##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2006
 - or -
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number 0-22891
 GEORGIA-CAROLINA BANCSHARES, INC.
  Georgia
    
    58-2326075(State or other Jurisdiction of
    
    (I.R.S. Employer Identification Number)Incorporation or Organization)
 (Address of principal executive offices, including zip code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
  o o þ
  o þ
  Class
    
    Outstanding at November 14, 2006Common Stock, $.001 Par Value
    
    3,376,522 shares




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##### 



GEORGIA-CAROLINA BANCSHARES, INC.
  PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of September 30, 2006
and December 31, 2005
    
    
    2Condensed
Consolidated Statements of Income for the Three Months and Nine
Months Ended September 30, 2006 and 2005
    
    
    3Condensed Consolidated Statements of Comprehensive Income
for the Three Months and Nine Months Ended September 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 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-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF PFOEX-32.1 SECTION 906 CERTIFICATION OF CEO/PFO




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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)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCash and due from banks
    
    $
    7,078
    
    
    $
    9,498Federal funds sold
    
    
    4,360
    
    
    
    Securities available-for-sale
    
    
    51,342
    
    
    
    38,337Loans, net of allowance for loan losses
    
    
    263,807
    
    
    
    244,555Loans, held for sale
    
    
    62,125
    
    
    
    40,064Bank premises and fixed assets
    
    
    10,795
    
    
    
    10,563Accrued interest receivable
    
    
    2,023
    
    
    
    1,756Foreclosed real estate, net of allowance
    
    
    509
    
    
    
    427Deferred tax asset, net
    
    
    1,411
    
    
    
    1,341Federal Home Loan Bank Stock
    
    
    2,171
    
    
    
    1,025Other assets
    
    
    2,163
    
    
    
    1,915Total assets
    
    $
    407,784
    
    
    $
    349,481LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Non-interest bearing
    
    $
    42,442
    
    
    $
    36,986Interest-bearing:NOW accounts
    
    
    27,551
    
    
    
    33,090Savings
    
    
    53,989
    
    
    
    58,473Money market accounts
    
    
    13,704
    
    
    
    19,669Time deposits of $100,000, and over
    
    
    126,344
    
    
    
    94,763Other time deposits
    
    
    68,546
    
    
    
    61,459Total deposits
    
    
    332,576
    
    
    
    304,440Borrowings:Other liabilities, borrowings and retail agreements
    
    
    44,110
    
    
    
    16,432Total liabilities
    
    
    376,686
    
    
    
    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
    
    
    3
    
    
    
    4Additional paid-in-capital
    
    
    14,415
    
    
    
    13,974Retained Earnings
    
    
    17,164
    
    
    
    15,183Accumulated other comprehensive income (loss)
    
    
    (484
    )
    
    
    (552
    )Total shareholders equity
    
    
    31,098
    
    
    
    28,609Total liabilities and shareholders equity
    
    $
    407,784
    
    
    $
    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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest incomeInterest and fees on loans
    
    $
    5,873
    
    
    $
    5,149
    
    
    $
    16,573
    
    
    $
    13,943Interest on taxable securities
    
    
    380
    
    
    
    330
    
    
    
    1,097
    
    
    
    1,060Interest on nontaxable securities
    
    
    155
    
    
    
    41
    
    
    
    332
    
    
    
    89Interest on Federal funds sold
    
    
    28
    
    
    
    18
    
    
    
    101
    
    
    
    46Total interest income
    
    
    6,436
    
    
    
    5,538
    
    
    
    18,103
    
    
    
    15,138Interest expenseInterest on time deposits of $100,000 or more
    
    
    1,287
    
    
    
    724
    
    
    
    3,304
    
    
    
    1,825Interest on other deposits
    
    
    1,502
    
    
    
    1,253
    
    
    
    4,230
    
    
    
    3,205Interest on funds purchased and other borrowings
    
    
    423
    
    
    
    455
    
    
    
    741
    
    
    
    935Total interest expense
    
    
    3,212
    
    
    
    2,432
    
    
    
    8,275
    
    
    
    5,965Net interest income
    
    
    3,224
    
    
    
    3,106
    
    
    
    9,828
    
    
    
    9,173Provision for loan losses
    
    
    242
    
    
    
    356
    
    
    
    700
    
    
    
    1,103Net interest income after provision for loan losses
    
    
    2,982
    
    
    
    2,750
    
    
    
    9,128
    
    
    
    8,070Non-interest incomeService charges on deposits
    
    
    209
    
    
    
    186
    
    
    
    599
    
    
    
    499Other income/loss
    
    
    129
    
    
    
    133
    
    
    
    381
    
    
    
    267Gain on sale of mortgage loans
    
    
    2,097
    
    
    
    2,658
    
    
    
    6,005
    
    
    
    7,0122,435
    
    
    
    2,977
    
    
    
    6,985
    
    
    
    7,778Non-interest expenseSalaries and employee benefits
    
    
    2,991
    
    
    
    2,896
    
    
    
    8,802
    
    
    
    8,047Occupancy expenses
    
    
    367
    
    
    
    301
    
    
    
    1,092
    
    
    
    923Other expenses
    
    
    1,096
    
    
    
    1,032
    
    
    
    3,368
    
    
    
    3,0664,454
    
    
    
    4,229
    
    
    
    13,262
    
    
    
    12,036Income before income taxes
    
    
    963
    
    
    
    1,498
    
    
    
    2,851
    
    
    
    3,812Income tax expense
    
    
    281
    
    
    
    546
    
    
    
    872
    
    
    
    1,406Net income
    
    $
    682
    
    
    $
    952
    
    
    $
    1,979
    
    
    $
    2,406Net income per share of common stock (See Note 1)Basic
    
    $
    0.20
    
    
    $
    0.28
    
    
    $
    0.59
    
    
    $
    0.72Diluted
    
    $
    0.19
    
    
    $
    0.27
    
    
    $
    0.57
    
    
    $
    0.68Dividends 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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    682
    
    
    $
    952
    
    
    $
    1,979
    
    
    $
    2,406Unrealized holding gains and (losses) arising
during period, less reclassifications adjustment
for gains and losses included in net income,
net of tax
    
    
    286
    
    
    
    (33
    )
    
    
    68
    
    
    
    (234
    )Comprehensive income
    
    $
    968
    
    
    $
    919
    
    
    $
    2,047
    
    
    $
    2,172
  4




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GEORGIA-CAROLINA BANCSHARES, INC.
 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)  (dollars in thousands)
 Nine Months Ended September 30,2006
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    1,979
    
    
    $
    2,406Adjustments to reconcile net income
to net cash used in operating activities:Depreciation and amortization
    
    
    582
    
    
    
    355Provision for loan losses
    
    
    700
    
    
    
    1,103SFAS 123R Stock option expense
    
    
    223
    
    
    
    Stock compensation
    
    
    159
    
    
    
    173(Gain)/Loss on sales of other real estate
    
    
    (39
    )
    
    
    75Net origination & proceeds on loans originated for sale
    
    
    (22,061
    )
    
    
    (4,964
    )Increase in accrued interest receivable
    
    
    (267
    )
    
    
    (753
    )(Increase)
decrease in deferred tax
    
    
    (109
    )
    
    
    47Net change in other assets and liabilities
    
    
    1,195
    
    
    
    (101
    )Net cash (used in) provided by operating activities
    
    
    (17,638
    )
    
    
    (1,659
    )Cash flows from investing activitiesIncrease in federal funds sold
    
    
    (4,360
    )
    
    
    Loan originations and collections, net
    
    
    (20,575
    )
    
    
    (32,541
    )Purchases of available for sale securities
    
    
    (16,860
    )
    
    
    (11,688
    )Proceeds from maturities, sales & calls of
available-for-sale securities, net
    
    
    3,961
    
    
    
    14,269Purchases of restricted securities
    
    
    (1,146
    )
    
    
    Proceeds from sale of foreclosed real estate
    
    
    580
    
    
    
    185Net additions to premises and equipment
    
    
    (735
    )
    
    
    (2,562
    )Net cash used in investing activities
    
    
    (39,135
    )
    
    
    (32,337
    )Cash flows from financing activitiesNet increase
in deposits and funds purchased
    
    
    54,293
    
    
    
    38,410Proceeds from stock options exercised
    
    
    60
    
    
    
    65Net cash provided by financing activities
    
    
    54,353
    
    
    
    38,475Net increase/(decrease) in cash and due from banks
    
    
    (2,420
    )
    
    
    4,479Cash and due from banks at beginning of period
    
    
    9,498
    
    
    
    7,138Cash and due from banks at end of period
    
    $
    7,078
    
    
    $
    11,617
  5




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GEORGIA-CAROLINA BANCSHARES, INC.
 
 Notes to Condensed Consolidated Financial Statements
 September 30, 2006
(Unaudited)
 Note 1  Basis of Presentation
    Note 2
 Stock-Based Compensation
 Share-Based Payment
  Accounting for Stock Issued to Employees (as amended)
 6




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NineMonths EndedSeptember 30, 2005Net income, as reported
    
    $
    2,406Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    (205
    )Proforma net income including stock-based compensation
cost based on fair-value method
    
    
    2,201Earnings per share:Basic  as reported
    
    $
    .72Basic  proforma
    
    $
    .66Diluted  as reported
    
    $
    .68Diluted  proforma
    
    $
    .62
 Note 3  Earnings Per Share
   7




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For the Three Months Ended September 30, 2006WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountNet income
    
    $
    682,000Basic EPSIncome available to common shareholders
    
    
    682,000
    
    
    
    3,375,324
    
    
    $
    0.20Effect of dilutive securitiesOptions
    
    
    
    
    
    
    125,273Diluted EPSIncome available to common
shareholders and assumed
conversions
    
    $
    682,000
    
    
    
    3,500,597
    
    
    $
    0.19
 For the Three Months Ended September 30, 2005WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountNet income
    
    $
    952,000Basic EPSIncome available to common shareholders
    
    
    952,000
    
    
    
    3,343,891
    
    
    $
    0.28Effect of dilutive securitiesOptions
    
    
    
    
    
    
    177,715Diluted EPSIncome available to common
shareholders and assumed
conversions
    
    $
    952,000
    
    
    
    3,521,606
    
    
    $
    0.27
 For the Nine Months Ended September 30, 2006WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountNet income
    
    $
    1,979,000Basic EPSIncome available to common shareholders
    
    
    1,979,000
    
    
    
    3,368,126
    
    
    $
    0.59Effect of dilutive securitiesOptions
    
    
    
    
    
    
    117,412Diluted EPSIncome available to common
shareholders and assumed
conversions
    
    $
    1,979,000
    
    
    
    3,485,538
    
    
    $
    0.57
 For the Nine Months Ended September 30, 2005WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountNet income
    
    $
    2,406,000Basic EPSIncome available to common shareholders
    
    
    2,406,000
    
    
    
    3,332,964
    
    
    $
    0.72Effect of dilutive securitiesOptions
    
    
    
    
    
    
    196,129Diluted EPSIncome available to common
shareholders and assumed
conversions
    
    $
    2,406,000
    
    
    
    3,529,093
    
    
    $
    0.68
 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,
 Fair Value
Measurements
 Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109
 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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Accounting for Contingencies Accounting by Creditors for Impairment of a Loan
  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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##### Table of Contents



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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September 30,
    
    
    December 31,2006
    
    
    2005Non-accrual loans
    
    $
    1,967,000
    
    
    $
    1,708,000OREO, net of valuation allowance
    
    
    509,000
    
    
    
    427,000$
    2,476,000
    
    
    $
    2,135,000
    Liquidity and Capital Resources
    15




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Off-Balance Sheet Arrangements
   At
    
    
    AtSeptember 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Commitments to extend credit
    
    $
    75,393
    
    
    $
    66,262Standby letters of credit
    
    
    2,643
    
    
    
    1,947$
    78,036
    
    
    $
    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 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).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.
 17




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