10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

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 No. 0-22891

GEORGIA-CAROLINA BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Georgia	58-2326075
(State of Incorporation)	(I.R.S. Employer Identification Number)
3527 Wheeler Road
Augusta, Georgia	30909
(Address of Principal Executive Offices)	(Zip Code)

(706) 731-6600

(Registrant’s telephone number, including area code)

Securities registered under Section 12(b) of the Act:

Title of Each Class	Name of each exchange on which registered
None	None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $0.001 Par Value
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o No þ

Indicate by check mark whether the issuer has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ YES o NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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). o YES þ NO

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (2,403,861 shares), on March 20, 2007 was $33,053,089 based on the closing price of the registrant’s common stock as reported on the Over-the-Counter Bulletin Board on March 20, 2007. For purposes of this response, officers, directors and holders of 5% or more of the registrant’s common stock are considered affiliates of the registrant at that date. As of March 20, 2007, 3,388,116 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrant’s definitive proxy statement to be delivered to shareholders in connection with the 2007 Annual Meeting of Shareholders scheduled to be held on May 21, 2007 are incorporated by reference in response to Part III of this Report.

GEORGIA-CAROLINA BANCSHARES, INC.
2006 Form 10-K Annual Report

TABLE OF CONTENTS

Item Number		Page or
In Form 10-K	Description	Location
PART I
Item 1.	Business		1
Item 1A.	Risk Factors		9
Item 1B.	Unresolved Staff Comments		13
Item 2.	Properties		13
Item 3.	Legal Proceedings		14
Item 4.	Submission of Matters to a Vote of Security Holders		14
PART II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		14
Item 6.	Selected Financial Data		16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation		17
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		35
Item 8.	Financial Statements and Supplementary Data		36
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		36
Item 9A.	Controls and Procedures		36
Item 9A(T).	Controls and Procedures		36
Item 9B.	Other Information		36
PART III
Item 10.	Directors and Executive Officers of the Registrant		37
Item 11.	Executive Compensation		37
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		37
Item 13.	Certain Relationships and Related Transactions		37
Item 14.	Principal Accountant Fees and Services		37
PART IV
Item 15.	Exhibits and Financial Statement Schedules		37
Signatures
EX-10.6 SEVERANCE PROTECTION AGREEMENT
EX-10.7 COMPENSATION ARRANGEMENTS
EX-10.8 FIRST BANK OF GEORGIA ANNUAL INCENTIVE PLAN
EX-10.9 COMPENSATION ARRANGEMENTS
EX-21.1 SUBSIDIARIES OF THE REGISTRANT
EX-23.1 CONSENT OF CHERRY BEKAERT & HOLLAND, L.L.P.
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF ACTING PFO
EX-32.1 SECTION 906 CERTIFICATIONS OF CEO AND ACTING PFO
EX-99.1 FINANCIAL STATEMENTS

(i)

Special Note Regarding Forward-Looking Statements

     Certain statements in this Annual Report on Form 10-K contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which represent the expectations or beliefs of our management, including, but not limited to, statements concerning the banking industry and the issuer’s operations, performance, financial condition and growth. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “can,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the issuer’s control, and actual results may differ materially depending on a variety of important factors, including competition, general economic and market conditions, changes in interest rates, changes in the value of real estate and other collateral securing loans, interest rate sensitivity and exposure to regulatory and legislative changes, and other risks and uncertainties described in the issuer’s filings with the Securities and Exchange Commission. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate. Therefore, we can give no assurance that the results contemplated in the forward-looking statements will be realized. The inclusion of this forward-looking information should not be construed as a representation by the issuer or any person that the future events, plans, or expectations contemplated by the issuer will be achieved. The issuer undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

PART I

Item 1. Business

General

Georgia-Carolina Bancshares, Inc. (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 which opened for business in 1989. The Bank operates three 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. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”).

The Company was incorporated under the laws of the State of Georgia in January 1997 at the direction of the Board of Directors of the Bank based on a plan of reorganization developed by the Board to substantially strengthen the Bank’s competitive position. The reorganization, in which the Bank became a wholly owned subsidiary of the Company, was completed in June 1997.

The following table sets forth the location of each of the Bank’s branch offices and the date each branch opened for business:

Branch	Date Opened
Hill Street Office, Thomson, Georgia	January 1989
Daniel Village Office, Augusta, Georgia	March 1999
West Town Office, Martinez, Georgia	October 1999
Medical Center Office, Augusta, Georgia	January 2001
Fury’s Ferry Road Office, Martinez, Georgia	April 2002
Main Office, Augusta, Georgia	September 2005

In September 1999, the Bank established a mortgage division which operates as First Bank Mortgage (the “Mortgage Division”). The Mortgage Division originates mortgage loans and offers a variety of other mortgage products. As of December 31, 2006, First Bank Mortgage had locations in the Augusta and Savannah, Georgia markets as well as the Jacksonville, Florida market.

In December 2003, the Bank established a financial services division which operates as FB Financial Services. FB Financial Services offers financial planning and investment services through its relationship with Linsco/Private Ledger (Member NASD/SIPC), one of the nation’s leading independent brokerage firms. A joint office of FB Financial Services and Linsco/Private Ledger is located in the Bank’s Main Office location on Wheeler Road in Augusta.

For further information responsive to this item, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in Item 7 of this report.

Market Area and Competition

The primary service area of the Bank includes the counties of Richmond, Columbia and McDuffie, Georgia, and the communities of Augusta, Martinez, Evans and Thomson, Georgia, which are within a 30-mile radius. The Bank encounters competition from other commercial banks, which offer a full range of banking services and compete for all types of services, especially deposits. In addition, in certain aspects of its banking business, the Bank also competes with credit unions, small loan companies, consumer finance companies, brokerage houses, insurance companies, money market funds and other financial service companies which attract customers that have traditionally been served by banks.

The extent to which other types of financial service companies compete with commercial banks has increased significantly over the past several years as a result of federal and state legislation which has permitted these organizations to compete for customers and offer products that have historically been offered by banks. The impact of this legislation and other subsequent legislation on the financial services industry cannot be predicted. See “ — Supervision and Regulation.”

Asset/Liability Management

It is the objective of the Bank to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established cash, loan investment, borrowing and capital policies. An investment committee is responsible for monitoring policies and procedures that are designed to ensure acceptable composition of the asset/liability mix, stability and leverage of all sources of funds while adhering to prudent banking practices. It is the overall philosophy of management to support asset growth primarily through growth of core deposits, which include deposits of all categories made by individuals, partnerships and corporations. Management of the Bank seeks to invest the largest portion of the Bank’s assets in commercial, consumer and real estate loans.

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The Bank’s asset/liability mix is monitored on a daily basis and further evaluated with a quarterly report that reflects interest-sensitive assets and interest-sensitive liabilities. This report is prepared and presented to the Bank’s Investment Committee and Board of Directors. The objective of this policy is to control interest-sensitive assets and liabilities so as to minimize the impact of substantial movements in interest rates on the Company’s earnings.

Correspondent Banking

Correspondent banking involves the delivery of services by one bank to another bank which cannot provide that service for itself from an economic or practical standpoint. The Bank purchases correspondent services offered by larger banks, including check collections, purchase and sale of federal funds, security safekeeping, investment services, coin and currency supplies, over line and liquidity loan participations, and sales of loans to or participations with correspondent banks.

The Bank sells loan participations to correspondent banks. The Bank has established correspondent relationships with The Bankers Bank, the Federal Home Loan Bank of Atlanta and SunTrust Bank. As compensation for services provided by a correspondent, the Bank maintains certain balances with such correspondents in both non-interest bearing and interest bearing accounts.

Data Processing

The Bank has entered into a data processing servicing agreement with Fidelity Information Services, under which the Bank receives a full range of data processing services, including an automated general ledger, deposit accounting, commercial, real estate and installment lending data processing, central information file and ATM processing.

Employees

At December 31, 2006, the Company and the Bank employed 156 persons on a full-time and 10 persons on a part-time basis, including 48 officers.

Monetary Policies

The results of operations of the Bank are affected by credit policies of monetary authorities, particularly the Federal Reserve Board. The instruments of monetary policy employed by the Federal Reserve Board include open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, changes in reserve requirements against member bank deposits and limitations on interest rates which member banks may pay on time and savings deposits. In view of changing conditions in the national economy and in the money markets, as well as the effect of action by monetary and fiscal authorities, including the Federal Reserve Board, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Bank.

Supervision and Regulation

The following discussion sets forth some of the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides some specific information relative to the Company and the Bank. The regulatory framework is intended primarily for the protection of depositors and the Deposit Insurance Fund and not for the protection of security holders and creditors. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions.

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The Company

Bank Holding Company Regulation. The Company is a bank holding company and a member of the Federal Reserve System under the Bank Holding Company Act of 1956 (the “BHC Act”). As such, the Company is subject to the supervision, examination and reporting requirements of the BHC Act, as well as other federal and state laws governing the banking business. The Federal Reserve Board is the primary regulator of the Company, and supervises the Company’s activities on a continual basis. The Company is required to furnish to the Federal Reserve an annual report of its operations at the end of each fiscal year, and such additional information as the Federal Reserve may require pursuant to the BHC Act. In general, the BHC Act limits bank holding company business to owning or controlling banks and engaging in other banking-related activities. The BHC Act requires that a bank holding company obtain the prior approval of the Federal Reserve before:

• acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank;

• taking any action that causes a bank to become a subsidiary of a bank holding company;

• merging or consolidating with another bank holding company; or

• acquiring most other operating companies.

Subject to certain state laws, a bank holding company that is adequately capitalized and adequately managed may acquire the assets of both in-state and out-of-state banks. With certain exceptions, the BHC Act prohibits bank holding companies from acquiring direct or indirect ownership or control of voting shares in any company that is not a bank or a bank holding company unless the Federal Reserve Board determines such activities are incidental or closely related to the business of banking.

The Change in Bank Control Act of 1978 requires a person (or group of persons acting in concert) acquiring “control” of a bank holding company to provide the Federal Reserve Board with 60 days’ prior written notice of the proposed acquisition. Following receipt of this notice, the Federal Reserve Board has 60 days (or up to 90 days if extended) within which to issue a notice disapproving the proposed acquisition. In addition, any “company” must obtain the Federal Reserve Board’s approval before acquiring 25% (5% if the “company” is a bank holding company) or more of the outstanding shares or otherwise obtaining control over the Company.

Financial Services Modernization. The Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “Modernization Act”), enacted on November 12, 1999, amended the BHC Act and:

• allows bank holding companies that qualify as “financial holding companies” to engage in a substantially broader range of non-banking activities than was permissible under prior law;

• allows insurers and other financial services companies to acquire banks;

• allows national banks, and some state banks, either directly or through operating subsidiaries, to engage in certain non-banking financial activities;

• removes various restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and

• establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.

If the Company, which has not obtained qualification as a “financial holding company,” were to do so in the future, the Company would be eligible to engage in, or acquire companies engaged in, the broader range of activities that are permitted by the Modernization Act, provided that if any of the Company’s banking subsidiaries were to cease to be “well capitalized” or “well managed” under applicable regulatory

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standards, the Federal Reserve Board could, among other things, place limitations on the Company’s ability to conduct these broader financial activities or, if the deficiencies persisted, require the Company to divest the banking subsidiary. In addition, if the Company were to be qualified as a financial holding company and any of its banking subsidiaries were to receive a rating of less than satisfactory under the Community Reinvestment Act of 1977 (the “CRA”), the Company would be prohibited from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies. The broader range of activities that financial holding companies are eligible to engage in includes those that are determined to be “financial in nature,” including insurance underwriting, securities underwriting and dealing, and making merchant banking investments in commercial and financial companies.

Transactions with Affiliates. The Company and the Bank are deemed to be affiliates within the meaning of the Federal Reserve Act, and transactions between affiliates are subject to certain restrictions. Generally, the Federal Reserve Act limits the extent to which a financial institution or its subsidiaries may engage in “covered transactions” with an affiliate. It also requires all transactions with an affiliate, whether or not “covered transactions,” to be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions.

Tie-In Arrangements. The Company and the Bank cannot engage in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor the Bank may condition an extension of credit on either a requirement that the customer obtain additional services provided by either the Company or the Bank, or an agreement by the customer to refrain from obtaining other services from a competitor. The Federal Reserve Board has adopted exceptions to its anti-tying rules that allow banks greater flexibility to package products with their affiliates. These exceptions were designed to enhance competition in banking and non-banking products and to allow banks and their affiliates to provide more efficient, lower cost service to their customers.

Source of Strength. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank. This support may be required at times when, absent that Federal Reserve Board policy, the Company may not find itself able to provide it. Capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Subsidiary Dividends. The Company is a legal entity separate and distinct from the Bank. A major portion of the Company’s revenues results from amounts paid as dividends to the Company by the Bank. The Georgia Department of Banking and Finance’s approval must be obtained before the Bank may pay cash dividends out of retained earnings if (i) the total classified assets at the most recent examination of the Bank exceeded 80% of the equity capital, (ii) the aggregate amount of dividends declared or anticipated to be declared in the calendar year exceeds 50% of the net profits, after taxes but before dividends for the previous calendar year, or (iii) the ratio of equity capital to adjusted assets is less than 6%.

In addition, the Company and the Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank or bank holding company that the

5

payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice and that banking organizations should generally pay dividends only out of current operating earnings.

State Law Restrictions. As a Georgia business corporation, the Company may be subject to certain limitations and restrictions under applicable Georgia corporate law.

The Bank

General. The Bank, as a Georgia state-chartered bank, is subject to regulation and examination by the State of Georgia Department of Banking and Finance, as well as the FDIC. Georgia state laws regulate, among other things, the scope of the Bank’s business, its investments, its payment of dividends to the Company, its required legal reserves and the nature, lending limit, maximum interest charged and amount of and collateral for loans. The laws and regulations governing the Bank generally have been promulgated by Georgia to protect depositors and not to protect shareholders of the Company or the Bank.

Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their jurisdiction, the FDIC evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility.

Insider Credit Transactions. Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders, or any related interests of such persons. Extensions of credit must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting procedures that are not less stringent than those prevailing at the time for comparable transactions with persons not covered above and who are not employees. Also, such extensions of credit must not involve more than the normal risk of repayment or present other unfavorable features.

Federal Deposit Insurance Corporation Improvement Act. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”), each federal banking agency has prescribed, by regulation, noncapital safety and soundness standards for institutions under its authority. These standards cover internal controls, information systems, and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation.

Interstate Banking and Branching. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “IBBEA”) permits nationwide interstate banking and branching under certain circumstances. This legislation generally authorizes interstate branching and relaxes federal law restrictions on interstate banking. Currently, bank holding companies may purchase banks in any state, and states may not prohibit such purchases. Additionally, banks are permitted to merge with banks in other states as long as the home state of neither merging bank has “opted out.” The IBBEA requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area. The IBBEA also prohibits the interstate acquisition of a bank if, as a result, the bank holding company would control more than ten percent of the total United States insured depository deposits or more than thirty percent, or the applicable state law limit, of deposits in the acquired bank’s state. Under recent FDIC regulations, banks are prohibited from using their interstate branches primarily for deposit

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production. The FDIC has accordingly implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.

Georgia has “opted in” to the IBBEA and allows in-state banks to merge with out-of-state banks subject to certain requirements. Georgia law generally authorizes the acquisition of an in-state bank by an out-of-state bank by merger with a Georgia financial institution that has been in existence for at least 3 years prior to the acquisition. With regard to interstate bank branching, out-of-state banks that do not already operate a branch in Georgia may not establish de novo branches in Georgia.

Deposit Insurance and Assessments. The deposits of the Bank are currently insured to a maximum of $100,000 per depositor, except for “self-directed” retirement accounts, which are insured up to $250,000 per owner. All insured banks are required to pay semi-annual deposit insurance assessments to the FDIC which are determined pursuant to a risk-based system adopted by the FDIC. In 2006, the FDIC enacted various rules to implement the provisions of the Federal Deposit Insurance Reform Act of 2005 (the “FDI Reform Act”). On March 31, 2006, in accordance with the FDI Reform Act, the FDIC merged the Bank Insurance Fund and the Savings Association Insurance Fund to form the Deposit Insurance Fund (“DIF”). The FDIC also revised, effective January 1, 2007, the risk-based premium system under which the FDIC classifies institutions and generally assesses higher rates on those institutions that tend to pose greater risks to the DIF. Under the new rules, the FDIC will evaluate each institution’s, including the Bank’s, risk based on a combination of the institution’s supervisory ratings and financial ratios. FDIC assessment rates will generally range between 5 and 7 cents per $100 in deposits.

Capital Adequacy

Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. If capital falls below minimum guideline levels, the holding company or bank may be denied approval to acquire or establish additional banks or nonbank businesses or to open new facilities.

The FDIC and Federal Reserve Board use risk-based capital guidelines for banks and bank holding companies. These are designed to make such capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the Federal Reserve Board has noted that bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimum. The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital for bank holding companies includes common shareholders’ equity, certain qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most other intangibles and excludes the allowance for loan and lease losses. Tier 2 capital includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate term-preferred stock, and general reserves for loan and lease losses up to 1.25% of risk-weighted assets.

The FDIC and Federal Reserve Board also employ a leverage ratio, which is Tier 1 capital as a percentage of total assets less intangibles, to be used as a supplement to risk-based guidelines. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank holding company or bank may leverage its equity capital base. A minimum leverage ratio of 3% is required for the most highly rated bank holding companies and banks. Other bank holding companies, banks and bank holding companies

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seeking to expand, however, are required to maintain minimum leverage ratios of at least 4% to 5%.

The FDICIA created a statutory framework of supervisory actions indexed to the capital level of the individual institution. Under the “prompt corrective action” regulations adopted by the FDIC and the Federal Reserve Board, an institution is assigned to one of five capital categories, ranging from “well-capitalized” to “critically undercapitalized”, depending on its total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio, together with certain subjective factors. Institutions which are deemed to be “significantly undercapitalized” or “critically undercapitalized” are subject to certain mandatory supervisory corrective actions.

Other Laws and Regulations

International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. On October 26, 2001, the USA PATRIOT Act was enacted. It includes the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the “IMLAFA”) and strong measures to prevent, detect and prosecute terrorism and international money laundering. As required by the IMLAFA, the federal banking agencies, in cooperation with the U.S. Treasury Department, established rules that generally apply to insured depository institutions and U.S. branches and agencies of foreign banks.

Among other things, the new rules require that financial institutions implement reasonable procedures to (1) verify the identity of any person opening an account; (2) maintain records of the information used to verify the person’s identity; and (3) determine whether the person appears on any list of known or suspected terrorists or terrorist organizations. The rules also prohibit banks from establishing correspondent accounts with foreign shell banks with no physical presence and encourage cooperation among financial institutions, their regulators and law enforcement to share information regarding individuals, entities and organizations engaged in terrorist acts or money laundering activities. The rules also limit a financial institution’s liability for submitting a report of suspicious activity and for voluntarily disclosing a possible violation of law to law enforcement.

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “SOX”) was enacted to address corporate and accounting fraud. It established a new accounting oversight board that enforces auditing standards and restricts the scope of services that accounting firms may provide to their public company audit clients. Among other things, it also; (i) requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission (the “SEC”); (ii) imposes new disclosure requirements regarding internal controls, off-balance-sheet transactions, and pro forma (non-GAAP) disclosures; (iii) accelerates the time frame for reporting of insider transactions and periodic disclosures by certain public companies; and (iv) requires companies to disclose whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial expert.”

The SOX requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings. To deter wrongdoing, it: (i) subjects bonuses issued to top executives to disgorgement if a restatement of a company’s financial statements was due to corporate misconduct; (ii) prohibits an officer or director from misleading or coercing an auditor; (iii) prohibits insider trades during pension fund “blackout periods”; (iv) imposes new criminal penalties for fraud and other wrongful acts; and (v) extends the period during which certain securities fraud lawsuits can be brought against a company or its officers.

Privacy. Under the Modernization Act, federal banking regulators adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances,

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allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. The privacy provisions of the Modernization Act affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors.

Future Legislation. Changes to federal and state laws and regulations can affect the operating environment of bank holding companies and their subsidiaries in substantial and unpredictable ways. From time to time, various legislative and regulatory proposals are introduced. These proposals, if codified, may change banking statutes and regulations and the Company’s operating environment in substantial and unpredictable ways. If codified, these proposals could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. The Company cannot accurately predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon the Company’s financial condition or results of operation.

Item 1A. Risk Factors

The following are certain significant risks that our management believes are specific to our business. This should not be viewed as an all inclusive list.

An economic downturn, especially one affecting Richmond, Columbia and McDuffie counties, could adversely affect our business.

Our success significantly depends upon the growth in population, income levels, deposits, and housing starts in our primary market areas of Richmond, Columbia and McDuffie counties in the State of Georgia. If these communities do not grow or if prevailing local or national economic conditions are unfavorable, our business may not succeed. An economic downturn would likely harm the quality of our loan portfolio and reduce the level of our deposits, which in turn would hurt our business. If an economic downturn occurs, borrowers may be less likely to repay their loans as scheduled. Unlike many larger institutions, we are not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies. An economic downturn could, therefore, result in losses that materially and adversely affect our business.

If real estate values in our market decline or become stagnant, our business could be adversely affected.

Real estate values in the Columbia, Richmond and McDuffie county market areas have risen over the last several years. There continues to be a significant amount of speculation that the United States, or at least certain parts of the country, are in the midst of a real estate “bubble”, meaning that current real estate prices exceed the true values of the properties. If this is the case, or if the market generally perceives that this is the case, then real estate prices could become stagnant or decline, and there could be a significant reduction in real estate construction and housing starts. In addition, the value and liquidity of the real estate or other collateral securing our loans could be impaired. Given our heavy reliance on real estate lending, this could have a significant adverse effect on our business.

Our loan portfolio includes a substantial amount of commercial real estate and construction and development loans, which may have more risks than residential or consumer loans.

Our commercial real estate loans and construction and development loans account for a substantial portion of our total loan portfolio. These loans generally carry larger loan balances and involve a greater degree of financial and credit risk than home equity, residential or consumer loans. The increased financial and credit risk associated with these types of loans is a result of several factors, including the

9

concentration of principal in a limited number of loans and to borrowers in similar lines of business, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans.

Furthermore, the repayment of loans secured by commercial real estate in some cases is dependent upon the successful operation, development or sale of the related real estate or commercial project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired. This cash flow shortage may result in the failure to make loan payments. In these cases, we may be compelled to modify the terms of the loan. As a result, repayment of these loans may, to a greater extent than other types of loans, be subject to adverse conditions in the real estate market or economy.

Many of our borrowers have more than one loan or credit relationship with us.

Many of our borrowers have more than one commercial real estate or commercial business loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to, for example, a one- to- four-family residential mortgage loan.

Our decisions regarding credit risk and reserves for loan losses may materially and adversely affect our business.

Making loans and other extensions of credit is an essential element of our business. Although we seek to mitigate risks inherent in lending by adhering to specific underwriting practices, our loans and other extensions of credit may not be repaid. The risk of nonpayment is affected by a number of factors, including:

• the duration of the credit;

• credit risks of a particular customer;

• changes in economic and industry conditions; and

• in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.

We attempt to maintain an appropriate allowance for loan losses to provide for potential losses in our loan portfolio. However, there is no precise method of predicting credit losses, since any estimate of loan losses is necessarily subjective and the accuracy depends on the outcome of future events. Therefore, we face the risk that charge-offs in future periods will exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required. Additions to the allowance for loan losses would result in a decrease of our net income, and possibly our capital.

We face strong competition for customers, which could prevent us from obtaining customers and may cause us to pay higher interest rates to attract deposits.

The banking business is highly competitive and we experience competition in each of our markets from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere. We compete with these institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established, larger financial institutions. These institutions offer some services, such

10

as extensive and established branch networks and trust services, that we currently do not provide. There is a risk that we will not be able to compete successfully with other financial institutions in our markets, and that we may have to pay higher interest rates to attract deposits, resulting in reduced profitability. Competitors that are not depository institutions are generally not subject to the extensive regulations that apply to us. In new markets that we may enter, we will also compete against well-established community banks that have developed relationships within the community.

Changes in interest rates may reduce our profitability.

Our profitability depends in large part on our net interest income, which is the difference between interest earned from interest-earning assets, such as loans and investment securities, and interest paid on interest-bearing liabilities, such as deposits and borrowings. Our net interest income will be adversely affected if market interest rates change such that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments. Many factors cause changes in interest rates, including governmental monetary policies and domestic and international economic and political conditions. While we intend to manage the effects of changes in interest rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our efforts may not be effective and our financial condition and results of operations may suffer.

Our recent operating results may not be indicative of our future operating results.

We may not be able to sustain our historical rate of growth and may not even be able to grow our business at all. If we continue to expand, it will be difficult for us to generate similar earnings growth. Consequently, our historical results of operations are not necessarily indicative of our future operations. Various factors, such as economic conditions, regulatory and legislative considerations and competition may also impede our ability to expand our market presence. If we experience a significant decrease in our rate of growth, our results of operations and financial condition may be adversely affected because a high percentage of our operating costs are fixed expenses.

We could be adversely affected by the loss of one or more key personnel or by an inability to attract and retain employees.

We believe that our growth and future success will depend in large part on the skills of our executive officers. The loss of the services of one or more of these officers could impair our ability to continue to implement our business strategy. In particular, Patrick G. Blanchard, our President and Chief Executive Officer, Remer Y. Brinson, III, our Bank’s President and Chief Executive Officer, and Thomas M. Bird, Executive Vice President of First Bank Mortgage, have extensive and long-standing ties within our primary market areas and substantial experience with our operations, and have contributed significantly to our growth. If we lose the services of any one of them, they would likely be difficult to replace and our business could be materially and adversely affected.

Our success also depends, in part, on our continued ability to attract and retain experienced and qualified employees. The competition for such employees is intense, and our inability to continue to attract, retain and motivate employees could adversely affect our business.

The success of our growth strategy depends on our ability to identify and recruit individuals with experience and relationships in the markets in which we intend to expand.

We intend to expand our banking network over the next several years into both new and existing markets in and around our current market areas. We believe that to expand into new markets successfully, we must identify and recruit experienced key management members with local expertise and relationships in

11

these markets. We expect that competition for qualified management in the markets in which we may expand will be intense and that there will be a limited number of qualified persons with knowledge of and experience in the community banking industry in these markets. Even if we identify individuals that we believe could assist us in establishing a presence in a new market, we may be unable to recruit these individuals away from more established banks. In addition, the process of identifying and recruiting individuals with the combination of skills and attributes required to carry out our strategy is often lengthy. Our inability to identify, recruit and retain talented personnel to manage new offices effectively and in a timely manner would limit our growth and could materially adversely affect our business, financial condition and results of operations. We may fail to open any additional offices and, if we open these offices, they may not be profitable.

We will face risks with respect to future expansion and acquisitions or mergers.

We may expand into new lines of business or offer new products or services. Any expansion plans we undertake may also divert the attention of our management from the operation of our business, which would have an adverse effect on our results of operations. We may also seek to acquire other financial institutions or parts of those institutions. Any of these activities would involve a number of risks such as the time and expense associated with evaluating new lines of business or new markets for expansion, hiring or retaining local management and integrating new acquisitions. Even if we identify new lines of business or new products or services, they may not be profitable. Nor can we say with certainty that we will be able to consummate, or if consummated, successfully integrate, future acquisitions, if any, or that we will not incur disruptions or unexpected expense in integrating such acquisitions. Any given acquisition, if and when consummated, may adversely affect our results of operations and financial condition.

Our growth may require us to raise additional capital that may not be available when it is needed or may not be available on terms acceptable to us.

We are required by regulatory authorities to maintain adequate levels of capital to support our operations. To support our continued growth, we may need to raise additional capital. Our ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control. Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.

We are subject to extensive regulation that could limit or restrict our activities.

We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various regulatory agencies. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to regulatory capital requirements established by our regulators, which require us to maintain adequate capital to support our growth. If we fail to meet these capital and other regulatory requirements, our ability to grow, our cost of funds and FDIC insurance, our ability to pay dividends on common stock, and our ability to make acquisitions could be materially and adversely affected.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.

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Efforts to comply with the Sarbanes-Oxley Act will involve significant expenditures, and non-compliance with the Sarbanes-Oxley Act may adversely affect us.

The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission that are now applicable to us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. We have experienced, and we expect to continue to experience, greater compliance costs, including costs related to internal controls, as a result of the Sarbanes-Oxley Act. For example, by December 31, 2007, we will be required to comply with Section 404 of the Sarbanes-Oxley Act and issue a report on our internal controls. We expect these new rules and regulations to continue to increase our accounting, legal and other costs, and to make some activities more difficult, time consuming and costly. In the event that we are unable to maintain or achieve compliance with the Sarbanes-Oxley Act and related rules, we may be adversely affected.

We are evaluating our internal control systems in order to allow management to report on, and our independent registered public accounting firm to attest to, our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. If we identify significant deficiencies or material weaknesses in our internal control over financial reporting that we cannot remediate in a timely manner, or if we are unable to receive a positive attestation from our independent registered public accounting firm with respect to our internal control over financial reporting, the trading price of our common stock could decline, our ability to obtain any necessary equity or debt financing could suffer and the trading market for our common stock could be materially impaired.

Item 1B. Unresolved Staff Comments

Not Applicable

Item 2. Properties

The Company’s and the Bank’s main office is located at 3527 Wheeler Road in Augusta, Georgia. This office was opened in September 2005. The Bank operates three banking offices in Augusta, Georgia, two banking offices in Martinez, Georgia and one banking office in Thomson, Georgia. The following table sets forth the location of each of the Bank’s branch offices and the date each branch opened for business:

Branch	Date Opened
Hill Street Office, Thomson, Georgia	January 1989
Daniel Village Office, Augusta, Georgia	March 1999
West Town Office, Martinez, Georgia	October 1999
Medical Center Office, Augusta, Georgia	January 2001
Fury’s Ferry Road Office, Martinez, Georgia	April 2002
Main Office, Augusta, Georgia	September 2005

In January 2002, the Bank purchased a site located in Evans, Georgia. In March 2005, the Bank entered into a contract to purchase another site in Evans, Georgia and finalized that purchase in February 2006. The Bank will continue to evaluate the possibility of constructing a full service banking facility on one of the two sites in Evans, Georgia.

The Bank also leases office space at one location in Augusta to house the Mortgage Division. The Mortgage Division also operates offices in Savannah, Georgia and Jacksonville, Florida out of leased office space.

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Item 3. Legal Proceedings

There are no material pending legal proceedings to which the Company or the Bank is a party or of which any of their properties are subject; nor are there material proceedings known to the Company or the Bank to be contemplated by any governmental authority; nor are there material proceedings known to the Company or the Bank, pending or contemplated, in which any director, officer or affiliate or any principal security holder of the Company or the Bank, or any associate of any of the foregoing is a party or has an interest adverse to the Company or the Bank.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted during the fourth quarter ended December 31, 2006 to a vote of security holders of the Company.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

The Company’s common stock trades on the Over-The-Counter Bulletin Board under the symbol “GECR”. The market for the Company’s common stock must be characterized as a limited market due to its relatively low trading volume and lack of analyst coverage. The following table sets forth for the periods indicated the quarterly high and low bid quotations per share as reported by the Over-The-Counter Bulletin Board. These quotations also reflect inter-dealer prices without retail mark-ups, mark-downs, or commissions and may not necessarily represent actual transactions. The share prices below reflect all stock splits.

	High		Low
Fiscal year ended December 31, 2006
First Quarter	$	16.00	$	13.82
Second Quarter	$	15.50	$	13.50
Third Quarter	$	16.60	$	13.95
Fourth Quarter	$	16.65	$	12.80
Fiscal year ended December 31, 2005
First Quarter	$	17.60	$	15.60
Second Quarter	$	19.50	$	14.75
Third Quarter	$	16.35	$	15.00
Fourth Quarter	$	15.05	$	13.10

Holders of Common Stock

As of March 20, 2007, the number of holders of record of the Company’s common stock was 592.

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Dividends

No cash dividends were paid by the Company during the years ended December 31, 2006 or 2005. On April 1, 2005, the Company effected a 5-for-4 split of its common stock in the form of a 25% stock dividend to shareholders of record as of March 1, 2005.

Future dividends will be determined by the Board of Directors of the Company in light of circumstances existing from time to time, including the Company’s growth, financial condition and results of operations, the continued existence of the restrictions described below on the Bank’s ability to pay dividends and other factors that the Board of Directors of the Company considers relevant. In addition, the Board of Directors of the Company may determine, from time to time, that it is prudent to pay special nonrecurring cash dividends in addition to or in lieu of regular cash dividends. Such special dividends will depend upon the financial performance of the Company and will take into account its capital position. No special dividend is presently contemplated.

Because the Company’s principal operations are conducted through the Bank, the Company generates cash to pay dividends primarily through dividends paid to it by the Bank. Accordingly, any dividends paid by the Company will depend on the Bank’s earnings, capital requirements, financial condition and other factors. Under Georgia law, the Bank may pay dividends only when and if the Bank is not insolvent. In addition, dividends may not be declared or paid at any time when the Bank does not have combined paid-in capital and appropriated retained earnings equal to at least 20% of the Bank’s capital stock. Moreover, dividends may not be paid by the Bank without the prior approval of the Georgia Banking Department, if the dividends are in excess of specified amounts fixed by the Georgia Banking Department.

Equity Compensation Plan Information

     The Company currently has three equity compensation plans: (i) the 1997 Stock Option Plan, which was approved by shareholders; (ii) the 2004 Incentive Plan, which was approved by shareholders; and (iii) the Director Stock Purchase Plan, which has not been approved by shareholders. The following table provides information as of December 31, 2006 regarding the Company’s then existing compensation plans and arrangements:

					Number of securities
	Number of securities		Weighted-average		remaining
	to be issued upon		exercise price of		available for future issuance
	exercise of outstanding		outstanding		under equity compensation
	options, warrants and		options, warrants		plans (excluding securities
	rights		and rights		reflected in column (a))
Plan category	(a)		(b)		(c)
Equity compensation plans approved by security holders:
1997 Stock Option Plan		291,055	$	6.90		—
2004 Incentive Plan		39,505	$	14.79		290,620
Equity compensation plans not approved by security holders		N/A		N/A		83,860

Recent Sales of Unregistered Securities; Issuer Stock Purchases

Not Applicable.

15

Item 6. Selected Financial Data

          Our selected consolidated financial data presented below as of and for the years ended December 31, 2002 through 2006 is derived from our audited consolidated financial statements. Our audited consolidated financial statements as of December 31, 2005 and 2006 and for each of the years in the three year period ended December 31, 2006 are included elsewhere in this report. All years have been restated as necessary for stock dividends and stock splits.

	At and for the Years Ended December 31,
	($ in thousands, except per share data)
	2006		2005		2004		2003		2002
Selected Balance Sheet Data:
Assets	$	417,471	$	349,481	$	332,393	$	266,025	$	257,362
Investment securities		55,404		39,362		43,375		35,594		28,916
Loans, held for investment		280,883		248,311		216,728		174,567		145,370
Loans, held for sale		56,758		40,064		56,729		34,219		67,927
Allowance for loan losses		4,386		3,756		3,416		3,164		2,436
Deposits		341,342		304,440		257,780		221,656		201,619
Short-term borrowings		38,561		13,342		46,987		19,993		35,745
Accrued interest		3,214		1,539		785		531		1,110
Long-term debt		700		800		900		1,000		1,000
Other liabilities		1,528		751		573		981		993
Shareholders’ equity		32,126		28,609		25,368		21,864		16,895
Selected Results of Operations Data:
Interest income		25,335		20,876		16,088		15,159		13,368
Interest expense		11,969		8,420		4,468		4,911		5,172
Net interest income		13,366		12,456		11,620		10,248		8,196
Provision for loan losses		898		1,022		808		880		451
Net interest income after provision for provision for loan losses		12,468		11,434		10,812		9,368		7,745
Noninterest income		9,800		10,331		10,571		15,540		10,397
Noninterest expense		17,911		16,368		15,714		16,503		12,879
Income before taxes		4,357		5,397		5,669		8,405		5,263
Income tax expense		1,460		1,942		2,167		3,373		1,932
Net income	$	2,897	$	3,455	$	3,502	$	5,032	$	3,331
Per Share Data
Net income – basic	$	0.86	$	1.04	$	1.06	$	1.53	$	1.02
Net income – diluted	$	0.83	$	0.98	$	0.99	$	1.41	$	0.95
Book value	$	9.51	$	8.53	$	7.65	$	6.63	$	5.17
Weighted average number of shares outstanding:
Basic		3,370,277		3,336,834		3,305,534		3,281,130		3,253,662
Diluted		3,489,564		3,524,294		3,521,876		3,560,495		3,518,055

	At and for the Years Ended December 31,
	2006			2005			2004			2003			2002
Performance Ratios:
Return on average assets		0.78	%		1.00	%		1.19	%		1.92	%		1.44	%
Return on average equity		9.57	%		12.80	%		14.86	%		25.97	%		22.14	%
Net interest margin (1)		3.81	%		3.78	%		4.14	%		3.96	%		4.12	%
Efficiency ratio (2)		77.39	%		71.45	%		70.81	%		63.98	%		68.72	%
Loan to deposit ratio		98.92	%		94.72	%		106.08	%		94.19	%		105.79	%

16

	At and for the Years Ended December 31,
	2006			2005			2004			2003			2002
Asset Quality Ratios:
Nonperforming loans to total loans		0.68	%		0.59	%		0.61	%		0.51	%		0.28	%
Nonperforming assets to total assets		0.69	%		0.61	%		0.63	%		0.42	%		0.35	%
Net charge-offs to average total loans		0.09	%		0.24	%		0.23	%		0.07	%		0.12	%
Allowance for loan losses to nonperforming loans		191.86	%		219.91	%		205.29	%		299.05	%		408.04	%
Allowance for loan losses to total loans		1.30	%		1.30	%		1.25	%		1.52	%		1.14	%
Capital Ratios:
Average equity to average assets
Leverage ratio		7.85	%		8.14	%		7.98	%		8.48	%		6.81	%
Tier 1 risk-based capital ratio		9.25	%		9.91	%		9.11	%		10.38	%		8.68	%
Total risk-based capital ratio		10.50	%		11.16	%		10.34	%		11.89	%		9.93	%
Growth Ratios and Other Data:
Percentage change in net income		(16.2	%)		(1.3	%)		(30.4	%)		51.1	%		98.9	%
Percentage change in diluted net income per share		(15.3	%)		(1.0	%)		(29.8	%)		48.4	%		93.9	%
Percentage change in assets		19.5	%		5.1	%		24.9	%		3.4	%		25.0	%
Percentage change in loans		17.1	%		5.5	%		31.0	%		(2.1	%)		22.6	%
Percentage change in deposits		12.1	%		18.1	%		16.3	%		9.94	%		34.8	%
Percentage change in equity		12.3	%		12.8	%		16.0	%		29.4	%		28.0	%

(1)	Non-tax equivalent.
(2)	Computed by dividing noninterest expense by the sum of net interest income and noninterest income, excluding gains and losses on the sale of assets.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion provides information about the major components of the results of operations and financial condition, liquidity and capital resources of the Company and Bank and should be read in conjunction with the “Business” and “Financial Statements” sections included elsewhere in this Report. Information given in response to Item 6 of this report, “Selected Financial Data” is incorporated by reference in response to this Item 7.

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 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

17

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.

  The most significant accounting policies for the Company and Bank are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. 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 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.

Additional information on the Bank’s loan portfolio and allowance for loan losses can be found in the “Loan Portfolio” section on pages 26-31 of this “Management’s Discussion and Analysis”. Note 1 to the consolidated financial statements also includes additional information on the Bank’s accounting policies related to the allowance for loan losses.

18

Consolidated Financial Information

Certain financial information for the Company and Bank consolidated, and solely for the Bank as of and for the years ended December 31, 2006, 2005 and 2004 is presented below:

	2006				2005				2004
	Total Assets		Net Income		Total Assets		Net Income		Total Assets		Net Income
	(Dollar amounts in thousands)
Consolidated	$	417,471	$	2,897	$	349,481	$	3,455	$	332,393	$	3,502
Bank only	$	417,154	$	3,040	$	349,368	$	3,604	$	332,325	$	3,696

During 2006, the Company funded operational costs primarily through proceeds from the exercise of stock options. The Company incurred approximately $329,883 in operational costs for the year ended December 31, 2006. The Company recorded an income tax benefit of $187,300, resulting in a net loss of $142,583 for 2006.

The Company has entered into an agreement with The Bankers Bank that provides the Company with a line of credit of up to $3 million and bears interest at the prime rate minus 50 basis points and matures in 2014. As of December 31, 2006 and 2005, the outstanding balance under the line of credit was $700,000 and $800,000 respectively. The arrangement requires the Company and the Bank to comply with certain financial and other covenants. At December 31, 2006, the Company and the Bank were in compliance with all applicable covenants.

The Bank

Results of Operations – Comparison of 2006 and 2005

For the year ended December 31, 2006, the Bank experienced an increase in total assets and a decrease in net income. Total assets increased 19.5% to $417.5 million at December 31, 2006 from $349.5 million at December 31, 2005. Average total assets were $372.8 million in 2006 and $345.9 million in 2005, an increase of $26.9 million or 7.8%. This increase in average assets is primarily the result of strong loan demand during 2006. Net loans held for investment increased from $244.6 million at December 31, 2005 to $276.5 million at December 31, 2006, an increase of 13.0%. Commercial loans decreased $2.2 million, or 7.4%, from $29.9 million at December 31, 2005 to $27.7 million at December 31, 2006. Real estate mortgage loans increased $16.6 million, or 10.9%, from $152.5 million at December 31, 2005 to $169.1 million at December 31, 2006, and real estate construction loans increased $17.8 million, or 32.0%, from $55.7 million at December 31, 2005 to $73.5 million at December 31, 2006. Installment and consumer loans increased $400,000 or 3.9%, from $10.2 million at December 31, 2005 to $10.6 million at December 31, 2006. The decrease in commercial loans is primarily the result of softer demand in this segment of the loan portfolio. The increases in each of the other loan categories are the result of the Bank’s continuing efforts to increase these types of loans. Loans held for sale by the Bank increased 41.6% from $40.1 million at December 31, 2005 to $56.8 million at December 31, 2006, as flattening rates impacted the volume of activity in this loan category.

The allowance for loan losses was $4,386,000 at December 31, 2006 and $3,756,000 at December 31, 2005. This represents an increase of $630,000, or 16.8%. The increase in the allowance is based upon management’s rating and assessment of the loan portfolio and the credit risk inherent in the portfolio, and reflects the growth in the Bank’s loan portfolio. The Bank’s ratio of allowance for loan losses to gross loans was 1.30% at December 31, 2006 and 1.30% at December 31, 2005. Substantially all loans held for

19

sale originated by the Bank consist of well-secured single family residential mortgage loans which are originated with a sales commitment and are sold in the secondary market shortly after origination, thus greatly reducing the Bank’s credit risk. The Bank’s ratio of allowance for loan losses to gross loans, excluding loans held for sale, was 1.56% at December 31, 2006, compared to 1.51% at December 31, 2005.

The asset growth of the Bank during 2006 was funded through deposit account growth within the Bank’s existing market areas as well as out-of-market funding, through short-term borrowings from correspondent banks, and from lines of credit established with the Federal Home Loan Bank. Total deposit accounts at December 31, 2006 were $341.3 million, an increase of $36.9, million or 12.1%, from $304.4 million at December 31, 2005. Total other borrowings by the Bank were $38.6 million at December 31, 2006, an increase of $25.3 million, or 190.2%, from the balance of $13.3 million at December 31, 2005. Borrowings were up in 2006 as a result of the growth in the loan portfolio.

The Bank’s loan to deposit ratio was 98.9% at December 31, 2006 and 94.7% at December 31, 2005. Excluding mortgage loans held for sale, this ratio was 82.3% for 2006 and 81.6% for 2005.

Interest income was $25.3 million for 2006, compared to $20.9 million for 2005. This represents an increase of $4.4 million, or 21.1%. This increase was attributable to both higher loan volume as well as higher yields. Interest expense increased $3.6 million, or 42.9%, from $8.4 million for 2005 to $12.0 million for 2006. This increase in interest expense was also the result of increased deposit account balances as well as a higher cost of funds for the year. The increase in deposit accounts was a result of marketing efforts in the local markets served by the Bank and strategic planning with respect to obtaining out-of-market funds. The Bank focuses on obtaining growth in deposit accounts to fund the Bank’s loan growth. Non-interest bearing deposits increased $2.8 million, or 7.6%, from $37.0 million in 2005 to $39.8 million in 2006. Net interest income for 2006 was $13.4 million, representing an increase of $900,000, or 7.2%, from $12.5 million in 2005.

Non-interest income of $9.8 million was recorded in 2006, a decrease of $500,000, or 4.9%, from the $10.3 million recorded in 2005.

Non-interest expense increased from $16.4 million in 2005 to $17.9 million in 2006, an increase of $1.5 million, or 9.1%. The increase resulted from increased personnel costs associated with normal merit increases as well as strategic new positions added during the year. Additionally, there were increases in operating costs associated with the new main office that opened during 2005.

In total, net income decreased in 2006 by $600,000, or 17.1%, from $3.5 million in 2005 to $2.9 million in 2006 as a result of each of the above factors.

Comparison of 2005 and 2004

For the year ended December 31, 2005, the Bank experienced an increase in total assets and a decrease in net income. Total assets increased 5.1% to $349.4 million at December 31, 2005 from $332.3 million at December 31, 2004. Average total assets were $345.9 million in 2005 and $294.3 million in 2004, an increase of $51.6 million or 17.5%. This increase in average assets is primarily the result of strong loan demand during 2005. Net loans held for investment increased from $213.3 million at December 31, 2004 to $244.6 million at December 31, 2005, an increase of 14.6%. Commercial loans decreased $900,000, or 2.8%, from $30.8 million at December 31, 2004 to $29.9 million at December 31, 2005. Real estate mortgage loans increased $24.8 million, or 19.4%, from $127.7 million at December 31, 2004 to $152.5 million at December 31, 2005, and real estate construction loans increased $9.1 million, or 19.7%, from $46.6 million at December 31, 2004 to $55.7 million at December 31, 2005. Installment and

20

consumer loans decreased $1.5 million or 13.0%, from $11.7 million at December 31, 2004 to $10.2 million at December 31, 2005. The decrease in commercial loans is due to a significant loan payoff at year end, and the decrease in installment and consumer loans is primarily the result of softer demand in this segment of the loan portfolio. The increases in each of the other loan categories are the result of the Bank’s continuing efforts to increase these types of loans. Loans held for sale by the Bank decreased 29.4% from $56.7 million at December 31, 2004 to $40.1 million at December 31, 2005 as rising rates impacted the volume of activity in this loan category.

The allowance for loan losses was $3,756,000 at December 31, 2005 and $3,416,000 at December 31, 2004. This represents an increase of $340,000, or 10.0%. The increase in the allowance is based upon management’s rating and assessment of the loan portfolio and the credit risk inherent in the portfolio, and reflects the growth in the Bank’s loan portfolio. The Bank’s ratio of allowance for loan losses to gross loans was 1.30% at December 31, 2005 and 1.25% at December 31, 2004. Substantially all loans held for sale originated by the Bank consist of well-secured single family residential mortgage loans which are originated with a sales commitment and are sold in the secondary market shortly after origination, thus greatly reducing the Bank’s credit risk. The Bank’s ratio of allowance for loan losses to gross loans, excluding loans held for sale, was 1.51% at December 31, 2005, compared to 1.58% at December 31, 2004.

The asset growth of the Bank during 2005 was funded through deposit account growth within the Bank’s existing market areas as well as out-of-market funding, through short-term borrowings from correspondent banks, and from lines of credit established with the Federal Home Loan Bank. Total deposit accounts at December 31, 2005 were $304.4 million, an increase of $46.6, million or 18.1%, from $257.8 million at December 31, 2004. Total other borrowings by the Bank were $13.3 million at December 31, 2005, a decrease of $33.7 million, or 71.7%, from the balance of $47.0 million at December 31, 2004. Borrowings were down in 2005 as the level of loans held for sale was down.

The Bank’s loan to deposit ratio was 94.7% at December 31, 2005 and 106.1% at December 31, 2004. Excluding mortgage loans held for sale, this ratio was 81.6% for 2005 and 84.1% for 2004.

Interest income was $20.9 million for 2005, compared to $16.1 million for 2004. This represents an increase of $4.8 million, or 29.8%. This increase was attributable to both higher loan volume and higher yields. Interest expense increased $3.9 million, or 88.5%, from $4.5 million for 2004 to $8.4 million for 2005. This increase in deposit expense was also the result of increased deposit account balances as well as a higher cost of funds for the year. The increase in deposit accounts was a result of marketing efforts in the local markets served by the Bank and strategic planning with respect to obtaining out-of-market funds. The Bank focuses on obtaining growth in deposit accounts to fund the Bank’s loan growth. Non-interest bearing deposits increased $3.5 million, or 10.5%, from 2004 to 2005. Net interest income for 2005 was $12.4 million, representing an increase of $.8 million, or 7.2%, from $11.6 million for 2004.

The change in non-interest income was minimal with $10.3 million recorded in 2005, a decrease of $300,000, or 2.3%, from the $10.6 million recorded in 2004.

Non-interest expense increased from $15.4 million in 2004 to $16.1 million in 2005, an increase of $700,000, or 4.7%. The increase resulted from increased personnel costs associated with normal merit increases as well as strategic new positions added during the year. Additionally, there were increases in operating costs associated with the new main office that was opened during 2005.

In total, net income only slightly decreased in 2005 by $100,000, or 2.7%, from $3.7 million in 2004 to $3.6 million in 2005 as a result of each of the above factors.

21

Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential

The following table presents the average balance sheet of the Company for the years ended December 31, 2006, 2005 and 2004. Also presented is the Company’s actual interest income and expense from each asset and liability, the average yield of each interest-earning asset and the average cost of each interest-bearing liability. This table includes all major categories of interest-earning assets and interest-bearing liabilities:

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AVERAGE BALANCE SHEETS
(Dollar amounts in thousands)

	Year Ended December 31,
	2006								2005								2004
				Interest		Average						Interest		Average						Interest		Average
	Average			Income/		Yield /			Average			Income/		Yield /			Average			Income/		Yield /
	Balance			Expense		Rate			Balance			Expense		Rate			Balance			Expense		Rate
ASSETS
INTEREST-EARNING ASSETS
Loans, net of unearned income	$	302,778		$	23,144		7.64	%	$	286,924		$	19,263		6.71	%	$	242,158		$	14,713		6.07	%
Investment securities		47,153			2,053		4.35	%		40,951			1,549		3.78	%		38,416			1,368		3.56	%
Fed funds sold & cash in banks		2,788			138		4.95	%		2,008			64		3.19	%		373			7		1.88	%
Total interest-earning assets		352,719			25,335		7.18	%		329,883			20,876		6.33	%		280,947			16,088		5.73	%
NON-INTEREST-EARNING ASSETS
Cash and due from banks		7,404								6,235								6,647
Bank premises and fixed assets		10,879								9,555								7,351
Accrued interest receivable		1,779								1,479								1,225
Other assets		4,010								2,598								1,528
Allowance for loan losses		(4,039	)							(3,877	)							(3,439	)
Total assets	$	372,752							$	345,873							$	294,259
LIABILITIES AND SHAREHOLDERS’ EQUITY
INTEREST-BEARING DEPOSITS
NOW accounts	$	29,395		$	497		1.69	%	$	32,212		$	494		1.53	%	$	36,681		$	417		1.14	%
Savings accounts		53,603			1,994		3.72	%		56,234			1,542		2.74	%		62,431			941		1.51	%
Money market accounts		18,782			555		2.96	%		13,001			348		2.68	%		9,520			97		1.02	%
Time accounts		178,982			7,760		4.34	%		145,226			4,742		3.27	%		99,153			2,384		2.40	%
Total interest-bearing deposits		280,762			10,806		3.85	%		246,673			7,126		2.89	%		207,785			3,839		1.85	%
OTHER INTEREST-BEARING LIABILITIES
Borrowed funds		21,592			1,163		5.39	%		34,052			1,294		3.80	%		30,681			629		2.05	%
Total interest-bearing liabilities		302,354			11,969		3.96	%		280,725			8,420		3.00	%		238,466			4,468		1.87	%
NON-INTEREST-BEARING LIABILITIES AND SHAREHOLDERS’ EQUITY
Demand deposits		36,717								36,273								30,837
Other liabilities		3,433								1,887								1,438
Shareholders’ equity		30,248								26,988								23,518
Total liabilities and shareholders’ equity	$	372,752							$	345,873							$	294,259
Interest rate spread							3.22	%							3.33	%							3.86	%
Net interest income				$	13,366							$	12,456							$	11,620
Net interest margin							3.79	%							3.78	%							4.14	%
Average interest-earning assets to average total assets							94.63	%							95.38	%							95.48	%
Average loans to average deposits							95.37	%							101.41	%							101.48	%

23

Rate/Volume Analysis of Net Interest Income

The following table sets forth information regarding changes in net interest income attributable to changes in average balances and changes in rates for the periods indicated. The effect of a change in average balance has been determined by applying the average rate in the earlier period to the change in average balance in the later period, as compared with the earlier period. The balance of the change in interest income or expense and net interest income has been attributed to a change in average rate. Non-accruing loans have been included in the category “Net loans and loans held for sale.”

	Year Ended December 31, 2006								Year Ended December 31, 2005
	Compared with								Compared with
	Year Ended December 31, 2005								Year Ended December 31, 2004
	(in thousands)
	Increase (Decrease) Due to
	Volume			Rate		Total			Volume			Rate			Total
Interest earned on:
Tax-exempt securities	$	31		$	28	$	59		$	37		$	(21	)	$	16
Taxable securities		200			245		445			54			111			165
Federal funds sold and cash in banks		23			51		74			54			2			56
Net loans and loans held for sale		1,064			2,817		3,881			2,715			1,836			4,551
Total interest income	$	1,318		$	3,141	$	4,459		$	2,860		$	1,928		$	4,788
Interest paid on:
NOW deposits		(43	)		46		3			(49	)		126			77
Money market deposits		155			52		207			35			216			251
Savings deposits		(72	)		524		452			(91	)		692			601
Time deposits		1,102			1,916		3,018			1,095			1,263			2,358
Borrowed funds		(473	)		342		(131	)		51			564			615
Total interest expense	$	669		$	2,880	$	3,549		$	1,041		$	2,861		$	3,902
Increase (decrease) in net interest income	$	649		$	261	$	910		$	1,819		$	(933	)	$	886

Deposits

The Bank offers a wide range of commercial and consumer interest bearing and non-interest bearing deposit accounts, including checking accounts, money market accounts, negotiable order of withdrawal (“NOW”) accounts, individual retirement accounts, certificates of deposit and regular savings accounts. The sources of deposits are residents, businesses and employees of businesses within the Bank’s market area, obtained through the personal solicitation of the Bank’s officers and directors, direct mail solicitation and advertisements published in the local media. The Bank pays competitive interest rates on time and savings deposits. In addition, the Bank has implemented a service charge fee schedule competitive with other financial institutions in the Bank’s market area, covering such matters as maintenance fees on checking accounts, per item processing fees on checking accounts, returned check charges and similar items.

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The following table details, for the periods indicated, the average amount of and average rate paid on each of the following deposit categories (dollar amounts in thousands):

	Year Ended					Year Ended					Year Ended
	December 31, 2006					December 31, 2005					December 31, 2004
			Average					Average					Average
	Average		Rate			Average		Rate			Average		Rate
Deposit Category	Amount		Paid			Amount		Paid			Amount		Paid
Non-interest bearing demand deposits	$	36,717		—		$	36,273		—		$	30,837		—
NOW and money market deposits		48,177		2.18	%		45,213		1.86	%		46,201		1.11	%
Savings deposits		53,603		3.72	%		56,234		2.74	%		62,431		1.51	%
Time deposits		178,982		4.34	%		145,226		3.27	%		99,153		2.40	%

The maturities of certificates of deposit and individual retirement accounts of $100,000 or more as of December 31, 2006 were as follows (in thousands):

Three months or less	$	36,679
Over three months through six months		29,758
Over six months through twelve months		43,124
Over twelve months		29,808
Total	$	139,369

Short-Term Borrowings

Borrowed funds consist of short-term borrowings, including federal funds purchased, retail and other repurchase agreements and lines of credit with the Federal Home Loan Bank. The average balance of borrowed funds was approximately $20.8 million for the year ended December 31, 2006, compared to $33.2 million and $30.7 million for the years ended December 31, 2005 and 2004, respectively.

The most significant borrowed funds categories for the Bank are two lines of credit from the Federal Home Loan Bank, consisting of the “Loans Held for Sale” (LHFS) program, formerly known as the warehouse line of credit, and a 1-4 family line of credit.

At December 31, 2006, the outstanding balance on the LHFS line of credit was $23,328,076 with an interest rate of 6.06%, compared to no outstanding balance at December 31, 2005. At December 31, 2004, the outstanding balance on the LHFS line of credit was $30,001,709 with an interest rate of 2.94%. The average balance outstanding on the LHFS line of credit was $7,574,412 for 2006 with a weighted average interest rate of 5.69 %. The average balance outstanding on the LHFS line of credit was $16,192,581 for 2005 with a weighted average interest rate of 4.13%. The average balance outstanding for 2004 was $15,271,565, with a weighted average interest rate of 2.31%. The maximum amount outstanding on the LHFS line of credit at any month end during 2006 was $24,213,305 and was $33,967,444 during 2005. The maximum amount outstanding during 2004 was $30,001,709. The LHFS line of credit is secured by the mortgage loans held for sale originated with the borrowed funds. The interest rate on the LHFS line of credit is equal to the Federal Home Loan Bank’s Daily Rate Credit Program rate plus 50 basis points.

At December 31, 2006, the outstanding balance on the 1-4 family line of credit was $8,500,000 with a weighted average interest rate of 5.56%. The balance outstanding on the 1-4 family line of credit was $8,000,000 as of December 31, 2005, with a weighted average interest rate of 4.44%. At December 31,

25

2004, the outstanding balance on the 1-4 family line of credit was $10,235,000, with a weighted average interest rate of 2.44%. The maximum amount outstanding on the 1-4 family line of credit at any month end during 2006 was $9,200,000 and was $12,562,000 during 2005. The maximum amount outstanding during 2004 was $10,235,000. This line of credit was established in May 2003 and is secured by the Bank’s portfolio of 1-4 family first mortgage loans, excluding those loans that are held for sale. The interest rate on the 1-4 family line of credit is equal to the Federal Home Loan Bank’s Daily Rate Credit Program rate.

Loan Portfolio

The Bank engages in a full complement of lending activities, including commercial, consumer/installment and real estate loans. As of December 31, 2006, the Bank’s loan portfolio consisted of 60.2% real estate mortgage loans, 26.2% real estate construction loans, 9.9% commercial loans and 3.7% consumer/installment loans.

Commercial lending is directed principally towards businesses whose demands for funds fall within the Bank’s legal lending limits and which are potential deposit customers of the Bank. This category of loans includes loans made to individual, partnership or corporate borrowers, for a variety of business purposes. These loans include short-term lines of credit, short- to medium-term plant and equipment loans, loans for general working capital and letters of credit.

The Bank’s consumer loans consist primarily of installment loans to individuals for personal, family or household purposes, including automobile loans to individuals and pre-approved lines of credit.

The Bank’s real estate mortgage loans include commercial mortgage lending and residential mortgage lending. The Bank’s commercial mortgage loans are generally secured by office buildings, retail establishments and other types of property. The Bank’s residential mortgage loans are primarily single-family residential loans secured by the residential property.

The Bank’s real estate construction loans consist of residential and commercial construction loans as well as land development loans. These loans are primarily construction and development loans to builders in the Augusta and Savannah, Georgia areas.

While risk of loss in the Bank’s loan portfolio is primarily tied to the credit quality of the various borrowers, risk of loss may also increase due to factors beyond the Bank’s control, such as local, regional and/or national economic downturns. General conditions in the real estate market may also impact the relative risk in the Bank’s real estate portfolio.

With respect to loans which exceed the Bank’s lending limits or established credit criteria, the Bank may originate the loan and sell it to another bank. The Bank may also purchase loans originated by other banks. Management of the Bank does not believe that loan purchase participations will necessarily pose any greater risk of loss than loans which the Bank originates.

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The following table presents the categories of loans contained in the Bank’s loan portfolio as of the end of the five most recent fiscal years and the total amount of all loans for such periods:

	December 31,
Type of Loan	2006			2005			2004			2003			2002
	(In thousands)
Commercial, financial and agricultural	$	27,692		$	29,945		$	30,820		$	24,552		$	24,105
Real estate – construction		73,502			55,737			46,581			37,201			26,117
Real estate – mortgage		169,141			152,497			127,691			99,179			79,374
Installment and consumer		10,609			10,189			11,705			15,500			15,832
Subtotal	$	280,944		$	248,368		$	216,797		$	176,432		$	145,428
Less:
Unearned income and deferred loan fees		(61	)		(57	)		(69	)		(65	)		(58	)
Allowance for possible loan losses		(4,386	)		(3,756	)		(3,416	)		(3,164	)		(2,436	)
Total (net of allowance)	$	276,497		$	244,555		$	213,312		$	173,203		$	142,934

In addition to the above, at December 31, 2006, the Bank also had $56.8 million of single family residential mortgage loans held for sale that were originated by the Bank’s Mortgage Division.

The table below presents an analysis of maturities of certain categories of loans as of December 31, 2006:

	Due in 1
	Year or		Due in 1 to		Due After
Type of Loan	Less		5 Years		5 Years		Total
	(In thousands)
Commercial, financial and agricultural	$	14,558	$	11,309	$	1,825	$	27,692
Real estate-construction		71,479		2,023		—		73,502
Total	$	86,037	$	13,332	$	1,825	$	101,194

The following is a presentation of an analysis of sensitivities of certain loans (those presented in the maturity table above) to changes in interest rates as of December 31, 2006 (in thousands):

Loans due after 1 year with predetermined interest rates	$	11,937
Loans due after 1 year with floating interest rates	$	3,220

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The following table presents information regarding non-accrual and past due loans at the dates indicated:

	December 31,
	2006		2005		2004		2002		2001
	(Dollars in thousands)
Loans accounted for on a non-accrual basis
Number		49		73		75		58		43
Amount	$	2,286	$	1,708	$	1,664	$	1,057	$	597
Accruing loans which are contractually past due 90 days or more as to principal and interest payments
Number		2		10		6		13		3
Amount	$	71	$	297	$	444	$	496	$	91

The Bank does not have any loans which are “troubled debt restructurings” as defined in SFAS No. 15.

Accrual of interest is discontinued when a loan becomes 90 days past due as to principal and interest or, when in management’s judgment, the interest will not be collectible in the normal course of business. Additional interest income of $118,900 in 2006 would have been recorded if all loans accounted for on a non-accrual basis had been current in accordance with their original terms. No interest income has been recognized in 2006 on loans that have been accounted for on a non-accrual basis.

At December 31, 2006, there were no loans classified for regulatory purposes as doubtful, substandard or special mention that have not been disclosed above which (i) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

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Summary of Loan Loss Experience

An analysis of the Bank’s loss experience is furnished in the following table for the periods indicated.

	Years Ended December 31,
	2006			2005			2004			2003			2002
	(Dollar amounts in thousands)
Allowance, beginning of year	$	3,756		$	3,416		$	3,164		$	2,436		$	2,187
Charge-offs:
Commercial, financial and agricultural		106			521			240			55			11
Installment and consumer		95			129			127			141			195
Real estate – mortgage		98			73			333			10			7
		299			723			700			206			213
Recoveries:
Commercial, financial and agricultural		16			34			—			—			1
Installment and consumer		7			7			14			53			6
Real estate – mortgage		8			—			130			1			4
		31			41			144			54			11
Net (charge-offs) recoveries		(268	)		(682	)		(556	)		(152	)		(202	)
Provision charged to operations		898			1,022			808			880			451
Allowance, end of year	$	4,386		$	3,756		$	3,416		$	3,164		$	2,436
Ratio of net (charge-offs) recoveries during the period to average loans outstanding during the period		(.09	%)		(.24	%)		(.23	%)		(.07	%)		(.11	%)

Loan Loss Allowance

In the normal course of business, the Bank has recognized and will continue to recognize losses resulting from the inability of certain borrowers to repay loans and the insufficient realizable value of collateral securing such loans.

29

Accordingly, management has established an allowance for loan losses, which totaled approximately $4,386,000 at December 31, 2006, which is allocated according to the following table, along with the percentage of loans in each category to total loans:

	2006					2005					2004					2003					2002
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(Dollar amounts in thousands)
Commercial, financial and agricultural	$	883		9.9	%	$	543		12.1	%	$	581		14.2	%	$	410		13.9	%	$	330		16.6	%
Real estate - construction		1,442		26.2	%		1,312		22.4	%		1,165		21.5	%		1,100		21.1	%		704		17.9	%
Real estate - Mortgage		1,760		60.2	%		1,671		61.4	%		1,432		58.9	%		1,385		56.2	%		920		54.6	%
Consumer and installment		191		3.7	%		136		4.1	%		152		5.4	%		249		8.8	%		387		10.9	%
Unallocated		110		—			94		—			86		—			20		—			95		—
Total	$	4,386				$	3,756				$	3,416				$	3,164				$	2,436

In evaluating the Bank’s allowance for loan losses, management has taken into consideration concentrations within the loan portfolio, past loan loss experience, growth of the portfolio, current economic conditions and the appraised value of collateral securing loans. Although management believes the allowance for loan losses is adequate, management’s evaluation of losses is a continuing process which may necessitate adjustments to the allowance in future periods.

Real estate mortgage loans constituted approximately 60.2% of outstanding loans at December 31, 2006. These loans include both commercial and residential mortgage loans. Management believes the risk of loss for commercial real estate loans is generally higher than residential loans. Management continuously monitors the performance of the commercial real estate portfolio and collateral values. Residential mortgages are generally secured by the underlying residence. Management of the Bank believes that these loans are adequately secured.

Real estate construction loans represented approximately 26.2% of the Bank’s outstanding loans at December 31, 2006. This category of the loan portfolio consists of commercial and residential construction and development loans located in the Bank’s market areas in Georgia and Florida. Management of the Bank closely monitors the performance of these loans and periodically inspects properties and development progress. Management considers these factors in estimating and evaluating the allowance for loan losses.

Commercial loans represented approximately 9.9% of outstanding loans at December 31, 2006. Commercial loans are generally considered by management as having greater risk than other categories of loans in the Bank’s loan portfolio. However, the Bank generally originates commercial loans on a secured basis, and at December 31, 2006, over 90% of the Bank’s commercial loans were secured. Management believes that the secured status of a substantial portion of the commercial loan portfolio greatly reduces the risk of loss inherently present in commercial loans.

Consumer and installment loans represented approximately 3.7% of outstanding loans at December 31, 2006 and are also well secured. At December 31, 2006, the majority of the Bank’s consumer loans were

30

secured by collateral primarily consisting of automobiles, boats and other personal property. Management believes that these loans inherently possess less risk than other categories of loans.

Loans held for sale consist of single family residential mortgage loans originated by the Bank’s Mortgage Division. These loans are originated with an investor purchase commitment and are sold shortly after origination by the Bank.

The Bank’s management and Board of Directors monitor the loan portfolio monthly to evaluate the adequacy of the allowance for loan losses. Ratings on classified loans are also reviewed and performance is evaluated in determining the allowance. The provision for loan losses charged to operations is based on this analysis. In addition, management and the Board consider such factors as delinquent loans, collateral values and economic conditions in their evaluation of the adequacy of the allowance for loan losses.

Investments

As of December 31, 2006, investment securities comprised approximately 12.8% of the Bank’s assets. The Bank invests primarily in obligations of the United States or agencies of the United States, mortgage-backed securities and obligations, other taxable securities and in certain obligations of states and municipalities. The Bank also enters into federal funds transactions with its principal correspondent banks. The Bank may act as a net seller or net purchaser of such funds.

The following table presents, for the dates indicated, the estimated fair market value of the Bank’s investment securities available for sale. The Bank has classified all of its investment securities as available for sale.

	December 31,
	2006		2005		2004
	(In thousands)
Obligations of the U.S. Treasury and other U.S government agencies	$	26,177	$	16,681	$	15,887
Mortgage-backed securities		21,415		17,041		20,232
Obligations of States and political subdivisions		5,681		3,607		3,279
Corporate obligations		—		1,008		1,557
Total investment securities	$	53,273	$	38,337	$	40,955
Federal Home Loan Bank stock		2,131		1,025		2,420
Total investment securities and FHLB stock	$	55,404	$	39,362	$	43,375

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The following tables present the contractual maturities and weighted average yields of the Bank’s investments as of December 31, 2006:

	Maturities of Investment Securities
			After One		After Five
	Within		Through		Through		After
	One Year		Five Years		Ten Years		Ten Years
	(In thousands)
Obligations of the U.S. Treasury and other U.S. government agencies		5,426		7,046		12,190		1,515
Mortgage-backed securities		595		5,533		—		15,287
Obligations of States and political subdivisions		—		539		2,320		2,822
Corporate obligations		—		—		—		—
Federal home loan bank stock		2,131		—		—		—
Total		8,152		13,118		14,510		19,624

	Weighted Average Yields
				After One			After Five
	Within			Through			Through			After
	One Year			Five Years			Ten Years			Ten Years
Obligations of the U.S. Treasury and other U.S. government agencies		3.11	%		5.08	%		5.73	%		6.00	%
Mortgage-backed securities		3.46	%		3.75	%		—			4.85	%
Obligations of States and political subdivisions		—			3.92	%		5.96	%		6.10	%
Corporate obligations		—			—			—			—
Federal home loan bank stock		5.90	%		—			—			—
Total weighted average yield		3.88	%		4.47	%		5.73	%		5.05	%

The weighted average yields on tax-exempt obligations presented in the table above have been computed on a tax-equivalent basis.

With the exception of U.S. government agency securities, the Bank did not have investments with a single issuer exceeding, in the aggregate, 10% of the Company’s shareholders’ equity.

Return on Equity and Assets

The following table presents certain profitability, return and capital ratios for the Company as of the end of the past three fiscal years.

	December 31,
	2006			2005			2004
Return on Average Assets		0.78	%		1.00	%		1.19	%
Return on Average Equity		9.57	%		12.80	%		14.86	%
Dividend Payout		—			—			–
Equity to Assets		7.70	%		8.19	%		7.63	%

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Liquidity and Interest Rate Sensitivity

Deposit levels and the associated timing and quantity of funds flowing into and out of a bank inherently involve a degree of uncertainty. In order to ensure that it is capable of meeting depositors’ demands for funds, the Bank must maintain adequate liquidity. Liquid assets consisting primarily of cash and deposits due from other banks, federal funds sold and investment securities maturing within one year provide the source of such funds. Insufficient liquidity may force a bank to engage in emergency measures to secure necessary funding, which could be costly and negatively affect earnings. The Bank monitors its liquidity on a monthly basis and seeks to maintain it at an optimal level.

As of December 31, 2006, the Bank’s liquidity ratio was 15.1% as compared to 18.8% at December 31, 2005. In addition to the liquid assets described above, the Bank has a reserve funding source in the form of federal funds lines of credit with The Bankers Bank and SunTrust Bank. Management is not aware of any demands, commitments or uncertainties which could materially affect the Bank’s liquidity position. However, should an unforeseen demand for funds arise, the Bank held readily marketable investment securities at December 31, 2006 with a market value of $53.3 million in its available-for-sale portfolio which would provide an additional source of liquidity.

Gap management is a conservative asset/liability strategy designed to maximize earnings over a complete interest rate cycle while reducing or minimizing the Bank’s exposure to interest rate risk. Various assets and liabilities are termed to be “rate sensitive” when the interest rate can be replaced. By definition, the “gap” is the difference between rate sensitive assets and rate sensitive liabilities in a given time horizon. At December 31, 2006, the Bank was asset sensitive except in the 3-12 month time frame.

The following is an analysis of rate sensitive assets and liabilities as of December 31, 2006 (in thousands):

										5 years
	0- 3 mos.			3 – 12 mos.			1 – 5 years			or more			Total
Taxable securities	$	—		$	6,021		$	12,579		$	28,992		$	47,592
Tax-exempt securities		—			—			539			5,142			5,681
Federal funds sold and cash in banks		12,291			—			—			—			12,291
Loans		191,742			23,925			118,393			3,581			337,641
Total rate sensitive assets		204,033			29,946			131,511			37,715			403,205
NOW and money market deposits		41,169			—			—			—			41,169
Savings deposits		53,606			—			—			—			53,606
Time deposits		51,989			108,658			46,047			25			206,719
Total rate sensitive deposits		146,764			108,658			46,047			25			301,494
Borrowed funds		38,561			—			—			—			38,561
Total rate sensitive liabilities		185,325			108,658			46,047			24			340,055
Excess of rate sensitive assets less rate sensitive liabilities	$	18,708		$	(78,712	)	$	85,464		$	37,690		$	63,150
Cumulative ratio of rate sensitive assets to liabilities		110	%		80	%		107	%		119	%
Cumulative gap	$	18,708		$	(60,004	)	$	25,460		$	63,150

33

Capital Resources

The equity capital of the Bank totaled $32.3 million at December 31, 2006, an increase of $3.1 million, or 10.6%, from equity capital of $29.2 million at December 31, 2005. The increase in equity capital was attributable to the Bank’s net income of $3.0 million, offset by a $200,000 debit adjustment as a result of SEC pronouncement SAB 108 effective November 15, 2006, and an increase of $300,000 in the Bank’s after-tax unrealized gain/(loss) on available-for-sale securities, which under Statement of Financial Accounting Standard No. 115, is recognized in the available-for-sale portion of the bond portfolio by making adjustments to the equity capital account.

The equity capital of the Company totaled $32.1 million at December 31, 2006.

Management believes that the capitalization of the Company and the Bank is adequate to sustain the growth experienced in 2006. The following table sets forth the applicable actual and required capital ratios for the Company and the Bank as of December 31, 2006:

				Minimum
Bank	December 31, 2006			Regulatory Requirement
Tier 1 Capital ratio		9.32	%		4.0	%
Total risk-based capital ratio		10.57	%		8.0	%
Leverage ratio		8.77	%		4.0	%
Company – Consolidated
Tier 1 Capital ratio		9.25	%		4.0	%
Total risk-based capital ratio		10.50	%		8.0	%
Leverage ratio		7.85	%		4.0	%

The above ratios indicate that the capital position of the Company and the Bank are sound and that the Company is well positioned for future growth.

There are no commitments of capital resources known to management which would have a material impact on the Bank’s capital position.

Market Risk

Market risk is the risk arising from adverse changes in the fair value of financial instruments due to a change in interest rates, exchange rates and equity prices. Our primary market risk is interest rate risk.

The primary objective of asset/liability management is to manage interest rate risk and achieve reasonable stability in net interest income throughout interest rate cycles. This is achieved by maintaining the proper balance of rate sensitive earning assets and rate sensitive liabilities. The relationship of rate sensitive earning assets to rate sensitive liabilities is the principal factor in projecting the effect that fluctuating interest rates will have on future net interest income. Rate sensitive earning assets and interest-bearing liabilities are those that can be repriced to current market rates within a relatively short time period. Management monitors the rate sensitivity of earning assets and interest-bearing liabilities over the entire life of these instruments in order to manage this risk.

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We have not experienced a high level of volatility in net interest income primarily because of the relatively large base of core deposits that do not reprice on a contractual basis. These deposit products include regular savings, interest-bearing transaction accounts and money market savings accounts. Balances for these accounts are reported based on historical repricing. However, the rates paid are typically not directly related to market interest rates, since management has some discretion in adjusting these rates as market rates change.

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 December 31, 2006 and 2005.

	At		At
	December 31, 2006		December 31, 2005
	(In thousands)
Commitments to extend credit	$	79,828	$	66,262
Standby letters of credit		2,389		1,947
	$	82,217	$	68,209

Contractual Obligations

We have various contractual obligations that we must fund as part of our normal operations. The following table shows aggregate information about our contractual obligations, including interest, and the periods in which payments are due. The amounts and time periods are measured from December 31, 2006, based upon rates in effect at December 31, 2006.

Payments Due by Period (in thousands)

			Less than						More than
	Total		1 year		1-3 years		3-5 years		5 years
Long-Term Debt	$	889	$	147	$	401	$	341		—
Capital Lease Obligations		—		—		—		—		—
Operating Lease Obligations		811		288		523		—		—
Time Deposits		216,495		168,182		47,971		295		47
	$	218,195	$	168,617	$	48,895	$	636	$	47

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Information in response to this Item 7A is incorporated by reference from the following sections of Item 7 of this report: “Liquidity and Interest Rate Sensitivity” and “Market Risk.”

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Item 8. Financial Statements and Supplementary Data

The following financial statements are filed as Exhibit 99.1 to this Report and incorporated herein by reference:

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Financial Condition as of December 31, 2006 and 2005

Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004

Notes to Consolidated Financial Statements

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There has been no occurrence requiring a response to this item.

Item 9A. Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures as of the end of the fiscal year covered by this Report on Form 10-K and have concluded that the Company’s disclosure controls and procedures are effective. During the fourth quarter of 2006, there were no changes in the Company’s internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9A(T). Controls and Procedures

Not applicable.

Item 9B. Other Information

Not applicable.

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PART III

Certain information required by Part III of this Form 10-K is incorporated by reference from the Company’s definitive proxy statement to be filed pursuant to Regulation 14A for the Company’s Annual Meeting of Shareholders to be held on May 21, 2007 (the “Proxy Statement”). The Company will, within 120 days of the end of its fiscal year, file the Proxy Statement with the Securities and Exchange Commission.

Item 10. Directors and Executive Officers of the Registrant

The information responsive to this item is incorporated by reference from the sections entitled “Corporate Governance and Board Matters,” “Election of Directors” and “Executive Officers” contained in the Proxy Statement.

Item 11. Executive Compensation

The information responsive to this item is incorporated by reference from the section entitled “Executive Compensation” contained in the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information responsive to this item is incorporated by reference from the section entitled “Ownership of Common Stock” contained in the Proxy Statement. See also the section entitled “Equity Compensation Plan Information” in Item 5 of this Annual Report.

Item 13. Certain Relationships and Related Transactions

The information responsive to this item is incorporated by reference from the sections entitled “Corporate Governance and Board Matters and “Related Party Transactions” contained in the Proxy Statement.

Item 14. Principal Accountant Fees and Services

The information responsive to this item is incorporated by reference from the section entitled “Independent Public Accountants” contained in the Proxy Statement.

PART IV

Item 15. Exhibits and Financial Statement Schedules

     (a)1. The following financial statements are filed as Exhibit 99.1 to this Report and incorporated herein by reference:

37

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Financial Condition as of December 31, 2006 and 2005

Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004

Notes to Consolidated Financial Statements

(a)2. Financial Statement Schedules

Not Applicable

(a)3 & (b). The following exhibits are filed with this report:

Exhibit
Number		Description of Exhibit
3.1	-	Articles of Incorporation of the Company (incorporated herein by reference to the exhibit of the same number in the Company’s Registration Statement on Form SB-2 under the Securities Act of 1933, as amended, Registration No. 333-69763, previously filed with the Commission).
3.1.1	-	Articles of Amendment to the Articles of Incorporation of the Company (incorporated herein by reference to the exhibit of the same number in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2000, previously filed with the Commission).
3.2	-	By-Laws of the Company (incorporated herein by reference to the exhibit of the same number in the Company’s Registration Statement on Form SB-2 under the Securities Act of 1933, as amended (Registration No. 333-69763)).
10.1	-	Employment Agreement dated October 6, 1997 between the Company and Patrick G. Blanchard (incorporated herein by reference to the exhibit of the same number in the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997, previously filed with the Commission).

38

Exhibit
Number		Description of Exhibit
10.1.1	-	Amendment No. 1 to Employment Agreement dated October 6, 1997 between First Bank of Georgia, the Company and Patrick G. Blanchard, dated September 30, 1998 (incorporated herein by reference to the exhibit of the same number in the Company’s Registration Statement on Form SB-2, as amended, Registration No. 333-69763, previously filed with the Commission).
10.1.2	-	Amendment No. 2 to Employment Agreement dated October 6, 1997 between First Bank of Georgia, the Company and Patrick G. Blanchard, dated December 23, 1998 (incorporated herein by reference to the exhibit of the same number in the Company’s Registration Statement on Form SB-2, as amended, Registration No. 333-69763, previously filed with the Commission).
10.2	-	1997 Stock Option Plan (incorporated herein by reference to the exhibit of the same number in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2002, previously filed with the Commission).
10.3	-	Directors Stock Purchase Plan (incorporated herein by reference to the exhibit of the same number in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2002, previously filed with the Commission).
10.4	-	2005 Incentive Plan (incorporated herein by reference to Appendix A of the Company’s Proxy Statement for its 2005 Annual Meeting of Shareholders, filed with the Commission on May 5, 2005).
10.5	-	Form of Incentive Stock Option Agreement under the Company’s 2005 Incentive Plan (incorporated herein by reference to the exhibit of the same number in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005, previously filed with the Commission).
* 10.6	-	Severance Protection Agreement between First Bank of Georgia and Remer Y. Brinson, III, dated September 4, 2000.
* 10.7	-	Compensation Arrangements with Remer Y. Brinson, III.
* 10.8	-	First Bank of Georgia Annual Incentive Plan for Patrick G. Blanchard and Remer Y. Brinson, III.
* 10.9	-	Compensation Arrangements with Patrick G. Blanchard.
10.10	-	Severance Protection Agreement between First Bank of Georgia and Bradley J. Gregory, dated August 24, 2006 (incorporated herein by reference from Exhibit 10.1 contained in the Current Report on Form

39

Exhibit
Number		Description of Exhibit
		8-K dated August 24, 2006, previously filed with the Commission).
10.11	-	Compensation Arrangements with Bradley J. Gregory (incorporated herein by reference from Exhibit 10.1 contained in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, previously filed with the Commission).
14.1	-	Code of Ethics (incorporated herein by reference from Exhibit 99.2 contained in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004, previously filed with the Commission).
* 21.1	-	Subsidiaries of the Registrant.
* 23.1	-	Consent of Cherry, Bekaert & Holland, L.L.P.
* 31.1	-	Certification of President and Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
* 31.2	-	Certification of Acting Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
* 32.1	-	Certifications Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
* 99.1	-	Financial Statements.

* Filed herewith.

40

SIGNATURES

Pursuant to the requirements of Section 13 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.
	By:	/s/ Patrick G. Blanchard
Date: March 28, 2007		Patrick G. Blanchard
		President and Chief Executive Officer (principal executive officer)
Date: March 28, 2007	By:	/s/ Bradley J. Gregory, Sr.
		Bradley J. Gregory, Sr.
		Senior Vice President & Chief Financial Officer (principal financial and accounting officer)

41

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

DIRECTORS	DATE
/s/ Patrick G. Blanchard Patrick G. Blanchard	March 28, 2007
/s/ Remer Y. Brinson, III Remer Y. Brinson, III	March 28, 2007
/s/ Larry DeMeyers Larry DeMeyers	March 28, 2007
/s/ Philip G. Farr Philip G. Farr	March 28, 2007
/s/ Samuel A. Fowler, Jr. Samuel A. Fowler, Jr.	March 28, 2007
/s/ Arthur J. Gay, Jr. Arthur J. Gay, Jr.	March 28, 2007
/s/ Joseph D. Greene Joseph D. Greene	March 28, 2007
/s/ J. Randall Hall J. Randall Hall	March 28, 2007
/s/ John W. Lee John W. Lee	March 28, 2007
/s/ Robert N. Wilson, Jr. Robert N. Wilson, Jr.	March 28, 2007
/s/ Hugh L. Hamilton, Jr. Hugh L. Hamilton, Jr.	March 28, 2007
/s/ William G. Hatcher, Sr. William G. Hatcher	March 28, 2007
/s/ George H. Inman George H. Inman	March 28, 2007
/s/ David W. Joesbury, Sr. David W. Joesbury	March 28, 2007
/s/ James L. Lemley, M.D. James L. Lemley, M.D.	March 28, 2007
/s/ Julian W. Osbon Julian W. Osbon	March 28, 2007
/s/ Bennye M. Young Bennye M. Young	March 28, 2007
/s/ A. Montague Miller A. Montague Miller	March 28, 2007

42

EXHIBIT
NUMBER	DESCRIPTION OF EXHIBIT
10.6	Severance Protection Agreement between First Bank of Georgia and Remer Y. Brinson, III, dated September 4, 2000
10.7	Compensation Arrangements with Remer Y. Brinson, III
10.8	First Bank of Georgia Annual Incentive Plan for Patrick G. Blanchard and Remer Y. Brinson, III
10.9	Compensation Arrangements with Patrick G. Blanchard
21.1	Subsidiaries of the Registrant
23.1	Consent of Cherry, Bekaert & Holland, L.L.P.
31.1	Certification of President and Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2	Certification of Acting Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1	Certifications Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
99.1	Financial Statements

EX-10.6

EXHIBIT 10.6

SEVERANCE PROTECTION AGREEMENT

     This Severance Protection Agreement (“Agreement”) is made by and between FIRST BANK. OF GEORGIA, a banking corporation chartered under the laws of the State of Georgia (the “Bank’) and REMER Y. BRINSON, an employee of the Bank (the “Employee”).

W I T N E S S E T H:

     WHEREAS, the Employee is currently an officer of the Bank holding the title of President; and

     WHEREAS, the Bank and the Employee desire to provide for the payment of severance pay to the Employee in the event of termination of Employee’s employment with the Bank following a change in control of the Bank and/or the Bank’s parent holding company, Georgia-Carolina Bancshares, Inc. (the “Company”), on the terms and conditions set forth in this Agreement;

     NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and conditions set forth herein, the Bank and the Employee agree herein as follows:

     1. OPERATION OF AGREEMENT. This Agreement shall be effective immediately upon its execution, but its provisions shall not be operative, for any reason, unless and until a “Change in Control” (as such term is defined in paragraph 2 hereof) has occurred.

     2. CHANGE IN CONTROL. (a) Unless otherwise provided, the term “Change in Control” as used in this Agreement shall mean the first to occur of any of the following;

(i)

The effective date of any transaction or series of transactions (other than a transaction to which only the Company and one or more of its subsidiaries are parties) pursuant to which (a) the Company merges into or becomes a subsidiary of another corporation or (b) one or more of the Company’s subsidiaries (including but not limited to the Bank) becomes a subsidiary of or merges with another entity, or (c) substantially all of the assets of the Company are sold to or acquired by a person, corporation or group of associated persons acting in concert who are not members of the present Board of Directors of the Company.

(ii)

The date upon which any person, corporation, or group of associated persons acting in concert becomes a direct or indirect beneficial owner of shares of stock of the Company representing an aggregate of more than 25% of the votes then entitled to be cast at an election of directors of the Company; or

(iii) The date upon which the persons who were members of the Board of Directors of the Company as of the date of this Agreement (the “Original Directors”) cease to constitute a majority of the Board of Directors of the Company; provided, however, that any new director whose nomination or selection has been approved by the unanimous affirmative vote of the Original Directors then in office shall also be deemed an Original Director.

     (b) Notwithstanding the foregoing and for purposes of paragraph 4(b) below only, the term “Change in Control” shall mean the date upon which any person, corporation, or group of associated persons acting in concert becomes a direct or indirect beneficial owner of shares of stock of the Company representing an aggregate of 50% or more of the votes then entitled to be cast at an election of directors of the Company.

     3. SEVERANCE PAY UPON TERMINATION BY THE BANK WITHOUT CAUSE OR BY EMPLOYEE FOR CAUSE. If, during the three (3) year period immediately following a Change in Control, the Employee’s employment with the Bank is terminated either:

     (a) by the Bank for no reason or for any reason other than as a result of:

(i)	the gross negligence or willful misconduct by the Employee which is materially damaging to the business of the Bank or the Company;
(ii)	the conviction of the Employee of any crime involving breach of trust or moral turpitude;
(iii)	a consistent pattern of failure by the Employee to follow the reasonable written instructions or policies of the Employee’s supervisor or the Board of Directors of the Bank or Company; or
(iv)	receipt by the Bank or the Company of any written notice from the Georgia Department of Banking and Finance, the Federal Deposit Insurance Corporation or the Board of Governors of the Federal Reserve System requiring the removal of the Employee.

     (b) by the Employee as a result of, and within ninety (90) days following:

(i)	a reduction in the Employee’s rate of regular compensation from the Bank to an amount below the rate of the Employee’s regular compensation as in effect immediately prior to the Change in Control; or
(ii)	a requirement that the Employee relocate to a county other than Columbia, McDuffie or Richmond County; or

3

(iii) a reduction in the Employee’s duties, title, and/or responsibilities, as were previously set prior to the Change in Control,

then the Bank shall pay the Employee an amount equal to two (2) times the rate of the Employee’s annual regular compensation (not including bonuses, benefits, grant of options or any other compensation other than regular periodic salary payments) as in effect immediately prior to the Change in Control. Such compensation shall be paid in a lump sum within thirty (30) days after such termination or on a monthly basis as specified in writing by the Employee.

     4. SEVERANCE PAY UPON TERMINATION BY THE EMPLOYEE. Within ninety (90) days after the date upon which a Change in Control occurs as defined in:

(a)

paragraphs 2(a)(i)-(iii) above, Employee may terminate employment and the Bank shall pay Employee an amount equal to Employee’s regular annual compensation (not including bonuses, benefits, grant of options, or any other compensation other than regular periodic salary payments) as in effect immediately prior to the Change in Control as set forth is paragraphs 2(a)(i)-(iii) hereof. Such compensation shall be paid in a lump sum within thirty (30) days of such termination or on a monthly basis as specified in writing by the Employee; or

(b)

paragraph 2(b) above, Employee may terminate its employment and the Bank shall pay Employee an amount equal to one and one half (1 1/2) times the rate of Employee’s regular annual compensation (not including bonuses, benefits, grant of options, or any other compensation other than regular periodic salary payments) as in effect immediately prior to the Change in Control as set forth in paragraph 2(b) hereof. Such compensation shall be paid in a lump sum within thirty (30) days of such termination or on a monthly basis as specified in writing by the Employee.

     5. NO SEVERANCE PAY UPON OTHER TERMINATION. Upon any termination of Employee’s employment with the Bank other than a termination specified in paragraphs 3 and 4, the sole obligation of the Bank to the Employee shall be to pay Employee’s regular compensation up to the effective date of the termination.

     6. ENTIRE OBLIGATION. Payment to the Employee pursuant to paragraph 3 or 4 of this Agreement shall constitute the entire obligation of the Bank to the Employee in full settlement of any claim at law or in equity that the Employee may otherwise assert against the Bank or any of its employees, officers or directors on account of the Employee’s termination of employment.

     7. NO OBLIGATION TO CONTINUE EMPLOYMENT. This Agreement does not create any obligation on the part of the Bank to continue to employ the Employee following a Change in Control or in the absence of a Change in Control.

     8. TERM OF AGREEMENT. This Agreement shall remain in effect for a term of three (3) years from the date hereof and shall automatically renew for an additional three (3) years on each anniversary thereof, unless Employee is otherwise notified to the contrary thirty (30) days

4

prior to such anniversary by the Bank, in which case this Agreement shall terminate two (2) years from such anniversary.

     9. SEVERABILITY. Should any clause, portion or section of this Agreement be unenforceable or invalid for any reason, such unenforceability or invalidity shall not affect the enforceability or validity of the remainder of this Agreement,

     10. ASSIGNMENT, SUCCESSOR AND INTEREST. This agreement being personal to the Employee, it may not be assigned by the Employee. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Bank and/or the Company and the heirs, executors and personal representatives of the Employee.

     11. WAIVER. Failure to insist upon strict compliance with any of the terms, covenants, and conditions of this Agreement shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times.

     IN WITNESS WHEREOF, this Agreement has been executed by the undersigned duly authorized on this 4^th day of September, 2000.

BANK: FIRST BANK OF GEORGIA
By:	/s/ John W. Lee
	Chairman of the Board
EMPLOYEE:
/s/ Remer Y. Brinson
Remer Y. Brinson

EX-10.7

EXHIBIT 10.7

Compensation Arrangements with Remer Y. Brinson, III

     Neither Georgia-Carolina Bancshares, Inc. (“Company”), nor First Bank of Georgia (“Bank”), has a written employment agreement with Remer Y. Brinson, III, President and Chief Executive Officer of First Bank of Georgia. Mr. Brinson’s current (2007) annual salary is $225,000 and Mr. Brinson is eligible for an annual incentive award under the Bank’s Annual Incentive Plan, pursuant to which he received $28,769 in 2006. See Exhibit 10.8 of this Annual Report on Form 10-K for the year ended December 31, 2006 for a description of the Annual Incentive Plan. Mr. Brinson is eligible for stock option grants under the Company’s option plans as determined from time to time by the Board of Directors of the Company. In addition, Mr. Brinson participates in the Bank’s medical, dental, life and disability insurance plans and he may participate in the Company’s 401(k) plan. Mr. Brinson also receives the following perquisites: payment of private and civic club membership dues, provision of an automobile and an automobile allowance. The aggregate value of these perquisites in 2006 was less than $10,000.

     Mr. Brinson has entered into a Severance Protection Agreement with the Bank, which entitles him to certain payments following a change in control of the Company. The Severance Protection Agreement is filed with this Annual Report on Form 10-K for the year ended December 31, 2006 as Exhibit 10.6.

EX-10.8

EXHIBIT 10.8

First Bank of Georgia Annual Incentive Plan
for
Patrick G. Blanchard, President and Chief Executive Officer,
Georgia-Carolina Bancshares, Inc.
and
Remer Y. Brinson, III, President and Chief Executive Officer,
First Bank of Georgia

     In March 2006, the independent directors who are members of the Executive Committee of the Board of Directors of First Bank of Georgia approved the First Bank of Georgia Annual Incentive Plan (the “Plan”), pursuant to which Mr. Blanchard and Mr. Brinson (the “Executive Officers”) may earn an incentive award equal to a percentage of their annual base salary. The cash incentive award is based upon meeting certain financial performance objectives established at the beginning of each calendar year.

     The performance measures are related to asset growth, net income (including accruals for incentive payments under the Plan), and a subjective assessment by the Board of Directors. The financial performance objectives of asset growth and net income are assigned a weighting factor of 40% each, and the subjective assessment of the Board of Directors is assigned a weighting factor of 20%.

     The Plan includes a “threshold,” “target” and “stretch” or aspiration goal in each of the asset growth and net income categories. Failure to meet the threshold goals results in no incentive payment in that category. Achievement of the threshold goals is designed to result in an incentive award of 15% of base salary. Achievement of the target goals is designed to result in an incentive award of 30% of base salary. Achievement of the stretch goals is designed to result in an incentive award of 60% of base salary. The performance objectives are designed so that the achievement of the target goals would be considered to be reflective of superior performance, and the target goals are considered to be difficult to achieve.

     Certain other quality measures, which are based upon credit quality measures, are also included in the Plan, which can have the effect of increasing or decreasing the incentive award amount by as much as 45%. The credit quality measures are designed as to act as control measures to insure that asset growth and net income are not achieved at the expense of credit quality, and that balanced results are achieved. The credit quality measures include expectations related to: (i) classified assets as a percent of total assets, (ii) charge-offs as a percent of loans, and (iii) delinquencies as a percent of loans. If the credit quality results do not meet expectations for a particular credit quality measure, the incentive award will be reduced by 15%. If the credit quality results meet expectations, there is no impact on the incentive award. If the credit quality results exceed expectations, there will be a 15% increase in the incentive award. Additional payments for exceeding expectations under the credit quality measures will only be made if the target net income measure is exceeded.

     The subjective assessment of the Board of Directors takes into account various circumstances, developments and occurrences during the year which may have had an impact on the performance measures, and the Board of Directors may act subjectively based upon those considerations and may make upward or downward adjustments to an incentive award based upon the 20% weighting factor.

     Excluding the subjective assessment of the Board of Directors, and assuming that (i) the stretch goals were attained for each financial performance category, and (ii) the results of each of the credit quality measures exceeded expectations, the maximum annual incentive award which could be earned is 87% of base salary.

     Pursuant to the actual results for the year ended December 31, 2006, asset growth fell between the target amount and the stretch amount. Net income for the year ended December 31, 2006 did not meet the threshold goal, so no incentive payment was earned with respect to that performance measure. Thus, under the Plan, an incentive award of 15.34% of base salary was earned for 2006. Based upon the subjective assessment by the Board of Directors, no adjustment was made to the incentive award for 2006. Under the credit quality measure categories, the target measure was met in one category and was exceeded in each of the other two categories. However, due to the fact that the threshold net income goal was not met, no additional incentive award was earned under the credit quality measure categories. Pursuant to the 2006 Annual Incentive Plan, Mr. Blanchard’s incentive award was $25,316, and Mr. Brinson’s incentive award was $28,769.

     The financial performance objectives and credit quality measures may be adjusted annually by the Board of Directors or an appropriate committee of the Board of Directors. The financial performance objectives have been modified for the 2007 Plan year.

EX-10.9

EXHIBIT 10.9

Compensation Arrangements with Patrick G. Blanchard

     Georgia-Carolina Bancshares, Inc. (“Company”) has a written employment agreement with Patrick G. Blanchard, President and Chief Executive Officer of the Company. The Employment Agreement is filed as Exhibit 10.1 to this Annual Report on Form 10-K for the year ended December 31, 2006. Mr. Blanchard’s current (2007) annual salary is $175,000 and Mr. Blanchard is eligible for an annual incentive award under First Bank of Georgia’s Annual Incentive Plan, pursuant to which he received $25,316 in 2006. See Exhibit 10.8 of this Annual Report on Form 10-K for the year ended December 31, 2006 for a description of the Annual Incentive Plan. Mr. Blanchard’s Employment Agreement entitles him to certain payments following a change in control of the Company. Mr. Blanchard is eligible for stock option grants under the Company’s option plans as determined from time to time by the Board of Directors of the Company. In addition, Mr. Blanchard participates in the Bank’s medical, dental, life and disability insurance plans and he may participate in the Company’s 401(k) plan. Mr. Blanchard also receives the following perquisites: payment of private and civic club membership dues, provision of an automobile and an automobile allowance. The aggregate value of these perquisites in 2006 was less than $10,000.

EX-21.1

EXHIBIT 21.1

Subsidiaries of the Registrant

First Bank of Georgia

EX-23.1

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in Registration Statement Nos. 333-100176, 333-100177, and 333-123855 of Georgia-Carolina Bancshares, Inc. on Form S-8 of our report dated March 20, 2007, related to the audit of the consolidated financial statements of Georgia-Carolina Bancshares, Inc. as of December 31, 2006 and 2005, and for each of the years in the three year period ending December 31, 2006 appearing in this Annual Report on Form 10-K of Georgia-Carolina Bancshares, Inc..

/s/     Cherry, Bekaert & Holland, L.L.P.

Augusta, Georgia
March 27, 2007

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Patrick G. Blanchard, certify that:

1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2006 of Georgia-Carolina Bancshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986]

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 28, 2007

/s/ Patrick G. Blanchard

Patrick G. Blanchard

President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Bradley J. Gregory, Sr., certify that:

1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2006 of Georgia-Carolina Bancshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986]

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 28, 2007

/s/ Bradley J. Gregory, Sr.

Bradley J. Gregory, Sr.

Senior Vice President and

Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report of Georgia-Carolina Bancshares, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), the undersigned, Patrick G. Blanchard, President and Chief Executive Officer of the Company, and Bradley J. Gregory, Sr., Senior Vice President and Chief Financial Officer do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

     (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:
	/s/ Patrick G. Blanchard
	Patrick G. Blanchard
	President and Chief Executive Officer
	March 28, 2007
	/s/ Bradley J. Gregory, Sr.
	Bradley J. Gregory, Sr.
	Senior Vice President and Chief Financial Officer
	March 28, 2007

EX-99.1

EXHIBIT 99.1

FINANCIAL STATEMENTS

GEORGIA-CAROLINA BANCSHARES, INC.

Financial Statements

For the Years Ended December 31, 2006 and 2005

GEORGIA-CAROLINA BANCSHARES, INC.

Table of Contents

December 31, 2006 and 2005

	Page
Report of Independent Registered Public Accounting Firm		1
Consolidated Statements of Financial Condition		2
Consolidated Statements of Income		3
Consolidated Statements of Comprehensive Income		4
Consolidated Statements of Shareholders’ Equity		5
Consolidated Statements of Cash Flows		6
Notes to Consolidated Financial Statements		7-34

Report of Independent Registered Public Accounting Firm

The Board of Directors
Georgia-Carolina Bancshares, Inc.
Augusta, Georgia

We have audited the accompanying consolidated statements of financial condition of Georgia-Carolina Bancshares, Inc. and subsidiary (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows, for each of the years in the three-year period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Georgia-Carolina Bancshares, Inc. and subsidiary as of December 31, 2006 and 2005, and the results of their operations and cash flows, for each of the years in the three-year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for share-based payments and evaluating prior year misstatements effective January 1, 2006.

Augusta, Georgia
March 20, 2007

GEORGIA-CAROLINA BANCSHARES, INC.

Consolidated Statements of Financial Condition

December 31, 2006 and 2005
(dollars in thousands, except per share amounts)

	2006			2005
Assets
Cash and due from banks	$	11,109		$	9,498
Federal funds sold		1,182			—
Securities available-for-sale		53,273			38,337
Loans, net of allowance for loan losses		276,497			244,555
Loans held for sale		56,758			40,064
Bank premises and fixed assets		10,655			10,563
Accrued interest receivable		1,738			1,756
Foreclosed real estate, net of allowance		599			427
Deferred tax asset, net		1,360			1,341
Federal Home Loan Bank Stock		2,131			1,025
Other assets		2,169			1,915
Total assets	$	417,471		$	349,481
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Non-interest bearing	$	39,848		$	36,986
Interest-bearing:
NOW accounts		28,447			33,090
Savings		53,606			58,473
Money market accounts		12,722			19,669
Time deposits of $100,000 or more		139,369			94,763
Other time deposits		67,350			61,459
Total deposits		341,342			304,440
Federal funds purchased		—			3,456
Federal Home Loan Bank borrowings		31,828			8,000
Retail deposit agreements		6,733			1,886
Other liabilities		5,442			3,090
Total liabilities		385,345			320,872
Shareholders’ equity(1)
Preferred stock, par value $.001; 1,000,000 shares authorized; none issued		—			—
Common stock, par value $.001; 9,000,000 shares authorized; 3,376,522 and 3,354,090 shares issued and outstanding, respectively		4			4
Additional paid-in capital		14,500			13,974
Retained earnings		17,903			15,183
Accumulated other comprehensive (loss)		(281	)		(552	)
Total shareholders’ equity		32,126			28,609
Total liabilities and shareholders’ equity	$	417,471		$	349,481

(1) Adjusted to reflect the 5-for-4 common stock split effected April 1, 2005.

See notes to consolidated financial statements.

2

GEORGIA-CAROLINA BANCSHARES, INC.

Consolidated Statements of Income

For the Years Ended December 31, 2006, 2005 and 2004
(dollars in thousands, except per share amounts)

	2006		2005		2004
Interest income
Interest and fees on loans	$	23,144	$	19,263	$	14,713
Interest on taxable securities		1,541		1,434		1,268
Interest on nontaxable securities		512		115		100
Interest on Federal funds sold and cash in banks		138		64		7
Total interest income		25,335		20,876		16,088
Interest expense
Interest on time deposits of $100,000 or more		4,976		2,654		1,175
Interest on other deposits		5,830		4,472		2,664
Interest on funds purchased and other borrowings		1,163		1,294		629
Total interest expense		11,969		8,420		4,468
Net interest income		13,366		12,456		11,620
Provision for loan losses		898		1,022		808
Net interest income after provision for loan losses		12,468		11,434		10,812
Noninterest income
Service charges on deposits		928		675		773
Other income		560		355		362
Gain on sale of mortgage loans		8,312		9,301		9,436
Total noninterest income		9,800		10,331		10,571
Noninterest expense
Salaries and employee benefits		11,801		10,828		10,248
Occupancy expenses		1,467		1,310		1,255
Other expenses		4,643		4,230		4,211
Total noninterest expense		17,911		16,368		15,714
Income before income taxes		4,357		5,397		5,669
Income tax expense		1,460		1,942		2,167
Net income	$	2,897	$	3,455	$	3,502
Earnings per share(1)
Basic	$	.86	$	1.04	$	1.06
Diluted	$	.83	$	0.98	$	0.99

(1) Adjusted to reflect the 5-for-4 common stock split effected April 1, 2005.

See notes to consolidated financial statements.

3

GEORGIA-CAROLINA BANCSHARES, INC.

Consolidated Statements of Comprehensive Income

For the Years Ended December 31, 2006, 2005 and 2004
(dollars in thousands)

	2006		2005			2004
Net income	$	2,897	$	3,455		$	3,502
Unrealized holding gain (loss) arising during the period, net of tax		271		(511	)		(215	)
Comprehensive income	$	3,168	$	2,944		$	3,287

See notes to consolidated financial statements.

4

GEORGIA-CAROLINA BANCSHARES, INC.

Consolidated Statements of Shareholders’ Equity

For the Years Ended December 31, 2006, 2005 and 2004
(dollars in thousands)

										Accumulated
	Common		Common		Additional					Other			Total
	Stock		Stock		Paid-in		Retained			Comprehensive			Shareholders’
	Shares		Par Value		Capital		Earnings			Income (Loss)			Equity
Balance at January 1, 2004		2,636,510		2		13,461		8,227			174			21,864
Net income		—		—		—		3,502			—			3,502
Change in unrealized gain (loss) on securities available-for-sale, net of deferred taxes		—		—		—		—			(215	)		(215	)
Stock split effected in the form of a stock dividend		664,582		1		—		(1	)		—			—
Proceeds from exercise of stock options		8,600		—		40		—			—			40
Issuance of stock for compensation		7,558		1		176		—			—			177
Balance at December 31, 2004		3,317,250		4		13,677		11,728			(41	)		25,368
Net income		—		—		—		3,455			—			3,455
Change in unrealized gain (loss) on securities available-for-sale, net of deferred taxes		—		—		—		—			(511	)		(511	)
Stock split effected in the form of a stock dividend		368		—		—		—			—			—
Proceeds from exercise of stock options		24,795		—		106		—			—			106
Issuance of stock for compensation		11,677		—		191		—			—			191
Balance at December 31, 2005		3,354,090		4		13,974		15,183			(552	)		28,609
SAB 108 adjustment, net of taxes		—		—		—		(177	)		—			(177	)
Balance at January 1, 2006 (2)		3,354,090		4		13,974		15,006			(552	)		28,432
Net income		—		—		—		2,897			—			2,897
Change in unrealized gain (loss) on securities available-for-sale, net of deferred taxes		—		—		—		—			271			271
Proceeds from exercise of stock options		10,400		—		59		—			—			59
Stock-based compensation expense		—		—		295		—			—			295
Issuance of stock for compensation		12,032		—		172		—			—			172
Balance at December 31, 2006		3,376,522	$	4	$	14,500	$	17,903		$	(281	)	$	32,126

(2) See Note 1 – Recent accounting standards

See notes to consolidated financial statements.

5

GEORGIA-CAROLINA BANCSHARES, INC.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2006, 2005 and 2004
(dollars in thousands)

	2006			2005			2004
Cash flows from operating activities
Net income	$	2,897		$	3,455		$	3,502
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		764			534			480
Provision for loan losses		898			1,022			808
(Gains) losses on sales of foreclosed real estate		(21	)		119			(9	)
Stock-based compensation expense		295			—			—
Stock compensation		172			191			176
Deferred income tax		(172	)		(113	)		(348	)
Net originations, proceeds and gain on loans originated for sale		(16,694	)		16,665			(24,310	)
(Increase) decrease in accrued interest receivable		18			(402	)		(228	)
Increase in accrued interest payable		1,674			743			236
Net change in other assets and liabilities		241			(1,036	)		109
Net cash provided by (used in) operating activities		(9,928	)		21,178			(19,584	)
Cash flows from investing activities
(Increase) decrease in Federal funds sold		(1,182	)		—			8,470
Loan originations and collections, net		(33,619	)		(32,668	)		(41,272	)
Purchases of available-for-sale securities		(21,003	)		(7,077	)		(24,279	)
Proceeds from maturities and calls of available-for-sale securities		6,492			8,895			18,050
Purchases of restricted securities		(1,106	)		—			(1,337	)
Proceeds from sales of restricted securities		—			1,395			—
Proceeds from sale of foreclosed real estate		628			271			—
Net additions to premises and equipment		(751	)		(2,755	)		(1,673	)
Net cash used in investing activities		(50,541	)		(31,939	)		(42,041	)
Cash flows from financing activities
Net increase in deposits, funds purchased, and other borrowings		33,346			44,546			40,694
Increase (decrease) in FHLB borrowings		23,828			(32,237	)		21,637
Increase (decrease) in repurchase agreements		4,847			706			(204	)
Proceeds from stock options exercised		59			106			40
Net cash provided by financing activities		62,080			13,121			62,167
Net increase in cash and due from banks		1,611			2,360			542
Cash and due from banks at beginning of the year		9,498			7,138			6,596
Cash and due from banks at end of the year	$	11,109		$	9,498		$	7,138

See notes to consolidated financial statements.

6

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

Note 1¾Summary of significant accounting policies

Nature of business

Georgia-Carolina Bancshares, Inc. (the “Company”) is a one-bank holding company. Substantially all of its business is conducted by its wholly-owned subsidiary, First Bank of Georgia (the “Bank”). The Bank is engaged in community banking activities through its locations in Thomson and Augusta, Georgia and the surrounding area. Most of the Bank’s loans and loan commitments have been granted to customers in the Columbia, Richmond, and McDuffie County, Georgia areas. Many of the Bank’s loan customers are also depositors of the Bank. The Bank has established a mortgage division that operates as First Bank Mortgage. This division currently has locations in the Augusta and Savannah, Georgia areas and in Jacksonville, Florida. The division originates residential real estate mortgage loans and provides financing to residential construction and development companies. Substantially all residential mortgage loans originated by the division are sold in the secondary market.

The Bank is subject to the regulations of Federal and state banking agencies and is periodically examined by them.

On December 31, 2004, 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, on April 1, 2005 to shareholders of record on March 1, 2005. Per share information throughout the financial statements and footnotes reflects this stock split, with prior period amounts being restated to reflect the effects of the stock split.

Significant accounting policies

Basis of presentation: The consolidated financial statements include the accounts of the Company and its subsidiary bank. Significant inter-company transactions and accounts are eliminated in consolidation. The accounting and reporting policies of the Bank conform to accounting principles generally accepted in the United States of America and general practices within the banking industry.

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

Significant group concentrations of credit risk: A substantial portion of the Bank’s loan portfolio is with customers in the Thomson and Augusta, Georgia market areas. The ultimate collectibility of a substantial portion of the portfolio is therefore susceptible to changes in the economic and market conditions in and around these areas.

7

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 1¾Summary of significant accounting policies (continued)

Cash and due from banks: For purposes of reporting cash flows, cash and due from banks includes cash on hand and amounts due from banks (including cash items in the process of clearing). The Bank maintains due from accounts with banks primarily located in Georgia. Balances generally exceed insured amounts.

Investment securities: The Bank’s investments in securities are classified and accounted for as follows:

Securities available-for-sale – Securities classified as available-for-sale are identified when acquired as being available-for-sale to meet liquidity needs or other purposes. They are carried at fair value with unrealized gains and losses, net of taxes, reported in other comprehensive income.

Securities held-to-maturity – Securities classified as held-to-maturity are those debt securities the Bank has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. These securities are carried at cost, adjusted for amortization of premium and accretion of discount, and computed by the interest method over their contractual lives.

Restricted equity securities without a readily determinable fair value are recorded at cost.

The Bank has not classified any securities as trading.

Gains and losses on the sale of securities are determined using the specific-identification method on a trade date basis. Dividends and interest income are recognized when earned. A decline in fair value of individual available-for-sale or held-to-maturity securities below cost that is deemed other than temporary, results in write-downs of individual securities to their fair value.

Loans and allowance for loan losses: Loans are stated at principal amounts outstanding less unearned income and the allowance for loan losses. Interest income on loans is credited to income based on the principal amount outstanding at the respective rate of interest, except for unearned interest on discounted loans that is recognized as income over the term of the loan using a method that approximates a level yield.

Loans originated and intended for sale in the secondary market are stated at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. As the mortgage loans originated are individually pre-approved by the secondary market investors, the Bank is subject to minimal interest rate and credit risk on these loans, as the Bank only holds the loans temporarily as funding is completed.

8

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 1¾Summary of significant accounting policies (continued)

Loan commitments, whose underlying mortgage loans at origination will be held for sale upon funding of the loan, are derivative instruments as defined by Statement of Financial Accounting Standards (SFAS) No. 133, as amended. Pursuant to that SFAS, loan commitments are recognized on the consolidated balance sheet in other assets and other liabilities at fair value, with changes in their fair values recognized in current period earnings. At the inception of a loan commitment, the Bank generally will simultaneously enter into a forward loan sale commitment to protect the Bank from losses on sales of the loans underlying the loan commitment by securing the ultimate sale price and delivery date of the loan.

Accrual of interest income is discontinued when a loan becomes 90 days past due as to principal and interest or when, in management’s judgment, the interest will not be collectible in the normal course of business. Accrual of interest on such loans is resumed when, in management’s judgment, the collection of interest and principal becomes probable. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current interest income. Interest income is subsequently recognized only to the extent cash payments are received.

The accrual of interest on impaired loans is discontinued when, in management’s judgment, the borrower may be unable to meet payments as due. Management applies this criterion to all loans identified for evaluation except for smaller-balance homogeneous residential mortgage and consumer installment loans that are collectively evaluated for impairment. Impairment on loans is measured using either the discounted expected cash flow method or value of collateral method. A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Management of the Bank evaluates the borrower’s ability to pay, the value of any collateral, and other factors in determining when a loan is impaired. Management does not consider a loan to be impaired during a period of delay in payment if it is expected that the Bank will collect all amounts due including interest accrued at the contractual interest rate for the period of the delay.

Interest payments on impaired loans are applied to the remaining principal balance until the balance is fully recovered. Once principal is recovered, cash payments received are recorded as recoveries to the extent of any principal previously charged-off and then as interest income.

Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield over the life of the loan. Loan origination fees and direct loan origination costs on loans held for sale are deferred and recognized at the time the loan is sold.

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans, including impaired loans, are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing loans that may become uncollectible, based on evaluation of the collectibility of certain specific loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and

9

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 1¾Summary of significant accounting policies (continued)

volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions.

Foreclosed real estate: Foreclosed real estate represents properties acquired through foreclosure or other proceedings. The property is held for sale and is recorded at the lower of the recorded amount of the loan, or fair value of the property, less estimated costs of disposal. Any write-down to fair value at the time of foreclosure is charged to the allowance for loan losses. Property is evaluated regularly to ensure the carrying amount is supported by its current fair value. Foreclosed real estate is reported net of allowance for losses in the consolidated financial statements.

Bank premises and equipment: Premises and equipment are stated at cost, less accumulated depreciation, and computed by straight-line and declining balance methods over the estimated useful lives of the assets, which range from three to thirty-nine years.

Financial instruments: In the ordinary course of business, the Company has entered into off balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable.

Advertising: The Company expenses advertising costs as incurred.

Income taxes: Provisions for income taxes are based on amounts reported in the statements of income after exclusion of nontaxable income, such as interest on state and municipal securities, and include deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Deferred taxes are computed on the liability method. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Earnings per share: Earnings per share are calculated on the basis of the weighted average number of shares outstanding in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share. This Statement establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. The Company’s outstanding stock options are the primary cause of the Company’s diluted earnings per share.

Fair value of financial instruments: The following methods and assumptions are used by the Bank in estimating fair values of financial instruments. In cases where quoted market prices of financial instruments are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

10

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 1¾Summary of significant accounting policies (continued)

In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Accordingly, the aggregate fair value amounts presented are not intended to and do not represent the underlying value of the Bank.

Cash and due from banks, Federal funds sold, and interest-bearing deposits in banks – Due to the short-term nature of these instruments, their estimated fair values approximate their carrying amounts.

Available-for-sale and held-to-maturity securities – Estimated fair values are based on quoted market prices when available. Where quoted market prices are not available, quoted market prices of comparable instruments or discounted cash flow methods are used to estimate fair value.

Loans – Fair values for loans are estimated by discounted cash flows using interest rates currently being offered by the Bank for loans with similar terms and similar credit quality. For loan commitments, the Bank utilizes prevailing interest rates being offered on similar loans to estimate the fair value of the commitment.

Deposit liabilities, other borrowings, and retail agreements – Due to the short-term nature of demand and savings accounts and retail agreements, the estimated fair value of these instruments approximates their carrying amounts. In addition, due to the short-term nature of borrowings from other institutions, the estimated fair value of these instruments approximates their carrying amounts. Fair values for certificates of deposit are estimated by discounted cash flows using interest rates currently being offered by the Bank on certificates.

Commitments to extend credit and standby letters of credit are not recorded until such commitments are funded. The value of these commitments is equal to the fees charged to enter into such agreements. The Bank has determined that such instruments do not have a material distinguishable fair value, and no fair value has been assigned to these instruments.

Comprehensive income: Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income, although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the statement of financial condition. Such items, along with net income, are components of comprehensive income.

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 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

11

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 1¾Summary of significant accounting policies (continued)

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.

In adopting SFAS No. 123, 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 following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period (in thousands, except per share amounts). See Note 10 for additional information regarding the Company’s stock-based compensation plans.

	2005		2004
Net income as reported	$	3,455	$	3,502
Earnings per share as reported
Basic:		1.04		1.06
Diluted:		0.98		0.99
Stock-based employee compensation cost based on fair-value method		251		396
Proforma net income, including stock-based compensation cost based on fair-value method		3,204		3,106
Proforma earnings per share, including stock-based compensation cost based on fair-value method
Basic:		0.96		0.94
Diluted:		0.91		0.88

12

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 1¾Summary of significant accounting policies (continued)

Recently Issued Accounting Standards

In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments. SFAS 155 amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155 permits the fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation. Further, it clarifies which interest-only strips and principal-only strips are not subject to SFAS 133 requirements. It also establishes a requirement to evaluate interests in securitized financial assets to identify interest in freestanding derivatives and clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. Last, it eliminates the prohibition on a qualifying special purpose entity from holding a derivative financial instrument pertaining to a beneficial interest other than another derivative financial instrument. The Company will be required to adopt this standard in 2007. The adoption of SFAS 155 is not expected to have a material impact on the Company’s financial condition, results of operations, or liquidity.

In June 2006, the FASB issued FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109,” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is required to be adopted by the Company on January 1, 2007. Management does not expect that the impact of this Interpretation will be material to the Company’s financial condition, results of operations, or liquidity.

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” 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 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

13

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 1¾Summary of significant accounting policies (continued)

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. Based on the method previously applied, prior to the issuance of SAB 108, the impact was considered immaterial to the Company’s 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 financial condition, results of operations, and liquidity.

Note 2¾Investment securities

The amortized cost and fair value amounts of securities owned as of December 31, 2006 and 2005 are shown below:

	2006
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(in thousands)
Available-for-sale securities:
U.S. Government and agency	$	26,312	$	95	$	(230	)	$	26,177
Mortgage-backed		21,729		41		(355	)		21,415
State and municipal		5,670		44		(33	)		5,681
	$	53,711	$	180	$	(618	)	$	53,273

14

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 2¾Investment securities (continued)

	2005
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(in thousands)
Available-for-sale securities:
U.S. Government and agency	$	17,057	$	—	$	(376	)	$	16,681
Mortgage-backed		17,511		8		(478	)		17,041
Corporate obligations		1,003		5		—			1,008
State and municipal		3,629		17		(39	)		3,607
	$	39,200	$	30	$	(893	)	$	38,337

The amortized cost and fair value of securities as of December 31, 2006 by contractual maturity are as follows. Actual maturities may differ from contractual maturities in mortgage-backed securities, as the mortgages underlying the securities may be called or prepaid without penalty; therefore, these securities are not included in the maturity categories in the following maturity summary.

	Securities
	Available-for-Sale
	Amortized		Fair
	Cost		Value
	(in thousands)
One year or less	$	5,504	$	5,426
After one year through five years		7,735		7,585
After five years through ten years		14,421		14,510
After ten years		4,322		4,337
Mortgage-backed securities		21,729		21,415
	$	53,711	$	53,273

Securities with a carrying amount of approximately $48.7 million at December 31, 2006 and $38.8 million at December 31, 2005 were pledged to secure public deposits and for other purposes.

There were no material net realized gains (losses) on sales of securities during 2006, 2005, or 2004.

Information pertaining to securities with gross unrealized losses at December 31, 2006 and 2005 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

15

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 2¾Investment securities (continued)

	2006
	Less than				Over
	Twelve Months				Twelve Months
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
	(in thousands)
Securities available-for-sale:
U. S. agency	$	7	$	2,991	$	224	$	15,033
State and municipal		6		1,153		26		731
Mortgage-backed		8		2,096		347		14,265
	$	21	$	6,240	$	597	$	30,029

	2005
	Less than				Over
	Twelve Months				Twelve Months
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
	(in thousands)
Securities available-for-sale:
U. S. agency	$	105	$	6,219	$	271	$	10,462
State and municipal		7		908		32		724
Mortgage-backed		122		6,205		356		10,346
	$	234	$	13,332	$	659	$	21,532

Management evaluates securities for other-than-temporary impairment on a periodic basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuers, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At December 31, 2006, the gross unrealized losses are primarily the result of changes in market interest rates and not related to the credit quality of the underlying issuer. Each of the securities are U.S. agency debt securities, including mortgage-backed securities and municipal securities. As the Bank has the ability to hold the securities for the foreseeable future, no declines are deemed to be other than temporary.

16

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 2¾Investment securities (continued)

Included in Other Assets is an investment of approximately $919,000 in a real estate rehabilitation project located in Georgia that will provide the Bank with state tax credits for approximately 10 years.

Note 3¾Loans

The composition of loans for the years ended December 31, 2006 and 2005 is summarized as follows:

	2006			2005
	(in thousands)
Commercial and industrial	$	27,692		$	29,945
Real estate – construction		73,502			55,737
Real estate – residential		47,319			46,464
Real estate – commercial		121,822			106,033
Consumer		10,609			10,189
		280,944			248,368
Deferred loan fees		(61	)		(57	)
		280,833			248,311
Allowance for loan losses		(4,386	)		(3,756	)
Loans, net	$	276,497		$	244,555

Changes in the allowance for loan losses are as follows:

	2006			2005			2004
Balance at beginning of the year	$	3,756		$	3,416		$	3,164
Provision charged to operations		898			1,022			808
Recoveries		31			41			144
Loans charged off		(299	)		(723	)		(700	)
Balance at end of the year	$	4,386		$	3,756		$	3,416

Loans for which the accrual of interest had been discontinued or reduced amounted to approximately $2,286,000 and $1,708,000 at December 31, 2006 and 2005, respectively. There was no significant reduction in interest income associated with non-accrual and renegotiated loans. There were no loans identified as impaired under SFAS 114 at December 31, 2006 and 2005.

17

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 3¾Loans (continued)

At December 31, 2006, executive officers and directors, and companies in which they have a beneficial ownership, were indebted to the Bank in the aggregate amount of approximately $4,508,000. The interest rates on these loans were substantially the same as rates prevailing at the time of the transactions, and repayment terms are customary for the type of loan involved. Following is a summary of transactions for December 31, 2006 and 2005:

	2006		2005
	(in thousands)
Balance at beginning of the year	$	8,790	$	3,299
Advances		1,217		6,588
Repayments		5,499		1,097
Balance at end of the year	$	4,508	$	8,790

Note 4¾Foreclosed real estate

A summary of foreclosed real estate for the years ended December 31, 2006, 2005 and 2004 is as follows:

	2006		2005		2004
	(in thousands)
Carrying amount of property	$	599	$	427	$	414
Less valuation allowance		—		—		—
	$	599	$	427	$	414

There was no provision charged to income for each of the years presented.

18

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 5¾Bank premises and equipment

Bank premises and equipment consists of the following for the years ended December 31, 2006 and 2005:

	2006			2005
	(in thousands)
Land	$	3,851		$	3,097
Building and improvements		6,020			6,151
Equipment, furniture and fixtures		4,729			4,613
Construction in progress		—			—
		14,600			13,861
Less accumulated depreciation		(3,945	)		(3,298	)
Premises and equipment, net	$	10,655		$	10,563

Depreciation expense for the years ended December 31, 2006, 2005 and 2004 was approximately $659,000, $508,000 and $480,000, respectively.

Note 6¾Deposits

At December 31, 2006, the scheduled maturities of time deposit liabilities were as follows:

	(in thousands)
2007		160,647
2008		21,549
2009		12,038
2010		12,409
2011 and thereafter		76
	$	206,719

To manage the Bank’s funding capabilities, the Bank may also enter into retail deposit agreements with customers and may obtain short-term funding from other institutions. Retail deposit agreements with customers are generally secured by investment securities owned by the Bank and are established at prevailing market rates. Short-term funding from other institutions is generally overnight or 30-day funding at current market rates. Retail deposit agreements were approximately $6.7 million and $1.9 million at December 31, 2006 and 2005, respectively.

19

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 7¾Federal home loan bank advances

As of December 31, 2006 and 2005, the Bank had a Credit Availability, or potential borrowing capacity, of 25% of total assets, subject to the Bank’s financial condition and collateral balances with the FHLB. One of the advance products utilized in 2006 was the “Loans Held for Sale” (LHFS) program, formerly known as the warehouse line of credit. The line is collateralized by the Bank’s mortgage loans held for sale. Advances under this line are due 90 days from the date of the advance. As of December 31, 2006, the Bank had a balance of $23.4 million outstanding under the LHFS program, as compared to no outstanding balance under the warehouse line at December 31, 2005. The Bank also maintains a line of credit with the FHLB, which is secured by 1-4 family loans held in the Bank’s loan portfolio. As of December 31, 2006 and 2005, the 1-4 family line of credit reflected balances of $8.5 million and $8.0 million, respectively. The weighted average interest rates on the outstanding balances of both lines were 3.92% and 3.05% as of December 31, 2006 and 2005, respectively.

Note 8¾Line of credit

The Company has a line of credit with a financial institution, which provided the Company the ability to draw $3.0 million at current market rates until December 30, 2003 with a maturity date of January 1, 2014. The principal under this line of credit is payable in nine (9) annual installments of $100,000 that began on January 1, 2005 with the entire outstanding balance due and payable on January 1, 2014. Interest is calculated annually using a rate of prime minus 0.50% (7.75% and 6.50% at December 31, 2006 and 2005, respectively). The line of credit is secured through the pledge of all issued and outstanding shares of the Bank’s capital stock. The outstanding principal balance at December 31, 2006 and 2005 was $700,000 and $800,000, respectively. The arrangement provides for the Company and Bank to comply with financial covenants related to capital levels, the allowance for loan losses, dividend payments, and other financial matters. At December 31, 2006 and 2005, the Company and the Bank were in compliance with these covenants.

Note 9¾Employee benefit plan

The Bank has a 401(k) salary-deferred plan covering substantially all employees. At the discretion of the Bank’s Board of Directors, the Bank may match a percentage of the annual amounts deferred by employees. Matching amounts are funded by the Bank as accrued. Total deferred and matching amounts are limited to amounts that can be deducted for Federal income tax purposes. The Bank’s matching contributions were approximately $168,000, $141,000, and $154,000, respectively, for each of the years in the three year period ended December 31, 2006.

20

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 10¾Shareholders’ equity and regulatory requirements

The primary source of funds available to the Company is the payment of dividends by its subsidiary bank. Banking regulations limit the amount of dividends that may be paid by the Bank without prior approval of regulatory agencies.

The Bank is subject to various regulatory capital requirements administered by state and Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes that, as of December 31, 2006, the Bank met all capital adequacy requirements to which it is subject.

As of December 31, 2006, the most recent notification from the regulatory agencies categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios, as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.

21

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 10¾Shareholders’ equity and regulatory requirements (continued)

The Bank’s actual capital amounts (in thousands) and ratios are also presented in the table.

											Required to Be
											Well-Capitalized
						Required for					Under Prompt
						Capital Adequacy					Corrective Action
	Actual					Purposes					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2006:
Total capital (to risk weighted assets)
Bank	$	36,981		10.68	%	$	28,033		8.0	%	$	35,041		10.0	%
Consolidated	$	36,734		10.61	%	$	28,033		8.0	%	$	—		—
Tier 1 capital (to risk weighted assets)
Bank	$	32,653		9.43	%	$	14,016		4.0	%	$	21,025		6.0	%
Consolidated	$	32,407		9.36	%	$	14,016		4.0	%	$	—		—
Tier 1 leverage (to average assets)
Bank	$	32,653		8.08	%	$	14,901		4.0	%	$	18,626		5.0	%
Consolidated	$	32,407		7.85	%	$	14,901		4.0	%	$	—		—
As of December 31, 2005:
Total capital (to risk weighted assets)
Bank	$	33,470		11.37	%	$	23,550		8.0	%	$	29,437		10.0	%
Consolidated	$	32,841		11.16	%	$	23,550		8.0	%	$	—		—
Tier 1 capital (to risk weighted assets)
Bank	$	29,792		10.12	%	$	11,775		4.0	%	$	17,663		6.0	%
Consolidated	$	29,161		9.91	%	$	11,775		4.0	%	$	—		—
Tier 1 leverage (to average assets)
Bank	$	29,792		8.32	%	$	14,323		4.0	%	$	17,904		5.0	%
Consolidated	$	29,161		8.14	%	$	14,323		4.0	%	$	—		—

22

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 10¾Shareholders’ equity and regulatory requirements (continued)

In 2005, the Company effected a five-for-four stock split of the common stock in the form of a 25% stock dividend. The dividend was paid on April 1, 2005 to shareholders of record as of March 1, 2005. As a result, approximately $664 ($0.001 par for each share was issued pursuant to the split) was transferred from retained earnings to the common stock account.

During 1997, the Company adopted the 1997 Stock Option Plan (the “1997 Plan”) for eligible directors, officers, and key employees of the Company and the Bank. Options are granted to purchase common shares at prices not less than the fair market value of the stock at the date of grant. The maximum number of shares that may be reserved and made available-for-sale under the 1997 Plan is 345,000 shares, as adjusted for the Company’s stock splits and stock dividends.

During early 2005, the Company adopted the 2004 Incentive Plan (the “2004 Plan”) for eligible directors, officers, and key employees of the Company and the Bank. Options are granted to purchase common shares at prices not less than the fair market value of the stock at the date of grant. The maximum number of shares that may be reserved and made available-for-sale under the 2004 Plan is 330,125 shares, as adjusted for the Company’s stock split in 2005.

The Plans provide for the grant of both incentive and nonqualified stock options to purchase the Company’s common stock. The Stock Option Committee of the Board of Directors of the Company establishes to whom options shall be granted and determines exercise prices, vesting requirements, and the number of shares covered by each option, subject to the approval of the Company’s Board of Directors.

On January 1, 2006, the Company adopted SFAS 123(R), Accounting for Stock-Based Compensation (“SFAS 123(R)”). SFAS 123(R) requires all share-based payment to employees, including grants of employee stock options, to be recognized as expense in the statement of earnings based on their fair values. Prior to SFAS 123(R), only certain pro forma disclosures of fair value were required. The amount of compensation is measured at the fair value of the options when granted and this cost is expensed over the required service period, which is normally the vesting period of the options. SFAS 123(R) applies to awards granted or modified after January 1, 2006 or any unvested awards outstanding at December 31, 2005. The effect of the adoption of the new accounting principle on results of operations depends on the level of option grants, the vesting period for those grants, and the fair value of the options granted at such date. Existing options that vested after the adoption date resulted in additional compensation expense of approximately $295,000 in 2006. The Company utilized the disclosure requirements permitted by SFAS 123, Accounting for Stock-Based Compensation (“SFAS 123”), for transactions entered into during 1996 and thereafter. For the periods prior to January 1, 2006, the Company elected to remain with the former method of accounting under Accounting Principles Board Opinion 25 (“APB 25”).

23

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 10¾Shareholders’ equity and regulatory requirements (continued)

Presentation of proforma information regarding net income and earnings per share is presented in Note 1 to the financial statements and has been determined as if the Company had accounted for the Plans under the fair value method of that Statement. The fair value for these options was estimated for each of the years presented at the date of grant using an option pricing model that included the following range of assumptions:

	2006			2005			2004
Dividend yield		0.0	%		0.0	%		0.0	%
Volatility		32.7	%		34.3	%		42.2	%
Risk-free rate		4.3-5.0	%		3.8-4.5	%		3.3-3.7	%

In addition, the model assumed that each option was exercised in the initial year of vesting.

For purposes of proforma disclosures, the estimated fair value of options is amortized to expense over the option’s vesting period. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate. In management’s opinion, the model does not necessarily provide a reliable single measure of the fair value of options.

Vesting requirements are determined by the Board of Directors at the time options are granted and generally provide for vesting over a four-year period. The Plans provide that vesting periods may not exceed ten years.

A summary of the Company’s stock option activity, and related information, for the years ended December 31, 2006, 2005, and 2004, follows. Exercise price per share information is based on weighted averages.

	2006					2005					2004
				Exercise					Exercise					Exercise
				Price					Price					Price
				Per					Per					Per
	Options			Share		Options			Share		Options			Share
Outstanding at beginning of year		310,569		$	7.09		301,474		$	5.82		309,630		$	5.66
Granted		33,391			14.60		33,890			16.30		3,844			16.07
Exercised		(10,400	)		5.71		(24,795	)		4.29		(10,750	)		3.71
Forfeited		(3,000	)		11.71		—			—		—			—
Expired		—			—		—			—		(1,250	)		14.30
Outstanding at end of year		330,560		$	7.85		310,569		$	7.09		301,474		$	5.82

24

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 10¾Shareholders’ equity and regulatory requirements (continued)

Stock options exercisable and the weighted-average exercise price, at December 31, 2006, 2005, and 2004, follows:

	2006		2005		2004
Options		269,675		238,033		220,898
Weighted-average exercise price	$	6.30	$	5.65	$	4.90

The estimated weighted-average fair value of options granted during the years ended December 31, 2006, 2005 and 2004 are as follows (per option):

2006	$	7.32
2005		8.58
2004		9.63

At December 31, 2006, options outstanding have exercise prices that range from $3.33 per share to $20.41 per share. The weighted-average remaining contractual life of options outstanding at December 31, 2006 was approximately 65 months.

The Company has issued shares of common stock to non-employee directors as compensation for services rendered. The Company recorded $172,000, $191,000, and $176,000 in stock compensation expense related to the issuance of these shares for the years ended December 31, 2006, 2005, and 2004, respectively. The expense recognized for these shares was equal to the fair value of the shares on the date of issuance.

Following is a reconciliation of the income amounts and common stock amounts utilized in computing the Company’s earnings per share for each of the following years ended December 31. Share amounts are weighted average amounts, which, along with per share amounts, have been adjusted to reflect the 5-for-4 stock split effected April 1, 2005.

	2006
	Income		Shares		Per
	(Numerator)		(Denominator)		Share
	(dollars in thousands, except per share)
Basic EPS
Income available to common stockholders	$	2,897		3,370,277	$	0.86
Effect of stock options outstanding		—		119,287		0.03
Diluted EPS
Income available to common stockholders, plus conversions	$	2,897		3,489,564	$	0.83

25

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 10¾Shareholders’ equity and regulatory requirements (continued)

	2005
	Income		Shares		Per
	(Numerator)		(Denominator)		Share
	(dollars in thousands, except per share)
Basic EPS
Income available to common stockholders	$	3,455		3,336,834	$	1.04
Effect of stock options outstanding		—		187,460		0.06
Diluted EPS
Income available to common stockholders, plus conversions	$	3,455		3,524,294	$	0.98

	2004
	Income		Shares		Per
	(Numerator)		(Denominator)		Share
	(dollars in thousands, except per share)
Basic EPS
Income available to common stockholders	$	3,502		3,305,534	$	1.06
Effect of stock options outstanding		—		216,342		0.07
Diluted EPS
Income available to common stockholders, plus conversions	$	3,502		3,521,876	$	0.99

Note 11¾Income taxes

The total income taxes in the statements of income for the years ended December 31, 2006, 2005 and 2004 are as follows (in thousands):

	2006			2005			2004
Current tax	$	1,632		$	2,231		$	2,515
Deferred tax (benefit)		(172	)		(289	)		(348	)
	$	1,460		$	1,942		$	2,167

26

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 11¾Income Taxes (continued)

The Bank’s provision for income taxes differs from the amounts computed by applying the Federal and state income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows:

	2006			2005			2004
Federal statutory rates		34.0	%		34.0	%		34.0	%
State taxes		6.0	%		6.0	%		6.0	%
Tax exempt income		(2.0	)		—			—
Nondeductible interest		0.5			—			—
State tax credits		(4.7	)		(3.4	)		—
Other, including effect of graduated rate brackets		(0.3	)		(0.6	)		(1.8	)
		33.5	%		36.0	%		38.2	%

The primary components of deferred income taxes at December 31, 2006 and 2005 are as follows:

	2006			2005
	(in thousands)
Deferred tax assets
Allowance for loan losses	$	1,406		$	1,218
Unrealized loss on securities available-for-sale		158			311
Amortization of GA low-income housing tax credits		38			—
Valuation allowance on GA low-income housing tax credits		(47	)		—
Deferred income tax assets		1,555			1,529
Deferred tax liabilities
Depreciation		195			188
Deferred income tax liabilities		195			188
Net deferred income tax assets	$	1,360		$	1,341

Realization of deferred tax assets is dependent on sufficient future taxable income during the period that deductible temporary differences are expected to be available to reduce taxable income.

27

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 12¾Commitments and contingencies

In the ordinary course of business, the Bank may enter into off-balance-sheet financial instruments that 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 Bank uses the same credit policies for these off-balance-sheet financial instruments as it does for other instruments that are recorded in the financial statements.

Following is an analysis of significant off-balance-sheet financial instruments for the years ended December 31, 2006 and 2005:

	2006		2005
	(in thousands)
Commitments to extend credit	$	79,828	$	66,262
Standby letters of credit		2,389		1,947
	$	82,217	$	68,209

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitment amounts expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. 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.

The Company, 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 Company 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 Company’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 $38 million each at December 31, 2006. 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 December 31, 2006 or 2005.

28

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 12¾Commitments and contingencies (continued)

The Company 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 Company’s market risk on these loans. The notional value of the forward sales commitments on retail mortgage loans at December 31, 2006 was approximately $57 million. The fair value of the sales commitments on retail mortgage loans resulted in no material gains or losses to the Company at December 31, 2006 or 2005.

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 matters in which the outcome will have a material adverse effect on the Company’s financial statements.

Note 13¾Supplemental consolidated cash flow information

	2006		2005		2004
	(dollars in thousands)
Income taxes paid	$	1,396	$	1,847	$	2,125
Interest paid	$	10,295	$	7,677	$	4,232

Note 14¾Fair value of financial instruments

The estimated fair values of the Bank’s financial instruments, for those instruments for which the Bank’s management believes estimated fair value does not by nature approximate the instruments’ carrying amount, are as follows at December 31, 2006 and 2005 (in millions):

	2006				2005
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Loans and loans held for sale, net	$	333.3	$	384.1	$	284.6	$	294.2
Certificates of deposit	$	206.7	$	208.3	$	156.2	$	160.1

Estimated fair value information of investment securities is presented in Note 2 of the financial statements.

29

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 15¾Other expenses

Other non-interest expenses for the years ended December 31, 2006, 2005 and 2004 are as follows:

	2006		2005		2004
	(dollars in thousands)
Data processing	$	759	$	720	$	618
Legal and accounting		367		393		318
Printing and supplies		319		360		356
Advertising		303		295		295
Telephone		174		167		194
Outside services		458		364		409
Other		2,263		1,931		2,021
	$	4,643	$	4,230	$	4,211

Note 16¾Comprehensive Income

The components of other comprehensive income and related tax effects for each of the years ended December 31, 2006, 2005 and 2004 are as follows (in thousands):

	2006			2005			2004
Unrealized holding losses on available-for-sale securities	$	424		$	(863	)	$	(356	)
Tax effect		(153	)		352			141
Net of tax amount	$	271		$	(511	)	$	(215	)

30

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 17 – Quarterly Financial Data (Unaudited)

The following table represents summarized data for each of the quarters in 2006 and 2005 (in thousands, except earnings per share data.

Selected Quarterly Data
($ in thousands, except per share data)

	2006								2005
	4Q		3Q		2Q		1Q		4Q			3Q		2Q		1Q
Interest income	$	7,230	$	6,437	$	6,057	$	5,611	$	5,738		$	5,538	$	4,967	$	4,633
Interest expense		3,693		3,212		2,651		2,413		2,455			2,432		1,915		1,618
Net interest income		3,537		3,225		3,406		3,198		3,283			3,106		3,052		3,015
Provision for loan losses		198		242		275		183		(81	)		356		427		320
Net interest income after Provision for loan losses		3,339		2,983		3,131		3,015		3,364			2,750		2,625		2,695
Non-interest income		2,815		2,435		2,342		2,208		2,553			2,977		2,324		2,476
Securities gain (loss)		—		—		—		—		—			—		—		1
Non-interest expenses		4,606		4,474		4,544		4,287		4,332			4,229		3,916		3,891
Income before income tax expense		1,548		944		929		936		1,585			1,498		1,033		1,281
Income tax expense		602		275		296		287		536			546		378		482
Net income	$	946	$	669	$	633	$	649	$	1,049		$	952	$	655	$	799
Basic earnings per common share	$	0.28	$	0.20	$	0.19	$	0.19	$	0.31		$	0.28	$	0.20	$	0.24
Diluted earnings per common share	$	0.27	$	0.19	$	0.18	$	0.19	$	0.30		$	0.27	$	0.19	$	0.23

31

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 18¾Condensed financial information on Georgia-Carolina Bancshares, Inc. (parent company only)

Condensed Balance Sheet
December 31, 2006 and 2005
(dollars in thousands)

	2006		2005
Assets
Cash	$	112	$	81
Investment in subsidiary		32,373		29,240
Other assets		404		42
Deferred tax benefit		0		88
Total assets	$	32,889	$	29,451
Liabilities
Note payable	$	700	$	800
Other Liabilities		63		42
Total liabilities		763		842
Shareholders’ equity		32,126		28,609
Total liabilities and shareholders’ equity	$	32,889	$	29,451

32

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 18¾Condensed financial information on Georgia-Carolina Bancshares, Inc. (parent company only) (continued)

Condensed Statement of Income
Years Ended December 31, 2006, 2005 and 2004
(dollars in thousands)

	2006			2005			2004
Income, dividends from subsidiary	$	—		$	85		$	—
Expenses
Director compensation		(48	)		(31	)		(112	)
Other		(282	)		(206	)		(199	)
Total expenses		(330	)		(237	)		(311	)
Loss before income tax benefits and equity in undistributed earnings of subsidiary		(330	)		(152	)		(311	)
Income tax benefits		187			88			117
Loss before equity in undistributed earnings of subsidiary		(143	)		(64	)		(194	)
Equity in undistributed earnings of subsidiary		3,040			3,519			3,696
Net income	$	2,897		$	3,455		$	3,502

33

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements – (continued)

December 31, 2006 and 2005

Note 18¾Condensed financial information on Georgia-Carolina Bancshares, Inc. (parent company only) (continued)

Condensed Statement of Cash Flows
Years Ended December 31, 2006, 2005 and 2004
(dollars in thousands)

	2006			2005			2004
Cash flows from operating activities
Net income	$	2,897		$	3,455		$	3,502
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense		295			—			—
Stock compensation		172			191			176
Equity in undistributed earnings of subsidiary		(3,040	)		(3,519	)		(3,696	)
Net change in other assets and liabilities		(252	)		(59	)		42
Total adjustments		(2,825	)		(3,387	)		(3,478	)
Net cash provided by operating activities		72			68			24
Cash flows from financing activities
Payments on borrowed funds		(100	)		(100	)		(100	)
Proceeds from issuance of common stock, and exercise of stock options		59			106			40
Net cash provided by (used in) financing activities		(41	)		6			(60	)
Net change in cash		31			74			(36	)
Cash at beginning of the year		81			7			43
Cash at end of the year	$	112		$	81		$	7

34