Bank of the Carolinas CORP - FORM 10-Q

Bank of the Carolinas CORP - FORM 10-Q - May 15, 2015

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file	filename
EXCEL - IDEA: XBRL DOCUMENT - Bank of the Carolinas CORP	Financial_Report.xls
EX-31.02 - EX-31.02 - Bank of the Carolinas CORP	d894006dex3102.htm
EX-32.01 - EX-32.01 - Bank of the Carolinas CORP	d894006dex3201.htm
EX-4.01 - EX-4.01 - Bank of the Carolinas CORP	d894006dex401.htm
EX-31.01 - EX-31.01 - Bank of the Carolinas CORP	d894006dex3101.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2015

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)		(IRS Employer Identification No.)

135 Boxwood Village Drive Mocksville, North Carolina		27028
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (336) 751-5755

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 web site, 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 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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

On May 15, 2015, there were 462,028,831 outstanding shares of the registrant’s common stock.

BANK OF THE CAROLINAS CORPORATION

FORM 10-Q

March 31, 2015

INDEX


Part I. FINANCIAL INFORMATION			3

	Item 1.	Financial Statements	3

		Consolidated Balance Sheets at March 31, 2015 and December 31, 2014	3

		Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014	4

		Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014	5

		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014	6

		Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2015 and 2014	7

		Notes to Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34

	Item 4.	Controls and Procedures	34

Part II. OTHER INFORMATION			34

	Item 1.	Legal Proceedings	34

	Item 1A.	Risk Factors	34

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

	Item 3.	Defaults Upon Senior Securities	34

	Item 4.	Mine Safety Disclosures	34

	Item 5.	Other Information	34

	Item 6.	Exhibits	35

SIGNATURES			36

EXHIBIT INDEX			37

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Bank of the Carolinas Corporation

Consolidated Balance Sheets

(amounts in thousands, except share data)


	March 31 2015			December 31 2014*
	(Unaudited)
Assets:
Cash and due from banks, noninterest-bearing	$	11,650		$	9,571
Interest-bearing deposits in banks		39,843			37,041

Cash and cash equivalents		51,493			46,612

Investment securities available-for-sale, at fair value		13,431			40,348

Loans receivable		278,659			278,610
Less: Allowance for loan losses		(4,815	)		(5,126	)

Total loans, net		273,844			273,484
Premises and equipment		10,741			10,811
Other real estate owned		1,108			1,108
Bank owned life insurance		11,322			11,234
Accrued interest receivable		711			852
Other assets		786			1,010

Total Assets	$	363,436		$	385,459


Liabilities:

Deposits:
Noninterest-bearing demand deposits	$	41,061		$	37,533
Interest-checking deposits		41,627			39,557

Savings and money market deposits		107,376			112,487
Time deposits		123,646			147,045

Total deposits		313,710			336,622
Securities sold under agreements to repurchase		304			491
Other liabilities		1,421			1,290


Total Liabilities		315,435			338,403


Stockholders’ Equity:
Preferred stock, net of discount, no par value		—			—
Common stock, no par value		—			—
Additional paid-in capital		73,815			73,815
Accumulated deficit		(25,996	)		(26,922	)
Accumulated other comprehensive income		182			163


Total Stockholders’ Equity		48,001			47,056

Total Liabilities and Stockholders’ Equity	$	363,436		$	385,459


Preferred shares authorized		3,000,000			3,000,000
Preferred shares issued and outstanding		—			—
Common shares authorized		580,000,000			580,000,000
Common shares issued and outstanding		462,028,831			462,028,831

*	Derived from audited consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

Bank of the Carolinas Corporation

Consolidated Statements of Operations

(Unaudited)

(dollars in thousands, except per share data)


	Three Months Ended March 31
	2015			2014
Interest income
Interest and fees on loans	$	3,137		$	3,193
Interest on securities		146			538
Other interest income		26			18

Total interest income		3,309			3,749


Interest expense
Interest on deposits		346			527
Interest on borrowed funds		—			557

Total interest expense		346			1,084


Net interest income		2,963			2,665
Provision for (recovery of) loan losses		(402	)		1,062

Net interest income after provision for loan losses		3,365			1,603


Noninterest income
Customer service fees		276			291
Increase in value of bank owned life insurance		87			85
Gains on sales of investment securities available-for-sale		218			—
Other income		4			14

Total noninterest income		585			390


Noninterest expense
Salaries and benefits		1,625			1,590
Occupancy and equipment		448			472
FDIC insurance assessments		206			363
Data processing services		265			261
Valuation provisions and net operating costs associated with foreclosed real estate		14			39
Other		466			790

Total noninterest expense		3,024			3,515

Income (loss) before income taxes		926			(1,522	)
Provision for income taxes		—			—

Net income (loss)		926			(1,522	)
Dividends and accretion on preferred stock		—			(249	)
Net income (loss) available to common stockholders	$	926		$	(1,771	)


Earnings (Loss) per common share:
Basic	$	0.002		$	(0.45	)

Diluted	$	0.002		$	(0.45	)

The accompanying notes are an integral part of these consolidated financial statements.

Bank of the Carolinas Corporation

Consolidated Statements of Comprehensive Income

(Unaudited)

(dollars in thousands)


	Three Months Ended March 31
	2015			2014

Net income (loss)	$	926		$	(1,522	)
Other comprehensive income:
Unrealized holding gains on securities available-for-sale		237			1,763
Reclassification adjustment for gains realized in net income		(218	)		—
Income tax effect		—			—

Total other comprehensive income, net of income tax effect		19			1,763

Total comprehensive income	$	945		$	241

The accompanying notes are an integral part of these consolidated financial statements.

Bank of the Carolinas Corporation

Consolidated Statements of Cash Flows

(Unaudited)

(dollars in thousands)


	Three Months Ended March 31
	2015			2014
Cash flows from operating activities:
Net income (loss)	$	926		$	(1,522	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
(Recovery of) provision for loan losses		(402	)		1,062
Depreciation and amortization		160			168
Loss on sale of other real estate owned		—			11
Gain on sale of investment securities available-for-sale		(218	)		—
Increase in bank owned life insurance		(88	)		(85	)
Net amortization/accretion of premiums and discounts on investments		1,012			95
Net change in other assets		328			218
Net change in other liabilities		131			281

Net cash provided by operating activities		1,849			228


Cash flows from investing activities:
Net change in federal funds sold		—			(5,175	)
Purchases of premises and equipment		(90	)		(84	)
Activity in investment securities available-for-sale:
Proceeds from sales		25,114			—
Maturities and calls		1,028			1,425
Redemption of FHLB stock		37			140
Proceeds from sales of other real estate owned		—			202
Net decrease (increase) in loans		42			(397	)

Net cash provided by (used in) investing activities		26,131			(3,889	)


Cash flows from financing activities:
Net (decrease) increase in deposits		(22,912	)		3,540
Net (decrease) increase in repurchase agreements		(187	)		334

Net cash (used in) provided by financing activities		(23,099	)		3,874


Net increase in cash and cash equivalents		4,881			213
Cash and cash equivalents at beginning of period		46,612			14,842

Cash and cash equivalents at end of period	$	51,493		$	15,055


Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	114		$	1,021


Noncash investing and financing activities:
Change in fair value of investment securities available-for-sale	$	19		$	1,763

Transfer from loans to other real estate owned	$	—		$	1,072

The accompanying notes are an integral part of these consolidated financial statements.

Bank of the Carolinas Corporation

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

(dollars in thousands)


	Preferred Stock				Discount on Preferred			Common Stock				Additional Paid-In		Accumulated			Accumulated Other Comprehensive			Total Stockholders’
	Shares		Amount		Stock			Shares		Amount		Capital		Deficit			Income (Loss)			Equity

Balance, December 31, 2013		13,179	$	13,179	$	(100	)		3,895,840	$	19,479	$	12,991	$	(38,422	)	$	(5,379	)	$	1,748
Net loss		—		—		—			—		—		—		(1,522	)		—			(1,522	)
Other comprehensive income		—		—		—			—		—		—		—			1,763			1,763

Discount accretion on preferred stock		—		—		84			—		—		—		(84	)		—			—

Balance, March 31, 2014		13,179	$	13,179	$	(16	)		3,895,840	$	19,479	$	12,991	$	(40,028	)	$	(3,616	)	$	1,989


Balance, December 31, 2014		—	$	—	$	—			462,028,831	$	—	$	73,815	$	(26,922	)	$	163		$	47,056
Net income		—		—		—			—		—		—		926			—			926
Other comprehensive income		—		—		—			—		—		—		—			19			19

Balance, March 31, 2015		—	$	—	$	—			462,028,831	$	—	$	73,815	$	(25,996	)	$	182		$	48,001

The accompanying notes are an integral part of these consolidated financial statements.

Bank of the Carolinas Corporation

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

In the opinion of management, the financial information included in these unaudited financial statements reflects all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial information as of March 31, 2015 and December 31, 2014 and for the three-month periods ended March 31, 2015 and 2014, in conformity with accounting principles generally accepted in the United States of America.

The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the three-month periods ended March 31, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2015.

The results presented here are for Bank of the Carolinas Corporation (“the Company”), the parent company of Bank of the Carolinas (“the Bank”). The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the financial statements filed as part of the Company’s annual report on Form 10-K for the year ended December 31, 2014. This quarterly report should be read in conjunction with the annual report. Because the Company has no separate operations and conducts no business on its own other than owning the Bank, this discussion concerns primarily the business of the Bank. However, because the financial statements are presented on a consolidated basis, the Company and the Bank are collectively referred to as “the Company” unless otherwise noted.

New Accounting Pronouncements – In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810). The amendments in this Update affect the following areas:

Limited partnerships and similar legal entities

Evaluating fees paid to a decision maker or a service provider as a variable interest

The effect of fee arrangements on the primary beneficiary determination

The effect of related parties on the primary beneficiary determination

Certain investment funds.

The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply the amendments in this Update using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The amendments are not expected to have a significant impact on the Company.

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.

NOTE 2. EARNINGS PER SHARE

Basic earnings (loss) per share represents income (loss) available to common stockholders divided by the weighted average number of common shares outstanding during the period. When applicable, the weighted average shares outstanding for the diluted earnings per share computations are adjusted to reflect the assumed conversion of shares available under stock options using the treasury stock method.

Earnings (loss) per share have been computed based on the following (dollars in thousands):


	Three months ended
	March 31
	2015		2014

Net income (loss) applicable to common stockholders	$	926	$	(1,771	)


Weighted average number of common shares outstanding		462,028,831		3,895,840


Weighted average number of diluted common shares outstanding		462,028,831		3,895,840


Earnings (Loss) per common share:
Basic	$	0.002	$	(0.45	)

Diluted	$	0.002	$	(0.45	)

For the three months ended March 30, 2015, there were 4,500 common stock options outstanding that were anti-dilutive as the average market price for the shares was less than the exercise price.

NOTE 3. INVESTMENT SECURITIES

The amortized cost, estimated fair values and carrying values of the investment securities portfolios at the indicated dates are summarized as follows (dollars in thousands):


	March 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Carrying Value
Investment securities available-for-sale:
U.S. Government agencies securities	$	2,968	$	110	$	—	$	3,078	$	3,078
State and municipal bonds		1,343		26		—		1,369		1,369
Mortgage-backed securities		8,938		53		7		8,984		8,984


Total investment securities available-for-sale	$	13,249	$	189	$	7	$	13,431	$	13,431


	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Carrying Value
Investment securities available-for-sale:
U.S. Government agencies securities	$	4,894	$	99	$	8	$	4,985	$	4,985
State and municipal bonds		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

The amortized cost and fair value of debt securities by contractual maturity at March 31, 2015 is as follows (dollars in thousands):


	Amortized Cost		Estimated Fair Value

Within 1 year	$	—	$	—
Over 1 year through 5 years		968		1,007
Over 5 years through 10 years		3,343		3,440
Over 10 years		—		—

		4,311		4,447
Mortgage-backed securities		8,938		8,984


	$	13,249	$	13,431

The fair values of securities with unrealized losses at March 31, 2015 and December 31, 2014 are as follows (dollars in thousands):

March 31, 2015:


	Less than 12 Months						12 Months or More						Total
Temporarily impaired securities:	Estimated Fair Value		Unrealized Losses		Number of Securities		Estimated Fair Value		Unrealized Losses		Number of Securities		Estimated Fair Value		Unrealized Losses		Number of Securities

U.S. Government agency securities	$	—	$	—		—	$	—	$	—		—	$	—	$	—		—
State and municipal bonds		—		—		—		—		—		—		—		—		—
Mortgage-backed securities		1,539		7		1		—		—		—		1,539		7		1


Total	$	1,539	$	7		1	$	—	$	—		—	$	1,539	$	7		1

December 31, 2014:


	Less than 12 Months						12 Months or More						Total
Temporarily impaired securities:	Estimated Fair Value		Unrealized Losses		Number of Securities		Estimated Fair Value		Unrealized Losses		Number of Securities		Estimated Fair Value		Unrealized Losses		Number of Securities

U.S. Government agency securities	$	—	$	—		—	$	1,696	$	8		2	$	1,696	$	8		2
State and municipal bonds		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

The Company does not believe that the investment security that was in an unrealized loss position as of March 31, 2015 represents an other-than-temporary impairment. Total gross unrealized losses were primarily attributable to change in interest rates, relative to the when the investment securities were purchased, and not due to the credit quality of the investment securities. As of March 31, 2015, the gross unrealized losses reported for mortgage-backed securities were primarily related to investment securities issued by Federal Home Loan Mortgage Corporation. At December 31, 2014, the gross unrealized losses reported were a combination of agency, municipal, and mortgage-backed securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity. Investment securities with market values of $10.3 million and $10.5 million at March 31, 2015 and December 31, 2014, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

NOTE 4. LOANS

The loan portfolio as of the dates indicated is summarized below (dollars in thousands):


	March 31,			December 31,
	2015			2014
Real estate loans:
Residential, 1-4 family	$	88,577		$	88,990
Commercial real estate		114,928			111,195
Construction and development		21,667			23,081
Home equity		27,889			28,207

Total real estate loans		253,061			251,473


Commercial business and other loans		22,053			23,105

Consumer loans		3,054			3,065
Other		491			967

Gross loans receivable		278,659			278,610
Allowance for loan losses		(4,815	)		(5,126	)

Loans, net	$	273,844		$	273,484

Impaired loans, segregated by class of loans, are summarized as follows as of the dates indicated (dollars in thousands):


	March 31, 2015										December 31, 2014
			Unpaid				Average		Interest				Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial - Non Real Estate	$	503	$	578	$	—	$	587	$	8	$	339	$	407	$	—	$	421	$	22
Commercial Real Estate
Owner occupied		1,825		2,094		—		2,102		26		1,996		2,329		—		2,671		143
Income producing		2,037		2,210		—		2,218		26		1,891		2,057		—		2,080		98
Multifamily		—		—		—		—		—		—		—		—		—		—
Construction & Development
1 - 4 Family		—		—		—		—		—		—		—		—		—		—
Other		2,207		3,236		—		3,255		16		2,232		3,259		—		3,455		72
Farmland		—		—		—		—		—		—		—		—		—		—
Residential
Equity Lines		65		75		—		75		1		67		76		—		77		3
1 - 4 Family		5,265		5,705		—		5,738		60		4,878		5,313		—		5,385		229
Junior Liens		283		310		—		312		4		287		314		—		320		17
Consumer - Non Real Estate		16		16		—		16		—		—		—		—		—		—

Total loans with no allowance	$	12,201	$	14,224	$	—	$	14,303	$	141	$	11,690	$	13,755	$	—	$	14,409	$	584


With an allowance recorded:
Commercial - Non Real Estate	$	1,326	$	1,327	$	83	$	1,352	$	13	$	1,560	$	1,563	$	78	$	1,670	$	71
Commercial Real Estate
Owner occupied		4,045		4,117		903		4,134		42		4,109		4,166		823		4,215		178
Income producing		7,068		7,122		207		7,146		90		7,485		7,540		218		7,731		396
Multifamily		1,191		1,224		68		1,228		11		1,198		1,232		74		1,245		44
Construction & Development
1 - 4 Family		347		353		7		355		5		350		356		8		362		18
Other		712		718		20		723		8		726		732		23		751		34
Farmland		—		—		—		—		—		—		—		—		—		—
Residential
Equity Lines		54		55		40		56		—		56		56		41		59		2
1 - 4 Family		5,177		5,222		381		5,245		58		6,105		6,150		414		6,256		280
Junior Liens		—		—		—		—		—		—		—		—		—		—
Consumer - Non Real Estate		8		8		5		9		—		25		25		5		29		2

Total loans with an allowance	$	19,928	$	20,146	$	1,714	$	20,248	$	227	$	21,614	$	21,820	$	1,684	$	22,318	$	1,025


Total:
Commercial - Non Real Estate	$	1,829	$	1,905	$	83	$	1,939	$	21	$	1,899	$	1,970	$	78	$	2,091	$	93
Commercial Real Estate	$	16,166	$	16,767	$	1,178	$	16,828	$	195	$	16,679	$	17,324	$	1,115	$	17,942	$	859
Construction & Development	$	3,266	$	4,307	$	27	$	4,333	$	29	$	3,308	$	4,347	$	31	$	4,568	$	124
Residential	$	10,844	$	11,367	$	421	$	11,426	$	123	$	11,393	$	11,909	$	455	$	12,097	$	531
Consumer - Non Real Estate	$	24	$	24	$	5	$	25	$	—	$	25	$	25	$	5	$	29	$	2

Totals	$	32,129	$	34,370	$	1,714	$	34,551	$	368	$	33,304	$	35,575	$	1,684	$	36,727	$	1,609

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 $31.1 million and $32.1 million at March 31, 2015 and December 31, 2014, respectively.

The following tables provide a summary of loans modified as TDRs (dollars in thousands):


	Accrual		Nonaccrual		Total TDRs		Allowance for Loan Losses Allocated
March 31, 2015
Commercial real estate	$	13,826	$	1,848	$	15,674	$	1,105
Commercial construction		1,735		1,531		3,266		27
Commercial and industrial		1,667		162		1,829		83
Residential mortgage		10,085		215		10,300		376
Consumer and other		19		—		19		—

Total modifications	$	27,332	$	3,756	$	31,088	$	1,591

Total contracts		120		11		131


	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

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.

There were no new TDRs for the period ended March 31, 2015. The following table illustrates new TDR information for the period March 31, 2014 (dollars in thousands):


	Three Months Ended March 31, 2014
Troubled Debt Restructuring	Number of Contracts		Rate Modification		Term Modification		Combination Modification		Total Modifications

Commercial - Non Real Estate		1	$	—	$	61	$	—	$	61
Commercial - Real Estate		1		22		—		—		22
Construction & Development		—		—		—		—		—
Residential		—		—		—		—		—
Consumer - Non Real Estate		—		—		—		—		—

Totals		2	$	22	$	61	$	—	$	83

For the purposes of this report, default is defined as being 90-days past due or on non-accrual status without performance. There were no loans restructured in the twelve months prior to March 31, 2015 and 2014 that went into default during the three-month periods ended March 31, 2015 and 2014.

Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and may 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.

Loans in non-accrual status were approximately $4.7 million and $3.1 million at March 31, 2015 and December 31, 2014, respectively. The increase during the first quarter of 2015 is largely related to one credit relationship, in which a TDR is currently paying interest only. Non-accrual loans and an age analysis of past due loans, segregated by class of loans, 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
March 31, 2015:
Commercial - Non Real Estate	$	—	$	—	$	159	$	159	$	21,894	$	22,053	$	—	$	162
Commercial Real Estate
Owner occupied		135		—		—		135		57,409		57,544		—		2,061
Income producing		455		—		—		455		48,526		48,981		—		279
Multifamily		—		—		—		—		8,403		8,403		—		—
Construction & Development
1 - 4 Family		—		—		—		—		3,765		3,765		—		—
Other		—		—		—		—		17,635		17,635		—		1,531
Farmland		—		—		—		—		267		267		—		—
Residential
Equity Lines		—		—		—		—		27,889		27,889		—		105
1 - 4 Family		352		128		269		749		86,734		87,483		—		519
Junior Liens		—		—		—		—		1,094		1,094		—		19
Consumer - Non Real Estate		15		—		—		15		3,039		3,054		—		5
Other		—		—		—		—		491		491		—		—

Total	$	957	$	128	$	428	$	1,513	$	277,146	$	278,659	$	—	$	4,681


	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

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 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.

Commercial loans that do not require individual analysis as part of the above described process are considered to be pass-rated loans. As of March 31, 2015 and December 31, 2014, and based on the most recent analysis performed, the loans and leases were categorized as follows (dollars in thousands):


	March 31, 2015
Internal Risk Rating Grades	Pass		Special Mention		Substandard		Doubtful		Loss
Commercial - Non Real Estate	$	18,860	$	2,749	$	444	$	—	$	—
Commercial Real Estate
Owner occupied		49,846		4,101		3,597		—		—
Income producing		36,446		10,966		1,569		—		—
Multifamily		6,690		1,713		—		—		—
Construction & Development
1 - 4 Family		3,234		184		347		—		—
Other		13,873		1,191		2,571		—		—
Farmland		267		—		—		—		—

Totals	$	129,216	$	20,904	$	8,528	$	—	$	—


Total:
Commercial - Non Real Estate	$	18,860	$	2,749	$	444	$	—	$	—
Commercial Real Estate	$	92,982	$	16,780	$	5,166	$	—	$	—
Construction & Development	$	17,374	$	1,375	$	2,918	$	—	$	—

Totals	$	129,216	$	20,904	$	8,528	$	—	$	—


	December 31, 2014
Internal Risk Rating Grades	Pass		Special Mention		Substandard		Doubtful		Loss
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	$	—	$	—

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 March 31, 2015 and December 31, 2014, segregated by class of loans, were as follows (dollars in thousands):


	March 31, 2015				December 31, 2014
			Non-				Non-
Risk Based on Payment Activity	Performing		Performing		Performing		Performing
Residential
Equity Lines	$	27,784	$	105	$	28,100	$	107
1 - 4 Family		87,179		304		87,803		314
Junior Liens		1,094		—		873		—
Consumer - Non Real Estate		3,049		5		3,060		5
Other		491		—		967		—

Totals	$	119,597	$	414	$	120,803	$	426


Total:
Residential	$	116,057	$	409	$	116,776	$	421
Consumer - Non Real Estate	$	3,049	$	5	$	3,060	$	5
Other	$	491	$	—	$	967	$	—

Totals	$	119,106	$	414	$	119,836	$	426

NOTE 5. ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses by segment, since their respective year-end, are as follows (dollars in thousands):


	March 31, 2015												March 31, 2014
	Beginning										Ending		Beginning										Ending
	Balance		Chargeoffs			Recoveries		Provision			Balance		Balance		Chargeoffs			Recoveries		Provision			Balance
Commercial - Non Real Estate	$	324	$	—		$	12	$	(67	)	$	269	$	176	$	(48	)	$	80	$	(8	)	$	200
Commercial Real Estate
Owner occupied		1,247		—			70		(96	)		1,221		1,224		—			4		(49	)		1,179
Income producing		747		—			1		10			758		831		—			—		626			1,457
Multifamily		153		—			—		(16	)		137		50		—			—		69			119
Construction & Development
1 - 4 Family		87		—			—		10			97		52		—			—		(16	)		36
Other		511		—			3		(168	)		346		580		—			2		526			1,108
Farmland		5		—			—		—			5		3		—			—		—			3
Residential
Equity Lines		609		—			2		(14	)		597		332		(59	)		2		(9	)		266
1 - 4 Family		1,235		—			4		(50	)		1,189		1,218		(8	)		62		(72	)		1,200
Consumer - Non Real Estate		44		(4	)		3		(2	)		41		44		(8	)		7		8			51
Other		5		—			—		(1	)		4		—		—			—		—			—
Unallocated		159		—			—		(8	)		151		1,505		—			—		(13	)		1,492

Total	$	5,126	$	(4	)	$	95	$	(402	)	$	4,815	$	6,015	$	(123	)	$	157	$	1,062		$	7,111

As of March 31, 2015 and December 31, 2014, loans were evaluated for impairment as follows (dollars in thousands):


	Individually Evaluated for Impairment
	March 31, 2015				December 31, 2014
	Allowance		Total Loans		Allowance		Total Loans
Commercial - Non Real Estate	$	83	$	1,829	$	78	$	1,899
Commercial Real Estate
Owner occupied		903		5,870		823		6,105
Income producing		207		9,105		218		9,376
Multifamily		68		1,191		74		1,198
Construction & Development
1 - 4 Family		7		347		8		350
Other		20		2,919		23		2,958
Farmland		—		—		—		—
Residential
Equity Lines		40		119		41		123
1 - 4 Family		381		10,725		414		11,270
Consumer - Non Real Estate		5		24		5		25
Other		—		—		—		—
Unallocated		—		—		—		—

Total	$	1,714	$	32,129	$	1,684	$	33,304


	Collectively Evaluated for Impairment
	March 31, 2015				December 31, 2014
	Allowance		Total Loans		Allowance		Total Loans
Commercial - Non Real Estate	$	186	$	20,224	$	246	$	21,206
Commercial Real Estate
Owner occupied		318		51,674		424		48,923
Income producing		551		39,876		529		38,301
Multifamily		69		7,212		79		7,292
Construction & Development
1 - 4 Family		90		3,418		79		3,016
Other		326		14,716		488		16,486
Farmland		5		267		5		271
Residential
Equity Lines		557		27,770		568		28,084
1 - 4 Family		808		77,852		821		77,720
Consumer - Non Real Estate		36		3,030		39		3,040
Other		4		491		5		967
Unallocated		151		—		159		—

Total	$	3,101	$	246,530	$	3,442	$	245,306

NOTE 6. COMMITMENTS AND CONTINGENCIES

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, lines of credit and standby letters of credit. These instruments involve elements of credit risk in excess of amounts recognized in the accompanying financial statements.

The Company’s risk of loss related to unfunded loan commitments and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. 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 following table presents a summary of outstanding financial instruments whose contract amounts represent credit risk as of March 31, 2015 (dollars in thousands):


Unfunded loan commitments	$	32,932
Financial standby letters of credit		209

Total unused commitments	$	33,141

NOTE 7. FAIR VALUE

Accounting principles generally accepted in the United States of America require that companies measure and record certain assets and liabilities at fair value and record any adjustments to the fair value of those assets. Securities are recorded at fair value on a recurring basis while other assets, such as impaired loans, are recorded at fair value on a non-recurring basis.

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.

Impaired Loans – The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Impaired loans are recorded at fair value less estimated selling costs. Once a loan is identified as individually impaired, the Company measures impairment. Fair values of impaired loans are generally estimated using one of several methods, including collateral value, liquidation value, discounted cash flows and, in rare cases, the market value of the note. Those impaired loans not requiring an allowance represent loans for which the net present value of the expected cash flows or fair value of the collateral less costs to sell exceed the recorded investments in such loans. At March 31, 2015 and December 31, 2014, a majority of the total impaired loans were evaluated based on the fair value of the collateral. When the fair value of the collateral is based on an executed sales contract with an independent third party, the Company records the impaired loans as nonrecurring Level 1. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the underlying collateral for collateral-dependent loans, which the Company classifies as a Level 3 valuation. Appraised values may be discounted to reflect current market conditions and ultimate collectability. These discounts typically range from 0% to 20% for each of the respective periods. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.

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 2. However, the Company also considers other factors or recent developments which could result in adjustments to the collateral value estimates indicated in the appraisals such as changes in absorption rates or market conditions from the time of valuation. In situations where an appraisal less estimated selling costs is used to determine fair value, management adjustments are significant to the fair value measurements, or other means are used to estimate fair value in the absence of an appraisal, the Company records the impaired loan as nonrecurring Level 3 within the valuation hierarchy. Appraised values may be discounted to reflect current market conditions and ultimate collectability. These discounts typically range from 0% to 20% for each of the respective periods.

The following table summarizes the Company’s assets measured at fair value at the dates indicated (dollars in thousands):


	At March 31, 2015
	Total		Level 1		Level 2		Level 3

Assets valued on a recurring basis
Investment securities:
U.S. government agency	$	3,078	$	—	$	3,078	$	—
State and municipals		1,369		—		1,369		—
Mortgage-backed		8,984		—		8,984		—
Assets valued on a non-recurring basis
Impaired loans		30,415		—		—		30,415
Other real estate owned		1,108		—		—		1,108

Total	$	44,954	$	—	$	13,431	$	31,523


	At December 31, 2014
	Total		Level 1		Level 2		Level 3

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

NOTE 8. BORROWED FUNDS

A summary of the Company’s outstanding borrowings and the annual rate of interest currently payable on each category is presented in the following table at the dates indicated (dollars in thousands):


	March 31, 2015					December 31, 2014
	Outstanding Balance		Annual Interest Rate			Outstanding Balance		Annual Interest Rate

Securities sold under overnight repurchase agreements	$	304		0.15	%	$	491		0.14	%

Total borrowed funds	$	304		0.15	%	$	491		0.14	%

The Bank engages from time-to-time in federal funds purchases from upstream correspondent institutions to meet temporary funding needs. There were none of these transactions outstanding at the close of either period presented in the above table.

The Bank utilizes borrowings from the Federal Home Loan Bank (“FHLB”) as a source of liquidity. At March 31, 2015 and December 31, 2014, the Bank had immediately available credit of $5.8 million and $6.2 million, respectively. There were no advances from the FHLB at quarter-end.

NOTE 9. INCOME TAXES

The Company utilizes the liability method of computing income taxes. Under the liability method, 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. The current portion of income tax expense is provided based upon the actual tax liability incurred for tax return purposes.

The Company has a deferred tax asset of $16.5 million and $17.5 million as of March 31, 2015 and December 31, 2014, respectively. 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. Management has established a deferred tax asset valuation allowance of $16.5 million and $16.8 as of March 31, 2015 and December 31, 2014, respectively. The valuation allowance has been established because management believes 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. The Company does not expect to have taxable income for year ended December 31, 2015.

NOTE 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, 2014	$	163		$	163

Other comprehensive gain before reclassifications		19			19
Amounts reclassified from accumulated other comprehensive income		—			—

Net current period other comprehensive gain		19			19

Balance at March 31, 2015	$	182		$	182


Balance at December 31, 2013	$	(5,379	)	$	(5,379	)

Other comprehensive gain before reclassifications		1,763			1,763
Amounts reclassified from accumulated other comprehensive income		—			—

Net current period other comprehensive gain		1,763			1,763

Balance at March 31, 2014	$	(3,616	)	$	(3,616	)

NOTE 11. SUBSEQUENT EVENT

On May 6, 2015, the Company entered into a definitive merger agreement with Bank of the Ozarks, Inc (“OZRK”). The Company and OZRK jointly announced the signing of a definitive agreement and plan of merger and reorganization (“Agreement”) whereby OZRK will acquire the Company and its wholly-owned bank subsidiary, Bank of the Carolinas, in an all-stock transaction valued at approximately $64.7 million, or approximately $0.14 per outstanding share of the Company’s common stock, subject to potential downward adjustments as described in the Agreement.

Under the terms of the Agreement, which has been approved by the boards of directors of both companies, each holder of outstanding shares of the Company’s common stock will receive shares of common stock of OZRK. The number of OZRK shares to be issued will be determined based on OZRK’s ten day average closing stock price as of the second business day prior to the closing date, subject to a minimum and maximum price of $29.28 and $48.80, respectively.

Upon the closing of the transaction, the Company will merge into OZRK and Bank of the Carolinas will merge into OZRK’s wholly-owned bank subsidiary, Bank of the Ozarks. Completion of the transaction is subject to certain closing conditions, including customary regulatory approvals and approval by the Company’s shareholders. The transaction is expected to close in the third quarter of 2015.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Introduction

Bank of the Carolinas Corporation (“the Company”) is the parent holding company of Bank of the Carolinas (“the Bank”). Because the Company has no separate operations and conducts no business on its own other than owning the Bank, the discussion contained in this Management’s Discussion and Analysis concerns primarily the business of the Bank. However, because the financial statements are presented on a consolidated basis, the Company and the Bank are collectively referred to herein as “the Company” unless otherwise noted.

The Bank began operations in December 1998 as a state chartered bank and currently has eight offices in the Piedmont region of North Carolina. The Bank competes for loans and deposits throughout the markets it serves. The Bank, like most community banks, derives most of its revenue from net interest income which is the difference between the income it earns from loans and securities and the interest expense it incurs on deposits and borrowings.

Written Agreement with Federal Reserve

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 full text of the Agreement, a copy of which is included as Exhibit 10.01 to the Company’s Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on November 14, 2011, and 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 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 Federal Reserve Board of Governors. 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 Bank of the Carolinas Trust I 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.

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. 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 Agreement will remain in effect until modified or terminated by the Federal Reserve Bank of Richmond.

Consent Order with Regulators

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 10.1 and 10.2, respectively, to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 3, 2011, and incorporated herein by reference.

Management. The Order required 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. Within 60 days from 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 March 31, 2015, 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 was required to 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 required 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. As of March 31, 2015, the Bank was classified as “well capitalized.”

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.

CHANGES IN FINANCIAL CONDITION

Total Assets

At March 31, 2015, total assets were $363.4 million, a decrease of 5.7% compared to $385.5 million at December 31, 2014. The asset decrease was primarily the result of selling investment securities and not renewing non-core institutional certificates of deposit. The Company had earning assets of $331.9 million at March 31, 2015 consisting of $278.7 million in loans, $13.4 million in investment securities, and $39.8 million in temporary investments. Stockholders’ equity was $48.0 million at March 31, 2015 compared to $47.1 million at December 31, 2013. The increase in stockholders’ equity was due to the net income recognized in the first quarter of 2015.

Investment Securities

Investment securities totaled $13.4 million at March 31, 2015, compared to $40.3 million at December 31, 2014. The decrease was as a result of restructuring the investment portfolio to address interest rate risk. The Company sold investment securities of $26.1 million for a gain of $218,000. A summary of the Company’s investment securities holdings by major category at March 31, 2015 and December 31, 2014 is included in Note 3 of “Notes to Consolidated Financial Statements”.

Loans and Allowance for Loan Losses

At March 31, 2015, the loan portfolio totaled $278.7 million and represented 76.7% of total assets compared to $278.6 million or 72.3% of total assets at December 31, 2014. Total loans at March 31, 2015 increased $49,000 or 0.02% from December 31, 2014. The increase in loans outstanding in the three-month period is the result of new loans originated in excess of net chargeoffs and principal repayments. Loan demand has increased over the last year. Real estate loans, including commercial real estate, constituted approximately 91% of the loan portfolio, and commercial business and other loans represented approximately 9% of the total loan portfolio at both March 31, 2015 and December 31, 2014.

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 such loans, in management’s opinion, become uncollectible. Recoveries during the period are credited to this allowance. The factors that influence management’s judgment in determining the amount charged to operating expense include past loan experience, composition of the loan portfolio, current economic conditions and probable losses.

The appropriateness of the allowance for loan losses is measured on a quarterly basis using an allocation model that assigns reserves to various components of the loan portfolio in order to provide for probable inherent losses. It must be emphasized, however, that the determination of the reserve using the Company’s procedures and methods rests upon various judgments and assumptions about current economic conditions and other factors affecting loans. No assurance can be given that the Company will not in any particular period sustain loan losses that are sizable in relation to amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. In addition, bank regulatory agencies, as an integral part of their routine examination process, periodically review the Company’s allowance. Those agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examinations. The Company believes the allowance is appropriate based on management’s current analysis.

The allowance for loan losses at March 31, 2015, amounted to $4.8 million, a decrease of $311,000, or 6.1% from December 31, 2014. The allowance consists of specific reserves of $1.7 million and a general allowance $3.1 million. The Bank’s recovery of loan losses amounted to $402,000 during the three months ended March 31, 2015 compared to a provision for loan losses of $1.1 million during the three months ended March 31, 2014. The loan loss provision for 2014 reflects a specific impairment of $1.1 million to one of the Bank’s top ten largest loan relationships. While the Company has not participated in “subprime” lending activities, we were affected by the economic downturn in our markets. We continue to work with our customers with troubled credit relationships to the extent that it is reasonably possible.

Certain credit risks are inherent in making loans, particularly commercial and consumer loans. Management prudently assesses these risks and attempts to manage them effectively. The Company also attempts to reduce default risks 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 nonaccrual status when, in management’s judgment, the collection of interest appears doubtful.

The following table summarizes information regarding our nonaccrual loans, other real estate owned, and 90-day and over past due loans as of March 31, 2015 and December 31, 2014 (dollars in thousands):


	March 31,			December 31,
	2015			2014
Loans accounted for on a nonaccrual basis:
Real estate loans:
1-4 family residential	$	538		$	631
Commercial real estate		2,340			682
Construction and development		1,531			1,550
Home equity		105			107

Total real estate loans		4,514			2,970
Commercial business and other loans		162			171
Consumer loans		5			5

Total nonaccrual loans		4,681			3,146
Accruing loans which are contractually past due 90 days or more		—			—

Total nonperforming loans		4,681			3,146
Other real estate owned		1,108			1,108

Total nonperforming assets	$	5,789		$	4,254


Total nonperforming loans as a percentage of loans		1.68	%		1.13	%
Allowance for loan losses as a percentage of total nonperforming loans		102.86	%		162.94	%
Allowance for loan losses as a percentage of total loans		1.73	%		1.84	%
Total nonperforming assets as a percentage of loans and other real estate owned		2.07	%		1.52	%
Total nonperforming assets as a percentage of total assets		1.59	%		1.10	%

Deposits

The Company’s deposit services include business and individual checking accounts, interest bearing checking accounts, savings accounts, money market accounts, IRA deposits and certificates of deposit. At March 31, 2015, total deposits were $313.7 million compared to $336.6 million at December 31, 2014. The March 31, 2015 amount represents a decrease of 6.8% from December 31, 2014, which is mainly recognized in customer time deposit accounts. At March 31, 2015, the deposit mix was comparable to December 31, 2014, with the exception of customer time deposit accounts. Currently, the Company has chosen to not renew non-core institutional certificates of deposit due to excess liquidity.

The following table presents a breakdown of our deposit base at March 31, 2015 and December 31, 2014 (dollars in thousands):


	March 31,			December 31,
	2015			2014
Noninterest bearing demand deposits	$	41,061		$	37,533
Interest checking deposits		41,627			39,557
Savings deposits		17,116			16,557
Money market deposits		90,260			95,930
Customer time deposits		123,646			147,045
Brokered certificates of deposit		—			—

Total deposits	$	313,710		$	336,622


Time deposits $100,000 or more:
Brokered certificates of deposit	$	—		$	—
Customer time deposits issued in denominations of $100,000 or more		74,927			90,890

Total time deposits issued in denominations of $100,000 or more	$	74,927		$	90,890


As a percent of total deposits:
Noninterest bearing demand deposits		13.09	%		11.15	%
Interest checking deposits		13.27			11.75
Savings deposits		5.46			4.92
Money market deposits		28.77			28.50
Customer time deposits		39.41			43.68
Brokered certificates of deposit		—			—

Total time deposits issued in denominations of $100,000 or more		23.88			27.00

Liquidity

Liquidity management is the process of managing assets and liabilities, as well as their maturities, to ensure adequate funding for loan and deposit activities. 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 are the sum of cash and cash items, less required reserves on demand and interest checking 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 are equal to total liabilities less required cash reserves on noninterest-bearing demand deposits and interest checking deposits 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 March 31, 2015 our balance sheet liquidity ratio (net liquid assets as a percent of unsecured liabilities) amounted to 17.4% and our total liquidity ratio (balance sheet plus off-balance sheet liquidity) was 18.93%. As of December 31, 2014, our balance sheet liquidity ratio was 23.25% and our total liquidity ratio was 24.67%.

In addition, we have the ability to borrow up to $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, of which there were none at March 31, 2015, 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 March 31, 2015 is adequate to meet its operating needs.

Interest Rate Sensitivity

Fluctuating interest rates, increased competition, and changes in the regulatory environment continue to significantly affect the importance of interest rate sensitivity management. Rate sensitivity arises when interest rates on assets change in a different period of time or in a different proportion to interest rates on liabilities. The primary objective of interest rate sensitivity management is to prudently structure the balance sheet so that movements of interest rates on assets and liabilities are highly correlated and produce a reasonable net interest margin even in periods of volatile interest rates. The Company uses an asset/liability simulation model to project potential changes to the Company’s net interest margin, net income, and economic value of equity based on simulated changes to market interest rates, namely the prime rate. Our goal is to maintain an interest rate sensitivity position as close to neutral as practicable whereby little or no change in interest income would occur as interest rates change. On March 31, 2015, 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 characteristic of assets is 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.

Capital Adequacy

Regulatory guidelines require banks to hold minimum levels of capital based upon the risk weighting of certain categories of assets as well as any off-balance sheet contingencies. Federal regulators have adopted risk-based capital and leverage capital guidelines for measuring the capital adequacy of banks and bank holding companies. All applicable capital standards must be satisfied for the Company and the Bank to be considered in compliance with regulatory requirements.

As described above, the Bank is subject to a consent order issued by the FDIC and the North Carolina Office of the Commissioner of Banks and the Company is party to a written agreement with the Federal Reserve Bank of Richmond. These regulatory agreements require that the Bank maintain capital levels in excess of normal regulatory minimums, including a Leverage Capital Ratio of at least 8.0% and a Total Risk-Based Capital Ratio of at least 10.0%, and that the Company and the Bank seek the approval of their respective regulators prior to the payment of any cash dividend. At March 31, 2015, the Bank was in compliance with the minimum capital requirements set forth in the consent order.

At March 31, 2015, the Company’s leverage and Tier 1 risk-weighted Capital Ratios were 12.83% and 17.19%, respectively, which are above the minimum level required by regulatory guidelines. At March 31, 2015, the Company’s Total risk-weighted Capital Ratio was 18.44%, which is above the minimum level required by regulatory guidelines. At March 31, 2014 the Bank’s leverage and Tier 1 risk-weighted Capital Ratios were 12.30% and 16.41%, respectively, which are above the minimum levels required by regulatory guidelines. At March 31, 2015, the Bank’s Total risk-weighted Capital Ratio was 17.66%, which is above the minimum level required by regulatory guidelines. At March 31, 2015, the Bank’s leverage and Total risk-weighted Capital Ratios were both compliant with the levels specified in the above referenced consent order with bank regulators.

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 implemented 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 established 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 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 are 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 was made with the March 31, 2015 call report.

The new rule also amended 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 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 intends to evaluate the effect of the new final rule over the coming quarters.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2015 and 2014

Overview. For the three months ended March 31, 2015, the Company had net income available to common shareholders of $926,000 million, or $0.002 per common share. This compares to a net loss of $1.8 million, or $0.45 per common share, for the three months ended March 31, 2014. The increase in net income was primarily due to the elimination of borrowed funds, recovery of loan losses, and gains on investment securities.

Net Interest Income. The Company’s net interest income for the three months ended March 31, 2015 totaled $3.0 million compared to net interest income of $2.7 million at March 31, 2014. Net interest income increased due to the elimination of borrowed funds compared to March 31, 2014. The net interest margin was 3.52% for the first quarter of 2015 compared to 2.74% for the first quarter of 2014.

Provision for Loan Losses. The loan loss provision amounted to a recovery of $402,000 for the quarter ended March 31, 2015 compared to the expense of $1.1 million recorded in the comparable quarter of 2014. Net recoveries totaled $91,000 in the first quarter of 2015 compared to net recoveries of $34,000 in the first quarter of 2014.

Noninterest Income. Noninterest income totaled $585,000 for the three months ended March 31, 2015 compared to $390,000 for the comparable three-month period of 2014. Noninterest income includes customer service charges on deposit accounts, bank owned life insurance, and gains or losses on investment securities. The Company restructured its investment security portfolio resulting in a $218,000 gain on sale of securities. Excluding the gain on investment securities, noninterest income decreased 5.9% for the three months ended March 31, 2015 as compared to the same three months of 2014.

Noninterest Expenses. Noninterest expenses totaled $3.0 million and $3.5 million for the three months ended March 31, 2015 and 2014, respectively. The Company received reimbursement of attorney fees related to a customer bankruptcy case in the amount of $297,000. Excluding the fee reimbursement, noninterest expenses for the three months ended March 31, 2015 decreased by $194,000 compared to the three months ended March 31, 2014. The Company is performing due diligence in all cost categories to minimize expense.

Income Taxes. There was no provision for income taxes made for the first quarters of 2015 and 2014. Our deferred tax asset had no value at March 31, 2015 and at December 31, 2014.

DISCLOSURES ABOUT FORWARD LOOKING STATEMENTS

Statements in this Report relating to plans, strategies, economic performance and 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, may be forward-looking statements as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “ feels,” “believes,” “estimates,” “predicts,” “forecasts,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of our management about future events. Factors that could influence the accuracy of forward-looking statements include, but are not limited to (a) pressures on our earnings, capital and liquidity resulting from current and future conditions in the credit and capital markets, (b) continued or unexpected increases in nonperforming loans and credit losses in our loan portfolio, (c) adverse conditions in the economy and in the real estate market in our banking markets (particularly those conditions that affect our loan portfolio, the abilities of our borrowers to repay their loans, and the values of collateral that secures our loans), (d) the financial success or changing strategies of our customers, (e) actions of government regulators, or changes in laws, regulations or accounting standards, that adversely affect our business, (f) changes in the interest rate environment and the level of market interest rates that reduce our net interest margins and/or the values of loans we make and securities we hold, and changes in general economic conditions and real estate values in our banking market (particularly changes that affect our loan portfolio, the abilities of our borrowers to repay their loans, and the values of loan collateral), (g) changes in competitive pressures among depository and other financial institutions or in our ability to compete effectively against other financial institutions in our banking markets, and (h) other developments or changes in our business that we do not expect. Although we believe that the expectations reflected in the forward-looking statements included in this Report are reasonable, they represent our management’s judgments only as of the date they are made, and we cannot guarantee future results, levels of activity, performance or achievements. As a result, readers are cautioned not to place undue reliance on these forward-looking statements. All forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements in this paragraph. We have no obligation, and do not intend to update these forward-looking statements.

Item 3. 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.

Item 4. CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of its principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based on their evaluation, the principal 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 it is able to record, process, summarize and report in a timely manner the information required to be disclosed in reports it files under the Exchange Act.

In connection with the above evaluation of the effectiveness 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 most recent quarterly period that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

There are no material pending legal proceedings to which the Company or the Bank is a party, or of which any of their property is the subject other than routine litigation that is incidental to their business.

Item 1A.

Risk Factors

Smaller reporting companies such as the Company are not required to provide the information required by this item.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.

Defaults Upon Senior Securities.

None at March 31, 2015.

Item 4.

Mine Safety Disclosures

Not applicable

Item 5.

Other Information

None

Item 6.

Exhibits

The following exhibits are filed with this report.


4.01		First Amendment to Tax Benefits Preservation Plan dated May 6, 2015

31.01		Certification of our principal executive officer pursuant to Rule 13a-14(a)

31.02		Certification of our principal financial officer pursuant to Rule 13a-14(a)

32.01		Certification of our principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350

101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014; (ii) Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014; (iii) Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2015 and 2014; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2015 and 2014; (v) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014; and (vi) Notes to Consolidated Financial Statements as of March 31, 2015 and December 31, 2014 and for the Three Months Ended March 31, 2015 and 2014

SIGNATURES

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

BANK OF THE CAROLINAS CORPORATION


Date: May 15, 2015	By:	/s/ Stephen R. Talbert
	Stephen R. Talbert
	President and Chief Executive Officer
	(principal executive officer)

Date: May 15, 2015	By:	/s/ Megan W. Patton
	Megan W. Patton
	Senior Vice President and Chief Financial Officer
	(principal financial officer)

EXHIBIT INDEX


Exhibit Number		Description

4.01		First Amendment to Tax Benefits Preservation Plan dated May 6, 2015

31.01		Certification of our principal executive officer pursuant to Rule 13a-14(a)

31.02		Certification of our principal financial officer pursuant to Rule 13a-14(a)

32.01		Certification of our principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350

101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014; (ii) Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014; (iii) Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2015 and 2014; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2015 and 2014; (v) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014; and (vi) Notes to Consolidated Financial Statements as of March 31, 2015 and December 31, 2014 and for the Three Months Ended March 31, 2015 and 2014

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company