U.S. SECURITIES AND  EXCHANGE COMMISSION  WASHINGTON, D.C.   20549

**FORM 10-K**

(Mark One)

þ     Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act  of 1934          For the Fiscal Year Ended December 31, 2001

 ̈     Transition report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from  __________ to __________

Commission file number 000-24203

**GB&T  Bancshares, Inc.**(Exact name of  registrant as specified in its charter)

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

 

| 500 Jesse          Jewell Parkway, S.E.           |       |
|---------------------------------------------------|------------|
| Gainesville,          Georgia                     | 30501      |
| (Address of          principal executive offices) | (Zip code) |

Registrant’s telephone number,  including area code* ***(770)  532-1212**

Securities registered pursuant to  Section 12(b) of the Act:  None

Securities registered pursuant to  Section 12(g) of the Act:

(Title of class)**Common Stock, par  value $5.00**

Name of each exchange on which  registered:  NASDAQ National Market

             Indicate by check mark whether the registrant:  (1) has filed all reports  required to be filed by Section 13 or 15(d) of the Securities Exchange Act of  1934 during the preceding 12 months (or for such shorter period that the  registrant was required to file such reports), and (2) has been subject to  such filing requirements for the past 90 days.  Yes  þ   No   ̈

             Indicate by check mark if disclosure of delinquent filers pursuant to Item 405  of Regulation S-K is not contained herein, and will not be contained, to the  best of registrant’s knowledge, in definitive proxy or information  statements incorporated by reference in Part III of this Form 10-K or any  amendment to this Form 10-K.    ̈  

             As of March 15, 2002, the aggregate market value of our voting common stock  held by nonaffiliates was approximately $60,511,694.

             As of March 15, 2002, we had issued and outstanding 4,760,314 shares of the  20,000,000 authorized shares of its $5.00 per value common stock. 

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DOCUMENTS INCORPORATED  BY REFERENCE

             Portions of the Annual Report to Shareholders for the year ended December 31,  2001, are incorporated by reference into Parts I and II of this report.

             Portions of the Proxy Statement for the 2002 Annual Meeting of Shareholders to  be filed with the Securities and Exchange Commission within 120 days of the  Registrant’s 2001 fiscal year end are incorporated by reference into Part  III of this report.

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**PART I**

**ITEM  1.          BUSINESS**

**The Company**

             GB&T Bancshares, Inc. (the “Company”) was formed in 1998 as a bank  holding company existing under the laws of the State of Georgia.  On  April 24, 1998, we acquired all of the outstanding common stock of  Gainesville Bank & Trust (the “Bank”) in exchange for 1,676,160 shares  at $5 par value common stock.  The acquisition was accounted for as a  pooling of interests.  At December 31, 2001, we had three wholly-owned  bank subsidiaries, Gainesville Bank & Trust, United Bank & Trust and  Community Trust Bank, collectively the (“Banks”) and one non-bank  subsidiary, Community Loan Company.

             We operate as a multi bank holding company.  At December 31, 2001, we  also held common stock in three de novo banks in Georgia, representing a less  than 5% ownership in each bank.  Our current plans include aggressively  exploring opportunities through mergers and acquisitions.  Currently,  there are no paid employees in the Company.

**Gainesville Bank & Trust**

             Gainesville Bank & Trust (“GB&T”) located in Gainesville, Hall  County, Georgia was incorporated under the laws of the State of Georgia on  July 20, 1987 and commenced operations as a Georgia state-chartered bank on  February 1, 1988.

             GB&T conducts business from its main office facility at 500 Jesse Jewell  Parkway, Gainesville, Georgia, which is owned equally by GB&T and one of  the Company’s directors.  GB&T currently occupies seventy-nine  percent of this facility.  The remainder of this facility is available  for lease and approximately 5,900 square feet in the building is currently  under lease to two tenants unrelated to GB&T.  GB&T currently  operates four branches in Gainesville, Georgia, one branch in Oakwood, Georgia  and one branch in Buford, Georgia.

             GB&T provides a full range of banking services to customers within its  primary market area of Hall County and surrounding counties.  GB&T  offers checking accounts, money market accounts, savings accounts,  certificates of deposit, commercial, small business, real estate, consumer,  home equity, automobile and credit card loans.  GB&T also offers a  variety of other traditional banking services to its customers, including  drive-up and night depository facilities, 24-hour automated teller machines,  Internet banking, telephone banking and limited trust services.

**United Bank & Trust**

             United Bank & Trust (“UB&T”) is located in Rockmart, Polk County,  Georgia and was also incorporated under the laws of the State of Georgia on  October 27, 1988 and commenced operations as a Georgia state-chartered bank on  January 16, 1990.  On February 29, 2000, UB&T was acquired by the  Company in a business combination accounted for as a pooling of  interests.  All prior year financial statements have been restated to  include UB&T.

             UB&T conducts business from its main office facility at 129 East Elm  Street, Rockmart, Georgia.  UB&T currently operates a branch in  Cedartown, Georgia.

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UB&T  provides a full range of banking services  to customers within its primary market area of Polk County and surrounding  counties.  UB&T offers checking accounts, money market accounts,  savings accounts, certificates of deposit, commercial, small business, real  estate, consumer, home equity and automobile loans.  UB&T also offers  a variety of other traditional banking services to its customers, including  drive-up and night depository facilities and 24-hour automated teller machine.

**Community Trust Bank**

             Community Trust Bank (“CTB”) is located in Hiram, Paulding County, Georgia  and was also incorporated under the laws of the State of Georgia and commenced  operations as a Georgia state-chartered bank in 1988.  On June 30,  2001, CTB was acquired by the Company in a business combination accounted for  as a pooling of interests.  All prior year financial statements have been  restated to include CTB.

             CTB conducts business from its main office facility at 3844 Atlanta Highway,  Hiram, Georgia.  CTB currently operates one branch in Dallas, Georgia,  one branch in Marietta, Georgia and one branch in Kennesaw, Georgia.

             CTB provides a full range of banking services to customers within its primary  market areas of Paulding and Cobb Counties and surrounding counties.  CTB  offers checking accounts, money market accounts, savings accounts,  certificates of deposit, commercial, small business, real estate, consumer,  home equity and automobile loans.  CTB also offers a variety of other  traditional banking services to its customers, including drive-up and night  depository facilities and 24-hour automated teller machine.

**Community Loan Company**

             Community Loan Company (“CLC”) was formed in 1995 as a non-bank subsidiary  for the purpose of engaging in the consumer finance business.  CLC  presently operates 8 offices located in the Northwest Georgia cities of  Woodstock, Rockmart, Rossville, Gainesville, Dalton, Rome, Dahlonega and  Cartersville.

**Cash Transactions, LLC**

             Another non-bank subsidiary was established in 1997 called CashTrans.   CashTrans is a limited liability company that is owned 49% by the Company and  51% by an individual who serves as Chairman of CashTrans.  CashTrans is  engaged in the business of providing retail establishments with automated  teller machines that are owned by CashTrans and that dispense cash or cash  equivalents.

**Market Area and Competition**

             GB&T competes primarily with seven other commercial banks, Bank America,  N.A, Regions Bank, Community Bank & Trust, Branch Banking and Trust,  SunTrust Bank, National Bank of Commerce, and Wachovia Bank, N.A.  In  addition, GB&T competes with other financial institutions, including two  credit unions and various other finance companies.  The banking business  continues to be very competitive in our primary market areas of  Hall,  Polk and Paulding counties.  The banking industry also continues to  experience increased competition for deposits from brokerage firms and money  market funds.

             As a whole, the banking industry in Georgia is highly competitive.  We  compete with institutions, some of which have much greater financial resources  than our Banks, and which may be able to offer more services to their  customers.  In recent years, intense market demands, economic pressures,  and increased customer awareness of products, services, and the availability  of electronic services have forced banks to diversify their services and  become more cost effective.  Our Banks continually face strong  competition in attracting and retaining deposits and loans.

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             The most direct competition for deposits comes from other commercial banks,  savings banks, credit unions and issuers of securities such as shares in money  market funds.  Interest rates, convenience, availability of products and  services, and marketing are all significant factors in the competition for  deposits.

             Competition for loans comes from other commercial banks, savings banks,  insurance companies, consumer finance companies, credit unions and other  institutional lenders.  We compete for loan originations through interest  rates, loan fees, efficiency in closing and handling of loans, and the overall  quality of service.  Competition is affected by the general availability  of lendable funds, general and local economic conditions, current interest  rates, and other factors that are not readily predictable.

             Management expects that competition will continue in the future due to  statewide branching laws that became effective in 1998 and the entry of  additional bank and nonbank competitors. 

**Lending Activities**

             We originate loans primarily secured by single family real estate, residential  construction, owner-occupied commercial buildings, and other loans to small  businesses and individuals.  In addition, loans are made to small- and  medium-sized commercial businesses, as well as to consumers for a variety of  purposes.  We also lend to a limited number of residential contractors  and developers in the Hall County, Polk County, and Paulding County areas.

             In addition, GB&T originates loans to small businesses secured by real  estate and other collateral, which loans are in part (up to 75% of each loan)  guaranteed by the U.S. Small Business Administration (“SBA”).

             Our commercial lending includes loans to smaller business ventures, credit  lines for working capital and short-term seasonal or inventory financing, as  well as occasional letters of credit.  Commercial borrowers typically  secure their loans with assets of the business, personal guaranties of their  principals, and often secured by mortgages on their personal residences.

             We provide commercial and consumer installment loans to our customers.   Such loans are typically of multiple-year duration and, if not variable rate,  bear interest at a rate tied to our cost of funds of equivalent  maturity.  Commercial installment loans generally finance commercial  equipment and real estate, while consumer installment loans typically finance  automobiles, consumer products, or home improvements.

             Risks associated with loans made by us include, but are not limited to, the  real estate market in Hall, Polk and Paulding Counties, fraud, deteriorating  or non-existing collateral, general economic conditions, interest rate risk,  and deteriorating borrower financial conditions.

             Our Board of Directors establishes and periodically reviews the Banks’  lending policies and procedures.  State banking regulations provide that  no secured loan relationship may exceed 25% of the Banks’ statutory capital  and no unsecured loan relationship may exceed 15% of statutory capital, except  in very limited circumstances.  Our Banks occasionally sell participation  interests in loans to other lenders, primarily when a loan exceeds the Banks’  legal lending limits.

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**Deposits**

             Checking, savings, money market accounts, and certificates of deposit are the  primary sources of funds for investing in loans and securities.  We  obtain most of our deposits from individuals and businesses in our market  area.  A secondary source of funding is through advances from the Federal  Home Loan Bank and other borrowings which enable us to borrow funds at rates  and terms, which at times, are more beneficial to us.

             We do not solicit deposits by offering depositors rates of interest on  certificates of deposit or money market accounts significantly above rates  paid by other local competitors.  GB&T solicits brokered deposits on  a limited basis.

**Securities**

             After establishing necessary cash reserves and funding loans, we invest our  remaining liquid assets in securities allowed under banking laws and  regulations.  We invest primarily in obligations of the United States or  obligations guaranteed as to principal and interest by the United States,  mortgage-backed securities, other taxable securities and in certain  obligations of states and municipalities.  We also invest excess funds in  Federal funds with our correspondents and primarily act as a net seller of  such funds.  The sale of Federal funds amounts to a short term loan from  us to another bank.  Risks associated with securities include, but are  not limited to, interest rate fluctuation, maturity, and concentration.

**Asset/Liability Management**

             It is our objective to manage our assets and liabilities to provide a  satisfactory and consistent level of profitability within the framework of  established cash, loan, securities, borrowing and capital policies.   Certain officers are charged with the responsibility for developing and  monitoring policies and procedures that are designed to insure acceptable  composition of the asset/liability mix.  It is the overall philosophy of  management to support asset growth primarily through growth of core deposits,  which include deposits of all categories from individuals and  businesses.  Management seeks to invest the largest portion of our assets  in loans.

             Our asset-liability mix is monitored on a periodic basis with a report  reflecting interest-sensitive assets and interest-sensitive liabilities being  prepared and presented to the Banks’ Board of Directors on a monthly  basis.  The objective of this policy is to manage interest-sensitive  assets and liabilities so as to minimize the impact of substantial movements  in interest rates on our earnings.

             We have grown from our initial capital base of $7 million to a total asset  base of approximately $548 million.  The continued growth in total assets  and loans was generated almost exclusively from deposits obtained from our  market areas.  The loan portfolio of $419 million as of December 31,  2001 is comprised of commercial loans ($39 million), loans secured by real  estate ($347 million), and consumer and other loans ($33 million).

**Employees**

             As of December 31, 2001, we had 233 full-time equivalent employees, of which  109 were employed by GB&T, 35 were employed by UB&T, 65 were employed  by CTB, and 24 were employed by CLC.  We are not a party to any  collective bargaining agreement and, in the opinion of management, we enjoy  satisfactory relations with our employees.

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**REGULATION AND  SUPERVISION**

             We are subject to extensive state and federal banking laws and regulations  that impose specific requirements or restrictions on and provide for general  regulatory oversight of virtually all aspects of our operations. These laws  and regulations are generally intended to protect depositors, not  shareholders. The following summary is qualified by reference to the statutory  and regulatory provisions discussed. Changes in applicable laws or regulations  may have a material effect on our business and prospects. Beginning with the  enactment of the Financial Institutions Reform Recovery and Enforcement Act in  1989 and following with the FDIC Improvement Act in 1991, numerous additional  regulatory requirements have been placed on the banking industry in the past  several years and additional changes have been proposed. Legislative changes  and the policies of various regulatory authorities may significantly affect  our operations. We cannot predict the effect that fiscal or monetary policies,  or new federal or state legislation may have on our business and earnings in  the future.

##### **Gramm-Leach-Bliley Act**

             On November 12, 1999, the Gramm-Leach-Bliley Act, previously known as the  Financial Services Modernization Act of 1999 was signed into law by President  Clinton. Among other things, this law repealed the restrictions on banks  affiliating with securities firms contained in sections 20 and 32 of the  Glass-Steagall Act. The legislation also permits bank holding companies to  engage in a statutorily provided list of financial activities, including  insurance and securities underwriting and agency activities, merchant banking,  and insurance company portfolio investment activities. It also authorizes  activities that are "complementary" to financial activities.

             One purpose of the legislation was to grant to community banks certain powers  as a matter of right that larger institutions have accumulated on an ad hoc  basis. Nevertheless, the legislation may have the result of increasing the  amount of competition that we face from larger institutions and other types of  companies. In fact, it is not possible for us to predict the full effect that  the Gramm-Leach-Bliley Act will have on our business and operations. From time  to time other changes may be proposed to laws affecting the banking industry,  and these changes could have a material affect on our business and prospects.  We cannot predict the nature or extent of the effect on our business and  earnings of fiscal or monetary policies, or new federal or state legislation.

##### **The Company**

             Because we own all the outstanding common stock of the Banks, we are a bank  holding company under the federal Bank Holding Company Act of 1956 and the  Financial Institutions Code of Georgia.

*             The Bank Holding Company Act.* Under  the Bank Holding Company Act, we are subject to periodic examination by the  Federal Reserve and are required to file periodic reports of our operations  and any additional information that the Federal Reserve may require. Our  activities at the bank and holding company level will be limited to:

> - banking and managing or controlling banks;
- furnishing services to or performing services for our subsidiaries; and
- engaging in other activities that the Federal Reserve determines to be so  closely related to banking and managing or controlling banks as to be a proper  incident thereto.

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            *Investments,  Control, and Activities.* With certain  limited exceptions, the Bank Holding Company Act requires every bank holding  company to obtain the prior approval of the Federal Reserve before:

> - acquiring substantially all the assets of any bank;
- acquiring direct or indirect ownership or control of any voting shares of any  bank if after the acquisition it would own or control more than 5% of the  voting shares of such bank (unless it already owns or controls the majority of  such shares); or
- merging or consolidating with another bank holding company.

             In addition, and subject to certain exceptions, the Bank Holding Company Act  and the Change in Bank Control Act, together with regulations thereunder,  require Federal Reserve approval prior to any person or company acquiring  "control" of a bank holding company. Control is conclusively  presumed to exist if an individual or company acquires 25% or more of any  class of voting securities of the bank holding company. Control is rebuttably  presumed to exist if a person acquires 10% or more, but less than 25%, of any  class of voting securities and either the bank holding company has registered  securities under Section 12 of the Securities Exchange Act of 1934 or no other  person owns a greater percentage of that class of voting securities  immediately after the transaction. The regulations provide a procedure for  challenge of the rebuttable control presumption.

             Under the Bank Holding Company Act, a bank holding company is generally  prohibited from engaging in, or acquiring direct or indirect control of more  than 5% of the voting shares of any company engaged in nonbanking activities  unless the Federal Reserve Board, by order or regulation, has found those  activities to be so closely related to banking or managing or controlling  banks as to be a proper incident thereto. Some of the activities that the  Federal Reserve Board has determined by regulation to be proper incidents to  the business of a bank holding company include:

> -  making or servicing loans and certain types of leases;
- engaging in certain insurance and discount brokerage activities;
- performing certain data processing services;
- acting in certain circumstances as a fiduciary or investment or financial  adviser;
- owning savings associations; and
- making investments in certain corporations or projects designed primarily to  promote community welfare.

             The Federal Reserve Board imposes certain capital requirements on bank holding  companies under the Bank Holding Company Act, including a minimum leverage  ratio and a minimum ratio of "qualifying" capital to risk-weighted  assets. These requirements are described below under "Capital  Regulations." Subject to capital requirements and certain other  restrictions, a bank holding company is able to borrow money to make a capital  contribution to a subsidiary bank, and these loans may be repaid from  dividends paid from the bank to the holding company. Our ability to pay  dividends will be subject to regulatory restrictions as described below in  "The Bank - Dividends.” We are also able to raise capital for  contribution to the bank by issuing securities without having to receive  regulatory approval, subject to compliance with federal and state securities  laws.

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*             Source of Strength.* In accordance with  Federal Reserve Board policy, bank holding companies are expected to act as a  source of financial strength to their bank subsidiaries and to commit  resources to support such subsidiaries in circumstances in which they might  not otherwise do so. Under the Bank Holding Company Act, the Federal Reserve  Board may require a bank holding company to terminate any activity or  relinquish control of a nonbank subsidiary, other than a nonbank subsidiary of  a bank, upon the Federal Reserve Board’s determination that such activity or  control constitutes a serious risk to the financial soundness or stability of  any subsidiary depository institution of the bank holding company. Further,  federal bank regulatory authorities have additional discretion to require a  bank holding company to divest itself of any bank or nonbank subsidiary if the  agency determines that divestiture may aid the depository institution’s  financial condition.

*             Georgia State Regulation.* As a bank  holding company registered under the Financial Institutions Code of Georgia,  we are subject to limitations on sale or merger and to regulation by the  Georgia Department of Banking and Finance. Prior to acquiring the common stock  of a bank, we must obtain the approval of the Department. We must also receive  the Department’s approval prior to engaging in the acquisition of banking or  nonbanking institutions or assets, and we must file periodic reports with  respect to our financial condition and operations, management, and  intercompany relationships between us and our subsidiaries.

##### **The Banks**

             The Banks are state banks incorporated under the laws of Georgia and subject  to examination by the Georgia Department of Banking and Finance and the FDIC.  Deposits in the Banks are insured by the FDIC up to a maximum amount, which is  generally $100,000 per depositor subject to aggregation rules. The Georgia  Department of Banking and Finance and the FDIC regulate or monitor virtually  all areas of the bank’s operations, including:

> - security devices and procedures;
- adequacy of capitalization and loss reserves;
- loans;
- investments;
- borrowings;
- deposits;
- mergers;
- issuances of securities;
- payment of dividends;
- interest payable on certain deposits;
- interest rates or fees chargeable on loans;
- establishment of branches;
- corporate reorganizations;

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> - maintenance of books and records; and
- adequacy of staff training to carry on safe lending and deposit  gathering practices.

             The Georgia Department of Banking and Finance and FDIC require the Banks to  maintain specified capital ratios and impose limitations on the Banks’  aggregate investment in real estate, bank premises, and furniture and  fixtures. The Georgia Department of Banking and Finance and FDIC also require  the Banks to prepare quarterly reports on the Banks’ financial condition and  to conduct an annual audit of its financial affairs in compliance with its  minimum standards and procedures. Under the FDIC Improvement Act, all insured  institutions must undergo regular on site examinations by their appropriate  banking agency. The cost of examinations of insured depository institutions  and any affiliates may be assessed by the appropriate agency against each  institution or affiliate as it deemed necessary or appropriate. Insured  institutions are required to submit reports to the FDIC, their federal  regulatory agency, and state supervisor when applicable. The FDIC Improvement  Act directs the FDIC to develop a method for insured depository institutions  to provide supplemental disclosure of the estimated fair market value of  assets and liabilities, to the extent feasible and practicable, in any balance  sheet, financial statement, report of condition or any other report of any  insured depository institution. The FDIC Improvement Act also requires the  federal banking regulatory agencies to prescribe, by regulation, standards for  all insured depository institutions and depository institution holding  companies relating, among other things, to the following:

> - internal controls;
- information systems and audit systems;
- loan documentation;
- credit underwriting;
- interest rate risk exposure; and
- asset quality.

             State banks and their holding companies which have been chartered or  registered or have undergone a change in control within the past two years or  which have been deemed by the Georgia Department of Banking and Finance, FDIC,  or the Federal Reserve Board to be troubled institutions must give the Georgia  Department of Banking and Finance, FDIC or the Federal Reserve Board 30 days  prior notice of the appointment of any senior executive officer or director.  Within the 30 day period, the Georgia Department of Banking and Finance, FDIC  or the Federal Reserve Board, as the case may be, may approve or disapprove  any such appointment.

*             Deposit Insurance.* The FDIC  establishes rates for the payment of premiums by federally insured banks and  thrifts for deposit insurance. A separate Bank Insurance Fund and Savings  Association Insurance Fund are maintained for commercial banks and savings  associations, respectively, with insurance premiums from the industry used to  offset losses from insurance payouts when banks and thrifts fail. In 1993, the  FDIC adopted a rule which establishes a risk-based deposit insurance premium  system for all insured depository institutions. Under this system, until  mid-1995, depository institutions paid to Bank Insurance Fund or Savings  Association Insurance Fund from $0.23 to $0.31 per $100 of insured deposits  depending on their capital levels and risk profile, as determined by their  primary federal regulator on a semiannual basis. Once the Bank Insurance Fund  reached its legally mandated reserve ratio in mid-1995, the FDIC lowered  premiums for well-capitalized banks, eventually eliminating premiums for  well-capitalized banks, with a minimum semiannual assessment of $1,000.

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 However, in 1996 Congress enacted the Deposit Insurance Funds Act of 1996,  which eliminated even this minimum assessment.  Increases in deposit  insurance premiums or changes in risk classification will increase the Banks’  cost of funds, and we may not be able to pass these costs on to our customers.

*             Transactions With Affiliates and Insiders.*  The Banks are subject to the provisions of Section 23A of the Federal Reserve  Act, which places limits on the amount of loans or extensions of credit to, or  investments in, or certain other transactions with, affiliates and on the  amount of advances to third parties collateralized by the securities or  obligations of affiliates. The aggregate of all covered transactions is  limited in amount, as to any one affiliate, to 10% of the Banks’ capital and  surplus and, as to all affiliates combined, to 20% of the Banks’ capital and  surplus. Furthermore, within the foregoing limitations as to amount, each  covered transaction must meet specified collateral requirements. Compliance is  also required with certain provisions designed to avoid the taking of low  quality assets. The Banks are also subject to the provisions of Section 23B of  the Federal Reserve Act which, among other things, prohibits an institution  from engaging in certain transactions with certain affiliates unless the  transactions are on terms substantially the same, or at least as favorable to  such institution or its subsidiaries, as those prevailing at the time for  comparable transactions with nonaffiliated companies. The Banks are also  subject to certain restrictions on extensions of credit to executive officers,  directors, certain principal shareholders, and their related interests. Such  extensions of credit:

> - must be made on substantially the same terms, including interest rates and  collateral, as those prevailing at the time for comparable transactions with  third parties, and
- must not involve more than the normal risk of repayment or present other  unfavorable features.

*             Dividends.* A Georgia state bank may  not pay dividends from its permanent capital. All dividends must be paid out  of undivided profits after deducting expenses, including reserves for losses  and bad debts. In addition, a state bank is prohibited from declaring a  dividend on its shares of common stock until its surplus equals its stated  capital, unless there has been transferred to surplus no less than one-tenth  of the Banks’ net profits of the preceding two consecutive half-year periods  (in the case of an annual dividend). The approval of the Georgia Department of  Banking and Finance is required if the total of all dividends declared by a  state bank in any calendar year exceeds the total of its net profits for that  year combined with its retained net profits for the preceding two years, less  any required transfers to surplus, or if classified assets exceed 80% of its  capital.

*             Branching.* Under current Georgia law,  the Banks may open branch offices throughout Georgia with the prior approval  of the Georgia Department of Banking and Finance. In addition, with prior  regulatory approval, the Banks will be able to acquire existing banking  operations in Georgia. Thus, one or more branch offices could be the result of  merger, consolidation or purchase of assets of another bank pursuant to  Georgia law.

*             Community Reinvestment Act.* The  Community Reinvestment Act requires that, in connection with examinations of  financial institutions, the FDIC shall evaluate the record of each financial  institution in meeting the credit needs of its local community, including low  and moderate income neighborhoods. These factors are also considered in  evaluating mergers, acquisitions, and applications to open a branch or  facility. Failure to adequately meet these criteria could impose additional  requirements and limitations on a bank.

*             Other Regulations.* Interest and other  charges collected or contracted for by the Banks are subject to state usury  laws. The Banks’ loan operations are also subject to federal laws applicable  to credit transactions, including, but not limited to:

> - the federal Truth-In-Lending Act, governing disclosures of credit terms to  consumer borrowers;

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> - the Real Estate Settlement Procedures Act of 1974, requiring lending  institutions to provide consumers with thorough and timely information on the  nature and costs of settlement, including a uniform settlement statement;
- the Home Mortgage Disclosure Act of 1975, requiring financial institutions to  provide information to enable the public and public officials to determine  whether a financial institution is fulfilling its obligation to help meet the  housing needs of the community it serves;
- the Equal Credit Opportunity Act, prohibiting discrimination on the basis of  race, sex, creed or other prohibited factors in extending credit;
- the Fair Credit Reporting Act of 1978, governing the use and provision of  information to credit reporting agencies;
- the Fair Debt Collection Act, governing the manner in which consumer debts may  be collected by collection agencies; and
- the rules and regulations of the various federal agencies charged with the  responsibility of implementing such federal laws.

The deposit operations of the bank  also are subject to:

> - the Right to Financial Privacy Act, which imposes a duty to maintain  confidentiality of consumer financial records from disclosure to government  agencies and prescribes procedures for complying with administrative subpoenas  of financial records; and
- the Electronic Funds Transfer Act and Regulation E issued by the Federal  Reserve Board to implement that act, which governs automatic deposits to and  withdrawals from deposit accounts and customers’ rights and liabilities  arising from the use of automated teller machines and other electronic banking  services.

*             Capital Regulations.* The federal bank  regulatory authorities have adopted risk-based capital guidelines for banks  and bank holding companies that are designed to make regulatory capital  requirements more sensitive to differences in risk profiles among banks and  bank holding companies and account for off-balance sheet items. The guidelines  are minimums, and the federal regulators have noted that banks and bank  holding companies contemplating significant expansion programs should not  allow expansion to diminish their capital ratios and should maintain ratios in  excess of the minimums. We have not received any notice indicating that we are  subject to higher capital requirements. The current guidelines require all  bank holding companies and federally-regulated banks to maintain a minimum  risk-based total capital ratio equal to 8%, of which at least 4% must be Tier  1 capital. Tier 1 capital includes common shareholders’ equity, qualifying  perpetual preferred stock, and minority interests in equity accounts of  consolidated subsidiaries, but excludes goodwill and most other intangibles  and excludes the allowance for loan and lease losses. Tier 2 capital includes  the excess of any preferred stock not included in Tier 1 capital, mandatory  convertible securities, hybrid capital instruments, subordinated debt and  intermediate term-preferred stock, and general reserves for loan and lease  losses up to 1% of risk-weighted assets. Under these guidelines, banks’ and  bank holding companies’ assets are given risk-weights of 0%, 20%, 50%, or  100%. In addition, certain off-balance sheet items are given credit conversion  factors to convert them to asset equivalent amounts to which an appropriate  risk-weight applies. These computations result in the total risk-weighted  assets. Most loans are assigned to the 100% risk category, except for first  mortgage loans fully secured by residential property and, under certain  circumstances, residential construction loans, both of which carry a 50%  rating. Most investment securities are assigned to the 20%

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 category, except  for municipal or state revenue bonds, which have a 50% rating, and direct  obligations of or obligations guaranteed by the United States Treasury or  United States Government agencies, which have a 0% rating.

             The federal bank regulatory authorities have also implemented a leverage  ratio, which is equal to Tier 1 capital as a percentage of average total  assets less intangibles, to be used as a supplement to the risk-based  guidelines. The principal objective of the leverage ratio is to place a  constraint on the maximum degree to which a bank holding company may leverage  its equity capital base. The minimum required leverage ratio for top-rated  institutions is 3%, but most institutions are required to maintain a leverage  ratio of at least 4%.

             The FDIC Improvement Act established a new capital-based regulatory scheme  designed to promote early intervention for troubled banks, which requires the  FDIC to choose the least expensive resolution of bank failures. The new  capital-based regulatory framework contains five categories of compliance with  regulatory capital requirements, including "well capitalized,"  "adequately capitalized," "undercapitalized,"  "significantly undercapitalized," and "critically  undercapitalized." To qualify as a "well capitalized"  institution, a bank must have a leverage ratio of no less than 5%, a Tier 1  risk-based ratio of no less than 6%, and a total risk-based capital ratio of  no less than 10%, and the bank must not be under any order or directive from  the appropriate regulatory agency to meet and maintain a specific capital  level.  GB&T is currently considered “adequately capitalized” and  UB&T and CTB currently qualify as "well capitalized".   Under the FDIC Improvement Act regulations, the applicable agency can treat an  institution as if it were in the next lower category if the agency determines  (after notice and an opportunity for hearing) that the institution is in an  unsafe or unsound condition or is engaging in an unsafe or unsound practice.  The degree of regulatory scrutiny of a financial institution increases, and  the permissible activities of the institution decreases, as it moves downward  through the capital categories. Institutions that fall into one of the three  undercapitalized categories may be required to do some or all of the  following:

> - submit a capital restoration plan;
- raise additional capital;
- restrict their growth, deposit interest rates, and other activities;
- improve their management;
- eliminate management fees; or
- divest themselves of all or a part of their operations.

             Bank holding companies controlling financial institutions can be called upon  to boost the institutions’ capital and to partially guarantee the  institutions’ performance under their capital restoration plans. These capital  guidelines can affect us in several ways. If we grow at a rapid pace, our  capital may be depleted too quickly, and a capital infusion from the holding  company may be necessary, which could impact our ability to pay dividends. Our  capital levels are currently more than adequate; however, rapid growth, poor  loan portfolio performance, poor earnings performance, or a combination of  these factors could change our capital position in a relatively short period  of time.

             The FDIC Improvement Act requires the federal banking regulators to revise the  risk-based capital standards to provide for explicit consideration of  interest-rate risk, concentration of credit risk, and the risks of  untraditional activities.  Failure to meet these capital requirements  would mean that a bank would be required to develop and file a plan with its  primary state and/or federal banking regulator describing the means and a

13

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schedule for achieving the minimum capital requirements. In addition, such a  bank would generally not receive regulatory approval of any application that  requires the consideration of capital adequacy, such as a branch or merger  application, unless the bank could demonstrate a reasonable plan to meet the  capital requirement within a reasonable period of time.

*             Enforcement Powers.* The Financial  Institution Reform Recovery and Enforcement Act expanded and increased civil  and criminal penalties available for use by the federal regulatory agencies  against depository institutions and certain "institution-affiliated  parties." Institution affiliated parties primarily include management,  employees, and agents of a financial institution, as well as independent  contractors and consultants such as attorneys and accountants and others who  participate in the conduct of the financial institution’s affairs. Civil  penalties may be as high as $1,000,000 a day for such violations. Criminal  penalties for some financial institution crimes have been increased to twenty  years. In addition, regulators are provided with greater flexibility to  commence enforcement actions against institutions and institution-affiliated  parties. Possible enforcement actions include the termination of deposit  insurance. Furthermore, banking agencies’ power to issue cease-and-desist  orders were expanded. Such orders may, among other things, require affirmative  action to correct any harm resulting from a violation or practice, including  restitution, reimbursement, indemnification or guarantee against loss. A  financial institution may also be ordered to restrict its growth, dispose of  certain assets, rescind agreements or contracts, or take other actions as  determined by the ordering agency to be appropriate.

*             Effect of Governmental Monetary Policies.*Our  earnings are affected by domestic economic conditions and the monetary and  fiscal policies of the United States government and its agencies. The Federal  Reserve Bank’s monetary policies have had, and are likely to continue to have,  an important impact on the operating results of commercial banks through its  power to implement national monetary policy in order, among other things, to  curb inflation or combat a recession. The monetary policies of the Federal  Reserve Board have major effects upon the levels of bank loans, investments  and deposits through its open market operations in United States government  securities and through its regulation of the discount rate on borrowings of  member banks and the reserve requirements against member bank deposits. It is  not possible to predict the nature or impact of future changes in monetary and  fiscal policies.

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**ITEM  2.          PROPERTIES**

                 GB&T’s main office is owned  jointly by GB&T and Director Donald J. Carter.  The three story  building is located in downtown Gainesville at the intersection of Jesse  Jewell Parkway and Race Street.  GB&T occupies over two-thirds of the  building, with remaining space presently leased to other tenants.   GB&T’s main office also has a drive-in automated teller machine.

             GB&T has four branch locations in Gainesville, Georgia, the first located  in a leased shopping center facility at 2412 Old Cornelia Highway, in a small  community just north of Gainesville, the second located in a leased shopping  center facility at 1210 Thompson Bridge Road, the third located in a leased  shopping center facility at 475 Dawsonville Highway, and the fourth located at  1403 Atlanta Highway, all of which have an automated teller machine. 

             GB&T has two other branch banking facilities, one in Oakwood, Georgia and  one in Buford, Georgia.  Both branches are located in Hall County south  of Gainesville.  Both branches have automated teller machines.

             GB&T operates automated teller machines in a Gainesville-based retail  shopping center at 975 Dawsonville Road and in the hospital atrium at 675  White Sulphur Road in Gainesville, Georgia.

             UB&T’s main office is located at 129 East Elm Street near downtown  Rockmart, Georgia. 

             The main office is an office building  owned by UB&T and contains approximately 8,000 square feet of finished  space used for Bank offices and  operations.  The Bank also has an  automated teller machine. 

             UB&T’s Cedartown branch is an  office building owned by UB&T and contains approximately 4,700 square feet  of finished space.  The branch also has an automated teller machine.

             CTB’s main office is located at  3844 Atlanta Highway in Hiram, Georgia.

             The main office is an office building  owned by CTB and contains approximately 16,000 square feet of finished  space.  The Bank also has an automated teller machine.

             CTB’s Dallas branch is an office  building owned by CTB and contains approximately 1,150 square feet of  space.  The branch also has an automated teller machine.

             CTB leases space in a shopping center  facility in each of the cities of Marietta and Kennesaw.

             CLC leases office space in the Georgia cities of Woodstock, Rockmart,  Rossville, Gainesville, Dalton, Rome, Dahlonega and Cartersville.

             CashTrans leases office space in Dallas, Georgia.

             In the opinion of management, all properties including improvements and  furnishings are adequately insured.

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**ITEM  3.          LEGAL PROCEEDINGS**

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

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

                 There were no matters submitted to a  vote of security holders during the fourth quarter of 2001.

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**PART II**

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

| (a) | Our common stock is traded on the NASDAQ Stock Market under the symbol “GBTB.”   The following table sets forth the high and low closing sale prices for our  common stock. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   |                | **Sales Price** |
|--------|---------------------|-----------------|
|   | **Calendar Period** |            | **Low** |   |   | **High** |
|        |                     |                 |  |  |  |  |
|   |                |            |   |   |   |   |
|   | **2000**            |            |   |   |   |   |
|   | First Quarter       | $               | 16.00 |   | $ | 21.50 |
|   | Second Quarter      |            | 14.75 |   |   | 18.00 |
|   | Third Quarter       |            | 14.50 |   |   | 18.75 |
|   | Fourth Quarter      |            | 15.00 |   |   | 20.00 |
|   |                |            |   |   |   |   |
|   | **2001**            |            |   |   |   |   |
|   | First Quarter       | $               | 14.88 |   | $ | 19.50 |
|   | Second Quarter      |            | 15.00 |   |   | 19.25 |
|   | Third Quarter       |            | 13.65 |   |   | 18.45 |
|   | Fourth Quarter      |            | 14.00 |   |   | 17.00 |

 

| (b) | As of March 15, 2002, there were approximately 1,590 holders of record of our  common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (c) | We paid a $.29 and $.24 per share cash dividend on our common stock for the  years ended December 31, 2001 and 2000, respectively.  We anticipate  continuing to pay a quarterly dividend in the future.  Any declaration  and payment of dividends will be based on our earnings, economic conditions,  and the Board of Directors’ evaluation of other relevant factors.  Our  ability to pay dividends will also be dependent on cash dividends paid to us  by our Banks.  The ability of our Banks to pay dividends to us is  restricted by applicable regulatory requirements.  See “Regulation and  Supervision.” |

 

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**ITEM  6.          SELECTED FINANCIAL  DATA**

             The following table presents selected historical consolidated financial  information for us and our subsidiaries and is derived from the consolidated  financial statements and related notes included in this annual report.   This information is only a summary and should be read in conjunction with our  historical financial statements and related notes.  All prior year  financial information has been restated to include the business combinations  with UBT Financial Services Corporation and Community Trust Financial Services  Corporation, which were both accounted for as a pooling of interests.

|                                              | As of and For        the Year Ended December 31,        |
|---------------------------------------------------|---------------------------------------------------------|
|                                              |                                                         |
|                                         | 2001                                     | 2000    | 1999    | 1998    | 1997    |
|                                         |                                                         |  |  |  |  |
|                                              | (Dollars in        thousands, except per share amounts) |
|                                              |                                                    |   |   |   |   |
| Total Loans                                       | $418,656                                                | $384,691 | $324,355 | $242,578 | $201,143 |
| Total Deposits                                    | 426,758                                                 | 401,302 | 345,252 | 299,978 | 273,442 |
| Total Borrowings                                  | 70,169                                                  | 64,299 | 48,460 | 9,099 | 2,230 |
| Total Assets                                      | 547,596                                                 | 512,488 | 439,697 | 346,906 | 306,377 |
|                                              |                                                    |   |   |   |   |
| Interest Income                                   | 42,349                                                  | 41,794 | 32,701 | 27,606 | 24,190 |
| Interest Expense                                  | 20,893                                                  | 20,797 | 14,077 | 12,523 | 10,959 |
|   Net Interest Income                        | 21,456                                                  | 20,997 | 18,624 | 15,083 | 13,231 |
| Provision for Loan Losses                         | 1,306                                                   | 1,149 | 1,896 | 1,006 | 645 |
|   Net Interest Income        After Provision | 20,150                                                  | 19,848 | 16,728 | 14,077 | 12,586 |
| Non-Interest Income                               | 6,329                                                   | 4,362 | 3,712 | 3,556 | 2,562 |
| Non-Interest Expense                              | 20,523                                                  | 17,811 | 15,703 | 13,054 | 10,583 |
| Income Before Income Taxes                        | 5,956                                                   | 6,399 | 4,737 | 4,579 | 4,565 |
| Provision for Income Taxes                        | 1,986                                                   | 2,090 | 1,405 | 1,365 | 1,471 |
|   Net Income                                 | 3,970                                                   | 4,309 | 3,332 | 3,214 | 3,094 |
|                                              |                                                    |   |   |   |   |
| Net Income Per Share:                             |                                                    |   |   |   |   |
|   Basic                                      | .85                                                     | .93 | .72 | .76 | .76 |
|   Diluted                                    | .82                                                     | .90 | .69 | .72 | .75 |
|                                              |                                                    |   |   |   |   |
| Cash Dividends Declared                           | .29                                                     | .24 | .20 | .16 | .15 |
| Book Value Per Share                              | 9.45                                                    | 8.72 | 7.82 | 7.51 | 7.24 |
| Weighted Average Shares:                          |                                                    |   |   |   |   |
|   Basic                                      | 4,676                                                   | 4,640 | 4,601 | 4,257 | 4,060 |
|   Diluted                                    | 4,816                                                   | 4,791 | 4,801 | 4,446 | 4,123 |

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

**General**

             The purpose of this discussion is to focus on information about our financial  condition and results of operations which is not otherwise apparent from the  consolidated financial statements included in this Annual Report.   Reference should be made to those statements and the selected financial data  presented elsewhere in this report for an understanding of the following  discussion and analysis.  Historical results of operations and any trends  which may appear, are not necessarily indicative of the results to be expected  in future years.

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**A Warning About Forward-Looking  Statements**

             Some of the statements made in this annual report (and in other documents to  which we refer) are “forward-looking statements.” When used in this  document, the words “anticipate,” “believe,”  “estimate,” and similar expressions generally identify  forward-looking statements. These statements are based on the beliefs,  assumptions, and expectations of management, and on information currently  available to those members of management. They are expressions of historical  fact, not guarantees of future performance. Forward-looking statements include  information concerning possible or assumed future results of our operations.

             Forward-looking statements involve risks, uncertainties, and assumptions, and  certain factors could cause actual results to differ from results expressed or  implied by the forward-looking statements, including:

> - economic conditions (both  generally and in the markets where we operate);
- competition from other  companies that provide financial services similar to those offered by us;
- government regulation and  legislation;
- changes in interest rates;  and
- unexpected changes in the  financial stability and liquidity of our credit customers

             We believe these forward-looking statements are reasonable. You should not,  however, place undue reliance on these forward-looking statements, because our  future results and shareholder values may differ materially from those  expressed or implied by these forward-looking statements.

             During 2000 and 2001, we completed our acquisitions of UBT Financial Services  Corporation and Community Trust Financial Services Corporation, respectively,  which were both accounted for as a pooling of interests.  All prior  financial information has been restated to reflect the combination as of the  earliest period presented.  Our discussion and analysis reflects the  combined performance and financial position for the periods presented.

**Summary**

             During 2001 and 2000, we continued to experience moderate growth in  interest-earning and total assets which was funded by increases in deposits,  borrowings, and the retention of net profits.  We recorded net income of  $3,970,000 and $4,309,000 for the years ended December 31, 2001 and 2000,  respectively.  Total equity at December 31, 2001 increased to  $44,773,000 from $40,554,000, or $4,219,000 from December 31, 2000.

**Balance Sheets**

             Our total assets increased $35.1 million or 6.9% for the year ended December  31, 2001 compared to $72.8 million or 16.6% for the same period in 2000.   The increase in total assets for the year ended December 31, 2001  consists primarily of an increase in interest-earning assets of $32.2 million  or 6.8% compared to an increase of $82.0 million or 20.8% during the same  period in 2000.  The overall growth in 2001 and 2000 is consistent with  management’s plans.  The competition for deposits plays an important  role in the overall growth of the Company.

             Our primary focus is to maximize earnings through lending activities.   Any excess funds are invested according to our investment policy.  Total  loans increased 8.8% or $34.0 million for the year ended December 31,  2001.  This increase is compared to an increase of 18.6% or $60.3 million  during 2000.  The increase in total loans for 2001 included a 44.3%  increase in real estate construction loans, or $30.5 million.  The  economy in Gainesville, and Georgia as a whole, continues to be strong despite  the events of September 11,

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2001.  As of December 31, 2001, our  loan-to-deposit ratio was 98% compared to 96% in 2000.  At  December 31, 2001 and 2000, we had total outstanding borrowings of $70.2  million and $64.3 million, respectively.  These funds have been used to  fund loan growth.  The utilization of borrowings to fund loan growth  enables us to maintain a higher loan to deposit ratio and maintain an adequate  liquidity ratio.  Our loan-to-funds ratio is 84% and 83% at December 31,  2001 and 2000, respectively.

             During 2001, total deposits grew by $25.5 million, or 6.3% compared to an  increase of $56.1 million or 16.2% in 2000.  The increase in 2001  consists primarily of an increase in interest-bearing deposits of $20.4  million or 5.8% compared to an increase of $47.7 million or 15.7% during  2000.  The decline in growth in deposits during the past year reflects  the increased competition for deposits and the decrease in deposit rates in  2001.  Noninterest bearing demand deposits increased by $5.1 million  during 2001 compared to an $8.4 million increase in 2000.

             The specific economic and credit risks associated with our loan portfolio,  especially the real estate portfolio, include, but are not limited to, a  general downturn in the economy which could affect unemployment rates in our  market areas, general real estate market 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 to the lender such as whether  developers can find builders to buy lots for home construction, whether the  builders can obtain financing for the construction, whether the builders can  sell the home to a buyer, and whether the buyer can obtain permanent  financing.  Currently, real estate values and employment trends in our  market areas have remained stable.  The general economy and loan volume  showed signs of declining slightly during the fourth quarter of 2000, and  continued through 2001.  The events of September 11, 2001 have impacted  our operations due to the continued cutting of interest rates.

             We attempt to reduce these economic and credit risks not only by adherence to  our lending policy, which includes loan to value guidelines, but also by  investigating the creditworthiness of the borrower and monitoring the borrower’s  financial position.  Also, we periodically review our lending policies  and procedures.

**Liquidity and Capital Resources**

             Liquidity management involves the matching of the cash flow requirements of  customers who may be either depositors desiring to withdraw funds or borrowers  needing assurance that sufficient funds will be available to meet their credit  needs and our ability to meet those needs.  We seek to meet liquidity  requirements primarily through management of short-term investments, monthly  amortizing loans, maturing single payment loans, and maturities of securities  and prepayments.  Also, we maintain relationships with correspondent  banks which could provide funds on short notice.  As of December 31,  2001, we had borrowed under Federal funds purchase lines and securities sold  under repurchase agreements $19.7 million compared to $17.1 million as of  December 31, 2000.  These borrowings typically mature within one to four  business days.

             Our liquidity and capital resources are monitored on a periodic basis by  management and state and Federal regulatory authorities.  At December 31,  2001, our liquidity ratio was 17.23% which was above our policy minimum ratio  of 15%.  Management reviews liquidity on a periodic basis to monitor and  adjust liquidity as necessary.  Management has the ability to adjust  liquidity by selling securities available for sale, selling participations in  loans and accessing available funds through various borrowing  arrangements.  At December 31, 2001, we had available borrowing capacity  totaling approximately $54.1 million through various borrowing arrangements  and available lines of credit.  Our short-term investments and available  borrowing arrangements are adequate to cover any reasonably anticipated  immediate need for funds.  We are not aware of any events or trends  likely to result in a material change in liquidity.

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             At December 31, 2001, our capital to asset ratios were considered adequate  based on guidelines established by the regulatory authorities.  During  2001, we increased our capital by retaining net earnings of $4.0 million.

             At December 31, 2001, we had outstanding commitments totaling approximately  $1.9 million for the construction of a full service branch facility and a  major computer conversion scheduled to be fully implemented during the third  quarter of 2002.

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

**Effects of Inflation**

             The impact of inflation on banks differs from its impact on non-financial  institutions.  Banks, as financial intermediaries, have assets which are  primarily monetary in nature and which tend to fluctuate in concert with  interest rates which are effected by inflation.  A bank can reduce the  impact of inflation if it can manage its rate sensitivity gap.  This gap  represents the difference between rate sensitive assets and rate sensitive  liabilities.  Through our asset-liability committees, we attempt to  structure the assets and liabilities and manage the rate sensitivity gap,  thereby seeking to minimize the potential effects of inflation.  For  information on the management of our interest rate sensitive assets and  liabilities, see the “Asset/Liability Management” section.

**Results of Operations - For the  Years Ended December 31, 2001, 2000 and 1999**

             Our profitability is determined by our ability to effectively manage interest  income and expense, to minimize loan and security losses, to generate  noninterest income, and to control operating expenses.  Because interest  rates are determined by market forces and economic conditions beyond our  control, our ability to generate net interest income depends upon our ability  to obtain an adequate net interest spread between the rate earned on  interest-earning assets and the rate paid on interest-bearing  liabilities.  The net yield on average interest-earning assets decreased  to 4.33% in 2001 from 4.74% in 2000.  This decrease is attributable  primarily to the continued decrease in interest rates in 2001.  In 2001,  the average yield on interest-earning assets decreased to 8.55% from 9.43% in  2000 while the average yield on interest-bearing liabilities decreased only to  4.85% in 2001 from 5.40% in 2000.  The overall change in the interest  rate spread from 2000 to 2001 was a decrease of 33 basis points.  The  decrease in the net interest spread is directly related to the 475 basis point  drop in prime interest rates during 2001 which ended its downward spiral at  4.75%.

             The net yield on average interest-earning assets decreased by 46 basis points  to 4.74% from 5.20% for the year ended December 31, 2000 as compared to  1999.  The decreased net yield in 2000 was attributable to an increase in  interest paid on interest-bearing liabilities which increased during that  period by 77 basis points to 5.40%.  During that same period, interest  earned on interest-bearing assets only increased by 31 basis points.   During 2000, the prime interest rate increased 100 basis points.

             The net interest spread for the years ended December 31, 2001 and 2000 has  dropped by 33 and 46 basis points which closely matches the drop in yield in  interest-earning assets which dropped by 41 and 46 basis points, respectively.

             Net interest income, however, increased by $459,000 to $21.5 million in 2001,  compared to an increase of $2.4 million in 2000.  The increase for both  years continues to reflect the continued increase in interest-

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earning assets  during 2001 and 2000.  The increase in interest-earning assets in 2000  was significantly higher than 2001, as discussed earlier.  As shown in  Table 1 and Table 2 included in this annual report, the change in net interest  income is the result of the increases in net volume versus changes in net  interest rates.

             Provisions for loan losses increased by only $157,000 during 2001 compared to  a decrease of $747,000 during 2000.  The provision for loan losses is the  charge to operations which management feels is necessary to fund the allowance  for loan losses.  This provision is based on the growth of the loan  portfolio, the amount of historical net charge-offs incurred, and the general  economy as well as the local economies.  The allowance for loan loss was  $5,522,000 or 1.32% of total loans at December 31, 2001 compared to $5,099,000  or 1.33% of total loans at December 31, 2000.  We incurred net charge  offs of $883,000, $268,000 and $808,000 for the years ended December 31, 2001,  2000 and 1999, respectively.  The percentage of net charge-offs to  average loans outstanding was .22% and .08% for the years ended  December 31, 2001 and 2000.  The increase in the provision for loan  losses in 2001 was due to loan growth and not to any specific identified  trends.  The increase in net charge-offs of $615,000 includes consumer  related net charge-offs of $277,000 and real estate net charge-offs of  $299,000 which accounts for 94% of all net charge-offs.  The consumer  related charge-offs consist of many smaller balance loans while the real  estate charge-offs consist of only a few larger balance loans.  Real  estate loans are normally secured by 1 to 4 family residences or other real  estate with values exceeding the original loan balance, therefore minimizing  the risk of loss.  Consumer loans, however, are oftentimes secured by  consumer goods and automobiles, or unsecured, and therefore subject to greater  loss in the event of charge-off.  During a recession, losses are more  likely and the risk of loss is greater in the consumer portfolio.  The  allowance for loan losses as a percentage of nonaccrual loans at December 31,  2001 was 1167.4%, which was up significantly from 318.3% at December 31,  2000.  This increase is due to nonaccrual loans decreasing to $473,000 at  December 31, 2001 from $1,602,000 at December 31, 2000.  During the same  period, other problem loans, including past due loans greater than 90 days  past due, decreased by $563,000 compared to a decrease of $133,000 in  2000.  Based on management’s evaluations, the allowance for loan losses  is adequate to absorb potential losses on existing loans.

             Other income increased during 2001 by $1,967,000 compared to an increase of  $650,000 in 2000.  For the year ended December 31, 2001, the most  significant portion of the net increase consisted of an increase of $1,245,000  in service charges on deposit accounts and an increase of $611,000 in mortgage  origination fees.  For the same period in 2000, service charges decreased  by $54,000 and mortgage origination fees increased by $93,000.  The  increases in service charges on deposit accounts reflects the continued growth  in transaction accounts.  The increase in mortgage origination fees is  directly related to the decrease in mortgage rates.  In a decreasing rate  environment, refinancing of mortgage loans provided an excellent opportunity  for us to generate other fee income.

             Other expense increased $2,712,000 and $2,108,000 for the years ended December  31, 2001 and 2000, respectively.  Increases in salaries and employee  benefits represent the most significant portions of these increases, which  increased by $1,219,000 and $1,585,000 for the years ended 2001 and 2000,  respectively.  The number of full-time equivalent employees decreased by  11 from December of 2000 to December of 2001 and by 15 for the same period  from 1999 to 2000.  These reductions in number of employees is directly  related to the business combinations and the duplication of  responsibilities.  In connection with the acquisition of Community Trust  Financial Services Corporation, we incurred one-time expenses of approximately  $884,000 of salary continuation benefits to officers and employees who are no  longer with the Company.  In addition, we incurred normal increases due  to increases in profit sharing contributions, health insurance costs,  incentive compensation and salary increases for the years ended December 31,  2001 and 2000.  Other operating expenses increased by $1,005,000 and  $114,000, respectively, for the years ended December 31, 2001 and 2000.   Professional and merger related expenses were $618,678 and $336,367 for the  years ended December 31, 2001 and 2000, respectively.  These expenses are  recognized in other operating expenses due to the business combinations

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consummated in 2001 and 2000 being accounted for as poolings of  interests.  The Company actively pursues merger opportunities and expects  to incur expenses related to evaluating these opportunities.

             Income tax expense decreased $104,000 to $1,986,000 in 2001 from $2,090,000 in  2000.  The effective tax rate was 33% for the years ended December 31,  2001 and 2000.

             Net income decreased by $339,000 for the year ended December 31, 2001, or by  7.91%.  The increase in net income for the same period in 2000 was  $977,000, or 29.3%.  The decrease in net income in 2001 is due to a  decrease in growth rate of interest-earning assets, an overall decline in  yields on interest-earning assets and one-time merger expenses recognized in  connection with the business combination with Community Trust Financial  Services Corporation.  The increase in net income in 2000 was a  combination of significant growth in interest-earning assets, moderate  increases in other expenses, a decrease in provision for loan losses and  increased non-interest income.

**SELECTED FINANCIAL  INFORMATION AND STATISTICAL DATA**

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

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

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**Table 1 -      Distribution of Assets, Liabilities and Stockholders’ Equity                       Interest Rates and Interest Differentials**

 

|                                                | Years Ended        December 31        |
|-----------------------------------------------------|---------------------------------------|
|                                                |                                       |
|                                                | 2001                                  | 2000 | 1999 |
|                                                |                                       |  |  |
|                                                | Average        Balances(1)            | Income/        Expense |  Yields/        Rates |  Average        Balances(1) | Income/        Expense | Yields/        Rates | Average        Balances(1) | Income/        Expense | Yields/        Rates |
|                                                |                                       |  |  |  |  |  |  |  |  |
|                                                |                                  |   |   | (Dollars in        Thousands) |   |   |   |
|                                                |                                  |   |   |   |   |   |   |   |   |
| Taxable securities                                  | 68,639            | 4,360     | 6.35% | 65,110      | 4,232     | 6.50%  | 52,762    | 3,189     | 6.04% |
| Nontaxable securities (5)                           | 15,907            | 720     | 4.53    | 15,041      | 678     | 4.51     | 12,591    | 561            | 4.46    |
| Federal funds sold                                  | 11,458            | 447     | 3.90    | 6,465      | 425     | 6.57     | 9,258    | 495     | 5.35    |
| Interest-bearing deposits in        banks           | 1,736             | 60     | 3.46    | 707      | 34     | 4.81     | 1,506    | 89     | 5.91    |
| Loans (2) (4)                                       | 397,496           | 36,762     | 9.25    | 356,051      | 36,425     | 10.23     | 282,277    | 28,367     | 10.05    |
|                                                |                                       |  |    |  |  |   |  |  |   |
|                                                |                                  |   |   |   |   |   |   |   |   |
| Total interest-earning assets                       | 495,236           | 42,349     | 8.55% | 443,374      | 41,794     | 9.43%  | 358,394    | 32,701     | 9.12% |
|                                                |                                  |  |    |   |  |   |   |  |   |
|                                                |                                  |   |   |   |   |   |   |   |   |
| Unrealized gains (losses) on        securities      | 1,355             |   |   | (1,471)     |   |   | (269)   |   |   |
| Allowance for loan losses                           | (5,498)                |   |   | (3,232)     |   |   | (2,390)   |   |   |
| Cash and due from banks                             | 14,107            |   |   | 13,530      |   |   | 8,755    |   |   |
| Other assets                                        |   25,637     |   |   | 23,136      |   |   |   19,768    |   |   |
|                                                |                                       |   |    |  |   |   |  |   |   |
|                                                |                                  |   |   |   |   |   |   |   |   |
|      Total                      | 530,837           |   |   | 475,337      |   |   | 384,258    |   |   |
|                                                |                                       |   |    |  |   |   |  |   |   |
|                                                |                                  |   |   |   |   |   |   |   |   |
| Interest-bearing demand &        savings        | 119,961           | 2,527     | 2.11    | 99,787      | 3,060     | 3.07     | 100,691    | 2,663     | 2.64    |
| Time                                                | 248,906           | 14,958     | 6.01    | 220,938      | 13,976     | 6.33     | 174,900    | 9,899     | 5.66    |
| Borrowings                                          |   62,283     |            3,408     | 5.47    |   64,389      |   3,761     | 5.84     |   28,764    |   1,515     | 5.27    |
|                                                |                                       |  |    |  |  |   |  |  |   |
|                                                |                                  |   |   |   |   |   |   |   |   |
| Total interest-bearing        liabilities           | 431,150           |   20,893     | 4.85% | 385,114      | 20,797     | 5.40%  | 304,355    | 14,077     | 4.63% |
|                                                |                                  |  |   |   |  |   |   |  |   |
|                                                |                                  |   |   |   |   |   |   |   |   |
| Noninterest-bearing demand                          | 50,462            |   |   | 47,047      |   |   | 41,185    |   |   |
| Other liabilities                                   | 6,889             |   |   | 6,125      |   |   | 3,654    |   |   |
| Stockholders’ equity (3)                       |   42,336     |   |   |   37,051      |   |   |   35,064    |   |   |
|                                                |                                       |   |    |  |   |   |  |   |   |
|                                                |                                  |   |   |   |   |   |   |   |   |
|      Total                      | 530,837           |   |   | 475,337      |   |   | 384,258    |   |   |
|                                                |                                       |   |    |  |   |   |  |   |   |
|                                                |                                  |   |   |   |   |   |   |   |   |
| Net interest income                                 |                                  |   21,456     |   |   | 20,997     |   |   | 18,624     |   |
|                                                |                                  |  |   |   |  |   |   |  |   |
| Net interest spread                                 |                                  |   | 3.70% |   |   | 4.03%  |   |   | 4.49% |
| Net yield on average        interest-earning assets |                                  | 4.33% |   |   | 4.74%  |   |   | 5.20% |

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

(2)            Average balances of loans include nonaccrual loans and are net of deferred  interest and fees.

(3)            Average unrealized gains (losses) on securities available for sale, net of  tax, have been included in stockholders’ equity at $844,000,                   $(540,000), and  $(144,000) for 2001, 2000, and 1999, respectively.

(4)            Interest and fees on loans include $2,916,000, $2,390,000 and $2,517,000 of  loan fee income for the years ended December 31,                   2001, 2000 and  1999,  respectively.

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

**Table 2 - Rate and Volume Analysis**

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

24

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|                                                | Years Ended          December 31,                               |
|-----------------------------------------------------|-----------------------------------------------------------------|
|                                                     |                                                                 |
|                                                | 2001 to 2000                                                    |   | 2000 to 1999 |
|                                                     |                                                                 |  |  |
|                                                | 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                          | $                                                               | (3,676) |   | $ | 4,013  |   | $ | 337  |   | $ | 517  |   | $ | 7,541  |   | $ | 8,058  |
| Interest on taxable          securities             |                                                            | (99) |   |   | 227  |   |   | 128  |   |   | 256  |   |   | 787  |   |   | 1,043  |
| Interest on nontaxable          securities          |                                                            | 3  |   |   | 39  |   |   | 42  |   |   | 6  |   |   | 111  |   |   | 117  |
| Interest on federal funds          sold             |                                                            | (219) |   |   | 241  |   |   | 22  |   |   | 98  |   |   | (168) |   |   | (70) |
| Interest on interest-bearing                        |                                                            |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |
|    deposits in          other banks       |                                                            | (12) |   |   | 38  |   |   | 26  |   |   | (15) |   |   | (40) |   |   | (55) |
|                                                     |                                                                 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Total interest income                               |                                                            | (4,003) |   |   | 4,558  |   |   | 555  |   |   | 862  |   |   | 8,231  |   |   | 9,093  |
|                                                     |                                                                 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|                                                |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Expense from interest-bearing                       |                                                            | ** ** |   |   | ** ** |   |   | ** ** |   |   |   |   |   |   |   |   |   |
| liabilities:                                        |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest on interest-bearing          demand        |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|             deposits and savings deposits |                                                            | (1,076) |   |   | 543  |   |   | (533) |   |   | 422  |   |   | (25) |   |   | 397  |
| Interest on time deposits                           |                                                            | (730) |   |   | 1,712  |   |   | 982  |   |   | 1,265  |   |   | 2,812  |   |   | 4,077  |
| Interest on borrowings                              |                                                            | (233) |   |   | (120) |   |   | (353) |   |   | 180  |   |   | 2,066  |   |   | 2,246  |
|                                                     |                                                                 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Total interest expense                              |                                                            | (2,039) |   |   | 2,135  |   |   |   96  |   |   | 1,867  |   |   | 4,853  |   |   | 6,720  |
|                                                     |                                                                 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|                                                |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                 | $                                                               | (1,964) |   | $ | 2,423  |   | $ | 459   |   | $ | (1,005) |   | $ | 3,378 |   | $ | 2,373  |
|                                                     |                                                                 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

**Asset/Liability Management**

              Our asset/liability mix is monitored on a regular basis and a report  evaluating the interest rate sensitive assets and interest rate sensitive  liabilities is prepared and presented to the Board of Directors on a monthly  basis.  The objective of this policy is to monitor interest rate  sensitive assets and liabilities so as to minimize the impact of substantial  movements in interest rates on earnings.  An asset or liability is  considered to be interest rate-sensitive if it will reprice or mature within  the time period analyzed, usually one year or less. The interest  rate-sensitivity gap is the difference between the interest-earning assets and  interest-bearing liabilities scheduled to mature or reprice within such time  period.  A gap is considered positive when the amount of interest  rate-sensitive assets exceeds the amount of interest rate-sensitive  liabilities.  A gap is considered negative when the amount of interest  rate-sensitive liabilities exceeds the interest rate-sensitive assets.   During a period of rising interest rates, a negative gap would tend to  adversely affect net interest income, while a positive gap would tend to  result in an increase in net interest income. Conversely, during a period of  falling interest rates, a negative gap would tend to result in an increase in  net interest income, while a positive gap would tend to adversely affect net  interest income.  If our assets and liabilities were equally flexible and  moved concurrently, the impact of any increase or decrease in interest rates  on net interest income would be minimal.

              A simple interest rate “gap” analysis by itself may not be an  accurate indicator of how net interest income will be affected by changes in  interest rates.  Accordingly, we also evaluate how the repayment of  particular assets and liabilities is impacted by changes in interest  rates.  Income associated with interest-earning assets and costs  associated with interest-bearing liabilities may not be affected uniformly by  changes in interest rates.  In addition, the magnitude and duration of  changes in interest rates may have a significant impact on net

25

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interest  income.  For example, although certain assets and liabilities may have  similar maturities or periods of repricing, they may react in different  degrees to changes in market interest rates.  Interest rates on certain  types of assets and liabilities fluctuate in advance of changes in general  market rates, while interest rates on other types may lag behind changes in  general market rates.  In addition, certain assets, such as adjustable  rate mortgage loans, have features (generally referred to as “interest  rate caps and floors”) which limit the amount of changes in interest  rates.  Prepayment and early withdrawal levels also could deviate  significantly from those assumed in calculating the interest rate gap.   The ability of many borrowers to service their debts also may decrease during  periods of rising interest rates.

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

              At December 31, 2001 our cumulative one year interest rate sensitivity gap  ratio was .75%.  Our targeted ratio is 80% to 120% in this time  horizon.  This indicates that our interest-bearing liabilities will  reprice during this period at a rate faster than our interest-earning assets.

             The following table sets forth the distribution of the repricing of our  interest-earning assets and interest-bearing liabilities as of December 31,  2001, the interest rate sensitivity gap (i.e., interest rate sensitive assets  less interest rate sensitive liabilities), the cumulative interest rate  sensitivity gap, the interest rate sensitivity gap ratio (i.e., interest rate  sensitive assets divided by interest rate sensitive liabilities) and the  cumulative interest rate sensitivity gap ratio.

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

26

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|                                                  |                          |
|-------------------------------------------------------|-------------------------------|
|                                                  |                          |   |   | After |   |   |   |   |   |   |   |   |   |
|                                                  |                          |   |   | Three |   | After |   |   |   |   |   |   |
|                                                  |                          |   |   | Months |   | One Year |   |   |   |   |   |   |
|                                                  | Within                        |   | But |   | But |   |   |   |   |   |
|                                                  | Three                         |   | Within |   | Within |   | After |   |   |   |
|                                                  | Months                        |   | One Year |   | Five Years |   | Five Years |   | Total |
|                                                  |                               |  |  |  |  |  |  |  |  |
|                                                  | (Dollars in        Thousands) |
|                                                       |                               |
| Interest-earning assets:                              |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing deposits                             | $                             | 988  |   | $ | 99      |   | $ | -   |   | $ | -   |   | $ | 1,087 |
| Federal funds sold                                    |                          | 24  |   |   | -        |   |   | -   |   |   | -   |   |   | 24 |
| Securities                                            |                          | 8,764  |   |   | 9,297             |   |   | 45,067 |   |   | 23,076 |   |   | 86,204 |
| Loans                                                 |                          | 191,738  |   |   | 43,537      |   |   | 170,359 |   |   | 13,022 |   |   | 418,656 |
|                                                  |                               |  |  |  |  |  |  |  |  |
|                                                  |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                         |                          | 201,514  |   |   | 52,933      |   |   | 215,426 |   |   | 36,098 |   |   | 505,971 |
|                                                  |                               |  |  |  |  |  |  |  |  |
|                                                  |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                         |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand and        savings            | $                             | 121,193  |   | $ | -        |   | $ | -   |   | $ | 13,308 |   | $ | 134,501 |
| Time deposits                                         |                          | 67,766  |   |   | 117,085      |   |   | 52,965 |   |   | 48 |   |   | 237,864 |
| Federal funds purchased and                           |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    repurchase        agreements             |                          | 19,707  |   |   | -        |   |   | -   |   |   | -   |   |   | 19,707 |
| Other borrowings                                      |                          | 830  |   |   | 14,107      |   |   | 25,525 |   |   | 10,000 |   |   | 50,462 |
|                                                  |                               |  |  |  |  |  |  |  |  |
|                                                  |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing        liabilities             | $                             | 209,496  |    | $ | 131,192      |   | $ | 78,490 |   | $ | 23,356 |   | $ | 442,534 |
|                                                  |                               |  |  |  |  |  |  |  |  |
|                                                  |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate sensitivity gap                         | $                             | (7,982) |   | $ | (78,259)     |   | $ | 136,936 |   | $ | 12,742 |   | $ | 63,437 |
|                                                  |                               |  |  |  |  |  |  |  |  |
|                                                  |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative interest rate        sensitivity gap       | $                             | (7,982) |   | $ | (86,241)     |   | $ | 50,695 |   | $ | 63,437 |   |   |   |
|                                                  |                               |  |  |  |  |  |  |  |   |
|                                                  |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate sensitivity gap        ratio            |                          | .96  |   |   | .40       |   |   | 2.74 |   |   | 1.55 |   |   |   |
|                                                  |                               |  |  |  |  |  |  |  |   |
|                                                  |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative interest rate        sensitivity gap ratio |                          | .96 |    |   | .75       |   |   | 1.12 |   |   | 1.14 |   |   |   |
|                                                  |                               |  |  |  |  |  |  |  |   |

             We actively manage the mix of asset andliability maturities to control the  effects of changes in the general level of interest rates on net interest  income. Except for its effect on the general level of interest rates,  inflation does not have a material impact on us due to the rate variability  and short-term maturities of our earning assets.  In particular,  approximately 50.3% of the loan portfolio is comprised of loans which have  variable rate terms or mature within one year.  Most mortgage loans are  made on a variable rate basis with rates being adjusted every one to five  years. 

**SECURITIES  PORTFOLIO**

             The carrying value at the dates indicated of securities available-for-sale are  as follows:

|                                                                   | December 31,                    |
|------------------------------------------------------------------------|---------------------------------|
|                                                                   |                                 |
|                                                                   |                            | 2001 |   |   | 2000 |   |   | 1999 |
|                                                                        |                                 |  |  |  |  |
|                                                                   | (Dollars in          Thousands) |
|                                                                   |                                 |
|                                                                   |                            |   |   |   |   |   |   |   |
| U. S. Treasury and U. S.          government agencies and corporations | $                               | 28,857 |   | $ | 47,671 |   | $ | 48,032 |
| Mortgage-backed securities                                             |                            | 36,835 |   |   | 14,224 |   |   | 10,602 |
| State and municipal          securities                                |                            | 16,590 |   |   | 16,213 |   |   | 14,368 |
|  Equity securities (1)                                            |                            | 6,914 |   |   | 5,925 |   |   | 3,441 |
|                                                                        |                                 |  |  |  |  |
|                                                                   | $                               | 89,196 |   | $ | 84,033 |   | $ | 76,443 |
|                                                                        |                                 |  |  |  |  |

 

27

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| (1) | Other  securities consist of Federal Home Loan Bank stock, The Bankers Bank stock,  common stock of three de novo banks and corporate notes.  For  presentation purposes, the equity securities are not included in the maturity  table below because they have no contractual maturity date. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Maturities**

           The amounts of debt securities as of December 31, 2001 are shown in the  following table according to contractual maturities classified as; (1) one  year or less; (2) after one year through five years; (3) after five years  through ten years; and (4) after ten years.

|                                      |   | 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                          | $      | 3,533                         |   | 6.24                        | %      |   | $      | 1,487  |   | 4.28 | % |
| After one year through five        years  |   | 19,052                        |   | 6.00                        |   |   |   | 9,129  |   | 4.49 |   |
| After five years through ten        years |   | 9,001                         |   | 5.90                        |   |   |   | 4,245  |   | 4.89 |   |
| After ten years                           |   | 35,933                        |   | 6.51                        |   |   |   | 1,729  |   | 5.39 |   |
|                                           |        |                               |        |                        |        |        |        |        |   |
|                                      |   | $                             | 67,519 |                        | 6.27   | %      |   | $      | 16,590 |   | 4.66 | % |
|                                           |        |                               |        |                        |        |        |        |        |   |

 

| (1) | Yields were computed using coupon interest rates, including discount accretion  and premium amortization.  The weighted average yield for each maturity  range was computed using the carrying value of each security in that range. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Yields on municipal securities are not stated on a tax-equivalent basis.                                                                                                                                                                  |

**LOAN PORTFOLIO**

**Types of Loans**

             Loans by type of collateral are presented below:

|                                    | December 31,                    |
|-----------------------------------------|---------------------------------|
|                                    |                                 |
|                                    |                            | 2001 |   |   | 2000 |   |   | 1999 |   |   | 1998 |   |   | 1997 |
|                                         |                                 |  |  |  |  |  |  |  |  |
|                                    | (Dollars in          Thousands) |
|                                    |                                 |
|                                    |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                              | $                               | 38,597  |   | $ | 37,159  |   | $ | 47,439  |   | $ | 31,973   |   | $ | 32,976  |
| Real estate - construction              |                            | 99,473  |   |   | 68,951  |   |   | 66,658  |   |   | 42,268   |   |   | 34,791  |
| Real estate - mortgage (1)              |                            | 247,311  |   |   | 240,635  |   |   | 170,557  |   |   | 136,191  |   |   | 104,928  |
| Consumer                                |                            | 29,286  |   |   | 33,207  |   |   | 34,389  |   |   | 30,416  |   |   | 26,398  |
| Other                                   |                            | 3,989  |   |   | 4,739  |   |   | 5,312  |   |   | 1,730  |   |   | 2,050  |
|                                         |                                 |  |  |  |  |  |  |  |  |
|                                    |                            | 418,656  |   |   | 384,691  |   |   | 324,355  |   |   | 242,578  |   |   | 201,143  |
| Less allowance for loan          losses |                            | (5,522) |   |   | (5,099) |   |   | (4,233) |   |   | (3,068) |   |   | (2,575) |
|                                         |                                 |  |  |  |  |  |  |  |  |
| Net loans                               | $                               | 413,134  |   | $ | 379,592  |   | $ | 320,122  |   | $ | 239,510  |   | $ | 198,568  |
|                                         |                                 |  |  |  |  |  |  |  |  |

 (1)           Real estate-mortgage loans are net of deferred loan fees.

28

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**Maturities and Sensitivities to  Changes in Interest Rates**

      Total  loans as of December 31, 2001 are shown in the following table according to  contractual maturity classifications (1) one year or less, (2) after one year  through five years, and (3) after five years. 

> 
 

(Dollars in        Thousands)

 

Commercial

 

             One year or less

$                 18,904

             After one through five years

                   16,599

             After five years

           3,094
     
 

                     38,597
     
Construction

 

             One year or less

71,080

             After one through five years

18,841

             After five years

           6,552
     
 

  99,473
     
Other

 

             One year or less

72,398

             After one through five years

171,450

             After five years

36,738

 

280,586
     
 

 

 

$418,656
     

             The following table summarizes loans at December 31, 2001 with the due dates  after one year for predetermined and floating or adjustable interest rates.

         

|                                         |   | (Dollars in        Thousands) |
|----------------------------------------------|--------|-------------------------------|
|                                    |   |                               |
|                                         |   |                          |   |
| Predetermined interest rates                 |   | **$**                         | 199,024 |
| Floating or adjustable interest        rates |   |                          | 54,250 |
|                                    |   |                               |
|                                         |   | **$**                         | 253,274 |
|                                    |   |                               |

    

29

----

**Risk Elements**

             The following table presents the aggregate of nonperforming loans for the  categories indicated.

    

|                                                                  | December 31,                    |
|-----------------------------------------------------------------------|---------------------------------|
|                                                             |                                 |
|                                                             |  2001                      |    | 2000 |    | 1999 |   |  1998 |   | 1997 |
|                                                             |                                 |    |  |    |  |   |  |   |  |
|                                                             | (Dollars in          Thousands) |
|                                                             |                                 |
|                                                             |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans accounted for on a          nonaccrual basis                    | $                               | 473     |   | $ | 1,602    |   | $ | 589 |   | $ | 772 |   | $ | 441 |
|                                                             |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans contractually past due          ninety days or more             |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |
| to interest or principal          payments and still                  |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| accruing                                                              |                            | 196     |   |   | 773    |   |   | 906 |   |   | 876 |   |   | 589 |
|                                                             |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 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      |                            | 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 with nonaccrual loans as of  December 31, 2001 is as follows:

 

|  |  | (Dollars in Thousands)
 

Interest income that would have        been recorded

 

 

 

 

on nonaccrual loans under        original terms

 

$

35

 

 

 

 

Interest income that was        recorded on nonaccrual loans

 

$

14

 

 

 

             Management includes nonaccrual loans in its definition of impaired loans as  determined by Financial Accounting Standards Board Statement Numbers 114 and  118.

             Our policy is to discontinue 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 the borrower and full repayment of principal and  interest is not expected; and (2) the principal or interest is more than  ninety days past due, unless the loan is both well-secured and in the process  of collection.  Accrual of interest on such loans is resumed when, in  management’s judgment, the collection of interest and principal becomes  probable.  Loans classified for regulatory purposes as loss, doubtful,  substandard, or special mention that have not been included in the table above  do not represent or result from trends or uncertainties which management  reasonably expects will materially impact future operating results, liquidity,  or capital resources.  These classified loans do not represent material  credits about which management is aware and which causes management to have  serious doubts as to the ability of such borrowers to comply with the loan  repayment terms.  In the event of non-performance by the borrower, these  loans have collateral pledged which would prevent the recognition of  substantial losses.

30
       
**Commitments and Lines of Credit**

             We will, in the normal course of business, commit to extend credit in the form  of letters of credit, lines of credit, and credit cards.  The amount of  outstanding loan commitments at December 31, 2001 and 2000 was $79.6 million  and $74.8 million, respectively.  These commitments are recorded in the  financial statements when funds are disbursed or the financial instruments  become payable.  We use the same credit and collateral policies for these  off balance sheet commitments as for financial instruments that are recorded  in the financial statements.  Commitments generally have fixed expiration  dates or other termination clauses and may require payment of a fee. Since  many of the commitment amounts expire without being drawn upon, the total  commitment amounts do not necessarily represent future cash requirements.

**SUMMARY OF LOAN  LOSS EXPERIENCE**

             The following table summarizes average loan balances for each year determined  using the daily average balances during the year; changes in the allowance for  loan losses arising from loans charged off and recoveries on loans previously  charged off; additions to the allowance which have been charged to expense;  and the ratio of net charge-offs during the year to average loans.

 

December 31,
 
 

2001

 

2000

 

1999

 

1998

 

1997
     
 

(Dollars in          Thousands)
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average amount of loans          outstanding

$

397,496 

 

$

356,051 

 

$

282,277 

 

$

214,852 

 

$

180,769 
     
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance of allowance for loan          losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   at beginning of          year

$

5,099 

 

$

4,233 

  

$

3,068 

 

$

2,575 

 

$

2,100 
     
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Real          estate

 

(211)

 

 

(22)

 

 

(23)

 

 

(99)

 

 

(1)

              Commercial

 

(78)

 

 

(68)

 

 

(42)

 

 

(171)

 

 

(50)

              Installment

 

(801)

 

 

(481)

 

 

(861)

 

 

(319)

 

 

(212)

              Credit cards

 

(28)

 

 

(11)

 

 

(8)

 

 

(6)

 

 

(3)
     
 

 

(1,118)

 

 

(582)

 

 

(934)

 

 

(595)

 

 

(266)
     
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries of loans          previously             charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Real          estate

 

21 

 

 

131 

 

 

-   

 

 

9 

 

 

3 

              Commercial

 

8 

 

 

37 

 

 

25 

 

 

21 

 

 

12 

              Installment

 

192 

 

 

146 

 

 

96 

 

 

52 

 

 

81 

              Credit cards

 

14 

 

 

-   

 

 

5 

 

 

-   

 

 

-   
     
 

 

235 

 

 

314 

 

 

126 

  

 

82 

  

 

96 
     
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans charged off during          the year

 

(883)

 

 

(268)

 

 

(808)

 

 

(513)

 

 

(170)
     
Allowance for loan losses          acquired              (sold)

 

-   

 

 

(15)

 

 

77 

 

 

-   

 

 

-   
     
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to allowance          charged

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   to expense          during year

 

1,306 

 

 

1,149 

 

 

1,896 

 

 

1,006 

 

 

645 
     
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance of allowance for loan          losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   at end of year

$

5,522 

 

$

5,099 

 

$

4,233 

 

$

3,068 

 

$

2,575 
     
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of net loans charged          off 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   during the year to          average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    loans outstanding

 

.22%

 

 

0.08%

 

 

0.29%

 

 

0.24%

 

 

0.09%
     
31
       
            The  following table sets forth the allowance  for loan losses to total allowance for loan losses and the percent of loans to  total loans in each of the categories listed at the dates indicated.

 

December 31,
    
 

2001

2000

1999

1998

1997
 
 

 

 

 

  

 

 

  

  

 

  

 

Amount

Percent        of Loans        in Each        Category        to Total        Loans

Amount

Percent        of Loans        in Each        Category        to Total        Loans

Amount

Percent        of Loans        in Each        Category        to Total        Loans

Amount

Percent        of Loans        in Each        Category        to Total        Loans

Amount

Percent        of Loans        in Each        Category        to Total        Loans
    
 

 

 

 

  

(Dollars in        Thousands)

  

  

  

 

 

 

 

  

 

 

  

  

  

  

Commercial

$          418    

9.21%  

$          373    

9.66%  

$   307   

14.63%    

$   263    

13.18%

$          219    

16.39% 

Real estate-construction

690    

23.76     

574    

17.92     

471   

20.55       

392    

17.42   

275    

17.30    

Real estate-mortgage

3,288    

59.13     

2,787    

62.55     

2,450   

52.58       

1,785    

56.14   

1,343    

52.17    

Consumer and other

1,126    

           7.90     

1,365    

           9.87     

1,005   

  12.24       

           628    

  13.26   

          738    

  14.14    
    
Total allowance

$5,522    

100.00%  

$5,099    

100.00%   

$4,233   

100.00%    

$3,068    

100.00%

$2,575    

100.00% 
    
**Allowance for Loan Losses**

                 The allowance for loan losses is  created by direct charges to income.  Losses on loans are charged against  the allowance in the year in which such loans, in management’s opinion,  become uncollectible.  Recoveries are credited to this allowance.   The factors that influence management’s judgment in determining the amount  charged to income are past loan loss experience, composition of the loan  portfolio, evaluation of trends and possible losses, current economic  conditions and other relevant factors.  Our allowance for loan losses was  approximately $5,522,000 at December 31, 2001, representing 1.32% of total  loans, compared with $5,099,000 at December 31, 2000, which represented 1.33%  of total loans.  The allowance for loan losses is evaluated and adjusted  periodically based on management’s evaluation of current risk  characteristics of the loan portfolio, as well as the impact of prevailing and  expected economic and business conditions.  Management considers the  allowance for loan losses adequate to cover possible losses at  December 31, 2001.

**DEPOSITS**

             Average amounts of deposits and average rates paid thereon, classified as to  noninterest-bearing demand deposits, interest-bearing demand and savings  deposits and time deposits, are presented below. (1)

 

Year Ended          December 31,
 
 

2001

 

2000

 

1999
   
 

Amount

Rate

 

Amount

Rate

 

Amount

Rate
   
 

(Dollars in          Thousands)

 

 
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand          deposits

$

50,462

 

-  

%

 

$

47,047

 

-  

%

 

$

41,185

 

-  

%

Interest-bearing demand and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   savings deposits

 

119,961

 

2.11

 

 

 

99,787

 

3.07

 

 

 

100,691

 

2.64

 

Time deposits

 

248,906

 

6.01

 

 

 

220,938

 

6.33

 

 

 

174,900

 

5.66

 
                                                            
              Total deposits

$

419,329

 

 

 

 

$

367,772

 

 

 

 

$

316,776

 

 

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

32
       
 

             The amounts of time certificates of deposit issued in amounts of $100,000 or  more as of December 31, 2001 are shown below by category, which is based on  time remaining until maturity of (1) three months or less, (2) over three  through twelve months, and (3) over twelve months.

 

 

(Dollars in          Thousands)
  
 

 

 

 

 

Three months or less

**$**

18,629

 

Over three through twelve          months

 

31,659

 

Over  twelve months

 

7,373
  
 

Total

**$**

57,661
  
**RETURN ON EQUITY  AND ASSETS**

             The following rate of return information for the periods indicated is  presented below.

 

 

Years Ended          December 31,
  
 

 

2001

 

2000

 

1999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on assets (1)

.75

%

 

.91

%

 

.87

%

 

 

 

 

Return on equity (2)

9.38

 

 

11.63

 

 

9.50

 

 

 

 

 

Dividend payout ratio (3)

35.37

 

 

26.67

 

 

28.99

 

 

 

 

 

Equity to assets ratio (4)

7.98

 

 

7.79

 

 

9.13

 

 

 

 

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

**SHORT TERM  BORROWINGS**

**Other Borrowings**

             As part of our operating strategy, we have utilized Federal funds purchased  and securities sold under repurchase agreements as an alternative to retail  deposits to fund our operations when borrowings are less costly and can be  invested at a positive interest rate spread or when we need additional funds  to satisfy loan demand.  By utilizing Federal funds purchased and  securities sold under repurchase agreements, which possess varying stated  maturities, we can meet our liquidity needs without otherwise being dependent  upon retail deposits and revising our deposit rates to attract retail  deposits.  At December 31, 2001, we had $19,707,000 in outstanding  Federal funds purchased and securities sold under repurchase agreements.

33
       
 

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

 

At or For the          Year Ended          December 31,
 
 

2001

 

 

2000

 

 

1999

 

(Dollars in          Thousands)

 

 

 

 

 

 

 

 

 

 

 

Average balance outstanding

$

12,785

 

 

$

19,115

 

 

$

9,552

Maximum amount outstanding at          any month-end during the year

 

19,707

 

 

 

22,018

 

 

 

15,859

Balance outstanding at end of          year

 

19,707

 

 

 

17,132

 

 

 

17,850

Weighted average interest          rate during year

 

3.44%

 

 

 

5.90%

 

 

 

4.65%

Weighted average interest          rate at end of year

 

1.74%

 

 

 

6.08%

 

 

 

5.25%

34
       
**ITEM  7A.       QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK**

             We are exposed only to U.S. dollar interest rate changes and accordingly, we  manage exposure by considering the possible changes in the net interest  margin. We do not have any trading instruments nor do we classify any portion  of the investment portfolio as held for trading.  We do not engage in any  hedging activities or enter into any derivative instruments with a higher  degree of risk than mortgage-backed securities that are commonly pass through  securities. Finally, we have no exposure to foreign currency exchange rate  risk, commodity price risk, and other market risks. Interest rates play a  major part in the net interest income of a financial institution. The  sensitivity to rate changes is known as “interest rate risk.” The  repricing of interest earning assets and interest-bearing liabilities can  influence the changes in net interest income. As part of our asset/liability  management program, the timing of repriced assets and liabilities is referred  to as Gap management. It is our policy to maintain a Gap ratio in the one-year  time horizon of .80 to 1.20.

             GAP management alone is not enough to properly manage interest rate  sensitivity, because interest rates do not respond at the same speed or at the  same level to market rate changes. For example, savings and money market rates  are more stable than loans tied to a “Prime” rate and thus respond  with less volatility to a market rate change.

             We use a simulation model to monitor changes in net interest income due to  changes in market rates. The model of rising, falling and stable interest rate  scenarios allow management to monitor and adjust interest rate sensitivity to  minimize the impact of market rate swings. The analysis of impact on net  interest margins as well as market value of equity over a twelve-month period  is subjected to a 200 basis point increase and decrease in rate. The December  model reflects an increase of 2% in net interest income and a 14% decrease in  market value equity for a 200 basis point increase in rates. The same model  shows a 1% decrease in net interest income and a 16% increase in market value  equity for a 200 basis point decrease in rates. Our policy is to allow no more  than +- 8% change in net interest income and no more than +- 25% change in  market value equity for these scenarios. Therefore, we are within our policy  guidelines and are protected from any significant impact due to market rate  changes.

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

Consolidated Balance Sheets -  December 31, 2001 and 2000

Consolidated Statements of Income –  Three Years Ended December 31, 2001, 2000, and 1999

Consolidated Statements of  Comprehensive Income – Three Years Ended December 31, 2001, 2000, and 1999

Consolidated Statements of  Stockholders’ Equity – Three Years Ended December 31, 2001, 2000, and 1999

Consolidated Statements of Cash Flows  – Three Years Ended December 31, 2001, 2000, and 1999

Notes to Consolidated Financial  Statements

35
       
**ITEM  9.          CHANGES IN AND  DISAGREEMENTS WITH ACCOUNTANTS                          ON ACCOUNTING  AND FINANCIAL DISCLOSURE**

               Not applicable

**PART III**

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

             The information set forth under the caption “Election of Directors” and  “Executive Officers” in the Proxy Statement used in connection with our  2002 Annual Shareholders Meeting is incorporated herein by reference.

**ITEM  11.        EXECUTIVE COMPENSATION**

             The information set forth under the caption “Executive Compensation” in  the Proxy Statement used in connection with our 2002 Annual Shareholders  meeting is incorporated herein by reference.

**ITEM  12.        SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND                          MANAGEMENT**

             The information set forth under the caption “Security Ownership of Certain  Beneficial Owners and Management” in the Proxy Statement used in connection  with our 2002 Annual Shareholders meeting is incorporated herein by reference.

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

             The information set forth under the caption “Certain Transactions” in the  Proxy Statement used in connection with our 2002 Annual Shareholders meeting  is incorporated herein by reference.

36
       
**ITEM  14.        EXHIBITS AND REPORTS ON FORM 8K**

(a)

Contents:

 

 

 

 

 

 

1.

Consolidated financial        statements:

 

 

 

 

 

(a)

G B & T Bancshares, Inc.        and Subsidiaries:

 

 

 

 

 

 

(i)

Consolidated Balance Sheets -        December 31, 2001 and 2000

 

 

 

 

 

 

(ii)

Consolidated Statements of        Income – Three Years Ended December 31, 2001, 2000, and 1999

 

 

 

 

 

 

(iii)

Consolidated Statements of        Comprehensive Income – Three Years Ended December 31, 2001, 2000, and        1999

 

 

 

 

 

 

(iv)

Consolidated Statements of        Stockholders' Equity – Three Years Ended December 31, 2001, 2000, and        1999

 

 

 

 

 

 

(v)

Consolidated Statements of Cash        Flows – Three Years Ended December 31, 2001, 2000, and 1999

 

 

 

 

 

 

(vi)

Notes to Consolidated Financial        Statements

 

 

 

 

 

2.

Financial statement schedules:

 

 

 

 

 

All schedules are omitted as        the required information isinapplicable or the information is presented        in the financial statements or related notes

 

 

 

 

(b)

Reports of Form 8-K:

 

 

 

 

 

We did not file a report on        Form 8-K during the last quarter of 2001.
           
37
       
             (c)        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, filed on September 24, 1998).

 

 

3.2

By-Laws of the Registrant        (incorporated herein by reference to the Registrant’s Registration        Statement on Form S-3, filed on September 24, 1998).

 

 

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, filed on September 24, 1998).

 

 

21.1

Subsidiary of the Registrant.
               99.1Report of Independent Certified Public Accountants by        Porter Keadle Moore, LLP
38
       
 

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

**CONSOLIDATED  FINANCIAL REPORT**

**DECEMBER 31, 2001**

**TABLE OF  CONTENTS**

 

 

 

 

 

**Page**

 

 

 

**INDEPENDENT AUDITOR’S        REPORT**

**F-2**

 

 

 

**CONSOLIDATED FINANCIAL        STATEMENTS**

 

 

 

 

 

**Consolidated balance sheets**

**F-3**

 

**Consolidated statements of        income**

**F-4**

 

**Consolidated statements of        comprehensive income**

**F-5**

 

**Consolidated statements of        stockholders’ equity**

**F-6 and 7**

 

**Consolidated statements of        cash flows**

**F-8 and 9**

 

**Notes to consolidated        financial statements**

**F-10-32**
    
** **
****
F-1
 
 

** INDEPENDENT  AUDITOR’S REPORT**

 

**To the Board of Directors  GB&T Bancshares, Inc. and Subsidiaries  Gainesville, Georgia**

                                 We have audited the accompanying consolidated balance sheets of **GB&T  Bancshares, Inc. and subsidiaries** as of December 31, 2001 and 2000, and  the related consolidated statements of income, comprehensive income,  stockholders’ equity and cash flows for each of the three years in the  period ended December 31, 2001.  These financial statements are the  responsibility of the Company’s management.  Our responsibility is to  express an opinion on these financial statements based on our audits.  We  did not audit the 2000 financial statements of Community Trust Financial  Services Corporation and subsidiaries, a company which was pooled with  GB&T Bancshares, Inc. in 2001, as explained in Note 16 to the consolidated  financial statements, which statements are included in the restated 2000  financial statements and reflect total assets and revenues constituting 31%  and 34%, respectively, of the related consolidated totals.  Those  statements were audited by other auditors whose report has been furnished to  us, and our opinion for 2000 insofar as it relates to the amounts included for  Community Trust Financial Services Corporation, is based solely upon the  report of the other auditors.

                                 We conducted our audits in accordance with auditing standards generally  accepted in the United States of America.  Those standards require that  we plan and perform the audit to obtain reasonable assurance about whether the  financial statements are free of material misstatement.  An audit  includes examining, on a test basis, evidence supporting the amounts and  disclosures in the financial statements.  An audit also includes  assessing the accounting principles used and significant estimates made by  management, as well as evaluating the overall financial statement  presentation.  We believe that our audits provide a reasonable basis for  our opinion.

                                 In our opinion, based upon our audits and the report of other auditors, 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, 2001 and 2000, and the results of their  operations and their cash flows for each of the three years in the period  ended December 31, 2001 in conformity with accounting principles generally  accepted in the United States of America.

                                                                                                                                /s/  Mauldin & Jenkins, LLC

Atlanta, Georgia  February 1, 2002

F-2
 **GB&T          BANCSHARES, INC.****AND          SUBSIDIARIES**** ****CONSOLIDATED                    BALANCE SHEETS****DECEMBER          31, 2001 AND 2000**      **Assets****2001** 2000      Cash          and due from banks**$**
**18,096,778**
 
$
16,332,076Interest-bearing          deposits in banks** **
**1,087,194**
  323,675Federal          funds sold** **
**23,831**
  7,722,991Securities          available-for-sale** **
**86,204,079**
  81,190,128Restricted          equity securities** **
**2,992,469**
  2,842,469 ** **** **   Loans** **
**418,655,292**
  384,690,470Less          allowance for loan losses** **
**5,521,683**
  5,098,512
Loans,          net
** ****413,133,609**  379,591,958 ** **** **   Premises          and equipment** ****14,807,158**  13,304,711Other          assets** ****11,250,634**  11,180,428 ** **** **   
**Total          assets**
**$****547,595,752** 
$
512,488,436 ** **** **   **Liabilities          and Stockholders’ Equity**** **** **    ** **** **   Deposits** **** **   
Noninterest-bearing
**$****54,393,181** $49,291,994
Interest-bearing
** ****372,365,074**  352,009,708
Total          deposits
** ****426,758,255**  401,301,702Federal          funds purchased and securities** **** **                sold under repurchase agreements** ****19,707,004**  17,131,999Other          borrowings** ****50,462,339**  47,166,782Other          liabilities** ****5,894,683**  6,333,606
Total          liabilities
** ****502,822,281**  471,934,089 ** **** **   **Commitments          and contingencies**** **** **    ** **** **   **Stockholders’          equity**** **** **   
Common          stock, par value $5; 20,000,000 shares
** **** **   
              authorized, 4,739,139 and 4,651,100 shares
** **** **   
              issued and outstanding, respectively
** ****23,695,695**  23,255,500
Capital          surplus
** ****1,893,779**  1,600,636
Retained          earnings
** ****18,197,695**  15,586,246
Accumulated          other comprehensive income
** ****986,302**  111,965 ** **** **   
**Total          stockholders’ equity**
** ****44,773,471**  40,554,347 ** **** **   
**Total          liabilities and stockholders’ equity**
**$****547,595,752** 
$
512,488,436 ** **** **    ** **    **See          Notes to Consolidated Financial Statements.**** **         
F-3
  **GB&T          BANCSHARES, INC.****AND          SUBSIDIARIES**   
**CONSOLIDATED                    STATEMENTS OF INCOME**
**YEARS          ENDED DECEMBER 31, 2001, 2000 AND 1999**  **2001** 2000 1999**Interest          income**        
Loans
**$****36,762,473 **** **$
36,425,249 
** **$28,366,827 
Taxable          securities
** ****4,359,627 **  
4,231,921 
  3,189,257 
Nontaxable          securities
** ****720,239 **  678,781   560,596 
Federal          funds sold
** ****446,982 **  424,596   494,561 
Deposits          in banks
** ****59,444 **  33,748   89,335 
Total          interest income
** ****42,348,765 **  41,794,295   32,700,576  ** **** **      **Interest          expense**** **** **      
Deposits
** ****17,484,630 **  17,036,542   12,561,403 
Federal          funds purchased, securities sold under
** **** **      
repurchase          agreements and other borrowings
** ****3,407,837 **  3,760,975   1,515,305 
Total          interest expense
** ****20,892,467 **  20,797,517   14,076,708  ** **** **      
Net          interest income
** ****21,456,298 **  20,996,778   18,623,868 **Provision          for loan losses**** ****1,305,972 **  1,149,010   1,895,795 
Net          interest income after provision for              loan losses
** ****20,150,326 **  19,847,768   16,728,073  ** **** **      **Other          income**** **** **      
Service          charges on deposit accounts
** ****3,470,639 **  2,225,768   2,280,367 
Other          service charges and fees
** ****925,046 **  817,058   646,553 
Security          transactions, net
** ****34,298 **  130,273   (2,071)
Mortgage          origination fees
** ****1,061,681 **  450,788   358,254 
Gain          on sale of loans
** ****184,656 **  53,001   61,457 
Trust          fees
** ****127,208 **  123,121   100,108 
Equity          in loss of unconsolidated subsidiary
** ****(146,258)**  (148,662)  (14,849)
Other          operating income
** ****671,350 **  710,775   281,944 
Total          other income
** ****6,328,620 **  4,362,122   3,711,763  ** **** **      **Other          expenses**** **** **      
Salaries          and employee benefits
** ****11,414,920 **** ** 10,196,258 ** ** 8,611,042 
Occupancy          expenses
** ****3,354,354 **** ** 2,865,714 ** ** 2,456,998 
Other          operating expenses
** ****5,753,700 **  4,749,457   4,635,449 
Total          other expenses
** ****20,522,974 **  17,811,429   
15,703,489 
 ** **** **      
Income          before income taxes
** ****5,955,972 **** ** 6,398,461 ** ** 4,736,347  ** **** **      **Income          tax expense**** ****1,986,213 **  2,089,916   1,404,506  ** **** **      
Net          income
**$**
**3,969,759 **
 $
4,308,545 
 $
3,331,841 
 ** **** **      **Basic          earnings per share****$**
**0.85 **
 $
0.93 
 $
0.72 
 ** **** **      **Diluted          earnings per share****$**
**0.82 **
 $
0.90 
 $
0.69 
  ** **      **See          Notes to Consolidated Financial Statements.** ** **             
 

F-4
 **GB&T          BANCSHARES, INC.****AND          SUBSIDIARIES**** **   **CONSOLIDATED          STATEMENTS OF  COMPREHENSIVE INCOME****YEARS          ENDED DECEMBER 31, 2001, 2000 AND 1999**     **2001** 2000 1999         **Net          income**
**$**
**3,969,759 ** 
$
4,308,545  
$
3,331,841  ** ****  **      **Other          comprehensive income (loss):**** ****  **** **  ** **  ** **** **** **** **  ** **  
Unrealized          holding gains (losses) arising during period,
** **** **** **  ** **  
net          of tax (benefits) of $548,222, $602,566 and
** **** **** **  ** **  
$(840,477),          respectively
** **
** 895,602**
** ** 994,884** ** (1,385,931)
 
** **** **** **  ** **  
Reclassification          adjustment for (gains) losses realized
** **** **** **  ** **  
in          net income, net of (taxes) benefits of $(13,033) ,
** **** **** **  ** **  
$9,326          and $704, respectively
** **
**(21,265)**
** ** 15,215** ** 1,367  ** **** **** **  ** **  **Other          comprehensive income (loss)**** **
**874,337**
** ** 1,010,099** ** (1,384,564) ** **** **** **  ** **  **Comprehensive          income**
**$**

**4,844,096 **
** **
$
5,318,644** **
$
1,947,277   ** **** **     ** **          ** **      **See          Notes to Consolidated Financial Statements.**  
 

F-5
 **GB&T          BANCSHARES, INC.****AND          SUBSIDIARIES** ** ****CONSOLIDATED          STATEMENTS OF  STOCKHOLDERS’ EQUITY****YEARS          ENDED DECEMBER 31, 2001, 2000 AND 1999**           **Common          Stock** **Shares**** ****Par          Value**     **Balance,          December 31, 1998**2,745,951  
$
13,729,755 
Restatement          to reflect the pooling of interests
    
               with Community Trust Financial Services
    
               Corporation at December 31, 1998 (Note 16)
1,804,779   9,023,895 **Balance,          December 31, 1998, as restated**4,550,730   22,753,650 
Net          income
-   - 
Issuance          of common stock to acquire assets
64,185   320,925 
Options          exercised, net of repurchases
8,477   42,385 
Tax          benefit of nonqualified stock options
-   - 
Dividends          reinvested
14,028   70,140 
Dividends          declared, $.20 per share
-   - 
Other          comprehensive loss
-   - **Balance,          December 31, 1999**4,637,420   23,187,100 
Net          income
-   - 
Options          exercised, net of repurchases
13,978   69,890 
Tax          benefit of nonqualified stock options
-   - 
Payment          for fractional shares in connection with
     
               UB&T Financial Services Corporation business combination
(298)  (1,490)
Dividends          declared, $.24 per share
-   - 
Other          comprehensive income
-   - **Balance,          December 31, 2000**4,651,100   23,255,500 
Net          income
-   - 
Options          exercised
88,328   441,640 
Payment          for fractional shares in connection with
     
               Community Trust Financial Services Corporation
    
               business combination
(289)  (1,445)
Tax          benefit of nonqualified stock options
-   - 
Dividends          declared, $.29 per share
-   - 
Other          comprehensive income
-   
- 
**Balance,          December 31, 2001**4,739,139  $23,695,695           **See          Notes to Consolidated Financial Statements.**    
 

F-6
 
**CONSOLIDATED  STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)**
** **** **** **** **** **** **               **Accumulated**         **Other** **Total****Capital** **Retained** **Comprehensive** **Stockholders’****Surplus** **Earnings** **Income          (Loss)** **Equity**            
$
866,827  
$

5,435,114 
 
$
179,359  
$
20,211,055                         78,854   4,561,383   307,071   13,971,203   945,681   9,996,497   486,430   34,182,258  -   3,331,841   -   3,331,841  373,185   -   -    694,110  (8,901)  -   -   33,484  7,385   -   -   7,385  268,175   -   -   338,315  -   (921,480)  -   (921,480) -   -   (1,384,564)  (1,384,564)  1,585,525   12,406,858   (898,134)  36,281,349  -   
4,308,545 
  -   4,308,545  (13,206)  -   -   56,684  32,729   -    -   32,729              (4,412)  -   -   (5,902) -   (1,129,157)  -   (1,129,157) -   -   1,010,099   1,010,099   1,600,636   15,586,246   111,965   40,554,347  -   3,969,759   -   3,969,759  98,948   -   -   540,588                        (3,743)  -   -   (5,188) 197,938   -   -   197,938  -   (1,358,310)  -   (1,358,310)  -   -   874,337   874,337 
$
1,893,779  
$
18,197,695  
$
986,302  
$
44,773,471     
F-7
 **GB&T          BANCSHARES, INC.****AND          SUBSIDIARIES**** **   **CONSOLIDATED          STATEMENTS OF CASH FLOWS****YEARS          ENDED DECEMBER 31, 2001, 2000 AND 1999**         ** ****2001**** **2000** **1999**OPERATING          ACTIVITIES**** **** **** **  ** **  Net          income
**$**
**3,969,759 ** 
$
4,308,545  
$
3,331,841 Adjustments          to reconcile net income to ** **      
net          cash provided by operating activities:
 ** **      
Depreciation          and amortization
 **1,541,690 **  1,354,098   1,184,724 
Provision          for loan losses
 **1,305,972 **  1,149,010   1,895,795 
Provision          for losses on other real estate owned
 **100,000 **  -   92,954 
Equity          in loss of unconsolidated subsidiary
 **146,258 **  148,662   14,849 
(Gain)          loss on sale of securities
 **(34,299)**  24,541   2,071 
Gain          on sale of restricted equity securities
 **- **  (154,813)  - 
Gain          on sale of other real estate owned
 **(25,794)**  (9,657)  (1,446)
Gain          on sale of loans
 **- **  (63,365)  - 
(Gain)          loss on disposal of premises and equipment
 **(2,843)**  (15,834)  6,579 
Deferred          income taxes
 **(323,545)**  (313,816)  (495,876)
(Increase)          decrease in interest receivable
 **747,489 **  (967,822)  (277,578)
Increase          (decrease) in interest payable
 **(914,949)**  1,270,686   995,016 
Increase          in cash surrender value of life insurance
 **(219,348)**  (103,063)  (3,682)
Net          other operating activities
 **964,288 **  (48,244)  147,189   ** **      Net          cash provided by operating activities **7,254,678 **  6,578,928   6,892,436   ** **      **INVESTING          ACTIVITIES**** **** **** **  ** **  (Increase)          decrease in interest-bearing deposits in banks **(763,519)**  1,187,346   1,070,780 Purchases          of securities available-for-sale **(48,649,885)**  (18,029,989)  (42,162,921)Purchases          of restricted equity securities **(150,000)**  (210,500)  (195,271)Proceeds          from sale of restricted equity securities **- **  395,490   - Proceeds          from maturities of securities available-for-sale **41,759,992 **  9,072,386   22,363,863 Proceeds          from sales of securities available-for-sale **3,313,534 **  2,969,741   2,550,318 Net          (increase) decrease in federal funds sold **7,699,160 **  (600,801)  5,676,328 Net          increase in loans **(36,852,556)**  (61,282,938)  (81,935,564)Acquisition          of assets **- **  -   (821,919)Purchase          of premises and equipment **(3,060,592)**  (3,513,263)  (3,180,622)Disposals          of premises and equipment **84,019 **  73,627   2,245 Purchase          of cash value life insurance policies **- **  (1,650,000)  (500,000)Proceeds          from sale of other real estate owned **625,666 **  615,263   420,855 Proceeds          from sale of loans and related goodwill **- **  551,444   -   ** **      
Net          cash used in investing activities
** ****(35,994,181)**** ** (70,422,194)** ** (96,711,908) ** **** **** **  ** **  **FINANCING          ACTIVITIES** ** **      Net          increase in deposits **25,456,553 **  56,049,534   45,273,803 Net          increase (decrease) in federal funds purchased ** **                    and securities sold under repurchase agreements **2,575,005 **  (718,239)  15,790,254 Net          increase in other borrowings **3,295,557 **  11,662,879   28,465,103 Proceeds          from issuance of common stock **540,588 **  56,684   33,484 Dividends          reinvested **- **  -   338,315 Dividends          paid **(1,358,310)**  (1,129,157)  (921,480)Payment          for fractional shares **(5,188)**  (5,902)  - Purchase          of treasury stock **- **  -   (50,975)  ** **      
Net          cash provided by financing activities
 **30,504,205 **  65,915,799   88,928,504 
 

F-8
 **GB&T          BANCSHARES, INC.****AND          SUBSIDIARIES**** **   **CONSOLIDATED          STATEMENTS OF  CASH FLOWS****YEARS          ENDED DECEMBER 31, 2001, 2000 AND 1999**          **2001** 2000 1999 ** **    Net          increase (decrease) in cash and due from banks
**$**
**1,764,702** 
$
2,072,533 
$
(890,968) ** **** **      Cash          and due from banks at beginning of year** ****16,332,076**** ** 14,259,543** ** 15,150,511  ** **** **      Cash          and due from banks at end of year
**$**
**18,096,778** 
$
16,332,076 
$
14,259,543  ** **** **      **SUPPLEMENTAL          DISCLOSURES**** **** **      
Cash          paid for:
** **** **** **  ** **  
Interest
**$****21,838,416** $19,526,831 $13,081,692  ** **** **      
Income          taxes
**$****1,804,228** $2,211,989 $1,796,700  ** **** **      **NONCASH          TRANSACTIONS**** **** **      
Principal          balances of loans transferred to other
** **** **      
real          estate owned
**$****2,050,776** $327,867 $401,588  ** **** **      
Financed          sales of other real estate owned
**$****45,843** $- $-  ** **** **      
Stock          issued to acquire assets
**$****-** $- $694,110   ** **  ** **   
Tax          benefit of nonqualified stock options
**$****197,938** $32,729 $7,385   ** **  ** **     ** **  ** **   **See          Notes to Consolidated Financial Statements.** ** **  ** **   
 

F-9
 
**GB&T  BANCSHARES, INC.  AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL  STATEMENTS**

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

**                      Nature  of Business**

GB&T  Bancshares, Inc. (the “Company”) is a multi-bank holding company whose  business is conducted by its wholly-owned commercial bank subsidiaries,  Gainesville Bank & Trust, United Bank & Trust, and Community Trust  Bank (the “Banks”).  Gainesville Bank & Trust is located in  Gainesville, Hall County, Georgia with the main office and four branches  located in Gainesville, one branch located in Oakwood, Georgia and one branch  located in Buford, Georgia.  United Bank & Trust is located in  Rockmart, Polk County, Georgia with a branch in Cedartown, Georgia.   Community Trust Bank is located in Hiram, Paulding County, Georgia with one  branch in Dallas, Georgia, one branch in Marietta, Georgia, and one branch in  Kennesaw, Georgia.  The Banks provide a full range of banking services to  individual and corporate customers in their primary market areas of Hall,  Polk, and Paulding Counties, respectively, and the surrounding counties. 

The  consolidated financial statements also include its wholly-owned subsidiary,  Community Loan Company (“CLC”).  CLC was incorporated in 1995 for the  purpose of acquiring and operating existing consumer finance companies under  the direction of the Company.  The operations of CLC, located in the  Georgia cities of Rockmart, Rossville, Gainesville, Woodstock, Cartersville,  Dahlonega, Dalton and Rome, are funded principally through a line of credit  arrangement with another financial institution.

The Company  owns a 49% interest in Cash Transactions, L.L.C. (“CashTrans”), a company  that sells, leases and services automated teller machines.  Community  Trust Bank has loans to CashTrans totaling approximately $586,685 and $504,000  at December 31, 2001 and 2000, respectively.  The investment is accounted  for using the equity method of accounting.

**                      Basis  of Presentation**

The  consolidated financial statements include the accounts of the Company and its  subsidiaries.  Significant intercompany transactions and balances are  eliminated in consolidation. 

The  preparation of financial statements in conformity with generally accepted  accounting principles requires management to make estimates and assumptions  that affect the reported amounts of assets and liabilities as of the balance  sheet date and the reported amounts of revenues and expenses during the  reporting period.  Actual results could differ from those  estimates.  Material estimates that are particularly susceptible to  significant change in the near term relate to the determination of the  allowance for loan losses, the valuation of foreclosed real estate and  deferred taxes.

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

For purposes  of reporting cash flows, cash and due from banks includes cash on hand, cash  items in process of collection and amounts due from banks.  Cash flows  from loans, federal funds sold, federal funds purchased and securities sold  under repurchase agreements, deposits and other borrowings are reported net.

The Company  maintains amounts due from banks which, at times, may exceed federally insured  limits.  The Company has not experienced any losses in such accounts.

F-10
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

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

**                      Securities**

Debt  securities that management has the positive intent and ability to hold to  maturity are classified as held-to-maturity and recorded at amortized  cost.  Securities not classified as held-to-maturity, including equity  securities with readily determinable fair values, are classified as  available-for-sale and recorded at fair value with unrealized gains and losses  excluded from earnings and reported in other comprehensive income.   Equity securities, including restricted stock, without a readily determinable  fair value are recorded at cost.

Interest and  dividends, including amortization of premiums and accretion of discounts, are  recognized in interest income.  Gains and losses on the sale of  securities are determined using the specific identification method.   Declines in the fair value of held-to-maturity and available-for-sale  securities below their cost that are deemed to be other than temporary are  reflected in earnings as realized losses.

**                      Loans**

Loans are  reported at their outstanding unpaid principal balances less unearned income,  including deferred fees and costs on originated loans, and the allowance for  loan losses.  Interest income is accrued on the unpaid balance.   Loan origination fees, net of certain direct loan origination costs, are  deferred and recognized as an adjustment of the related loan yield over the  life of the loan.

The accrual  of interest on loans is discontinued when, in management’s opinion, the  borrower may be unable to meet payments as they become due, unless the loan is  well-secured.  All interest accrued but not collected for loans that are  placed on nonaccrual or charged off is reversed against interest income.   Interest income on nonaccrual loans is subsequently recognized only to the  extent cash payments are received, until the loan is returned to accrual  status.

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

The  allowance is an amount that management believes will be adequate to absorb  estimated losses in the loan portfolio.  The allowance for loan losses is  evaluated on a regular basis by management and is based upon management’s  periodic review of the collectibility of the loans in light of historical  experience, the nature and volume of the loan portfolio, adverse situations  that may affect the borrower’s ability to repay, estimated value of any  underlying collateral and prevailing economic conditions.  This  evaluation is inherently subjective as it requires estimates that are  susceptible to significant revision as more information becomes  available.  In addition, regulatory agencies, as an integral part of  their examination process, periodically review the Company’s allowance for  loan losses, and may require the Company to make additions to the allowance  based on their judgment about information available to them at the time of  their examinations.

A loan is  considered impaired when it is probable the Company will be unable to collect  all principal and interest payments due in accordance with the contractual  terms of the loan agreement.  Impaired loans are measured by either the  present value of expected future cash flows discounted at the loan’s  effective interest rate, the loan’s obtainable market price, or the fair  value of the collateral if the loan is collateral dependent.  The amount  of impairment, if any, and any subsequent changes are included in the  allowance for loan losses.

F-11
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

 

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

**                      Premises  and Equipment**

Land is  carried at cost.  Premises and equipment are stated at cost less  accumulated depreciation computed principally by the straight-line method over  the estimated useful lives of the assets.  The range of estimated useful  lives for premises and equipment are:

Buildings and improvements

20 – 40 years

Furniture and equipment 

3 – 10 years

**                      Other  Real Estate Owned**

Other real  estate owned represents properties acquired through foreclosure.  Other  real estate owned is held for sale and is carried at the lower of cost or fair  value less estimated costs of disposal.  Any write-down to fair value at  the time of transfer to other real estate owned is charged to the allowance  for loan losses.  Revenue and expenses from operations and changes in the  valuation allowance are included in net expenses from foreclosed assets.   The carrying amount of other real estate owned at December 31, 2001 and 2000  was $1,522,874 and $228,133, respectively.

**                      Intangible  Assets**

Intangible  assets, arising from the excess of cost over the fair value of net assets  acquired, is amortized on a straight-line basis over periods not exceeding 15  years.  On an ongoing basis, management reviews the valuation and  amortization periods of goodwill to determine if events and circumstances  require the remaining lives to be reduced.  The carrying amount of  goodwill as of December 31, 2001 and 2000 was $566,128 and $630,849,  respectively.

**                      Transfers  of Financial Assets**

Transfers of  financial assets are accounted for as sales when control over the assets has  been surrendered.  Control over transferred assets is deemed to be  surrendered when (1) the assets have been isolated from the Company, (2) the  transferee obtains the right (free of conditions that constrain it from taking  advantage of that right) to pledge or exchange the transferred assets, and (3)  the Company does not maintain effective control over the transferred assets  through an agreement to repurchase them before their maturity.

The Company  originates and sells participations in certain loans.  Gains are  recognized at the time the sale is consummated.  The amount of gain  recognized on the sale of a specific loan is equal to the percentage resulting  from determining the fair value of the portion of the loan sold relative to  the fair value of the entire loan.  Losses are recognized at the time the  loan is identified as held for sale and the loan’s carrying value exceeds  its fair value.

**                      Income  Taxes**

Deferred  income tax assets and liabilities are determined using the balance sheet  method.  Under this method, the net deferred tax asset or liability is  determined based on the tax effects of the temporary differences between the  book and tax bases of the various balance sheet assets and liabilities and  gives current recognition to changes in tax rates and laws.

F-12
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

 

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

**                      Profit-Sharing  Plan**

Profit-sharing  plan costs are based on a percentage of individual employee’s salary, not to  exceed the amount that can be deducted for federal income tax purposes.

**                      Stock  Compensation Plans**

Statement of  Financial Accounting Standards (“SFAS”) No. 123, *Accounting for  Stock-Based Compensation*, encourages all entities to adopt a fair value  based method of accounting for employee stock compensation plans, whereby  compensation cost is measured at the grant date based on the value of the  award and is recognized over the service period, which is usually the vesting  period.  However, it also allows an entity to continue to measure  compensation cost for those plans using the intrinsic value based method of  accounting prescribed by Accounting Principles Board Opinion No. 25, *Accounting  for Stock Issued to Employees*, whereby compensation cost is the excess, if  any, of the quoted market price of the stock at the grant date over the amount  an employee must pay to acquire the stock.  Stock options issued under  the Company’s stock option plan have no intrinsic value at the grant date,  and under Opinion No. 25 no compensation cost is recognized for them.   The Company has elected to continue with the accounting methodology in Opinion  No. 25 and, as a result, has provided pro forma disclosures of net income and  earnings per share and other disclosures, as if the fair value based method of  accounting had been applied.

**                      Earnings  Per Share**

Basic  earnings per share are computed by dividing net income by the weighted-average  number of shares of common stock outstanding.  Diluted earnings per share  are computed by dividing net income by the sum of the weighted-average number  of shares of common stock outstanding and potential common shares.   Potential common shares consist of stock options.

**                      Comprehensive  Income**

Accounting  principles generally require that recognized revenue, expenses, gains and  losses be included in net income.  Although certain changes in assets and  liabilities, such as unrealized gains and losses on available-for-sale  securities, are reported as a separate component of the equity section of the  balance sheet, such items, along with net income, are components of  comprehensive income.

**                      Reclassifications**

Certain  assets, liabilities, income and expenses on the balance sheet and statement of  income as of and for the years ended December 31, 2000 and 1999 have been  reclassified, with no effect on net income, to be consistent with the  classifications adopted for the year ended December 31, 2001.

F-13
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

 

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

**                      Recent  Developments**

In July  2001, the Financial Accounting Standards Board  (“FASB”) issued  Statement No. 141 (SFAS No. 141), "Business Combinations" and  Statement No. 142 (SFAS No. 142), "Goodwill and Other Intangible  Assets". SFAS No. 141 requires that the purchase method of accounting be  used for all business combinations initiated after June 30, 2001. SFAS No. 141  also specifies criteria that intangible assets acquired in a purchase method  business combination must meet to be recognized and reported apart from  goodwill. SFAS No. 142 requires that goodwill and intangible assets with  indefinite useful lives no longer be amortized, but instead tested for  impairment at least annually in accordance with the provisions of SFAS No.  142. SFAS No. 142 also requires that intangible assets with estimable useful  lives be amortized over their respective estimated useful lives to their  estimated residual values, and reviewed for impairment.  SFAS No. 141 was  effective July 1, 2001 while the provisions of SFAS No. 142 will be adopted  effective January 1, 2002.

As of  December 31, 2001, the Company had unamortized goodwill of approximately  $566,128, which will be subject to the transition provisions of SFAS No. 141  and SFAS No. 142.  Amortization expense related to goodwill was $64,721  and $64,721 for the years ended December 31, 2001 and 2000,  respectively.  The Company has not fully determined the impact of  adopting these Statements on the financial statements as of December 31, 2001.

**NOTE  2.       SECURITIES**

The amortized cost and fair value of  securities available-for-sale are summarized as follows:

 

 

**Amortized        Cost**

 

**Gross        Unrealized        Gains**

 

**Gross        Unrealized        Losses**

 

**Fair        Value**
 ** **
 

December 31, 2001:

 

 

 

 

 

 

 

 

 

 

 

 

U. S.        Government and agency

 

 

 

 

 

 

 

 

 

 

 

 

     securities

**$**

**28,088,750**

 

**$**

**772,518**

 

**$**

**(3,898)**

 

**$**

**28,857,370**

 

State        and municipal securities

 

**16,148,296**

 

 

**450,261**

 

 

**(8,633)**

 

 

**16,589,924**

 

Mortgage-backed        securities

 

**36,523,548**

 

 

**368,200**

 

 

**(56,816)**

 

 

**36,834,932**

 

Equity        securities

 

**2,095,439**

 

 

**-  **

 

 

**-  **

 

 

**2,095,439**

 

Corporate        bonds

 

**1,765,319**

 

 

**66,798**

 

 

**(5,703)**

 

 

**1,826,414**
 ** **
 

 

$

**84,621,352**

 

$

**1,657,777**

 

$

**(75,050)**

 

$

**86,204,079**
 ** **
 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2000:

 

 

 

 

 

 

 

 

 

 

 

 

U. S.        Government and agency

 

 

 

 

 

 

 

 

 

 

 

 

     securities

$

47,696,995

 

$

146,962

 

$

(173,412)

 

$

47,670,545

 

State        and municipal securities

 

16,017,566

 

 

225,262

 

 

(29,360)

 

 

16,213,468

 

Mortgage-backed        securities

 

14,216,787

 

 

86,276

 

 

(79,273)

 

 

14,223,790

 

Equity        securities

 

2,095,439

 

 

-  

 

 

-  

 

 

2,095,439

 

Corporate        bonds

 

983,908

 

 

2,978

 

 

-  

 

 

986,886
 ** **
 

 

$

81,010,695

 

$

461,478

 

$

(282,045)

 

$

81,190,128
 ** **
F-14
 
 

**NOTES TO CONSOLIDATED FINANCIAL  STATEMENTS**

**NOTE  2.          SECURITIES  (Continued)**

The  amortized cost and fair value of debt securities as of December 31, 2001 by  contractual maturity are shown below.  Maturities may differ from  contractual maturities of mortgage-backed securities because the mortgages  underlying the securities may be called or repaid without penalty.   Therefore, these securities are not included in the maturity categories in the  following summary. 

 

 

**Amortized        Cost**

 

**Fair        Value**
 ** **
 

 

 

 

 

 

 

 

Due within one year

$

4,634,180

 

$

4,703,586

 

Due from one to five years

 

28,913,682

 

 

29,735,564

 

Due from five to ten years

 

11,265,316

 

 

11,604,421

 

Due after ten years

 

1,189,187

 

 

1,230,137

 

Mortgage-backed securities

 

36,523,548

 

 

36,834,932
 ** **
 

 

$

82,525,913

 

$

84,108,640
 ** **
Securities  with a carrying value of $39,159,884 and $57,819,269 at December 31, 2001 and  2000, respectively, were pledged to secure public deposits and for other  purposes required or permitted by law.

Gains and  losses on sales of securities available-for-sale consist of the following:

 

 

**Years Ended        December 31,**

 

 

**2001**

 

**2000**

 

**1999**

 

 

 

 

 

 

 

 

 

 

 

Gross gains

**$**

**48,374 **

 

$

154,814 

 

$

8,177 

 

Gross losses

 

**(14,076)**

 

 

(24,541)

 

 

(10,248)

 

Net realized gains (losses)

$

**34,298 **

 

$

130,273 

 

$

(2,071)

**NOTE  3.          LOANS**

The  composition of loans is summarized as follows:

 

 

**December 31,**

 

 

**2001**

 

**2000**
 ** **
 

Commercial, financial and        agricultural

**$**

**38,596,998 **

 

$

37,158,561 

 
 

Real estate – construction

 

**99,473,213 **

 

 

68,951,261 

 
 

Real estate – mortgage

 

**247,824,476 **

 

 

240,986,963 

 
 

Consumer

 

**29,286,063 **

 

 

33,206,621 

 
 

Other

 

**3,988,573 **

 

 

4,738,905 

  ** **
 

 

 

**419,169,323 **

 

 

385,042,311 

 
 

Unearned income

 

**(514,031)**

 

 

(351,841)

 
 

Allowance for loan losses

 

**(5,521,683)**

 

 

(5,098,512)

  ** **
 

Loans, net

**$**

**413,133,609 **

 

$

379,591,958 

  ** **
F-15
 
**NOTES TO CONSOLIDATED FINANCIAL  STATEMENTS**

**NOTE  3.          LOANS (Continued)**

Changes in  the allowance for loan losses are as follows:

 

 

**Years Ended        December 31,**

 

 

**2001**

 

**2000**

 

**1999**
 ** **
 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

**$**

**5,098,512 **

 

$

4,232,413 

 

$

3,067,850 

 

Provision        for loan losses

 

**1,305,972 **

 

 

1,149,010 

 

 

1,895,795 

 

Loans        charged off

 

**(1,118,001)**

 

 

(581,466)

 

 

(934,496)

 

Recoveries        of loans previously charged off

 

**235,200 **

 

 

313,547 

 

 

127,013 

 

Allowance        for loan losses acquired (sold)

 

**-   **

 

 

(14,992)

 

 

76,251 
 ** **

 

Balance, end of year

**$**

**5,521,683 **

 

$

5,098,512 

 

$

4,232,413 
 ** **
The following is a summary of  information pertaining to impaired loans:

 

 

**As of and for        the Years Ended        December 31,**
 ** **
 

 

**2001**

 

**2000**

 

**1999**
 ** **
 

 

 

 

 

 

 

 

 

 

 

Impaired loans without a        valuation allowance

**$**

**189,416**

 

$

21,046

 

$

-  

 

Impaired loans with a valuation        allowance

 

**327,290**

 

 

1,602,493

 

 

735,993
     
 

Total impaired loans

**$**

**516,706**

 

$

1,623,539

 

$

735,993
    
 

Valuation allowance related to        impaired loans

**$**

**49,094**

 

$

185,160

 

$

106,002
    
 

Average investment in impaired        loans

**$**

**1,223,601**

 

$

943,602

 

$

964,216
  
 

Interest income recognized on        impaired loans

**$**

**13,876**

 

$

130,084

 

$

22,037
  
In the  ordinary course of business, the Company has granted loans to certain related  parties, including executive officers, directors and their affiliates.   The interest rates on these loans were substantially the same as rates  prevailing at the time of the transaction and repayment terms are customary  for the type of loan.  Changes in related party loans for the year ended  December 31, 2001 are as follows:

 

Balance, beginning of year

**$**

9,808,378 

 

Advances

 

5,560,965 

 

Repayments

 

(7,424,879)

 

Change in directors

 

(255,008)
   
 

Balance, end of year

**$**

7,689,456 

F-16
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE  4.          PREMISES AND  EQUIPMENT**

Premises and  equipment are summarized as follows:

 

 

**December 31,**

 

 

**2001**

 

**2000**
 ** **** **
 

 

 

 

 

 

 

 

Land

**$**

**3,485,039 **

 

$

2,797,952 

 

Land improvements

 

**104,460 **

 

 

104,459 

 

Buildings

 

**7,095,616 **

 

 

6,172,521 

 

Leasehold improvements

 

**2,837,329 **

 

 

2,028,779 

 

Furniture and equipment

 

**9,606,164 **

 

 

8,429,659 

 

Computer installation and        construction in progress

 

**482,441 **

 

 

1,198,214 
 ** ** 
 

 

 

**23,611,049 **

 

 

20,731,584 

 

Accumulated depreciation

 

**(8,803,891)**

 

 

(7,426,873)
 ** ** 
 

 

**$**

**14,807,158 **

 

$

13,304,711 
 ** ** 
Depreciation  expense was $1,476,969, $1,205,517 and $1,059,886 for the years ended December  31, 2001, 2000 and 1999, respectively.

At December  31, 2001, the Company’s 50% interest in the Gainesville Bank & Trust  main office banking facility with a carrying value (including land) of  $1,613,909 was pledged to a bank to secure a $751,173 borrowing of a director  who is the owner of the remaining 50% interest in the building.

At December  31, 2001, computer installation and construction in progress consisted of  costs incurred in constructing a new branch and a software upgrade.   Total estimated costs to complete both projects as of December 31, 2001 were  approximately $1,857,544.

**Leases**

The Company  leases the Gainesville Bank & Trust main office banking facility under a  noncancelable operating lease agreement from 400 Church Street Properties, a  partnership that is 50% owned by Gainesville Bank & Trust and 50% owned by  a director.  The lease had an initial lease term of 10 years with four  five-year renewal options. 

The Company  also leases various other branches under noncancelable operating lease  agreements.

Rental  expense under all operating leases amounted to $707,844, $651,352 and $539,361  for the years ended December 31, 2001, 2000 and 1999, respectively.

Future  minimum lease payments on noncancelable operating leases are summarized as  follows:

 

2002

$

571,918

 

2003

 

563,381

 

2004 

 

538,810

 

2005  

 

196,004

 

2006  

 

139,112

 

Thereafter 

 

235,469
 
 

 

$

2,244,694
 
F-17
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE  5.          DEPOSITS**

The  aggregate amount of time deposits in denominations of $100,000 or more at  December 31, 2001 and 2000 was $57,660,875 and $63,247,790,  respectively.  The scheduled maturities of time deposits at December 31,  2001 are as follows:

 

2002

$

198,696,844

 

2003

 

27,769,400

 

2004

 

6,018,990

 

2005

 

4,036,830

 

2006

 

1,019,003
  
 

 

**$**

237,541,067

**NOTE  6.         SECURITIES SOLD UNDER  REPURCHASE AGREEMENTS**

Securities  sold under repurchase agreements, which are secured borrowings, generally  mature within one to four days from the transaction date.  Securities  sold under repurchase agreements are reflected at the amount of cash received  in connection with the transactions.  The Company may be required to  provide additional collateral based on the fair value of the underlying  securities.  The Company monitors the fair value of the underlying  securities on a daily basis.  Securities sold under repurchase agreements  at December 31, 2001 and 2000 were $10,663,854 and $12,942,850, respectively.

**NOTE  7.          OTHER BORROWINGS**

Other  borrowings consist of the following:

 

 

**December 31,**
 **  **
 

 

 

**2001**

 

 

**2000**
   
 

FHLB advances, interest payable        at fixed rates ranging from 4.98%

 

 

 

 

 

 

to        6.48%, advances mature at various maturity dates from

 

 

 

 

 

November        13, 2002 through January 5, 2011.

**$**

**35,551,375**

 

$

35,602,857

FHLB advances, interest payable        at variable rates from LIBOR

 

 

 

 

 

minus        .23% to LIBOR minus .12%, advances mature at various

 

 

 

 

 

maturity        dates from February 11, 2002 to May 19, 2003.

 

**12,000,000**

 

 

9,000,000

 

Note payable to bank.

 

**-  **

 

 

419,000

Line of credit with bank with        interest due quarterly at prime less

 

 

 

 

 

1.0% or        3.75% at December 31, 2001.  Collateralized by 100%

 

 

 

 

 

of        Community Trust Bank common stock, subject to various

 

 

 

 

 

 

loan        covenants.  As of December 31, 2001, the Company was

 

 

 

 

 

in        substantial compliance with the loan covenants.

 

**1,875,000**

 

 

1,030,000

Line of credit with bank with        interest due quarterly at prime less

 

 

 

 

 

.75% or        4.00% at December 31, 2001.  Collateralized by a first

 

 

 

 

 

lien on        loans receivable of CLC and 100% of Community Trust

 

 

 

 

 

 

Bank        common stock.

 

**180,000**

 

 

715,921

Treasury, tax and loan note        option account due on demand, bearing

 

 

 

 

 

 

interest        equal to the 90 day Treasury bill rate.

 

**855,964**

 

 

399,004
   
 

 

 

 

 

 

 

 

 

**$**

**50,462,339**

 

$

47,166,782
   
F-18
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE  7.          OTHER BORROWINGS**

Contractual  maturities of other borrowings as of December 31, 2001 are as follows:

 

2002

 

$

7,087,339

 

2003

 

 

11,000,000

 

2004

 

 

7,000,000

 

2005

 

 

8,000,000

 

2006

 

 

-  

 

Thereafter

 

 

17,375,000
   
 

 

 

$

50,462,339
   
The advances  from the Federal Home Loan Bank are collateralized by blanket floating liens  on qualifying first mortgages, Federal Home Loan Bank stock, qualifying home  equity loans and certain other qualifying specific loans.

**Loan  Guarantee**

CashTrans  has a $1,000,000 revolving line of credit with another financial institution  which is guaranteed by the Company.  At December 31, 2001, CashTrans had  $1,000,000 outstanding under this line of credit.

**NOTE  8.       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 $239,640, $229,260 and $182,511 for the years  ended December 31, 2001, 2000 and 1999, respectively.

                        **Deferred Compensation Plan**

The Company  has various deferred compensation plans providing for death and retirement  benefits for certain officers.  The estimated amounts to be paid under  the compensation plans have been funded through the purchase of life insurance  policies on the officers.  Accrued deferred compensation of $360,204 and  $227,916 is included in other liabilities as of December 31, 2001 and 2000,  respectively.  Cash surrender values of $4,321,007 and $4,101,659 on the  insurance policies is included in other assets at December 31, 2001 and  2000, respectively.

**NOTE  9.       STOCK COMPENSATION PLANS**

The Company  has a 1992 stock option plan for key employees.  Option prices reflect  the fair market value of the Company’s common stock on the dates the options  are granted.  These options expire five years from the grant date and  vest in accordance with vesting schedules determined by the Board of  Directors.

F-19
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE  9.            STOCK  COMPENSATION PLANS (Continued)**

The Company  has a 1997 stock option plan for the granting of options to directors,  officers, and employees.  Option prices reflect the fair market value of  the Company’s common stock on the dates the options are granted.  The  options may be exercised over a period of ten years in accordance with vesting  schedules determined by the Board of Directors. 

Other  pertinent information related to the options is as follows:

 

 

**2001**

 

**2000**

 

**1999**

 

 

**Shares**

 

**Weighted-        Average        Exercise        Price**

 

** Shares**

 

**Weighted-        Average        Exercise        Price**

 

**Shares**

 

**Weighted-        Average        Exercise        Price**
            
 

Outstanding at beginning of        year

**559,092 **

 

**$**

**10.19  **

 

551,561 

 

$

9.87  

 

495,964 

 

$

9.32  

 

Granted

**46,364 **

 

 

**13.35  **

 

42,386 

 

 

15.01  

 

71,697 

 

 

13.02  

 

Exercised

**(146,814)**

 

 

**8.83  **

 

(19,056)

 

 

6.10  

 

(11,379)

 

 

5.99  

 

Terminated

**(22,006)**

 

 

**13.73  **

 

(15,799)

 

 

16.29  

 

(4,721)

 

 

10.77  
 ** **   
 

Outstanding at end of year

**436,636 **

 

**$**

**10.81  **

 

559,092 

 

$

10.19  

 

551,561 

  

$

9.87  
 ** **   
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at year-end

**291,749 **

 

**$**

**10.18  **

 

321,132 

 

$

9.09  

 

261,942 

 

$

9.28  

 

Weighted-average fair value of         options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   granted during the        year

 

 

**$**

**4.32  **

 

 

 

$

7.80  

 

 

 

$

8.37  

Information  pertaining to options outstanding at December 31, 2001 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**

 

$3.68 - $5.01

 

27,313    

 

2.3 years

 

$

4.43   

 

27,313   

 

 $

4.43  

 

$6.36 - $9.01

 

21,970    

 

3.4 years

 

 

7.19   

 

20,720   

 

 

7.13  

 

$10.04 - $15.00

 

366,408    

 

6.4 years

 

 

11.08   

 

240,488   

 

 

10.97  

 

$16.50 - $23.00

 

20,945    

 

8.4 years

 

 

18.18   

 

3,228   

 

 

19.21  

 

 

 

436,636    

 

6.1 years

 

$

10.81   

 

291,749   

 

$

10.18  

The Company  applies Opinion 25 and related Interpretations in accounting for the stock  option plan.  Accordingly, no compensation cost has been  recognized.  Had compensation cost for the stock option plan been  determined based on the fair value at the grant dates for awards under the  plan consistent with the method prescribed by FASB Statement No. 123, net  income and earnings per share would have been adjusted to the pro forma  amounts indicated below.

F-20
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE  9.            STOCK  COMPENSATION PLANS (Continued)**

 

 

 

 

**Years Ended        December 31,**
  ** **
 

 

 

**2001**

 

**2000**

 

**1999**

 

 

 

**(In        thousands, except per share data)**
  ** **
 

 

 

 

 

 

 

 

 

 

 

 

Net income

As reported

**$**

**3,970**

 

$

4,309

 

$

3,332

 

 

Pro forma

**$**

**3,748**

 

$

4,227

 

$

3,113

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

As reported

**$**

**.85**

 

$

.93

 

$

.72

 

 

Pro forma

**$**

**.80**

 

$

.91

 

$

.68

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share -

As reported

**$**

**.82**

 

$

.90

 

$

.69

 

  assuming dilution

Pro forma

**$**

**.78**

 

$

.88

 

$

.65

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

 

 

 

**Years Ended        December 31,**
   ** **
 

 

 

**2001**

 

**2000**

 

**1999**

 

 

 

 

 

 

 

 

 

 

 

 

Dividend yield

 

 

**2.63%**

 

 

1.25%

 

$

1.10%

 

Expected life

 

 

**10 years**

 

 

10 years

 

 

10 years

 

Expected volatility

 

 

**27.60%**

 

 

25.74%

 

 

14.31%

 

Risk-free interest rate

 

 

**5.59%**

 

 

6.24%

 

 

5.97%

**NOTE  10.        INCOME TAXES**

The  components of income tax expense are as follows:

 

 

 

**Years Ended        December 31,**

 

 

 

**2001**

 

**2000**

 

**1999**
  ** **** **** **
 

 

 

 

 

 

 

 

 

Current

 

**$**

**2,309,757 **

 

$

2,403,732 

 

$

1,900,382 

 

Deferred

 

 

**(323,544)**

 

 

(313,816)

 

 

(479,961)

 

Change in valuation allowance

 

 

**-  **

 

 

- 

 

 

(15,915)
  ** **** **** **
 

 

 

**$**

**1,986,213 **

 

**$**

2,089,916 

 

**$**

1,404,506 
  ** **** **** **
F-21
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE  10.            INCOME  TAXES (Continued)**

The Company’s  income tax expense differs from the amounts computed by applying the federal  income tax statutory rates to income before income taxes.  A  reconciliation of the differences is as follows:

 

 

**Years Ended        December 31,**
 ** **
 

 

**2001**

 

**2000**

 

**1999**
 ** **
 

 

 

 

 

 

 

 

 

 

 

Tax provision at statutory rate

**$**

**2,025,030 **

 

$

2,175,477 

 

$

1,610,359 

 

Tax-exempt        interest

 

**(245,347)**

 

 

(234,875)

 

 

(205,063)

 

Disallowed        interest

 

**42,305 **

 

 

43,977

 

 

29,281 

 

Life        insurance

 

**(69,596)**

 

 

(62,068)

 

 

(27,527)

 

State        income taxes

 

**36,544 **

 

 

50,382 

 

 

31,459 

 

Merger        expenses

 

**167,179 **

 

 

69,773 

 

 

8,500 

 

Other

 

**30,098 **

 

 

47,250 

 

 

(42,503)
 ** **
 

Income tax expense

**$**

**1,986,213 **

 

$

2,089,916 

 

$

1,404,506 
 ** **
The  components of deferred income taxes are as follows:
  
**2001**
 
**2000**
 ** **** **       
 

Deferred tax assets:

 

 

 

 

 

 

Loan        loss reserves

**$**

**1,667,711**

 

$

1,544,821

 

Other        real estate write-down

 

**37,759**

 

 

2,008

 

Deferred        compensation

 

**189,656**

 

 

120,753

 

Organizational        expenses

 

**4,496**

 

 

13,674

 

Deferred        loan fees

 

**64,372**

 

 

19,086

 

Goodwill        amortization

 

**28,641**

 

 

29,929

 

Nonbank        bad debt reserve

 

**202,731**

 

 

139,199

 

Other

 

**36,276**

 

 

46,712
 ** **** **
 

 

 

**2,231,642**

 

 

1,916,182
 ** **** **
 

Deferred tax liabilities:

 

 

 

 

 

 

Depreciation

 

**166,999**

 

 

176,896

 

Accretion        of discount on securities

 

**6,179**

 

 

4,366

 

Securities        available-for-sale

 

**602,438**

 

 

67,249
 ** **** **
 

 

 

**775,616**

 

 

248,511
 ** **** **
 

 

 

 

 

 

 

 

Net deferred tax assets

**$**

**1,456,026**

 

$

1,667,671
  ** **** **
 

F-22
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE  11.        EARNINGS PER SHARE**

Presented  below is a summary of the components used to calculate basic and diluted  earnings per share:

 

 

 

**Years Ended        December 31,**
  ** **
 

 

 

**2001**

 

**2000**

 

**1999**
  
 

 

 

 

 

 

 

 

 

Net income

 

**$**

**3,969,759**

 

$

4,308,545

 

$

3,331,841
  
 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of

 

 

 

 

 

 

 

 

 

 

   common shares        outstanding

 

 

**4,676,314**

 

 

4,639,505

 

 

4,600,628

 

Effect of dilutive options

 

 

**139,569**

 

 

151,839

 

 

200,798
  
 

Weighted average number of        common

 

 

 

 

 

 

 

 

 

 

   shares outstanding        used to calculate

 

 

 

 

 

 

 

 

 

 

   dilutive earnings        per share

 

 

**4,815,883**

 

 

4,791,344

 

 

4,801,426
  
**NOTE  12.        COMMITMENTS AND  CONTINGENCIES**

The Company  is a party to financial instruments with off-balance sheet risk in the normal  course of business to meet the financing needs of its customers.  These  financial instruments include commitments to extend credit, standby letters of  credit and credit card commitments.  Such commitments involve, to varying  degrees, elements of credit risk and interest rate risk in excess of the  amount recognized in the balance sheets.

The Company’s  exposure to credit loss in the event of nonperformance by the other party to  the financial instrument for commitments to extend credit, standby letters of  credit and credit card commitments is represented by the contractual amount of  those instruments.  The Company uses the same credit policies in making  commitments and conditional obligations as it does for on-balance sheet  instruments.  A summary of the Company’s commitments is as follows:
 ** **
**December 31,**
** **** ** ** **
**2001**

**2000**
** **** **
 

Commitments to extend credit

**$**

**70,932,849**

 

$

66,937,389

 

Standby letters of credit

 

**3,704,226**

 

 

3,204,058

 

Credit card commitments

 

**4,996,493**

 

 

4,668,453
** **** **
 

 

**$**

**79,633,568**

 

$

74,809,900
** **** **
Commitments  to extend credit are agreements to lend to a customer as long as there is no  violation of any condition established in the contract.  Since many of  the commitments are expected to expire without being drawn upon, the total  commitment amounts do not necessarily represent future cash  requirements.  The amount of collateral obtained, if deemed necessary by  the Company upon extension of credit, is based on management’s credit  evaluation of the customer.

F-23
 
 **NOTES  TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE  12.       COMMITMENTS AND CONTINGENCIES  (Continued)**

Credit card  commitments are granted on an unsecured basis.

Standby  letters of credit are conditional commitments issued by the Company to  guarantee the performance of a customer to a third party.  Those letters  of credit are primarily issued to support public and private borrowing  arrangements.  The credit risk involved in issuing letters of credit is  essentially the same as that involved in extending loans to customers.   Collateral is required in instances which the Company deems necessary.

In the  normal course of business, the Company is involved in various legal  proceedings.  In the opinion of management, any liability resulting from  such proceedings would not have a material effect on the Company’s financial  statements.

**NOTE  13.       CONCENTRATIONS OF CREDIT**

The Company  originates primarily commercial, residential and consumer loans to customers  in Hall, Polk, Paulding and surrounding counties.  The ability of the  majority of the Company’s customers to honor their contractual obligations  is dependent on the local and metropolitan Atlanta, Georgia economies.

Eighty-three  percent of the Company’s loan portfolio is concentrated in loans secured by  real estate.  A substantial portion of these loans are in the Company’s  primary market areas.  In addition, a substantial portion of the other  real estate owned is located in those same markets.  Accordingly, the  ultimate collectibility of the Company’s loan portfolio and recovery of the  carrying amount of other real estate owned are susceptible to changes in  market conditions in the Company’s market areas.  The other significant  concentrations of credit by type of loan are set forth in Note 3.

The Company,  as a matter of policy, does not generally extend credit to any single borrower  or group of related borrowers in excess of 25% of each Bank’s statutory  capital, or approximately $3,595,000, $1,210,000, and $2,500,000 for  Gainesville Bank & Trust, United Bank & Trust and Community Trust  Bank, respectively. 

**NOTE  14.       REGULATORY MATTERS**

The Banks  are subject to certain restrictions on the amount of dividends that may be  declared without prior regulatory approval.  At December 31, 2001,  approximately $2,679,000 of retained earnings were available for dividend  declaration without regulatory approval.

The Company  and Banks are subject to various regulatory capital requirements administered  by the Federal banking agencies.  Failure to meet minimum capital  requirements can initiate certain mandatory, and possibly additional  discretionary actions by regulators that, if undertaken, could have a direct  material effect on the financial statements.  Under capital adequacy  guidelines and the regulatory framework for prompt corrective action, the  Company and the Banks must meet specific capital guidelines that involve  quantitative measures of the assets, liabilities, and certain off-balance  sheet items as calculated under regulatory accounting practices.  The  Company’s and the Banks’ capital amounts and classification are also  subject to qualitative judgments by the regulators about components, risk  weightings, and other factors.  Prompt corrective action provisions are  not applicable to bank holding companies.

Quantitative  measures established by regulation to ensure capital adequacy require the  Company and the Banks to maintain minimum amounts and ratios of Total and Tier  I capital to risk-weighted assets and of Tier I capital to average  assets.  Management believes, as of December 31, 2001 and 2000, the  Company and the Banks met all capital adequacy requirements to which they are  subject.

F-24
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE  14.            REGULATORY MATTERS (Continued)**

As of  December 31, 2001, the most recent notification from the Federal Deposit  Insurance Corporation categorized Gainesville Bank & Trust as adequately  capitalized and United Bank & Trust and Community Trust Bank as well  capitalized under the regulatory framework for prompt corrective action.   To be categorized as well capitalized, the Banks must maintain minimum Total  risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the  following table.  There are no conditions or events since that  notification that management believes have changed the Banks’ categories.

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

 

 

 

 

 

 

 

 

 

 

 

 

**To Be Well**

 

 

 

 

 

 

 

**For Capital**

 

**Capitalized        Under**

 

 

 

 

 

 

 

**Adequacy**

 

**Prompt        Corrective**

 

 

**Actual**

 

**Purposes**

 

**Action        Provisions**
 ** **
 

 

**Amount**

 

**Ratio**

 

**Amount**

 

**Ratio**

 

**Amount**

 

**Ratio**
 ** **** **** **** **** **** **
 

 

**(Dollars in        Thousands)**
 ** **
 

**As of December 31, 2001:**

 

 

 

 

 

 

 

 

** **

 

 

 

 

 

 

**Total Capital to Risk        Weighted Assets:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Consolidated**

**$**

**48,764**

 

**11.19%**

 

**$**

**34,850**

 

**8%**

 

 

**N/A**

 

**N/A**

 

**Gainesville        Bank & Trust**

**$**

**23,273**

 

**9.32%**

 

**$**

**19,987**

 

**8%**

 

**$**

**24,984**

 

**10%**

 

**United        Bank & Trust**

**$**

**6,312**

 

**13.15%**

 

**$**

**3,842**

 

**8%**

 

**$**

**4,802**

 

**10%**

 

**Community        Trust Bank**

**$**

**13,684**

 

**10.79%**

 

**$**

**10,148**

 

**8%**

 

**$**

**12,686**

 

**10%**

 

**Tier I Capital to Risk        Weighted Assets:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Consolidated**

**$**

**43,243**

 

**9.93%**

 

**$**

**17,425**

 

**4%**

 

 

**N/A**

 

**N/A**

 

**Gainesville        Bank & Trust**

**$**

**20,337**

 

**8.14%**

 

**$**

**9,994**

 

**4%**

 

**$**

**14,990**

 

**6%**

 

**United        Bank & Trust**

**$**

**5,830**

 

**12.14%**

 

**$**

**1,921**

 

**4%**

 

**$**

**2,881**

 

**6%**

 

**Community        Trust Bank**

**$**

**12,109**

 

**9.55%**

 

**$**

**5,074**

 

**4%**

 

**$**

**7,611**

 

**6%**

 

**Tier I Capital to Average        Assets:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Consolidated**

**$**

**43,243**

 

**7.87%**

 

**$**

**21,974**

 

**4%**

 

 

**N/A**

 

**N/A**

 

**Gainesville        Bank & Trust**

**$**

**20,337**

 

**6.40%**

 

**$**

**12,719**

 

**4%**

 

**$**

**15,899**

 

**5%**

 

**United        Bank & Trust**

**$**

**5,830**

 

**9.06%**

 

**$**

**2,574**

 

**4%**

 

**$**

**3,217**

 

**5%**

 

**Community        Trust Bank**

**$**

**12,109**

 

**7.55%**

 

**$**

**6,413**

 

**4%**

 

**$**

**8,016**

 

**5%**

 

** **

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2000:

 

 

 

 

 

 

 

 

** **

 

 

 

 

 

 

Total Capital to Risk Weighted        Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

44,773

 

11.00%

 

$

32,562

 

8%

 

 

N/A

 

N/A

 

Gainesville        Bank & Trust

$

20,873

 

8.70%

 

$

19,202

 

8%

 

$

24,002

 

10%

 

United        Bank & Trust

$

5,903

 

13.74%

 

$

3,438

 

8%

 

$

4,297

 

10%

 

Community        Trust Bank

$

12,552

 

10.71%

 

$

9,373

 

8%

 

$

11,716

 

10%

 

Tier I Capital to Risk Weighted        Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

39,811

 

9.78%

 

$

14,869

 

4%

 

 

N/A

 

N/A

 

Gainesville        Bank & Trust

$

18,203

 

7.58%

 

$

9,601

 

4%

 

$

14,401

 

6%

 

United        Bank & Trust

$

5,363

 

12.48%

 

$

1,719

 

4%

 

$

2,578

 

6%

 

Community        Trust Bank

$

11,240

 

9.59%

 

$

4,686

 

4%

 

$

7,030

 

6%

 

Tier I Capital to Average        Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

39,811

 

7.99%

 

$

19,930

 

4%

 

 

N/A

 

N/A

 

Gainesville        Bank & Trust

$

18,203

 

6.25%

 

$

11,647

 

4%

 

$

14,559

 

5%

 

United        Bank & Trust

$

5,363

 

9.94%

 

$

2,159

 

4%

 

$

2,699

 

5%

 

Community Trust Bank

$

11,240

 

7.44%

 

$

5,393

 

4%

 

$

6,992

 

5%

F-25
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE  15.            FAIR  VALUE OF FINANCIAL INSTRUMENTS**

The fair  value of a financial instrument is the current amount that would be exchanged  between willing parties, other than in a forced liquidation.  Fair value  is best determined based upon quoted market prices.  However, in many  instances, there are no quoted market prices for the Company’s various  financial instruments.  In cases where quoted market prices are not  available, fair values are based on estimates using present value or other  valuation techniques.  Those techniques are significantly affected by the  assumptions used, including the discount rate and estimates of future cash  flows.  Accordingly, the fair value estimates may not be realized in an  immediate settlement of the instrument.  SFAS No. 107, *Disclosures  about Fair Value of Financial Instruments,* excludes certain financial  instruments and all nonfinancial instruments from its disclosure  requirements.  Accordingly, the aggregate fair value amounts presented  may not necessarily represent the underlying fair value of the Company.

The  following methods and assumptions were used by the Company in estimating its  fair value disclosures for financial instruments.

**                         Cash, Due From Banks, Interest-Bearing Deposits in Banks and Federal Funds                           Sold:**

The carrying  amounts of cash, due from banks, interest-bearing deposits in banks and  federal funds sold approximate fair value.

**                         Securities:**

Fair values  for securities are based on available quoted market prices.  The carrying  values of equity securities with no readily determinable fair value  approximate fair values.

**                         Loans:**

For  variable-rate loans that reprice frequently and have no significant change in  credit risk, fair values are based on carrying values.  For other loans,  the fair values are estimated using discounted cash flow analyses, using  interest rates currently being offered for loans with similar terms to  borrowers with similar credit quality.  Fair values for impaired loans  are estimated using discounted cash flow analyses or underlying collateral  values, where applicable.

**                         Deposits:**

The carrying  amounts of demand deposits, savings deposits, and variable-rate certificates  of deposit approximate their fair values.  Fair values for fixed-rate  certificates of deposit are estimated using a discounted cash flow calculation  that applies interest rates currently being offered on certificates to a  schedule of aggregated expected monthly maturities on time deposits.

**                         Federal Funds Purchased, Repurchase Agreements and Other Borrowings:**

The fair values of the Company’s  fixed rate other borrowings are estimated using discounted cash flow models  based on the Company’s current incremental borrowing rates for similar types  of borrowing arrangements.  The carrying amounts of all other variable  rate borrowings, federal funds purchased, and securities sold under repurchase  agreements approximate their fair values.

F-26
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE  15.            FAIR  VALUE OF FINANCIAL INSTRUMENTS (Continued)**

**                         Accrued Interest:**

The carrying  amounts of accrued interest approximate their fair values.

**                         Off-Balance Sheet Instruments:**

Fair values  of the Company’s off-balance sheet financial instruments are based on fees  currently charged to enter into similar agreements.  Since the majority  of the Company’s off-balance-sheet instruments consist of nonfee-producing,  variable-rate commitments, the Company has determined they do not have a  distinguishable fair value.

The carrying  amounts and estimated fair value of the Company’s financial instruments were  as follows:

 

 

**December 31,        2001**

 

**December 31,        2000**
 ** **** **
 

 

**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

**$**

**19,208**

 

**$**

**19,208**

 

$

24,379

 

$

24,379

 

Securities

 

**86,204**

 

 

**86,204**

 

 

81,190

 

 

81,190

 

Restricted        equity securities

 

**2,992**

 

 

**2,992**

 

 

2,842

 

 

2,842

 

Loans

 

**413,134**

 

 

**423,042**

 

 

379,592

 

 

378,375

 

Accrued        interest receivable

 

**3,198**

 

 

**3,198**

 

 

3,945

 

 

3,945

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

**426,758**

 

 

**433,836**

 

 

401,302

 

 

403,045

 

Federal        funds purchased and

 

 

 

 

 

 

 

 

 

 

 

 

securities        sold under

 

 

 

 

 

 

 

 

 

 

 

 

repurchase        agreements

 

**19,707**

 

 

**19,707**

 

 

17,132

 

 

17,132

 

Other        borrowings

 

**50,462**

 

 

**49,153**

 

 

47,167

 

 

46,938

 

Accrued        interest payable

 

**4,384**

 

 

**4,384**

 

 

5,298

 

 

5,298

 

F-27
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE  16.            BUSINESS  COMBINATIONS**

On June 30,  2001, the Company effected a business combination with Community Trust  Financial Services Corporation (“CTF”) by exchanging 1,890,662 shares of  its common stock for all of the common stock of CTF.  The combination has  been accounted for as a pooling of interests and, accordingly, all prior year  financial statements have been restated to include CTF.  The results of  operations of the separate companies for the periods prior to the combination  are summarized as follows:

 

 

**Total        Revenues**

 

**Net        Income (Loss)**
 ** **** **
 

 

**(Dollars in        Thousands)**
 ** **
 

 

 

 

 

 

 

 

Six months ended June 30, 2001

 

 

 

 

 

 

   GB&T        Bancshares, Inc.

$

16,616

 

$

1,529

 

   Community Trust        Financial Services Corporation

 

8,291

 

 

(302)
 ** **** **
 

 

$

24,907

 

$

1,227
 ** **** **
 

 

 

 

 

 

 

 

Year ended December 31, 2000

 

 

 

 

 

 

   GB&T        Bancshares, Inc.

$

30,629

 

$

3,239

 

   Community Trust        Financial Services Corporation

 

15,527

 

 

1,070
 ** **** **
 

 

$

46,156

 

$

4,309
 ** **** **
 

 

 

 

 

 

 

 

Year ended December 31, 1999

 

 

 

 

 

 

   GB&T        Bancshares, Inc.

$

24,046

 

$

2,469

 

   Community Trust        Financial Services Corporation

 

12,367

 

 

863
 ** **** **
 

 

$

36,413

 

$

3,332
 ** **** **
**NOTE  17.             SUPPLEMENTAL FINANCIAL DATA**

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

 

 

 

**Years Ended        December 31,**
 
 

 

 

**2001**

 

**2000**

 

**1999**

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

**$**

**375,018**

 

$

395,159

 

$

449,087

 

Legal fees and merger expenses

 

 

**618,678**

 

 

336,367

 

 

180,170

F-28
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE  18.            PARENT  COMPANY FINANCIAL INFORMATION**

The  following information presents the condensed balance sheets as of December 31,  2001 and 2000 and statements of income and cash flows of GB&T Bancshares,  Inc. for the periods ended December 31, 2001, 2000 and 1999.

 

**CONDENSED        BALANCE SHEETS**

 

**2001**

**2000**

 

**Assets**

 

 

 

 

 

 

  Cash

**$**

**853,986**

 

$

229,721

 

  Securities        available-for-sale

 

**1,295,440**

 

 

1,295,440

 

  Investment in        subsidiaries

 

**42,909,038**

 

 

38,736,794

 

  Premises and equipment

 

**1,510,978**

 

 

1,617,909

 

  Other assets

 

**234,343**

 

 

152,621

 

 

 

 

 

 

 

 

             Total assets

**$**

**46,803,785**

 

$

42,032,485

 

 

 

 

 

 

 

 

**Liabilities**

 

 

 

 

 

 

  Other borrowings

**$**

**1,875,000**

 

$

1,449,000

 

  Other liabilities

 

**155,314**

 

 

29,138
   
 

 

 

 

 

 

 

 

             Total liabilities

 

**2,030,314**

 

 

1,478,138

 

 

 

 

 

 

 

 

**Stockholders’ equity**

 

**44,773,471**

 

 

40,554,347
   
 

 

 

 

 

 

 

 

             Total liabilities and stockholders’ equity

**$**

**46,803,785**

 

**$**

42,032,485

F-29
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE  18.            PARENT  COMPANY FINANCIAL INFORMATION (CONTINUED)**

 

**CONDENSED        STATEMENTS OF INCOME**

 
 
 

**2001**

 

**2000**

 

**1999**
 ** ** 
 

 

 

 

 

 

 

 

 
 
Income

 

 

 

 

 

 

 

 
 
Interest income

**$**

**-  **

 

$

-  

 

$

59,074
 
Dividends from subsidiaries

 

**1,948,425**

 

 

2,168,961

 

 

1,678,153
 
Management fees

 

**-  **

 

 

296,769

 

 

252,830
 
Other income

 

**145,622**

 

 

18,222

 

 

-  
 **  ** 
  

 

**2,094,047**

 

 

2,483,952

 

 

1,990,057
 **  ** 
 

 

 

 

 

 

 

 

 
 
Expense

 

 

 

 

 

 

 

 
 
Interest

 

**131,452**

 

 

77,614

 

 

-  
 
Other operating expense

 

**1,861,594**

 

 

1,236,812

 

 

1,017,139
 ** **
 

 

 

**1,993,046**

 

 

1,314,426

 

 

1,017,139
 ** **
 

 

 

 

 

 

 

 

 

 

 

              Income before income tax benefit and equity

 

 

 

 

 

 

 

 

 

                 in undistributed income of subsidiaries

 

**101,001**

 

 

1,169,526

 

 

972,918

 

 

 

 

 

 

 

 

 

 

 

Income tax benefits

 

**570,850**

 

 

353,123

 

 

267,558
 ** **
 

 

 

 

 

 

 

 

 

 

 

              Income before equity in undistributed

 

 

 

 

 

 

 

 

 

                 income of subsidiaries

 

**671,851**

 

 

1,522,649

 

 

1,240,476

  

 

 

 

 

 

 

 

 

 

 

Equity in undistributed income        of subsidiaries

 

**3,297,908**

 

 

2,785,896

 

 

2,091,365
  ** **
  

 

 

 

 

 

 

 

 

 

              Net income

$

**3,969,759**

 

$

4,308,545

 

$

3,331,841
  ** **
F-30
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE  18.            PARENT  COMPANY FINANCIAL INFORMATION****(Continued**)

 

**CONDENSED        STATEMENTS OF CASH FLOWS**

 

 

**2001**

 

2000

 

1999
** **
 

 

 

 

 

 

 

 

 

**OPERATING ACTIVITIES**

 

 

 

 

 

 

 

 

Net income

**$**

**3,969,759 **

 

$

4,308,545 

 

$

3,331,841 

Adjustments to reconcile net        income to net

 

 

 

 

 

 

 

 

cash provided by operating        activities:

 

 

 

 

 

 

 

 

Undistributed income of        subsidiaries

 

**(3,297,908)**

 

 

(2,785,896)

 

 

(2,091,365)

Amortization

 

**-   **

 

 

-   

 

 

36,416 

Depreciation

 

**86,341 **

 

 

51,206 

 

 

14,323 

Other operating activities

 

**242,393 **

 

 

102,544 

 

 

188,496 
** **
 

 

 

 

 

 

 

 

 

                 Net cash provided by operating activities

 

**1,000,585 **

 

 

1,676,399 

 

 

1,479,711 
** **
 

 

 

 

 

 

 

 

 

**INVESTING ACTIVITIES**

 

 

 

 

 

 

 

 

Purchase of securities        available-for-sale

 

**-   **

 

 

(378,000)

 

 

(917,440)

Capital contribution in CLC

 

**-   **

 

 

**-   **

 

 

(2,500,000)

Acquisition of assets on behalf        of CLC

 

**-   **

 

 

**-   **

 

 

(821,919)

Purchase of premises and        equipment

 

**-   **

 

 

(1,326,747)

 

 

(341,027)

Sale of premises and equipment

 

**20,590 **

 

 

**-   **

 

 

-   

Decrease in loans to        subsidiaries

 

**-   **

 

 

-   

 

 

2,743,850 
** **
 

 

 

 

 

 

 

 

 

Net cash provided by (used in)

 

 

 

 

 

 

 

 

   investing        activities

 

**20,590 **

 

 

(1,704,747)

 

 

(1,836,536)
** **
 

 

 

 

 

 

 

 

 
 
**FINANCING ACTIVITIES**

 

 

 

 

 

 

 

 
 
Dividends paid

 

**(1,358,310)**

 

 

(1,129,157)

 

 

(921,480)
 
Proceeds from issuance of        common stock

 

**540,588 **

 

 

56,684 

 

 

33,484 
 
Dividends reinvested

 

**-   **

 

 

-   

 

 

338,315 
 
Payment for fractional shares

 

**(5,188)**

 

 

(5,902)

 

 

-   
 
Purchase of treasury stock

 

**-   **

 

 

-   

 

 

(50,975)
 
Proceeds from note payable

 

**845,000 **

 

 

1,038,000  

 

 

55,000  
 
Repayment of note payable

 

**(419,000)**

 

 

-   

 

 

-   
 ** ** 
 

 

 

 

 

 

 

 

 
 
               Net cash used in financing activities

 

**(396,910)**

 

 

(40,375)

 

 

(545,656)
 ** **   
 

 

 

 

 

 

 

 

 
 
Net increase (decrease) in cash

 

**624,265 **

 

 

(68,723)

 

 

(902,481)
 
 

 

 

 

 

 

 

 

 
 
Cash at beginning of period

 

**229,721 **

 

 

298,444 

 

 

1,200,925 
 ** ** 
 

 

 

 

 

 

 

 

 
 
Cash at end of year

**$**

**853,986 **

 

$

229,721 

 

$

298,444 
 ** **
F-31
 
**NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE  19.             QUARTERLY DATA (Unaudited)**

 

**Years Ended          December 31,**

 

**2001**

 

**2000**
** **
 

**Fourth**

 

**Third**

 

**Second**

 

**First**

 

**Fourth**

 

**Third**

 

**Second**

 

**First**

 

**Quarter**

 

**Quarter**

 

**Quarter**

 

**Quarter**

 

**Quarter**

 

**Quarter**

 

**Quarter**

 

**Quarter**
** **** **** **** **** **** **** **** **
 

**(In          thousands, except per share data)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

**$**

**10,478**

 

**$**

**10,292**

 

**$**

**10,704**

 

**$**

**10,875**

 

$

11,319

 

$

10,808

 

$

10,139

 

**$**

9,528

Interest expense

 

**4,444**

 

 

**5,200**

 

 

**5,494**

 

 

**5,755**

 

 

5,904

 

 

5,475

 

 

4,911

 

 

4,507
** **** **** **** **** **** **** **** **
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

**6,034**

 

 

**5,092**

 

 

**5,210**

 

 

**5,120**

 

 

5,415

 

 

5,333

 

 

5,228

 

 

5,021

Provision for loan losses

 

**268**

 

 

**230**

 

 

**464**

 

 

**344**

 

 

190

 

 

283

 

 

332

 

 

344
** **** **** **** **** **** **** **** **
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income after

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  provision for loan          losses

 

**5,766**

 

 

**4,862**

 

 

**4,746**

 

 

**4,776**

 

 

5,225

 

 

5,050

 

 

4,896

 

 

4,677

Noninterest income

 

**1,270**

 

 

**1,731**

 

 

**1,734**

 

 

**1,594**

 

 

1,124

 

 

1,083

 

 

1,167

 

 

988

Noninterest expenses

 

**4,963**

 

 

**4,616**

 

 

**5,927**

 

 

**5,017**

 

 

4,513

 

 

4,330

 

 

4,343

 

 

4,625
** **** **** **** **** **** **** **** **
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

**2,073**

 

 

**1,977**

 

 

**553**

 

 

**1,353**

 

 

1,836

 

 

1,803

 

 

1,720

 

 

1,040

Provision for income taxes

 

**635**

 

 

**672**

 

 

**272**

 

 

**407**

 

 

585

 

 

577

 

 

544

 

 

384
** **** **** **** **** **** **** **** **
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

**$**

**1,438**

 

**$**

**1,305**

 

**$**

**281**

 

**$**

**946**

 

$

1,251

 

$

1,226

 

$

1,176

 

$

656
** **** **** **** **** **** **** **** **
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

**$**

**0.31**

 

**$**

**0.28**

 

**$**

**0.06**

 

**$**

**0.20**

 

$

0.28

 

$

0.26

 

$

0.25

 

$

0.14
** **** **** **** **** **** **** **** **
  Diluted

**$**

**0.30**

 

**$**

**0.27**

 

**$**

**0.06**

 

**$**

**0.19**

 

$

0.27

 

$

0.25

 

$

0.24

 

$

0.14
** **** **** **** **** **** **** **** **
F-32
 
 

**SIGNATURES**

             Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange  Act of 1934, the registrant has duly caused this report to be signed on its  behalf by the undersigned, thereunto duly authorized.

**GB&T        BANCSHARES, INC.**

 

 

 

 

By:

/s/ Richard A.        Hunt                                                      

 

DATE:  March 29, 2002

 

Richard A. Hunt, President,        Chief

 

 

 

  Executive Officer and        Director

 

 

 

 

 

 

By:

/s/ Gregory L.        Hamby                                                   

 

DATE:  March 29, 2002

 

Gregory L. Hamby, Executive        Vice President

 

 

 

 

 

 

By:

/s/ F. Abit        Massey                                                         

 

DATE:  March 29, 2002

 

F. Abit Massey, Chairman and        Director

 

 

 

 

 

 

By:

/s/ Philip A.        Wilheit                                                         

 

DATE:  March 29, 2002

 

Philip A. Wilheit,        Vice-Chairman and

 

 

 

   Director

 

 

 

 

 

 

By:

/s/ Samuel L.        Oliver                                                         

 

DATE:  March 29, 2002

 

Samuel L. Oliver, Secretary and        Director

 

 

 

 

 

 

By:

/s/ Donald J.        Carter                                                          

 

DATE:  March 29, 2002

 

Donald J. Carter, Director

 

 

 

 

 

 

By:

/s/ Dr. John W.        Darden                                                    

 

DATE:  March 29, 2002

 

Dr. John W. Darden, Director

 

 
             
By:

/s/ Bennie E. Hewett                                                                

 

DATE:  March 29, 2002
                   Bennie E. Hewett, Director                                
By:

/s/ John E. Mansfield, Sr.                                                 

 

DATE:  March 29, 2002

John E. Mansfield, Sr., Director

 

 

By:

/s/ Alan S.        Wayne                                                                  

 

DATE:  March 29, 2002
        Alan S. Wayne, Director      
 

 

 

 

By:

/s/ William A.        Foster                                                       

 

DATE:  March 29, 2002

 

William A. Foster,        Director

 

 

 

 

 

 

By:

/s/ James L. Lester                                                                 

 

DATE:  March 29, 2002

 

James L. Lester, Director

 

 

 
 
**Exhibit Index**

Exhibit  No.   

                                    Description                   

 

 

 

21.1

Subsidiary of the Registrant.

 

 
        99.1              Report of Independent Certified Public Accountants        by Porter Keadle Moore, LLP      
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