10-Q 1 g09018e10vq.htm GEORGIA-CAROLINA BANCSHARES, INC. GEORGIA-CAROLINA BANCSHARES, INC.
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 June 30, 2007
- 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.
(Exact name of registrant as specified in its charter)
     
Georgia   58-2326075
     
(State or other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer Identification Number)
3527 Wheeler Road, Augusta, Georgia 30909
Address of principal executive offices, including zip code)
(706) 731-6600
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has 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 þ       NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o                 Accelerated filer o                 Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o       NO þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Class   Outstanding at August 13, 2007
     
Common Stock, $.001 Par Value   3,397,518 shares
 
 

 


 

GEORGIA-CAROLINA BANCSHARES, INC.
Form 10-Q
Index
                 
            Page  
PART I.          
       
 
       
Item 1.          
       
 
       
            2  
       
 
       
            3  
       
 
       
            4  
       
 
       
            5  
       
 
       
            6  
       
 
       
Item 2.       10  
       
 
       
Item 3.       17  
       
 
       
Item 4.       17  
       
 
       
Item 4T.       18  
       
 
       
PART II.          
       
 
       
Item 4.       18  
       
 
       
Item 6.       18  
       
 
       
            20  
       
 
       
            21  
       
 
       
       
CERTIFICATIONS
    22  
 EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
 EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
 EX-32.1 SECTION 906 CERTIFICATIONS OF THE CEO AND CFO

 


Table of Contents

Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
GEORGIA-CAROLINA BANCSHARES, INC.
Condensed Consolidated Balance Sheets
(Unaudited)

(dollars in thousands)
                 
    June 30,     December 31,  
    2007     2006  
ASSETS
               
Cash and due from banks
  $ 12,573     $ 11,109  
Federal funds sold
          1,182  
Securities available-for-sale
    56,482       53,273  
Loans, net of allowance for loan losses
    300,427       276,497  
Loans, held for sale
    45,354       56,758  
Bank premises and fixed assets
    10,622       10,655  
Accrued interest receivable
    2,112       1,738  
Foreclosed real estate, net of allowance
    1,122       599  
Deferred tax asset, net
    1,672       1,360  
Federal Home Loan Bank Stock
    1,291       2,131  
Other assets
    1,847       2,169  
 
           
Total assets
  $ 433,502     $ 417,471  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
               
Deposits:
               
Non-interest bearing
  $ 41,213     $ 39,848  
Interest-bearing:
               
NOW accounts
    29,066       28,447  
Savings
    69,230       53,606  
Money market accounts
    12,779       12,722  
Time deposits of $100,000, and over
    126,510       139,369  
Other time deposits
    95,799       67,350  
 
           
Total deposits
    374,597       341,342  
 
               
Borrowings:
               
Other liabilities, borrowings and retail agreements
    25,175       44,003  
 
           
Total liabilities
    399,772       385,345  
 
           
 
               
Shareholders’ equity:
               
Preferred stock, par value $.001; 1,000,000 shares authorized; none issued
           
Common stock, par value $.001; 9,000,000 shares authorized; 3,396,040 and 3,376,522 shares issued and outstanding
    4       4  
Additional paid-in-capital
    14,804       14,500  
Retained Earnings
    19,569       17,903  
Accumulated other comprehensive income (loss)
    (647 )     (281 )
 
           
Total shareholders’ equity
    33,730       32,126  
 
           
Total liabilities and shareholders’ equity
  $ 433,502     $ 417,471  
 
           
See notes to condensed consolidated financial statements.

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GEORGIA-CAROLINA BANCSHARES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
(dollars in thousands, except per share amounts)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2007     2006     2007     2006  
Interest income
                               
Interest and fees on loans
  $ 6,640     $ 5,541     $ 12,942     $ 10,700  
Interest on taxable securities
    585       326       1,160       717  
Interest on nontaxable securities
    73       142       125       177  
Interest on Federal funds sold
    84       48       167       74  
 
                       
Total interest income
    7,382       6,057       14,394       11,668  
 
                       
Interest expense
                               
Interest on time deposits of $100,000 or more
    1,604       1,100       3,305       2,017  
Interest on other deposits
    2,169       1,399       3,932       2,728  
Interest on funds purchased and other borrowings
    107       152       390       319  
 
                       
Total interest expense
    3,880       2,651       7,627       5,064  
 
                       
 
                               
Net interest income
    3,502       3,406       6,767       6,604  
 
                               
Provision for loan losses
    102       275       370       458  
 
                       
 
                               
Net interest income after provision for loan losses
    3,400       3,131       6,397       6,146  
 
                       
 
                               
Non-interest income
                               
Service charges on deposits
    315       202       618       390  
Other income/loss
    178       122       358       252  
Gain on sale of mortgage loans
    2,219       2,018       4,255       3,908  
 
                       
 
    2,712       2,342       5,231       4,550  
 
                       
 
                               
Non-interest expense
                               
Salaries and employee benefits
    2,955       2,961       5,828       5,811  
Occupancy expenses
    394       358       750       725  
Other expenses
    1,301       1,225       2,473       2,295  
 
                       
 
    4,650       4,544       9,051       8,831  
 
                       
Income before income taxes
    1,462       929       2,577       1,865  
 
                       
Income tax expense
    527       296       911       583  
 
                       
Net income
  $ 935     $ 633     $ 1,666     $ 1,282  
 
                       
 
                               
Net income per share of common stock (See Note 1)
                               
Basic
  $ 0.28     $ 0.19     $ 0.49     $ 0.38  
 
                       
Diluted
  $ 0.27     $ 0.18     $ 0.48     $ 0.37  
 
                       
Dividends per share of common stock
  $     $     $     $  
 
                       
See notes to condensed consolidated financial statements.
 
(1)   Adjusted for the 5-for-4 common stock split on April 1, 2005

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GEORGIA-CAROLINA BANCSHARES, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

(dollars in thousands)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2007     2006     2007     2006  
Net income
  $ 935     $ 633     $ 1,666     $ 1,282  
 
                               
Unrealized holding gains and (losses) arising during period, less reclassifications adjustment for gains and losses included in net income, net of tax
    (483 )     (170 )     (367 )     (219 )
 
                       
 
                               
Comprehensive income
  $ 452     $ 463     $ 1,299     $ 1,063  
 
                       
See notes to the condensed consolidated financial statements.

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GEORGIA-CAROLINA BANCSHARES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

(dollars in thousands)
                 
    Six Months Ended June 30,  
    2007     2006  
Cash flows from operating activities
               
Net income
  $ 1,666     $ 1,282  
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation and amortization
    378       391  
Provision for loan losses
    370       458  
SFAS 123R Stock option expense
    118       149  
Stock compensation
    153       52  
(Gain)/Loss on sales of other real estate
    (14 )      
Net origination & proceeds on loans originated for sale
    11,404       (11,731 )
Increase in accrued interest receivable
    (374 )     (57 )
Increase in accrued interest payable
    500       390  
Increase in deferred tax asset, net
    (106 )     (46 )
Net change in other assets and liabilities
    (356 )     (203 )
 
           
Net cash provided by (used in) operating activities
    13,739       (9,315 )
 
           
 
               
Cash flows from investing activities
               
Increase in federal funds sold
    1,182        
Loan originations and collections, net
    (25,009 )     (2,283 )
Purchases of available for sale securities
    (6,977 )     (10,780 )
Proceeds from maturities, sales & calls of available-for-sale securities, net
    3,196       2,195  
(Purchases)/sales of restricted securities
    840       (169 )
Proceeds from sale of foreclosed real estate
    200       391  
Net additions to premises and equipment
    (293 )     (706 )
 
           
Net cash used in investing activities
    (26,861 )     (11,352 )
 
           
 
               
Cash flows from financing activities
               
Net increase in deposits and funds purchased
    14,553       21,173  
Proceeds from stock options exercised
    33       60  
 
           
Net cash provided by financing activities
    14,586       21,233  
 
           
 
               
Net increase in cash and due from banks
    1,464       566  
 
               
Cash and due from banks at beginning of period
    11,109       9,498  
 
           
 
               
Cash and due from banks at end of period
  $ 12,573     $ 10,064  
 
           
See notes to the condensed consolidated financial statements.

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GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 2007
(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 have been eliminated in consolidation.
The financial statements as of June 30, 2007 and for the six months ended June 30, 2007 and 2006 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-K for the year ended December 31, 2006.
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.
Note 2 – Stock-Based Compensation
On January 1, 2006, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, to account for compensation costs under its stock option plans. The adoption of SFAS No. 123(R) resulted in an additional expense in the first six months of 2007 of approximately $118,000 relating to the expensing of stock options. Future levels of compensation cost recognized related to share-based compensation awards may be impacted by new awards and/or modifications, repurchases and cancellations of existing awards that may occur subsequent to the date of adoption of this standard.
In adopting SFAS No. 123R, the Company elected to use the modified prospective method to account for the transition from the intrinsic value method to the fair value recognition method. Under the modified prospective method, compensation cost is recognized from the adoption date forward for all new stock options granted and for any outstanding unvested awards as if the fair value method had been applied to those awards as of the date of grant.
The Company previously utilized the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (as amended) (“APB 25”). Under the intrinsic value method prescribed by APB 25, no compensation costs were recognized for the Company’s stock options because the option exercise price in its plans equals the market price on the date of grant. Prior to January 1, 2006, the Company only disclosed the pro forma effects on net income and earnings per share as if the fair value recognition provisions of SFAS 123(R) had been utilized.

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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 and other employees of the Company, diluted earnings per share are presented in the Statements of Income.
In the first quarter of 2005, the Company’s Board of Directors approved a five-for-four stock split of the Company’s common stock that was effected in the form of a stock dividend, paid on April 1, 2005 to shareholders of record on March 1, 2005. Share amounts presented in the financial statements reflect this transaction, and the transaction has been presented in the statement of shareholders’ equity. Per share information throughout the financial statements and note disclosures reflect this stock split, with prior period amounts being restated to reflect the effects of the stock split.
The following reconciles the numerators and denominators of the basic and diluted earnings per share computations:
                         
    For the Three Months Ended June 30, 2007  
            Weighted        
            Average Shares-     Per-Share  
    Numerator     Denominator     Amount  
Net income
  $ 935,000                  
Basic EPS
                       
Income available to common shareholders
    935,000       3,392,403     $ 0.28  
Effect of dilutive securities
                       
Options
            113,720          
 
                 
Diluted EPS
                       
Income available to common shareholders and assumed conversions
  $ 935,000       3,506,123     $ 0.27  
 
                 
                         
    For the Three Months Ended June 30, 2006  
            Weighted        
            Average Shares-     Per-Share  
    Numerator     Denominator     Amount  
Net income
  $ 633,000                  
Basic EPS
                       
Income available to common shareholders
    633,000       3,368,055     $ 0.19  
Effect of dilutive securities
                       
Options
            113,588          
 
                 
Diluted EPS
                       
Income available to common shareholders and assumed conversions
  $ 633,000       3,481,643     $ 0.18  
 
                 

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    For the Six Months Ended June 30, 2007  
            Weighted        
            Average Shares-     Per-Share  
    Numerator     Denominator     Amount  
Net income
  $ 1,666,000                  
Basic EPS
                       
Income available to common shareholders
    1,666,000       3,388,279     $ 0.49  
Effect of dilutive securities
                       
Options
            114,601          
 
                 
Diluted EPS
                       
Income available to common shareholders and assumed conversions
  $ 1,666,000       3,502,880     $ 0.48  
 
                 
                         
    For the Six Months Ended June 30, 2006  
            Weighted        
            Average Shares-     Per-Share  
    Numerator     Denominator     Amount  
Net income
  $ 1,282,000                  
Basic EPS
                       
Income available to common shareholders
    1,282,000       3,364,468     $ 0.38  
Effect of dilutive securities
                       
Options
            116,163          
 
                 
Diluted EPS
                       
Income available to common shareholders and assumed conversions
  $ 1,282,000       3,480,631     $ 0.37  
 
                 
Note 4 — Impact of Recently Issued Accounting Standards
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140. This Statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and resolves issues in Statement No. 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. The provisions of this statement are effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 155 did not have a material impact on the consolidated financial statements of the Company.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140. This Statement amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement 125, with respect to the accounting for separately-recognized servicing assets and servicing liabilities. The provisions of this statement are effective for fiscal years beginning after September 15, 2006. The adoption of SFAS No. 156 did not have a material impact on the consolidated financial statements of the Company.

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In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, which establishes that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this new standard has not had a material impact on the consolidated financial statements of the Company.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of this new standard to have a material impact on the consolidated financial statements of the Company.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The decision to elect the fair value option may be applied instrument by instrument, is irrevocable and is applied to the entire instrument and not to only specified risks, specific cash flows or portions of that instrument. An entity is restricted in choosing the dates to elect the fair value option for an eligible item. Adoption of SFAS 159 is effective for the Company on January 1, 2008. Early adoption is permitted, provided the entity also elects to apply the provisions of SFAS 157, Fair Value Measurements. Management of the Company is currently evaluating the potential impact of SFAS 159 on the consolidated financial statements of the Company.
Note 5 – Commitments and Contingencies
The Bank uses the same credit policies for off-balance-sheet financial instruments as it does for other instruments that are recorded in the financial statements. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. In managing the Bank’s credit and market risk exposure, the Bank may participate these commitments with other institutions when funded. The credit risk involved in issuing these financial instruments is essentially the same as that involved in extending loans to customers. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies, but may include real estate and improvements, marketable securities, accounts receivable, inventory, equipment and personal property. At June 30, 2007, the Bank had outstanding loan commitments approximating $81.6 million.
Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The amount of standby letters of credit whose contract amounts represent credit risk totaled approximately $1.6 million as of June 30, 2007.

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The Bank, as part of its retail mortgage loan production activities, routinely enters into short-term commitments to originate loans. Most of the loans will be sold to third parties upon closing. For those loans, the Bank enters into individual forward sales commitments at the same time the commitments to originate are finalized. While the forward sales commitments function as an economic offset and effectively eliminate the Bank’s financial risk of rate changes during the rate lock period, both the commitment to originate mortgage loans that will be sold and the commitment to sell the mortgage loans are derivatives, the fair values of which are essentially equal and offsetting. The fair values are calculated based on changes in market interest rates after the commitment date. The notional amounts of these mortgage loan origination commitments and the related forward sales commitments were approximately $53.2 million each at June 30, 2007. The net unrealized gains/losses of the origination and sales commitments did not have a material effect on the consolidated financial statements of the Company at June 30, 2007.
The Bank has executed individual forward sales commitments related to retail mortgage loans, which are classified as loans held for sale. The forward sales commitments on retail mortgage loans function as an economic offset and mitigate the Bank’s market risk on these loans. The notional value of the forward sales commitments on retail mortgage loans at June 30, 2007 was approximately $50.0 million. The fair value of the sales commitments on retail mortgage loans resulted in no material gains or losses to the Bank at June 30, 2007.
The nature of the business of the Bank is such that it ordinarily results in a certain amount of litigation. In the opinion of management, there are no present litigation matters in which the anticipated outcome will have a material adverse effect on the financial statements.
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, state-chartered commercial bank. The Bank operates three offices in Augusta, Georgia, two offices in Martinez, Georgia and one office in Thomson, Georgia. The Bank also operates three non-depository, mortgage origination offices in Augusta, Georgia, Savannah, Georgia and Jacksonville, Florida.
The Bank 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.

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Critical Accounting Policies
The accounting and reporting policies of the Company and 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, 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 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. 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 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 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, in part, by 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 non-performing 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

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differ from management estimates, additional provision for loan losses could be required that could adversely affect earnings or the Company’s financial position in future periods.
New Accounting Pronouncements
In September 2006, the FASB issued SFAS 157, Fair Value Measurement. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. SFAS 157 clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. SFAS 157 emphasizes that fair value is a market-based measurement and not an entity-specific measurement. It also establishes a fair value hierarchy used in fair value measurements and expands the required disclosures of assets and liabilities measured at fair value. The Company will be required to adopt this statement beginning in 2008. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial condition, results of operations, or liquidity.
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 108 (“SAB 108”). SAB 108 expresses the views of the SEC regarding the process of quantifying financial statement misstatements to determine if any restatement of prior financial statements is required. SAB 108 addresses the two techniques commonly used in practice in accumulating and quantifying misstatements, and requires that the technique with the most severe result be used in determining whether a misstatement is material. SAB 108 was adopted by the Company on December 31, 2006. As a result of adopting SAB 108 on December 31, 2006, the Company recognized a decrease of $177,000 to beginning retained earnings as of January 1, 2006. The decrease is the result of an additional payroll accrual as of December 31, 2005, which the Company has elected to correct under the guidance in SAB 108. Adopting SAB 108 also resulted in the restatement of net income for the second quarter of 2006 from $619,000 to $633,000, which was also the result of an additional payroll accrual, net of tax. Based on the method previously applied, prior to the issuance of SAB 108, the impact was considered immaterial to the Company’s consolidated financial condition, results of operations, and liquidity.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The decision to elect the fair value option may be applied instrument by instrument, is irrevocable, and is applied to the entire instrument and not to only specified risks, specific cash flows or portions of that instrument. An entity is restricted in choosing the dates to elect the fair value option for an eligible item. Adoption of SFAS 159 is effective for the Company on January 1, 2008. Early adoption is permitted, provided the entity also elects to apply the provisions of SFAS 157, Fair Value Measurements. Management of the Company is currently evaluating the potential impact of SFAS 159 on the Company’s consolidated financial condition, results of operations, and liquidity.
Results of Operations
Overview
The Company’s net income was $935,000 for the second quarter of 2007, compared to $633,000 for the second quarter of 2006, an increase of 47.7%. Basic earnings per share were $0.28 for the second quarter of 2007, compared to $0.19 for the second quarter of 2006.
The Company’s net income was $1,666,000 for the six months ended June 30, 2007, compared to $1,282,000 for the six months ended June 30, 2006, an increase of 30.0%. Basic earnings per share were $0.49 for the six months ended June 30, 2007, compared to $0.38 for the six months ended June 30, 2006.

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The Company’s return on average assets was 0.90% (annualized) for the quarter ended June 30, 2007, compared to 0.71% (annualized) for the quarter ended June 30, 2006. The Company’s return on average equity for the quarter ended June 30, 2007 was 10.94% (annualized) compared to 8.59% (annualized) for the quarter ended June 30, 2006. The Company’s return on average assets was 0.81% (annualized) for the six months ended June 30, 2007, compared to 0.73% (annualized) for the six months ended June 30, 2006. The Company’s return on average equity for the six months ended June 30, 2007 was 9.88% (annualized) compared to 8.79% (annualized) for the six months ended June 30, 2006.
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 $3,502,000 for the quarter ended June 30, 2007, an increase of $96,000 (2.8%) over net interest income of $3,406,000 for the quarter ended June 30, 2006. Net interest income was $6,767,000 for the six months ended June 30, 2007, an increase of $163,000 (2.5%) over net interest income of $6,604,000 for the six months ended June 30, 2006. This increase was primarily the result of investing increased deposit liability funds and other borrowed funds in higher yielding loans, offset by higher interest rates paid by the Bank on deposit liability funds and other borrowed funds as competitive interest rates continued to rise. Interest-earning assets were $408,251,000 at June 30, 2007 compared to $394,227,000 at December 31, 2006 and $349,380,000 at June 30, 2006, increases of $14,024,000 (3.6%) and $58,871,000 (16.9%), 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 $345,781,000 at June 30, 2007 compared to $333,255,000 at December 31, 2006 and $297,573,000 at June 30, 2006, increases of $12,526,000 (3.8%) and $48,208,000 (16.2%) respectively. The increase continues to be primarily attributable to the Company’s continuing loan growth in the Augusta, Georgia and Columbia County, Georgia market areas.
Interest Income
Interest income for the three months ended June 30, 2007 was $7,382,000, an increase of $1,325,000 (21.9%) from $6,057,000 for the three months ended June 30, 2006. Interest income for the six months ended June 30, 2007 was $14,394,000, an increase of $2,726,000 (23.4%) from $11,668,000 for the six months ended June 30, 2006. 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 higher yields on the Bank’s growing loan portfolio. Interest income and fees on loans for the three months ended June 30, 2007 were $6,640,000, an increase of $1,099,000 (19.8%) from $5,541,000 for the three months ended June 30, 2006. Interest income and fees on loans for the six months ended June 30, 2007 were $12,942,000, an increase of $2,242,000 (21.0%) from $10,700,000 for the six months ended June 30, 2006. The Bank’s opportunity to increase the investment in loans continues to be primarily attributable to the Bank’s growth in the Augusta, Georgia and Columbia County, Georgia market areas.
Interest Expense
Interest expense for the three months ended June 30, 2007 was $3,880,000, an increase of $1,229,000 (46.4%) from $2,651,000 for the three months ended June 30, 2006. Interest expense for the six months ended June 30, 2007 was $7,627,000, an increase of $2,563,000 (50.6%) from $5,064,000 for the six months ended June 30, 2006. While the Bank has experienced a significant increase in the amount of interest-bearing deposits from June 30, 2006 to June 30, 2007, interest expense on these deposits has also increased due to the higher interest rate environment.

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Provision for Loan Losses
The provision for loan losses was $102,000 for the three months ended June 30, 2007, compared to $275,000 for the three months ended June 30, 2006, representing a decrease of 62.9%. The provision for loan losses was $370,000 for the six months ended June 30, 2007, compared to $458,000 for the six months ended June 30, 2006, representing a decrease of 19.2%. This decrease is the result of management’s continuing analysis of the adequacy of the allowance for loan losses. The ratio of the allowance for loan losses to total gross loans was 1.34% at June 30, 2007 and 1.31% at December 31, 2006. Excluding the balance of loans held for sale by the Bank, the ratio of the allowance for loan losses to gross loans was 1.54% at June 30, 2007 and 1.58% at December 31, 2006. 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.
Non-interest Income
Non-interest income for the three months ended June 30, 2007 was $2,712,000, an increase of $370,000 (15.8%) from $2,342,000 for the three months ended June 30, 2006. Non-interest income for the six months ended June 30, 2007 was $5,231,000, an increase of $681,000 (15.0%) from $4,550,000 for the six months ended June 30, 2006. Service charges on deposit accounts were $315,000 for the three months ended June 30, 2007, an increase of $113,000 (55.9%) from $202,000 for the three months ended June 30, 2006. Service charges on deposit accounts were $618,000 for the six months ended June 30, 2007, an increase of $228,000 (58.5%) from $390,000 for the six months ended June 30, 2006. Gain on sale of mortgage loans originated and sold by the Bank’s mortgage division was $2,219,000 for the three months ended June 30, 2007, an increase of $201,000 (10.0%) from $2,018,000 for the three months ended June 30, 2006. Gain on sale of mortgage loans originated and sold by the Bank’s mortgage division was $4,255,000 for the six months ended June 30, 2007, an increase of $347,000 (8.9%) from $3,908,000 for the six months ended June 30, 2006. Substantially all loans originated by the division are sold in the secondary market with servicing rights released.
Non-interest Expense
Non-interest expense for the three months ended June 30, 2007 was $4,650,000, an increase of $106,000 (2.3%) from $4,544,000 for the three months ended June 30, 2006. Non-interest expense for the six months ended June 30, 2007 was $9,051,000, an increase of $220,000 (2.5%) from $8,831,000 for the six months ended June 30, 2006. Salary and employee benefit costs were $2,955,000 for the three months ended June 30, 2007, a decrease of $6,000 (0.2%) from $2,961,000 for the three months ended June 30, 2006. Salary and employee benefit costs were $5,828,000 for the six months ended June 30, 2007, an increase of $17,000 (0.3%) from $5,811,000 for the six months ended June 30, 2006. Occupancy and other non-interest expenses for the three months ended June 30, 2007 increased by $112,000 (7.1%) to $1,695,000 from $1,583,000 during the three months ended June 30, 2006. Occupancy and other non-interest expenses for the six months ended June 30, 2007 increased by $203,000 (6.7%) to $3,223,000 from $3,020,000 during the six months ended June 30, 2006. This increase was primarily a result of the continued expansion and growth of the Bank, including expenses associated with the new main office.
Income Taxes
The Company recorded income tax expense of $527,000 for the three months ended June 30, 2007, resulting from net income before taxes of $1,462,000 for the quarter. The Company recorded income tax expense of $911,000 for the six months ended June 30, 2007, resulting from net income before taxes of $2,577,000 for the period. Included in the income tax expense for the six months ended June 30, 2007 is a deferred tax valuation allowance of $18,795 related to the Georgia low income housing tax credits.

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Financial Condition
Overview
Total consolidated assets at June 30, 2007 were $433,502,000, an increase of $16,031,000 (3.8%) from December 31, 2006 total consolidated assets of $417,471,000. At June 30, 2007, loans represented 85.8% of interest-earning assets compared to 85.6% at December 31, 2006. Investments in securities at June 30, 2007 were $56,482,000, an increase of $3,209,000 (6.0%) from $53,273,000 at December 31, 2006. Interest-bearing deposits at June 30, 2007 were $333,384,000, an increase of $31,890,000 (10.6%) from the December 31, 2006 balance of $301,494,000. The Bank’s lines of credit balances with the Federal Home Loan Bank were $11,000,000 at June 30, 2007, as compared to December 31, 2006 balances of $31,828,000, a decrease of $20,828,000 (65.4%). There was a $3,123,000 shift in the Bank’s Federal funds position to funds purchased of $1,941,000 at June 30, 2007, as compared to $1,182,000 in Federal funds sold at December 31, 2006. The Bank’s retail repurchase agreements amounted to $6,918,000 at June 30, 2007, an increase of $185,000 (2.7%) from the December 31, 2006 balance of $6,733,000. The Company’s balance on its line of credit with a correspondent bank was $700,000 at both June 30, 2007 and December 31, 2006.
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 $3,373,000 at June 30, 2007, compared to $2,885,000 at December 31, 2006. The composition of non-performing assets for each date is shown below.
                 
    June 30,     December 31,  
    2007     2006  
Non-accrual loans
  $ 2,251,000     $ 2,286,000  
OREO, net of valuation allowance
    1,122,000       599,000  
 
           
 
  $ 3,373,000     $ 2,885,000  
 
           
The ratio of non-performing assets to total loans and other real estate was 0.96% at June 30, 2007 and 0.85% at December 31, 2006.
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 June 30, 2007, management determined that the allowance for loan losses should be increased through a provision for loan losses of $102,000. The ratio of the allowance for loan losses to total gross loans was 1.34% at June 30, 2007 and 1.31% at December 31, 2006. Excluding the balance of loans held for sale by the Bank, the

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ratio of the allowance for loan losses to gross loans was 1.54% at June 30, 2007 and 1.58% at December 31, 2006. 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, 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, investment maturities, federal funds lines, and other lines of credit and funding sources. 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 June 30, 2007 was 16.6%, compared to 15.1% at December 31, 2006.
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 June 30, 2007, the Bank’s Tier 1 risk-based capital ratio was 9.4% and the total risk-based capital ratio was 10.6%, compared to 9.4% and 10.7% at December 31, 2006, respectively. At June 30, 2007, the Bank’s leverage ratio was 8.4% compared to 8.1% at December 31, 2006.
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.
The following is an analysis of significant off-balance sheet financial instruments at June 30, 2007 and December 31, 2006.
                 
    At     At  
    June 30,     December 31,  
    2007     2006  
    (in thousands)  
 
           
Commitments to extend credit
  $ 81,595     $ 79,828  
Standby letters of credit
    1,608       2,389  
 
           
 
  $ 83,203     $ 82,217  
 
           

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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. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the Company’s quantitative and qualitative disclosures about market risk as of June 30, 2007 from that presented under the heading “Liquidity and Interest Rate Sensitivity” and “Market Risk” in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
Item 4. 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 the Chief Financial Officer, has evaluated the effectiveness of the design and operation of disclosure controls and procedures as of June 30, 2007 and, based on such evaluation, has concluded that these controls and procedures are effective. 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 the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There were no 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.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

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Item 4T. Controls and Procedures.
Not applicable.
Part II — OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The 2007 Annual Meeting of Shareholders of the Company (the “Annual Meeting”) was held on May 21, 2007. At the Annual Meeting, the following persons were elected as directors to serve as Class I directors, for a term of three years and until their successors are elected and qualified: Phillip G. Farr, Samuel A. Fowler, Jr., Arthur J. Gay, Jr., Joseph D. Greene, Hugh L. Hamilton, Jr., and Remer Y. Brinson, III.
The number of votes cast for and withheld in the election of each nominee for director was as follows:
                 
    Votes   Votes
    FOR   WITHHELD
Phillip G. Farr
    2,486,815       117,314  
Samuel A. Fowler, Jr.
    2,479,895       124,234  
Arthur J. Gay, Jr.
    2,488,195       115,934  
Joseph D. Greene
    2,496,327       107,802  
Hugh L. Hamilton, Jr.
    2,488,195       115,934  
Remer Y. Brinson, III
    2,488,195       115,934  
The following persons did not stand for reelection to the Board at the Annual Meeting as their term of office continued after the Annual Meeting: Patrick G. Blanchard, David W. Joesbury, Sr., John W. Lee, A. Montague Miller, Robert N. Wilson, Jr., Bennye M. Young, Larry DeMeyers, J. Randal Hall, George H. Inman, James L. Lemley, M.D. and Julian W. Osbon.
Item 6. Exhibits.
The following exhibits are filed with this Report:
         
Exhibit No.       Description
 
3.1
  -   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.

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Exhibit No.       Description
 
31.2
  -   Certification of Senior Vice President and 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.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  GEORGIA-CAROLINA BANCSHARES, INC.
 
 
August 13, 2007 
By:   /s/ Patrick G. Blanchard    
    Patrick G. Blanchard   
    President and Chief Executive Officer
(principal executive officer) 
 
 
     
August 13, 2007 
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 Exhibit
 
Exhibit 31.1
  Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
Exhibit 31.2
  Certification of Senior Vice President and 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.