**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION****WASHINGTON, D.C.  20549**

**FORM 10-K**

**(Mark One)**

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

**For the Fiscal Year EndedDecember 31, 2006**

**o****        TransitionReport 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 inits charter)

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

 

Registrant’s telephone number, includingarea code:* ***(770) 532-1212**

Securities registered pursuant to Section12(b) of the Act:

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

 

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

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

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Exchange Act.  Yes   o   No   x

Indicateby check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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   x   No   o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.

Large accelerated filer   o        Acceleratedfiler   x        Non-acceleratedfiler   o

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

Theaggregate market value of the registrant’s common stock held by nonaffiliatesas of June 30, 2006 was approximately $278,858,339 based on the closing priceof the common stock on the Nasdaq Global Select Market of $21.76 per share onthat date.  For this purpose, directorsand executive officers have been assumed to be affiliates.

Asof March 1, 2007, the Company had issued and outstanding 14,170,027 shares of the 20,000,000authorized shares of its no par value common stock.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the Proxy Statement for the 2007 Annual Meeting of Stockholders to be filedwith the Securities and Exchange Commission within 120 days of the Registrant’s2006 fiscal year end are incorporated by reference into Part III of thisreport.

 

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

Some of the statementscontained or incorporated by reference in this Report, including, withoutlimitation, matters discussed under the caption “Management’s Discussion andAnalysis of Financial Condition and Results of Operation,” of GB&TBancshares, Inc. (the “Company”) are “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements include statements about the competitiveness of thebanking industry, potential regulatory obligations, our entrance and expansioninto other markets, our ability to recover on the impaired loans, our otherbusiness strategies and other statements that are not historical facts.Forward-looking statements are not guarantees of performance or results. Whenwe use words like “may,” “plan,” “contemplate,” “anticipate,” “believe,”“intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,”“should,” “would,” “will,” and similar expressions, you should consider them asidentifying forward-looking statements, although we may use other phrasing.These forward-looking statements involve risks and uncertainties and are basedon our beliefs and assumptions, and on the information available to us at thetime that these disclosures were prepared. Factors that may cause actualresults to differ materially from those expressed or implied by suchforward-looking statements include, among others, the following possibilities:(1) competitive pressures among depository and other financial institutions mayincrease significantly; (2) changes in the interest rate environment may reducemargins; (3) general economic conditions may be less favorable than expected(both generally and in our markets), resulting in, among other things, adeterioration in credit quality and/or a reduction in demand for credit; (4)economic, governmental or other factors may prevent the projected populationand commercial growth in the counties in which we operate;  (5) legislative or regulatory changes,including changes in accounting standards, may adversely affect the businessesin which we are engaged;  (6) costs ordifficulties related to the integration of our acquired businesses may be greaterthan expected; (7) deposit attrition, customer loss or revenue loss followingacquisitions may be greater than expected; (8) competitors may have greaterfinancial resources and develop products that enable such competitors tocompete more successfully than we can; and (9) adverse changes may occur in theequity markets. You should refer to the risks detailed below under the heading“Risk Factors” and throughout this Report and in our periodic and currentreports filed with the Securities and Exchange Commission for specific factorswhich could cause our actual results to be materially different from thoseexpressed or implied by these forward-looking statements. Many of these factorsare beyond our ability to control or predict, and readers are cautioned not toput undue reliance on such forward-looking statements. We do not intend to, andassume no responsibility for updating or revising any forward-lookingstatements contained in this Report, whether as a result of new information,future events or otherwise.

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**PART I**

**ITEM1.****           ****BUSINESS**

**The Company**

GB&TBancshares was formed in 1998 as a bank holding company existing under the lawsof the State of Georgia. On April 24, 1998, we completed a reorganization ofGainesville Bank & Trust to the current holding company structure byacquiring all of the outstanding common stock of Gainesville Bank & Trustin exchange for 1,676,160 shares of GB&T Bancshares common stock. Theacquisition was accounted for as a pooling of interests. We operate as amulti-bank holding company. All of our business activities are conductedthrough our subsidiaries. At December 31, 2006, we had seven wholly owned banksubsidiaries, Gainesville Bank & Trust, (“GBT”), United Bank & Trust, (“UBT”),Community Trust Bank, (“CTB”), HomeTown Bank of Villa Rica, (“HTB”), FirstNational Bank of the South, (“FNBS”), First National Bank of Gwinnett, (“FNBG”)and Mountain State Bank (“MSB”).

Throughour subsidiary banks, we offer a wide range of lending services, including realestate, consumer and commercial loans to individuals, small businesses andother organizations that are located in or conduct a substantial portion oftheir business in our markets. We complement our lending operations with a fullarray of retail deposit products and fee-based services to support our clientsincluding checking accounts, money market accounts, savings accounts andcertificates of deposit. We also offer a variety of other traditional bankingservices to our customers, including drive-up and night depository facilities,24-hour automated teller machines, internet banking, telephone banking andlimited trust services.

**MarketAreas and Competition**

Wecurrently conduct business through 32 branches in our subsidiary banks’ marketareas of Hall, Polk, Paulding, Cobb, Carroll, Baldwin, Bartow, Putnam, Clarke,Gwinnett, Dawson, Forsyth, Fulton and Lumpkin Counties, Georgia.  These market areas geographically surroundmetropolitan Atlanta. According to 2005 data from the U.S. Census Bureau, theaverage projected population growth in our markets from 2005 to 2010 isexpected to be 22.7% compared to a U.S. average of 6.3%.

Asa whole, the banking industry in Georgia is highly competitive. Our subsidiarybanks compete with local as well as with national and regional financialinstitutions in our markets. In addition, our banks compete with credit unions,brokerage firms and money market funds. We compete with institutions which mayhave much greater financial resources than our subsidiary banks, and which maybe able to offer more services to customers. In recent years, intense marketdemands, economic pressures, and increased customer awareness of products andservices, and the availability of electronic services have forced banks todiversify their services and become more cost-effective. Our subsidiary banksface strong competition in attracting and retaining deposits and loans.

Directcompetition for deposits comes from other commercial banks, savingsinstitutions, credit unions and issuers of securities, such as shares in moneymarket funds. Interest rates on deposit accounts, convenience of bankingfacilities, products and services, and marketing are all significant factors inthe competition for deposits.

Competitionfor loans comes from other commercial banks, savings institutions, insurancecompanies, consumer finance companies, credit unions, mortgage banking firmsand other institutional lenders. We compete for loan originations throughinterest rates charged on loans, loan fees, our efficiency in closing andhandling of loans, and the overall quality of service. Competition is affectedby the availability of lendable funds, general and local economic conditions,interest rates, and other factors that are not readily predictable.

Managementexpects that competition will continue in the future due to statewide branchinglaws and the entry of additional bank and nonbank competitors.

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**OurStrategy**

Weintend to achieve our primary goal of maximizing shareholder value by focusingon the following objectives:

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

·            Continueour primary focus on commercial and retail customers in our existing marketareas with the goal of providing superior, personal customer service andmaintaining strong asset quality;

·            Maintainlocal autonomy and accountability at our subsidiary banks;

·            Improveour financial performance through efficient management of our infrastructureand capital base;

·            Expandour financial products and services to meet the needs of our customers and toincrease our fee income; and

·            Ensuremanagement’s interests are aligned with shareholders.

*CommunityBanking*.   We believe that, in our market areas, customers are attracted andretained primarily through personal customer service and a local,community-oriented atmosphere in which they can feel comfortable and trust thebank personnel with whom they are dealing. In order to maintain thisatmosphere, as we have acquired new banks and grown internally, we generallymaintain the management team of each separate bank, allowing it to retain itslocal entrepreneurial identity, autonomy and decision making. By keeping withthis community banking strategy, we feel that our employees and customers willforge long-term, mutually beneficial relationships. By keeping management localand accessible to customers, we believe our banks can respond more quickly toour customers’ needs than other, larger banks. Although we intend to maintain the relatively autonomous community bankatmosphere, due to the growth our company has experienced in the past severalyears, we focused our attention on maintaining asset and credit quality at allof our bank subsidiaries from a centralized, holding company level.  To further this effort, in 2006 we appointedSid J. Sims, a twenty-eight year banking veteran, to the newly created positionof Executive Vice President and Chief Credit Officer, who has assumed theresponsibility of managing asset and credit quality throughout our company.

*GrowthStrategy*.   Our strategy is to continue pursuing expansion into attractive, highgrowth markets around the metropolitan Atlanta area through acquisitions ofcommunity banks and the establishment of de novo branch offices. Since February2000, we have integrated eight bank acquisitions through mergers with theirholding companies or merging the banks into Gainesville Bank & Trust. Wefocus our acquisition strategy on high-quality community banks with provenmanagement teams that view combining with us as forging a partnership ratherthan as an exit strategy. Our goal is to maintain the management team of eachacquired bank, allowing it to retain its local entrepreneurial identity,autonomy and decision making, while simultaneously increasing efficiency byconsolidating administrative and back office operations.

Inaddition to our strategy of expansion through combinations with other banks, weintend to continue to expand internally where possible by growing our existingbanks in their respective market areas and nearby attractive markets. Webelieve that our decentralized community banking strategy allows our banks toeffectively compete with our larger competitors by providing superior,personalized customer service, leveraging local decision making capabilities,and staying attuned to community matters.

**TrustPreferred Securities**

In2002, our holding company formed a wholly owned grantor trust and issued $15.5million in aggregate principal amount of trust preferred securities in aprivate placement offering. The grantor trust has invested the proceeds of thetrust preferred securities in subordinated debentures of our holding company.The trust preferred securities can be redeemed, in

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whole or in part, fromtime to time, prior to maturity at our option on or after October 30, 2007. Thesole assets of the grantor trust are the subordinated debentures of GB&TBancshares. The debentures have the same variable interest rate as the trustpreferred securities. We have the right to defer interest payments on thedebentures for up to 20 consecutive quarterly periods (five years), so long aswe are not in default under the debentures.

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

Inaddition, in connection with the acquisition of Southern Heritage Bank, whichnow operates as a division of GBT, we assumed $4.1 million in aggregateprincipal amount of trust preferred securities which have substantially thesame terms as our other trust preferred securities except that they have a fixedrate of interest and may be redeemed at our option on or after June 26, 2008.As of December 31, 2006, we had $29.9 million in aggregate principal amount oftrust preferred securities outstanding. See the notes to the consolidatedfinancial statements for further information on the trust preferred securities.

**LendingActivities**

Weoriginate loans primarily secured by single and multi-family real estate,residential construction, and owner-occupied commercial buildings. In addition,we make loans to small and medium-sized commercial businesses, as well as toconsumers for a variety of purposes. We also lend to residential contractorsand developers in our market areas. We attempt to obtain a security interest inreal estate whenever possible. As of December 31, 2006, approximately 90% ofour loan portfolio was secured by real estate.

Wealso provide commercial and consumer installment loans to our customers thatare secured by collateral other than real estate. Such loans are typically ofmultiple-year duration and, if not variable rate, bear interest at a rate tiedto our cost of funds of equivalent maturity.

Ourloan portfolio at December 31, 2006 was comprised as follows:
| Type                      | ** ** | **Dollar Amount**               | ** ** | **Percentage of  Portfolio** | ** ** |
|---------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|
| ** **                | ** ** | **(Dollars in thousands)** | ** ** | ** **                        | ** ** |
|                      |       |                                 |       |                              |       |
| Real  Estate-Mortgage     |       | $                                    | 643,765    |                              | 43.0       | % |
| Real  Estate-Construction |       | 702,809                              |       | 46.9                              |       |
| Commercial                |       | 115,792                              |       | 7.8                               |       |
| Consumer                  |       | 31,756                               |       | 2.1                               |       |
| Other                     |       | 3,579                                |       | 0.2                               |       |
| Total                     |       | $                                    | 1,497,701  |                              | 100.0      | % |

 

*RealEstate-Mortgage*.    We make commercial mortgage loans tofinance the purchase of real property as well as loans to smaller businessventures, credit lines for working capital and short-term seasonal or inventoryfinancing, including letters of credit, that are also secured by real estate.Commercial mortgage lending typically involves higher loan principal amounts,and the repayment of loans is dependent, in large part, on sufficient incomefrom the properties collateralizing the loans to cover operating expenses anddebt service. As a general practice, we require our commercial mortgage loansto be collateralized by well-managed, income producing property with adequatemargins and to be guaranteed by responsible parties. In addition, a substantialpercentage of our commercial mortgage loan portfolio is secured byowner-occupied commercial buildings. We look for opportunities where cash flowfrom the collateral provides adequate debt service coverage and the guarantor’snet worth is centered on assets other than the project we are financing. Ourcommercial mortgage loans are generally collateralized by first liens on realestate, have fixed or floating interest rates and amortize over a 15 to 25-yearperiod with balloon payments due at the end of one to nine years. Payments on

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loans collateralizedby such properties are often dependent on the successful operation ormanagement of the properties. Accordingly, repayment of these loans may bysubject to adverse conditions in the real estate market.

Inunderwriting commercial mortgage loans, we seek to minimize our risks in avariety of ways, including giving careful consideration to the property’soperating history, future operating projections, current and projectedoccupancy, location and physical condition. Our underwriting analysis alsoincludes credit checks, reviews of appraisals and environmental hazards or EPAreports and a review of the financial condition of the borrower. We attempt tolimit our risk by analyzing our borrowers’ cash flow and collateral value on anongoing basis.

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

*RealEstate-Construction*.    We also make construction and developmentloans to residential and, to a lesser extent, commercial contractors anddevelopers located within our market areas. Construction loans generally aresecured by first liens on real estate and have floating interest rates.Construction loans involve additional risks attributable to the fact that loanfunds are advanced upon the security of a project under construction, and the valueof the project is dependent on its successful completion. As a result of theseuncertainties, construction lending often involves the disbursement ofsubstantial funds with repayment dependent, in part, upon the success of theultimate project rather than the ability of a borrower or guarantor to repaythe loan. If we are forced to foreclose on a project prior to completion, thereis no assurance that we will be able to recover all of the unpaid portion ofthe loan. In addition, we may be required to fund additional amounts tocomplete a project and may have to hold the property for an indeterminateperiod of time. While we have underwriting procedures designed to identify whatwe believe to be acceptable levels of risks in construction lending, no assurancecan be given that these procedures will prevent losses from the risks describedabove.

*CommercialLending*.   Our commercial loan portfolio includes loans to smaller businessventures, credit lines for working capital and short-term seasonal or inventoryfinancing, as well as letters of credit that are generally secured bycollateral other than real estate. Commercial borrowers typically secure theirloans with assets of the business, personal guaranties of their principals, andoften mortgages on the principals’ personal residences. Our commercial loansare primarily made within our market areas and are underwritten on the basis ofthe commercial borrower’s ability to service the debt from income. In general,commercial loans involve more credit risk than residential and commercialmortgage loans. The increased risk in commercial loans is generally due to thetype of assets collateralizing these loans. The increased risk also derivesfrom the expectation that commercial loans generally will be serviced from theoperations of the business, and those operations may not be successful.

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

*CreditRisks*.   The principal economic risk associated with each category of the loansthat we make is the creditworthiness of the borrower and the ability of theborrower to repay the loan. General economic conditions and the strength of theservices and retail market segments affect borrower creditworthiness. Generalfactors affecting a commercial borrower’s ability to repay include interestrates, inflation and the demand for the commercial borrower’s products andservices, as well as other factors affecting a borrower’s customers, suppliersand employees.

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Risksassociated with real estate loans also include fluctuations in the value ofreal estate, new job creation trends, tenant vacancy rates and, in the case ofcommercial borrowers, the quality of the borrower’s management. Consumer loanrepayments depend upon the borrower’s financial stability and are more likelyto be adversely affected by divorce, job loss, illness and personal bankruptcyor other hardships.

*LendingPolicies*.   The boards of directors of our subsidiary banks establish andperiodically review the subsidiary banks’ lending policies and procedures. Ourboard of directors adopted a company-wide lending policy in 2004. Despite ourcentralized policy, we may grant our subsidiary banks the flexibility to adaptour lending policy to conditions in their specific market areas. However, inorder to properly recognize the benefits of that flexibility within theparameters of our lending policy, in late 2006 we appointed Sid J. Sims as our ChiefCredit Officer to oversee the lending practices of all our subsidiarybanks.  There are also regulatoryrestrictions on the dollar amount of loans available for each lendingrelationship. State banking regulations provide that no secured loan relationshipmay exceed 25% of the subsidiary banks’ statutory capital or net assets, asdefined, and no unsecured loan relationship may exceed 15% of statutorycapital, except in limited circumstances. National banking regulations providethat no loan relationship may exceed 15% of the subsidiary banks’ Tier 1capital. Our subsidiary banks occasionally sell participation interests inloans to other lenders, including our other subsidiary banks, primarily when aloan exceeds the subsidiary banks’ legal lending limits.

**Deposits**

Ourprincipal source of funds for loans and investing in securities is coredeposits. We offer a wide range of deposit services, including checking,savings, money market accounts, and certificates of deposit. We obtain most ofour deposits from individuals and businesses in our market areas. We believethat the rates we offer for core deposits are competitive with those offered byother financial institutions in our market areas. A secondary source of fundingis through advances from the Federal Home Loan Bank of Atlanta, subordinateddebt and other borrowings which enable us to borrow funds at rates and terms,which at times, are more beneficial to us.

**OtherBanking Services**

Weoffer a range of products and services, including 24-hour internet banking,trust services, direct deposit, traveler’s checks, safe deposit boxes, UnitedStates savings bonds and automatic account transfers. We earn fees for most ofthese services. We also receive ATM transaction fees from transactionsperformed by our customers participating in a shared network of automatedteller machines and a debit card system that our customers can use throughoutGeorgia and in other states.

**InvestmentSecurities**

Afterestablishing necessary cash reserves and funding loans, we invest our remainingliquid assets in securities allowed under banking laws and regulations. Weinvest primarily in obligations of the United States or obligations guaranteedas to principal and interest by the United States, other taxable securities andin certain obligations of states and municipalities. We also invest excessfunds in federal funds with our correspondent banks and primarily act as a netseller of such funds. The sale of federal funds represents a short-term loanfrom us to another bank. Risks associated with securities include, but are notlimited to, interest rate fluctuation, maturity, and concentration.

**Asset/LiabilityManagement**

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

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

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**Employees**

Asof December 31, 2006, we had 505 full-time equivalent employees, of which 154were employed by Gainesville Bank & Trust, 35 were employed by United Bank& Trust, 73 were employed by Community Trust Bank, 49 were employed byHomeTown Bank of Villa Rica, 51 were employed by First National Bank of theSouth, 20 were employed by First National Bank of Gwinnett, 50 were employed byMountain State Bank and 73 were employed by the holding company.  We are not a party to any collective bargainingagreement and, in the opinion of management, we enjoy satisfactory relationswith our employees.

**Supervision and Regulation**

We,like the rest of the banking industry, are subject to extensive state andfederal banking laws and regulations that impose specific requirements orrestrictions on and provide for general regulatory oversight of virtually allaspects of our operations. These laws and regulations are generally intended toprotect depositors, not shareholders.

Legislationand regulations authorized by legislation influence, among other things:

·      How,when and where we may expand geographically;

·      Intowhat product or service market we may enter;

·      Howwe must manage our assets; and

·      Underwhat circumstances money may or must flow between the parent bank holdingcompany and the subsidiary bank.

Setforth below is an explanation of the major pieces of legislation affecting ourindustry and how that legislation affects our actions.  The following summary is qualified byreference to the statutory and regulatory provisions discussed. Changes inapplicable laws or regulations may have a material effect on our business andprospects, and legislative changes and the policies of various regulatoryauthorities may significantly affect our operations. We cannot predict theeffect that fiscal or monetary policies, or new federal or state legislationmay have on our business and earnings in the future.

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

GBT,UBT, CTB, HTB and MSB are state banks incorporated under the laws of Georgiaand are subject to examination by the Georgia Department and the FederalDeposit Insurance Corporation (“FDIC”). FNBS and FNBG are nationally chartered banks incorporated under the lawsof the United States and are subject to examination by the FDIC and the Officeof the Comptroller of the Currency (“OCC”). All of our banks’ deposits are insured by the FDIC to the maximum extentprovided by law.  The FDIC, OCC, theBoard of Governors of the Federal Reserve (the “Federal Reserve”) and theGeorgia Department regularly examine our operations and are given authority toapprove or disapprove mergers, consolidations, the establishment of branches,and similar corporate actions.  Theagencies also have the power to prevent the continuance or development ofunsafe or unsound banking practices or other violations of law.

*Acquisitions. *The BHC Actrequires every bank holding company to obtain the prior approval of the FederalReserve before:  (i) it may acquiredirect or indirect ownership or control of any voting shares of any bank if,after such acquisition, the bank holding company will directly or indirectlyown or control more than 5% of the voting shares of the bank; (ii) it or anyof its subsidiaries, other than a bank, may acquire all or substantially all ofthe assets of any bank; or (iii) it may merge or consolidate with anyother bank holding company.

TheBHC Act further provides that the Federal Reserve may not approve any transactionthat would result in a monopoly or would be in furtherance of any combinationor conspiracy to monopolize or attempt to monopolize the business of banking inany section of the United States, or the effect of which may be substantiallyto lessen competition or to tend to create a monopoly in any section of thecountry, or that in any other manner would be in restraint of trade,

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unless theanticompetitive effects of the proposed transaction are clearly outweighed bythe public interest in meeting the convenience and needs of the communities tobe served.  The Federal Reserve is alsorequired to consider the financial and managerial resources and futureprospects of the bank holding companies and banks involved and the convenienceand needs of the communities to be served. Consideration of financial resources generally focuses on capitaladequacy, and consideration of convenience and needs issues generally focuseson the parties’ performance under the Community Reinvestment Act of 1977.

Underthe Riegle-Neal Interstate Banking and Branching Efficiency Act, therestrictions on interstate acquisitions of banks by bank holding companies wererepealed.  As a result, the Company, andany other bank holding company located in Georgia, is able to acquire a banklocated in any other state, and a bank holding company located outside ofGeorgia can acquire any Georgia-based bank, in either case subject to certaindeposit percentage and other restrictions. The legislation provides that unless an individual state has elected toprohibit out-of-state banks from operating interstate branches within itsterritory, adequately capitalized and managed bank holding companies are ableto consolidate their multistate banking operations into a single banksubsidiary and to branch interstate through acquisitions.  De novo branching by an out-of-state bank ispermitted only if it is expressly permitted by the laws of the host state.  Georgia does not permit de novo branching byan out-of-state bank.  Therefore, theonly method by which an out-of-state bank or bank holding company may enterGeorgia is through an acquisition. Georgia has adopted an interstate banking statute that removedrestrictions on the ability of banks to branch interstate through mergers,consolidations and acquisitions. However, Georgia law prohibits a bank holding company from acquiringcontrol of a financial institution until the target financial institution hasbeen incorporated for three years.

*Restrictionson Transactions with Affiliates.* We and our subsidiary banks are subject to the provisions of Section 23Aof the Federal Reserve Act.  Section 23Aplaces limits on: the amount of a bank’s loans or extensions of credit toaffiliates; a bank’s investment in affiliates; assets a bank may purchase fromaffiliates, except for real and personal property exemption by the FederalReserve; the amount of loans or extensions of credit to third partiescollateralized by the securities or obligations of affiliates; and a bank’sguarantee, acceptance or letter of credit issued on behalf of an affiliate.

The total amount of theabove transactions is limited in amount, as to any one affiliate, to 10.0% of abank’s capital and surplus and, as to all affiliates combined, to 20.0% of abank’s capital and surplus.  In additionto the limitation on the amount of these transactions, each of the abovetransactions must also meet specified collateral requirements.  The Bank must also comply with otherprovisions designed to avoid the taking of low-quality assets.

We and our subsidiarybanks are also subject to the provisions of Section 23B of the Federal ReserveAct which, among other things, prohibit an institution from engaging in theabove transactions with affiliates unless the transactions are on termssubstantially the same, or at least as favorable to the institution or itssubsidiaries, as those prevailing at the time for comparable transactions withnonaffiliated companies.

We are also subject torestrictions on extensions of credit to our executive officers, directors,principal shareholders and their related interests.  These extensions of credit must be made onsubstantially the same terms, including interest rates and collateral, as thoseprevailing at the time for comparable transactions with third parties, and mustnot involve more than the normal risk of repayment or present other unfavorablefeatures.

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

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

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

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

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

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

During2006, the Company paid a total of $0.36 per share to its shareholders.  At December 31, 2006, the Company coulddeclare approximately $12.5 million in dividends without further regulatoryapproval.

*CapitalAdequacy*. We are required to comply with the capital adequacy standardsestablished by the federal banking agencies. There are two basic measures of capital adequacy for bank holdingcompanies that have been promulgated by the Federal Reserve: a risk-basedmeasure and a leverage measure.  Allapplicable capital standards must be satisfied for a bank holding company to beconsidered in compliance.

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

Theminimum guideline for the ratio of Total Capital to risk-weighted assets(including certain off-balance-sheet items, such as standby letters of credit)is 8.0%.  Total Capital consists of Tier1 Capital, which is comprised of common

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stock, undividedprofits, minority interests in the equity accounts of consolidated subsidiariesand noncumulative perpetual preferred stock, less goodwill and certain otherintangible assets, and Tier 2 Capital, which consists of subordinated debt,other preferred stock, and a limited amount of loan loss reserves.  At December 31, 2006, our consolidated TotalCapital Ratio and our Tier 1 Capital Ratio were 12.12% and 10.86%,respectively.

Inaddition, the Federal Reserve has established minimum leverage ratio guidelinesfor bank holding companies.  Theseguidelines provide for a minimum ratio (the “Leverage Ratio”) of Tier 1 Capitalto average assets, less goodwill and certain other intangible assets, of 3.0%for bank holding companies that meet certain specified criteria, includingthose having the highest regulatory rating. All other bank holding companies generally are required to maintain aLeverage Ratio of at least 3.0%, plus an additional cushion of 1.0% to2.0%.  Our Leverage Ratio at December 31,2006 was 9.44%.  The guidelines alsoprovide that bank holding companies experiencing internal growth or makingacquisitions will be expected to maintain strong capital positionssubstantially above the minimum supervisory levels without significant relianceon intangible assets.  Furthermore, theFederal Reserve has indicated that it will consider a “tangible Tier 1 CapitalLeverage Ratio” (deducting all intangibles) and other indicators of capitalstrength in evaluating proposals for expansion or new activities.

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

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

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

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

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

Aninstitution that is categorized as undercapitalized, significantlyundercapitalized, or critically undercapitalized is required to submit an acceptablecapital restoration plan to its appropriate federal banking agency.  A bank holding company must guarantee that asubsidiary depository institution meets its capital restoration plan, subjectto certain limitations.  The controllingholding company’s obligation to fund a capital restoration plan is limited tothe lesser of 5.0% of an undercapitalized subsidiary’s assets or the amountrequired to meet regulatory capital requirements.  An

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undercapitalizedinstitution is also generally prohibited from increasing its average totalassets, making acquisitions, establishing any branches or engaging in any newline of business, except under an accepted capital restoration plan or withFDIC approval.  In addition, theappropriate federal banking agency may test an undercapitalized institution inthe same manner as it treats a significantly undercapitalized institution if itdetermines that those actions are necessary.

At December 31, 2006, all our banks had therequisite capital level to qualify as “well capitalized” under the regulatoryframework for prompt corrective action, except for HTB which was considered “adequatelycapitalized”.  On March 1, 2007, theCompany injected sufficient capital at HTB for it to obtain “well capitalized”status.

*FDIC Insurance Assessments. *The FDIC establishes rates for the payment of premiums by federallyinsured banks and thrifts for deposit insurance.  Member institutions pay deposit insuranceassessments to the Deposit Insurance Fund, or the “DIF.”  The FDIC previously maintained the SavingsAssociation Insurance Fund and the Bank Insurance Fund, which primarily insuredthe deposits of banks and state chartered savings banks.  These two funds were merged into the DIFeffective March 31, 2006.

The FDIC recently amended its risk-based assessmentsystem for 2007 to implement authority that the FDIC was granted under theFederal Deposit Insurance Reform Act of 2005, or the “Reform Act.”  Under the revised system, insuredinstitutions are assigned to one of four risk categories based on supervisoryevaluations, regulatory capital levels and other factors.  The new regulation allows the FDIC to moreclosely tie each financial institution’s deposit insurance premiums to the riskit poses to the DIF. The assessment rate of an institution depends upon thecategory to which it is assigned.  RiskCategory I, which contains the least risky depository institutions, is expectedto include more than 90 percent of all institutions.  Risk Category I, unlike the other riskcategories, contains further risk differentiation based on the FDIC’s analysisof financial ratios, examination components and other information.  The new assessment rates for nearly allfinancial institutions (Risk Category I) are expected to vary between five andseven basis points, or five to seven cents for every $100 of domesticdeposits.  The riskiest institutions(Risk Category IV) may be assessed up to 43 basis points.  The FDIC may adjust rates uniformly from onequarter to the next, except that no single adjustment can exceed three basispoints.

In addition to the assessments for depositinsurance, institutions are required to make payments on bonds which wereissued in the late 1980s by the Financing Corporation in order to recapitalizethe predecessor to the Savings Association Insurance Fund.  During 2006, Financing Corporation paymentsfor Savings Association Insurance Fund members approximated 1.28 basis pointsof assessable deposits. These assessments, which are adjusted quarterly, willcontinue until the Financing Corporation bonds mature in 2017.

TheFDIC may terminate its insurance of deposits if it finds that the institutionhas engaged in unsafe and unsound practices, is in an unsafe or unsoundcondition to continue operations or has violated any applicable law,regulation, rule, order or condition imposed by the FDIC.

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

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such an order, theagency may seek to enforce such order in judicial proceedings and to impose civilmoney penalties.  The federal regulatoryagencies also proposed guidelines for asset quality and earnings standards.

*CommunityReinvestment Act. *Underthe Community Reinvestment Act (“CRA”), our subsidiary banks, as FDIC insuredinstitutions, have a continuing and affirmative obligation to help meet thecredit needs of the entire community, including low- and moderate-incomeneighborhoods, consistent with safe and sound banking practices. The CRArequires the appropriate federal regulator, in connection with its examinationof an insured institution, to assess the institution’s record of meeting thecredit needs of its community and to take such record into account in itsevaluation of certain applications, such as applications for a merger or theestablishment of a branch.  Anunsatisfactory rating may be used as the basis for the denial of an applicationby the federal banking regulator.  TheBanks have received satisfactory ratings in their CRA examinations.

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

*Effectof Governmental Monetary Policies. *Theearnings of our subsidiary banks are affected by domestic and foreignconditions, particularly by the monetary and fiscal policies of the UnitedStates government and its agencies.  TheFederal Reserve has had, and will continue to have, an important impact on theoperating results of commercial banks through its power to implement monetarypolicy in order, among other things, to mitigate recessionary and inflationarypressures by regulating the national money supply.  The techniques used by the Federal Reserveinclude setting the reserve requirements of member banks and establishing thediscount rate on member bank borrowings. The Federal Reserve also conducts open market transactions in UnitedStates government securities.

*USAPatriot Act of 2001*.** In October 2001, theUSA Patriot Act of 2001 (the “Patriot Act”) was enacted in response to theterrorist attacks in New York, Pennsylvania, and Washington, D.C. that occurredon September 11, 2001.  The Patriot Actimpacts financial institutions in particular through its anti-money launderingand financial transparency laws.  ThePatriot Act amended the Bank Secrecy Act and the rules and regulations of theOffice of Foreign Assets Control to establish regulations which, among others,set standards for identifying customers who open an account and promotingcooperation with law enforcement agencies and regulators in order toeffectively identify parties that may be associated with, or involved in,terrorist activities or money laundering*.*

On March 2, 2006,Congress passed the USA Patriot Act Improvement and Reauthorization Act of2005.  This act reauthorized allprovisions of the Patriot Act that would otherwise have expired, made 14 of the16 sunsetting provisions permanent, and extended the sunset period of theremaining two for an additional four years.

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

**Available Information**

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

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**ITEM1A.****        ****RISKFACTORS**

*Ourbusiness is subject to certain risks, including those described below.  Readers of this Annual Report on Form 10-Kshould take such risks into account in evaluating any investment decisioninvolving our common stock.  The risksbelow do not describe all risks applicable to our business and are intendedonly as a summary of certain material factors that affect our operations in theindustries in which we operate.  Moredetailed information concerning these and other risks is contained in othersections of this Annual Report on Form 10-K, including “Business” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”*

**Significantrisks accompany our recent rapid expansion**.

Wehave recently experienced significant growth through acquisitions, includingthe acquisitions of Lumpkin County Bank and Southern Heritage Bank in August2004, the acquisition of First National Bank of Gwinnett in March 2005 and theacquisition of Mountain State Bank in May 2006. These acquisitions could place a strain on our resources, systems,operations and cash flow. Our ability to manage these acquisitions will dependon our ability to monitor operations and control costs, maintain effectivequality controls, expand our internal management and technical and accountingsystems and otherwise successfully integrate acquired businesses into ourcompany. If we fail to do so, our business, financial condition and operatingresults will be negatively impacted.

**Weface risks with respect to future expansion and acquisitions or mergers**.

Wecontinuously seek to acquire other financial institutions or parts of thoseinstitutions and may continue to engage in de novo branch expansion in thefuture. Acquisitions and mergers involve a number of risks, including:

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

·          theestimates and judgments used to evaluate credit, operations, management andmarket risks with respect to the target institution may not be accurate;

·          thetime and costs of evaluating new markets, hiring experienced local managementand opening new offices and the time lags between these activities and thegeneration of sufficient assets and deposits to support the costs of theexpansion may negatively affect our business;

·          wemay not be able to finance an acquisition without diluting our existing shareholders;

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

·          wemay enter into new markets where we lack experience;

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

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

Inaddition, no assurance can be given that we will be able to integrate ouroperations after an acquisition without encountering difficulties including,without limitation, the loss of key employees and customers, the disruption ofour respective ongoing businesses or possible inconsistencies in standards,controls, procedures and policies. Successful integration of our operationswith another entity’s will depend primarily on our ability to consolidateoperations, systems and procedures and to eliminate redundancies and costs. Ifwe have difficulties with the integration, we might not achieve the economicbenefits we expect to result from any particular acquisition or merger. Inaddition, we may experience greater than expected costs or difficultiesrelating to such integration.

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

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

Aswe expand into new markets, our determination of the size of the allowancecould be understated due to our lack of familiarity with market-specificfactors. If our assumptions are wrong, our current allowance may not besufficient to cover future loan losses, and adjustments may be necessary toallow for different economic conditions or adverse developments in our loanportfolio. Additions to our allowance would significantly decrease our netincome.

Inaddition, federal and state regulators periodically review our allowance forloan losses and may require us to increase our provision for loan losses orrecognize further loan charge-offs, based on judgments different than those ofour management. Any increase in our allowance for loan losses or loancharge-offs as required by these regulatory agencies could have a negativeeffect on our operating results.

**Ourbusiness is subject to the success of the local economies where we operate**.

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

Inaddition, the market value of the real estate securing loans as collateral couldbe adversely affected by unfavorable changes in market and economic conditions.As of December 31, 2006, approximately 90% of our total loans were secured byreal estate. Any sustained period of increased payment delinquencies,foreclosures or losses caused by adverse market or economic conditions in ourmarket areas could adversely affect the value of our assets, our revenues,results of operations and financial condition.

**Risksassociated with unpredictable economic and political conditions may be amplifiedas a result of our limited market areas**.

Conditionssuch as inflation, recession, unemployment, high interest rates, short moneysupply, scarce natural resources, international disorders, terrorism and otherfactors beyond our control may adversely affect our profitability. Because themajority of our borrowers are individuals and businesses located and doingbusiness in Hall, Polk, Paulding, Cobb, Carroll, Bartow, Baldwin, Putnam,Clarke, Gwinnett, Dawson, Forsyth, Fulton and Lumpkin Counties, Georgia, oursuccess will depend significantly upon the economic conditions in those and thesurrounding counties. Unfavorable economic conditions in those and thesurrounding counties may result in, among other things, a deterioration incredit quality or a reduced demand for credit and may harm the financialstability of our customers. Due to our limited market areas, these negativeconditions may have a more noticeable effect on us than would be experienced bya larger institution more able to spread these risks of unfavorable localeconomic conditions across a large number of diversified economies.

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**Ourrecent operating results may not be indicative of our future operating results**.

Wemay not be able to sustain our historical rate of growth or may not even be ableto grow our business at all. In addition, our recent and rapid growth,including our growth through acquisitions, may distort some of our historicalfinancial ratios and statistics. Our strong performance during this time periodwas, in part, the result of an extremely favorable residential mortgagerefinancing market and our successful integration of acquisitions whichoccurred during that period. In the future, we may not have the benefit of afavorable interest rate environment, a strong residential mortgage market, orthe ability to find suitable candidates for acquisition. Various factors, suchas economic conditions, regulatory and legislative considerations andcompetition, may also impede or prohibit our ability to expand our marketpresence. If we experience a significant decrease in our historical rate ofgrowth, our results of operations and financial condition may be adverselyaffected due to a high percentage of our operating costs being fixed expenses.

**Departuresof our key personnel may harm our ability to operate successfully**.

Oursuccess has been and continues to be largely dependent upon the services ofRichard A. Hunt, our President and Chief Executive Officer, other members ofour senior management team, including our senior loan officers, and our boardof directors, many of whom have significant relationships with our customers.Our continued success will depend, to a significant extent, on the continuedservice of these key personnel. The prolonged unavailability or the unexpectedloss of any of them could have an adverse effect on our financial condition andresults of operations. We cannot be assured of the continued service of oursenior management team or our board of directors with us.

**Ourcontinued pace of growth may require us to raise additional capital in thefuture, but that capital may not be available when it is needed**.

Weare required by federal and state regulatory authorities to maintain adequatelevels of capital to support our operations. We anticipate that our capital resourceswill continue to satisfy our capital requirements for the foreseeable future.We may at some point, however, need to raise additional capital to support ourcontinued growth.

Ourability to raise additional capital, if needed, will depend on conditions inthe capital markets at that time, which are outside our control, and on ourfinancial performance. Accordingly, we cannot assure you of our ability toraise additional capital if needed on favorable terms. If we cannot raiseadditional capital when needed, our ability to expand our operations throughinternal growth and acquisitions could be materially impaired.

**Competitionfrom financial institutions and other financial service providers may adverselyaffect our profitability**.

Thebanking business is highly competitive, and we experience competition in eachof our market areas from many other financial institutions. We compete withcommercial banks, credit unions, savings and loan associations, mortgagebanking firms, consumer finance companies, securities brokerage firms,insurance companies, money market funds, and other mutual funds, as well asother super-regional, national and international financial institutions such asBank of America, BB&T, Regions Bank, SunTrust, Synovus and Wachovia that operateoffices in our market areas and elsewhere.

Wecompete with these institutions both in attracting deposits and in makingloans. In addition, we have to attract our customer base from other existingfinancial institutions and from new residents. Many of our competitors arewell-established, larger financial institutions. While we believe we can and dosuccessfully compete with these other financial institutions in our marketareas, we may face a competitive disadvantage as a result of our smaller size,lack of geographic diversification and inability to spread our marketing costsacross a broader market. Although we attempt to compete by concentrating ourmarketing efforts in our market areas with local advertisements, personalcontacts, and greater flexibility and responsiveness in working with localcustomers, we can give no assurance that this strategy will be successful.

**Weare subject to extensive regulation that could limit or restrict our activitiesand adversely affect our earnings**.

Weoperate in a highly regulated industry and are subject to examination,supervision, and comprehensive regulation by various federal and stateagencies. Our compliance with these regulations is costly and restricts certainof our activities, including payment of dividends, mergers and acquisitions,investments, loans and interest rates charged, interest rates paid

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on deposits andlocations of offices. We are also subject to capitalization guidelinesestablished by our regulators, which require us to maintain adequate capital tosupport our growth. Many of these regulations are intended to protectdepositors, the public and the FDIC rather than shareholders.

Thelaws and regulations applicable to the banking industry could change at anytime, and we cannot predict the effects of these changes on our business andprofitability. Because government regulation greatly affects the business andfinancial results of all commercial banks and bank holding companies, our costof compliance could adversely affect our earnings. In addition, theSarbanes-Oxley Act of 2002, and the related rules and regulations promulgatedby the Securities and Exchange Commission and Nasdaq that are now applicable tous, have increased the scope, complexity and cost of corporate governance,reporting and disclosure practices, including the costs of completing our auditand maintaining our internal controls.

**Ourability to pay dividends is limited and we may be unable to pay futuredividends**.

Ourability to pay dividends is limited by regulatory restrictions and the need tomaintain sufficient consolidated capital. The ability of our bank subsidiariesto pay dividends to us is limited by their obligations to maintain sufficientcapital and by other general restrictions on their dividends that are applicableto our regulated bank subsidiaries. If these regulatory requirements are notmet, our subsidiary banks will not be able to pay dividends to us, and we maybe unable to pay dividends on our common stock.

**ITEM1B.****        ****UNRESOLVEDSTAFF COMMENTS**

**Not applicable.**

**ITEM2.****           ****PROPERTIES**

TheCompany’s corporate headquarters are located at 500 Jesse Jewell Parkway, S.E.,Gainesville, Georgia, in the main office of the lead bank, Gainesville Bank& Trust.  The building is jointlyowned by Gainesville Bank & Trust and a related party.  The Company also has an operations centerlocated at 1480 Jesse Jewell Parkway, Gainesville, Georgia.  Data Processing, Deposit Operations, HumanResources, Accounting and Audit are located in this facility.   The Company’s seven subsidiary banks conductbusiness from facilities the majority of which are owned by the respectivebanks, all of which are in good state of repair and appropriately designed foruse as banking facilities.  Thesubsidiaries provide services from 32 locations, of which 21 locations areowned and 11 are leased.   In the opinionof management, all properties including improvements and furnishings areadequately insured.

**ITEM3.****           ****LEGAL PROCEEDINGS**

We are not a party to, nor are any of ourproperty the subject of, any material pending legal proceedings, other thanordinary routine proceedings incidental to our business, nor to the knowledgeof the management are any such proceedings contemplated or threatened againstus.

**ITEM4.****           ****SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

None.

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**PART II**

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

(a)           Ourcommon stock is quoted on the Nasdaq Global Select Market under the symbol “GBTB.”  The following table sets forth the high andlow closing prices for our common stock as reported by the Nasdaq Global SelectMarket and the cash dividends declared per share of our common stock for theindicated periods.
|                          | ** ** | **Closing Price** | ** ** | **Dividends  Declared Per** | ** ** |
|--------------------------|------------|------------------------|------------|----------------------------------|------------|
| **Calendar Period** | ** ** | **High**               | ** ** | **Low**                          | ** ** | **Share** | ** ** |
|                     |       |                   |       |                             |       |   |   |
| **2005**                 |       |                   |       |                             |       |   |   |
| First Quarter            |       | $                      | 24.39      |                             | $          | 21.66 |   | $ | 0.076 |   |
| Second Quarter           |       | 24.45                  |       | 19.05                            |       | 0.085 |   |
| Third Quarter            |       | 24.12                  |       | 20.61                            |       | 0.085 |   |
| Fourth Quarter           |       | 23.57                  |       | 19.93                            |       | 0.085 |   |
|                     |       |                   |       |                             |       |   |   |
| **2006**                 |       |                   |       |                             |       |   |   |
| First Quarter            |       | $                      | 22.39      |                             | $          | 20.50 |   | $ | 0.085 |   |
| Second Quarter           |       | 22.78                  |       | 20.62                            |       | 0.090 |   |
| Third Quarter            |       | 21.98                  |       | 20.20                            |       | 0.090 |   |
| Fourth Quarter           |       | 22.74                  |       | 20.66                            |       | 0.090 |   |

 

(b)           Asof March 1, 2007, there were approximately 3,854 holders of record of our common stock.

(c)           Dividendsare paid at the discretion of our board of directors. We have historically paiddividends on a quarterly basis as set forth in the table above. We intend tocontinue paying cash dividends, but the amount and frequency of cash dividends,if any, will be determined by our board of directors after consideration of earnings,capital requirements and our financial condition and will depend on cashdividends paid to us by our subsidiary banks. Dividends from our subsidiarybanks are our primary source of funds for the payment of dividends to ourshareholders, and there are various legal and regulatory limits on the extentto which our subsidiary banks may pay dividends or otherwise supply funds tous.  See “Supervision and Regulation”section discussed earlier in this Report. In addition, federal and stateagencies have the authority to prevent us from paying a dividend to ourshareholders. Thus, while we intend to continue paying dividends, we can makeno assurances that we will continue to pay dividends or that we will not reducethe amount of dividends paid in the future.

(d)           Duringthe fourth quarter of 2006, the Company did not repurchase any of its equitysecurities.

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**ITEM6.****           ****SELECTED FINANCIAL DATA**

The following tablepresents selected historical consolidated financial information for us and oursubsidiaries and is derived from the consolidated financial statements andrelated notes included in this annual report. This information is only a summary and should be read in conjunctionwith our historical financial statements and related notes.  The year ended December 31, 2006 includes theacquisition of Mountain Bancshares, Inc. which was completed on May 1, 2006 andaccounted for as a purchase.  See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” forfurther discussion on this and our prior acquisitions.

 
| ** **                           | ** ** | **As of and For the Year Ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands, except per share amounts)**    | ** ** |
| ** **                           |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| **Summary  Balance Sheet Data:**     |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Total loans                          |       | $                                                                                     | 1,497,701  |   | $ | 1,231,410 |   | $ | 955,880 |   | $ | 709,958 |   | $ | 542,834 |   |
| Allowance for  loan losses           |       | 24,676                                                                                |       | 12,773 |   | 11,061 |   | 8,726 |   | 7,538 |   |
| Net loans (1)                        |       | 1,473,025                                                                             |       | 1,218,637 |   | 944,819 |   | 701,232 |   | 535,296 |   |
| Earning assets  (2)                  |       | 1,708,509                                                                             |       | 1,427,484 |   | 1,144,540 |   | 850,505 |   | 678,315 |   |
| Total assets                         |       | 1,900,376                                                                             |       | 1,584,094 |   | 1,274,136 |   | 944,278 |   | 742,232 |   |
| Total deposits                       |       | 1,480,168                                                                             |       | 1,197,026 |   | 928,603 |   | 728,629 |   | 580,248 |   |
| Subordinated  debt                   |       | 29,898                                                                                |       | 29,898 |   | 29,898 |   | 15,464 |   | 15,000 |   |
| Stockholders’  equity (3)       |       | 233,338                                                                               |       | 198,711 |   | 174,715 |   | 96,843 |   | 60,353 |   |
|                                 |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| **Summary  Income Statement:**       |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Interest income                      |       | 126,575                                                                               |       | 90,815 |   | 58,274 |   | 46,792 |   | 38,956 |   |
| Interest expense                     |       | 57,393                                                                                |       | 33,836 |   | 17,952 |   | 15,288 |   | 14,897 |   |
| Net interest  income                 |       | 69,182                                                                                |       | 56,979 |   | 40,322 |   | 31,504 |   | 24,059 |   |
| Provision for  loan losses           |       | 15,744                                                                                |       | 5,916 |   | 1,406 |   | 1,406 |   | 845 |   |
| Net interest  income after provision |       | 53,438                                                                                |       | 51,063 |   | 38,916 |   | 30,098 |   | 23,214 |   |
| Other income                         |       | 10,513                                                                                |       | 11,631 |   | 11,778 |   | 9,928 |   | 8,062 |   |
| Other expense                        |       | 50,159                                                                                |       | 44,825 |   | 36,180 |   | 29,693 |   | 21,748 |   |
| Income before  income taxes          |       | 13,792                                                                                |       | 17,869 |   | 14,514 |   | 10,333 |   | 9,528 |   |
| Provision for  income taxes          |       | 4,271                                                                                 |       | 5,878 |   | 4,676 |   | 2,608 |   | 3,019 |   |
| Net income                           |       | 9,521                                                                                 |       | 11,991 |   | 9,838 |   | 7,725 |   | 6,509 |   |
|                                 |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| **Net  Income Per Share:**           |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Basic                                |       | 0.70                                                                                  |       | 0.96 |   | 1.05 |   | 1.06 |   | 1.08 |   |
| Diluted                              |       | 0.68                                                                                  |       | 0.93 |   | 1.04 |   | 1.03 |   | 1.06 |   |
| Cash dividends  declared             |       | 0.36                                                                                  |       | 0.33 |   | 0.30 |   | 0.29 |   | 0.27 |   |
| Book value                           |       | 16.51                                                                                 |       | 15.54 |   | 14.84 |   | 11.40 |   | 9.01 |   |
| Tangible book  value                 |       | 9.95                                                                                  |       | 10.32 |   | 10.19 |   | 7.51 |   | 7.59 |   |
|                                 |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| **Average  Balances:**               |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Total loans                          |       | 1,379,203                                                                             |       | 1,131,883 |   | 807,340 |   | 608,131 |   | 446,518 |   |
| Earning assets                       |       | 1,598,719                                                                             |       | 1,343,345 |   | 973,246 |   | 740,818 |   | 544,672 |   |
| Intangible  assets                   |       | 84,108                                                                                |       | 70,947 |   | 42,030 |   | 17,331 |   | 632 |   |
| Total assets                         |       | 1,776,709                                                                             |       | 1,496,792 |   | 1,082,701 |   | 813,134 |   | 587,330 |   |
| Total deposits                       |       | 1,374,419                                                                             |       | 1,123,577 |   | 834,100 |   | 637,688 |   | 456,769 |   |
| Stockholders’  equity           |       | 223,112                                                                               |       | 198,004 |   | 118,271 |   | 73,144 |   | 47,443 |   |
|                                 |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| **Other  Data:**                     |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Number of:                           |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Common shares outstanding            |       | 14,132                                                                                |       | 12,784 |   | 11,772 |   | 8,493 |   | 6,696 |   |
| Basic average shares outstanding     |       | 13,652                                                                                |       | 12,562 |   | 9,340 |   | 7,313 |   | 6,016 |   |
| Diluted average shares outstanding   |       | 13,956                                                                                |       | 12,880 |   | 9,472 |   | 7,469 |   | 6,125 |   |
|                                      |            |                                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

19

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| **Performance  Ratios:**                                |   |   |   |   |   |   |   |   |   |   |   |
|---------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Return on  average assets                               |   | 0.54   |   | 0.80   |   | 0.91   |   | 0.95   |   | 1.11   |   |
| Return on  average equity                               |   | 4.27   |   | 6.06   |   | 8.32   |   | 10.56  |   | 13.72  |   |
| Return on average  tangible assets                      |   | 0.56   |   | 0.84   |   | 0.95   |   | 0.97   |   | 1.11   |   |
| Return on  average tangible equity                      |   | 6.85   |   | 9.44   |   | 12.90  |   | 13.84  |   | 13.90  |   |
| Average loans to  average deposits                      |   | 100.35 |   | 100.74 |   | 96.79  |   | 95.36  |   | 97.76  |   |
|                                                    |   |   |   |   |   |   |   |   |   |   |   |
| **Asset  Quality Ratios:**                              |   |   |   |   |   |   |   |   |   |   |   |
| Nonperforming  loans to net loans (1)(4)                |   | 1.74   |   | 0.54   |   | 1.10   |   | 0.55   |   | 1.37   |   |
| Nonperforming  assets to total assets (5)               |   | 1.59   |   | 0.63   |   | 0.86   |   | 0.60   |   | 1.11   |   |
| Net charge-offs  to average total loans                 |   | 0.36   |   | 0.47   |   | 0.14   |   | 0.18   |   | 0.15   |   |
| Allowance for  loan losses to total nonperforming loans |   | 96.50  |   | 194.15 |   | 106.49 |   | 227.12 |   | 102.98 |   |
| Allowance for  loan losses to total loans               |   | 1.65   |   | 1.04   |   | 1.16   |   | 1.23   |   | 1.39   |   |
|                                                    |   |   |   |   |   |   |   |   |   |   |   |
| **Capital  Ratios:**                                    |   |   |   |   |   |   |   |   |   |   |   |
| Average equity  to average assets                       |   | 12.56  |   | 13.23  |   | 10.92  |   | 9.00   |   | 8.08   |   |
| Average tangible  equity to average tangible assets     |   | 8.21   |   | 8.91   |   | 7.33   |   | 7.01   |   | 7.98   |   |
| Tangible equity  to tangible assets                     |   | 7.78   |   | 8.70   |   | 9.84   |   | 7.00   |   | 6.94   |   |
| Leverage ratio                                          |   | 9.44   |   | 10.71  |   | 12.58  |   | 8.63   |   | 10.22  |   |
| Tier 1  risk-based capital ratio                        |   | 10.86  |   | 12.80  |   | 15.15  |   | 10.62  |   | 11.26  |   |
| Total risk-based  capital ratio                         |   | 12.12  |   | 13.80  |   | 16.27  |   | 11.80  |   | 12.51  |   |

 

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

(2)   Earningassets include interest-bearing deposits in banks, federal funds sold,securities available for sale, restricted equity securities, loans net ofunearned income, less unrealized gains (losses) on securities and nonaccrualloans.

(3)   The increasein stockholders’ equity for the years ended December 31, 2006, 2005 and 2004related to business combinations was 15%, 12% and 34%, respectively. Net incomeless dividends declared represented 2%, 4% and 7% of the total increase for thesame periods, respectively.

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

(5)   Nonperformingassets include nonperforming loans and foreclosed assets.

**GAAPReconciliation and Management Explanation for Non-GAAP Financial Measures**

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

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

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

20

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

·      “Averagetangible equity to average tangible assets” is defined as average total equityreduced by recorded average intangible assets divided by average total assetsreduced by recorded average intangible assets. This measure is important tomany investors that are interested in the equity to asset ratio exclusive ofthe effect of changes in average intangible assets on average equity andaverage total assets.

·      “Earningassets” is defined as total assets plus the allowance for loan losses less cashand due from banks, premises and equipment, goodwill and intangible assets,other assets, unrealized gains (losses) on securities and nonaccrual loans.This measure is important to many investors because for financial institutions,their net interest income is directly related to their level of earning assets.

Thesedisclosures should not be viewed as a substitute for results determined inaccordance with GAAP, and are not necessarily comparable to non-GAAP performancemeasures which may be presented by other companies. The followingreconciliation table provides a more detailed analysis of these non-GAAPperformance measures.
| ** **                                          | ** ** | **As of and For the Year Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands, except per share amounts)**                                  | ** ** |
|                                                |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Book value per common  share                        |       | $                                                                                     | 16.51      |   | $ | 15.54 |   | $ | 14.84 |   | $ | 11.40 |   | $ | 9.01 |   |
| Effect of intangible  assets per share              |       | (6.56                                                                                 | )          | (5.22 | ) | (4.65 | ) | (3.89 | ) | (1.42 | ) |
| Tangible book value per  common share               |       | $                                                                                     | 9.95       |   | $ | 10.32 |   | $ | 10.19 |   | $ | 7.51 |   | $ | 7.59 |   |
|                                                |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Equity to assets                                    |       | 12.28                                                                                 |       | 12.54 |   | 13.71 |   | 10.26 |   | 8.13 |   |
| Effect of intangible  assets                        |       | (4.50                                                                                 | )          | (3.84 | ) | (3.87 | ) | (3.26 | ) | (1.19 | ) |
| Tangible equity to  tangible assets                 |       | 7.78                                                                                  |       | 8.70 |   | 9.84 |   | 7.00 |   | 6.94 |   |
|                                                |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Return on average  assets                           |       | 0.54                                                                                  |       | 0.80 |   | 0.91 |   | 0.95 |   | 1.11 |   |
| Effect of intangible  assets                        |       | 0.02                                                                                  |       | 0.04 |   | 0.04 |   | 0.02 |   | — |   |
| Return on average  tangible assets                  |       | 0.56                                                                                  |       | 0.84 |   | 0.95 |   | 0.97 |   | 1.11 |   |
|                                                |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Return on average  equity                           |       | 4.27                                                                                  |       | 6.06 |   | 8.32 |   | 10.56 |   | 13.72 |   |
| Effect of intangible  assets                        |       | 2.58                                                                                  |       | 3.38 |   | 4.58 |   | 3.28 |   | 0.18 |   |
| Return on average  tangible equity                  |       | 6.85                                                                                  |       | 9.44 |   | 12.90 |   | 13.84 |   | 13.90 |   |
|                                                |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Average equity to  average assets                   |       | 12.56                                                                                 |       | 13.23 |   | 10.92 |   | 9.00 |   | 8.08 |   |
| Effect of average  intangible assets                |       | (4.35                                                                                 | )          | (4.32 | ) | (3.59 | ) | (1.99 | ) | (0.10 | ) |
| Average tangible equity  to average tangible assets |       | 8.21                                                                                  |       | 8.91 |   | 7.33 |   | 7.01 |   | 7.98 |   |
|                                                |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Total assets                                        |       | $                                                                                     | 1,900,376  |   | $ | 1,584,094 |   | $ | 1,274,136 |   | $ | 944,278 |   | $ | 742,232 |   |
| Plus:                                               |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Allowance for  loan losses                          |       | 24,676                                                                                |       | 12,773 |   | 11,061 |   | 8,726 |   | 7,538 |   |
| Less:                                               |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Cash and due  from banks                            |       | (25,876                                                                               | )          | (30,748 | ) | (20,723 | ) | (17,584 | ) | (18,113 | ) |
| Premises and  equipment                             |       | (41,776                                                                               | )          | (37,014 | ) | (31,548 | ) | (25,813 | ) | (20,774 | ) |
| Intangible  assets                                  |       | (92,794                                                                               | )          | (66,750 | ) | (54,745 | ) | (33,043 | ) | (9,522 | ) |
| Other assets                                        |       | (43,494                                                                               | )          | (32,245 | ) | (23,646 | ) | (22,010 | ) | (14,525 | ) |
| Unrealized  (gains) losses on securities            |       | 2,187                                                                                 |       | 3,936 |   | 64 |   | (716 | ) | (3,015 | ) |
| Nonaccrual loans                                    |       | (14,790                                                                               | )          | (6,562 | ) | (10,059 | ) | (3,333 | ) | (5,506 | ) |
| Earning assets                                      |       | $                                                                                     | 1,708,509  |   | $ | 1,427,484 |   | $ | 1,144,540 |   | $ | 850,505 |   | $ | 678,315 |   |

 

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

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

**ExecutiveSummary**

TheCompany, headquartered in Gainesville, Georgia, consists of a network ofcommunity banks in growth areas of Georgia with approximately $1.9 billion intotal consolidated assets as of December 31, 2006. We believe that maintainingautonomy within our subsidiary banks serves the unique needs of each communitywe serve. We focus on strong asset quality and sound management teams and useeconomies of scale to enhance our profitability. Our results reflect acombination of internal and acquisition growth. Prior to 2006, we had completedseven acquisitions.  On May 1, 2006, wecompleted the acquisition of Mountain Bancshares, Inc. and its bankingsubsidiary Mountain State Bank.    Wecontinue to build infrastructure to support our growth.

Asa bank holding company, our results of operations are almost entirely dependenton the results of operations of our subsidiary banks. The following table setsforth our subsidiary banks and selected data related to each bank as ofDecember 31, 2006:
| Bank                                                                                     | ** ** | **Number of  Branches** | ** ** | **Market Area  Counties**        | ** ** | **Total Assets at  December 31, 2006** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------------|------------|----------------------------------------|------------|
| ** **                                                                               | ** ** | ** **              | ** ** | ** **                       | ** ** | **(in thousands)**                     | ** ** |
| ** **                                                                               | ** ** | ** **              | ** ** | ** **                       | ** ** | ** **                             | ** ** |
| Gainesville Bank & Trust (with divisions  Southern Heritage Bank and Bank of Athens) |       | 11                      |       | Hall, Clarke, Cobb               |       | $                                      | 636,446    |   |
| United Bank & Trust                                                                  |       | 3                       |       | Polk, Bartow                     |       | 104,111                                | ** ** |
| Community Trust Bank                                                                     |       | 6                       |       | Paulding, Cobb                   |       | 319,210                                | ** ** |
| HomeTown Bank of Villa Rica                                                              |       | 3                       |       | Carroll, Paulding                |       | 267,233                                | ** ** |
| First National Bank of the South                                                         |       | 3                       |       | Baldwin, Putnam                  |       | 210,975                                | ** ** |
| First National Bank of Gwinnett                                                          |       | 1                       |       | Gwinnett                         |       | 170,039                                | ** ** |
| Mountain State Bank                                                                      |       | 5                       |       | Dawson, Forsyth, Lumpkin, Fulton |       | 212,685                                | ** ** |
|                                                                                          |            |                         |            |                                  |            |                                        |            |  |

 

Wederive the majority of our income from interest received on our loans andinvestments. Our primary source of funds for making these loans and investmentsis our deposits, on which we pay interest. Approximately 90% of our totaldeposits are interest-bearing. Consequently, one of the key measures of our success is our amount ofnet interest income, or the difference between the income on ourinterest-earning assets, such as loans and investments, and the expense on ourinterest-bearing liabilities, such as deposits and borrowings. Another keymeasure is the spread between the yield we earn on these interest-earning assetsand the rate we pay on our interest-bearing liabilities, which is called ournet interest spread.

Thereare risks inherent in all loans, so we maintain an allowance for loan losses toabsorb probable losses on existing loans that may become uncollectible. Wemaintain this allowance by charging a provision for loan losses against ouroperating earnings for each period. We have included a detailed discussion ofthis process, as well as several tables describing our allowance for loanlosses.  The financial performance forthe year ended December 31, 2006 was impacted by the additional loan lossprovision taken in the fourth quarter of 2006 related to several loanrelationships at HomeTown Bank of Villa Rica determined to have multiple policyviolations.  Please see “Results ofOperations – Asset Quality” for further discussion concerning the additionalloan loss provision.

22

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Inaddition to earning interest on our loans and investments, we earn incomethrough fees and other charges to our clients. We have also included adiscussion of the various components of this noninterest income, as well as ofour noninterest expense.

Thefollowing discussion and analysis also identifies significant factors that haveaffected our financial position and operating results during the periodsincluded in the financial statements accompanying or incorporated by referencein this report. We encourage you to read this discussion and analysis inconjunction with our financial statements and the other statistical informationincluded and incorporated by reference in this report.

Wemeasure and monitor the following factors as key indicators of our financialperformance:

·      Netincome

·      Earningsper share

·      Loanand deposit growth

·      Creditquality

Belowis a summary of the performance of these key indicators for the year endedDecember 31, 2006 as compared to the year ended December 31, 2005:

·      Netincome of $9.5 million compared to $12.0 million

·      Dilutedearnings per share of $0.68 compared to $0.93

·      Netinterest margin of 4.34% compared to 4.26%

·      Loangrowth of $266.3 million or 21.6% (12.9% excluding acquisition of MountainBancshares, Inc.)

·      Depositgrowth of $283.1 million or 23.7% (13.3% excluding acquisition of MountainBancshares, Inc.)

·      Returnon average assets of 0.54% compared to 0.80%

·      Returnon average equity of 4.27% compared to 6.06%

·      Nonperfomingassets ratio of 1.59% compared to 0.63%

·      Netcharge-off ratio of 0.36% compared to 0.47%

**Effectof Economic Trends**

Duringthe three years ended December 31, 2004, our rates on both short-term orvariable rate interest-earning assets and short-term or variable rateinterest-bearing liabilities declined primarily as a result of the actionstaken by the Federal Reserve, however during 2005 and continuing through 2006,both these rates increased.

Duringmost of 2001 and during 2002, the United States experienced an economicdecline. During this period, the economy was affected by lower returns of thestock markets. Economic data led the Federal Reserve to begin an aggressive programof reducing rates that moved the federal funds rate down 11 times during 2001for a total reduction of 475 basis points. During the fourth quarter of 2002and the first quarter of 2003, the Federal Reserve reduced the federal fundsrate down an additional 75 basis points, bringing the federal funds rate to itslowest level in 40 years.

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Despitesharply lower short-term rates, stimulus to the economy during 2003 was mutedand consumer demand and business investment activity remained weak. During allof 2003 and substantially all of 2004, the financial markets operated underhistorically low interest rates. As a result of these unusual conditions,Congress passed an economic stimulus plan in 2003. During 2004, many economistsbelieved the economy began to show signs of strengthening, and the FederalReserve increased the short-term interest rate by 100 basis points during thesecond, third and fourth quarters of 2004 and by 200 basis points during 2005.In 2006, the short-term interest rate continued to increase by 50 basis pointsduring the first quarter and another 50 basis points during the second quarterof 2006.  Many economists believe thatthe Federal Reserve will lower rates during 2007. No assurance can be giventhat the Federal Reserve will actually lower interest rates or that the resultswe anticipate will actually occur.

Thespecific economic and credit risks associated with our loan portfolio,especially the real estate portfolio, include, but are not limited to, ageneral downturn in the economy which could affect unemployment rates in ourmarket areas, general real estate market deterioration, interest ratefluctuations, deteriorated collateral, title defects, inaccurate appraisals,and financial deterioration of borrowers. Construction and development lendingcan also present other specific risks to the lender such as whether developerscan find builders to buy lots for home construction, whether the builders canobtain financing for the construction, whether the builders can sell the home toa buyer, and whether the buyer can obtain permanent financing. Currently, realestate values and employment trends in our market areas have remained stable.The general economy and loan demand declined slightly during 2001 and continuedto decline throughout 2002. In 2003, the economy began to show signs ofimprovement which continued through 2004, 2005 and 2006. Our growth has notbeen significantly impacted by the previously mentioned economic conditions.

**CriticalAccounting Policies**

Wehave adopted various accounting policies that govern the application ofaccounting principles generally accepted in the United States and generalpractices within the banking industry in the preparation of our financialstatements. Our significant accounting policies are reviewed and discussedperiodically by our Audit Committee and are described in the notes to ourconsolidated financial statements as of December 31, 2006 included in thisreport. Certain accounting policies require management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereported period. Actual results could differ from those estimates. Estimatesand assumptions are reviewed periodically and the effects of revisions arereflected in the consolidated financial statements in the period they aredetermined to be necessary.

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

Weuse an 8 point rating system for our loans. Ratings of 1 to 4 are considered “passratings”, 5 is special mention, 6 is substandard, 7 is doubtful, and 8 is loss.The originating loan officer rates all loans based on this system, and theratings are adjusted as needed to reflect the current status of the loan.  The loan officers are trained to rate loansin a timely and accurate manner based on current information.  These ratings are reviewed regularly by theloan committee of the respective bank subsidiary, an outside independent loanreview firm, our accountants, and by the applicable regulator for accuracy.

Ageneral allowance will be maintained for all loans rated 1 to 4 and for allhomogeneous loan pools such as consumer, credit card and residentialmortgage.  Management will develop arange of expected losses for each risk grade and for each pool.  This range of losses will be management’sbest estimate based on actual loss experience, industry loss

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experience, loanportfolio trends and characteristics of the markets it serves.  On a quarterly basis, management willevaluate each of the loan categories and determine the expected loss levelsfrom the range previously established.

All loans rated 5, 6, 7and 8, as well as any other impaired loan of a significant amount, will beindividually analyzed and a specific reserve assigned.  This analysis will include information frommanagement’s Problem Asset Review Committee which meets quarterly and reviewscredit relationships of one million and above and rated 5 through 8.  Management, considering current informationand events regarding a borrower’s ability to repay its obligations, considers aloan to be impaired when the ultimate collection of all amounts due, accordingto the contractual terms of the loan agreement, is in doubt.  When a loan is considered to be impaired, theamount of the impairment is measured based on the present value of expectedfuture cash flows discounted at the loan’s effective interest rate.  If the loan is collateral dependent, the fairvalue of the collateral less estimated selling costs is used to determine theamount of impairment.  Impairment lossesare included in the allowance for loan losses through a charge to the provisionfor loan losses.  A majority of ourimpaired loans are collateral dependent. The allowance for loan losses on these loans is determined based on fairvalue estimates (net of selling costs) of the respective collateral.  The actual losses on these loans could differsignificantly if the fair value of the collateral is different from theestimates used in determining the allocated allowance.  Most of our collateral dependent impairedloans are secured by real estate.  Thefair value of these real estate properties is generally determined based onappraisals performed by a certified or licensed appraiser.  Management also considers other factors orrecent developments which could result in adjustments to the collateral valueestimates indicated in the appraisals.

Theremainder of the balance in the reserve for loan losses is unallocated.  The unallocated reserve represents management’sestimate of the probable losses inherent in the loan portfolio that have notbeen fully provided for through the specific reserve calculations.  Factors considered in determining theunallocated reserve are overall economic conditions, the rapid rise of realestate prices over the past three years in our markets, the recent slowdown inreal estate activity, the number of new and relatively inexperienced banks andbankers entering our markets and offering aggressive terms and pricing, ourconcentration in commercial and consumer real estate loans and the experienceand historic performance of our lenders.

*Goodwill*. Our growth over the past several yearshas been enhanced significantly by mergers and acquisitions. Prior to July2001, all of our acquisitions were accounted for using the pooling-of-interestsbusiness combination method of accounting. Effective July 1, 2001, we adoptedSFAS No. 141, “Business Combinations,” which allows only the use of thepurchase method of accounting. For purchase acquisitions, we are required torecord the assets acquired, including identified intangible assets, andliabilities assumed at their fair value, which in many instances involvesestimates based on third party valuations, such as appraisals, or internalvaluations based on discounted cash flow analyses or other valuationtechniques. The determination of the useful lives of intangible assets issubjective as is the appropriate amortization period for such intangibleassets. In addition, purchase acquisitions typically result in recordinggoodwill, which is subject to ongoing periodic impairment tests based on thefair value of net assets acquired compared to the carrying value of goodwill.In July 2006, the required impairment testing of goodwill was performed and noimpairment existed as of the valuation date, as the fair value of our netassets exceeded their carrying value. If for any future period we determinethat there has been impairment in the carrying value of our goodwill balances,we will record a charge to our earnings, which could have a material adverseeffect on our net income.

**Effectof Recent Business Acquisitions**

On May 1, 2006, theCompany completed the acquisition of Mountain Bancshares, Inc. the parentcompany of Mountain State Bank, which is headquartered in Dawsonville, DawsonCounty, Georgia, and has branches in Dawson, Forsyth, Fulton and LumpkinCounties.  Mountain State Bank became awholly owned subsidiary of the Company. The Company issued 1,088,924 shares of its capital stock andapproximately $10.3 million in cash in exchange for all of the issued andoutstanding common shares of Mountain Bancshares, Inc.  The acquisition was accounted for as apurchase resulting in estimated goodwill of approximately $26.0 million.  Mountain State Bank’s results of operationsfrom May 1, 2006, are included in the consolidated results of operations forthe year ended December 31, 2006.  Theresults of

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operations for the years ended December 31, 2005and 2004 do not include the results of operations of Mountain Bancshares, Inc.

On March 1, 2005, theCompany completed the acquisition of FNBG Bancshares, Inc. the parent companyof First National Bank of Gwinnett in Duluth, Gwinnett County, Georgia, whichresulted in First National Bank of Gwinnett becoming a wholly owned subsidiaryof the Company.  The Company issued845,128 shares of its capital stock and approximately $3.8 million in cash inexchange for all of the issued and outstanding common shares of FNBGBancshares, Inc.  The acquisition wasaccounted for as a purchase resulting in estimated goodwill of approximately$16.4 million.  First National Bank ofGwinnett’s results of operations from March 1, 2005, are included in theconsolidated results of operations for the year ended December 31, 2005.  The results of operations for the year endedDecember 31, 2004 does not include the results of operations of FNBGBancshares, Inc.

On August 3, 2004, the Company completed theacquisition of Southern Heritage Bancorp, Inc., the parent company of SouthernHeritage Bank, in Flowery Branch, Georgia. Southern Heritage Bank merged with and into, and became a division of,the Company’s lead bank, Gainesville Bank & Trust.  The Company issued 1,141,628 shares of itscommon stock and approximately $869,172 in cash in exchange for all of theissued and outstanding common shares of Southern Heritage Bancorp, Inc.  The acquisition was accounted for as apurchase resulting in goodwill of approximately $14,901,000.  The results of operations for the year endedDecember 31, 2004 include Southern Heritage Bank’s results of operations sincethe date of acquisition, which represents approximately five months ofoperations.

On August 19, 2004, the Company completed theacquisition of Lumpkin County Bank in Dahlonega, Georgia.  Lumpkin County Bank merged with and into, andbecame a division of, the Company’s lead bank, Gainesville Bank &Trust.  The Company issued 262,682 sharesof its common stock in exchange for all of the issued and outstanding commonshares of Lumpkin County Bank.  Theacquisition was accounted for as a purchase resulting in goodwill ofapproximately $331,000.  The results ofoperations for the year ended December 31, 2004 include Lumpkin County Bank’sresults of operations since the date of acquisition, which representsapproximately four and one-half months of operations.

**FinancialCondition**

*TotalAssets*.   Our total assets increased $316.3 million or 20.0% during 2006 comparedto $310.0 million or 24.3% during 2005. The increase in 2006 consists primarilyof an increase in total loans of $266.3 million or 21.6%, and an increase ingoodwill and intangible assets of $26.0 million. Excluding the acquisition ofMountain Bancshares, Inc., total assets increased $150.8 million, or 9.5%,during 2006. Also, excluding the acquisition, total loans increased $158.8million or 12.9%.  For the year endedDecember 31, 2005 as compared with the year ended December 31, 2004, theacquisition of FNBG Bancshares, Inc. accounted for approximately $139.0 millionof the increase in total assets.  Theoverall growth in 2006 and 2005 is consistent with management’s plans. Thecompetition for deposits plays an important role in our overall growth.

*TotalLoans*.   Our primary focus is to maximize earnings through lending activities.Any excess funds are invested according to our investment policy. Total loansincreased 21.6% or $266.3 million for the year ended December 31, 2006.  Exclusive of the acquisition of MountainBancshares, Inc., which represented $107.5 million of this increase, totalloans increased $158.8 million or 12.9%. This increase is compared to an increase of $275.5 million or 28.8%during 2005.  Exclusive of the acquisitionof FNBG Bancshares, Inc., which represented $101.5 million of the increase in2005, total loans increased $174.0 million or 18.2%.  As of December 31, 2006 and 2005, ourloan-to-deposit ratio was 101.2% and 102.9%, respectively. At December 31, 2006and 2005, we had total outstanding borrowings of $168.4 million and $173.7million, respectively. These funds have been used to fund loan growth. Theutilization of borrowings to fund loan growth enables us to maintain a higherloan to deposit ratio and maintain an adequate liquidity ratio. Ourloan-to-funds ratio was 90.8% and 89.8% at December 31, 2006 and 2005,respectively.

*TotalDeposits*.   During 2006, total deposits grew by $283.1 million or 23.7%. Exclusiveof the acquisition of Mountain Bancshares, Inc., which accounted for $124.0million of this increase, total deposits grew $159.1 million or

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13.3% during 2006compared to an increase of $158.8 million or 17.1% in 2005, exclusive of theacquisition of FNBG Bancshares, Inc.

**Resultsof Operations—For the Years Ended December 31, 2006, 2005 and 2004**

*NetInterest Income and Earning Assets*.   During 2006 and 2005, we continued toexperience moderate internal growth in interest-earning and total assets whichwas funded by increases in deposits and the retention of net profits. During2006, we experienced additional growth through the acquisition of MountainBancshares, Inc. and in 2005 through the acquisition of FNBG Bancshares, Inc.as explained above. We recorded net income of $9.5 million, $12.0 million and$9.8 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Ourprofitability is determined by our ability to effectively manage interestincome and expense, to minimize loan and security losses, to generatenoninterest income, and to control operating expenses. Because interest ratesare determined by market forces and economic conditions beyond our control, ourability to generate net interest income depends upon our ability to obtain anadequate net interest spread between the rate earned on interest-earning assetsand the rate paid on interest-bearing liabilities. The net yield on averageinterest-earning assets increased to 4.34% for the year ended December 31, 2006from 4.26% for the year ended December 31, 2005. This increase is attributableto increases in interest rates by the Federal Reserve in 2005 and 2006 inaddition to increased loan volume. In 2006, the average yield oninterest-earning assets increased to 7.93% from 6.78% in 2005 and the averageyield on interest-bearing liabilities increased to 4.20% in 2006 from 3.00% in2005. The overall change in the interest rate spread from 2005 to 2006 was adecrease of 5 basis points. The decrease in the net interest spread is a resultof increases in time deposit volume at an average rate 136 basis points abovethe average in 2005 and increases in interest-bearing demand and savings volumeat an average rate 92 basis points above the 2005 average, partially offset byincreases in loan volume at an average rate 120 basis points above the averagein 2005. Total average interest-earning assets increased by $255.4 million, to$1,598.7 million at December 31, 2006 as compared to 2005 and averageinterest-bearing liabilities increased by $238.1 million, to $1,367.8 millionfor the same period. We continue to experience growth in our portfolios whilemaintaining our competitive pricing.

Thenet yield on average interest-earning assets increased by 8 basis points to4.26% from 4.18% for the year ended December 31, 2005 as compared to 2004. Theincreased net yield in 2005 was primarily attributable to increases in loanvolume in addition to increases in interest rates.

Netinterest income increased by $12.2 million to $69.2 million in 2006, comparedto an increase of $16.7 million in 2005. The increase for both years continuesto reflect the continued increase in interest-earning assets during 2006 and2005. The change in net interest income is primarily the result of theincreases in net volume versus changes in net interest rates. These variancesinclude the impact of the acquisition of Mountain Bancshares in 2006 and theacquisition of FNBG Bancshares in 2005.

*OtherIncome*. Other income decreased during 2006 by $1.1 million compared to adecrease of $147,000 in 2005. For the year ended December 31, 2006, servicecharges on deposit accounts decreased by $135,000, other service charges andfees decreased by $151,000 and securities transactions, net decreased by$569,000.  These decreases were partiallyoffset by an increase in mortgage origination fees of $398,000.  For the year ended December 31, 2005, servicecharges on deposit accounts increased by $292,000 and mortgage origination feesincreased by $275,000, which was offset by a decrease in other service chargesand fees of $712,000.  The decrease inother service charges and fees can be attributed to the loss of insurancecommissions due to the sale of Community Loan Company in 2005 and the loss ofprocessing fees due to an expired contract.

*OtherExpense*.    Other expense increased $5.3 million and $8.6million for the years ended December 31, 2006 and 2005, respectively. Increasesin salaries and employee benefits represent the most significant portions ofthese increases, which increased by $3.7 million and $5.4 million for the yearsended 2006 and 2005, respectively. The number of full-time equivalent employeesincreased by 34 employees in May 2006 due to the acquisition of MountainBancshares, Inc.  In addition to theadditional salary expense related to new employees for eight months of 2006, weincurred increases due to increases in profit sharing contributions, healthinsurance costs, incentive compensation, certain severance payments and normalsalary increases for the years ended December 31, 2006 and 2005.  Other operating expenses increased by$882,000 and $2.1 million, respectively, for the years ended December 31, 2006and 2005. The increase in other operating

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expenses in 2006included increases in marketing and public relations of $124,000, ATM and dataprocessing expense of $82,000, supplies, postage and telephone expense of$68,000 and a loss of $306,000 recorded in the fourth quarter of 2005 on thesale of Community Loan Company.  Theincreases in all of the above categories can be partially attributed to theinclusion of Mountain Bancshares, Inc. for the year ended December 31, 2006,since the acquisition date of May 1, 2006.

*IncomeTax Expense*.   Income tax expense decreased by $1.6 millionto $4.3 million in 2006 from $5.9 million in 2005. The decrease in 2006 wasattributable to decreased profits primarily related to the additional loan lossprovision taken in the fourth quarter of 2006 as discussed below.  The effective tax rate for year endedDecember 31, 2006 was 31.0%, compared to 32.9% for 2005.

Incometax expense increased by $1.2 million to $5.9 million in 2005 from $4.7 millionin 2004.  The increase in 2005 wasattributable to increased profits.  Theeffective tax rate for the year ended December 31, 2005 was 32.9%, compared to32.2% for 2004.

*NetIncome*.   Net income decreased by $2.5 million for the year ended December 31,2006 when compared to 2005.  Thisdecrease is primarily attributable to the additional loan loss provision takenin the fourth quarter of 2006 as discussed below.  The increase in net income for the year endedDecember 31, 2005 was $2.2 million or 21.9% when compared to 2004.  This increase is directly related to theincrease in net interest income and the inclusion of First National Bank ofGwinnett in 2005, which is partially offset by increases in other expenses andthe additional loan loss provision taken in the second quarter of 2005.

*AssetQuality*.   The provision for loan losses was $15.7 million during 2006, compared to$5.9 million in 2005.  This increase wasdue primarily to an additional provision of $9.7 million taken in the fourthquarter of 2006 at HTB arising from a recent examination conducted by the FDICand relates to several loan relationships originated by the president of thatbank in which it has become apparent that this officer did not follow numerousbank loan policies and procedures, including loan approval authorities,collateral requirements, inadequate documentation, and other underwritingguidelines.  This officer is no longeremployed by the bank.  Management, alongwith the assistance of its external loan reviewer, has conducted a review of allloans within this officer’s portfolio. Management has also consulted with the FDIC following the conclusion ofits examination regarding its recommendations as to the appropriate amount forthe increase in the reserve.  The Companyis actively pursuing several courses of action to improve its position on theimpaired loans and to mitigate any actual losses on these loans.  However, as of the date of this report, it istoo early to determine the success of these actions.

Theprovision for loan losses is the charge to operations which management believesis necessary to fund the allowance for loan losses. This provision is based onmanagement’s periodic review of the collectibility of the loans in light ofhistorical experience, the nature and volume of the loan portfolio, adversesituations that may affect the borrower’s ability to repay, estimated value ofany underlying collateral and prevailing economic conditions. Our evaluation isinherently subjective as it requires estimates that are susceptible to significantrevision as more information becomes available. In addition, regulatoryagencies, as an integral part of their examination process, periodically reviewour allowance for loan losses, and may require us to make additions to theallowance based on their judgment about information available to them at thetime of their examinations. Loans acquired in business acquisitions wereacquired at their estimated fair value, including an adequate allowance forloan losses.  See also our discussion ofthe loan loss allowance in the “Critical Accounting Policies” section includedin this report.

Thefollowing table presents details of the provision for loan losses, nonaccrualloans and related categories.  Theincrease in nonaccrual loans is related to two large loan relationshipstotaling $9.4 million at HTB and CTB.  As shown in “Summary of Loan Loss Experience” below, the consumerrelated charge-offs consist of many smaller balance loans while the real estaterelated charge-offs consist of only a few larger balance loans. Real estateloans are normally secured by one to four family residences or other realestate with values exceeding the original loan balance, therefore minimizingthe risk of loss.  Consumer loans, however,may be secured by consumer goods and automobiles, or may be unsecured, andtherefore subject to greater loss in the event of charge-off. During arecession, losses are more likely and the risk of loss is greater in theconsumer portfolio. The allowance for loan losses as a percentage of nonperformingloans at December 31, 2006 was 96.50%, which was down from 194.15% at December31, 2005. This decrease is due to nonaccrual loans increasing to $14.8 millionat December 31, 2006 from $6.6 million at December 31, 2005 as well as the

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increase in theprovision for loan losses in 2006 to $15.7 million compared to $5.9 million for2005.  Based on management’s evaluations,management believes the allowance for loan losses is adequate to absorbpotential losses on existing loans.
|                                             | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands)**        | ** ** |
| ** **                                  | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| Total  charge-offs                          |       | $                                           | 5,570      |   | $ | 5,761 |   |
| Total recoveries                            |       | 641                                         |       | 452 |   |
| Net charge-offs  (recoveries)               |       | 4,929                                       |       | 5,309 |   |
| Total nonaccrual  loans                     |       | 14,790                                      |       | 6,562 |   |
| Loans past due  90 days                     |       | 10                                          |       | 17 |   |
| Other real  estate                          |       | 4,673                                       |       | 3,431 |   |
| Provision for  loan losses                  |       | 15,744                                      |       | 5,916 |   |
| Allowance/Total  loans                      |       | 1.65                                        | %          | 1.04 | % |
| Net charge-offs  (recoveries)/Average loans |       | 0.357                                       | %          | 0.469 | % |
| Allowance/Nonperforming  loans              |       | 96.50                                       | %          | 194.15 | % |
|                                             |            |                                             |            |  |  |  |  |

 

**Effectsof Inflation**

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

**Off-BalanceSheet Arrangements**

Ourfinancial statements do not reflect various commitments and contingentliabilities that arise in the normal course of business. These off-balancesheet financial instruments include commitments to extend credit, standbyletters of credit and credit card commitments. Such financial instruments areincluded in the financial statements when funds are distributed or theinstruments become payable. Our exposure to credit loss in the event ofnonperformance by the other party to the financial instrument for commitmentsto extend credit, standby letters of credit and credit card commitments isrepresented by the contractual amount of those instruments. We use the samecredit policies in making such commitments as we do for on-balance sheetinstruments. Although these amounts do not necessarily represent future cashrequirements, a summary of our commitments as of December 31, 2006 and December31, 2005 are as follows:
|                                      | ** ** | **December 31,  2006**          | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **(Dollars in thousands)** | ** ** |
| Commitments to extend  credit        |       | $                                    | 425,391    |                        | $          | 288,448 |   |
| Financial standby  letters of credit |       | 7,544                                |       | 8,650                       |       |
| Other standby letters  of credit     |       | 1,129                                |       | 1,569                       |       |
| Credit card commitments              |       | 6,595                                |       | 7,229                       |       |
| Total                                |       | $                                    | 440,659    |                        | $          | 305,896 |   |

 

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**Liquidityand Capital Resources**

Liquidityrepresents the ability of a company to convert assets into cash or cashequivalents without significant loss and the ability to raise additional fundsby increasing liabilities. Liquidity management involves monitoring our sourcesand uses of funds in order to meet our day-to-day cash flow requirements whilemaximizing profits. We seek to meet liquidity requirements primarily throughmanagement of short-term investments, monthly amortizing loans, maturing singlepayment loans, and maturities of securities and prepayments. Also, we maintainrelationships with correspondent banks which could provide funds on shortnotice. As of December 31, 2006, we had amounts borrowed under federal fundspurchase lines and securities sold under repurchase agreements of $41.1 millioncompared to $45.5 million as of December 31, 2005. These borrowings typicallymature within one to four business days. In November 2004, the Companycompleted the sale of 1,651,680 shares of its common stock in a secondary stockoffering receiving net proceeds of approximately $35.4 million.  The Company used the proceeds of the offeringfor general corporate purposes.

Thefollowing table sets forth certain information about contractual cashobligations as of December 31, 2006.
|                                     | ** ** | **Payments Due after December 31, 2006** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                                         | ** ** | **1 Year  Or Less** | ** ** | **1 – 3  Years** | ** ** | **4 – 5  Years** | ** ** | **After 5  Years** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)**                              | ** ** |
|                                |       |                                                              |       |   |   |   |   |   |   |   |   |
| Subordinated  debt                  |       | $                                                                 | 29,898     |   | $ | — |   | $ | — |   | $ | — |   | $ | 29,898 |   |
| Operating leases                    |       | 8,431                                                             |       | 936 |   | 1,688 |   | 617 |   | 5,190 |   |
| Federal Home  Loan Bank advances    |       | 96,498                                                            |       | 51,700 |   | 30,270 |   | 8,988 |   | 5,540 |   |
| Total  contractual cash obligations |       | $                                                                 | 134,827    |   | $ | 52,636 |   | $ | 31,958 |   | $ | 9,605 |   | $ | 40,628 |   |

 

Ouroperating leases represent short-term obligations, normally with maturities ofone year or less, with the exception of one lease entered into in 2005 whichhas a maturity of 25 years.  Many of theoperating leases have thirty-day cancellation provisions.

Ourliquidity and capital resources are monitored on a periodic basis by managementand state and federal regulatory authorities. At December 31, 2006, ourliquidity ratio was 11.76%. Our liquidity ratio is measured by the ratio of netcash, federal funds sold and securities to net deposits and short-termliabilities. In the event our subsidiary banks need to generate additionalliquidity, funding plans would be implemented as outlined in the liquiditypolicy of the banks. Our banks have lines of credit available to meet anyunforeseen liquidity needs. Also, our banks have relationships with the FederalHome Loan Bank of Atlanta, which provides funding for loan growth on an asneeded basis. Management reviews liquidity on a periodic basis to monitor andadjust liquidity as necessary. Management has the ability to adjust liquidityby selling securities available for sale, selling participations in loans andaccessing available funds through various borrowing arrangements. At December31, 2006, we had available borrowing capacity totaling approximately $262.7 millionthrough various borrowing arrangements and available lines of credit. Webelieve our short-term investments and available borrowing arrangements areadequate to cover any reasonably anticipated immediate need for funds.

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Asof December 31, 2006, the Company and its subsidiary banks were considered tobe well-capitalized as defined in the FDICIA and based on regulatory minimumcapital requirements, with the exception of HTB which was considered adequatelycapitalized. The Company has infused capital into HTB during the first quarterof 2007 to bring them back to a well-capitalized status.  The Company and its subsidiary banks’ capitalratios as of December 31, 2006 are presented in the following table:
|                                          | ** ** | **Capital  Ratios** | ** ** | **For  Capital  Adequacy  Purposes** | ** ** | **To Be Well  Capitalized** | ** ** |
|------------------------------------------|------------|---------------------|------------|--------------------------------------|------------|---------------------------------------|------------|
| Total Capital to  Risk Weighted Assets:  |       |                |       |                                 |       |                                  |       |
| Consolidated                             |       | 12.12               | %          | 8.00                                 | %          | N/A                                   |       |
| Gainesville Bank & Trust             |       | 11.47               |       | 8.00                                 |       | 10.00                                 | %          |
| United Bank & Trust                  |       | 10.09               |       | 8.00                                 |       | 10.00                                 |       |
| Community Trust Bank                     |       | 10.73               |       | 8.00                                 |       | 10.00                                 |       |
| HomeTown Bank of Villa Rica              |       | 8.54                |       | 8.00                                 |       | 10.00                                 |       |
| First National Bank of the South         |       | 11.57               |       | 8.00                                 |       | 10.00                                 |       |
| First National Bank of Gwinnett          |       | 11.27               |       | 8.00                                 |       | 10.00                                 |       |
| Mountain State Bank                      |       | 10.29               |       | 8.00                                 |       | 10.00                                 |       |
|                                     |       |                |       |                                 |       |                                  |       |
| Tier 1 Capital  to Risk Weighted Assets: |       |                |       |                                 |       |                                  |       |
| Consolidated                             |       | 10.86               | %          | 4.00                                 | %          | N/A                                   |       |
| Gainesville Bank & Trust             |       | 10.48               |       | 4.00                                 |       | 6.00                                  | %          |
| United Bank & Trust                  |       | 8.94                |       | 4.00                                 |       | 6.00                                  |       |
| Community Trust Bank                     |       | 9.47                |       | 4.00                                 |       | 6.00                                  |       |
| HomeTown Bank of Villa Rica              |       | 7.25                |       | 4.00                                 |       | 6.00                                  |       |
| First National Bank of the South         |       | 10.58               |       | 4.00                                 |       | 6.00                                  |       |
| First National Bank of Gwinnett          |       | 10.28               |       | 4.00                                 |       | 6.00                                  |       |
| Mountain State Bank                      |       | 9.15                |       | 4.00                                 |       | 6.00                                  |       |
|                                     |       |                |       |                                 |       |                                  |       |
| Tier 1 Capital  to Average Assets:       |       |                |       |                                 |       |                                  |       |
| Consolidated                             |       | 9.44                | %          | 4.00                                 | %          | N/A                                   |       |
| Gainesville Bank & Trust             |       | 8.41                |       | 4.00                                 |       | 5.00                                  | %          |
| United Bank & Trust                  |       | 7.49                |       | 4.00                                 |       | 5.00                                  |       |
| Community Trust Bank                     |       | 7.99                |       | 4.00                                 |       | 5.00                                  |       |
| HomeTown Bank of Villa Rica              |       | 5.74                |       | 4.00                                 |       | 5.00                                  |       |
| First National Bank of the South         |       | 9.12                |       | 4.00                                 |       | 5.00                                  |       |
| First National Bank of Gwinnett          |       | 9.24                |       | 4.00                                 |       | 5.00                                  |       |
| Mountain State  Bank                     |       | 9.77                |       | 4.00                                 |       | 5.00                                  |       |

 

In 2005, the Company began construction of a branchin Athens, Georgia for the Athens division of Gainesville Bank &Trust.  The cost of the building,including furniture, fixtures and equipment was approximately $1.5million.  The building was completed inthe second quarter of 2006.

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

Oursubsidiary banks are subject to certain restrictions on the amount of dividendsthat may be declared without prior regulatory approval. At December 31, 2006,approximately $12.5 million of retained earnings at our subsidiary banks wereavailable for dividend declaration without regulatory approval.

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**SelectedFinancial Information and Statistical Data**

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

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

The following table sets forth the amount of ourinterest income or interest expense for each category of interest-earningassets and interest-bearing liabilities and the average interest yield/rate fortotal interest-earning assets and total interest-bearing liabilities, netinterest spread and net yield on average interest-earning assets.
| ** **                                   | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | ** **                                  | ** ** | **2006** | ** ** | ** ** | ** ** | ** ** | ** ** | **2005** | ** ** | ** ** | ** ** | ** ** | ** ** | **2004** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **Average**                                 | ** ** | **Income/** | ** ** | **Yields/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yields/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yields/** | ** ** |
| ** **                                   | ** ** | **Balances(1)**                             | ** ** | **Expense** | ** ** | **Rates** | ** ** | **Balances(1)** | ** ** | **Expense** | ** ** | **Rates** | ** ** | **Balances(1)** | ** ** | **Expense** | ** ** | **Rates** | ** ** |
| ** **                                   | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | **(Dollars in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable securities                           |       | $                                           | 200,983    |   | $ | 8,436 |   | 4.20 | % | $ | 194,093 |   | $ | 7,287 |   | 3.75 | % | $ | 139,054 |   | $ | 4,706 |   | 3.38 | % |
| Nontaxable securities  (5)                   |       | 13,516                                      |       | 866 |   | 6.41 |   | 14,023 |   | 910 |   | 6.49 |   | 16,063 |   | 1,082 |   | 6.74 |   |
| Federal funds sold                           |       | 16,014                                      |       | 812 |   | 5.07 |   | 9,842 |   | 327 |   | 3.32 |   | 13,106 |   | 163 |   | 1.24 |   |
| Interest-bearing  deposits in banks          |       | 2,176                                       |       | 145 |   | 6.66 |   | 1,077 |   | 42 |   | 3.90 |   | 2,329 |   | 27 |   | 1.16 |   |
| Loans (2) (4)                                |       | 1,366,030                                   |       | 116,593 |   | 8.54 |   | 1,124,310 |   | 82,541 |   | 7.34 |   | 802,694 |   | 52,642 |   | 6.56 |   |
|                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning  assets               |       | 1,598,719                                   |       | 126,852 |   | 7.93 | % | 1,343,345 |   | 91,107 |   | 6.78 | % | 973,246 |   | 58,620 |   | 6.02 | % |
|                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized gains  (losses) on securities     |       | (4,483                                      | )          |   |   |   |   | (2,175 | ) |   |   |   |   | 324 |   |   |   |   |   |
| Allowance for loan  losses                   |       | (15,247                                     | )          |   |   |   |   | (12,499 | ) |   |   |   |   | (9,856 | ) |   |   |   |   |
| Nonaccrual loans                             |       | 13,174                                      |       |   |   |   |   | 7,573 |   |   |   |   |   | 4,646 |   |   |   |   |   |
| Cash and due from banks                      |       | 23,566                                      |       |   |   |   |   | 24,996 |   |   |   |   |   | 20,347 |   |   |   |   |   |
| Other assets                                 |       | 160,980                                     |       |   |   |   |   | 135,552 |   |   |   |   |   | 93,994 |   |   |   |   |   |
|                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                        |       | $                                           | 1,776,709  |   |   |   |   |   | $ | 1,496,792 |   |   |   |   |   | $ | 1,082,701 |   |   |   |   |   |
|                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand  & savings       |       | $                                           | 430,143    |   | 12,786 |   | 2.97 | % | $ | 407,551 |   | 8,337 |   | 2.05 | % | $ | 331,999 |   | 4,053 |   | 1.22 | % |
| Time                                         |       | 776,798                                     |       | 36,652 |   | 4.72 |   | 560,786 |   | 18,816 |   | 3.36 |   | 393,352 |   | 9,326 |   | 2.37 |   |
| Borrowings                                   |       | 160,820                                     |       | 7,955 |   | 4.95 |   | 161,370 |   | 6,683 |   | 4.14 |   | 119,291 |   | 4,573 |   | 3.83 |   |
|                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing  liabilities          |       | 1,367,761                                   |       | 57,393 |   | 4.20 | % | 1,129,707 |   | 33,836 |   | 3.00 | % | 844,642 |   | 17,952 |   | 2.13 | % |
|                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  demand                  |       | 167,477                                     |       |   |   |   |   | 155,241 |   |   |   |   |   | 108,749 |   |   |   |   |   |
| Other liabilities                            |       | 18,359                                      |       |   |   |   |   | 13,840 |   |   |   |   |   | 11,039 |   |   |   |   |   |
| Stockholders’ equity (3)                |       | 223,112                                     |       |   |   |   |   | 198,004 |   |   |   |   |   | 118,271 |   |   |   |   |   |
|                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                        |       | $                                           | 1,776,709  |   |   |   |   |   | $ | 1,496,792 |   |   |   |   |   | $ | 1,082,701 |   |   |   |   |   |
|                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                          |       |                                        |       | $ | 69,459 |   |   |   |   |   | $ | 57,271 |   |   |   |   |   | $ | 40,668 |   |   |   |
| Net interest spread                          |       |                                        |       |   |   | 3.73 | % |   |   |   |   | 3.78 | % |   |   |   |   | 3.89 | % |
| Net yield on average interest-earning assets |       |                                        |       |   |   | 4.34 | % |   |   |   |   | 4.26 | % |   |   |   |   | 4.18 | % |

 

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

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

(3)           Averageunrealized gains (losses) on securities available for sale, net of tax, havebeen included in stockholders’ equity at ($2,842,000), ($1,306,000), and$210,000 for 2006, 2005, and 2004, respectively.

(4)           Interest andfees on loans include $6,690,000, $5,944,000 and $4,146,000 of loan fee incomefor the years ended December 31, 2006, 2005 and 2004, respectively.

(5)           Yields onnontaxable securities are presented on a tax-equivalent basis.

32

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**Rateand Volume Analysis**

Thefollowing table describes the extent to which changes in interest rates andchanges in volume of interest-earning assets and interest-bearing liabilitieshave affected our interest income and expense during the years indicated. Foreach category of interest-earning assets and interest-bearing liabilities,information is provided on changes attributable to: (1) change in volume(change in volume multiplied by old rate); (2) change in rate (change in ratemultiplied by old volume); and (3) a combination of change in rate and changein volume. The changes in interest income and interest expense attributable toboth volume and rate have been allocated proportionately to the change due tovolume and the change due to rate.
|                                                                    | ** ** | **Years Ended December 31,**                   | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2006 to 2005**                                    | ** ** | **2005 to 2004** | ** ** |
| ** **                                                         | ** ** | **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                                         |       | $                                                             | 14,709     |   | $ | 19,343 |   | $ | 34,052 |   | $ | 6,842 |   | $ | 23,057 |   | $ | 29,899 |   |
| Interest on taxable securities                                     |       | 887                                                           |       | 262 |   | 1,149 |   | 559 |   | 2,022 |   | 2,581 |   |
| Interest on nontaxable securities                                  |       | (11                                                           | )          | (33 | ) | (44 | ) | (39 | ) | (133 | ) | (172 | ) |
| Interest on federal funds sold                                     |       | 221                                                           |       | 264 |   | 485 |   | 213 |   | (49 | ) | 164 |   |
| Interest on interest-bearing deposits in other banks               |       | 42                                                            |       | 61 |   | 103 |   | 36 |   | (21 | ) | 15 |   |
| Total interest income                                              |       | 15,849                                                        |       | 19,896 |   | 35,745 |   | 7,611 |   | 24,876 |   | 32,487 |   |
|                                                               |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Expense from  interest-bearing liabilities:                        |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Interest on interest-bearing demand deposits and  savings deposits |       | 3,960                                                         |       | 489 |   | 4,449 |   | 3,210 |   | 1,074 |   | 4,284 |   |
| Interest on time deposits                                          |       | 9,139                                                         |       | 8,697 |   | 17,836 |   | 4,700 |   | 4,790 |   | 9,490 |   |
| Interest on borrowings                                             |       | 1,295                                                         |       | (23 | ) | 1,272 |   | 394 |   | 1,716 |   | 2,110 |   |
| Total interest expense                                             |       | 14,394                                                        |       | 9,163 |   | 23,557 |   | 8,304 |   | 7,580 |   | 15,884 |   |
|                                                               |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                               |       | $                                                             | 1,455      |   | $ | 10,733 |   | $ | 12,188 |   | $ | (693 | ) | $ | 17,296 |   | $ | 16,603 |   |

 

33

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**MarketRisk and Interest Rate Sensitivity**

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

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

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

AtDecember 31, 2006 our cumulative one year interest rate sensitivity gap ratiowas 0.99. This indicates that our interest-bearing liabilities will repriceduring this period at a slightly faster rate than our interest-earning assets.

Thefollowing table sets forth the distribution of the repricing of ourinterest-earning assets and interest-bearing liabilities as of December 31,2006, the interest rate sensitivity gap (i.e., interest rate sensitive assetsless interest rate sensitive liabilities), the cumulative interest ratesensitivity gap, the interest rate sensitivity gap ratio (i.e., interest ratesensitive assets divided by interest rate sensitive liabilities) and thecumulative interest rate sensitivity gap ratio.

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

34

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| ** **                                     | ** ** | ** **                           | ** ** | **After**         | ** ** | ** **          | ** ** | ** **          | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|-------------------|------------|---------------------|------------|---------------------|------------|------------|------------|
| ** **                                     | ** ** | ** **                           | ** ** | **Three**         | ** ** | **After**           | ** ** | ** **          | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | ** **                           | ** ** | **Months**        | ** ** | **One Year**   | ** ** | ** **          | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Within**                           | ** ** | **But**           | ** ** | **But**             | ** ** | ** **          | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Three**                            | ** ** | **Within**        | ** ** | **Within**          | ** ** | **After**           | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Months**                           | ** ** | **One Year** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** | **Total**  | ** ** |
| ** **                                     | ** ** | **(Dollars in thousands)** | ** ** |
| Interest–earning assets:                  |       |                                 |       |              |       |                |       |                |       |       |       |
| Interest-bearing  deposits                     |       | $                                    | 1,848      |              | $          | —              |       | $                   | —     |       | $          | — |   | $ | 1,848 |   |
| Federal funds  sold                            |       | 1,445                                |       | —            |       | —              |       | —              |       | 1,445      |       |
| Securities (1)                                 |       | 27,631                               |       | 31,368            |       | 99,067              |       | 52,183              |       | 210,249    |       |
| Loans                                          |       | 1,005,696                            |       | 204,993           |       | 285,703             |       | 1,309               |       | 1,497,701  |       |
|                                           |       |                                 |       |              |       |                |       |                |       |       |       |
| Total interest-earning  assets                 |       | 1,036,620                            |       | 236,361           |       | 384,770             |       | 53,492              |       | 1,711,243  |       |
|                                           |       |                                 |       |              |       |                |       |                |       |       |       |
| Interest-bearing  liabilities:                 |       |                                 |       |              |       |                |       |                |       |       |       |
| Interest-bearing  demand and savings           |       | $                                    | 447,994    |              | $          | —              |       | $                   | —     |       | $          | — |   | $ | 447,994 |   |
| Time deposits                                  |       | 200,815                              |       | 543,755           |       | 136,002             |       | 73                  |       | 880,645    |       |
| Federal funds  purchased and                   |       |                                 |       |              |       |                |       |                |       |       |       |
| repurchase  agreements                         |       | 41,061                               |       | —            |       | —              |       | —              |       | 41,061     |       |
| Other borrowings                               |       | 18,799                               |       | 34,200            |       | 38,898              |       | 35,438              |       | 127,335    |       |
|                                           |       |                                 |       |              |       |                |       |                |       |       |       |
| Total interest-bearing  liabilities            |       | $                                    | 708,669    |              | $          | 577,955             |       | $                   | 174,900    |       | $          | 35,511 |   | $ | 1,497,035 |   |
|                                           |       |                                 |       |              |       |                |       |                |       |       |       |
| Interest rate  sensitivity gap                 |       | $                                    | 327,951    |              | $          | (341,594            | )          | $                   | 209,870    |       | $          | 17,981 |   | $ | 214,208 |   |
|                                           |       |                                 |       |              |       |                |       |                |       |       |       |
| Cumulative interest  rate sensitivity gap      |       | $                                    | 327,951    |              | $          | (13,643             | )          | $                   | 196,227    |       | $          | 214,208 |   |   |   |
|                                           |       |                                 |       |              |       |                |       |                |       |       |       |
| Interest rate  sensitivity gap ratio           |       | 1.46                                 | %          | 0.41              | %          | 2.20                | %          | 1.51                | %          |       |       |
|                                           |       |                                 |       |              |       |                |       |                |       |       |       |
| Cumulative interest rate sensitivity gap ratio |       | 1.46                                 | %          | 0.99              | %          | 1.13                | %          | 1.14                | %          |       |       |

 

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(1)Does not includerestricted equity securities, which consist of Federal Home Loan Bank ofAtlanta stock, Federal Reserve Bank stock and The Bankers Bank stock, as suchassets are not interest rate sensitive.

Managementbelieves that gap analysis is a useful tool for measuring interest rate riskonly when used in conjunction with its simulation model.  As of December 31, 2006, the Companymaintained an asset sensitive interest rate risk position based on itssimulation model results.  Thispositioning would be expected to result in an increase in net interest incomein a rising rate environment and a decrease in net interest income in adeclining rate environment.  This isgenerally due to a greater proportion of interest earning assets repricing on avariable rate basis as compared to variable rate funding sources. This assetsensitivity is indicated by selected results of net interest incomesimulations.  The actual realized changein net interest income would depend on several factors.  These factors include, but are not limitedto, actual realized growth in asset and liability volumes, as well as the mixexperienced over these time horizons. Market conditions and their resulting impact on loan, deposit, andfunding pricing would also be a primary determinant in the realized level ofnet interest income.  The table belowshows the impact on net interest margins over a twelve-month period whensubjected to an immediate 100 basis point increase and decrease in rate.

**TwelveMonth Net Interest Income Sensitivity**
| Change in Short-Term  Interest  Rates (in basis points) | ** ** | **Estimated Change in Net  Interest Income** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------|------------|
|                                                    |       |                                         |       |
| +100                                                    |       | 3.51                                         | %          |
| Flat                                                    |       | —                                       |       |
| -100                                                    |       | (3.23                                        | )%         |

 

35

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Weactively manage the mix of asset and liability maturities to control theeffects of changes in the general level of interest rates on net interestincome. Except for its effect on the general level of interest rates, inflationdoes not have a material impact on us due to the rate variability andshort-term maturities of our earning assets. In particular, as of December 31,2006, approximately 81% of the loan portfolio is comprised of loans which havevariable rate terms or mature within one year. Most mortgage loans are made ona variable rate basis with rates being adjusted every one to five years.

**SecuritiesPortfolio**

*Typesof Securities*

Thefollowing table sets forth the carrying value of securities held by us as ofthe dates indicated:
|                                                                | ** ** | **December 31,**                | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                     | ** ** | **(Dollars in thousands)** | ** ** |
|                                                           |       |                                 |       |   |   |   |   |
| U. S. Treasury  and U. S. government agencies and corporations |       | $                                    | 101,806    |   | $ | 77,363 |   | $ | 59,966 |   |
| Mortgage-backed  securities                                    |       | 83,697                               |       | 97,729 |   | 111,344 |   |
| State and  municipal securities                                |       | 21,731                               |       | 11,327 |   | 16,790 |   |
| Equity  securities (1)                                         |       | 11,567                               |       | 10,985 |   | 9,259 |   |
| Corporate bonds                                                |       | 1,317                                |       | — |   | 503 |   |
|                                                           |       | $                                    | 220,118    |   | $ | 197,404 |   | $ | 197,862 |   |

 

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

*Maturities*

Theamounts of debt securities as of December 31, 2006 are shown in the followingtable according to contractual maturities.
| ** **                          | ** ** | **U. S. Treasury**         | ** ** | ** **                    | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|-------------------------------|------------|------------|------------|
| ** **                          | ** ** | **and U. S.**              | ** ** | ** **                    | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Government Agencies**         | ** ** | **State and**            | ** ** |
| ** **                          | ** ** | **and Corporations**            | ** ** | **Municipal Securities** | ** ** |
| ** **                          | ** ** | ** **                           | ** ** | **Yield**                     | ** ** | ** ** | ** ** | **Yield** | ** ** |
| ** **                          | ** ** | **Amount**                           | ** ** | **(1)**                       | ** ** | **Amount** | ** ** | **(1)(2)** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
| Maturity:                           |       |                                 |       |                          |       |       |       |   |   |
| One year or less                    |       | $                                    | 20,528     |                          | 2.87       | %          | $          | 1,899 |   | 4.47 | % |
| After one year  through five years  |       | 78,998                               |       | 4.15                          |       | 1,211      |       | 5.28 |   |
| After five years  through ten years |       | 37,609                               |       | 5.26                          |       | 3,879      |       | 4.66 |   |
| After ten years                     |       | 49,685                               |       | 4.58                          |       | 14,742     |       | 4.23 |   |
|                                |       | $                                    | 186,820    |                          | 4.35       | %          | $          | 21,731 |   | 4.39 | % |

 

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

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

36

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**LoanPortfolio**

*Typesof Loans*

Thefollowing table sets forth our loans by type of collateral as of the datesindicated therein:
|                                  | ** ** | **December 31,**                | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| ** **                       | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)** | ** ** |
|                             |       |                                 |       |   |   |   |   |   |   |   |   |
| Commercial                       |       | $                                    | 115,792    |   | $ | 99,640 |   | $ | 74,437 |   | $ | 50,997 |   | $ | 43,011 |   |
| Real estate –  construction |       | 702,809                              |       | 481,332 |   | 294,817 |   | 185,397 |   | 120,922 |   |
| Real estate –  mortgage     |       | 643,765                              |       | 615,594 |   | 545,614 |   | 439,779 |   | 348,229 |   |
| Consumer                         |       | 31,756                               |       | 33,260 |   | 37,248 |   | 30,088 |   | 29,630 |   |
| Other                            |       | 3,579                                |       | 1,584 |   | 3,764 |   | 3,697 |   | 1,042 |   |
|                             |       | 1,497,701                            |       | 1,231,410 |   | 955,880 |   | 709,958 |   | 542,834 |   |
| Less allowance  for loan losses  |       | (24,676                              | )          | (12,773 | ) | (11,061 | ) | (8,726 | ) | (7,538 | ) |
| Net loans (1)                    |       | $                                    | 1,473,025  |   | $ | 1,218,637 |   | $ | 944,819 |   | $ | 701,232 |   | $ | 535,296 |   |

 

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(1)  Loans arenet of deferred loan fees.

*Maturitiesand Sensitivities to Changes in Interest Rates*

Totalloans as of December 31, 2006 are shown in the following table according tocontractual maturity.
|                               | ** ** | **(Dollars in thousands)** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|
| ** **                    | ** ** | ** **                           | ** ** |
| Commercial                    |       |                                 |       |
| One year or less              |       | $                                    | 71,693     |   |
| After one  through five years |       | 39,566                               |       |
| After five years              |       | 4,533                                |       |
|                          |       | 115,792                              |       |
| Real Estate -  Construction   |       |                                 |       |
| One year or less              |       | 617,828                              |       |
| After one  through five years |       | 82,289                               |       |
| After five years              |       | 2,692                                |       |
|                          |       | 702,809                              |       |
| Other                         |       |                                 |       |
| One year or less              |       | 258,320                              |       |
| After one  through five years |       | 388,797                              |       |
| After five years              |       | 31,983                               |       |
|                          |       | 679,100                              |       |
|                          |       |                                 |       |
|                          |       | $                                    | 1,497,701  |   |

 

Thefollowing table summarizes loans at December 31, 2006 with the due dates afterone year for predetermined and floating or adjustable interest rates.
|                                        | ** ** | **(Dollars in  Thousands)** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
|                                   |       |                             |       |
| Predetermined interest  rates          | ** ** | $                                | 332,288    | ** ** |
| Floating or adjustable  interest rates |       | 217,633                          |       |
|                                   | ** ** | $                                | 549,861    | ** ** |

 

37

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*RiskElements*

Thefollowing table presents the aggregate of nonperforming loans for thecategories and as of the dates indicated.
|                                                                                                                                                                                   | ** ** | **December 31,**                | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                                                                                        | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                                                                                                              |       |                                 |       |   |   |   |   |   |   |   |   |
| Loans accounted  for on a nonaccrual basis                                                                                                                                        |       | $                                    | 14,790     |   | $ | 6,562 |   | $ | 10,059 |   | $ | 3,333 |   | $ | 5,506 |   |
|                                                                                                                                                                              |       |                                 |       |   |   |   |   |   |   |   |   |
| Loans  contractually past due 90 days or more to interest or principal payments and  still Accruing                                                                               |       | 10                                   |       | 17 |   | 328 |   | 509 |   | 1,814 |   |
|                                                                                                                                                                              |       |                                 |       |   |   |   |   |   |   |   |   |
| Loans, the term  of which have been renegotiated to provide a reduction or deferral of  interest or principal because of deterioration in the financial position of  the borrower |       | —                               |       | 106 |   | 33 |   | 62 |   | 12 |   |
|                                                                                                                                                                              |       |                                 |       |   |   |   |   |   |   |   |   |
| Loans now current about  which there are serious doubts as to the ability of the borrower to comply  with present loan repayment terms                                            |       | 10,771                               |       | — |   | — |   | — |   | — |   |
|                                                                                                                                                                                   |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The reduction ininterest income associated with nonaccrual loans as of December 31, 2006is as follows:
|                                                                                         | ** ** | **(Dollars in thousands)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
|                                                                                    |       |                                 |       |
| Interest income  that would have been recorded on nonaccrual loans under original terms |       | $                                    | 541        |   |
|                                                                                    |       |                                 |       |
| Interest income that  was recorded on nonaccrual loans                                  |       | $                                    | 164        |   |

 

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

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

38

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**Summaryof Loan Loss Experience**

Thefollowing table summarizes average loan balances for the periods set forththerein determined using the daily average balances during the year; changes inthe allowance for loan losses arising from loans charged off and recoveries onloans previously charged off; additions to the allowance which have beencharged to expense; and the ratio of net charge-offs during the year to averageloans.
| ** **                                                                   | ** ** | **December 31,**                | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                   | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Average amount of loans  outstanding (1)                                     |       | $                                    | 1,379,203  |   | $ | 1,131,887 |   | $ | 807,340 |   | $ | 608,131 |   | $ | 446,518 |   |
|                                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Balance of allowance  for loan losses at beginning of year                   |       | $                                    | 12,773     |   | $ | 11,061 |   | $ | 8,726 |   | $ | 7,538 |   | $ | 5,522 |   |
|                                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Loans charged off:                                                           |       |                                 |       |   |   |   |   |   |   |   |   |
| Real estate                                                                  |       | (4,344                               | )          | (3,863 | ) | (422 | ) | (469 | ) | (190 | ) |
| Commercial                                                                   |       | (681                                 | )          | (666 | ) | (185 | ) | (295 | ) | (77 | ) |
| Consumer                                                                     |       | (526                                 | )          | (1,177 | ) | (1,001 | ) | (700 | ) | (799 | ) |
| Credit cards                                                                 |       | (19                                  | )          | (55 | ) | (20 | ) | (2 | ) | (28 | ) |
|                                                                         |       | (5,570                               | )          | (5,761 | ) | (1,628 | ) | (1,466 | ) | (1,094 | ) |
|                                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Recoveries of loans  previously charged off:                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Real estate                                                                  |       | 360                                  |       | 68 |   | 113 |   | 53 |   | 175 |   |
| Commercial                                                                   |       | 29                                   |       | 95 |   | 66 |   | 31 |   | 2 |   |
| Consumer                                                                     |       | 248                                  |       | 269 |   | 292 |   | 286 |   | 246 |   |
| Credit cards                                                                 |       | 4                                    |       | 20 |   | 11 |   | 14 |   | 1 |   |
|                                                                         |       | 641                                  |       | 452 |   | 482 |   | 384 |   | 424 |   |
|                                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Net loans charged off  during the year                                       |       | (4,929                               | )          | (5,309 | ) | (1,146 | ) | (1,082 | ) | (670 | ) |
| Allowance for loan  losses acquired (sold)                                   |       | 1,088                                |       | 1,105 |   | 2,075 |   | 864 |   | 1,841 |   |
|                                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Additions to allowance  charged to expense during year                       |       | 15,744                               |       | 5,916 |   | 1,406 |   | 1,406 |   | 845 |   |
|                                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Balance of allowance  for loan losses at end of year                         |       | $                                    | 24,676     |   | $ | 12,773 |   | $ | 11,061 |   | $ | 8,726 |   | $ | 7,538 |   |
|                                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Ratio of net loans charged off during the year to average loans  outstanding |       | 0.36                                 | %          | 0.47 | % | 0.14 | % | 0.18 | % | 0.15 | % |

 

----

(1)       Average total loans include nonaccrual loans.

39

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Thefollowing table sets forth the allowance for loan losses to total allowance forloan losses and the percent of loans to total loans in each of the categorieslisted at the dates indicated:
| ** **                | ** ** | **December 31,**                | ** ** |
|---------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                | ** ** | ** **                           | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                | ** ** | ** **                           | ** ** | **of Loans** | ** ** | ** ** | ** ** | **of Loans** | ** ** | ** ** | ** ** | **of Loans** | ** ** | ** ** | ** ** | **of Loans** | ** ** | ** ** | ** ** | **of Loans** | ** ** |
| ** **                | ** ** | ** **                           | ** ** | **in Each** | ** ** | ** ** | ** ** | **in Each** | ** ** | ** ** | ** ** | **in Each** | ** ** | ** ** | ** ** | **in Each** | ** ** | ** ** | ** ** | **in Each** | ** ** |
| ** **                | ** ** | ** **                           | ** ** | **Category** | ** ** | ** ** | ** ** | **Category** | ** ** | ** ** | ** ** | **Category** | ** ** | ** ** | ** ** | **Category** | ** ** | ** ** | ** ** | **Category** | ** ** |
| ** **                | ** ** | ** **                           | ** ** | **to Total** | ** ** | ** ** | ** ** | **to Total** | ** ** | ** ** | ** ** | **to Total** | ** ** | ** ** | ** ** | **to Total** | ** ** | ** ** | ** ** | **to Total** | ** ** |
| ** **                | ** ** | **Amount**                           | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| ** **                | ** ** | **(Dollars in thousands)** | ** ** |
|                      |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                |       | $                                    | 1,876      |   | 7.73 | % | $ | 971 |   | 8.09 | % | $ | 840 |   | 7.79 | % | $ | 663 |   | 7.19 | % | $ | 573 |   | 7.92 | % |
| Real  estate-construction |       | 5,601                                |       | 46.93 |   | 1,597 |   | 39.09 |   | 1,383 |   | 30.84 |   | 1,091 |   | 26.11 |   | 942 |   | 22.28 |   |
| Real estate-mortgage      |       | 13,350                               |       | 42.98 |   | 7,600 |   | 49.99 |   | 6,581 |   | 57.08 |   | 5,192 |   | 61.94 |   | 4,485 |   | 64.15 |   |
| Consumer and other        |       | 3,849                                |       | 2.36 |   | 2,605 |   | 2.83 |   | 2,257 |   | 4.29 |   | 1,780 |   | 4.76 |   | 1,538 |   | 5.65 |   |
| Total allowance           |       | $                                    | 24,676     |   | 100.00 | % | $ | 12,773 |   | 100.00 | % | $ | 11,061 |   | 100.00 | % | $ | 8,726 |   | 100.00 | % | $ | 7,538 |   | 100.00 | % |

 

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

Ourallowance for loan losses was approximately $24,676,000 at December 31, 2006,representing 1.65% of total loans, compared with $12,773,000 at December 31,2005, which represented 1.04% of total loans.

**Deposits**

Averageamounts of deposits and average rates paid thereon, classified as tononinterest-bearing demand deposits, interest-bearing demand and savingsdeposits and time deposits, are presented below. Average balances weredetermined using daily average balances.
|                                               | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **Amount**                                 | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| ** **                                    | ** ** | **(Dollars in thousands)**       | ** ** |
|                                          |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  demand deposits          |       | $                                          | 167,477    |   | — | % | $ | 155,241 |   | — | % | $ | 108,749 |   | — | % |
| Interest-bearing  demand and savings deposits |       | 430,143                                    |       | 2.97 |   | 407,551 |   | 2.05 |   | 331,999 |   | 1.22 |   |
| Time deposits                                 |       | 776,798                                    |       | 4.72 |   | 560,786 |   | 3.36 |   | 393,352 |   | 2.37 |   |
| Total deposits                                |       | $                                          | 1,374,418  |   |   |   | $ | 1,123,578 |   |   |   | $ | 834,100 |   |   |   |

 

40

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The amounts of timecertificates of deposit issued in amounts of $100,000 or more as of December31, 2006 are shown below by category.
|                                | ** ** | **(Dollars in  thousands)** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
|                           |       |                             |       |
| Three months or  less          | ** ** | $                                | 96,821     |   |
| Over three  through six months |       | 92,541                           |       |
| Over six through  12 months    |       | 151,082                          |       |
| Over 12 months                 |       | 71,188                           |       |
| Total                          | ** ** | $                                | 411,632    |   |

 

**Return on Equity and Assets**

The following table sets forth rate of returninformation for the periods indicated.
|                             | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------|------------|------------------------------|------------|
| ** **                  | ** ** | **2006**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|                        |       |                         |       |   |   |   |   |
| Return on assets (1)        |       | 0.54                         | %          | 0.80 | % | 0.91 | % |
| Return on equity (2)        |       | 4.27                         |       | 6.06 |   | 8.32 |   |
| Dividend payout ratio  (3)  |       | 52.21                        |       | 35.48 |   | 28.85 |   |
| Equity to assets ratio  (4) |       | 12.56                        |       | 13.23 |   | 10.92 |   |

 

----

(1)           Net incomedivided by average total assets.

(2)           Net incomedivided by average equity.

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

(4)           Averageequity divided by average total assets.

**Borrowings**

Aspart of our operating strategy, we have utilized federal funds purchased andsecurities sold under repurchase agreements as an alternative to retaildeposits to fund our operations when borrowings are less costly and can beinvested at a positive interest rate spread or when we need additional funds tosatisfy loan demand. By utilizing federal funds purchased and securities soldunder repurchase agreements, which possess varying stated maturities, we canmeet our liquidity needs without otherwise being dependent upon retail depositsand revising our deposit rates to attract retail deposits, which, other thancertificates of deposit, have no stated maturities and are subject towithdrawal from us at any time. At December 31, 2006, we had $41.1 million inoutstanding federal funds purchased and securities sold under repurchaseagreements.

Thefollowing table sets forth certain information regarding federal fundspurchased and securities sold under repurchase agreements at or for the periodsended on the dates indicated:
|                                                              | ** ** | **At or For the Year Ended  December 31,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | **(Dollars in thousands)**                                     | ** ** |
|                                                         |       |                                                                     |       |   |   |   |   |
| Average balance  outstanding                                 |       | $                                                                        | 35,720     |   | $ | 33,130 |   | $ | 19,906 |   |
| Maximum amount  outstanding at any month-end during the year |       | 44,086                                                                   |       | 47,527 |   | 47,582 |   |
| Balance  outstanding at end of year                          |       | 41,061                                                                   |       | 45,510 |   | 47,582 |   |
| Weighted average  interest rate during year                  |       | 5.05                                                                     | %          | 3.30 | % | 1.49 | % |
| Weighted average  interest rate at end of year               |       | 5.15                                                                     | %          | 4.09 | % | 2.10 | % |
|                                                              |            |                                                                          |            |  |  |  |  |  |  |  |

 

41

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**ITEM7A.****        ****QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

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

**ITEM8.****           ****FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

Consolidated BalanceSheets - December 31, 2006 and 2005.

ConsolidatedStatements of Income – Three Years Ended December 31, 2006, 2005, and 2004.

ConsolidatedStatements of Comprehensive Income – Three Years Ended December 31, 2006, 2005,and 2004.

ConsolidatedStatements of Stockholders’ Equity – Three Years Ended December 31, 2006, 2005,and 2004.

ConsolidatedStatements of Cash Flows – Three Years Ended December 31, 2006, 2005, and 2004.

Notes to ConsolidatedFinancial Statements.

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

Not applicable

**ITEM9A.****       ****CONTROLSAND PROCEDURES**

**Disclosure Controls andProcedures**

Asof the end of the period covered by this report, an evaluation was carried outunder the supervision and with the participation of the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures. Basedupon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that the design and operation of these disclosure controls andprocedures were effective as of the end of the period covered by this Report inalerting them on a timely basis to material information relating to the Companyrequired to be included in the Company’s reports filed or submitted under theSecurities Exchange Act of 1934.

**Internal Control over FinancialReporting**

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

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

Themanagement of the Company and subsidiaries has assessed the effectiveness ofthe Company’s internal control over financial reporting as of December 31,2006.  To make this assessment, we usedthe criteria for effective internal control over financial reporting describedin Internal Control – Integrated Framework, issued by the Committee ofSponsoring Organizations of the Treadway Commission.  Based on ourassessment and based on such criteria, we believe that, as of December 31,2006, the Company’s internal control over financial reporting was noteffective, as demonstrated

42

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by a material weaknessin the controls over loan approval, loan proceeds disbursement on constructionand development loans, and problem loan reporting at HomeTown Bank of VillaRica. The individuals charged with implementing these controls were eitheroverridden or intimidated, thus rendering the controls ineffective.

Mauldin& Jenkins, LLC, the independent registered public accounting firm thataudited the consolidated financial statements of the Company included in thisAnnual Report on Form 10-K, has issued an attestation report on management’sassessment of the Company’s internal control over financial reporting as ofDecember 31, 2006.  The report isincluded in this Item under the heading “Attestation Report of IndependentRegistered Public Accounting Firm.”

**ATTESTATION REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

Tothe Board of Directors

GB&TBancshares, Inc.

Gainesville,Georgia

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control over FinancialReporting, that GB&T Bancshares, Inc. did not maintain effective internalcontrol over financial reporting as of December 31, 2006, because of the effectof the breakdown of controls over loan approval, loan proceeds disbursement onconstruction and development loans, and problem loan reporting at HomeTown Bankof Villa Rica, based on criteria established in *InternalControl – Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.  GB&T Bancshares Inc.’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting.  Our responsibility is toexpress an opinion on management’s assessment and an opinion on theeffectiveness of the company’s internal control over financial reporting basedon our audit.

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financialreporting was maintained in all material respects. Our audit included obtainingan understanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

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

Amaterial weakness is a control deficiency, or combination of controldeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not be preventedor detected.  The following materialweakness has been identified and included in management’s assessment.  As a result of the breakdown in controls overloan approval, loan proceeds disbursement on construction and developmentloans, and problem loan reporting at HomeTown Bank of Villa Rica, additionalrisks of losses within the loan portfolio were incurred and went unidentifiedand unreported.  Subsequentidentification of these problem loans and the risks associated

43

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with them requiredadditional loan loss provisions and a material adjustment to the financialstatements of the Company.  This materialweakness was considered in determining the nature, timing, and extent of audittests applied in our audit of the 2006 financial statements, and this reportdoes not affect our report dated March 12, 2007 on those financial statements.

Inour opinion, management’s assessment that GB&T Bancshares, Inc. did notmaintain effective internal control over financial reporting as of December 31,2006, is fairly stated, in all material respects, based on criteria establishedin *Internal Control – Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also, in our opinion, because of the effect of the material weaknessdescribed above on the achievement of the objectives of the control criteria,GB&T Bancshares, Inc. has not maintained effective internal control overfinancial reporting as of December 31, 2006, based on criteria established in *Internal Control – Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.
|                  | /s/ MAULDIN & JENKINS,  LLC |   |
|------------------|---------------------------------|--------|
|             |
| Atlanta, Georgia |
| March 12, 2007   |

 

**Changes in Internal Control Over Financial Reporting**

During the fourth quarter of the year ended December31, 2006, no change in the Company’s internal control over financial reportingoccurred that has materially affected or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

**ITEM9B.****       ****OTHERINFORMATION**

None.

**PARTIII**

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

Theinformation set forth under the caption “Election of Directors” “Directors,Executive Officers Promoters and Control Persons” “Code of Ethics” and “CorporateGovernance” in the definitive Proxy Statement to be filed in connection withour 2007 Annual Shareholders Meeting is incorporated herein by reference.

**ITEM11.****         ****EXECUTIVECOMPENSATION**

Theinformation set forth under the caption “Executive Compensation” and “CompensationCommittee Report” in the definitive Proxy Statement to be filed in connectionwith our 2007 Annual Shareholders meeting is incorporated herein by reference.

44

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

Theinformation set forth under the caption “Security Ownership of CertainBeneficial Owners and Management” in the definitive Proxy Statement to be filedin connection with our 2007 Annual Shareholders meeting is incorporated hereinby reference.

**EquityCompensation Plan Information**

Thefollowing table gives information about shares of the Company’s common stockthat may be issued upon the exercise of options, warrants and rights under allexisting equity compensation plans as of December 31, 2006.
| Plan Category                                             | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,   warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  first column)** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders (1)    |       | 771,384                                                                                                                                                |       | $                                                                                                           | 11.95      |                                                                                                                                                                                                           | 174,218    |   |
| Equity  compensation plans not approved by security holders(2) |       | —                                                                                                                                                 |       | —                                                                                                      |       | —                                                                                                                                                                                                         |       |
| Total                                                          |       | 771,384                                                                                                                                                |       | N/A                                                                                                         |       | 174,218                                                                                                                                                                                                        |       |
|                                                                |            |                                                                                                                                                        |            |                                                                                                             |            |                                                                                                                                                                                                                |            |  |

 

----

(1)           GB&TBancshares 1997 Stock Incentive Plan

(2)           N/A

**ITEM 13.****         ****CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE**

Theinformation set forth under the caption “Certain Transactions with RelatedPersons, Promoters, and Certain Control Persons” in the definitive ProxyStatement to be filed in connection with our 2007 Annual Shareholders meetingis incorporated herein by reference.

**ITEM14.****         ****PRINCIPALACCOUNTANT FEES AND SERVICES**

Theinformation set forth under the caption “Independent Accountants” in thedefinitive Proxy Statement to be filed in connection with our 2007 AnnualShareholders Meeting is incorporated herein by reference.

45

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**PARTIV**

**ITEM15.****         ****EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

(a)       Contents:

1.          Consolidatedfinancial statements:

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

(i)            ConsolidatedBalance Sheets - December 31, 2006 and 2005

(ii)           ConsolidatedStatements of Income – Three Years Ended December 31, 2006, 2005, and 2004

(iii)          ConsolidatedStatements of Comprehensive Income – Three Years Ended December 31, 2006, 2005,and 2004

(iv)          ConsolidatedStatements of Stockholders’ Equity – Three Years Ended December 31, 2006, 2005,and 2004

(v)           ConsolidatedStatements of Cash Flows – Three Years Ended December 31, 2006, 2005, and 2004

(vi)          Notesto Consolidated Financial Statements

2.          Financialstatement schedules:

All schedules are omitted as the requiredinformation isinapplicableor the information is presented in the financial statements or related notes.

46

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(b)           Exhibits:
| Exhibit  No. | ** ** | **Description**                                                                                                                                                                                                                    | ** ** |
|--------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|         |       |                                                                                                                                                                                                                               |       |
| 3.1          |       | Articles of Incorporation of the Registrant  (incorporated herein by reference to the Registrant’s Registration Statement  on Form S-3, Registration No. 333-64197 filed on September 24, 1998).                              |       |
|         |       |                                                                                                                                                                                                                               |       |
| 3.2          |       | Articles of Amendment of the Registrant, dated July  8, 1998 (incorporated herein by reference to the Registrant’s Registration  Statement on Form S-3, Registration No. 333-64197 filed on September 24,  1998)              |       |
|         |       |                                                                                                                                                                                                                               |       |
| 3.3          |       | Articles of Amendment of the Registrant, dated  effective June 30, 2002 (incorporated herein by reference from the  Registrant’s Registration Statement on Form S-4, Registration No. 333-99461  filed on September 12, 2002) |       |
|         |       |                                                                                                                                                                                                                               |       |
| 3.4          |       | Articles of Amendment of the Registrant, dated  October 15, 2004 (incorporated by reference from the Registrant’s Current  Report on Form 8-K filed October 21, 2004).                                                        |       |
|         |       |                                                                                                                                                                                                                               |       |
| 3.5          |       | By-Laws of the Registrant (incorporated herein by  reference to the Registrant’s Registration Statement on Form S-3,  Registration No. 333-64197).                                                                            |       |
|         |       |                                                                                                                                                                                                                               |       |
| 4.1          |       | See Exhibits 3.1 and 3.2 herein for provisions of  the Registrant’s Articles of Incorporation and By-Laws which define the rights  of the holders of Common Stock of the Registrant.                                          |       |
|         |       |                                                                                                                                                                                                                               |       |
| *10.1        |       | Dividend Reinvestment and Share Purchase Plan of the  Registrant (incorporated herein by reference to the Registration’s  Registration Statement on Form S-3, Registration No.333-64197).                                     |       |
|         |       |                                                                                                                                                                                                                               |       |
| *10.2        |       | Employment Agreement, by and between GB&T and  Richard A. Hunt, dated as of March 5, 2007.                                                                                                                                     |       |
|         |       |                                                                                                                                                                                                                               |       |
| *10.3        |       | Employment Agreement, by and between GB&T and  Gregory L. Hamby, dated as of March 7, 2007.                                                                                                                                    |       |
|         |       |                                                                                                                                                                                                                               |       |
| *10.4        |       | GB&T Bancshares, Inc. Stock Option Plan of 1997  (incorporated herein by reference to the Registrant’s Form 10-K filed on  March 31, 2003).                                                                               |       |
|         |       |                                                                                                                                                                                                                               |       |
| 21.1         |       | Subsidiaries of the Registrant.                                                                                                                                                                                                    |       |
|         |       |                                                                                                                                                                                                                               |       |
| 23.1         |       | Consent of Mauldin & Jenkins, LLC.                                                                                                                                                                                             |       |
|         |       |                                                                                                                                                                                                                               |       |
| 24.1         |       | Power of Attorney (included on the signatures page  hereto).                                                                                                                                                                       |       |
|         |       |                                                                                                                                                                                                                               |       |
| 31.1         |       | Rule 13a-14(a) Certification of Principal Executive  Officer.                                                                                                                                                                      |       |
|         |       |                                                                                                                                                                                                                               |       |
| 31.2         |       | Rule 13a-14(a) Certification of Principal Financial  Officer.                                                                                                                                                                      |       |
|         |       |                                                                                                                                                                                                                               |       |
| 32.1         |       | Section 1350 Certification of Principal Executive  Officer.                                                                                                                                                                        |       |
|         |       |                                                                                                                                                                                                                               |       |
| 32.2         |       | Section 1350 Certification of Principal Financial  Officer.                                                                                                                                                                        |       |

 

----

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

47

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d)of the Securities Exchange Act of 1934, as amended, the Registrant has dulycaused this Report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                                   |   | GB&T BANCSHARES, INC. |
|-----------------------------------|--------|---------------------------|
|                              |   |                      |
| Dated:  March 16,  2007 |   | By:                       |   /s/  Richard A. Hunt |   |
|                              |   |                      | Richard A. Hunt, President and CEO |

 

**POWER OF ATTORNEY**

KNOW ALL MEN BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Richard A. Hunt andSamuel L. Oliver,****and each of them, as his true andlawful attorneys-in-fact and agents, with full powers of substitution andresubstitution for him, in his name place and stead, in any and all capacities,to sign any and all amendments to this Annual Report on Form 10-K, and to filethe same, with all exhibits thereto, and other documents in connection therewith,with the Securities and Exchange Commission, granting unto saidattorneys-in-fact and agents full power and authority to do and perform eachand every act and thing requisite and necessary to be done in and about thepremises as fully and to all intents and purposes as he might or could do inperson, hereby ratifying and confirming all that said attorneys-in-fact andagents may lawfully do or cause to be done by virtue hereof.

48

----

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

**GB&T BANCSHARES, INC.**
| By:    |   | /s/ Richard A. Hunt                           |   |   | DATE  March  16, 2007 |
|--------|--------|-----------------------------------------------|--------|--------|----------------------------|
|   |   | Richard A. Hunt,  President, Chief            |   |   |
|   |   | Executive  Officer and Director               |   |   |
|   |   | (Principal  Executive Officer)                |   |   |
|   |   |                                          |   |   |
| By:    |   | /s/ Gregory L. Hamby                          |   |   | DATE  March  16, 2007 |
|   |   | Gregory L.  Hamby, Executive Vice President   |   |   |
|   |   | and Chief  Financial Officer                  |   |   |
|   |   | (Principal  Financial and Accounting Officer) |   |   |
|   |   |                                          |   |   |
| By:    |   | /s/ Philip A. Wilheit                         |   |   | DATE  March  16, 2007 |
|   |   | Philip A.  Wilheit, Chairman and Director     |   |   |
|   |   |                                          |   |   |
| By:    |   | /s/ Samuel L. Oliver                          |   |   | DATE  March  16, 2007 |
|   |   | Samuel L.  Oliver, Vice Chairman and          |   |   |
|   |   | Director                                      |   |   |
|   |   |                                          |   |   |
| By:    |   | /s/ Alan A. Wayne                             |   |   | DATE  March  16, 2007 |
|   |   | Alan A. Wayne,  Secretary and Director        |   |   |
|   |   |                                          |   |   |
| By:    |   | /s/ Anna B. Williams                          |   |   | DATE  March  16, 2007 |
|   |   | Anna B.  Williams, Director                   |   |   |
|   |   |                                          |   |   |
| By:    |   | /s/ James H. Moore                            |   |   | DATE  March  16, 2007 |
|   |   | James H. Moore,  Director                     |   |   |
|   |   |                                          |   |   |
| By:    |   | /s/ Dr. John W. Darden                        |   |   | DATE  March  16, 2007 |
|   |   | Dr. John W.  Darden, Director                 |   |   |
|   |   |                                          |   |   |
| By:    |   | /s/ William A. Foster, III                    |   |   | DATE  March  16, 2007 |
|   |   | William A.  Foster, III, Director             |   |   |
|   |   |                                          |   |   |
| By:    |   | /s/ Bennie E. Hewett                          |   |   | DATE  March  16, 2007 |
|   |   | Bennie E. Hewett,  Director                   |   |   |
|   |   |                                          |   |   |
| By:    |   | /s/ James L. Lester                           |   |   | DATE  March  16, 2007 |
|   |   | James L. Lester,  Director                    |   |   |
|   |   |                                          |   |   |
| By:    |   | /s/ T. Alan Maxwell                           |   |   | DATE  March  16, 2007 |
|   |   | T. Alan Maxwell,  Director                    |   |   |
|   |   |                                          |   |   |
| By:    |   | /s/ Lowell S. (Casey) Cagle                   |   |   | DATE  March  16, 2007 |
|   |   | Lowell S.  (Casey) Cagle, Director            |   |   |
|   |   |                                          |   |   |
| By:    |   | /s/ John E. Mansour                           |   |   | DATE  March  16, 2007 |
|   |   | John E. Mansour,  Director                    |   |   |

 

49

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**GB&T BANCSHARES, INC.**

**ANDSUBSIDIARIES**

**CONSOLIDATEDFINANCIAL REPORT**

**DECEMBER31, 2006**

----

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

**CONSOLIDATED FINANCIAL REPORT****DECEMBER 31, 2006**

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

 

----

**GB&TBANCSHARES, INC.**

**ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER31, 2006 AND 2005**

**(Dollars in thousands)**
| ** **                                                                                                                                                       | ** ** | **2006**      | ** **    | **2005**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|---------------|------------|------------|
| **Assets**                                                                                                                                                       |       |          |          |       |       |
| Cash and due from banks                                                                                                                                          | ** ** | **$**         | **25,876**    |       | $          | 30,748 |   |
| Interest-bearing  deposits in banks                                                                                                                              | ** ** | **1,848**     |          | 728        |       |
| Federal funds sold                                                                                                                                               | ** ** | **1,445**     |          | 568        |       |
| Securities available  for sale                                                                                                                                   | ** ** | **210,249**   |          | 188,127    |       |
| Restricted equity  securities, at cost                                                                                                                           | ** ** | **9,869**     |          | 9,277      |       |
|                                                                                                                                                             |       |          |          |       |       |
| Loans, net of unearned  income                                                                                                                                   | ** ** | **1,497,701** |          | 1,231,410  |       |
| Less allowance for loan  losses                                                                                                                                  | ** ** | **24,676**    |          | 12,773     |       |
| Loans, net                                                                                                                                                       | ** ** | **1,473,025** |          | 1,218,637  |       |
|                                                                                                                                                             |       |          |          |       |       |
| Premises and equipment,  net                                                                                                                                     | ** ** | **41,776**    |          | 37,014     |       |
| Goodwill                                                                                                                                                         | ** ** | **87,116**    |          | 61,164     |       |
| Intangible assets                                                                                                                                                | ** ** | **5,678**     |          | 5,586      |       |
| Other assets                                                                                                                                                     | ** ** | **43,494**    |          | 32,245     |       |
|                                                                                                                                                             |       |          |          |       |       |
| **Total  assets**                                                                                                                                                | ** ** | **$**         | **1,900,376** |       | $          | 1,584,094 |   |
|                                                                                                                                                             |       |          |          |       |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                   | ** ** | ** **    | ** **    | ** ** | ** ** |
|                                                                                                                                                             |       |          |          |       |       |
| **Liabilities:**                                                                                                                                                 | ** ** | ** **    | ** **    | ** ** | ** ** |
| Deposits:                                                                                                                                                        |       |          |          |       |       |
| Noninterest-bearing                                                                                                                                              | ** ** | **$**         | **151,529**   |       | $          | 158,487 |   |
| Interest-bearing                                                                                                                                                 | ** ** | **1,328,639** |          | 1,038,539  |       |
| Total deposits                                                                                                                                                   | ** ** | **1,480,168** |          | 1,197,026  |       |
| Federal funds purchased  and securities sold under repurchase agreements                                                                                         |       | **41,061**    |          | 45,510     |       |
| Other borrowings                                                                                                                                                 | ** ** | **97,437**    |          | 98,266     |       |
| Other liabilities                                                                                                                                                | ** ** | **18,474**    |          | 14,683     |       |
| Subordinated debt                                                                                                                                                | ** ** | **29,898**    |          | 29,898     |       |
| Total  liabilities                                                                                                                                               | ** ** | **1,667,038** |          | 1,385,383  |       |
|                                                                                                                                                             |       |          |          |       |       |
| **Commitments and contingencies**                                                                                                                                | ** ** | ** **    | ** **    | ** ** | ** ** |
|                                                                                                                                                             |       |          |          |       |       |
| **Stockholders’ equity :**                                                                                                                                  | ** ** | ** **    | ** **    | ** ** | ** ** |
| Capital stock,  no par value; 20,000,000 shares authorized, 14,131,891 and 12,784,397 shares  issued and outstanding at December 31, 2006 and 2005, respectively |       | **186,539**   |          | 157,875    |       |
| Retained  earnings                                                                                                                                               | ** ** | **48,148**    |          | 43,404     |       |
| Accumulated  other comprehensive loss                                                                                                                            | ** ** | **(1,349**    | **)**         | (2,568     | )          |
|                                                                                                                                                             |       |          |          |       |       |
| **Total  stockholders’ equity**                                                                                                                             | ** ** | **233,338**   |          | 198,711    |       |
|                                                                                                                                                             |       |          |          |       |       |
| **Total  liabilities and stockholders’ equity**                                                                                                             | ** ** | **$**         | **1,900,376** |       | $          | 1,584,094 |   |

 

**See Notes to Consolidated Financial Statements.**

50

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**GB&TBANCSHARES, INC.**

**ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**YEARSENDED DECEMBER 31, 2006, 2005 AND 2004**

**(Dollars in thousands, except per share amounts)**
| ** **                                                                                                    | ** ** | **2006**    | ** **  | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|------------|------------|
| **Interest  income:**                                                                                         | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Loans, including fees                                                                                         | ** ** | **$**       | **116,593** |       | $          | 82,541     |       | $ | 52,642 |   |
| Taxable securities                                                                                            | ** ** | **8,436**   |        | 7,287      |       | 4,706      |       |
| Nontaxable securities                                                                                         | ** ** | **589**     |        | 618        |       | 736        |       |
| Federal funds sold                                                                                            | ** ** | **812**     |        | 327        |       | 163        |       |
| Interest-bearing deposits in banks                                                                            | ** ** | **145**     |        | 42         |       | 27         |       |
| Total interest income                                                                                         | ** ** | **126,575** |        | 90,815     |       | 58,274     |       |
|                                                                                                          |       |        |        |       |       |       |       |
| **Interest  expense:**                                                                                        | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Deposits                                                                                                      | ** ** | **49,438**  |        | 27,153     |       | 13,379     |       |
| Federal funds purchased, securities sold under repurchase  agreements, other borrowings and subordinated debt |       | **7,955**   |        | 6,683      |       | 4,573      |       |
| Total interest expense                                                                                        | ** ** | **57,393**  |        | 33,836     |       | 17,952     |       |
|                                                                                                          |       |        |        |       |       |       |       |
| Net interest income                                                                                           | ** ** | **69,182**  |        | 56,979     |       | 40,322     |       |
| **Provision  for loan losses**                                                                                | ** ** | **15,744**  |        | 5,916      |       | 1,406      |       |
| Net interest income after provision for loan losses                                                           | ** ** | **53,438**  |        | 51,063     |       | 38,916     |       |
|                                                                                                          |       |        |        |       |       |       |       |
| **Other  income:**                                                                                            | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Service charges on deposit accounts                                                                           | ** ** | **6,278**   |        | 6,413      |       | 6,121      |       |
| Other service charges and fees                                                                                | ** ** | **586**     |        | 737        |       | 1,449      |       |
| Gain (loss) on sale of securities                                                                             | ** ** | **(16**     | **)**       | 553        |       | 609        |       |
| Mortgage origination fees                                                                                     | ** ** | **2,661**   |        | 2,263      |       | 1,988      |       |
| Trust fees                                                                                                    | ** ** | **370**     |        | 379        |       | 403        |       |
| Other operating income                                                                                        | ** ** | **634**     |        | 1,286      |       | 1,208      |       |
| Total other income                                                                                            | ** ** | **10,513**  |        | 11,631     |       | 11,778     |       |
|                                                                                                          |       |        |        |       |       |       |       |
| **Other  expenses:**                                                                                          | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Salaries and employee benefits                                                                                | ** ** | **29,979**  |        | 26,248     |       | 20,893     |       |
| Occupancy and equipment expenses, net                                                                         | ** ** | **7,055**   |        | 6,334      |       | 5,099      |       |
| Other operating expenses                                                                                      | ** ** | **13,125**  |        | 12,243     |       | 10,188     |       |
| Total other expenses                                                                                          | ** ** | **50,159**  |        | 44,825     |       | 36,180     |       |
|                                                                                                          |       |        |        |       |       |       |       |
| Income before income taxes                                                                                    | ** ** | **13,792**  |        | 17,869     |       | 14,514     |       |
|                                                                                                          |       |        |        |       |       |       |       |
| **Income  tax expense**                                                                                       | ** ** | **4,271**   |        | 5,878      |       | 4,676      |       |
|                                                                                                          |       |        |        |       |       |       |       |
| Net income                                                                                                    | ** ** | **$**       | **9,521**   |       | $          | 11,991     |       | $ | 9,838 |   |
|                                                                                                          |       |        |        |       |       |       |       |
| **Basic  earnings per share**                                                                                 | ** ** | **$**       | **0.70**    |       | $          | 0.96       |       | $ | 1.05 |   |
|                                                                                                          |       |        |        |       |       |       |       |
| **Diluted  earnings per share**                                                                               | ** ** | **$**       | **0.68**    |       | $          | 0.93       |       | $ | 1.04 |   |

 

**See Notes to Consolidated Financial Statements.**

51

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**GB&TBANCSHARES, INC.**

**ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

**YEARSENDED DECEMBER 31, 2006, 2005 AND 2004**

**(Dollars in thousands)**
| ** **                                                                                                                           | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                                                                                 |       |       |       |       |       |       |       |
| **Net  income**                                                                                                                      | ** ** | **$**      | **9,521**  |       | $          | 11,991     |       | $ | 9,838 |   |
|                                                                                                                                 |       |       |       |       |       |       |       |
| **Other  comprehensive income (loss):**                                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Unrealized holding gains (losses) arising during  period, net of tax (benefit) of $528, $(1,136) and $(40), respectively             |       | **1,209**  |       | (2,183     | )          | (131       | )          |
|                                                                                                                                 |       |       |       |       |       |       |       |
| Reclassification adjustment for (gains) losses  realized in net income, net of taxes (benefit) of $(6), $210 and $231,  respectively |       | **10**     |       | (343       | )          | (378       | )          |
|                                                                                                                                 |       |       |       |       |       |       |       |
| **Other  comprehensive income (loss)**                                                                                               | ** ** | **1,219**  |       | (2,526     | )          | (509       | )          |
|                                                                                                                                 |       |       |       |       |       |       |       |
| **Comprehensive income**                                                                                                             | ** ** | **$**      | **10,740** |       | $          | 9,465      |       | $ | 9,329 |   |

 

**See Notes to Consolidated Financial Statements.**

52

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**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

**YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

**(Amounts in thousands, except per share amounts)**
| ** **                                                                              | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | **Accumulated**        | ** ** | ** **             | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|--------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                              | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | **Other**              | ** ** | **Total**              | ** ** |
| ** **                                                                              | ** ** | ** ** | ** ** | **Capital** | ** ** | **Retained** | ** ** | **Comprehensive**      | ** ** | **Stockholders’** | ** ** |
| ** **                                                                              | ** ** | **Shares** | ** ** | **Stock**   | ** ** | **Earnings** | ** ** | **Income (Loss)** | ** ** | **Equity**             | ** ** |
|                                                                                    |       |       |       |        |       |         |       |                   |       |                   |       |
| **Balance,  December 31, 2003**                                                         |       | 6,794      |       | $           | 67,983     |         | $          | 28,393                 |       | $                      | 467        |   | $ | 96,843 |   |
| Net income                                                                              |       | —     |       | —      |       | 9,838        |       | —                 |       | 9,838                  |       |
| Options exercised, net of repurchases                                                   |       | 224        |       | 1,981       |       | —       |       | —                 |       | 1,981                  |       |
| Purchase of Southern Heritage Bancorp, Inc. and Lumpkin  County Bank                    |       | 1,404      |       | 33,201      |       | —       |       | —                 |       | 33,201                 |       |
| Tax benefit of nonqualified stock options                                               |       | —     |       | 654         |       | —       |       | —                 |       | 654                    |       |
| Payment for fractional shares in connection with business  combinations                 |       | (1         | )          | (30         | )          | —       |       | —                 |       | (30                    | )          |
| Capital issued in stock offering                                                        |       | 1,652      |       | 35,418      |       | —       |       | —                 |       | 35,418                 |       |
| Five-for-four stock split                                                               |       | 1,699      |       | —      |       | —       |       | —                 |       | —                 |       |
| Dividends declared, $.30 per share                                                      |       | —     |       | —      |       | (2,681       | )          | —                 |       | (2,681                 | )          |
| Other comprehensive loss                                                                |       | —     |       | —      |       | —       |       | (509                   | )          | (509                   | )          |
| **Balance,  December 31, 2004**                                                         |       | 11,772     |       | 139,207     |       | 35,550       |       | (42                    | )          | 174,715                |       |
| Net income                                                                              |       | —     |       | —      |       | 11,991       |       | —                 |       | 11,991                 |       |
| Options exercised, net of repurchases                                                   |       | 167        |       | 1,019       |       | —       |       | —                 |       | 1,019                  |       |
| Purchase of FNBG Bancshares, Inc.                                                       |       | 845        |       | 21,290      |       | —       |       | —                 |       | 21,290                 |       |
| Tax benefit of nonqualified stock options                                               |       | —     |       | 173         |       | —       |       | —                 |       | 173                    |       |
| Payment for fractional shares in connection with stock  split and business combinations |       | —     |       | (4          | )          | —       |       | —                 |       | (4                     | )          |
| Adjustment on purchase of Southern Heritage Bancorp,  Inc. and Lumpkin County Bank      |       | —     |       | (3,810      | )          | —       |       | —                 |       | (3,810                 | )          |
| Dividends declared, $.33 per share                                                      |       | —     |       | —      |       | (4,137       | )          | —                 |       | (4,137                 | )          |
| Other comprehensive loss                                                                |       | —     |       | —      |       | —       |       | (2,526                 | )          | (2,526                 | )          |
| **Balance,  December 31, 2005**                                                         |       | 12,784     |       | 157,875     |       | 43,404       |       | (2,568                 | )          | 198,711                |       |
| Net income                                                                              |       | —     |       | —      |       | 9,521        |       | —                 |       | 9,521                  |       |
| Options exercised, net of repurchases                                                   |       | 519        |       | 3,961       |       | —       |       | —                 |       | 3,961                  |       |
| Purchase of Mountain Bancshares, Inc.                                                   |       | 1,089      |       | 29,372      |       | —       |       | —                 |       | 29,372                 |       |
| Tax benefit of nonqualified stock options                                               |       | —     |       | 676         |       | —       |       | —                 |       | 676                    |       |
| Payment for fractional shares in connection with business  combinations                 |       | —     |       | (6          | )          | —       |       | —                 |       | (6                     | )          |
| Stock repurchase                                                                        |       | (260       | )          | (5,586      | )          | —       |       | —                 |       | (5,586                 | )          |
| Stock option expense                                                                    |       | —     |       | 247         |       | —       |       | —                 |       | 247                    |       |
| Dividends declared, $.36 per share                                                      |       | —     |       | —      |       | (4,777       | )          | —                 |       | (4,777                 | )          |
| Other comprehensive income                                                              |       | —     |       | —      |       | —       |       | 1,219                  |       | 1,219                  |       |
| **Balance, December 31, 2006**                                                          |       | 14,132     |       | $           | 186,539    |         | $          | 48,148                 |       | $                      | (1,349     | ) | $ | 233,338 |   |

 

**See Notes to Consolidated Financial Statements.**

53

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**GB&TBANCSHARES, INC.**

**ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARSENDED DECEMBER 31, 2006, 2005 AND 2004**

**(Dollars in thousands)**
| ** **                                                                                          | ** ** | **2006**     | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------|------------|------------|------------|------------|------------|
| **OPERATING  ACTIVITIES**                                                                           | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                          | ** ** | **$**        | **9,521**  |       | $          | 11,991     |       | $ | 9,838 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:                  |       |         |       |       |       |       |       |
| Depreciation and amortization, net                                                                  | ** ** | **3,937**    |       | 3,973      |       | 3,486      |       |
| Provision for loan losses                                                                           | ** ** | **15,744**   |       | 5,916      |       | 1,406      |       |
| Provision for losses on other real estate owned                                                     | ** ** | **—**   |       | **—** |       | **—** |       |
| (Gain) loss on sale of securities                                                                   | ** ** | **16**       |       | (553       | )          | (609       | )          |
| Loss on sale of other real estate owned                                                             | ** ** | **143**      |       | 18         |       | 44         |       |
| Gain on disposal of premises and equipment                                                          | ** ** | **(12**      | **)**      | (21        | )          | (468       | )          |
| Deferred income taxes                                                                               | ** ** | **(4,649**   | **)**      | (522       | )          | 77         |       |
| Increase in interest receivable                                                                     | ** ** | **(3,912**   | **)**      | (3,188     | )          | (1,317     | )          |
| Increase in interest payable                                                                        | ** ** | **4,619**    |       | 2,890      |       | 600        |       |
| Increase in cash surrender value of life insurance                                                  | ** ** | **(800**     | **)**      | (728       | )          | (772       | )          |
| Net other operating activities                                                                      | ** ** | **(1,777**   | **)**      | 1,369      |       | 2,139      |       |
|                                                                                                |       |         |       |       |       |       |       |
| Net cash provided by operating activities                                                           | ** ** | **22,830**   |       | 21,145     |       | 14,424     |       |
|                                                                                                |       |         |       |       |       |       |       |
| **INVESTING  ACTIVITIES**                                                                           | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Increase in interest-bearing deposits in banks                                                      | ** ** | **(1,120**   | **)**      | (28        | )          | (156       | )          |
| Purchases of securities available for sale                                                          | ** ** | **(108,497** | **)**      | (109,841   | )          | (141,580   | )          |
| Purchases of restricted equity securities                                                           | ** ** | **(1,605**   | **)**      | (2,302     | )          | (3,273     | )          |
| Proceeds from sale of restricted equity securities                                                  | ** ** | **1,296**    |       | 885        |       | 1,116      |       |
| Proceeds from maturities of securities available for  sale                                          | ** ** | **85,432**   |       | 112,752    |       | 88,778     |       |
| Proceeds from sales of securities available for sale                                                | ** ** | **22,032**   |       | 6,431      |       | 2,318      |       |
| Net (increase) decrease in federal funds sold                                                       | ** ** | **(340**     | **)**      | 4,414      |       | 25,640     |       |
| Net increase in loans                                                                               | ** ** | **(167,420** | **)**      | (182,907   | )          | (99,572    | )          |
| Net cash acquired (provided) in business  combinations                                              | ** ** | **(3,291**   | **)**      | 11         |       | 4,308      |       |
| Purchase of premises and equipment                                                                  | ** ** | **(2,505**   | **)**      | (4,681     | )          | (6,376     | )          |
| Proceeds from disposals of premises and equipment                                                   | ** ** | **12**       |       | 99         |       | 2,534      |       |
| Proceeds from sale of other real estate owned                                                       | ** ** | **2,149**    |       | 1,298      |       | 1,996      |       |
|                                                                                                |       |         |       |       |       |       |       |
| Net cash used in investing activities                                                               | ** ** | **(173,857** | **)**      | (173,869   | )          | (124,267   | )          |
|                                                                                                |       |         |       |       |       |       |       |
| **FINANCING  ACTIVITIES**                                                                           | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net increase in deposits                                                                            | ** ** | **159,165**  |       | 158,580    |       | 36,339     |       |
| Net increase (decrease) in federal funds purchased and  securities sold under repurchase agreements |       | **(6,449**   | **)**      | (2,072     | )          | 30,268     |       |
| Proceeds from other borrowings                                                                      | ** ** | **30,008**   |       | 42,927     |       | 17,411     |       |
| Repayment of other borrowings                                                                       | ** ** | **(30,837**  | **)**      | (33,737    | )          | (16,688    | )          |
| Proceeds from issuance of subordinated debt                                                         | ** ** | **—**   |       | **—** |       | 10,310     |       |
| Proceeds from exercise of stock options                                                             | ** ** | **3,961**    |       | 1,019      |       | 1,981      |       |
| Dividends paid                                                                                      | ** ** | **(4,777**   | **)**      | (4,137     | )          | (2,681     | )          |
| Tax benefit of nonqualified stock options                                                           | ** ** | **676**      |       | 173        |       | 654        |       |
| Payment for fractional shares                                                                       | ** ** | **(6**       | **)**      | (4         | )          | (30        | )          |
| Payment for stock repurchase                                                                        | ** ** | **(5,586**   | **)**      | **—** |       | **—** |       |
| Proceeds from stock offering                                                                        | ** ** | **—**   |       | **—** |       | 35,418     |       |
|                                                                                                |       |         |       |       |       |       |       |
| Net cash  provided by financing activities                                                          | ** ** | **146,155**  |       | 162,749    |       | 112,982    |       |
|                                                                                                     |            |              |            |            |            |            |            |  |  |  |

 

54

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**GB&TBANCSHARES, INC.**

**ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YEARSENDED DECEMBER 31, 2006, 2005 AND 2004**

**(Dollars in thousands)**
| ** **                                          | ** ** | **2006**     | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------|------------|--------------|------------|------------|------------|------------|------------|
|                                                |       |         |       |       |       |       |       |
| Net increase  (decrease) in cash and due from banks | ** ** | **$**        | **(4,872** | **)**      | $          | 10,025     |       | $ | 3,139 |   |
|                                                |       |         |       |       |       |       |       |
| Cash and due  from banks at beginning of year       | ** ** | **30,748**   |       | 20,723     |       | 17,584     |       |
|                                                |       |         |       |       |       |       |       |
| Cash and due  from banks at end of year             | ** ** | **$**        | **25,876** |       | $          | 30,748     |       | $ | 20,723 |   |
|                                                |       |         |       |       |       |       |       |
| **SUPPLEMENTAL  DISCLOSURES**                       | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid for:                                      |       |         |       |       |       |       |       |
| Interest                                            | ** ** | **$**        | **52,774** |       | $          | 31,111     |       | $ | 17,353 |   |
| Income taxes                                        | ** ** | **$**        | **10,739** |       | $          | 6,123      |       | $ | 4,848 |   |
|                                                |       |         |       |       |       |       |       |
| **NONCASH  TRANSACTIONS**                           | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other real estate acquired in settlement of loans   | ** ** | **$**        | **4,573**  |       | $          | 3,516      |       | $ | 1,062 |   |
| Financed sales of other real estate owned           | ** ** | **$**        | **1,006**  |       | $          | —     |       | $ | — |   |
| Increase in cash surrender value of life insurance  | ** ** | **$**        | **800**    |       | $          | 728        |       | $ | 772 |   |
|                                                |       |         |       |       |       |       |       |
| **BUSINESS  ACQUISITIONS**                          | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital stock issued                                | ** ** | **$**        | **29,372** |       | $          | 21,290     |       | $ | 33,213 |   |
|                                                |       |         |       |       |       |       |       |
| Assets acquired  (liabilities assumed)              |       |         |       |       |       |       |       |
| Cash and due from banks, net of cash paid           | ** ** | **$**        | **(3,291** | **)**      | $          | 11         |       | $ | 4,308 |   |
| Interest-bearing deposits in banks                  | ** ** | **—**   |       | —     |       | 9          |       |
| Federal funds sold                                  | ** ** | **537**      |       | 4,889      |       | 19,199     |       |
| Securities available for sale                       | ** ** | **17,909**   |       | 10,872     |       | 8,179      |       |
| Restricted equity securities                        | ** ** | **1,554**    |       | 634        |       | 496        |       |
| Loans, net                                          | ** ** | **106,279**  |       | 100,229    |       | 146,290    |       |
| Premises and equipment                              | ** ** | **5,628**    |       | 3,755      |       | 4,916      |       |
| Goodwill                                            | ** ** | **25,952**   |       | 16,416     |       | 19,054     |       |
| Core deposit intangible                             | ** ** | **971**      |       | 697        |       | 3,154      |       |
| Other assets                                        | ** ** | **546**      |       | 1,451      |       | 2,108      |       |
| Deposits                                            | ** ** | **(123,708** | **)**      | (109,628   | )          | (164,237   | )          |
| Other borrowings                                    | ** ** | **(2,000**   | **)**      | (7,150     | )          | (9,391     | )          |
| Other liabilities                                   | ** ** | **(1,005**   | **)**      | (508       | )          | (872       | )          |
|                                                | ** ** | **$**        | **29,372** |       | $          | 21,668     |       | $ | 33,213 |   |

 

**See Notes to Consolidated Financial Statements.**

55

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**GB&T BANCSHARES, INC.**

**AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

**Nature of Operations**

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

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

**Basis of Presentation and Accounting Estimates**

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

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

56

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

For purposes of reporting cash flows, cash and due from banksinclude cash on hand, cashitems 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 anddeposits are reported net.

TheBanks are required to maintain reserve balances in cash or on deposit with theFederal Reserve Bank, based on a percentage of deposits.  The total of those reserve balances wasapproximately $11,063,000 and $11,398,000 at December 31, 2006 and 2005,respectively.

**Securities**

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

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

**Loans**

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

The accrual of interest on loans isdiscontinued when, in management’s opinion, the borrower may be unable to meetpayments as they become due..  Allinterest accrued but not collected for loans that are placed on nonaccrual orare charged off is reversed against interest income.  Loans are returned to accrual status when allthe principal and interest amounts are brought current and future payments arereasonably assured.

**Allowance for Loan Losses**

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

57

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The allowance is an amount that management believeswill be adequate to absorb estimated losses relating to specifically identifiedloans, as well as probable credit losses inherent in the balance of the loanportfolio, based on an evaluation of the collectibility of existing loans andprior loss experience.  This evaluationalso takes into consideration such factors as changes in the nature and volumeof the loan portfolio, overall portfolio quality, review of specific problemloans, concentrations and current economic conditions that may affect theborrower’s ability to pay.  This evaluationdoes not include the effects of expected losses on specific loans or groups ofloans that are related to future events or expected changes in economicconditions.  While management uses thebest information available to make its evaluation, future adjustments to theallowance may be necessary if there are significant changes in economicconditions.  In addition, regulatoryagencies, as an integral part of their examination process, periodically reviewthe Banks’ allowance for loan losses, and may require the Banks to makeadditions to their allowance based on their judgment about informationavailable to them at the time of their examinations.

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

Managementbelieves that the unallocated allowance is adequate to provide for probablelosses that are inherent in the loan portfolio and that have not been fullyprovided for through the allocated allowance. Factors considered in determining the adequacy of the unallocatedallowance include the economic environment, experience level of lenders,concentration in commercial and consumer real estate loans, size of individualloans and the continued strong loan growth in our markets.  These factors are tempered by lending practicesrelated to the real estate portfolio, the continuing positive performancewithin this segment of our loan portfolio, the knowledge and experience of ourcommercial lending staff, and the relationship banking philosophy maintained inour community banks.

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

**Premises and Equipment**

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

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

 

58

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**Foreclosed Assets**

Assets acquired through, or in lieu of, loan foreclosure areheld for sale and are initially recorded at fair value at the date offoreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed bymanagement and the assets are carried at the lower of carrying amount or fairvalue less cost to sell.  Revenue andexpenses from operations and changes in the valuation allowance are included innet expenses from foreclosed assets.  Thecarrying amount of foreclosed assets at December 31, 2006 and 2005 was$4,673,000 and $3,431,000, respectively.

**Goodwill and Intangible Assets**

Goodwill represents the excess of cost over the fair value ofthe net assets purchased in business combinations.  Goodwill is required to be tested annuallyfor impairment, or whenever events occur that may indicate that therecoverability of the carrying amount is not probable.  In the event of an impairment, the amount bywhich the carrying amount exceeds the fair value would be charged to earnings.  The Company performed its annual test ofimpairment in the third quarter and determined that there was no impairment ofthe carrying value as of July 31, 2006, 2005 and 2004.

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

**Income Taxes**

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

**Profit-Sharing Plan**

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

**Stock-Based Compensation**

At December 31, 2006, the Company had a stock option plan forgrants of options to directors, officers and employees.  The options may be exercised over a period often years in accordance with vesting schedules determined by the Board ofDirectors.  Prior to January 1, 2006, theCompany accounted for the plan under the recognition and measurement principlesof APB Opinion No. 25, Accounting for Stock Issued to Employees, and relatedinterpretations, as permitted by FASB Statement No. 123, Accounting forStock-Based Compensation.  No stock-basedemployee compensation cost was recognized in the Results of Operations for theyears ended December 31, 2005 or 2004, as all options granted under the planhad an exercise price equal to the market value of the underlying stock on thedate of grant.  Effective January 1,2006, the Company adopted the fair value recognition provisions of FASB StatementNo. 123(R), Share-Based Payment, using the modified-prospective-transitionmethod.  To give effect to the adoptionof Statement 123(R),  compensation costrecognized in 2006 includes (a) compensation cost for all share-based paymentsgranted prior to, but not yet vested as of January 1, 2006, based on the grantdate fair value estimated in accordance with the original provisions of

59

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

Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*, to stock-basedemployee compensation for the years ended December 31, 2005 and 2004.
|                                                                                                                                               | ** ** | **Years ended December 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                                                                                                                                    | ** ** | **(Dollars in thousands)**       | ** ** |
|                                                                                                                                          | ** ** | ** **                                 |       |   |   |
| Net income, as  reported                                                                                                                      | ** ** | **$**                                      | **11,991** |   | $ | 9,838 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based method  for all awards, net of related tax effects |       | **199**                                    |       | 144 |   |
| Pro forma net  income                                                                                                                         | ** ** | **$**                                      | **11,792** |   | $ | 9,694 |   |
| Earnings per  share:                                                                                                                          |       |                                       |       |   |   |
| Basic - as reported                                                                                                                           | ** ** | **$**                                      | **0.96**   |   | $ | 1.05 |   |
| Basic - pro forma                                                                                                                             | ** ** | **$**                                      | **0.94**   |   | $ | 1.04 |   |
| Diluted - as reported                                                                                                                         | ** ** | **$**                                      | **0.93**   |   | $ | 1.04 |   |
| Diluted - pro  forma                                                                                                                          | ** ** | **$**                                      | **0.91**   |   | $ | 1.02 |   |

 

Aspermitted by SFAS 123, through December 31, 2005, the Company accounted forshare-based payments to employees using the intrinsic value method set forth inAPB 25 and, as such, recognized no compensation cost for employee stockoptions.  Upon adoption of the fair valuemethod under SFAS 123(R) on January 1, 2006, the Company incurred expense of$247,000 for the year ended December 31, 2006. In addition, had the Company adopted SFAS 123(R) in prior periods, theimpact of that standard and therefore, the disclosure of pro forma net incomeand earnings per share above would remain the same.  SFAS 123(R) also requires that tax deductionsin excess of recognized compensation cost be reported as a financing cash flow,rather than as operating cash flow.  Thisrequirement has reduced net operating cash flow and increased net financingcash flow in all periods since the adoption of SFAS 123(R).

**Earnings Per Share**

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

Optionsto purchase 106,866 shares of common stock at prices ranging from $21.60 to$24.15 per share were outstanding during the year but were not included in thecomputation of diluted EPS because the options' exercise price was greater thanthe average market price of the common shares. The options were stilloutstanding as of December 31, 2006.

60

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**Comprehensive Income**

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

**Recent Accounting Standards**

In July 2006, the FASBissued Interpretation No. 48, *Accounting forUncertainty in Income Taxes – An Interpretation of FASB Statement No. 109. *This interpretation addresses the accounting for uncertaintyin income taxes recognized in a Company’s financial statements in accordancewith FASB Statement No. 109, *Accounting forIncome Taxes*.  It prescribes a comprehensive model forrecognizing, measuring, presenting and disclosing in the financial statementstax positions taken or expected to be taken in a tax return.  It requiresthat only benefits from tax positions that are more-likely-than-not of beingsustained upon examination should be recognized in the financial statements. These benefits would be recorded at amounts considered to be the maximumamounts more-likely-than-not of being sustained.  At the time thesepositions become more-likely-than-not to be disallowed, their recognition wouldbe reversed.  This interpretation is effective for fiscal years beginningafter December 15, 2006 and is not expected to have a material impact on theCompany’s financial condition or results of operations.

In September 2006, theFASB issued SFAS 157, *Fair ValueMeasurements.  *The standard provides guidance for using fairvalue to measure assets and liabilities.  It defines fair value,establishes a framework for measuring fair value under generally acceptedaccounting principles and expands disclosures about fair value measurement. Under the standard, fair value refers to the price that would be receivedto sell an asset or paid to transfer a liability in an orderly transactionbetween market participants in the market in which the reporting entitytransacts.  It clarifies the principle that fair value should be based onthe assumptions market participants would use when pricing the asset orliability.  In support of this principle, the standard establishes a fairvalue hierarchy that prioritizes the information used to develop thoseassumptions.  Under the standard, fair value measurements would be separatelydisclosed by level within the fair value hierarchy.  Statement 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007.  The Company is currently evaluating the impact theadoption of this statement could have on its financial condition, results of operations and cash flows.

**NOTE 2.                BUSINESSCOMBINATION**

On May 1, 2006, theCompany completed the acquisition of Mountain Bancshares, Inc. the parentcompany of Mountain State Bank in Dawsonville, Dawson County, Georgia, whichresulted in Mountain State Bank becoming a wholly owned subsidiary of theCompany.  The aggregate purchase pricewas $39.8 million including 1,088,924 shares of its capital stock valued at$24.0 million, $10.3 million in cash and stock options and warrants valued at$5.3 million and $197,000 in direct acquisition costs.  The value of the capital stock issued wasdetermined based on the average market price of GB&T’s capital stock over a2 day period before and after the terms of the acquisition were agreed upon andannounced.  The fair value of the stockoptions was determined based on the Black-Scholes-Merton option pricingmodel.  The acquisition was accounted foras a purchase resulting in estimated goodwill of approximately $26.0 million.  The goodwill will not be deductible for taxpurposes.  Identifiable intangible assetsof $971,000 acquired consist of a core deposit premium with an estimatedweighted average useful life of 5 years. Mountain State Bank’s results of operations from May 1, 2006 areincluded in the consolidated results of operations for the year ended December31, 2006.  The results of operations forthe years ended December 31, 2005 and 2004 do not include the results ofoperations of Mountain Bancshares, Inc.

61

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Unaudited pro forma consolidated results of operationsfor years ended December 31, 2006 and 2005 as though the companies had combinedas of January 1, 2006 and 2005 are as follows:
|                             | ** ** | **2006**                             | ** ** | **2005** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                  | ** ** | **(Dollars in thousands)** | ** ** |
| Net interest  income        |       | $                                    | 71,321     |     | $          | 61,628 |   |
| Net income                  |       | 10,024                               |       | 12,938   |       |
| Basic earnings  per share   |       | 0.73                                 |       | 0.95     |       |
| Diluted earnings  per share |       | 0.72                                 |       | 0.92     |       |
|                             |            |                                      |            |          |            |  |  |

 

**NOTE 3.                SECURITIES**

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

|                                                 | ** ** | **Amortized  Cost**                  | ** **  | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|-------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| ** **                                      | ** ** | **(Dollars in thousands)** | ** **  |
| **December 31, 2006:**                | ** ** | ** **                           | ** **  | ** **                   | ** ** | ** **                    | ** ** | ** **      | ** ** |
| **U.S. Government sponsored agency securities** | ** ** | **$**                                | **102,765** | ** **                   | **$**      | **182**                       | ** ** | **$**           | **(1,141** | **)** | **$** | **101,806** | ** ** |
| **State and municipal securities**              | ** ** | **21,417**                           | ** **  | **359**                      | ** ** | **(45**                       | **)**      | **21,731**      | ** ** |
| **Mortgage-backed securities**                  | ** ** | **85,272**                           | ** **  | **147**                      | ** ** | **(1,722**                    | **)**      | **83,697**      | ** ** |
| **Equity securities**                           | ** ** | **1,698**                            | ** **  | **—**                   | ** ** | **—**                    | ** ** | **1,698**       | ** ** |
| **Corporate bonds**                             | ** ** | **1,284**                            | ** **  | **36**                       | ** ** | **(3**                        | **)**      | **1,317**       | ** ** |
| ** **                                      | ** ** | **$**                                | **212,436** | ** **                   | **$**      | **724**                       | ** ** | **$**           | **(2,911** | **)** | **$** | **210,249** | ** ** |
|                                            | ** ** | ** **                           | ** **  | ** **                   | ** ** | ** **                    | ** ** | ** **      | ** ** |
| December 31,  2005:                             | ** ** | ** **                           | ** **  | ** **                   | ** ** | ** **                    | ** ** | ** **      | ** ** |
| U.S. Government sponsored agency securities     |       | $                                    | 78,938      |                         | $          | 5                             |       | $               | (1,580     | ) | $ | 77,363 |   |
| State and municipal securities                  |       | 11,140                               |        | 232                          |       | (45                           | )          | 11,327          |       |
| Mortgage-backed securities                      |       | 100,277                              |        | 181                          |       | (2,729                        | )          | 97,729          |       |
| Equity securities                               |       | 1,708                                |        | —                       |       | —                        |       | 1,708           |       |
| December 31,  2005:                             |       | $                                    | 192,063     |                         | $          | 418                           |       | $               | (4,354     | ) | $ | 188,127 |   |

 

62

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Theamortized cost and fair value of debt securities available for sale as ofDecember 31, 2006 by contractual maturity are shown below.  Actual maturities may differ from contractualmaturities because issuers may have the right to call or prepay obligationswith or without call or prepayment penalties.
|                             | ** ** | **Amortized**                        | ** ** | **Fair**  | ** ** |
|-----------------------------|------------|--------------------------------------|------------|-----------|------------|
| ** **                  | ** ** | **Cost**                             | ** ** | **Value** | ** ** |
| ** **                  | ** ** | **(Dollars in thousands)** | ** ** |
|                        |       |                                 |       |      |       |
| Due within one  year        |       | $                                    | 22,641     |      | $          | 22,422 |   |
| Due from one to  five years |       | 58,977                               |       | 58,164    |       |
| Due from five to  ten years |       | 28,018                               |       | 28,227    |       |
| Due after ten  years        |       | 15,830                               |       | 16,041    |       |
| Mortgage-backed  securities |       | 85,272                               |       | 83,697    |       |
|                        |       | $                                    | 210,738    |      | $          | 208,551 |   |

 

Securitieswith an approximate carrying value of $92,500,000 and $99,496,000 at December31, 2006 and 2005, respectively, were pledged to secure public deposits and forother purposes required or permitted by law.

Gainsand losses on sales of securities available for sale consist of the following:
|                             | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                  | ** ** | **(Dollars in thousands)**        | ** ** |
|                        |       |                                        |       |   |   |   |   |
| Gross gains                 | ** ** | **$**                                       | **—** |   | $ | 621 |   | $ | 638 |   |
| Gross losses                | ** ** | **(16**                                     | **)**      | (68 | ) | (29 | ) |
| Net realized  gains(losses) | ** ** | **$**                                       | **(16**    | **)** | $ | 553 |   | $ | 609 |   |

 

Thefollowing table shows the gross unrealized losses and fair value of securities,aggregated by category and length of time that securities have been in acontinuous unrealized loss position at December 31, 2006 and 2005.
| ** **                                   | ** ** | **Less Than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total**       | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|-----------------|------------|
| **Description of Securities:**     | ** ** | **Fair  Value**                        | ** ** | **Unrealized  Losses**               | ** ** | **Fair  Value** | ** ** | **Unrealized   Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)**   | ** ** |
| **December  31, 2006**                       | ** ** | ** **                             | ** ** | ** **                           | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Government  sponsored agency securities |       | $                                      | 36,323     |                                 | $          | 391             |       | $ | 45,137 |   | $ | 751 |   | $ | 81,460 |   | $ | 1,142 |   |
| State and  municipal securities              |       | 1,416                                  |       | 19                                   |       | 910             |       | 26 |   | 2,326 |   | 45 |   |
| Mortgage-backed  securities                  |       | 30,902                                 |       | 720                                  |       | 37,834          |       | 1,001 |   | 68,736 |   | 1,721 |   |
| Corporate bonds                              |       | 300                                    |       | 3                                    |       | —          |       | — |   | 300 |   | 3 |   |
| Total  temporarily impaired securities       |       | $                                      | 68,941     |                                 | $          | 1,133           |       | $ | 83,881 |   | $ | 1,778 |   | $ | 152,822 |   | $ | 2,911 |   |
|                                         |       |                                   |       |                                 |       |            |       |   |   |   |   |   |   |
| **December  31, 2005**                       | ** ** | ** **                             | ** ** | ** **                           | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Government  sponsored agency securities |       | $                                      | 41,523     |                                 | $          | 693             |       | $ | 34,114 |   | $ | 887 |   | $ | 75,637 |   | $ | 1,580 |   |
| State and  municipal securities              |       | 1,088                                  |       | 40                                   |       | 606             |       | 5 |   | 1,694 |   | 45 |   |
| Mortgage-backed  securities                  |       | 28,585                                 |       | 628                                  |       | 65,280          |       | 2,091 |   | 93,865 |   | 2,729 |   |
| Total temporarily  impaired securities       |       | $                                      | 71,196     |                                 | $          | 1,361           |       | $ | 100,000 |   | $ | 2,983 |   | $ | 171,196 |   | $ | 4,354 |   |

 

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AtDecember 31, 2006, the unrealized losses are the result of the current yieldenvironment.  The depreciation within theportfolio is 1.87% of the Company’s amortized cost basis.  In analyzing an issuer’s financial condition,management considers whether the securities are issued by the federalgovernment or its agencies, whether downgrades by bond rating agencies have occurred,and industry analysts’ reports.  Asmanagement has the ability to hold debt securities until maturity, or for theforeseeable future if classified as available for sale, no declines are deemedto be other than temporary.

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

Thecomposition of loans is summarized as follows:
|                                         | ** ** | **December 31,**                | ** **    |
|-----------------------------------------|------------|--------------------------------------|---------------|
| ** **                              | ** ** | **2006**                             | ** **    | **2005** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)** | ** **    |
| ** **                              | ** ** | ** **                           | ** **    | ** ** | ** ** |
| Commercial,  financial and agricultural | ** ** | **$**                                | **115,965**   |   | $ | 99,919 |   |
| Real estate –  construction        | ** ** | **702,809**                          |          | 481,332 |   |
| Real estate –  mortgage            | ** ** | **643,765**                          |          | 615,583 |   |
| Consumer                                | ** ** | **31,756**                           |          | 33,260 |   |
| Other                                   | ** ** | **3,579**                            |          | 1,584 |   |
|                                    | ** ** | **1,497,874**                        |          | 1,231,678 |   |
| Unearned income  and deferred loan fees | ** ** | **(173**                             | **)**         | (268 | ) |
| Allowance for  loan losses              | ** ** | **(24,676**                          | **)**         | (12,773 | ) |
| Loans, net                              | ** ** | **$**                                | **1,473,025** |   | $ | 1,218,637 |   |

 

Changesin the allowance for loan losses are as follows:
|                                                      | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**        | ** ** |
|                                                 |       |                                        |       |   |   |   |   |
| Balance,  beginning of year                          | ** ** | **$**                                       | **12,773** |   | $ | 11,061 |   | $ | 8,726 |   |
| Provision for loan losses                            | ** ** | **15,744**                                  |       | 5,916 |   | 1,406 |   |
| Loans charged off                                    | ** ** | **(5,570**                                  | **)**      | (5,761 | ) | (1,628 | ) |
| Recoveries of loans previously charged off           | ** ** | **641**                                     |       | 452 |   | 482 |   |
| Allowance for loan losses related to acquired loans  |       | **1,088**                                   |       | 1,269 |   | 2,075 |   |
| Allowance for loan losses related to the sale of CLC |       | **—**                                  |       | (164 | ) | — |   |
| Balance, end of year                                 | ** ** | **$**                                       | **24,676** |   | $ | 12,773 |   | $ | 11,061 |   |

 

64

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Thefollowing is a summary of information pertaining to nonperforming loans:
|                                                                 | ** ** | **As of and for the Years Ended  December 31,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **(Dollars in thousands)**                                               | ** ** |
|                                                            |       |                                                                               |       |   |   |   |   |
| Impaired loans  without a valuation allowance                   | ** ** | **$**                                                                              | **—** |   | $ | — |   | $ | — |   |
| Impaired loans  with a valuation allowance                      | ** ** | **25,561**                                                                         |       | 6,668 |   | 10,092 |   |
| Total impaired  loans                                           | ** ** | **$**                                                                              | **25,561** |   | $ | 6,668 |   | $ | 10,092 |   |
| Valuation  allowance related to impaired loans                  | ** ** | **$**                                                                              | **4,314**  |   | $ | 1,024 |   | $ | 1,721 |   |
| Average  investment in impaired loans                           | ** ** | **$**                                                                              | **12,353** |   | $ | 7,647 |   | $ | 4,647 |   |
| Interest income  recognized on impaired loans                   | ** ** | **$**                                                                              | **164**    |   | $ | 118 |   | $ | 34 |   |
| Nonaccrual loans                                                | ** ** | **$**                                                                              | **14,790** |   | $ | 6,562 |   | $ | 10,059 |   |
| Loans past due ninety  days or more and still accruing interest |       | **$**                                                                              | **10**     |   | $ | 17 |   | $ | 328 |   |

 

Inthe ordinary course of business, the Company has granted loans to certainrelated parties, including executive officers, directors and theiraffiliates.  The interest rates on theseloans were substantially the same as rates prevailing at the time of thetransaction and repayment terms are customary for the type of loan.  Changes in related party loans for the yearended December 31, 2006 are as follows:
|                             | ** ** | **(Dollars in  thousands)** | ** ** |
|-----------------------------|------------|----------------------------------|------------|
|                        |       |                             |       |
| Balance,  beginning of year | ** ** | **$**                            | 30,607     | ** ** |
| Advances                    |       | 46,293                           |       |
| Repayments                  |       | (50,079                          | )          |
| Change in directors         |       | 1,671                            |       |
| Balance, end of year        | ** ** | **$**                            | 28,492     | ** ** |

 

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

Premisesand equipment are summarized as follows:
|                           | ** ** | **December 31,**                | ** ** |
|---------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(Dollars in thousands)** | ** ** |
|                      |       |                                 |       |   |   |
| Land                      | ** ** | **$**                                | **7,013**  |   | $ | 5,628 |   |
| Land  improvements        | ** ** | **945**                              |       | 916 |   |
| Buildings                 | ** ** | **31,133**                           |       | 25,805 |   |
| Leasehold  improvements   | ** ** | **4,829**                            |       | 4,758 |   |
| Furniture and  equipment  | ** ** | **19,154**                           |       | 17,592 |   |
| Automobiles               | ** ** | **450**                              |       | 431 |   |
| Construction in  progress | ** ** | **196**                              |       | 504 |   |
|                      | ** ** | **63,720**                           |       | 55,634 |   |
| Accumulated  depreciation | ** ** | **(21,944**                          | **)**      | (18,620 | ) |
|                      | ** ** | **$**                                | **41,776** |   | $ | 37,014 |   |

 

65

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Depreciationexpense was $3,104,000, $2,825,000 and $2,268,000 for the years ended December31, 2006, 2005 and 2004, respectively.

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

AtDecember 31, 2006, the Company's 50% interest in the Gainesville Bank &Trust main office banking facility with a total carrying value (including land)of $3,016,000 was pledged to a subsidiary bank to secure a $259,273 borrowingof the related party.

At December 31, 2006, construction in processincluded costs related to deposits paid on software purchases, computerequipment not yet in service and several small renovation projects still inprocess.  At December 31, 2005,construction in process included costs related to the construction of a branchin Athens, Georgia, for the Athens division of Gainesville Bank and Trust.  The construction of the Athens branchbuilding was completed in the second quarter of 2006 with an approximate costof $1.5 million.

**Leases**

TheCompany leases the Gainesville Bank & Trust main office banking facilityunder a noncancelable operating lease agreement from 400 Church StreetProperties, a partnership that is 50% owned by Gainesville Bank & Trust and50% owned by a related party.  The leasehas an initial lease term of 10 years with four five-year renewal options.  

TheCompany also leases various other branches under noncancelable operating leaseagreements.

Rentalexpense under all operating leases amounted to $980,000, $846,000 and $707,000for the years ended December 31, 2006, 2005 and 2004, respectively.

Futureminimum lease payments on noncancelable operating leases are summarized asfollows:
|            | ** ** | **(Dollars in  thousands)** | ** ** |
|------------|------------|----------------------------------|------------|
|       |       |                             |       |
| 2007       |       | $                                | 936        |   |
| 2008       |       | 844                              |       |
| 2009       |       | 844                              |       |
| 2010       |       | 305                              |       |
| 2011       |       | 312                              |       |
| Thereafter |       | 5,190                            |       |
|       |       | $                                | 8,431      |   |

 

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

Followingis a summary of information related to acquired intangible assets:
|                                                    | ** ** | **December 31, 2006**      | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **Gross  Amount**                    | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                                         | ** ** | **(Dollars in thousands)** | ** ** |
| Amortized intangible  assets Core deposit premiums |       | $                                    | 7,913      |                            | $          | 2,235 |   | $ | 6,942 |   | $ | 1,356 |   |
|                                                    |            |                                      |            |                                 |            |  |  |  |  |  |  |  |  |

 

Theaggregate amortization expense was $879,000, $729,000 and $468,000 for theyears ended December 31, 2006, 2005 and 2004, respectively.

Theestimated amortization expense for each of the next five years is as follows:
|        | ** ** | **(Dollars in  thousands)** | ** ** |
|--------|------------|----------------------------------|------------|
|   |       |                             |       |
| 2007   |       | $                                | 947        |   |
| 2008   |       | 947                              |       |
| 2009   |       | 947                              |       |
| 2010   |       | 947                              |       |
| 2011   |       | 780                              |       |
|        |            |                                  |            |  |

 

Changesin the carrying amount of goodwill are as follows:
|                                                                                       | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                  |       |                                                         |       |   |   |   |   |
| Beginning  balance                                                                    | ** ** | **$**                                                        | **61,164** |   | $ | 49,127 |   | $ | 30,111 |   |
| Goodwill  acquired                                                                    | ** ** | **25,952**                                                   |       | 16,416 |   | 19,054 |   |
| Write-off of CLC  goodwill                                                            | ** ** | **—**                                                   |       | (566 | ) | — |   |
| Adjustment of  Southern Heritage Bancorp, Inc. and Lumpkin County Bank purchase price | ** ** | **—**                                                   |       | (3,813 | ) | (38 | ) |
| Ending balance                                                                        | ** ** | **$**                                                        | **87,116** |   | $ | 61,164 |   | $ | 49,127 |   |

 

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

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

67

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

The aggregate amount of time deposits indenominations of $100,000 or more at December 31, 2006 and 2005 wasapproximately $411,632,000 and $250,694,000 respectively.  The scheduled maturities of time deposits atDecember 31, 2006 are as follows:
|        | ** ** | **(Dollars in  thousands)** | ** ** |
|--------|------------|----------------------------------|------------|
|   |       |                             |       |
| 2007   | ** ** | **$**                            | 744,661    | ** ** |
| 2008   |       | 75,414                           |       |
| 2009   |       | 19,155                           |       |
| 2010   |       | 24,818                           |       |
| 2011   |       | 16,689                           |       |
|   | ** ** | **$**                            | 880,737    | ** ** |

 

TheCompany had brokered time deposits at December 31, 2006 and 2005 of$104,876,000 and $41,218,000, respectively.

AtDecember 31, 2006 and 2005, overdraft demand deposits reclassified to loanstotaled $823,000 and $335,000, respectively.

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

Securitiessold under repurchase agreements, which are secured borrowings, generallymature within one to four days from the transaction date.  Securities sold under repurchase agreementsare reflected at the amount of cash received in connection with thetransactions.  The Company pledges assetsto collateralize repurchase agreements based on the fair value of theunderlying securities.  The Companymonitors the fair value of the underlying securities on a daily basis.  Securities sold under repurchase agreementsat December 31, 2006 and 2005 were $37,460,000 and $20,209,000, respectively.

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

Otherborrowings consist of the following:
|                                                                                                                                                                                     | ** ** | **December 31,**                | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                                                                                                                                                                          | ** ** | **(Dollars in thousands)** | ** ** |
| FHLB advances,  interest payable at fixed rates ranging from 2.47% to 5.55%; advances mature  at various maturity dates from January 25, 2007 through September 23, 2013.           |       | **$**                                | **65,888** |   | $ | 71,648 |   |
| FHLB advances,  interest payable at variable rates tied to LIBOR and overnight funds market;  advances mature at various maturity dates from June 27, 2007 through April  21, 2008. |       | **30,610**                           |       | 25,650 |   |
| Treasury, tax  and loan note option account due on demand, bearing interest equal to the  90-day Treasury bill rate.                                                                |       | **939**                              |       | 968 |   |
|                                                                                                                                                                                | ** ** | **$**                                | **97,437** |   | $ | 98,266 |   |

 

68

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Contractualmaturities of other borrowings as of December 31, 2006 are as follows:
|            | ** ** | **(Dollars in  thousands)** | ** ** |
|------------|------------|----------------------------------|------------|
|       |       |                             |       |
| 2007       |       | $                                | 52,639     |   |
| 2008       |       | 14,910                           |       |
| 2009       |       | 15,360                           |       |
| 2010       |       | 5,988                            |       |
| 2011       |       | 3,000                            |       |
| Thereafter |       | 5,540                            |       |
|       |       | $                                | 97,437     |   |

 

Theadvances from the Federal Home Loan Bank are collateralized by blanket floatingliens on qualifying first mortgage, home equity and commercial loans ofapproximately $141,973,000, available for sale securities of approximately$7,905,000, Federal Home Loan Bank stock of $7,888,000 and cash of $1,144,000.

TheCompany and subsidiaries have available unused lines of credit with variousfinancial institutions totaling approximately $262,742,000 at December 31,2006.  There were no other advancesoutstanding at December 31, 2006.

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

On October 30, 2002, theCompany formed a wholly-owned grantor trust to issue $15,464,000 in variablerate cumulative trust preferred securities in a private placementoffering.  The grantor trust has investedthe proceeds of the trust preferred securities in subordinated debentures ofthe Company.  The trust preferredsecurities can be redeemed, in whole or in part, from time to time, prior tomaturity (October 30, 2032) at the option of the Company on or after October30, 2007.  The sole assets of the grantortrust are the subordinated debentures of the Company.    The Company has the right to redeem thedebentures, in whole or in part, from time to time, on or after October 30,2007, at a redemption price equal to 100% of the principal amount to beredeemed plus any accrued and unpaid interest. Both financial instruments bear an identical annual rate of interest of8.77% and 7.42% at December 31, 2006 and 2005, respectively.

OnJuly 22, 2004, the Company formed a second wholly-owned grantor trust to issue$10,310,000 in variable rate cumulative trust preferred securities in a privateplacement offering.  The grantor trust has invested the proceeds ofthe trust preferred securities in subordinated debentures of the Company.   The trust preferred securities can beredeemed, in whole or in part, from time to time, prior to maturity (July 30,2034) at the option of the Company on or after September 30, 2009.  The sole assets of the grantor trust are thesubordinated debentures of the Company. Both financial instruments bear an identical annual rate of interest of8.02% and 6.67% at December 31, 2006 and 2005, respectively.

In addition, inconnection with the acquisition of Southern Heritage Bancorp, Inc., the Companyassumed $4,124,000 in aggregate principal amount of fixed rate trust preferredsecurities which have substantially the same terms as our other trust preferredsecurities except that they may be redeemed on or after June 26, 2008. Theannual rate of interest on the trust preferred securities and on the debentureswas 5.55% at December 31, 2006 and 2005.

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

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

The Company is requiredby the Federal Reserve Board to maintain certain levels of capital for bankregulatory purposes.  The Federal ReserveBoard has determined that certain cumulative preferred securities having thecharacteristics of trust preferred securities qualify as minority interest,which is included in Tier 1 capital for bank and financial holdingcompanies.  In calculating the amount ofTier l qualifying capital, the trust preferred securities can only be includedup to the amount constituting 25% of total Tier 1 capital elements (includingtrust preferred securities).  Such Tier 1capital treatment provides the Company with a more cost-effective means ofobtaining capital for bank regulatory purposes than if the Company were toissue preferred stock.

Asof December 31, 2006, the Company had $29.9 million in aggregate principalamount of trust preferred securities outstanding and $29.9 million in aggregateprincipal amount of debentures outstanding.

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

**Profit Sharing Plan**

TheCompany has a 401(k) Employee Profit-Sharing Plan available to all eligibleemployees, subject to certain minimum age and service requirements.  The contributions expensed were $763,000,$360,000 and $493,000 for the years ended December 31, 2006, 2005 and 2004,respectively.

**Deferred Compensation Plans**

TheCompany has various deferred compensation plans providing for death andretirement benefits for certain officers and directors.  The estimated amounts to be paid under thecompensation plans have been partially provided through the purchase of lifeinsurance policies on certain officers and directors.  Accrued deferred compensation of $6,641,000and $6,255,000 is included in other liabilities as of December 31, 2006 and2005, respectively.  Cash surrendervalues of $12,736,000 and $11,936,000 on the insurance policies is included inother assets at December 31, 2006 and 2005, respectively.

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**Stock Purchase Plan**

In2003, the Company adopted a stock purchase plan.  Under the plan, all full-time employees anddirectors of the Company or a subsidiary meeting certain eligibilityrequirements are eligible to participate in the plan.  Participants in the plan may participatethrough payroll deduction, direct contribution or a combination thereof.  Payroll deductions are limited to $3,500 fordirectors and the lesser of 10% of gross pay or $3,500 for employees.  The Company matches payroll deductions anddirect contributions at a rate of 50% of the amount contributed.  The purchase price of the shares of capitalstock is based on the current market price. All administrative costs are borne by the Company.  For the years ended December 31, 2006 and2005, 31,222 and 25,973 shares were purchased under the plan.  Contributions expensed for the years endedDecember 31, 2006, 2005 and 2004 were $207,000, $193,000 and $186,000,respectively.

**Dividend Reinvestment Plan**

TheCompany has a dividend reinvestment and share purchase plan.  Under the plan, all holders of record of capitalstock are eligible to participate in the plan. Participants in the plan may direct the plan administrator to investcash dividends declared with respect to all or any portion of their capitalstock.  Participants may also makeoptional cash payments that will be invested through the plan.  All cash dividends paid to the planadministrator are invested within 30 days of the cash dividend paymentdate.  Cash dividends and optional cashpayments will be used to purchase capital stock of the Company in the openmarket, from newly-issued shares, from shares held in treasury, in negotiatedtransactions, or in any combination of the foregoing.  The purchase price of the shares of capitalstock is based on the average market price. All administrative costs are borne by the Company.  For the years ended December 31, 2006 and2005, 38,989 and 34,988 shares were purchased under the plan, respectively.

71

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**NOTE 12.              STOCK-BASEDCOMPENSATION**

TheCompany has a stock option plan in which 2,000,000 shares were approved for thegranting of options to directors, officers, and employees.  Both incentive stock options andnon-qualified stock options may be granted under the Plan.  Option prices are equal to the fair marketvalue of the Company’s capital stock on the dates the options are granted.  The options may be exercised over a period often years in accordance with vesting schedules determined by the Board ofDirectors.

Otherpertinent information related to the options is as follows:
|                                                                                               | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                    | ** ** | **Shares**                                  | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Outstanding at  beginning of year                                                             | ** ** | **781,131**                                 | ** ** | **10.48** |   | 680,281 |   | $ | 10.14 |   | 528,836 |   | $ | 9.78 |   |
| Granted (1)                                                                                   | ** ** | **522,569**                                 | ** ** | **10.12** |   | 323,248 |   | 10.06 |   | 399,402 |   | 9.97 |   |
| Exercised                                                                                     | ** ** | **(526,346**                                | **)**      | **7.83** |   | (192,336 | ) | 8.16 |   | (224,331 | ) | 8.84 |   |
| Terminated                                                                                    | ** ** | **(5,970**                                  | **)**      | **21.77** |   | (30,062 | ) | 13.04 |   | (23,626 | ) | 12.10 |   |
| Outstanding at  end of year                                                                   | ** ** | **771,384**                                 | ** ** | **$** | **11.95** |   | 781,131 |   | $ | 10.48 |   | 680,281 |   | $ | 10.14 |   |
|                                                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Options  exercisable at year-end                                                              | ** ** | **598,186**                                 | ** ** | **$** | **9.75** |   | 633,766 |   | $ | 9.04 |   | 518,095 |   | $ | 8.86 |   |
| Weighted-average  fair value of options granted during the year                               |       |                                        |       | **$** | **3.07** |   |   |   | $ | 6.89 |   |   |   | $ | 8.74 |   |
| Total intrinsic  value of options exercised during the year                                   |       |                                        |       | **$** | **7,548,000** |   |   |   | $ | 2,548,000 |   |   |   | $ | 3,428,000 |   |
| Weighted-average  remaining contractual term of exercisable options at end of year (in years) |       |                                        |       | **4.20** |   |   |   | 4.43 |   |   |   | 4.61 |   |
| Aggregate  intrinsic value of options outstanding at end of year                              |       |                                        |       | **$** | **7,884,000** |   |   |   | $ | 8,178,000 |   |   |   | $ | 9,510,000 |   |
| Aggregate intrinsic  value of exercisable options at end of year                              |       |                                        |       | **$** | **7,429,000** |   |   |   | $ | 7,840,000 |   |   |   | $ | 7,906,000 |   |

 

----

(1)Included in options granted for the year ended December 31, 2006, were 436,639options and warrants with a weighted average exercise price of $7.89 which wereassumed under the plan for Mountain Bancshares, Inc.  Included in options granted for the yearended December 31, 2005, were 268,748 options and warrants with a weightedaverage exercise price of $7.47 which were assumed under the plan for FNBGBancshares, Inc.  Included in optionsgranted for the year ended December 31, 2004, were 355,652 options and warrantswith a weighted average exercise price of $8.58 which were assumed under theplans for Southern Heritage Bancorp, Inc. and Lumpkin County Bank.

72

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Informationpertaining to options outstanding at December 31, 2006 is as follows:
|                                         | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                         | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding**      | ** ** | **Weighted-  Average  Remaining  Contractual  Life** | ** ** | **Weighted-  Average  Exercise   Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|                                    | ** ** | ** **                   | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $5.89 - $8.65                           |       | 481,768                      |       | 4.48  years                                          |       | $ | 8.17 |   | 463,018 |   | $ | 8.15 |   |
| $9.38 - $13.78                          |       | 87,584                       |       | 4.81  years                                          |       | 11.98 |   | 77,652 |   | 11.81 |   |
| $14.15 - $21.18                         |       | 75,916                       |       | 7.58  years                                          |       | 18.82 |   | 31,266 |   | 17.18 |   |
| $21.46 - $24.15                         |       | 126,116                      |       | 8.77  years                                          |       | 22.26 |   | 26,250 |   | 23.00 |   |
| Total                                   |       | 771,384                      |       | 5.52 years                                           |       | 11.95 |   | 598,186 |   | 9.75 |   |
|                                         |            |                              |            |                                                      |            |  |  |  |  |  |  |  |  |

 

Thetotal fair value of options vested during 2006 was $273,000.  The total amount expensed for options vestedduring 2006 was $247,000.

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

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes-Merton option-pricing model with the following weighted-averageassumptions:
|                         | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|
| ** **              | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Dividend yield          | ** ** | **1.66%**                                   |       | 1.57% |   | $ | 1.36% |   |
| Expected life           | ** ** | **3 years**                                 |       | 10 years |   | 10 years |   |
| Expected  volatility    | ** ** | **22.36%**                                  |       | 19.82% |   | 28.41% |   |
| Risk-free interest rate | ** ** | **4.59%**                                   |       | 4.46% |   | 4.66% |   |
|                         |            |                                             |            |  |  |  |  |  |

 

AtDecember 31, 2006, there was approximately $708,000 of unrecognizedcompensation cost related to stock based payments which is expected to berecognized over a weighted average period of 3.97 years.

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

Thecomponents of income tax expense are as follows:
|                                | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(Dollars in thousands)**        | ** ** |
|                           |       |                                        |       |   |   |   |   |
| Current                        | ** ** | **$**                                       | **8,920**  |   | $ | 6,400 |   | $ | 4,599 |   |
| Deferred                       | ** ** | **(4,649**                                  | **)**      | (522 | ) | 77 |   |
| Change in  valuation allowance | ** ** | **—**                                  |       | — |   | — |   |
|                           | ** ** | **$**                                       | **4,271**  | ** ** | $ | 5,878 |   | $ | 4,676 | ** ** |

 

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TheCompany’s income tax expense differs from the amounts computed by applying thefederal income tax statutory rates to income before income taxes.  A reconciliation of the differences is asfollows:
|                                          | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **(Dollars in thousands)**        | ** ** |
|                                     |       |                                        |       |   |   |   |   |
| Tax provision at  statutory federal rate | ** ** | **$**                                       | **4,827**  |   | $ | 6,254 |   | $ | 5,080 |   |
| Tax-exempt interest                      | ** ** | **(206**                                    | **)**      | (216 | ) | (265 | ) |
| Disallowed interest                      | ** ** | **31**                                      |       | 22 |   | 16 |   |
| Life insurance                           | ** ** | **(154**                                    | **)**      | (133 | ) | (153 | ) |
| State income taxes, net of credits       | ** ** | **(146**                                    | **)**      | 200 |   | 48 |   |
| Other                                    | ** ** | **(81**                                     | **)**      | (249 | ) | (50 | ) |
| Income tax expense                       | ** ** | **$**                                       | **4,271**  |   | $ | 5,878 |   | $ | 4,676 |   |

 

Thecomponents of deferred income taxes are as follows:
|                                     | ** ** | **2006**                             | ** ** | **2005** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
| Deferred tax  assets:               |       |                                 |       |     |       |
| Loan loss reserves                  | ** ** | **$**                                | **9,285**  |     | $          | 4,455 |   |
| Other real estate write-down        | ** ** | **124**                              |       | 121      |       |
| Deferred compensation               | ** ** | **2,868**                            |       | 2,612    |       |
| Deferred loan fees                  | ** ** | **92**                               |       | 137      |       |
| Net operating loss carryforward     | ** ** | **539**                              |       | 624      |       |
| Securities available for sale       | ** ** | **838**                              |       | 1,360    |       |
| Other                               | ** ** | **86**                               |       | —   |       |
|                                | ** ** | **13,832**                           |       | 9,309    |       |
| Deferred tax  liabilities:          |       |                                 |       |     |       |
| Depreciation                        | ** ** | **1,386**                            |       | 1,283    |       |
| Accretion of discount on securities | ** ** | **82**                               |       | 49       |       |
| Purchase adjustment                 | ** ** | **3,148**                            |       | 2,880    |       |
|                                | ** ** | **4,616**                            |       | 4,212    |       |
|                                |       |                                 |       |     |       |
| Net deferred tax assets             | ** ** | **$**                                | **9,216**  |     | $          | 5,097 |   |

 

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

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

Presentedbelow is a summary of the components used to calculate basic and dilutedearnings per share:
|                                                                                                      | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                           | ** ** | **(Amounts in thousands)**        | ** ** |
|                                                                                                 |       |                                        |       |   |   |   |   |
| Net income                                                                                           | ** ** | **$**                                       | **9,521**  |   | $ | 11,991 |   | $ | 9,838 |   |
|                                                                                                 |       |                                        |       |   |   |   |   |
| Weighted average  number of capital shares outstanding                                               |       | **13,652**                                  |       | 12,562 |   | 9,340 |   |
| Effect of  dilutive options                                                                          | ** ** | **304**                                     |       | 318 |   | 132 |   |
| Weighted average number  of capital shares outstanding used to calculate dilutive earnings per share |       | **13,956**                                  |       | 12,880 |   | 9,472 |   |
|                                                                                                      |            |                                             |            |  |  |  |  |  |  |  |

 

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

**Loan Commitments**

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

TheCompany’s exposure to credit loss in the event of nonperformance by the otherparty to the financial instrument for commitments to extend credit and standbyletters of credit is represented by the contractual amount of thoseinstruments.  The Company uses the same credit policies inmaking commitments as it does for on-balance sheet instruments.  A summary of the Company’s commitments is asfollows:
|                                      | ** ** | **December 31,**                | ** **  |
|--------------------------------------|------------|--------------------------------------|-------------|
| ** **                           | ** ** | **2006**                             | ** **  | **2005** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)** | ** **  |
|                                 |       |                                 |        |   |   |
| Commitments to  extend credit        | ** ** | **$**                                | **425,391** |   | $ | 288,448 |   |
| Financial  standby letters of credit | ** ** | **7,544**                            |        | 8,650 |   |
| Other standby  letters of credit     | ** ** | **1,129**                            |        | 1,569 |   |
| Credit card  commitments             | ** ** | **6,595**                            |        | 7,229 |   |
|                                 | ** ** | **$**                                | **440,659** |   | $ | 305,896 |   |

 

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

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include accounts receivable, inventory, property andequipment, residential real estate and income-producing commercial properties.

**Loan Commitments (Continued)**

Creditcard commitments are granted on an unsecured basis.

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

AtDecember 31, 2006 and 2005, the carrying amount of liabilities related to theCompany’s obligation to perform under financial standby letters of credit wasinsignificant.  The Company has not beenrequired to perform on any financial standby letters of credit, and the Companyhas not incurred any losses on financial standby letters of credit for theyears ended December 31, 2006 and 2005.

**Contingencies**

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

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

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

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

TheCompany, as a matter of policy, does not generally extend credit to any singleborrower or group of related borrowers in excess of regulatory limits, orapproximately $14,178,000, $1,687,000, $5,501,000, $3,888,000, $4,541,000,$3,857,000 and $4,232,000 for Gainesville Bank & Trust, United Bank &Trust, Community Trust Bank, HomeTown Bank of Villa Rica, First National Bankof the South, First National Bank of Gwinnett and Mountain State Bank,respectively.

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

TheBanks are subject to certain restrictions on the amount of dividends that maybe declared without prior regulatory approval. At December 31, 2006, approximately $12,500,000 of retained earningswere available for dividend declaration without regulatory approval.

TheCompany and Banks are subject to various regulatory capital requirementsadministered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certainmandatory, and possibly additional discretionary actions by regulators that, ifundertaken, could have a direct material effect on the consolidated financialstatements.  Under capital adequacyguidelines and the regulatory framework for prompt corrective action, theCompany and the Banks must meet specific capital guidelines that involvequantitative measures of the Company’s and Banks’ assets, liabilities, andcertain off-balance sheet items as

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calculatedunder regulatory accounting practices. Capital amounts and classification are also subject to qualitativejudgments by the regulators about components, risk weightings, and otherfactors.

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany and the Banks to maintain minimum amounts and ratios of total and TierI capital to risk-weighted assets, as defined, and of Tier I capital to averageassets.  Management believes, as ofDecember 31, 2006 the Company and the Banks met all capital adequacyrequirements to which they are subject.

Asof December 31, 2006, based on the regulatory framework for prompt correctiveaction, all of the affiliate banks are considered to be well capitalized exceptfor HTB, which was adequately capitalized. To be categorized as well capitalized, the Banks must maintain minimumtotal risk-based, Tier I risk-based, and Tier I leverage ratios as set forth inthe following table.  On March 1, 2007,the Company injected sufficient capital at HTB for it to obtain wellcapitalized status.   Prompt correctiveaction provisions are not applicable to bank holding companies.

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

 

77

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

 

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

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

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

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

78

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

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

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

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

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

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

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

Thecarrying amount and estimated fair value of the Company’s financial instrumentswere as follows:
|                                                                                   | ** ** | **December 31, 2006**      | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                                                        | ** ** | **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 |       | **$**                                | **29,169** |                            | **$**      | **29,169** |   | $ | 32,044 |   | $ | 32,044 |   |
| Securities                                                                        | ** ** | **210,249**                          | ** ** | **210,249**                     |       | 188,127 |   | 188,127 |   |
| Restricted equity securities                                                      | ** ** | **9,869**                            | ** ** | **9,869**                       |       | 9,277 |   | 9,277 |   |
| Loans                                                                             | ** ** | **1,473,025**                        | ** ** | **1,463,077**                   |       | 1,218,637 |   | 1,208,643 |   |
| Accrued interest receivable                                                       | ** ** | **13,118**                           | ** ** | **13,118**                      |       | 8,498 |   | 8,498 |   |
|                                                                              |       |                                 |       |                            |       |   |   |   |   |
| Financial  liabilities:                                                           |       |                                 |       |                            |       |   |   |   |   |
| Deposits                                                                          | ** ** | **1,480,168**                        | ** ** | **1,480,841**                   |       | 1,197,026 |   | 1,185,874 |   |
| Federal funds purchased and securities sold under repurchase  agreements          |       | **41,061**                           |       | **41,061**                      |       | 45,510 |   | 45,510 |   |
| Other borrowings                                                                  | ** ** | **97,437**                           | ** ** | **97,115**                      |       | 98,266 |   | 97,719 |   |
| Subordinated debt                                                                 | ** ** | **29,898**                           | ** ** | **30,444**                      |       | 29,898 |   | 29,749 |   |
| Accrued interest  payable                                                         | ** ** | **11,468**                           | ** ** | **11,468**                      |       | 6,609 |   | 6,609 |   |
|                                                                                   |            |                                      |            |                                 |            |  |  |  |  |  |  |  |  |

 

79

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

Componentsof other operating expenses in excess of 1% of total revenue are as follows:
|                                 | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(Dollars in thousands)**        | ** ** |
|                            |       |                                        |       |   |   |   |   |
| Audit and  professional fees    | ** ** | **$**                                       | **745**    |   | $ | 946 |   | $ | 860 |   |
| Stationery, forms and  supplies | ** ** | **745**                                     |       | 744 |   | 661 |   |
|                                 |            |                                             |            |  |  |  |  |  |  |  |

 

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

Thefollowing information presents the condensed balance sheets as of December 31,2006 and 2005 and statements of income and cash flows of GB&T Bancshares,Inc. for the years ended December 31, 2006, 2005 and 2004.

**CONDENSED BALANCE SHEETS**
|                                                  | ** ** | **2006**                             | ** **  | **2005**   | ** ** |
|--------------------------------------------------|------------|--------------------------------------|-------------|------------|------------|
| ** **                                       | ** ** | **(Dollars in thousands)** | ** **  |
| **Assets**                                       |       |                                 |        |       |       |
| Cash                                             | ** ** | **$**                                | **946**     |       | $          | 4,566 |   |
| Securities available for sale                    | ** ** | **15,421**                           |        | 24,060     |       |
| Investment in subsidiaries                       | ** ** | **242,645**                          |        | 191,779    |       |
| Premises and equipment                           | ** ** | **4,319**                            |        | 4,646      |       |
| Other assets                                     | ** ** | **4,837**                            |        | 3,893      |       |
|                                             |       |                                 |        |       |       |
| Total assets                                     | ** ** | **$**                                | **268,168** |       | $          | 228,944 |   |
|                                             |       |                                 |        |       |       |
| **Liabilities**                                  |       |                                 |        |       |       |
| Securities sold under agreements to repurchase   | ** ** | **$**                                | **4,500**   |       | $          | — |   |
| Subordinated debt                                | ** ** | **29,898**                           |        | 29,898     |       |
| Other liabilities                                | ** ** | **432**                              |        | 335        |       |
| ** **                                       | ** ** | ** **                           | ** **  | ** ** | ** ** |
| Total liabilities                                | ** ** | **34,830**                           |        | 30,233     |       |
|                                             |       |                                 |        |       |       |
| **Stockholders’  equity**                   | ** ** | **233,338**                          |        | 198,711    |       |
|                                             |       |                                 |        |       |       |
| Total  liabilities and stockholders’ equity | ** ** | **$**                                | **268,168** | ** ** | $          | 228,944 |   |

 

80

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**CONDENSEDSTATEMENTS OF INCOME**
|                                                                                      | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                           | ** ** | **(Dollars in thousands)** | ** ** |
| Income                                                                               |       |                                 |       |     |       |     |       |
| Dividends from subsidiaries                                                          | ** ** | **$**                                | **7,224**  |     | $          | 5,324    |       | $ | 3,350 |   |
| Management fees                                                                      | ** ** | **1,637**                            |       | 1,312    |       | 1,148    |       |
| Other income                                                                         | ** ** | **3,227**                            |       | 3,365    |       | 1,936    |       |
|                                                                                 | ** ** | **12,088**                           |       | 10,001   |       | 6,434    |       |
|                                                                                 |       |                                 |       |     |       |     |       |
| Expense                                                                              |       |                                 |       |     |       |     |       |
| Interest                                                                             | ** ** | **2,657**                            |       | 2,049    |       | 1,190    |       |
| Other operating expense                                                              | ** ** | **8,447**                            |       | 6,594    |       | 4,998    |       |
|                                                                                 | ** ** | **11,104**                           |       | 8,643    |       | 6,188    |       |
|                                                                                 |       |                                 |       |     |       |     |       |
| Income before income tax benefit and equity in  undistributed income of subsidiaries |       | **984**                              |       | 1,358    |       | 246      |       |
|                                                                                 |       |                                 |       |     |       |     |       |
| Income tax  benefits                                                                 | ** ** | **2,336**                            |       | 1,635    |       | 1,241    |       |
|                                                                                 |       |                                 |       |     |       |     |       |
| Income before equity in undistributed income of  subsidiaries                        |       | **3,320**                            |       | 2,993    |       | 1,487    |       |
|                                                                                 |       |                                 |       |     |       |     |       |
| Equity in  undistributed income of subsidiaries                                      | ** ** | **6,201**                            |       | 8,998    |       | 8,351    |       |
|                                                                                 |       |                                 |       |     |       |     |       |
| Net income                                                                           | ** ** | **$**                                | **9,521**  |     | $          | 11,991   |       | $ | 9,838 |   |

 

81

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**CONDENSEDSTATEMENTS OF CASH FLOWS**
| ** **                                                                                   | ** ** | **2006**                             | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                   | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                                                                                   | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **OPERATING  ACTIVITIES**                                                                    |       |                                 |       |       |       |       |       |
| Net income                                                                                   | ** ** | **$**                                | **9,521**  |       | $          | 11,991     |       | $ | 9,838 |   |
| Adjustments to reconcile net income to net cash provided  by (used in) operating activities: |       |                                 |       |       |       |       |       |
| Undistributed income of subsidiaries                                                         | ** ** | **(6,201**                           | **)**      | (8,998     | )          | (8,351     | )          |
| Depreciation                                                                                 | ** ** | **641**                              |       | 591        |       | 300        |       |
| (Gain) loss on sale of assets                                                                | ** ** | **—**                           |       | (2         | )          | (371       | )          |
| Net other operating activities                                                               | ** ** | **1,492**                            |       | (789       | )          | (1,981     | )          |
|                                                                                         |       |                                 |       |       |       |       |       |
| Net cash provided by (used in) operating activities                                          |       | **5,453**                            |       | 2,793      |       | (565       | )          |
|                                                                                         |       |                                 |       |       |       |       |       |
| **INVESTING  ACTIVITIES**                                                                    |       |                                 |       |       |       |       |       |
| Purchase of securities available for sale                                                    |       | **—**                           |       | —     |       | (31,259    | )          |
| Proceeds from maturities of securities available for  sale                                   |       | **4,028**                            |       | 4,080      |       | —     |       |
| Purchase of premises and equipment                                                           | ** ** | **(268**                             | **)**      | (1,389     | )          | (4,422     | )          |
| Proceeds from sale of premises and equipment                                                 | ** ** | **—**                           |       | 2          |       | 2,223      |       |
| Capital investment in subsidiaries                                                           | ** ** | **(10,925**                          | **)**      | (4,577     | )          | (6,000     | )          |
|                                                                                         |       |                                 |       |       |       |       |       |
| Net cash used in investing activities                                                        | ** ** | **(7,165**                           | **)**      | (1,884     | )          | (39,458    | )          |
|                                                                                         |       |                                 |       |       |       |       |       |
| **FINANCING  ACTIVITIES**                                                                    |       |                                 |       |       |       |       |       |
| Dividends paid                                                                               | ** ** | **(4,777**                           | **)**      | (4,137     | )          | (2,681     | )          |
| Proceeds from purchased funds and other short term  borrowings                               |       | **4,500**                            |       | —     |       | —     |       |
| Proceeds from issuance of common stock                                                       | ** ** | **3,961**                            |       | 1,019      |       | 37,399     |       |
| Payment to repurchase common stock                                                           | ** ** | **(5,586**                           | **)**      | —     |       | —     |       |
| Payment for fractional shares                                                                | ** ** | **(6**                               | **)**      | (4         | )          | (30        | )          |
| Proceeds from issuance of subordinated debentures                                            |       | **—**                           |       | —     |       | 10,310     |       |
| Proceeds from note payable                                                                   | ** ** | **—**                           |       | 1,000      |       | —     |       |
| Repayment of note payable                                                                    | ** ** | —                               |       | (3,150     | )          | —     |       |
|                                                                                         |       |                                 |       |       |       |       |       |
| Net cash provided by (used in) financing activities                                          |       | **(1,908**                           | **)**      | (5,272     | )          | 44,998     |       |
|                                                                                         |       |                                 |       |       |       |       |       |
| Net increase  (decrease) in cash                                                             | ** ** | **(3,620**                           | **)**      | (4,363     | )          | 4,975      |       |
|                                                                                         |       |                                 |       |       |       |       |       |
| Cash at  beginning of year                                                                   | ** ** | **4,566**                            |       | 8,929      |       | 3,954      |       |
|                                                                                         |       |                                 |       |       |       |       |       |
| Cash at end of year                                                                          | ** ** | **$**                                | **946**    |       | $          | 4,566      |       | $ | 8,929 |   |

 

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

|                                                      | ** ** | **Years Ended December 31,**                                     | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                                                        | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **Fourth**                                                                      | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** | **Fourth** | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** |
| ** **                                           | ** ** | **Quarter**                                                                     | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
|                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                      | ** ** | **$**                                                                           | **34,985** | ** ** | **$** | **34,147** | ** ** | **$** | **30,774** | ** ** | **$** | **26,668** |   | $ | 25,886 | ** ** | **$** | **24,021** |   | $ | 22,029 |   | $ | 18,879 |   |
| Interest expense                                     | ** ** | **16,907**                                                                      | ** ** | **15,816** | ** ** | **13,463** | ** ** | **11,206** |   | 10,418 |   | 9,376 |   | 7,909 |   | 6,133 |   |
|                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                 | ** ** | **18,078**                                                                      | ** ** | **18,331** | ** ** | **17,311** | ** ** | **15,462** |   | 15,468 |   | 14,645 |   | 14,120 |   | 12,746 |   |
| Provision for  loan losses                           | ** ** | **11,475**                                                                      | ** ** | **1,789** | ** ** | **1,274** | ** ** | **1,206** |   | 977 |   | 635 |   | 3,822 |   | 482 |   |
|                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income after provision for loan losses |       | **6,603**                                                                       |       | **16,542** |   | **16,037** |   | **14,256** |   | 14,491 |   | 14,010 |   | 10,298 |   | 12,264 |   |
| Other income                                         | ** ** | **2,675**                                                                       | ** ** | **2,764** | ** ** | **2,611** | ** ** | **2,463** |   | 2,492 |   | 3,476 |   | 2,906 |   | 2,757 |   |
| Other expenses                                       | ** ** | **12,977**                                                                      | ** ** | **12,860** | ** ** | **12,578** | ** ** | **11,744** |   | 11,406 |   | 11,551 |   | 11,273 |   | 10,595 |   |
|                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income before  income taxes                          | ** ** | **(3,699**                                                                      | **)**      | **6,446** | ** ** | **6,070** | ** ** | **4,975** |   | 5,577 |   | 5,935 |   | 1,931 |   | 4,426 |   |
| Provision for  income taxes                          | ** ** | **(1,774**                                                                      | **)**      | **2,231** | ** ** | **2,116** | ** ** | **1,698** |   | 1,888 |   | 2,032 |   | 543 |   | 1,415 |   |
|                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                           | ** ** | **$**                                                                           | **(1,925** | **)** | **$** | **4,215** | ** ** | **$** | **3,954** | ** ** | **$** | **3,277** |   | $ | 3,689 |   | $ | 3,903 |   | $ | 1,388 |   | $ | 3,011 |   |
|                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per  share:                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                | ** ** | **$**                                                                           | **(0.14**  | **)** | **$** | **0.30** | ** ** | **$** | **0.29** | ** ** | **$** | **0.26** |   | $ | 0.29 |   | $ | 0.31 |   | $ | 0.11 |   | $ | 0.25 |   |
| Diluted                                              | ** ** | **$**                                                                           | **(0.13**  | **)** | **$** | **0.30** | ** ** | **$** | **0.28** | ** ** | **$** | **0.25** |   | $ | 0.28 |   | $ | 0.30 |   | $ | 0.11 |   | $ | 0.25 |   |

 

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

On January 30, 2006, the Company’s Board of Directors approvedthe repurchase of up to approximately 2% of the Company’s outstanding commonstock, no par value per share.  SunTrustRobinson Humphrey administered the purchases in open market transactions, onbehalf of the Company.  The purchases weremade in accordance with the volume and timing guidelines of Rule 10b-18 of theExchange Act applicable to the Company and Rule 10b5-1 of the ExchangeAct.  During the second quarter of 2006,the Company repurchased a total of 260,000 shares for a total cost of $5.6million, the maximum share repurchase permitted by the Board.

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

On February 20, 2007, the Company filed a Form 8-K with theSecurities and Exchange Commission to report the issuance of a press release onthe same date revising its results for the quarter and year ended December 31,2006 as a result of an increase in the Company’s allowance for loanlosses.  The Company reported that itwould increase its allowance for loan losses through an additional provision ofapproximately $9.7 million in the fourth quarter ended December 31, 2006.  The approximate after tax effect of thisprovision resulted in a reduction in net income of $5.9 million for the fourthquarter and year ended December 31, 2006. In addition, loans totaling $10.8 million were placed on nonaccrualstatus.

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

To the Board of Directors

GB&T Bancshares, Inc.

Gainesville, Georgia

We have audited the consolidated balancesheets of GB&T Bancshares, Inc. and Subsidiaries as of December 31, 2006and 2005, and the related consolidated statements of income, comprehensiveincome, stockholders’ equity and cash flows for each of the three years in theperiod ended December 31, 2006.  Thesefinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

We conducted our audits in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

In our opinion, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of GB&T Bancshares, Inc. and Subsidiariesas of December 31, 2006 and 2005, and the results of their operations and theircash flows for each of the three years in the period ended December 31, 2006,in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theeffectiveness of GB&T Bancshares, Inc. and Subsidiaries’ internal controlover financial reporting as of December 31, 2006, based on criteria established in*Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission.  Our report dated March 12, 2007expressed an unqualified opinion on management’s assessment of theeffectiveness of GB&T Bancshares, Inc.’s internal control over financialreporting and an opinion that GB&T Bancshares, Inc. had not maintainedeffective internal control over financial reporting as of December 31, 2006,based on criteria established in *Internal Control –Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.
|                  | /s/ MAULDIN & JENKINS, LLC |   |
|------------------|--------------------------------|--------|
|             |                           |   |
|             |                           |   |
| Atlanta, Georgia |                           |
| March 12, 2007   |                           |

 

84

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Exhibit Index
| Exhibit No. | ** ** | **Description**                                                                                 |
|-------------|------------|-------------------------------------------------------------------------------------------------|
|        |       |                                                                                            |
| 10.2        |       | Employment Agreement, by and between GB&T and  Richard A. Hunt, dated as of March 5, 2007.  |
|        |       |                                                                                            |
| 10.3        |       | Employment Agreement, by and between GB&T and  Gregory L. Hamby, dated as of March 7, 2007. |
|        |       |                                                                                            |
| 21.1        |       | Subsidiaries of the Registrant                                                                  |
|        |       |                                                                                            |
| 23.1        |       | Consent of Mauldin & Jenkins, LLC                                                           |
|        |       |                                                                                            |
| 31.1        |       | Rule 13a-14(a) Certification of Principal Executive  Officer                                    |
|        |       |                                                                                            |
| 31.2        |       | Rule 13a-14(a) Certification of Principal Financial Officer                                     |
|        |       |                                                                                            |
| 32.1        |       | Section 1350 Certification of Principal Executive  Officer                                      |
|        |       |                                                                                            |
| 32.2        |       | Section 1350 Certification of Principal Financial  Officer                                      |

 

85

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