance withGAAP, and are not necessarily comparable to non-GAAP performance measures whichmay be presented by other companies. The following reconciliation tableprovides a more detailed analysis of these non-GAAP performance measures.

 
| ** **                                          | ** ** | **As of and For the Year Ended December 31,**        | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                          | ** ** | **2004**                                             | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
|                                                |       |                                                 |       |   |   |   |   |   |   |   |   |
| Book value per common share                         |       | $                                                    | 14.84      |   | $ | 11.40 |   | $ | 9.01 |   | $ | 7.49 |   | $ | 6.97 |   |
| Effect of intangible assets per share               |       | (4.65                                                | )          | (3.89 | ) | (1.42 | ) | (0.10 | ) | (0.11 | ) |
| Tangible book value per common share                |       | $                                                    | 10.19      |   | $ | 7.51 |   | $ | 7.59 |   | $ | 7.39 |   | $ | 6.86 |   |
|                                                |       |                                                 |       |   |   |   |   |   |   |   |   |
| Equity to assets                                    |       | 13.71                                                |       | 10.26 |   | 8.13 |   | 8.10 |   | 7.91 |   |
| Effect of intangible assets                         |       | (3.87                                                | )          | (3.26 | ) | (1.19 | ) | (0.10 | ) | (0.11 | ) |
| Tangible equity to tangible assets                  |       | 9.84                                                 |       | 7.00 |   | 6.94 |   | 8.00 |   | 7.80 |   |
|                                                |       |                                                 |       |   |   |   |   |   |   |   |   |
| Return on average assets                            |       | 0.91                                                 |       | 0.95 |   | 1.11 |   | 0.67 |   | 0.90 |   |
| Effect of intangible assets                         |       | 0.04                                                 |       | 0.02 |   | — |   | — |   | 0.01 |   |
| Return on average tangible assets                   |       | 0.95                                                 |       | 0.97 |   | 1.11 |   | 0.67 |   | 0.91 |   |
|                                                |       |                                                 |       |   |   |   |   |   |   |   |   |
| Return on average equity                            |       | 8.32                                                 |       | 10.56 |   | 13.72 |   | 8.53 |   | 11.60 |   |
| Effect of intangible assets                         |       | 4.58                                                 |       | 3.28 |   | 0.18 |   | 0.12 |   | 0.21 |   |
| Return on average tangible equity                   |       | 12.90                                                |       | 13.84 |   | 13.90 |   | 8.65 |   | 11.81 |   |
|                                                |       |                                                 |       |   |   |   |   |   |   |   |   |
| Average equity to average assets                    |       | 10.92                                                |       | 9.00 |   | 8.08 |   | 7.90 |   | 7.79 |   |
| Effect of average intangible assets                 |       | (3.59                                                | )          | (1.99 | ) | (0.10 | ) | (0.11 | ) | (0.12 | ) |
| Average tangible equity to average Tangible  assets |       | 7.33                                                 |       | 7.01 |   | 7.98 |   | 7.79 |   | 7.67 |   |
|                                                |       |                                                 |       |   |   |   |   |   |   |   |   |
| Total assets                                        |       | $                                                    | 1,274,136  |   | $ | 944,278 |   | $ | 742,232 |   | $ | 547,845 |   | $ | 512,496 |   |
| Plus:                                               | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allowance for loan losses                           |       | 11,061                                               |       | 8,726 |   | 7,538 |   | 5,522 |   | 5,099 |   |
| Less:                                               | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and due from banks                             |       | (20,723                                              | )          | (17,584 | ) | (18,113 | ) | (18,097 | ) | (16,332 | ) |
| Premises and equipment                              |       | (31,548                                              | )          | (25,813 | ) | (20,774 | ) | (14,807 | ) | (13,305 | ) |
| Intangible assets                                   |       | (54,745                                              | )          | (33,043 | ) | (9,522 | ) | (566 | ) | (631 | ) |
| Other assets                                        |       | (23,646                                              | )          | (22,010 | ) | (14,525 | ) | (10,685 | ) | (10,549 | ) |
| Unrealized (gains) losses on securities             |       | 64                                                   |       | (716 | ) | (3,015 | ) | (1,583 | ) | (179 | ) |
| Nonaccrual loans                                    |       | (10,059                                              | )          | (3,333 | ) | (5,506 | ) | (473 | ) | (1,602 | ) |
| Earning assets                                      |       | $                                                    | 1,144,540  |   | $ | 850,505 |   | $ | 678,315 |   | $ | 507,156 |   | $ | 474,997 |   |

 

21

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**ITEM 7.****                 ****MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The followingdiscussion reviews our results of operations and assesses our financialcondition. The purpose of this discussion is to focus on information about ourfinancial condition and results of operations which is not otherwise apparentfrom the consolidated financial statements included or incorporated byreference in this report. Reference should be made to those statements and theselected financial data presented elsewhere or incorporated by reference inthis report for an understanding of the following discussion and analysis.Historical results of operations and any trends which may appear are notnecessarily indicative of the results to be expected in future years.

 

**Executive Summary**

 

GB&T Bancshares,Inc., headquartered in Gainesville, Georgia, consists of a network of communitybanks in growth areas of Georgia with approximately $1.3 billion in totalconsolidated assets as of December 31, 2004. 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. We have completed oneacquisition in each of the last four fiscal years. In August 2004, we completedthe acquisition of Southern Heritage Bancorp, Inc. and its banking subsidiary,Southern Heritage Bank, as well as the acquisition of Lumpkin County Bank. OnMarch 1, 2005, we completed the acquisition of FNBG Bancshares, Inc. and itsbanking subsidiary First National Bank of Gwinnett.  We continue to build infrastructure tosupport our growth.

 

As a bank holdingcompany, our results of operations are almost entirely dependent on the resultsof operations of our subsidiary banks. The following table sets forth oursubsidiary banks and selected data related to each bank as of December 31,2004:

 
| **Bank**                                                                                                      | ** ** | **Number of  Branches** | ** ** | **Market Area  Counties** | ** ** | **Total Assets at  December 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                    | ** ** | ** **              | ** ** | ** **                | ** ** | **(in thousands)**                     | ** ** |
|                                                                                                          |       |                    |       |                      |       |                                   |       |
| Gainesville Bank & Trust (with  divisions Lumpkin County Bank, Southern Heritage Bank and Bank of Athens) |       | 11                      |       | Hall,  Lumpkin, Clarke    |       | $                                      | 631,476    |   |
| United Bank & Trust                                                                                       |       | 3                       |       | Polk, Bartow              |       | 79,710                                 |       |
| Community Trust Bank                                                                                          |       | 5                       |       | Paulding,  Cobb           |       | 203,641                                |       |
| HomeTown Bank of Villa Rica                                                                                   |       | 3                       |       | Carroll, Paulding         |       | 193,002                                |       |
| First National Bank of the South                                                                              |       | 3                       |       | Baldwin,  Putnam          |       | 168,014                                |       |
|                                                                                                               |            |                         |            |                           |            |                                        |            |  |

 

Like most communitybanks, we derive the majority of our income from interest received on our loansand investments. Our primary source of funds for making these loans andinvestments is our deposits, on which we pay interest. Consequently, one of thekey measures of our success is our amount of net interest income, or thedifference between the income on our interest-earning assets, such as loans andinvestments, and the expense on our interest-bearing liabilities, such asdeposits and borrowings. Another key measure is the spread between the yield weearn on these interest-earning assets and the rate we pay on ourinterest-bearing liabilities, which is called our net interest spread.

 

There are risksinherent in all loans, so we maintain an allowance for loan losses to absorbprobable losses on existing loans that may become uncollectible. We maintainthis allowance 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.

 

22

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

 

We measure and monitorthe following factors as key indicators of our financial performance:

 

*      Net income

 

*      Earnings pershare

 

*      Loan anddeposit growth

 

*      Credit quality

 

Financial performancefor the year ended December 31, 2004 versus the year ended December 31, 2003:

 

*      Net income of$9.8 million, up 27.4% from $7.7 million

 

*      Dilutedearnings per share of $1.04 compared to $1.03

 

*      Net interestmargin of 4.14% compared to 4.25%

 

*      Loan growth of$245.9 million or 34.6% (13.7% excluding acquisitions)

 

*      Deposit growthof $200.0 million or 27.4% (4.9% excluding acquisitions)

 

*      Return onaverage assets of 0.91% compared to 0.95%

 

*      Return onaverage equity of 8.32% compared to 10.56%

 

*      Nonperfomingassets ratio of 0.86% compared to 0.60%

 

*      Past dues over90 days as a percentage of total loans of 0.03% compared to 0.07%

 

*      Net charge-offratio of 0.14% compared to 0.18%

 

**Effect of Economic Trends**

 

During the four yearsended December 31, 2004, our rates on both short-term orvariable rate interest-earning assets and short-term or variable rateinterest-bearing liabilities declined primarily as a result of the actionstaken by the Federal Reserve.

 

During most of 2001and during 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 andthe first 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

 

23

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operatedunder historically low interest rates. As a result of these unusual conditions,Congress passed an economic stimulus plan in 2003. During 2004, many economistsbelieved the economy began to show signs of strengthening, and the FederalReserve increased the short-term interest rate by 100 basis points during thesecond, third and fourth quarters of 2004. Many economists believe that theFederal Reserve will continue to increase rates during most of 2005. Noassurance can be given that the Federal Reserve will actually continue to raiseinterest rates or that the results we anticipate will actually occur.

 

The specific economicand credit risks associated with our loan portfolio, especially the real estateportfolio, include, but are not limited to, a general downturn in the 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 in 2004.Our growth has not been significantly impacted by the previously mentionedeconomic conditions.

 

**Critical Accounting Policies**

 

We have adoptedvarious accounting policies that govern the application of accountingprinciples generally accepted in the United States and general practices withinthe banking industry in the preparation of our financial statements. Oursignificant accounting policies are described in the notes to our auditedfinancial statements as of December 31, 2004 included in this report. Certainaccounting policies require management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reported period.Actual results could differ from those estimates. Estimates and assumptions arereviewed periodically and the effects of revisions are reflected in theconsolidated financial statements in the period they are determined to benecessary.

 

*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, estimated value ofany underlying collateral and prevailing economic conditions. This evaluationis inherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available. In addition, regulatoryagencies, as an integral part of their examination process, periodically reviewour allowance for loan losses, and may require us to make additions to theallowance based on their judgment about information available to them at thetime of their examinations.

 

We use an 8 pointrating system for our loans. Ratings of 1 to 4 are considered pass ratings, 5is special mention, 6 is substandard, 7 is doubtful,and 8 is loss. The originating officer rates all loans on this system. Thisrating is adjusted from time to time by the officer to accurately reflect theloan’s current status. These ratings are reviewed for accuracy regularly by theloan committee of the respective bank subsidiary, an outside independent loanreview firm, our accountants, and by the applicable regulator.

 

Pass loans areseparated into homogeneous pools. Currently, these pools consist of realestate, commercial, consumer and credit card loans. Management assigns losspercentages to these categories of homogeneous pools of loans based on thegreater of historic loss data in each category or the minimum risk percentagefor this category. Management tracks the last eight quarters moving average netlosses for the historic loss percentage in each category. This historic losspercentage is reviewed and adjusted periodically, by pool, in light of currenttrends in past dues, changes in lending policies, underwriting standards,economic conditions, and other factors that may affect this number. In additionto the homogeneous pools, management has specified certain industry risks andapplied loss percentages to the specified

 

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industryrisk categories. Recently, because of low losses in most categories, managementhas assigned minimum percentages to each category.

 

For loans rated 4(pass/watch), a loss percentage of 1% is used. 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 eachsubsidiary bank. All other loans rated 6 and 7 are assigned loss percentages of15% and 50% respectively. All loans rated 8 are assigned a specific reserve of100%.

 

The remainder of thebalance in the reserve for loan losses is unallocated.  Management believes that the unallocatedallowance is adequate to provide for probable losses that are inherent in theloan portfolio and that have not been fully provided for through the allocatedallowance.  Factors considered 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.

 

*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, we adoptedSFAS No. 141, “Business Combinations,” which allows only the use of thepurchase method of accounting. For purchase acquisitions, we are required torecord 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 2004, the required impairment testing of goodwill was performed and noimpairment existed as of the valuation date, as the fair value of our netassets 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.

 

**Effect of Recent BusinessAcquisitions**

 

On October 1, 2004,the Company signed a definitive agreement to acquire FNBG Bancshares, Inc., theparent company of the $115 million asset First National Bank of Gwinnett.  Under the terms of the agreement, FNBGBancshares shareholders may elect to receive 1.38 shares of our common stock,$30 in cash, or a combination of our common stock and cash, in exchange foreach share of FNBG Bancshares common stock, subject to an overall limit of 30%to be paid in cash.  As of the date ofthis filing, a final consideration amount to be paid in cash had not beendetermined.   The transaction wascompleted effective as of the close of business on March 1, 2005.  Accordingly,the results of operations included in this report do not include the results ofoperations of FNBG Bancshares.

 

On August 3, 2004, the Company completed the acquisition of SouthernHeritage Bancorp, Inc., the parent company of Southern Heritage Bank, inFlowery Branch, Georgia.  SouthernHeritage Bank merged with and into, and became a division of, the Company’slead bank, Gainesville Bank & Trust. The Company issued 1,141,628 shares of its common stock andapproximately $869,172 in cash in exchange for all of the issued andoutstanding common shares of Southern Heritage Bancorp, Inc.  The acquisition was accounted for as apurchase resulting in goodwill of approximately $18,326,000.  The results of operations for the year endedDecember 31, 2004 include Southern Heritage Bank’s results of operations sincethe date of acquisition, which represents approximately five months ofoperations.  The results of operationsfor the years ended December 31, 2003 and December 31, 2002 do not include theresults of operations for Southern Heritage Bank.

 

On August 19, 2004, the Company completed the acquisition of LumpkinCounty Bank in Dahlonega, Georgia. Lumpkin County Bank merged with and into, and became a division of, theCompany’s lead bank, Gainesville Bank & Trust.  The Company issued 262,682 shares of itscommon stock in exchange for all of the issued and outstanding common shares ofLumpkin County Bank.  The acquisition wasaccounted for as a purchase resulting in goodwill of

 

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approximately $728,000. The results of operations for the year ended December 31, 2004include 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 years ended December 31, 2003 andDecember 31, 2002 do not include the results of operations for Lumpkin CountyBank.

 

On August 31, 2003,the Company 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 endedDecember 31, 2003 include the results of operations for First National Bank ofthe South since the date of acquisition, which represents four months ofoperations. The year ended December 31, 2002 does not include results ofoperations for First National Bank of the South.

 

The results ofoperations for the year ended December 31, 2003, includes twelve months ofoperations for HomeTown Bank of Villa Rica compared to one month of operationsincluded in the year ended December 31, 2002 due to the acquisition of HomeTownBank of Villa Rica being consummated on November 30, 2002.

 

**Financial Condition**

 

*TotalAssets*.  Our total assets increased $329.9million or 34.9% for the year ended December 31, 2004 compared to $202.0million or 27.2% for the same period in 2003. The increase in 2004 consistsprimarily of an increase in total loans of $245.9 million or 34.6%, an increasein securities of $60.3 million, and an increase in goodwill and intangibleassets of $21.7 million. Excluding the acquisitions of Southern Heritage Bankand Lumpkin County Bank, total assets increased $122.2 million, or 12.9%,during this same period. Also, excluding the acquisitions, total loans increased$97.6 million, securities increased $51.6 million and federal funds solddecreased $25.6 million. For the year ended December 31, 2003 as compared withthe same period in 2002, the acquisition of First National Bank of the Southaccounted for approximately $150.7 million of the increase in total assets. Theoverall growth in 2004 and 2003 is consistent with management’s plans. Thecompetition for deposits plays an important role in our overall growth.

 

*TotalLoans*.  Our primary focus is to maximizeearnings through lending activities. Any excess funds are invested according toour investment policy. Total loans increased 34.6% or $245.9 million for theyear ended December 31, 2004. Exclusive of the acquisitions of SouthernHeritage Bank and Lumpkin County Bank, which represented $148.4 million of thisincrease, total loans increased $97.6 million or 13.7%. This increase iscompared to an increase of $167.1 million or 30.8% during 2003. Exclusive ofthe acquisition of First National Bank of the South, which represented $89.3million of the increase in 2003, total loans increased $77.8 million or 14.3%. Asof December 31, 2004, our loan-to-deposit ratio was 102.9% compared to 97.4% in2003. At December 31, 2004 and 2003, we had total outstanding borrowings of $159.4million and $108.8 million, respectively. These funds have been used to fundloan growth. The utilization of borrowings to fund loan growth enables us tomaintain a higher loan to deposit ratio and maintain an adequate liquidityratio. Our loan-to-funds ratio was 87.9% and 84.8% at December 31, 2004 and2003, respectively.

 

*TotalDeposits*.  During 2004, total deposits grew by$200.0 million, or 27.4%. Exclusive of acquisitions, which accounted for $164.2million of this increase, total deposits grew $35.7 million or 4.9% during 2004compared to an increase of $44.4 million or 7.6% in 2003, exclusive of theacquisition of First National Bank of the South.

 

**Results of Operations—For theYears Ended December 31, 2004, 2003 and 2002**

 

*NetInterest Income and Earning Assets*.  During 2004 and 2003, we continued toexperience moderate internal growth in interest-earning and total assets whichwas funded by increases in deposits, borrowings, and the retention of netprofits and proceeds from a stock offering. During 2004, we experiencedadditional growth through the acquisitions of Southern Heritage Bank andLumpkin County Bank as explained above. We recorded net income of $9.8 million,$7.7 million and $6.5 million for the years ended December 31, 2004, 2003 and 2002,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

 

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determinedby market forces and economic conditions beyond our control, our ability togenerate net interest income depends upon our ability to obtain an adequate netinterest spread between the rate earned on interest-earning assets and the ratepaid on interest-bearing liabilities. The net yield on average interest-earningassets decreased to 4.14% in 2004 from 4.25% in 2003. This decrease isattributable primarily to decreases in interest rates by the Federal Reserve.In 2004, the average yield on interest-earning assets decreased to 5.99% from6.32% in 2003 and the average yield on interest-bearing liabilities decreasedto 2.13% in 2004 from 2.33% in 2003. The overall change in the interest ratespread from 2003 to 2004 was a decrease of 13 basis points. The decrease in thenet interest spread is a result of increases in loan volume at an average rate43 basis points below the average in 2003. Total average interest-earningassets increased by $232.4 million, to $973.2 million at December 31, 2004 fromthe same period of 2003 and average interest-bearing liabilities increased by$189.1 million, to $844.6 million for the same period. We continue toexperience growth in our portfolios while maintaining our competitive pricingduring this low interest rate environment.

 

The net yield onaverage interest-earning assets decreased by 17 basis points to 4.25% from4.42% for the year ended December 31, 2003 as compared to 2002. The decreasednet yield in 2003 was primarily attributable to increases in loan volume atlower interest rates.

 

Netinterest income increased by $8.8 million to $40.3 million in 2004, compared toan increase of $7.4 million in 2003.The increase for both years continues to reflect the continued increase ininterest-earning assets during 2004 and 2003. The change in net interest incomeis the result of the increases in net volume versus changes in net interestrates. These variances include the impact of the acquisitions of SouthernHeritage Bank and Lumpkin County Bank since their respective acquisition datesin 2004.

 

*OtherIncome*.Other income increased during 2004 by $1.9 million compared to an increase of$1.9 million in 2003. For the year ended December 31, 2004, the mostsignificant portion of the net increase consisted of an increase of $1.2million in service charges on deposit accounts, an increase of $227,000 insecurity transactions, net and a gain recorded on the sale of property at theoperations center of $372,000. This increase was partially offset by a decreasein mortgage origination fees of $452,000. For the same period in 2003, servicecharges increased by $1.3 million and mortgage origination fees increased by$933,000, which was partially offset by a decrease in security transactions,net of $424,000. The increases in service charges are directly related to theincrease in deposit accounts and the inclusion of First National Bank of theSouth for the year ended December 31, 2004, and Southern Heritage Bank andLumpkin County Bank for part of the year ended 2004.

 

*OtherExpense*. Otherexpense increased $6.5 million and $7.9 million for the years ended December31, 2004 and 2003, respectively. Increases in salaries and employee benefitsrepresent the most significant portions of these increases, which increased by$3.7 million and $4.6 million for the years ended 2004 and 2003, respectively.The number of full-time equivalent employees increased by 73 from December of2003 to December of 2004, 41 of which related to the acquisitions of SouthernHeritage Bank and Lumpkin County Bank. In addition to the additional salaryexpense related to new employees, we incurred increases due to increases inprofit sharing contributions, health insurance costs, incentive compensationand normal salary increases for the years ended December 31, 2004 and 2003.Other operating expenses increased by $2.0 million and $2.3 million,respectively, for the years ended December 31, 2004 and 2003. The increase inother operating expenses in 2004 included increases in marketing and publicrelations of $379,000, ATM and data processing expenses of $429,000, and auditand professional fees of $245,000. The increases in all of the above categoriescan be partially attributed to the inclusion of First National Bank of theSouth for the year ended December 31, 2004, and theinclusion of Southern Heritage Bank and Lumpkin County Bank since theirrespective acquisitions.

 

*IncomeTax Expense*.  Income tax expenseincreased by $2.1 million to $4.7 million in 2004 from $2.6 million in 2003.The increase in 2004 was attributable to a combination of increased profits in2004 and state tax retraining credits in 2003. The effective tax rate for yearended December 31, 2004 was 32.2%, compared to 25.2 for the same period in 2003.

 

*NetIncome*.  Net income increased by $2.1 million or 27.4%for the year ended December 31, 2004. The increase in net income for the sameperiod in 2003 was $1.2 million or 18.7%. These increases are directly relatedto the increase in net interest income and the inclusion of First National Bankof the South, Southern Heritage Bank and Lumpkin County Bank, which arepartially offset by the increases in other expenses as discussed above.

 

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*AssetQuality*.  Provisions for loan losseswas $1.4 million during 2004, the same as in 2003. The provision forloan losses is the charge to operations which management believes is necessaryto fund the allowance for loan losses. This provision is based on management’speriodic review of the collectibility of the loans in light of historicalexperience, the nature and volume of the loan portfolio, adverse situationsthat may affect the borrower’s ability to repay, estimated value of anyunderlying collateral and prevailing economic conditions. Our evaluation isinherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available. In addition,regulatory agencies, as an integral part of their examination process,periodically review our allowance for loan losses, and may require us to makeadditions to the allowance based on their judgment about information availableto them at the time of their examinations. Loans acquired in recent businessacquisitions were acquired at their estimated fair value, including an adequateallowance for loan losses. See also our discussion of the loan loss allowancein the “Critical Accounting Policies” section included in this report.

 

The following tablepresents details of the provision for loan losses, nonaccrual loans and relatedcategories for each subsidiary as well as on a consolidated basis. The increasein nonaccrual loans is related to increases at HTB totaling $4.8 million andincreases at GBT totaling $1.8 million. Included in the increase in nonaccrualloans at HTB are four loans totaling $4.6 million representing one loanrelationship, of which all four loans are secured by real estate and havespecific reserves allocated in accordance with Company policy. The consumerrelated charge-offs consist of many smaller balance loans while the real estaterelated charge-offs consist of only a few larger balance loans. Real estateloans are normally secured by one to four family residences or other realestate with values exceeding the original loan balance, therefore minimizingthe risk of loss. Consumer loans, however, may be secured by consumer goods andautomobiles, or may be unsecured, and therefore subject to greater loss in theevent of charge-off. During a recession, losses are more likely and the risk ofloss is greater in the consumer portfolio. The allowance for loan losses as apercentage of nonperforming loans at December 31, 2004 was 106.49%, which wasdown from 227.12% in 2003. This decrease is due to nonaccrual loans increasingto $10.1 million at December 31, 2004 from $3.3 million at December 31, 2003.During the same period, other problem loans, including past due loans greaterthan 90 days past due, decreased by $181,000 compared to a decrease of $1.3million in 2003. Based on management’s evaluations, management believes theallowance for loan losses is adequate to absorb potential losses on existingloans.

 
| ** **                                      | ** ** | **For the year ended December 31, 2004** | ** ** |
|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                      | ** ** | **GBT**                                  | ** ** | **UBT** | ** ** | **CTB** | ** ** | **CLC** | ** ** | **HTB** | ** ** | **FNBS** | ** ** | **CONSOLIDATED** | ** ** |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total charge-offs**                           |       | $                                        | 277        |   | $ | 144 |   | $ | 229 |   | $ | 584 |   | $ | 337 |   | $ | 57 |   | $ | 1,628 |   |
| **Total recoveries**                            |       | 20                                       |       | 39 |   | 153 |   | 29 |   | 167 |   | 74 |   | 482 |   |
| **Net charge-offs (recoveries)**                |       | 257                                      |       | 105 |   | 76 |   | 555 |   | 170 |   | (17 | ) | 1,146 |   |
| **Total nonaccrual loans**                      |       | 3,279                                    |       | 81 |   | 964 |   | 288 |   | 5,273 |   | 174 |   | 10,059 |   |
| **Loans past due 90 days**                      |       | —                                   |       | — |   | — |   | 328 |   | — |   | — |   | 328 |   |
| **Provision for loan losses**                   |       | 450                                      |       | 72 |   | 86 |   | 438 |   | 180 |   | 180 |   | 1,406 |   |
| **Allowance/Total loans**                       |       | 1.16                                     | %          | 1.14 | % | 1.11 | % | 5.61 | % | 1.21 | % | 1.00 | % | 1.16 | % |
| **Net charge-offs (recoveries)/ Average loans** |       | .070                                     | %          | .183 | % | .055 | % | 14.915 | % | .119 | % | (.017 | )% | .142 | % |
| **Allowance/Nonperforming loans**               |       | 171.36                                   | %          | 766.67 | % | 166.49 | % | 34.42 | % | 36.41 | % | 622.99 | % | 106.49 | % |
| ** **                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                      | ** ** | **For the year ended December 31, 2003** | ** ** |
| ** **                                      | ** ** | **GBT**                                  | ** ** | **UBT** | ** ** | **CTB** | ** ** | **CLC** | ** ** | **HTB** | ** ** | **FNBS** | ** ** | **CONSOLIDATED** | ** ** |
| ** **                                      |       | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total charge-offs**                           |       | $                                        | 221        |   | $ | 65 |   | $ | 350 |   | $ | 204 |   | $ | 615 |   | $ | 11 |   | $ | 1,466 |   |
| **Total recoveries**                            |       | 66                                       |       | 69 |   | 121 |   | 35 |   | 79 |   | 14 |   | 384 |   |
| **Net charge-offs (recoveries)**                |       | 155                                      |       | (4 | ) | 229 |   | 169 |   | 536 |   | (3 | ) | 1,082 |   |
| **Total nonaccrual loans**                      |       | 1,459                                    |       | 143 |   | 590 |   | 444 |   | 497 |   | 200 |   | 3,333 |   |
| **Loans past due 90 days**                      |       | 9                                        |       | — |   | — |   | 477 |   | 22 |   | 1 |   | 509 |   |
| **Provision for loan losses**                   |       | 431                                      |       | — |   | 125 |   | 151 |   | 679 |   | 20 |   | 1,406 |   |
| **Allowance/Total loans**                       |       | 1.12                                     | %          | 1.10 | % | 1.27 | % | 8.27 | % | 1.45 | % | .98 | % | 1.23 | % |
| **Net charge-offs (recoveries)/ Average loans** |       | .054                                     | %          | (.007 | )% | .191 | % | 4.942 | % | .468 | % | (.003 | )% | .178 | % |
| **Allowance/Nonperforming loans**               |       | 228.27                                   | %          | 457.34 | % | 270.34 | % | 35.72 | % | 368.02 | % | 441.29 | % | 227.12 | % |

 

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**Effects of Inflation**

 

The impact ofinflation on banks differs from its impact on non-financial institutions.Banks, as financial intermediaries, have assets which are primarily monetary innature and which tend to fluctuate in concert with inflation. A bank can reducethe impact of inflation if it can manage its interest rate sensitivity gap.This gap represents the difference between rate sensitive assets and ratesensitive liabilities. Through the Investment Committee of our holding company’sboard of directors, we attempt to structure the assets and liabilities andmanage the rate sensitivity gap of each subsidiary bank, thereby seeking tominimize the potential effects of inflation. For information on the managementof our interest rate sensitive assets and liabilities, see “Asset/LiabilityManagement” below.

 

**Off-Balance Sheet Arrangements**

 

Our financialstatements do not reflect various commitments and contingent liabilities thatarise in the normal course of business. These off-balance sheet financialinstruments include commitments to extend credit, standby letters of credit andcredit card commitments. Such financial instruments are included in thefinancial statements when funds are distributed or the instruments becomepayable. Our exposure to credit loss in the event of nonperformance by theother party to the financial instrument for commitments to extend credit,standby letters of credit and credit card commitments is represented by thecontractual amount of those instruments. We use the same credit policies inmaking such commitments as we do for on-balance sheet instruments. Althoughthese amounts do not necessarily represent future cash requirements, a summaryof our commitments as of December 31, 2004 and December 31, 2003 are asfollows:

 
| ** **                          | ** ** | **December 31,  2004**     | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------|------------|----------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
|                                |       |                       |       |                   |       |
| Commitments to extend credit        |       | $                          | 192,294    |                   | $          | 138,310 |   |
| Financial standby letters of credit |       | 7,354                      |       | 3,718                  |       |
| Other standby letters of credit     |       | 1,357                      |       | 1,349                  |       |
| Credit card commitments             |       | 5,235                      |       | 5,302                  |       |
| Total                               |       | $                          | 206,240    |                   | $          | 148,679 |   |
|                                     |            |                            |            |                        |            |  |  |  |

 

**Liquidity and Capital Resources**

 

Liquidity representsthe ability of a company to convert assets into cash or cash equivalentswithout significant loss and the ability to raise additional funds byincreasing liabilities. Liquidity management involves monitoring our sourcesand uses of funds in order to meet our day-to-day cash flow requirements whilemaximizing profits. We seek to meet liquidity requirements primarily throughmanagement of short-term investments, monthly amortizing loans, maturing singlepayment loans, and maturities of securities and prepayments. Also, we maintainrelationships with correspondent banks which could provide funds on shortnotice. As of December 31, 2004, we had borrowed under federal funds purchaselines and securities sold under repurchase agreements $47.6 million compared to$17.3 million as of December 31, 2003. These borrowings typically mature withinone to four business days. In November 2004, the Company completed the sale of 1,651,680shares of its common stock in a secondary stock offering receiving net proceedsof approximately $35.4 million. The Company intends to use the proceeds of theoffering for general corporate purposes.

 

The following tablesets forth certain information about contractual cash obligations as ofDecember 31, 2004.

 
| ** **                         | ** ** | **Payments Due after December 31, 2004** | ** ** |
|------------------------------------|------------|------------------------------------------|------------|
| ** **                         | ** ** | **Total**                                | ** ** | **1 Year  or Less** | ** ** | **1 – 3  Years** | ** ** | **4 – 5  Years** | ** ** | **After 5  Years** | ** ** |
|                               |       |                                     |       |   |   |   |   |   |   |   |   |
| Subordinated debt                  |       | $                                        | 29,898     |   | $ | — |   | $ | — |   | $ | — |   | $ | 29,898 |   |
| Operating leases                   |       | 4,194                                    |       | 855 |   | 1,462 |   | 1,170 |   | 707 |   |
| Federal Home Loan Bank advances    |       | 80,992                                   |       | 23,122 |   | 20,754 |   | 22,143 |   | 14,973 |   |
| Total contractual cash obligations |       | $                                        | 115,084    |   | $ | 23,977 |   | $ | 22,216 |   | $ | 23,313 |   | $ | 45,578 |   |

 

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Our operating leasesrepresent short-term obligations, normally with maturities of one year or less.Many of the operating leases have thirty-day cancellation provisions. The totalcontractual obligations for operating leases do not require a material amountof our cash funds.

 

Our liquidity andcapital resources are monitored on a periodic basis by management and state andfederal regulatory authorities. At December 31, 2004, our liquidity ratio was14.06%. 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 outlined in the liquidity policy of the banks. Our banks havelines of credit available to meet any unforeseen liquidity needs. Also, ourbanks have relationships with the Federal Home Loan Bank of Atlanta, whichprovides funding for loan growth on an as needed basis. Management reviewsliquidity on a periodic basis to monitor and adjust liquidity as necessary.Management has the ability to adjust liquidity by selling securities availablefor sale, selling participations in loans and accessing available funds throughvarious borrowing arrangements. At December 31, 2004, we had availableborrowing capacity totaling approximately $172.4 million through variousborrowing arrangements and available lines of credit. We believe our short-terminvestments and available borrowing arrangements are adequate to cover anyreasonably anticipated immediate need for funds.

 

As of December 31,2004, GB&T Bancshares, Inc. and its subsidiary banks were considered to bewell-capitalized as defined in the Federal Deposit Insurance CorporationImprovement Act and based on regulatory minimum capital requirements. GB&TBancshares, Inc. and its subsidiary banks’ capital ratios as of December 31,2004 are presented in the following table:

 
| ** **                              | ** ** | **Capital  Ratios** | ** ** | **For  Capital  Adequacy  Purposes** | ** ** | **To Be Well  Capitalized** | ** ** |
|-----------------------------------------|------------|---------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| Total Capital to Risk Weighted Assets:  |       |                |       |                                 |       |                        |       |
| Consolidated                            |       | 16.27               | %          | 8.00                                 | %          | N/A                         |       |
| Gainesville Bank & Trust            |       | 10.92               |       | 8.00                                 |       | 10.00                       | %          |
| United Bank & Trust                 |       | 13.48               |       | 8.00                                 |       | 10.00                       |       |
| Community Trust Bank                    |       | 11.21               |       | 8.00                                 |       | 10.00                       |       |
| HomeTown Bank of Villa Rica             |       | 11.18               |       | 8.00                                 |       | 10.00                       |       |
| First National Bank of the South        |       | 11.08               |       | 8.00                                 |       | 10.00                       |       |
|                                    |       |                |       |                                 |       |                        |       |
| Tier 1 Capital to Risk Weighted Assets: |       |                |       |                                 |       |                        |       |
| Consolidated                            |       | 15.15               | %          | 4.00                                 | %          | N/A                         |       |
| Gainesville Bank & Trust            |       | 9.76                |       | 4.00                                 |       | 6.00                        | %          |
| United Bank & Trust                 |       | 12.31               |       | 4.00                                 |       | 6.00                        |       |
| Community Trust Bank                    |       | 10.24               |       | 4.00                                 |       | 6.00                        |       |
| HomeTown Bank of Villa Rica             |       | 9.95                |       | 4.00                                 |       | 6.00                        |       |
| First National Bank of the South        |       | 10.20               |       | 4.00                                 |       | 6.00                        |       |
|                                    |       |                |       |                                 |       |                        |       |
| Tier 1 Capital to Average Assets:       |       |                |       |                                 |       |                        |       |
| Consolidated                            |       | 12.58               | %          | 4.00                                 | %          | N/A                         |       |
| Gainesville Bank & Trust            |       | 7.88                |       | 4.00                                 |       | 5.00                        | %          |
| United Bank & Trust                 |       | 8.46                |       | 4.00                                 |       | 5.00                        |       |
| Community Trust Bank                    |       | 8.16                |       | 4.00                                 |       | 5.00                        |       |
| HomeTown Bank of Villa Rica             |       | 8.68                |       | 4.00                                 |       | 5.00                        |       |
| First National Bank of the South        |       | 8.91                |       | 4.00                                 |       | 5.00                        |       |

 

We purchased property in May 2003 in Gainesville, Georgia for the purposeof establishing an operations center for the holding company’s operations anddata processing. The cost of the land, including land development costs wasapproximately $2,314,000. In December 2004, the Company sold 4 of thesurrounding lots and recorded a gain after tax of approximately $232,000. Theestimated cost of the building, including furniture, fixtures and equipment wasapproximately $2,736,000. The building was completed in the first quarter of2005.

 

30

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Management is notaware of any known trends, events or uncertainties, other than those discussedabove, 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 banksare subject to certain restrictions on the amount of dividends that may bedeclared without prior regulatory approval. At December 31, 2004, approximately$6.5 million of retained earnings at our subsidiary banks were available fordividend declaration without regulatory approval.

 

**Selected Financial Informationand Statistical Data**

 

The tables andschedules on the following pages set forth certain financial information andstatistical data with respect to: the distribution of assets, liabilities andshareholders’ equity; interest rates and interest differentials; interest ratesensitivity gap ratios; our securities portfolio; our loan portfolio, includingtypes of loans, maturities and sensitivities to changes in interest rates andinformation on nonperforming loans; summary of the loan loss experience andallowance for loan losses; types of deposits; and the return on equity andassets.

 

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

 

The following tablesets forth the amount of our interest income or interest expense for eachcategory of interest-earning assets and interest-bearing liabilities and theaverage interest yield/rate for total interest-earning assets and totalinterest-bearing liabilities, net interest spread and net yield on averageinterest-earning assets.

 
| ** **                                    | ** ** | **Years  Ended December 31,** | ** ** |
|-----------------------------------------------|------------|-------------------------------|------------|
| ** **                                    | ** ** | ** **                    | ** ** | **2004** | ** ** | ** ** | ** ** | ** ** | ** ** | **2003** | ** ** | ** ** | ** ** | ** ** | ** ** | **2002** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Average**                   | ** ** | **Income/** | ** ** | **Yields/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yields/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yields/** | ** ** |
| ** **                                    | ** ** | **Balances(1)**               | ** ** | **Expense** | ** ** | **Rates** | ** ** | **Balances(1)** | ** ** | **Expense** | ** ** | **Rates** | ** ** | **Balances(1)** | ** ** | **Expense** | ** ** | **Rates** | ** ** |
|                                          |       | **(Dollars  in Thousands)**   |       |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable  securities                           |       | 139,054                       |       | 4,706 |   | 3.38 | % | 103,660 |   | 3,753 |   | 3.62 | % | 73,123 |   | 3,869 |   | 5.29 | % |
| Nontaxable  securities (5)                    |       | 16,063                        |       | 736 |   | 4.58 |   | 18,172 |   | 688 |   | 3.79 |   | 15,891 |   | 698 |   | 4.39 |   |
| Federal funds  sold                           |       | 13,106                        |       | 163 |   | 1.24 |   | 12,897 |   | 145 |   | 1.12 |   | 10,075 |   | 150 |   | 1.49 |   |
| Interest-bearing  deposits in banks           |       | 2,329                         |       | 27 |   | 1.16 |   | 2,378 |   | 30 |   | 1.26 |   | 2,055 |   | 42 |   | 2.04 |   |
| Loans (2) (4)                                 |       | 802,694                       |       | 52,642 |   | 6.56 |   | 603,711 |   | 42,176 |   | 6.99 |   | 443,528 |   | 34,197 |   | 7.71 |   |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                |       | 973,246                       |       | 58,274 |   | 5.99 | % | 740,818 |   | 46,792 |   | 6.32 | % | 544,672 |   | 38,956 |   | 7.15 | % |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized gains  on securities               |       | 324                           |       |   |   |   |   | 2,330 |   |   |   |   |   | 2,327 |   |   |   |   |   |
| Allowance for  loan losses                    |       | (9,856                        | )          |   |   |   |   | (7,932 | ) |   |   |   |   | (5,779 | ) |   |   |   |   |
| Nonaccrual loans                              |       | 4,646                         |       |   |   |   |   | 4,420 |   |   |   |   |   | 2,990 |   |   |   |   |   |
| Cash and due from  banks                      |       | 20,347                        |       |   |   |   |   | 17,026 |   |   |   |   |   | 14,639 |   |   |   |   |   |
| Other assets                                  |       | 93,994                        |       |   |   |   |   | 56,472 |   |   |   |   |   | 28,481 |   |   |   |   |   |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                         |       | 1,082,701                     |       |   |   |   |   | 813,134 |   |   |   |   |   | 587,330 |   |   |   |   |   |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand & savings        |       | 331,999                       |       | 4,053 |   | 1.22 |   | 239,731 |   | 2,579 |   | 1.08 |   | 147,969 |   | 1,692 |   | 1.14 |   |
| Time                                          |       | 393,352                       |       | 9,326 |   | 2.37 |   | 320,974 |   | 8,892 |   | 2.77 |   | 251,887 |   | 9,763 |   | 3.88 |   |
| Borrowings                                    |       | 119,291                       |       | 4,573 |   | 3.83 |   | 94,880 |   | 3,817 |   | 4.02 |   | 76,790 |   | 3,442 |   | 4.48 |   |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities           |       | 844,642                       |       | 17,952 |   | 2.13 | % | 655,585 |   | 15,288 |   | 2.33 | % | 476,646 |   | 14,897 |   | 3.13 | % |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  demand                   |       | 108,749                       |       |   |   |   |   | 76,983 |   |   |   |   |   | 56,913 |   |   |   |   |   |
| Other liabilities                             |       | 11,039                        |       |   |   |   |   | 7,422 |   |   |   |   |   | 6,328 |   |   |   |   |   |
| Stockholders’  equity (3)                |       | 118,271                       |       |   |   |   |   | 73,144 |   |   |   |   |   | 47,443 |   |   |   |   |   |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                         |       | 1,082,701                     |       |   |   |   |   | 813,134 |   |   |   |   |   | 587,330 |   |   |   |   |   |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                          |       |                          |       | 40,322 |   |   |   |   |   | 31,504 |   |   |   |   |   | 24,059 |   |   |   |
| Net interest  spread                          |       |                          |       |   |   | 3.86 | % |   |   |   |   | 3.99 | % |   |   |   |   | 4.02 | % |
| Net yield on  average interest-earning assets |       |                          |       |   |   | 4.14 | % |   |   |   |   | 4.25 | % |   |   |   |   | 4.42 | % |

 

----

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

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

(3)           Averageunrealized gains (losses) on securities available for sale, net of tax, havebeen included in stockholders’ equity at $210,000, $1,260,000, and $1,365,000for 2004, 2003, and 2002, respectively.

(4)           Interest andfees on loans include $4,146,000, $3,412,000 and $2,560,000 of loan fee incomefor the years ended December 31, 2004, 2003 and 2002, respectively.

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

 

31

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**Rate and Volume Analysis**

 

The following tabledescribes the extent to which changes in interest rates and changes in volumeof interest-earning assets and interest-bearing liabilities have affected ourinterest income and expense during the years indicated. For each category of interest-earningassets and interest-bearing liabilities, information is provided on changesattributable to: (1) change in volume (change in volume multiplied by oldrate); (2) change in rate (change in rate multiplied by old volume); and (3) acombination of change in rate and change in volume. The changes in interestincome and interest expense attributable to both volume and rate have beenallocated proportionately to the change due to volume and the change due torate.

 
| ** **                                                         | ** ** | **Years Ended December 31,**              | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                         | ** ** | **2004 to 2003**                          | ** ** | **2003 to 2002** | ** ** |
| ** **                                                         | ** ** | **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                                         |       | $                                         | (2,729     | ) | $ | 13,195 |   | $ | 10,466 |   | $ | (3,435 | ) | $ | 11,414 |   | $ | 7,979 |   |
| Interest on taxable securities                                     |       | (262                                      | )          | 1,215 |   | 953 |   | (1,441 | ) | 1,325 |   | (116 | ) |
| Interest on nontaxable securities                                  |       | 134                                       |       | (86 | ) | 48 |   | (102 | ) | 92 |   | (10 | ) |
| Interest on federal funds sold                                     |       | 16                                        |       | 2 |   | 18 |   | (42 | ) | 37 |   | (5 | ) |
| Interest on interest-bearing deposits in  other banks              |       | (2                                        | )          | (1 | ) | (3 | ) | (18 | ) | 6 |   | (12 | ) |
| Total interest income                                              |       | (2,843                                    | )          | 14,325 |   | 11,482 |   | (5,038 | ) | 12,874 |   | 7,836 |   |
|                                                               |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Expense from interest-bearing                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Interest on interest-bearing demand deposits  and savings deposits |       | 372                                       |       | 1,102 |   | 1,474 |   | (94 | ) | 981 |   | 887 |   |
| Interest on time deposits                                          |       | (1,396                                    | )          | 1,830 |   | 434 |   | (3,182 | ) | 2,311 |   | (871 | ) |
| Interest on borrowings                                             |       | (187                                      | )          | 943 |   | 756 |   | (378 | ) | 753 |   | 375 |   |
| Total interest expense                                             |       | (1,211                                    | )          | 3,875 |   | 2,664 |   | (3,654 | ) | 4,045 |   | 391 |   |
|                                                               |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                                |       | $                                         | (1,632     | ) | $ | 10,450 |   | $ | 8,818 |   | $ | (1,384 | ) | $ | 8,829 |   | $ | 7,445 |   |
|                                                                    |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Market Risk and Interest RateSensitivity**

 

Our asset/liabilitymix is monitored on a regular basis and a report evaluating the interest ratesensitive assets and interest rate sensitive liabilities is prepared andpresented to the Investment Committee of the holding company’s board of directorson a quarterly basis. The objective of this policy is to monitor interest ratesensitive assets and liabilities so as to minimize the impact of substantialmovements in interest rates on earnings. An asset or liability is considered tobe interest rate sensitive if it will reprice or mature within the time periodanalyzed, usually one year or less. The interest rate sensitivity gap is thedifference between the interest-earning assets and interest-bearing liabilitiesscheduled to mature or reprice within such time period. A gap is consideredpositive when the amount of interest rate sensitive assets exceeds the amountof interest rate sensitive liabilities. A gap is considered negative when theamount of interest rate sensitive liabilities exceeds the interest ratesensitive assets. During a period of rising interest rates, a negative gapwould tend to adversely affect net interest income, while a positive gap wouldtend to result in an increase in net interest income. Conversely, during aperiod of falling interest rates, a negative gap would tend to result in anincrease in net interest income, while a positive gap would tend to adverselyaffect net interest income. If our assets and liabilities were equally flexibleand moved concurrently, the impact of any increase or decrease in interestrates on net interest income would be minimal.

 

32

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A simple interest rate“gap” analysis by itself may not be an accurate indicator of how net interestincome will be affected by changes in interest rates. Accordingly, we alsoevaluate how the repayment of particular assets and liabilities is impacted bychanges in interest rates. Income associated with interest-earning assets andcosts associated with interest-bearing liabilities may not be affecteduniformly by changes in interest rates. In addition, the magnitude and durationof changes in interest rates may have a significant impact on net interestincome. For example, although certain assets and liabilities may have similarmaturities or periods of repricing, they may react in different degrees tochanges in market interest rates. Interest rates on certain types of assets andliabilities fluctuate in advance of changes in general market rates, whileinterest rates on other types may lag behind changes in general market rates.In addition, certain assets, such as adjustable rate mortgage loans, havefeatures (generally referred to as “interest rate caps and floors”) which limitthe amount of changes in interest rates. Prepayment and early withdrawal levelsalso could deviate significantly from those assumed in calculating the interestrate gap. The ability of many borrowers to service their debts also maydecrease during periods of rising interest rates.

 

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

 

At December 31, 2004our cumulative one year interest rate sensitivity gap ratio was 0.94. Thisindicates that our interest-bearing liabilities will reprice during this periodat a rate faster than our interest-earning assets.

 

The following tablesets forth the distribution of the repricing of our interest-earning assets andinterest-bearing liabilities as of December 31, 2004, the interest ratesensitivity gap (i.e., interest rate sensitive assets less interest ratesensitive liabilities), the cumulative interest rate sensitivity gap, theinterest rate sensitivity gap ratio (i.e., interest rate sensitive assetsdivided by interest rate sensitive liabilities) and the cumulative interestrate sensitivity gap ratio.

 

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

 

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                          |       | $                          | 700        |                                            | $          | —                                       |       | $                     | —     |       | $          | — |   | $ | 700 |   |
| Federal funds sold                                 |       | 93                         |       | —                                          |       | —                                       |       | —                |       | 93         |       |
| Securities (1)                                     |       | 20,932                     |       | 27,811                                          |       | 94,315                                       |       | 47,578                |       | 190,636    |       |
| Loans                                              |       | 525,519                    |       | 142,752                                         |       | 278,943                                      |       | 8,666                 |       | 955,880    |       |
|                                               |       |                       |       |                                            |       |                                         |       |                  |       |       |       |
| Total interest earning assets                      |       | 547,337                    |       | 170,563                                         |       | 373,258                                      |       | 56,244                |       | 1,147,4021 |       |
|                                               |       |                       |       |                                            |       |                                         |       |                  |       |       |       |
| Interest-bearing liabilities:                      |       |                       |       |                                            |       |                                         |       |                  |       |       |       |
| Interest-bearing demand and savings                |       | $                          | 367,078    |                                            | $          | —                                       |       | $                     | —     |       | $          | — |   | $ | 367,078 |   |
| Time deposits                                      |       | 80,701                     |       | 246,295                                         |       | 108,748                                      |       | 77                    |       | 435,821    |       |
| Federal funds purchased and Repurchase  agreements |       | 47,582                     |       | —                                          |       | —                                       |       | —                |       | 47,582     |       |
| Other borrowings                                   |       | 934                        |       | 22,950                                          |       | 43,068                                       |       | 44,872                |       | 111,824    |       |
|                                               |       |                       |       |                                            |       |                                         |       |                  |       |       |       |
| Total interest-bearing liabilities                 |       | $                          | 496,295    |                                            | $          | 269,245                                      |       | $                     | 151,816    |       | $          | 44,949 |   | $ | 962,305 |   |
|                                               |       |                       |       |                                            |       |                                         |       |                  |       |       |       |
| Interest rate sensitivity gap                      |       | $                          | 51,042     |                                            | $          | (98,682                                      | )          | $                     | 221,442    |       | $          | 11,295 |   | $ | 180,912 |   |
|                                               |       |                       |       |                                            |       |                                         |       |                  |       |       |       |
| Cumulative interest rate sensitivity gap           |       | $                          | 51,042     |                                            | $          | (47,640                                      | )          | $                     | 173,802    |       | $          | 185,097 |   |   |   |
|                                               |       |                       |       |                                            |       |                                         |       |                  |       |       |       |
| Interest rate sensitivity gap ratio                |       | 1.10                       | %          | 0.63                                            | %          | 2.46                                         | %          | 1.25                  | %          |       |       |
|                                               |       |                       |       |                                            |       |                                         |       |                  |       |       |       |
| Cumulative interest rate sensitivity gap  ratio    |       | 1.10                       | %          | 0.94                                            | %          | 1.19                                         | %          | 1.19                  | %          |       |       |
|                                                    |            |                            |            |                                                 |            |                                              |            |                       |            |            |            |  |  |  |  |  |  |  |  |  |

 

----

(1) Does not include restricted equitysecurities, which consist of Federal Home Loan Bank of Atlanta stock, TheBankers Bank stock and common stock of one de novo bank, as such assets are notinterest rate sensitive.

 

Management believesthat gap analysis is a useful tool for measuring interest rate risk only whenused in conjunction with its simulation model. As of December 31, 2004, theCompany maintained an asset sensitive interest rate risk position based on itssimulation model results. This positioning would be expected to result in anincrease in net interest income in a rising rate environment and a decrease innet interest income in a declining rate environment. This is generally due to agreater proportion of interest earning assets repricing on a variable ratebasis as compared to variable rate funding sources. This asset sensitivity isindicated by selected results of net interest income simulations. The actualrealized change in net interest income would depend on several factors. Thesefactors include, but are not limited to, actual realized growth in asset andliability volumes, as well as the mix experienced over these time horizons. Marketconditions and their resulting impact on loan, deposit, and funding pricingwould also be a primary determinant in the realized level of net interestincome. The table below shows the impact on net interest margins over atwelve-month period when subjected to an immediate 100 basis point increase anddecrease in rate.

 

**TwelveMonth Net Interest Income Sensitivity**

 

| **Change in Short-Term Interest  Rates (in basis points)** | ** ** | **Estimated Change in Net  Interest Income** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------|------------|
|                                                       |       |                                         |       |
| +100                                                       |       | 8.40                                         | %          |
| Flat                                                       |       | —                                       |       |
| -100                                                       |       | 7.98                                         | %          |

 

34

----

 

We actively manage themix of asset and liability maturities to control the effects of changes in thegeneral level of interest rates on net interest income. Except for its effecton the general level of interest rates, inflation does not have a materialimpact on us due to the rate variability and short-term maturities of ourearning assets. In particular, as of December 31, 2004 approximately 68% of theloan portfolio is comprised of loans which have variable rate terms or maturewithin one year. Most mortgage loans are made on a variable rate basis withrates being adjusted every one to five years.

 

**Securities Portfolio**

 

*Types of Securities*

 

The following table sets forth the carryingvalue of securities held by us as of the dates indicated:

 
| ** **                                                     | ** ** | **December 31,**           | ** ** |
|----------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                     | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                     | ** ** | **(Dollars in Thousands)** | ** ** |
| U. S. Treasury and U. S. government  agencies and corporations |       | $                          | 59,966     |   | $ | 42,639 |   | $ | 38,337 |   |
| Mortgage-backed securities                                     |       | 111,344                    |       | 69,872 |   | 47,069 |   |
| State and municipal securities                                 |       | 16,790                     |       | 17,576 |   | 16,774 |   |
| Equity securities (1)                                          |       | 9,762                      |       | 7,440 |   | 8,447 |   |
|                                                           |       | $                          | 197,862    |   | $ | 137,527 |   | $ | 110,627 |   |

 

----

(1) Equity securitiesconsist of Federal Home Loan Bank of Atlanta stock, The Bankers Bank stock,common stock of one de novo bank and corporate notes. For presentationpurposes, the equity securities are not included in the maturity table belowbecause they have no contractual maturity date.

 

*Maturities*

 

The amounts of debtsecurities as of December 31, 2004 are shown in the following table accordingto contractual maturities.

 
| ** **                         | ** ** | **U. S. Treasury  And Other U. S.  Government Agencies  And Corporations** | ** ** | **Municipal Securities** | ** ** |
|------------------------------------|------------|----------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                         | ** ** | ** **                                                                 | ** ** | **Yield**                | ** ** | ** ** | ** ** | **Yield** | ** ** |
| ** **                         | ** ** | **Amount**                                                                 | ** ** | **(1)**                  | ** ** | **Amount** | ** ** | **(1)(2)** | ** ** |
| ** **                         | ** ** | **(Dollars in Thousands)**                                                 | ** ** |
| Maturity:                          |       |                                                                       |       |                     |       |   |   |   |   |
| One year or less                   |       | $                                                                          | 1,276      |                     | 7.12       | % | $ | 2,816 |   | 5.06 | % |
| After one year through five years  |       | 56,455                                                                     |       | 3.38                     |       | 5,888 |   | 4.66 |   |
| After five years through ten years |       | 46,091                                                                     |       | 4.33                     |       | 6,863 |   | 4.86 |   |
| After ten years                    |       | 67,991                                                                     |       | 4.43                     |       | 1,223 |   | 4.47 |   |
|                               |       | $                                                                          | 171,813    |                     | 4.08       | % | $ | 16,790 |   | 4.79 | % |

 

----

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

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

 

35

----

 

**Loan Portfolio**

 

*Types of Loans*

 

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

 
| ** **                      | ** ** | **December 31,**           | ** ** |
|---------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
|                            |       |                       |       |   |   |   |   |   |   |   |   |
| Commercial                      |       | $                          | 74,437     |   | $ | 50,997 |   | $ | 43,011 |   | $ | 38,597 |   | $ | 37,159 |   |
| Real estate – construction |       | 294,817                    |       | 185,397 |   | 120,922 |   | 99,473 |   | 68,951 |   |
| Real estate – mortgage     |       | 545,614                    |       | 439,779 |   | 348,229 |   | 247,311 |   | 240,635 |   |
| Consumer                        |       | 37,248                     |       | 30,088 |   | 29,630 |   | 29,286 |   | 33,207 |   |
| Other                           |       | 3,764                      |       | 3,697 |   | 1,042 |   | 3,989 |   | 4,739 |   |
|                            |       | 955,880                    |       | 709,958 |   | 542,834 |   | 418,656 |   | 384,691 |   |
| Less allowance for loan losses  |       | (11,061                    | )          | (8,726 | ) | (7,538 | ) | (5,522 | ) | (5,099 | ) |
| Net loans                       |       | $                          | 944,819    |   | $ | 701,232 |   | $ | 535,296 |   | $ | 413,134 |   | $ | 379,592 |   |

 

Loans are netof deferred loan fees.

 

*Maturities and Sensitivities toChanges in Interest Rates*

 

Total loans as ofDecember 31, 2004 are shown in the following table according to contractualmaturity.

 
| ** **                   | ** ** | **(Dollars in Thousands)** | ** ** |
|------------------------------|------------|----------------------------|------------|
|                         |       |                       |       |
| Commercial                   |       |                       |       |
| One year or less             |       | $                          | 39,108     |   |
| After one through five years |       | 32,994                     |       |
| After five years             |       | 2,333                      |       |
|                         |       | 74,435                     |       |
| Construction                 |       |                       |       |
| One year or less             |       | 242,410                    |       |
| After one through five years |       | 50,055                     |       |
| After five years             |       | 2,352                      |       |
|                         |       | 294,817                    |       |
| Other                        |       |                       |       |
| One year or less             |       | 179,132                    |       |
| After one through five years |       | 366,649                    |       |
| After five years             |       | 40,847                     |       |
|                         |       | 586,628                    |       |
|                         |       | $                          | 955,880    |   |

 

The following tablesummarizes loans at December 31, 2004 with the due dates after one year forpredetermined and floating or adjustable interest rates.

 
| ** **                            | ** ** | **(Dollars in  Thousands)** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|
|                                  |       |                        |       |
| Predetermined interest rates          | ** ** | **$**                       | 302,413    | ** ** |
| Floating or adjustable interest rates |       | 192,817                     |       |
| ** **                            |       | **$**                       | 495,230    |   |

 

36

----

 

*Risk Elements*

 

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

 
| ** **                                                                                                                                                                       | ** ** | **December 31,**           | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                                                                                                                       | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                                                                                                                                             |       |                       |       |   |   |   |   |   |   |   |   |
| Loans accounted for on a nonaccrual basis                                                                                                                                        |       | $                          | 10,059     |   | $ | 3,333 |   | $ | 5,506 |   | $ | 473 |   | $ | 1,602 |   |
|                                                                                                                                                                             |       |                       |       |   |   |   |   |   |   |   |   |
| Loans contractually past due 90 days or  more to interest or principal payments and still Accruing                                                                               |       | 328                        |       | 509 |   | 1,814 |   | 196 |   | 773 |   |
|                                                                                                                                                                             |       |                       |       |   |   |   |   |   |   |   |   |
| 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 |       | 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                                           |       | —                     |       | — |   | — |   | — |   | — |   |
|                                                                                                                                                                                  |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The reduction in interest income associated withnonaccrual loans as of December 31, 2004 is as follows:

 
| ** **                                                                              | ** ** | **(Dollars in Thousands)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------|------------|
| Interest income that would have been  recorded on nonaccrual loans under original terms |       | $                          | 626        |   |
|                                                                                    |       |                       |       |
| Interest income that was recorded on  nonaccrual loans                                  |       | $                          | 180        |   |

 

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

 

Our policy is todiscontinue the accrual of interest income when, in the opinion of management,collection of such interest becomes doubtful. This status is determined when:(1) there is a significant deterioration in the financial condition of theborrower and full repayment of principal and interest is not expected; and (2)the principal or interest is more than 90 days past due, unless the loan isboth well-secured and in the process of collection. Community Loan Companyaccrues interest until management determines that full repayment of principaland interest is not probable, which in some cases exceeds 90 days past due. Accrualof interest on such loans is resumed when, in management’s judgment, thecollection of interest and principal becomes probable. Loans classified forregulatory purposes as loss, doubtful, substandard, or special mention thathave not been included in the table above do not represent or result fromtrends or uncertainties which management reasonably expects will materiallyimpact future operating results, liquidity, or capital resources. Theseclassified loans do not represent material credits about which management isaware and which cause management to have serious doubts as to the ability ofsuch borrowers to comply with the loan repayment terms. In the event ofnon-performance by the borrower, these loans have collateral pledged which would prevent the recognition of substantial losses.

 

37

----

 

**Summary of Loan Loss Experience**

 

The following tablesummarizes average loan balances for the periods set forth therein determinedusing the daily average balances during the year; changes in the allowance forloan losses arising from loans charged off and recoveries on loans previouslycharged off; additions to the allowance which have been charged to expense; andthe ratio of net charge-offs during the year to average loans.

 
| ** **                                                                     | ** ** | **December 31,**           | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                     | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                     | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                                           |       |                       |       |   |   |   |   |   |   |   |   |
| Average amount of loans outstanding (1)                                        |       | $                          | 807,340    |   | $ | 608,131 |   | $ | 446,518 |   | $ | 397,496 |   | $ | 356,051 |   |
|                                                                           |       |                       |       |   |   |   |   |   |   |   |   |
| Balance of allowance for loan losses at  beginning of year                     |       | $                          | 8,726      |   | $ | 7,538 |   | $ | 5,522 |   | $ | 5,099 |   | $ | 4,233 |   |
|                                                                           |       |                       |       |   |   |   |   |   |   |   |   |
| Loans charged off:                                                             |       |                       |       |   |   |   |   |   |   |   |   |
| Real estate                                                                    |       | (422                       | )          | (469 | ) | (190 | ) | (211 | ) | (22 | ) |
| Commercial                                                                     |       | (185                       | )          | (295 | ) | (77 | ) | (78 | ) | (68 | ) |
| Consumer                                                                       |       | (1,001                     | )          | (700 | ) | (799 | ) | (801 | ) | (481 | ) |
| Credit cards                                                                   |       | (20                        | )          | (2 | ) | (28 | ) | (28 | ) | (11 | ) |
|                                                                           |       | (1,628                     | )          | (1,466 | ) | (1,094 | ) | (1,118 | ) | (582 | ) |
|                                                                           |       |                       |       |   |   |   |   |   |   |   |   |
| Recoveries of loans previously charged off:                                    |       |                       |       |   |   |   |   |   |   |   |   |
| Real estate                                                                    |       | 113                        |       | 53 |   | 175 |   | 21 |   | 131 |   |
| Commercial                                                                     |       | 66                         |       | 31 |   | 2 |   | 8 |   | 37 |   |
| Consumer                                                                       |       | 292                        |       | 286 |   | 246 |   | 192 |   | 146 |   |
| Credit cards                                                                   |       | 11                         |       | 14 |   | 1 |   | 14 |   | — |   |
|                                                                           |       | 482                        |       | 384 |   | 424 |   | 235 |   | 314 |   |
|                                                                           |       |                       |       |   |   |   |   |   |   |   |   |
| Net loans charged off during the year                                          |       | (1,146                     | )          | (1,082 | ) | (670 | ) | (883 | ) | (268 | ) |
| Allowance for loan losses acquired (sold)                                      |       | 2,075                      |       | 864 |   | 1,841 |   | — |   | (15 | ) |
|                                                                           |       |                       |       |   |   |   |   |   |   |   |   |
| Additions to allowance charged   To expense during year                        |       | 1,406                      |       | 1,406 |   | 845 |   | 1,306 |   | 1,149 |   |
|                                                                           |       |                       |       |   |   |   |   |   |   |   |   |
| Balance of allowance for loan losses   At end of year                          |       | $                          | 11,061     |   | $ | 8,726 |   | $ | 7,538 |   | $ | 5,522 |   | $ | 5,099 |   |
|                                                                           |       |                       |       |   |   |   |   |   |   |   |   |
| Ratio of net loans charged off during the  year to average loans   Outstanding |       | 0.14                       | %          | 0.18 | % | 0.15 | % | 0.22 | % | 0.08 | % |

 

----

(1)           Average total loans include nonaccrual loans.

 

38

----

 

The following tablesets forth the allowance for loan losses to total allowance for loan losses andthe percent of loans to total loans in each of the categories listed at thedates indicated:

 
| ** **                | ** ** | **December  31,**           | ** ** |
|---------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                | ** ** | ** **                  | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                | ** ** | ** **                  | ** ** | **of Loans** | ** ** | ** ** | ** ** | **of Loans** | ** ** | ** ** | ** ** | **of Loans** | ** ** | ** ** | ** ** | **of Loans** | ** ** | ** ** | ** ** | **of Loans** | ** ** |
| ** **                | ** ** | ** **                  | ** ** | **in Each** | ** ** | ** ** | ** ** | **in Each** | ** ** | ** ** | ** ** | **in Each** | ** ** | ** ** | ** ** | **in Each** | ** ** | ** ** | ** ** | **in Each** | ** ** |
| ** **                | ** ** | ** **                  | ** ** | **Category** | ** ** | ** ** | ** ** | **Category** | ** ** | ** ** | ** ** | **Category** | ** ** | ** ** | ** ** | **Category** | ** ** | ** ** | ** ** | **Category** | ** ** |
| ** **                | ** ** | ** **                  | ** ** | **to Total** | ** ** | ** ** | ** ** | **to Total** | ** ** | ** ** | ** ** | **to Total** | ** ** | ** ** | ** ** | **to Total** | ** ** | ** ** | ** ** | **to Total** | ** ** |
| ** **                | ** ** | **Amount**                  | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| ** **                | ** ** | **(Dollars  in Thousands)** | ** ** |
| ** **                | ** ** | ** **                  | ** ** |
| Commercial                |       | $                           | 840        |   | 7.79 | % | $ | 663 |   | 7.19 | % | $ | 573 |   | 7.92 | % | $ | 418 |   | 9.22 | % | $ | 373 |   | 9.66 | % |
| Real  estate-construction |       | 1,383                       |       | 30.84 |   | 1,091 |   | 26.11 |   | 942 |   | 22.28 |   | 690 |   | 23.76 |   | 574 |   | 17.92 |   |
| Real  estate-mortgage     |       | 6,581                       |       | 57.08 |   | 5,192 |   | 61.94 |   | 4,485 |   | 64.15 |   | 3,287 |   | 59.07 |   | 2,787 |   | 62.55 |   |
| Consumer and  other       |       | 2,257                       |       | 4.29 |   | 1,780 |   | 4.76 |   | 1,538 |   | 5.65 |   | 1,127 |   | 7.95 |   | 1,365 |   | 9.87 |   |
| Total allowance           |       | $                           | 11,061     |   | 100.00 | % | $ | 8,726 |   | 100.00 | % | $ | 7,538 |   | 100.00 | % | $ | 5,522 |   | 100.00 | % | $ | 5,099 |   | 100.00 | % |

 

The allowance for loanlosses is established through provisions for loan losses charged to operations.Loans are charged against the allowance for loan losses when managementbelieves that the collection of principal is unlikely. Subsequent recoveriesare added to the allowance. Management’s evaluation of the adequacy of theallowance for loan losses is based on a formal analysis which assesses the riskwithin the loan portfolio. Management believes that the allowance for loanlosses is adequate. While management uses available information to recognizelosses on loans, future additions to the allowance for loan losses may benecessary based on changes in economic conditions. In addition, variousregulatory agencies, as an integral part of their examination process,periodically review the subsidiary banks’ allowances for loan losses. Suchagencies may require our subsidiary banks to recognize additions to theallowance for loan losses based on their judgments about information availableto them at the time of their examination. See also our allowance for loan lossdiscussion in “Critical Accounting Policies.”

 

Our allowance for loanlosses was approximately $11,061,000 at December 31, 2004, representing 1.16%of total loans, compared with $8,726,000 at December 31, 2003, whichrepresented 1.23% of total loans.

 

**Deposits**

 

Average amounts ofdeposits and average rates paid thereon, classified as to noninterest-bearingdemand deposits, interest-bearing demand and savings deposits and time deposits,are presented below. Average balances were determined using daily averagebalances.

 
| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                    | ** ** | **Amount**                  | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| ** **                                    | ** ** | **(Dollars in Thousands)**  | ** ** |
|                                          |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing demand deposits           |       | $                           | 108,749    |   | — | % | $ | 76,983 |   | — | % | $ | 56,913 |   | — | % |
| Interest-bearing demand and Savings  deposits |       | 331,999                     |       | 1.22 |   | 239,731 |   | 1.08 |   | 147,968 |   | 1.14 |   |
| Time deposits                                 |       | 393,352                     |       | 2.37 |   | 320,974 |   | 2.77 |   | 251,887 |   | 3.88 |   |
| Total deposits                                |       | $                           | 834,100    |   |   |   | $ | 637,688 |   |   |   | $ | 456,768 |   |   |   |

 

39

----

 

The amounts of timecertificates of deposit issued in amounts of $100,000 or more as of December31, 2004 are shown below by category.

 
| ** **                    | ** ** | **(Dollars in  Thousands)** | ** ** |
|-------------------------------|------------|-----------------------------|------------|
|                          |       |                        |       |
| Three months or less          | ** ** | $                           | 29,053     | ** ** |
| Over three through six months |       | 23,718                      |       |
| Over six through 12 months    |       | 60,886                      |       |
| Over 12 months                |       | 49,840                      |       |
| Total                         | ** ** | $                           | 163,497    | ** ** |

 

**Return on Equity and Assets**

 

The following table sets forth rate of returninformation for the periods indicated.

 
| ** **                 | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
|                       |       |                         |       |   |   |   |   |
| Return on assets (1)       |       | 0.91                         | %          | 0.95 | % | 1.11 | % |
| Return on equity (2)       |       | 8.32                         |       | 10.56 |   | 13.72 |   |
| Dividend payout ratio (3)  |       | 28.85                        |       | 28.16 |   | 25.47 |   |
| Equity to assets ratio (4) |       | 10.92                        |       | 9.00 |   | 8.08 |   |

 

----

(1)           Net incomedivided by average total assets.

(2)           Net incomedivided by average equity.

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

(4)           Averageequity divided by average total assets.

 

**Borrowings**

 

As part of ouroperating strategy, we have utilized federal funds purchased and securitiessold under repurchase agreements as an alternative to retail deposits to fundour operations when borrowings are less costly and can be invested at apositive interest rate spread or when we need additional funds to satisfy loandemand. By utilizing federal funds purchased and securities sold underrepurchase agreements, which possess varying stated maturities, we can meet ourliquidity needs without otherwise being dependent upon retail deposits andrevising 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, 2004, we had $47.6 million inoutstanding federal funds purchased and securities sold under repurchaseagreements.

 

The following tablesets forth certain information regarding federal funds purchased and securitiessold under repurchase agreements at or for the periods ended on the dates indicated:

 
| ** **                                                   | ** ** | **At or For the Year Ended  December 31,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                   | ** ** | **(Dollars in Thousands)**                 | ** ** |
|                                                         |       |                                       |       |   |   |   |   |
| Average balance outstanding                                  |       | $                                          | 19,906     |   | $ | 13,882 |   | $ | 14,695 |   |
| Maximum amount outstanding at any month-end  during the year |       | 47,582                                     |       | 21,343 |   | 26,160 |   |
| Balance outstanding at end of year                           |       | 47,582                                     |       | 17,314 |   | 11,538 |   |
| Weighted average interest rate during year                   |       | 1.49                                       | %          | 1.06 | % | 2.16 | % |
| Weighted average interest rate at end of  year               |       | 2.10                                       | %          | 0.85 | % | 1.69 | % |
|                                                              |            |                                            |            |  |  |  |  |  |  |  |

 

40

----

 

**ITEM7A.****          ****QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

See “Market Risk andInterest Rate Sensitivity” section of “Management’s Discussion and Analysis ofFinancial Information and Results of Operations” in this report for a discussionof market risk.

 

**ITEM 8.****          FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

** **
| Consolidated Balance Sheets  - December 31, 2004 and 2003.                                                         |
|--------------------------------------------------------------------------------------------------------------------|
|                                                                                                               |
| Consolidated  Statements of Income – Three Years Ended December 31, 2004, 2003, and 2002.                     |
|                                                                                                               |
| Consolidated  Statements of Comprehensive Income – Three Years Ended December 31, 2004,  2003, and 2002.      |
|                                                                                                               |
| Consolidated  Statements of Stockholders’ Equity – Three Years Ended December 31, 2004,  2003, and 2002. |
|                                                                                                               |
| Consolidated  Statements of Cash Flows – Three Years Ended December 31, 2004, 2003, and  2002.                |
|                                                                                                               |
| Notes to Consolidated Financial Statements.                                                                        |

 

**ITEM 9.****          ****CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL**

**DISCLOSURE**

Not applicable

 

**Item 9A.****          CONTROLSAND PROCEDURES**

** **

**Disclosure Controls andProcedures**

 

As of the end of theperiod covered by this report, an evaluation was carried out under thesupervision and with the participation of the Company’s President and ChiefFinancial Officer, of the effectiveness of the design and operation of itsdisclosure controls and procedures. Based upon that evaluation, the Presidentand Chief Financial Officer concluded that the design and operation of thesedisclosure controls and procedures were effective as of the end of the periodcovered by this report in alerting them on a timely basis to materialinformation relating to the Company required to be included in the Company’sreports filed or submitted under the Securities Exchange Act of 1934.

 

**Internal Control over FinancialReporting**

 

As permitted byparagraph (b) of Securities and Exchange Commission Release No. 34-50754), theCompany has elected not to file within the 75 day filing period specified inForm 10-K either “Management’s annual report on internal control over financialreporting” or the related “Attestation report of the registered publicaccounting firm” required by Items 308(a) and (b), respectively, of RegulationS-K. In accordance with the conditions of Release No. 34-50754, the Companyanticipates filing an amendment to this Form 10-K before April 30, 2005 toinclude the information required by Items 308(a) and (b) of Regulation S-K. Asof the date of filing of this Form 10-K, the Company is not aware of anymaterial weaknesses in its internal control over financial reporting.  No change in our internal control over financialreporting occurred during the fourth quarter of our fiscal year endedDecember 31, 2004 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**Item 9B.****          OTHERINFORMATION**

** **

None.

 

41

----

 

**PARTIII**

 

**ITEM10.****              ****DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

 

The information setforth under the caption “Election of Directors” and “Executive Officers” in thedefinitive Proxy Statement filed in connection with our 2005 AnnualShareholders Meeting is incorporated herein by reference.

 

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

 

The information setforth under the caption “Executive Compensation” in the definitive ProxyStatement filed in connection with our 2005 Annual Shareholders meeting isincorporated herein by reference.

 

**ITEM 12.****              ****SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

The information setforth under the caption “Security Ownership of Certain Beneficial Owners andManagement” in the definitive Proxy Statement filed in connection with our 2005Annual Shareholders meeting is incorporated herein by reference.

 

**EquityCompensation Plan Information**

 

The following tablegives information about shares of the Company’s common stock that may be issuedupon the exercise of options, warrants and rights under all existing equitycompensation plans as of December 31, 2004.

 
| **Plan Category**                                              | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  first column)** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by  security holders (1)    |       | 680,281                                                                                             |       | $                                                                                  | 10.14      |                                                                                                                                                    | 484,004    |   |
| Equity compensation plans not approved by  security holders(2) |       | —                                                                                              |       | —                                                                             |       | —                                                                                                                                                  |       |
| Total                                                          |       | 680,281                                                                                             |       | N/A                                                                                |       | 484,004                                                                                                                                                 |       |
|                                                                |            |                                                                                                     |            |                                                                                    |            |                                                                                                                                                         |            |  |

 

----

(1)           GB&TBancshares 1997 Stock Incentive Plan

(2)           N/A

 

**ITEM13.****              ****CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

The information setforth under the caption “Certain Transactions” in the definitive ProxyStatement filed in connection with our 2005 Annual Shareholders meeting isincorporated herein by reference.

 

**ITEM14.****              ****PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

The information setforth under the caption “Independent Accountants” in the definitive ProxyStatement filed in connection with our 2005 Annual Shareholders Meeting isincorporated herein by reference.

 

42

----

 

**PARTIV**

 

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

 
| (a)           Contents:                                                                                   |                                                                                                              |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                        |                                                                                                              |
| 1.             Consolidated financial statements:                                               |
|                                                                                                                                                        |                                                                                                              |
| (a)                                                                                                                                                         | G B & T Bancshares, Inc. and  Subsidiaries:                                                                   |
|                                                                                                                                                        |                                                                                                              |
| (i)                                                                                                                                                         | Consolidated Balance Sheets  - December 31, 2004 and 2003                                                         |
|                                                                                                                                                        |                                                                                                              |
| (ii)                                                                                                                                                        | Consolidated  Statements of Income – Three Years Ended December 31, 2004, 2003, and 2002                     |
|                                                                                                                                                        |                                                                                                              |
| (iii)                                                                                                                                                       | Consolidated  Statements of Comprehensive Income – Three Years Ended December 31, 2004,  2003, and 2002      |
|                                                                                                                                                        |                                                                                                              |
| (iv)                                                                                                                                                        | Consolidated  Statements of Stockholders’ Equity – Three Years Ended December 31, 2004,  2003, and 2002 |
|                                                                                                                                                        |                                                                                                              |
| (v)                                                                                                                                                         | Consolidated  Statements of Cash Flows – Three Years Ended December 31, 2004, 2003, and  2002                |
|                                                                                                                                                        |                                                                                                              |
| (vi)                                                                                                                                                        | Notes to  Consolidated Financial Statements                                                                       |
|                                                                                                                                                        |                                                                                                              |
| 2.             Financial statement schedules:                                                   |
|                                                                                                                                                        |
| All schedules are  omitted as the required information is  inapplicable or the  information is presented in the financial statements or related notes. |
|                                                                                                                                                             |                                                                                                                   |  |

 

43

----

 

(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).                                                                                                                                           |

 

44

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

 

----

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

 

45

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**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, theRegistrant has duly caused this Report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|                  | GB&T BANCSHARES, INC. |
|-----------------------|---------------------------|
|                  |                      |
| Dated: March 16, 2005 | By:                       | /s/ Richard A. Hunt |   |
|                  |                      | Richard A. Hunt, President and CEO |

 

 

**POWER OF ATTORNEY**

 

KNOWALL MEN BY THESE PRESENTS, that each person whose signature appears belowconstitutes and appoints Richard A. Hunt and Samuel L. Oliver,****and each of them, as his true and lawful attorneys-in-factand agents, with full powers of substitution and resubstitution for him, in hisname place and stead, in any and all capacities, to sign any and all amendmentsto this Annual Report on Form 10-K, and to file the same, with all exhibitsthereto, and other documents in connection therewith, with the Securities andExchange Commission, granting unto said attorneys-in-fact and agents full powerand authority to do and perform each and every act and thing requisite andnecessary to be done in and about the premises as fully and to all intents andpurposes as he might or could do in person, hereby ratifying and confirming allthat said attorneys-in-fact and agents may lawfully do or cause to be done byvirtue hereof.

 

46

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Pursuant to the requirements of the SecuritiesExchange Act of 1934, as amended, this Report has been signed below by thefollowing persons on behalf of the Registrant, in the capacities and on thedates indicated.

 
| **GB&T  BANCSHARES, INC.** |                                           |                           |
|--------------------------------|------------------------------------------------|--------------------------------|
|                           |                                           |                           |
| By:                            | /s/ Richard A. Hunt                            | DATE  March 16, 2005 |
|                           | Richard A. Hunt, President, Chief              |                           |   |
|                           | Executive Officer  and Director                |                           |   |
|                           | (Principal Executive  Officer)                 |                           |   |
|                           |                                           |                           |   |
| By:                            | /s/ Gregory L. Hamby                           | DATE  March 16, 2005 |
|                           | Gregory L. Hamby, Executive Vice  President    |                           |   |
|                           | and Chief Financial  Officer                   |                           |   |
|                           | (Principal Financial  and Accounting Officer)  |                           |   |
|                           |                                           |                           |   |
| By:                            | /s/ Philip A. Wilheit                          | DATE  March 16, 2005 |
|                           | Philip A. Wilheit, Chairman and  Director      |                           |   |
|                           |                                           |                           |   |
| By:                            | /s/ Samuel L. Oliver                           | DATE  March 16, 2005 |
|                           | Samuel  L. Oliver, Vice Chairman and  Director |                           |   |
|                           |                                           |                           |   |
| By:                            | /s/ Alan A. Wayne                              | DATE  March 16, 2005 |
|                           | Alan A. Wayne, Secretary and Director          |                           |   |
|                           |                                           |                           |   |
| By:                            | /s/ Larry B. Boggs                             | DATE  March 16, 2005 |
|                           | Larry B. Boggs, Director                       |                           |   |
|                           |                                           |                           |   |
| By:                            | /s/ James H. Moore                             | DATE  March 16, 2005 |
|                           | James H. Moore, Director                       |                           |   |
|                           |                                           |                           |   |
| By:                            | /s/ Dr. John W. Darden                         | DATE  March 16, 2005 |
|                           | Dr. John W. Darden, Director                   |                           |   |
|                           |                                           |                           |   |
| By:                            | /s/ William A. Foster, III                     | DATE  March 16, 2005 |
|                           | William A. Foster, III, Director               |                           |   |
|                           |                                           |                           |   |
| By:                            | /s/ Bennie E. Hewett                           | DATE  March 16, 2005 |
|                           | Bennie E. Hewett, Director                     |                           |   |
|                           |                                           |                           |   |
| By:                            | /s/ James L. Lester                            | DATE  March 16, 2005 |
|                           | James L. Lester, Director                      |                           |   |
|                           |                                           |                           |
| By:                            | /s/ T. Allen Maxwell.                          | DATE  March 16, 2005 |
|                           | T. Allen Maxwell, Director                     |                           |   |
|                           |                                           |                           |
| By:                            | /s/ Lowell S. (Casey) Cagle.                   | DATE  March 16, 2005 |
|                           | Lowell S. (Casey) Cagle, Director              |                           |   |

 

47

----

 

**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

** **

**CONSOLIDATED FINANCIAL REPORT**

**DECEMBER 31, 2004**

 

48

----

 

**TABLE OF CONTENTS**

 
| **REPORT  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM** | ** ** |
|--------------------------------------------------------------|------------|
| ** **                                                   | ** ** |
| **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**              | ** ** |

 

49

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**CERTIFIEDPUBLIC ACCOUNTANTS, LLC**

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

 

To the Board of Directors

GB&T Bancshares, Inc.

Gainesville, Georgia

 

 

We haveaudited the accompanying consolidated balance sheets of GB&T Bancshares,Inc. and Subsidiaries as of December 31, 2004 and 2003, and the related consolidatedstatements of income, comprehensive income, stockholders’ equity and cash flowsfor each of the three years in the period ended December 31, 2004. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above present fairly,in all material respects, the financial position of GB&T Bancshares, Inc.and Subsidiaries as of December 31, 2004 and 2003, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2004, in conformity with U.S. generally accepted accountingprinciples.

 

 
|   | /s/ Mauldin  & Jenkins, LLC |   |
|--------|---------------------------------|--------|

 

 

Atlanta, Georgia

March 1, 2005

 

200 GALLERIA PARKWAY S.E., SUITE 1700  •  ATLANTA, GA 30339-5946  •  770-955-8600  •  800-277-0080  •  FAX 770-980-4489  •  www.mjcpa.com

*Members of The American Institute of Cerfitied Public Accountants*•* RSM**International*

 

50

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**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2004 AND 2003**

**(Dollars in thousands)**

 
|                                                                                                                                                                 | ** ** | **2004**      | ** **    | **2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|---------------|----------|------------|
| **Assets**                                                                                                                                                           |       |          |          |     |       |
| Cash and due from banks                                                                                                                                              | ** ** | **$**         | **20,723**    |     | $          | 17,584 |   |
| Interest-bearing deposits in banks                                                                                                                                   | ** ** | **700**       |          | 535      |       |
| Federal funds sold                                                                                                                                                   | ** ** | **93**        |          | 6,534    |       |
| Securities available for sale                                                                                                                                        | ** ** | **190,636**   |          | 132,945  |       |
| Restricted equity securities, at cost                                                                                                                                | ** ** | **7,226**     |          | 4,582    |       |
|                                                                                                                                                                 |       |          |          |     |       |
| Loans, net of unearned income                                                                                                                                        | ** ** | **955,880**   |          | 709,958  |       |
| Less allowance for loan losses                                                                                                                                       | ** ** | **11,061**    |          | 8,726    |       |
| Loans, net                                                                                                                                                           | ** ** | **944,819**   |          | 701,232  |       |
|                                                                                                                                                                 |       |          |          |     |       |
| Premises and equipment, net                                                                                                                                          | ** ** | **31,548**    |          | 25,813   |       |
| Goodwill                                                                                                                                                             | ** ** | **49,127**    |          | 30,111   |       |
| Intangible assets                                                                                                                                                    | ** ** | **5,618**     |          | 2,932    |       |
| Other assets                                                                                                                                                         | ** ** | **23,646**    |          | 22,010   |       |
|                                                                                                                                                                 |       |          |          |     |       |
| **Total assets**                                                                                                                                                     | ** ** | **$**         | **1,274,136** |     | $          | 944,278 |   |
|                                                                                                                                                                 |       |          |          |     |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                        |       |          |          |     |       |
|                                                                                                                                                                 |       |          |          |     |       |
| **Liabilities:**                                                                                                                                                     |       |          |          |     |       |
| Deposits:                                                                                                                                                            |       |          |          |     |       |
| Noninterest-bearing                                                                                                                                                  | ** ** | **$**         | **125,704**   |     | $          | 90,914 |   |
| Interest-bearing                                                                                                                                                     | ** ** | **802,899**   |          | 637,715  |       |
| Total deposits                                                                                                                                                       | ** ** | **928,603**   |          | 728,629  |       |
| Federal funds purchased and securities sold under  repurchase agreements                                                                                             | ** ** | **47,582**    |          | 17,314   |       |
| Other borrowings                                                                                                                                                     | ** ** | **81,926**    |          | 76,003   |       |
| Other liabilities                                                                                                                                                    | ** ** | **11,412**    |          | 10,025   |       |
| Subordinated debt                                                                                                                                                    | ** ** | **29,898**    |          | 15,464   |       |
| Total liabilities                                                                                                                                                    | ** ** | **1,099,421** |          | 847,435  |       |
|                                                                                                                                                                 |       |          |          |     |       |
| **Commitments and contingencies**                                                                                                                                    |       |          |          |     |       |
|                                                                                                                                                                 |       |          |          |     |       |
| **Stockholders’ equity :**                                                                                                                                      |       |          |          |     |       |
| Capital stock, no par value; 20,000,000 shares  authorized, 11,772,352 and 6,794,148 shares issued and outstanding at December 31,  2004 and 2003, respectively | ** ** | **139,207**   |          | 67,983   |       |
| Retained earnings                                                                                                                                                    | ** ** | **35,550**    |          | 28,393   |       |
| Accumulated other comprehensive income (loss)                                                                                                                        | ** ** | **(42**       | **)**         | 467      |       |
|                                                                                                                                                                 |       |          |          |     |       |
| **Total stockholders’ equity**                                                                                                                                  | ** ** | **174,715**   |          | 96,843   |       |
|                                                                                                                                                                 |       |          |          |     |       |
| **Total liabilities and stockholders’ equity**                                                                                                                  | ** ** | **$**         | **1,274,136** |     | $          | 944,278 |   |

 

**See Notes to Consolidated FinancialStatements.**

 

51

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**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF INCOME**

**YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002**

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

 
| ** **                                                                                                    | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| **Interest income:**                                                                                          |       |       |       |     |       |     |       |
| Loans, including fees                                                                                         | ** ** | **$**      | **52,642** |     | $          | 42,176   |       | $ | 34,197 |   |
| Taxable securities                                                                                            | ** ** | **4,706**  |       | 3,753    |       | 3,869    |       |
| Nontaxable securities                                                                                         | ** ** | **736**    |       | 688      |       | 698      |       |
| Federal funds sold                                                                                            | ** ** | **163**    |       | 145      |       | 150      |       |
| Interest-bearing deposits in banks                                                                            | ** ** | **27**     |       | 30       |       | 42       |       |
| Total interest income                                                                                         | ** ** | **58,274** |       | 46,792   |       | 38,956   |       |
|                                                                                                          |       |       |       |     |       |     |       |
| **Interest expense:**                                                                                         |       |       |       |     |       |     |       |
| Deposits                                                                                                      | ** ** | **13,379** |       | 11,471   |       | 11,455   |       |
| Federal funds purchased, securities sold under  repurchase agreements, other borrowings and subordinated debt | ** ** | **4,573**  |       | 3,817    |       | 3,442    |       |
| Total interest expense                                                                                        | ** ** | **17,952** |       | 15,288   |       | 14,897   |       |
|                                                                                                          |       |       |       |     |       |     |       |
| Net interest income                                                                                           | ** ** | **40,322** |       | 31,504   |       | 24,059   |       |
| **Provision for loan losses**                                                                                 | ** ** | **1,406**  |       | 1,406    |       | 845      |       |
| Net interest income after provision for loan losses                                                           | ** ** | **38,916** |       | 30,098   |       | 23,214   |       |
|                                                                                                          |       |       |       |     |       |     |       |
| **Other income:**                                                                                             |       |       |       |     |       |     |       |
| Service charges on deposit accounts                                                                           | ** ** | **6,121**  |       | 4,953    |       | 3,660    |       |
| Other service charges and fees                                                                                | ** ** | **1,449**  |       | 1,144    |       | 1,147    |       |
| Gain on sale of securities                                                                                    | ** ** | **609**    |       | 382      |       | 806      |       |
| Mortgage origination fees                                                                                     | ** ** | **1,988**  |       | 2,440    |       | 1,507    |       |
| Gain on sale of loans                                                                                         | ** ** | —     |       | 20       |       | 72       |       |
| Trust fees                                                                                                    | ** ** | **403**    |       | 279      |       | 221      |       |
| Other operating income                                                                                        | ** ** | **1,208**  |       | 710      |       | 649      |       |
| Total other income                                                                                            | ** ** | **11,778** |       | 9,928    |       | 8,062    |       |
|                                                                                                          |       |       |       |     |       |     |       |
| **Other expenses:**                                                                                           |       |       |       |     |       |     |       |
| Salaries and employee benefits                                                                                | ** ** | **20,893** |       | 17,193   |       | 12,642   |       |
| Occupancy and equipment expenses, net                                                                         | ** ** | **5,099**  |       | 4,352    |       | 3,290    |       |
| Other operating expenses                                                                                      | ** ** | **10,188** |       | 8,148    |       | 5,816    |       |
| Total other expenses                                                                                          | ** ** | **36,180** |       | 29,693   |       | 21,748   |       |
|                                                                                                          |       |       |       |     |       |     |       |
| Income before income taxes                                                                                    | ** ** | **14,514** |       | 10,333   |       | 9,528    |       |
|                                                                                                          |       |       |       |     |       |     |       |
| **Income tax expense**                                                                                        | ** ** | **4,676**  |       | 2,608    |       | 3,019    |       |
|                                                                                                          |       |       |       |     |       |     |       |
| Net income                                                                                                    | ** ** | **$**      | **9,838**  |     | $          | 7,725    |       | $ | 6,509 |   |
|                                                                                                          |       |       |       |     |       |     |       |
| **Basic earnings per share**                                                                                  | ** ** | **$**      | **1.05**   |     | $          | 1.06     |       | $ | 1.08 |   |
|                                                                                                          |       |       |       |     |       |     |       |
| **Diluted earnings per share**                                                                                | ** ** | **$**      | **1.04**   |     | $          | 1.03     |       | $ | 1.06 |   |

 

**See Notesto Consolidated Financial Statements.**

 

52

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**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

**YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002**

**(Dollars in thousands)**

 
| ** **                                                                                                             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                   |       |     |       |     |       |     |       |
| **Net income**                                                                                                         | ** ** | **$**    | **9,838**  |     | $          | 7,725    |       | $ | 6,509 |   |
|                                                                                                                   |       |     |       |     |       |     |       |
| **Other comprehensive income (loss):**                                                                                 |       |     |       |     |       |     |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Unrealized holding gains (losses) arising during  period, net of tax (benefit) of $(40), $(632) and $735, respectively | ** ** | **(131** | **)**      | (1,285   | )          | 1,503    |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Reclassification adjustment for gains realized in  net income, net of taxes of $231, $145 and $306, respectively       | ** ** | **(378** | **)**      | (237     | )          | (500     | )          |
|                                                                                                                   |       |     |       |     |       |     |       |
| **Other comprehensive income (loss)**                                                                                  | ** ** | **(509** | **)**      | (1,522   | )          | 1,003    |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| **Comprehensive income**                                                                                               | ** ** | **$**    | **9,329**  |     | $          | 6,203    |       | $ | 7,512 |   |

 

**See Notes to Consolidated Financial Statements.**

 

53

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**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002**

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

 
| ** **                                                                              | ** ** | ** ** | ** ** | **Common Stock** | ** ** | **Capital** | ** ** | **Capital** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Total  Stockholders’** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|-------------|------------|-------------|------------|--------------|------------|---------------------------------------|------------|-------------------------------|------------|
| ** **                                                                              | ** ** | **Shares** | ** ** | **Par Value**    | ** ** | **Stock**   | ** ** | **Surplus** | ** ** | **Earnings** | ** ** | **Income (Loss)**                     | ** ** | **Equity**                    | ** ** |
|                                                                                    |       |       |       |             |       |        |       |        |       |         |       |                                  |       |                          |       |
| **Balance, December 31, 2001**                                                     |       | 4,739      |       | $                | 23,696     |        | $          | —      |       | $            | 1,894      |                                  | $          | 17,793                        |       | $ | 986 |   | $ | 44,369 |   |
| Net income                                                                              |       | —     |       | —           |       | —      |       | —      |       | 6,509        |       | —                                |       | 6,509                         |       |
| Options exercised, net of repurchases                                                   |       | 55         |       | 111              |       | 312         |       | 18          |       | —       |       | —                                |       | 441                           |       |
| Purchase of HomeTown Bank of Villa Rica                                                 |       | 563        |       | —           |       | 9,571       |       | —      |       | —       |       | —                                |       | 9,571                         |       |
| Tax benefit of nonqualified stock options                                               |       | —     |       | —           |       | 56          |       | —      |       | —       |       | —                                |       | 56                            |       |
| Reclassification of stock to no par stock                                               |       | —     |       | (23,807          | )          | 25,719      |       | (1,912      | )          | —       |       | —                                |       | —                        |       |
| Dividends declared, $.27 per share                                                      |       | —     |       | —           |       | —      |       | —      |       | (1,596       | )          | —                                |       | (1,596                        | )          |
| Other comprehensive income                                                              |       | —     |       | —           |       | —      |       | —      |       | —       |       | 1,003                                 |       | 1,003                         |       |
| **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 |   |

 

**See Notes to Consolidated Financial Statements.**

 

54

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**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002**

**(Dollars in thousands)**

 
| ** **                                                                                          | ** ** | **2004**     | ** ** | **2003**   | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------|------------|------------|------------|----------|------------|
| **OPERATING ACTIVITIES**                                                                            |       |         | ** ** |       |       |     |       |
| Net income                                                                                          | ** ** | **$**        | **9,838**  | ** ** | $          | 7,725    |       | $ | 6,509 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:                  |       |         | ** ** |       |       |     |       |
| Depreciation and amortization, net                                                                  | ** ** | **3,486**    | ** ** | 2,917      |       | 1,645    |       |
| Provision for loan losses                                                                           | ** ** | **1,406**    | ** ** | 1,406      |       | 845      |       |
| Provision for losses on other real estate owned                                                     | ** ** | —       | ** ** | 65         |       | —   |       |
| Gain on sale of securities                                                                          | ** ** | **(609**     | **)**      | (382       | )          | (806     | )          |
| (Gain) loss on sale of other real estate owned                                                      | ** ** | **44**       | ** ** | (37        | )          | 106      |       |
| Gain on sale of loans                                                                               | ** ** | —       | ** ** | (20        | )          | (72      | )          |
| (Gain) loss on disposal of premises and equipment                                                   | ** ** | **(468**     | **)**      | 295        |       | 82       |       |
| Deferred income taxes                                                                               | ** ** | **77**       | ** ** | (582       | )          | 246      |       |
| (Increase) decrease in interest receivable                                                          | ** ** | **(1,317**   | **)**      | 324        |       | 124      |       |
| Increase (decrease) in interest payable                                                             | ** ** | **600**      | ** ** | (561       | )          | (1,421   | )          |
| Increase in cash surrender value of life insurance                                                  | ** ** | **(772**     | **)**      | (505       | )          | (445     | )          |
| Net other operating activities                                                                      | ** ** | **2,793**    | ** ** | (2,391     | )          | 2,598    |       |
| Net cash provided by operating activities                                                           | ** ** | **15,078**   | ** ** | 8,254      |       | 9,411    |       |
|                                                                                                |       |         | ** ** |       |       |     |       |
| **INVESTING ACTIVITIES**                                                                            |       |         | ** ** |       |       |     |       |
| (Increase) decrease in interest-bearing deposits in  banks                                          | ** ** | **(156**     | **)**      | 7,720      |       | (830     | )          |
| Purchases of securities available for sale                                                          | ** ** | **(141,580** | **)**      | (111,808   | )          | (49,825  | )          |
| Purchases of restricted equity securities                                                           | ** ** | **(3,273**   | **)**      | (685       | )          | (471     | )          |
| Proceeds from sale of restricted equity securities                                                  | ** ** | **1,116**    | ** ** | 500        |       | —   |       |
| Proceeds from maturities of securities available for  sale                                          | ** ** | **88,778**   | ** ** | 80,200     |       | 30,891   |       |
| Proceeds from sales of securities available for sale                                                | ** ** | **2,318**    | ** ** | 18,802     |       | 9,630    |       |
| Net (increase) decrease in federal funds sold                                                       | ** ** | **25,640**   | ** ** | 21,615     |       | (17,089  | )          |
| Net increase in loans                                                                               | ** ** | **(99,572**  | **)**      | (80,886    | )          | (33,594  | )          |
| Net cash acquired in business combinations                                                          | ** ** | **4,308**    | ** ** | 5,452      |       | 176      |       |
| Purchase of premises and equipment                                                                  | ** ** | **(6,376**   | **)**      | (4,937     | )          | (2,880   | )          |
| Proceeds from disposals of premises and equipment                                                   | ** ** | **2,534**    | ** ** | 2,198      |       | —   |       |
| Proceeds from sale of other real estate owned                                                       | ** ** | **1,996**    | ** ** | 864        |       | 1,413    |       |
| Net cash used in investing activities                                                               | ** ** | **(124,267** | **)**      | (60,965    | )          | (62,579  | )          |
|                                                                                                |       |         | ** ** |       |       |     |       |
| **FINANCING ACTIVITIES**                                                                            |       |         | ** ** |       |       |     |       |
| Net increase in deposits                                                                            | ** ** | **36,339**   | ** ** | 44,905     |       | 40,162   |       |
| Net increase (decrease) in federal funds purchased and  securities sold under repurchase agreements | ** ** | **30,268**   | ** ** | 5,776      |       | (8,169   | )          |
| Proceeds from other borrowings                                                                      | ** ** | **17,411**   | ** ** | 16,852     |       | 20,883   |       |
| Repayment of other borrowings                                                                       | ** ** | **(16,688**  | **)**      | (13,695    | )          | (13,537  | )          |
| Proceeds from issuance of subordinated debt                                                         | ** ** | **10,310**   | ** ** | —     |       | 15,000   |       |
| Proceeds from exercise of stock options                                                             | ** ** | **1,981**    | ** ** | 380        |       | 441      |       |
| Dividends paid                                                                                      | ** ** | **(2,681**   | **)**      | (2,038     | )          | (1,596   | )          |
| Payment for fractional shares                                                                       | ** ** | **(30**      | **)**      | (9         | )          | —   |       |
| Proceeds from stock offering                                                                        | ** ** | **35,418**   | ** ** | 11         |       | —   |       |
| Net cash provided by financing activities                                                           | ** ** | **112,328**  | ** ** | 52,182     |       | 53,184   |       |
|                                                                                                     |            |              |            |            |            |          |            |  |  |  |

 

55

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| ** **                                         | ** ** | **2004**     | ** ** | **2003**   | ** ** | **2002** | ** ** |
|----------------------------------------------------|------------|--------------|------------|------------|------------|----------|------------|
|                                               |       |         | ** ** |       |       |     |       |
| Net increase (decrease) in cash and due from banks | ** ** | **$**        | **3,139**  | ** ** | $          | (529     | )          | $ | 16 |   |
|                                               |       |         | ** ** |       |       |     |       |
| Cash and due from banks at beginning of year       | ** ** | **17,584**   | ** ** | 18,113     |       | 18,097   |       |
|                                               |       |         | ** ** |       |       |     |       |
| Cash and due from banks at end of year             | ** ** | **$**        | **20,723** | ** ** | $          | 17,584   |       | $ | 18,113 |   |
|                                               |       |         | ** ** |       |       |     |       |
| **SUPPLEMENTAL DISCLOSURES**                       |       |         | ** ** |       |       |     |       |
| Cash paid for:                                     |       |         | ** ** |       |       |     |       |
| Interest                                           | ** ** | **$**        | **17,353** | ** ** | $          | 15,849   |       | $ | 16,318 |   |
|                                               |       |         | ** ** |       |       |     |       |
| Income taxes                                       | ** ** | **$**        | **4,848**  | ** ** | $          | 2,524    |       | $ | 3,150 |   |
|                                               |       |         | ** ** |       |       |     |       |
| **NONCASH TRANSACTIONS**                           |       |         | ** ** |       |       |     |       |
| Other real estate acquired in settlement of loans  | ** ** | **$**        | **1,062**  | ** ** | $          | 2,010    |       | $ | 70 |   |
|                                               |       |         | ** ** |       |       |     |       |
| Financed sales of other real estate owned          | ** ** | **$**        | **—** | ** ** | $          | 84       |       | $ | 161 |   |
|                                               |       |         | ** ** |       |       |     |       |
| **ACQUISITION OF SUBSIDIARIES**                    |       |         | ** ** |       |       |     |       |
| Capital stock issued                               | ** ** | **$**        | **33,213** | ** ** | $          | 31,869   |       | $ | 9,571 |   |
|                                               |       |         | ** ** |       |       |     |       |
| Assets acquired (liabilities assumed)              |       |         | ** ** |       |       |     |       |
| Cash and due from banks, net of cash paid          | ** ** | **$**        | **4,308**  | ** ** | $          | 5,452    |       | $ | 176 |   |
| Interest-bearing deposits in banks                 | ** ** | **9**        | ** ** | 50         |       | 6,288    |       |
| Federal funds sold                                 | ** ** | **19,199**   | ** ** | 2,979      |       | 8,057    |       |
| Securities available for sale                      | ** ** | **8,179**    | ** ** | 16,239     |       | 10,217   |       |
| Restricted equity securities                       | ** ** | **496**      | ** ** | 652        |       | 321      |       |
| Loans, net                                         | ** ** | **146,290**  | ** ** | 88,467     |       | 89,322   |       |
| Premises and equipment                             | ** ** | **4,916**    | ** ** | 5,662      |       | 4,658    |       |
| Goodwill                                           | ** ** | **19,054**   | ** ** | 21,318     |       | 7,822    |       |
| Core deposit intangible                            | ** ** | **3,154**    | ** ** | 2,354      |       | 1,142    |       |
| Other assets                                       | ** ** | **2,108**    | ** ** | 7,540      |       | 1,830    |       |
| Deposits                                           | ** ** | **(164,237** | **)**      | (104,092   | )          | (113,328 | )          |
| Other borrowings                                   | ** ** | **(9,391**   | **)**      | (9,522     | )          | (6,666   | )          |
| Other liabilities                                  | ** ** | **(872**     | **)**      | (5,230     | )          | (268     | )          |
| ** **                                         |       | **$**        | **33,213** | ** ** | $          | 31,869   |       | $ | 9,571 |   |

 

**See Notesto Consolidated Financial Statements.**

 

56

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**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE1.****      ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Nature of Operations**

 

GB&T Bancshares,Inc. (the “Company”) is a multi-bank holding company whose business isconducted by its wholly-owned commercial bank subsidiaries, Gainesville Bank& Trust, United Bank & Trust, Community Trust Bank, HomeTown Bank ofVilla Rica, and First National Bank of the South (the “Banks”).  Gainesville Bank & Trust is located inGainesville, Hall County, Georgia with the main office and four brancheslocated in Gainesville, two branches located in Oakwood, Georgia, one branchlocated in Buford, Georgia, two branches located in Dahlonega, Georgia and onebranch located in Athens, Georgia.  UnitedBank & Trust is located in Rockmart, Polk County, Georgia with a branch inCedartown, Georgia and a branch in Cartersville, Georgia.  Community Trust Bank is located in Hiram,Paulding County, Georgia with two branches in Dallas, Georgia, one branch inMarietta, Georgia, and one branch in Kennesaw, Georgia.  HomeTown Bank of Villa Rica is located inVilla Rica, Carroll County, Georgia with the main office and one branch locatedin Villa Rica and one branch located in Hiram, Georgia.  First National Bank of the South is locatedin Milledgeville, Baldwin County, Georgia with the main office and one branchlocated in Milledgeville and one branch located at Lake Oconee, PutnamCounty.  The Banks provide a full rangeof banking services to individual and corporate customers in their primarymarket areas of Hall, Lumpkin, Clarke, Polk, Bartow, Paulding, Cobb, Carroll,Baldwin, and Putnam Counties, respectively, and the surrounding counties.

 

The consolidatedfinancial statements also include the Company’s wholly-owned subsidiary,Community Loan Company (“CLC”).  CLC wasincorporated in 1995 for the purpose of acquiring and operating existingconsumer finance companies under the direction of the Company.  CLC has operations located in the Georgiacities of Rockmart, Rossville, Gainesville, Woodstock, Cartersville, Dahlonega,Dalton and Rome.

 

**Basis of Presentation and Accounting Estimates**

 

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

 

The preparation of theconsolidated financial statements in accordance with generally accepted accountingprinciples 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.

 

57

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

 

Forpurposes of reporting cash flows, cash and due from banks includescash on hand, cash items in process of collection and amounts due frombanks.  Cash flows from loans, federalfunds sold, federal funds purchased and securities sold under repurchaseagreements and deposits are reported net.

 

The Banks are requiredto maintain reserve balances in cash or on deposit with the Federal ReserveBank, based on a percentage of deposits. The total of those reserve balances was approximately $10,880,000 and$8,002,000 at December 31, 2004 and 2003, respectively.

 

**Securities**

 

Debt securities that managementhas the positive intent and ability to hold to maturity would be classified asheld to maturity and recorded at amortized cost.  Securities not classified as held tomaturity, including equity securities with readily determinable fair values,are classified as available for sale and recorded at fair value with unrealizedgains and losses excluded from earnings and reported in accumulated othercomprehensive income (loss), net of the related deferred tax effect.  Equity securities, including restricted equitysecurities, without a readily determinable fair value are recorded at cost.

 

The amortization ofpremiums and accretion of discounts are recognized in interest income using theinterest method over the life of the securities.  Realized gains and losses on the sale ofsecurities are determined using the specific identification method and areincluded in earnings on the settlement date. Declines in the fair value of held to maturity and available for salesecurities below their cost that are deemed to be other than temporary would bereflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers(1) the length of time and the extent to which the fair value has been lessthan cost, (2) the financial condition and near-term prospects of the issuer,and (3) the intent and ability of the Company to retain its investment in theissuer for a period of time sufficient to allow for any anticipated recovery infair value.

 

**Loans**

 

Loans are reported attheir outstanding principal balances less unearned income, net deferred feesand the allowance for loan losses. Interest income is accrued on the outstanding principal balance.  Loan origination fees, net of certain directloan origination costs, are deferred and recognized as an adjustment of therelated loan yield over the life of the loan using a method which approximatesa level yield.

 

The accrual of intereston loans is discontinued when, in management’s opinion, the borrower may be unableto meet payments 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 loanlosses is established through a provision for loan losses charged toexpense.  Loan losses are charged againstthe allowance when management believes the collectibility of the principal isunlikely.  Subsequent recoveries arecredited to the allowance.

 

58

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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.

 

The allowance consistsof specific, general and unallocated components.  The specific component relates to loans thatare classified as either 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.  The generalcomponent 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 theportfolio.

 

Management believes thatthe unallocated allowance is adequate to provide for probable losses that areinherent in the loan portfolio and that have not been fully provided forthrough the allocated allowance.  Factorsconsidered in determining the adequacy of the unallocated allowance include theeconomic environment, experience level of lenders, concentration in commercialand consumer real estate loans, size of individual loans and the continuedstrong loan 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.

 

A loan is consideredimpaired when it is probable the Company will be unable to collect allprincipal and interest payments due in accordance with the contractual terms ofthe loan agreement.  Impaired loans aremeasured by either the present value of expected future cash flows discountedat the loan’s effective interest rate, the loan’s obtainable market price, orthe fair value of the collateral if the loan is collateral dependent.  The amount of impairment, if any, and anysubsequent changes are included in the allowance for loan losses.

 

**Premises and Equipment**

 

Land is carried atcost.  Premises and equipment are statedat cost less accumulated depreciation computed principally by the straight-linemethod over the estimated useful lives of the assets.  The range of estimated useful lives for premisesand equipment are:

 

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

 

59

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**Foreclosed Assets**

 

Assetsacquired through, or in lieu of, loan foreclosure are held for sale and areinitially recorded at fair value at the date of foreclosure, establishing a newcost basis.  Subsequent to foreclosure,valuations are periodically performed by management and the assets are carriedat the lower of carrying amount or fair value less cost to sell.  Revenue and expenses from operations andchanges in the valuation allowance are included in net expenses from foreclosedassets.  The carrying amount of foreclosedassets at December 31, 2004 and 2003 was $620,000 and $1,868,000, respectively.

 

**Goodwill and Intangible Assets**

 

Goodwillrepresents the excess of cost over the fair value of the net assets purchasedin business combinations.  Goodwill isrequired to be tested annually for impairment, or whenever events occur thatmay indicate that the recoverability of the carrying amount is notprobable.  In the event of an impairment,the amount by which the carrying amount exceeds the fair value would be chargedto earnings.  The Company performed itsannual test of impairment in the third quarter and determined that there was noimpairment of the carrying value as of July 31, 2004.

 

Intangible assetsconsist of core deposit premiums acquired in connection with businesscombinations.  The core deposit premiumis initially recognized based on an independent valuation performed as of theconsummation date.  The core depositpremium is amortized by the straight-line method over the average remaininglife of the acquired customer deposits, or a weighted average life of 10 years.  Amortization periods are reviewed annually inconnection with the annual impairment testing of goodwill.

 

**Income Taxes**

 

Deferredincome tax assets and liabilities are determined using the balance sheetmethod.  Under this method, the netdeferred tax asset or liability is determined based on the tax effects of thetemporary differences between the book and tax bases of the various balancesheet assets and liabilities and gives current recognition to changes in taxrates and laws.

 

**Profit-Sharing Plan**

 

Profit-sharingplan costs are based on a percentage of individual employee’s salary, not toexceed the amount that can be deducted for federal income tax purposes.  The Banks make matching contributions up to100% of the first 6% of each participant’s salary contribution based on theindividual Bank’s performance.

 

**Stock-Based Compensation**

 

Statement of FinancialAccounting Standards (SFAS) No. 123, *Accounting for Stock-Based**Compensation*, encourages all entities toadopt a fair value based method of accounting for employee stock compensationplans, whereby compensation cost is measured at the grant date based on thevalue of the award and is recognized over the service period, which is usuallythe vesting period.  However, it alsoallows an entity to continue to measure compensation cost for those plans usingthe intrinsic value based method of accounting prescribed by AccountingPrinciples Board Opinion No. 25, *Accounting for**Stock Issued to Employees*, whereby compensation cost is theexcess, if any, of the quoted market price of the stock at the grant date (orother measurement date) over the amount an employee must pay to acquire thestock.  The Company has elected tocontinue with the accounting methodology in Opinion No. 25.  Stock options issued under the Company’sstock option plan have no intrinsic value at the grant date, and under OpinionNo. 25 no compensation cost is recognized for them.  The Company’s stock-based employeecompensation plan is described more fully in Note 12.

 

60

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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,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                                                    | ** ** | **(Dollars in thousands)**        | ** ** |
|                                                                                                                                          |       |                              |       |   |   |   |   |
| Net income, as reported                                                                                                                       | ** ** | **$**                             | **9,838**  |   | $ | 7,725 |   | $ | 6,509 |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects | ** ** | **144**                           |       | 109 |   | 84 |   |
| Pro forma net income                                                                                                                          | ** ** | **$**                             | **9,694**  |   | $ | 7,616 |   | $ | 6,425 |   |
| Earnings per share:                                                                                                                           | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic - as reported                                                                                                                           | ** ** | **$**                             | **1.05**   |   | $ | 1.06 |   | $ | 1.08 |   |
| Basic - pro forma                                                                                                                             | ** ** | **$**                             | **1.04**   |   | $ | 1.04 |   | $ | 1.06 |   |
| Diluted - as reported                                                                                                                         | ** ** | **$**                             | **1.04**   |   | $ | 1.03 |   | $ | 1.06 |   |
| Diluted - pro forma                                                                                                                           | ** ** | **$**                             | **1.02**   |   | $ | 1.02 |   | $ | 1.05 |   |

 

**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.

 

Optionsto purchase 1,000 shares of common stock at a price of $24.15 per share wereoutstanding during the year but were not included in the computation of dilutedEPS because the options’ exercise price was greater than the average marketprice of the common shares. The options were still outstanding as of December 31,2004.

 

**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 on availablefor sale securities, are reported as a separate component of the equity section ofthe balance sheet, such items, along with net income, are components ofcomprehensive income.

 

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**Recent Accounting Standards**

 

In December 2004,the Financial Accounting Standards Board (“FASB”) published FASB Statement No.123 (revised 2004), Share-Based Payment (“FAS 123(R)” or the “Statement”). FAS123(R) requires that the compensation cost relating to share-based paymenttransactions, including grants of employee stock options, be recognized infinancial statements. That cost will be measured based on the fair value of theequity or liability instruments issued. FAS 123(R) covers a wide range ofshare-based compensation arrangements including stock options, restricted shareplans, performance-based awards, share appreciation rights, and employee sharepurchase plans. FAS 123(R) is a replacement of FASB Statement No. 123,Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and its related interpretiveguidance.

 

The effect of theStatement will be to require entities to measure the cost of employee servicesreceived in exchange for stock options based on the grant-date fair value ofthe award, and to recognize the cost over the period the employee is requiredto provide services for the award. FAS 123(R) permits entities to use anyoption-pricing model that meets the fair value objective in the Statement.

 

The Company will berequired to apply FAS 123(R) as of the beginning of its first interim periodthat begins after June 15, 2005, which will be the quarter ending September 30,2005.

 

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

 

The Company has not yetcompleted its study of the transition methods or made any decisions about howit will adopt FAS 123(R).   The impact ofthis Statement on the Company in fiscal 2005 and beyond will depend uponvarious factors, among them being our future compensation strategy. The proforma compensation costs presented in the table above and in prior filings forthe Company have been calculated using a Black-Scholes option pricing model andmay not be indicative of amounts which should be expected in future years. Nodecisions have been made as to which option-pricing model is most appropriatefor the Company for future awards.

 

In December 2003the American Institute of Certified Public Accountants issued Statement ofPosition (“SOP”) 03-3, Accounting for Certain Loans or Debt Securities Acquiredin a Transfer.  This SOP

 

62

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addresses accounting fordifferences between contractual cash flows and cash flows expected to becollected from an investor’s initial investment in loans or debt securities(loans) acquired in a transfer if those differences are attributable, at least inpart, to credit quality. It includes such loans acquired in purchase businesscombinations and applies to all nongovernmental entities, includingnot-for-profit organizations. This SOP does not apply to loans originated bythe entity. This SOP limits the yield that may be accreted (accretable yield)to the excess of the investor’s estimate of undiscounted expected principal,interest, and other cash flows (cash flows expected at acquisition to becollected) over the investor’s initial investment in the loan. This SOPrequires that the excess of contractual cash flows over cash flows expected tobe collected (nonaccretable difference) not be recognized as an adjustment ofyield, loss accrual, or valuation allowance. This SOP prohibits investors fromdisplaying accretable yield and nonaccretable difference in the balance sheet.Subsequent increases in cash flows expected to be collected generally should berecognized prospectively through adjustment of the loan’s yield over itsremaining life. Decreases in cash flows expected to be collected should berecognized as impairment.

 

This SOP prohibits “carryingover” or creation of valuation allowances in the initial accounting of all loansacquired in a transfer that are within the scope of this SOP. The prohibitionof the valuation allowance carryover applies to the purchase of an individualloan, a pool of loans, a group of loans, and loans acquired in a purchasebusiness combination.

 

This SOP is effectivefor loans acquired in fiscal years beginning after December 15, 2004.  The changes required by this SOP are notexpected to have a material impact on results of operations, financialposition, or liquidity of the Company.

 

63

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**NOTE2.****      ****BUSINESS COMBINATIONS**

 

On October 1, 2004,the Company signed a definitive agreement to acquire FNBG Bancshares, Inc., theparent company of First National Bank of Gwinnett, Duluth, Gwinnett County,Georgia.  The terms of the agreement callfor the exchange of 1.38 shares of common stock of the Company, $30 in cash ora combination of cash and common stock of the Company for each outstandingshare of FNBG Bancshares stock, subject to an overall cash limit ofapproximately $8.7 million.  The transactionclosed on March 1, 2005 and has been accounted for as a purchase.  The results of operations for the years endedDecember 31, 2004, 2003 and 2002 do not include the results of operationsof FNBG Bancshares.

 

On August 3, 2004,the Company completed the acquisition of Southern Heritage Bancorp, Inc., theparent company of Southern Heritage Bank, in Flowery Branch, Hall County,Georgia.  Southern Heritage Bancorpmerged with and into GB&T Bancshares, Inc., and Southern Heritage Bankmerged with and into, and became a division of, the Company’s lead bank,Gainesville Bank & Trust.  Thecompany issued 1,141,628 shares of its capital stock and approximately $869,172in cash in exchange for all of the issued and outstanding common shares ofSouthern Heritage Bancorp, Inc.  Theacquisition was accounted for as a purchase resulting in goodwill ofapproximately $18,326,000.  SouthernHeritage Bank’s results of operations from August 3, 2004 are included inthe consolidated results of operations of GB&T Bancshares, Inc. for theyear ended December 31, 2004.  Theresults of operations for the years ended December 31, 2003 and December 31,2002 do not include the results of operations for Southern Heritage Bank.

 

On August 19, 2004,the Company completed the acquisition of Lumpkin County Bank (“LCB”) inDahlonega, Lumpkin County, Georgia.  LCBmerged with and into, and became a division of, the Company’s lead bank,Gainesville Bank & Trust.  TheCompany issued 262,682 shares of its capital stock in exchange for all of theissued and outstanding common shares of LCB. The acquisition was accounted for as a purchase resulting in goodwill ofapproximately $728,000.  LCB’s results ofoperations from August 19, 2004 are included in the consolidated resultsof operations of GB&T Bancshares, Inc. for the year ended December 31,2004.  The results of operations for theyears ended December 31, 2003 and December 31, 2002 do not includethe results of operations for Lumpkin County Bank.

 

Unaudited pro formaconsolidated results of operations for years ended December 31, 2004 and2003 as though the companies had combined as of January 1, 2004 and 2003are as follows:

 
| ** **                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
|                       |       |     |       |     |       |
| Net interest income        |       | $        | 44,747     |     | $          | 39,024 |   |
| Net income                 |       | 8,839    |       | 6,665    |       |
| Basic earnings per share   |       | 0.87     |       | 0.77     |       |
| Diluted earnings per share |       | 0.86     |       | 0.75     |       |
|                            |            |          |            |          |            |  |  |

 

64

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**NOTE3.****      ****SECURITIES**

 

The amortized cost and fair value of securitiesavailable for sale are summarized as follows:

 
| ** **                                | ** ** | **Amortized  Cost**        | ** **  | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|-------------------------------------------|------------|----------------------------|-------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| ** **                                | ** ** | **(Dollars in thousands)** | ** **  |
| **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** | ** ** |
| ** **                                | ** ** | ** **                 | ** **  | ** **                   | ** ** | ** **                    | ** ** | ** **      | ** ** |
| December 31, 2003:                   |       |                       |        |                         |       |                          |       |            |       |
| U.S. Government and agency securities     |       | $                          | 42,497      |                         | $          | 310                           |       | $               | (168       | ) | $ | 42,639 |   |
| State and municipal securities            |       | 16,792                     |        | 795                          |       | (11                           | )          | 17,576          |       |
| Mortgage-backed securities                |       | 70,083                     |        | 422                          |       | (633                          | )          | 69,872          |       |
| Equity securities                         |       | 1,642                      |        | **—**                   |       | **—**                    |       | 1,642           |       |
| Corporate bonds                           |       | 1,215                      |        | 1                            |       | **—**                    |       | 1,216           |       |
|                                      |       | $                          | 132,229     |                         | $          | 1,528                         |       | $               | (812       | ) | $ | 132,945 |   |

 

The amortized cost andfair value of debt securities available for sale as of December 31, 2004by 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        |       | $                          | 3,984      |            | $          | 4,092 |   |
| Due from one to five years |       | 58,027                     |       | 58,044          |       |
| Due from five to ten years |       | 13,592                     |       | 13,900          |       |
| Due after ten years        |       | 1,172                      |       | 1,223           |       |
| Mortgage-backed securities |       | 111,892                    |       | 111,344         |       |
|                       |       | $                          | 188,667    |            | $          | 188,603 |   |

 

Securities with anapproximate carrying value of $101,229,000 and $65,501,000 at December 31,2004 and 2003, respectively, were pledged to secure public deposits and forother purposes required or permitted by law.

 

65

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

 
| ** **         | ** ** | **Years Ended December 31,** | ** ** |
|--------------------|------------|-----------------------------------|------------|
| ** **         | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **         | ** ** | **(Dollars in thousands)**        | ** ** |
|               |       |                              |       |   |   |   |   |
| Gross gains        | ** ** | **$**                             | **638**    | ** ** | $ | 460 |   | $ | 816 |   |
| Gross losses       | ** ** | **(29**                           | **)**      | (78 | ) | (10 | ) |
| Net realized gains | ** ** | **$**                             | **609**    | ** ** | $ | 382 |   | $ | 806 |   |

 

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, 2004 and 2003.

 
| ** **                            | ** ** | **Less Than 12 Months** | ** ** | **12 Months or More**  | ** ** | **Total**       | ** ** |
|---------------------------------------|------------|-------------------------|------------|------------------------|------------|-----------------|------------|
| ** **                            | ** ** | **Fair  Value**         | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized   Losses** | ** ** |
| **December 31, 2004**            |       |                    |       |                   |       |            |       |   |   |   |   |   |   |
| **Description of Securities:**        |       |                    |       |                   |       |            |       |   |   |   |   |   |   |
| 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 |   |
|                                  |       |                    |       |                   |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **December 31, 2003**            | ** ** | ** **              | ** ** | ** **             | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Description of Securities:**        | ** ** | ** **              | ** ** | ** **             | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Government and agency securities |       | $                       | 14,230     |                   | $          | 168             |       | $ | — |   | $ | — |   | $ | 14,230 |   | $ | 168 |   |
| State and municipal securities        |       | 1,015                   |       | 11                     |       | —          |       | — |   | 1,015 |   | 11 |   |
| Mortgage-backed securities            |       | 46,412                  |       | 633                    |       | —          |       | — |   | 46,412 |   | 633 |   |
| Total temporarily impaired securities |       | $                       | 61,657     |                   | $          | 812             |       | $ | — |   | $ | — |   | $ | 61,657 |   | $ | 812 |   |

 

At December 31,2004, the unrealized losses are the result of the current yieldenvironment.  The depreciation within theportfolio is 1.17% 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.

 

66

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**NOTE4.****      ****LOANS**

 

The composition of loans is summarized asfollows:

 
| ** **                             | ** ** | **December 31,**      | ** **  |
|----------------------------------------|------------|----------------------------|-------------|
| ** **                             | ** ** | **2004**                   | ** **  | **2003** | ** ** |
| ** **                             | ** ** | **(Dollars in thousands)** | ** **  |
|                                   |       |                       | ** **  |   |   |
| Commercial, financial and agricultural | ** ** | **$**                      | **74,437**  | ** ** | $ | 50,997 |   |
| Real estate – construction        | ** ** | **294,817**                | ** **  | 185,397 |   |
| Real estate – mortgage            | ** ** | **545,721**                | ** **  | 440,496 |   |
| Consumer                               | ** ** | **37,248**                 | ** **  | 30,088 |   |
| Other                                  | ** ** | **3,764**                  | ** **  | 3,697 |   |
| ** **                             |       | **955,987**                |        | 710,675 | ** ** |
| Unearned income and deferred loan fees | ** ** | **(107**                   | **)**       | (717 | ) |
| Allowance for loan losses              | ** ** | **(11,061**                | **)**       | (8,726 | ) |
| Loans, net                             | ** ** | **$**                      | **944,819** | ** ** | $ | 701,232 |   |

 

Changes in the allowancefor loan losses are as follows:

 
| ** **                                          | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                          | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**        | ** ** |
|                                                |       |                              |       |   |   |   |   |
| Balance, beginning of year                          | ** ** | **$**                             | **8,726**  |   | $ | 7,538 |   | $ | 5,522 |   |
| Provision for loan losses                           | ** ** | **1,406**                         |       | 1,406 |   | 845 |   |
| Loans charged off                                   | ** ** | **(1,628**                        | **)**      | (1,466 | ) | (1,094 | ) |
| Recoveries of loans previously charged off          | ** ** | **482**                           |       | 384 |   | 424 |   |
| Allowance for loan losses related to acquired loans | ** ** | **2,075**                         |       | 864 |   | 1,841 |   |
| Balance, end of year                                | ** ** | **$**                             | **11,061** |   | $ | 8,726 |   | $ | 7,538 |   |

 

67

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The following is a summary of informationpertaining to impaired loans:

 
| ** **                                                      | ** ** | **As of and for the Years Ended  December 31,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2004**                                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                      | ** ** | **(Dollars in thousands)**                           | ** ** |
|                                                            |       |                                                 |       |   |   |   |   |
| Impaired loans without a valuation allowance                    | ** ** | **$**                                                | **—** |   | $ | 3 |   | $ | — |   |
| Impaired loans with a valuation allowance                       | ** ** | **10,092**                                           |       | 3,392 |   | 6,028 |   |
| Total impaired loans                                            | ** ** | **$**                                                | **10,092** |   | $ | 3,395 |   | $ | 6,028 |   |
| Valuation allowance related to impaired loans                   | ** ** | **$**                                                | **1,721**  |   | $ | 608 |   | $ | 1,017 |   |
| Average investment in impaired loans                            | ** ** | **$**                                                | **4,647**  |   | $ | 3,925 |   | $ | 5,142 |   |
| Interest income recognized on impaired loans                    | ** ** | **$**                                                | **180**    |   | $ | 100 |   | $ | 131 |   |
| Nonaccrual loans                                                | ** ** | **$**                                                | **10,059** |   | $ | 3,333 |   | $ | 5,506 |   |
| Loans past due ninety days or more and still  accruing interest | ** ** | **$**                                                | **328**    |   | $ | 509 |   | $ | 1,814 |   |

 

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, 2004 are as follows:

 
| ** **                 | ** ** | **(Dollars in  thousands)** | ** ** |
|----------------------------|------------|-----------------------------|------------|
|                       |       |                        |       |
| Balance, beginning of year | ** ** | $                           | 19,436     | ** ** |
| Advances                   |       | 22,767                      |       |
| Repayments                 |       | (19,191                     | )          |
| Change in directors        |       | (2,335                      | )          |
| Balance, end of year       |       | **$**                       | 20,677     |   |

 

**NOTE5.****      ****PREMISES AND EQUIPMENT**

 

Premises and equipment are summarized asfollows:

 
| ** **               | ** ** | **December 31,**      | ** ** |
|--------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **2004**                   | ** ** | **2003** | ** ** |
| ** **               | ** ** | **(Dollars in thousands)** | ** ** |
|                     |       |                       |       |   |   |
| Land                     | ** ** | **$**                      | **4,956**  |   | $ | 4,910 |   |
| Land improvements        | ** ** | **763**                    |       | 638 |   |
| Buildings                | ** ** | **20,488**                 |       | 15,385 |   |
| Leasehold improvements   | ** ** | **2,848**                  |       | 2,683 |   |
| Furniture and equipment  | ** ** | **14,955**                 |       | 12,892 |   |
| Automobiles              | ** ** | **370**                    |       | 323 |   |
| Construction in progress | ** ** | **2,619**                  |       | 1,265 |   |
| ** **               |       | **46,999**                 |       | 38,096 |   |
| Accumulated depreciation | ** ** | **(15,451**                | **)**      | (12,283 | ) |
| ** **               |       | **$**                      | **31,548** |   | $ | 25,813 |   |

 

68

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Depreciation expense was$2,268,000, $1,705,000 and $1,489,000 for the years ended December 31,2004, 2003 and 2002, respectively.

 

The Gainesville Bank &Trust main office banking facility is owned by a partnership that is 50% ownedby Gainesville Bank & Trust and 50% owned by a related party.

 

At December 31,2004, the Company’s 50% interest in the Gainesville Bank & Trust mainoffice banking facility with a total carrying value (including land) of$1,775,000 was pledged to a subsidiary bank to secure a $473,282 borrowing ofthe related party.

 

At December 31, 2004 and 2003, construction in process includedcomputer equipment purchased but not yet in service. In addition, the Companypurchased property in May 2003 to build an operations center.  The cost of the land, including landdevelopment costs was approximately $2,314,000. In December 2004, the Company sold 4 of the surrounding lots andrecorded a gain after tax of approximately $232,000.  The estimated cost of the building, includingfurniture, fixtures and equipment was approximately $2,736,000.  The building was completed in the firstquarter of 2005.

 

**Leases**

 

The Company leases theGainesville Bank & Trust main office banking facility under a noncancelableoperating lease agreement from 400 Church Street Properties, a partnership thatis 50% owned by Gainesville Bank & Trust and 50% owned by a related party.  The lease had an initial lease term of 10years with four five-year renewal options. 

 

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

 

Rental expense under alloperating leases amounted to $707,000, $688,000 and $697,000 for the yearsended December 31, 2004, 2003 and 2002, respectively.

 

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

 
| ** ** | ** ** | **(Dollars in  thousands)** | ** ** |
|------------|------------|-----------------------------|------------|
|       |       |                        |       |
| 2005       |       | $                           | 854,915    |   |
| 2006       |       | 754,746                     |       |
| 2007       |       | 707,467                     |       |
| 2008       |       | 591,641                     |       |
| 2009       |       | 578,224                     |       |
| Thereafter |       | 706,758                     |       |
|       |       | $                           | 4,193,751  |   |

 

69

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**NOTE6.****      ****INTANGIBLE ASSETS**

 

Following is a summary of information related toacquired intangible assets:

 
| ** **                                                           | ** ** | **December 31, 2004**  | ** ** | **December 31, 2003**    | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                                           | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                                                           | ** ** | **(Dollars in thousands)**  | ** ** |
| Amortized intangible assets

   Core deposit premiums |       | $                           | 6,245      |                          | $          | 627 |   | $ | 3091 |   | $ | 159 |   |
|                                                                      |            |                             |            |                               |            |  |  |  |  |  |  |  |  |

 

The aggregate amortization expense was $468,000,$151,000 and $8,000 for the years ended December 31, 2004, 2003 and 2002,respectively.

 

The estimated amortization expense for each ofthe next five years is as follows:

 
| ** ** | ** ** | **(Dollars in  thousands)** | ** ** |
|------------|------------|-----------------------------|------------|
|       |       |                        |       |
| 2005       |       | $                           | 649        |   |
| 2006       |       | 649                         |       |
| 2007       |       | 649                         |       |
| 2008       |       | 649                         |       |
| 2009       |       | 649                         |       |
|            |            |                             |            |  |

 

Changes in the carrying amount of goodwill areas follows:

 
| ** **                      | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------------|------------|------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|                            |       |                                     |       |   |   |   |   |
| Beginning balance               | ** ** | **$**                                    | **30,111** |   | $ | 8,388 |   | $ | 566 |   |
| Goodwill acquired               | ** ** | **19,054**                               |       | 21,318 |   | 7,822 |   |
| Adjustment to previous goodwill | ** ** | **(38**                                  | **)**      | 405 |   | — |   |
| Ending balance                  | ** ** | **$**                                    | **49,127** |   | $ | 30,111 |   | $ | 8,388 |   |

 

70

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

 

Theaggregate amount of time deposits in denominations of $100,000 or more at December 31,2004 and 2003 was approximately $163,496,000 and $122,453,000respectively.  The scheduled maturitiesof time deposits at December 31, 2004 are as follows:

 
| ** ** | ** ** | **(Dollars in  thousands)** | ** ** |
|------------|------------|-----------------------------|------------|
|       |       |                        |       |
| 2005       |       | $                           | 324,700    |   |
| 2006       |       | 39,633                      |       |
| 2007       |       | 28,469                      |       |
| 2008       |       | 25,500                      |       |
| 2009       |       | 17,518                      |       |
|       |       | $                           | 435,820    |   |

 

The Company had brokeredtime deposits at December 31, 2004 and 2003 of $2,500,000 and $7,921,000,respectively.

 

At December 31,2004 and 2003, overdraft demand deposits reclassified to loans totaled$1,493,000 and $1,006,000, 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, 2004 and 2003 were $32,733,000 and $13,315,000, respectively.

 

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

 

Other borrowings consist of the following:

 
| ** **                                                                                                                                                                                                                                  | ** ** | **December 31,**      | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                  | ** ** | **2004**                   | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                                                                                                  | ** ** | **(Dollars in thousands)** | ** ** |
| FHLB advances, interest  payable at fixed rates ranging from 1.95%** **to 6.10%;  advances mature at various maturity dates from October 13, 2005 through September 23,  2013.                                               | ** ** | **$**                      | **69,992** |   | $ | 66,703 |   |
| FHLB advances, interest payable at variable rates  which are set daily, based on the overnight funds market; advances mature at  various advances mature at various maturity dates from June 27, 2005  through December 20, 2005. | ** ** | **11,000**                 |       | 9,000 |   |
| Treasury, tax and loan note option account due on  demand, bearing interest equal to the 90 day Treasury bill rate.                                                                                                                         | ** ** | **934**                    |       | 300 |   |
|                                                                                                                                                                                                                                        |       | **$**                      | **81,926** |   | $ | 76,003 |   |

 

71

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Contractual maturitiesof other borrowings as of December 31, 2004 are as follows:

 
| ** ** | ** ** | **(Dollars in  thousands)** | ** ** |
|------------|------------|-----------------------------|------------|
|       |       |                        |       |
| 2005       |       | $                           | 24,056     |   |
| 2006       |       | 5,127                       |       |
| 2007       |       | 15,627                      |       |
| 2008       |       | 7,037                       |       |
| 2009       |       | 15,106                      |       |
| Thereafter |       | 14,973                      |       |
|       |       | $                           | 81,926     |   |

 

The advances from theFederal Home Loan Bank are collateralized by blanket floating liens onqualifying first mortgage, home equity and commercial loans of approximately$102,199,000, available for sale securities of approximately $17,275,000 andFederal Home Loan Bank stock of $5,899,000.

 

The Company andsubsidiaries have available unused lines of credit with various financialinstitutions totaling approximately $172,427,000 at December 31,2004.  There were no other advancesoutstanding at December 31, 2004.

 

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

 

On October 30, 2002, the Company formed awholly-owned grantor trust to issue $15,464,000 in cumulative trust preferredsecurities in a private placement offering. The grantor trust has invested the proceeds of the trust preferredsecurities in subordinated debentures of the Company.  The trust preferred securities can beredeemed, in whole or in part, from time to time, prior to maturity (October 30,2032) at the option of the Company on or after October 30, 2007.  The sole assets of the grantor trust are theSubordinated 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 after October 30,2007, at a redemption price equal to 100% of the principal amount to beredeemed plus any accrued and unpaid interest. Both financial instruments bear an identical annual rate of interest of5.375% and 4.54% at December 31, 2004 and 2003, respectively.

 

On July 22, 2004, theCompany formed a second wholly-owned grantor trust to issue $10,310,000 incumulative trust preferred securities in a private placement offering.  The grantor trust has invested the proceeds ofthe trust preferred securities in subordinated debentures of the Company.   The trust preferred securities can beredeemed, in whole or in part, from time to time, prior to maturity (July 30,2034) at the option of the Company on or after September 30, 2009.  The sole assets of the grantor trust are thesubordinated debentures of the Company. Both financial instruments bear an identical annual rate of interest of4.625% at December 31, 2004.

 

In addition, inconnection with the acquisition of Southern Heritage Bancorp, Inc., theCompany assumed $4,124,000 in aggregate principal amount of trust preferredsecurities which have substantially the same terms as our other trust preferredsecurities except that they may be redeemed on or after June 26, 2008. Theannual rate of interest on the trust preferred securities and on the debentureswas 5.55% at December 31, 2004.

 

72

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The Debentures have the same variable interest rate asthe trust preferred securities.  TheCompany has the right to defer interest payments on the Debentures up to twentyconsecutive quarterly periods (five years), so long as the Company is not indefault under the subordinated debentures. Interest compounds during the deferral period.  No deferral period may extend beyond thematurity date.  Distributions on thetrust preferred securities are paid quarterly. Interest on 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 1 capitaltreatment provides the Company with a more cost-effective means of obtainingcapital for bank regulatory purposes than if the Company were to issuepreferred stock.

 

 As of December 30, 2004, 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 to certain minimum age and service requirements. The  contributions expensed were $493,000, $391,000 and $283,000 for the years  ended December 31, 2004, 2003 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **Deferred  Compensation Plans**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| The  Company has various deferred compensation plans providing for death and  retirement benefits for certain officers and directors. The estimated amounts  to be paid under the compensation plans have been partially provided through  the purchase of life insurance policies on certain officers and directors.  Accrued deferred compensation of $5,851,000 and $5,027,000 is included in  other liabilities as of December 31, 2004 and 2003, respectively. Cash  surrender values of $11,208,000 and $10,436,000 on the insurance policies is  included in other assets at December 31, 2004 and 2003, respectively. |

 

73

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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 grosspay or $3,500 for employees.  The Companymatches payroll deductions and direct contributions at a rate of 50% of theamount contributed.  The purchase priceof the shares of capital stock is based on the current market price.  All administrative costs are borne by theCompany.  For the years ended December 31,2004 and 2003, 28,109 and 16,487 shares were purchased under the plan.  Contributions expensed for the years ended December 31,2004 and 2003 were $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 cash dividend payment date.  Cash dividends and optional cash paymentswill be used to purchase capital stock of the Company in the open market, fromnewly-issued shares, from shares held in treasury, in negotiated transactions,or in any combination of the foregoing. The purchase price of the shares of capital stock is based on theaverage market price.  All administrativecosts are borne by the Company.  For theyears ended December 31, 2004 and 2003, 27,484 and 28,301 shares werepurchased under the plan, respectively.

 

74

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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.  Bothincentive stock options and non-qualified stock options may be granted underthe Plan.  Option prices reflect the fairmarket value of the Company’s capital stock on the dates the options aregranted.  The options may be exercisedover a period of ten years in accordance with vesting schedules determined bythe Board of Directors.

 

Other pertinentinformation related to the options is as follows:

 
| ** **                                                      | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                      | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                      | ** ** | **Shares**                        | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Outstanding at beginning of year                                |       | **528,836**                       |       | **$** | **9.78** |   | 558,287 |   | $ | 9.30 |   | 545,795 |   | $ | 8.65 |   |
| Granted (1)                                                     | ** ** | **399,402**                       | ** ** | **9.97** |   | 33,805 |   | 17.64 |   | 72,026 |   | 13.30 |   |
| Exercised                                                       | ** ** | **(224,331**                      | **)**      | **8.84** |   | (51,130 | ) | 7.69 |   | (51,979 | ) | 7.62 |   |
| Terminated                                                      | ** ** | **(23,626**                       | **)**      | **12.10** |   | (12,126 | ) | 12.52 |   | (7,555 | ) | 12.52 |   |
| Outstanding at end of year                                      | ** ** | **680,281**                       | ** ** | **$** | **10.14** |   | 528,836 |   | $ | 9.78 |   | 558,287 |   | $ | 9.30 |   |
|                                                            | ** ** | ** **                        | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |
| Options exercisable at year-end                                 | ** ** | **518,095**                       | ** ** | **$** | **8.86** |   | 337,231 |   | $ | 8.79 |   | 343,031 |   | $ | 8.39 |   |
| Weighted-average fair value of options granted  during the year | ** ** | ** **                        |       | **$** | **8.74** |   |   |   | $ | 6.96 |   |   |   | $ | 3.96 |   |

 

----

(1) Included inoptions granted for the year ended December 31, 2004, were 355,652 shareswith a weighted average exercise price of $8.58 which were assumed under theplans for Southern Heritage Bancorp, Inc. and Lumpkin County Bank.

 

Information pertainingto options outstanding at December 31, 2004 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                 |       | 39,662                  |       | 4.4 years                                            |       | $ | 6.61 |   | 39,662 |   | $ | 6.61 |   |
| $8.03 - $12.00                |       | 510,391                 |       | 5.42 years                                           |       | 8.66 |   | 440,143 |   | 8.57 |   |
| $12.40 - $18.40               |       | 90,853                  |       | 5.76 years                                           |       | 14.84 |   | 38,041 |   | 14.40 |   |
| $18.84 - $24.15               |       | 39,375                  |       | 9.66 years                                           |       | 21.95 |   | 250 |   | 18.84 |   |
| Total                         |       | 680,281                 |       | 5.65 years                                           |       | 10.14 |   | 518,095 |   | 8.86 |   |
|                               |            |                         |            |                                                      |            |  |  |  |  |  |  |  |  |

 

The fair value of each optiongrant is estimated on the date of grant using the Black-Scholes option-pricingmodel with the following weighted-average assumptions:

 
| ** **              | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------|------------|-----------------------------------|------------|
| ** **              | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **              | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Dividend yield          | ** ** | **1.36**                          | **%**      | 1.60 | % | $ | 1.83 | % |
| Expected life           | ** ** | **10 years**                      | ** ** | 10 years |   | 10 years |   |
| Expected volatility     | ** ** | **28.41**                         | **%**      | 32.42 | % | 23.07 | % |
| Risk-free interest rate | ** ** | **4.66**                          | **%**      | 3.95 | % | 3.88 | % |
|                         |            |                                   |            |  |  |  |  |  |

 

75

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

 

Thecomponents of income tax expense are as follows:

 
| ** **                    | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|
| ** **                    | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                    | ** ** | **(Dollars in thousands)**        | ** ** |
| ** **                    | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current                       | ** ** | **$**                             | **4,599**  |   | $ | 3,190 |   | $ | 2,784 |   |
| Deferred                      | ** ** | **77**                            |       | (246 | ) | 282 |   |
| Change in valuation allowance | ** ** | **—**                        |       | (336 | ) | (36 | ) |
| ** **                    | ** ** | **$**                             | **4,676**  | ** ** | $ | 2,608 |   | $ | 3,030 |   |

 

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,** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|
| ** **                              | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)**        | ** ** |
|                                    |       |                              |       |   |   |   |   |
| Tax provision at statutory federal rate | ** ** | **$**                             | **5,080**  | ** ** | $ | 3,513 |   | $ | 3,249 |   |
| Tax-exempt interest                     | ** ** | **(265**                          | **)**      | (234 | ) | (237 | ) |
| Disallowed interest                     | ** ** | **16**                            | ** ** | 17 |   | 25 |   |
| Life insurance                          | ** ** | **(153**                          | **)**      | (93 | ) | (82 | ) |
| State income taxes, net of credits      | ** ** | **48**                            | ** ** | (149 | ) | 169 |   |
| Change in valuation allowance           | ** ** | **—**                        | ** ** | (336 | ) | (36 | ) |
| Other                                   | ** ** | **(50**                           | **)**      | (110 | ) | (58 | ) |
| Income tax expense                      | ** ** | **$**                             | **4,676**  | ** ** | $ | 2,608 |   | $ | 3,030 |   |

 

The components ofdeferred income taxes are as follows:

 
| ** **                          | ** ** | **2004**                   | ** ** | **2003** | ** ** |
|-------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
| Deferred tax assets:                |       |                       |       |     |       |
| Loan loss reserves                  | ** ** | **$**                      | **3,536**  |     | $          | 2,754 |   |
| Other real estate write-down        | ** ** | **122**                    |       | 24       |       |
| Deferred compensation               | ** ** | **2,409**                  |       | 2,210    |       |
| Deferred loan fees                  | ** ** | **193**                    |       | 174      |       |
| CLC bad debt reserve                | ** ** | **80**                     |       | 124      |       |
| Net operating loss carryforward     | ** ** | **727**                    |       | —   |       |
| Securities available for sale       | ** ** | **49**                     |       | —   |       |
| Other                               | ** ** | **15**                     |       | —   |       |
| ** **                          |       | **7,131**                  |       | 5,286    |       |
| Deferred tax liabilities:           |       |                       |       |     |       |
| Depreciation                        | ** ** | **1,449**                  |       | 1,100    |       |
| Accretion of discount on securities | ** ** | **20**                     |       | 9        |       |
| Purchase adjustment                 | ** ** | **2,298**                  |       | 1,072    |       |
| Securities available for sale       | ** ** | **—**                 |       | 248      |       |
| ** **                          |       | **3,767**                  |       | 2,429    |       |
|                                |       |                       |       |     |       |
| Net deferred tax assets             | ** ** | **$**                      | **3,364**  |     | $          | 2,857 |   |

 

76

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For the year ended December 31,2004, net deferred tax assets increased by $287,000 as a result of theacquisitions of Southern Heritage Bancorp, Inc. and Lumpkin CountyBank.  For the year ended December 31,2003, net deferred tax assets increased by $699,000 as a result of theacquisition of Baldwin Bancshares, Inc.

 

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

 

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

 
| ** **                                                                                           | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                           | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                           | ** ** | **(Amounts in thousands)**        | ** ** |
| ** **                                                                                           | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                           | ** ** | **$**                             | **9,838**  |   | $ | 7,725 |   | $ | 6,509 |   |
|                                                                                                 |       |                              |       |   |   |   |   |
| Weighted average number of capital shares  outstanding                                               | ** ** | **9,340**                         |       | 7,313 |   | 6,016 |   |
| Effect of dilutive options                                                                           | ** ** | **132**                           |       | 156 |   | 109 |   |
| Weighted average number of capital shares  outstanding used to calculate dilutive earnings per share | ** ** | **9,472**                         |       | 7,469 |   | 6,125 |   |
|                                                                                                      |            |                                   |            |  |  |  |  |  |  |  |

 

**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,**      | ** **  |
|-------------------------------------|------------|----------------------------|-------------|
| ** **                          | ** ** | **2004**                   | ** **  | **2003** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)** | ** **  |
|                                |       |                       |        |   |   |
| Commitments to extend credit        | ** ** | **$**                      | **192,294** |   | $ | 138,310 |   |
| Financial standby letters of credit | ** ** | **7,354**                  |        | 3,718 |   |
| Other standby letters of credit     | ** ** | **1,357**                  |        | 1,349 |   |
| Credit card commitments             | ** ** | **5,235**                  |        | 5,302 |   |
| ** **                          |       | **$**                      | **206,240** |   | $ | 148,679 |   |

 

77

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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. Collateral held varies as specified above and is required in instancesthat the Company deems necessary.

 

At December 31,2004 and 2003, 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, 2004 and 2003.

 

**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 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-eight 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 $12,540,000,$1,500,000, $3,500,000, $4,007,000 and $2,048,000 for Gainesville Bank &Trust, United Bank & Trust, Community Trust Bank, HomeTown Bank ofVilla Rica, and First National Bank of the South, respectively.

 

78

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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.  At December 31,2004, approximately $6,500,000 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 31,2004 the Company and the Banks met all capital adequacy requirements to whichthey are subject.

 

As of December 31,2004, 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.

 

79

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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, 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 | % |

 

80

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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, 2003:**       | ** ** | ** **                 | ** ** | ** **                          | ** ** | ** **                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total Capital to Risk Weighted Assets:  |       |                       |       |                                |       |                                                                    |       |   |   |   |   |   |   |
| Consolidated                            |       | $                          | 87,524     |                                | 11.80      | %                                                                       | $          | 59,351 |   | 8 | % | N/A |   | N/A |   |
| Gainesville Bank & Trust       |       | $                          | 31,025     |                                | 10.10      | %                                                                       | $          | 24,575 |   | 8 | % | $ | 30,719 |   | 10 | % |
| United Bank & Trust            |       | $                          | 6,953      |                                | 12.41      | %                                                                       | $          | 4,483 |   | 8 | % | $ | 5,603 |   | 10 | % |
| Community Trust Bank                    |       | $                          | 16,000     |                                | 11.58      | %                                                                       | $          | 11,053 |   | 8 | % | $ | 13,817 |   | 10 | % |
| HomeTown Bank of Villa Rica             |       | $                          | 13,306     |                                | 10.04      | %                                                                       | $          | 10,603 |   | 8 | % | $ | 13,253 |   | 10 | % |
| First National Bank of the South        |       | $                          | 9,735      |                                | 9.29       | %                                                                       | $          | 8,387 |   | 8 | % | $ | 10,484 |   | 10 | % |
| Tier I Capital to Risk Weighted Assets: |       |                       |       |                                |       |                                                                    |       |   |   |   |   |   |   |
| Consolidated                            |       | $                          | 78,797     |                                | 10.62      | %                                                                       | $          | 29,676 |   | 4 | % | N/A |   | N/A |   |
| Gainesville Bank & Trust       |       | $                          | 27,673     |                                | 9.01       | %                                                                       | $          | 12,287 |   | 4 | % | $ | 18,431 |   | 6 | % |
| United Bank & Trust            |       | $                          | 6,299      |                                | 11.24      | %                                                                       | $          | 2,241 |   | 4 | % | $ | 3,362 |   | 6 | % |
| Community Trust Bank                    |       | $                          | 14,405     |                                | 10.43      | %                                                                       | $          | 5,527 |   | 4 | % | $ | 8,290 |   | 6 | % |
| HomeTown Bank of Villa Rica             |       | $                          | 11,646     |                                | 8.79       | %                                                                       | $          | 5,301 |   | 4 | % | $ | 7,952 |   | 6 | % |
| First National Bank of the South        |       | $                          | 8,848      |                                | 8.44       | %                                                                       | $          | 4,194 |   | 4 | % | $ | 6,290 |   | 6 | % |
| Tier I Capital to Average Assets:       |       |                       |       |                                |       |                                                                    |       |   |   |   |   |   |   |
| Consolidated                            |       | $                          | 78,797     |                                | 8.63       | %                                                                       | $          | 36,510 |   | 4 | % | N/A |   | N/A |   |
| Gainesville Bank & Trust       |       | $                          | 27,673     |                                | 7.10       | %                                                                       | $          | 15,586 |   | 4 | % | $ | 19,482 |   | 5 | % |
| United Bank & Trust            |       | $                          | 6,299      |                                | 8.23       | %                                                                       | $          | 3,063 |   | 4 | % | $ | 3,829 |   | 5 | % |
| Community Trust Bank                    |       | $                          | 14,405     |                                | 8.28       | %                                                                       | $          | 6,962 |   | 4 | % | $ | 8,703 |   | 5 | % |
| HomeTown Bank of Villa Rica             |       | $                          | 11,646     |                                | 7.72       | %                                                                       | $          | 6,031 |   | 4 | % | $ | 7,539 |   | 5 | % |
| First National Bank of the South        |       | $                          | 8,848      |                                | 6.82       | %                                                                       | $          | 5,188 |   | 4 | % | $ | 6,485 |   | 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: **Thecarrying amount of cash, due from banks, interest-bearing deposits in banks andfederal funds sold approximates fair value.

 

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

 

81

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

 

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

 

**Federal Funds Purchased,Repurchase Agreements and Other Borrowings: **The carrying amount ofvariable rate borrowings, federal funds purchased, and securities sold underrepurchase agreements approximate fair value. The fair value of fixed rate other borrowings are estimated based ondiscounted contractual cash flows using the current incremental borrowing ratesfor similar type borrowing arrangements.

 

**Subordinated Debt: **Thecarrying amount of the Company’s variable rate subordinated debt approximatesthe fair value.

 

**Accrued Interest: **Thecarrying amount of accrued interest approximates their fair value.

 

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

 

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

 
| ** **                                                                        | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                        | ** ** | **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 | ** ** | **$**                      | **21,516** | ** **                 | **$**      | **21,516** |   | $ | 24,738 |   | $ | 24,738 |   |
| Securities                                                                        | ** ** | **190,636**                | ** ** | **190,636**                |       | 132,945 |   | 132,945 |   |
| Restricted equity securities                                                      | ** ** | **7,226**                  | ** ** | **7,226**                  |       | 4,582 |   | 4,582 |   |
| Loans                                                                             | ** ** | **944,819**                | ** ** | **936,255**                |       | 701,232 |   | 706,667 |   |
| Accrued interest receivable                                                       | ** ** | **5,310**                  | ** ** | **5,310**                  |       | 3,993 |   | 3,993 |   |
|                                                                              |       |                       |       |                       |       |   |   |   |   |
| Financial liabilities:                                                            |       |                       |       |                       |       |   |   |   |   |
| Deposits                                                                          | ** ** | **928,603**                | ** ** | **926,128**                |       | 728,629 |   | 730,920 |   |
| Federal funds purchased and securities sold under  repurchase agreements          | ** ** | **47,582**                 | ** ** | **47,582**                 |       | 17,314 |   | 17,314 |   |
| Other borrowings                                                                  | ** ** | **81,926**                 | ** ** | **84,097**                 |       | 76,003 |   | 79,573 |   |
| Subordinated debt                                                                 | ** ** | **29,898**                 | ** ** | **29,898**                 |       | 15,464 |   | 15,464 |   |
| Accrued interest payable                                                          | ** ** | **3,719**                  | ** ** | **3,719**                  |       | 3,119 |   | 3,119 |   |
|                                                                                   |            |                            |            |                            |            |  |  |  |  |  |  |  |  |

 

82

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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,** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| ** **                     | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                     | ** ** | **(Dollars in thousands)**        | ** ** |
|                           |       |                              |       |   |   |   |   |
| Audit and professional fees    | ** ** | **$**                             | **860**    |   | $ | 615 |   | $ | 507 |   |
| Stationery, forms and supplies | ** ** | **661**                           |       | 617 |   | 466 |   |
|                                |            |                                   |            |  |  |  |  |  |  |  |

 

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

 

The followinginformation presents the condensed balance sheets as of December 31, 2004and 2003 and statements of income and cash flows of GB&T Bancshares, Inc.for the years ended December 31, 2004, 2003 and 2002.

 

**CONDENSED BALANCE SHEETS**

 
| ** **                                      | ** ** | **2004**                   | ** **  | **2003**   | ** ** |
|-------------------------------------------------|------------|----------------------------|-------------|------------|------------|
| ** **                                      | ** ** | **(Dollars in thousands)** | ** **  |
| **Assets**                                      |       |                       |        |       |       |
| Cash                                            | ** ** | **$**                      | **8,929**   |       | $          | 3,954 |   |
| Securities available for sale                   | ** ** | **32,226**                 |        | 842        |       |
| Investment in subsidiaries                      | ** ** | **157,322**                |        | 106,280    |       |
| Premises and equipment                          | ** ** | **3,749**                  |        | 1,478      |       |
| Other assets                                    | ** ** | **2,802**                  |        | 393        |       |
|                                            |       |                       |        |       |       |
| Total assets                                    | ** ** | **$**                      | **205,028** |       | $          | 112,947 |   |
|                                            |       |                       |        |       |       |
| **Liabilities**                                 |       |                       |        |       |       |
| Subordinated debt                               | ** ** | **$**                      | **29,898**  |       | $          | 15,464 |   |
| Other liabilities                               | ** ** | **415**                    |        | 640        |       |
|                                            |       |                       |        |       |       |
| Total liabilities                               | ** ** | **30,313**                 |        | 16,104     |       |
|                                            |       |                       |        |       |       |
| **Stockholders’ equity**                   | ** ** | **174,715**                |        | 96,843     |       |
|                                            |       |                       |        |       |       |
| Total liabilities and stockholders’ equity | ** ** | **$**                      | **205,028** | ** ** | $          | 112,947 |   |

 

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**CONDENSED STATEMENTS OF INCOME**

 
| ** **                                                                           | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|----------|------------|
| ** **                                                                           | ** ** | **(Dollars in thousands)** | ** ** |
| Income                                                                               |       |                       |       |     |       |     |       |
| Dividends from subsidiaries                                                          | ** ** | **$**                      | **3,350**  |     | $          | 3,080    |       | $ | 2,000 |   |
| Management fees                                                                      | ** ** | **1,148**                  |       | 1,048    |       | —   |       |
| Other income                                                                         | ** ** | **1,936**                  |       | 142      |       | 751      |       |
| ** **                                                                           |       | **6,434**                  |       | 4,270    |       | 2,751    |       |
|                                                                                 |       |                       |       |     |       |     |       |
| Expense                                                                              |       |                       |       |     |       |     |       |
| Interest                                                                             | ** ** | **1,190**                  |       | 822      |       | 252      |       |
| Other operating expense                                                              | ** ** | **4,998**                  |       | 2,522    |       | 589      |       |
| ** **                                                                           |       | **6,188**                  |       | 3,344    |       | 841      |       |
|                                                                                 |       |                       |       |     |       |     |       |
| Income before income tax benefit and equity in  undistributed income of subsidiaries | ** ** | **246**                    |       | 926      |       | 1,910    |       |
|                                                                                 |       |                       |       |     |       |     |       |
| Income tax benefits                                                                  | ** ** | **1,241**                  |       | 819      |       | 108      |       |
|                                                                                 |       |                       |       |     |       |     |       |
| Income before equity in undistributed income of  subsidiaries                        | ** ** | **1,487**                  |       | 1,745    |       | 2,018    |       |
|                                                                                 |       |                       |       |     |       |     |       |
| Equity in undistributed income of subsidiaries                                       | ** ** | **8,351**                  |       | 5,980    |       | 4,491    |       |
|                                                                                 |       |                       |       |     |       |     |       |
| Net income                                                                           | ** ** | **$**                      | **9,838**  |     | $          | 7,725    |       | $ | 6,509 |   |

 

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**CONDENSED STATEMENTS OF CASHFLOWS**

 
| ** **                                                                                   | ** ** | **2004**                   | ** ** | **2003**   | ** ** | **2002** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------|------------|----------|------------|
| ** **                                                                                   | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                         |       |                       | ** ** |       |       |     |       |
| **OPERATING ACTIVITIES**                                                                     |       |                       | ** ** |       |       |     |       |
| Net income                                                                                   | ** ** | **$**                      | **9,838**  | ** ** | $          | 7,725    |       | $ | 6,509 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                       | ** ** |       |       |     |       |
| Undistributed income of subsidiaries                                                         | ** ** | **(8,351**                 | **)**      | (5,980     | )          | (4,491   | )          |
| Depreciation                                                                                 | ** ** | **300**                    | ** ** | 42         |       | 74       |       |
| (Gain) loss on sale of assets                                                                | ** ** | **(371**                   | **)**      | 316        |       | (752     | )          |
| Net other operating activities                                                               | ** ** | **(1,981**                 | **)**      | (2,406     | )          | (682     | )          |
|                                                                                         |       |                       | ** ** |       |       |     |       |
| Net cash provided by (used in) operating activities                                          | ** ** | **(565**                   | **)**      | (303       | )          | 658      |       |
|                                                                                         |       |                       | ** ** |       |       |     |       |
| **INVESTING ACTIVITIES**                                                                     |       |                       | ** ** |       |       |     |       |
| Purchase of securities available for sale                                                    | ** ** | **(31,259**                | **)**      | (723       | )          | —   |       |
| Proceeds from sale of securities available for sale                                          |       |                       | ** ** | 693        |       | —   |       |
| Purchase of premises and equipment                                                           | ** ** | **(4,422**                 | **)**      | (1,394     | )          | (150     | )          |
| Proceeds from sale of premises and equipment                                                 | ** ** | **2,223**                  | ** ** | 1,144      |       | —   |       |
| Capital investment in subsidiaries                                                           | ** ** | **(6,000**                 | **)**      | (4,628     | )          | (2,964   | )          |
|                                                                                         |       |                       | ** ** |       |       |     |       |
| Net cash used in investing activities                                                        | ** ** | **(39,458**                | **)**      | (4,908     | )          | (3,114   | )          |
|                                                                                         |       |                       | ** ** |       |       |     |       |
| **FINANCING ACTIVITIES**                                                                     |       |                       | ** ** |       |       |     |       |
| Dividends paid                                                                               | ** ** | **(2,681**                 | **)**      | (2,038     | )          | (1,596   | )          |
| Proceeds from issuance of common stock                                                       | ** ** | **37,399**                 | ** ** | 380        |       | 441      |       |
| Payment for fractional shares                                                                | ** ** | **(30**                    | **)**      | (9         | )          | —   |       |
| Proceeds from issuance of subordinated debentures                                            | ** ** | **10,310**                 | ** ** | —     |       | 15,464   |       |
| Proceeds from note payable                                                                   | ** ** | **—**                 | ** ** | —     |       | 4,000    |       |
| Repayment of note payable                                                                    | ** ** | **—**                 | ** ** | —     |       | (5,875   | )          |
|                                                                                         |       |                       | ** ** |       |       |     |       |
| Net cash provided by (used in) financing activities                                          | ** ** | **44,998**                 | ** ** | (1,667     | )          | 12,434   |       |
|                                                                                         |       |                       | ** ** |       |       |     |       |
| Net increase (decrease) in cash                                                              | ** ** | **4,975**                  | ** ** | (6,878     | )          | 9,978    |       |
|                                                                                         |       |                       | ** ** |       |       |     |       |
| Cash at beginning of year                                                                    | ** ** | **3,954**                  | ** ** | 10,832     |       | 854      |       |
|                                                                                         |       |                       | ** ** |       |       |     |       |
| Cash at end of year                                                                          | ** ** | **$**                      | **8,929**  | ** ** | $          | 3,954    |       | $ | 10,832 |   |

 

85

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

 
| ** **                                          | ** ** | **Years Ended December 31,**                  | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2004**                                           | ** ** | **2003** | ** ** |
| ** **                                          | ** ** | **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                                     | ** ** | **$**                                              | **17,052** | ** ** | **$** | **15,211** | ** ** | **$** | **13,169** | ** ** | **$** | **12,842** |   | $ | 13,152 | ** ** | $ | 11,551 |   | $ | 11,133 |   | $ | 10,956 |   |
| Interest expense                                    | ** ** | **5,336**                                          | ** ** | **4,601** | ** ** | **4,059** | ** ** | **3,956** |   | 3,851 |   | 3,686 |   | 3,792 |   | 3,959 |   |
| ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest income                                 | ** ** | **11,716**                                         | ** ** | **10,610** | ** ** | **9,110** | ** ** | **8,886** |   | 9,301 |   | 7,865 |   | 7,341 |   | 6,997 |   |
| Provision for loan losses                           | ** ** | **465**                                            | ** ** | **332** | ** ** | **325** | ** ** | **284** |   | 155 |   | 861 |   | 176 |   | 214 |   |
| ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest income after provision for loan losses | ** ** | **11,251**                                         | ** ** | **10,278** | ** ** | **8,785** | ** ** | **8,602** |   | 9,146 |   | 7,004 |   | 7,165 |   | 6,783 |   |
| Noninterest income                                  | ** ** | **3,238**                                          | ** ** | **2,699** | ** ** | **2,942** | ** ** | **2,899** |   | 2,660 |   | 2,524 |   | 2,392 |   | 2,352 |   |
| Noninterest expenses                                | ** ** | **9,901**                                          | ** ** | **9,456** | ** ** | **8,475** | ** ** | **8,348** |   | 8,282 |   | 7,319 |   | 7,291 |   | 6,801 |   |
| ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income before income                                | ** ** | **4,588**                                          | ** ** | **3,521** | ** ** | **3,252** | ** ** | **3,153** |   | 3,524 |   | 2,209 |   | 2,266 |   | 2,334 |   |
| Provision for income taxes                          | ** ** | **1,613**                                          | ** ** | **1,121** | ** ** | **1,019** | ** ** | **923** |   | 721 |   | 731 |   | 533 |   | 623 |   |
| ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                          | ** ** | **$**                                              | **2,975**  | ** ** | **$** | **2,400** | ** ** | **$** | **2,233** | ** ** | **$** | **2,230** |   | $ | 2,803 |   | $ | 1,478 |   | $ | 1,733 |   | $ | 1,711 |   |
| ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Earnings per share:                                 | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                               | ** ** | **$**                                              | **0.28**   | ** ** | **$** | **0.25** | ** ** | **$** | **0.26** | ** ** | **$** | **0.26** |   | $ | 0.33 |   | $ | 0.20 |   | $ | 0.26 |   | $ | 0.26 |   |
| Diluted                                             | ** ** | **$**                                              | **0.27**   | ** ** | **$** | **0.25** | ** ** | **$** | **0.26** | ** ** | **$** | **0.26** |   | $ | 0.32 |   | $ | 0.19 |   | $ | 0.25 |   | $ | .025 |   |

 

**NOTE 22.****                    ****STOCK SPLIT**

 

On May 17, 2004,the Company declared a five-for-four stock split payable on June 18, 2004to stockholders of record on June 1, 2004.  The earnings  percommon share and all other per share data for the years ended December 31,2004, 2003 and 2002 have been retroactively adjusted for this split as if itoccurred on January 1, 2002.

 

86

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**NOTE 23.****                    ****STOCK OFFERING**

 

On October 15,2004, the Company filed a Registration Statement on Form S-3 toregister up to 1,380,000 shares of its common stock for sale in a publicoffering.  The number of shares to besold in the offering was subsequently increased pursuant to an additionalRegistration Statement filed pursuant to Rule 462(b) under theSecurities Act.  In November 2004,the Company completed the sale of 1,651,680 shares of its common stockreceiving net proceeds of approximately $35.4 million.  The Company intends to use the proceeds ofthe offering for general corporate purposes.

 

87

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Exhibit Index

 
| **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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