Exhibit 99.1

GEORGIA-CAROLINA BANCSHARES, INC.

Consolidated Financial Statements

For the Years Ended December 31, 2013 and 2012

GEORGIA-CAROLINA BANCSHARES, INC.

Table of Contents

Financial Statements

For the Years Ended December 31, 2013 and 2012

	Page
Report of Independent Registered Public Accounting Firm	1
Consolidated Statements of Financial Condition	2
Consolidated Statements of Operations	3
Consolidated Statements of Comprehensive Income	4
Consolidated Statements of Shareholders’ Equity	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7-68

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Georgia-Carolina Bancshares, Inc.

Augusta, Georgia

We have audited the accompanying consolidated statements of financial condition of Georgia-Carolina Bancshares, Inc. (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Crowe Horwath LLP

Atlanta, Georgia

March 7, 2014

GEORGIA-CAROLINA BANCSHARES, INC.

Consolidated Statements of Financial Condition

December 31, 2013 and 2012

(dollars in thousands, except per share data)

	2013			2012
Assets
Cash and due from banks	$	16,828		$	30,279
Securities available-for-sale		158,439			132,760
Loans		274,747			265,831
Allowance for loan losses		(5,357	)		(5,954	)
Loans, net		269,390			259,877
Loans held for sale at fair value		31,298			48,432
Bank-owned life insurance		14,834			10,001
Bank premises and equipment, net		9,512			8,790
Accrued interest receivable		1,854			1,772
Other real estate owned, net		4,897			5,876
Federal Home Loan Bank stock		1,606			1,865
Other assets		7,840			6,523
Total assets	$	516,498		$	506,175
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Non-interest bearing	$	76,747		$	70,880
Interest-bearing:
NOW accounts		59,661			57,482
Savings		56,757			64,236
Money market accounts		74,056			54,982
Time deposits of $100,000 or more		97,625			111,537
Other time deposits		54,859			57,839
Total deposits		419,705			416,956
Short-term debt		22,200			25,028
Repurchase agreements		12,111			3,333
Other liabilities		5,593			4,533
Total liabilities		459,609			449,850
Shareholders’ equity
Preferred stock, par value $.001; 1,000,000 shares authorized; none issued		-			-
Common stock, par value $.001; 9,000,000 shares authorized; 3,572,204 and 3,528,296 shares issued and outstanding, respectively		4			4
Additional paid-in capital		16,192			15,687
Retained earnings		44,758			39,177
Accumulated other comprehensive income (loss)		(4,065	)		1,457
Total shareholders’ equity		56,889			56,325
Total liabilities and shareholders’ equity	$	516,498		$	506,175

See notes to consolidated financial statements.

2

GEORGIA-CAROLINA BANCSHARES, INC.

Consolidated Statements of Operations

For the Years Ended December 31, 2013 and 2012

(dollars in thousands, except per share data)

	2013			2012
Interest income
Interest and fees on loans	$	15,277		$	18,019
Interest on taxable securities		2,472			2,046
Interest on nontaxable securities		536			439
Other interest income		47			65
Total interest income		18,332			20,569
Interest expense
Interest on time deposits of $100,000 or more		1,029			1,600
Interest on other deposits		1,059			1,403
Interest on funds purchased and other borrowings		27			679
Total interest expense		2,115			3,682
Net interest income		16,217			16,887
Provision for loan losses		(2,029	)		(605	)
Net interest income after provision for loan losses		18,246			17,492
Non-interest income
Service charges on deposits		1,567			1,524
Mortgage banking activities		8,225			11,376
Gain (loss) on sale of securities		91			(105	)
Other		3,021			1,858
Total non-interest income		12,904			14,653
Non-interest expense
Salaries and employee benefits		12,853			12,329
Occupancy expenses		1,505			1,556
Other real estate owned expenses		1,654			2,284
Other		6,454			6,692
Total non-interest expense		22,466			22,861
Income before income taxes		8,684			9,284
Income tax expense		2,480			2,663
Net income	$	6,204		$	6,621
Earnings per common share
Basic	$	1.74		$	1.84
Diluted	$	1.73		$	1.84
Dividends per common share	$	0.175		$	0.120

See notes to consolidated financial statements.

3

GEORGIA-CAROLINA BANCSHARES, INC.

Consolidated Statements of Comprehensive Income

For the Years Ended December 31, 2013 and 2012

(dollars in thousands)

	2013			2012
Net income	$	6,204		$	6,621
Other comprehensive income (loss):
Unrealized holding gain (loss) arising during the period		(8,144	)		350
Tax effect of unrealized holding gain (loss)		2,682			(114	)
Reclassification for (gain) loss included in net income		(91	)		105
Tax effect of gain/ loss included in net income		31			(36	)
Total other comprehensive income (loss)		(5,522	)		305
Comprehensive income	$	682		$	6,926

See notes to consolidated financial statements.

4

GEORGIA-CAROLINA BANCSHARES, INC.

Consolidated Statements of Shareholders’ Equity

For the Years Ended December 31, 2013 and 2012

(dollars in thousands)

	Common Stock Shares			Common Stock Par Value		Additional Paid-in-Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity
Balance at January 1, 2012		3,592,100		$	4	$	16,301		$	32,988		$	1,152		$	50,445
Net income		-			-		-			6,621			-			6,621
Other comprehensive income		-			-		-			-			305			305
Proceeds from exercise of stock options		45,491			-		253			-			-			253
Stock-based compensation expense		-			-		108			-			-			108
Issuance of restricted stock for compensation		15,988			-		35			-			-			35
Issuance of stock for directors' fees		24,504			-		209			-			-			209
Repurchase of common shares		(149,787	)		-		(1,219	)		-			-			(1,219	)
Dividends		-			-		-			(432	)		-			(432	)
Balance at December 31, 2012		3,528,296		$	4	$	15,687		$	39,177		$	1,457		$	56,325
Net income		-			-		-			6,204			-			6,204
Other comprehensive income		-			-		-			-			(5,522	)		(5,522	)
Proceeds from exercise of stock options		28,469			-		407			-			-			407
Net settlement from exercise of stock options		(22,638	)				(332	)								(332	)
Stock-based compensation expense		-			-		93			-			-			93
Issuance of restricted stock for compensation		24,006			-		132			-			-			132
Issuance of stock for directors' fees		14,071			-		205			-			-			205
Dividends		-			-		-			(623	)		-			(623	)
Balance at December 31, 2013		3,572,204		$	4	$	16,192		$	44,758		$	(4,065	)	$	56,889

See notes to consolidated financial statements.

5

GEORGIA-CAROLINA BANCSHARES, INC.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2013 and 2012

(dollars in thousands)

	2013			2012
Cash flows from operating activities
Net income	$	6,204		$	6,621
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		603			622
Provision for loan losses		(2,029	)		(605	)
OREO valuation adjustment		896			1,434
Gain on sale of other real estate owned		(231	)		(40	)
(Gain) loss on sale of equipment		5			(5	)
(Gain) loss on sale of securities		(91	)		105
Gain on bank owned life insurance		(806	)		-
Mortgage banking activities		(8,225	)		(11,376	)
Proceeds from sale of loans held for sale		384,495			438,048
Originations of loans held for sale		(359,136	)		(429,877	)
Increase in cash value of bank-owned life insurance		(448	)		(392	)
Stock-based compensation expense		225			108
Stock compensation		205			244
Deferred income tax (benefit) expense		(549	)		(615	)
Increase in accrued interest receivable		(82	)		(40	)
(Increase) decrease in other assets		1,840			(1,513	)
Decrease in accrued interest payable		(56	)		(215	)
Increase in other liabilities		1,116			1,901
Net cash provided by operating activities		23,936			4,405
Cash flows from investing activities
Loan originations and collections, net		(9,452	)		14,352
Purchases of available-for-sale securities		(70,248	)		(76,053	)
Proceeds from maturities and calls of available-for-sale securities		23,690			29,602
Proceeds from sales of available-for-sale securities		12,735			14,324
Proceeds from sale of FHLB stock		259			205
Purchase of bank-owned life insurance		(5,000	)		-
Proceeds from life insurance death benefit		1,421			-
Proceeds from sale of other real estate owned		2,282			4,906
Net additions to bank premises and equipment		(1,225	)		(323	)
Net cash used in investing activities		(45,538	)		(12,987	)
Cash flows from financing activities
Increase in deposits		2,749			5,561
Repayments on FHLB advances and other borrowings		(41,528	)		(25,000	)
Proceeds from FHLB advances and other borrowings		38,700			25,028
Increase (decrease) in repurchase agreements		8,778			(232	)
Proceeds from stock options exercised, net		75			253
Purchase of stock		-			(1,219	)
Cash dividends paid		(623	)		(432	)
Net cash provided by financing activities		8,151			3,959
Net decrease in cash and due from banks		(13,451	)		(4,623	)
Cash and due from banks at beginning of the year		30,279			34,902
Cash and due from banks at end of the year	$	16,828		$	30,279

See notes to consolidated financial statements.

6

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 1—Summary 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 Augusta, Thomson, Martinez and Evans, Georgia and the surrounding area. Most of the Bank’s loans and loan commitments have been made 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 offices in Augusta and Savannah, Georgia. 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.

Significant accounting policies

Basis of presentation: The consolidated financial statements include the accounts of the Company and the Bank. Significant intercompany transactions and accounts are eliminated in consolidation. The accounting and reporting policies of the Company and 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 consolidated financial statements in conformity with U.S. generally accepted accounting principles 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 consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans, including valuation allowances for impaired loans, the valuation of other real estate acquired in connection with foreclosures or in satisfaction of loans, recourse liability on mortgage loans previously sold, and the fair value of mortgage loans held for sale and the fair value of the interest rate lock and forward commitment derivatives.  In connection with the determination of the allowances for losses on loans and loss estimates on other real estate owned, management obtains independent appraisals for significant properties.  Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.

7

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 1—Summary of significant accounting policies (continued)

Management uses available information to recognize losses on loans and other real estate owned; however, future additions to the allowances may be necessary based on changes in local economic conditions.  In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowances for losses on loans and valuations of other real estate owned.  Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examinations.  Because of these factors, it is reasonably possible that the allowances for losses on loans and loss estimates for other real estate owned may change materially in the near term.

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

Cash and due from banks: For purposes of reporting cash flows, cash and due from banks includes cash on hand and interest-bearing and noninterest-bearing amounts due from banks (including cash items in the process of clearing). The Bank maintains due from accounts with banks primarily located in Georgia and Louisiana. Balances generally exceed insured amounts. Net cash flows are presented for customer loan and deposit transactions and repurchase agreements.

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.

The Bank has not classified any securities as held-to-maturity or trading.

Realized 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. The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the life of the securities.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income. 

8

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 1—Summary of significant accounting policies (continued)

The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Loans and interest income: Loans are stated at principal amounts outstanding less unearned income, deferred fees and costs, and the allowance for loan losses. Management has the intent and ability to hold for the foreseeable future or until maturity or payoff. Interest income on loans is credited to income based on the principal amount outstanding at the respective rate of interest.

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.

Accrual of interest income is discontinued for all classes of loans 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. 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 when due according to the contractual terms of the loan agreement. Impairments on loans are charged to the allowance for loan losses.

Management 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. Any loan classified as a troubled debt restructuring is considered impaired.

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.

Allowance for loan losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the loan balance is confirmed as uncollectible. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

9

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 1—Summary of significant accounting policies (continued)

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as 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. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

Factors considered by management in determining impaired loans include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

All loans included on the management watch list are individually evaluated for impairment. If a loan has an impairment, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, management determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors. Management considers the actual loss history experience over the last four quarters, one year, two year, and three year periods by portfolio segment to determine the historical loss experience used in the general component. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries for the most recent three years; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

For further discussion of portfolio segments and associated risks and grades, please see Note 4 to the consolidated financial statements.

10

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 1—Summary of significant accounting policies (continued)

Loans held for sale: Prior to July 1, 2012, mortgage loans originated and intended for sale in the secondary market were carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, were recorded as a valuation allowance and charged to earnings. Mortgage loans held for sale are generally sold with servicing rights released. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold. Loans held for sale, for which the fair value option has been elected starting July 1, 2012, are recorded at fair value as of each balance sheet date. The fair value includes the servicing value of the loans as well as any accrued interest.

Interest rate risk is minimal as rates on loans originated and intended for sale are locked with the investor and the loans are held in the portfolio only temporarily until funding from the investor is completed. The Bank also manages credit risk by having loans greater than $650,000 approved by the secondary market investors, while all other loans are approved internally.

Loans sold under the Bank’s mortgage loans held for sale portfolio contain certain representations and warranties in the loan sale agreements which require that we repurchase or indemnify the investors for losses or costs on loans we sell under certain limited conditions. Any losses related to loans previously sold are charged against the Bank’s recourse liability for mortgage loans previously sold. The recourse liability is based on historical loss experience adjusted for current information and events when it is probable that a loss will be incurred.

Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Bank-owned life insurance (BOLI): In order to insure the lives of its key officers, the Bank owns three bank-owned life insurance policies. BOLI is recorded at its cash surrender value, net of surrender charges and/or early termination charges that are probable at settlement. The increase in cash value is recorded as other income.

Bank premises and equipment: Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from five to thirty-nine years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from three to fifteen years.

Other real estate owned: Other real estate owned represents properties acquired through foreclosure or other proceedings. The property is held for sale and is initially recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, the assets are carried at the lower of carrying amount or fair value less estimated selling costs.

11

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 1—Summary of significant accounting policies (continued)

Expenses to maintain such assets and subsequent changes in the valuations are included in other noninterest expenses, while gains and losses on disposal are included in noninterest income.

Federal Home Loan Bank Stock: Federal Home Loan Bank Stock consists of the cost of the Company’s investment in the stock of the Federal Home Loan Bank (“FHLB”).  The stock has no quoted market value and no ready market exists.  Investment in the Federal Home Loan Bank is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to collateralize such borrowings and periodically evaluated for impairment based on ultimate recovery of par value.  Dividends received on this stock are included in other non-interest income.

Mortgage banking derivatives: Loan commitments, whose underlying mortgage loans at origination will be held for sale upon funding of the loan, are derivative instruments. Loan commitments are recognized on the consolidated statement of financial condition in other assets and other liabilities at fair value, with changes in their fair values recognized in mortgage banking activities. At the inception of a loan commitment, the Bank generally will simultaneously enter into a best efforts 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.

Loan commitments and related financial instruments: In the ordinary course of business, the Bank has entered into off balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit and standby letters of credit. The face amount for these items represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded in the consolidated financial statements when they become payable.

Income taxes: Provisions for income taxes are based on amounts reported in the statements of operations after exclusion of nontaxable income, such as interest on state and municipal securities, and BOLI income, 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. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. It is the Company’s policy to recognize interest and penalties associated with uncertain tax positions as components of income taxes and to disclose the recognized interest and penalties, if material.

Stock-based compensation: Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options when granted and this cost is expensed over the required service period which is usually the vesting period of the options. The fair market value of the Company’s common stock at the date of grant is used for restricted stock awards and this cost is expensed over the required service period which is usually the vesting period of the stock awards.

12

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 1—Summary of significant accounting policies (continued)

Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

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.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters pending that will have a material effect on the financial statements.

Earnings per common share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. The Company’s outstanding stock options are the primary component of the Company’s diluted earnings per share. All outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends are considered participating securities for this calculation. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.

Fair value of financial instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.

Operating Segments: While management monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.

13

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 1—Summary of significant accounting policies (continued)

Recently issued accounting standards

In February 2013, the FASB amended existing guidance related to reporting amounts reclassified out of accumulated other comprehensive income. These amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. These amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional details about those amounts. For public companies, these amendments are effective prospectively for interim and annual reporting periods beginning after December 15, 2012. The effect of adopting this standard did not have a material effect on the Company’s operating results or financial condition.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies, but not specifically addressed in this report, are not expected to have a material impact on the Company’s financial condition, results of operations, or liquidity.

14

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 2—Cash and due from banks

Cash and due from banks totaled $16.8 million at December 31, 2013, compared to $30.3 million at December 31, 2012. Cash on hand, cash items in the process of collection, and amounts due from correspondent banks and the Federal Reserve Bank are included in cash and due from banks. As of December 31, 2013, interest-bearing cash on deposit with correspondent banks totaled $1.4 million compared to $4.8 million as of December 31, 2012. Interest-bearing cash on deposit in the Federal Reserve Bank was $1.3 million as of December 31, 2013 compared to $14.5 million as of December 31, 2012. Funds not included in interest bearing deposits, but required to be on reserve with the Federal Reserve Bank to meet regulatory and reserve clearing requirements totaled $4.5 million and $3.8 as of December 31, 2013 and 2012, respectively.

15

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 3—Investment securities

The amortized cost and fair value amounts of securities owned as of December 31, 2013 and 2012 are shown below:

	2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
Securities available-for-sale:
U.S. Government and agency	$	61,486	$	146	$	(3,351	)	$	58,281
Mortgage-backed		66,095		558		(1,921	)		64,732
State and municipal		32,088		255		(1,592	)		30,751
Corporate		4,749		25		(99	)		4,675
Total	$	164,418	$	984	$	(6,963	)	$	158,439

	2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
Securities available-for-sale:
U.S. Government and agency	$	55,404	$	260	$	(99	)	$	55,565
Mortgage-backed		50,074		1,313		(92	)		51,295
State and municipal		21,974		852		(38	)		22,788
Corporate		3,052		68		(8	)		3,112
Total	$	130,504	$	2,493	$	(237	)	$	132,760

16

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 3—Investment securities (continued)

The amortized cost and fair value of securities as of December 31, 2013 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 Cost		Fair Value
	(dollars in thousands)
Less than one year	$	14,850	$	13,178
One to five years		23,669		22,919
Five to ten years		38,266		36,773
Over ten years		21,538		20,837
Mortgage-backed securities		66,095		64,732
Total	$	164,418	$	158,439

Securities with a carrying amount of approximately $64.1 million at December 31, 2013 and $53.7 million at December 31, 2012 were pledged to secure public deposits and for other purposes.

In 2013, the Bank sold $12.7 million in securities available-for-sale, realizing gains of $158,000 and losses of $74,400 for an overall net gain of $83,600. In 2012, the Bank sold $14.3 million in securities available-for-sale, realizing gains of $161,100 and losses of $270,500, for an overall loss of $109,400.

17

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 3—Investment securities (continued)

Information pertaining to securities with gross unrealized losses at December 31, 2013 and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:          

	2013
	Less than Twelve Months							Over Twelve Months
	Number of Securities		Fair Value		Gross Unrealized Losses			Number of Securities		Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Securities available-for-sale:
U.S. Government and agency		23	$	34,142	$	(1,911	)		7	$	11,759		(1,440	)
Corporate bonds		4		3,487		(99	)		-		-		-
Mortgage-backed		31		40,852		(1,744	)		3		5,294		(177	)
State and municipal		41		19,934		(1,156	)		8		3,028		(436	)
Total		99	$	98,415	$	(4,910	)		18	$	20,081	$	(2,053	)

	2012
	Less than Twelve Months							Over Twelve Months
	Number of Securities		Fair Value		Gross Unrealized Losses			Number of Securities		Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Securities available-for-sale:
U.S. Government and agency		7	$	13,757	$	(99	)		1	$	1,365		*
Corporate bonds		1		992		(8	)		-		-		-
Mortgage-backed		2		4,794		(92	)		-		-		-
State and municipal		5		2,035		(38	)		-		-		-
Total		15	$	21,578	$	(237	)		1	$	1,365	$	-

* Gross unrealized loss is less than $1,000.

18

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 3—Investment securities (continued)

Management evaluates investment 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, 2013 and 2012, the gross unrealized losses in securities available-for-sale are primarily the result of changes in market interest rates and not related to the credit quality of the underlying issuer. All of the securities are U.S. agency debt securities, corporate bonds, mortgage-backed securities, and municipal securities. Management has determined that no declines in market value are deemed to be other than temporary at December 31, 2013 and 2012. Securities rated below Moody’s (Baa) or Standard & Poor’s (BBB-) are not purchased. Non-rated municipal securities are limited to those bonds in the state of Georgia, and possess no greater risk that (Baa) or (BBB) bonds. Corporate bonds will have a minimum rating at purchase of Moody’s (A3), S&P (A-), or Fitch (A-). The Bank does not intend to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery.

19

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans

The Bank engages in a full complement of lending activities, including commercial, consumer and real estate loans. The composition of loans for the years ended December 31, 2013 and 2012 is summarized as follows:

	2013			2012
	(dollars in thousands)
Commercial and industrial	$	18,113		$	19,816
Real estate - construction, land and land development		60,476			55,926
Real estate - residential		55,792			55,495
Real estate - commercial		136,632			130,729
Consumer		3,931			3,921
Total loans		274,944			265,887
Deferred loan fees		(197	)		(56	)
Total loans		274,747			265,831
Allowance for loan losses		(5,357	)		(5,954	)
Loans, net of allowance for loan losses	$	269,390		$	259,877

Loan segments

Commercial and industrial loans are directed principally towards individual, partnership or corporate borrowers, for a variety of business purposes.  These loans include short-term lines of credit, short-term to medium-term plant and equipment loans, and loans for general working capital.  Risks associated with this type of lending arise from the impact of economic stresses on the business operations of borrowers. The Bank mitigates such risks to the loan portfolio by diversifying lending across North American Industry Classification System (“NAICS”) codes and has experienced very low levels of loss for this loan type for the past three years.  

Real estate – construction, land and land development loans consist of residential and commercial construction loans as well as land and land development loans.  Land development loans are primarily construction and development loans to builders in the Augusta and Savannah, Georgia markets.  These loan portfolios possess an increased level of risk compared to other types. The Bank’s approach to financing the development, financing the construction and providing the ultimate residential mortgage loans to the residential property purchasers has resulted in less exposure to the effects of declines in property values. These loans include certain real estate – construction loans classified as acquisition, development & construction. The loans are managed by the Bank’s construction division.

20

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

Real estate – residential loans include residential mortgage lending and are primarily single-family residential loans secured by the residential property.  Residential property values have stabilized over the past year, and this loan type has experienced decreases in historical losses over the past three years. Home equity lines are also included in real estate – residential loans.

Real estate – commercial loans include commercial mortgage loans that are generally secured by office buildings, retail establishments and other types of real property, both owner occupied and non-owner occupied. A significant component of this type of lending is to owner occupied borrowers, including churches.

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 has experienced low levels of loss for this loan type for the past three years compared to the other loan types.

Loan risk grades

The Company categorizes loans into risk grades based on relevant information about the ability of borrowers to service their debt such as: future repayment ability, financial condition, collateral, administration, management ability of borrower, and history and character of borrower. Grades are assigned at loan origination and may be changed due to the result of a loan review or at the discretion of management. The Company uses the following definitions for risk grades:

Grade 1: Highest quality - Alternate sources of cash exist, such as the commercial paper market, capital market, internal liquidity or other bank lines. These are national or regional companies with excellent cash flow which covers all debt service requirements and a significant portion of capital expenditures. Balance sheet strength and liquidity are excellent and exceed the industry norms. Financial trends are positive. Corporate borrowers are market leaders within the industry and the industry performance is excellent. This grade includes loans which are fully secured by cash or equivalents. This grade includes loans secured by marketable securities with no less than 25% margin. Borrowers are of unquestionable financial strength. Financial standing of borrower is known and borrower exhibits superior liquidity, net worth, cash flow and leverage.

Grade 2: Above average quality - There is minimal risk. Borrowers have strong, stable financial trends. There is strong cash flow covering debt service requirements and some portion of capital expenditures. Alternate sources of repayment are evident and financial ratios are comparable to or exceed the industry norms. Financial trends are positive. Borrower has prominent position within the industry or the local economy and the industry performance is above average. Management is strong in most areas and management depth is good. This grade includes loans secured by marketable securities with a margin less than 25%, and includes borrowers who have stable and reliable cash flow and above average liquidity and cash flow. There is modest risk from exposure to contingent liabilities.

21

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

Grade 3: Average quality - Cash flow is adequate to cover all debt service requirements but not capital expenditures. Balance sheet may be leveraged but still comparable to industry norms. Financial trends are stable to mixed over the long term but no significant concerns presently exist. Generally there is a stable industry outlook, although there may be some cyclical characteristics. Borrowers are of average position in the industry or the local economy. The management team is considered capable and stable. This grade includes borrowers with reliable cash flow and alternate sources of repayment which may require the sale of assets. Financial position has been leveraged to a modest degree. However, the borrower has a relatively strong net worth considering income and debt.

Grade 4: Below average quality - Loan conditions require more frequent monitoring. Stability is lacking in the primary repayment source, cash flow, credit history or liquidity; however, the instability is manageable and considered temporary. Overall trends are not yet adverse. These loans exhibit Grade 3 financial characteristics but lack proper and complete documentation. Sources of income or cash flow have become unstable or may possibly decline given current business or economic conditions. The borrower has a highly leveraged financial position or limited capital. Speculative construction loans originated by third parties are included in this grade.

Grade 5: Other Assets Especially Mentioned - These loans have potential weaknesses which may inadequately protect the Bank’s position at some future date. Unlike a Grade 4 credit, adverse trends in the borrower’s operations and/or financial position are evident, but have not yet developed into well-defined credit weaknesses. Specific negative events within the borrower or the industry have occurred, which may jeopardize cash flow. Borrower’s operations are highly cyclical or vulnerable to economic or market conditions. Management has potential weaknesses and management depth is lacking. Borrower is taking positive steps to alleviate potential weaknesses and has the potential for improvement and upgrade. Corrective strategy to protect the Bank may be required and active management attention is warranted. Some minor delinquencies may exist from time to time. Borrowers exhibit some degree of weakness in financial condition. This may manifest itself in a reduction of net worth and liquidity.

Grade 6: Substandard - A substandard loan has a well-defined weakness or weaknesses in the primary repayment source and undue reliance is placed on secondary repayment sources (collateral or guarantors). No loss beyond the specific reserves of the allowance for loan losses allocated to these loans is presently expected based on a current assessment of collateral values and guarantor cash flow. However, there is the distinct possibility that the Bank will sustain some future loss if the credit weaknesses are not corrected. Management is inadequate to the extent that the business’s ability to continue operations is in question. Intensive effort to correct the weaknesses and ensure protection against loss of principal (i.e. additional collateral) is mandatory. Delinquency of principal or interest may exist. Net worth, repayment ability, management and collateral protection, all exhibit weakness. In the case of consumer credit, closed end consumer installment loans delinquent between 90 and 119 days (4 monthly payments) will be minimally classified Substandard. Open end consumer credits will be minimally classified substandard if delinquent 90 to 179 days (4 to 6 billing cycles).

22

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

Grade 7: Doubtful - A doubtful loan has well-defined weaknesses as in Grade 6 with the added characteristic that collection or liquidation in full, on the basis of currently existing facts, conditions and values, is highly questionable and improbable. The possibility of loss is very high, but because of certain important and reasonably specific pending factors which may work to strengthen the credit, its classification as a loss is deferred until a more exact status can be determined. Pending factors include proposed merger, acquisition, liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. Borrower is facing extreme financial distress, bankruptcy or liquidation, and prospects for recovery are limited. Loans are seriously in default and should be on non-accrual status. Collateral and guarantor protection are insufficient. Efforts are directed solely at retirement of debt, e.g., asset liquidation. Due to their highly questionable collectability, loans rated doubtful should not remain in this category for an extended period of time.

Grade 8: Loss - Loans classified loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off the asset while pursuing recovery. In the case of consumer credit, closed end consumer installment loans delinquent 120 days or more (5 monthly payments) will be classified Loss. Open end consumer credits will be classified Loss if delinquent 180 days or more (7 or more billing cycles).

As of December 31, 2013 and December 31, 2012, the Bank had no loans classified as Grade 7 or 8. It is the Bank’s practice, in most cases, to take a charge-off when a loan or portion of a loan is deemed doubtful or loss. Consequently, the remaining principal balance, if applicable, which has been evaluated as collectible, is graded accordingly.

23

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

As of December 31, 2013 and 2012, the credit risk grades of loans by loan class were as follows:

Credit Risk Profile by Risk Grade Category:

	2013
	(dollars in thousands)
	Grades 1 - 4		Grade 5		Grade 6		Total
Commercial and industrial	$	18,010	$	103	$	-	$	18,113
Real estate - construction, land and land development
Acquistion, development, & construction		11,257		49		-		11,306
Other real estate - construction		49,078		-		92		49,170
Real estate - residential
Home equity lines		18,021		-		110		18,131
Other real estate - residential		36,493		612		556		37,661
Real estate - commercial
Owner occupied		54,450		4,845		1,493		60,788
Non-owner occupied		67,989		6,786		1,069		75,844
Consumer		3,910		-		21		3,931
Total loans receivable	$	259,208	$	12,395	$	3,341	$	274,944

	2012
	(dollars in thousands)
	Grades 1 - 4		Grade 5		Grade 6		Total
Commercial and industrial	$	19,723	$	32	$	61	$	19,816
Real estate - construction, land and land development
Acquistion, development, & construction		13,498		774		-		14,272
Other real estate - construction		41,344		192		118		41,654
Real estate - residential
Home equity lines		19,829		104		4		19,937
Other real estate - residential		33,446		81		2,031		35,558
Real estate - commercial
Owner occupied		47,833		5,191		1,804		54,828
Non-owner occupied		72,603		3,103		195		75,901
Consumer		3,872		22		27		3,921
Total loans receivable	$	252,148	$	9,499	$	4,240	$	265,887

The credit risk profile by risk grade category excludes accrued interest receivables of approximately $953,000 and $1,057,000 as of December 31, 2013 and December 31, 2012, respectively.

24

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

The following tables present the activity in the allowance for loan losses by loan segment for the years ended December 31, 2013 and 2012:

Allowance for Loan Losses Activity

For the Year Ended December 31, 2013

(dollars in thousands)

	Commercial and industrial			Real estate - construction, land and land development			Real estate - residential			Real estate - commercial			Consumer			Unallocated			Total
Beginning balance	$	225		$	2,870		$	794		$	1,872		$	77		$	116		$	5,954
Charge offs		(12	)		-			(96	)		(105	)		(93	)		-			(306	)
Recoveries		6			1,467			37			190			38			-			1,738
Provisions		8			(2,711	)		37			501			188			(52	)		(2,029	)
Ending balance	$	227		$	1,626		$	772		$	2,458		$	210		$	64		$	5,357
Ending balances:
Individually evaluated for impairment	$	-		$	37		$	67		$	252		$	2		$	-		$	358
Collectively evaluated for impairment	$	227		$	1,589		$	705		$	2,206		$	208		$	64		$	4,999

25

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

Allowance for Loan Losses Activity

For the Year Ended December 31, 2012

(dollars in thousands)

	Commercial and industrial			Real estate - construction, land and land development			Real estate - residential			Real estate - commercial			Consumer			Unallocated			Total
Beginning balance	$	185		$	3,219		$	1,141		$	1,706		$	108		$	445		$	6,804
Charge offs		(98	)		(692	)		(242	)		(179	)		(108	)		-			(1,319	)
Recoveries		225			734			43			14			58			-			1,074
Provisions		(87	)		(391	)		(148	)		331			19			(329	)		(605	)
Ending balance	$	225		$	2,870		$	794		$	1,872		$	77		$	116		$	5,954
Ending balances:
Individually evaluated for impairment	$	28		$	-		$	59		$	185		$	-		$	-		$	272
Collectively evaluated for impairment	$	197		$	2,870		$	735		$	1,687		$	77		$	116		$	5,682

26

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

The following tables present the recorded investment in loans receivable by loan segment as of December 31, 2013 and December 31, 2012:

Recorded Investment in Loans Receivable

As of December 31, 2013

(dollars in thousands)

	Commercial and industrial		Real estate - construction, land and land development		Real estate - residential		Real estate - commercial		Consumer		Total
Individually evaluated for impairment	$	-	$	92	$	1,695	$	7,053	$	21	$	8,861
Collectively evaluated for impairment	$	18,177	$	60,670	$	54,367	$	129,896	$	3,926	$	267,036
Ending balance total	$	18,177	$	60,762	$	56,062	$	136,949	$	3,947	$	275,897

Recorded Investment in Loans Receivable

As of December 31, 2012

(dollars in thousands)

	Commercial and industrial		Real estate - construction, land and land development		Real estate - residential		Real estate - commercial		Consumer		Total
Individually evaluated for impairment	$	90	$	566	$	2,376	$	6,770	$	27	$	9,829
Collectively evaluated for impairment	$	19,798	$	55,657	$	53,413	$	124,420	$	3,914	$	257,202
Ending balance total	$	19,888	$	56,223	$	55,789	$	131,190	$	3,941	$	267,031

27

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

Loans for which it is probable that the payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired, and are individually evaluated for impairment. Impaired loans for which interest is recorded on a cash basis is immaterial for disclosure. The following tables present loans individually evaluated for impairment and related allowance by loan class for the years ended December 31, 2013 and 2012:

Impaired Loans

As of and for the Year Ended December 31, 2013

(dollars in thousands)

	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	-	$	-	$	-	$	-	$	-
Real estate - construction, land and land development
Acquistion, development, & construction		-		-		-		-		-
Other real estate - construction		144		55		-		171		2
Real estate - residential
Home equity lines		162		162		-		176		3
Other real estate - residential		1,342		1,260		-		1,546		73
Real estate - comercial
Owner occupied		5,219		5,184		-		6,012		249
Non-owner occupied		1,060		1,057		-		1,061		37
Consumer		31		19		-		32		-
Total	$	7,958	$	7,737	$	-	$	8,998	$	364
With an allowance recorded:
Commercial and industrial	$	-	$	-	$	-	$	-	$	-
Real estate - construction, land and land development
Acquistion, development, & construction		-		-		-		-		-
Other real estate - construction		37		37		37		-		-
Real estate - residential
Home equity lines		14		14		7		-		-
Other real estate - residential		259		259		60		-		-
Real estate - comercial
Owner occupied		812		812		252		-		-
Non-owner occupied		-		-		-		-		-
Consumer		2		2		2		-		-
Total	$	1,124	$	1,124	$	358	$	-	$	-
TOTAL
Commercial and industrial	$	-	$	-	$	-	$	-	$	-
Real estate - construction, land and land development
Acquistion, development, & construction						-		-		-
Other real estate - construction		181		92		37		171		2
Real estate - residential
Home equity lines		176		176		7		176		3
Other real estate - residential		1,601		1,519		60		1,546		73
Real estate - comercial
Owner occupied		6,031		5,996		252		6,012		249
Non-owner occupied		1,060		1,057		-		1,061		37
Consumer		33		21		2		32		-
Total	$	9,082	$	8,861	$	358	$	8,998	$	364

28

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

Impaired Loans

As of and for the Year Ended December 31, 2012

(dollars in thousands)

	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	60	$	61	$	-	$	454	$	25
Real estate - construction, land and land development
Acquistion, development, & construction		2,457		447		-		2,429		21
Other real estate - construction		197		119		-		206		5
Real estate - residential
Home equity lines		70		70		-		74		-
Other real estate - residential		2,129		1,964		-		2,283		96
Real estate - comercial
Owner occupied		6,053		5,866		-		6,168		258
Non-owner occupied		-		-		-		-		-
Consumer		37		27		-		41		-
Total	$	11,003	$	8,554	$	-	$	11,655	$	405
With an allowance recorded:
Commercial and industrial	$	29	$	29	$	29	$	32	$	2
Real estate - construction, land and land development
Acquistion, development, & construction		-		-		-		-		-
Other real estate - construction		-		-		-		-		-
Real estate - residential
Home equity lines		-		-		-		-		-
Other real estate - residential		342		342		60		346		23
Real estate - comercial
Owner occupied		143		143		23		149		8
Non-owner occupied		760		761		160		780		50
Consumer		-		-		-		-		-
Total	$	1,274	$	1,275	$	272	$	1,307	$	83
TOTAL
Commercial and industrial	$	89	$	90	$	29	$	486	$	27
Real estate - construction, land and land development
Acquistion, development, & construction		2,457		447		-		2,429		21
Other real estate - construction		197		119		-		206		5
Real estate - residential
Home equity lines		70		70		-		74		-
Other real estate - residential		2,471		2,306		60		2,629		119
Real estate - comercial
Owner occupied		6,196		6,009		23		6,317		266
Non-owner occupied		760		761		160		780		50
Consumer		37		27		-		41		-
Total	$	12,277	$	9,829	$	272	$	12,962	$	488

29

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

The following tables present a summary of current, past due and nonaccrual loans as of December 31, 2013 and 2012 by loan class:

Analysis of Current, Past Due and Nonaccrual Loans

As of December 31, 2013

(dollars in thousands)

	Accruing
	30-89 Days Past Due		90 Days or more Past Due		Nonaccrual		Total Past Due and Nonaccrual		Current and not Past Due or Nonaccrual		Total Loans Receivable
Commercial and industrial	$	59	$	-	$	-	$	59	$	18,054	$	18,113
Real estate - construction, land and land development
Acquistion, development, & construction		-		-		-		-		11,306		11,306
Other real estate - construction		125		31		52		208		48,962		49,170
Real estate - residential
Home equity lines		132		-		110		242		17,889		18,131
Other real estate - residential		468		-		556		1,024		36,637		37,661
Real estate - comercial
Owner occupied		919		-		744		1,663		59,125		60,788
Non-owner occupied		-		-		441		441		75,403		75,844
Consumer		6		-		21		27		3,904		3,931
Total	$	1,709	$	31	$	1,924	$	3,664	$	271,280	$	274,944

30

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

Analysis of Current, Past Due and Nonaccrual Loans

As of December 31, 2012

(dollars in thousands)

	Accruing
	30-89 Days Past Due		90 Days or more Past Due		Nonaccrual		Total Past Due and Nonaccrual		Current and not Past Due or Nonaccrual		Total Loans Receivable
Commercial and industrial	$	134	$	-	$	61	$	195	$	19,621	$	19,816
Real estate - construction, land and land development
Acquistion, development, & construction		-		-		134		134		14,138		14,272
Other real estate - construction		1,318		-		68		1,386		40,268		41,654
Real estate - residential
Home equity lines		211		-		108		319		19,618		19,937
Other real estate - residential		1,322		-		1,776		3,098		32,460		35,558
Real estate - comercial
Owner occupied		941		-		1,527		2,468		52,360		54,828
Non-owner occupied		772		-		195		967		74,934		75,901
Consumer		27		-		27		54		3,867		3,921
Total	$	4,725	$	-	$	3,896	$	8,621	$	257,266	$	265,887

The Bank’s policy is that loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current and the prospect for future payments in accordance with the loan agreement appear relatively certain. The Bank’s policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.

31

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

Troubled debt restructurings

Troubled debt restructurings are defined as debt modifications, for economic or legal reasons related to the borrower’s financial difficulties, in which the Bank grants a concession that it would not otherwise consider.

Such a concession may stem from an agreement between the Bank and the borrower, or may be imposed by law or a court. Some examples of modifications are as follows:

Rate Modification - A modification in which the interest rate is changed.

Term Modification - A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Interest Only Modification – A modification in which the loan is converted to interest only payments for a period of time.

Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

Transfer of Assets Modification – A modification in which a transfer of assets has occurred to partially satisfy debt, including foreclosure and repossession.

Combination Modification – Any other type of modification which includes the use of multiple categories above.

32

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

The following tables present the Bank’s loans classified as troubled debt restructurings by loan class as of December 31, 2013 and 2012:

As of December 31, 2013

(dollars in thousands)

	Number of  Contracts		Accrual		Nonaccrual		Total Restructurings
Commercial and industrial		-	$	-	$	-	$	-
Real estate - construction, land and land development
Acquistion, development, & construction		-		-		-		-
Other real estate - construction		-		-		-		-
Real estate - residential
Home equity lines		1		66		-		66
Other real estate - residential		10		925				925
Real estate - comercial
Owner occupied		13		5,775				5,775
Non-owner occupied		1		563		-		563
Consumer		-		-		-		-
Total		25	$	7,329	$	-	$	7,329

33

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

As of December 31, 2012

(dollars in thousands)

	Number of Contracts		Accrual		Nonaccrual		Total Restructurings
Commercial and industrial		1	$	-	$	34	$	34
Real estate - construction, land and land development
Acquistion, development, & construction		2		310		134		444
Other real estate - construction		-		-		-		-
Real estate - residential
Home equity lines		1		66		-		66
Other real estate - residential		10		583		243		826
Real estate - comercial
Owner occupied		9		4,187		1,177		5,364
Non-owner occupied		-		-		-		-
Consumer		-		-		-		-
Total		23	$	5,146	$	1,588	$	6,734

At December 31, 2013 and 2012, commitments to advance additional funds outstanding on troubled debt restructurings totaled $0.

34

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

The following tables present newly restructured loans that occurred during the years ended December 31, 2013 and 2012, respectively:

Year Ended December 31, 2013

(dollars in thousands)

	Number of Contracts		Rate Modification		Payment Modification		Transfer of Assets Modification		Combination Modification		Total Modifications
Pre-Modification Outstanding Recorded Investment:
Real-estate - residential
Other real estate - residential		2	$	154	$	-	$	-	$	18	$	172
Real estate - commercial
Owner occupied		4		359		-		-		1,231		1,590
Non-owner occupied		3		72		-		-		570		642
Total		9	$	585	$	-	$	-	$	1,819	$	2,404
Post-Modification Outstanding Recorded Investment:
Real-estate - residential
Other real estate - residential		2	$	148	$	-	$	-	$	18	$	166
Real estate - commercial
Owner occupied		4		340		-		-		1,221		1,561
Non-owner occupied		3		64		-		-		563		627
Total		9	$	552	$	-	$	-	$	1,802	$	2,354

35

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

Year Ended December 31, 2012

(dollars in thousands)

	Number of Contracts		Rate Modification		Payment Modification		Transfer of Assets Modification		Combination Modification		Total Modifications
Pre-Modification Outstanding Recorded Investment:
Real-estate - residential
Other real estate - residential		8	$	243	$	566	$	-	$	-	$	809
Real estate - commercial
Owner occupied		-		-		-		-		-		-
Non-owner occupied		-		-		-		-		-		-
Total		8	$	243	$	566	$	-	$	-	$	809
Post-Modification Outstanding Recorded Investment:
Real-estate - residential
Other real estate - residential		8	$	243	$	557	$	-	$	-	$	800
Real estate - commercial
Owner occupied		-		-		-		-		-		-
Non-owner occupied		-		-		-		-		-		-
Total		8	$	243	$	557	$	-	$	-	$	800

The following tables represent loans receivable modified as troubled debt restructurings and with a payment default, with the payment default occurring within 12 months of the restructure date, and the payment default occurring during the years ended December 31, 2013 and 2012 (dollars in thousands):

	2013				2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Commercial and industrial		-	$	-		1	$	34
Real estate - construction, land and land development
Other real estate - construction		-		-		-		-
Real estate - residential
Other real estate - residential		-		-		-		-
Real estate - commercial
Owner occupied		1		563		2		1,001
Total		1	$	563		3	$	1,035

36

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 4—Loans (continued)

At December 31, 2013, executive officers and directors were indebted to the Bank in the aggregate amount of approximately $5,591,000. Following is a summary of transactions for the years ended December 31, 2013 and 2012:

	2013			2012
	(dollars in thousands)
Balance at beginning of year	$	6,376		$	9,813
Advances		1,144			4,607
Repayments		(1,929	)		(8,044	)
Balance at end of year	$	5,591		$	6,376

Note 5—Bank-owned life insurance (BOLI)

In September 2007, $8.0 million in bank-owned life insurance (BOLI) was acquired through two policies in order to insure certain key officers of the Bank. In September 2013, an additional $5.0 million bank-owned life insurance policy (BOLI) was acquired in order to insure certain key officers of the Bank. As of December 31, 2013, the total BOLI cash surrender value was $14.8 million resulting in other income for 2013 of $448,000 and an annualized net yield of 4.06%. As of December 31, 2012, the BOLI cash surrender value was $10.0 million resulting in other income for 2012 of $392,000 and an annualized net yield of 4.01%. During 2013, the Bank received death insurance benefits from the two original Bank owned life insurance policies totaling $1.42 million. These benefits resulted in $806,000 of other income.

Note 6—Bank premises and equipment

Bank premises and equipment consist of the following as of December 31, 2013 and 2012:

	2013			2012
	(dollars in thousands)
Land and improvements	$	3,855		$	3,839
Building and improvements		7,191			6,445
Equipment, furniture and fixtures		4,885			4,600
Construction in progress		82			80
		16,013			14,964
Less accumulated depreciation		(6,501	)		(6,174	)
Premises and equipment, net	$	9,512		$	8,790

Depreciation expense for the years ended December 31, 2013 and 2012 was approximately $498,000 and $517,000, respectively. Rental expense of office premises and equipment was approximately $267,000 and $265,000 for the years ended December 31, 2013 and 2012, respectively.

37

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 7—Other real estate owned

At December 31, 2013 and 2012, the Bank had other real estate owned activities as follows:

	2013			2012
	(dollars in thousands)
Balance at beginning of year	$	5,876		$	6,990
Loans transferred to real estate owned		1,968			5,186
Sales of real estate owned		(2,051	)		(4,866	)
Direct write-downs		(896	)		(1,434	)
Balance at end of year	$	4,897		$	5,876

Income and expenses related to other real estate owned for the years ending December 31, 2013 and 2012 were as follows:

	2013		2012
	(dollars in thousands)
Net gains on sales	$	231	$	40
Rental income	$	567	$	686
Operating expenses	$	758	$	850

Note 8—Deposits

At December 31, 2013, the scheduled maturities of time deposit liabilities were as follows:

	2013
	(dollars in thousands)
One year or less	$	91,649
Over one year through two years		32,700
Over two years through three years		10,299
Over three years through four years		8,642
Over four years		9,194
Total	$	152,484

The Bank may also enter into repurchase agreements with customers and may obtain short-term funding from other institutions through brokered and internet deposits in order to manage the Bank’s funding capabilities. Repurchase agreements with customers are generally secured by investment securities owned by the Bank and are established at prevailing market rates. Total repurchase agreements with customers were approximately $12.1 million and $3.3 million at December 31, 2013 and 2012, respectively. Total brokered and internet deposits were $19.9 million and $27.8 million at December 31, 2013 and 2012, respectively.

38

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 9—Federal Home Loan Bank advances and borrowings

As of December 31, 2013 and 2012, the Bank had 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 established is the “Loans Held for Sale” (LHFS) program. 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, 2013 and 2012, the Bank did not have a balance outstanding under the LHFS program. As of December 31, 2013, the Bank had $10.1 million in loans held for sale pledged as collateral under this line.

The Bank also maintains a line of credit with the FHLB which is secured by 1-4 family and commercial real estate loans held in the Bank’s loan portfolio. The balance at December 31, 2012 was $25,000,000 with a variable interest rate of 0.42% and a maturity date of September 30, 2013. The balance at December 31, 2013 was $22,200,000 with a variable interest rate of 0.355% and a maturity date of October 29, 2014. At December 31, 2013, the Bank had $68.5 million in 1-4 family and commercial real estate loans pledged as collateral to the FHLB.

In 2007, a long-term convertible advance was established. During the year ended December 31, 2012, the Bank paid off the outstanding balance on this advance of $10.0 million with a weighted average interest rate of 3.83%. An additional but similar long-term convertible advance was established during 2008. During the year ended December 31, 2012, the Bank paid off the outstanding balance on this advance of $15.0 million with a weighted average interest rate of 3.33%. The Bank paid a penalty of $392,000 for pre-payment of the advances which is included in other non-interest expense for 2012.

Note 10—Employee benefit plans

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 $206,000 and $200,000 for the years ended December 31, 2013 and 2012, respectively.

The Bank has a Nonqualified Executive Deferred Compensation Plan (“EDCP”) covering a select group of key employees and senior management. The EDCP allows participating employees to elect each year to defer compensation into a participant account. At its discretion, the Bank may also elect to make discretionary contributions to the participant account. The EDCP expense, including employee deferrals and contributions made by the Bank, totaled $22,000 and $23,000 for the years ending December 31, 2013 and 2012, respectively. The accrued liability related to the EDCP was approximately $96,000 and $74,000 at December 31, 2013 and 2012, respectively.

39

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 10—Employee benefit plans (continued)

The Bank also has a Supplemental Executive Retirement Plan (“SERP”) for the benefit of certain key officers. The SERP provides selected employees who satisfy specific eligibility requirements with supplemental benefits upon retirement, termination of employment, death, disability or a change of control of the Bank, in certain prescribed circumstances. The Bank recorded expense totaling $273,000 and $294,000 for the SERP for the years ended December 31, 2013 and 2012, respectively. The accrued liability related to the SERP was approximately $1,444,000 and $1,188,000 as of December 31, 2013 and 2012, respectively.

Note 11—Regulatory capital matters

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 certain regulatory agencies. The amount of dividends allowable without prior approval was $13.9 million at December 31, 2013.

In 2012, the Company began paying cash dividends to shareholders. Three quarterly dividends of $0.04 per share were paid for a total of $431,500 for the year ended December 31, 2012. One quarterly dividend of $0.04 per share and three quarterly dividends of $0.045 per share were paid for a total of $623,000 for the year ended December 31, 2013.

On January 27, 2014, the Company declared another cash dividend of $0.045 per share to all shareholders of record as of February 11, 2014.

The Bank is subject to various regulatory capital requirements administered by state and Federal banking agencies. Failure to meet minimum capital requirements can trigger certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated 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, 2013, the Bank met all capital adequacy requirements to which it is subject.

40

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 11— Regulatory capital matters (continued)

As of December 31, 2013, 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.

The Bank’s actual capital amounts (in thousands) and ratios as of December 31, 2013 and 2012 are presented in the following tables:

	Actual					Required for Capital Adequacy Purposes					Required to be Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2013:
Total capital to risk weighted assets
Bank	$	64,863		17.25	%	$	30,087		8.00	%	$	37,609		10.00	%
Consolidated	$	65,663		17.44	%	$	30,116		8.00	%	$	37,645		10.00	%
Tier 1 capital to risk weighted assets
Bank	$	60,154		15.99	%	$	15,043		4.00	%	$	22,565		6.00	%
Consolidated	$	60,954		16.19	%	$	15,058		4.00	%	$	22,587		6.00	%
Tier 1 leverage to average assets
Bank	$	60,154		11.93	%	$	20,172		4.00	%	$	25,215		5.00	%
Consolidated	$	60,954		12.08	%	$	20,189		4.00	%	$	25,233		5.00	%

	Actual					Required for Capital Adequacy Purposes					Required to be Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2012:
Total capital to risk weighted assets
Bank	$	58,321		16.59	%	$	28,125		8.00	%	$	35,156		10.00	%
Consolidated	$	59,262		16.86	%	$	28,125		8.00	%	$	35,156		10.00	%
Tier 1 capital to risk weighted assets
Bank	$	53,926		15.34	%	$	14,062		4.00	%	$	21,094		6.00	%
Consolidated	$	54,867		15.61	%	$	14,062		4.00	%	$	21,094		6.00	%
Tier 1 leverage to average assets
Bank	$	53,926		11.13	%	$	19,382		4.00	%	$	24,227		5.00	%
Consolidated	$	54,867		11.32	%	$	19,383		4.00	%	$	24,229		5.00	%

41

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 12— Stock based compensation

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. The 1997 Plan expired in 2007 and no more grants may be made pursuant to this plan. Options were granted to purchase common shares at prices not less than the fair market value of the stock at the date of grant. Fair market value is defined to mean the average closing price for the ten business days prior to the date of board approval and grant. The maximum number of shares reserved under the 1997 Plan was 345,000 shares, as adjusted for the Company’s stock splits and stock dividends.

In 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. The 2004 Plan allows awards of stock, performance units, stock appreciation rights, incentive stock options, non-qualified stock options and phantom stock. Options are granted to purchase common shares at prices not less than the fair market value of the stock at the date of grant. Fair market value is defined to mean the average closing price for the ten business days prior to the date of board approval and grant. The maximum number of shares reserved and available for issuance under the 2004 Plan is 330,125 shares, as adjusted for the Company’s stock split in 2005.

The Stock Incentive Committee of the Board of Directors of the Company administers both plans and establishes to whom awards shall be made and determines option exercise prices, methods of exercise, vesting requirements, the number of shares covered by each option, the terms and restrictions applicable to restricted stock awards, all subject to the approval of the Company’s Board of Directors.

The Company recorded compensation expense of approximately $93,000 and $108,000 for the years ended December 31, 2013 and 2012, respectively, related to employee stock options. No stock options were issued during the years ended December 31, 2013 and 2012.

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 seven-year period. The plans provide that vesting periods may not exceed ten years.

During the years ending December 31, 2013 and 2012, the Company made restricted stock awards totaling 24,006 and 15,988 shares, respectively. The shares granted in 2012 vest fully at the end of three years. During 2013, there were 16,406 shares granted which vest fully at the end of three years and 7,600 shares granted which vest fully at the end of five years. The grants resulted in expense of $132,456 and $35,210 for the years ended December 31, 2013 and 2012, respectively.

42

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 12— Stock based compensation (continued)

A summary of the Company’s stock option activity under the plans as of December 31, 2013 and 2012, and changes and related information for the years then ended, is presented below:

Options	Shares			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2013		238,728		$	11.21			4.12	$	583,833
Granted		-		$	-
Exercised		(28,469	)	$	(14.30	)
Forfeited or expired		(28,017	)	$	(9.44	)
Outstanding at December 31, 2013		182,242		$	11.00			4.19	$	710,283
Fully vested and expected to vest		182,242		$	11.00			4.19	$	710,283
Exercisable at December 31, 2013		120,933		$	12.49			3.26	$	314,381

Options	Shares			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2012		290,344		$	10.26			4.35	$	67,631
Granted		-		$	-
Exercised		(45,491	)	$	(5.55	)
Forfeited or expired		(6,125	)	$	(7.96	)
Outstanding at December 31, 2012		238,728		$	11.21			4.12	$	583,833
Fully vested and expected to vest		238,728		$	11.21			4.12	$	583,833
Exercisable at December 31, 2012		160,861		$	12.59			2.81	$	251,921

At December 31, 2013, options both outstanding and exercisable under both plans have exercise prices that range from $7.00 per share to $20.41 per share.

43

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 12— Stock based compensation (continued)

The fair value of these options was estimated on the date of grant using a Black-Scholes option valuation model that used the following range of assumptions for each of the years presented:

	2013		2012
Total intrinsic value of options exercised	$	6,263	$	318,282
Cash received from option exercise	$	407,107	$	252,630
Tax benefit related to option exercises	$	130,274	$	85,890

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

A summary of the status of the Company’s nonvested options as of December 31, 2013 and 2012, and changes during the years then ended, is presented below:

Nonvested Options	Shares			Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2013		77,867		$	5.55
Granted		-		$	-
Vested		(16,558	)	$	5.71
Forfeited		-		$	-
Nonvested at December 31, 2013		61,309		$	5.50

Nonvested Options	Shares			Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2012		93,516		$	5.57
Granted		-		$	-
Vested		(15,355	)	$	5.71
Forfeited		(294	)	$	5.69
Nonvested at December 31, 2012		77,867		$	5.55

As of December 31, 2013, there was $243,195 of total unrecognized compensation cost related to the Company’s nonvested options granted under the plans. This cost is expected to be recognized over a weighted-average period of 1.61 years. The total fair value of shares vested during the years ended December 31, 2013 and 2012, was $94,494 and $87,638, respectively.

44

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 12— Stock based compensation (continued)

For the years ended December 31, 2013 and 2012, the Company issued a total of 14,071 and 24,504 shares of common stock, respectively, to non-employee directors as compensation for services rendered under the Company’s Directors Equity Incentive Plan.  The Company recorded $205,000 and $209,000 in stock compensation expense related to the issuance of these shares for the years ended December 31, 2013 and 2012, respectively.

For shares issued as retainer stock, the shares are issued at fair value and the expense recognized was equal to the fair value of the shares on the date of grant. The Company issued 7,646 and 11,350 of retainer shares included above during the years ended December 31, 2013 and 2012, respectively.

In addition, directors may choose to purchase stock under this plan in lieu of directors fees paid for meeting attendance.  The shares under the plan were purchased at 85% of the fair value of the shares on the date of the grant. The Company has defined fair value under the plan to be the average closing market price of the Company’s common stock for the last ten trading days of each quarter as reported on the Over-the-Counter Bulletin Board.The Company records the expense related to the purchases at fair value of the shares on the date of the grant.   The following table represents activity in the Directors’ Equity Incentive Plan in 2013 and 2012:

	2013			2012
Beginning shares authorized and unissued		170,434			21,739
Additional shares authorized and unissued		-			173,199
Shares issued		(14,071	)		(24,504	)
Ending shares authorized and unissued		156,363			170,434

A summary of common stock issued through the exercise of employee stock options and employee/director compensation and expense is as follows:

	2013		2012
Net options exercised		5,831		45,491
Issuance of stock for compensation		24,006		15,988
Issuance of stock for directors' fees		14,071		24,504
Net issuance of common stock		43,908		85,983

45

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 13— Earnings per common share

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 years ended December 31, 2013 and 2012:

	2013
	Income (Numerator)		Shares (Denominator)		Per Share
	(dollars in thousands, except per share data)
Basic EPS
Net income available to common shareholders	$	6,204		3,558,876	$	1.74
Effect of stock options outstanding		-		31,244		(0.01	)
Diluted EPS
Net income available to common shareholders	$	6,204		3,590,120	$	1.73

	2012
	Income (Numerator)		Shares (Denominator)		Per Share
	(dollars in thousands, except per share data)
Basic EPS
Net income available to common shareholders	$	6,621		3,599,431	$	1.84
Effect of stock options outstanding		-		-		-
Diluted EPS
Net income available to common shareholders	$	6,621		3,599,431	$	1.84

For the years ended December 31, 2013 and 2012, there were 47,365 and 129,417 options, respectively, that were antidilutive since the exercise price exceeded the average market price for the year.

46

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 14—Other expenses

Other non-interest expenses for the years ended December 31, 2013 and 2012 are as follows:

	2013		2012
	(dollars in thousands)
Data processing	$	1,346	$	1,050
FDIC assessment		254		403
Legal and accounting		713		783
Printing and supplies		307		290
Advertising		203		177
Business development		158		144
Telecommunications		222		194
Outside services		255		240
Courier and postage		204		178
Software license fees		85		92
City and county taxes		181		149
Directors fees		288		275
Travel and employee meals and entertainment		162		180
Provision for mortgage recourse liability		499		499
Legal settlement payable		-		598
FHLB early payoff penalty		-		392
Other		1,577		1,048
Total	$	6,454	$	6,692

47

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 15—Income Taxes

Total income taxes in the statements of income for the years ended December 31, 2013 and 2012 are as follows:

	2013			2012
	(dollars in thousands)
Current tax provision	$	3,012		$	3,278
Deferred tax expense (benefit)		(532	)		(615	)
Total income tax expense (benefit)	$	2,480		$	2,663

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:

	2013			2012
Federal statutory rates		34.0	%		34.0	%
State taxes, net of federal benefit		3.3	%		3.8	%
Tax-exempt income		-2.1	%		-1.5	%
State tax credits		-3.0	%		-2.6	%
Bank-owned life insurance		-4.9	%		-1.4	%
State tax credit valuation allowance		0.5	%		-4.1	%
Other		0.8	%		0.6	%
Total		28.6	%		28.8	%

48

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 15—Income Taxes (continued)

The primary components of deferred income taxes at December 31, 2013 and 2012 are as follows:

	2013			2012
Deferred tax assets
Allowance for loan losses	$	1,713		$	1,689
Unrealized loss on securities available for sale		1,913			-
Executive compensation plans		646			502
Valuation adjustment of other real estate owned		645			437
Recourse liability		414			293
Contingent liability		227			228
Investment in GA low-income housing tax credits		310			270
State tax credits		184			281
Mortgage derivatives IRLC expenses		97			115
Other		44			102
Total deferred income tax assets		6,193			3,917
Deferred tax liabilities
Unrealized gain on securities available for sale		-			(798	)
Qualified prepaids		(26	)		(131	)
Depreciation on bank premises and equipment		(198	)		(174	)
Mortgage derivative change in method		(293	)		(439	)
Total deferred income tax liabilities		(517	)		(1,542	)
Valuation allowance		(310	)		(270	)
Net deferred income tax assets	$	5,366		$	2,105

Deferred tax assets are included in other assets. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered in income.  Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. 

Prior to 2012, the Company had created a full valuation allowance for the Georgia Form 900 tax credits. During 2012, the Company reversed the deferred tax valuation allowance that was recorded against these tax credits since it was determined that, based on the profitability of the Company and other positive evidence, these state tax credits would be utilized before their expiration dates. The Company continues to reflect a full valuation allowance on its investment in a Georgia Low Income Housing Project, to reflect management’s estimate of the temporary deductible differences that may expire prior to their utilization.

49

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 15—Income Taxes (continued)

Management has evaluated all other tax positions that could have a significant effect on the consolidated financial statements and determined that the Company had no uncertain income tax positions at December 31, 2013.

The Company and its subsidiary are subject to U.S. Federal income tax as well as income tax within the state of Georgia. The Company is no longer subject to examination by taxing authorities for years before 2010.

Note 16—Commitments and contingencies

In the ordinary course of business, the Bank may enter into off-balance-sheet financial instruments that are not reflected in the consolidated financial statements. These instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated 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 consolidated financial statements.

Following is an analysis of significant off-balance-sheet financial instruments for the years ended December 31, 2013 and 2012:

	2013		2012
	(dollars in thousands)
Commitments to extend credit	$	74,144	$	48,976
Standby letters of credit		472		1,029
Total	$	74,616	$	50,005

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 with other institutions when these commitments are funded. The credit risk involved in issuing these financial instruments is essentially the same as that involved in making 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.

50

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 16—Commitments and contingencies (continued)

Loans sold under the mortgage loans held for sale portfolio contain certain representations and warranties in the loan sale agreements which require that we repurchase or indemnify the investors for losses or costs on loans we sell under certain limited conditions. Some of these conditions include underwriting errors or omissions, fraud or material misstatements by the borrower in the loan application or invalid market value on the collateral property due to deficiencies in the appraisal. In addition to these representations and warranties, our loan sale contracts define a condition in which the borrower defaults during a short period of time, typically 120 days to one year, as an Early Payment Default (“EPD”). In the event of an EPD, we are required to return the premium paid by the investor for the loan as well as certain administrative fees, and in some cases repurchase the loan or indemnify the investor. Based on these recourse provisions, the Bank established a recourse liability for mortgage loans sold. The following table demonstrates the activity for the years ended December 31, 2013 and 2012:

	2013			2012
	(dollars in thousands)
Beginning balance	$	772		$	245
Provision		499			499
Losses		(196	)		(167	)
Recoveries		15			195
Ending balance	$	1,090		$	772

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, at December 31, 2013, there were no pending litigation matters in which the anticipated outcome would have a material adverse effect on the consolidated financial statements.

In August 2011, the Bank was sued in State Court by a subcontractor related to a residential development project foreclosed upon by the Bank. The suit alleged various claims against the Bank, all of which the Bank denied. Following a mistrial in November 2012 where the jury failed to reach a verdict, a second trial in January 2013 resulted in a verdict against the Bank in the amount of $597,500. The Bank is in the process of appealing this verdict and believes it has meritorious defenses against the verdict. The entire judgment amount was recorded as a contingent liability as of December 31, 2012; therefore, management does not expect that there will be any material adverse effects on the Company’s future consolidated financial position, results of operations or cash flows related to this litigation.

51

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 16—Commitments and contingencies (continued)

The Bank has various contractual obligations that it must fund as part of normal operations. The following is a summary of future minimum lease obligations as of December 31, 2013. 

	2014		2015		2016		2017		Thereafter		Total
	(dollars in thousands)
Operating leases	$	239	$	236	$	12	$	11	$	-	$	498

Note 17—Mortgage banking derivatives

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Bank’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships. At December 31, 2013, the Bank had approximately $25.6 million of interest rate lock commitments and $50.6 million of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by a derivative asset of $823,000 and a derivative liability of $175,000. The net gains related to interest rate lock commitments used for risk management were $166,000 as of December 31, 2013. The net gains for forward contracts related to these mortgage loans was $483,000 as of December 31, 2013. At December 31, 2012, the Company had approximately $35.9 million of interest rate lock commitments and $80.3 million of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by a derivative asset of $485,000 and a derivative liability of $409,000. The net gains related to interest rate lock commitments used for risk management were $303,000 as of December 31, 2012. The net losses for forward contracts related to these mortgage loans was $227,000 as of December 31, 2012. Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. Changes in the fair values of these mortgage-banking derivatives are included in net gains on sales of loans.

52

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 18—Supplemental consolidated cash flow information

	2013			2012
	(dollars in thousands)
Income taxes paid	$	2,750		$	3,225
Interest paid	$	2,171		$	3,897
Interest received	$	18,250		$	20,529
Transfers from loans to real estate owned	$	1,968		$	5,186
Unrealized gain(loss) on securities, net	$	(5,522	)	$	305

Note 19—Fair value of financial instruments

The Company utilizes fair value measurement to record fair value adjustments to certain other assets and liabilities and to determine fair value measurements where required. For these assets and liabilities recorded at fair value, it is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are as follows:

Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. At December 31, 2013, the Company’s Level 1 assets include U.S. Government agency obligations.

Level 2 – Valuations for assets and liabilities that are obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company’s principal markets for these securities are the secondary institutional markets and valuations are based on observable market data in those markets. At December 31, 2013, the Company’s Level 2 assets include U.S. Government agency obligations, state and municipal bonds, and mortgage-backed securities.

Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. Level 3 assets include impaired loans and other real estate owned as discussed below.

53

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 19—Fair value of financial instruments (continued)

Following is a description of valuation methodologies used for determining fair value for assets and liabilities:

Investment Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the securities’ credit rating, prepayment assumptions, and other factors such as credit loss assumptions. At December 31, 2013, the Company classified $158.4 million of investment securities available-for-sale subject to recurring fair value adjustments as Level 2. At December 31, 2012, the Company classified $132.8 million of investment securities available-for-sale subject to recurring fair value adjustments as Level 2.

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans with respect to which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once an individual loan is identified as impaired, management measures the impairment in accordance with ASC 310-10-35, “Receivables-Subsequent Measurements.” The fair value of impaired loans is estimated primarily using the collateral value. However, in some cases other methods are used, such as market value of similar debt, enterprise value, liquidation value, and discounted cash flows. Those impaired loans not requiring an allowance represent loans with respect to which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2013, substantially all of the total impaired loans were evaluated based on the fair value of the collateral less estimated selling costs. In accordance with ASC 820-10, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Most fair values of the collateral are based on an observable market price or a current appraised value by a third party appraiser, tax valuation, or broker price opinion; however, in some cases an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price.

As such, the Company records these collateral dependent impaired loans at fair value as nonrecurring Level 3. Collateral dependent impaired loans recorded at fair value totaled $1.4 million and $3.2 million at December 31, 2013 and December 31, 2012, respectively. Specific loan loss allowances for these impaired loans totaled $358,000 and $272,000 at December 31, 2013 and December 31, 2012, respectively. At December 31, 2013 and December 31, 2012, $1.0 million and $2.9 million of impaired loans, net of allowance for loan losses, respectively, were classified as Level 3.

54

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 19—Fair value of financial instruments (continued)

Loans Held for Sale

Loans held for sale are carried at fair value, as determined by outstanding commitments, from third party investors (Level 2). The Company elected the fair value option for loans held for sale on July 1, 2012. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans are 90 days or more past due nor on nonaccrual as of December 31, 2013 and 2012.

As of December 31, 2013, the aggregate fair value was $31.3 million, the contractual balance including accrued interest was $30.9 million and the gain recorded from the change in fair value included in earnings for the year ended December 31, 2013 was $372,000. As of December 31, 2012, the aggregate fair value was $48.4 million, the contractual balance including accrued interest was $48.3 million and the gain recorded from the change in fair value included in earnings for the year ended December 31, 2012 was $179,000.

Interest Rate Lock and Forward Commitments

Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked (Level 2). Changes in the fair values of these derivatives are included in net gains

on sales of loans. The interest rate lock commitments with a positive fair value totaled $39,000 and $97,000 at December 31, 2013 and 2012, respectively, and were recorded in other assets. The interest rate lock commitments with a negative fair value totaled $118,000 and $49,000 at December 31, 2013 and 2012, respectively, and were recorded in other liabilities.

The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in the fair values of these derivatives are included in net gains on sales of loans. The interest rate lock commitments with a positive fair value totaled $118,000 and $49,000 at December 31, 2013 and 2012, respectively, and were recorded in other assets. The interest rate lock commitments with a negative fair value totaled $39,000 and $97,000 at December 31, 2013 and 2012, respectively, and were recorded in other liabilities.

Other Real Estate Owned

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Subsequently, other real estate owned is carried at the lower of carrying value or fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Most fair values of the collateral are based on an observable market price or a current appraised value; however, in some cases an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price. Management may apply discount adjustments to the appraised value for estimated selling costs, information from comparable sales, and marketability of the property.

55

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 19—Fair value of financial instruments (continued)

As such, the Company records other real estate owned with subsequent write downs after transfer as nonrecurring Level 3. Other real estate owned that has had subsequent write-downs after transfer from loans to other real estate totaled $3.6 million and $1.2 million at December 31, 2013 and December 31, 2012, respectively.

The tables below present information about assets and liabilities which are measured at fair value on a recurring basis:

	Fair Value Measurements at December 31, 2013, Using,
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)			Total
	(dollars in thousands)
U.S. Government and agency	$	-	$	58,281	$	-	$	58,281
Mortgage-backed - residential GSEs		-		64,732		-		64,732
State and municipal		-		30,751		-		30,751
Corporate bonds		-		4,675		-		4,675
Total	$	-	$	158,439	$	-	$	158,439
Loans held for sale	$	-	$	31,298	$	-	$	31,298
Derivative assets (1)	$	-	$	823	$	-	$	823
Derivative liabilities(1)	$	-	$	175	$	-	$	175

(1) This amount includes mortgage related interest rate lock commitments and commitments to sell.

56

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 19—Fair value of financial instruments (continued)

	Fair Value Measurements at December 31, 2012, Using,
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total
	(dollars in thousands)
U.S. Government and agency	$	-	$	55,565	$	-	$	55,565
Mortgage-backed - residential GSEs		-		3,112		-		3,112
State and municipal		-		51,295		-		51,295
Corporate bonds		-		22,788		-		22,788
Total	$	-	$	132,760	$	-	$	132,760
Loans held for sale	$	-	$	48,432	$	-	$	48,432
Derivative assets (1)	$	-	$	485	$	-	$	485
Derivative liabilities(1)	$	-	$	409	$	-	$	409

(1) This amount includes mortgage related interest rate lock commitments and commitments to sell.

There were no transfers between Level 1 and Level 2 during 2013 or 2012.

57

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 19—Fair value of financial instruments (continued)

Assets measured at fair value on a non-recurring basis are summarized below:

	Fair Value Measurements at December 31, 2013, Using,
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total
	(dollars in thousands)
Impaired loans, net of allowance
Commercial and industrial	$	-	$	-	$	-	$	-
Real estate - construction		-		-		40		40
Real estate - residential		-		-		249		249
Real estate - commercial		-		-		701		701
Consumer		-		-		11		11
Total impaired loans	$	-	$	-	$	1,001	$	1,001
Other real estate owned
Unimproved land	$	-	$	-	$	471	$	471
Real estate - residential		-		-		144		144
Real estate - commercial		-		-		2,951		2,951
Total other real estate owned	$	-	$	-	$	3,566	$	3,566

58

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 19—Fair value of financial instruments (continued)

	Fair Value Measurements at December 31, 2012, Using,
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total
	(dollars in thousands)
Impaired loans, net of allowance
Commercial and industrial	$	-	$	-	$	-	$	-
Real estate - construction		-		-		542		542
Real estate - residential		-		-		477		477
Real estate - commercial		-		-		1,895		1,895
Consumer		-		-		16		16
Total impaired loans	$	-	$	-	$	2,930	$	2,930
Other real estate owned
Unimproved land	$	-	$	-	$	642	$	642
Real estate - residential		-		-		346		346
Real estate - commercial		-		-		172		172
Total other real estate owned	$	-	$	-	$	1,160	$	1,160

The following tables represent changes in non-recurring fair value recorded during the years ended December 31, 2013 and 2012:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Impaired Loans			Other Real Estate Owned			Total
	(dollars in thousands)
Balance at December 31, 2012	$	2,930		$	1,160		$	4,090
Gains included in earnings		-			-			-
Gross reductions		(135	)		(1,496	)		(1,631	)
Transfers into (out of) Level 3		(1,794	)		3,902			2,108
Balance at December 31, 2013	$	1,001		$	3,566		$	4,567

Gross reductions in other real estate owned included $1,026,000 in sales and $470,000 in write downs.

59

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 19—Fair value of financial instruments (continued)

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Impaired Loans			Other Real Estate Owned			Total
	(dollars in thousands)
Balance at December 31, 2011	$	4,816		$	1,038		$	5,854
Gains (losses) included in earnings		-			103			103
Gross additions (reductions)		(1,886	)		(1,980	)		(3,866	)
Transfers into (out of) Level 3		-			1,999			1,999
Balance at December 31, 2012	$	2,930		$	1,160		$	4,090

Gross reductions in other real estate owned included $1,752,000 in sales and $228,000 in write downs.

60

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 19—Fair value of financial instruments (continued)

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2013 for collateral dependent impaired loans and other real estate owned:

	Fair Value		Valuation Technique	Unobservable Inputs	Range				Weighted Average
Impaired loans:
Real estate – construction	$	40	Sales comparison	Management and appraiser adjustment for difference between comparable sales		42.41%	-	94%		42.41	%
Real estate – residential		249	Sales comparison	Management and appraiser adjustment for difference between comparable sales		27.31%	-	94%		16.92	%
Real estate - commercial		701	Sales comparison	Management and appraiser adjustment for difference between comparable sales		3.87%	-	44.85%		13.86	%
			Income approach	Capitalization rate			9.50%			9.50	%
Consumer		11	NADA or third party valuation of underlying collateral	Management adjustment for comparable sales		45.85%	-	100%		45.85	%
Total	$	1,001
Other real estate owned:
Unimproved land	$	471	Sales comparison	Management and appraiser adjustment for difference between comparable sales		0%	-	10%		1.51	%
Real estate - residential		144	Sales comparison	Management and appraiser adjustment for difference between comparable sales		29.73%	-	82.80%		33.99	%
Real estate – commercial		2,951	Sales comparison	Management and appraiser adjustment for difference between comparable sales		10.12%	-	26.54%		17.86	%
			Income approach	Capitalization rate			10.00%			10.00	%
Total	$	3,566

61

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 19—Fair value of financial instruments (continued)

Financial Instruments

Fair value measurements for assets and liabilities where there exists limited or no observable market data and, therefore, are based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability, and other factors. Therefore, the fair value cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect current or future values.

The methods and assumptions, not previously presented, used to estimate the fair value of significant financial instruments are as follows:

Cash and due from banks - The carrying value of cash and due from banks approximates the fair value and is classified as Level 1.

Loans held for sale – Loans held for sale are carried at fair value, as determined by outstanding commitments from third party investors. Loans held for sale are classified as Level 2.

Federal Home Loan Bank stock - The fair value of Federal Home Loan Bank (“FHLB”) stock is not practicable since no ready market exists for the stock.

Deposits - The fair value of time deposits is estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities and is classified as Level 2. The carrying value of other deposits approximates the fair value and they are classified as Level 1.

Repurchase agreements - The carrying value of repurchase agreements approximates fair value due to their short-term nature and they are classified as Level 1.

Short-term debt and other borrowings - Fair value approximates the carrying value of other borrowings due to their short-term nature and they are classified as

Level 1.

Long-term debt - The fair value of long-term debt is calculated by discounting contractual cash flows using an estimated interest rate based on the current rates available for debt of similar remaining maturities and collateral terms, resulting in a Level 2 classification.

62

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 19—Fair value of financial instruments (continued)

The carrying amount and estimated fair values of financial instruments at December 31, 2013 and December 31, 2012 are as follows:

	Fair Value Measurements at December 31, 2013
	Carrying Value		Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Financial assets:
Cash and due from banks	$	16,828	$	16,828	$	-	$	-	$	16,828
Securities available for sale		158,439		-		158,439		-		158,439
Loans, net of allowance		269,390		-		-		271,112		271,112
Loans held for sale		31,298		-		31,298		-		31,298
Federal Home Loan Bank stock		1,606	N/A		N/A		N/A		N/A
Accrued interest receivable, loans		974		-		974		-		974
Accrued interest receivable, securities		880		-		880		-		880
Other derivative assets(1)		823		-		823		-		823
Financial liabilities
Time deposits	$	152,484	$	-	$	153,411	$	-	$	153,411
Other deposits		267,221		267,221		-		-		267,221
Repurchase agreements		12,111		12,111		-		-		12,111
FHLB short-term debt		22,200		22,200				-		22,200
Accrued interest payable, deposits		398		5		393		-		398
Accrued interest payable, borrowings		6		6		-		-		6
Other derivative liabilities(1)		409		-		409		-		409

(1) This amount includes mortgage related interest rate lock commitments and commitments to sell.

63

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 19—Fair value of financial instruments (continued)

	Fair Value Measurements at December 31, 2012
	Carrying Value		Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Financial assets:
Cash and due from banks	$	30,279	$	30,279	$	-	$	-	$	30,279
Securities available for sale		132,760		-		132,760		-		132,760
Loans, net of allowance		259,877		-		-		264,159		264,159
Loans held for sale		48,432		-		48,432		-		48,432
Federal Home Loan Bank stock		1,865	N/A		N/A		N/A		N/A
Accrued interest receivable, loans		1,123		-		1,123		-		1,123
Accrued interest receivable, securities		649		-		649		-		649
Other derivative assets(1)		485		-		485		-		485
Financial liabilities
Time deposits	$	169,376	$	-	$	170,707	$	-	$	170,707
Other deposits		247,580		247,580		-		-		247,580
Repurchase agreements		3,333		3,333		-		-		3,333
FHLB short-term debt		25,028		25,028				-		25,028
Accrued interest payable, deposits		458		5		453		-		458
Accrued interest payable, repurchase agreements		3		3		-		-		3
Other derivative liabilities(1)		409		-		409		-		409

(1) This amount includes mortgage related interest rate lock commitments and commitments to sell.

64

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 20 – Quarterly Financial Data (Unaudited)

The following table represents summarized data for each of the quarters in 2013 and 2012:

	Selected Quarterly Data
	2013											2012
	4Q			3Q		2Q			1Q			4Q			3Q			2Q		1Q
	(dollars in thousands, except per share data)
Interest income	$	4,655		$	4,581	$	4,576		$	4,520		$	4,887		$	5,200		$	5,226	$	5,256
Interest expense		489			512		545			569			649			945			1,016		1,072
Net interest income		4,166			4,069		4,031			3,951			4,238			4,255			4,210		4,184
Provision for loan losses		(242	)		15		(1,200	)		(602	)		(306	)		(729	)		125		305
Net interest income after provision for loan losses		4,408			4,054		5,231			4,553			4,544			4,984			4,085		3,879
Non-interest income		2,610			2,704		3,723			3,776			3,529			4,824			3,484		2,921
Securities gain (loss)		-			-		78			13			(116	)		11			-		-
Other-than-temporary impairment on securities		-			-		-			-			-			-			-		-
Less: Non-interest expenses		5,752			5,633		5,868			5,213			6,323			6,507			5,065		4,966
Income before income tax expense (benefit)		1,266			1,125		3,164			3,129			1,634			3,312			2,504		1,834
Income tax expense (benefit)		331			282		1,045			822			242			1,070			801		550
Net income	$	935		$	843	$	2,119		$	2,307		$	1,392		$	2,242		$	1,703	$	1,284
Basic earnings (loss) per common share	$	0.26		$	0.24	$	0.60		$	0.65		$	0.39		$	0.62		$	0.47	$	0.36
Diluted earnings (loss) per common share	$	0.26		$	0.23	$	0.59		$	0.65		$	0.39		$	0.62		$	0.47	$	0.36
Dividends per common share	$	0.045		$	0.045	$	0.045		$	0.040		$	0.04		$	0.04		$	0.04	$	-

65

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 21—Condensed financial information on Georgia-Carolina Bancshares, Inc. (Parent Company only)

Condensed Balance Sheets

December 31, 2013 and 2012

(dollars in thousands)

	2013		2012
Assets
Cash	$	431	$	683
Investment in subsidiary		56,089		55,383
Other assets		436		317
Total assets	$	56,956	$	56,383
Liabilities
Deferred tax liability	$	-	$	7
Other liabilities		67		51
Total liabilities		67		58
Shareholders' equity		56,889		56,325
Total liabilities and shareholders' equity	$	56,956	$	56,383

66

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 21—Condensed financial information on Georgia-Carolina Bancshares, Inc. (Parent Company only) (continued)

Condensed Statements of Income

Years Ended December 31, 2013 and 2012

(dollars in thousands)

	2013			2012
Income, dividends from subsidiary	$	160		$	1,500
Expenses
Director compensation		71			56
Legal fees		80			73
Audit exam and accounting fees		71			42
Annual report and proxy		25			20
Shareholder services		26			27
Other		16			11
Total expenses		289			229
Income (loss) before income tax benefits and equity in undistributed earnings of subsidiary		(129	)		1,271
Income tax benefits		105			75
Income (loss) before equity in undistributed earnings of subsidiary		(24	)		1,346
Equity in undistributed earnins of subsidiary		6,228			5,275
Net income	$	6,204		$	6,621

67

GEORGIA-CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements 

December 31, 2013 and 2012

Note 21—Condensed financial information on Georgia-Carolina Bancshares, Inc. (Parent Company only) (continued)

Condensed Statements of Cash Flows

Years Ended December 31, 2013 and 2012

(dollars in thousands)

	2013			2012
Cash flows from operating activities
Net income	$	6,204		$	6,621
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for deferred income taxes		(7	)		1
Stock incentive expense		225			143
Stock compensation		205			209
Equity in undistributed earnings of subsidiary		(6,228	)		(5,275	)
Change in other liabilities		16			(32	)
Change in other assets		(119	)		(78	)
Net cash provided by operating activities		296			1,589
Cash flows from financing activities
Proceeds from stock options exercised		75			253
Repurchased Stock		-			(1,219	)
Dividends		(623	)		(432	)
Net cash used in financing activities		(548	)		(1,398	)
Net increase (decrease) in cash and due from backs		(252	)		191
Cash and due from banks at beginning of period		683			492
Cash and due from banks at end of period	$	431		$	683

68