##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 FORM 10-QSB þ
    
    Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
 For the quarterly period ended September 30, 2004 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. 
 Georgia
    
    58-2326075(State or other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer Identification Number)
 2805 Wrightsboro Road, Augusta, Georgia 30909 
 Issuers Telephone Number (706) 736-2100 Not Applicable 
 Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. YES  x      NO o 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 10, 2004Common Stock, $.001 Par Value
    
    2,647,400 shares
 Transitional Small Business Disclosure Format: YES o     NO x




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GEORGIA-CAROLINA BANCSHARES, INC.
Form 10-QSB Index PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of September 30, 2004
and December 31, 2003
    
    
    2Condensed Consolidated Statements of Income for the Three
Months Ended September 30, 2004 and 2003, and the Nine Months
Ended September 30, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Comprehensive
Income for the Three Months Ended September 30, 2004 and 2003,
and the Nine Months Ended September 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    10Item 3. Controls and Procedures
    
    
    16PART II OTHER INFORMATIONItem 6. Exhibits
    
    
    17SIGNATURES
    
    
    18EXHIBIT INDEXEX-31.1 302 Certification of CEOEX-31.2 302 Certification of CFOEX-32.1 906 Certifications of CEO and CFO




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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 31,2004
    
    2003ASSETSCash and due from banks
    
    $
    4,690
    
    
    $
    6,596Federal funds sold
    
    
    0
    
    
    
    8,470Securities available-for-sale
    
    
    36,467
    
    
    
    34,511Loans, net of allowance for loan losses
    
    
    210,398
    
    
    
    173,203Loans, held for sale
    
    
    41,387
    
    
    
    32,419Bank premises and fixed assets
    
    
    7,335
    
    
    
    7,123Accrued interest receivable
    
    
    1,420
    
    
    
    1,126Foreclosed real estate, net of allowance
    
    
    133
    
    
    
    59Deferred tax asset, net
    
    
    868
    
    
    
    806Federal Home Loan Bank Stock
    
    
    1,749
    
    
    
    1,083Other assets
    
    
    641
    
    
    
    629Total assets
    
    $
    305,088
    
    
    $
    266,025LIABILITIES AND SHAREHOLDERS EQUITYDepositsNon-interest bearing
    
    $
    33,917
    
    
    $
    26,326Interest-bearing:NOW accounts
    
    
    38,935
    
    
    
    31,161Savings
    
    
    59,611
    
    
    
    64,001Money market accounts
    
    
    10,632
    
    
    
    9,508Time deposits of $100,000 and over
    
    
    52,610
    
    
    
    39,986Other time deposits
    
    
    48,703
    
    
    
    50,674Total deposits
    
    
    244,408
    
    
    
    221,656Other liabilities, borrowings and retail agreements
    
    
    36,296
    
    
    
    22,505Total liabilities
    
    
    280,704
    
    
    
    244,161Shareholders equity (See Note 1)Preferred stock, par value $.001; 1,000,000 shares authorized; none issuedCommon stock, par value $.001; 9,000,000 shares authorized; 2,646,601 and 2,636,510
shares issued and outstanding
    
    
    3
    
    
    
    2Additional paid-in-capital
    
    
    13,632
    
    
    
    13,461Retained Earnings
    
    
    10,714
    
    
    
    8,227Accumulated other comprehensive income
    
    
    35
    
    
    
    174Total shareholders equity
    
    
    24,384
    
    
    
    21,864Total liabilities and shareholders equity
    
    $
    305,088
    
    
    $
    266,025
 Note 1: Shares of outstanding common stock have been adjusted to reflect the results of the 2-for-1 stock split on January 30, 2004. 2




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GEORGIA-CAROLINA BANCSHARES, INC. 
 Condensed Consolidated Statements of Income
(Unaudited)(dollars in thousands, except per share amounts) Thee Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Interest incomeInterest and fees on loans
    
    $
    3,913
    
    
    $
    3,832
    
    
    $
    10,554
    
    
    $
    10,674Interest on taxable securities
    
    
    303
    
    
    
    270
    
    
    
    920
    
    
    
    836Interest on nontaxable securities
    
    
    27
    
    
    
    12
    
    
    
    71
    
    
    
    34Interest on Federal funds sold
    
    
    0
    
    
    
    0
    
    
    
    3
    
    
    
    3Total interest income
    
    
    4,243
    
    
    
    4,114
    
    
    
    11,548
    
    
    
    11,547Interest expenseInterest on time deposits of $100,000 or more
    
    
    270
    
    
    
    268
    
    
    
    796
    
    
    
    871Interest on other deposits
    
    
    648
    
    
    
    782
    
    
    
    1,932
    
    
    
    2,582Interest on funds purchased and other borrowings
    
    
    218
    
    
    
    230
    
    
    
    365
    
    
    
    493Total interest expense
    
    
    1,136
    
    
    
    1,280
    
    
    
    3,093
    
    
    
    3,946Net interest income
    
    
    3,107
    
    
    
    2,834
    
    
    
    8,455
    
    
    
    7,601Provision for loan losses
    
    
    347
    
    
    
    313
    
    
    
    742
    
    
    
    728Net interest income after provision for loan losses
    
    
    2,760
    
    
    
    2,521
    
    
    
    7,713
    
    
    
    6,873Non-interest incomeService charges on deposits
    
    
    192
    
    
    
    187
    
    
    
    596
    
    
    
    521Other income/(loss)
    
    
    112
    
    
    
    63
    
    
    
    286
    
    
    
    195Gain on sale of mortgage loans
    
    
    2,498
    
    
    
    4,732
    
    
    
    7,282
    
    
    
    11,4922,802
    
    
    
    4,982
    
    
    
    8,164
    
    
    
    12,208Non-interest expenseSalaries and employee benefits
    
    
    2,652
    
    
    
    3,137
    
    
    
    7,761
    
    
    
    8,612Occupancy expenses
    
    
    318
    
    
    
    298
    
    
    
    939
    
    
    
    874Other expenses
    
    
    1,084
    
    
    
    1,139
    
    
    
    3,149
    
    
    
    2,9124,054
    
    
    
    4,574
    
    
    
    11,849
    
    
    
    12,398Income before income taxes
    
    
    1,508
    
    
    
    2,929
    
    
    
    4,028
    
    
    
    6,683Income tax expense
    
    
    573
    
    
    
    1,171
    
    
    
    1,541
    
    
    
    2,685Net income
    
    $
    935
    
    
    $
    1,758
    
    
    $
    2,487
    
    
    $
    3,998Net income per share of common stock (See Note 1)Basic
    
    $
    0.35
    
    
    $
    0.67
    
    
    $
    0.94
    
    
    $
    1.52Diluted
    
    $
    0.32
    
    
    $
    0.62
    
    
    $
    0.86
    
    
    $
    1.40Dividends per share of common stock
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
 Note 1: Per share amounts
have been adjusted to reflect the results of the 2-for-1 stock split on January 30, 2004. 3




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GEORGIA-CAROLINA BANCSHARES, INC. 
 Condensed Consolidated Statements of Comprehensive Income
(Unaudited)(dollars in thousands) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    935
    
    
    $
    1,758
    
    
    $
    2,487
    
    
    $
    3,998Unrealized holding gains and (losses) arising
during period, less reclassifications adjustment
for gains and losses included in net income,
net of tax
    
    
    355
    
    
    
    (289
    )
    
    
    (138
    )
    
    
    (221
    )Comprehensive income
    
    $
    1,290
    
    
    $
    1,469
    
    
    $
    2,349
    
    
    $
    3,777
 See Notes to Consolidated Financial Statements. 4




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GEORGIA-CAROLINA BANCSHARES, INC. 
 Condensed Consolidated Statements of Cash Flows
(Unaudited)(dollars in thousands) Nine Months Ended September 30,2004
    
    2003Cash flows from operating activitiesNet income
    
    $
    2,487
    
    
    $
    3,998Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    368
    
    
    
    363Provision for loan losses
    
    
    742
    
    
    
    728Net origination and proceeds
on loans originated for sale
    
    
    (8,968
    )
    
    
    8,053Stock compensation
    
    
    172
    
    
    
    105Net change in other assets and liabilities
    
    
    (581
    )
    
    
    (468
    )Net cash provided by (used in)
operating activities
    
    
    (5,780
    )
    
    
    12,779Cash flows from investing activitiesDecrease in federal funds sold
    
    
    8,470
    
    
    
    507Loan originations and collections, net
    
    
    (37,937
    )
    
    
    (19,163
    )Purchases and proceeds of securities
    
    
    (2,622
    )
    
    
    (3,070
    )Proceeds from sale of foreclosed real estate
    
    
    0
    
    
    
    317Net additions to premises and equipment
    
    
    (580
    )
    
    
    (375
    )Net cash provided by (used in)
investing activities
    
    
    (32,669
    )
    
    
    (21,784
    )Cash flows from financing activitiesNet increase (decrease) in deposits and funds purchased
    
    
    36,453
    
    
    
    8,325Issuance of common stock
    
    
    0
    
    
    
    24Net cash provided by (used in)
financing activities
    
    
    36,453
    
    
    
    8,349Net increase (decrease) in cash and due from
banks
    
    
    (1,906
    )
    
    
    (656
    )Cash and due from banks at beginning of period
    
    
    6,596
    
    
    
    7,520Cash and due from banks at end of period
    
    $
    4,690
    
    
    $
    6,864
 See Notes to Consolidated Financial Statements. 5




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GEORGIA-CAROLINA BANCSHARES, INC. 
 Notes
to Condensed Consolidated Financial Statements
September 30, 2004
(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
inter-company transactions and accounts are eliminated in consolidation. The financial statements as of September 30, 2004 and for the nine months and
three months ended September 30, 2004 and 2003 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, 2003. The financial information included herein reflects all 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. New Accounting Pronouncements During the quarter ended June 30, 2004 the Company adopted the provisions of
SEC Staff Accounting Bulletin (SAB) No. 105, Application of Accounting
Principles to Loan Commitments. This SAB provides the views of the SEC staff
regarding the application of generally accepted accounting principles to loan
commitments accounted for as derivative instruments. The adoption of this SAB
did not have a material effect on the Companys financial statements. 6




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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 Ended
    
    Three Months Ended
    
    Nine Months Ended
    
    Nine Months EndedSeptember 30, 2004
    
    September 30, 2003
    
    September 30, 2004
    
    September 30, 2003Net income as reported
    
    $
    935
    
    
    $
    1,758
    
    
    $
    2,487
    
    
    $
    3,998Earnings per share as reportedBasic:
    
    $
    0.35
    
    
    $
    0.67
    
    
    $
    0.94
    
    
    $
    1.52Diluted:
    
    $
    0.32
    
    
    $
    0.62
    
    
    $
    0.86
    
    
    $
    1.40Stock-based employee compensation cost
included in net income as reported
    
    $
    -0-
    
    
    $
    -0-
    
    
    $
    -0-
    
    
    $
    -0-Stock-based employee compensation cost
based on fair-value method
    
    $
    69
    
    
    $
    40
    
    
    $
    170
    
    
    $
    90Pro forma net income including stock-based
compensation cost based on fair-value
method
    
    $
    866
    
    
    $
    1,718
    
    
    $
    2,317
    
    
    $
    3,908Pro forma earnings per share including
stock-based compensation cost based on
fair-value methodBasic:
    
    $
    0.33
    
    
    $
    0.66
    
    
    $
    0.88
    
    
    $
    1.49Diluted:
    
    $
    0.30
    
    
    $
    0.61
    
    
    $
    0.80
    
    
    $
    1.38
 7




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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 with the Company or the Bank, diluted earnings per share have been
presented in the Statements of Income. In the first quarter of 2004 the Company paid a 100% stock dividend. Earnings
per share amounts presented in the Statements of Income from previous financial
reports have been restated from previously reported amounts to reflect the
additional shares issued in this dividend. The following reconciles the numerators and denominators of the basic and
diluted earnings per share computations: For the Three Months Ended September 30, 2004WeightedAverage Shares-
    
    Per-ShareNumerator
    
    Denominator
    
    AmountNet income
    
    $
    935,000Basic EPSIncome available to common
Shareholders
    
    
    935,000
    
    
    
    2,646,601
    
    
    $
    0.35Effect of dilutive securitiesOptions
    
    
    
    
    
    
    248,579Diluted EPSIncome available to common
shareholders and assumed
conversions
    
    $
    935,000
    
    
    
    2,895,180
    
    
    $
    0.32
 For the Three Months Ended September 30, 2003WeightedAverage Shares-
    
    Per-ShareNumerator
    
    Denominator
    
    AmountNet income
    
    $
    1,758,000Basic EPSIncome available to common
Shareholders
    
    
    1,758,000
    
    
    
    2,629,640
    
    
    $
    0.67Effect of dilutive securitiesOptions
    
    
    
    
    
    
    205,844Diluted EPSIncome available to common
shareholders and assumed
conversions
    
    $
    1,758,000
    
    
    
    2,835,484
    
    
    $
    0.62
 8




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Note 3  Earnings per share (continued) For the Nine Months Ended September 30, 2004WeightedAverage Shares-
    
    Per-ShareNumerator
    
    Denominator
    
    AmountNet income
    
    $
    2,487,000Basic EPSIncome available to common
shareholders
    
    
    2,487,000
    
    
    
    2,642,913
    
    
    $
    0.94Effect of dilutive securitiesOptions
    
    
    
    
    
    
    248,683Diluted EPSIncome available to common
shareholders and assumedconversions
    
    $
    2,487,000
    
    
    
    2,891,596
    
    
    $
    0.86
 For the Nine Months Ended September 30, 2003WeightedAverage Shares-
    
    Per-ShareNumerator
    
    Denominator
    
    AmountNet income
    
    $
    3,998,000Basic EPSIncome available to common
shareholders
    
    
    3,998,000
    
    
    
    2,622,047
    
    
    $
    1.52Effect of dilutive securitiesOptions
    
    
    
    
    
    
    233,667Diluted EPSIncome available to common
shareholders and assumed
conversions
    
    $
    3,998,000
    
    
    
    2,855,714
    
    
    $
    1.40
 9




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Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations. Overview Georgia-Carolina Bancshares, Inc. (the Company) was incorporated under the
laws of the State of Georgia on January 31, 1997 to operate as a bank holding
company pursuant to the Federal Bank Holding Company Act of 1956, as amended.
The Company is a one-bank holding company and owns 100% of the issued and
outstanding stock of First Bank of Georgia (the Bank), an independent,
locally owned state-chartered commercial bank. The Bank operates two offices in
Augusta, Georgia, two offices in Martinez, Georgia and one office in Thomson,
Georgia. The Bank operates as a locally owned bank that targets the banking needs of
individuals and small- to medium-sized businesses by emphasizing personal
service. The Bank offers a full range of deposit and lending services and is a
member of an electronic banking network that enables its customers to use the
automated teller machines of other financial institutions. In addition, the
Bank offers commercial and business credit services, as well as various
consumer credit services, including home mortgage loans, automobile loans,
lines of credit, home equity loans and home improvement loans. Critical Accounting Policies The accounting and reporting policies of the Company and the Bank are in
accordance with accounting principles generally accepted in the United States
and conform to general practices within the banking industry. Application of
these principles requires management to make estimates or judgments that affect
the amounts reported in the financial statements and the accompanying notes.
These estimates are based on information available as of the date of the
financial statements; accordingly, as this information changes, the financial
statements could reflect different estimates or judgments. Certain policies
inherently have a greater reliance on the use of estimates, and as such have a
greater possibility of producing results that could be materially different
than originally reported. Estimates or judgments are necessary when assets and liabilities are required
to be recorded at fair value, when a decline in the value of an asset not
carried on the financial statements at fair value warrants an impairment
write-down or valuation reserve to be established, or when an asset or
liability needs to be recorded contingent upon a future event. Carrying assets
and liabilities at fair value inherently results in more financial statement
volatility. The fair values and the information used to record the valuation
adjustments for certain assets and liabilities are based either on quoted
market prices or are provided by other third-party sources, when available.
When third-party information is not available, valuation adjustments are
estimated in good faith by management primarily through the use of internal
cash flow modeling techniques. Management views critical accounting policies to be those that are highly
dependent on subjective or complex judgments, estimates and assumptions, and
where changes in those estimates and assumptions could have a significant
impact on the financial statements. Management currently views the
determination of the allowance for loan losses to be the Companys only
critical accounting policy. The allowance for loan losses represents managements estimate of probable
credit losses inherent in the loan portfolio. Estimating the amount of the
allowance for loan losses requires significant judgment and the use of
estimates related to the amount and timing of expected future cash flows on
impaired loans, estimated losses on non-impaired loans based on historical loss
experience, and consideration of current economic trends and conditions, all of
which may be susceptible to significant change. The loan portfolio also
represents the largest asset type on the consolidated balance sheet. Loan
losses are charged off against the allowance, while recoveries of amounts
previously charged off are credited to the allowance. 10




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A provision for loan losses is charged to operations based on managements
periodic evaluation of the factors previously mentioned, as well as other
pertinent factors. The allowance for loan losses consists of an allocated component and an
unallocated component. The components of the allowance for loan losses
represent an estimation made pursuant to either Statement of Financial
Accounting Standards (SFAS) No. 5, Accounting for Contingencies, or SFAS 114,
Accounting by Creditors for Impairment of a Loan. The allocated component of
the allowance for loan losses reflects expected losses resulting from analyses
developed through specific credit allocations for individual loans and
historical loss experience for each loan category. The specific credit
allocations are based on regular analyses of all loans over a fixed-dollar
amount where the internal credit rating is at or below a predetermined
classification. These analyses involve a high degree of judgment in estimating
the amount of loss associated with specific loans, including estimating the
amount and timing of future cash flows and collateral values. The historical
loss element is determined using the average of actual losses incurred over
prior years for each type of loan. The historical loss experience is adjusted
for known changes in economic conditions and credit quality trends such as
changes in the amount of past due and nonperforming loans. The resulting loss
allocation factors are applied to the balance of each type of loan after
removing the balance of impaired loans from each category. There are many factors affecting the allowance for loan losses; some are
quantitative while others require qualitative judgment. Although management
believes its process for determining the allowance adequately considers all the
potential factors that could potentially result in credit losses, the process
includes subjective elements and may be susceptible to significant change. To
the extent actual outcomes differ from management estimates, additional
provisions for loan losses could be required that could adversely affect
earnings or financial position in future periods. New Accounting Pronouncements During the quarter ended June 30, 2004 the Company adopted the provisions of
SEC Staff Accounting Bulletin (SAB) No. 105, Application of Accounting
Principles to Loan Commitments. This SAB provides the views of the SEC staff
regarding the application of generally accepted accounting principles to loan
commitments accounted for as derivative instruments. The adoption of this SAB
did not have a material effect on the Companys financial statements. Results of Operations Overview The Companys net income was $935,000 for the third quarter of 2004, compared
to $1,758,000 for the third quarter of 2003, a decrease of 46.8%. Basic
earnings per share were $0.35 for the third quarter of 2004, compared to $0.67
for the third quarter of 2003. The Companys net income was $2,487,000 for the nine months ended September 30,
2004, compared to $3,998,000 for the nine months ended September 30, 2003, a
decrease of 37.8%. Basic earnings per share were $0.94 for the nine months
ended September 30, 2004, compared to $1.52 for the nine months ended September
30, 2003. The Companys return on average assets was 1.23% (annualized) for the three
months ended September 30, 2004, compared to 2.45% (annualized) for the three
months ended September 30, 2003. The Companys return on average equity for
the three months ended September 30, 2004 was 15.76% (annualized) compared to
35.10% (annualized) for the three months ended September 30, 2003. 11




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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). Net interest income was $3,107,000 for the quarter ended September 30, 2004, an
increase of $273,000 (9.6%) over net interest income of $2,834,000 for the
quarter ended September 30, 2003. Net interest income was $8,455,000 for the
nine months ended September 30, 2004, an increase of $854,000 (11.2%) over net
interest income of $7,601,000 for the nine months ended September 30, 2003.
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 continued to decline. Interest-earning assets were
$291,979,000 at September 30, 2004 compared to $251,766,000 at December 31,
2003, an increase of $40,213,000 (16.0%). 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 $251,785,000 at September 30,
2004 compared to $205,622,000 at December 31, 2003, an increase of $46,163,000
(22.5%). The increase in deposit liability funds continues to be primarily
attributable to the Companys continuing growth in the Augusta, Georgia and
Columbia County, Georgia market areas. The increase in loans also continues to
be primarily attributable to this growth. Interest Income Interest income for the three months ended September 30, 2004 was $4,243,000,
an increase of $129,000 (3.1%) from $4,114,000 for the three months ended
September 30, 2003. For the nine months ended September 30, 2004, interest
income was $11,548,000 an increase of $1,000 as compared to the nine months
ended September 30, 2003. Interest and fees on loans was $3,913,000 for the
three months ended September 30, 2004, an increase of $81,000 (2.1%) from
$3,832,000 for the three months ended September 30, 2003. For the nine months
ended September 30, 2004, interest and fees on loans was $10,554,000, a
decrease of $120,000 (1.1%) from $10,674,000 for the nine months ended
September 30, 2003. While the Banks increased investments in interest-earning
assets, particularly the Banks loan portfolio, is resulting in increased
interest income, this increase is being offset by a decrease in interest income
from the Banks mortgage loans originated for sale due to a decrease in the
volume of mortgage loans being originated. The Banks opportunity to increase
the investment in loans continues to be primarily attributable to the Banks
growth in the Augusta and Columbia County market areas. Interest Expense Interest expense for the three months ended September 30, 2004 was $1,136,000,
a decrease of $144,000 (11.3%) from $1,280,000 for the three months ended
September 30, 2003. Interest expense for the nine months ended September 30,
2004 was $3,093,000, a decrease of $853,000 (21.6%) from $3,946,000 for the
nine months ended September 30, 2003. While the Bank has experienced a
significant increase in the amount of interest-bearing deposits from September
30, 2003 to September 30, 2004, interest expense on these deposits has
decreased due to the lower interest rate environment. 12




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Non-interest Income Non-interest income for the three months ended September 30, 2004 was
$2,802,000, a decrease of $2,180,000 (43.8%) from $4,982,000 for the three
months ended September 30, 2003. Non-interest income for the nine months ended
September 30, 2004 was $8,164,000, a decrease of $4,044,000 (33.1%) from
$12,208,000 for the nine months ended September 30, 2003. Service charges on
deposit accounts were $192,000 for the three months ended September 30, 2004,
an increase of $5,000 (2.7%) from $187,000 for the three months ended September
30, 2003. Service charges on deposit accounts were $596,000 for the nine
months ended September 30, 2004, an increase of $75,000 (14.4%) from $521,000
for the nine months ended September 30, 2003. Gain on sale of mortgage loans
originated and sold by the Banks mortgage division was $2,498,000 for the
three months ended September 30, 2004, a decrease of $2,234,000 (47.2%) from
$4,732,000 for the three months ended September 30, 2003. Gain on sale of
mortgage loans originated and sold for the nine months ended September 30, 2004
was $7,282,000, a decrease of $4,210,000 (36.6%) from $11,492,000 for the nine
months ended September 30, 2003. The decrease in the gain on sale of mortgage
loans is due primarily to the unusually large number of mortgage refinancings
during 2003 resulting from historically low interest rates. Substantially all
loans originated by the division are sold in the secondary market with
servicing released. Non-interest Expense Non-interest expense for the three months ended September 30, 2004 was
$4,054,000, a decrease of $520,000 (11.4%) from $4,574,000 for the three months
ended September 30, 2003. For the nine months ended September 30, 2004 and
2003, non-interest expense was $11,849,000 and $12,398,000 respectively,
representing a decrease of 4.4%. Salary and employee benefit costs were
$2,652,000 for the three months ended September 30, 2004, a decrease of
$485,000 (15.5%) from $3,137,000 for the three months ended September 30, 2003.
Salary and employee benefit costs were $7,761,000 for the nine months ended
September 30, 2004, a decrease of $851,000 (9.9%) from $8,612,000 for the nine
months ended September 30, 2003. These decreases are primarily the result of
the Bank paying reduced incentives to mortgage personnel due to lower loan
volume and normal attrition within the mortgage division. Occupancy expenses
and other non-interest expenses for the nine months ended September 30, 2004
increased by $302,000 (8.0%) to $4,088,000 from $3,786,000 during the nine
months ended September 30, 2003. This increase was primarily a result of
planned expenditures in the areas of data processing, communications and
outside services to support the continued growth of the Bank. Income Taxes The Company recorded income tax expense of $573,000 for the three months ended
September 30, 2004, resulting from net income before taxes of $1,508,000 for
the quarter. The Company recorded income tax expense of $1,541,000 for the
nine months ended September 30, 2004, resulting from net income before taxes of
$4,028,000 for the period. Financial Condition Overview Total consolidated assets at September 30, 2004 were $305,088,000, an increase
of $39,063,000 (14.7%) from December 31, 2003 total consolidated assets of
$266,025,000. At September 30, 2004, loans represented 87.5% of
interest-earning assets compared to 82.6% at December 31, 2003. Investments in
securities at September 30, 2004 were $36,467,000, an increase of $1,956,000
(5.7%) from $34,511,000 at December 31, 2003. Interest-bearing deposits at
September 30, 2004 were $210,491,000, an increase of $15,161,000 (7.8%) from
the December 31, 2003 balance of $195,330,000. The Banks warehouse 13




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line of credit was $19,589,000 at September 30, 2004, an increase of $9,589,000
(95.9%) from the December 31, 2003 balance of $10,000,000. The Banks balance
of Federal funds purchased was $2,220,000 at September 30, 2004, as compared to
the December 31, 2003 balance of $0. The Banks retail repurchase agreements
were $1,693,000 at September 30, 2004, an increase of $309,000 (22.3%) from the
December 31, 2003 balance of $1,384,000. 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 is presented 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
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 $1,633,000 at September 30, 2004, compared to
$1,116,000 at December 31, 2003. The composition of non-performing assets for
each date is shown below. September 30,
    
    December 31,2004
    
    2003Non-accrual loans
    
    $
    1,500,000
    
    
    $
    1,057,000OREO, net of valuation allowance
    
    
    133,000
    
    
    
    59,000$
    1,633,000
    
    
    $
    1,116,000
 The ratio of non-performing assets to total loans and other real estate was
0.6% at September 30, 2004 and 0.5% at December 31, 2003. The 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, as described above under the heading
Critical Accounting Policies. During the quarter ended September 30, 2004,
management determined that the allowance for loan losses should be increased
through a provision for loan losses of $347,000. The ratio of the allowance
for loan losses to total gross loans was 1.5% at September 30, 2004 and 1.5% at
December 31, 2003. Excluding the balance of mortgage loans held for sale by
the Bank, the ratio of the allowance for loan losses to loans was 1.7% at
September 30, 2004 and 1.8% at December 31, 2003. Management considers the
current allowance for loan losses appropriate based upon its analysis of the
potential risk in the portfolio; however, there can be no assurance that
charge-offs in future periods will not exceed the allowance for loan losses or
that additional provisions will not be required. 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, 14




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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. The Banks liquidity remains adequate to meet operating and loan funding
requirements. The Banks liquidity ratio at September 30, 2004 was 14.6%,
compared to 25.4% at December 31, 2003. 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 of 4.0% for
Tier 1 risk-based capital, 8.0% for total risk-based capital and 4.0% for the
Tier 1 leverage ratio. At September 30, 2004, the Banks Tier 1 risk-based
capital was 9.9% and total risk-based capital was 11.2%, compared to 10.7% and
11.9% at December 31, 2003, respectively. At September 30, 2004, the Banks
Tier 1 leverage ratio was 8.3% compared to 8.7% at December 31, 2003. Off-Balance Sheet Arrangements In the ordinary course of business, the Bank may enter into off-balance sheet
financial instruments which are not reflected in the financial statements.
These instruments include commitments to extend credit and standby letters of
credit. Such financial instruments are recorded in the financial statements
when funds are disbursed or the instruments become payable. Following is an analysis of significant off-balance sheet financial instruments
at September 30, 2004 and December 31, 2003. At
    
    AtSeptember 30,
    
    December 31,2004
    
    2003(In thousands)Commitments to extend credit
    
    $
    68,507
    
    
    $
    48,485Standby letters of credit
    
    
    374
    
    
    
    223$
    68,881
    
    
    $
    48,708
 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. 15




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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. Management has developed and implemented a policy and procedures for reviewing
disclosure controls and procedures and internal controls over financial
reporting on a quarterly basis. Management, including the Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the design
and operation of disclosure controls and procedures as of September 30, 2004
and, based on their evaluation, the Companys Chief Executive Officer and Chief
Financial Officer have concluded that these controls and procedures are
operating effectively. Disclosure controls and procedures are the Companys
controls and other procedures that are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commissions rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by the Company in the reports that it files under the Exchange Act is
accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. There were no significant changes in the Companys internal control over
financial reporting during the Companys last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. 16




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##### Table of Contents



Part II. OTHER INFORMATION 
 Item 6.     Exhibits The following exhibits are filed with this Report: 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).31.1
    
    -
    
    Certification of President and Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    -
    
    Certification of Chief 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.
 17




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##### Table of Contents



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
Patrick G. Blanchard
President and Chief Executive Officer
(principal executive officer)
    
    November 12, 2004By:
    
    /s/James M. Thomas
James M. Thomas
Chief Financial Officer
(principal financial and accounting officer)
    
    November 12 , 2004
 18




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##### Table of Contents



EXHIBIT INDEX Exhibit No.
    
    Description of ExhibitExhibit 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 Chief 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.
 19