##### 



U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-QSB

x
    
    Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934


For the quarterly period ended September 30, 2003

o
    
    Transition Report Pursuant to 13 or 15(d) of the Securities Exchange Act
of 1934


For the transition period of  to

Commission File Number 0-22891

GEORGIA-CAROLINA BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)


Georgia
    
    58-2326075(State or other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer Identification Number)


2805 Wrightsboro Road, Augusta, Georgia 30909(Address of Principal Executive Offices)


Issuers Telephone Number (706) 736-2100

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Year)


Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

YES
    
    X
    
    NO


State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date.

Class
    
    Outstanding at November 12, 2003Common Stock, $.001 Par Value
    
    1,316,255 shares


Transitional Small Business Disclosure Format: YES  NO X





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GEORGIA-CAROLINA BANCSHARES, INC.
Form 10-QSB

Index

PART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002
    
    
    3Condensed Consolidated Statements of Income for the Three
Months Ended September 30, 2003 and 2002, and the Nine Months
Ended September 30, 2003 and 2002
    
    
    4Condensed Consolidated Statements of Comprehensive
Income for the Three Months Ended September 30, 2003 and 2002,
and the Nine Months Ended September 30, 2003 and 2002
    
    
    5Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2003 and 2002
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    10Item 3.
    
    Controls and Procedures
    
    
    14PART II
    
    OTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    16SIGNATURESEXHIBIT INDEX


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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

GEORGIA-CAROLINA BANCSHARES, INC.
Condensed Consolidated Balance Sheets
(Unaudited)(dollars in thousands)

September 30,
    
    December 31,2003
    
    2002ASSETSCash and due from banks
    
    $
    6,864
    
    
    $
    7,520Federal funds sold
    
    
    
    
    
    
    507Securities available-for-sale
    
    
    30,547
    
    
    
    27,346Loans, net of allowance for loan losses
    
    
    160,900
    
    
    
    142,934Loans, held for sale
    
    
    59,874
    
    
    
    67,927Bank premises and fixed assets
    
    
    7,183
    
    
    
    7,171Accrued interest receivable
    
    
    1,269
    
    
    
    1,245Foreclosed real estate, net of allowance
    
    
    456
    
    
    
    305Deferred tax asset, net
    
    
    552
    
    
    
    449Federal Home Loan Bank Stock
    
    
    1,083
    
    
    
    1,570Other assets
    
    
    654
    
    
    
    388Total assets
    
    $
    269,382
    
    
    $
    257,362LIABILITIES AND SHAREHOLDERS EQUITYDepositsNon-interest bearing
    
    $
    27,423
    
    
    $
    22,512Interest-bearing:NOW accounts
    
    
    31,158
    
    
    
    22,703Savings
    
    
    63,893
    
    
    
    30,763Money market accounts
    
    
    11,462
    
    
    
    11,665Time deposits of $100,000, and over
    
    
    40,747
    
    
    
    48,709Other time deposits
    
    
    52,296
    
    
    
    65,267Total deposits
    
    
    226,979
    
    
    
    201,619Other liabilities, borrowings and retail agreements
    
    
    21,607
    
    
    
    38,848Total liabilities
    
    
    248,586
    
    
    
    240,467Shareholders equityPreferred stock, par value $.001; 1,000,000 shares authorized;
none issued
    
    
    
    
    
    
    Common stock, par value $.001; 9,000,000 shares authorized;
1,315,743 and 1,307,790 shares
issued and outstanding
    
    
    1
    
    
    
    1Additional paid-in-capital
    
    
    13,423
    
    
    
    13,294Retained Earnings
    
    
    7,194
    
    
    
    3,196Accumulated other comprehensive income
    
    
    178
    
    
    
    404Total shareholders equity
    
    
    20,796
    
    
    
    16,895Total liabilities and shareholders equity
    
    $
    269,382
    
    
    $
    257,362


See Notes to Condensed Consolidated Financial Statements

3



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GEORGIA-CAROLINA BANCSHARES, INC.

Condensed Consolidated Statements of Income
(Unaudited)(dollars in thousands, except per share amounts)

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Interest incomeInterest and fees on loans
    
    $
    3,832
    
    
    $
    2,973
    
    
    $
    10,674
    
    
    $
    8,688Interest on taxable securities
    
    
    270
    
    
    
    338
    
    
    
    836
    
    
    
    966Interest on nontaxable securities
    
    
    12
    
    
    
    
    
    
    
    34
    
    
    
    Interest on Federal funds sold
    
    
    
    
    
    
    2
    
    
    
    3
    
    
    
    7Total interest income
    
    
    4,114
    
    
    
    3,313
    
    
    
    11,547
    
    
    
    9,661Interest expenseInterest on time deposits of $100,000 or more
    
    
    268
    
    
    
    401
    
    
    
    871
    
    
    
    1,212Interest on other deposits
    
    
    782
    
    
    
    796
    
    
    
    2,582
    
    
    
    2,277Interest on funds purchased and other borrowings
    
    
    230
    
    
    
    51
    
    
    
    493
    
    
    
    272Total interest expense
    
    
    1,280
    
    
    
    1,248
    
    
    
    3,946
    
    
    
    3,761Net interest income
    
    
    2,834
    
    
    
    2,065
    
    
    
    7,601
    
    
    
    5,900Provision for loan losses
    
    
    313
    
    
    
    168
    
    
    
    728
    
    
    
    382Net interest income after provision for loan losses
    
    
    2,521
    
    
    
    1,897
    
    
    
    6,873
    
    
    
    5,518Noninterest incomeService charges on deposits
    
    
    187
    
    
    
    140
    
    
    
    521
    
    
    
    396Other income/(loss)
    
    
    63
    
    
    
    (110
    )
    
    
    195
    
    
    
    (30
    )Gain on sale of mortgage loans
    
    
    4,732
    
    
    
    2,257
    
    
    
    11,492
    
    
    
    6,8134,982
    
    
    
    2,287
    
    
    
    12,208
    
    
    
    7,179Noninterest expenseSalaries and employee benefits
    
    
    3,137
    
    
    
    2,183
    
    
    
    8,612
    
    
    
    5,975Occupancy expenses
    
    
    298
    
    
    
    246
    
    
    
    874
    
    
    
    745Other expenses
    
    
    1,139
    
    
    
    813
    
    
    
    2,912
    
    
    
    2,4574,574
    
    
    
    3,242
    
    
    
    12,398
    
    
    
    9,177Income before income taxes
    
    
    2,929
    
    
    
    942
    
    
    
    6,683
    
    
    
    3,520Income tax expense
    
    
    1,171
    
    
    
    331
    
    
    
    2,685
    
    
    
    1,328Net income
    
    $
    1,758
    
    
    $
    611
    
    
    $
    3,998
    
    
    $
    2,192Net income per share of common stockBasic
    
    $
    1.34
    
    
    $
    0.47
    
    
    $
    3.05
    
    
    $
    1.69Diluted
    
    $
    1.23
    
    
    $
    0.44
    
    
    $
    2.81
    
    
    $
    1.57Dividends per share of common stock
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    


See Notes to Condensed Consolidated Financial Statements

4



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GEORGIA-CAROLINA BANCSHARES, INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)(dollars in thousands)

Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302003
    
    2002
    
    2003
    
    2002Net income (loss)
    
    $
    1,758
    
    
    $
    611
    
    
    $
    3,998
    
    
    $
    2,192Unrealized holding gains and (losses) arising
during period, less reclassifications adjustment
for gains and losses included in net income,
net of tax
    
    
    (289
    )
    
    
    114
    
    
    
    (221
    )
    
    
    227Comprehensive income (loss)
    
    $
    1,469
    
    
    $
    725
    
    
    $
    3,777
    
    
    $
    2,419


See Notes to Condensed Consolidated Financial Statements

5



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GEORGIA-CAROLINA BANCSHARES, INC.

Condensed Consolidated Statements of Cash Flows
(Unaudited)(dollars in thousands)

Nine Months Ended September 30,2003
    
    2002Cash flows from operating activitiesNet income
    
    $
    3,998
    
    
    $
    2,192Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    363
    
    
    
    330Provision for loan losses
    
    
    728
    
    
    
    382Net origination and proceeds
on loans originated for sale
    
    
    8,053
    
    
    
    6,650Stock compensation
    
    
    105
    
    
    
    72Deferred income tax
    
    
    27
    
    
    
    (74
    )Net change in other assets and liabilities
    
    
    (495
    )
    
    
    (1,554
    )Net cash provided by (used in)
operating activities
    
    
    12,779
    
    
    
    7,998Cash flows from investing activitiesDecrease/(Increase) in federal funds sold
    
    
    507
    
    
    
    (384
    )Loan originations and collections, net
    
    
    (19,163
    )
    
    
    (21,602
    )Purchases of available-for-sale and other securities
    
    
    (14,411
    )
    
    
    (9,732
    )Proceeds from maturities, sales, and calls of
available-for-sale securities
    
    
    11,341
    
    
    
    4,843Proceeds from sale of foreclosed real estate
    
    
    317
    
    
    
    70Net additions to premises and equipment
    
    
    (375
    )
    
    
    (609
    )Net cash provided by (used in)
investing activities
    
    
    (21,784
    )
    
    
    (27,414
    )Cash flows from financing activitiesNet increase (decrease) in deposits and
funds purchased
    
    
    8,325
    
    
    
    22,433Issuance of common stock
    
    
    24
    
    
    
    Net cash provided by (used in)
financing activities
    
    
    8,349
    
    
    
    22,433Net increase (decrease) in cash and due from
banks
    
    
    (656
    )
    
    
    3,017Cash and due from banks at beginning of period
    
    
    7,520
    
    
    
    3,316Cash and due from banks at end of period
    
    $
    6,864
    
    
    $
    6,333


See Notes to Condensed Consolidated Financial Statements

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GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements
September 30, 2003
(Unaudited)

Note 1  Basis of presentation

The accompanying condensed consolidated financial statements include the
accounts of Georgia-Carolina Bancshares, Inc. (the Company) and its wholly
owned subsidiary, First Bank of Georgia (the Bank). Significant intercompany
transactions and accounts are eliminated in consolidation.

The financial statements as of September 30, 2003 and for the nine months ended
and three months ended September 30, 2003 and 2002 are unaudited and have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant
to such rules and regulations. These condensed consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Companys Annual Report on Form 10-KSB for
the year ended December 31, 2002.

The financial information included herein reflects all adjustments (consisting
of normal recurring adjustments) which are, in the opinion of management,
necessary to a fair presentation of the financial position and results of
operations for interim periods.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.

The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the
determination of the estimated losses on loans, management may obtain
independent appraisals for significant collateral. While management uses
available information to recognize losses on loans, further reductions in the
carrying amounts of loans may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the estimated losses on loans. Such
agencies may require the Bank to recognize additional losses based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the estimated losses
on loans may change materially in the near term. However, the amount of the
change that is reasonably possible cannot be estimated.

7



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Note 2  Stock-based compensation

The Company accounts for stock-based compensation utilizing the intrinsic value
method. Presented below is certain actual financial information of the Company
with comparative pro forma information determined as if the Company had
accounted for the stock-based compensation for the periods presented utilizing
the fair-value method (in thousands, except per share amounts).

Three Months
    
    Three Months
    
    Nine
Months
    
    Nine
MonthsEnded
    
    Ended
    
    Ended
    
    EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net income as reported
    
    $
    1,758
    
    
    $
    611
    
    
    $
    3,998
    
    
    $
    2,192Earnings per share as reportedBasic:
    
    $
    1.34
    
    
    $
    .47
    
    
    $
    3.05
    
    
    $
    1.69Diluted:
    
    $
    1.23
    
    
    $
    .44
    
    
    $
    2.81
    
    
    $
    1.57Stock-based employee compensation cost
included in net income as reported
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Stock-based employee compensation cost
based on fair-value method
    
    $
    40
    
    
    $
    29
    
    
    $
    90
    
    
    $
    103Pro forma net income including
stock-based compensation cost based on
fair-value method
    
    $
    1,718
    
    
    $
    582
    
    
    $
    3,908
    
    
    $
    2,089Pro forma earnings per share including
stock-based compensation cost based on
fair-value methodBasic:
    
    $
    1.31
    
    
    $
    .45
    
    
    $
    2.98
    
    
    $
    1.61Diluted:
    
    $
    1.21
    
    
    $
    .42
    
    
    $
    2.75
    
    
    $
    1.50


Note 3  Earnings per share

Earnings per share are calculated on the basis of the weighted average number
of shares outstanding. As the Company has granted stock options to certain
officers and others within the Company, diluted earnings per share has been
presented in the Statements of Income.

In the fourth quarter of 2002, the Company paid a 15% stock dividend. The
September 30, 2002 earnings per share amounts presented in the Statements of
Income have been restated from previously reported amounts to reflect the
additional shares issued in connection with this dividend.

8



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The following reconciles the numerators and denominators of the basic and
diluted earnings per share computations:

Nine Months ended September 30,2003
    
    2002Basic Earnings Per Share:(Income available to common shareholders)Weighted average common shares outstanding
    
    
    1,311,005
    
    
    
    1,300,240Net income
    
    $
    3,998,000
    
    
    $
    2,192,000Basic earnings per share
    
    $
    3.05
    
    
    $
    1.69Diluted Earnings Per Share:(Income available to common shareholders and assumed conversions)Weighted average common shares outstanding
    
    
    1,311,005
    
    
    
    1,300,240Effect of dilutive securities (Options)
    
    
    111,763
    
    
    
    94,148Total weighted average common shares and
common stock equivalents
    
    
    1,422,768
    
    
    
    1,394,388Net income
    
    $
    3,998,000
    
    
    $
    2,192,000Diluted earnings per share
    
    $
    2.81
    
    
    $
    1.57


Three Months ended September 30,2003
    
    2002Basic Earnings Per Share:(Income available to common shareholders)Weighted average common shares outstanding
    
    
    1,314,785
    
    
    
    1,302,539Net income
    
    $
    1,758,000
    
    
    $
    611,000Basic earnings per share
    
    $
    1.34
    
    
    $
    0.47Diluted Earnings Per Share:(Income available to common shareholders
and assumed conversions)Weighted average common shares outstanding
    
    
    1,314,785
    
    
    
    1,302,539Effect of dilutive securities (Options)
    
    
    110,348
    
    
    
    97,257Total weighted average common shares and
common stock equivalents
    
    
    1,425,133
    
    
    
    1,399,796Net income
    
    $
    1,758,000
    
    
    $
    611,000Diluted earnings per share
    
    $
    1.23
    
    
    $
    0.44


9



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Overview

The Companys net income was $1,758,000 for the third quarter of 2003,
compared to $611,000 for the third quarter of 2002, an increase of 188%. Net
income for the nine months ended September 30, 2003 was $3,998,000, as compared
to $2,192,000 for the nine months ended September 30, 2002, an increase of 82%.
Basic earnings per share were $1.34 for the third quarter of 2003 compared to
$0.47 for the third quarter of 2002, and were $3.05 for the nine months ended
September 30, 2003, compared to $1.69 for the nine months ended September 30,
2002. Total consolidated assets at September 30, 2003 were $269,382,000, an
increase of $12,020,000 (4.7%) from December 31, 2002 total consolidated assets
of $257,362,000, and an increase of $40,149,000 (17.5%) from September 30, 2002
total consolidated assets of $229,233,000.

The Companys growth in assets from September 30, 2002 and December 31,
2002 to September 30, 2003 is substantially the result of increased customer
deposits obtained and used by the Bank primarily as an investment in loans.
This increase in deposits and loans is the result of the Banks continued
growth in the Augusta, Georgia market area. This growth in loans also resulted
in increased interest income for the nine months ended September 30, 2003
compared to the nine months ended September 30, 2002. During 2002 and 2003 a
significant factor contributing to the growth in the assets of the Company has
been the growth in mortgage loans originated and held for sale in the secondary
market. Loans held for sale were approximately $60 million at September 30,
2003, compared to $67 million at December 31, 2002. During 2002 and 2003 the
interest rate environment has been conducive to a high level of lending volume
and profitability for the Company in the origination and sale of these mortgage
loans.

The Company also had an increase in the gain on sale of mortgage loans
originated by the Banks mortgage division for both the three and nine month
periods ended September 30, 2003 compared to the three and nine month periods
ended September 30, 2002. This increase in the gain on sale of mortgage loans
was the result of the Banks continued focus on the development of this
division and an interest rate environment conducive to growth in mortgage
originations and refinancing transactions. See Noninterest Income below. In
addition, during the first quarter of 2003, the Banks mortgage division opened
a satellite office in the Orlando, Florida market.

The Companys return on average assets was 2.02% (annualized) for the nine
months ended September 30, 2003, compared to 1.34% (annualized) for the nine
months ended September 30, 2002. The Companys return on average equity for
the nine months ended September 30, 2003 was 28.29% (annualized) compared to
20.23% (annualized) for the nine months ended September 30, 2002.

Further discussion of significant items affecting net income are discussed
in detail below.

Net Interest Income

Net interest income is the difference between the interest and fees earned
on loans, securities, and other interest-earning assets (interest income) and
the interest paid on deposits and borrowed funds (interest expense). Higher
net interest income is a result of the relationship between the
interest-earning assets and interest-bearing liabilities.

Net interest income was $2,834,000 for the quarter ended September 30,
2003, an increase of $769,000 (37.2%) over net interest income of $2,065,000
for the quarter ended September 30, 2002. Net interest income was $7,601,000
for the nine months ended September 30, 2003, an increase of $1,701,0000
(28.8%) over net interest income of $5,900,000 for the nine months ended
September 30, 2002. This increase was primarily the result of investing
increased deposit liability funds and other borrowed funds in loans and a
decrease in the interest rates paid by the Bank on deposit liability funds and
other borrowed funds as competitive interest rates

10



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##### 



continued to decline. Interest-earning assets were $251,321,000 at September
30, 2003 compared to $238,207,000 at December 31, 2002 and $211,539,000 at
September 30, 2002, an increase of $13,114,000 (5.5%) and $39,782,000 (18.8%),
respectively. Loans, including loans held for sale, are the highest yielding
component of interest-earning assets. Total loans, net of the allowance for
loan losses, were $220,774,000 at September 30, 2003 compared to $210,861,000
at December 31, 2002 and $186,345,000 at September 30, 2002, an increase of
$9,913,000 (4.7%) and $34,429,000 (18.5%), respectively. The increase in
deposit liability funds continues to be primarily attributable to the Companys
continuing growth in the Augusta, Georgia market area. The increase in loans
also continues to be primarily attributable to this growth.

Loans held for sale by the Bank are primarily funded by the Bank through
customer deposits, short-term borrowings, and lines-of-credit. Substantially
all loans originated by the Banks mortgage lending operation are sold in the
secondary market following origination. At September 30, 2003, loans
represented 87.8% of interest-earning assets compared to 88.5% at December 31,
2002, and 88.1% at September 30, 2002. Investments in securities at September
30, 2003 were $30,547,000, an increase of $3,201,000 (11.7%) from $27,346,000 at
December 31, 2002. Interest-bearing deposits at September 30, 2003 were
$199,556,000. This represents an increase of $20,449,000 (11.4%) from the
December 31, 2002 balance of $179,107,000 and an increase of $35,160,000
(21.4%) from the September 30, 2002 balance of $164,396,000. The Banks
warehouse line-of-credit was $11,101,000 at September 30, 2003, a decrease of
$22,420,000 (66.9%) from the December 31, 2002 balance of $33,521,000, and a
decrease of $4,387,000 (28.3%) from the September 30, 2002 balance of
$15,488,000. The Banks balance of Federal funds purchased was $4,767,000 at
September 30, 2003. The Bank had no Federal funds purchased as of December 31,
2002 and September 30, 2002. The Banks retail repurchase agreements were
$2,830,000 at September 30, 2003, an increase of $626,000 (28.4%) from the
December 31, 2002 balance of $2,204,000, and an increase of $331,000 (13.3%)
from the September 30, 2002 balance of $2,499,000.

Interest Income

Interest income for the three months ended September 30, 2003 was
$4,114,000, an increase of $801,000 (24.2%) from $3,313,000 for the three
months ended September 30, 2002. For the nine months ended September 30, 2003,
interest income was $11,547,000 an increase of $1,886,000 (19.5%) from
$9,661,000 for the nine months ended September 30, 2002. The increase in
interest income primarily resulted from an increase in interest and fees on
loans. The increase in interest and fees on loans resulted from the Banks
increased investment in the loan portfolio. Interest income and fees on loans
was $3,832,000 for the three months ended September 30, 2003, an increase of
$859,000 (28.9%) from $2,973,000 for the three months ended September 30, 2002.
For the nine months ended September 30, 2003, interest and fees on loans was
$10,674,000, an increase of $1,986,000 (22.9%) from $8,688,000 for the nine
months ended September 30, 2002. The Bank has maintained an increasing level
of interest income and fees on loans for the three and nine months ended
September 30, 2003 when compared to the three and nine months ended September
30, 2002 in a declining rate environment primarily as a result of increasing
the Banks investment in loans.

Interest Expense

Interest expense for the three months ended September 30, 2003 was
$1,280,000, an increase of $32,000 (2.6%) from $1,248,000 for the three months
ended September 30, 2002. Interest expense for the nine months ended September
30, 2003 was $3,946,000, an increase of $185,000 (4.9%) from $3,761,000 for the
nine months ended September 30, 2002. While the Bank has experienced an
increase in interest-bearing deposits from September 30, 2002 to September 30,
2003, interest expense on these deposits has decreased due to the generally
lower rate environment in which these funds were obtained.

Noninterest Income

Noninterest income for the three months ended September 30, 2003 was
$4,982,000, an increase of $2,695,000 (117.8%) from $2,287,000 for the three
months ended September 30, 2002. For the nine months

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ended September 30, 2003, noninterest income was $12,208,000 compared to
$7,179,000 for the nine months ended September 30, 2002, an increase of
$5,029,000 (70.1%). Service charges on deposit accounts were $187,000 for the
three months ended September 30, 2003, an increase of $47,000 (33.6%) from
$140,000 for the three months ended September 30, 2002. Service charges for
the nine months ended September 30, 2003 were $521,000, an increase of $125,000
(31.6%) from $396,000 for the nine months ended September 30, 2002. Gain on
sale of mortgage loans originated and sold by the Banks mortgage division was
$4,732,000 for the three months ended September 30, 2003, an increase of
$2,475,000 (109.7%) from $2,257,000 for the three months ended September 30,
2002. For the nine months ended September 30, 2003, gain on sale of mortgage
loans originated and sold was $11,492,000, an increase of $4,679,000 (68.7%)
from $6,813,000 for the nine months ended September 30, 2002. Substantially
all loans originated by the division are sold in the secondary market with
servicing released.

Noninterest Expense

Noninterest expense for the three months ended September 30, 2003 was
$4,574,000, an increase of $1,332,000 (41.1%) from $3,242,000 for the three
months ended September 30, 2002. For the nine months ended September 30, 2003,
noninterest expense was $12,398,000 an increase of $3,221,000 (35.1%) from
$9,177,000 for the nine months ended September 30, 2002. Salary and employee
benefit costs were $3,137,000 for the three months ended September 30, 2003, an
increase of $954,000 (43.7%) from $2,183,000 for the three months ended
September 30, 2002. Salary and employee benefit costs were $8,612,000 for the
nine months ended September 30, 2003, an increase of $2,637,000 (44.1%) from
$5,975,000 for the nine months ended September 30, 2002. These increases are
the result of the Bank hiring additional personnel to operate the Furys Ferry
office in Columbia County, the reestablishment of the Banks mortgage
operations in Savannah, Georgia, and continued growth in the Banks and
mortgage divisions operations. Occupancy expenses and other expenses for the
three and nine months ended September 30, 2003 also increased from the three
and nine months ended September 30, 2002, primarily as a result of the
continued growth of the Bank with costs to support the operations.

Income Taxes

The Company recorded income tax expense of $1,171,000 for the three months
ended September 30, 2003, resulting from the net income before taxes of
$2,929,000 for the quarter. The Company recorded income tax expense of
$2,685,000 for the nine months ended September 30, 2003, resulting from the net
income before taxes of $6,683,000 for this period.

REVIEW OF FINANCIAL CONDITION

Overview

Management continuously monitors the financial condition of the Bank in
order to protect depositors, increase retained earnings and protect current and
future earnings. Further discussion of significant items affecting the Banks
financial condition are discussed in detail below.

Asset Quality

A major key to long-term earnings growth is the maintenance of a
high-quality loan portfolio. The Banks directive in this regard is carried
out through its policies and procedures for extending credit to the Banks
customers. The goal and result of these policies and procedures is to provide
a sound basis for new credit extensions and an early recognition of problem
assets to allow the most flexibility in their timely disposition.

Non-performing assets were $1,600,000 at September 30, 2003, compared to
$910,000 at December 31, 2002 and $1,850,000 at September 30, 2002. The
composition of non-performing assets for each date is shown below.

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September 30,
    
    December 31,
    
    September 30,2003
    
    2002
    
    2002Non-accrual loans
    
    $
    1,103,000
    
    
    $
    597,000
    
    
    $
    1,545,000OREO, net of valuation allowance
    
    
    456,000
    
    
    
    305,000
    
    
    
    305,000Repossessed collateral
    
    
    41,000
    
    
    
    8,000
    
    
    
    $
    1,600,000
    
    
    $
    910,000
    
    
    $
    1,850,000


The ratio of non-performing assets to total loans and other real estate
was 0.72% at September 30, 2003, 0.43% at December 31, 2002, and 0.99% at
September 30, 2002.

Reduction and disposition of non-performing assets is a management
priority.

Additions to the allowance for loan losses are made periodically to
maintain the allowance at an appropriate level based upon managements analysis
of potential risk in the loan portfolio. The amount of the loan loss allowance
and related provision is determined by an evaluation of the level of loans
outstanding, the level of non-performing loans, historical loan loss experience
delinquency trends, the amount of actual losses charged to the allowance in a
given period, and assessment of present and anticipated economic conditions.
From the previously described analysis, management determined that the
allowance for loan losses should be increased through a provision for loan
losses of $313,000 during the quarter ended September 30, 2003. The ratio of
allowance for loan losses to total gross loans was 1.36% at September 30, 2003,
1.14% at December 31, 2002 and 1.35% at September 30, 2002. Excluding the
balance of loans held for sale by the Bank, the ratio of allowance for loan
losses to loans was 1.85% at September 30, 2003, 1.68% at December 31, 2002 and
1.86% at September 30, 2002. Management considers the current allowance for
loan losses appropriate based upon its analysis of the potential risk in the
portfolio, although there can be no assurance that the assumptions underlying
such analysis will continue to be correct.

Liquidity and Capital Resources

Liquidity is the ability of an organization to meet its financial
commitments and obligations on a timely basis. These commitments and
obligations include credit needs of customers, withdrawals by depositors, and
payment of operating expenses and dividends. The Bank does not anticipate any
events which would require liquidity beyond that which is available through
deposit growth, federal funds balances, warehouse lines and other funding
sources or investment portfolio maturities. The Bank actively manages the
levels, types and maturities of earning assets in relation to the sources
available to fund current and future needs to ensure that adequate funding will
be available at all times.

Management believes that the Banks liquidity remains adequate to meet
operating and loan funding requirements. The Banks liquidity ratio at
September 30, 2003 was 31.9%, compared to 39.6% at December 31, 2002, and
36.6% at September 30, 2002.

Management is committed to maintaining capital at a level sufficient to
protect depositors, provide for reasonable growth, and fully comply with all
regulatory requirements. Managements strategy to achieve this goal is to
retain sufficient earnings while providing a reasonable return on equity.
Federal banking regulations establish certain capital adequacy standards
required to be maintained by banks. These regulations set minimum requirements
for risk-based capital of 4% for core capital (Tier I), 8% for total
risk-based capital and 4% for the leverage ratio. At September 30, 2003, the
Banks Tier I capital was 10.18% and total risk-based capital was 11.43%,
compared to 9.15% and 10.39% at year-end December 31, 2002, respectively. At
September 30, 2003, the Banks leverage ratio was 6.92% compared to 7.17% at
December 31, 2002.

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Cautionary Note Regarding Forward-Looking Statements

The Company may, from time to time, make written or oral forward-looking
statements, including statements contained in the Companys filings with the
Securities and Exchange Commission (the Commission) and its reports to
stockholders. Such forward-looking statements are made based on managements
belief as well as assumptions made by, and information currently available to,
management pursuant to safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.

The Companys actual results may differ materially from the results
anticipated in these forward-looking statements due to a variety of factors,
including governmental monetary and fiscal policies, deposit levels,
loan demand, loan collateral values, securities portfolio values and interest
rate risk management; the effects of competition in the banking business from
other commercial banks, savings and loan associations, mortgage banking firms,
consumer finance companies, credit unions, securities brokerage firms,
insurance companies, money market mutual funds and other financial institutions
operating in the Companys market area and elsewhere, including institutions
operating through the Internet; changes in government regulations relating to
the banking industry, including regulations relating to branching and
acquisitions; failure of assumptions underlying the establishment of reserves
for loan losses, including the value of collateral underlying delinquent loans,
and other factors. The Company cautions that such factors are not exclusive.
The Company does not undertake to update any forward-looking statements that
may be made from time to time by, or on behalf of, the Company.

Item 3. Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer have evaluated the
Companys disclosure controls and procedures as of the end of the quarterly
period covered by this Report on Form 10-QSB and have concluded that the
Companys disclosure controls and procedures are effective. During the third
quarter of 2003, there were no changes in the Companys internal control over
financial reporting that have materially affected, or that are reasonably
likely to materially affect, the Companys internal control over financial
reporting.

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Part II
OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

On July 18, 2003, the Company issued 2,000 shares of its common stock as a
result of the exercise of certain non-qualified options. The Company received
$24,000 in consideration of this issuance. The issuance of the common stock
was made in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended, as a transaction by an issuer
not involving a public offering. All of the securities were acquired by the
recipient thereof for investment and with no view toward the resale or
distribution thereof. The purchaser had a preexisting relationship with the
Company, the offer and sale was made without any public solicitation, and the
stock certificate bears a restrictive legend. No underwriter was involved in
the transaction and no commissions were paid.

Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits.
| | --- |  | ---------

Exhibit 31.1
    
    Certification of President and Chief Executive Officer
Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.Exhibit 31.2
    
    Certification of Chief Financial Officer Pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.Exhibit 32.1
    
    Certification Pursuant to Section 906 of Sarbanes-Oxley
Act of 2002.




| | (b) |  | Reports on Form 8-K. The Company furnished a Current Report
on Form 8-K on July 18, 2003 with respect to its financial results
for the quarter ended June 30, 2003.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Georgia-Carolina Bancshares, Inc.

By:
    
    /s/ Patrick G. Blanchard
    
    November 12, 2003Patrick G. Blanchard
    
    DatePresident and Chief Executive Officer(principal executive officer)By:
    
    /s/ James M. Thomas
    
    November 12, 2003James M. Thomas
    
    DateChief Financial Officer(principal financial and accounting officer)


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EXHIBIT INDEX

Exhibit No.
    
    Description of ExhibitExhibit 31.1
    
    Certification of President and Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.Exhibit 31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.Exhibit 32.1
    
    Certifications Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.