##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
   o
    
    Transition Report Pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
  0-22891
 GEORGIA-CAROLINA BANCSHARES, INC.
  Georgia
    
    58-2326075(State or other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer Identification Number)
 3527 Wheeler Road, Augusta, Georgia 30909
 (706) 731-6600
  
  x o
  o o x
  o x
  Class
    
    Outstanding at July 31, 2006Common Stock, $.001 Par Value
    
    3,375,653 shares




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##### 



GEORGIA-CAROLINA BANCSHARES, INC.
  PagePART I .
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    2Condensed Consolidated Statements of Income for the Six Months Ended June 30, 2006 and 2005
    
    
    3Condensed Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    16Item 4.
    
    Controls and Procedures
    
    
    17PART II.
    
    OTHER INFORMATIONItem 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17Item 6.
    
    Exhibits
    
    
    18SIGNATURES
    
    
    19EXHIBIT INDEX
    
    
    20EX-10.1 EMPLOYMENT AGREEMENT W/ BRADLEY J. GREGORYEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEO/CFO




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 
 GEORGIA-CAROLINA BANCSHARES, INC.
Condensed Consolidated Balance Sheets
(Unaudited)  (dollars in thousands)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCash and due from banks
    
    $
    10,064
    
    
    $
    9,498Securities available-for-sale
    
    
    46,581
    
    
    
    38,337Loans, net of allowance for loan losses
    
    
    245,778
    
    
    
    244,555Loans, held for sale
    
    
    51,795
    
    
    
    40,064Bank premises and fixed assets
    
    
    10,931
    
    
    
    10,563Accrued interest receivable
    
    
    1,813
    
    
    
    1,756Foreclosed real estate, net of allowance
    
    
    659
    
    
    
    427Deferred tax asset, net
    
    
    1,509
    
    
    
    1,341Federal Home Loan Bank Stock
    
    
    1,194
    
    
    
    1,025Other assets
    
    
    2,051
    
    
    
    1,915Total assets
    
    $
    372,375
    
    
    $
    349,481LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Non-interest bearing
    
    $
    41,819
    
    
    $
    36,986Interest-bearing:NOW accounts
    
    
    28,433
    
    
    
    33,090Savings
    
    
    52,297
    
    
    
    58,473Money market accounts
    
    
    21,340
    
    
    
    19,669Time deposits of $100,000, and over
    
    
    109,671
    
    
    
    94,763Other time deposits
    
    
    66,051
    
    
    
    61,459Total deposits
    
    
    319,611
    
    
    
    304,440Borrowings:Other liabilities, borrowings and retail agreements
    
    
    22,816
    
    
    
    16,432Total liabilities
    
    
    342,427
    
    
    
    320,872Shareholders equity:Preferred stock, par value $.001; 1,000,000 shares authorized;
none issued
    
    
    
    
    
    
    Common stock, par value $.001; 9,000,000 shares authorized;
3,366,936 and 3,354,090 shares
issued and outstanding
    
    
    4
    
    
    
    4Additional paid-in-capital
    
    
    14,234
    
    
    
    13,974Retained Earnings
    
    
    16,481
    
    
    
    15,183Accumulated other comprehensive income (loss)
    
    
    (771
    )
    
    
    (552
    )Total shareholders equity
    
    
    29,948
    
    
    
    28,609Total liabilities and shareholders equity
    
    $
    372,375
    
    
    $
    349,481
  2




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GEORGIA-CAROLINA BANCSHARES, INC.
 Condensed Consolidated Statements of Income
(Unaudited)
(dollars in thousands, except per share amounts)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest incomeInterest and fees on loans
    
    $
    5,541
    
    
    $
    4,564
    
    
    $
    10,700
    
    
    $
    8,794Interest on taxable securities
    
    
    326
    
    
    
    367
    
    
    
    717
    
    
    
    730Interest on nontaxable securities
    
    
    142
    
    
    
    19
    
    
    
    177
    
    
    
    48Interest on Federal funds sold
    
    
    47
    
    
    
    17
    
    
    
    73
    
    
    
    28Total interest income
    
    
    6,056
    
    
    
    4,967
    
    
    
    11,667
    
    
    
    9,600Interest expenseInterest on time deposits of $100,000 or more
    
    
    1,100
    
    
    
    600
    
    
    
    2,017
    
    
    
    1,101Interest on other deposits
    
    
    1,399
    
    
    
    1,082
    
    
    
    2,728
    
    
    
    1,952Interest on funds purchased and other borrowings
    
    
    151
    
    
    
    233
    
    
    
    318
    
    
    
    480Total interest expense
    
    
    2,650
    
    
    
    1,915
    
    
    
    5,063
    
    
    
    3,533Net interest income
    
    
    3,406
    
    
    
    3,052
    
    
    
    6,604
    
    
    
    6,067Provision for loan losses
    
    
    275
    
    
    
    427
    
    
    
    458
    
    
    
    747Net interest income after provision for loan losses
    
    
    3,131
    
    
    
    2,625
    
    
    
    6,146
    
    
    
    5,320Non-interest incomeService charges on deposits
    
    
    202
    
    
    
    166
    
    
    
    390
    
    
    
    313Other income/loss
    
    
    122
    
    
    
    44
    
    
    
    252
    
    
    
    134Gain on sale of mortgage loans
    
    
    2,018
    
    
    
    2,114
    
    
    
    3,908
    
    
    
    4,3542,342
    
    
    
    2,324
    
    
    
    4,550
    
    
    
    4,801Non-interest expenseSalaries and employee benefits
    
    
    2,961
    
    
    
    2,594
    
    
    
    5,811
    
    
    
    5,151Occupancy expenses
    
    
    358
    
    
    
    300
    
    
    
    725
    
    
    
    622Other expenses
    
    
    1,246
    
    
    
    1,022
    
    
    
    2,272
    
    
    
    2,0344,565
    
    
    
    3,916
    
    
    
    8,808
    
    
    
    7,807Income before income taxes
    
    
    908
    
    
    
    1,033
    
    
    
    1,888
    
    
    
    2,314Income tax expense
    
    
    289
    
    
    
    378
    
    
    
    591
    
    
    
    860Net income
    
    $
    619
    
    
    $
    655
    
    
    $
    1,297
    
    
    $
    1,454Net income per share of common stock (See Note 1)Basic
    
    $
    0.18
    
    
    $
    0.20
    
    
    $
    0.39
    
    
    $
    0.44Diluted
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    0.37
    
    
    $
    0.41Dividends per share of common stock
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
  3




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GEORGIA-CAROLINA BANCSHARES, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)  (dollars in thousands)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    619
    
    
    $
    655
    
    
    $
    1,297
    
    
    $
    1,454Unrealized
holding gains and (losses) arising during period, less reclassifications adjustment
for gains and losses included in net income,
net of tax
    
    
    (170
    )
    
    
    98
    
    
    
    (219
    )
    
    
    (201
    )Comprehensive income
    
    $
    449
    
    
    $
    753
    
    
    $
    1,078
    
    
    $
    1,253
  4




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GEORGIA-CAROLINA BANCSHARES, INC.
 Condensed Consolidated Statements of Cash Flows
(Unaudited)  (dollars in thousands)
 Six Months Ended June 30,2006
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    1,297
    
    
    $
    1,454Adjustments to reconcile net income
to net cash used in operating activities:Depreciation and amortization
    
    
    391
    
    
    
    233Provision for loan losses
    
    
    458
    
    
    
    747SFAS 123R Stock option expense
    
    
    149
    
    
    
    Stock compensation
    
    
    52
    
    
    
    56Gain on sales of other real estate
    
    
    
    
    
    
    65Net origination & proceeds on loans originated for sale
    
    
    (11,731
    )
    
    
    3,166Increase in accrued interest receivable
    
    
    (57
    )
    
    
    Deferred income tax
    
    
    (46
    )
    
    
    Net change in other assets and liabilities
    
    
    172
    
    
    
    278Net cash (used in) provided by operating activities
    
    
    (9,315
    )
    
    
    5,999Cash flows from investing activitiesLoan originations and collections, net
    
    
    (2,283
    )
    
    
    (24,013
    )Purchases of available for sale securities
    
    
    (10,780
    )
    
    
    Proceeds from maturities, sales & calls of
available-for-sale securities, net
    
    
    2,195
    
    
    
    (Purchases) / proceeds from restricted securities
    
    
    (169
    )
    
    
    2,292Proceeds from sale of foreclosed real estate
    
    
    391
    
    
    
    119Net additions to premises and equipment
    
    
    (706
    )
    
    
    (1,512
    )Net cash used in investing activities
    
    
    (11,352
    )
    
    
    (23,114
    )Cash flows from financing activitiesNet increase in deposits and funds purchased
    
    
    21,173
    
    
    
    18,621Proceeds from stock options exercised
    
    
    60
    
    
    
    65Net cash provided by financing activities
    
    
    21,233
    
    
    
    18,686Net increase in cash and due from banks
    
    
    566
    
    
    
    1,571Cash and due from banks at beginning of period
    
    
    9,498
    
    
    
    7,138Cash and due from banks at end of period
    
    $
    10,064
    
    
    $
    8,709
  5




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GEORGIA-CAROLINA BANCSHARES, INC.
 Notes to Condensed Consolidated Financial Statements
June 30, 2006
(Unaudited)
 Note 1  Basis of presentation
    Note 2  Stock-Based Compensation
 Share-Based Payment
  6




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Accounting for Stock Issued to Employees (as amended)
 SixMonths EndedJune 30, 2005Net income, as reported
    
    $
    1,454Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    (152
    )Proforma net income including stock-based compensation
cost based on fair-value method
    
    
    1,302Earnings per share:Basic  as reported
    
    $
    .44Basic  proforma
    
    $
    .39Diluted  as reported
    
    $
    .41Diluted  proforma
    
    $
    .37
 Note 3  Earnings per share
   7




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For the Three Months Ended June 30, 2006WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountNet income
    
    $
    619,000Basic EPSIncome available to common shareholders
    
    
    619,000
    
    
    
    3,368,055
    
    
    $
    0.18Effect of dilutive securitiesOptions
    
    
    
    
    
    
    113,588Diluted EPSIncome available to common
shareholders and assumed
conversions
    
    $
    619,000
    
    
    
    3,481,643
    
    
    $
    0.18
 For the Three Months Ended June 30, 2005WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountNet income
    
    $
    655,000Basic EPSIncome available to common shareholders
    
    
    655,000
    
    
    
    3,335,827
    
    
    $
    0.20Effect of dilutive securitiesOptions
    
    
    
    
    
    
    181,635Diluted EPSIncome available to common
shareholders and assumed
conversions
    
    $
    655,000
    
    
    
    3,517,462
    
    
    $
    0.19
 For the Six Months Ended June 30, 2006WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountNet income
    
    $
    1,297,000Basic EPSIncome available to common shareholders
    
    
    1,297,000
    
    
    
    3,364,468
    
    
    $
    0.39Effect of dilutive securitiesOptions
    
    
    
    
    
    
    116,163Diluted EPSIncome available to common
shareholders and assumed
conversions
    
    $
    1,297,000
    
    
    
    3,480,631
    
    
    $
    0.37
 For the Six Months Ended June 30, 2005WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountNet income
    
    $
    1,454,000Basic EPSIncome available to common shareholders
    
    
    1,454,000
    
    
    
    3,327,410
    
    
    $
    0.44Effect of dilutive securitiesOptions
    
    
    
    
    
    
    205,335Diluted EPSIncome available to common
shareholders and assumed
conversions
    
    $
    1,454,000
    
    
    
    3,532,745
    
    
    $
    0.41
 8




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Note 4  Impact of Recently Issued Accounting Standards
 , Accounting for Certain Hybrid Financial
Instruments, an amendment of FASB Statements No. 133 and 140. Accounting for Derivative Instruments and Hedging Activities Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets
 , Accounting for Servicing of Financial Assets, an
amendment of FASB Statement No. 140. Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB
Statement 125,
 Note 5  Commitments and Contingencies
    9




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
   Critical Accounting Policies
   10




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New Accounting Pronouncements
 , Accounting for Certain Hybrid Financial
Instruments, an amendment of FASB Statements No. 133 and 140. Accounting for Derivative Instruments and Hedging Activities Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets
 , Accounting for Servicing of Financial Assets, an
amendment of FASB Statement No. 140. Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB
Statement 125,
 11




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Results of Operations
 Overview
    Net Interest Income
   Interest Income
  12




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Interest Expense
  Provision for Loan Losses
  Non-interest Income
  Non-interest Expense
  13




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Income Taxes
  Financial Condition
 Overview
   Asset Quality
   14




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June 30,
    
    
    December 31,2006
    
    
    2005Non-accrual loans
    
    $
    1,623,000
    
    
    $
    1,708,000OREO, net of valuation allowance
    
    
    659,000
    
    
    
    427,000$
    2,282,000
    
    
    $
    2,135,000
    Liquidity and Capital Resources
    15




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Off-Balance Sheet Arrangements
   At
    
    
    AtJune 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Commitments to extend credit
    
    $
    72,029
    
    
    $
    66,262Standby letters of credit
    
    
    3,056
    
    
    
    1,947$
    75,085
    
    
    $
    68,209
 Cautionary Note Regarding Forward-Looking Statements
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  16




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Item 4. Controls and Procedures.
    
 Part II  OTHER INFORMATION
 
 Item 4. Submission of Matters to a Vote of Security Holders.
   Votes
    
    
    VotesFOR
    
    
    WITHHELDPatrick G. Blanchard
    
    
    2,533,002
    
    
    
    24,712David W. Joesbury, Sr
    
    
    2,548,892
    
    
    
    8,822John W. Lee
    
    
    2,548,892
    
    
    
    8,822A. Montague Miller
    
    
    2,548,892
    
    
    
    8,822Robert N. Wilson, Jr.
    
    
    2,548,892
    
    
    
    8,822Bennye M. Young
    
    
    2,548,892
    
    
    
    8,822
  17




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Item 6. Exhibits.
  Exhibit No.
    
    
    
    Description3.1
    
    
    -
    
    Articles of Incorporation of the Company (incorporated herein by reference to Exhibit
3.1 of the Companys Registration Statement on Form SB-2 under the Securities Act of 1933,
as amended, Registration No. 333-69763).3.1.1
    
    
    -
    
    Articles of Amendment to the Articles of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.1.1 of the Companys Annual Report on Form 10-KSB for the
year ended December 31, 2000).3.2
    
    
    -
    
    By-Laws of the Company (incorporated herein by reference to Exhibit 3.2 of the
Companys Registration Statement on Form SB-2 under the Securities Act of 1933, as amended,
Registration No. 333-69763).10.1
    
    
    -
    
    Employment Arrangements with Bradley J. Gregory.31.1
    
    
    -
    
    Certification of President and Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    
    -
    
    Certification of Acting Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    
    -
    
    Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 18




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SIGNATURES
  GEORGIA-CAROLINA BANCSHARES,
INC.August 14, 2006
    By:
    /s/ Patrick G. BlanchardPatrick G. BlanchardPresident and Chief Executive
Officer
(principal executive officer)August 14, 2006
    By:
    /s/ Bradley J. Gregory, Sr.Bradley J. Gregory, Sr.Senior Vice President and Chief Financial Officer
(principal financial and accounting officer) 19




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EXHIBIT INDEX
 Exhibit No.
    
    Description of ExhibitExhibit 10.1
    
    Employment Arrangements with Bradley J. Gregory.Exhibit 31.1
    
    Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 31.2
    
    Certification of Acting Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 32.1
    
    Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 20