Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - CAROLINA BANK HOLDINGS INCFinancial_Report.xls
EX-32.1 - EXHIBIT 32.1 - CAROLINA BANK HOLDINGS INCv311867_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - CAROLINA BANK HOLDINGS INCv311867_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - CAROLINA BANK HOLDINGS INCv311867_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

For the quarterly period ended March 31, 2012                          

or

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

For the transition period from                          to                            

 

Commission File Number: 000-31877                                             

 

Carolina Bank Holdings, Inc.
(Exact name of registrant as specified in its charter)

 

North Carolina 56-2215437
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

101 North Spring Street, Greensboro, North Carolina 27401
(Address of principal executive offices) (Zip Code)

 

(336) 288-1898
(Registrant’s telephone number, including area code)

 

n/a  
(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨  
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

There were 3,387,045 shares of the Issuer’s common stock, $1.00 par value, outstanding as of May 11, 2012. 

 

 
 

 

CAROLINA BANK HOLDINGS, INC.

 

INDEX    
     
    Page
     
PART I.    FINANCIAL INFORMATION    
     
Item 1. Financial Statements (unaudited)   2
     
Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011   2
     
Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011   3
     
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011   4
     
Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2012   5
     
Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011   6
     
Notes to Consolidated Financial Statements   7
     
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations   29
     
Item 4.  Controls and Procedures   35
     
PART II.   OTHER INFORMATION    
     
Item 1. Legal Proceedings   36
     
Item 4. (Reserved)   36
     
Item 6. Exhibits   36
     
Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act  
     
Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act  
     
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350  

  

1
 

 

ITEM 1. Financial Statements

 

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Balance Sheets

 

   March 31,   December 31, 
   2012   2011* 
   (unaudited)     
   (in thousands, except share data) 
Assets          
Cash and due from banks  $6,100   $5,664 
Interest-bearing deposits with banks   15,130    7,647 
Securities available-for-sale, at fair value   44,929    42,208 
Securities held-to-maturity   370    392 
Loans held for sale   81,497    91,955 
Loans   480,888    487,031 
Less allowance for loan losses   (12,491)   (11,793)
Net loans   468,397    475,238 
Premises and equipment, net   17,454    17,442 
Other real estate owned   7,708    6,728 
Bank-owned life insurance   10,480    10,385 
Other assets   15,944    15,666 
Total assets  $668,009   $673,325 
           
Liabilities and Stockholders' Equity          
Deposits          
Non-interest bearing demand  $57,172   $57,475 
NOW, money market and savings   325,636    324,449 
Time   205,692    214,715 
Total deposits   588,500    596,639 
           
Advances from the Federal Home Loan Bank   3,053    3,075 
Securities sold under agreements to repurchase   1,918    1,536 
Subordinated debentures   19,507    19,489 
Other liabilities and accrued expenses   7,088    6,028 
Total liabilities   620,066    626,767 
           
Commitments  - Note O          
Stockholders' equity          
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding 16,000 shares   15,273    15,177 
Common stock, $1 par value; authorized 20,000,000 shares; issued and outstanding 3,387,045 shares   3,387    3,387 
Common stock warrants   1,841    1,841 
Additional paid-in capital   15,879    15,870 
Retained earnings   10,058    9,132 
Stock in directors' rabbi trust   (912)   (875)
Directors' deferred fees obligation   912    875 
Accumulated other comprehensive income   1,505    1,151 
Total stockholders’ equity   47,943    46,558 
Total liabilities and stockholders’ equity  $668,009   $673,325 

 

* Derived from audited consolidated financial statements.

 

See accompanying notes to consolidated financial statements.

 

2
 

 

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statements of Operations (unaudited)

 

   Three Months 
   Ended March 31, 
   2012   2011 
   (in thousands, except per share data) 
Interest income          
Loans  $7,085   $7,150 
Investment securities, taxable   306    401 
Investment securities, non taxable   107    162 
Interest from deposits in banks   10    20 
Total interest income   7,508    7,733 
           
Interest expense          
NOW, money market, savings   548    660 
Time deposits   709    967 
Other borrowed funds   202    188 
Total interest expense   1,459    1,815 
           
Net interest income   6,049    5,918 
Provision for loan losses   1,460    1,700 
Net interest income after provision for loan losses   4,589    4,218 
Non-interest income          
Service charges   283    231 
Mortgage banking income   3,297    1,635 
Gain on sale of securities available-for-sale   -    97 
Gain on sale of other real estate owned   48    - 
Other   172    147 
Total non-interest income   3,800    2,110 
           
Non-interest expense          
Salaries and benefits   4,030    2,964 
Occupancy and equipment   682    638 
Professional fees   257    253 
Outside data processing   206    219 
FDIC insurance   215    385 
Advertising and promotion   175    87 
Stationery, printing and supplies   135    139 
Impairment of other real estate owned   296    - 
Other real estate owned expense   156    294 
Other   539    491 
Total non-interest expense   6,691    5,470 
           
Income before income taxes   1,698    858 
Income tax expense   470    246 
Net income   1,228    612 
Dividends and accretion on preferred stock   302    288 
Net income available to common stockholders  $926   $324 
           
Net income per common share          
Basic  $0.27   $0.10 
Diluted  $0.27   $0.10 

 

See accompanying notes to consolidated financial statements.

 

3
 

  

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (unaudited)

 

   Three Months 
   Ended March 31, 
   2012   2011 
   (in thousands) 
         
Net income  $1,228   $612 
           
Other comprehensive income:          
Investment securities available-for-sale:          
Unrealized holding gains   537    400 
Tax effect   (183)   (136)
Reclassification of gains recognized in net income   -    (97)
Tax effect   -    33 
    354    200 
           
Comprehensive income  $1,582   $812 

 

See accompanying notes to consolidated financial statements.

 

4
 

 

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statement of Stockholders' Equity (unaudited)

 

                       Stock in   Directors'   Accumulated     
           Common   Additional       Directors'   Deferred   Other     
   Preferred   Common   Stock   Paid-In   Retained   Rabbi   Fees   Comprehensive     
   Stock   Stock   Warrants   Capital   Earnings   Trust   Obligation   Income   Total 
   (in thousands) 
                                     
Balance, December 31, 2011  $15,177   $3,387   $1,841   $15,870   $9,132   $(875)  $875   $1,151   $46,558 
                                              
Net income   -    -    -    -    1,228    -    -    -    1,228 
Other comprehensive income, net of tax   -    -    -    -    -    -    -    354    354 
                                              
Directors' fees deferred less payment of deferred fees   -    -    -    -    -    (37)   37    -    - 
Stock options expensed   -    -    -    9    -    -    -    -    9 
Amortization of preferred stock discount   96    -    -    -    (96)   -    -    -    - 
Preferred stock dividends   -    -    -    -    (206)   -    -    -    (206)
                                              
Balance, March 31, 2012  $15,273   $3,387   $1,841   $15,879   $10,058   $(912)  $912   $1,505   $47,943 

 

See accompanying notes to consolidated financial statements.

 

5
 

 

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statements of Cash Flows (unaudited)

 

   Three Months 
   Ended March 31, 
   2012   2011 
Cash flows from operating activities  (in thousands) 
Net income  $1,228   $612 
Adjustments to reconcile net income to net cash provided by operating activities          
Provision for loan losses   1,460    1,700 
Depreciation   219    226 
Increase in cash surrender value of bank-owned life insurance   (95)   (94)
Stock-based compensation expense   9    9 
Deferred income tax benefit   (202)   (36)
Amortization (accretion), net   (15)   5 
Amortization of subordinated debt discount   18    19 
Gain on sale of other real estate owned   (48)   - 
Gain on sale of investments   -    (97)
Impairment of other real estate owned   296    - 
Net decrease in loans held for sale   10,458    37,838 
(Increase) decrease in other assets   (258)   669 
Increase (decrease) in accrued expenses and other liabilities   854    (10)
Net cash provided by operating activities   13,924    40,841 
           
Cash flows from investing activities          
Purchases of investment securities available-for-sale   (3,778)   (11,846)
Maturities and calls of securities available-for-sale   919    2,000 
Repayments from mortgage-backed securities available-for-sale   690    888 
Repayments from mortgage-backed securities held-to-maturity   21    56 
Reduction of loans, net of principal collected   3,419    7,844 
Proceeds from sales of investment securities   -    365 
Improvements to other real estate owned   (44)   - 
Proceeds from sale (less purchases) of premises and equipment   (231)   (145)
Proceeds from sales of other real estate owned   778    1,249 
Net cash provided by investing activities   1,774    411 
           
Cash flows from financing activities          
Net decrease in deposits   (8,139)   (15,172)
Net decrease in Federal Home Loan Advances   (22)   (21)
Increase in securities sold under agreements to repurchase   382    1,793 
Net cash used for financing activities   (7,779)   (13,400)
           
Net increase in cash and cash equivalents   7,919    27,852 
Cash and cash equivalents at beginning of period   13,311    22,826 
Cash and cash equivalents at end of period  $21,230   $50,678 
           
Supplemental disclosure of cash flow information          
Cash paid during the period for interest  $1,423   $1,936 
Cash paid during the period for income taxes  $-   $- 
Supplemental disclosure of non-cash transactions          
Transfer of loans to other real estate owned  $1,962   $2,563 
Dividends declared but not paid  $206   $200 
Accretion of preferred stock discount  $96   $89 
Change in unrealized gains on securities available-for-sale  $537   $400 

 

See accompanying notes to consolidated financial statements.

 

6
 

 

Carolina Bank Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

 

Note A – Summary

 

Carolina Bank Holdings, Inc. (the “Holding Company” or the “Company”) is a North Carolina corporation organized in 2000. Effective October 31, 2000, pursuant to the plan of share exchange approved by the shareholders of Carolina Bank (the “Bank”), all of the outstanding shares of common stock of the Bank were exchanged for shares of common stock of the Holding Company. The Holding Company presently has no employees.

 

The Bank was incorporated in August 1996, and began banking operations in November 1996. It is engaged in lending and deposit gathering activities in Guilford, Alamance, Randolph and Forsyth Counties, North Carolina and operates under the laws of North Carolina, the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank has eight full-service banking locations, comprised of four in Greensboro and one in each of Asheboro, Burlington, High Point, and Winston-Salem. A wholesale mortgage division is located at the Greensboro corporate headquarters, and retail mortgage loan production offices are located in Burlington and Raleigh. The Raleigh loan production office was opened in March 2012. All offices, except the Raleigh loan production office, are in the Piedmont Triad region of North Carolina.

 

The Holding Company files periodic reports with the Securities and Exchange Commission and is also subject to regulation by the Federal Reserve Board.

 

Note B – Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant inter-company transactions and balances have been eliminated.

 

Note C – Basis of presentation

 

In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three months ended March 31, 2012 and 2011, in conformity with accounting principles generally accepted in the United States of America. Operating results for the three months ended March 31, 2012 and 2011 are not necessarily indicative of the results that may be expected for annual future periods.

 

The organization and business of the Company, accounting policies followed, and other information are contained in the notes to the financial statements of the Company as of and for the years ended December 31, 2011 and 2010, filed with the Securities and Exchange Commission as part of the Company’s annual report on Form 10-K. These financial statements should be read in conjunction with the annual financial statements.

 

Note D - Use of estimates

 

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

7
 

 

Note E - Stock compensation plans

 

The Company’s shareholders approved the 2009 Omnibus Stock Ownership and Long Term Incentive Plan (“Omnibus Plan”) in 2009 to replace three expired stock option plans, a nonqualified plan for directors (Director Plan) and two incentive stock option plans for management and employees (Employee Plans). The Omnibus Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, long-term incentive compensation units and stock appreciation rights to employees and directors. An aggregate of 500,000 shares of the Company’s common stock have been reserved for issuance under the terms of the Omnibus Plan.

 

There were no stock option grants in 2011 or the first three months of 2012. The fair value of employee plan options granted in December 2007 was $178,000, which is being expensed over a five year vesting period. Total expense related to the 2007 grants was $9,000 in the first three months of 2012 and 2011. At March 31, 2012, there was $27,000 of total unrecognized compensation cost related to unvested share-based compensation which is expected to be recognized over a weighted-average period of 0.75 years.

 

Note F - Earnings per share

 

Earnings per share has been determined on a basic basis and a diluted basis which considers potential stock issuances. For the quarters ended March 31, 2012 and 2011, basic earnings per share has been computed based upon the weighted average common shares outstanding of 3,387,045.

 

The only potential issuances of Company stock are stock options granted to various officers of the Bank and a warrant to purchase common stock executed in conjunction with the issuance of preferred stock to the U.S. Treasury in 2009. The following is a summary of the diluted earnings per share calculation for the three months ended March 31, 2012 and 2011.

 

   Three Months Ended 
   March 31, 
   2012   2011 
   (in thousands, except per share data) 
         
Net income available to common stockholders  $926   $324 
           
Weighted average outstanding shares - basic   3,387    3,387 
Dilutive effect of stock options and warrants   -    - 
Weighted average shares - diluted   3,387    3,387 
           
Diluted net income per share  $0.27   $0.10 

 

For the three months ended March 31, 2012 and 2011, there were stock options and warrants covering 513,976 and 519,102 shares, respectively, that were excluded in computing diluted common shares outstanding given that they were anti-dilutive since the exercise price exceeded the average market price for the period.

 

8
 

 

Note G – Preferred stock and common stock warrants

 

In December 2008, the shareholders of the Company approved an amendment to the Articles of Incorporation authorizing the issuance of up to 1,000,000 shares of preferred stock, no par value. In January 2009, the Company issued 16,000 shares of preferred stock to the U.S. Treasury and received $16 million under the Capital Purchase Program. The Company granted a warrant to purchase 357,675 shares of common stock at a price of $6.71 per share to the U.S. Treasury as part of the preferred stock transaction. In accordance with accounting principles, the preferred stock and common stock warrant were valued independently and their relative fair market values were allocated to the $16 million received. Under the relative value method, $14,159,000 was allocated to the preferred stock and $1,841,000 to the common stock warrant. The discount of $1,841,000 on the preferred stock is accreted over five years using the effective yield method, thereby increasing preferred stock dividends. The accretion of the discount for the first three months of 2012 and 2011 was $96,000 and $89,000, respectively. Dividends at 5% per annum are payable quarterly for the first five years; the dividend increases to 9% per annum after the fifth year.

  

Note H – Subordinated debentures

 

In December 2004, the Company issued $10,310,000 of unsecured junior subordinated debentures which accrue and pay interest quarterly at three month LIBOR plus 2% per annum. These debentures were issued to Carolina Capital Trust (“Carolina Trust”), a wholly owned subsidiary of the Company which is not consolidated in these consolidated financial statements pursuant to accounting principles governing Consolidated Variable Interest Entities. Carolina Trust acquired these debentures using the proceeds of its offerings of common securities to the Company and $10 million of Trust Preferred Securities to outside investors. The Trust Preferred Securities currently qualify as Tier 1 capital under Federal Reserve Board guidelines. The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act eliminates trust preferred securities as an element of Tier 1 capital for certain institutions. However, bank holding companies with assets of less than $15 billion as of December 31, 2009, will be permitted to include trust preferred securities that were issued before May 19, 2010, as Tier 1 capital. The Company therefore believes the Trust Preferred Securities will continue to qualify as Tier 1 capital. The Company has entered into contractual arrangements which, in the aggregate, constitute a full, irrevocable and unconditional guarantee on a subordinated basis by the Company of the obligations of Carolina Trust under the Trust Preferred Securities. The Trust Preferred Securities are redeemable upon maturity of the debentures on January 7, 2035, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures purchased by Carolina Trust in whole or in part at any time.

 

In the third quarter of 2008, Carolina Bank issued $9,300,000 of unsecured junior subordinated notes to outside investors which accrue and pay interest quarterly at three month LIBOR plus 4% per annum. The notes, net of unamortized expenses associated with the offering, equal to $9,197,000 and $9,179,000 at March 31, 2012 and December 31, 2011, respectively and qualify as Tier 2 capital for the Bank. The notes are redeemable upon maturity on September 30, 2018, or earlier at the Bank’s option, in whole or part subject to regulatory approval, beginning September 30, 2013. The expenses of the offering of $373,000 were capitalized at issue and are being amortized over sixty months. The notes are subordinate to the rights of payment to depositors, bankers acceptances, letters of creditors and general creditors.

  

Note I – Operating segments

 

The Company is considered to have three principal business segments in 2012 and 2011, the Commercial/Retail Bank, the Mortgage Division, and the Holding Company. The Mortgage Division began originating home mortgage loans through third parties and selling these loans to investors in late 2007. A retail mortgage operation was added to the mortgage division in July 2010. Financial performance, reflective of inter-company eliminations, for the three months ended March 31, 2012 and 2011, and selected balance sheet information, reflective of inter-company eliminations, at March 31, 2012 and 2011 for each segment is as follows:

 

9
 

 

   Three months ended March 31, 2012 
   Commercial/Retail   Mortgage   Holding     
   Bank   Division   Company   Total 
   (in thousands) 
Interest income  $6,795   $711   $2   $7,508 
Interest expense   680    713    66    1,459 
Net interest income (loss)   6,115    (2)   (64)   6,049 
Provision for loan losses   1,460    -    -    1,460 
Net interest income (loss) after provision for loan losses   4,655    (2)   (64)   4,589 
Non-interest income   503    3,297    -    3,800 
Non-interest expense   4,436    2,234    21    6,691 
Income (loss) before income taxes   722    1,061    (85)   1,698 
Income tax (benefit) expense   80    419    (29)   470 
Net income (loss)  $642   $642   $(56)  $1,228 
                     
Total assets  $584,438   $83,216   $355   $668,009 
Net loans   468,397    81,497    -    549,894 
Equity   642    642    46,659    47,943 

 

   Three months ended March 31, 2011 
   Commercial/Retail   Mortgage   Holding     
   Bank   Division   Company   Total 
   (in thousands) 
Interest income  $7,431   $300   $2   $7,733 
Interest expense   1,474    284    57    1,815 
Net interest income (loss)   5,957    16    (55)   5,918 
Provision for loan losses   1,700    -    -    1,700 
Net interest income (loss) after provision for loan losses   4,257    16    (55)   4,218 
Non-interest income   475    1,635    -    2,110 
Non-interest expense   4,033    1,412    25    5,470 
Income (loss) before income taxes   699    239    (80)   858 
Income tax (benefit) expense   179    94    (27)   246 
Net income (loss)  $520   $145   $(53)  $612 
                     
Total assets  $647,273   $16,476   $381   $664,130 
Net loans   489,563    16,123    -    505,686 
Equity   520    145    44,238    44,903 

  

The Mortgage Division has experienced strong growth in originations since its establishment in 2007 due to low interest rates and due to the purchase of a retail loan production office in July of 2010. Originations and related fee income increased substantially in the first three months of 2012 over 2011 due to lower interest rates in 2012, continued refinancing by borrowers, and expansion of staff and overtime to manage the additional volume. Interest rate risk has been minimized by obtaining optional loan sales commitments when loan origination commitments are made or by entering into hedging transactions whereby mortgage backed securities are sold for the estimated closing value of loan commitments. Borrower fraud is a risk that has been minimized by prudent underwriting and by obtaining indemnification from the originating bank or broker for the risks the Company assumes. Warranty expenses and related warranty liabilities were established in 2009 to provide for potential claims that might arise from borrower fraud or underwriting errors. Warranty expenses were $128,000 and $109,000 for the three months ending March 31, 2012 and 2011, respectively. The warranty liability, which is available to fund future warranty claims, was $932,000 and $833,000 at March 31, 2012 and December 31, 2011, respectively. Five warranty claims totaling $410,000 have been paid since establishment of the mortgage division in 2007. In addition, three loans with a total current principal balance of $467,000 and fair value of $411,000 have been repurchased and are included in loans held for sale at fair value. Other real estate owned includes one residence valued at $116,000 which was repurchased due to warranty claims.

 

10
 

 

Note J - Securities

 

A summary of the amortized cost, gross unrealized gains and losses and estimated fair values of securities available-for-sale and held-to-maturity follows:

 

       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
       (in thousands)     
March 31, 2012                    
                     
Available for sale                    
Municipal securities  $15,599   $1,235   $-   $16,834 
FNMA, FHLMC, and GNMA mortgage-backed securities   12,807    988    -    13,795 
Corporate securities   13,977    42    72    13,947 
Unrestricted stock   266    87    -    353 
   $42,649   $2,352   $72   $44,929 
                     
Held to maturity                    
FNMA and GNMA mortgage-backed securities  $370   $28   $-   $398 
   $370   $28   $-   $398 
                     
December 31, 2011                    
                     
Available for sale                    
Municipal securities  $16,531   $1,236   $-   $17,767 
FNMA, FHLMC, and GNMA mortgage-backed securities   13,489    1,005    -    14,494 
Corporate securities   10,179    15    588    9,606 
Unrestricted stock   266    75    -    341 
   $40,465   $2,331   $588   $42,208 
                     
Held to maturity                    
FNMA and GNMA mortgage-backed securities  $392   $28   $-   $420 
   $392   $28   $-   $420 

 

11
 

 

Investments are periodically evaluated for any impairment which would be deemed other than temporary. Based upon these evaluations, the Company did not deem any debt securities to be impaired during 2011 or the first three months of 2012. The deterioration in value is primarily attributable to changes in market demand for corporate securities, not changes in the credit risk of the corporate issuers, and the Company expects these securities to be paid in full and that any temporary impairment will be fully recoverable prior to or at maturity.  The Company has the ability and intent to hold the investment securities for a reasonable period of time sufficient for a forecasted recovery or until maturity. Information pertaining to temporarily impaired securities with gross unrealized losses at March 31, 2012 and December 31, 2011, by category and length of time that individual securities have been in a continuous loss position follows:

 

   Less Than 12 Months   12 Months or Greater   Total 
   Number       Gross       Gross       Gross 
   of   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Securities   Value   Losses   Value   Losses   Value   Losses 
       (in thousands) 
March 31, 2012:                                   
Corporate securities   6   $7,604   $72   $-   $-   $7,604   $72 
Total   6   $7,604   $72   $-   $-   $7,604   $72 
                                    
December 31, 2011:                                   
Corporate securities   6   $8,142   $588   $-   $-   $8,142   $588 
Total   6   $8,142   $588   $-   $-   $8,142   $588 

 

12
 

 

Note K - Loans and allowance for loan losses

 

The activity in the allowance for loan losses for the first three months of 2012 and 2011 and related asset balances at March 31, 2012 and December 31, 2011 is summarized as follows:

 

   Construction &   Commercial   Home Equity   Residential   Commercial   Consumer         
   Development   Real Estate   Lines   Real Estate   & Industrial   & Other   Unallocated   Total 
   (in thousands) 
Allowance for loan losses:                                        
2012                                        
Beginning of year balance  $2,948   $3,690   $1,126   $994   $2,985   $46   $4   $11,793 
Provision for loan losses   821    559    (46)   76    (56)   95    11    1,460 
Charge-offs   (146)   (354)   (163)   (76)   (28)   (17)   -    (784)
Recoveries   -    5    -    2    14    1    -    22 
Balance at March 31,  $3,623   $3,900   $917   $996   $2,915   $125   $15   $12,491 
2011                                        
Beginning of year balance  $4,478   $3,364   $818   $846   $2,746   $79   $28   $12,359 
Provision for loan losses   3,440    1,161    698    896    708    (29)   (24)   6,850 
Charge-offs   (5,137)   (1,319)   (405)   (756)   (569)   (6)   -    (8,192)
Recoveries   167    484    15    8    100    2    -    776 
Balance at December 31,  $2,948   $3,690   $1,126   $994   $2,985   $46   $4   $11,793 
                                         
Balances at March 31, 2012                                        
Allowance for loan losses:                                        
Balance at March 31,  $3,623   $3,900   $917   $996   $2,915   $125   $15   $12,491 
Ending balance individually evaluated for impairment  $544   $1,185   $304   $207   $1,542   $-   $-   $3,782 
Ending balance collectively evaluated for impairment  $3,079   $2,715   $613   $789   $1,373   $125   $15   $8,709 
Loans Outstanding:                                        
Balance at March 31,  $52,205   $242,321   $67,060   $48,860   $64,402   $6,040   $-   $480,888 
Ending balance individually evaluated for impairment  $4,395   $27,965   $1,701   $5,372   $5,570   $8   $-   $45,011 
Ending balance collectively evaluated for impairment  $47,810   $214,356   $65,359   $43,488   $58,832   $6,032   $-   $435,877 
                                         
Balances at December 31, 2011                                        
Allowance for loan losses:                                        
Balance at December 31,  $2,948   $3,690   $1,126   $994   $2,985   $46   $4   $11,793 
Ending balance individually evaluated for impairment  $23   $595   $556   $165   $1,398   $-   $-   $2,737 
Ending balance collectively evaluated for impairment  $2,925   $3,095   $570   $829   $1,587   $46   $4   $9,056 
Loans Outstanding:                                        
Balance at December 31,  $51,383   $251,015   $66,172   $51,499   $60,863   $6,099   $-   $487,031 
Ending balance individually evaluated for impairment  $4,606   $27,183   $1,858   $5,978   $5,868   $10   $-   $45,503 
Ending balance collectively evaluated for impairment  $46,777   $223,832   $64,314   $45,521   $54,995   $6,089   $-   $441,528 

 

13
 

 

A loan is past due when the borrower has not made a payment by the contractual due date. The following table presents the carrying value of loans that are past due thirty days or more. Loans which are ninety days or more past due are generally on non-accrual status, at which time all accrued interest is removed from interest income, as shown in the following table:

 

                           Loans Past 
   Number of Days Past Due               Due 90 Days 
   30-59 Days   60-89 Days   90 Days
or More
   Total
Past Due
   Current   Total
Loans
   or More
& Accruing
 
   (in thousands) 
At March 31, 2012    
Real Estate Loans:                                   
Construction & development  $-   $-   $2,464   $2,464   $49,741   $52,205   $- 
Commercial real estate   23    -    13,766    13,789    228,532    242,321    - 
Home equity lines   227    -    685    912    66,148    67,060    - 
Residential real estate   625    -    2,925    3,550    45,310    48,860    - 
Total real estate   875    -    19,840    20,715    389,731    410,446    - 
Commercial & industrial   27    -    3,344    3,371    61,031    64,402    - 
Consumer & other   -    4    3    7    6,033    6,040    - 
Total loans  $902   $4   $23,187   $24,093   $456,795   $480,888   $- 
                                    
At December 31, 2011                                   
Real Estate Loans:                                   
Construction & development  $-   $-   $4,265   $4,265   $47,118   $51,383   $- 
Commercial real estate   -    -    12,513    12,513    238,502    251,015    - 
Home equity lines   300    -    791    1,091    65,081    66,172    - 
Residential real estate   369    3    3,770    4,142    47,357    51,499    - 
Total real estate   669    3    21,339    22,011    398,058    420,069    - 
Commercial & industrial   -    -    1,572    1,572    59,291    60,863    - 
Consumer & other   -    -    4    4    6,095    6,099    - 
Total loans  $669   $3   $22,915   $23,587   $463,444   $487,031   $- 

 

Loans are determined to be impaired when, based on current information and events, it is probable that all amounts will not be collected when due according to the contractual terms of the original loan agreement. At March 31, 2012 and December 31, 2011, the total recorded investment in impaired loans amounted to approximately $45,011,000 and $45,503,000, respectively. Of these impaired loans, $23,187,000 and $22,915,000 were on non-accrual at March 31, 2012 and December 31, 2011, respectively.

 

14
 

The recorded investment and related information for impaired loans is summarized as follows:

 

   Impaired Loans 
   At end of period   For Period Ended 
       Unpaid   Related   Average   Interest 
   Recorded   Principal   Loan Loss   Recorded   Income 
   Investment   Balance   Allowance   Investment   Recognized 
   (in thousands) 
March 31, 2012                         
With no related allowance recorded                         
Real Estate Loans:                         
Construction & development  $2,779   $2,849   $-   $2,875   $5 
Commercial real estate   21,872    22,422    -    23,368    518 
Home equity lines   405    426    -    539    3 
Residential real estate   4,018    4,145    -    4,372    29 
Total real estate   29,074    29,842    -    31,154    555 
Commercial & industrial   3,616    3,629    -    3,634    20 
Consumer & other   8    9    -    10    - 
Total loans   32,698    33,480    -    34,798    575 
With an allowance recorded                         
Real Estate Loans:                         
Construction & development   1,615    1,617    544    1,671    21 
Commercial real estate   6,094    6,134    1,185    6,146    69 
Home equity lines   1,296    1,314    304    1,314    16 
Residential real estate   1,354    1,368    207    1,375    21 
Total real estate   10,359    10,433    2,240    10,506    127 
Commercial & industrial   1,954    1,960    1,542    2,147    26 
Consumer & other   -    -    -    -    - 
Total loans   12,313    12,393    3,782    12,653    153 
Total impaired loans  $45,011   $45,873   $3,782#  $47,451   $728 
December 31, 2011                         
With no related allowance recorded                         
Real Estate Loans:                         
Construction & development  $4,479   $5,473   $-   $5,352   $81 
Commercial real estate   22,967    23,551    -    23,297    846 
Home equity lines   533    555    -    542    20 
Residential real estate   4,929    5,448    -    5,727    173 
Total real estate   32,908    35,027    -    34,918    1,120 
Commercial & industrial   2,186    2,200    -    2,273    77 
Consumer & other   10    11    -    13    1 
Total loans   35,104    37,238    -    37,204    1,198 
With an allowance recorded                         
Real Estate Loans:                         
Construction & development   127    127    23    222    2 
Commercial real estate   4,216    4,226    595    4,339    246 
Home equity lines   1,325    1,336    556    1,319    77 
Residential real estate   1,049    1,057    165    1,070    61 
Total real estate   6,717    6,746    1,339    6,950    386 
Commercial & industrial   3,682    3,691    1,398    3,789    191 
Consumer & other   -    -    -    -    - 
Total loans   10,399    10,437    2,737    10,739    577 
Total impaired loans  $45,503   $47,675   $2,737#  $47,943   $1,775 

 

15
 

 

Loans that are past due 90 days or more or where there is serious doubt as to collectability are placed on non-accrual status. Non-accrual loans are not returned to accrual status unless principal and interest are current and borrowers have demonstrated the ability to make contractual payments. Accrued interest is reversed through a charge to income when loans are placed on non-accrual and future payments on non-accrual loans are generally applied to principal. The following is a summary of non-accrual loans at March 31, 2012 and December 31, 2011:

 

   March 31,   December 31, 
   2012   2011 
   (in thousands) 
Real Estate Loans:          
Construction & development  $2,464   $4,265 
Commercial real estate   13,766    12,513 
Home equity lines   685    791 
Residential real estate   2,925    3,770 
Total real estate   19,840    21,339 
Commercial & industrial   3,344    1,572 
Consumer & other   3    4 
Total loans  $23,187   $22,915 

 

Loans are graded according to an internal loan rating classification system when originated. Loan grades are periodically re-evaluated during servicing, internal loan reviews, and external loan reviews. The general categories of the internal loan rating classification are:

·Pass - Acceptable loans
·Special Mention - Loans with potential identified weaknesses in administration or servicing.
·Criticized - Adversely classified loans with identified weaknesses, and potential or identified losses of principal and/or interest due.

 

The following is a breakdown of loans by the general categories of the internal rating system:

 

   Outstanding Loans at March 31, 2012 and December 31, 2011 
   Construction &
   Commercial   Home Equity 
   Development   Real Estate   Lines of Credit 
   2012   2011   2012   2011   2012   2011 
   (in thousands) 
Pass  $39,900   $36,968   $205,186   $210,356   $64,610   $64,561 
Special Mention   1,083    1,083    6,132    9,099    214    214 
Criticized   11,222    13,332    31,003    31,560    2,236    1,397 
TOTAL  $52,205   $51,383   $242,321   $251,015   $67,060   $66,172 

 

   Residential   Commercial &   Consumer 
   Real Estate   Industrial   & Other 
   2012   2011   2012   2011   2012   2011 
   (in thousands) 
Pass  $39,685   $41,664   $57,694   $54,947   $6,005   $6,064 
Special Mention   824    802    353    646    23    25 
Criticized   8,351    9,033    6,355    5,270    12    10 
TOTAL  $48,860   $51,499   $64,402   $60,863   $6,040   $6,099 

  

16
 

 

During 2012 and 2011, the Company restructured certain loans to improve the likelihood that the loans would be repaid in full under the modified terms in accordance with reasonable repayment schedules. Management evaluates each of these loans in accordance with generally accepted accounting principles to determine whether they should be reported as troubled debt restructurings. The Company adopted the amendments in Accounting Standards Update No. 2011-02 during the period ended September 30, 2011. As required, the Company reassessed all restructurings that occurred on or after the beginning of the current fiscal year (January 1, 2011) for identification as troubled debt restructurings. The Company did not identify as troubled debt restructurings any receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology.

 

The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories:

·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.

 

·Combination Modification – Any other type of modification, including the use of multiple categories above.

 

There were no available commitments for troubled debt restructurings outstanding at March 31, 2012.

 

17
 

 

The following tables present troubled debt restructurings as of March 31, 2012 and December 31, 2011:

 

Troubled Debt Restructurings
   March 31, 2012 
       Non-Accrual   Total 
   Accrual Status   Status   Modifications 
   #   Amount   #   Amount   #   Amount 
   ($ in thousands)     
Real Estate Loans:                              
Construction & development   2   $346    4   $1,130    6   $1,476 
Commercial real estate   9    11,958    16    7,718    25    19,676 
Home equity lines   0    -    1    150    1    150 
Residential real estate   10    1,924    9    1,199    19    3,123 
Total real estate   21    14,228    30    10,197    51    24,425 
Commercial & industrial   5    1,495    5    2,091    10    3,586 
Consumer & other   1    5    0    -    1    5 
Total loans   27   $15,728    35   $12,288    62   $28,016 

 

   December 31, 2011 
       Non-Accrual   Total 
   Accrual Status   Status   Modifications 
   #   Amount   #   Amount   #   Amount 
   ($ in thousands)     
Real Estate Loans:                              
Construction & development   2   $349    6   $1,789    8   $2,138 
Commercial real estate   11    13,912    13    5,758    24    19,670 
Home equity lines   0    -    1    150    1    150 
Residential real estate   10    1,949    8    870    18    2,819 
Total real estate   23    16,210    28    8,567    51    24,777 
Commercial & industrial   10    2,286    2    493    12    2,779 
Consumer & other   1    6    0    -    1    6 
Total loans   34   $18,502    30   $9,060    64   $27,562 

 

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

 

Troubled debt restructurings are classified as impaired loans when modified, and fair value calculations are performed to determine the specific reserves required in the allowance for loan losses related to these loans. Troubled debt restructurings can be removed from such status and returned to non-impaired status in years subsequent to restructure if the interest rate charged at restructure was greater than or equal to the rate charged for a new extension of credit with comparable risk and if the loan is performing and there is no available information to indicated that performance will not continue.

 

18
 

 

The following tables present newly restructured loans that occurred during the three months ended March 31, 2012 and 2011, respectively:

 

   New Troubled Debt Restructurings 
   Three Months Ended March 31, 2012 
   Rate   Term   Payment   Combination   Total 
   Modifications   Modifications   Modifications   Modifications   Modifications 
   #   Amount   #   Amount   #   Amount   #   Amount   #   Amount 
   ($ in thousands) 
Pre-Modification Outstanding Recorded Investment:                                                  
Real Estate Loans:                                                  
Commercial real estate   -   $-    -   $-    1   $123    -   $-    1   $123 
Total real estate   -    -    -    -    1    123    -    -    1    123 
Commercial & industrial   -    -    -    -    1    835    -    -    1    835 
Total loans   -   $-    -   $-    2   $958    -   $-    2   $958 
                                                   
Post-Modification Outstanding Recorded Investment:                                                  
Real Estate Loans:                                                  
Commercial real estate   -   $-    -   $-    1   $122    -   $-    1   $122 
Total real estate   -    -    -    -    1    122    -    -    1    122 
Commercial & industrial   -    -    -    -    1    829    -    -    1    829 
Total loans   -   $-    -   $-    2   $951    -   $-    2   $951 
                                                   
   Three Months Ended March 31, 2011 
Pre-Modification Outstanding Recorded Investment:                                                   
Real Estate Loans:                                                  
Commercial real estate   -   $-    -   $-    2   $3,481    9   $5,214    11   $8,695 
Residential real estate   -    -    -    -    2    190    11    1,801    13    1,991 
Total real estate   -    -    -    -    4    3,671    20    7,015    24    10,686 
Commercial & industrial   -    -    -    -    1    85    1    68    2    153 
Total loans   -   $-    -   $-    5   $3,756    21   $7,083    26   $10,839 
                                                   
Post-Modification Outstanding Recorded Investment:                                        
Real Estate Loans:                                                  
Commercial real estate   -   $-    -   $-    2   $3,481    9   $5,208    11   $8,689 
Residential real estate   -    -    -    -    2    190    11    1,794    13    1,984 
Total real estate   -    -    -    -    4    3,671    20    7,002    24    10,673 
Commercial & industrial   -    -    -    -    1    83    1    68    2    151 
Total loans   -   $-    -   $-    5   $3,754    21   $7,070    26   $10,824 

 

The following tables represent financing receivables 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 three months ended March 31, 2012 and 2011, respectively:

 

19
 

 

TDRs with a payment default occurring within 12 months of restructure

   During the three months ended 
   March 31, 2012   March 31, 2011 
   #   Amount   #   Amount 
   ($ in thousands) 
Real Estate Loans:                    
Commercial real estate   5   $7,134    -   $- 
Total real estate   5    7,134    -    - 
Commercial & industrial   3    1,606    -    - 
Total loans   8   $8,740    -   $- 

 

Troubled debt restructuring defaults can result in a higher allowance for loan losses and a corresponding higher provision for loan losses because defaults generally negatively impact the timing of and expected collections from these impaired loans. Impaired loans, which include troubled debt restructurings, are evaluated for specific additions to the allowance for loan losses by subtracting the recorded investment in these impaired loans from their fair values. Fair value is generally determined by the present value of future cash flows, collateral value, or liquidation value. Defaults generally reduce the present value of the future cash flows and can negatively impact the collateral values if declining real estate values are impacting the sale of collateral.

 

Note L – Fair value measurements

 

The Company has adopted the accounting standards within FASB Accounting Standards Codification (ASC) 820 “Fair Value Measurements and Disclosures”, which provides a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. The Company has not elected the fair value option to value liabilities. Securities available-for-sale and loans held for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

 

When measuring fair value, valuation techniques should be appropriate in the circumstances and consistently applied. A hierarchy is used to prioritize valuation inputs into the following three levels to determine fair value:

Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 – observable inputs other than the quoted prices included in Level 1.

Level 3 – unobservable inputs.

 

Fair Value on a Recurring Basis. The Company measures certain assets at fair value on a recurring basis and the following is a general description of the methods used to value such assets.

 

Investment Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value. 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 the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

 

20
 

 

Loans Held for Sale

The Company opted to account for loans held for sale at fair value which is measured based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans subjected to recurring fair value adjustments as Level 2 valuation.

 

Interest Rate Lock Commitments

The Mortgage Division of the Company hedges some of its residential mortgage loans held for sale by selling mortgage backed securities on a forward basis. The forward sale mortgage backed securities are later purchased or closed when mandatory loan sales are consummated for the related mortgages that are originated. The value of the estimated loan commitments and open hedges are marked to market through the income statement. The significant unobservable input used in the Level 3 fair value measurement of the Company’s Interest Rate Lock Commitments (IRLCs) on hedged loans held for sale is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. Generally, the fair value of an IRLC is positive (negative) if the prevailing interest rate is lower (higher) than the IRLC rate. Therefore, an increase in the closing ratio (i.e., higher percentage of loans are estimated to close) will result in the fair value of the IRLC to increase if in a gain position, or decrease if in a loss position. The closing ratio is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. The closing ratio is computed by management using historical data.

 

21
 

 

 

Assets measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011 are summarized below:

 

  Assets     
   Measured at   Fair Value Measured Using 
Description  Fair Value   Level 1   Level 2   Level 3 
   (in thousands) 
                 
At March 31, 2012:                    
Securities available-for-sale:                    
Municipal securities  $16,834   $-   $16,834   $- 
Mortgage-backed securities   13,795    -    13,795    - 
Corporate securities   13,947    -    13,947    - 
Unrestricted stock   353    353    -    - 
Total available-for-sale securities   44,929    353    44,576    - 
Loans held for sale   81,497    -    81,497    - 
Interest rate lock commitments   159    -    -    159 
Total  $126,585   $353   $126,073   $159 
                     
At December 31, 2011:                    
Securities available-for-sale:                    
Municipal securities  $17,767   $-   $17,767   $- 
Mortgage-backed securities   14,494    -    14,494    - 
Corporate securities   9,606    -    9,606    - 
Unrestricted stock   341    341    -    - 
Total available-for-sale securities   42,208    341    41,867    - 
Loans held for sale   91,955    -    91,955    - 
Interest rate lock commitments   47    -    -    47 
Total  $134,210   $341   $133,822   $47 

 

Fair Value on a Non-recurring Basis. The Company measures certain assets at fair value on a non-recurring basis and the following is a general description of the methods used to value such assets.

 

Impaired 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 for 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. Impaired loans are recorded at fair value less estimated selling costs. Once a loan is identified as individually impaired, the Company measures impairment. Fair values of impaired loans are generally estimated using one of several methods, including collateral value, liquidation value, discounted cash flows and, in rare cases, the market value of the note. Those impaired loans not requiring an allowance represent loans for which the net present value of the expected cash flows or fair value of the collateral less costs to sell exceed the recorded investments in such loans. At March 31, 2012 and December 31, 2011, a majority of the total impaired loans were evaluated based on the fair value of the collateral. When the fair value of the collateral is based on an executed sales contract with an independent third party, the Company records the impaired loans as nonrecurring Level 1. If the collateral is based on another observable market price or a current appraised value, the Company records the impaired loans as nonrecurring Level 2. When an appraised value is not available or the Company determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. Impaired loans can also be evaluated for impairment using the present value of expected future cash flows discounted at the loan’s effective interest rate. The measurement of impaired loans using future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest is not a fair value measurement and is therefore excluded from fair value disclosure requirements. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.

 

22
 

 

Other Real Estate Owned and Repossessed Assets

Properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying value or the new fair value less estimated selling costs. Fair value is generally based upon current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for selling costs. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the asset as nonrecurring Level 2. However, the Company also considers other factors or recent developments which could result in adjustments to the collateral value estimates indicated in the appraisals such as changes in absorption rates or market conditions from the time of valuation. In situations where an appraisal less estimated selling costs is used to determine fair value, management adjustments are significant to the fair value measurements, or other means are used to estimate fair value in the absence of an appraisal, the Company records the impaired loan as nonrecurring Level 3 within the valuation hierarchy.

 

Securities Held to Maturity

The fair values of securities held to maturity are recorded on a non-recurring basis when an impairment in value that is deemed to be other than temporary occurs.  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 the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  At March 31, 2012, there were no fair value adjustments related to $370,000 of securities held to maturity.

 

Assets measured at fair value on a non-recurring basis at March 31, 2012 and December 31, 2011 are summarized below:

 

   Assets     
   Measured at   Fair Value Measured Using 
Description  Fair Value   Level 1   Level 2   Level 3 
   (in thousands) 
                 
At March 31, 2012:                    
Impaired loans  $41,229   $-   $-   $41,229 
Other real estate owned   7,708    -    -    7,708 
                     
At December 31, 2011:                    
Impaired loans  $42,766   $-   $-   $42,766 
Other real estate owned   6,728    -    -    6,728 

 

Fair Value on a Recurring or Non-recurring Basis – Unobservable Inputs for Level 3. For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

 

23
 

 

            Significant   Significant  
    Fair Value at   Valuation   Unobservable   Unobservable  
Description   March 31, 2012   Technique   Inputs   Input Value  
    (in thousands)              
                   
Impaired loans   $ 41,229  

Appraised Value /

Discounted Cash

Flows / Market

Value of Note

 

Appraisals and/or

sales of comparable

properties /

Independent quotes

  n/a  
                     
Other real estate owned   $ 7,708  

Appraised Value /

Comparable Sales /

Other Estimates

from Independent

Sources

 

Appraisals and/or

sales of comparable

properties /

Independent

quotes/bids / Forward

sale contract values

  n/a  
                     
Net Derivative Assets and Liabilities:                    
Interest rate lock commitments   $ 159   Pricing Models  

Weighted Average

Closing Ratio

  80.7 %

   

Fair Value of items not valued as such. The Company measures certain financial assets and liabilities at fair value for disclosure purposes only.

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of financial instruments at March 31, 2012 and December 31, 2011. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and due from banks and interest-bearing deposits with banks, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as non-interest bearing demand deposits, NOW, money market and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

 

24
 

 

           Fair Value Measurements 
           Quoted         
           Prices in         
           Active Markets   Significant     
           for Identical   Other   Significant 
           Assets or   Observable   Unobservable 
   Carrying   Fair   Liabilities   Inputs   Inputs 
   Amount   Value   (Level 1)   (Level 2)   (Level 3) 
   (in thousands) 
March 31, 2012                         
Financial Instruments - Assets                         
Investment securities held-to-maturity  $370   $398   $-   $398   $- 
Net loans held for investment   468,397    469,626    -    -    469,626 
                          
Financial Instruments - Liabilities                         
Time deposits   205,692    207,556    -    -    207,556 
Trust preferred subordinated debt   10,310    7,398    -    -    7,398 
                          
December 31, 2011                         
Financial Instruments - Assets                         
Investment securities held-to-maturity  $392   $420   $-   $420   $- 
Net loans held for investment   475,238    477,271    -    -    477,271 
                          
Financial Instruments - Liabilities                         
Time deposits   214,715    216,418    -    -    216,418 
Trust preferred subordinated debt   10,310    7,453    -    -    7,453 

 

Note M – Derivatives and financial instruments

 

A derivative is a financial instrument that derives its cash flows and value by reference to an underlying instrument, index or referenced interest rate. These instruments are designed to hedge exposures to interest rate risk or for speculative purposes.

 

Accounting guidance requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet, and measure those instruments at fair value. Changes in the fair value of those derivatives are reported in current earnings or other comprehensive income depending on the purpose for which the derivative is held and whether the derivative qualifies for hedge accounting.

 

The Mortgage Division of the Company began hedging its governmental mortgage loans, primarily FHA and VA loans, in October 2010 by selling mortgage backed securities on a forward basis. The forward sale mortgage backed securities are later purchased or closed when mandatory loan sales are consummated for the related mortgages that are originated. The value of the estimated loan commitments and open hedges are marked to market through the income statement.

 

25
 

 

The table below provides the carrying values of derivative instruments at March 31, 2012 and December 31, 2011:

 

   Carrying Value   Carrying Value   Gain (Loss)   Notional Amount 
Derivatives designated as  of Assets   of Liabilities   in Income   of Derivative 
hedging instruments:  (in thousands) 
                 
At March 31, 2012:                    
Mortgage loan rate lock commitments  $159   $-   $159   $- 
                     
Mortgage backed securities forward sales  $-   $5   $(5)  $11,500 
                     
At December 31, 2011:                    
Mortgage loan rate lock commitments  $47   $-   $47   $- 
                     
Mortgage backed securities forward sales  $-   $60   $(60)  $4,750 

 

Prior to October 2010, the Company sold mortgage loans on a best efforts basis whereby optional commitments to sell mortgage loans were consummated at approximately the same time that optional commitments were given to borrowers to originate the loans. Conventional loans which represent the majority of mortgage originations by the Mortgage Division are still sold on a best efforts basis. The below presents the aggregate fair value and aggregate unpaid principal of loans held for sale at March 31, 2012 and December 31, 2011;

 

   March 31, 2012   December 31, 2011 
           Aggregate Fair           Aggregate Fair 
           Value Less           Value Less 
       Aggregate   Aggregate       Aggregate   Aggregate 
   Aggregate   Unpaid   Unpaid   Aggregate   Unpaid   Unpaid 
   Fair Value   Principal   Principal   Fair Value   Principal   Principal 
   (in thousands) 
Loans held for sale, at fair value  $81,497   $80,855   $642   $91,955   $91,254   $701 

 

Interest income on loans held for sale is recognized based on contractual rates and is reflected in interest income on loans in the consolidated statements of operations. The following table details net (losses) resulting from changes in fair value of these loans which were recorded in mortgage banking income in the consolidated statements of operations during the three months ended March 31, 2012 and 2011, respectively. These changes in fair value are mostly offset by economic hedging activities and also fluctuate based on the change in the aggregate loan principal outstanding. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.

 

   Loans Held for Sale, At Fair Value 
   Three Months Ended March 31, 
   2012   2011 
   (in thousands) 
Net gains (losses) resulting from changes in fair value  $(59)  $(322)

 

26
 

 

Note N – Impact of recently adopted accounting standards

 

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. The Update amended the existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring (“TDR”). The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. The Company implemented this guidance in the quarter ended September 30, 2011; the adoption of this amendment has resulted in expanded narrative and tabular disclosures surrounding TDRs in the Company’s consolidated financial statements, as reflected in Note K.

 

In April 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements. The Update amends existing guidance to remove from the assessment of effective control, the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion. The other criteria to assess effective control were not changed. The amendments were effective for the Company on January 1, 2012 and had no effect on the Company’s consolidated financial statements.

 

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The Update amends existing guidance by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments were effective for the Company beginning January 1, 2012. The adoption of this guidance has resulted in expanded narrative and tabular disclosures regarding fair value measurements in the Company’s consolidated financial statements, as reflected in Note L.

 

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The amendments eliminate the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and require consecutive presentation of the statement of net income and other comprehensive income. The Company implemented this guidance in the period ended December 31, 2011; the adoption of these amendments affected the presentation of the Company’s consolidated financial statements, but did not change the items that are reported in other comprehensive income. In December 2011, the FASB further amended this topic with ASU No. 2011-12. This amendment deferred the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates further requirements.

 

Several other accounting standards have been issued or proposed by the FASB or other standards-setting bodies during the periods presented or will be effective subsequent to March 31, 2012. None of these new standards had or is expected to have a material impact on the Company’s consolidated financial statements.

 

Note O - Commitments

 

In the normal course of business there are outstanding commitments for the extension of credit which are not reflected in the financial statements. At March 31, 2012 and December 31, 2011, pre-approved but unused lines of credit for loans totaled approximately $124,069,000 and $133,103,000, respectively. In addition, we had $1,862,000 in standby letters of credit at March 31, 2012 and December 31, 2011. These commitments represent no more than the normal lending risk that we commit to borrowers. If these commitments are drawn, we will obtain collateral if it is deemed necessary based on our credit evaluation of the counter-party. We believe these commitments can be funded through normal operations.

 

We are committed for future lease payments on our Friendly Center office, the land for our Greensboro headquarters, our office in Winston-Salem, and a mortgage loan office in Burlington. Aggregate minimum lease payments over the next five years are $1,646,000 and $2,919,000 thereafter.

 

27
 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion is intended to assist in understanding our financial condition and results of operations. Because we have no material operations and conduct no business on our own other than owning our subsidiaries, Carolina Bank and Carolina Capital Trust, and because Carolina Capital Trust has no operations other than the issuance of its trust preferred securities, the discussion contained in this Management’s Discussion and Analysis concerns primarily the business of Carolina Bank. However, for ease of reading and because the financial statements are presented on a consolidated basis, Carolina Bank Holdings, Inc. and Carolina Bank are collectively referred to herein as “we”, “our” or “us” unless otherwise noted.

 

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, without limitation, our future economic performance, plans and objectives for future operations, and projections of revenues and other financial items that are based on our beliefs, as well as assumptions made by and information currently available to us. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “could”, “project”, “predict,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements. Our actual results, performance, or achievements may differ materially from the results expressed or implied by our forward-looking statements.

 

Impact of Dodd-Frank Act. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) into law. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry in the United States. The Dodd-Frank Act includes, among other things:

 

·the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and improve cooperation between federal agencies;

 

·the creation of a Bureau of Consumer Financial Protection authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank financial companies;

 

·the establishment of strengthened capital and prudential standards for banks and bank holding companies;

 

·enhanced regulation of financial markets, including derivatives and securitization markets;

 

·the elimination of certain trading activities by banks;

 

·a permanent increase of the previously implemented temporary increase of FDIC deposit insurance to $250,000 per account, an extension of unlimited deposit insurance on qualifying noninterest-bearing transaction accounts, and an increase in the minimum deposit insurance fund reserve requirement from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits;

 

·amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations; and

 

·new disclosure and other requirements relating to executive compensation and corporate governance.

 

The Company is unable to predict the extent to which the Dodd-Frank Act or the forthcoming rules and regulations will impact the Company’s business. However, the Company believes that certain aspects of the new legislation, including, without limitation, the additional cost of higher deposit insurance coverage and the costs of compliance with disclosure and reporting requirements and examinations could have a significant impact on the Company’s business, financial condition, and results of operations. Additionally, the Company cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced, or how such changes may affect the Company.

 

28
 

 

Comparison of Financial Condition

 

Assets. Our total assets decreased by $5.3 million, or 0.8%, from $673.3 million at December 31, 2011, to $668.0 million at March 31, 2012. During the three months ended March 31, 2012, cash and due from banks, interest-bearing deposits with banks and investment securities increased by $10.6 million while loans held for sale decreased $10.5 million, and loans held for investment decreased $6.1 million. The decrease in loans held for sale was expected as loans outstanding had risen to above targeted levels at December 31, 2011 due to delays in processing loan sales. We experienced slowing commercial and consumer loan demand in our primary lending markets, Guilford, Randolph, Alamance and Forsyth Counties, North Carolina in 2010, 2011, and the first three months of 2012. The slowing demand complimented our planned asset reduction strategy to improve our capital ratios.

 

Liabilities. Total deposits decreased by $8.1 million, or 1.4%, from $596.6 million at December 31, 2011, to $588.5 million at March 31, 2012. Time deposits decreased $9.0 million during the first three months of 2012, primarily from maturing broker deposits, that were not renewed due to ample liquidity. Our branching activities are designed to enhance customer convenience and related deposit gathering activities as well as provide new sources for loans. While deposit growth has been an ongoing goal, wholesale sources of funding such as Federal Home Loan Bank (“FHLB’) advances and repurchase borrowings, may be utilized where cost beneficial and when necessary to meet liquidity requirements. Retail repurchase agreements increased $0.4 million and FHLB advances were down slightly during the first three months of 2012. We had approximately $35.2 million in out-of-market time deposits from other institutions and $19.4 million in brokered deposits at March 31, 2012, a decrease of $4.2 million in these two types of accounts from December 31, 2011.

 

Stockholders’ Equity. Total stockholders’ equity increased $1.3 million at March 31, 2012 to $47.9 million from $46.6 million at December 31, 2011, due to retained net income and an increase in accumulated other comprehensive income from appreciation of investment securities available-for-sale.

 

Comparison of Results of Operations for the Three Months Ended March 31, 2012 and 2011

 

General. Net income was $1,228,000 and $612,000 for the first quarter of 2012 and 2011, respectively. Net income available to common stockholders was $926,000, or $0.27 per diluted share, for the three months ended March 31, 2012 compared to $324,000, or $0.10 per diluted share, for the three months ended March 31, 2011. Net income available to common stockholders represents net income less preferred stock dividends and related discount accretion. Higher net income in 2012 resulted primarily from higher mortgage banking income. Our primary markets in the Triad of North Carolina experienced deteriorating economic conditions in 2010, 2011, and the first three months of 2012 which negatively impacted our borrowers as evidenced by increasing defaults and loan charge-offs. While economic conditions have not improved substantially since 2010 in our primary markets, loan charge-offs have declined and the risk in the loan portfolio has declined as evidenced by a decrease in construction and development loans.

 

Net interest income. Net interest income of $6,049,000 for the three months ended March 31, 2012 increased $131,000 from the first quarter of 2011. An increase in the net yield on interest earning assets of 10 basis points in 2012 was partially offset by a decline in average interest-earning assets by $10.7 million. The net yield on interest earning assets, adjusted to a fully taxable basis, increased to 3.98% in the first quarter of 2012 from 3.88% in the first quarter of 2011. The table below provides an analysis of effective yields and rates on categories of interest-earning assets and interest-bearing liabilities for the three months ended March 31, 2012 and 2011.

 

29
 

 

Net Interest Income and Average Balance Analysis

 

  For the Three Months Ended March 31, 
   2012  2011 
   Average   Interest   Average   Average   Interest   Average 
   Balance (1.)   Inc./Exp.   Yield/Cost   Balance (1.)   Inc./Exp.   Yield/Cost 
   (Dollars in thousands) 
Interest-earning assets                              
Interest bearing deposits  $20,163   $10    0.20%  $41,596   $20    0.19%
Non-taxable investments (2.)   11,107    160    5.79%   16,080    241    6.08%
Taxable investments   32,626    306    3.77%   35,742    401    4.55%
Loans held for sale   73,084    711    3.91%   23,353    300    5.21%
Loans (3.)   479,121    6,374    5.35%   510,051    6,850    5.45%
Interest-earning assets   616,101    7,561         626,822    7,812      
Interest-earning assets             4.94%             5.05%
                               
Non interest-earning assets   47,831              46,841           
                               
Total assets  $663,932             $673,663           
                               
Interest-bearing liabilities                              
Interest checking  $35,193   $22    0.25%  $31,821   $24    0.31%
Money market and savings   286,638    526    0.74%   274,282    636    0.94%
Time certificates and IRAs   207,574    709    1.37%   249,278    967    1.57%
Other borrowings   24,530    202    3.31%   24,293    188    3.14%
Total interest-bearing liabilities   553,935    1,459         579,674    1,815      
Cost on average                              
Interest-bearing liabilities             1.06%             1.27%
Non-interest-bearing liabilities                              
Demand deposits   57,446              44,818           
Other liabilities   5,350              4,520           
Total non-interest-bearing  liabilities   62,796              49,338           
Total liabilities   616,731              629,012           
Stockholders' equity   47,201              44,651           
Total liabilities and equity  $663,932             $673,663           
Net interest income       $6,102             $5,997      
Net yield on average interest-earning assets             3.98%             3.88%
Interest rate spread             3.88%             3.78%

 

(1.)Average balances are computed on a daily basis.
(2.)Interest income and yields related to certain investment securities exempt from federal income tax are stated on a fully taxable basis using a 34% federal tax rate, reduced by the nondeductible portion of interest expense.
(3.)Nonaccrual loans are included in the average loan balance.

 

30
 

 

Provision for loan losses. The provision for loan losses amounted to $1,460,000 and $1,700,000 for the three months ended March 31, 2012 and 2011, respectively. The amount of the provision for loan losses decreased in 2012 primarily because of a decrease in net loan charge-offs and fewer allowances for loan losses on impaired loans. We believe the allowance for loan losses is appropriate based on asset quality indicators and other factors.

 

Non-interest income. Total non-interest income amounted to $3,800,000 for the three months ended March 31, 2012, as compared to $2,110,000 for the three months ended March 31, 2011. Service charges increased $52,000, or 22.5%, and mortgage banking income increased $1,662,000, or 101.7%, during the first quarter of 2012 compared to the first quarter of 2011.

 

Non-interest expense. Total non-interest expense amounted to $6,691,000 and $5,470,000 for the three months ended March 31, 2012 and 2011, respectively. Salaries and employee benefits increased $1,066,000, or 36.0%, primarily from expansion of our Mortgage Division, from increased variable compensation in our Mortgage Division due to additional mortgage loan activity, and from resumption of incentive accruals for Bank employees upon attainment of certain financial goals. The number of full-time equivalent employees increased to 184 at March 31, 2012 from 163 at March 31, 2011. Impairment of other real estate owned was $296,000 and $0 in the first quarter of 2012 and 2011, respectively, as real estate values continued to decrease in our primary lending markets in 2012. Lower expenses were incurred in the first quarter of 2012 in the areas of outside data processing, FDIC insurance and repossessed asset expenses.

 

Income taxes. Income tax expense was $470,000, or 27.7% of net income before income taxes, for the three month period ended March 31, 2012, as compared to $246,000, or 28.7% of net income before income taxes, for the three month period ended March 31, 2011. Larger tax credits primarily accounted for the lower effective tax rate in 2012.

 

Asset Quality

 

Non-performing assets, composed of other real estate owned and non-accrual loans, totaled $30,895,000 at March 31, 2012, compared to $29,643,000 at December 31, 2011. Non-performing assets, as a percentage of total assets, was 4.62% at March 31, 2012, compared to 4.40% at December 31, 2011. There were no loans 90 days or more past due and still accruing interest at March 31, 2012 or December 31, 2011. Other real estate owned was $7,708,000 at March 31, 2012 and $6,728,000 at December 31, 2011. The increase in the level of non-performing assets was primarily one commercial loan relationship of $2,719,000 that defaulted in March of 2012; otherwise, the level of non-performing assets would have declined in accordance with our goal of meaningful reductions in 2012. The elevated level of non-performing assets at March 31, 2012 and December 31, 2011 is related to the decline in economic conditions in our lending markets. The seasonally adjusted unemployment rate in North Carolina decreased to 9.7% in March 2012 from 10.4% in December 2011 and March 2011. A large portion of our loans are made to businesses and real estate developers and are secured by real estate. Due to the slow economic conditions, it has been difficult for borrowers to sell businesses or real estate properties as needed to pay off their loans.

 

Our allowance for loan losses is composed of two parts, a specific portion related to non-performing loans and performing impaired loans and a general section related to non-impaired loans. The specific portion of our allowance for loan losses, which relates to impaired loans, increased to $3,782,000 at March 31, 2012 from $2,737,000 at December 31, 2011, and impaired loans decreased to $45,011,000 at March 31, 2012 from $45,503,000 at December 31, 2011. The specific portion of our allowance relating to impaired loans increased primarily because we changed from using the present value of cash flows to a collateral based method to measure impairment on two loans whose cash flows had not met expectations during 2012. The general portion of our allowance for loan losses decreased to $8,709,000 on non-impaired loans of $435,877,000 at March 31, 2012 from $9,056,000 on non-impaired loans of $441,528,000 at December 31, 2011. The general portion of our allowance applies to non-impaired loans and was determined by applying estimated loss ratios inherent in the loan portfolio, ranging from 0.37% on loans secured by multi-family properties to 4.86% on construction and development loans, to categories of non-impaired loans at each period end. We changed from using the latest eight quarters in 2011 to the latest ten quarters in 2012 to determine the estimated loss ratios inherent in the loan portfolio because we believe the longer period is more representative of expected losses. The general section of our allowance also includes a qualitative component which is calculated based on nine environmental factors such as the changes in economic and business conditions that affect the collectability of the loan portfolio and changes in the value of collateral dependent loans. The qualitative component of the general section of our allowance for loan losses increased from $1,605,000 at December 31, 2011 to $2,006,000 at March 31, 2012 because of continued decline in the market value of collateral securing many of our real estate loans.

 

31
 

 

The allowance for loan losses is increased by direct charges to operating expense, the provision for loan losses. Losses on loans or charge-offs are deducted from the allowance in the period that loans are deemed to become uncollectible or in the period that updated appraisals indicate a loss in value of non-performing, collateral dependent, real estate loans. Recoveries of previously charged-off loans are added back to the allowance. Net loan charge-offs (charge-offs minus recoveries) totaled $762,000 for the three months ended March 31, 2012 compared to $1,645,000 for the same period in 2011.

 

Liquidity and Capital Resources

 

The objective of our liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for expansion. Liquidity management addresses our ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.

 

Our primary sources of internally generated funds are principal and interest payments on loans receivable and cash flows generated from operations. External sources of funds include increases in deposits, repurchase agreements, lines of credit from banks, including the Federal Reserve, and advances from the Federal Home Loan Bank of Atlanta (“FHLB”).

 

Carolina Bank is required under applicable federal regulations to maintain specified levels of liquid investments in qualifying types of investments. Cash and due from banks, interest-bearing deposits in banks, investment securities available-for-sale, and loans held for sale by our mortgage division are the primary liquid assets of Carolina Bank. We regularly monitor Carolina Bank’s liquidity position to ensure its liquidity is sufficient to meet its needs. During the first three months of 2012, we increased our levels of short-term liquidity due to a decrease in our loans held for sale and loans held for investment. Short-term liquidity in the form of cash and due from banks and interest-bearing deposits in banks, increased to $21.2 million at March 31, 2012 from $13.3 million at December 31, 2011. We also have substantial secondary sources of liquidity in the form of unused secured lines of credit from the FHLB and the Federal Reserve of approximately $146 million at March 31, 2012.

 

We are subject to various regulatory capital requirements administered by the banking regulatory agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly discretionary actions by the regulators that, if undertaken, could have a direct material effect on our financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. As of March 31, 2012 and December 31, 2011, our levels of capital exceeded all applicable published regulatory requirements. Carolina Bank met its goal of increasing Tier 1 capital to average assets to 8% in 2011 through earnings and moderate asset growth in response to regulatory requests in January 2011. Tier 1 capital to average assets for Carolina Bank was 8.35% at March 31, 2012 compared to 8.02% at December 31, 2011. Carolina Bank Holdings, Inc. also agreed to seek regulatory approval to pay dividends on its preferred stock and interest on its trust preferred securities after January 2011. Interest payments on trust preferred securities are current based on approvals granted. Dividends of $608,000 on preferred stock have been deferred due to approvals not granted.

 

32
 

 

Due to our strong growth in recent years and our anticipation of continued growth, we increased our capital in January 2009 by issuing $16 million in preferred stock to the United States Treasury under the Capital Purchase Program. Carolina Bank also issued approximately $9.3 million in subordinated debt through a private placement in the third quarter of 2008 to increase capital at the bank level.

 

33
 

 

ITEM 4. Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer have conducted an evaluation of our disclosure controls and procedures as of March 31, 2012. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the applicable Securities and Exchange Commission Rules and Forms. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the most recent evaluation of these controls by our Chief Executive Officer and Chief Financial Officer.

 

Management of the Company has evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, changes in the Company's internal controls over financial reporting (as defined in Rule 13a−15(f) and 15d−15(f) of the Exchange Act) during the first quarter of 2012. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the first quarter that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

34
 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There are various claims and lawsuits in which the Company and the Bank are periodically involved incidental to their business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits.

 

Item 4. (Reserved)

 

Item 6. Exhibits

 

Exhibit No.   Description of Exhibit
     
31.1   Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).
     
31.2   Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).
     
32.1   Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith).
     
101   Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012, in XBRL(eXtensible Business Reporting Language). *

 

 

*Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Carolina Bank Holdings, Inc.
   
Date: May 14, 2012 By: /s/ Robert T. Braswell
    Robert T. Braswell
    President and Chief Executive Officer
     
Date: May 14, 2012 By: /s/ T. Allen Liles
    T. Allen Liles
    Chief Financial and Principal Accounting Officer

 

35
 

 

Exhibit Index

 

 

 

Exhibit No.   Description of Exhibit
     
31.1   Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).
     
31.2   Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).
     
32.1   Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith).
     
101   Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012, in XBRL(eXtensible Business Reporting Language). *

 

 

*Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.

 

 

36