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| EXCEL - IDEA: XBRL DOCUMENT - Bank of the Carolinas CORP | Financial_Report.xls |
| EX-32.01 - EX-32.01 - Bank of the Carolinas CORP | d897534dex3201.htm |
| EX-23.02 - EX-23.02 - Bank of the Carolinas CORP | d897534dex2302.htm |
| EX-99.02 - EX-99.02 - Bank of the Carolinas CORP | d897534dex9902.htm |
| EX-23.01 - EX-23.01 - Bank of the Carolinas CORP | d897534dex2301.htm |
| EX-99.01 - EX-99.01 - Bank of the Carolinas CORP | d897534dex9901.htm |
| EX-31.02 - EX-31.02 - Bank of the Carolinas CORP | d897534dex3102.htm |
| EX-21.00 - EX-21.00 - Bank of the Carolinas CORP | d897534dex2100.htm |
| EX-31.01 - EX-31.01 - Bank of the Carolinas CORP | d897534dex3101.htm |
Table of Contents
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
Commission File No. 000-52195
BANK OF THE CAROLINAS CORPORATION
(Exact name of registrant as specified in its charter)
| North Carolina | 20-4989192 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
135 Boxwood Village Drive
Mocksville, North Carolina 27028
(Address of principal executive offices, including Zip Code)
(336) 751-5755
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 ¨ 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 ¨ No x
The aggregate market value of the voting and non-voting common equity held by nonaffiliates (computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity), as of the last business day of the registrant’s most recently completed second fiscal quarter was $1,831,000 (based on the closing price of such stock as of June 30, 2014).
On March 31, 2015, the number of outstanding shares of Registrant’s common stock was 462,028,831.
Documents Incorporated by Reference:
None
Table of Contents
BANK OF THE CAROLINAS CORPORATION
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014
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In this Report, the terms “we,” “us,” “our” and similar terms refer to Bank of the Carolinas Corporation separately and, as the context requires, on a consolidated basis with our banking subsidiary, Bank of the Carolinas. Bank of the Carolinas is sometimes referred to separately as the “Bank.”
General
Bank of the Carolinas Corporation (the “Company”) was formed in 2006 to serve as a holding company for Bank of the Carolinas (the “Bank”). The Company is registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and the bank holding company laws of North Carolina. The Company’s office is located at 135 Boxwood Village Drive, Mocksville, North Carolina 27028. The Company’s primary business activity consists of directing the activities of the Bank.
The Bank is incorporated under the laws of North Carolina and began operations on December 7, 1998 as a North Carolina chartered commercial bank. The Bank operates under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation (the “FDIC”). As a state chartered non-Federal Reserve member bank, the Bank is subject to examination and regulation by the FDIC and the North Carolina Commissioner of Banks (the “Commissioner”). The Bank is further subject to certain regulations of the Federal Reserve. The business and regulation of the Bank are also subject to legislative changes from time to time. See Item 1. Description of Business—Supervision and Regulation.
The Bank’s primary market area is in the Piedmont region of North Carolina where we are engaged in general commercial banking primarily in Davie, Randolph, Rowan, Cabarrus, Davidson, and Forsyth Counties. The Bank’s main office is located at 135 Boxwood Village Drive in Mocksville, North Carolina. Our main office in Mocksville and our Advance office are located in Davie County. Our other offices are located in Asheboro (Randolph County), Landis (Rowan County), Harrisburg and Concord (Cabarrus County), Lexington (Davidson County), and Winston-Salem (Forsyth County).
Services
Our operations are primarily retail oriented and directed toward individuals and small- and medium-sized businesses located in our banking market. The majority of our deposits and loans are derived from customers in our banking market, but we also make loans and have deposit relationships in areas surrounding our immediate banking market. We also occasionally solicit and accept wholesale deposits. We offer a variety of commercial and consumer banking services, but our principal activities are the taking of demand and time deposits and the making of consumer and commercial loans. To a lesser extent, we also generate income from other fee-based products and services that we provide.
The Bank’s primary source of revenue is interest and fee income from its lending activities. These lending activities consist principally of originating commercial operating and working capital loans, residential mortgage loans, home equity lines of credit, other consumer loans and loans secured by commercial real estate. Interest and dividend income from investment activities generally provide the second largest source of income to the Bank.
Deposits are the primary source of the Bank’s funds for lending and other investment purposes. The Bank attracts both short-term and long-term deposits from the general public by offering a variety of accounts and rates. The Bank offers statement savings accounts, negotiable order of withdrawal (“NOW”) accounts, money market demand accounts, non-interest-bearing accounts and fixed interest rate certificates with varying maturities. The Bank also utilizes alternative sources of funds such as borrowings from the Federal Home Loan Bank (the “FHLB”) of Atlanta, Georgia and other commercial banks.
The Bank’s deposits are obtained primarily from its primary market area. The Bank uses traditional marketing methods to attract new customers and deposits including print media advertising and direct mailings. Deposit flows are greatly influenced by economic conditions, the general level of interest rates, competition and other factors.
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Organization
The Bank is the sole banking subsidiary of the Company. A trust (Bank of the Carolinas Trust I) was formed as a subsidiary of the Company to facilitate the issuance of trust preferred securities as a form of non-dilutive equity to supplement our capital. Although the trust is still in existence, we repurchase all of our outstanding trust preferred securities in 2014.
The Bank formed an LLC (East Atlantic Properties, LLC) to manage our income producing assets transferred from our Other Real Estate Owned. BOTC, LLC, is a North Carolina limited liability company which serves as the trustee for the benefit of Bank of the Carolinas in connection with real estate deeds of trust. Both LLCs are consolidated into the Bank and are disregarded entities for tax purposes.
Lending Activities
General. We make a variety of types of consumer and commercial loans to individuals and small- and medium-sized businesses for various personal, business and agricultural purposes, including term and installment loans, commercial and equity lines of credit, and overdraft checking credit. For financial reporting purposes, our loan portfolio generally is divided into real estate loans (including home equity lines of credit), commercial loans, and consumer loans. We make credit card services available to our customers through a correspondent relationship. For an analysis of the components of our loan portfolio, see Table I. Analysis of Loan Portfolio in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Real Estate Secured Loans. Our real estate loan classifications include loans secured by real estate which are made to purchase, construct or improve residential or commercial real estate, for real estate development purposes, and for various other commercial and consumer purposes (whether or not those purposes are related to our real estate collateral).
Commercial real estate and construction loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In the case of commercial real estate loans, loan repayment may be dependent on the successful operation of income producing properties, a business, or a real estate project and, thus, may, to a greater extent than in the case of other loans, be subject to the risk of adverse conditions in the economy generally or in the real estate market in particular.
Construction loans involve special risks due to the fact that loan funds are advanced upon the security of houses or other improvements that are under construction and that are of uncertain value prior to the completion of construction. For that reason, it is more difficult to evaluate accurately the total loan funds required to complete a project and the related loan-to-value ratios. To minimize these risks, generally we limit loan amounts to 80% of the projected appraised value of our collateral upon completion of construction.
Many of our real estate loans, while secured by real estate, were made for purposes unrelated to the real estate collateral. That generally is reflective of our efforts to minimize credit risk by taking real estate as primary or additional collateral, whenever possible, without regard to loan purpose. All our real estate loans are secured by first or junior liens on real property, the majority of which is located in or near our banking market. However, we have made loans, and have purchased participations in some loans from other entities, which are secured by real property located outside our banking market.
Our real estate loans may be made at fixed or variable interest rates and, generally, with the exception of our long-term residential mortgage loans discussed below, have maturities that do not exceed five years. However, we also make real estate loans that have maturities of more than five years, or which are based on amortization schedules of as much as 30 years, but that generally will include contractual provisions which allow us to call the loan in full, or provide for a “balloon” payment in full, at the end of no more than five to fifteen years.
In addition to residential real estate loans made for a variety of purposes, we offer long-term, residential mortgage loans that are funded by and closed in the name of third-party lenders. This arrangement permits us to offer this product in our banking market and enhance our fee-based income, but, by closing the loans in the names of the ultimate owners of those loans, we avoid the credit and interest rate risk associated with these long-term loans. However, on a limited basis,
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we also make residential mortgage loans that we retain in our own loan portfolio. Those loans typically are secured by first liens on the related residential property, are made at fixed and variable interest rates, and have maturities that do not exceed 15 years, although we have a small number of residential mortgage loans in our portfolio with 30-year maturities.
Our home equity lines of credit include lines of credit that generally are used by borrowers for consumer purposes and are secured by first or junior liens on residential real property. Our commitment on each line is for a term of 15 years, and interest is charged at a variable rate. The terms of these lines of credit provide that borrowers either may pay accrued interest only, with the outstanding principal balances becoming due in full at the maturity of the lines, or they will make payments of principal and interest based on a 15-year amortization schedule.
Commercial Loans. Our commercial loan classification includes loans to individuals and small- and medium-sized businesses for working capital, equipment purchases, and various other business and agricultural purposes, but that classification excludes any such loan that is secured by real estate. These loans generally are secured by inventory, equipment or similar assets, but they also may be made on an unsecured basis. In addition to loans which are classified on our books as commercial loans, as described above, many of our loans included within the real estate loan classification were made for commercial purposes but are classified as real estate loans on our books because they are secured by first or junior liens on real estate. Commercial loans may be made at variable or fixed rates of interest. However, it is our policy that any loan which has a maturity or amortization schedule of longer than five years normally would be made at an interest rate that varies with our prime lending rate or would include contractual provisions which allow us to call the loan in full, or provide for a “balloon” payment in full, at the end of no more than five years.
Commercial loans typically are made on the basis of the borrower’s ability to make repayment from business cash flow, and those loans typically are secured by business assets, such as accounts receivable, equipment and inventory. As a result, the ability of borrowers to repay commercial loans may be substantially dependent on the success of their businesses, and the collateral for commercial loans may depreciate over time and their values may not be as determinable relative to the time the loans were originated.
Consumer Loans. Our consumer loans consist primarily of loans for various consumer purposes, as well as the outstanding balances on non-real estate secured consumer revolving credit accounts. A majority of these loans are secured by liens on various personal assets of the borrowers, but they also may be made on an unsecured basis. Additionally, our real estate loans include loans secured by first or junior liens on real estate which were made for consumer purposes unrelated to the real estate collateral. Consumer loans generally are made at fixed interest rates and with maturities or amortization schedules which generally do not exceed five years. However, consumer-purpose loans secured by real estate (and, thus, classified as real estate loans as described above) may be made for terms of up to 30 years, but under terms which allow us to call the loan in full, or provide for a “balloon” payment, at the end of no more than five to fifteen years.
Consumer loans generally are secured by personal property and other personal assets of borrowers which often depreciate rapidly or are vulnerable to damage or loss. In cases where damage or depreciation reduces the value of our collateral below the unpaid balance of a defaulted loan, repossession may not result in repayment of the entire outstanding loan balance. The resulting deficiency often does not warrant further substantial collection efforts against the borrower. In connection with consumer lending in general, the success of our loan collection efforts are highly dependent on the continuing financial stability of our borrowers. Our collection capacity on consumer loans may be more likely to be adversely affected by a borrower’s job loss, illness, personal bankruptcy or other change in personal circumstances than is the case with other types of loans.
Loan Administration and Underwriting. Like most community banks, we make loans based to a great extent on our assessment of borrowers’ income, cash flow, net worth, character and ability to repay the loan. A principal risk associated with each loan category is the creditworthiness of our borrowers. Our loans may be viewed as involving a higher degree of credit risk than is typically the case with some other types of loans, such as long-term residential mortgage loans where greater emphasis is placed on assessed collateral values. To manage risk, we have adopted written loan policies and procedures. Our loan portfolio is administered under a defined process that includes guidelines for loan underwriting standards, risk assessment, procedures for loan approvals, loan risk grading, ongoing identification and management of credit deterioration, and portfolio reviews to assess loss exposure. These reviews also are used to test our compliance with our credit policies and procedures in an ongoing fashion.
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The underwriting standards that we employ for loans include an evaluation of various factors, including but not limited to a loan applicant’s income, cash flow, payment history on other debts and an assessment of ability to meet existing obligations including payments on any proposed loan. Though creditworthiness of the applicant is a primary consideration within the loan approval process, we take collateral (particularly real estate) whenever it is available. This is done without regard to loan purpose. In the case of secured loans, the underwriting process includes an analysis of the value of the proposed collateral. The analysis is conducted in relation to the proposed loan amount. Consideration is given to the value of the collateral, the degree to which the value is ascertainable with any certainty, the marketability of the collateral in the event of default, and the likelihood of depreciation in the collateral value.
Our Board of Directors has approved levels of lending authority for lending personnel based on our aggregate credit exposures to borrowers, along with the secured or unsecured status and the risk grade of a proposed loan. A loan that satisfies our loan policies and is within a lending officer’s assigned authority may be approved by that officer. Anything above that amount must be approved before funding by our Credit Administration management, the Loan Committee of the Board of Directors or our Board of Directors.
At the time a loan is proposed, the account officer assigns a risk grade to the loan based on various underwriting and other criteria. The grades assigned to loans generally indicate the level of ongoing review and attention that we will give to those loans to protect our position.
After funding, all loans are reviewed by our Loan Administration personnel for adequacy of documentation and compliance with regulatory requirements. Most loans (including the largest exposure loans) are reviewed for compliance with our underwriting criteria and to reassess the grades assigned to them by the account officers.
During the life of each loan, its grade is reviewed and validated. Modifications can and are made to reflect changes in circumstances and risk. Loans generally are placed in a non-accrual status if they become 90 days past due (unless, based on relevant circumstances, we believe that collateral is sufficient to justify continued accrual and the loan is in process of collection). Non-accrual status is also applied whenever we believe that collection has become doubtful. Loans are charged off when the collection of principal and interest has become doubtful and the loans no longer can be considered a sound collectible asset (or, in the case of unsecured loans, when they become 90 days past due).
Allowance for Loan Losses. Our Board of Directors’ Loan Committee reviews all substandard loans at least monthly, and our management meets regularly to review asset quality trends and to discuss loan policy issues. Based on these reviews and our current judgments about the credit quality of our loan portfolio and other relevant internal and external factors as well as historical charge off rates, we have established an allowance for loan losses. The appropriateness of the allowance is assessed by our management, reviewed by the Loan Committee each month, and reviewed by the Board of Directors quarterly. We make provisions to the allowance based on those assessments which are charged against our earnings.
For additional information regarding loss experience, our allowance for loan losses and problem assets, see Table II. Summary of Loan Loss Experience, Table III. Allocation of Allowance for Loan Losses, and Table V. Nonperforming Assets in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Deposit Activities
Our deposit products include business and individual checking accounts, savings accounts, NOW accounts, certificates of deposit and money market checking accounts. We monitor our competition in order to keep the rates paid on our deposits at a competitive level. However, under FDIC regulations and the terms of the regulatory consent order discussed under the heading “Supervision and Regulation” below, we may not currently solicit deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yield on insured deposits of comparable maturity in our market area or the market area where the deposits are being solicited. The majority of our deposits are derived from within our banking market. However, we have historically solicited and accepted wholesale deposits as a way to supplement funding to support loan growth and provide added balance sheet liquidity. For additional analysis of deposit relationships, see Table VIII. Deposit Mix in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Investment Portfolio
On December 31, 2014, our investment portfolio consisted of U.S. government agency securities, state and municipal obligations, and mortgage-backed securities issued by the Federal National Mortgage Association (“Fannie Mae”), the Government National Mortgage Association (“Ginnie Mae”), and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Our securities are classified as either “held to maturity” and “available for sale.” We analyze their performance monthly and carry the available for sale securities on our books at their fair market values while carrying the held to maturity securities at their amortized cost. For additional analysis of investment security balances by type and maturities and average yields by security type, see Table VI. Investment Securities and Table VII. Investment Securities in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. For additional information regarding appreciation and depreciation by security type, and information relating to Other Than Temporary Impairment, see Note 2. Investment Securities in our Notes to Consolidated Financial Statements under Item 8.
Competition
Commercial banking in North Carolina is highly competitive, due in large part to our state’s early adoption of statewide branching. Over the years, federal and state legislation (including the elimination of many of the restrictions on interstate banking) has heightened the competitive environment in which all financial institutions conduct their business, and the potential for competition among financial institutions of all types has increased significantly. As of June 30, 2014 (the most recent date for which data is available), there were 26 other FDIC-insured institutions with offices in our banking market.
Interest rates, both on loans and deposits, and prices of fee-based services are significant competitive factors among financial institutions in general. Other important competitive factors include office location, office hours, the quality of customer service, community reputation, continuity of personnel and services, and, in the case of larger commercial customers, relative lending limits and the ability to offer sophisticated cash management and other commercial banking services. Many of our competitors have greater resources, broader geographic markets, more extensive branch networks, and higher lending limits than we do. They also can offer more products and services and can better afford and make more effective use of media advertising, support services and electronic technology than we can. In terms of assets, we are one of the smaller commercial banks in North Carolina, and there is no assurance that we will be or continue to be an effective competitor in our banking market. However, we believe that community banks can compete successfully by providing personalized service and making timely, local decisions, and that further consolidation in the banking industry is likely to create additional opportunities for community banks to capture deposits from affected customers who may become dissatisfied as their financial institutions grow larger. Additionally, we believe that the continued growth of our banking market affords an opportunity to capture new deposits from new residents.
Substantially all of our customers are individuals and small- and medium-sized businesses. We try to differentiate ourselves from our larger competitors with our focus on relationship banking, personalized service, direct customer contact, and our ability to make credit and other business decisions locally. We also depend on our reputation as a community bank in our banking market, our involvement in the communities we serve, the experience of our senior management team, and the quality of our associates. We believe that our focus allows us to be more responsive to our customers’ needs and more flexible in approving loans based on our personal knowledge of our customers.
Employees
On December 31, 2014, we had approximately 89 full-time equivalent employees (including our executive officers). We are not party to any collective bargaining agreement with our employees, and we consider our relations with our employees to be good.
Supervision and Regulation
Our business and operations are subject to extensive federal and state governmental regulation and supervision. The following is a summary of some of the basic statutes and regulations that apply to us, but it is not a complete discussion of all the laws that affect our business. In addition to these statutes and regulations, we are subject to a consent order issued by the FDIC and the North Carolina Commissioner of Banks and a written agreement with the Federal Reserve Bank of Richmond, as summarized below.
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Consent Order with FDIC and North Carolina Commissioner of Banks. The Bank entered into a Stipulation to the Issuance of a Consent Order (the “Stipulation”) with the Federal Deposit Insurance Corporation (the “FDIC”) and the North Carolina Office of the Commissioner of Banks (the “Commissioner”) and the FDIC and the Commissioner issued the related Consent Order (the “Order”), effective April 27, 2011. The description of the Stipulation and the Order set forth below is qualified in its entirety by reference to the Stipulation and the Order, copies of which are included as exhibits 10.13 and 10.14 to this Form 10-K, and incorporated herein by reference.
Management. The Order requires that the Bank have and retain qualified management, including a chief executive officer, senior lending officer, and chief operating officer with qualifications and experience commensurate with their assigned duties and responsibilities within 60 days from the effective date of the Order. Within 30 days of the effective date of the Order, the board of directors was required to retain a bank consultant to develop a written analysis and assessment of the Bank’s management needs. Following receipt of the consultant’s management report, the Bank was required to formulate a written management plan that incorporated the findings of the management report, a plan of action in response to each recommendation contained in the management report, and a time frame for completing each action.
Capital Requirements. While the Order is in effect, the Bank must maintain a leverage ratio (the ratio of Tier 1 capital to total assets) of at least 8% and a total risk-based capital ratio (the ratio of qualifying total capital to risk-weighted assets) of at least 10%. If the Bank’s capital ratios are below these levels as of the date of any call report or regulatory examination, the Bank must, within 30 days from receipt of a written notice of capital deficiency from its regulators, present a plan to increase capital to meet the requirements of the Order. At December 31, 2014, the Bank was in compliance with the capital requirements contained in the Order.
Allowance for Loan and Lease Losses and Call Report. Upon issuance of the Order, the Bank was required to make a provision to replenish the allowance for loan and lease losses (“ALLL”). Within 30 days of the effective date of the Order, the Bank was required to review its call reports filed with its regulators on or after December 31, 2010, and amend those reports if necessary to accurately reflect the financial condition of the Bank. Within 60 days of the effective date of the Order, the Bank was required to submit a comprehensive policy for determining the adequacy of the ALLL.
Concentrations of Credit. Within 60 days of the issuance of the Order, the Bank was required to perform a risk segmentation analysis with respect to its concentrations of credit and develop a written plan for systematically reducing and monitoring the Bank’s commercial real estate and acquisition, construction, and development loans to an amount commensurate with the Bank’s business strategy, management expertise, size, and location.
Charge-Offs, Credits. The Order requires that the Bank eliminate from its books, by charge-off or collection, all assets or portions of assets classified “loss” and 50% of those assets classified “doubtful.” If an asset is classified “doubtful,” the Bank may alternatively charge off the amount that is considered uncollectible in accordance with the Bank’s written analysis of loan or lease impairment. The Order also prevents the Bank from extending, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, “loss” or “doubtful” and is uncollected. The Bank may not extend, directly or indirectly, any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been classified “substandard.” These limitations do not apply if the Bank’s failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank.
Asset Growth. While the Order is in effect, the Bank must notify its regulators at least 60 days prior to undertaking asset growth that exceeds 10% or more per year or initiating material changes in asset or liability composition. The Bank’s asset growth cannot result in noncompliance with the capital maintenance provisions of the Order unless the Bank receives prior written approval from its regulators.
Restriction on Dividends and Other Payments. While the Order is in effect, the Bank cannot declare or pay dividends, pay bonuses, or pay any form of payment outside the ordinary course of business resulting in a reduction of capital without the prior written approval of its regulators. In addition, the Bank cannot make any distributions of interest, principal, or other sums on subordinated debentures without prior regulatory approval.
Brokered Deposits. The Order provides that the Bank may not accept, renew, or roll over any brokered deposits unless it is in compliance with the requirements of the FDIC regulations governing brokered deposits. These regulations prohibit undercapitalized institutions from accepting, renewing, or rolling over any brokered deposits and also prohibit
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undercapitalized institutions from soliciting deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yields on insured deposits of comparable maturity in the institution’s market area. An “adequately capitalized” institution may not accept, renew, or roll over brokered deposits unless it has applied for and been granted a waiver by the FDIC.
Written Plans and Other Material Terms. Under the terms of the Order, the Bank was required to prepare and submit the following written plans or reports to the FDIC and the Commissioner:
| - | Plan to improve liquidity, contingency funding, interest rate risk, and asset liability management |
| - | Plan to reduce assets of $500,000 or greater classified “doubtful” and “substandard” |
| - | Revised lending and collection policy to provide effective guidance and control over the Bank’s lending and credit administration functions |
| - | Effective internal loan review and grading system |
| - | Policy for managing the Bank’s other real estate |
| - | Business/strategic plan covering the overall operation of the Bank |
| - | Plan and comprehensive budget for all categories of income and expense for the year 2011 |
| - | Policy and procedures for managing interest rate risk |
| - | Assessment of the Bank’s information technology function |
Under the Order, the Bank’s board of directors agreed to increase its participation in the affairs of the Bank, including assuming full responsibility for the approval of policies and objectives for the supervision of all of the Bank’s activities. The Bank was also required to establish a board committee to monitor and coordinate compliance with the Order.
The Order will remain in effect until modified or terminated by the FDIC and the Commissioner.
Written Agreement with the Federal Reserve Bank of Richmond. The Company entered into a written agreement (the “Agreement”) with the Federal Reserve Bank of Richmond on August 26, 2011. The description of the Agreement set forth below is qualified in its entirety by reference to the Agreement, a copy of which is included as exhibit 10.15 to this Form 10-K, and is incorporated herein by reference.
Source of Strength. The Agreement requires that the Company take appropriate steps to fully utilize its financial and managerial resources to serve as a source of strength to the Bank and to ensure that the Bank complies with the requirements of the consent order entered into between the North Carolina Commissioner of Banks, the FDIC and the Bank.
Dividends, Distributions, and other Payments. The Agreement prohibits the Company’s payment of any dividends without the prior approval of the Federal Reserve Bank of Richmond and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System. It also prohibits the Company from directly or indirectly taking any dividends or any other form of payment representing a reduction in capital from the Bank without the prior written approval of the Federal Reserve Bank of Richmond.
Under the terms of the Agreement, the Company and the Bank may not make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without the prior written approval of the Federal Reserve Bank of Richmond and the Director of the Division of Banking Supervision and Regulation of the Federal Reserve Board of Governors.
Debt and Stock Redemption. The Agreement requires that the Company and any non-bank subsidiary of the Company not, directly or indirectly, incur, increase or guarantee any debt without the prior written approval of the Federal Reserve Bank of Richmond. The Agreement also requires that the Company not, directly or indirectly, purchase or redeem any shares of its capital stock without the prior written approval of the Federal Reserve Bank of Richmond.
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Capital Plan, Cash Flow Projections and Progress Reports. The Agreement requires that the Company file an acceptable capital plan and certain cash flow projections with the Federal Reserve Bank of Richmond. It also requires that the Company file a written progress report within 30 days after the end of each calendar quarter while the Agreement remains in effect.
The Order will remain in effect until modified or terminated by the Federal Reserve Bank of Richmond.
Regulation of Bank Holding Companies. Bank of the Carolinas Corporation is a North Carolina business corporation that operates as a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”). We are subject to supervision and examination by, and the regulations and reporting requirements of, the Federal Reserve Board (the “FRB”). Under the BHCA, a bank holding company’s activities are limited to banking, managing or controlling banks, or engaging in other activities the FRB determines are closely related and a proper incident to banking or managing or controlling banks.
Bank holding companies may elect to be regulated as “financial holding companies” if all their financial institution subsidiaries are and remain well capitalized and well managed as described in the FRB’s regulations and have a satisfactory record of compliance with the Community Reinvestment Act. In addition to the activities that are permissible for bank holding companies, financial holding companies are permitted to engage in additional activities that are determined by the FRB, in consultation with the Secretary of the Treasury, to be financial in nature or incidental to a financial activity, or that are complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions, or the financial system generally, as determined by the FRB. We are not a financial holding company.
The BHCA prohibits a bank holding company or financial holding company from acquiring direct or indirect control of more than 5.0% of the outstanding voting stock, or substantially all of the assets, of any financial institution, or merging or consolidating with another bank holding company or savings bank holding company, without the prior approval of or, under specified circumstances, notice to, the FRB. Additionally, the BHCA generally prohibits banks or financial holding companies from acquiring ownership or control of more than 5.0% of the outstanding voting stock of any company that engages in an activity other than one that is permissible for the holding company. In approving an application to engage in a nonbanking activity, the FRB must consider whether that activity can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.
The law imposes a number of obligations and restrictions on a bank holding company and its insured bank subsidiaries designed to minimize potential losses to depositors and the FDIC insurance fund. For example, if a bank holding company’s insured bank subsidiary becomes “undercapitalized,” the bank holding company is required to guarantee the bank’s compliance (subject to certain limits) with the terms of any capital restoration plan filed with its federal banking agency. A bank holding company is required to serve as a source of financial strength to its bank subsidiaries and to commit resources to support those banks in circumstances in which, absent that policy, it might not do so. Under the BHCA, the FRB may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary if the FRB determines that the activity or control constitutes a serious risk to the financial soundness and stability of a bank subsidiary of a bank holding company. As described above, Bank of the Carolinas Corporation is currently party to a written agreement with the Federal Reserve Bank of Richmond.
Regulation of the Bank. The Bank is an FDIC-insured, North Carolina-chartered bank. Its deposits are insured under the FDIC’s Deposit Insurance Fund (“DIF”), and it is subject to supervision and examination by, and the regulations and reporting requirements of, the FDIC and the Commissioner. The FDIC and the Commissioner are its primary federal and state banking regulators. The Bank is not a member bank of the Federal Reserve System.
As a state-chartered, FDIC-insured bank, the Bank is prohibited from engaging as principal in any activity that is not permitted for national banks unless (1) the FDIC determines that the activity or investment would not pose a significant risk to the DIF, and (2) the Bank is, and continues to be, in compliance with the capital standards that apply to it. The Bank also is prohibited from directly acquiring or retaining any equity investment of a type or in an amount that is not permitted for national banks.
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The FDIC and the Commissioner regulate all areas of the Bank’s business, including its reserves, mergers, payment of dividends and other aspects of its operations. They conduct regular examinations of the Bank, and the Bank must furnish periodic reports to the FDIC and the Commissioner containing detailed financial and other information about its affairs. The FDIC and the Commissioner have broad powers to enforce laws and regulations that apply to the Bank and to require the Bank to correct conditions that affect its safety and soundness. Among others, these powers include issuing cease and desist orders, imposing civil penalties, and removing officers and directors, and their ability otherwise to intervene in the Bank’s operation if their examinations of the Bank, or the reports it files, reflect a need for them to do so. As described above, the Bank is currently subject to a Consent Order issued by the FDIC and the Commissioner.
The Bank’s business also is influenced by prevailing economic conditions and governmental policies, both foreign and domestic, and, though it is not a member bank of the Federal Reserve System, by the monetary and fiscal policies of the FRB. The FRB’s actions and policy directives determine to a significant degree the cost and availability of funds the Bank obtains from money market sources for lending and investing, and they also influence, directly and indirectly, the rates of interest the Bank pays on time and savings deposits and the rates it charges on commercial bank loans.
Powers of the FDIC in Connection with the Insolvency of an Insured Depository Institution. Under the Federal Deposit Insurance Act (the “FDIA”), if any insured depository institution becomes insolvent and the FDIC is appointed as its conservator or receiver, the FDIC may disaffirm or repudiate any contract or lease to which the institution is a party which it determines to be burdensome, and the disaffirmance or repudiation of which is determined to promote the orderly administration of the institution’s affairs. The disaffirmance or repudiation of any of our obligations would result in a claim of the holder of that obligation against the conservatorship or receivership. The amount paid on that claim would depend upon, among other factors, the amount of conservatorship or receivership assets available for the payment of unsecured claims and the priority of the claim relative to the priority of other unsecured creditors and depositors.
In its resolution of the problems of an insured depository institution in default or in danger of default, the FDIC generally is required to satisfy its obligations to insured depositors at the least possible cost to the DIF. In addition, the FDIC may not take any action that would have the effect of increasing the losses to the DIF by protecting depositors for more than the insured portion of deposits or creditors other than depositors. The FDIA authorizes the FDIC to settle all uninsured and unsecured claims in the insolvency of an insured bank by making a final settlement payment after the declaration of insolvency as full payment and disposition of the FDIC’s obligations to claimants. The rate of the final settlement payments will be a percentage rate determined by the FDIC reflecting an average of the FDIC’s receivership recovery experience.
North Carolina Banking Law. The Bank is incorporated under and subject to the provisions of Chapter 53C of the General Statutes of North Carolina, which provides for the supervision and regulation of the Bank by the State of North Carolina through the State Banking Commission, the Commissioner of Banks, and the Office of the Commissioner of Banks. It contains provisions regarding the following topics:
| • | formation and organization of banks, |
| • | corporate governance of banks, |
| • | activities and powers of banks, |
| • | bank operations, |
| • | mergers and other change-in-control or business combination transactions, |
| • | charter conversions, and |
| • | bank holding companies. |
The statute also grants the Commissioner the authority to issue administrative rules with respect to the establishment, operation, conduct, and termination of any and all activities and businesses that are subject to regulation by the Commissioner. Rules issued by the Commissioner are subject to review and approval of the State Banking Commission. The Bank is subject to these rules, which are set forth in Chapter 3 of Title 4 of the North Carolina Administrative Code.
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The Office of the Commissioner of Banks conducts regular supervisory examinations of the Bank in coordination with the FDIC. The FDIC serves as the Bank’s primary federal regulator.
Dodd–Frank Wall Street Reform and Consumer Protection Act. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. This law significantly changed the structure of bank regulation, affecting the lending, deposit, investment, trading, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act required various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies were granted broad discretion in drafting rules and regulations. The Dodd-Frank Act included, among other things:
| • | the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and to improve cooperation between federal agencies; |
| • | the creation of the Consumer Financial Protection Bureau, which is authorized to promulgate and enforce consumer protection regulations relating to financial products, affecting 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 FDIC deposit insurance to $250,000 per deposit category and an increase in the minimum DIF 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. |
As required by the Dodd-Frank Act, federal regulators have adopted regulations to (1) increase capital requirements on banks and bank holding companies pursuant to Basel III, and (2) implement the so-called “Volcker Rule” of the Dodd-Frank Act, which significantly restricts certain activities by covered bank holding companies, including restrictions on proprietary trading and private equity investing. Additional information on these regulations can be found below under the headings Volcker Rule and Implementation of Basel III Capital Rules.
Some of the regulations to implement the Dodd-Frank Act have not yet been published for comment or adopted in final form and/or will take effect over several years, making it difficult to anticipate the overall financial impact on the Company and the Bank, our customers, or the financial industry more generally. Individually and collectively, these proposed regulations resulting from the Dodd-Frank Act may materially and adversely affect the Company’s and the Bank’s business, financial condition, and results of operations. Provisions in the legislation that require revisions to the capital requirements of the Company and the Bank could require the Company and the Bank to seek additional sources of capital in the future.
Volcker Rule. The Dodd-Frank Act prohibits insured depository institutions and their holding companies from engaging in proprietary trading except in limited circumstances, and prohibits them from owning equity interests in excess of three percent (3%) of Tier 1 capital in private equity and hedge funds (known as the “Volcker Rule”). On December 10, 2013, five U.S. financial regulators adopted final rules (the “Final Rules”) implementing the Volcker Rule. The Final Rules prohibit banking entities from (1) engaging in short-term proprietary trading for their own accounts, and (2) having certain ownership interests in and relationships with hedge funds or private equity funds, which are referred to as “covered funds.” The Final Rules are intended to provide greater clarity with respect to both the extent of those primary prohibitions and of the related exemptions and exclusions. The Final Rules also require each regulated entity to establish an internal compliance program that is consistent with the extent to which it engages in activities covered by the Volcker Rule. Although the Final Rules provide some tiering of compliance and reporting obligations based on size, the fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including the Company and the Bank. The Final Rules were effective on April 1, 2014, but the conformance period has been extended from its statutory end date of July 21, 2014 until July 21, 2015. In addition, the FRB recently granted an extension until July 21, 2016 of the
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conformance period for banking entities to conform investments in and relationships with covered funds that were in place prior to December 31, 2013, and announced its intention to further extend this aspect of the conformance period until July 21, 2017. The Volcker Rule is not expected to have a material impact on the Bank or the Company.
Gramm-Leach-Bliley Act. The federal Gramm-Leach-Bliley Act, enacted in 1999 (the “GLB Act”), dramatically changed various federal laws governing the banking, securities and insurance industries. The GLB Act permitted bank holding companies to become “financial holding companies” and, in general (1) expanded opportunities to affiliate with securities firms and insurance companies; (2) overrode certain state laws that would prohibit certain banking and insurance affiliations; (3) expanded the activities in which banks and bank holding companies may participate; (4) required that banks and bank holding companies engage in some activities only through affiliates owned or managed in accordance with certain requirements; and (5) reorganized responsibility among various federal regulators for oversight of certain securities activities conducted by banks and bank holding companies. The GLB Act expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them. However, while this expanded authority permits financial institutions to engage in additional activities, it also presents smaller institutions with challenges as larger competitors continue to expand their services and products into areas that are not feasible for smaller, community-oriented financial institutions. We are not a financial holding company.
Payment of Dividends. Under North Carolina law, we are authorized to pay dividends as declared by our Board of Directors, provided that no such distribution results in our insolvency on a going concern or balance sheet basis. However, although we are a legal entity separate and distinct from the Bank, our principal source of funds with which we can pay dividends to our shareholders and pay our own obligations is dividends we receive from the Bank. For that reason, our ability to pay dividends effectively is subject to the same limitations that apply to the Bank. There are statutory and regulatory limitations on the Bank’s payment of dividends to us.
As described above, the terms of the consent order issued by the Bank’s regulators prohibit the Bank from declaring or paying dividends without the prior written approval of its regulators. The Company is also prohibited from declaring or paying dividends without prior regulatory approval under the terms of its written agreement with the Federal Reserve.
Under North Carolina banking law, the Bank’s Board of Directors may declare dividends so long as they do not reduce the Bank’s capital below its applicable required capital. As described above, the Bank is currently restricted from paying dividends under the terms of the Consent Order with the FDIC and the Commissioner.
In addition to the restrictions described above, other state and federal statutory and regulatory restrictions apply to the Bank’s payment of cash dividends. As an insured depository institution, federal law prohibits the Bank from making any capital distributions, including the payment of a cash dividend if it is “undercapitalized” (as that term is defined in the FDIA) or after making the distribution, would become undercapitalized. If the FDIC believes that we are engaged in, or about to engage in, an unsafe or unsound practice, the FDIC may require, after notice and hearing, that we cease and desist from that practice. The FDIC has indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. The FDIC has issued policy statements that provide that insured banks generally should pay dividends only from their current operating earnings, and, under the FDIA, no dividend may be paid by an insured bank while it is in default on any assessment due the FDIC. The Bank’s payment of dividends also could be affected or limited by other factors, such as events or circumstances which lead the FDIC to require (as further described below) that it maintain capital in excess of regulatory guidelines.
In the future, our ability to declare and pay cash dividends will be subject to our Board of Directors’ evaluation of our operating results, capital levels, financial and regulatory condition, future growth plans, general business and economic conditions, and tax and other relevant considerations.
Capital Requirements. The Company and the Bank are subject to various regulatory capital requirements administered by federal and state regulators. Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material adverse effect on the financial condition of the Company and the Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (described below), the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting policies. Capital amounts and classifications are also subject to judgments by the regulators regarding qualitative components, risk weightings, and other factors.
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On July 2, 2013, the FRB approved a final rule that establishes an integrated regulatory capital framework that addresses shortcomings in certain capital requirements. The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. The major provisions of the new rule applicable to us are:
| • | The new rule implements higher minimum capital requirements, includes a new common equity Tier1 capital requirement, and establishes criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. These enhancements will improve the quality and increase the quantity of capital required to be held by banking organizations, better equipping the U.S. banking system to deal with adverse economic conditions. The new minimum capital to risk-weighted assets (RWA) requirements are a common equity Tier 1 capital ratio of 4.5% and a Tier 1 capital ratio of 6.0%, which is an increase from 4%, and a total capital ratio that remains at 8.0%. The minimum leverage ratio (Tier 1 capital to total assets) is 4.0%. The new rule maintains the general structure of the current prompt corrective action (PCA) framework while incorporating these increased minimum requirements. |
| • | The new rule improves the quality of capital by implementing changes to the definition of capital. Among the most important changes are stricter eligibility criteria for regulatory capital instruments that would disallow the inclusion of instruments such as trust preferred securities in Tier 1 capital going forward, and new constraints on the inclusion of minority interests, mortgage-servicing assets (MSAs), deferred tax assets (DTAs), and certain investments in the capital of unconsolidated financial institutions. In addition, the new rule requires that most regulatory capital deductions be made from common equity Tier 1 capital. |
| • | Under the new rule, to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements. This buffer will help to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is measured relative to RWA. Phase-in of the capital conservation buffer requirements will begin on January 1, 2016. A banking organization with a buffer greater than 2.5% would not be subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. The new rule also prohibits a banking organization from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. When the new rule is fully phased in, the minimum capital requirements plus the capital conservation buffer will exceed the PCA well-capitalized thresholds. |
| • | The new rule also increases the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors. |
On July 9, 2013, the FDIC confirmed that it would join in the Basel III standards and, on September 10, 2013, issued an “interim final rule” applicable to the Bank that is identical in substance to the final rules issued by the FRB described above. The Bank is required to comply with the interim final rule beginning on January 1, 2015.
Also, as described above, the Bank is subject to a Consent Order issued by the FDIC and the North Carolina Commissioner of Banks. The Consent Order requires that the Bank maintain capital levels in excess of normal statutory minimums, including a leverage capital ratio of at least 8% and a total capital risk-based capital ratio of at least 10%.
Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, the federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy the minimum capital requirements discussed above, including a leverage limit, a risk-based capital requirement, a common equity Tier 1 capital requirement (applicable beginning January 1, 2015), and any other measure deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees if the institution would thereafter fail to satisfy the minimum levels for any of its capital requirements. An institution that fails to meet the minimum level for any relevant capital measure (an “undercapitalized institution”) may be: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of businesses. The capital restoration plan must include a
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guarantee by the institution’s holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution’s total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A “significantly undercapitalized” institution, as well as any undercapitalized institution that does not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution may also be required to divest the institution or the institution could be required to divest subsidiaries. The senior executive officers of a significantly undercapitalized institution may not receive bonuses or increases in compensation without prior approval and the institution is prohibited from making payments of principal or interest on its subordinated debt. In their discretion, the federal banking regulators may also impose the foregoing sanctions on an undercapitalized institution if the regulators determine that such actions are necessary to carry out the purposes of the prompt corrective action provisions. If an institution’s ratio of tangible capital to total assets falls below the “critical capital level” established by the appropriate federal banking regulator, the institution will be subject to conservatorship or receivership within specified time periods.
Under the implementing regulations, the federal banking regulators, including the FDIC, generally measure an institution’s capital adequacy on the basis of its total risk-based capital ratio (the ratio of its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjusted total assets). The following table shows the Bank’s actual capital ratios and the required capital ratios for the various prompt corrective action categories as of December 31, 2014. Please note that, in order to be considered “well capitalized,” a bank must not only satisfy the capital ratio requirements set forth in the table below, but must not be subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC to meet and maintain a specific capital level for any capital measure. As described above, the Bank is subject to a Consent Order issued by the FDIC and the North Carolina Commissioner of Banks. The Consent Order requires that the Bank maintain capital levels in excess of normal statutory minimums, including a leverage capital ratio of at least 8% and a total capital ratio of at least 10%. As long as the Consent Order is in place, the Bank will not be considered “well capitalized” under FDIC regulations, even if its capital ratios satisfy the requirements for that designation.
Capital Requirements as of December 31, 2014 (pre-Basel III implementation)
| Actual | Adequately Well Capitalized |
Capitalized | Significantly Undercapitalized |
Undercapitalized | ||||||
| Total risk-based capital ratio |
16.16% | 10.0% or more | 8.0% or more | Less than 8.0% | Less than 6.0% | |||||
| Tier 1 risk-based capital ratio |
14.90% | 6.0% or more | 4.0% or more | Less than 4.0% | Less than 3.0% | |||||
| Leverage ratio |
11.46% | 5.0% or more | 4.0% or more* | Less than 4.0%* | Less than 3.0% |
| * | 3.0% if institution has the highest regulatory rating and meets certain other criteria. |
The table above presents the required capital ratios as they were on December 31, 2014. On January 1, 2015, the Basel III regulatory capital requirements went into effect. As shown in the table below, the Basel III requirements include a new common equity Tier 1 capital requirement. In addition, the new rules require a minimum Tier 1 risk-based capital ratio of 6.0% (formerly 4.0%). In order to be considered “well capitalized,” the Basel III regulations require a Tier 1 risk-based capital ratio of 8.0% (formerly 6.0%).
Capital Requirements as of January 1, 2015 (reflecting Basel III standards)
| Well Capitalized | Adequately Capitalized |
Undercapitalized | Significantly Undercapitalized |
|||||||||||||
| Total risk-based capital ratio |
10.0% or more | 8.0% or more | Less than 8.0% | Less than 6.0% | ||||||||||||
| Tier 1 risk-based capital ratio |
8.0% or more | 6.0% or more | Less than 6.0% | Less than 4.0% | ||||||||||||
| Leverage ratio |
5.0% or more | 4.0% or more | Less than 4.0% | Less than 3.0% | ||||||||||||
| Common equity Tier 1 risk-based capital ratio |
6.5% or more | 4.5% or more | Less than 4.5% | Less than 4.0% | ||||||||||||
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A “critically undercapitalized” institution is defined as one that has a ratio of “tangible equity” to total assets of less than 2.0%. Tangible equity is defined as Tier 1 capital plus non-Tier 1 perpetual preferred stock. The FDIC may reclassify a well-capitalized institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category (but may not reclassify a significantly undercapitalized institution as critically undercapitalized) if the FDIC determines, after notice and an opportunity for a hearing, that the institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any regulatory rating category.
North Carolina Capital Requirements and Regulatory Action. Under North Carolina banking law, a bank’s “required capital” is equal to at least the amount required for the bank to be considered “adequately capitalized” under the federal regulatory capital standards described above. “Inadequate capital” is defined as an amount of capital equal to at least 75% but less than 100% of required capital. “Insufficient capital” is defined as an amount of capital less than 75% of required capital.
The Commissioner is empowered to take regulatory action if a bank’s capital falls below the required capital level. If the Commissioner determines that a bank has “inadequate capital” or “insufficient capital,” the Commissioner may order the bank to take corrective action. If the Commissioner determines that that a bank has insufficient capital and is conducting business in an unsafe or unsound manner or in a fashion that threatens the financial integrity of the bank, the Commissioner may serve a notice of charges and show-cause order on the bank and, if after a hearing, he determines that supervisory control of the bank is necessary to protect the bank’s customers, creditors, or the general public, the Commissioner may take supervisory control of the bank. The Commissioner may also take custody of the books and records of a bank and appoint a receiver if the bank’s capital is impaired such that the likely realizable value of the bank’s assets is insufficient to pay and satisfy the claims of its depositors and creditors.
As described above, the Bank is subject to a Consent Order issued by the FDIC and the North Carolina Commissioner of Banks.
Regulatory Guidance on “CRE” Lending Concentrations. During 2006, the FDIC and other federal banking regulators issued guidance for sound risk management for financial institutions whose loan portfolios are deemed to have significant concentrations in commercial real estate (“CRE”). In 2008, the FDIC and other federal banking regulators issued further guidance on applying these principles in the current real estate lending environment, and they noted particular concern about construction and development loans. The banking regulators have indicated that this guidance does not set strict limitations on the amount or percentage of CRE within any given loan portfolio, and that they also will examine risk indicators in banks which have amounts or percentages of CRE below the thresholds. However, if a bank’s CRE exceeds these thresholds or if other risk indicators are present, the FDIC and other federal banking regulators may require additional reporting and analysis to document management’s evaluation of the potential additional risks of such concentration and the impact of any mitigating factors. The 2008 supplementary guidance stated that banks with significant CRE concentrations should maintain or implement processes to: (1) increase and maintain strong capital levels; (2) ensure that their loan loss allowances are appropriately strong; (3) closely manage their CRE and construction and development loan portfolios; (4) maintain updated financial and analytical information about borrowers and guarantors; and (5) bolster their workout infrastructure for problem loans. It is possible that regulatory constraints associated with this guidance could increase the costs of monitoring and managing this component of our loan portfolio.
Reserve Requirements. Under the FRB’s regulations, all FDIC-insured depository institutions must maintain average daily reserves against their transaction accounts. Under regulations in effect at December 31, 2014, no reserves were required to be maintained on the first $13.3 million of transaction accounts, but reserves equal to 3.0% were required to be maintained on the aggregate balances of those accounts between $13.3 million and $89.0 million, and reserves equal to 10.0% were required to be maintained on aggregate balances in excess of $89.0 million. The FRB may adjust these percentages from time to time. Effective January 22, 2015, no reserves are required to be maintained on the first $14.5 million of transaction accounts, but reserves equal to 3% must be maintained on the aggregate balances of those accounts between $14.5 million and $103.6 million, and reserves equal to 10% must be maintained on aggregate balances in excess of $103.6 million. Because the Bank’s reserves are required to be maintained in the form of vault cash or in an account at a Federal Reserve Bank or with a qualified correspondent bank, one effect of the reserve requirement is to reduce the amount of our assets that are available for lending and other investment activities.
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Deposit Insurance. The Bank’s deposits are insured up to limits set by the DIF. The DIF was formed on March 31, 2006, upon the merger of the Bank Insurance Fund and the Savings Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). The Reform Act established a range of 1.15% to 1.50% within which the FDIC may set the Designated Reserve Ratio (the “reserve ratio”). The Dodd-Frank Act gave the FDIC greater discretion to manage the DIF, raised the minimum DIF reserve ratio to 1.35%, and removed the upper limit of 1.50%. In 2010, the FDIC adopted a restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. The FDIC also proposed a comprehensive, long-range plan for management of the DIF. As part of this comprehensive plan, the FDIC has adopted a final rule to set the reserve ratio at 2.0%.
In 2010, the Dodd-Frank Act permanently increased FDIC insurance coverage to $250,000 per deposit category.
The FDIC imposes a risk-based deposit insurance premium assessment on member institutions in order to maintain the DIF. This assessment system was amended by the Reform Act and further amended by the Dodd-Frank Act. Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. The Dodd-Frank Act changed the methodology for calculating deposit insurance assessments from the amount of an insured institution’s domestic deposits to its total assets minus tangible capital. In 2011, the FDIC issued a new regulation implementing these revisions to the assessment system.
The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Community Reinvestment. Under the Community Reinvestment Act (the “CRA”), an insured institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for banks, nor does it limit a bank’s discretion to develop, consistent with the CRA, the types of products and services that it believes are best suited to its particular community. The CRA requires the federal banking regulators, in connection with their examinations of insured banks, to assess the banks’ records of meeting the credit needs of their communities, using the ratings of “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance,” and to take that record into account in its evaluation of various applications by those banks. All banks are required to publicly disclose their CRA performance ratings. The Bank received a “Satisfactory” rating in its last CRA examination during August 2012.
Interstate Banking and Branching. The BHCA, as amended by the interstate banking provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking Law”), permits adequately capitalized and managed bank holding companies to acquire control of the assets of banks in any state. Acquisitions are subject to antitrust provisions that cap at 10.0% the portion of the total deposits of insured depository institutions in the United States that a single bank holding company may control, and generally cap at 30.0% the portion of the total deposits of insured depository institutions in a state that a single bank holding company may control. Under certain circumstances, states have the authority to increase or decrease the 30.0% cap, and states may set minimum age requirements of up to five years on target banks within their borders.
The Dodd-Frank Act allows national and state banks to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state.
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Restrictions on Transactions with Affiliates. The Bank is subject to the provisions of Sections 23A and 23B of the Federal Reserve Act which restrict a bank’s ability to enter into certain types of transactions with its “affiliates,” including its parent holding company or any subsidiaries of its parent company. Section 23A places limits on the amount of:
| • | a bank’s loans or extensions of credit to, or investment in, its affiliates; |
| • | assets a bank may purchase from affiliates, except for real and personal property exempted by the FRB; |
| • | the amount of loans or extensions of credit by a bank to third parties which are collateralized by the securities or obligations of the bank’s affiliates; and |
| • | a bank’s guarantee, acceptance or letter of credit issued on behalf of one of its affiliates. |
Transactions of the type described above are limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. The Bank also must comply with other provisions designed to avoid the taking of low-quality assets from an affiliate.
Among other things, Section 23B prohibits a bank or its subsidiaries generally from engaging in transactions with its affiliates unless the transactions are on terms substantially the same, or at least as favorable to the bank or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.
Federal law also places restrictions on our ability to extend credit to our executive officers, directors, principal shareholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.
USA Patriot Act of 2001. The USA Patriot Act of 2001 is intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The impact of the Act on financial institutions of all kinds is significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including standards for verifying customer identification when accounts are opened, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 is sweeping federal legislation that addressed accounting, corporate governance and disclosure issues. The Act applies to all public companies and imposed significant new requirements for public company governance and disclosure requirements.
In general, the Sarbanes-Oxley Act mandated important corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It established new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process, and it created a new regulatory body to oversee auditors of public companies. It backed these requirements with new SEC enforcement tools, increased criminal penalties for federal mail, wire and securities fraud, and created new criminal penalties for document and record destruction in connection with federal investigations. It also increased the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and providing new federal corporate whistleblower protection.
The economic and operational effects of the Sarbanes-Oxley Act on public companies, including us, have been and will continue to be significant in terms of the time, resources and costs associated with compliance. Because the Act, for the most part, applies equally to larger and smaller public companies, we have been and will continue to be presented with additional challenges as a smaller, community-oriented financial institution seeking to compete with larger financial institutions in our market.
Federal Banking Agency Guidance on Executive Compensation. In 2010, the federal banking agencies issued guidance which applies to all banking organizations supervised by the agencies. Pursuant to the guidance, to be consistent with safety and soundness principles, a banking organization’s incentive compensation arrangements should: (1) provide
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employees with incentives that appropriately balance risk and reward; (2) be compatible with effective controls and risk management; and (3) be supported by strong corporate governance including active and effective oversight by the banking organization’s board of directors. Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.
Ability-to-Repay and Qualified Mortgage Rule. Pursuant to the Dodd-Frank Act, the Consumer Financial Protection Bureau (“CFPB”) issued a final rule on January 10, 2013 (effective on January 10, 2014), amending Regulation Z under the Truth in Lending Act, requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Mortgage lenders are required to determine consumers’ ability to repay in one of two ways. The first alternative requires the mortgage lender to consider the following eight underwriting factors when making the credit decision: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history. Alternatively, the mortgage lender can originate “qualified mortgages,” which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a qualified mortgage is a mortgage loan without negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer cannot exceed 3% of the total loan amount.
Consumer Laws and Regulations. The Bank is also subject to other federal and state consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth below is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Check Clearing for the 21st Century Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Fair and Accurate Transactions Act, the Mortgage Disclosure Improvement Act and the Real Estate Settlement Procedures Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to customers. The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing customer relations.
Statistical Data
Certain statistical data regarding our loans, deposits, investment securities and business is included in the information provided in Part II of this Report under the caption Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Smaller reporting companies such as the Company are not required to provide the information required by this item.
Item 1B. Unresolved Staff Comments.
Smaller reporting companies such as the Company are not required to provide the information required by this item.
As of December 31, 2014, we owned the facilities housing six of our banking offices, and we leased the facilities housing our remaining two offices. In addition, we own an operations center which houses the finance, deposit operations, information technology, and loan administration departments of the Bank. Each of our banking offices is in good condition and fully equipped for our purposes. On December 31, 2014, our investment in premises and equipment (cost less accumulated depreciation) was approximately $10.8 million.
There are no material pending legal proceedings to which the Company or the Bank is a party, or of which any of their property is the subject other than routine litigation that is incidental to their business.
Item 4. Mine Safety Disclosures.
Not applicable
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for Registrant’s Common Stock; Dividends. During the year ended December 31, 2014, our common stock has been quoted under the symbol “BCAR” on the OTCQB marketplace operated by OTC Markets Group, Inc. The following table shows the reported high and low bid prices for shares of our common stock on the OTCQB marketplace and cash dividends declared on our common stock for each calendar quarter during 2014 and 2013:
| Bid price range | Cash Dividends Declared |
|||||||||||
| Quarter |
High | Low | ||||||||||
| 2014 Fourth |
$ | 0.75 | $ | 0.12 | $ | — | ||||||
| Third |
1.35 | 0.45 | — | |||||||||
| Second |
0.56 | 0.42 | — | |||||||||
| First |
0.84 | 0.45 | — | |||||||||
| Bid price range | Cash Dividends Declared |
|||||||||||
| Quarter |
High | Low | ||||||||||
| 2013 Fourth |
$ | 0.90 | $ | 0.54 | $ | — | ||||||
| Third |
1.55 | 0.41 | — | |||||||||
| Second |
0.64 | 0.34 | — | |||||||||
| First |
0.61 | 0.17 | — | |||||||||
On December 31, 2014, there were approximately 1,850 total shareholders of our common stock, including 980 shareholders of record and approximately 870 holders whose shares were in street name.
Under North Carolina law, subject to certain restrictions, we are authorized to pay dividends as declared by our Board of Directors. However, although we are a legal entity separate and distinct from the Bank, our principal source of funds with which we can pay dividends to our shareholders and pay our own obligations is dividends we receive from the Bank. For that reason, our ability to pay dividends effectively is subject to the same limitations that apply to the Bank. Information regarding restrictions on our and the Bank’s ability to pay dividends is contained in Item 1 of this Report under the caption “Payment of Dividends.”
In the future, any declaration and payment of cash dividends will be subject to the Board of Directors’ evaluation of our operating results, financial condition, future growth plans, general business and economic conditions, and tax and other relevant considerations. Also, the payment of cash dividends in the future will be subject to ongoing review by our banking regulators and to certain other legal and regulatory limitations including the requirement that our capital be maintained at certain minimum levels.
There is no assurance that, in the future, we will have funds available to pay cash dividends, or, even if funds are available, that we will pay or the Bank will be permitted to pay dividends in any particular amount or at any particular times, or that we will pay dividends at all.
Securities Authorized for Issuance under Equity Compensation Plans. This information is included under Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Recent Sales of Unregistered Securities. On July 15, 2014, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with certain institutional and other accredited investors, including entities controlled or advised by, or affiliated with the following: Wellington Management Company LLP; FJ Capital Management, LLC; EJF Capital Management; The Family Office; RMB Capital Management LLC; JCSD Partners; Siena Capital Partners; PRB Investors; Sandler O’Neill Asset Management, LLC (now Maltese Capital Management, LLC); Tricadia Capital Management; and Allstate Investments (the “Investors”). The Purchase Agreement was entered into by the Company in connection with a private placement of its common stock in which the Company issued and sold to the Investors, as well as other investors who were not a party to the Purchase Agreement, a total of 458,132,991 shares (the “Shares”) of the Company’s common stock, no par value per share, at a sales price of $0.10 per share, for an aggregate purchase price of $45,813,299.10.
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The private placement closed on July 16, 2014. The issuance and sale of the Shares was exempt from registration under the Securities Act, pursuant to Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D as promulgated thereunder, as a transaction by an issuer not involving a public offering.
FIG Partners, LLC, Atlanta, Georgia, served as placement agent in the private placement, and The Hutchison Company, Durham, North Carolina, served as the Company’s financial advisor in connection with the transaction. The Company paid FIG Partners a placement agent fee of $1,723,431.96 and paid The Hutchison Company a financial advisory fee of $390,107.99.
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Item 6. Selected Financial Data.
Smaller reporting companies such as the Company are not required to provide the information required by this item.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following presents management’s discussion and analysis of our financial condition and results of operations. The discussion is intended to assist in understanding our consolidated financial condition and results of operations, and it should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of various factors. All share and per share data have been adjusted to give retroactive effect to stock splits and stock dividends.
Bank of the Carolinas Corporation (the “Company”) is a North Carolina-chartered bank holding company that was incorporated on May 30, 2006, for the sole purpose of serving as the parent bank holding company for Bank of the Carolinas (the “Bank”). The Bank is an FDIC-insured, North Carolina-chartered bank that began operations on December 7, 1998.
Because the Company has no operations and conducts no business on its own other than owning the Bank, the discussion contained herein concerns primarily the business of the Bank. However, for ease of reading and because the financial statements are presented on a consolidated basis, the Company and its subsidiary are collectively referred to herein as the “Company” unless otherwise noted.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The notes to our audited financial statements for the years ended December 31, 2014, 2013, and 2012 contain a summary of our significant accounting policies. We believe our policies with respect to methodology for the determination of our allowance for loan losses, and our asset impairment judgments, such as the recoverability of other real estate values, involve a higher degree of complexity and require us to make difficult and subjective judgments that often require assumptions or estimates about highly uncertain matters. Accordingly, we consider the policies related to those areas critical.
The allowance for loan losses represents our best estimate of probable losses that are inherent in the loan portfolio at the balance sheet date. The allowance is based on generally accepted accounting principles, which require that losses be accrued when they are probable of occurring and estimable and require that losses be accrued based on the differences between the value of collateral, the present value of future cash flows or values that are observable in the secondary market, and the loan balance.
The allowance for loan losses is created by direct charges to income. Losses on loans are charged against the allowance in the period in which those loans, in our opinion, become uncollectible. Recoveries during the period are credited to the allowance. The factors that influence our judgment in determining the amount charged against operating income include analyzing historical loan and lease losses, current trends in delinquencies and charge-offs, current assessment of problem loan administration, the results of regulatory examinations, and changes in the size, composition and risk assessment of the loan and lease portfolio. Also included in our estimates for loan losses are considerations with respect to the impact of current economic events, the outcomes of which are uncertain. These events may include, but are not limited to, fluctuations in overall interest rates, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical areas and industries in which we conduct business.
The factors that are enumerated above form the basis for a model which we utilize in calculating the appropriate level of our allowance for loan losses at the balance sheet date. This model has three main components. First, losses are estimated on loans we have individually identified and determined to be “impaired”. A loan is considered to be impaired when, based on current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The loss allowance applicable to impaired loans is the difference, if any, between the loan balances outstanding and the value of the impaired loans as determined by either 1) an estimate of the cash flows that we expect to receive from those borrowers discounted at the loan’s effective rate, or 2) in the case of collateral-dependent loans, the fair value of the collateral securing those loans less estimated costs to sell.
Second, for all other loans, we divide the loan portfolio into groups or pools based on similarity of risk characteristics. Historical loss rates, which are an average of the most recent 12 quarters, are then applied to determine an appropriate allowance for each pool or group.
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Finally, an adjustment is applied, if appropriate, to give effect to qualitative or environmental factors that could cause estimated credit losses within the existing loan portfolio to differ from the historical loss experience.
We review our allowance on a quarterly basis and believe that it is adequate to cover inherent loan losses on the loans outstanding as of each reporting date. However, the appropriateness of the allowance using our procedures and methods is dependent upon the accuracy of various judgments and assumptions about economic conditions and other factors affecting loans. No assurance can be given that we will not, in any particular period, sustain loan losses that are significantly different from the amounts reserved for those loans, or that subsequent evaluations of the loan portfolio and our allowance, in light of conditions and factors then prevailing, will not require material changes in the allowance for loan losses or future charges to earnings. In addition, various regulatory agencies, as an integral part of their routine examination process, periodically review our allowance. Those agencies may require that we make additions to the allowance based on their judgments about information available to them at the time of their examinations.
Accrued taxes represent the estimated amount payable to or receivable from taxing jurisdictions, either currently or in the future, and are reported, on a net basis, as a component of either “other assets” or “other liabilities” in the consolidated balance sheets. The calculation of the Company’s income tax expense is complex and requires the use of many estimates and judgments in its determination.
Management’s determination of the realization of the net deferred tax asset is based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income and the implementation of various tax plans to maximize realization of the deferred tax asset. As of December 31, 2014, a $17.5 million valuation allowance has been established primarily due to the possibility that all of the deferred tax asset associated with the allowance for loan losses may not be realized. See Note 11 Income Taxes in the notes to the audited consolidated financial statements for further disclosure on this matter.
From time to time, management bases the estimates of related tax liabilities on its belief that future events will validate management’s current assumptions regarding the ultimate outcome of tax-related exposures. While the Company has obtained the opinion of advisors that the anticipated tax treatment of these transactions should prevail and has assessed the relative merits and risks of the appropriate tax treatment, examination of the Company’s income tax returns, changes in tax law and regulatory guidance may impact the treatment of these transactions and resulting provisions for income taxes.
Overview
The Company completed a private placement of common stock resulting in gross proceeds of approximately $45.8 million on July 16, 2014. In connection with the private placement, the Company repurchased all 13,179 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued under the Capital Purchase Program from the U.S. Treasury for a cash payment of $3.3 million. The Treasury also agreed to waive any unpaid dividends on the Series A Preferred Stock, and to cancel the warrant to purchase 475,204 shares of the Company’s common stock held by the Treasury. The Company also repurchased all of its floating rate trust preferred securities issued through its subsidiary, Bank of the Carolinas Trust I, from the holders of those securities for an aggregate cash payment of $1.75 million. The holders of the trust preferred securities agreed to forgive any unpaid interest on the securities. The Company also agreed to repurchase a subordinated note from the holder of the note for a cash payment of $1.35 million. The noteholder agreed to forgive any unpaid interest on the note. As of December 31, 2014, the Company and its subsidiaries have no debt obligations. The Company injected $34.8 million from the private placement into the Company’s banking subsidiary.
Our net income available to common shareholders was $10.4 million for 2014 compared to net loss available to common shareholders of $2.3 million for 2013 and $5.5 million for 2012. The loss in 2012 was driven by substantial increases in loan loss provisions due to deterioration in our loan portfolio, significant losses and net operating expenses associated with foreclosed real estate, as well as lost interest revenue caused by elevated levels of nonperforming assets. In 2013 and 2014, significant improvements were made in levels of nonperforming assets compared to 2012. The increase in net income in 2014 was primarily due to the gain on redemption of preferred stock. Also, after completion of the private placement in 2014, FDIC insurance premiums have been significantly reduced which we believe will decrease our non-interest expense.
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An increased loan demand in 2013 led to an increase of $8.1 million in our loan portfolio over the prior year. In 2014, our loan portfolio remained relatively constant throughout the year. Given the prominence of real estate loans in our lending activities, it has been and continues to be a challenge to generate quality credit in sufficient volume to outpace payments.
We strive to serve the financial needs of small to medium-sized businesses and individuals in our market area, offering an array of financial products emphasizing superior customer service.
Real estate secured loans, including construction loans and loans secured by existing commercial and residential properties, made up almost 90% of our loan portfolio at December 31, 2014, with the remainder of our loans consisting of commercial and industrial loans and loans to individuals. We also offer certain loan products through associations with various mortgage lending companies. Through these associations, we originate 1-4 family residential mortgages, at both fixed and variable rates. We earn fees for originating these loans and transferring the loan package to the mortgage lending companies.
The deposit services we offer include small business and personal checking accounts, savings accounts, money market checking accounts and certificates of deposit. The Company concentrates on providing customer service to build its customer deposit base.
Additional funding includes advances from the Federal Home Loan Bank and federal funds lines of credit from correspondent banks.
Over 90% of our net revenue (net interest income plus noninterest income) in 2014 consisted of net interest income, which is the difference between the interest earned on loans and securities and the interest paid on deposits and borrowings. Therefore, the levels of interest rates and our ability to effectively manage the effect that changes in interest rates have on net interest income can have a significant impact on revenue and results of operations. Results of operations may also be materially affected by our provision for loan losses, which was much higher during 2012 than our long-term trend. In 2013 and 2014, our provision for loan losses reflected a recovery. Service charges and fee income generated from customer services represented less than 10% of revenue in each of the past two years and represents an area of potential revenue growth. Noninterest expense is the third major driver of operating results along with net interest income and the provision for loan losses. Total noninterest expenses absorbed over 103% of our revenue in 2014 and 120% in 2013. Noninterest expenses include compensation and employee benefits, occupancy and equipment expenses, FDIC insurance premiums, expenses related to foreclosed real estate, professional services, expenditures for data processing services and various other costs of doing business. In addition, due to the establishment of the valuation allowance against the deferred tax asset in 2011, there was a tax expense of $942,000 in 2013. In 2014, an income tax expense of $200,000 was incurred at the holding company state income tax level due to the gain on extinguishment of debt.
Regulatory Action
Consent Order with FDIC and North Carolina Commissioner of Banks. The Bank entered into a Stipulation to the Issuance of a Consent Order (the “Stipulation”) with the Federal Deposit Insurance Corporation (the “FDIC”) and the North Carolina Office of the Commissioner of Banks (the “Commissioner”) and the FDIC and the Commissioner issued the related Consent Order (the “Order”), effective April 27, 2011. The description of the Stipulation and the Order set forth below is qualified in its entirety by reference to the Stipulation and the Order, copies of which are included as exhibits 10.13 and 10.14 to this Form 10-K, and incorporated herein by reference.
Management. The Order requires that the Bank have and retain qualified management, including a chief executive officer, senior lending officer, and chief operating officer with qualifications and experience commensurate with their assigned duties and responsibilities within 60 days from the effective date of the Order. Within 30 days of the effective date of the Order, the board of directors was required to retain a bank consultant to develop a written analysis and assessment of the Bank’s management needs. Following receipt of the consultant’s management report, the Bank was required to formulate a written management plan that incorporated the findings of the management report, a plan of action in response to each recommendation contained in the management report, and a time frame for completing each action.
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Capital Requirements. While the Order is in effect, the Bank must maintain a leverage ratio (the ratio of Tier 1 capital to total assets) of at least 8% and a total risk-based capital ratio (the ratio of qualifying total capital to risk-weighted assets) of at least 10%. If the Bank’s capital ratios are below these levels as of the date of any call report or regulatory examination, the Bank must, within 30 days from receipt of a written notice of capital deficiency from its regulators, present a plan to increase capital to meet the requirements of the Order. At December 31, 2014, the Bank was in compliance with the capital requirements contained in the Order.
Allowance for Loan and Lease Losses and Call Report. Upon issuance of the Order, the Bank was required to make a provision to replenish the allowance for loan and lease losses (“ALLL”). Within 30 days of the effective date of the Order, the Bank was required to review its call reports filed with its regulators on or after December 31, 2010, and amend those reports if necessary to accurately reflect the financial condition of the Bank. Within 60 days of the effective date of the Order, the Bank was required to submit a comprehensive policy for determining the adequacy of the ALLL.
Concentrations of Credit. Within 60 days of the issuance of the Order, the Bank was required to perform a risk segmentation analysis with respect to its concentrations of credit and develop a written plan for systematically reducing and monitoring the Bank’s commercial real estate and acquisition, construction, and development loans to an amount commensurate with the Bank’s business strategy, management expertise, size, and location.
Charge-Offs, Credits. The Order requires that the Bank eliminate from its books, by charge-off or collection, all assets or portions of assets classified “loss” and 50% of those assets classified “doubtful.” If an asset is classified “doubtful,” the Bank may alternatively charge off the amount that is considered uncollectible in accordance with the Bank’s written analysis of loan or lease impairment. The Order also prevents the Bank from extending, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, “loss” or “doubtful” and is uncollected. The Bank may not extend, directly or indirectly, any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been classified “substandard.” These limitations do not apply if the Bank’s failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank.
Asset Growth. While the Order is in effect, the Bank must notify its regulators at least 60 days prior to undertaking asset growth that exceeds 10% or more per year or initiating material changes in asset or liability composition. The Bank’s asset growth cannot result in noncompliance with the capital maintenance provisions of the Order unless the Bank receives prior written approval from its regulators.
Restriction on Dividends and Other Payments. While the Order is in effect, the Bank cannot declare or pay dividends, pay bonuses, or pay any form of payment outside the ordinary course of business resulting in a reduction of capital without the prior written approval of its regulators. In addition, the Bank cannot make any distributions of interest, principal, or other sums on subordinated debentures without prior regulatory approval.
Brokered Deposits. The Order provides that the Bank may not accept, renew, or roll over any brokered deposits unless it is in compliance with the requirements of the FDIC regulations governing brokered deposits. These regulations prohibit undercapitalized institutions from accepting, renewing, or rolling over any brokered deposits and also prohibit undercapitalized institutions from soliciting deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yields on insured deposits of comparable maturity in the institution’s market area. An “adequately capitalized” institution may not accept, renew, or roll over brokered deposits unless it has applied for and been granted a waiver by the FDIC.
Written Plans and Other Material Terms. Under the terms of the Order, the Bank was required to prepare and submit the following written plans or reports to the FDIC and the Commissioner:
| - | Plan to improve liquidity, contingency funding, interest rate risk, and asset liability management |
| - | Plan to reduce assets of $500,000 or greater classified “doubtful” and “substandard” |
| - | Revised lending and collection policy to provide effective guidance and control over the Bank’s lending and credit administration functions |
| - | Effective internal loan review and grading system |
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| - | Policy for managing the Bank’s other real estate |
| - | Business/strategic plan covering the overall operation of the Bank |
| - | Plan and comprehensive budget for all categories of income and expense for the year 2011 |
| - | Policy and procedures for managing interest rate risk |
| - | Assessment of the Bank’s information technology function |
Under the Order, the Bank’s board of directors agreed to increase its participation in the affairs of the Bank, including assuming full responsibility for the approval of policies and objectives for the supervision of all of the Bank’s activities. The Bank was also required to establish a board committee to monitor and coordinate compliance with the Order.
The Order will remain in effect until modified or terminated by the FDIC and the Commissioner.
Written Agreement with the Federal Reserve Bank of Richmond. The Company entered into a written agreement (the “Agreement”) with the Federal Reserve Bank of Richmond on August 26, 2011. The description of the Agreement set forth below is qualified in its entirety by reference to the Agreement, a copy of which is included as exhibit 10.15 to this Form 10-K, and is incorporated herein by reference.
Source of Strength. The Agreement requires that the Company take appropriate steps to fully utilize its financial and managerial resources to serve as a source of strength to the Bank and to ensure that the Bank complies with the requirements of the consent order entered into between the North Carolina Commissioner of Banks, the FDIC and the Bank.
Dividends, Distributions, and other Payments. The Agreement prohibits the Company’s payment of any dividends without the prior approval of the Federal Reserve Bank of Richmond and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System. It also prohibits the Company from directly or indirectly taking any dividends or any other form of payment representing a reduction in capital from the Bank without the prior written approval of the Federal Reserve Bank of Richmond.
Under the terms of the Agreement, the Company and the Bank may not make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without the prior written approval of the Federal Reserve Bank of Richmond and the Director of the Division of Banking Supervision and Regulation of the Federal Reserve Board of Governors.
Debt and Stock Redemption. The Agreement requires that the Company and any non-bank subsidiary of the Company not, directly or indirectly, incur, increase or guarantee any debt without the prior written approval of the Federal Reserve Bank of Richmond. The Agreement also requires that the Company not, directly or indirectly, purchase or redeem any shares of its capital stock without the prior written approval of the Federal Reserve Bank of Richmond.
Capital Plan, Cash Flow Projections and Progress Reports. The Agreement requires that the Company file an acceptable capital plan and certain cash flow projections with the Federal Reserve Bank of Richmond. It also requires that the Company file a written progress report within 30 days after the end of each calendar quarter while the Agreement remains in effect.
The Order will remain in effect until modified or terminated by the Federal Reserve Bank of Richmond.
Financial Condition at December 31, 2014 and December 31, 2013
Total assets at December 31, 2014, decreased by $38.2 million or 9.0% to $385.5 million compared to $423.7 million at December 31, 2013. We had earning assets of $352.8 million at December 31, 2014 consisting of $275.5 million in accruing loans, $40.3 million in investment securities and $37.0 million in interest-bearing deposits in banks. Stockholders’ equity was $47.1 million at December 31, 2014 compared to $1.7 million at December 31, 2013, which was primarily due to the sale of common stock.
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Loans. Total loans increased by $100,000 or 0.04% during the twelve months of 2014, from $278.5 million on December 31, 2013 to $278.6 million at December 31, 2014. On December 31, 2014, real estate loans made up 90.3% of total loans while commercial non-real estate loans comprised another 8.3% of the portfolio, compared to 92.5% and 6.3% in the prior year. Total loans represented 72.3% and 65.3% of our total assets on December 31, 2014 and 2013, respectively.
Interest rates charged on loans vary with the degree of risk, maturity and amount of the loan. Competitive pressures, money market rates, availability of funds, and government regulation also influence interest rates. On average, our loan portfolio yielded 4.63% for the year ending December 31, 2014 as compared to an average yield of 4.76% during 2013.
The following table contains selected data relating to the composition of our loan portfolio by type of loan on the dates indicated.
Table I.
Analysis of Loan Portfolio (dollars in thousands)
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||
| Real estate loans: |
||||||||||||||||||||||||||||||||||||||||
| Residential 1-4 family |
$ | 88,990 | 31.94 | % | $ | 84,855 | 30.47 | % | $ | 72,595 | 26.85 | % | $ | 78,631 | 25.54 | % | $ | 78,750 | 21.51 | % | ||||||||||||||||||||
| Commercial real estate |
111,195 | 39.91 | 117,463 | 42.18 | 110,527 | 40.88 | 126,849 | 41.20 | 161,839 | 44.20 | ||||||||||||||||||||||||||||||
| Construction and development |
23,081 | 8.29 | 27,049 | 9.71 | 28,976 | 10.72 | 33,081 | 10.74 | 35,310 | 9.64 | ||||||||||||||||||||||||||||||
| Home equity |
28,207 | 10.12 | 28,217 | 10.12 | 29,462 | 10.89 | 29,727 | 9.65 | 31,465 | 8.59 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total real estate loans |
251,473 | 90.26 | 257,584 | 92.48 | 241,560 | 89.34 | 268,288 | 87.13 | 307,364 | 83.94 | ||||||||||||||||||||||||||||||
| Commercial business loans |
23,105 | 8.29 | 17,428 | 6.26 | 22,992 | 8.50 | 34,271 | 11.13 | 51,581 | 14.09 | ||||||||||||||||||||||||||||||
| Consumer loans: |
||||||||||||||||||||||||||||||||||||||||
| Installment |
3,065 | 1.10 | 2,554 | 0.92 | 3,158 | 1.17 | 3,490 | 1.13 | 4,300 | 1.17 | ||||||||||||||||||||||||||||||
| Other |
967 | 0.35 | 944 | 0.34 | 2,664 | 0.99 | 1,858 | 0.61 | 2,908 | 0.80 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total loans |
278,610 | 100.00 | % | 278,510 | 100.00 | % | 270,374 | 100.00 | % | 307,907 | 100.00 | % | 366,153 | 100.00 | % | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
| Allowance for loan losses |
(5,126 | ) | (6,015 | ) | (6,890 | ) | (8,101 | ) | (6,863 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
| Total loans, net |
$ | 273,484 | $ | 272,495 | $ | 263,484 | $ | 299,806 | $ | 359,290 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
The following table reflects the scheduled maturities of commercial real estate loans, construction and development loans, and commercial business loans (dollars in thousands):
| December 31, 2014 | ||||||||||||||||
| 1 year or less |
After 1 year but within 5 years |
After 5 years |
Total | |||||||||||||
| Commercial real estate loans |
$ | 20,253 | $ | 55,996 | $ | 34,946 | $ | 111,195 | ||||||||
| Constructions and development loans |
4,827 | 9,317 | 8,937 | 23,081 | ||||||||||||
| Commercial business loans |
6,218 | 13,095 | 3,792 | 23,105 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 31,298 | $ | 78,408 | $ | 47,675 | $ | 157,381 | ||||||||
|
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|
|
|
|
|
|
|
|||||||||
The following table reflects the scheduled maturities of all fixed and variable interest rate loans (dollars in thousands):
| December 31, 2014 | ||||||||||||||||
| 1 year or less |
After 1 year but within 5 years |
After 5 years |
Total | |||||||||||||
| Loans with fixed interest rates |
$ | 28,119 | $ | 98,335 | $ | 102,758 | $ | 229,212 | ||||||||
| Loans with variable interest rates |
12,363 | 10,979 | 26,056 | 49,398 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 40,482 | $ | 109,314 | $ | 128,814 | $ | 278,610 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Allowance for Loan Losses. On December 31, 2014, our allowance for loan losses totaled approximately $5.1 million and amounted to 1.84% of total loans and 162.9% of our nonperforming loans. This compares to an allowance for loan losses of $6.0 million, or 2.16% of total loans and 125.6% of nonperforming loans at December 31, 2013 and $6.9 million, or 2.55% of total loans and 89.1% of nonperforming loans as of December 31, 2012.
29
Table of Contents
The following table contains an analysis of our allowance for loan losses for the time periods indicated.
Table II.
Summary of Loan Loss Experience (dollars in thousands)
| Year ended December 31, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| Balance at beginning of year |
$ | 6,015 | $ | 6,890 | $ | 8,101 | $ | 6,863 | $ | 8,167 | ||||||||||
| Provision for loan losses |
(967 | ) | (2,039 | ) | 2,359 | 17,565 | 6,441 | |||||||||||||
| Charge-offs: |
||||||||||||||||||||
| Residential mortgage |
(189 | ) | (897 | ) | (1,233 | ) | (3,125 | ) | (1,041 | ) | ||||||||||
| Commercial real estate |
(104 | ) | (544 | ) | (1,804 | ) | (7,339 | ) | (1,090 | ) | ||||||||||
| Construction and development |
(719 | ) | (248 | ) | (1,118 | ) | (1,256 | ) | (1,006 | ) | ||||||||||
| Commercial business |
(57 | ) | (115 | ) | (453 | ) | (5,310 | ) | (4,561 | ) | ||||||||||
| Installment |
(34 | ) | (51 | ) | (76 | ) | (150 | ) | (233 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total charge-offs |
(1,103 | ) | (1,855 | ) | (4,684 | ) | (17,180 | ) | (7,931 | ) | ||||||||||
|
|
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|
|
|
|
|
|
|
|
|||||||||||
| Recoveries: |
||||||||||||||||||||
| Residential mortgage |
148 | 689 | 126 | 118 | 3 | |||||||||||||||
| Commercial real estate |
112 | 573 | 116 | 101 | 28 | |||||||||||||||
| Construction and development |
59 | 22 | 169 | 145 | 94 | |||||||||||||||
| Commercial business |
836 | 1,698 | 671 | 470 | 23 | |||||||||||||||
| Installment |
26 | 37 | 32 | 19 | 38 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total recoveries |
1,181 | 3,019 | 1,114 | 853 | 186 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net (charge-offs) recoveries |
78 | 1,164 | (3,570 | ) | (16,327 | ) | (7,745 | ) | ||||||||||||
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|
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|
|||||||||||
| Balance at end of year |
$ | 5,126 | $ | 6,015 | $ | 6,890 | $ | 8,101 | $ | 6,863 | ||||||||||
|
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|
|
|
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|
|||||||||||
| Ratio of net charge-offs (recoveries) during period to average loans outstanding |
-0.03 | % | -0.42 | % | 1.24 | % | 4.78 | % | 2.08 | % | ||||||||||
| Ratio of allowance for loan losses to non-performing loans |
162.9 | % | 125.6 | % | 89.1 | % | 42.5 | % | 27.8 | % | ||||||||||
| Ratio of allowances for loan losses to total loans |
1.84 | % | 2.16 | % | 2.55 | % | 2.63 | % | 1.87 | % | ||||||||||
During 2014, we experienced net loan recoveries of $78,000, compared to net loan recoveries of $1.2 million in 2013 and net loan charge-offs of $3.6 million in 2012. These levels of net recoveries and charge-offs produced net recovery ratio of 0.03% for 2014 and 0.42% for 2013 and a net loss ratio of 1.24% for 2012. The net loss ratio for 2012 was substantially higher than our longer-term trend which contributed to increased loan loss provisions. The deterioration in our loan portfolio, as evidenced by rising loss ratios and nonperforming loans, resulted in the increases in our allowance for loan losses for 2011. By late 2012, our nonperforming loans had decreased significantly compared to the two prior years and we had our first quarter of net loan recoveries in five years. In 2013 and 2014, continued efforts reduced nonperforming loans to loss ratios that were comparable to our peers and full years of net recoveries.
30
Table of Contents
An analysis of the allowance for loan losses for the years ended December 31, 2014, 2013, 2012, 2011, and 2010 is contained in the following table:
Table III.
Allocation of Allowance for Loan Losses (1) (dollars in thousands)
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||
| Real estate loans: |
||||||||||||||||||||||||||||||||||||||||
| Residential, 1-4 family |
$ | 1,235 | 24.09 | % | $ | 1,218 | 20.25 | % | $ | 1,267 | 18.39 | % | $ | 1,168 | 16.95 | % | $ | 1,078 | 15.71 | % | ||||||||||||||||||||
| Commercial real estate |
2,147 | 41.89 | 2,105 | 35.00 | 2,210 | 32.08 | 2,421 | 35.14 | 1,154 | 16.81 | ||||||||||||||||||||||||||||||
| Construction and development |
603 | 11.76 | 635 | 10.56 | 806 | 11.70 | 719 | 8.88 | 667 | 9.72 | ||||||||||||||||||||||||||||||
| Home equity |
609 | 11.88 | 332 | 5.51 | 314 | 4.55 | 279 | 4.05 | 459 | 6.69 | ||||||||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total real estate loans |
4,594 | 89.62 | 4,290 | 71.32 | 4,597 | 66.71 | 4,587 | 65.02 | 3,358 | 48.93 | ||||||||||||||||||||||||||||||
| Commercial business loans |
324 | 6.32 | 176 | 2.93 | 1,209 | 17.55 | 2,247 | 32.61 | 2,252 | 32.81 | ||||||||||||||||||||||||||||||
| Consumer loans |
44 | 0.86 | 44 | 0.73 | 98 | 1.42 | 143 | 2.08 | 161 | 2.35 | ||||||||||||||||||||||||||||||
| Other |
5 | 0.10 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Unallocated |
159 | 3.10 | 1,505 | 25.02 | 986 | 14.31 | 1,124 | 13.86 | 1,092 | 15.91 | ||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||
| Total allowance for loan losses |
$ | 5,126 | 100.00 | % | $ | 6,015 | 100.00 | % | $ | 6,890 | 100.00 | % | $ | 8,101 | 100.00 | % | $ | 6,863 | 100.00 | % | ||||||||||||||||||||
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|
|||||||||||||||||||||
| (1) | The allowance has been allocated on an approximate basis. The entire amount of the allowance is available to absorb losses occurring in any category. The allocation is not necessarily indicative of future losses. |
Asset Quality. Credit risks are inherent in making loans. We assess these risks and attempt to manage them effectively by adhering to internal credit underwriting policies and procedures. These policies and procedures include officer and customer limits, periodic loan documentation review and follow up on exceptions to credit policies. A loan is placed in non-accrual status when, in our judgment, the collection of interest appears doubtful. Nonperforming assets are defined as nonaccrual loans, loans contractually past due for more than 90 days but still accruing interest, and foreclosed or idled properties. At December 31, 2014, the Company’s non-performing assets totaled $4.3 million, or 1.52% of loan-related assets, compared to $6.0 million, or 2.15% of loan-related assets at December 31, 2013.
On December 31, 2014, we had no loans that were delinquent over 90 days and still accruing interest, and $3.1 million that were in non-accrual status. Interest accrued, but not recognized as income on non-accrual loans, was approximately $37,000 during 2014. On December 31, 2013, we had no loans that were delinquent over 90 days and still accruing interest, and $4.8 million that were in non-accrual status. Interest accrued, but not recognized as income on non-accrual loans, was approximately $170,000 during 2013.
“Other real estate owned,” also referred to as “OREO,” generally consists of all real estate, other than bank premises, that is owned or controlled by a financial institution, including real estate acquired through foreclosure. Financial institutions such as the Company typically acquire OREO through foreclosure or a deed in lieu of foreclosure after a borrower defaults on a loan.
Other real estate owned at December 31, 2014 amounted to $1.1 million compared to $1.2 million as of December 31, 2013. Other real estate is carried at the lower of cost or estimated net realizable value. During the years ended December 31, 2014 and 2013, $1.2 million and $953,000 of real property, respectively, was foreclosed on and transferred to OREO. Properties transferred to OREO are initially recorded at the fair value of the property, less estimated costs to sell the property at the date of the foreclosure. The $1.2 million and $953,000 transferred to OREO in 2014 and 2013 represents the fair value of the properties at the date of transfer. As a result of obtaining the fair values of these properties prior to transferring them to OREO, the Company charged $7,000 to the allowance for loan losses in 2014 and $539,000 to the allowance for loan losses in 2013. As noted above, the Company also considers the estimated costs to sell a property when transferring a property to OREO. The Company takes the following factors into consideration when estimating the costs to sell a property:
| - | potential discount for liquidation, |
| - | prior liens on the property, |
31
Table of Contents
| - | taxes, |
| - | sales commissions, and |
| - | closing expenses. |
The estimated cost to sell a property is subtracted from the fair value of the property prior to transferring the property to OREO.
The following table provides a roll-forward of OREO for the periods ended December 31, 2014, 2013, and 2012:
Table IV.
OREO Rollforward (dollars in thousands)
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Beginning Balance |
$ | 1,233 | $ | 4,976 | $ | 8,524 | ||||||
| Additions from Transfers In |
1,188 | 953 | 5,823 | |||||||||
| Valuation Adjustments |
(103 | ) | (539 | ) | (2,040 | ) | ||||||
| Sales Proceeds |
(1,290 | ) | (4,080 | ) | (7,523 | ) | ||||||
| Net Gains (Losses) |
80 | (77 | ) | 192 | ||||||||
|
|
|
|
|
|
|
|||||||
| Ending Balance |
$ | 1,108 | $ | 1,233 | $ | 4,976 | ||||||
|
|
|
|
|
|
|
|||||||
In April 2011, the Company established a special assets department to provide expertise in the areas of problem loans and OREO. This department revised the Company’s procedures with respect to foreclosed properties. Previously, when a property was in foreclosure, the balance of the loan was transferred to OREO. Losses on the OREO property were taken upon the sale of the property. As a result, the charge-off did not become part of the loss history of the loan. The special assets department implemented changes such that management now obtains updated fair values for properties and prepares an impairment analysis when there is an indication that the loan is problematic. Any resulting impairment is charged to the allowance for loan losses and becomes part of the loan’s loss history. The Company conducts an annual review of problem loans to ensure that proper fair value is recognized.
The following table summarizes information regarding our nonperforming assets on December 31, 2014, 2013, 2012, 2011, and 2010.
Table V.
Nonperforming Assets (dollars in thousands)
| At December 31, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| Loans accounted for on a nonaccrual basis: |
||||||||||||||||||||
| Real estate loans: |
||||||||||||||||||||
| Mortgage |
$ | 738 | $ | 1,276 | $ | 2,491 | $ | 6,875 | $ | 4,071 | ||||||||||
| Commercial |
682 | 2,192 | 4,153 | 9,167 | 15,176 | |||||||||||||||
| Construction and development |
1,550 | 851 | 880 | 1,764 | 2,274 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total real estate loans |
2,970 | 4,319 | 7,524 | 17,806 | 21,521 | |||||||||||||||
| Commercial business customers |
171 | 463 | 202 | 1,246 | 3,068 | |||||||||||||||
| Installment |
5 | 6 | 7 | 10 | 101 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total nonaccrual loans |
3,146 | 4,788 | 7,733 | 19,062 | 24,690 | |||||||||||||||
| Accruing loans which are contractually past due 90 days or more |
— | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total nonperforming loans |
3,146 | 4,788 | 7,733 | 19,062 | 24,690 | |||||||||||||||
| Other real estate owned |
1,108 | 1,233 | 4,976 | 8,524 | 8,314 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total nonperforming assets |
$ | 4,254 | $ | 6,021 | $ | 12,709 | $ | 27,586 | $ | 33,004 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total nonperforming loans as a percentage of loans |
1.13 | % | 1.72 | % | 2.86 | % | 6.19 | % | 6.74 | % | ||||||||||
| Total nonperforming assets as a percentage of loans and other real estate owned |
1.52 | % | 2.15 | % | 4.62 | % | 8.72 | % | 8.81 | % | ||||||||||
| Total nonperforming assets as a percentage of total assets |
1.10 | % | 1.42 | % | 2.91 | % | 5.68 | % | 6.17 | % | ||||||||||
32
Table of Contents
Investment Securities. Our investment securities totaled $40.3 million at December 31, 2014 and $90.3 million at December 31, 2013. Our investment portfolio includes U.S. Government Agency bonds, mortgage backed securities, and state and municipal bonds, all of which are classified as available for sale. Available for sale securities are carried at fair value.
We use our investment portfolio to employ liquid funds and as a tool in the management of interest rate risk, while at the same time providing interest income. Practically all of our securities are classified as available for sale and, as such, may be sold from time to time to increase liquidity or re-balance the interest rate sensitivity profile of our balance sheet. However, we do have the available liquidity to hold our securities to maturity should we have the need to.
The following table summarizes the carrying value of our investment securities on the dates indicated.
Table VI.
Investment Securities (dollars in thousands)
| December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| U.S. Government agency securities |
$ | 4,985 | $ | 40,930 | $ | 48,118 | ||||||
| State and municipal securities |
6,155 | 10,181 | 10,326 | |||||||||
| Mortgage-backed securities |
29,208 | 38,204 | 46,492 | |||||||||
| Corporate securities |
— | 1,000 | 1,995 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 40,348 | $ | 90,315 | $ | 106,931 | ||||||
|
|
|
|
|
|
|
|||||||
The following tables summarize information regarding the scheduled maturities, amortized cost, and weighted average yields on a tax equivalent basis for our investment securities portfolio on December 31, 2014 and 2013.
Table VII.
Investment Securities (dollars in thousands)
At December 31, 2014:
| 1 year or less | Over 1 to 5 years |
Over 5 to 10 years |
Over 10 years |
Total Securities |
||||||||||||||||||||||||||||||||||||
| Amortized Cost |
Average Yield |
Amortized Cost |
Average Yield |
Amortized Cost |
Average Yield |
Amortized Cost |
Average Yield |
Amortized Cost |
Average Yield |
|||||||||||||||||||||||||||||||
| U.S. Government agency securities |
$ | 89 | 4.29 | % | $ | 1,101 | 3.79 | % | $ | 3,705 | 2.41 | % | $ | — | — | % | $ | 4,895 | 2.76 | % | ||||||||||||||||||||
| State and municipal securities |
— | — | 505 | 2.30 | 5,664 | 2.85 | — | — | 6,169 | 2.81 | ||||||||||||||||||||||||||||||
| Mortgage-backed securities |
— | — | — | — | 156 | 5.61 | 28,965 | 2.36 | 29,121 | 2.38 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
| Total investment securities |
$ | 89 | 4.29 | % | $ | 1,606 | 3.32 | % | $ | 9,525 | 2.73 | % | $ | 28,965 | 2.36 | % | $ | 40,185 | 2.49 | % | ||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
At December 31, 2013:
| 1 year or less | Over 1 to 5 years |
Over 5 to 10 years |
Over 10 years |
Total Securities |
||||||||||||||||||||||||||||||||||||
| Amortized Cost |
Average Yield |
Amortized Cost |
Average Yield |
Amortized Cost |
Average Yield |
Amortized Cost |
Average Yield |
Amortized Cost |
Average Yield |
|||||||||||||||||||||||||||||||
| U.S. Government agency securities |
$ | 19,000 | 1.38 | % | $ | 1,681 | 3.78 | % | $ | 13,810 | 2.20 | % | $ | 9,586 | 2.58 | % | $ | 44,077 | 1.99 | % | ||||||||||||||||||||
| State and municipal securities |
— | — | 508 | 2.50 | 10,079 | 2.69 | 572 | 2.38 | 11,159 | 2.67 | ||||||||||||||||||||||||||||||
| Mortgage-backed securities |
— | — | — | — | 200 | 6.03 | 39,258 | 2.43 | 39,458 | 2.44 | ||||||||||||||||||||||||||||||
| Corporate securities |
— | — | 1,000 | 3.75 | — | — | — | — | 1,000 | 3.75 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
| Total investment securities |
$ | 19,000 | 1.38 | % | $ | 3,189 | 3.57 | % | $ | 24,089 | 2.44 | % | $ | 49,416 | 2.46 | % | $ | 95,694 | 2.28 | % | ||||||||||||||||||||
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|
|||||||||||||||||||||||||||||||
Deposits. Our deposit service offerings include business and individual checking accounts, savings accounts, NOW accounts, certificates of deposit and money market checking accounts. On December 31, 2014, total deposits were $336.6 million compared with $366.2 million on December 31, 2013. During the year, there were increases in noninterest-checking, money market, and savings deposits, with decreases in interest-checking and time deposits.
33
Table of Contents
Under FDIC regulations and the terms of the regulatory consent order discussed under the heading “Regulatory Action” above, we may not currently solicit deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yield on insured deposits of comparable maturity in our market area or the market area where the deposits are being solicited.
On December 31, 2014 and 2013, there were no brokered deposits. Under FDIC regulations and the terms of the regulatory consent order discussed under the heading “Regulatory Action” above, we may not accept, renew, or roll over any brokered deposits unless it is in compliance with the requirements of the FDIC regulations governing brokered deposits. These regulations prohibit undercapitalized institutions from accepting, renewing, or rolling over any brokered deposits. On December 31, 2014, total time deposits issued in denominations of $100,000 or more made up approximately 27.0% of our total deposits as compared to 31.7% as of December 31, 2013 and 31.1% at December 31, 2012.
Retail deposits gathered through our branch network continue to be our principal source of funding. It is our intent to focus our efforts and marketing resources on the growth of our deposit base as we believe this to be the most effective long term strategy for profitable growth.
The following table summarizes our average deposits for the years ended December 31, 2014 and 2013.
Table VIII.
Deposit Mix (dollars in thousands)
| For the Years ended December 31, | ||||||||||||||||
| 2014 | 2013 | |||||||||||||||
| Average Balance |
Average Cost |
Average Balance |
Average Cost |
|||||||||||||
| Interest-bearing deposits: |
||||||||||||||||
| Interest-checking deposits |
$ | 41,723 | 0.22 | % | $ | 39,910 | 0.34 | % | ||||||||
| Money market and savings deposits |
112,179 | 0.44 | 110,542 | 0.49 | ||||||||||||
| Time deposits |
171,725 | 0.81 | 178,882 | 0.91 | ||||||||||||
|
|
|
|
|
|||||||||||||
| Total interest-bearing deposits |
325,627 | 0.61 | 329,334 | 0.70 | ||||||||||||
| Noninterest-bearing demand deposits |
35,479 | 35,365 | ||||||||||||||
|
|
|
|
|
|||||||||||||
| Total deposits |
$ | 361,106 | 0.55 | % | $ | 364,699 | 0.63 | % | ||||||||
|
|
|
|
|
|||||||||||||
The following table contains an analysis of our time deposits of $100,000 or more at December 31, 2014 and 2013.
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| (dollars in thousands) | ||||||||
| Remaining maturity of three months or less |
$ | 27,814 | $ | 29,553 | ||||
| Remaining maturity of over three to twelve months |
33,419 | 49,084 | ||||||
| Remaining maturity of over twelve months |
29,657 | 37,289 | ||||||
|
|
|
|
|
|||||
| Total time deposits of $100,000 or more |
$ | 90,890 | $ | 115,926 | ||||
|
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|
|
|
|||||
34
Table of Contents
Borrowed Funds. The following table summarizes our borrowings at December 31, 2014 and 2013.
Table IX.
Borrowed Funds (dollars in thousands)
| At December 31, | ||||||||||||||||
| 2014 | 2013 | |||||||||||||||
| Outstanding Balance |
Average Rate |
Outstanding Balance |
Average Rate |
|||||||||||||
| Federal funds purchased and securities sold under overnight repurchase agreements |
$ | 491 | 0.14 | % | $ | 388 | 0.10 | % | ||||||||
| Securities sold under term repurchase agreements |
— | — | 45,000 | 4.38 | ||||||||||||
| Trust preferred securities |
— | — | 5,155 | 3.19 | ||||||||||||
| Subordinated debt |
— | — | 2,700 | 4.00 | ||||||||||||
|
|
|
|
|
|||||||||||||
| Total borrowed funds |
$ | 491 | 0.14 | % | $ | 53,243 | 4.21 | % | ||||||||
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|
|
|
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The following table presents our average balances as well as the average cost associated with those balances for the specified periods.
| For the years ended December 31, | ||||||||||||||||
| 2014 | 2013 | |||||||||||||||
| Average Balance |
Average Cost |
Average Balance |
Average Cost |
|||||||||||||
| Federal funds purchased and securities sold under overnight repurchase agreements |
$ | 491 | 0.20 | % | $ | 805 | 0.12 | % | ||||||||
| Securities sold under term repurchase agreements |
24,356 | 4.38 | 45,000 | 4.38 | ||||||||||||
| Trust preferred securities |
2,768 | 3.54 | 5,155 | 3.51 | ||||||||||||
| Subordinated debt |
1,450 | 4.00 | 2,700 | 4.00 | ||||||||||||
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|
|
|
|||||||||||||
| Total borrowed funds |
$ | 29,065 | 4.21 | % | $ | 53,660 | 4.21 | % | ||||||||
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During 2008, we entered into term repurchase agreements with two money center financial institutions. These two borrowing arrangements totaled $45.0 million in the aggregate and had interest at an effective annual blended rate of 4.38%. These borrowings were secured by marketable investment securities equal to approximately 109.5% of the principal balances outstanding plus accrued interest and the value of an imbedded interest rate cap. The borrowings were repaid as of July 18, 2014. There was prepayment expense of $4.4 million. The security interests in the pledged investment securities were released in connection with the Company’s repayment of these borrowings.
On December 31, 2014, we had no advances from the Federal Home Loan Bank (“FHLB”). At December 31, 2014, we had immediate availability of $6.9 million as we pledged our eligible one-to-four family mortgages, commercial real estate loans and home equity loans with aggregate outstanding principal balances of approximately $9.1 million at that date.
During 2008, the Company issued $5.2 million of junior subordinated debentures to Bank of the Carolinas Trust I (the “Trust”), which, in turn, issued $5.0 million in trust preferred securities having a like liquidation amount and $155,000 in common securities (all of which are owned by the Company). The Company fully and unconditionally guaranteed the Trust’s obligations related to the trust preferred securities. The Trust has the right to redeem the trust preferred securities in whole or in part, on or after March 26, 2013 at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest. In addition, the Trust may redeem the trust preferred securities in whole (but not in part) at any time within 90 days following the occurrence of a tax event, an investment company event or a capital treatment event at a special redemption price (as defined in the debenture). The trust preferred securities bear interest at the annual rate of 90-day LIBOR plus 300 basis points adjusted quarterly. In February 2011, the Company announced its election to defer its regularly scheduled March 2011 interest payment on the junior subordinated debentures related to the trust preferred securities and continued to defer interest payments throughout 2011, 2012, 2013, and 2014.
35
Table of Contents
On July 16, 2014, the Company repurchased all of its floating rate trust preferred securities issued through the Trust from the holders of those securities for an aggregate cash payment of $1.75 million. The holders of the trust preferred securities agreed to forgive any unpaid interest on the securities.
The Company had also issued $2.7 million of subordinated debt in a private transaction with another banking institution. This subordinated note had a floating interest rate equal to 75 basis points over the Prime Rate published by the Wall Street Journal and a maturity date of August 13, 2018.
On July 16, 2014, the Company repurchased the subordinated note representing this debt from the holder of the note for a cash payment of $1.35 million. The noteholder also agreed to forgive any unpaid interest on the note.
Capital Resources. Total stockholders’ equity increased by $45.3 million to $47.1 million on December 31, 2014, compared to $1.7 million on December 31, 2013. The Company completed a private placement of common stock resulting in gross proceeds of approximately $45.8 million on July 16, 2014.
In connection with the private placement, the Company repurchased all 13,179 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued under the Capital Purchase Program from the U.S. Treasury for a cash payment of $3.3 million. The Treasury also agreed to waive any unpaid dividends on the Series A Preferred Stock, and to cancel the warrant to purchase 475,204 shares of the Company’s common stock held by the Treasury. As noted above, the Company also repurchased all of its trust preferred securities and a subordinated note held by another financial institution in connection with the closing of the private placement. The Company invested $34.8 million into its banking subsidiary.
Off-Balance Sheet Transactions. Certain financial transactions are entered into by the Company in the ordinary course of performing traditional banking services that result in off-balance sheet transactions. The off-balance sheet transactions as of December 31, 2014 and 2013 were commitments to extend credit and financial letters of credit. Except as disclosed in this report, the Company does not have any ownership interest in any off-balance sheet subsidiaries or special purpose entities.
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| (In thousands) | ||||||||
| Unfunded loan commitments |
$ | 29,549 | $ | 29,553 | ||||
| Financial standby letters of credit |
209 | 181 | ||||||
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|
|||||
| Total unused commitments |
$ | 29,758 | $ | 29,734 | ||||
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|||||
Commitments to extend credit to customers represent legally binding agreements with fixed expiration dates. Since many of these commitments expire without being funded, the commitment amounts do not necessarily represent liquidity requirements.
Contractual Obligations. The following disclosure shows the contractual obligations that the Company had outstanding at December 31, 2014.
| Total payments due by period | ||||||||||||||||||||
| Total | Less than 1 Year |
1-3 Years | 3-5 Years | More than 5 Years |
||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Time deposits |
$ | 147,045 | $ | 97,337 | $ | 45,788 | $ | 3,920 | $ | — | ||||||||||
| Leases |
330 | 214 | 116 | — | — | |||||||||||||||
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|
|||||||||||
| Total |
$ | 147,375 | $ | 97,551 | $ | 45,904 | $ | 3,920 | $ | — | ||||||||||
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Comparison of Results of Operations for the Years Ended December 31, 2014, 2013, and 2012
Net Income (Loss). Net income available to common shareholders was $10.4 million or $0.05 per diluted common share for the year ended December 31, 2014, compared to a net loss of $2.3 million or $0.60 per diluted common share for the year ended December 31, 2013 and net loss for the year ended December 31, 2012 of $5.5 million, or $1.42 per diluted common share. The increase in net income in 2014 was primarily due to the gain on redemption of preferred stock. As noted earlier, the principal reason for the losses incurred in 2012 was related to deterioration in our loan
36
Table of Contents
portfolio which resulted in materially higher loan loss provisions and increased expenses related to the ownership and disposal of foreclosed real estate. In 2013 and 2014, the provision for loan loss reported a recovery and the Company experienced increased performance in the loan portfolio.
Income tax expense was $200,000, $942,000 and $0 during the years ended December 31, 2014, 2013, and 2012. Pretax income and changes in the valuation allowance on net deferred tax assets were the primary reasons for changes in income tax expense each year.
Net Interest Income. Our primary source of revenue is net interest income, which is the difference between interest income generated by our interest-earning assets (primarily loans and investment securities) and interest expense on interest-bearing liabilities (primarily deposits and borrowed funds). Net interest income increased $811,000 to $11.5 million in 2014 from 2013 after decreasing $908,000 from 2012. Our net interest margin increased in 2014 to 3.01% compared to a constant 2.72% during 2013 and 2012. Our net interest spread increased to 2.94% in 2014 from 2.70% in 2013 and from 2.68% in 2012. The volatility in our net interest margin and net interest spread and resulting net interest income over the past three years has been primarily due to the declines in short-term rates brought about by very aggressive Federal Reserve policies, declining total balances of loans and investments.
Table X summarizes the average balances of our various categories of assets and liabilities and their associated yields or costs for the years ended December 31, 2014, 2013, and 2012.
Table X.
Summary of Net Interest Income and Average Balances (dollars in thousands)
| December 31, 2014 | December 31, 2013 | December 31, 2012 | ||||||||||||||||||||||||||||||||||
| Average Balance |
Interest Income/ Expense |
Yield/ Cost |
Average Balance |
Interest Income/ Expense |
Yield/ Cost |
Average Balance |
Interest Income/ Expense |
Yield/ Cost |
||||||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||||||||||||||
| Loans |
$ | 278,839 | $ | 12,924 | 4.63 | % | $ | 272,614 | $ | 12,978 | 4.76 | % | $ | 287,764 | $ | 14,303 | 4.97 | % | ||||||||||||||||||
| Investment securities |
68,972 | 1,644 | 2.38 | 95,569 | 2,156 | 2.26 | 108,990 | 2,669 | 2.45 | |||||||||||||||||||||||||||
| Other interest-earning assets |
33,276 | 90 | 0.27 | 22,671 | 74 | 0.33 | 28,631 | 77 | 0.27 | |||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Total interest-earning assets |
381,087 | 14,658 | 3.85 | % | 390,854 | 15,208 | 3.89 | % | 425,385 | 17,049 | 4.01 | % | ||||||||||||||||||||||||
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|||||||||||||||||||||||||||||||
| Other assets, net |
34,482 | 36,935 | 39,156 | |||||||||||||||||||||||||||||||||
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|
|
|
|
|
|||||||||||||||||||||||||||||||
| Total assets |
$ | 415,569 | $ | 427,789 | $ | 464,541 | ||||||||||||||||||||||||||||||
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|||||||||||||||||||||||||||||||
| Interest bearing liabilities: |
||||||||||||||||||||||||||||||||||||
| Interest-checking deposits |
$ | 41,723 | 91 | 0.22 | % | $ | 39,910 | 137 | 0.34 | % | $ | 37,421 | 142 | 0.38 | % | |||||||||||||||||||||
| Money Market and Savings deposits |
112,179 | 492 | 0.44 | 110,542 | 543 | 0.49 | 105,141 | 575 | 0.55 | |||||||||||||||||||||||||||
| Time deposits |
171,725 | 1,393 | 0.81 | 178,882 | 1,621 | 0.91 | 218,492 | 2,508 | 1.15 | |||||||||||||||||||||||||||
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|
|||||||||||||||||||||||||
| Total interest-bearing deposits |
325,627 | 1,976 | 0.61 | 329,334 | 2,301 | 0.70 | 361,054 | 3,225 | 0.89 | |||||||||||||||||||||||||||
| Borrowed funds |
29,065 | 1,223 | 4.21 | 53,660 | 2,259 | 4.21 | 53,201 | 2,268 | 4.26 | |||||||||||||||||||||||||||
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|
|||||||||||||||||||||||||
| Total Interest-bearing liabilities |
354,692 | 3,199 | 0.90 | 382,994 | 4,560 | 1.19 | 414,255 | 5,493 | 1.33 | |||||||||||||||||||||||||||
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|||||||||||||||||||||||||||||||
| Noninterest-bearing demand deposits |
35,479 | 35,365 | 37,555 | |||||||||||||||||||||||||||||||||
| Other liabilities |
2,044 | 2,068 | 2,243 | |||||||||||||||||||||||||||||||||
| Stockholders’ Equity |
23,354 | 7,362 | 10,488 | |||||||||||||||||||||||||||||||||
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|||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity |
$ | 415,569 | $ | 427,789 | $ | 464,541 | ||||||||||||||||||||||||||||||
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|||||||||||||||||||||||||||||||
| Net interest income & interest rate spread |
$ | 11,459 | 2.94 | % | $ | 10,648 | 2.70 | % | $ | 11,556 | 2.68 | % | ||||||||||||||||||||||||
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| Net yield on average interest-earning assets |
3.01 | % | 2.72 | % | 2.72 | % | ||||||||||||||||||||||||||||||
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| Ratio of average interest-earning assets to average interest-bearing liabilities |
107.44 | % | 102.05 | % | 102.69 | % | ||||||||||||||||||||||||||||||
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|||||||||||||||||||||||||||||||
Non-accrual loans are included in the table for the years ended December 31, 2014, 2013, and 2012.
Loan fees and late charges of $210,000, $150,000, and $146,000 for 2014, 2013, and 2012, respectively, are included in interest income.
37
Table of Contents
Table XI summarizes the dollar amount of changes in interest income and interest expense for the major components of our interest-earning assets and interest-bearing liabilities during the twelve months ended December 31, 2014, 2013, and 2012. The table shows changes in interest income and expense attributable to volume changes and interest rate changes. The changes attributable to both rate and volume changes have been allocated between the two components on a relative basis. As the table indicates, the increase in net interest income realized in 2014 in comparison to 2013 was the result of the decrease in volume and rates of deposits and borrowings resulting in a positive effect on the current year results.
Table XI.
Volume / Rate Variance Analysis (dollars in thousands)
| Year Ended December 31, 2014 vs. 2013 Increase (Decrease) Due to |
Year Ended December 31, 2013 vs. 2012 Increase (Decrease) Due to |
Year Ended December 31, 2012 vs. 2011 Increase (Decrease) Due to |
||||||||||||||||||||||||||||||||||
| Volume | Rate | Total | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||||||||||||||
| Loans |
$ | 296 | $ | (350 | ) | $ | (54 | ) | $ | (755 | ) | $ | (570 | ) | $ | (1,325 | ) | $ | (2,746 | ) | $ | (349 | ) | $ | (3,095 | ) | ||||||||||
| Investment securities |
(591 | ) | 79 | (512 | ) | (332 | ) | (181 | ) | (513 | ) | (154 | ) | (352 | ) | (506 | ) | |||||||||||||||||||
| Other interest-earning assets |
32 | (16 | ) | 16 | (15 | ) | 12 | (3 | ) | 27 | (9 | ) | 18 | |||||||||||||||||||||||
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| Total interest income |
(263 | ) | (287 | ) | (550 | ) | (1,102 | ) | (739 | ) | (1,841 | ) | (2,874 | ) | (709 | ) | (3,583 | ) | ||||||||||||||||||
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| Interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
| Deposits |
(26 | ) | (299 | ) | (325 | ) | (289 | ) | (635 | ) | (924 | ) | (291 | ) | (871 | ) | (1,162 | ) | ||||||||||||||||||
| Borrowed funds |
(1,036 | ) | (0 | ) | (1,036 | ) | 20 | (29 | ) | (9 | ) | (548 | ) | 163 | (385 | ) | ||||||||||||||||||||
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| Total interest expense |
(1,062 | ) | (299 | ) | (1,361 | ) | (269 | ) | (664 | ) | (933 | ) | (839 | ) | (708 | ) | (1,547 | ) | ||||||||||||||||||
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|||||||||||||||||||
| Net interest income |
$ | 799 | $ | 12 | $ | 811 | $ | (833 | ) | $ | (75 | ) | $ | (908 | ) | $ | (2,035 | ) | $ | (1 | ) | $ | (2,036 | ) | ||||||||||||
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|||||||||||||||||||
Provision for Loan Losses. Provisions for loan losses are charged to income in order to maintain the allowance for loan losses at a level we deem appropriate under circumstances known to exist at the balance sheet date. In evaluating the allowance for loan losses, we consider factors that include portfolio size, composition and industry diversification of the portfolio, historical loan loss experience, current levels of impaired and delinquent loans, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. The allowance for loan losses expressed as a percentage of total loans was 1.84%, 2.16%, and 2.55% at December 31, 2014, 2013, and 2012, respectively. The allowance included $1.7 million at December 31, 2014, $563,000 at December 31, 2013, and $755,000 at December 31, 2012 allocated to specific loans with principal balances totaling approximately $21.6 million, $24.0 million, and $26.6 million, respectively. See “Critical Accounting Policies”.
The recovery of loan losses decreased 52.6% to a recovery of $967,000 in 2014 from a recovery of $2.0 million in 2013 and decreased from an expense of $2.4 million in 2012. The sizable provision recorded in 2012 was the result of net charge-offs and nonperforming asset levels that were significantly above long-term historic trends on a relative basis.
Losses on loans are charged against the allowance for loan losses. These charge-offs are made in the period in which we determine that the loans in question have become uncollectible. For additional details regarding our methodology for the determination of our allowance for loan losses, see “Critical Accounting Policies” above.
38
Table of Contents
Net loan recoveries for 2014 totaled $78,000 which equates to 0.03% of average loans for the year and a 93.3% decrease from 2013 net recoveries of $1.2 million, which represented 0.42% of average loans outstanding for that year, and a 102.2% decrease from 2012 net charge-offs of $3.6 million, which represented 1.24% of average loans outstanding for that year. For the five years prior to the current credit cycle (2008—2012), our net charge-offs averaged 2.01% of average loans on an annual basis. The following table shows the Company’s net loan charge-offs by loan category for each quarter in 2014, 2013, and 2012:
Table XII.
Net Charge-offs by Quarter (dollars in thousands)
| December 31, 2014 | December 31, 2013 | December 31, 2012 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1Q | 2Q | 3Q | 4Q | Total | 1Q | 2Q | 3Q | 4Q | Total | 1Q | 2Q | 3Q | 4Q | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Commercial—Non Real Estate |
$ | (32 | ) | $ | (16 | ) | $ | (700 | ) | $ | (31 | ) | $ | (779 | ) | $ | (1,281 | ) | $ | 24 | $ | (241 | ) | $ | (85 | ) | $ | (1,583 | ) | $ | 180 | $ | 81 | $ | (185 | ) | $ | (294 | ) | $ | (218 | ) | ||||||||||||||||||
| Commercial Real Estate |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Owner occupied |
(4 | ) | (3 | ) | (4 | ) | (3 | ) | (14 | ) | 204 | 74 | (537 | ) | 229 | (30 | ) | 442 | (12 | ) | 53 | 82 | 565 | |||||||||||||||||||||||||||||||||||||
| Income producing |
— | — | 104 | (98 | ) | 6 | 1 | — | — | — | 1 | — | (47 | ) | 1,170 | — | 1,123 | |||||||||||||||||||||||||||||||||||||||||||
| Multifamily |
— | — | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Construction & Development |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1—4 Family |
— | — | — | — | — | 5 | — | — | — | 5 | (1 | ) | — | 99 | — | 98 | ||||||||||||||||||||||||||||||||||||||||||||
| Other |
(2 | ) | 670 | (4 | ) | (4 | ) | 660 | (2 | ) | (5 | ) | (2 | ) | 209 | 200 | 646 | (50 | ) | 257 | (2 | ) | 851 | |||||||||||||||||||||||||||||||||||||
| Farmland |
— | — | — | — | — | 8 | 13 | — | — | 21 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Residential |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity Lines |
57 | 20 | 40 | (52 | ) | 65 | 188 | (11 | ) | (3 | ) | 9 | 183 | 14 | (1 | ) | 5 | 97 | 115 | |||||||||||||||||||||||||||||||||||||||||
| 1—4 Family |
(54 | ) | (3 | ) | (6 | ) | 39 | (24 | ) | 123 | (7 | ) | 36 | (127 | ) | 25 | 54 | 768 | 137 | 33 | 992 | |||||||||||||||||||||||||||||||||||||||
| Consumer—Non Real Estate |
1 | 3 | 5 | (1 | ) | 8 | — | — | 10 | 4 | 14 | 10 | 1 | 26 | 7 | 44 | ||||||||||||||||||||||||||||||||||||||||||||
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| Totals by Quarter |
$ | (34 | ) | $ | 671 | $ | (565 | ) | $ | (150 | ) | $ | (78 | ) | $ | (754 | ) | $ | 88 | $ | (737 | ) | $ | 239 | $ | (1,164 | ) | $ | 1,345 | $ | 740 | $ | 1,562 | $ | (77 | ) | $ | 3,570 | ||||||||||||||||||||||
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Net loan charge-offs decreased from 2012 to 2013 and decreased again 2013 to 2014. Net loan charge-offs during 2012 were also affected by certain changes in the Company’s policies and procedures with respect to problem loans implemented by the Company’s special assets department. For a description of these policy changes, please refer to the discussion of other real estate owned under the heading “Asset Quality” above. Of the $3.6 million in net charge-offs in 2012, $1.2 million was related to a restructured loan and $2.3 million was related to ten relationships for which the underlying collateral was ultimately sold during the foreclosure process or transferred to other real estate owned. As a result of aggressively addressing our substandard loans, in 2012 we saw a decrease in our net loan-chargeoffs. In 2013, the loan loss provision reflected a specific recovery of a $1.25 million loan that was previously charged off in 2011. In 2014, $719,000 was related to a restructured loan relationship and $700,000 was recovered in a settlement from a loan previously charged off in 2011.
Total nonperforming assets amounted to $4.3 million at December 31, 2014, a decrease of 29.3% from the year-end 2013 total of $6.0 million. Total nonperforming assets as a percent of loan-related assets (loans plus foreclosed real estate) amounted to 1.52% at December 31, 2014 compared to 2.15% as of year-end 2013. For the five year-ends preceding the current credit cycle, nonperforming assets averaged 5.90% of loan-related assets. Nonperforming assets as a percent of total assets was 1.10% of total assets at the end of 2014 compared to 1.42% at December 31, 2013 and 2.91% at December 31, 2012.
Noninterest Income. In addition to net interest income, we derive revenues from providing a variety of financial services to our customers. Fees from providing these services totaled $1.2 million in 2014, $1.1 million in 2013, and $1.2 million in 2012. The largest component of customer service fees is revenues from deposit services which totaled $606,000 in 2014, $610,000 in 2013, and $620,000 in 2012. While this is a mature and very competitive part of our business, we believe this is an area of opportunity. The fastest growing area of fee revenue is from debit card services. Our revenues in this area increased to over $400,000 for the past three years. Fees from loan services, which primarily includes fees related to real estate loan production, has been insignificant for the last three years as real estate lending slowed.
Other significant components of noninterest income are gains and losses on investment securities and increase in the cash value of life insurance policies we hold on our officer level employees. In 2014, we realized net losses on investment securities of $1.3 million as compared to no gains or losses on investment securities in 2013 and net gains of $2.2 million in 2012. The increase in the cash value of life insurance policies was $346,000 in 2014 compared to $352,000 for 2013 and $359,000 for 2012. The Bank also received net proceeds from a bank owned life insurance policy of $415,000 due to the death of a former officer in 2012. In 2014, the private placement transaction included discounts and interest forgiveness on the Company’s trust preferred securities and subordinated debt in the amount of $5.4 million.
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The following is a tabular presentation of our non-interest income for the years ended December 31, 2014, 2013, and 2012.
Table XIII.
Noninterest Income (dollars in thousands)
| 2014 | 2013 | 2012 | ||||||||||
| Deposit services fees |
$ | 606 | $ | 610 | $ | 620 | ||||||
| Card services fees |
433 | 408 | 418 | |||||||||
| Loan services fees |
27 | 23 | 20 | |||||||||
| Other customer services fees |
105 | 108 | 118 | |||||||||
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| Total customer services fees |
1,171 | 1,149 | 1,176 | |||||||||
| Net gain (loss) on investment securities |
(1,275 | ) | — | 2,190 | ||||||||
| Increase in cash value of bank owned life insurance |
346 | 352 | 359 | |||||||||
| Net proceeds from bank owned life insurance |
— | — | 415 | |||||||||
| Extinguishment of debt |
5,443 | — | — | |||||||||
| All other income |
22 | 28 | 28 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total noninterest income |
$ | 5,707 | $ | 1,529 | $ | 4,168 | ||||||
|
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|
|
|
|
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Non-interest Expense. Non-interest expense totaled $17.8 million for the year ended December 31, 2014, an increase of $3.2 million, or 21.7% from the $14.6 million reported for the year ended December 31, 2013, which was a $3.3 million decrease, or 18.5%, below the 2012 amount. The Company prepaid two term repurchase agreements at a prepayment expense of $4.4 million. There were other major factors which contributed to the decrease in certain noninterest expenses in 2014 compared to 2013, including (1) a decrease of $698,000, or 86.2%, in valuation allowances and net operating cost associated with foreclosed real estate, (2) a decrease of $366,000, or 5.7%, in salaries and benefits, and (3) a decrease of $296,000, or 20.3%, in FDIC insurance premiums.
The major factors contributing to the decrease in noninterest expenses in 2013 compared to 2012 were (1) a decrease of $1.6 million, or 66.5%, in valuation allowances and net operating cost associated with foreclosed real estate, (2) a decrease of $494,000, or 34.7%, in professional services due to a reduction in attorney fees, (3) a decrease of $440,000, or 6.4%, in salaries and benefits, (4) a decrease of $141,000, or 8.8%, in FDIC insurance premiums, and (5) a decrease of $116,000, or 1.6%, in occupancy and equipment expenses. There was also a recovery of $197,000 of specific loan-related expenses.
During 2014 and 2013, foreclosed property was sold at 105% and 99% of book value, respectively, which were 75% and 58% of original loan book value. At December 31, 2014, we owned 7 OREO properties compared to 11 properties at December 31, 2013.
The following table summarizes the major components of our non-interest expense for the years ended December 31, 2014, 2013, and 2012.
Table XIV.
Noninterest Expenses (dollars in thousands)
| 2014 | 2013 | 2012 | ||||||||||
| Salaries and employee benefits |
$ | 6,071 | $ | 6,437 | $ | 6,877 | ||||||
| Net occupancy expense |
1,858 | 1,787 | 1,903 | |||||||||
| FDIC insurance assessments |
1,163 | 1,459 | 1,600 | |||||||||
| Data processing |
1,026 | 1,054 | 989 | |||||||||
| Professional services |
1,054 | 931 | 1,425 | |||||||||
| Telephone and data communications |
328 | 361 | 383 | |||||||||
| Advertising and promotional |
122 | 158 | 92 | |||||||||
| Postage and courier |
131 | 155 | 221 | |||||||||
| Printing and supplies |
115 | 139 | 154 | |||||||||
| Valuation allowances and net operating costs associated with foreclosed real estate |
112 | 810 | 2,417 | |||||||||
| Debt prepayment penalty |
4,353 | — | — | |||||||||
| All other expenses |
1,463 | 1,338 | 1,883 | |||||||||
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| Total noninterest expenses |
$ | 17,796 | $ | 14,629 | $ | 17,944 | ||||||
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Income Taxes. There was an income tax provision in 2014 of $200,000 and $942,000 in 2013. The Company continuously updates its evaluation of the likelihood of realization of a net deferred tax asset that had arisen principally as a result of operating losses incurred during the previous five years. Based upon that evaluation, the Company determined that it is unlikely that any significant realization of any portion of the net deferred tax asset is likely to occur within a timeframe that would support a decision to continue to include a net deferred tax asset in the Company’s consolidated balance sheet. As of December 31, 2014 the net deferred tax asset had a zero value as a result of a deferred tax asset of $17.5 million and an allowance of $17.5 million.
Capital Adequacy
The Bank is required to comply with the capital adequacy standards established by the Federal Deposit Insurance Corporation (FDIC). The FDIC has issued risk-based capital and leverage capital guidelines for measuring the adequacy of a bank’s capital, and all applicable capital standards must be satisfied for the Bank to be considered in compliance with the FDIC’s requirements. On December 31, 2014, the Bank’s Total Capital Ratio and Tier 1 Risk-Based Capital Ratio were 16.16% and 14.90%, respectively, both above the minimum levels required by the FDIC’s “well-capitalized” guidelines. On December 31, 2014 our Tier 1 Leverage Capital Ratio was 11.46%, which was also well above the minimum level required by the FDIC’s “well-capitalized” guidelines. As described above, the Bank is subject to a consent order issued by the FDIC and the North Carolina Commissioner of Banks. The consent order requires that the Bank maintain capital levels in excess of normal statutory minimums, including a leverage ratio (the ratio of Tier 1 capital to total assets) of at least 8% and a total risk-based capital ratio (the ratio of qualifying total capital to risk-weighted assets) of at least 10%. As of December 31, 2014, the Bank had achieved these minimum levels. As long as the consent order is in place, the Bank will not be considered well-capitalized under FDIC regulations, even if its capital ratios satisfy the requirements for that designation.
Revised Capital Requirements. On July 2, 2013, the Federal Reserve and the Office of the Comptroller of the Currency adopted a final rule that revised the current risk-based and leverage capital requirements for banking organizations. The final rule is a continuation of joint notices of proposed rulemaking originally published in the Federal Register during August 2012.
The final rule implements a revised definition of regulatory capital, a new common equity Tier 1 minimum capital requirement, and a higher overall minimum Tier 1 capital requirement, incorporating these new requirements into the existing prompt corrective action (PCA) framework. It also establishes limits on a banking organization’s capital distributions and certain discretionary bonus payments if the organization does not hold a specified amount of common equity Tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. This additional capital is referred to as the “capital conservation buffer.” The “countercyclical capital buffer” provisions from the proposed rule have also been adopted, however, they apply only to large financial institutions (banks and bank holding companies with total consolidated assets of $250 billion or more) implementing the “advanced approaches” framework and are not applicable to the Bank.
The final rule permanently grandfathers the Tier 1 capital treatment for certain non-qualifying capital instruments, including trust preferred securities, outstanding as of May 19, 2010.
Under the proposed rules released in August 2012, banking organizations would have been required to recognize in regulatory capital all components of accumulated other comprehensive income (excluding accumulated net gains and losses on cash-flow hedges that relate to the hedging of items that are not recognized at fair value on the balance sheet). The final rule carries this requirement forward, with an exception for smaller banking organizations, such as the Bank, which are not subject to the “advanced approaches” rule. Such organizations may make a one-time election not to include most elements of accumulated other comprehensive income (including unrealized gains and losses on securities designated as available-for-sale) in regulatory capital under the final rule. Organizations making this election will be permitted to use the currently existing treatment under the general risk-based capital rules that exclude most accumulated other comprehensive income elements from regulatory capital. The election must be made with the first call report or FR Y-9 report filed after the banking organization becomes subject to the final rule (January 2015 in the Bank’s case).
The new rule also amends the existing methodologies for determining risk-weighted assets for all banking organizations. Specifically, the final rule assigns a 50% or 100% risk weight to mortgage loans secured by one-to-four family residential properties. Generally, residential mortgage loans secured by a first lien on a one- to-four family
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residential property that are prudently underwritten and that are performing according to their original terms receive a 50% risk weight. All other one-to-four family residential mortgage loans, including loans secured by a junior lien on residential property, are assigned a 100% risk weight.
The mandatory compliance date for the Bank was January 1, 2015, with a transition period for the capital conservation buffer until January 1, 2016, and additional transition periods for certain other measures under the new rule.
Management considered these new capital rules during its capital planning in 2014 and will continue to evaluate the effects of the new final rule and the Company’s compliance over the coming quarters.
Liquidity and Interest Rate Sensitivity
Liquidity. Liquidity management is the process of managing assets and liabilities as well as their maturities to ensure adequate funding for loan and deposit activity. Sources of liquidity come from both balance sheet and off-balance sheet sources. We define balance sheet liquidity as the relationship that net liquid assets have to unsecured liabilities. Net liquid assets is the sum of cash and cash items, less required reserves on demand and NOW deposits, plus demand deposits due from banks, plus temporary investments, including federal funds sold, plus the fair value of investment securities, less collateral requirements related to public funds on deposit and repurchase agreements. Unsecured liabilities is equal to total liabilities less required cash reserves on noninterest-bearing demand deposits and interest-checking deposits and less the outstanding balances of all secured liabilities, whether secured by liquid assets or not. We consider off-balance sheet liquidity to include unsecured federal funds lines from other banks and loan collateral which may be used for additional advances from the Federal Home Loan Bank. As of December 31, 2014 our balance sheet liquidity ratio (net liquid assets as a percent of unsecured liabilities) amounted to 23.25% and our total liquidity ratio (balance sheet plus off-balance sheet liquidity) was 24.67%.
In addition, we have the ability to borrow $10.0 million from the Discount Window of the Federal Reserve subject to our pledge of marketable securities, which could be used for temporary funding needs. We also have the ability to borrow from the Federal Home Loan Bank on similar terms. While we consider these arrangements sources of back-up funding, we do not consider them as liquidity sources because they require our pledge of liquid assets as collateral. We regularly borrow from the Federal Home Loan Bank as a normal part of our business. These advances are secured by various types of real estate-secured loans. The Company closely monitors and evaluates its overall liquidity position. The Company believes its liquidity position at December 31, 2014 is adequate to meet its operating needs.
Interest Rate Sensitivity. Our goal is to maintain a neutral interest rate sensitivity position whereby little or no change in interest income would occur as interest rates change. On December 31, 2014, we were cumulatively liability sensitive for the next twelve months, which means that our interest-bearing liabilities would reprice more quickly than our interest bearing assets. Theoretically, our net interest margin will decrease if market interest rates rise or increase if market interest rates fall. However, the repricing characteristics of assets are different from the repricing characteristics of funding sources. Therefore, net interest income can be impacted by changes in interest rates even if the repricing opportunities of assets and liabilities are perfectly matched.
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The following table shows the interest rate sensitivity of our balance sheet on December 31, 2014, but is not necessarily indicative of our position on other dates. Each category of assets and liabilities is shown with projected repricing and maturity dates. Except as stated below, the amounts of assets and liabilities shown which reprice or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period. NOW accounts, savings accounts, and money market accounts are assumed to be subject to immediate repricing and depositor availability. Prepayment assumptions on mortgage loans and decay rates on deposit accounts have not been included in this analysis. Also, the table does not reflect scheduled principal repayments that will be received on loans. The interest rate sensitivity of our assets and liabilities may vary substantially if different assumptions are used or if our actual experience differs from that indicated by the assumptions.
| December 31, 2014 | ||||||||||||||||||||
| 1-3 months |
Over 3 to 12 months |
Over 12 to 60 months |
Over 60 months |
Total | ||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||
| Loans |
$ | 54,355 | $ | 16,212 | $ | 98,278 | $ | 106,619 | $ | 275,464 | ||||||||||
| Investment securities |
1,381 | — | 1,459 | 37,508 | 40,348 | |||||||||||||||
| Other interest-earning assets |
34,561 | — | 2,480 | — | 37,041 | |||||||||||||||
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| Total interest-earning assets |
$ | 90,297 | $ | 16,212 | $ | 102,217 | $ | 144,127 | $ | 352,853 | ||||||||||
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| Interest-bearing liabilities: |
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| Interest-checking deposits |
$ | 39,557 | $ | — | $ | — | $ | — | $ | 39,557 | ||||||||||
| Money market and savings deposits |
112,487 | — | — | — | 112,487 | |||||||||||||||
| Time deposits |
37,209 | 60,128 | 49,708 | — | 147,045 | |||||||||||||||
| Borrowed funds |
491 | — | — | — | 491 | |||||||||||||||
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| Total interest-bearing liabilities |
$ | 189,744 | $ | 60,128 | $ | 49,708 | $ | — | $ | 299,580 | ||||||||||
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| Interest-sensitivity gap |
$ | (99,447 | ) | $ | (43,916 | ) | $ | 52,509 | $ | 144,127 | $ | 53,273 | ||||||||
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| Cumulative sensitivity gap |
$ | (99,447 | ) | $ | (143,363 | ) | $ | (90,854 | ) | $ | 53,273 | $ | 53,273 | |||||||
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| Cumulative gap as a % of total interest-earning assets |
(28.18 | )% | (40.63 | )% | (25.75 | )% | 15.10 | % | 15.10 | % | ||||||||||
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| Cumulative ratio of sensitive assets to sensitive liabilities |
47.59 | % | 26.96 | % | 205.63 | % | — | % | 117.78 | % | ||||||||||
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Quarterly financial data for 2014 and 2013 is summarized in the table below.
Table XVI.
Quarterly Financial Data (dollars in thousands except per share amounts)
| 2014 | 2013 | |||||||||||||||||||||||||||||||
| 4th Qtr | 3rd Qtr. | 2nd Qtr. | 1st Qtr. | 4th Qtr | 3rd Qtr. | 2nd Qtr. | 1st Qtr. | |||||||||||||||||||||||||
| Interest income |
$ | 3,514 | $ | 3,608 | $ | 3,787 | $ | 3,749 | $ | 3,842 | $ | 3,801 | $ | 3,746 | $ | 3,819 | ||||||||||||||||
| Interest expense |
415 | 611 | 1,089 | 1,084 | 1,110 | 1,130 | 1,142 | 1,178 | ||||||||||||||||||||||||
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| Net interest income |
3,099 | 2,997 | 2,698 | 2,665 | 2,732 | 2,671 | 2,604 | 2,641 | ||||||||||||||||||||||||
| Provision for loan losses |
(207 | ) | (535 | ) | (1,287 | ) | 1,062 | 39 | (920 | ) | (12 | ) | (1,146 | ) | ||||||||||||||||||
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| Net interest income (loss) after provision for loan losses |
3,306 | 3,532 | 3,985 | 1,603 | 2,693 | 3,591 | 2,616 | 3,787 | ||||||||||||||||||||||||
| Noninterest income |
380 | 4,553 | 384 | 390 | 400 | 380 | 383 | 366 | ||||||||||||||||||||||||
| Noninterest expense |
3,084 | 7,715 | 3,482 | 3,515 | 3,610 | 3,579 | 3,721 | 3,719 | ||||||||||||||||||||||||
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| Income (loss) before income taxes |
602 | 370 | 887 | (1,522 | ) | (517 | ) | 392 | (722 | ) | 434 | |||||||||||||||||||||
| Income taxes (benefit) |
200 | — | — | — | 152 | 152 | 341 | 297 | ||||||||||||||||||||||||
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| Net income (loss) |
402 | 370 | 887 | (1,522 | ) | (669 | ) | 240 | (1,063 | ) | 137 | |||||||||||||||||||||
| Dividends and accretion on preferred stock |
— | 165 | (288 | ) | (249 | ) | (247 | ) | (245 | ) | (243 | ) | (243 | ) | ||||||||||||||||||
| Gain on redemption of preferred stock |
— | 10,203 | — | — | — | — | — | — | ||||||||||||||||||||||||
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| Net income (loss) available to common shareholders |
$ | 402 | $ | 10,738 | $ | 599 | $ | (1,771 | ) | $ | (916 | ) | $ | (5 | ) | $ | (1,306 | ) | $ | (106 | ) | |||||||||||
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| Earnings (loss) per common share: |
||||||||||||||||||||||||||||||||
| Basic |
$ | 0.001 | $ | 0.028 | $ | 0.15 | $ | (0.45 | ) | $ | (0.24 | ) | $ | — | $ | (0.33 | ) | $ | (0.03 | ) | ||||||||||||
| Diluted |
$ | 0.001 | $ | 0.028 | $ | 0.15 | $ | (0.45 | ) | $ | (0.24 | ) | $ | — | $ | (0.33 | ) | $ | (0.03 | ) | ||||||||||||
Effects of Inflation and Changing Prices
A commercial bank has an asset and liability structure that is distinctly different from that of a company with substantial investments in plant and inventory because the major portion of its assets is monetary in nature. As a result, a bank’s performance may be significantly influenced by changes in interest rates. Although the banking industry is more affected by changes in interest rates than by inflation in the price of goods and services, inflation also is a factor that may influence interest rates. Yet, the frequency and magnitude of interest rate fluctuations do not necessarily coincide with changes in the general inflation rate. Inflation does affect our operating expense in that personnel expense and the cost of supplies and outside services tend to increase more during periods of high inflation.
DISCLOSURES ABOUT FORWARD LOOKING STATEMENTS
This Report and its exhibits may contain statements relating to our financial condition, results of operations, plans, strategies, trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts. Those statements may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of the Company’s management about future events. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, including but not limited to, (a) pressures on the earnings, capital and liquidity of financial institutions resulting from current and future adverse conditions in the credit and equity markets and the banking industry in general; (b) changes in competitive pressures among depository and other financial institutions or in the Company’s ability to compete successfully against the larger financial institutions in its banking markets; (c) the financial success or changing strategies of the Company’s customers; (d) actions of government regulators, or changes in laws, regulations or accounting standards, that adversely affect the Company’s business; (e) changes in the interest rate environment and the level of
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market interest rates that reduce the Company’s net interest margins and/or the volumes and values of loans it makes and securities it holds; (f) changes in general economic or business conditions and real estate values in the Company’s banking markets (particularly changes that affect the Company’s loan portfolio, the abilities of its borrowers to repay their loans, and the values of loan collateral); (g) governmental action as of a result of our inability to comply with regulatory orders and agreements; and (h) other unexpected developments or changes in the Company’s business. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. All forward-looking statements attributable to the Company are expressly qualified in their entirety by the cautionary statements in this paragraph. The Company has no obligation, and does not intend, to update these forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Smaller reporting companies such as the Company are not required to provide the information required by this item.
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Item 8. Financial Statements and Supplementary Data.
Bank of the Carolinas Corporation and Subsidiary
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Bank of the Carolinas Corporation and Subsidiaries
Mocksville, North Carolina
We have audited the accompanying balance sheet of Bank of the Carolinas Corporation and Subsidiaries (the “Company”) as of December 31, 2014, and the related consolidated statement of operations, comprehensive income, stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bank of the Carolinas Corporation and Subsidiaries as of December 31, 2014, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Raleigh, North Carolina
March 31, 2015
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Bank of the Carolinas Corporation and Subsidiary
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Bank of the Carolinas Corporation
We have audited the accompanying consolidated balance sheet of Bank of the Carolinas Corporation and Subsidiary (hereinafter referred to as the “Company”) as of December 31, 2013, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for the years ended December 31, 2013 and 2012. Bank of the Carolinas Corporation and Subsidiary’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our report dated March 26, 2014, we expressed an opinion that the 2013 financial statements present fairly the financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. Our report raised substantial doubt about the Company’s ability to continue as a going concern. There is no longer substantial doubt about the Company’s ability to continue as a going concern as it relates to 2013. Accordingly, our present opinion on the 2013 financial statements, as presented herein, is different from that expressed in our previous report.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bank of the Carolinas Corporation and Subsidiary as of December 31, 2013 and the results of its operations and cash flows for the years ended December 31, 2013 and 2012 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 19 to the 2013 financial statements, the 2013 consolidated financial statements have been restated to correct a misstatement.
/s/ Turlington and Company, L.L.P.
Lexington, North Carolina
March 26, 2014, except for the restatement noted above, as to which the date is October 10, 2014
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Bank of the Carolinas Corporation and Subsidiary
December 31, 2014 and 2013
(In thousands except share data)
| 2014 | 2013 | |||||||
| Assets: |
||||||||
| Cash and due from banks, noninterest-bearing |
$ | 9,571 | $ | 12,778 | ||||
| Interest-bearing deposits in banks |
37,041 | 2,064 | ||||||
|
|
|
|
|
|||||
| Cash and cash equivalents |
46,612 | 14,842 | ||||||
| Federal funds sold |
— | 19,580 | ||||||
| Investment securities |
40,348 | 90,315 | ||||||
| Loans receivable |
278,610 | 278,510 | ||||||
| Less: Allowance for loan losses |
(5,126 | ) | (6,015 | ) | ||||
|
|
|
|
|
|||||
| Total loans, net |
273,484 | 272,495 | ||||||
| Premises and equipment, net |
10,811 | 11,274 | ||||||
| Other real estate owned |
1,108 | 1,233 | ||||||
| Bank owned life insurance |
11,234 | 10,888 | ||||||
| Accrued interest receivable |
852 | 1,156 | ||||||
| Other assets |
1,010 | 1,867 | ||||||
|
|
|
|
|
|||||
| Total Assets |
$ | 385,459 | $ | 423,650 | ||||
|
|
|
|
|
|||||
| Liabilities: |
||||||||
| Deposits: |
||||||||
| Noninterest-bearing demand deposits |
$ | 37,533 | $ | 35,243 | ||||
| Interest-checking deposits |
39,557 | 40,939 | ||||||
| Money market and savings deposits |
112,487 | 109,419 | ||||||
| Time deposits |
147,045 | 180,549 | ||||||
|
|
|
|
|
|||||
| Total deposits |
336,622 | 366,150 | ||||||
| Securities sold under repurchase agreements |
491 | 45,388 | ||||||
| Subordinated debt |
— | 7,855 | ||||||
| Other liabilities |
1,290 | 2,509 | ||||||
|
|
|
|
|
|||||
| Total Liabilities |
338,403 | 421,902 | ||||||
|
|
|
|
|
|||||
| Stockholders’ Equity: |
||||||||
| Preferred stock, no par value |
— | 13,179 | ||||||
| Discount on preferred stock |
— | (100 | ) | |||||
| Common stock, no par value per share at December 31, 2014, $5 par value per share at December 31, 2013 |
— | 19,479 | ||||||
| Additional paid-in capital |
73,815 | 12,991 | ||||||
| Accumulated deficit |
(26,922 | ) | (38,422 | ) | ||||
| Accumulated other comprehensive income (loss) |
163 | (5,379 | ) | |||||
|
|
|
|
|
|||||
| Total Stockholders’ Equity |
47,056 | 1,748 | ||||||
|
|
|
|
|
|||||
| Total Liabilities and Stockholders’ Equity |
$ | 385,459 | $ | 423,650 | ||||
|
|
|
|
|
|||||
| Preferred shares authorized |
3,000,000 | 3,000,000 | ||||||
| Preferred shares issued and outstanding |
0 | 13,179 | ||||||
| Unaccrued preferred stock dividend |
$ | — | $ | 1,894 | ||||
| Common shares authorized |
580,000,000 | 15,000,000 | ||||||
| Common shares issued and outstanding |
462,028,831 | 3,895,840 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
48
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Consolidated Statements of Operations
For the Years Ended December 31, 2014, 2013, and 2012
(In thousands except per share data)
| 2014 | 2013 | 2012 | ||||||||||
| Interest and dividend income: |
||||||||||||
| Loans, including fees |
$ | 12,924 | $ | 12,978 | $ | 14,303 | ||||||
| Investment securities |
1,644 | 2,156 | 2,669 | |||||||||
| Other |
90 | 74 | 77 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total interest income |
14,658 | 15,208 | 17,049 | |||||||||
|
|
|
|
|
|
|
|||||||
| Interest expense: |
||||||||||||
| Deposits |
1,976 | 2,301 | 3,225 | |||||||||
| Other borrowings |
1,223 | 2,259 | 2,268 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total interest expense |
3,199 | 4,560 | 5,493 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net interest income |
11,459 | 10,648 | 11,556 | |||||||||
| (Recovery of) provision for loan losses |
(967 | ) | (2,039 | ) | 2,359 | |||||||
|
|
|
|
|
|
|
|||||||
| Net interest income after (recovery of) provision for loan losses |
12,426 | 12,687 | 9,197 | |||||||||
|
|
|
|
|
|
|
|||||||
| Non-interest income: |
||||||||||||
| Customer service fees |
1,171 | 1,149 | 1,176 | |||||||||
| Increase in bank owned life insurance |
346 | 352 | 359 | |||||||||
| Net proceeds from bank owned life insurance |
— | — | 415 | |||||||||
| (Loss) Gain on sale of securities (net) |
(1,275 | ) | — | 2,190 | ||||||||
| Extinguishment of debt |
5,443 | — | — | |||||||||
| Other |
22 | 28 | 28 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total non-interest income |
5,707 | 1,529 | 4,168 | |||||||||
|
|
|
|
|
|
|
|||||||
| Non-interest expense: |
||||||||||||
| Salaries and employee benefits |
6,071 | 6,437 | 6,877 | |||||||||
| Net occupancy expense |
1,858 | 1,787 | 1,903 | |||||||||
| FDIC insurance assessments |
1,163 | 1,459 | 1,600 | |||||||||
| Data processing |
1,026 | 1,054 | 989 | |||||||||
| Professional services |
1,054 | 931 | 1,425 | |||||||||
| Advertising |
122 | 158 | 92 | |||||||||
| Valuation allowances and net operating costs associated with foreclosed real estate |
112 | 810 | 2,417 | |||||||||
| Debt prepayment penalty |
4,353 | — | — | |||||||||
| Other |
2,037 | 1,993 | 2,641 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total non-interest expense |
17,796 | 14,629 | 17,944 | |||||||||
|
|
|
|
|
|
|
|||||||
| Income (loss) before income taxes |
337 | (413 | ) | (4,579 | ) | |||||||
| Income tax expense |
200 | 942 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) |
137 | (1,355 | ) | (4,579 | ) | |||||||
| Preferred stock dividends and accretion |
65 | (978 | ) | (956 | ) | |||||||
| Gain on redemption of preferred stock |
10,203 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) available to common stockholders |
$ | 10,405 | $ | (2,333 | ) | $ | (5,535 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) per common share |
||||||||||||
| Basic |
$ | 0.05 | $ | (0.60 | ) | $ | (1.42 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Diluted |
$ | 0.05 | $ | (0.60 | ) | $ | (1.42 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Weighted average common shares oustanding |
||||||||||||
| Basic |
216,017,691 | 3,895,840 | 3,895,840 | |||||||||
|
|
|
|
|
|
|
|||||||
| Diluted |
216,017,691 | 3,895,840 | 3,895,840 | |||||||||
|
|
|
|
|
|
|
|||||||
The accompanying notes are an integral part of these consolidated financial statements.
49
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2014, 2013, and 2012
(In thousands)
| 2014 | 2013 | 2012 | ||||||||||
| Net income (loss) |
$ | 137 | $ | (1,355 | ) | $ | (4,579 | ) | ||||
| Other comprehensive income (loss): |
||||||||||||
| Unrealized holding gains (losses) on securities available-for-sale |
4,267 | (6,298 | ) | (1,576 | ) | |||||||
| Reclassification adjustment for (gains) losses realized in net income (loss) |
1,275 | — | (2,190 | ) | ||||||||
| Income tax effect |
— | 336 | 2,796 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total other comprehensive income (loss), net of income tax effect |
5,542 | (5,962 | ) | (970 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Total comprehensive income (loss) |
$ | 5,679 | $ | (7,317 | ) | $ | (5,549 | ) | ||||
|
|
|
|
|
|
|
|||||||
The accompanying notes are an integral part of these consolidated financial statements.
50
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 31, 2014, 2013, and 2012
(In thousands except share data)
| Preferred Stock | Discount on Preferred Stock |
Common Stock | Additional Paid-In Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Income (Loss) |
Total Stockholders’ Equity |
||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2011 |
13,179 | $ | 13,179 | $ | (716 | ) | 3,895,840 | $ | 19,479 | $ | 12,991 | $ | (31,871 | ) | $ | 1,553 | $ | 14,615 | ||||||||||||||||||
| Restricted stock benefit |
— | — | — | — | — | (1 | ) | — | — | (1 | ) | |||||||||||||||||||||||||
| Stock based compensation expense |
— | — | — | — | — | 1 | — | — | 1 | |||||||||||||||||||||||||||
| Cash dividends on common |
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Cash dividends on preferred |
— | — | — | — | — | — | (1 | ) | — | (1 | ) | |||||||||||||||||||||||||
| Accretion of discount on preferred |
— | — | 297 | — | — | — | (297 | ) | — | — | ||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | (4,579 | ) | — | (4,579 | ) | |||||||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | — | — | — | (970 | ) | (970 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Balance, December 31, 2012 |
13,179 | 13,179 | (419 | ) | 3,895,840 | 19,479 | 12,991 | (36,748 | ) | 583 | 9,065 | |||||||||||||||||||||||||
| Cash dividends on common |
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Cash dividends on preferred |
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Accretion of discount on preferred |
— | — | 319 | — | — | — | (319 | ) | — | — | ||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | (1,355 | ) | — | (1,355 | ) | |||||||||||||||||||||||||
| Other comprehensive loss |
— | — | — | — | — | — | — | (5,962 | ) | (5,962 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Balance, December 31, 2013 |
13,179 | 13,179 | (100 | ) | 3,895,840 | 19,479 | 12,991 | (38,422 | ) | (5,379 | ) | 1,748 | ||||||||||||||||||||||||
| Reclass due to no par value |
— | — | — | — | (19,479 | ) | 19,479 | — | — | — | ||||||||||||||||||||||||||
| Issuance of common stock |
— | — | — | 458,132,991 | — | 45,813 | — | — | 45,813 | |||||||||||||||||||||||||||
| Cost of issuing common stock |
— | — | — | — | — | (3,054 | ) | — | — | (3,054 | ) | |||||||||||||||||||||||||
| Repurchase of preferred stock |
(13,179 | ) | (13,179 | ) | — | — | — | (1,414 | ) | 11,298 | — | (3,295 | ) | |||||||||||||||||||||||
| Accretion of discount on preferred |
— | — | 100 | — | — | — | (100 | ) | — | — | ||||||||||||||||||||||||||
| Dividends accrued on preferred stock |
— | — | — | — | — | — | 165 | — | 165 | |||||||||||||||||||||||||||
| Net income |
— | — | — | — | — | — | 137 | — | 137 | |||||||||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | — | — | — | 5,542 | 5,542 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Balance, December 31, 2014 |
— | $ | — | $ | — | 462,028,831 | $ | — | $ | 73,815 | $ | (26,922 | ) | $ | 163 | $ | 47,056 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
51
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2014, 2013, and 2012
(In thousands)
| 2014 | 2013 | 2012 | ||||||||||
| Cash flows from operating activities: |
||||||||||||
| Net income (loss) |
$ | 137 | $ | (1,355 | ) | $ | (4,579 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||
| Depreciation and amortization |
670 | 678 | 807 | |||||||||
| Deferred tax expense |
— | 942 | — | |||||||||
| (Recovery of) provision for loan losses |
(967 | ) | (2,039 | ) | 2,359 | |||||||
| Amortization of premiums on securities, net |
329 | 521 | 925 | |||||||||
| Stock based compensation expense (benefit) |
— | — | 1 | |||||||||
| Restricted stock expense (benefit) |
— | — | (1 | ) | ||||||||
| (Increase) decrease in bank owned life insurance |
(346 | ) | (352 | ) | 196 | |||||||
| (Gain) loss on sale of other real estate owned |
(80 | ) | 77 | (192 | ) | |||||||
| Impairment valuation of other real estate owned |
103 | 539 | 2,040 | |||||||||
| Loss (gain) on sale of premises and equipment |
6 | (5 | ) | — | ||||||||
| Loss (gain) on sale of securities |
1,275 | — | (2,190 | ) | ||||||||
| Extinguishment of debt |
(5,443 | ) | — | — | ||||||||
| Net changes in: |
||||||||||||
| Accrued interest receivable |
304 | 159 | 188 | |||||||||
| Prepaid FDIC insurance assessment |
— | 630 | 1,570 | |||||||||
| Other assets |
563 | (158 | ) | 45 | ||||||||
| Accrued expenses and other liabilities |
(212 | ) | 372 | 235 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net cash (used in) provided by operating activities |
(3,661 | ) | 9 | 1,404 | ||||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from investing activities: |
||||||||||||
| Net change in federal funds sold |
19,580 | 7,790 | 795 | |||||||||
| Activity in available-for-sale securities: |
||||||||||||
| Purchases |
— | (16,893 | ) | (120,851 | ) | |||||||
| Proceeds from sale |
45,917 | — | 71,767 | |||||||||
| Maturities and calls of securities |
6,988 | 26,690 | 54,246 | |||||||||
| Maturity of held-to-maturity security |
1,000 | — | — | |||||||||
| Net loan originations and principal payments |
(1,210 | ) | (7,925 | ) | 28,140 | |||||||
| Redemption of FHLB stock |
140 | 205 | 842 | |||||||||
| Purchase of premises and equipment |
(213 | ) | (125 | ) | (421 | ) | ||||||
| Proceeds from sale of premises and equipment |
— | 21 | — | |||||||||
| Proceeds from sale of other real estate owned |
1,290 | 4,080 | 7,523 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by investing activities |
73,492 | 13,843 | 42,041 | |||||||||
|
|
|
|
|
|
|
|||||||
52
(continued)
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Consolidated Statements of Cash Flows, Continued
For the Years Ended December 31, 2014, 2013, and 2012
(In thousands)
| 2014 | 2013 | 2012 | ||||||||||
| Cash flows from financing activities: |
||||||||||||
| Net decrease in deposits |
$ | (29,528 | ) | $ | (6,822 | ) | $ | (43,240 | ) | |||
| Net change in retail repurchase agreements |
103 | 26 | (19 | ) | ||||||||
| Repayment of term repurchase agreements |
(45,000 | ) | — | — | ||||||||
| Repayment of borrowings |
(3,100 | ) | — | — | ||||||||
| Proceeds from issuance of common stock, net of cost |
42,759 | — | — | |||||||||
| Cash dividend on preferred |
— | — | (1 | ) | ||||||||
| Repurchase of preferred stock |
(3,295 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Net cash used by financing activities |
(38,061 | ) | (6,796 | ) | (43,260 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net increase in cash and cash equivalents |
31,770 | 7,056 | 185 | |||||||||
| Cash and cash equivalents at beginning of year |
14,842 | 7,786 | 7,601 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash and cash equivalents at end of year |
$ | 46,612 | $ | 14,842 | $ | 7,786 | ||||||
|
|
|
|
|
|
|
|||||||
| Supplemental disclosures of cash flow information: |
||||||||||||
| Cash paid during the year for interest |
$ | 3,354 | $ | 4,327 | $ | 5,225 | ||||||
|
|
|
|
|
|
|
|||||||
| Income taxes paid |
$ | 200 | $ | — | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
| Non-cash investing and financing activities: |
||||||||||||
| Change in fair value of securities available for sale |
$ | 5,542 | $ | (5,962 | ) | $ | (970 | ) | ||||
| Transfer to other real estate owned from loans receivable |
$ | 1,188 | $ | 953 | $ | 5,823 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
53
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2014, 2013, and 2012
1. Summary of Significant Accounting Policies
Organization—Bank of the Carolinas Corporation (“the Company”) is a North Carolina-chartered bank holding company that was incorporated on May 30, 2006, for the sole purpose of serving as the parent bank holding company for Bank of the Carolinas (“the Bank”). The Bank is a FDIC-insured, North Carolina-chartered bank that began operations on December 7, 1998.
Because the Company has no significant operations and conducts no business on its own other than owning the Bank, the discussion contained in these footnotes concerns primarily the business of the Bank. However, for ease of reading and because the financial statements are presented on a consolidated basis, the Company and its subsidiary are collectively referred to herein as the “Company” unless otherwise noted.
The accounting and reporting policies of the Company follow accounting principles generally accepted in the United States of America and general practices within the banking industry. The following is a summary of the more significant accounting policies.
Business—The Company provides a variety of financial services to individuals and small businesses through its retail offices. Its primary deposit products are demand deposits and time certificate accounts and its primary lending products are consumer, commercial, and mortgage loans. The Company does not have significant concentrations to any one industry or customer.
Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, valuation of other real estate owned, and fair values of financial instruments.
Cash and Cash Equivalents—The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents are defined as those amounts included in the balance sheet captions “cash and due from banks, noninterest-bearing,” and “interest-bearing deposits in banks.” At times, the Company places deposits with high credit quality financial institutions in amounts which may be in excess of federally insured limits.
Investment Securities—Securities available-for-sale are carried at fair value and held-to-maturity securities are carried at amortized cost. The unrealized holding gains or losses on securities available for sale are reported, net of related income tax effects, as accumulated other comprehensive income unless a valuation reserve has been established. Changes in unrealized holding gains or losses are included as a component of other comprehensive income until realized. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in income as realized losses. Gains or losses on sales of securities available for sale are based on the specific identification method.
The Company evaluates securities for OTTI on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, the Company considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. The Company also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an
54
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.
Loans Receivable—The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is invested within the central North Carolina region. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, loans in process, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan using the interest method.
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. All interest accrued, but not collected, for loans that are placed on non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses—The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.
Premises and Equipment—Land is carried at cost. Buildings, leasehold improvements and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the lesser of estimated useful lives of the assets or lease terms ranging from 3 to 40 years. The cost of maintenance and repairs are charged to expense as incurred while expenditures that materially increase the useful lives of property are capitalized.
55
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
Federal Home Loan Bank Stock—Investment in stock of the Federal Home Loan Bank is required by law of every member. The investment is carried at cost since redemptions of this stock have historically been at par. No ready market exists for the stock, and it has no quoted market value. The stock is presented in other assets. Due to the redemption provisions of the FHLB, the Bank estimates carrying value equals fair value and that it was not impaired at December 31, 2014. The stock had a carrying value of $383,900 and $524,000 at December 31, 2014 and 2013, respectively, and is reported in other assets on the consolidated balance sheet.
Other Real Estate Owned—Assets acquired through, or in lieu of, loan foreclosure are held for sale and initially recorded at the fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management, and the assets are carried at the lower of carrying amount or fair value less costs to sell. Expenses associated with maintaining these properties are included in other non-interest expense. The provision for real estate losses is also included in other non-interest expense. Realized gains and losses on disposal of real estate are included in other non-interest expense. Foreclosed assets are presented in other real estate owned. As of December 31, 2014, the Company held a variety of properties in other real estate owned, including 1-4 family residential real estate and commercial real estate. These properties are generally held within the Company’s market area.
Income Taxes—Deferred tax liabilities and assets are established for future tax return effects of the temporary differences between the stated value of assets and liabilities for financial reporting purposes and their tax bases. The focus is on accruing the appropriate balance sheet deferred tax amount, with the statement of income effect being the result of the changes in the balance sheet amounts from period to period.
An evaluation of the probability of being able to realize the future benefits of deferred tax assets is made. A valuation allowance is provided for the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
The Company’s policy is to report interest and penalties, if any, in tax expense in the Consolidated Statements of Operations. The Company and its subsidiary each reflect the tax expense or benefit associated with the results of their individual operating results. Due to prior IRS audits of 2008 and 2009, only the Company’s 2010 through 2014 federal and state income tax returns are open and subject to examination.
Earnings Per Share—Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and warrants, and are determined using the treasury stock method.
Net income (loss) per share have been computed based on the following:
| Years Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (in thousands except for share data) | ||||||||||||
| Net income (loss) available to common stockholders |
$ | 10,405 | $ | (2,333 | ) | $ | (5,535 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Weighted average number of common shares outstanding |
216,017,691 | 3,895,840 | 3,895,840 | |||||||||
|
|
|
|
|
|
|
|||||||
| Weighted average number of diluted common shares outstanding |
216,017,691 | 3,895,840 | 3,895,840 | |||||||||
|
|
|
|
|
|
|
|||||||
| Earnings (Loss) per common share: |
||||||||||||
| Basic |
$ | 0.05 | $ | (0.60 | ) | $ | (1.42 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Diluted |
$ | 0.05 | $ | (0.60 | ) | $ | (1.42 | ) | ||||
|
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|
|
|
|
|
|||||||
The Company had 4,500; 497,205; and 497,205 stock options and warrants that were considered anti-dilutive as the average market price for the shares was less than the exercise price for the years ended December 31, 2014, 2013, and 2012, respectively.
56
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
Stock Compensation Plans—The Company under generally accepted accounting principles accounts for stock option expense using the modified prospective method. The Company records expense throughout the options’ vesting period.
Advertising Expense—The Company’s policy is to expense advertising cost as incurred.
Comprehensive Income (Loss)—Accounting principles generally require that recognized revenues, expenses, gains and losses be included in net income (loss). Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section in the balance sheet, such items, along with net income (loss), are components of comprehensive income (loss).
Reclassifications—In certain instances, amounts reported in prior years’ consolidated financial statements have been reclassified to conform to the current presentation. Such reclassifications had no effect on previously reported cash flows, stockholders’ equity or net loss.
New Accounting Pronouncements—In June 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-11, Transfers and Servicing (Topic 860). The amendments in this ASU require that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. The amendments require an entity to disclose information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. In addition the amendments require disclosure of the types of collateral pledged in repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions and the tenor of those transactions. This ASU is effective for first interim or annual periods beginning after December 15, 2014. The Company will evaluate the impact this ASU may have on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU was developed as a joint project with the International Accounting Standards Board to remove inconsistencies in revenue requirements and provide a more robust framework for addressing revenue issues. The ASU’s core principle is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The ASU is effective for public entities for annual and interim periods beginning after December 15, 2016. The ASU may be adopted using either a modified retrospective method or a full retrospective method and early adoption is not permitted. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.
In January 2014, the FASB issued ASU 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40). The amendments in this Update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. The amendments are not expected to have a significant impact on the Company.
57
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740). An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For example, an entity should not evaluate whether the deferred tax asset expires before the statute of limitations on the tax position or whether the deferred tax asset may be used prior to the unrecognized tax benefit being settled. The amendments in this Update do not require new recurring disclosures. The amendments are not expected to have a significant impact on the Company.
2. Investment Securities
The amortized cost, estimated fair values and carrying values of the investment securities portfolio is summarized as follows (dollars in thousands):
| December 31, 2014 | ||||||||||||||||||||
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
Carrying Value |
||||||||||||||||
| Investment securities available-for-sale: |
||||||||||||||||||||
| U.S. Government agency securities |
$ | 4,894 | $ | 99 | $ | 8 | $ | 4,985 | $ | 4,985 | ||||||||||
| State and municipal securities |
6,170 | 55 | 69 | 6,156 | 6,156 | |||||||||||||||
| Mortgage-backed securities |
29,121 | 130 | 44 | 29,207 | 29,207 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total investment securities available-for-sale |
$ | 40,185 | $ | 284 | $ | 121 | $ | 40,348 | $ | 40,348 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| December 31, 2013 | ||||||||||||||||||||
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
Carrying Value |
||||||||||||||||
| Investment securities available-for-sale: |
||||||||||||||||||||
| U.S. Government agency securities |
$ | 44,077 | $ | 87 | $ | 3,234 | $ | 40,930 | $ | 40,930 | ||||||||||
| State and municipal securities |
11,159 | — | 978 | 10,181 | 10,181 | |||||||||||||||
| Mortgage-backed securities |
39,458 | 34 | 1,288 | 38,204 | 38,204 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total investment securities available-for-sale |
94,694 | 121 | 5,500 | 89,315 | 89,315 | |||||||||||||||
| Investment securities held-to-maturity: |
||||||||||||||||||||
| Corporate securities |
1,000 | — | 180 | 820 | 1,000 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Investment Securities |
$ | 95,694 | $ | 121 | $ | 5,680 | $ | 90,135 | $ | 90,315 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
58
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
The amortized cost and fair value of debt securities by contractual maturity at December 31, 2014 is as follows (dollars in thousands):
| Amortized Cost |
Estimated Fair Value |
|||||||
| Within 1 year |
$ | — | $ | — | ||||
| Over 1 year through 5 years |
1,695 | 1,760 | ||||||
| Over 5 years through 10 years |
9,369 | 9,381 | ||||||
| Over 10 years |
— | — | ||||||
|
|
|
|
|
|||||
| 11,064 | 11,141 | |||||||
| Mortgage-backed securities |
29,121 | 29,207 | ||||||
|
|
|
|
|
|||||
| $ | 40,185 | $ | 40,348 | |||||
|
|
|
|
|
|||||
The fair values of securities with unrealized losses at December 31, 2014 and 2013 are as follows (dollars in thousands):
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||
| Estimated Fair Value |
Unrealized Losses |
Number of Securities |
Estimated Fair Value |
Unrealized Losses |
Number of Securities |
Estimated Fair Value |
Unrealized Losses |
Number of Securities |
||||||||||||||||||||||||||||
| December 31, 2014: |
||||||||||||||||||||||||||||||||||||
| Temporarily impaired securities: |
||||||||||||||||||||||||||||||||||||
| U.S. Government agency securities |
$ | — | $ | — | — | $ | 1,696 | $ | 8 | 2 | $ | 1,696 | $ | 8 | 2 | |||||||||||||||||||||
| State and municipal securities |
502 | 1 | 1 | 3,727 | 68 | 6 | 4,229 | 69 | 7 | |||||||||||||||||||||||||||
| Mortgage-backed securities |
5,275 | 14 | 4 | 6,606 | 30 | 4 | 11,881 | 44 | 8 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total |
$ | 5,777 | $ | 15 | 5 | $ | 12,029 | $ | 106 | 12 | $ | 17,806 | $ | 121 | 17 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||
| Estimated Fair Value |
Unrealized Losses |
Number of Securities |
Estimated Fair Value |
Unrealized Losses |
Number of Securities |
Estimated Fair Value |
Unrealized Losses |
Number of Securities |
||||||||||||||||||||||||||||
| December 31, 2013: |
||||||||||||||||||||||||||||||||||||
| Temporarily impaired securities: |
||||||||||||||||||||||||||||||||||||
| U.S. Government agency securities |
$ | 35,679 | $ | 2,731 | 20 | $ | 3,482 | $ | 503 | 2 | $ | 39,161 | $ | 3,234 | 22 | |||||||||||||||||||||
| State and municipal securities |
7,835 | 723 | 16 | 2,346 | 255 | 5 | 10,181 | 978 | 21 | |||||||||||||||||||||||||||
| Mortgage-backed securities |
34,564 | 1,287 | 21 | 528 | 1 | 1 | 35,092 | 1,288 | 22 | |||||||||||||||||||||||||||
| Corporate securities |
— | — | — | 820 | 180 | 1 | 820 | 180 | 1 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total |
$ | 78,078 | $ | 4,741 | 57 | $ | 7,176 | $ | 939 | 9 | $ | 85,254 | $ | 5,680 | 66 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Management of the Bank believes all unrealized losses on available-for-sale securities as of December 31, 2014 represent temporary impairments related to market fluctuations. The unrealized losses on our securities are a nominal portion of the total value of the portfolio. The Bank has no intention of selling these securities before their maturity and has the appropriate sources of liquidity to hold these securities until maturity. The Bank believes that the unrealized losses are primarily the result of the interest rate environment currently in the marketplace for these types of securities. The Bank had one held to maturity corporate security at December 31, 2013 that had an unrealized loss position of longer than 12 months in duration. The corporate security matured during 2014 and the Bank did not realize any loss.
59
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
Investment securities with market values of $10.5 million and $67.7 million at December 31, 2014 and 2013, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. Gross realized gains and losses for the years ended December 31, 2014, 2013, and 2012 are as follows (dollars in thousands):
| December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (dollars in thousands) | ||||||||||||
| Gross gains on sales of available-for-sale securities |
$ | 28 | $ | — | $ | 2,190 | ||||||
| Gross losses on sales of available-for-sale securities |
(1,303 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
| $ | (1,275 | ) | $ | — | $ | 2,190 | ||||||
|
|
|
|
|
|
|
|||||||
3. Loans Receivable
Loans receivable are summarized as follows (dollars in thousands):
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Real estate loans: |
||||||||
| Residential, 1-4 family |
$ | 88,990 | $ | 84,855 | ||||
| Commercial real estate |
111,195 | 117,463 | ||||||
| Construction |
23,081 | 27,049 | ||||||
| Home equity |
28,207 | 28,217 | ||||||
|
|
|
|
|
|||||
| Total real estate loans |
251,473 | 257,584 | ||||||
|
|
|
|
|
|||||
| Commercial business loans |
23,105 | 17,428 | ||||||
| Consumer loans |
3,065 | 2,554 | ||||||
| Other |
967 | 944 | ||||||
|
|
|
|
|
|||||
| Gross loans receivable |
278,610 | 278,510 | ||||||
| Allowance for loan losses |
(5,126 | ) | (6,015 | ) | ||||
|
|
|
|
|
|||||
| Loans, net |
$ | 273,484 | $ | 272,495 | ||||
|
|
|
|
|
|||||
In accordance with accounting principles generally accepted in the United States of America, loans totaling approximately $33.3 million in non-homogenous groups were determined to be impaired as of December 31, 2014 while approximately $40.1 million were determined to be impaired as of December 31, 2013. Specific loan loss reserves of $1.7 million and $563,000, respectively, were related to these loans as of December 31, 2014 and 2013. These reserves were held against specific loan balances of $21.6 million and $24.0 million for 2014 and 2013, respectively. The average balance invested in impaired loans was approximately $36.7 million and $43.3 million in 2014 and 2013, respectively. All impaired loans as of December 31, 2014 and 2013 have been evaluated to determine whether a specific loan loss reserve is necessary.
60
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
Impaired loans as of December 31, 2014 and 2013, segregated by class of loans, were as follows (dollars in thousands):
| December 31, 2014 | December 31, 2013 | |||||||||||||||||||||||||||||||||||||||
| Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
|||||||||||||||||||||||||||||||
| With no related allowance: |
||||||||||||||||||||||||||||||||||||||||
| Commercial—Non Real Estate |
$ | 339 | $ | 407 | $ | — | $ | 421 | $ | 22 | $ | 1,099 | $ | 1,305 | $ | — | $ | 1,384 | $ | 79 | ||||||||||||||||||||
| Commercial Real Estate |
||||||||||||||||||||||||||||||||||||||||
| Owner occupied |
1,996 | 2,329 | — | 2,671 | 143 | 3,480 | 4,062 | — | 4,365 | 239 | ||||||||||||||||||||||||||||||
| Income producing |
1,891 | 2,057 | — | 2,080 | 98 | 3,734 | 3,887 | — | 3,938 | 183 | ||||||||||||||||||||||||||||||
| Multifamily |
— | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Construction & Development |
||||||||||||||||||||||||||||||||||||||||
| 1—4 Family |
— | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Other |
2,232 | 3,259 | — | 3,455 | 72 | 1,545 | 1,881 | — | 1,981 | 112 | ||||||||||||||||||||||||||||||
| Farmland |
— | — | — | — | — | 252 | 273 | — | 340 | 26 | ||||||||||||||||||||||||||||||
| Residential |
||||||||||||||||||||||||||||||||||||||||
| Equity Lines |
67 | 76 | — | 77 | 3 | 95 | 101 | — | 105 | 3 | ||||||||||||||||||||||||||||||
| 1—4 Family |
4,878 | 5,313 | — | 5,385 | 229 | 5,632 | 6,198 | — | 6,281 | 322 | ||||||||||||||||||||||||||||||
| Junior Liens |
287 | 314 | — | 320 | 17 | 196 | 218 | — | 223 | 12 | ||||||||||||||||||||||||||||||
| Consumer—Non Real Estate |
— | — | — | — | — | 68 | 68 | — | 70 | 4 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total loans with no allowance |
$ | 11,690 | $ | 13,755 | $ | — | $ | 14,409 | $ | 584 | $ | 16,101 | $ | 17,993 | $ | — | $ | 18,687 | $ | 980 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| With an allowance recorded: |
||||||||||||||||||||||||||||||||||||||||
| Commercial—Non Real Estate |
$ | 1,560 | $ | 1,563 | $ | 78 | $ | 1,670 | $ | 71 | $ | 1,205 | $ | 1,205 | $ | 25 | $ | 1,282 | $ | 45 | ||||||||||||||||||||
| Commercial Real Estate |
||||||||||||||||||||||||||||||||||||||||
| Owner occupied |
4,109 | 4,166 | 823 | 4,215 | 178 | 3,666 | 3,666 | 77 | 3,727 | 166 | ||||||||||||||||||||||||||||||
| Income producing |
7,485 | 7,540 | 218 | 7,731 | 396 | 7,287 | 7,343 | 126 | 7,465 | 382 | ||||||||||||||||||||||||||||||
| Multifamily |
1,198 | 1,232 | 74 | 1,245 | 44 | 1,226 | 1,259 | 12 | 1,273 | 45 | ||||||||||||||||||||||||||||||
| Construction & Development |
||||||||||||||||||||||||||||||||||||||||
| 1—4 Family |
350 | 356 | 8 | 362 | 18 | 360 | 366 | 8 | 371 | 19 | ||||||||||||||||||||||||||||||
| Other |
726 | 732 | 23 | 751 | 34 | 3,176 | 3,181 | 107 | 3,224 | 118 | ||||||||||||||||||||||||||||||
| Farmland |
— | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Residential |
||||||||||||||||||||||||||||||||||||||||
| Equity Lines |
56 | 56 | 41 | 59 | 2 | — | — | — | — | — | ||||||||||||||||||||||||||||||
| 1—4 Family |
6,105 | 6,150 | 414 | 6,256 | 280 | 6,778 | 6,795 | 204 | 6,893 | 279 | ||||||||||||||||||||||||||||||
| Junior Liens |
— | — | — | — | — | 339 | 341 | 4 | 345 | 19 | ||||||||||||||||||||||||||||||
| Consumer—Non Real Estate |
25 | 25 | 5 | 29 | 2 | 8 | 8 | — | 11 | — | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total loans with an allowance |
$ | 21,614 | $ | 21,820 | $ | 1,684 | $ | 22,318 | $ | 1,025 | $ | 24,045 | $ | 24,164 | $ | 563 | $ | 24,591 | $ | 1,073 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total: |
||||||||||||||||||||||||||||||||||||||||
| Commercial—Non Real Estate |
$ | 1,899 | $ | 1,970 | $ | 78 | $ | 2,091 | $ | 93 | $ | 2,304 | $ | 2,510 | $ | 25 | $ | 2,666 | $ | 124 | ||||||||||||||||||||
| Commercial Real Estate |
$ | 16,679 | $ | 17,324 | $ | 1,115 | $ | 17,942 | $ | 859 | $ | 19,393 | $ | 20,217 | $ | 215 | $ | 20,768 | $ | 1,015 | ||||||||||||||||||||
| Construction & Development |
$ | 3,308 | $ | 4,347 | $ | 31 | $ | 4,568 | $ | 124 | $ | 5,333 | $ | 5,701 | $ | 115 | $ | 5,916 | $ | 275 | ||||||||||||||||||||
| Residential |
$ | 11,393 | $ | 11,909 | $ | 455 | $ | 12,097 | $ | 531 | $ | 13,040 | $ | 13,653 | $ | 208 | $ | 13,847 | $ | 635 | ||||||||||||||||||||
| Consumer—Non Real Estate |
$ | 25 | $ | 25 | $ | 5 | $ | 29 | $ | 2 | $ | 76 | $ | 76 | $ | — | $ | 81 | $ | 4 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Totals |
$ | 33,304 | $ | 35,575 | $ | 1,684 | $ | 36,727 | $ | 1,609 | $ | 40,146 | $ | 42,157 | $ | 563 | $ | 43,278 | $ | 2,053 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
61
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
Impaired loans also include loans whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. Troubled debt restructurings (TDRs) are a subset of impaired loans and totaled $32.1 million and $37.5 million at December 31, 2014 and 2013, respectively.
The following tables provide a summary of loans modified as TDRs (dollars in thousands):
| Accrual | Nonaccrual | Total TDRs |
Allowance for Loan Losses Allocated |
|||||||||||||
| December 31, 2014 |
||||||||||||||||
| Commercial real estate |
$ | 15,997 | $ | — | $ | 15,997 | $ | 1,035 | ||||||||
| Commercial construction |
1,758 | 1,550 | 3,308 | 31 | ||||||||||||
| Commercial and industrial |
1,728 | 171 | 1,899 | 78 | ||||||||||||
| Residential mortgage |
10,617 | 222 | 10,839 | 408 | ||||||||||||
| Consumer and other |
20 | — | 20 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total modifications |
$ | 30,120 | $ | 1,943 | $ | 32,063 | $ | 1,552 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total contracts |
128 | 8 | 136 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Accrual | Nonaccrual | Total TDRs |
Allowance for Loan Losses Allocated |
|||||||||||||
| December 31, 2013 |
||||||||||||||||
| Commercial real estate |
$ | 17,461 | $ | 1,016 | $ | 18,477 | $ | 216 | ||||||||
| Commercial construction |
4,319 | 612 | 4,931 | 8 | ||||||||||||
| Commercial and industrial |
2,421 | 301 | 2,722 | 25 | ||||||||||||
| Residential mortgage |
11,051 | 230 | 11,281 | 314 | ||||||||||||
| Consumer and other |
70 | — | 70 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total modifications |
$ | 35,322 | $ | 2,159 | $ | 37,481 | $ | 563 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total contracts |
133 | 12 | 145 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
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 principal and interest payment are lowered from the original contractual terms. |
| • | Combination modification—Any other type of modification, including the use of multiple categories above. |
62
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
The following tables illustrate new TDR information for years ended December 31, 2014 and 2013 (dollars in thousands):
| Year Ended December 31, 2014 | ||||||||||||||||
| Rate Modification |
Term Modification |
Combination Modification |
Total Modifications |
|||||||||||||
| Commercial—Non Real Estate |
$ | — | $ | — | $ | 61 | $ | 61 | ||||||||
| Commercial—Real Estate |
82 | 22 | 436 | 540 | ||||||||||||
| Construction & Development |
— | — | — | — | ||||||||||||
| Residential |
26 | — | 74 | 100 | ||||||||||||
| Consumer—Non Real Estate |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Totals |
$ | 108 | $ | 22 | $ | 571 | $ | 701 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Year Ended December 31, 2013 | ||||||||||||||||
| Rate Modification |
Term Modification |
Combination Modification |
Total Modifications |
|||||||||||||
| Commercial—Non Real Estate |
$ | — | $ | 236 | $ | — | $ | 236 | ||||||||
| Commercial—Real Estate |
— | — | 238 | 238 | ||||||||||||
| Construction & Development |
— | — | 129 | 129 | ||||||||||||
| Residential |
— | 251 | 293 | 544 | ||||||||||||
| Consumer—Non Real Estate |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Totals |
$ | — | $ | 487 | $ | 660 | $ | 1,147 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
There were no loans restructured in the twelve months prior to December 31, 2014 that went into default during year ended December 31, 2014. There was one loan restructured in the twelve months prior to December 31, 2013 that went into default during the year ended December 31, 2013. For the purposes of this report, default is defined as being 90-days past due or on non-accrual status without performance.
Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and result in potential incremental losses. These potential incremental losses have been factored into our overall allowance for loan losses estimate. The level of any re-defaults will likely be affected by future economic conditions. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is ultimately repaid in full, reclassified to loans held for sale, or foreclosed and sold. Included in the allowance for loan losses at December 31, 2014 and 2013 was an impairment reserve for TDRs in the amount of $1.6 million and $563,000, respectively.
63
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
Loans in non-accrual status were approximately $3.1 million and $4.8 million at December 31, 2014 and 2013, respectively. Interest accrued, but not recognized as income on these loans, was approximately $37,000 and $170,000 for the years ended December 31, 2014 and 2013, respectively. Non-accrual loans and an age analysis of past due loans, segregated by class of loans and including TDRs, were as follows (dollars in thousands):
| 30—59 Days Past Due |
60—89 Days Past Due |
90 Days or More Past Due |
Total Past Due |
Current | Total Loans |
90-Days Past Due and Still Accruing |
Non-accrual Loans |
|||||||||||||||||||||||||
| December 31, 2014: |
||||||||||||||||||||||||||||||||
| Commercial—Non Real Estate |
$ | — | $ | — | $ | 167 | $ | 167 | $ | 22,938 | $ | 23,105 | $ | — | $ | 171 | ||||||||||||||||
| Commercial Real Estate |
||||||||||||||||||||||||||||||||
| Owner occupied |
170 | — | — | 170 | 54,858 | 55,028 | — | 390 | ||||||||||||||||||||||||
| Income producing |
— | — | — | — | 47,677 | 47,677 | — | 292 | ||||||||||||||||||||||||
| Multifamily |
— | — | — | — | 8,490 | 8,490 | — | — | ||||||||||||||||||||||||
| Construction & Development |
||||||||||||||||||||||||||||||||
| 1—4 Family |
— | — | — | — | 3,366 | 3,366 | — | — | ||||||||||||||||||||||||
| Other |
— | — | — | — | 19,444 | 19,444 | — | 1,550 | ||||||||||||||||||||||||
| Farmland |
— | — | — | — | 271 | 271 | — | — | ||||||||||||||||||||||||
| Residential |
||||||||||||||||||||||||||||||||
| Equity Lines |
17 | — | — | 17 | 28,190 | 28,207 | — | 107 | ||||||||||||||||||||||||
| 1—4 Family |
885 | — | 59 | 944 | 87,173 | 88,117 | — | 610 | ||||||||||||||||||||||||
| Junior Liens |
— | — | — | — | 873 | 873 | — | 21 | ||||||||||||||||||||||||
| Consumer—Non Real Estate |
4 | — | — | 4 | 3,061 | 3,065 | — | 5 | ||||||||||||||||||||||||
| Other |
— | — | — | — | 967 | 967 | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 1,076 | $ | — | $ | 226 | $ | 1,302 | $ | 277,308 | $ | 278,610 | $ | — | $ | 3,146 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| December 31, 2013: |
||||||||||||||||||||||||||||||||
| Commercial—Non Real Estate |
$ | 46 | $ | — | $ | 154 | $ | 200 | $ | 17,228 | $ | 17,428 | $ | — | $ | 463 | ||||||||||||||||
| Commercial Real Estate |
||||||||||||||||||||||||||||||||
| Owner occupied |
— | 77 | 684 | 761 | 57,154 | 57,915 | — | 1,689 | ||||||||||||||||||||||||
| Income producing |
— | — | 503 | 503 | 51,297 | 51,800 | — | 503 | ||||||||||||||||||||||||
| Multifamily |
— | — | — | — | 7,748 | 7,748 | — | — | ||||||||||||||||||||||||
| Construction & Development |
||||||||||||||||||||||||||||||||
| 1—4 Family |
— | — | — | — | 1,745 | 1,745 | — | — | ||||||||||||||||||||||||
| Other |
158 | — | 240 | 398 | 24,375 | 24,773 | — | 599 | ||||||||||||||||||||||||
| Farmland |
— | — | 252 | 252 | 279 | 531 | — | 252 | ||||||||||||||||||||||||
| Residential |
||||||||||||||||||||||||||||||||
| Equity Lines |
75 | 9 | — | 84 | 28,133 | 28,217 | — | 95 | ||||||||||||||||||||||||
| 1—4 Family |
157 | 242 | 355 | 754 | 82,995 | 83,749 | — | 1,128 | ||||||||||||||||||||||||
| Junior Liens |
— | — | 26 | 26 | 1,080 | 1,106 | — | 53 | ||||||||||||||||||||||||
| Consumer—Non Real Estate |
1 | 2 | — | 3 | 2,551 | 2,554 | — | 6 | ||||||||||||||||||||||||
| Other |
— | — | — | — | 944 | 944 | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 437 | $ | 330 | $ | 2,214 | $ | 2,981 | $ | 275,529 | $ | 278,510 | $ | — | $ | 4,788 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
The Bank categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. This categorization is made on all commercial, commercial real estate, and construction and development loans. The Bank uses the following definitions for risk ratings:
Pass—Loans and leases classified as pass should be performing relatively close to expectations, with adequate evidence that the borrower is continuing to generate adequate cash flow to service debt. There should be no significant
64
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
departure from the intended source and timing of repayment, and there should be no undue reliance on secondary sources of repayment. To the extent that some variance exists in one or more criteria being measured, it may be offset by the relative strength of other factors and/or collateral pledged to secure the transaction.
Special Mention—Loans and leases classified as special mention, while still adequately protected by the borrower’s capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management’s close attention so as to avoid becoming undue or unwarranted credit exposures.
Substandard—Loans and leases classified as substandard are inadequately protected by the borrower’s current financial condition and payment capability or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful—Loans and leases classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined. The Company’s practice is to charge-off the portion of the loan amount determined to be doubtful in the quarter that the determination is made if the repayment of the loan is collateral dependent.
Loss—Loans and leases classified as loss are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Losses are taken in the period in which they surface as uncollectible.
65
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. As of December 31, 2014 and 2013, and based on the most recent analysis performed, the risk category of loans and leases is as follows (dollars in thousands):
| Internal Risk Rating Grades | Pass | Special Mention |
Substandard | Doubtful | Loss | |||||||||||||||
| December 31, 2014: |
||||||||||||||||||||
| Commercial—Non Real Estate |
$ | 19,661 | $ | 2,783 | $ | 661 | $ | — | $ | — | ||||||||||
| Commercial Real Estate |
||||||||||||||||||||
| Owner occupied |
46,881 | 4,316 | 3,831 | — | — | |||||||||||||||
| Income producing |
34,843 | 11,231 | 1,603 | — | — | |||||||||||||||
| Multifamily |
6,764 | 1,726 | — | — | — | |||||||||||||||
| Construction & Development |
||||||||||||||||||||
| 1—4 Family |
2,826 | 190 | 350 | — | — | |||||||||||||||
| Other |
14,999 | 1,838 | 2,607 | — | — | |||||||||||||||
| Farmland |
271 | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Totals |
$ | 126,245 | $ | 22,084 | $ | 9,052 | $ | — | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total: |
||||||||||||||||||||
| Commercial—Non Real Estate |
$ | 19,661 | $ | 2,783 | $ | 661 | $ | — | $ | — | ||||||||||
| Commercial Real Estate |
$ | 88,488 | $ | 17,273 | $ | 5,434 | $ | — | $ | — | ||||||||||
| Construction & Development |
$ | 18,096 | $ | 2,028 | $ | 2,957 | $ | — | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Totals |
$ | 126,245 | $ | 22,084 | $ | 9,052 | $ | — | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| December 31, 2013: |
||||||||||||||||||||
| Commercial—Non Real Estate |
$ | 13,289 | $ | 3,157 | $ | 982 | $ | — | $ | — | ||||||||||
| Commercial Real Estate |
||||||||||||||||||||
| Owner occupied |
47,207 | 6,009 | 4,699 | — | — | |||||||||||||||
| Income producing |
33,875 | 10,501 | 7,424 | — | — | |||||||||||||||
| Multifamily |
5,925 | 1,823 | — | — | — | |||||||||||||||
| Construction & Development |
||||||||||||||||||||
| 1—4 Family |
1,133 | 252 | 360 | — | — | |||||||||||||||
| Other |
17,122 | 3,265 | 4,386 | — | — | |||||||||||||||
| Farmland |
279 | — | 252 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Totals |
$ | 118,830 | $ | 25,007 | $ | 18,103 | $ | — | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total: |
||||||||||||||||||||
| Commercial—Non Real Estate |
$ | 13,289 | $ | 3,157 | $ | 982 | $ | — | $ | — | ||||||||||
| Commercial Real Estate |
$ | 87,007 | $ | 18,333 | $ | 12,123 | $ | — | $ | — | ||||||||||
| Construction & Development |
$ | 18,534 | $ | 3,517 | $ | 4,998 | $ | — | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Totals |
$ | 118,830 | $ | 25,007 | $ | 18,103 | $ | — | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
66
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
All consumer-related loans, including residential real estate and non-real estate are evaluated and monitored based upon payment activity. Once a consumer related loan becomes past due on a recurring basis, the Company will pull that loan out of the homogenized pool and evaluate it individually for impairment. At this time, the consumer-related loan may be placed on the Company’s internal watch list and risk rated either special mention or substandard, depending upon the individual circumstances. Consumer related loans at December 31, 2014 and 2013, segregated by class of loans, were as follows (dollars in thousands):
| December 31, 2014 | December 31, 2013 | |||||||||||||||
| Risk Based on Payment Activity | Performing | Non- Performing |
Performing | Non- Performing |
||||||||||||
| Residential |
||||||||||||||||
| Equity Lines |
$ | 28,100 | $ | 107 | $ | 28,122 | $ | 95 | ||||||||
| 1—4 Family |
87,803 | 314 | 83,092 | 657 | ||||||||||||
| Junior Liens |
873 | — | 1,080 | 26 | ||||||||||||
| Consumer—Non Real Estate |
3,060 | 5 | 2,548 | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Totals |
$ | 119,836 | $ | 426 | $ | 114,842 | $ | 784 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total: |
||||||||||||||||
| Residential |
$ | 116,776 | $ | 421 | $ | 112,294 | $ | 778 | ||||||||
| Consumer—Non Real Estate |
$ | 3,060 | $ | 5 | $ | 2,548 | $ | 6 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Totals |
$ | 119,836 | $ | 426 | $ | 114,842 | $ | 784 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Directors and officers of the Bank and companies with which they are affiliated are customers of the Bank in the ordinary course of business and are considered “insiders.” Outstanding balances for term loans and lines of credit to insiders as of December 31, 2014 and 2013 were approximately $62,000 and $2.5 million, respectively.
The following table summarizes the Bank’s loan transactions with insiders for the year ended December 31, 2014 (dollars in thousands):
| Balance, December 31, 2013 |
$ | 2,549 | ||
| Originations |
— | |||
| Advances |
78 | |||
| Repayments and participations sold |
(299 | ) | ||
| Insider turnover |
(2,266 | ) | ||
|
|
|
|||
| Balance, December 31, 2014 |
$ | 62 | ||
|
|
|
Available lines of credit that can be drawn upon by insiders totaled $133,000 as of December 31, 2014.
4. Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular
67
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans.
The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.
The Company’s allowance for loan losses consists of three elements: (i) specific valuation allowances determined in accordance with accounting principles regarding receivables based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with accounting principles regarding contingencies based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with accounting principles regarding contingencies based on general economic conditions and other qualitative risk factors both internal and external to the Company.
Historical valuation allowances are calculated based on the historical loss experience of specific types of loans at the time they were charged-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Company’s pools of similar loans include commercial and industrial loans, commercial real estate loans, construction and development loans, residential real estate loans, and consumer and other loans. General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such valuation allowances are determined by evaluating, among other things: (i) levels and trends in delinquencies and impaired loans; (ii) levels of and trends in chargeoffs and recoveries; (iii) levels of non-impaired substandard loans; (iv) trends in volume and terms of loans; (v) effects of changes in risk selection and underwriting practices; (vi) experience, ability, and depth of lending management and staff; (vii) national and local economic trends and conditions; (viii) industry conditions; and (ix) effect of changes in credit concentrations. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Loans identified as losses by management, internal loan review and/or regulatory examiners are charged-off.
68
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
Changes in the allowance for loan losses by segment are as follows (dollars in thousands):
| December 31, 2014 | December 31, 2013 | |||||||||||||||||||||||||||||||||||||||
| Beginning Balance |
Chargeoffs | Recoveries | Provision | Ending Balance |
Beginning Balance |
Chargeoffs | Recoveries | Provision | Ending Balance |
|||||||||||||||||||||||||||||||
| Commercial—Non Real Estate |
$ | 176 | $ | (57 | ) | $ | 836 | $ | (631 | ) | $ | 324 | $ | 1,209 | $ | (115 | ) | $ | 1,698 | $ | (2,616 | ) | $ | 176 | ||||||||||||||||
| Commercial Real Estate |
. | . | ||||||||||||||||||||||||||||||||||||||
| Owner occupied |
1,224 | — | 14 | 9 | 1,247 | 1,359 | (523 | ) | 553 | (165 | ) | 1,224 | ||||||||||||||||||||||||||||
| Income producing |
831 | (104 | ) | 98 | (78 | ) | 747 | 773 | (21 | ) | 20 | 59 | 831 | |||||||||||||||||||||||||||
| Multifamily |
50 | — | — | 103 | 153 | 78 | — | — | (28 | ) | 50 | |||||||||||||||||||||||||||||
| Construction & Development |
||||||||||||||||||||||||||||||||||||||||
| 1—4 Family |
52 | — | — | 35 | 87 | 78 | (5 | ) | — | (21 | ) | 52 | ||||||||||||||||||||||||||||
| Other |
580 | (719 | ) | 59 | 591 | 511 | 728 | (222 | ) | 22 | 52 | 580 | ||||||||||||||||||||||||||||
| Farmland |
3 | — | — | 2 | 5 | — | (21 | ) | — | 24 | 3 | |||||||||||||||||||||||||||||
| Residential |
||||||||||||||||||||||||||||||||||||||||
| Equity Lines |
332 | (123 | ) | 58 | 342 | 609 | 314 | (222 | ) | 39 | 201 | 332 | ||||||||||||||||||||||||||||
| 1—4 Family |
1,218 | (66 | ) | 90 | (7 | ) | 1,235 | 1,267 | (675 | ) | 650 | (24 | ) | 1,218 | ||||||||||||||||||||||||||
| Consumer—Non Real Estate |
44 | (34 | ) | 26 | 8 | 44 | 98 | (51 | ) | 37 | (40 | ) | 44 | |||||||||||||||||||||||||||
| Other |
— | — | — | 5 | 5 | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Unallocated |
1,505 | — | — | (1,346 | ) | 159 | 986 | — | — | 519 | 1,505 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total |
$ | 6,015 | $ | (1,103 | ) | $ | 1,181 | $ | (967 | ) | $ | 5,126 | $ | 6,890 | $ | (1,855 | ) | $ | 3,019 | $ | (2,039 | ) | $ | 6,015 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Individually Evaluated for Impairment | ||||||||||||||||
| December 31, 2014 | December 31, 2013 | |||||||||||||||
| Allowance | Total Loans | Allowance | Total Loans | |||||||||||||
| Commercial—Non Real Estate |
$ | 78 | $ | 1,899 | $ | 25 | $ | 2,304 | ||||||||
| Commercial Real Estate |
||||||||||||||||
| Owner occupied |
823 | 6,105 | 77 | 7,146 | ||||||||||||
| Income producing |
218 | 9,376 | 126 | 11,021 | ||||||||||||
| Multifamily |
74 | 1,198 | 12 | 1,226 | ||||||||||||
| Construction & Development |
||||||||||||||||
| 1—4 Family |
8 | 350 | 8 | 360 | ||||||||||||
| Other |
23 | 2,958 | 107 | 4,721 | ||||||||||||
| Farmland |
— | — | — | 252 | ||||||||||||
| Residential |
||||||||||||||||
| Equity Lines |
41 | 123 | — | 95 | ||||||||||||
| 1—4 Family |
414 | 11,270 | 208 | 12,945 | ||||||||||||
| Consumer—Non Real Estate |
5 | 25 | — | 76 | ||||||||||||
| Other |
— | — | — | — | ||||||||||||
| Unallocated |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 1,684 | $ | 33,304 | $ | 563 | $ | 40,146 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
69
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
| Collectively Evaluated for Impairment | ||||||||||||||||
| December 31, 2014 | December 31, 2013 | |||||||||||||||
| Allowance | Total Loans | Allowance | Total Loans | |||||||||||||
| Commercial—Non Real Estate |
$ | 246 | $ | 21,206 | $ | 151 | $ | 15,124 | ||||||||
| Commercial Real Estate |
||||||||||||||||
| Owner occupied |
424 | 48,923 | 1,147 | 50,769 | ||||||||||||
| Income producing |
529 | 38,301 | 705 | 40,779 | ||||||||||||
| Multifamily |
79 | 7,292 | 38 | 6,522 | ||||||||||||
| Construction & Development |
||||||||||||||||
| 1—4 Family |
79 | 3,016 | 44 | 1,385 | ||||||||||||
| Other |
488 | 16,486 | 473 | 20,052 | ||||||||||||
| Farmland |
5 | 271 | 3 | 279 | ||||||||||||
| Residential |
||||||||||||||||
| Equity Lines |
568 | 28,084 | 332 | 28,122 | ||||||||||||
| 1—4 Family |
821 | 77,720 | 1,010 | 71,910 | ||||||||||||
| Consumer—Non Real Estate |
39 | 3,040 | 44 | 2,478 | ||||||||||||
| Other |
5 | 967 | — | 944 | ||||||||||||
| Unallocated |
159 | — | 1,505 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 3,442 | $ | 245,306 | $ | 5,452 | $ | 238,364 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
5. Premises and Equipment
Premises and equipment are summarized as follows (dollars in thousands):
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Land |
$ | 1,826 | $ | 1,826 | ||||
| Buildings |
10,295 | 10,233 | ||||||
| Leasehold improvements |
525 | 612 | ||||||
| Furniture, fixtures and equipment |
5,890 | 5,943 | ||||||
|
|
|
|
|
|||||
| 18,536 | 18,614 | |||||||
| Less, accumulated depreciation |
7,725 | 7,340 | ||||||
|
|
|
|
|
|||||
| $ | 10,811 | $ | 11,274 | |||||
|
|
|
|
|
|||||
The Bank has entered into non-cancelable lease agreements for certain branch facilities. The leases expire through December 2016 and contain various renewal options. For the years ended December 31, 2014, 2013, and 2012, rental expense was approximately $285,000, $283,000, and $296,000, respectively.
The approximate minimum future lease payments are as follows (dollars in thousands):
| 2015 |
$ | 214 | ||
| 2016 |
116 | |||
| Thereafter |
— | |||
|
|
|
|||
| $ | 330 | |||
|
|
|
6. Deposits
The aggregate amount of time deposits with a minimum denomination of $100,000 was approximately $90.9 million and $115.9 million at December 31, 2014 and 2013, respectively.
70
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
Contractual maturities of time deposits are summarized as follows (dollars in thousands):
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| 12 months or less |
$ | 97,337 | $ | 114,091 | ||||
| 1-3 years |
45,788 | 62,827 | ||||||
| Over 3-5 years |
3,920 | 3,631 | ||||||
| Thereafter |
— | — | ||||||
|
|
|
|
|
|||||
| $ | 147,045 | $ | 180,549 | |||||
|
|
|
|
|
|||||
At December 31, 2014 and 2013, the Company did not have any brokered certificates of deposit. At December 31, 2014, the Company had pledged $8.4 million of investment securities to the North Carolina State Treasurer for public funds in excess of the FDIC insured limits.
7. Federal Home Loan Bank Advances
The Bank had no advances from the Federal Home Loan Bank (“FHLB”) as of December 31, 2014 and 2013. The Bank has total credit availability through the FHLB of approximately $59.5 million; however, FHLB advances can only be obtained on a secured basis. As of December 31, 2014 and 2013, the Bank had pledged its FHLB stock and certain qualifying real estate loans as collateral to secure approximately $6.2 million and $7.8 million, respectively, in immediate availability.
8. Federal Funds Purchased and Repurchase Agreements
The Bank had no federal funds purchased outstanding at December 31, 2014 and 2013. At December 31, 2013, the Bank had a total of $45.0 million of borrowings in the form of securities sold under term repurchase agreements that were entered into during 2008. These borrowings were secured by marketable investment securities equal to approximately 109.5% of the principal balances outstanding plus accrued interest and the value of an imbedded interest rate cap.
The borrowings were repaid as of July 18, 2014. There was prepayment penalty expense of $4.4 million. The security interests in the pledged investment securities were released in connection with the Company’s repayment of these borrowings.
The remaining repurchase agreements were primarily overnight transactions offered as a cash management service to business customers. A summary of selected data related to federal funds purchased and securities sold under overnight agreements to repurchase follows (dollars in thousands):
| At or for the year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Maximum amount outstanding at any month-end during the year |
$ | 864 | $ | 1,499 | $ | 440 | ||||||
| Balance outstanding at end of year |
491 | 388 | 362 | |||||||||
| Average outstanding balance during the year |
491 | 805 | 348 | |||||||||
| Average interest rate during the year |
0.14 | % | 0.13 | % | 0.13 | % | ||||||
| Average interest rate at end of year (1) |
0.14 | 0.14 | 0.14 | |||||||||
| (1) | Average rate for month of December |
9. Subordinated Debt
During 2008, the Company issued $5.2 million of junior subordinated debentures to its wholly owned capital trust, Bank of the Carolinas Trust I (the “Trust”), which, in turn, issued $5.0 million in trust preferred securities having a like liquidation amount and $155,000 in common securities (all common securities are owned by the Company). The Company fully and unconditionally guaranteed the Trust’s obligations related to the trust preferred securities.
71
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
On July 16, 2014, the Company repurchased all of its floating rate trust preferred securities issued through the Trust from the holders of those securities for an aggregate cash payment of $1.75 million. The holders of the trust preferred securities agreed to forgive any unpaid interest on the securities, which resulted in a gain on extinguishment of $3.89 million.
In 2008, the Company issued $2.7 million of subordinated debt in a private transaction with another financial institution. On July 16, 2014, the Company agreed to repurchase the subordinated note from the holder of the note for a cash payment of $1.35 million. The noteholder also agreed to forgive any unpaid interest on the note, which resulted in a gain on extinguishment of $1.55 million.
10. Accumulated Other Comprehensive Income
The following tables present the changes in accumulated other comprehensive income (dollars in thousands):
| Unrealized Holding Gains (Losses) on Available-For-Sale Investment Securities |
Total Accumulated Other Comprehensive Income |
|||||||
| Balance at December 31, 2012 |
$ | 583 | $ | 583 | ||||
|
|
|
|
|
|||||
| Other comprehensive loss before reclassifications |
(5,962 | ) | (5,962 | ) | ||||
| Amounts reclassified from accumulated other comprehensive income |
— | — | ||||||
|
|
|
|
|
|||||
| Net current period other comprehensive loss |
(5,962 | ) | (5,962 | ) | ||||
|
|
|
|
|
|||||
| Balance at December 31, 2013 |
(5,379 | ) | (5,379 | ) | ||||
|
|
|
|
|
|||||
| Other comprehensive income before reclassifications |
4,267 | 4,267 | ||||||
| Amounts reclassified from accumulated other comprehensive income |
1,275 | 1,275 | ||||||
|
|
|
|
|
|||||
| Net current period other comprehensive income |
5,542 | 5,542 | ||||||
|
|
|
|
|
|||||
| Balance at December 31, 2014 |
$ | 163 | $ | 163 | ||||
|
|
|
|
|
|||||
11. Income Taxes
The components of income tax expense (benefit) are as follows (dollars in thousands):
| For the Years Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Current tax expense |
||||||||||||
| Federal |
$ | — | $ | — | $ | — | ||||||
| State |
200 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| 200 | — | — | ||||||||||
|
|
|
|
|
|
|
|||||||
| Deferred tax expense (benefit) |
||||||||||||
| Federal |
(5 | ) | (189 | ) | (1,571 | ) | ||||||
| State |
(1,269 | ) | (19 | ) | (210 | ) | ||||||
| Deferred tax asset valuation adjustment |
1,274 | 1,150 | 1,781 | |||||||||
|
|
|
|
|
|
|
|||||||
| — | 942 | — | ||||||||||
|
|
|
|
|
|
|
|||||||
| Total income tax expense |
$ | 200 | $ | 942 | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
72
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
The Company and its subsidiary each reflect the tax expense or benefit associated with the results of their individual operating results. The differences between actual income tax expense and the amount computed by applying the federal statutory income tax rate of 34% are reconciled as follows (dollars in thousands):
| 2014 | 2013 | 2012 | ||||||||||
| Computed income tax expense (benefit) |
$ | 115 | $ | (140 | ) | $ | (1,557 | ) | ||||
| Changes resulting from: |
||||||||||||
| State tax expense (benefit), net of federal expense (benefit) |
198 | (19 | ) | (209 | ) | |||||||
| Non-taxable income |
(125 | ) | (139 | ) | (301 | ) | ||||||
| Deferred tax asset valuation adjustment |
(5 | ) | 1,150 | 1,781 | ||||||||
| Other |
17 | 90 | 286 | |||||||||
|
|
|
|
|
|
|
|||||||
| Actual income tax expense |
$ | 200 | $ | 942 | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
The components of deferred income taxes are as follows (dollars in thousands):
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Deferred tax assets: |
||||||||
| Allowance for loan losses |
$ | 1,912 | $ | 2,319 | ||||
| Accrued expenses |
164 | 195 | ||||||
| Accrued income |
14 | 65 | ||||||
| Reserve for other real estate valuation |
392 | 571 | ||||||
| Securities |
— | 2,089 | ||||||
| State net economic loss carryovers |
1,567 | 164 | ||||||
| Federal net operating loss carryovers |
13,299 | 12,874 | ||||||
|
|
|
|
|
|||||
| Total deferred tax assets |
17,348 | 18,277 | ||||||
| Less valuation allowance |
(16,807 | ) | (17,683 | ) | ||||
|
|
|
|
|
|||||
| Net deferred tax assets |
541 | 594 | ||||||
|
|
|
|
|
|||||
| Deferred tax liabilities: |
||||||||
| Depreciation and amortization |
225 | 259 | ||||||
| Prepaid expenses |
231 | 310 | ||||||
| Securities |
61 | — | ||||||
| Other |
24 | 25 | ||||||
|
|
|
|
|
|||||
| Net deferred tax liabilities |
541 | 594 | ||||||
|
|
|
|
|
|||||
| Net deferred tax asset |
$ | — | $ | — | ||||
|
|
|
|
|
|||||
Management has established a deferred tax asset valuation allowance of $16.8 million and $17.7 million at December 31, 2014 and 2013, respectively. Although the Company has shown sufficient positive evidence and appears to have ample resources to remain viable into the future in order to utilize these benefits, we believe current overall credit trends, as well as actual and forecasted performance, raise significant concern over the ability of the Company to realize the components of its deferred tax assets relating to net operating losses and the allowances for losses on loans and OREO.
Income tax expense (benefit) contains no interest or penalty amounts related to unrecognized tax benefits for the years ended December 31, 2014, 2013 or 2012.
The 2014 state net economic loss of approximately $6.5 million must be carried forward to future years. The Company has approximately $47.5 million in total state net economic loss carryovers which will expire between 2023 and 2029 if not previously utilized. The Company’s 2014 federal net operating loss of approximately $1.2 million may be carried forward for up to 20 years, if not previously utilized. The Company has approximately $39.1 million in total federal net operating loss carryovers which will expire between 2029 and 2034 if not previously utilized.
73
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
12. Regulatory Matters
Dividends
The Company’s dividend payments, if any, will be made from dividends received from the Bank. Under North Carolina banking law, the Bank’s board of directors may declare dividends so long as they do not reduce the Bank’s capital below its applicable required capital. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the Bank. The ability of the Company and the Bank to pay dividends is currently restricted by the terms of a consent order issued by the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks and a written agreement between the Company and the Federal Reserve Bank of Richmond. See “Other Regulatory Restrictions” below.
Dividends paid on the Company’s preferred stock issued to the U.S. Treasury pursuant to the TARP Capital Purchase Program reduces the net income available to common stockholders and earnings per common share. The Company began deferring dividend payments on its preferred stock issued to the U.S. Treasury in February 2011. The preferred stock also would receive preferential treatment in the event of liquidation, dissolution or winding up of the Company. Additionally, the ownership interest of existing common stockholders will be diluted to the extent the warrant issued to the U.S. Treasury in conjunction with the issuance of preferred stock is exercised.
On July 16, 2014, the Company repurchased all 13,179 shares of its Series A Preferred Stock for a cash payment of $3.3 million. The Treasury also agreed to waive any unpaid dividends on the Series A Preferred Stock, and to cancel the warrant to purchase 475,204 shares of the Company’s common stock held by the Treasury.
Capital Requirements
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as all those terms are defined in the regulations. As described below, the Bank is subject to a consent order issued by the FDIC and the North Carolina Commissioner of Banks. The consent order requires that the Bank maintain capital levels in excess of normal statutory minimums. See “Other Regulatory Restrictions” below.
Intercompany transactions
Restrictions on loans by the Bank to the Company are imposed by Federal Reserve Act Sections 23A and 23B, and differ from legal lending limits on loans to external customers. Generally, a bank may lend up to 10% of its capital and surplus to its parent or other affiliate, if the loan is secured and so long as certain safety and soundness requirements and market terms requirements are met. If collateral is in the form of stocks, or other real or personal property, it must have a market value when the loan is made of at least 30% more than the amount of the loan; if the collateral is in the form of debt instruments, it must have a market value when the loan is made of at least 20% more than the amount of the loan; and if the collateral is in the form of obligations of a state or political subdivision or agency thereof, it must have a market value of at least 10% more than the amount of the loan. If such loans are secured by obligations of the United States or agencies thereof, or by notes, drafts, bills of exchange or bankers’ acceptances eligible for rediscount or purchase by a Federal Reserve Bank, requirements for collateral in excess of loan amount do not apply. Under this definition, the legal lending limit for the Bank on loans to the Company was approximately $4.5 million at December 31, 2014. No 23A transactions existed at December 31, 2014 or 2013.
74
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
Other Regulatory Restrictions
As noted above, banking regulators generally have the ability to require more stringent standards than those otherwise set forth in the regulations. The Bank is subject to a consent order issued by the FDIC and the North Carolina Commissioner of Banks and the Company is party to a written agreement with the Federal Reserve Bank of Richmond. The consent order requires that the Bank maintain capital levels in excess of normal statutory minimums, including a leverage ratio (the ratio of Tier 1 capital to total assets) of at least 8% and a total risk-based capital ratio (the ratio of qualifying total capital to risk-weighted assets) of at least 10%, and to take various other actions designed to improve the Bank’s lending procedures and various other conditions related to the Bank’s operations, and of the Company and the Bank to seek the approval of their respective regulators prior to the payment of any cash dividend. The Company’s Board agreed to take steps necessary to ensure the Bank’s compliance with the consent order and, without the approval of its regulator, to not incur additional debt or issue hybrid-capital instruments, or use cash assets other than for the benefit of the Bank, investment in short term, liquid assets or payment of normal expenses.
At December 31, 2014, the Bank’s capital ratios were in excess of those required in order to be categorized as well-capitalized under the regulatory framework for prompt corrective action, however, as long as the consent order is in place, the Bank will not be considered well-capitalized under FDIC regulations, even if its capital ratios satisfy the requirements for that designation. The Bank’s actual capital amounts (in thousands) and ratios and minimum requirements are set forth in the table below:
| Actual Capital | Capital needed to meet Regulatory Guidelines |
|||||||||||||||
| Ratio | Amount | Minimum | Well- Capitalized |
|||||||||||||
| As of December 31, 2014: |
||||||||||||||||
| Total Capital (to Risk Weighted Assets): |
||||||||||||||||
| Bank of the Carolinas |
16.16 | % | $ | 48,894 | $ | 24,208 | $ | 30,260 | ||||||||
| Bank of the Carolinas Corporation Consolidated |
16.75 | 50,693 | 24,208 | 30,261 | ||||||||||||
| Tier 1 Capital (to Risk Weighted Assets): |
||||||||||||||||
| Bank of the Carolinas |
14.90 | 45,095 | 12,104 | 18,156 | ||||||||||||
| Bank of the Carolinas Corporation Consolidated |
15.50 | 46,894 | 12,104 | 18,156 | ||||||||||||
| Tier I Leverage Capital (to Fourth Quarter Average Assets): |
||||||||||||||||
| Bank of the Carolinas* |
11.46 | 45,095 | 15,740 | 19,675 | ||||||||||||
| Bank of the Carolinas Corporation Consolidated |
11.92 | 46,894 | 15,740 | 19,675 | ||||||||||||
| As of December 31, 2013: |
||||||||||||||||
| Total Capital (to Risk Weighted Assets): |
||||||||||||||||
| Bank of the Carolinas |
6.13 | % | $ | 19,175 | $ | 25,023 | $ | 31,279 | ||||||||
| Bank of the Carolinas Corporation Consolidated |
4.93 | 15,408 | 25,011 | 31,264 | ||||||||||||
| Tier 1 Capital (to Risk Weighted Assets): |
||||||||||||||||
| Bank of the Carolinas |
4.87 | 15,240 | 12,512 | 18,767 | ||||||||||||
| Bank of the Carolinas Corporation Consolidated |
2.46 | 7,704 | 12,506 | 18,758 | ||||||||||||
| Tier I Leverage Capital (to Fourth Quarter Average Assets): |
||||||||||||||||
| Bank of the Carolinas* |
3.55 | 15,240 | 17,189 | 21,486 | ||||||||||||
| Bank of the Carolinas Corporation Consolidated |
1.79 | 7,704 | 17,183 | 21,478 | ||||||||||||
| * | As previously described, the Company’s Board of Directors agreed to maintain the Bank’s Leverage Capital Ratio of 8.0% which is above the minimum level required by regulatory capital guidelines. |
13. Employee Benefit Plan
The Bank has a 401(k) Plan to benefit employees. Employees that meet certain age and service requirements may participate in the Plan. Employees may contribute up to 75 percent of their compensation subject to certain limits based on federal tax laws. The Bank may make contributions to the Plan as determined by the Bank’s Board of Directors. For the years ended December 31, 2014, 2013 and 2012, there was no expense attributable to the Plan.
75
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
14. Commitments and Contingencies
To accommodate the financial needs of its customers, the Company makes commitments under various terms to lend funds. These commitments include revolving credit agreements, term loan commitments and short-term borrowing agreements. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held includes first and second mortgages on one-to-four family dwellings, accounts receivable, inventory, and commercial real estate. Certain lines of credit are unsecured.
The Company had outstanding commitments to originate commercial and construction loans of approximately $29.6 million at December 31, 2014. These commitments were composed of variable rate loans, with interest rates based upon the prime rate. The commitments included various maturity terms with balloon payments due between one to five years.
The following summarizes the Company’s approximate remaining available balance to customers under commitments to fund lines of credit at December 31, 2014 (in thousands):
| Unfunded Commitments |
||||
| Unfunded loan commitments |
$ | 29,549 | ||
| Standby letter of credits |
209 | |||
|
|
|
|||
| $ | 29,758 | |||
|
|
|
|||
15. Employment and Change of Control Agreements
The Company has entered into an employment agreement with a key employee. The employment agreement provides for a rolling three-year term. In most circumstances, commencing on the first anniversary date and continuing each anniversary date thereafter, the agreement automatically extends for an additional year so that the remaining term shall remain three years. The agreement provides for severance payments and other benefits in the event of involuntary termination of employment in connection with any change in control of the Company or the Bank. A severance payment will also generally be provided on a similar basis in connection with voluntary termination of employment where, subsequent to a change in control, the officer is assigned duties inconsistent with his position, duties, responsibilities and status immediately prior to such change in control. The severance payments are defined in the agreement, but in no case exceed 2.99 times the executive officer’s annual base salary in effect at the time the change in control becomes effective or as in effect at the time the officer’s termination becomes effective, whichever is greater. The employment agreement provides for termination by the Company for just cause at any time. The Company has not accrued any benefits under this post-employment agreement as of December 31, 2014 and 2013.
16. Stockholders’ Equity
Preferred Stock
The Company has 3 million shares of preferred stock authorized. There were 13,179 shares of preferred stock issued and outstanding with a $1,000 per share liquidation preference on December 31, 2013. All of the shares were issued on April 17, 2009, in connection with the U.S. Treasury’s TARP Capital Purchase Program.
On July 16, 2014, the Company repurchased all 13,179 shares of its Series A Preferred Stock for a cash payment of $3.3 million. The Treasury also agreed to waive any unpaid dividends on the Series A Preferred Stock, and to cancel the warrant to purchase 475,204 shares of the Company’s common stock held by the Treasury.
There were no preferred shares issued and outstanding at December 31, 2014.
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Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
Common Stock
The Company had 580.0 million shares with no par value common stock authorized as of December 31, 2014. There were 462,028,831 and 3,895,840 shares of common stock issued and outstanding at December 31, 2014 and 2013, respectively.
Warrants
In connection with the issuance of the preferred shares under the U.S. Treasury’s TARP Capital Purchase Program, the Company issued the Treasury a warrant to purchase 475,204 shares of its common stock for $4.16 per share.
The warrants were cancelled on July 16, 2014 as disclosed above.
Equity-Based Plans
Under the Company’s 2007 Omnibus Equity Plan (which was approved by the Company stockholders during 2007 to replace the previous Employee Stock Option Plan and Directors Stock Option Plan which expired in 2008), the Company may grant incentive and non-qualified stock options, restricted stock awards and performance share awards to its officers and employees, and non-qualified stock options and restricted stock awards to its directors, for up to an aggregate of 300,000 shares of common stock. The exercise price of each option equals the market price of the Company’s stock on the date of grant and grants have a maximum term of ten years.
The Company did not grant options during the years ended December 31, 2014, 2013, and 2012. The most recent options were granted with a weighted average fair market value of $5.25 per share. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model.
The Company also granted 6,000 shares of restricted stock during 2008. These shares were granted with a weighted average fair value of $5.25. The awards have all been recognized. The restricted stock grants were granted using the same fair value assumptions as the option grants during the year. The restricted stock grant agreements are based upon continued employment with the Company and carry no performance provisions in order to receive the shares at the end of the vesting schedule. The shares will vest equally over a three year period. There was a forfeiture of 1,333 shares in 2011.
Stock based compensation benefit (expense) was $0, $0, and $(1,000) in 2014, 2013, and 2012, respectively. All stock based awards are vested and all expense has been recognized at December 31, 2014.
Accounting principles generally accepted in the United States of America require the cash flows from the tax benefits resulting from tax deductions in excess of the compensation expense recognized for those options (“excess tax benefits”) to be classified as financing cash flows. There were no excess tax benefits classified as a financing cash inflow for the years ended December 31, 2014, 2013, and 2012. There were 6,000 options which expired in 2014. There were no options exercised in 2014. There were forfeitures of 9,500 options in 2014.
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Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
A summary of the status of the Company’s stock options and stock awards as well as the warrants issued to the U.S. Treasury as of December 31, 2014 and changes during the year then ended is presented below:
| For the Year ended December 31, 2014 |
||||||||||||||||||
| Stock Options and Warrants |
Restricted Stock Awards |
|||||||||||||||||
| Shares | Weighted Average Exercise Price |
Shares | Weighted Average Grant Date Fair Value |
|||||||||||||||
| Options outstanding at beginning of year |
20,000 | $ | 8.07 | Outstanding at beginning of year | 4,667 | $ | 5.25 | |||||||||||
| Options granted |
— | — | Granted | — | — | |||||||||||||
| Options exercised |
— | — | Forfeited | — | — | |||||||||||||
|
|
|
|||||||||||||||||
| Options forfeited |
(9,500 | ) | 7.60 | Outstanding at end of year | 4,667 | $ | 5.25 | |||||||||||
|
|
|
|||||||||||||||||
| Options expired |
(6,000 | ) | 10.92 | |||||||||||||||
|
|
|
|||||||||||||||||
| Options outstanding at end of year |
4,500 | 5.25 | ||||||||||||||||
| Warrants issued and outstanding at end of year |
— | — | ||||||||||||||||
|
|
|
|||||||||||||||||
| Total Options and warrants outstanding at end of year |
4,500 | $ | 5.25 | |||||||||||||||
|
|
|
|||||||||||||||||
| At December 31, 2014 |
||||||||||||||||||||||||||||
| Stock Options and Warrants Outstanding |
Stock Options and Warrants Exercisable |
|||||||||||||||||||||||||||
| Range of |
Number Outstanding |
Weighted Average Life |
Weighted Average Exercise Price |
Aggregate Intrinsic Value |
Number Exercisable |
Weighted Average Exercise Price |
Aggregate Intrinsic Value |
|||||||||||||||||||||
| 4.06 - 5.99 |
4,500 | 3.81 years | $ | 5.25 | $ | — | 4,500 | $ | 5.25 | $ | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total Options |
4,500 | 3.81 years | 5.25 | — | 4,500 | 5.25 | — | |||||||||||||||||||||
| Total Warrants |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total Options and warrants |
4,500 | 3.81 years | $ | 5.25 | $ | — | 4,500 | $ | 5.25 | $ | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
17. Fair Value of Financial Instruments
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Bank’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Accounting principles generally accepted in the United States of America exclude certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Bank.
The following methods and assumptions were used by the Bank in estimating fair value disclosures for financial instruments:
Cash and Cash Equivalents—The carrying amounts of cash and short-term instruments approximate fair values.
Federal Funds Sold—The carrying amounts of federal funds sold approximate fair values.
Investment Securities—Fair values for securities are based on quoted market prices.
78
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
Loans Receivable—For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans, as applicable, are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Bank Owned Life Insurance—The carrying amount of bank owned life insurance is the current cash surrender value.
Other Assets—Other assets include interest receivable and Federal Home Loan Bank stock. The carrying amount of accrued interest receivable approximates fair value. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.
Deposits—The fair values disclosed for demand deposits (e.g., interest and non-interest checking, statement savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank Advances—The fair values of the Bank’s advances are estimated using discounted cash flow analyses based on the Bank’s current incremental borrowing rates for similar types of borrowing arrangements.
Repurchase Agreements—The Bank established two term repurchase agreements during 2008. These agreements are collateralized by securities held in our portfolio. The fair value amount for these agreements is based on the repurchase price and agreed upon terms. The repurchase agreements were repaid on July 18, 2014.
Other Borrowings—Other borrowings includes federal funds purchased as well as repurchase agreements, trust preferred securities and subordinated debt. The carrying amounts approximate the fair value of these assets. On July 16, 2014, the Company repurchased all of the trust preferred securities and also repurchased the subordinated debt.
Other Liabilities—Other liabilities include accrued interest payable. The carrying amounts of accrued interest payable approximate fair value.
Off-Balance-Sheet Instruments—Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.
79
Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
The approximate carrying and estimated fair values of financial instruments are summarized below (in thousands):
| December 31, 2014 | Carrying Amount |
Estimated Fair Value |
Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial assets: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | 46,612 | $ | 46,612 | $ | 46,612 | $ | — | $ | — | ||||||||||
| Investment securities |
40,348 | 40,348 | — | 40,348 | — | |||||||||||||||
| Loans receivable, net |
273,484 | 271,887 | — | 240,267 | 31,620 | |||||||||||||||
| Bank owned life insurance |
11,234 | 11,234 | — | 11,234 | — | |||||||||||||||
| Accrued interest receivable |
852 | 852 | — | 852 | — | |||||||||||||||
| FHLB stock |
384 | 384 | — | 384 | — | |||||||||||||||
| Financial liabilities: |
||||||||||||||||||||
| Deposits: |
||||||||||||||||||||
| Demand, Savings, and Money Market |
$ | 189,577 | $ | 189,105 | $ | — | $ | 189,105 | $ | — | ||||||||||
| Time |
147,045 | 147,366 | — | 147,366 | — | |||||||||||||||
| Securities sold under repurchase agreements |
491 | 491 | — | 491 | — | |||||||||||||||
| Other liabilities |
1,290 | 1,290 | — | 1,290 | — | |||||||||||||||
| December 31, 2013 | Carrying Amount |
Estimated Fair Value |
Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial assets: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | 14,842 | $ | 14,842 | $ | 14,842 | $ | — | $ | — | ||||||||||
| Federal funds sold |
19,580 | 19,580 | 19,580 | — | — | |||||||||||||||
| Investment securities |
90,315 | 90,135 | — | 90,135 | — | |||||||||||||||
| Loans receivable, net |
272,495 | 272,524 | — | 232,941 | 39,583 | |||||||||||||||
| Bank owned life insurance |
10,888 | 10,888 | — | 10,888 | — | |||||||||||||||
| Accrued interest receivable |
1,156 | 1,156 | — | 1,156 | — | |||||||||||||||
| FHLB stock |
524 | 524 | — | 524 | — | |||||||||||||||
| Financial liabilities: |
||||||||||||||||||||
| Deposits: |
||||||||||||||||||||
| Demand, Savings, and Money Market |
$ | 185,601 | $ | 185,601 | $ | — | $ | 185,601 | $ | — | ||||||||||
| Time |
180,549 | 178,676 | — | 178,676 | — | |||||||||||||||
| Securities sold under repurchase agreements |
53,243 | 53,243 | — | 53,243 | — | |||||||||||||||
| Other liabilities |
2,509 | 2,509 | — | 2,509 | — | |||||||||||||||
Effective January 1, 2008, accounting principles generally accepted in the United States of America require that certain assets and liabilities be measured at fair value and that any adjustments to the fair value of those assets be recorded. Securities are recorded at fair value on a recurring basis while other assets are recorded at fair value on a non-recurring basis such as impaired loans and other real estate owned.
The Company uses three levels of measurement to group those assets measured at fair value. These groupings are made based on the markets the assets are traded in and the reliability of the assumptions used to determine fair value. The groupings include:
| • | 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. |
Investment Securities—The Company’s investment securities are measured on a recurring basis through a model used by our bond agent. All of our bond price adjustments meet level 2 criteria. Prices are derived from a model which uses actively quoted rates, prepayment models and other underlying credit and collateral data.
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Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
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. 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. At December 31, 2014 and 2013, a majority of the total impaired loans were evaluated based on the net present value of future cash flows.
Other Real Estate Owned—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 3. 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.
| Total at 12/31/2014 |
Level 1 | Level 2 | Level 3 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Assets valued on a recurring basis |
||||||||||||||||
| Investment securities: |
||||||||||||||||
| U.S. Government agency |
$ | 4,985 | $ | — | $ | 4,985 | $ | — | ||||||||
| State and municipals |
6,156 | — | 6,156 | — | ||||||||||||
| Mortgage-backed |
29,207 | — | 29,207 | — | ||||||||||||
| Assets valued on a non-recurring basis |
||||||||||||||||
| Impaired loans |
31,620 | — | — | 31,620 | ||||||||||||
| Other real estate owned |
1,108 | — | — | 1,108 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 73,076 | $ | — | $ | 40,348 | $ | 32,728 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
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Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
| Total at 12/31/2013 |
Level 1 | Level 2 | Level 3 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Assets valued on a recurring basis |
||||||||||||||||
| Investment securities: |
||||||||||||||||
| U.S. Government agency |
$ | 40,930 | $ | — | $ | 40,930 | $ | — | ||||||||
| State and municipals |
10,181 | — | 10,181 | — | ||||||||||||
| Mortgage-backed |
38,204 | — | 38,204 | — | ||||||||||||
| Assets valued on a non-recurring basis |
||||||||||||||||
| Impaired loans |
39,583 | — | — | 39,583 | ||||||||||||
| Other real estate owned |
1,233 | — | — | 1,233 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 130,131 | $ | — | $ | 89,315 | $ | 40,816 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
18. Parent Company Financial Information
The condensed balance sheets for 2014 and 2013, and the condensed statements of operations and cash flows for the parent company as of and for the years ended December 31, 2014, 2013, and 2012 are presented below (in thousands):
Condensed Balance Sheets
| 2014 | 2013 | |||||||
| Assets |
||||||||
| Cash |
$ | 1,797 | $ | 437 | ||||
| Investment in wholly owned subsidiary |
45,258 | 9,861 | ||||||
| Other assets |
1 | 156 | ||||||
|
|
|
|
|
|||||
| Total Assets |
$ | 47,056 | $ | 10,454 | ||||
|
|
|
|
|
|||||
| Liabilities and Stockholder’s equity: |
||||||||
| Borrowings |
$ | — | $ | 7,855 | ||||
| Other liabilities |
— | 851 | ||||||
| Stockholder’s Equity |
47,056 | 1,748 | ||||||
|
|
|
|
|
|||||
| Total Liabilities and Stockholder’s Equity |
$ | 47,056 | $ | 10,454 | ||||
|
|
|
|
|
|||||
Condensed Statements of Operations
| 2014 | 2013 | 2012 | ||||||||||
| Interest on deposits in other banks |
$ | 7 | $ | 3 | $ | 3 | ||||||
| Other income |
5,443 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total operating income |
5,450 | 3 | 3 | |||||||||
|
|
|
|
|
|
|
|||||||
| Interest expense on borrowed funds |
156 | 288 | 294 | |||||||||
| Other |
12 | 30 | 57 | |||||||||
| Equity in undistributed loss of subsidiary |
4,945 | 1,040 | 4,231 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total operating expense |
5,113 | 1,358 | 4,582 | |||||||||
|
|
|
|
|
|
|
|||||||
| Income (Loss) before taxes |
337 | (1,355 | ) | (4,579 | ) | |||||||
| Income tax expense |
200 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) |
137 | (1,355 | ) | (4,579 | ) | |||||||
| Preferred stock dividends and accretion |
65 | (978 | ) | (956 | ) | |||||||
| Gain on redemption of preferred stock |
10,203 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) available to common shareholders |
$ | 10,405 | $ | (2,333 | ) | $ | (5,535 | ) | ||||
|
|
|
|
|
|
|
|||||||
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Table of Contents
Bank of the Carolinas Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
Condensed Statements of Cash Flows
| 2014 | 2013 | 2012 | ||||||||||
| Cash Flows from Operating Activities: |
||||||||||||
| Net income (loss) |
$ | 137 | $ | (1,355 | ) | $ | (4,579 | ) | ||||
| Equity in undistributed net loss of subsidiary |
4,945 | 1,040 | 4,231 | |||||||||
| Gain on extinguishment of debt |
(5,443 | ) | — | — | ||||||||
| Change in other assets |
157 | 300 | 218 | |||||||||
| Change in other liabilities |
— | — | (1 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Net cash used by operating activities |
(204 | ) | (15 | ) | (131 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Cash Flows from Investing Activities: |
||||||||||||
| Investment in subsidiary |
(34,800 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Cash Flows from Financing Activities: |
||||||||||||
| Repayment of borrowings |
(3,100 | ) | — | — | ||||||||
| Issuance of common stock, net of cost |
42,759 | — | — | |||||||||
| Repurchase of preferred stock |
(3,295 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Net cash used by financing activities |
36,364 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net decrease in cash and cash equivalents |
1,360 | (15 | ) | (131 | ) | |||||||
| Cash and cash equivalents at beginning of year |
437 | 452 | 583 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash and cash equivalents at end of year |
$ | 1,797 | $ | 437 | $ | 452 | ||||||
|
|
|
|
|
|
|
|||||||
83
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On August 21, 2014, the Company advised Turlington and Company, L.L.P. (“Turlington”), that it was dismissed as its independent registered public accounting firm. On September 15, 2014, the Company appointed Cherry Bekaert LLP as its independent registered public accounting firm for the fiscal year ending December 31, 2014.
In connection with this change in accountants, there were (1) no disagreements with Turlington on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures which disagreements, if not resolved to Turlington’s satisfaction, would have caused Turlington to make reference thereto in its reports on the financial statements for such periods and (2) no “reportable events” as described in Item 304(a)(1)(v) of Regulation S-K promulgated by the Securities and Exchange Commission.
The foregoing information was previously reported on the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 17, 2014, as amended on September 22, 2014.
ITEM 9A. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures in accordance with Exchange Act Rule 13a-15(b). Based upon their evaluation, the Company’s Chief Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the Company is able to record, process, summarize, and report in a timely manner the information required to be disclosed in reports the Company files under the Exchange Act.
The Company’s Management’s Report on Internal Control Over Financial Reporting appears below.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is a process designed under supervision of the Company’s Chief Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Management has made a comprehensive review, evaluation and assessment of the Company’s internal control over financial reporting as of December 31, 2014. In making its assessment of internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013 Framework). Based on this assessment, management believes that, as of December 31, 2014, the Company’s internal control over financial reporting is effective. In accordance with Section 404 of the Sarbanes-Oxley Act of 2002, management makes the following assertions:
| • | Management has implemented a process to monitor and assess both design and operating effectiveness of internal control over financial reporting. |
| • | Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. |
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to an exemption from that requirement available to smaller reporting companies.
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CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
In connection with the above evaluation of the Company’s disclosure controls and procedures, no change in the Company’s internal control over financial reporting was identified that occurred during the quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
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Item 10. Directors, Executive Officers and Corporate Governance.
Directors
Our Bylaws provide that:
| • | our Board of Directors consists of not less than five nor more than eighteen members, and our Board is authorized to set and change the actual number of our directors from time to time within those limits; and |
| • | our directors are elected each year at our Annual Meeting for terms of one year, or until their successors have been duly elected and qualified. |
The following table lists information about each of our current directors, including a description of his or her principal occupation and business experience. There are no family relationships among directors and executive officers of the Company.
| Name and Age |
Positions With Us and the Bank (1) |
Year First Elected |
Principal Occupation and Business Experience | |||
| Derek J. Ferber (29) |
Director | 2014 | Senior Analyst, FJ Capital Management (2013–present); Equity Research Associate, Stifel Nicolaus & Company (2010–2013) | |||
| Harvey L. Glick (64) |
Director; Chairman of the Board of Directors | 2014 | Director, Insignia Bank, Sarasota, FL; President and Chief Executive Officer, Insight Bank, Worthington, OH (2008–2014) | |||
| Henry H. Land (72) |
Director | 2002(2)(3) | Retired; previously, Partner, McClary, Stocks, Smith, Land & Campbell, P.A., Certified Public Accountants (1988–2006) | |||
| Grady L. McClamrock, Jr. (62) |
Director | 2001(2) | Attorney; owner, Grady L. McClamrock, Jr., J.D., P.A. (law firm) | |||
| Sam D. Norton (55) |
Director | 2014 | Attorney; shareholder, Norton, Hammersley, Lopez & Skokos, P.A., Sarasota, FL (law firm) | |||
| John D. Russ (67) |
Director | 2014 | Banking consultant; previously, Founding Director, President and Chief Executive Officer, Carolina Financial Corporation, Charleston, South Carolina (parent company of CresCom Bank) | |||
| Dr. Lynne Scott Safrit (56) |
Director | 2002(2)(3) | President and Chief Operating Officer, Castle & Cooke North Carolina, LLC (property management and development) | |||
| Anton V. Schutz (51) |
Director | 2014 | President and Chief Investment Officer, Mendon Capital Advisors Corp; Portfolio Manager, RMB Capital Management LLC; Managing Partner, New Ground Capital (2012–2013) | |||
| Stephen R. Talbert (69) |
Director; Vice Chairman of the Board of Directors; President and Chief Executive Officer |
2002(2)(3)(4) | Our executive officer(3) |
| (1) | Members of certain committees of our Board are as follows: |
| Audit Committee |
Corporate Governance Committee |
Risk Oversight Committee |
Executive Committee | |||
| Henry H. Land - Chairman |
Grady L. McClamrock, Jr. - Chairman |
Lynne Scott Safrit - Chairman |
Harvey L. Glick- Chairman | |||
| Derek J. Ferber |
Derek J. Ferber | Derek J. Ferber | Henry H. Land | |||
| Sam D. Norton |
Henry H. Land | Henry H. Land | Grady L. McClamrock, Jr. | |||
| John D. Russ |
Dr. Lynne Scott Safrit | Grady L. McClamrock, Jr. | Sam D. Norton | |||
| Dr. Lynne Scott Safrit |
Anton V. Schutz | Anton V. Schutz | ||||
| Stephen R. Talbert | Stephen R. Talbert |
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| (2) | “Year first elected” refers to the year in which the individual first became a director of the Bank. The individual first became our director at the time we were incorporated during 2006 as the Bank’s holding company. |
| (3) | Previously served as a director of BOC Financial Corp and was appointed as a director of the Bank following our merger with that company on December 31, 2001. |
| (4) | Information regarding Mr. Talbert’s business experience is included in his listing below under the heading “Executive Officers.” |
Reconstitution of Our Board of Directors. On July 16, 2014, we successfully completed a private placement of our common stock to institutional and accredited individual investors. This private placement resulted in gross proceeds of $45.8 million to the Company. We used a portion of these proceeds to restructure our balance sheet by repurchasing all of the issued and outstanding shares of our preferred stock, repurchasing all of our issued and outstanding trust preferred securities, and redeeming a subordinated note we had issued to another financial institution. We used the remaining net proceeds to recapitalize the Bank.
In connection with the completion of the private placement, we reconstituted our Board of Directors in 2014. At the 2014 annual meeting of shareholders, the Board nominated and our shareholders elected five new directors to the Board—Derek J. Ferber, Harvey L. Glick, Sam D. Norton, John D. Russ, and Anton V. Schutz. Concurrently, five of our then-current directors retired from the Board.
Messrs. Ferber, Glick, Norton, Russ, and Schutz were introduced to the Board of Directors during the course of the private placement. The private placement was successful in part because of the participation of several institutional investors that invested significant amounts in the Company. In connection with two of these investments, we agreed to appoint representatives of these investors to our Board of Directors. Specifically we entered into Side Letter Agreements with Bridge Equities III, LLC, and RMB Capital Management LLC that entitle each of those entities to have one representative appointed to the Company’s Board of Directors. Bridge Equities III is affiliated with FJ Capital Management, which beneficially owns 44,935,687 shares, or 9.73%, of our outstanding shares of common stock. RMB Capital Management is affiliated with and manages Mendon Capital Master Fund Ltd., which beneficially owns 44,935,688 shares, or 9.73% or our outstanding shares of common stock. In satisfaction of our Side Letter Agreements with Bridge Equities and RMB Capital Management, our Board of Directors nominated Derek J. Ferber and Anton V. Schutz for election at the 2014 annual meeting as directors for one-year terms. Mr. Ferber is a representative of Bridge Equities and Mr. Schutz is a representative of RMB Capital Management.
Other Directorships
John D. Russ was a member of the board of directors of Carolina Financial Corporation from December 1996 until April 2014. Carolina Financial Corporation has a class of securities registered pursuant to section 12 of the Securities Exchange Act of 1934.
Factors Bearing on Qualifications of Directors
The experience, qualifications, attributes, skills and other factors that leads our Board to conclude that each of our directors listed in the table above should serve, or continue to serve, as a director are described below.
Derek J. Ferber
| • | Experience in the financial institutions sector since 2007 |
| • | Skills include equity research, financial statement analysis, and financial due diligence |
| • | Economics degree from the University of Virginia |
| • | Brings new perspective and financial service industry experience to the Board |
Harvey L. Glick
| • | Career in banking spanning over thirty years, including accounting experience |
| • | Prior experience serving on the boards of directors of financial institutions in Arizona, Ohio, and South Carolina |
| • | Founding director of Insignia Bank, Sarasota, Florida; currently serves on its board of directors |
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| • | Service as a member of the Banking Commission of the State of Ohio since 2011 brings regulatory perspective and experience to the Board |
| • | Bachelor of science degree in accounting from The Ohio State University |
| • | Brings new perspective and financial service industry and regulatory experience to the Board |
Henry H. Land
| • | Thorough understanding of our culture, values and goals derived from service as our director since 2002; currently serves as Chairman of and financial expert for the Audit Committee |
| • | East Carolina University, AB degree in Business Administration; CPA certification in 1969 from State of North Carolina (currently inactive) |
| • | Extensive experience in financial accounting and reporting with large industrial corporation |
| • | Public accounting experience with various small- to medium-size privately owned businesses |
| • | Able to identify the financial needs of small- and mid-size businesses in our market area |
Grady L. McClamrock, Jr.
| • | Thorough understanding of our culture, values and goals derived from service as our director since 2001 |
| • | North Carolina State University, Construction Engineering degree 1974; Wake Forest Law School, JD degree 1977 |
| • | Significant business skills developed through owning and managing law practice |
| • | Visible and active as a community leader serving on various boards within our market area |
| • | Able to identify with the financial needs of small- and mid-size businesses in our market area |
Sam D. Norton
| • | Significant business skills developed through law practice |
| • | Prior experience serving on the boards of directors of financial institutions |
| • | Board certified real estate attorney, which we believe provides valuable background for issues involving our real estate loan portfolio |
| • | Degree in finance from the University of Florida and law degree from Stetson University College of Law |
| • | Brings new perspective and legal experience to the Board |
John D. Russ
| • | Over four decades of experience in the financial services industry; currently a banking consultant |
| • | Prior experience serving on board of directors and as an executive officer of a financial institution |
| • | Business administration degree from the University of South Carolina |
| • | Experience in the mortgage banking industry |
| • | Brings new perspective and financial industry experience to the Board |
Dr. Lynne Scott Safrit
| • | Thorough understanding of our culture, values and goals derived from service as our director since 2002 |
| • | Substantial experience in commercial real estate with more than 15 years as president of a national real estate development company; holds CCIM (Certified Commercial Investment Member) designation; state-certified general appraiser in North Carolina and South Carolina |
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| • | Catawba College, BA Cum Laude 1980; UNCC, MA 1981; University of North Carolina at Chapel Hill, DrPH, 2014 |
| • | Graduate of NC Advanced Bank Directors’ College 2003 |
| • | Very active in many civic and professional organizations; currently serving on the Board of Trustees of Catawba College, President of the Board of Directors of the Cabarrus County Economic Development Corp., Board of Directors of Foundation for the Carolinas, Advisory Boards for the College of Health Sciences, UNC-Charlotte and Appalachian State University, Board of Directors, NC Biotechnology Center |
| • | Member of the Catawba College Business Hall of Fame |
| • | Able to identify with the financial needs of small- and mid-size businesses in our market area |
Anton V. Schutz
| • | Over twenty-five years of experience in the investment and risk management business |
| • | Familiar with the financial services sector through work as a portfolio manager |
| • | Master of business administration degree from Fordham University |
| • | Experience in risk management, which is a key function of the Board of Directors |
| • | Brings new perspective and financial service industry experience to the Board |
Stephen R. Talbert
| • | Thorough understanding of our culture, values and goals derived from 43 years experience in the banking industry and service as a director since 2002; currently serves as our Vice Chairman, President and Chief Executive Officer |
| • | Experience as President and Chief Executive Officer of Bank of the Carolinas until its merger with Bank of Davie in 2001 |
| • | Catawba College, BA degree in Business Administration 1966 |
| • | Very active in local community serving on many boards including NorthEast Medical Center Foundation, Trinity Lutheran Church, and Catawba College Board of Visitors |
| • | Able to identify with the financial needs of small- and mid-size businesses in our market area |
Executive Officers
We consider our three officers listed below to be our executive officers.
Stephen R. Talbert, age 69, serves as our and the Bank’s Vice Chairman, President, and Chief Executive Officer. He joined the Bank on December 31, 2001, in connection with the Bank’s acquisition of BOC Financial Corp. Previously, he had served as Chairman, President and Chief Executive Officer of BOC Financial Corp since its organization during 1998, and in the same positions with that company’s bank subsidiary or its predecessor since 1971. He served as the Bank’s Chairman and Executive Vice President from 2002 to 2004 and has been Vice Chairman since 2004. Prior to being appointed President and Chief Executive Officer, Mr. Talbert served as our Interim Chief Executive Officer from August to September 2010.
George E. (“Ed”) Jordan, age 56, was appointed to serve as Chief Operating Officer of the Bank on November 24, 2010. Mr. Jordan previously served as the Bank’s Executive Vice President since January 2008 and, in that position, supervised the Bank’s financial services, marketing and sales functions and served as regional executive for the Bank’s offices located in Stokes, Forsyth, Davidson and Randolph Counties. Prior to that, he served as the Bank’s President and Chief Operating Officer from May 2004 to January 2008. Prior to his employment with the Bank, Mr. Jordan was employed by Wachovia Bank for 24 years where his positions included supervisory responsibility over city executives for several of that bank’s Triad area offices and service as that bank’s Senior Vice President and Business Banking Sales Director with responsibilities for middle market lending.
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Megan W. Patton, age 33, was appointed to serve as Senior Vice President and Chief Financial Officer of the Company and the Bank on January 14, 2014. Ms. Patton has been employed by the Bank since June 2008 and has served as an internal auditor, controller, and vice president. Prior to joining the Bank, Ms. Patton was employed by Elliott Davis, LLC (now Elliott Davis Decosimo LLC), as a senior tax accountant.
Audit Committee
Our Board of Directors has a standing Audit Committee that operates under a written charter approved by our Board that sets out the Committee’s composition, authority, duties and responsibilities. A current copy of the charter of the Audit Committee is available on our website at www.bankofthecarolinas.com. We believe that each member of the Committee is an “independent director” as that term is defined by the listing standards of The Nasdaq Stock Market. Although the Company’s common stock is no longer listed on The Nasdaq Stock Market, the Board of Directors continues to use Nasdaq’s definition of independence in determining whether or not a director or nominee for director is independent.
The current members of the Audit Committee are listed in the following table:
Audit Committee
Henry H. Land - Chairman
Derek J. Ferber
Sam D. Norton
John D. Russ
Dr. Lynne Scott Safrit
The Audit Committee is a joint committee of our and the Bank’s Boards of Directors. Under its charter, the Committee is responsible for:
| • | appointing our independent accountants and approving their compensation and the terms of their engagement; |
| • | approving services proposed to be provided by the independent accountants; and |
| • | monitoring and overseeing the quality and integrity of our accounting and financial reporting process and systems of internal controls. |
The Committee reviews various reports from our independent accountants (including its annual audit report on our consolidated financial statements), financial reports we file under the Securities Exchange Act of 1934, and reports of examinations by our regulatory agencies, and it generally oversees our internal audit program. Also, as described in this Report under Item 13 (Certain Relationships and Related Transactions, and Director Independence), our Board has directed the Audit Committee to monitor and make annual reports regarding the independence of our directors. The Committee met eight times during 2014.
Audit Committee Financial Expert
Mr. Land, the Chairman of the Audit Committee, is a certified public accountant with over 40 years of accounting experience, including approximately 20 years in public accounting. Our Board of Directors believes that Mr. Land is an “audit committee financial expert” as that term is defined by rules of the Securities and Exchange Commission. Mr. Land is an “independent” director, as independence for audit committee members is defined by The Nasdaq Stock Market. For more information on director independence, see Item 13—Certain Relationships and Related Transactions, and Director Independence, which appears below.
Code of Ethics
Our Board of Directors has adopted a Code of Ethics which applies to our directors and executive officers, including our senior financial officers, and, among other things, is intended to promote:
| • | honest and ethical conduct; |
| • | ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
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| • | full, fair, accurate, timely and understandable disclosure in reports and documents that we file with the Securities and Exchange Commission and in other public communications we make; |
| • | compliance with governmental laws, rules and regulations; |
| • | prompt internal reporting of violations of the Code to the Board’s Audit Committee; and |
| • | accountability for adherence to the Code. |
A copy of the Code is posted under “Corporate Governance” on the investor relations section of Bank’s Internet website at http://investor.bankofthecarolinas.com/governance.cfm. Illegal or unethical behavior, violations of the Code, or accounting or auditing concerns may be reported, anonymously or otherwise, to the Chairman of our Audit Committee addressed as follows:
Henry H. Land
Post Office Box 166
Kannapolis, NC 28082
Section 16(a) Beneficial Ownership Reporting Compliance
Our directors and executive officers are required by federal law to file reports with the Securities and Exchange Commission regarding the amounts of and changes in their beneficial ownership of our common stock. Based on our review of copies of those reports, we are required to disclose failures to report shares beneficially owned or changes in beneficial ownership, and failures to timely file required reports, during previous years. We currently are not aware of any of our directors or executive officers who, during 2014, failed to report shares beneficially owned or to timely file a required report.
Item 11. Executive Compensation.
Summary
The following table shows the cash and certain other compensation paid or provided to or deferred by the named executive officers for 2014 and 2013. Our named executive officers are compensated by the Bank for their services as its officers, and they receive no separate salaries or other cash compensation from us for their services as our officers.
SUMMARY COMPENSATION TABLE
| Name and Principal Position (1) |
Year | Salary (2) | Bonus | Stock Awards |
Option Awards |
Non-Equity Incentive Plan Compensation |
All
Other Compensation (3) |
Total | ||||||||||||||||||||||||
| Stephen R. Talbert |
2014 | $ | 220,000 | -0- | -0- | -0- | -0- | $ | 9,103 | $ | 229,103 | |||||||||||||||||||||
| Vice Chairman, President and Chief Executive Officer |
2013 | 220,000 | -0- | -0- | -0- | -0- | 1,946 | 221,946 | ||||||||||||||||||||||||
| George E. Jordan |
2014 | $ | 167,500 | -0- | -0- | -0- | -0- | $ | 6,457 | $ | 173,957 | |||||||||||||||||||||
| Executive Vice President and Chief Operating Officer |
2013 | 167,500 | -0- | -0- | -0- | -0- | 1,261 | 168,761 | ||||||||||||||||||||||||
| Megan W. Patton |
2014 | $ | 115,000 | -0- | -0- | -0- | -0- | -0- | $ | 115,000 | ||||||||||||||||||||||
| Senior Vice President and Chief Financial Officer |
2013 | 110,485 | -0- | -0- | -0- | -0- | -0- | 110,485 | ||||||||||||||||||||||||
| (1) | Mr. Talbert served as a member of our Board of Directors during 2014 and 2013. Mr. Talbert received no additional compensation for his service as a director. Ms. Patton was appointed Senior Vice President and Chief Financial Officer on January 14, 2014. |
| (2) | Reflects total salary paid by the Bank each year, including the amount of salary deferred at each officer’s election under our Section 401(k) plan. |
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| (3) | The following table describes each officer’s “Other Compensation” for 2014: |
| Description |
Mr. Talbert |
Mr. Jordan |
||||||
| Our estimated aggregate incremental cost related to personal benefits received during 2014 (a) |
$ | 9,103 | $ | 6,457 | ||||
|
|
|
|
|
|||||
| Total |
$ | 9,103 | $ | 6,457 | ||||
| (a) | Our executive officers receive, or we may treat them as receiving, various non-cash personal benefits. During 2014, the personal benefits received by the named officers included, for Mr. Talbert and Mr. Jordan, personal use of a Bank-owned vehicle. |
We also provide our officers with group life, health, medical and other insurance coverages that are generally available on the same basis to all salaried employees. The cost of that insurance is not included in the table.
Employment Agreement
Mr. Jordan is employed by the Bank under an employment agreement. The agreement has a “rolling” term of employment of three years that, at the end of each year, is extended by one additional year. On May 17, 2018, the term becomes a fixed three years expiring at the close of business on May 17, 2021. If Mr. Jordan remains employed by the Bank after May 17, 2021, his employment will be on an “at will” basis. The agreement also provides for:
| • | an annual base salary (which is subject to review and periodic increase by the Bank’s Board) of $135,678; and |
| • | the right to participate in bonus or incentive plans and other benefits made available by the Bank to its executive officers. |
The Bank may terminate the agreement at any time for cause. Subject to certain limitations, the agreement provides for payments and benefits to be provided to Mr. Jordan and limits his ability to compete against the Bank after a termination of his employment under various circumstances (including a termination following a change in control of the Company or the Bank). Those provisions, and the limitations on their operation, are described below under the caption “Potential Payments Upon Termination of Employment or a Change in Control.”
Plan-Based Awards
At December 31, 2014, we maintained two arrangements under which awards were available to be granted to our officers and employees. They were our:
| • | 2007 Omnibus Equity Plan, under which stock options, restricted stock awards, and performance share awards were available to be granted; and |
| • | Annual Management Incentive Compensation Plan, under which additional cash compensation may be paid each year based on the extent to which corporate and individual goals or other performance criteria are met or satisfied for the year. |
Stock-Based Awards. Our shareholders approved the 2007 Omnibus Equity Plan at our 2007 Annual Meeting to replace both our Employee Stock Option Plan and Director Stock Option Plan which had been in effect since 1998 and under which we had granted options from time to time to our officers, employees and directors to purchase shares of our common stock. Those old plans have expired.
At the 2014 annual meeting of shareholders, our shareholders approved a new Omnibus Stock Incentive Plan to replace the 2007 Omnibus Equity Plan. As of the date of this report, the Board has not yet taken action to adopt the new Omnibus Stock Incentive Plan.
The Board of Directors terminated the 2007 Omnibus Equity Plan effective February 25, 2015, after which time no further awards will be granted under this plan. Outstanding and unexercised stock options under the plan will remain outstanding and exercisable until they expire per the terms of their individual grant agreements. A description of the 2007 Omnibus Equity Plan appears below and elsewhere in this Report because it was in effect during the fiscal year ended December 31, 2014, to which this Report pertains.
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Under the 2007 Omnibus Equity Plan, awards were available to be granted to officers and employees consisting of either:
| • | Incentive stock options; |
| • | Non-qualified stock options; |
| • | Restricted stock awards; or |
| • | Performance share awards. |
As described under the caption “Director Compensation,” the 2007 Omnibus Equity Plan also authorized the grant of non-qualified stock options and restricted stock awards to our non-employee directors.
A stock option gives the officer or employee to whom it is granted the right to buy shares of our common stock during a stated period of time (ordinarily ten years) at a fixed price per share equal to the fair market value of our stock on the date the option is granted. Options generally are granted to officers and employees on terms that provide for them to “vest,” or become exercisable, at intervals as to portions of the shares they cover based on a vesting schedule, and they do not include any performance-based conditions. They generally terminate immediately on the date of, or after a stated number of days following, the termination of an employee’s employment. Options granted to officers and employees may be “incentive stock options” that qualify for special tax treatment under the Internal Revenue Code of 1986, as amended, which we refer to as the Code, or they may be “non-qualified stock options” that do not qualify for that special tax treatment.
Restricted stock awards are conditional grants of shares of our common stock that are subject to forfeiture if specified conditions (usually the officer’s or employee’s continued performance) are not satisfied by the end of a specified restriction period. When an award is granted, the shares are issued and, if we pay dividends on our common stock during the restriction period, the officer or director would receive those dividends on the shares covered by his award at the same rate and on the same basis as they are paid to our other shareholders. However, the shares may not be sold or transferred until the restriction period ends. In most cases the restrictions lapse over time as to portions of the shares according to a “vesting” schedule. If the officer’s employment terminates for any reason prior to the end of the restriction period, he forfeits all unvested shares. As the restrictions expire, the shares become “vested” and are released to the officer.
Performance share awards are awards of shares of our common stock that may be earned based on performance objectives or criteria specified at the time the awards are granted. Like restricted stock awards, performance shares would be granted subject to conditions that must be satisfied before the officer or employee will own the shares outright. However, performance shares would be earned only to the extent that performance criteria are met by the end of a measurement period, while restricted stock awards usually are granted subject only to the condition of continued employment. Also, performance shares would not actually be issued until the end of the measurement period during which the performance criteria must be met, while restricted shares generally are issued at the time awards are granted and become unrestricted at the end of the restriction period.
The exercise price of stock options, and the other terms of options and stock awards, are determined by our Board, based on the recommendation of the Corporate Governance Committee, at the time they are granted.
As of December 31, 2014, none of the named executive officers held any stock options or other equity awards. As a result, the “Outstanding Equity Awards at Fiscal Year-End” table has been omitted from this Report.
Cash Incentive Awards. Our Board first adopted our Management Incentive Compensation Plan during 2007. Under the plan, our executive officers and other employees chosen to participate each year may earn additional cash compensation based on the extent to which:
| • | Our pre-tax profits (before any deduction for the expense of payments under the plan) exceed a threshold amount set by the Board; and |
| • | Other individual goals (which vary for different participants or groups of participants) set by the Board are achieved. |
The plan contemplates that each year our Board will set the maximum award each participant may receive for that year (stated as a percentage of his or her base salary). No cash awards are paid unless our pre-tax, pre-incentive profits for
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that year exceed a minimum amount set by the Board. Subject to the extent to which individual goals set by the Board for each participant are met, the maximum incentive awards may be paid if our pretax, pre-incentive profits reach a higher target level set by the Board.
During April 2009, we became a participant in the U.S. Department of the Treasury’s TARP Capital Purchase Program, or the CPP. Under rules adopted by Treasury under the Emergency Economic Stabilization Act of 2008 that apply to participants in that program, and with limited exceptions, we were prohibited from paying or accruing any bonus, retention award or incentive compensation to our most highly compensated employee. Also, in connection with any bonuses or incentive compensation, we were required to implement provisions to “clawback” payments to our senior executive officers and our next 20 highest paid employees if any of the criteria on which those payments are based are later found to have been inaccurate. On July 16, 2014, we repurchased all of the shares of preferred stock we sold to the Treasury under the CPP. We were subject to the Treasury’s rules on executive compensation for all of 2013 and until July 16, 2014.
Like most financial institutions, our financial performance has been negatively affected by the economy and by reduced real estate values in our banking markets, and increased levels of non-performing loans, loan charge-offs and provisions to our allowance for loan losses. Our Board chose not to implement the plan in 2014. As a result, none of our officers and employees were eligible to receive any cash awards under the plan, and no such awards were paid in 2014.
Potential Payments Upon Termination of Employment or a Change of Control
The terms of Mr. Jordan’s employment agreement provide for him to receive payments and benefits if his employment is terminated under various circumstances or following a change in control of the Company or the Bank. However, during April 2009, we became a participant in the CPP. Under rules adopted by Treasury under the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009, that apply to CPP participants (the “CPP Rules”), we believe we were prohibited from paying severance, “golden parachute,” or other such payments to any of our senior executive officers, or to certain of our other employees, in connection with any termination of their employment for any reason until July 16, 2014, other than payments relating to services already performed or benefits already accrued.
In addition to the CPP Rules, the Bank is subject to a Consent Order issued by the Federal Deposit Insurance Corporation (the “FDIC”) and the North Carolina Office of the Commissioner of Banks (the “Commissioner”), effective April 17, 2011. Under the terms of the Consent Order, the Bank may not pay bonuses or any form of payment outside the ordinary course of business resulting in a reduction of capital without the prior written approval of the FDIC and the Commissioner.
As a result of the terms of the Consent Order, notwithstanding the terms of Mr. Jordan’s employment agreement, we believe that no severance or golden parachute payments would have been made to him by the Bank if his employment had terminated on December 31, 2014.
In the event the Consent Order is lifted or modified, payments to Mr. Jordan under his employment agreement may no longer be prohibited. Under Mr. Jordan’s employment agreement, if his employment is terminated by the Bank without cause, or if he terminates his own employment for “good reason” (as defined below), he will continue to receive salary payments from the Bank for the unexpired term of the agreement. “Good reason” will exist if, without Mr. Jordan’s consent:
| • | his base salary is materially reduced; |
| • | his duties or responsibilities are materially reduced such that he no longer serves as an executive officer; |
| • | he is required to transfer his offices more than 50 miles from his principal work location; or |
| • | the Bank materially breaches any of the terms of the agreement. |
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The Agreement also provides that if, within 24 months following a change in control of the Company or the Bank, Mr. Jordan’s employment is terminated by the Bank or its successor without cause, or a “termination event” (as defined below) occurs and he voluntarily terminates his own employment within 90 days, then, in lieu of other termination payments provided for in the agreement, he will receive a lump-sum payment equal to 2.99 multiplied by his annual base salary in effect at the time the change in control becomes effective or at the time his employment terminates, whichever is greater. A “termination event” will occur under Mr. Jordan’s agreement if, following a change in control of the Company or the Bank:
| • | his base salary is reduced below the annual rate in effect at the time of the change in control; |
| • | insurance or other benefits, including retirement benefits, being provided to him when the change in control becomes effective are reduced or eliminated without being replaced with substantially similar benefits, unless the reduction or elimination applies proportionately to all salaried employees who participated in those benefits before the change in control; |
| • | he is transferred to a job location more than 50 miles from his principal work location when the change in control becomes effective; |
| • | if the Bank is still a separate entity, he no longer serves in the position he served in before the change in control; or |
| • | if the Bank is no longer a separate entity, he is not an executive officer of the Bank’s successor or does not report directly to the successor’s chairman, president, or chief executive officer. |
Generally, a “change in control” will have occurred if:
| • | a person directly or indirectly acquires voting control over more than 50% of the Company’s or the Bank’s common stock or control over the election of a majority of the Company’s or the Bank’s directors; |
| • | the Company or the Bank consolidates or merges with or into another company, or are reorganized in another way, and are not the surviving company in the transaction; or |
| • | all or substantially all of the Company’s or the Bank’s assets are sold or transferred to, or acquired by, any other company. |
The employment agreement provides that, notwithstanding the above provisions to the contrary, the Bank will have no obligation to make any payment or take any other action that the Board of Directors believes in good faith would be prohibited by or would violate any provision of state or federal law applicable to the Bank.
For a period of one year following any voluntary or involuntary termination of employment, Mr. Jordan may not compete with the Bank in a county in North Carolina in which the Bank maintains a business office on his employment termination date. However, in the case of an involuntary termination of his employment without case, or a voluntary termination of his employment for good reason (other than following a change in control), the restriction period will be the unexpired term of the agreement during which the Bank is obligated to continue to pay his salary as described above. The agreement also requires that, following any termination of his employment, Mr. Jordan must keep confidential all data and other information, financial or otherwise, relating to the Bank and its business, and must not disclose any of that information to any other person, remove it from the Bank, or use it for his own purposes or for the benefit of any other person.
Life Insurance Benefits. The Bank provides life insurance benefits to each of the named executive officers under our group life insurance plan in which all employees participate on the same terms. Under the group plan, death benefits are payable to a participant’s beneficiaries equal to two times the participant’s annual salary rate at the time of his or her death.
Accelerated Vesting of Stock Options. Under our 2007 Omnibus Equity Plan, which was in effect during the fiscal year ended December 31, 2014, in the event of a change in control of our Company, our Corporate Governance Committee may provide for outstanding stock options and other equity awards under the plan to be assumed by or converted into awards covering shares of the acquiring or surviving company. Alternatively, the Committee may accelerate the vesting of outstanding awards so that they become exercisable in full immediately before the change in control becomes effective.
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DIRECTOR COMPENSATION
General
Directors’ Fees. Our non-employee directors serve and are compensated as directors of the Bank. Our and the Bank’s Boards usually meet jointly, and directors do not receive any additional cash compensation for their services as our directors unless our Board meets separately. The following table describes our standard schedule of fees paid to our non-employee directors for their service during 2014.
| Description |
Amount | |||
| Monthly retainer |
$ | 450 | ||
| Monthly retainer paid to Lead Independent Director |
550 | |||
| Per diem fee for attendance in person at meetings of our and the Bank’s Boards (1) |
425 | |||
| Per diem fee paid to committee members for attendance at committee meetings: |
||||
| Audit Committee |
300 | |||
| Corporate Governance Committee |
250 | |||
| Executive, Loan, and Risk Oversight Committees |
225 | |||
| Per diem fee paid to committee chairmen for attendance at committee meetings: |
||||
| Audit Committee |
450 | |||
| Corporate Governance Committee |
350 | |||
| Executive, Loan, and Risk Oversight Committees |
325 | |||
| (1) | This fee is not paid for attendance at meetings by telephone. |
Mr. Talbert is compensated as an officer of the Bank, and he receives no additional compensation for his service as a director.
Stock Options. From time to time we have granted options to our non-employee directors to purchase shares of our common stock. As described above under the caption “Plan Based Awards,” during 2007 our shareholders approved our 2007 Omnibus Equity Plan which replaced our 1998 Director Stock Option Plan and which authorized the grant of nonqualified stock options and restricted stock awards to our directors in a manner similar to that described for officers. The Board of Directors terminated the 2007 Omnibus Equity Plan effective February 25, 2015, but the plan was in effect during the fiscal year ended December 31, 2014.
Each stock option gives the director who holds it the right to buy shares of our common stock during a stated period of time (ordinarily ten years) at a fixed price per share that is equal to the market value of our stock on the date the option was granted. We did not grant any restricted stock awards to directors under the plan.
No stock options or other equity awards of any type were granted under the 2007 Omnibus Equity Plan to any of our directors during 2014.
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Director Compensation for 2014
The following table summarizes the compensation paid or provided to our non-employee directors for their services during 2014. Although he served as a director during 2014, Stephen R. Talbert is not listed in the table. Mr. Talbert was compensated as an officer and employee of the Bank and he received no separate or additional compensation for his service as a director.
2014 DIRECTOR COMPENSATION
| Name |
Fees Earned or Paid in Cash |
Option Awards (1) |
Total | |||||||||
| Jerry W. Anderson (2) |
$ | 18,425 | $ | -0- | $ | 18,425 | ||||||
| Alan M. Bailey (2) |
18,600 | $ | -0- | 18,600 | ||||||||
| John A. Drye (2) |
19,700 | $ | -0- | 19,700 | ||||||||
| Derek J. Ferber |
-0- | $ | -0- | -0- | ||||||||
| Harvey L. Glick (3) |
-0- | $ | -0- | -0- | ||||||||
| John W. Googe (2) |
18,100 | $ | -0- | 18,100 | ||||||||
| Henry H. Land |
20,125 | $ | -0- | 20,125 | ||||||||
| Grady L. McClamrock, Jr. |
17,275 | $ | -0- | 17,275 | ||||||||
| Sam D. Norton . |
-0- | $ | -0- | -0- | ||||||||
| John D. Russ. |
-0- | $ | -0- | -0- | ||||||||
| Dr. Lynne Scott Safrit |
17,375 | $ | -0- | 17,375 | ||||||||
| Anton V. Schutz |
-0- | $ | -0- | 0- | ||||||||
| Dr. Francis W. Slate (2) |
21,400 | $ | -0- | 21,400 | ||||||||
| (1) | No stock options or other equity awards of any type were granted to any of our non-employee directors during 2014. On December 31, 2014, our current and former non-employee directors held stock options covering the following aggregate numbers of shares: Messrs. Anderson, Bailey, Drye, Googe, Land, McClamrock, Dr. Slate, and Dr. Safrit—1,500 shares each. |
| (2) | Retired from the Board of Directors effective December 4, 2014. |
| (3) | Mr. Glick received compensation under a Consultative Services Agreement with the Bank during 2014. See “Related Person Transactions” under Item 13 – Certain Relationships and Related Transactions, and Director Independence. |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Beneficial Ownership of Securities
Principal Shareholders. The following table describes the beneficial ownership of our common stock on December 31, 2014, by each person or entity known to us to be the beneficial owner of more than five percent of our outstanding common stock.
| Name and address of beneficial owner |
Amount and nature
of beneficial ownership |
Percent of class |
||||||
| EJF Capital LLC 2107 Wilson Boulevard Suite 410 Arlington, VA 22201 |
44,935,687 | (1) | 9.73 | % | ||||
| FJ Capital Management LLC 1313 Dolley Madison Blvd., Suite 306 McLean, VA 22101 |
44,935,688 | (2) | 9.73 | % | ||||
| Ithan Creek Master Investors (Cayman) L.P. c/o Wellington Management Group LLP 280 Congress Street Boston, MA 02210 |
44,710,448 | (3) | 9.68 | % | ||||
| Mendon Capital Master Fund Ltd. 115 S. LaSalle, 34th Floor Chicago, IL 60603 |
44,935,688 | (4) | 9.73 | % | ||||
| TFO Financial Institutions Restructuring Fund II LLC 555 5th Avenue, 6th Floor New York, NY 10017 |
44,831,488 | (5) | 9.70 | % | ||||
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| (1) | Based on Schedule 13G/A filed with the Securities and Exchange Commission on October 30, 2014, and the information contained therein. Includes 5,090,587 shares owned by EJF Financial Opportunities Master Fund LP; 5,090,587 shares owned by EJF Financial Opportunities GP, LLC; and 34,754,513 shares owned by EJF Sidecar Fund, Series LLP—Series D. |
| (2) | Based on Schedule 13D filed with the Securities and Exchange Commission on August 11, 2014, and the information contained therein. Includes 37,535,688 shares owned by Bridge Equities III, LLC, 5,000,000 shares owned by Rock Creek FJ Fund SP, and 2,400,000 shares owned by FJ Capital Management LLC. |
| (3) | Based on Schedule 13G/A filed with the Securities and Exchange Commission on February 12, 2015, and the information contained therein. |
| (4) | Based on Schedule 13D filed with the Securities and Exchange Commission on July 28, 2014, and the information contained therein. |
| (5) | Based on Schedule 13G/A filed with the Securities and Exchange Commission on February 9, 2015, and the information contained therein. |
Directors and Executive Officers. The following table describes the beneficial ownership of our common stock on December 31, 2014, by our current directors and named executive officers individually, and by all our directors and named executive officers as a group.
| Name of beneficial owner |
Amount and nature
of beneficial ownership (1) |
Percent of class (2) |
||||||
| Derek J. Ferber |
44,935,688 | (3) | 9.73 | % | ||||
| Harvey L. Glick |
5,000,000 | 1.08 | % | |||||
| George E. Jordan |
1,006,402 | (4) | 0.22 | % | ||||
| Henry H. Land |
218,589 | 0.05 | % | |||||
| Sam D. Norton |
2,500,000 | 0.54 | % | |||||
| Grady L. McClamrock, Jr. |
1,056,419 | (5) | 0.23 | % | ||||
| Megan W. Patton |
101,112 | (6) | 0.02 | % | ||||
| John D. Russ |
2,000,000 | (7) | 0.43 | % | ||||
| Dr. Lynne Scott Safrit |
65,384 | 0.01 | % | |||||
| Anton V. Schutz |
44,935,688 | (8) | 9.73 | % | ||||
| Stephen R. Talbert |
1,039,619 | (9) | 0.23 | % | ||||
| All current directors and executive officers as a group (11 people) |
102,858,901 | 22.26 | % | |||||
| (1) | Individuals named and included in the group have shared voting and investment power with respect to certain of the listed shares as follows: Mr. Glick—5,000,000 shares; Mr. Jordan—1,200 shares; Mr. Norton—2,500,000 shares; Dr. Safrit—57,948 shares; and Mr. Talbert—1,018,154 shares. The listed shares also include the following numbers of shares that could be purchased by individuals named and included in the group pursuant to stock options that could be exercised within 60 days of December 31, 2014 and with respect to which shares they may be deemed to have sole investment power: Mr. Land—1,500 shares; Mr. McClamrock—1,500 shares; and Dr. Safrit—1,500 shares. Except as otherwise noted, and to the best of our knowledge, the individuals named and included in the group exercise sole voting and investment power with respect to all remaining listed shares. |
| (2) | Percentages are calculated based on 462,028,831 total outstanding shares plus, in the case of each named individual and the group, the number of additional shares that could be purchased by that individual or by persons included in the group under stock options that could be exercised within 60 days of December 31, 2014. |
| (3) | Includes shares beneficially owned by FJ Capital Management LLC. Mr. Ferber is a senior analyst with FJ Capital Management LLC and disclaims beneficial ownership of 44,635,688 shares of common stock beneficially owned by FJ Capital Management LLC. |
| (4) | Includes 2,842 shares allocated to Mr. Jordan’s individual account under the Bank’s 401(k) plan. |
| (5) | Includes 3,286 shares held in Mr. McClamrock’s spouse’s individual retirement account. |
| (6) | Includes 112 shares allocated to Ms. Patton’s individual account under the Bank’s 401(k) plan. |
| (7) | Includes 800,000 shares held in Mr. Russ’s individual retirement account. |
| (8) | Includes shares beneficially owned by Mendon Capital Master Fund Ltd. Mr. Schutz is the portfolio manager of Mendon Capital Master Fund Ltd. and disclaims beneficial ownership of the shares of common stock beneficially owned by Mendon Capital Master Fund Ltd. except to the extent of his pecuniary interest therein. |
| (9) | Includes 1,323 shares owned by Mr. Talbert’s spouse in her individual capacity and 1,326 shares allocated to Mr. Talbert’s individual account under the Bank’s 401(k) plan. |
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Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes all compensation plans and individual compensation arrangements which were in effect on December 31, 2014, and under which shares of our common stock have been authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION
| Plan category |
(a) Number of shares to be issued upon exercise of outstanding options, warrants and rights (1) |
(b) Weighted-average exercise price of outstanding options, warrants and rights |
(c) Number of shares remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a)) (2) |
|||||||||
| Equity compensation plans approved by |
4,500 | $ | 5.25 | 267,500 | ||||||||
| Equity compensation plans not approved by security holders |
N/A | N/A | N/A | |||||||||
| Total |
4,500 | $ | 5.25 | 267,500 | ||||||||
| (1) | Includes outstanding options to purchase an aggregate of 4,500 shares previously granted under our 2007 Omnibus Equity Plan. |
| (2) | Reflects the aggregate number of shares for which options and other equity-based awards could have been granted under the 2007 Omnibus Equity Plan as of December 31, 2014. The Board of Directors terminated the 2007 Omnibus Equity Plan effective February 25, 2015, after which time no further awards will be granted under this plan. Outstanding and unexercised stock options under the plan will remain outstanding and exercisable until they expire per the terms of their individual grant agreements. No additional options may be granted under our Employee Stock Option Plan and Director Stock Option Plan. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Related Person Transactions
Our Policy. Our Board of Directors has adopted a written policy under which certain transactions, arrangements or relationships in which we or the Bank are a participant and in which any of our “related persons” has a material interest are required to be reviewed and approved by our Corporate Governance Committee. Our related persons include our directors, nominees for election as directors, executive officers, beneficial owners of more than 5% of a class of our capital stock, and members of the immediate family of one of those persons.
The transactions covered by the policy generally include loans, but the policy does not cover loans made by the Bank in the ordinary course of its business that are subject to banking regulations related to “insider loans” and that are required to be approved by a majority of the Bank’s Board of Directors. The policy also does not cover the Bank’s provision of services as a depository of funds or similar banking or financial services in the ordinary course of its business, or compensation paid to our executive officers that has been separately reviewed and approved, or recommended to our Board of Directors for approval, by our Corporate Governance Committee in its role as our Board’s compensation committee.
In its review of related person transactions, the policy provides that the Committee should exercise independent judgment and should not approve any proposed transaction unless and until it has concluded to its satisfaction that the transaction:
| • | is on terms that are fair and reasonable to us, and |
| • | is in our best interests. |
Related Person Transactions. There were no transactions with our related persons during 2014 that were required to be approved by our Corporate Governance Committee. The Bank has had, and expects to have in the future, banking transactions in the ordinary course of its business with certain of our current directors, nominees for director, executive officers, and our other related persons. All loans included in those transactions were made in the ordinary course of the Bank’s business on substantially the same terms, including interest rates, repayment terms and collateral, as those prevailing at the time the loans were made for comparable transactions with other persons, and did not involve more than the normal risk of collectibility or present other unfavorable features.
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Consultative Services Agreement with GLICK.BIZ, LLC. The Bank is party to a Consultative Services Agreement with GLICK.BIZ, LLC, which we refer to as GBL. Harvey L. Glick, the Chairman of our Board of Directors, is the managing member and 100% owner of GBL. Pursuant to this agreement, the Bank engaged GBL to serve as a consultant and specifically to review the Bank’s balance sheet, products, capital, procedures, and efficiencies in conjunction with and at the direction of the Bank’s executive management team.
The term of the agreement commenced on February 1, 2014, and will end on a date to be determined by the Bank and GBL. The Bank paid GBL $10,000 upon the signing of the agreement and agreed to pay GBL $10,000 per month during the term of the agreement. The aggregate yearly amount due to GBL under the agreement is $120,000. The Bank also agreed to reimburse GBL for its out-of-pocket expenses incurred in connection with the performance of its services under the agreement. In 2014, the Bank reimbursed $6,228.12 in GBL’s out-of-pocket expenses in 2014.
The agreement contains an indemnification provision under which the Bank will indemnify GBL, its officers, directors, managers, members, employees, agents, and affiliates against all liability, loss, cost, and expense incurred by GBL (including legal fees and expenses) in connection with or resulting from any action, suit, or proceeding in which GBL may become involved in connection with the agreement. The Bank will advance the expenses of any such proceedings. The Bank’s indemnification obligation does not apply in the case of matters judicially determined to have resulted from GBL’s gross negligence or willful misconduct. The agreement also contains a confidentiality provision whereby GBL agrees not to disclose any of the Bank’s confidential information to a third party without the Bank’s consent, unless compelled to do so by a governmental authority or court of competent jurisdiction.
The Corporate Governance Committee did not review and approve the Consultative Services Agreement with GBL. At the time the agreement commenced in February 2014, Mr. Glick was not a “related person” of the Company or the Bank, as that term is defined in Item 404 of SEC Regulation S-K. As a result, the Corporate Governance Committee was not required to review and approve the agreement. However, the engagement of GBL was discussed and approved by the full Board of Directors.
Participation of Directors in Private Placement. As described above, the Company completed a private placement of its common stock in July 2014. Directors Harvey L. Glick, Sam D. Norton, and John D. Russ each invested more than $120,000 in shares of our common stock in the private placement. Mr. Glick invested $500,000, Mr. Norton invested $250,000, and Mr. Russ invested $200,000.
Director Derek J. Ferber is a senior analyst with FJ Capital Management. FJ Capital Management and certain of its affiliated entities invested approximately $4.5 million in the Company’s common stock in the private placement.
Director Anton V. Schutz is president and chief executive officer of Mendon Capital Advisors and a portfolio manager for RMB Capital Management LLC, which manages Mendon Capital Master Fund Ltd. Mendon Capital Master Fund Ltd. invested approximately $4.5 million in the Company’s common stock in the private placement.
The Corporate Governance Committee did not review and approve the investments described above. At the time the private placement closed in July 2014, none of these directors were “related persons” of the Company or the Bank, as that term is defined in Item 404 of SEC Regulation S-K. As a result, the Corporate Governance Committee was not required to review and approve the transactions.
Director Independence
Each year our Board of Directors reviews transactions, relationships and other arrangements involving our directors and determines which of the directors the Board considers to be “independent.” In making those determinations, the Board applies the independence criteria contained in the listing requirements of The Nasdaq Stock Market. Although the Company’s common stock is no longer listed on The Nasdaq Stock Market, the Board continues to use Nasdaq’s definition of independence in determining whether or not a director or nominee for director is independent.
The Board has directed our Audit Committee to assess each outside director’s independence and report its findings to the Board in connection with the Board’s annual determinations, and to monitor the status of each director on an ongoing basis and inform the Board of changes in factors or circumstances that may affect a director’s ability to exercise independent judgment.
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The following table lists our current directors who our Board believes were, during their terms of office, and will be, if elected, “independent” directors under Nasdaq’s criteria:
| Derek J. Ferber |
Grady L. McClamrock, Jr. | Dr. Lynne Scott Safrit | ||
| Henry H. Land |
Sam D. Norton | Anton V. Schutz | ||
| John D. Russ |
In addition to the specific Nasdaq criteria, in determining the independence of each director the Board considers whether it believes transactions that are disclosable in our proxy statements as “related person transactions,” or any other transactions, relationships, arrangements or factors, could impair a director’s ability to exercise independent judgment. In its determination that the directors named above are independent, those other factors considered by the Committee and the Board included (1) the Bank’s lending relationships with directors who are loan customers and (2) legal services that Mr. McClamrock provides from time to time in connection with matters involving such things as loan closings or collections. In the case of Mr. McClamrock, the Board concluded that he is independent under Nasdaq’s criteria, but that he may not serve on our Audit Committee.
Item 14. Principal Accounting Fees and Services.
Cherry Bekaert LLP (“Cherry Bekaert”) was appointed by our Audit Committee on September 15, 2014, to serve as our independent accountants and audit our consolidated financial statements. Except as described below, under its current procedures our Audit Committee specifically preapproves all audit services and other services provided by our independent accountants. Since it is difficult to determine in advance the exact nature and extent of the tax services or advice we will need during the year, the Committee authorizes our management to obtain tax services from our accountants from time to time during the year up to preapproved aggregate amounts of fees set by the Committee. Requests for services with costs in addition to those amounts would require further Committee approval. The entire Audit Committee generally participates in the preapproval of services. However, in the case of proposals that arise during the year to obtain certain types of non-audit services from our accountants beyond what has been preapproved by the Committee, the Committee delegates authority to its Chairman to preapprove those additional services on behalf of the Committee. Any such action by the Chairman is to be reported to the full Committee at its next regularly scheduled meeting.
Prior to the appointment of Cherry Bekaert, Turlington and Company, L.L.P. (“Turlington”), served as our independent accountants and audited our consolidated financial statements. In 2014 and 2013, Turlington provided us with various audit and other professional services for which we were billed, or expect to be billed, for fees as further described below. In 2014, Cherry Bekaert also provided us with professional services for which we were billed, or expect to be billed, for fees as further described below. Our Audit Committee considers whether the provision of non-audit services by our independent accounting firm is compatible with maintaining its independence. The Committee believes that the provision of non-audit services by Turlington during 2014 and 2013 did not affect its independence. The Committee also believes that the provision of non-audit services by Cherry Bekaert in 2014 did not affect its independence.
The following table lists the aggregate amounts of fees paid to Turlington for audit services for 2014 and 2013 and for other services they provided during 2014 and 2013. The table also lists the aggregate amount of fees paid to Cherry Bekaert in 2014 for its services.
| Type of Fees and Description of Services |
2014 | 2014 | 2013 | |||||||||
| (Cherry Bekaert) | (Turlington) | (Turlington) | ||||||||||
| Audit Fees, including audits of our consolidated financial statements, reviews of our condensed interim consolidated financial statements, and other audit services |
$ | 92,000 | $ | 18,170 | $ | 116,750 | ||||||
| Audit-Related Fees |
-0- | 15,000 | (1) | 19,250 | (1) | |||||||
| Tax Fees, including reviews of our federal and related state income tax returns, non-routine tax consultations |
15,000 | -0- | 15,500 | |||||||||
| All Other Fees |
-0- | 2,678 | -0- | |||||||||
| (1) | Audit-Related Fees for 2014 and 2013 include amounts paid in connection with audits of the Bank’s 401(k) plan. |
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Item 15. Exhibits, Financial Statement Schedules
| (a) | Financial Statements. The following financial statements are included in Item 8 of this Report: |
| (b) | Exhibits. An Exhibit Index listing exhibits that are being filed or furnished with, or incorporated by reference into, this Report appears immediately following the signature page and is incorporated herein by reference. |
| (c) | Financial Statement Schedules. No separate financial statement schedules are being filed as all required schedules either are not applicable or are contained in the financial statements listed above or in Item 8 of this Report. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| BANK OF THE CAROLINAS CORPORATION | ||||
| Date: March 31, 2015 | By: | /S/ STEPHEN R. TALBERT | ||
| Stephen R. Talbert | ||||
| President and Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature |
Title |
Date | ||
| /S/ STEPHEN R. TALBERT Stephen R. Talbert |
President, Vice-Chairman and Chief Executive Officer (principal executive officer) |
March 31, 2015 | ||
| /S/ MEGAN W. PATTON Megan W. Patton |
Senior Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) |
March 31, 2015 | ||
| /S/ HARVEY L. GLICK Harvey L. Glick |
Director and Chairman |
March 31, 2015 | ||
| /S/ DEREK J. FERBER Derek J. Ferber |
Director |
March 31, 2015 | ||
| /S/ HENRY H. LAND Henry H. Land |
Director |
March 31, 2015 | ||
| /S/ GRADY L. MCCLAMROCK, JR. Grady L. McClamrock, Jr. |
Director |
March 31, 2015 | ||
| /S/ SAM D. NORTON Sam D. Norton |
Director |
March 31, 2015 | ||
| /S/ JOHN D. RUSS John D. Russ |
Director |
March 31, 2015 | ||
| /S/ LYNNE SCOTT SAFRIT Lynne Scott Safrit |
Director |
March 31, 2015 | ||
| /S/ ANTON V. SCHUTZ Anton V. Schutz |
Director |
March 31, 2015 | ||
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EXHIBIT INDEX
| Exhibit |
Description | |
| 3.01 | Our Articles of Incorporation, as amended (incorporated by reference from exhibits to our Quarterly Report on Form 10-Q dated August 14, 2014) | |
| 3.02 | Our By-laws, as amended (incorporated by reference from exhibits to our Current Report on Form 8-K dated August 18, 2006) | |
| 4.01 | Indenture between us and Wells Fargo Bank, N.A. (incorporated by reference from exhibits to our Current Report on Form 8-K dated March 26, 2008) | |
| 4.02 | Guarantee Agreement between us and Wells Fargo Bank, N.A. (incorporated by reference from exhibits to our Current Report on Form 8-K March 26, 2008) | |
| 4.03 | Amended and Restated Trust Agreement among us, Wells Fargo Bank N.A. and the Administrators (incorporated by reference from exhibits to our Current Report on Form 8-K dated March 26, 2008) | |
| 4.04 | Tax Benefits Preservation Plan (incorporated by reference from exhibits to our Current Report on Form 8-K dated July 17, 2014) | |
| 10.01* | Amended and Restated Employment Agreement between us and George E. Jordan (incorporated by reference from exhibits to our Current Report on Form 8-K dated December 23, 2008) | |
| 10.02* | Employee Stock Option Plan (incorporated by reference from exhibits to our Current Report on Form 8-K dated August 18, 2006) | |
| 10.03* | Form of Employee Stock Option Agreement (incorporated by reference from exhibits to our Current Report on Form 8-K dated August 18, 2006) | |
| 10.04* | Director Stock Option Plan, as amended (incorporated by reference from exhibits to our Current Report on Form 8-K dated August 18, 2006) | |
| 10.05* | Form of Director Stock Option Agreement (incorporated by reference from exhibits to our Current Report on Form 8-K dated August 18, 2006) | |
| 10.06* | Sections 1.2(g) and 2.5 of Agreement and Plan of Reorganization and Share Exchange dated June 1, 2006, between us and the Bank pertaining to our assumption of the Bank’s Employee Stock Option Plan, Director Stock Option Plan and outstanding stock options (incorporated by reference from exhibits to our Current Report on Form 8-K dated August 18, 2006) | |
| 10.07* | BOC Financial Corp 1999 Nonstatutory Stock Option Plan (incorporated by reference from exhibits to our Current Report on Form 8-K dated August 18, 2006) | |
| 10.08* | BOC Financial Corp 1999 Incentive Stock Option Plan (incorporated by reference from exhibits to our Current Report on Form 8-K dated August 18, 2006) | |
| 10.09* | Section 6.07 of Agreement and Plan of Reorganization and Merger dated July 20, 2001, between the Bank and BOC Financial Corp pertaining to the Bank’s assumption of outstanding BOC Financial Corp (incorporated by reference from exhibits to our Current Report on Form 8-K dated August 18, 2006) | |
| 10.10* | Option Conversion Agreements relating to stock options previously granted by BOC Financial Corp and held by former directors of BOC Financial Corp as assumed by us from the Bank (incorporated by reference from exhibits to our Current Report on Form 8-K dated August 18, 2006) | |
| 10.11* | 2007 Omnibus Equity Plan (incorporated by reference from exhibits to our Current Report on Form 8-K dated May 24, 2007) | |
| 10.12* | Management Incentive Compensation Plan (incorporated by reference from exhibits to our Current Report on Form 8-K dated May 24, 2007) | |
| 10.13 | Stipulation to the Issuance of a Consent Order (incorporated by reference from exhibits to our Current Report on Form 8-K dated May 3, 2011) | |
| 10.14 | Consent Order Issued by the Federal Deposit Insurance Corporation and the North Carolina Office of the Commissioner of Banks (incorporated by reference from exhibits to our Current Report on Form 8-K dated May 3, 2011) | |
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| Exhibit |
Description | |
| 10.15 | Written Agreement by and between Bank of the Carolinas Corporation and the Federal Reserve Bank of Richmond, dated August 26, 2011(incorporated by reference from exhibits to our Quarterly Report on Form 10-Q dated November 14, 2011) | |
| 10.16 | Securities Purchase Agreement with the United States Department of the Treasury, dated April 18, 2014 (incorporated by reference from exhibits to our Quarterly Report on Form 10-Q dated August 14, 2014) | |
| 10.17 | Form of Stock Purchase Agreement dated July 15, 2014 (incorporated by reference from exhibits to our Current Report on Form 8-K dated July 21, 2014) | |
| 10.18 | Form of Registration Rights Agreement dated July 15, 2014 (incorporated by reference from exhibits to our Current Report on Form 8-K dated July 21, 2014) | |
| 10.19 | Side Letter Agreement with FJ Capital Management, LLC, dated July 15, 2014 (incorporated by reference from exhibits to our Current Report on Form 8-K dated July 21, 2014) | |
| 10.20 | Side Letter Agreement with Bridge Equities III, LLC, dated July 15, 2014 (incorporated by reference from exhibits to our Current Report on Form 8-K dated July 21, 2014) | |
| 10.21 | Side Letter Agreement with RMB Capital Management LLC, dated July 15, 2014 (incorporated by reference from exhibits to our Current Report on Form 8-K dated July 21, 2014) | |
| 10.22 | Side Letter Agreement with Sandler O’Neill Asset Management, dated July 15, 2014 (incorporated by reference from exhibits to our Current Report on Form 8-K dated July 21, 2014) | |
| 10.23 | Side Letter Agreement with TFO Financial Institutions Restructuring Fund II LLC, dated July 15, 2014 (incorporated by reference from exhibits to our Current Report on Form 8-K dated July 21, 2014) | |
| 16.01 | Letter from Turlington and Company, L.L.P., regarding change in certifying accountant (incorporated by reference from exhibits to our Current Report on Form 8-K dated September 17, 2014, as amended on September 22, 2014) | |
| 21.01 | Subsidiaries of the Company (filed herewith) | |
| 23.01 | Consent of Cherry Bekaert LLP (filed herewith) | |
| 23.02 | Consent of Turlington and Company, L.L.P. (filed herewith) | |
| 31.01 | Certification of our Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith) | |
| 31.02 | Certification of our Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith) | |
| 32.01 | Certifications of our Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (filed herewith) | |
| 99.01 | Certification of our Chief Executive Officer pursuant to Section 111(b)(4) of EESA (filed herewith) | |
| 99.02 | Certification of our Chief Financial Officer pursuant to Section 111(b)(4) of EESA (filed herewith) | |
| 101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31, 2014 and 2013; (ii) Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012; (iii) Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2014, 2013, and 2012; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2014, 2013, and 2012; (v) Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013, and 2012; and (vi) Notes to Consolidated Financial Statements as of December 31, 2014 and 2013 and for the Years Ended December 31, 2014, 2013, and 2012 | |
| * | An asterisk denotes a management contract or compensatory plan or arrangement. |
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COPIES OF EXHIBITS ARE AVAILABLE UPON REQUEST TO:
MEGAN W. PATTON
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
BANK OF THE CAROLINAS
P.O. BOX 129
MOCKSVILLE, N.C. 27028
This Annual Report on Form 10-K also serves as the annual disclosure statement
of Bank of the Carolinas pursuant to Part 350 of the
Federal Deposit Insurance Corporation’s Rules and Regulations.
THIS STATEMENT HAS NOT BEEN REVIEWED OR CONFIRMED FOR ACCURACY OR
RELEVANCE BY THE FEDERAL DEPOSIT INSURANCE CORPORATION.
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